GAO finds modest wholesale gasoline price changes following three mergers

Three of the seven mergers of major US oil companies and large independent refiner-marketers since 2000 led to statistically significant wholesale gasoline price changes, the Government Accountability Office said.

Jul 1st, 2009

Three of the seven mergers of major US oil companies and large independent refiner-marketers since 2000 led to statistically significant wholesale gasoline price changes, the Government Accountability Office said.

But the changes were increases of 1 cent/gal in Valero Energy Corp.’s acquisitions of Ultramar Diamond Shamrock Corp. in 2001 and of Premcor Inc. in 2005, and a nearly 2 cent/gal decrease following Phillips Petroleum Co. and Conoco Inc.’s 2001 merger, GAO added in a report released on June 26.

Prices rose following Valero’s two acquisitions because downstream assets were involved, it said. Prices fell in the Phillips-Conoco merger’s wake because it involved primarily exploration and production properties, it noted.

It did not find statistically significant wholesale gasoline price changes following the 2000 merger of Chevron Corp. and Texaco Inc., the 2001 acquisition of Tosco Corp. by Phillips, Shell Oil Co.’s 2001 purchase of Texaco’s share in two US downstream joint ventures from Chevron, or Premcor’s 2002 acquisition of the former Mapco downstream holdings from Williams Cos. Inc.

The report said that GAO’s review of the seven mergers’ impacts on wholesale gasoline prices supports its 2008 recommendation that the Federal Trade Commission should begin to review past mergers’ actual impacts. This would help guide the antitrust watchdog’s examination of future oil company mergers, GAO said.

FTC chairman’s response

In a June 3 response to a draft of GAO’s report, FTC Chairman Jon Leibowitz said that the agency agrees that regular reviews of oil industry mergers are needed. “We plan to continue our ongoing program with appropriately targeted retrospectives and we will continue to use risk-based criteria to identify past mergers for review,” he said.

GAO’s report said that in reviewing proposed oil company mergers, the FTC’s staff tries to avoid the possibility of price increases as small as 1 cent/gal because large volumes are sold at thin margins, and price changes this small can affect production or sales decisions. “In addition, in some markets, even 1 cent/gal price increases can lead to more than $1 million/year in additional costs to consumers, according to FTC analysts,” GAO’s report said.

It noted that the FTC issued a proposed rulemaking notice on April 29 seeking public comment on a revised proposed rule prohibiting market manipulation in the oil industry, but added that it’s not yet clear how this new rule would affect the FTC’s monitoring of oil industry markets. “However, FTC staff [members] indicated that because [it] is an enforcement agency, they focus on merger and antitrust enforcement, rather than ongoing monitoring of the petroleum industry, as a regulatory agency would likely undertake,” GAO’s report said.

It said that according to the FTC, about 125 of its attorneys, economists, paralegals, research analysts and other staff members worked during the latter part of 2008 on oil and gas antitrust and pricing issues. Six or seven staff economists from the FTC’s Bureau of Economics were involved in ongoing petroleum industry monitoring, although the economists also devoted part of their time to other industries, it added.

These staff economists also occasionally analyze past mergers, and the FTC has indicated that retrospective merger reviews are a valuable part of antitrust decision making, according to GAO’s report. “If the FTC’s finds anticompetitive behavior in retrospective reviews, it has the ability to conduct further in-depth investigations into the merger and collect substantial company-specific data in order to pursue corrective action to reintroduce competition into the market such as forced divestitures or conduct-based remedies,” it said.

Potential benefits

GAO said that in responding to a draft of the new report, the FTC indicated that the conclusions were consistent with a recent evaluation of its own and it would consider the recommendations. “Although these reviews can be resource-intensive, experts, industry participants, and the FTC agreed that regular retrospective reviews would allow the agency to better inform future merger reviews and better measure its success in maintaining competition,” the report said.

GAO’s report said that it used two market concentration measurements in its analysis: the number of sellers at wholesale gasoline terminals, and the market share of refiners supplying gasoline to those sellers. It said that it found that prices at terminals with 14 sellers were about 8 cents/gal less than prices at terminals with nine sellers, a result it said is consistent with the idea that markets with more sellers tend to be more competitive.

Under the second measurement, GAO said that it found a similar statistically significant association between prices and the level of refinery concentration, with less concentrated groups of refineries associated with lower prices.

It said that the analysis used data purchased from IHS Herold on the nature and size of oil industry mergers from 2000 to 2007, and from Oil Price Information Service on historical gasoline prices at terminals across the United States. It also used data sets from the US Energy Information Administration, including crude oil prices, refinery utilization rates, and gasoline sales.

The study’s conclusions are limited because it could not consider every factor affecting gasoline markets, including weather-related disruptions, interruptions in refinery and pipeline operations, or other local gasoline supply changes, GAO said. But the results indicate that more detailed examinations of past oil company mergers involving downstream assets in markets with potentially high concentrations would be worthwhile, it said.

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