Senators told oil industry competitive despite mergers

Feb. 13, 2006
Most US petroleum industry sectors remain unconcentrated or lightly concentrated despite mergers that have occurred in the last 20 years, a Federal Trade Commission member told the Senate Judiciary Committee on Feb. 1.

Most US petroleum industry sectors remain unconcentrated or lightly concentrated despite mergers that have occurred in the last 20 years, a Federal Trade Commission member told the Senate Judiciary Committee on Feb. 1.

“In addition, the growth of independent marketers and hypermarkets has increased competition at the wholesale and retail levels in many areas,” William E. Kovacic told the committee.

Increased concentration by itself is not a basis for finding that a merger would be anticompetitive, he added. When the commission has concluded that a combination would reduce competition, it has ordered divestitures or sought preliminary injunctions to halt the transaction, he said.

But several committee members appeared skeptical. Chairman Arlen Specter (R-Pa.) said he was troubled that executives from ExxonMobil Corp., Chevron Corp., ConocoPhillips, BP PLC, Royal Dutch Shell PLC, and Valero Energy Corp. did not seem willing to testify in the wake of their companies’ reporting record 2005 profits.

Prior to the hearing, National Petrochemical & Refiners Association Pres. Bob Slaughter suggested that the executives were not able to appear because they were given only 4 business days’ notice and could not change their schedules (OGJ Online, Feb. 1, 2006).

“We have a whole airline industry that’s basically capitulating because of the price of fuel,” said Sen. Diane Feinstein (D-Calif.). “Just look at the profit increases of these companies.... I think Big Oil in America has the consumer in a real vise, and we need to do something about it.”

Sen. Jon Cornyn (R-Tex.) recommended caution. “There are some things Congress can do, and some it can’t. The largest single factor in the price of gasoline is the price of a barrel of oil,” he observed, adding that the US has affected this by keeping much of its oil and gas resources off-limits to exploration and development.

Small increases

The Government Accountability Office’s natural resources and environment director said that while crude oil costs are the biggest single influence on product prices, downstream mergers in the 1990s led to more-concentrated markets and small gasoline price increases.

James Wells said that while market concentration matters, other factors such as barriers to entry and vertical integration also can affect competition.

He said the GAO’s examination of 1990s mergers differed from the FTC’s because it occurred after the fact and not before or during the process.

“Going forward, we believe that, in light of our findings, both forward-looking and retrospective analysis of the effect of mergers on gasoline prices is necessary to ensure that consumers are protected from anticompetitive forces,” Wells said.

Connecticut Atty. Gen. Richard Blumenthal said his office investigated and prosecuted several oil product retailers and a number of marketers, “but our reach is limited.” He said, “We need help. We need a sense of urgency from federal law enforcers in this area.”

He recommended that Congress ban zone pricing and “consider fundamentally restructuring laws to consider modern technological conveniences such as e-mail that make it harder to prove collusion.”

Tim Hamilton, founder and executive director of the Automotive United Trades Organization, said, “Antitrust laws have prevented collusion. But with the internet and other modern technology, it’s possible for everyone to know what his competitor is doing.”

Kovacic said this would be fairly easy to document, however. “What we have found from our experience, from express collusion to tacit agreements, is that people have to write the information down. Managers need a written reference as they make their daily decisions,” the FTC member said.

R. Preston McAfee, Stanley Johnson professor of business, economics, and management at the California Institute of Technology, cited pressure in the oil industry to create bigger firms because a medium-size company is not financially equipped to take on very large projects, particularly overseas.

“We are fortunate that the hysteria of the 1970s has not returned and that Americans have accepted higher fuel prices without demanding reregulation. Overall, the deregulation of the American economy has produced tremendous gains for consumers,” he said.