GAO: Modest wholesale gasoline price changes followed mergers

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, July 1 -- Since 2000, three of the seven mergers of major US oil companies and large independent refiners and marketers have led to statistically significant wholesale gasoline price changes, according to a report released June 26 by the US Government Accountability Office.

After Valero Energy Corp.’s acquisitions of Ultramar Diamond Shamrock Corp. in 2001 and of Premcor Inc. in 2005, wholesale gasoline prices increased 1¢/gal. Following the merger of Phillips Petroleum Co. and Conoco Inc. in 2001, wholesale prices fell 2¢/gal.

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

GAO 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 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 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 noted that, in reviewing proposed oil company mergers, FTC’s staff tries to avoid the possibility of price increases as small as 1¢/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 a 1¢/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 FTC issued a proposed rulemaking notice on Apr. 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 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 according to 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 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 FTC has indicated that retrospective merger reviews are a valuable part of antitrust decision making, according to GAO’s report. “If FTC 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
In a response to a draft of the new report, GAO said 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 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 8¢/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 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 the analysis used data purchased from IHS Herold on the nature and size of oil industry mergers during 2000-07, and from Oil Price Information Service on historical gasoline prices at terminals across the US. 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.

Contact Nick Snow at nicks@pennwell.com.