A three-part editorial series concludes here with the last of 12 points in a monograph by two former US Federal Trade Commission officials entitled “A Dozen Facts You Should Know about Antitrust and the Oil Industry.” The authors are Timothy J. Muris, FTC chairman during the administration of George W. Bush, and Richard G. Parker, director of the FTC’s Bureau of Competition under Bill Clinton. They cochair the antitrust and competition practice in the Washington, DC, office of the O’Melveny & Myers LLP law firm, where Muris is of counsel and Parker is a partner.
Here are monograph facts summarized in the first part of this series: 1. Economic learning and antitrust enforcement have evolved; we now know that big is no longer necessarily bad; 2. The antitrust authorities scrutinize the petroleum industry more closely than any other; 3. The American petroleum industry is not highly concentrated; and 4. Refiners have expanded domestic and global capacity significantly (OGJ, July 16, 2007, p. 17).
The second part of the series presented these facts: 5. Refineries operate at or near their practical maximum utilization rates; 6. Inventory practices have reduced costs and benefited consumers; 7. The profitability of the petroleum industry is commensurate with other industries over the long run; and 8. The FTC applies tougher standards to mergers in the oil industry than to mergers elsewhere (OGJ, July 23, 2007, p. 19).
Summaries of the last four facts in the monograph follow.
• Fact 9: Empirical analyses of the price effects of oil mergers provide no basis for applying more-stringent merger standards.
Oil industry critics rely on a 2004 report by the Government Accountability Office to assert that a few oil industry mergers have increased gasoline prices. The GAO report can support no such claim. GAO based its report on fundamentally flawed analysis that was unreliable at best and invalid in most instances.
Some legislative proposals favor abandoning the antitrust agencies’ well-tested approach in favor of novel and unique standards for oil mergers. The bipartisan Antitrust Modernization Commission has observed that there is a general consensus that the agencies’ approach to merger review is sound. Replacing the current system with industry-specific rules threatens to politicize merger policy, encourage rent-seeking behavior, create judicial confusion, and generate high administrative burdens.
• Fact 10: Market forces provide the most effective mechanism for quickly and efficiently alleviating price spikes.
A particularly compelling example of the effectiveness of market forces in responding even to massive supply shocks involves Hurricanes Katrina and Rita. These hurricanes severely impacted product production and distribution in the Gulf Coast and throughout the United States, substantially reducing US supply for an extended period. Firms responded by quickly restoring production and logistics capabilities and by locating alternative supply sources, including increased imports. Prices returned to prehurricane levels within 4 weeks after Rita hit.
• Fact 11: Price-gouging legislation would harm, rather than benefit, consumers.
Effective price-gouging legislation would create the same effects as price controls. History reveals that such measures provide false comfort for consumers. Price controls would lead to fuel run-outs by raising costs of replacement supply, tend to hit consumers in rural areas the hardest by discouraging shipments to remote areas, waste resources, create market distortions, encourage inefficiencies that cause regulated prices to exceed market prices, and diminish refiners’ incentives over the long run to invest in refining capacity.
• Fact 12: There are constructive alternatives that will benefit consumers.
Instead of pursuing market-distorting initiatives that would harm consumers, the government should remove constraints on industry members to respond quickly to future supply disruptions. It also should continue vigorous and objective antitrust scrutiny at all levels of the oil industry; eliminate state laws that needlessly increase gasoline prices, including those addressing minimum pricing, divorcement of downstream operations, and full service; limit the number of boutique fuels; expedite waiver processes during supply disruptions; and streamline refinery permitting.
The 132-page monograph is available on the web site of O’Melveny & Myers at www.omm.com.
