Energy Markets
Effects of Mergers and Market Concentration in the U.S. Petroleum Industry Gao ID: GAO-04-96 May 17, 2004Starting in the mid-1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other. For example, Exxon, the largest U.S. oil company, acquired Mobil, the second largest, thus forming ExxonMobil. GAO was asked to examine the effects of the mergers on the U.S. petroleum industry since the 1990s. For this period, GAO examined (1) mergers in the U.S. petroleum industry and why they occurred, (2) the extent to which market concentration (the distribution of market shares among competing firms) and other aspects of market structure in the U.S. petroleum industry have changed as a result of mergers, (3) major changes that have occurred in U.S. gasoline marketing, and (4) how mergers and market concentration in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level. Commenting on a draft of GAO's report, FTC asserted that the models were flawed and the analyses unreliable. GAO used state-of-the-art econometric models to examine the effects of mergers and market concentration on wholesale gasoline prices. The models used in GAO's analyses were peer reviewed by independent experts. Thus, GAO believes its analyses are sound.
Over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s. The majority occurred later in the period, most frequently among firms involved in exploration and production. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Market concentration has increased substantially in the industry, partly because of these mergers. Concentrated markets can enable firms to raise prices above competitive levels but can also lead to cost savings and lower prices. Evidence suggests mergers also have changed other factors that affect competition, such as the ability of new firms to enter the market. According to industry officials, two major changes have occurred in U.S. gasoline marketing related to these mergers. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States from the mid-1990s through 2000. Six of the eight mergers GAO modeled led to price increases, averaging about 1 cent to 2 cents per gallon. GAO found that increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices. For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon. For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon.
GAO-04-96, Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry
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Report to the Ranking Minority Member, Permanent Subcommittee on
Investigations, Committee on Governmental Affairs, U.S. Senate:
May 2004:
ENERGY MARKETS:
Effects of Mergers and Market Concentration in the U.S. Petroleum
Industry:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-96]:
GAO Highlights:
Highlights of GAO-04-96, a report to the Ranking Minority Member,
Permanent Subcommittee on Investigations, Committee on Governmental
Affairs, U.S. Senate
Why GAO Did This Study:
Starting in the mid-1990s, the U.S. petroleum industry experienced a
wave of mergers, acquisitions, and joint ventures, several of them
between large oil companies that had previously competed with each
other. For example, as shown in the figure, Exxon, the largest U.S. oil
company, acquired Mobil, the second largest, thus forming ExxonMobil.
GAO was asked to examine the effects of the mergers on the U.S.
petroleum industry since the 1990s. For this period, GAO examined (1)
mergers in the U.S. petroleum industry and why they occurred, (2) the
extent to which market concentration (the distribution of market shares
among competing firms) and other aspects of market structure in the
U.S. petroleum industry have changed as a result of mergers, (3) major
changes that have occurred in U.S. gasoline marketing, and (4) how
mergers and market concentration in the U.S. petroleum industry have
affected U.S. gasoline prices at the wholesale level. Commenting on a
draft of GAO‘s report, FTC asserted that the models were flawed and the
analyses unreliable. GAO used state-of-the-art econometric models to
examine the effects of mergers and market concentration on wholesale
gasoline prices. The models used in GAO‘s analyses were peer reviewed
by independent experts. Thus, GAO believes its analyses are sound.
What GAO Found:
Over 2,600 mergers have occurred in the U.S. petroleum industry since
the 1990s. The majority occurred later in the period, most frequently
among firms involved in exploration and production. Industry officials
cited various reasons for the mergers, particularly the need for
increased efficiency and cost savings. Economic literature also
suggests that firms sometimes merge to enhance their ability to control
prices.
Market concentration has increased substantially in the industry,
partly because of these mergers. Concentrated markets can enable firms
to raise prices above competitive levels but can also lead to cost
savings and lower prices. Evidence suggests mergers also have changed
other factors that affect competition, such as the ability of new firms
to enter the market.
According to industry officials, two major changes have occurred in
U.S. gasoline marketing related to these mergers. First, the
availability of generic gasoline, which is generally priced lower than
branded gasoline, has decreased substantially. Second, refiners now
prefer to deal with large distributors and retailers, which has
motivated further consolidation in distributor and retail markets.
GAO‘s econometric analyses indicate that mergers and increased market
concentration generally led to higher wholesale gasoline prices in the
United States from the mid-1990s through 2000. Six of the eight mergers
GAO modeled led to price increases, averaging about 1 cent to 2 cents
per gallon. GAO found that increased market concentration, which
reflects the cumulative effects of mergers and other competitive
factors, also led to increased prices. For conventional gasoline, the
predominant type used in the country, the change in wholesale price due
to increased market concentration ranged from a decrease of about 1
cent per gallon to an increase of about 5 cents per gallon. For
boutique fuels sold in the East Coast and Gulf Coast regions, wholesale
prices increased by about 1 cent per gallon, while prices for boutique
fuels sold in California increased by over 7 cents per gallon.
Selected Recent Major Petroleum Mergers:
[See PDF for image]
[End of figure]
www.gao.gov/cgi-bin/getrpt?GAO-04-96
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells at (202)
512-3841 or wellsj@gao.gov.
[End of section]
Contents:
Letter:
Executive Summary:
Purpose:
Background:
Results in Brief:
Principal Findings:
Recommendations for Executive Action:
Agency Comments and GAO's Evaluation:
Chapter 1: Introduction:
The Petroleum Industry Consists of Three Main Segments:
Different Entities Have Historically Exerted Influence over the World
Petroleum Market:
FTC and DOJ Review Proposed Mergers to Preserve Market Competition:
Objectives, Scope, and Methodology:
Chapter 2: All Segments of the Petroleum Industry Experienced Mergers
for Several Reasons:
Mergers Occurred in All Three Segments, but Most Frequently in the
Upstream:
Several Reasons Were Cited for Mergers in the Petroleum Industry:
Chapter 3: Mergers Contributed to Increases in Market Concentration and
Other Changes in Market Structure:
Market Concentration Increased Mostly in the Downstream Segment of the
Petroleum Industry During the 1990s:
Mergers Have Caused Changes in Other Aspects of Market Structure, but
the Extent of These Changes Is Not Easily Quantifiable:
Chapter 4: Gasoline Marketing Has Changed in Two Major Ways:
The Availability of Unbranded Gasoline Decreased:
Refiners Prefer Dealing with Large Distributors and Retailers:
Chapter 5: Mergers and Increased Market Concentration Generally Led to
Higher Wholesale Gasoline Prices in the United States:
Econometric Models Developed to Estimate the Effects of Mergers and
Market Concentration on Wholesale Gasoline Prices:
Mergers in the Second Half of the 1990s Mostly Led to Increases in
Wholesale Gasoline Prices:
Increased Market Concentration Generally Led to Higher Wholesale
Gasoline Prices:
Other Factors Also Resulted in Higher Wholesale Gasoline Prices:
Our Findings Are Generally Consistent with Previous Studies' Empirical
Results:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Companies, Agencies, and Organizations Contacted by GAO:
Appendix II: Experts Who Reviewed GAO's Econometric Models:
Appendix III: Correlation Analysis of Mergers and Market Concentration
in the U.S. Petroleum Industry:
Wholesale Gasoline Market Concentration by State:
Correlation Analysis of Mergers and Market Concentration:
Appendix IV: Econometric Analyses of the Effects of Specific Mergers
and Market Concentration on U.S. Wholesale Gasoline Prices:
GAO's Econometric Models of Wholesale Gasoline Prices Built on Previous
Studies and Market Analysis:
Data Sources and Sample Selection:
Specification of Econometric Models and Estimation Methodology:
Econometric Results:
Our Econometric Methodology Had Some Limitations:
Appendix V: Comments from the Federal Trade Commission's Commissioners:
GAO's Comments:
Appendix VI: Comments from the Federal Trade Commission's Bureau of
Economics Staff:
GAO's Comments:
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Bibliography:
Tables:
Table 1: FTC/DOJ Horizontal Merger Guidelines on the General Standards
for Evaluating Postmerger Market Concentration:
Table 2: Selected Vertical Mergers in the Petroleum Industry Since the
1990s:
Table 3: Types of Wholesale Prices Paid for Gasoline:
Table 4: Selected Oil Industry Mergers Affecting Wholesale Gasoline
Markets, 1994-2000:
Table 5: Estimated Changes in Conventional Wholesale Gasoline Prices
Associated with Individual Mergers (1994-2000):
Table 6: Estimated Changes in Reformulated Wholesale Gasoline Prices
Associated with Individual Mergers (1995-2000):
Table 7: Estimated Changes in CARB Reformulated Wholesale Gasoline
Prices Associated with Individual Mergers (1996-2000):
Table 8: Estimated Changes in Conventional Wholesale Gasoline Prices
Associated with Increased Market Concentration (1994-2000):
Table 9: Estimated Changes in Boutique Fuels Wholesale Prices Associated
with Increased Market Concentration (1995-2000):
Table 10: State-level HHI for Wholesale Gasoline (1994-2002):
Table 11: Correlation between the Average Transaction Value of Mergers
and Market Concentration (HHI) for Petroleum Refining by PADD (1991-
2000):
Table 12: Correlation between the Average Transaction Value of Mergers
and Market Concentration (HHI) for Wholesale Gasoline (1994-2001):
Table 13: Expected Effects of Key Explanatory Variables on Wholesale
Gasoline Prices:
Table 14: Variables in Our Econometric Analysis of Wholesale Gasoline
Prices:
Table 15: Effects of Mergers on Conventional Wholesale Gasoline Prices
(1994-2000):
Table 16: Effects of Mergers on Reformulated Wholesale Gasoline Prices
(1995-2000):
Table 17: Effects of Mergers on CARB Wholesale Gasoline Prices (1996-
2000):
Table 18: Effects of Market Concentration on Conventional Wholesale
Gasoline Prices (1994-2000):
Table 19: Effects of Market Concentration on Wholesale Prices of
Boutique Fuels (1995-2000):
Table 20: Selected Summary Statistics for Conventional Wholesale
Gasoline Markets:
Table 21: Econometric Estimates of Mergers' Effects on Conventional
Wholesale Gasoline Prices:
Table 22: Econometric Estimates of Mergers' Effects on Reformulated
Wholesale Gasoline Prices:
Table 23: Econometric Estimates of Mergers' Effects on CARB Wholesale
Gasoline Prices:
Table 24: Econometric Estimates of Market Concentration on Conventional
Wholesale Gasoline Prices:
Table 25: Econometric Estimates of Market Concentration on Conventional
Wholesale Gasoline Prices: Eastern Region (PADDs I-III):
Table 26: Econometric Estimates of Market Concentration on Conventional
Wholesale Gasoline Prices: Western Region (PADDs IV-V):
Table 27: Econometric Estimates of Market Concentration on Reformulated
Wholesale Gasoline Prices:
Table 28: Econometric Estimates of Market Concentration on CARB
Wholesale Gasoline Prices:
Figures:
Figure 1: U.S. Petroleum Industry Chain:
Figure 2: Product Yield from a Barrel of Crude Oil, 2000:
Figure 3: Major Events in the World Petroleum Market:
Figure 4: Shares of the World's Conventional Crude Oil Reserves
(February 2003):
Figure 5: World's Estimated Excess Production Capacity (February 2003):
Figure 6: Percentage of Mergers That Occurred in Each Segment of the
Petroleum Industry (1991-2000):
Figure 7: Petroleum Industry Merger Trends (1991-2000):
Figure 8: Selected Major Petroleum Mergers (1996-2002):
Figure 9: Percentage of Merger Transactions within the Downstream
Segment by Type of Key Assets Acquired:
Figure 10: Range of Reported Merger Transaction Values (1991-2000):
Figure 11: Petroleum Administration for Defense Districts:
Figure 12: Market Concentration for the Upstream Segment, as Measured
by the HHI (1990-2000):
Figure 13: Refining Market Concentration for PADD I Based on Crude Oil
Distillation Capacity (1990-2000):
Figure 14: Refining Market Concentration for PADD II Based on Crude Oil
Distillation Capacity (1990-2000):
Figure 15: Refining Market Concentration for PADD III Based on Crude
Oil Distillation Capacity (1990-2000):
Figure 16: Refining Market Concentration for PADD IV Based on Crude Oil
Distillation Capacity (1990-2000):
Figure 17: Refining Market Concentration for PADD V Based on Crude Oil
Distillation Capacity (1990-2000):
Figure 18: Percentage of U.S. States with Unconcentrated, Moderately
Concentrated, and Highly Concentrated Wholesale Gasoline Markets (1994,
2000, and 2002):
Figure 19: Wholesale Gasoline Market Concentration by State in Each
PADD (1994 and 2002):
Figure 20: The Flow of Gasoline Marketing:
Figure 21: Percentage Volume of Gasoline Sold through Different
Marketing Channels:
Figure 22: Normalized Inventories and Expected Demand for Wholesale
Gasoline (1994-2000):
Figure 23: Ratio of Inventories to Expected Demand for Wholesale
Gasoline (1994-2000):
Abbreviations:
API: American Petroleum Institute:
BP: British Petroleum:
CARB: California Air Resources Board:
cpg: cents per gallon:
DOE: Department of Energy:
DOJ: Department of Justice:
DTW: Dealer-tankwagon:
EAI: Energy Analysts International, Inc.
EIA: Energy Information Administration:
FERC: Federal Energy Regulatory Commission:
FRS: Financial Reporting System:
FTC: Federal Trade Commission:
HHI: Herfindahl-Hirschman Index:
MAP: Marathon Ashland Petroleum:
mmb/d: million barrels per day:
MTBE: methyl tertiary butyl ether:
OGJ: Oil and Gas Journal:
OPEC: Organization of Petroleum Exporting Countries:
OPIS: Oil Price Information Service:
PADD: Petroleum Administration for Defense Districts:
PMAA: Petroleum Marketers Association of America:
RFG: reformulated gasoline:
UDS: Ultramar Diamond Shamrock:
WTI: West Texas Intermediate:
Letter May 17, 2004:
The Honorable Carl Levin:
Ranking Minority Member:
Permanent Subcommittee on Investigations:
Committee on Governmental Affairs:
United States Senate:
Dear Senator Levin:
This report responds to your request that we examine the effect of the
wave of mergers that occurred in the U.S. petroleum industry in the
1990s. The report examines the segments of the petroleum industry that
were involved in mergers, the extent to which market concentration and
other aspects of market structure that affect competition have changed
in the U.S. petroleum industry because of mergers, and major changes
that have occurred in U.S. gasoline marketing because of mergers.
Finally, the report estimates the effects of mergers and market
concentration on U.S. gasoline prices at the wholesale level.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter. At that time, we will send copies to
appropriate congressional committees, the Chairman of the Federal Trade
Commission, the Secretary of Energy, the Attorney General, and other
interested parties.
Please contact me at (202) 512-3841 if you or your staff have any
questions. Major contributors to this report are listed in appendix
VII.
Sincerely yours,
Signed by:
Jim Wells:
Director, Natural Resources and Environment:
[End of section]
Executive Summary:
Purpose:
Since the 1990s, the U.S. petroleum industry has experienced a wave of
mergers, acquisitions, and joint ventures (hereafter referred to as
mergers), several of them between large oil companies that had
previously competed with each other for the sale of petroleum products.
For example, in 1998 British Petroleum (BP) and Amoco merged to form
BP-Amoco, which later acquired ARCO in 2000. In 1999, Exxon, the
largest U.S. oil company, acquired Mobil, the second largest, thus
forming ExxonMobil. Increasing concerns about potential
anticompetitive effects have caused some policy makers and consumer
groups to suggest that these mergers may have reduced competition in
the United States and ultimately led to higher gasoline prices.
In this context, the Ranking Minority Member, Permanent Subcommittee on
Investigations, Senate Committee on Governmental Affairs, asked GAO to
examine the effect of the mergers that have occurred in the U.S.
petroleum industry since the 1990s. GAO examined (1) mergers in the
U.S. petroleum industry from the 1990s through 2000 and why they
occurred, (2) the extent to which market concentration (the
distribution of market shares among competing firms within a market)
and other aspects of market structure in the U.S. petroleum industry
have changed as a result of mergers, (3) major changes that have
occurred in U.S. gasoline marketing since the 1990s, and (4) how
mergers and market concentration in the U.S. petroleum industry have
affected U.S. gasoline prices at the wholesale level.
To address these issues, GAO purchased and analyzed a large body of
data on mergers and wholesale gasoline prices, as well as data on other
relevant economic factors. GAO also developed econometric models for
examining the effects of eight specific mergers and increased market
concentration on U.S. gasoline wholesale prices. In doing so, GAO
isolated the effects of mergers and market concentration from several
other factors that could influence wholesale gasoline prices, such as
crude oil costs, gasoline inventories relative to demand, refinery
capacity utilization rates, and gasoline supply disruptions. GAO also
differentiated among fuel formulations in its analyses. Other factors-
-including taxes--can affect the retail gasoline prices that consumers
ultimately pay, but GAO did not examine the effects of such factors
because this study focuses on wholesale gasoline prices.
In the course of its work, GAO consulted with Dr. Severin
Borenstein,[Footnote 1] a recognized expert in the modeling of gasoline
markets; interviewed officials across the industry spectrum; and
reviewed relevant economic literature and numerous related studies.
Furthermore, GAO used an extensive peer review process to obtain
comments from experts in academia and relevant government agencies.
Background:
The U.S. petroleum industry consists of many firms of varying sizes
that operate in one or more of three broad segments--the upstream,
which consists of exploration for and production of crude oil and
natural gas; the midstream, which consists of pipelines and other
infrastructure used to transport these products; and the downstream,
which consists of refining crude oil and marketing petroleum products
such as gasoline and heating oil. While some firms engage in only one
or two of these activities, fully vertically integrated oil companies
participate in all of them. Before the 1970s, major oil companies that
were fully vertically integrated controlled the global network for
supplying, pricing, and marketing crude oil. However, the structure of
the world crude oil market has dramatically changed as a result of such
factors as the nationalization of oil fields by oil-producing
countries, the emergence of independent oil companies, and the
evolution of futures and spot markets in the 1970s and 1980s. Moreover,
U.S. oil prices, controlled by the government since 1971, were
deregulated in 1981. Consequently, the price of crude oil is now
largely determined in the world oil market, which is mostly influenced
by global factors, especially Organization of Petroleum Exporting
Countries' (OPEC) supply decisions and world economic and political
conditions.
The United States currently imports over 60 percent of its crude oil
supply. In contrast, the bulk of the gasoline used in the United States
is produced domestically. In 2001, for example, gasoline refined in the
United States accounted for over 90 percent of the total domestic
gasoline consumption. Companies that supply gasoline to U.S. markets
also post the domestic gasoline prices. Historically, the domestic
petroleum market has been divided into five regions, known as Petroleum
Administration for Defense Districts (PADD)--PADD I is the East Coast
region, PADD II is the Midwest region, PADD III is the Gulf Coast
region, PADD IV is the Rocky Mountain region, and PADD V is the West
Coast region.
Proposed mergers in all industries, including the petroleum industry,
are generally reviewed by federal antitrust authorities--including the
Federal Trade Commission (FTC) and the Department of Justice (DOJ)--to
assess the potential impact on market competition. According to FTC
officials, FTC generally reviews proposed mergers involving the
petroleum industry because of the agency's expertise in that industry.
FTC analyzes these mergers to determine if they would likely diminish
competition in the relevant markets and result in harm, such as
increased prices. To determine the potential effect of a merger on
market competition, FTC evaluates, among other things, how the merger
would change the level of market concentration. Conceptually, the
higher the concentration, the less competitive the market is and the
more likely that firms can exert control over prices. The ability to
maintain prices above competitive levels for a significant period of
time is known as market power.
Market concentration is commonly measured by the Herfindahl-Hirschman
Index (HHI), calculated by summing the squares of the market shares of
all the firms within a given market. According to the merger guidelines
jointly issued by DOJ and FTC, market concentration is ranked into
three separate categories based on the HHI: a market with an HHI under
1,000 is considered to be unconcentrated; if the HHI is between 1,000
and 1,800 the market is considered moderately concentrated; and if the
HHI is above 1,800, the market is considered highly concentrated.
While concentration is an important aspect of market structure--the
underlying economic and technical characteristics of an industry--other
aspects of market structure that may be affected by mergers also play
an important role in determining the level of competition in a market.
These aspects include barriers to entry, which are market conditions
that provide established sellers an advantage over potential new
entrants in an industry, and vertical integration, which is the
participation of firms in more than one successive stage of production
or distribution in a market.
Results in Brief:
GAO's analysis indicates that from 1991 through 2000 all three segments
of the U.S. petroleum industry experienced mergers--over 2,600
transactions in all. The majority of the mergers occurred during the
second half of the decade, most frequently in the upstream (exploration
and production) segment. Petroleum industry officials cited various
reasons for this wave of mergers, particularly the need for increased
efficiency and cost savings. Economic literature suggests that firms
also sometimes use mergers to enhance their market power. However, the
reasons cited by both sources generally relate to the merging
companies' desire to ultimately maximize profit or shareholder wealth.
Market concentration, as measured by HHI, has increased substantially
in the downstream segment of the U.S. petroleum industry since the
1990s, partly as a result of merger activities, while changing very
little in the upstream segment. Increased market concentration can
result in greater market power, potentially increasing prices above
competitive levels. On the other hand, it can lead to efficiency gains
through cost savings, which may be passed on to consumers in the form
of lower prices. The impact--either positive or negative--of increased
market concentration on prices ultimately depends on whether market
power or efficiency dominates. In the downstream (refining and
marketing) segment, market concentration in refining increased from
moderately to highly concentrated in the East Coast and from
unconcentrated to moderately concentrated in the West Coast; it
increased but remained moderately concentrated in the Rocky Mountain
region. Concentration in the wholesale gasoline market increased
substantially from the mid-1990s so that by 2002, most states had
either moderately or highly concentrated wholesale gasoline markets. On
the other hand, market concentration decreased somewhat in the upstream
(exploration and production) segment and remained unconcentrated by the
end of the 1990s. While mergers occurred in the midstream
(transportation) segment, GAO could not determine the extent to which
concentration changed in this segment because of a lack of relevant
data and difficulties in defining markets. Anecdotal evidence and
economic analysis by some industry experts suggest that mergers not
only affected market concentration but also enhanced vertical
integration and barriers to entry. GAO could not, however, determine
the extent to which these other aspects of market structure changed in
the petroleum industry because adequate data do not exist. Like
increased market concentration, increased vertical integration can
result in higher or lower consumer prices. Barriers to entry are
important in a market because firms that operate in concentrated
industries with high barriers to entry are more likely to have market
power.
According to industry officials, two major changes have occurred in
U.S. gasoline marketing since the 1990s, partly related to mergers.
First, the availability of unbranded (generic) gasoline has decreased
substantially. Unbranded gasoline is generally priced lower than
branded gasoline, which is marketed under the refiner's trademark.
Industry officials generally attributed the decreased availability of
unbranded gasoline to, among other factors, a reduction in the number
of independent refiners that typically supply unbranded gasoline. GAO
could not, however, statistically quantify the extent to which the
supply of unbranded gasoline has decreased because relevant data are
not available. The second change identified by industry officials is
that refiners now prefer dealing with large distributors and retailers.
This preference, according to the officials, has motivated further
consolidation in both the distributor and retail markets, including the
rise of hypermarkets--a relatively new breed of gasoline market
participants that includes such large retail warehouses as Wal-Mart and
Costco.
GAO's econometric analyses show that oil industry mergers and increased
market concentration generally led to higher wholesale gasoline prices
(measured in this report as wholesale prices less crude oil prices) for
different gasoline types in the United States in the second half of the
1990s, although prices sometimes decreased. Six of the eight specific
mergers GAO modeled--which mostly involved large, fully vertically
integrated companies--generally resulted in increases in wholesale
prices for branded and/or unbranded gasoline of about 2 cents per
gallon, on average. Two of the mergers generally led to price
decreases, of about 1 cent per gallon, on average. For conventional
gasoline--the predominant type used in the United States except in
areas that require special gasoline formulations to meet clean air
standards--the change in wholesale prices ranged from a decrease of
about 1 cent per gallon to an increase of about 5 cents per gallon. The
preponderance of price increases over decreases indicates that the
market power effects, which tend to increase prices, for the most part
outweighed the efficiency effects, which tend to decrease prices.
Increased market concentration, which captures the cumulative effects
of mergers as well as other market structure factors, also generally
led to higher prices for conventional gasoline, which is sold
nationwide, and for boutique fuels--gasoline that has been reformulated
for certain areas in the East Coast and Gulf Coast regions and in
California, to lower pollution. The price increases were particularly
large in California, where they averaged about 7 cents per gallon.
Higher wholesale gasoline prices were also a result of other factors:
low gasoline inventories, which typically occur in the summer driving
months; high refinery capacity utilization rates; and supply
disruptions, which occurred in the Midwest and the West Coast.
GAO's findings are generally consistent with previous studies of the
effects of specific oil mergers and of market concentration on
wholesale and retail gasoline prices. GAO used extensive peer review to
obtain comments from outside experts, which were incorporated as
appropriate. GAO believes that this is the first study to model the
impact of the petroleum industry's 1990s merger wave on wholesale
gasoline prices for the primary gasoline specifications for the entire
United States, an effort that required GAO to acquire large datasets
and perform complex analyses.
Principal Findings:
Mergers Occurred in All Segments of the U.S. Petroleum Industry in the
1990s for Several Reasons:
Over 2,600 merger transactions occurred from 1991 through 2000
involving all three segments of the U.S. petroleum industry. Almost 85
percent of the mergers occurred in the upstream segment (exploration
and production), while the downstream segment (refining and marketing
of petroleum) accounted for about 13 percent, and the midstream segment
(transportation) accounted for over 2 percent. The vast majority of the
mergers--about 80 percent--involved one company's purchase of a segment
or asset of another company, while about 20 percent involved the
acquisition of one company's total assets by another so that the two
became one company. Most of the mergers occurred in the second half of
the decade, including those involving large partially or fully
vertically integrated companies.
Petroleum industry officials and experts GAO contacted cited several
reasons for the industry's wave of mergers in the 1990s, including
achieving synergies, increasing growth and diversifying assets, and
reducing costs. Economic literature indicates that enhancing market
power is also sometimes a motive for mergers. These reasons mostly
relate to companies' ultimate desire to maximize profit or stock
values.
Mergers Contributed to Increases in Market Concentration and to Changes
in Other Aspects of Market Structure That Affect Competition:
Mergers in the 1990s have contributed to increases in market
concentration in the downstream segment of the U.S. petroleum industry,
while the upstream segment experienced little change overall. Increased
market concentration can result in greater market power, potentially
allowing firms to increase prices above competitive levels. On the
other hand, increased market concentration may also lead to efficiency
gains that can be passed on to consumers as lower prices. Whether
increased market concentration results in higher or lower prices
depends on which effect predominates. GAO found that market
concentration, as measured by the HHI, decreased slightly in the
upstream segment, based on crude oil production activities at the
national level, from 290 in 1990 to 217 in 2000. Moreover, based on
benchmarks established jointly by DOJ and FTC, the upstream segment of
the U.S. petroleum industry remained unconcentrated at the end of the
1990s. The increases in market concentration in the downstream segment
varied by activity and region. For example, the HHI of the refining
market in the East Coast region increased from a moderately
concentrated level of 1136 in 1990 to a highly concentrated level of
1819 in 2000. In the Rocky Mountain and the West Coast regions it
increased from 1029 to 1124 and from 937 to 1267, respectively, in that
same period. Thus, while each of these refining markets increased, the
Rocky Mountain region remained within the moderately concentrated range
but the West Coast region changed from unconcentrated in 1990 to
moderately concentrated in 2000. The HHI of refining markets also
increased from 699 to 980 in the Midwest region and from 534 to 704 in
the Gulf Coast region during the same period, although these markets
remained unconcentrated. In wholesale gasoline markets, GAO found that
market concentration increased broadly throughout the United States
between 1994 and 2002. Specifically, GAO found that 46 states and the
District of Columbia had moderately or highly concentrated markets by
2002, compared to 27 in 1994. For both the refining and wholesale
markets of the downstream segment, GAO found that merger activity and
market concentration were highly correlated for most regions of the
country.
Evidence from various sources indicates that in addition to increasing
market concentration, mergers also contributed to changes in other
aspects of market structure in the U.S. petroleum industry that affect
competition--specifically, vertical integration and barriers to entry.
However, GAO could not quantify the extent of these changes because of
a lack of relevant data. Vertical integration can conceptually have
both pro-and anticompetitive effects. Based on anecdotal evidence and
economic analyses by some industry experts, GAO determined that a
number of mergers that have occurred since the 1990s have led to
greater vertical integration in the U.S. petroleum industry, especially
in the refining and marketing segment. For example, GAO identified
eight mergers that occurred between 1995 and 2001 that might have
enhanced the degree of vertical integration, particularly in the
downstream segment. Concerning barriers to entry, GAO's interviews with
petroleum industry officials and experts provide evidence that mergers
had some impact on the U.S. petroleum industry. Barriers to entry could
have implications for market competition because companies that operate
in concentrated industries with high barriers to entry are more likely
to possess market power. Industry officials pointed out that large
capital requirements and environmental regulations constitute barriers
for potential new entrants into the U.S. refining business. For
example, the officials indicated that a typical refinery could cost
billions of dollars to build and that it may be difficult to obtain the
necessary permits from the relevant state or local authorities. At the
wholesale and retail marketing levels, industry officials pointed out
that mergers may have exacerbated barriers to entry in some markets.
For example, the officials noted that mergers have contributed to a
situation where pipelines and terminals are owned by fewer, mostly
integrated companies that sometimes deny access to third-party users,
especially when supply is tight--which creates a disincentive for
potential new entrants into such wholesale markets.
U.S. Gasoline Marketing Has Changed in Two Major Ways:
According to some petroleum industry officials that GAO interviewed,
gasoline marketing in the United States has changed in two major ways
since the 1990s. First, the availability of unbranded gasoline has
decreased, partly due to mergers. Officials noted that unbranded
gasoline is generally priced lower than branded. They generally
attributed the decreased availability of unbranded gasoline to one or
more of the following factors:
* There are now fewer independent refiners, who typically supply mostly
unbranded gasoline. These refiners have been acquired by branded
companies, have grown large enough to be considered a brand, or have
simply closed down.
* Partially or fully vertically integrated oil companies have sold or
mothballed some refineries. As a result, some of these companies now
have only enough refinery capacity to supply their own branded needs,
with little or no excess to sell as unbranded.
* Major branded refiners are managing their inventory more efficiently,
ensuring that they produce only enough gasoline to meet their current
branded needs.
GAO could not quantify the extent of the decrease in the unbranded
gasoline supply because the data required for such analyses do not
exist.
The second change identified by these officials is that refiners now
prefer dealing with large distributors and retailers because they
present a lower credit risk and because it is more efficient to sell a
larger volume through fewer entities. Refiners manifest this preference
by setting minimum volume requirements for gasoline purchases. These
requirements have motivated further consolidation in the distributor
and retail sectors, including the rise of hypermarkets.
Mergers and Increased Market Concentration Generally Led to Higher U.S.
Wholesale Gasoline Prices:
GAO's econometric modeling shows that the mergers GAO examined mostly
led to higher wholesale gasoline prices in the second half of the
1990s. GAO's analysis shows that the majority of the eight specific
mergers examined--Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal,
Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva),
BP-Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS--
resulted in higher prices of wholesale gasoline in the cities where the
merging companies supplied gasoline before they merged. For the seven
mergers that GAO modeled for conventional gasoline, five led to
increased prices, especially the MAP-UDS and Exxon-Mobil mergers, where
the increases generally exceeded 2 cents per gallon. For the four
mergers that GAO modeled for reformulated gasoline, two--Exxon-Mobil
and Marathon-Ashland--led to increased prices of about 1 cent per
gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger
led to price decreases of less than one-half cent per gallon for
branded gasoline only. For the two mergers--Tosco-Unocal and Shell-
Texaco I (Equilon)--that GAO modeled for the reformulated gasoline used
in California, known as California Air Resources Board (CARB) gasoline,
only the Tosco-Unocal merger led to price increases. The increases were
for branded gasoline only and exceeded 6 cents per gallon. The effects
of some of the mergers were inconclusive, especially for boutique fuels
sold in the East Coast and Gulf Coast regions and in California.
For market concentration, which captures the cumulative effects of
mergers as well as other competitive factors, GAO's econometric
analysis shows that increased market concentration resulted in higher
wholesale gasoline prices. Prices increased for conventional (non-
boutique) gasoline, the dominant type of gasoline sold nationwide from
1994 through 2000, by less than one-half cent per gallon for branded
and unbranded gasoline. The increases were larger in the West than in
the East--the increases were between one-half cent and 1 cent per
gallon in the West, and about one-quarter cent in the East (for branded
gasoline only). Price increases for boutique fuels sold in some parts
of the East Coast and Gulf Coast regions and in California were larger
compared to the increases for conventional gasoline. The wholesale
prices increased by about 1 cent per gallon for boutique fuel sold in
the East Coast and Gulf Coast regions between 1995 and 2000, and by
over 7 cents per gallon in California between 1996 and 2000.
GAO's analysis shows that wholesale gasoline prices were also affected
by other factors included in the econometric models--particularly,
gasoline inventories relative to demand, refinery capacity utilization
rates, and the supply disruptions that occurred in some parts of the
Midwest and the West Coast. In particular, wholesale gasoline prices
were about 1 cent per gallon higher when gasoline inventories were low
relative to demand, typically in the summer driving months. Also,
prices were higher by about one-tenth to two-tenths of 1 cent per
gallon when refinery capacity utilization rates increased by 1 percent.
The prices of conventional gasoline were about 4 to 5 cents per gallon
higher on average during the Midwest and West Coast supply disruptions.
The increase in prices for CARB gasoline was about 4 to 7 cents per
gallon, on average, during the West Coast supply disruptions.
Recommendations for Executive Action:
GAO is not making recommendations in this report.
Agency Comments and GAO's Evaluation:
GAO provided a draft of this report to FTC for its review and comment.
FTC stated that the draft report was flawed and did not provide a basis
for reliable judgments about the competitive effects of mergers in the
petroleum industry. However, GAO believes that its analyses are sound
and consistent with the views of independent economists and experts
that peer reviewed GAO's overall modeling approach. In particular, Dr.
Severin Borenstein, a recognized expert in the modeling of gasoline
markets, reviewed and commented on GAO's econometric analysis and
results at several stages. In response, GAO made revisions in the
course of developing and estimating its models and in its final report,
as appropriate. In addition, partly in response to FTC's comments, GAO
re-estimated its models to account for the effects of gasoline supply
disruptions that occurred in some parts of the West Coast and Midwest
regions.
FTC focused a substantial portion of its comments on GAO's econometric
models, outlining five concerns. First, FTC asserted that the models
did not control for the many factors that could cause gasoline price
increases, citing the following factors: seasonality, temperature,
income, changes in gasoline formulations, and supply disruptions in the
Midwest and West Coast regions. This assertion is not correct. GAO's
models incorporated key factors that affect wholesale gasoline prices,
including crude oil prices, refinery capacity utilization rates, and
gasoline inventory-to-demand ratio--a ratio that captures the effects
of seasonality and temperature. GAO considered the available data for
income by city but found that income data did not vary over time and
therefore would not be appropriate for the estimation technique (fixed-
effects) that GAO used. GAO controlled for changes in gasoline
formulations between seasons through the inventory-to-demand ratio;
other changes in formulations either occurred outside the time period
that GAO examined or were unlikely to significantly affect the results.
During GAO's December 2002 meeting with FTC staff, the staff agreed
that the effects of other formulations could be minimal because these
other formulations are typically a small percentage of the total volume
of gasoline in the areas that GAO modeled. Regarding the potential
effects of the Midwest and West coast supply disruptions, GAO believes
that the models indirectly captured these effects through the
inventory-to-demand ratio. Nonetheless, in response to FTC's comments,
GAO included a proxy for these disruptions in its models.
Second, FTC stated that GAO's modeling of the effect of market
concentration on wholesale gasoline prices was problematic, primarily
because the agency claimed that the methodology GAO used did not
meaningfully distinguish correlation from causation. GAO disagrees.
Modeling using appropriate economic structure is a common basis for
inferring causation, and GAO's market concentration model is consistent
with previous studies on prices and market concentration.
Third, FTC said that GAO used geographic markets that were empirically
unjustified to conduct its analysis. GAO recognizes the importance and
difficulty of defining relevant geographic markets for gasoline,
especially at the wholesale level, and discussed this issue with FTC
and other industry experts. FTC indicated that it could not provide
specific evidence on what the actual geographic markets for wholesale
gasoline were across the United States because, when analyzing
potential mergers, FTC focuses on a limited geographic area and relies
substantially on proprietary company data. Like other industry experts
that GAO contacted, FTC staff agreed in a December 2002 meeting that it
was appropriate to use terminal cities and even states, in some cases,
as geographic markets for wholesale gasoline. GAO therefore used
terminal (rack) cities as the geographic unit. In measuring market
concentration at the wholesale level, the draft report that GAO
provided to FTC used HHI data from DOE's Energy Information
Administration (EIA) that were based on sales of prime suppliers of
wholesale gasoline and available only at the state level. In the final
report, GAO measured market concentration using HHI data that GAO
constructed based on refinery capacity at the PADD level, after
consultation with GAO's expert consultant/reviewer, because GAO
believes that market concentration at the refining level more
effectively captures the potential market power of the refiners.
Fourth, FTC said that GAO's modeling results are, in many cases, not
robust. By robustness, FTC meant that model results yielded by
alternative modeling approaches should be consistent. GAO believes that
the results for its models' key variables--mergers and market
concentration--are robust because these models yielded consistent
results using alternative model specifications. In particular, when GAO
estimated its models without including the effects of supply
disruptions in the affected markets, the effects of the key policy
variables--mergers and market concentration--were consistent with the
results obtained when GAO incorporated the effects of supply
disruptions. Furthermore, because market concentration reflects the
cumulative effects of the mergers and other competitive factors, one
would expect the results from both approaches--market concentration
models and mergers models--to be similar if mergers are the predominant
contributing factor to market concentration. In GAO's study, the
overall results for both approaches were consistent. GAO believes these
are valid demonstrations of the robustness of its model results.
Fifth, FTC said that GAO did not provide complete technical
documentation for its econometric models. This is not correct. GAO
provided a detailed and complete description of the basis of its
econometric models, including data sources, sample selection processes
(including tables detailing the list of variables, definitions,
sources, data frequency, and level), specifications of the econometric
models, and estimation techniques.
In addition to criticizing GAO's models, FTC also criticized GAO's
findings about the effects of mergers on the structure of the petroleum
industry and U.S. gasoline marketing. Specifically, the agency
commented that GAO's findings--that mergers have contributed to
barriers to entry and vertical integration and that the availability of
unbranded gasoline has decreased--lacked quantitative foundations and
were therefore flawed. GAO disagrees with this opinion. Economic
findings can be qualitative or quantitative. GAO stated in its report
that it could not quantify the extent to which mergers have affected
barriers to entry and vertical integration because of a lack of
comprehensive data to fully measure these factors and because there is
no consensus on how to appropriately measure them. GAO's finding that
mergers have contributed to barriers to entry was based on information
from industry officials who provided examples, which GAO included in
its report, to validate this finding. While GAO discussed the overall
importance of barriers to entry in a market, which FTC recognizes in
its merger guidelines, GAO did not conclude, contrary to FTC's
assertions, that barriers to entry have harmed or eliminated
competition in the industry. To validate GAO's finding that mergers
have contributed to vertical integration, GAO presented examples of
mergers--particularly in the downstream segment between refiners and
marketers--that were vertical in nature (that is, the mergers involved
different functional levels of the merging companies) and would
contribute to increased vertical integration. GAO also added language
to its report, as suggested by EIA, acknowledging the shift during the
1990s toward fully integrated companies' divestiture of certain
downstream assets, such as refineries, to nonintegrated companies. For
its finding that unbranded gasoline has become less available, GAO
relied on extensive interviews with industry participants in different
regions of the country. While it would be desirable to ascertain this
finding quantitatively, GAO noted in its report that EIA--the federal
agency mandated by Congress to collect energy data, including data on
gasoline supply--told GAO that the agency does not require petroleum
companies to report gasoline data in the form that would permit the
identification of branded and unbranded sales.
The full text of FTC's comments and GAO's responses are included in
appendixes V and VI. Appendix V contains the comments from FTC
Commissioners and appendix VI contains the comments from FTC's Bureau
of Economics staff.
[End of section]
Chapter 1: Introduction:
Since the 1990s, the U.S. petroleum industry has experienced a wave of
mergers, acquisitions, and joint ventures (hereafter referred to as
mergers). Some of these mergers involved well known major petroleum
companies that had previously competed with each other for the sale of
gasoline and other petroleum products. There were also numerous mergers
between smaller companies. Some policy makers and consumer groups
believe that these mergers may have reduced competition in the U.S.
petroleum industry and ultimately led to higher gasoline prices. During
the second half of the 1990s, U.S. gasoline prices exhibited periods of
high price volatility, with fairly frequent price spikes. The price of
crude oil, the primary input for producing gasoline, was similarly
volatile.
The Petroleum Industry Consists of Three Main Segments:
As depicted in figure 1, the U.S. petroleum industry consists of the
exploration and production segment (upstream); the refining and
marketing segment (downstream); and a third segment typically referred
to as the midstream, which consists of the infrastructure used to
transport crude oil and petroleum products. Some of the petroleum
companies in the United States, like Exxon-Mobil and Chevron-Texaco,
operate in all segments of the industry--that is, they are fully
vertically integrated. Others, like Anadarko and Valero, that operate
in one or more but not all segments are generally called partially
vertically integrated or independents.[Footnote 2]
Figure 1: U.S. Petroleum Industry Chain:
[See PDF for image]
[End of figure]
The Upstream Segment:
The activities of the upstream segment consist essentially of
exploration for and production of crude oil and natural gas. Hence, the
upstream is also referred to as the exploration and production segment.
Participants in the U.S. upstream include fully vertically integrated
companies and independent producers. The U.S. upstream segment is
characterized by a large number of independent producers and a smaller
number of fully vertically integrated oil companies.
The Energy Information Administration (EIA)--the independent
statistical and analytical agency within the U.S. Department of Energy
(DOE)--has classified U.S. upstream operators into three main
categories according to the size of their production in 2001, not
according to whether they are integrated or independent:
* large operators--who produced a total of 1.5 million barrels or more
of crude, 15 billion cubic feet of natural gas, or both;
* intermediate operators--who produced a total of at least 400,000
barrels of crude oil, 2 billion cubic feet of natural gas, or both, but
less than the large operators; and:
* small operators--who produced less than the intermediate operators.
Based on this classification, EIA estimated that as of 2001, there were
179 large operators, which accounted for 84.2 percent of crude oil
production; 430 intermediate operators, which accounted for 5.8 percent
of crude oil production; and 22,519 small operators, which accounted
for 10 percent of crude oil production.
Fully vertically integrated companies are generally large operators,
while independent producers are generally small operators, with a few
medium and large operators. While the fully vertically integrated
companies are generally multibillion dollar companies that are publicly
traded, the independent producers include many extremely small,
privately owned operations as well as a few multibillion dollar and
publicly traded companies. In general, the fully vertically integrated
companies have upstream operations both in the United States and
overseas and accounted for about 60 percent of U.S. crude oil
production in 2002. On the other hand, the exploration and production
activities of the independents occur:
mostly in the United States and accounted for about 40 percent of the
crude oil produced in the United States in 2002.[Footnote 3]
The price of crude oil produced in the United States is determined in
the world oil market because the decontrol of domestic oil prices in
1981 has effectively linked the U.S. oil market to the world oil
market. In 2000, the United States contained only about 2 percent of
world's estimated oil reserves but accounted for about 26 percent of
the world's oil demand. From 1990 to 2000, U.S. production decreased
significantly, from about 7.4 million barrels per day (mmb/d), or about
55.5 percent of total U.S. crude oil supply, to about 5.8 mmb/d, or 39
percent of total crude oil supply. Nevertheless, the United States was
still the world's third largest producer of crude oil. U.S. reliance on
oil imports has increased over the last decade as domestic production
has dwindled.
The Midstream Segment:
The midstream segment transports crude oil and petroleum products.
Petroleum transportation facilities include pipelines, marine tankers
and barges, railways, and trucks. Pipelines and, to a lesser extent,
the other carriers transport domestically produced crude oil from the
production points to the refineries, while marine carriers generally
transport imported oil. Refined products, such as gasoline, are also
carried via these modes from refineries to storage terminals, from
which they are generally transported by trucks to retail stations.
In general, pipelines are the dominant and most efficient mode of
transporting crude oil and petroleum products in the United States.
According to data from the Association of Oil Pipelines, pipelines
transported 66.1 percent of all the crude and petroleum products in the
United States in 2000. Marine tankers and barges transported 28
percent, while trucks and railways hauled 3.6 percent and 2.3 percent,
respectively. According to DOE's Office of Transportation Technology,
there are more than 200,000 miles of oil pipelines in the United States
in all 50 states. The Federal Energy Regulatory Commission (FERC)
regulates the rates on common carrier pipelines. The Association of Oil
Pipelines told us that FERC currently regulates about 202 pipeline
companies. According to the pipeline association, 84 percent of the
pipelines are federally regulated while 16 percent are not.
The Downstream Segment:
Refining and marketing are the main activities of the downstream
segment. Refining is the process of transforming crude oil into
petroleum products ranging from gasoline and distillate fuel oil
(heating oil) to heavier products such as asphalt. As figure 2 shows,
gasoline accounted for nearly half of U.S. refinery output in
2000.[Footnote 4]
Figure 2: Product Yield from a Barrel of Crude Oil, 2000:
[See PDF for image]
[End of figure]
According to data from EIA, as of January 1, 2002, there were 149
operable refineries in the United States, with a total crude oil
distillation capacity of about 16.8 mmb/d. Overall, 60 refining firms,
including large fully vertically integrated companies and independent
refiners, owned these refineries.[Footnote 5] The refining companies
ranged in size from the smallest, with only 880 barrels per day of
crude oil distillation capacity, to the biggest, with a combined
refinery capacity of 1.8 mmb/d of crude distillation. Not all of these
refineries produce gasoline; some, especially those with small
distillation capacity, produce only asphalt.
Marketing in the downstream involves selling petroleum products to
customers, who are generally wholesale and retail purchasers. For
gasoline, as shown in figure 1, refiners arrange to move products from
the refineries to storage terminals, from which they sell the product
to wholesale purchasers. As discussed in detail in chapter 4, there are
different classes of wholesale gasoline purchasers in the United
States, and the prices they pay depend, in part, on the type of
relationship they have with the refiners. From the terminals, gasoline
is distributed to retail stations for sale to final consumers.
Different Entities Have Historically Exerted Influence over the World
Petroleum Market:
The world petroleum market, of which the U.S. market is a part, has
been characterized by eras when a relatively small number of entities
exerted considerable influence on the market. Three entities in
particular have significantly influenced the world petroleum market
during their eras: (1) Standard Oil, (2) the "Seven Sisters," and (3)
the Organization of Petroleum Exporting Countries (OPEC). Figure 3
shows a timeline of the major events that shaped the eras dominated by
these entities.
Figure 3: Major Events in the World Petroleum Market:
[See PDF for image]
[End of figure]
The Standard Oil Era:
The Standard Oil Company was established in 1870, about a decade after
the discovery of crude oil in commercial quantity in the United States,
and the company quickly became the dominating force in the emerging
U.S. petroleum industry. During the decade prior to the establishment
of Standard Oil, the new industry experienced periods of overcapacity
in both crude oil production and refining. The industry consisted of
numerous independent producers and refiners. Railroad companies
provided transportation services for crude oil and refined products.
Thus, the industry tended to be intensely competitive and, by the end
of the 1860s, the industry had excess crude oil supply and refinery
capacity, resulting in frequent price fluctuations and price collapses.
In response to these conditions, Standard Oil adopted a process of
consolidation that would ultimately lead to the virtual monopolization
of the industry. Specifically, it employed a combination of tactics
that included acquisitions and buyouts of competitors, vertical
integration, control of transportation, and below-cost pricing to force
competitors out of business. By the time Standard Oil was broken into
separate companies in 1911 under the Sherman Antitrust Act, the company
was able to effectively determine the purchase price for American crude
oil. The breakup of Standard Oil ended its dominance as a single
company over the U.S. petroleum market. However, the resulting separate
companies began seeking ways to cooperate among themselves and with
other foreign oil companies to control the global supply and price of
oil.
The "Seven Sisters" Era:
During the decades following the breakup of Standard Oil until about
1970, seven oil companies--Exxon, Mobil, Chevron, Gulf, Texaco, Royal
Dutch/Shell, and British Petroleum (BP)--dominated and controlled the
global network for supplying, pricing, and marketing crude oil. Because
of their close association and multiple joint ventures, these companies
ultimately became known as the "Seven Sisters." The strategies the
companies employed to control the world petroleum market sometimes
included cooperation and collusion among themselves. For example, as a
surge of oil supply from the United States and other countries flooded
the world market in the 1920s, the ensuing competition between some of
the companies for market share precipitated collapsing oil prices and
threatened the security of their markets. In response, Exxon, Royal
Dutch Shell, and BP met to draw up a series of agreements in the late
1920s and 1930s to curb what they viewed as "ruinous competition" in
the market. The overall thrust of the agreements was to allocate market
shares or quotas; fix prices; and eliminate, through acquisitions and
other means, the potential competitive impact of other oil companies
outside their group, namely the independent producers and refiners.
Although by the 1960s the Seven Sisters had lost some ground in the
world petroleum market--especially in the United States where the role
of the independents continued to increase--as late as 1972, the seven
companies were still producing 91 percent of the Middle East's crude
oil and 77 percent of the supply outside the United States and the
former Soviet Union. By the 1960s and 1970s, the United States had
become a substantial net importer of oil.
The OPEC Era:
OPEC was formed in 1960 after members of the Seven Sisters unilaterally
cut the posted price of Middle Eastern crude oil--upon which they paid
taxes and royalties to the producing nations--without consulting the
producing nations. The founding members of OPEC were Saudi Arabia,
Iraq, Iran, Kuwait, and Venezuela. Over time, the organization's
membership grew to 13, with the addition of the United Arab Emirates,
Nigeria, Libya, Qatar, Algeria, Indonesia, Ecuador, and Gabon.[Footnote
6] The aim of the organization was to create an entity through which
member countries could jointly confront the Seven Sisters over the
control of their oil. The group had little or no influence on the world
oil market during its first 10 years, partly because the international
oil companies, not OPEC member countries, owned and controlled oil
reserves in those countries in the 1960s. OPEC also lacked sufficient
cohesion among its members to effectively challenge the influence of
the Seven Sisters. Since the 1970s, however, OPEC has been a dominant
force in the world oil market. OPEC became a major influence in 1973
when it orchestrated a nearly fourfold price increase in a matter of
months through an oil embargo by its Arab members against the United
States and other countries friendly to Israel. Two other major oil
price episodes resulting from events in OPEC member countries also
occurred. In 1979 the Iranian revolution caused the doubling of crude
oil prices from about $14 a barrel to $34 a barrel, and in 1990 the
Iraqi invasion of Kuwait caused an immediate increase in the crude oil
price from about $16 a barrel to about $28 barrel.
As a group, OPEC holds the world's largest and lowest-cost reserves of
crude oil. As figure 4 shows, OPEC countries accounted for over two-
thirds of the world's estimated conventional reserves of about 1
trillion barrels in 2001 (the latest available data). Persian Gulf OPEC
countries had by far the largest reserves, with Saudi Arabia alone
accounting for over one-fourth of world reserves. In contrast, the
United States contained an estimated 2 percent of world reserves.
Figure 4: Shares of the World's Conventional Crude Oil Reserves
(February 2003):
[See PDF for image]
[End of figure]
Moreover, as shown in figure 5, OPEC countries, especially Saudi
Arabia, also hold most of the world's excess production capacity, which
means they are the only countries in a position to increase production
relatively quickly if there is a supply shortage in the world oil
market. These conditions give OPEC countries considerable flexibility
to influence world oil prices.
Figure 5: World's Estimated Excess Production Capacity (February 2003):
[See PDF for image]
[End of figure]
During the 1980s, OPEC nations abandoned their strategy of setting
"official" prices for their crude oil, but the individual and/or
collective actions of the organization's member countries can still
have a significant impact on world oil prices. OPEC now establishes a
"target" price during its biannual meetings. To achieve this price,
OPEC sets an aggregate production level, or quota, based on the
organization's determination of the demand for its oil. OPEC then
allocates voluntary production quotas among its members, primarily
based on the size of each member's oil reserves and other negotiated
factors. Whether or not the target price is achieved depends on the
discipline exercised in producing oil, as well as the actual demand for
oil and non-OPEC countries' production levels. If, by adjusting its
production, OPEC keeps the world's oil supply relatively tight with
respect to demand, the average world price will likely be close to the
target price range.
FTC and DOJ Review Proposed Mergers to Preserve Market Competition:
While crude oil prices are determined by global market forces and
particularly by OPEC countries' actions, the prices of gasoline and
other petroleum products are generally influenced by, among other
things, the extent of domestic market competition. Thus, U.S. antitrust
laws, which are enforced by the Federal Trade Commission (FTC) and the
Department of Justice (DOJ), prohibit mergers and other activities that
may be anticompetitive. As part of their responsibility for enforcing
the antitrust laws, FTC and DOJ review proposed mergers to ensure they
would not be anticompetitive. Under the Hart-Scott-Rodino Act of
1976,[Footnote 7] as amended, companies contemplating a merger valued
at $15 million or more ($50 million or more from February 1, 2001) and
meeting certain other conditions must formally notify these agencies.
There is then a 30-day waiting period to allow FTC or DOJ to review the
proposed merger to determine its potential effect on
competition.[Footnote 8] If the review does not indicate a need for
further investigation, the merger can be consummated at the end of the
waiting period or earlier if the parties request early termination of
the waiting period and the request is granted.[Footnote 9] According to
an FTC official, FTC generally handles mergers in the petroleum
industry because of its expertise in the area.
The agencies will challenge a merger if it may substantially lessen
competition or tend to create or enhance market power or to facilitate
its exercise. Guidelines issued jointly by DOJ and FTC in 1992 outline
how the agencies generally analyze proposed horizontal mergers and
indicate when the government is likely to challenge a merger.[Footnote
10] For a recent GAO report, FTC staff told us that the majority of
mergers that raise antitrust concerns are horizontal mergers (mergers
between firms operating in the same market).[Footnote 11] The
guidelines indicate that horizontal mergers should not be permitted to
create, enhance or facilitate the exercise of market power, which is
the ability of one or more firms to profitably maintain prices above
competitive levels for a significant period of time.
In reviewing proposed horizontal mergers, FTC first examines market
concentration--a function of the number of firms in a market and their
respective market shares. Other things being equal, market
concentration affects the likelihood that one company, or a small group
of firms, could successfully exercise market power. The merger
guidelines identify the Herfindahl-Hirshman Index (HHI) as the measure
used in evaluating market concentration. The HHI reflects the
composition of a market while giving proportionately greater weight to
the market shares of the larger firms.[Footnote 12] The higher the HHI,
the greater the market concentration. According to the guidelines, a
merger will generally not be challenged in a market where HHI after the
proposed merger would be:
* less than 1,000 points (an unconcentrated market);
* 1,000 to 1,800 points (a moderately concentrated market), and the HHI
would be increased by less than 100 points by the merger; or:
* over 1,800 points (a highly concentrated market), and the merger
would increase it by less than 50 points.
Mergers that would increase the concentration above these levels will
be examined further by the agency. Other factors that affect market
competitiveness, such as barriers to entry into a market, are also
considered in deciding whether to challenge a proposed merger. (See
chapter three of this report for further discussion of these factors
and HHI).
If FTC determines that a merger has potential anticompetitive effects,
it can litigate to block the merger; negotiate a settlement to resolve
anticompetitive aspects of the merger while allowing the transaction to
go forward; or develop a consent arrangement that allows the merger to
proceed but requires divestiture of assets to remedy the decrease in
competition that would otherwise result. FTC has required divestiture
of assets in some of the mergers in the petroleum industry since the
1990s. For example, FTC required that Exxon divest all its retail
stations from New York to New England and that Mobil divest all its
retail stations from New Jersey to Virginia as a condition for the
merger between the two companies. Tosco acquired these stations.
Objectives, Scope, and Methodology:
As requested by the Ranking Minority Member, Permanent Subcommittee on
Investigations of the Senate Committee on Governmental Affairs, this
report examines the impact of mergers on the U.S. petroleum industry.
It includes an econometric modeling of the effects of mergers and
market concentration on U.S. wholesale gasoline markets. Specifically,
the report examines:
* mergers in the U.S. petroleum industry from the 1990s through 2000
and why they occurred,
* the extent to which market concentration and other aspects of market
structure in the petroleum industry have changed since the 1990s as a
result of mergers,
* the major changes that have occurred in U.S. gasoline marketing since
the 1990s, and:
* the effect of mergers and market concentration in the U.S. petroleum
industry on U.S. gasoline prices at the wholesale level.
To examine mergers in the U.S. petroleum industry in the 1990s and why
they occurred, we analyzed a large body of data on petroleum industry
merger transactions that occurred in the United States from the 1990s
through 2000. We purchased data on mergers that occurred in all
segments of the U.S. petroleum industry from 1990 through 2000 from
John S. Herold, Inc., and Thompson Financial. We also obtained
information from EIA on some of the industry's mergers since the 1990s.
In addition, we interviewed officials from these entities. We also
interviewed petroleum industry officials, including those whose firms
were involved in mergers, and experts to obtain their views on the
reasons for the mergers and reviewed relevant economic literature and
FTC documents.
To assess the extent to which market concentration and other aspects of
market structure have changed since the 1990s as a result of mergers,
we obtained data on petroleum industry market shares from the Oil and
Gas Journal (OGJ) and EIA. We also used the merger data from John S.
Herold, Inc., and Thomson Financial. Using these data, we calculated
and analyzed changes in the HHI--a measure of market concentration--for
the various segments of the industry and, as necessary, for the
relevant geographic markets, from the 1990s through 2000 or 2001, where
data availability allowed.[Footnote 13] We also calculated correlation
coefficients, where data availability permitted, to determine the
extent to which changes in market concentration were statistically
correlated with mergers. Because empirical data on other aspects of
market structure--essentially vertical integration and barriers to
entry--are usually not available, particularly at the broad levels that
our study examined, we relied instead on an extensive body of relevant
economic literature. Economic research on market structure is abundant
and well developed, although it has rarely been applied specifically to
the petroleum industry. We also interviewed oil industry officials and
experts to obtain their views.
To determine what major changes have occurred in U.S. gasoline
marketing since the 1990s, we analyzed EIA's data on gasoline
marketing, reviewed relevant studies and documents from EIA and
industry sources, and interviewed petroleum industry officials and
experts and EIA officials.
To examine how mergers and market concentration have affected U.S.
gasoline prices at the wholesale level, we developed econometric models
that examined the effect of mergers and of market concentration on U.S.
wholesale gasoline markets from 1994 through 2000. We chose 1994 as the
initial year of our analysis because the market concentration (HHI)
data on wholesale gasoline provided by EIA were available from 1994.
Also, the Oil Price Information Service (OPIS), the company from whom
we purchased the wholesale gasoline price data, informed us that it had
more comprehensive data on U.S. wholesale gasoline prices starting in
the second half of the 1990s than earlier. We developed two groups of
econometric models:
* one to estimate the impact of selected individual mergers on the
wholesale gasoline price (measured in this report as wholesale gasoline
price minus crude oil cost) in affected terminal markets and:
* another to estimate the impact of market concentration, which
essentially captures the cumulative effects of all the mergers in the
U.S. wholesale petroleum industry during the 1990s as well as the
effects of other changes in the structure of U.S. wholesale gasoline
markets on wholesale gasoline prices in different U.S. geographic
regions.
In doing so, we isolated the effects of mergers and market
concentration from several other factors that could influence wholesale
gasoline prices, such as crude oil costs, gasoline inventories relative
to demand, refinery capacity utilization rates, and gasoline supply
disruptions. We also differentiated among fuel formulations in our
analyses. Retail gasoline prices that consumers ultimately pay may be
affected by many other factors that vary from location to location,
including, among other things, taxes, land values, zoning regulations,
and competition at the retail level. We did not examine the effects of
such factors because this study focuses on wholesale gasoline prices.
We provided a detailed draft outline of our econometric methodology,
including a description of the types and sources of data we used, to a
cross section of experts in academia, industry, and government for peer
review and comment. We discussed extensively our econometric
methodology, including data requirements, with the staff of FTC's
Bureau of Economics. We requested comments from the American Petroleum
Institute (API) on our econometric methodology, but they did not
provide any comments. We also provided the same draft outline and our
estimated results and interpretations to our consultant/peer reviewer,
Dr. Severin Borenstein, E.T. Grether Professor of Business
Administration and Public Policy and Director of the California Energy
Institute at the University of California, Berkeley, for review and
comment. See appendix II for a list of expert peer reviewers. Based on
comments from and discussions with these experts and this consultant,
we revised our models and interpretations as appropriate. Also, we
interviewed industry officials and representatives involved in all
aspects of the petroleum industry and in all major U.S. regions, oil
industry experts, and officials from relevant federal and state
agencies. In addition, we reviewed numerous economic studies on
gasoline markets and pricing, including the few studies that have
modeled the impact of mergers on gasoline markets; several textbooks on
econometrics and industrial organization; and econometric studies of
the impact of mergers and market concentration on other industries.
Appendix IV contains details on our models' methodology, types and
sources of data we used, and our econometric analysis.
Although in building our models we drew substantial insight from
existing models, our models differ from most previous ones in three
principal ways. First, to our knowledge, our study is the first to
model the impact of the petroleum industry's merger wave in the 1990s
on the wholesale gasoline prices for the entire United States, while
isolating the effects of major boutique fuels and unique geographic
markets as well as the effects of specific (individual) mergers,
including some of the largest in the industry's history. Doing so
required us to acquire large and expensive data and make complex
computations. Second, we studied the behavior of wholesale prices
because this allows us to capture the net effect of any potential
market power and efficiency gains from mergers and market
concentration. Third, we included the effects of refinery capacity
utilization rates and of gasoline inventories, whereas other studies
have either omitted these variables entirely or included only one.
Most of the data used for our econometric analysis of the impact of
mergers and market concentration on wholesale prices were purchased
from OPIS, a company that collects and sells oil industry information
to oil companies and other entities. We also obtained data from EIA and
the Department of Commerce's Bureau of the Census.
This report did not assess the appropriateness of FTC's review or the
actions they took regarding mergers in the petroleum industry. However,
we obtained detailed comments from FTC staff and commissioners and EIA
staff on our modeling approach and revised our models and report where
appropriate.
We conducted our review between June 2001 and April 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Chapter 2: All Segments of the Petroleum Industry Experienced Mergers
for Several Reasons:
During the 1990s, mergers occurred in all segments of the U.S.
petroleum industry, but the upstream segment had the most mergers. The
majority of the mergers--especially mergers among large firms--occurred
in the second half of the decade. According to petroleum industry
officials, mergers occurred in the petroleum industry for several
reasons mostly related to the firms' desire to maximize profits through
efficiency gains and cost savings. In addition to these reasons,
economic literature also indicates that firms' desire to enhance their
market power is a motive for mergers.
Mergers Occurred in All Three Segments, but Most Frequently in the
Upstream:
A total of over 2,600 merger transactions occurred in the U.S.
petroleum industry from 1991 through 2000.[Footnote 14] As shown in
figure 6, the upstream segment accounted for almost 85 percent of these
mergers. About 13 percent of the mergers occurred in the downstream
segment. The midstream segment, specifically pipelines--a key
infrastructure for moving crude oil and petroleum products--accounted
for about 2 percent of the mergers.[Footnote 15]
Figure 6: Percentage of Mergers That Occurred in Each Segment of the
Petroleum Industry (1991-2000):
[See PDF for image]
Note: When a merger involved the acquisition of assets simultaneously
in each segment, it was counted in the segment with the largest
monetary value.
[End of figure]
As shown in figure 7, mergers in all segments occurred more frequently
in the mid-to late 1990s than in the early 1990s. Some of the mergers
involving vertically integrated oil companies and large independent
refiners occurred during this time (see figure 8).[Footnote 16]
Figure 7: Petroleum Industry Merger Trends (1991-2000):
[See PDF for image]
[End of figure]
Figure 8: Selected Major Petroleum Mergers (1996-2002):
[See PDF for image]
[End of figure]
Mergers that occurred in the petroleum industry in the 1990s were
categorized into two broad transaction types: corporate mergers and
asset mergers.[Footnote 17] About 20 percent of the mergers that
occurred in the U.S. petroleum industry were corporate mergers,which
generally involve the acquisition of a company's total assets by
another so that the two become one company.[Footnote 18] Most of the
mergers depicted in figure 8, such as Exxon-Mobil, BP-Amoco, Chevron-
Texaco, and Valero-UDS, were corporate mergers.
The majority of the mergers (about 80 percent) were asset mergers,
which involved one company's purchase of only a segment or asset of
another company, such as Williams' purchase of three storage and
distribution terminals from Amerada Hess in 1999 and Tosco's
acquisition of Unocal's refining and marketing assets on the West
Coast. Similarly, the majority of the mergers that occurred in each of
the segments were asset mergers. In the upstream, about 85 percent of
the merger transactions were asset mergers, involving the acquisition
of oil and/or gas reserves.[Footnote 19] In the downstream segment,
about 54 percent were asset mergers, where one or more downstream
assets--such as refining or gasoline service station assets--were
purchased. As figure 9 shows, 71 percent of all mergers in the
downstream segment involved the acquisition of wholesale distribution
assets.
Figure 9: Percentage of Merger Transactions within the Downstream
Segment by Type of Key Assets Acquired:
[See PDF for image]
Note: According to the data from John S. Herold, Inc., the wholesale
marketing category presented here includes both those establishments
engaged in wholesale gasoline marketing and those engaged in the
storage and/or wholesale distribution of crude petroleum, other
petroleum products, and natural gas (including liquid petroleum gas).
[End of figure]
As shown earlier, mergers involving transportation assets in the
midstream segment accounted for a small percentage of the total merger
transactions in the industry. About 65 percent of the midstream merger
transactions were asset mergers.
The mergers varied widely in terms of transaction values,but the
highest value mergers were corporate mergers. Our merger data included
transaction values for about 57 percent of the mergers, and those
values ranged from less than $1 million to over $10 billion. As
indicated in chapter 1, under the Hart-Scott-Rodino Act, firms
contemplating mergers with a transaction valued at $50 million or more
are required to provide information to FTC and the Department of
Justice and to observe a waiting period before completing the
transaction while it is reviewed for potential anticompetitive effects.
FTC reviews required some petroleum companies that merged to divest
assets to remedy potential anticompetitive effects.
As figure 10 shows, the majority of the reported transaction values
were below $50 million, and over 89 percent of these mergers were asset
transactions. Of the mergers with reported transactions values, about
32 percent of them exceeded $50 million, and about 3 percent were over
$1 billion. The latter accounted for over 83 percent of the total
dollar value reported for all petroleum mergers during the past decade.
Figure 10: Range of Reported Merger Transaction Values (1991-2000):
[See PDF for image]
[End of figure]
Several Reasons Were Cited for Mergers in the Petroleum Industry:
Petroleum industry officials and experts that we spoke with cited a
number of reasons for the wave of mergers in the industry in the 1990s.
These reasons generally related to the need for increased efficiency
and cost savings to ultimately maximize profits. Specifically, as
discussed below, the officials and experts said that mergers were
motivated by the firms' desire to achieve synergies, diversify their
assets, reduce costs, enhance stock values, and respond to price
volatility.[Footnote 20] However, economic literature also indicates
that the desire to enhance and use market power--as a means to help
maximize profits--may also have been a motive.
Achieving Synergies:
Many oil industry officials indicated that achieving synergies--
benefits from the combined strengths of different companies--was an
important motivation for some of the mergers in the industry in the
1990s. Firms that engage in different but complementary activities may
achieve synergies from mergers because it is more efficient and less
costly for one company to perform two related activities than for two
specialized firms to perform them separately. Furthermore, economic
literature states that mergers can create synergies that improve firms'
growth potential by yielding scale economies in production, marketing,
research and development, and management, among other things. We found
several instances of mergers where company officials cited synergies or
complementary activities as a factor for the transactions. These
mergers include Marathon Ashland's acquisition of Ultramar Diamond
Shamrock's Michigan terminals, jobber networks, convenience stores, and
pipelines in 1999; Sunoco's acquisition of crude oil transportation and
marketing business assets from Pride Refining in 1999; and Tesoro's
acquisition of BP Amoco's West Coast marine fuels operations in 1999.
Diversifying Assets:
According to industry officials, the need for firms to diversify their
portfolios in order to maintain stable profits played a role in
petroleum industry mergers. Officials cited the acquisition of natural
gas assets as a reason for mergers. Within the upstream segment, most
independent exploration and production firms have both oil and gas in
their portfolios because crude oil and natural gas are generally
produced jointly. However, in the 1990s, some companies sought to
increase their natural gas reserves through acquisition. For example,
in 1999, Dominion acquired Remington Energy, Ltd., a natural gas
production and exploration company, and increased its natural gas
reserves to one trillion cubic feet. For a producer, natural gas could
become a cushion during periods of low oil prices, all things being
equal, allowing the producer to develop and produce more gas when oil
prices are low, and vice versa. Moreover, EIA has reported that natural
gas demand is likely to increase in coming years due to its relatively
clean-burning qualities in comparison with other fossil fuels.
Within the downstream segment, some independent refiners acquired
marketing and retail assets to expand their presence in U.S. retail
markets. For example, Tosco's acquisition of Unocal's West Coast
refining, marketing, and transportation assets allowed Tosco to
diversify into retail operations on the West Coast.
Reducing Costs:
Industry officials said that some mergers occurred as part of efforts
to cut costs. Petroleum companies generally view each activity--such as
exploration and production, refining, wholesaling, and retailing--as an
individual "profit center." As a prudent business practice, petroleum
firms assess the performance of each profit center relative to their
overall business to determine where they could reduce costs or improve
efficiency by acquiring or divesting assets. For example, one industry
official said that mergers occurred frequently in the upstream segment
partly because it is more cost effective and less risky to buy existing
reserve assets than to discover new ones. Industry officials also told
us that some firms divested refineries partly because of high operating
costs and low returns. For companies acquiring these refineries, it was
more cost effective to acquire an existing refinery than to build one,
especially given the high cost and stringent environmental requirements
for refinery construction in the United States.
Enhancing Stock Values:
Some industry officials said that mergers, especially those involving
publicly traded companies, were also partly motivated by the need to
enhance stock values. The value of a company's common stock depends on
investor expectations regarding its future profits. According to one
industry official, the technology-fueled stock market boom of the 1990s
heightened investor expectations for firms to consistently generate
high stock appreciation. Thus, like other so-called old economy
sectors, the petroleum industry was under pressure to meet Wall
Street's expectations for rapid growth. Mergers were seen as a quick
strategy for achieving this growth. Industry officials also believe
that companies used mergers as a growth strategy to facilitate access
to the capital markets, which seemingly favored bigger companies.
Responding to Price Volatility:
Some industry officials believe that the large number of mergers that
occurred in the second half of the 1990s may have been related, in
part, to increased oil price volatility. According to one industry
official, the collapse in crude oil prices, which dropped from $18.46
per barrel in 1996 to $10.87 in 1998,dried up access to capital and
made long-term investment difficult, especially for small firms. As a
result, some high-cost producers became financially distressed, making
them valuable yet inexpensive takeover targets.
Enhancing Market Power:
While many of the reasons that industry officials cited for mergers are
broadly consistent with achieving efficiency, economic literature also
cites companies' desire to enhance market power as a motive for some
mergers.[Footnote 21] As described in the literature, mergers increase
market concentration and could reduce competition, allowing companies
to exert greater control over prices. However, while mergers raise
concern about potential anticompetitive effects,as stated in the
previous chapter, U.S. antitrust laws are intended to mitigate such
effects. Chapter 3 of this report examines in more detail the
relationship between mergers and market concentration and other aspects
of market structure that can affect competition in the U.S. petroleum
industry.
[End of section]
Chapter 3: Mergers Contributed to Increases in Market Concentration and
Other Changes in Market Structure:
Mergers contributed to substantial increases in market concentration--
the extent to which a small number of firms controls most of an
industry's sales--in the downstream segment of the U.S. petroleum
industry, while concentration in the upstream segment changed very
little by the end of the 1990s. Within the downstream segment, the
increases were most significant in refining and wholesale gasoline
markets. The overall impact of mergers is less clear for other aspects
of petroleum market structure that also affect competition--in
particular, vertical integration (the extent to which the same firms
own the various stages of production and marketing of a product) and
entry barriers (market conditions that provide established sellers in
an industry an advantage over potential entrants). However, anecdotal
evidence and economic studies indicate that mergers have affected these
aspects as well.
Market Concentration Increased Mostly in the Downstream Segment of the
Petroleum Industry During the 1990s:
While market concentration in the upstream segment changed very little,
the downstream segment of the petroleum industry experienced increases
in concentration by the end of the 1990s that were largely associated
with mergers during that period.[Footnote 22] Although mergers also
occurred in the midstream segment, we could not determine the extent of
midstream concentration during this period.[Footnote 23]
Analyzing Market Concentration in Relation to Mergers:
Increased market concentration can result in greater market power,
potentially increasing prices above competitive levels.[Footnote 24]
Economists have posited that the extent of market power in a given
market is directly and positively related to the degree of market
concentration as measured by the Herfindahl-Hirschman Index (HHI) of
that market, other things held constant. This index, as discussed
earlier, reflects the composition of a market while giving
proportionately greater weight to the market shares of the larger
firms.[Footnote 25] On the other hand, increased concentration may also
lead to cost savings and efficiency gains, which may be passed on to
consumers in lower prices. Ultimately, the impact of higher
concentration on prices depends on whether market power or efficiency
dominates. (The effects of mergers and market concentration on
wholesale gasoline prices are analyzed in chapter 5.):
Economists and federal antitrust agencies have identified mergers as a
major factor leading to higher market concentration. For example, in a
1989 study on mergers in the petroleum industry, FTC reported that
mergers and acquisitions, as well as other factors, affected changes in
concentration in the petroleum industry. DOJ and FTC pay close
attention to market concentration when reviewing proposed mergers. In
the DOJ/FTC 1992 Horizontal Merger Guidelines[Footnote 26] for
determining the potential anticompetitive effect of a proposed merger
and whether to challenge such a merger, a central analysis is to assess
whether the merger would significantly increase market concentration,
as measured by the HHI, after defining the relevant geographic and
product market. We based our analysis of market concentration in the
various segments of the U.S. petroleum industry on the HHI criteria
established by the guidelines. These guidelines, previously outlined in
chapter 1, are summarized in table 1.
Table 1: FTC/DOJ Horizontal Merger Guidelines on the General Standards
for Evaluating Postmerger Market Concentration:
Postmerger HHI: HHI less than 1,000;
Degree of market concentration: Unconcentrated;
Change in HHI that would result from the proposed merger:
Not applicable;
Potential competitive consequences and likely need for
further DOJ/FTC analysis: Mergers in this category require no further
analysis.
Postmerger HHI: HHI between 1,000 and 1,800;
Degree of market concentration: Moderately concentrated;
Change in HHI that would result from the proposed merger:
HHI increase 100;
Potential competitive consequences and likely need for
further DOJ/FTC analysis: Could raise significant competitive concerns,
depending on other factors.
Postmerger HHI: HHI greater than 1,800;
Degree of market concentration: Highly concentrated;
Change in HHI that would result from the proposed merger:
HHI increase < 50;
Potential competitive consequences and likely need for
further DOJ/FTC analysis: No further analysis.
Postmerger HHI: HHI greater than 1,800;
Degree of market concentration: Highly concentrated;
Change in HHI that would result from the proposed merger:
HHI increase > 50;
Potential competitive consequences and likely need for
further DOJ/FTC analysis: Could raise significant competitive concerns,
depending on other factors.
Postmerger HHI: HHI greater than 1,800;
Degree of market concentration: Highly concentrated;
Change in HHI that would result from the proposed merger:
HHI increase > 100;
Potential competitive consequences and likely need for
further DOJ/FTC analysis: Likely to create or enhance market power or
facilitate its exercise.
Sources: FTC and DOJ.
[End of table]
As table 1 shows, the guidelines establish market concentration into
three broad categories of market concentration as measured by the HHI:
an unconcentrated market has an HHI less than 1,000, a moderately
concentrated market has an HHI between 1,000 and 1,800, and a highly
concentrated market has an HHI over 1,800. Along with the level of HHI,
the agencies also consider changes in HHI that would result from a
proposed merger. In order to examine market concentration and any
changes in the proper market context, the guidelines stipulate that the
relevant geographic and product markets be defined on a case-by-case
basis. For example, firms selling a given product may compete at the
national level--in which case the relevant geographic market is
national--while firms selling another product may compete at less than
the national level--in which case the relevant geographic market could
be regional, statewide, or smaller.
In analyzing market concentration, we based our choice of relevant
geographic markets on various criteria, including what FTC officials
and industry experts told us. We also based our choice of relevant
market on the availability of data.
For the U.S. petroleum upstream segment, we analyzed market
concentration, as measured by HHI,[Footnote 27] at the national level.
For the downstream segment, we examined market concentration separately
for refining and wholesale gasoline marketing, focusing our HHI
analyses for refining at the regional (or the Petroleum Administration
for Defense Districts or PADD) level and, for wholesale gasoline
marketing, at the state level.[Footnote 28]'[Footnote 29] Figure 11
depicts the U.S. PADDs and the states within each PADD.
Figure 11: Petroleum Administration for Defense Districts:
[See PDF for image]
[End of figure]
To determine the extent to which mergers were associated with increased
market concentration in the U.S. petroleum industry in the 1990s, we
performed statistical correlation analyses. Correlation numbers (or
coefficients), which range from -1 to +1, measure the strength and
direction of the relationship between two variables.[Footnote 30] A
positive number denotes a positive and direct relationship, while a
negative number denotes a negative or inverse relationship. Overall,
the higher the number, the stronger the relationship between the two
variables being analyzed. (See appendix III for a more detailed
discussion of our correlation analysis). For our analysis, we used as a
surrogate for the level of merger activity the average transaction
value of all the mergers for which such values were reported.[Footnote
31] We correlated this value with the HHI for the upstream segment,
refining (at the PADD level), and the wholesale gasoline market (at the
state level).[Footnote 32] Other factors besides mergers that can
affect market concentration include firms entering and exiting the
industry. For example, if a company withdraws from a market and is not
replaced by a new company, both the market shares of the remaining
firms and concentration would increase.[Footnote 33]
The Upstream Segment Experienced Little Change in Market Concentration
and Remained Unconcentrated Over the 1990s:
Based on crude oil production activities, concentration in the upstream
segment of the U.S. petroleum industry experienced little change over
the decade. Specifically, the HHI for the upstream market decreased
somewhat from 290 in 1990 to 217 in 2000 (see figure 12). Hence, the
upstream segment of the U.S. petroleum industry remained unconcentrated
as of the year 2000. Moreover, notwithstanding the level of domestic
upstream concentration, industry officials and experts believe that
because crude oil prices are generally determined in the world market,
individual U.S. companies are not likely to have much influence on the
global market.
Figure 12: Market Concentration for the Upstream Segment, as Measured
by the HHI (1990-2000):
[See PDF for image]
[End of figure]
For the upstream market, we did not find a statistically significant
correlation between mergers in the 1990s and market concentration, as
measured by the HHI, for U.S. crude oil production.
Overall, the Downstream Segment of the Market Became More Concentrated:
In general, the downstream segment--consisting of the refining,
wholesale, and retail marketing levels--became more concentrated in the
1990s. However, the extent to which concentration increased varied
among operating levels and geographic regions.
Refining:
Overall, the U.S. refining market experienced increasing levels of
market concentration (based on refinery capacity) during the 1990s,
especially during the latter part of the decade, but the levels as well
as the changes of concentration varied geographically.
In PADD I--the East Coast--the HHI for the refining market increased
from 1136 in 1990 to 1819 in 2000, an increase of 683 (see figure 13).
Consequently, this market went from moderately concentrated to highly
concentrated. Compared to other U.S. PADDs, a greater share of the
gasoline consumed in PADD I comes from other supply sources--mostly
from PADD III and imports--than within the PADD. Consequently, some
industry officials and experts believe that the competitive impact of
increased refiner concentration within the PADD could be
mitigated.[Footnote 34]
Figure 13: Refining Market Concentration for PADD I Based on Crude Oil
Distillation Capacity (1990-2000):
[See PDF for image]
Note: Data for 1996 and 1998 were unavailable.
[End of figure]
For PADD II (the Midwest), the refinery market concentration increased
from 699 to 980 --an increase of 281--between 1990 and 2000. However,
as figure 14 shows, this PADD's refining market remained unconcentrated
at the end of the decade. According to EIA's data, as of 2001, the
quantity of gasoline refined in PADD II was slightly less than the
quantity consumed within the PADD.
Figure 14: Refining Market Concentration for PADD II Based on Crude Oil
Distillation Capacity (1990-2000):
[See PDF for image]
Note: Data for 1996 and 1998 were unavailable.
[End of figure]
The refining market in PADD III (the Gulf Coast), like PADD II, was
unconcentrated as of the end of 2000, although its HHI increased by
170--from 534 in 1990 to 704 in 2000 (see figure 15). According to
EIA's data, much more gasoline is refined in PADD III than is consumed
within the PADD, making PADD III the largest net exporter of gasoline
to other parts of the United States.
Figure 15: Refining Market Concentration for PADD III Based on Crude
Oil Distillation Capacity (1990-2000):
[See PDF for image]
Note: Data for 1996 and 1998 were unavailable.
[End of figure]
The HHI for the refining market in PADD IV--the Rocky Mountain region-
-where gasoline production and consumption are almost balanced--
increased by 95 between 1990 and 2000. This increase changed the PADD's
refining market from 1029 in 1990 to 1124 in 2000, within the moderate
level of market concentration (see figure 16).
Figure 16: Refining Market Concentration for PADD IV Based on Crude Oil
Distillation Capacity (1990-2000):
[See PDF for image]
Note: Data for 1996 and 1998 were unavailable.
[End of figure]
The refining market's HHI for PADD V--the West Coast--increased from
937 to 1267, an increase of 330, between 1990 and 2000 and changed the
West Coast refining market, which produces most of the gasoline it
consumes, from unconcentrated to moderately concentrated by the end of
the decade (see figure 17).[Footnote 35]
Figure 17: Refining Market Concentration for PADD V Based on Crude Oil
Distillation Capacity (1990-2000):
[See PDF for image]
Note: Data for 1996 and 1998 were unavailable.
[End of figure]
We estimated a high and statistically significant degree of correlation
between merger activity and the HHIs for refining in PADDs I, II, and V
for 1991 through 2000. Specifically, the corresponding correlation
numbers are 91 percent for PADD V (West Coast), 93 percent for PADD II
(Midwest), and 80 percent for PADD I (East Coast). While mergers were
positively correlated with refining HHIs in PADDs III and IV--the Gulf
Coast and the Rocky Mountains--the estimated correlations were not
statistically significant. (See table 11 in appendix III for
correlation coefficients and associated statistics for each of the
PADDs.):
Wholesale Gasoline:
The overall U.S. wholesale gasoline market--measured at the state
level[Footnote 36]--also experienced significant increases in and
higher levels of concentration, based on HHI data for wholesale
gasoline from 1994 to 2002 that we obtained from the Department of
Energy's Energy Information Administration (EIA).[Footnote 37] We found
that all but four states and the District of Columbia experienced
increases in wholesale gasoline market concentration between 1994 and
2002. (See table 10, app. III.) Forty-six states and the District of
Columbia had moderately or highly concentrated wholesale gasoline
markets in 2002, compared to 27 in 1994. For the years 1994, 2000, and
2002, figure 18 illustrates how the percentage of states categorized as
unconcentrated has fallen while the percentage of states categorized as
moderately to highly concentrated has risen. Specifically, the
proportion of states categorized as unconcentrated has decreased from
47 percent to 8 percent, while the percentage of states in the moderate
category has risen from 43 percent to 75 percent. The percentage of
states in the highly concentrated category has risen from 10 percent to
18 percent.
Figure 18: Percentage of U.S. States with Unconcentrated, Moderately
Concentrated, and Highly Concentrated Wholesale Gasoline Markets (1994,
2000, and 2002):
[See PDF for image]
[End of figure]
To determine the degree to which mergers and market concentration in
wholesale gasoline were related and how closely they moved together
during this period, we performed a correlation analysis for this
operating level. We found that mergers, as measured by their
transaction values, were significantly and highly positively correlated
with market concentration, as measured by the state HHI, for wholesale
gasoline. (See table 12, appendix III for the correlation coefficients
and associated statistics for individual states.)[Footnote 38] This was
especially the case for states that exhibited high levels of
concentration or experienced large changes in concentration between
1994 and 2001.
Figure 19 shows a comparison of concentration levels in individual
states and the District of Columbia--grouped within PADDs--between 1994
and 2002.
Figure 19: Wholesale Gasoline Market Concentration by State in Each
PADD (1994 and 2002):
[See PDF for image]
[End of figure]
* As can be observed, the wholesale gasoline market in 16 states in
PADD I (the East Coast) were moderately concentrated in 2002, compared
to 7 states in 1994. Also, in PADD I, the number of states that had
unconcentrated wholesale gasoline markets decreased from 10 in 1994 to
just 1 in 2002. Some key mergers that affected PADD I during this
period include Exxon-Mobil, BP-Amoco, and Shell-Texaco (Motiva).
* In PADD II (the Midwest) the wholesale gasoline markets in 5 states
were highly concentrated, 8 were moderately concentrated, and 2 were
unconcentrated as of 2002. By comparison, in 1994, there were no highly
concentrated markets, 7 states were moderately concentrated, and 8
states were unconcentrated in this PADD. Some key mergers that affected
PADD II during the period included Marathon-Ashland, Marathon-Ultramar
Diamond Shamrock (UDS), BP-Amoco, Shell-Texaco (Equilon), and UDS-
Total.
* The wholesale gasoline market in all the states in PADD III (the Gulf
Coast region) except one had become moderately concentrated in 2002,
compared to 1994 when all were unconcentrated. Key mergers that
affected PADD III during the period include Exxon-Mobil, Shell Texaco
(Motiva), Marathon-Ashland, and Valero-UDS.
* For the states included in PADDs IV and V (the Rocky Mountains and
the West Coast, respectively), wholesale gasoline markets remained in
the moderately or highly concentrated range in 2002 as in 1994. Within
this range, concentration levels increased in all but one state in PADD
IV and in all but one state in PADD V between 1994 and 2002. Key
mergers that affected PADD IV during this period include Shell-Texaco
(Equilon), Phillips-Tosco, Conoco-Phillips, and UDS-Total. Key mergers
that affected PADD V during the period included Tosco-Unocal, Shell-
Texaco (Equilon), Chevron-Texaco, Phillips-Tosco, and Valero-UDS.
Mergers Have Caused Changes in Other Aspects of Market Structure, but
the Extent of These Changes Is Not Easily Quantifiable:
Evidence from various sources suggests that in addition to market
concentration, mergers affected other aspects of market structure--in
particular, vertical integration and barriers to entry. The extent to
which they did so, however, could not be easily quantified because, in
addition to lack of consensus on how to appropriately measure these
aspects, there are no comprehensive data on them.
Vertical Integration:
Like increased concentration, increased vertical integration, as
measured by the extent to which the various stages of production and
marketing of a product are owned by the same firms, could conceptually
have both procompetitive and anticompetitive effects, with the net
effect depending on which effects dominate. One procompetitive view of
vertical integration is that it promotes efficiencies and leads to
lower prices by allowing a company to lower costs by making
transactions that are internal rather than external to the company. On
the other hand, a high degree of vertical integration in an industry
could be anticompetitive by creating disincentives for new firms to
enter a market because of the need to enter at several levels of the
market in order to compete effectively. Vertical integration could also
allow firms to use a strategy of "market foreclosure" against their
non-vertically-integrated rivals by reducing input supply for rivals,
raising prices paid by rival retailers, or totally refusing to sell
product to rival retailers. Some studies have recently found that
increased vertical integration in the U.S. petroleum industry has been
associated with higher wholesale gasoline prices.[Footnote 39]
While our review was not comprehensive, we found that a number of the
mergers since the 1990s led to greater vertical integration in the U.S.
petroleum industry, especially in the downstream market, as shown in
table 2. EIA has also reported that a substantial number of vertical
mergers have occurred between independent refiners and marketers in the
United States since the 1990s.[Footnote 40] Table 2 presents some
examples of petroleum industry mergers since the mid-1990s that created
or enhanced vertical integration.
Table 2: Selected Vertical Mergers in the Petroleum Industry Since the
1990s:
Year: 1995;
Acquiring company: Diamond Shamrock;
Stage of operation: Refining;
Company acquired: Stop-N-Go;
Stage of operation for assets purchased: Gasoline retailing.
Year: 1996;
Acquiring company: Tosco;
Stage of operation: Refining;
Company acquired: Circle K;
Stage of operation for assets purchased: Gasoline retailing.
Year: 1997;
Acquiring company: Tosco;
Stage of operation: Refining;
Company acquired: Unocal Corporation;
Stage of operation for assets purchased: Refining/marketing/ retail.
Year: 1997;
Acquiring company: ARCO;
Stage of operation: Integrated;
Company acquired: Thrifty;
Stage of operation for assets purchased: Gasoline retailing in
California.
Year: 1998;
Acquiring company: Shell; (Joint Venture);
Stage of operation: Integrated; (with small downstream market share);
Company acquired: Texaco;
Stage of operation for assets purchased: Integrated; (with large
downstream market share).
Year: 2000;
Acquiring company: Tosco;
Stage of operation: Refining;
Company acquired: Some of Exxon's and Mobil's East Coast retail
gasoline stations;
Stage of operation for assets purchased: Retail gasoline stations.
Year: 2001;
Acquiring company: Phillips;
Stage of operation: Integrated;
Company acquired: Tosco;
Stage of operation for assets purchased: Refining/marketing/retail.
Year: 2001;
Acquiring company: Valero;
Stage of operation: Refining;
Company acquired: Ultramar Diamond Shamrock;
Stage of operation for assets purchased: Refining/marketing/retail.
Source: GAO.
[End of table]
Typically, firms in the petroleum industry are either fully vertically
integrated--operating across the entire industry spectrum from crude
production to retail gasoline sales--or partially vertically
integrated--operating in more than one but not all stages of the
petroleum industry's operation. We included in our analysis mergers
that have led to either type of vertical integration. Also, we have
included in our analysis mergers that have enhanced the degree of
vertical integration in the market--even if the mergers were
essentially horizontal--such as the acquisition of an independent
refiner by an already partially or fully vertically integrated company.
Our analysis of mergers encompassed all these types of vertical
integration because they all can affect competition in the market.
As shown in table 2, many mergers that contributed to increased
vertical integration occurred between independents as well as between
fully vertically integrated companies and independents.[Footnote 41]
For example, Tosco, a previously independent refiner that had no retail
operation, acquired several retail assets on the West Coast, such as
Circle K (a retail chain) and Unocal's retail stations and other
downstream assets.[Footnote 42] These acquisitions essentially
transformed Tosco into a partially vertically integrated downstream
company before Phillips Petroleum, a fully vertically integrated
company, acquired it. This acquisition most likely boosted Phillips'
downstream position in both refining and wholesale and retail
marketing. Also, the acquisition of Thrifty, an independent chain
retailer on the West Coast, by ARCO, an integrated company, enhanced
the latter's retail position in the West Coast retail market. Likewise,
the acquisition of UDS' wholesale gasoline terminals and retail outlets
in Michigan by Marathon Ashland Petroleum--a joint venture between
Marathon and Ashland, which are both fully vertically integrated oil
companies--enhanced Marathon Ashland Petroleum's position in
Michigan's wholesale and retail market.
Barriers to Entry:
Our interviews with petroleum industry officials and experts provided
anecdotal evidence that mergers have had some impact on barriers to
entry in the U.S. petroleum industry, but there are generally no
empirical data to quantify the extent of the impact. Barriers to entry
can be defined as market conditions that provide established sellers in
an industry an advantage (typically cost advantage) over potential
entrants. Entry barriers are important in a market because of their
effect on competitive conditions; theoretically, industries that are
highly concentrated and have high entry barriers are more likely to
possess market power. Industry officials that we interviewed indicated
that large investment capital requirements, regulatory impediments/
environmental concerns, and public opposition to siting facilities
constitute significant entry barriers that may have been exacerbated by
mergers.
For example, industry officials told us that in the upstream segment,
crude oil exploration and production activities moved increasingly
offshore to areas such as the deep waters of the Gulf of Mexico during
the 1990s because of the greater likelihood of finding oil. Offshore
operations are generally riskier and require much higher capital
investments than onshore operations.[Footnote 43] One official
estimated that it could cost a company about $40 million to $100
million just to drill several wells in deep waters and purchase
equipment, and some operations could cost as much as $1 billion. As a
result, some firms, mostly large producers that already had the
wherewithal to engage in offshore activities, merged to further share
the risks and costs. These mergers tended to help consolidate their
dominance in offshore activities and made it more difficult for smaller
firms to enter the market.
For the transportation infrastructure segment--pipelines--the
potential barriers to entry include high investment costs and large
economies of scale.[Footnote 44] Moreover, as noted by one source,
procedural requirements and associated legal costs for entry into the
pipeline business have limited the number of companies in the segment.
[Footnote 45] Thus, as mergers, and possibly concentration, increased,
entry barriers also increased because firms must make large and high-
cost investments in order to enter the market and be competitive at
large scales of operation.
Like the upstream and midstream segments, the downstream segment of the
U.S. petroleum industry is characterized by pervasive barriers to
entry, including large capital investment requirements at the refining
level, and regulatory and permitting impediments at the refining and
wholesale/retail levels. For example, regarding refining, industry
officials told us that building a typical refinery or even upgrading an
existing one is a multibillion dollar investment. Also, they said that
it is extremely difficult to obtain a permit from the relevant state or
local authorities to build a new refinery in many parts of the country
because of regulatory hurdles and public opposition. In addition, they
noted that federal and state environmental regulations to meet clean
air requirements have contributed to the high cost of owning and
operating a refinery. Furthermore, they pointed out that return on
investment in refining has been relatively low compared to investment
in other industries. They attributed the failure to build any new
refineries in the United States in over 20 years to these factors.
We could not quantify the extent to which mergers may have increased or
decreased these barriers because of the lack of empirical data to
properly measure entry barriers. Industry officials said that mergers
have not caused these barriers. Instead, they opined that some of the
mergers and acquisitions in refining have been partly a result of these
barriers because merging with or acquiring existing refineries is less
expensive than building a new one. During the 1990s, many refiners
expanded through mergers and acquisitions as well as through upgrading
existing facilities. For example, refiners such as Tosco and Tesoro
entered the industry through acquisitions in the early 1990s.
Entry barriers also exist at the wholesale gasoline marketing level of
the downstream segment in the form of high investment capital
requirements, regulatory/permitting impediments, and infrastructure
barriers. For example, a potential entrant into the wholesale gasoline
supply market may enter by operating his own refinery and producing
gasoline and/or buying from existing domestic refiners or importing
gasoline for distribution. As a potential refiner, he faces the entry
barriers in refining discussed above. On the other hand, industry
officials told us that while it is possible to enter this market as an
independent purchaser from domestic refiners and/or importers, there
are potential infrastructure impediments to doing so, such as lack of
access to pipelines and terminals. They pointed out that although
shipping gasoline through a third-party, common carrier pipeline
operator such as Kinder Morgan offers an option in some markets, this
option may not be available in the particular market that the shipper
wants to bring gasoline into. Moreover, to ship gasoline through such a
common-carrier pipeline, the shipper must have access to a terminal on
that route to receive the product, or the pipeline operator cannot
accept such shipment. According to some industry officials, oil
companies who own most of the gasoline terminals around the nation
sometimes deny access to third-party users, especially when supply is
tight. Some industry officials indicated that mergers have exacerbated
entry barriers at the wholesale level in some markets because mergers
have created a situation in which pipelines and terminals in some
markets are owned by fewer, mostly integrated companies who use these
facilities mostly proprietarily. In addition, industry officials
pointed out that there has been a preference for larger distributors
over smaller distributors in the market. For example, wholesale
marketers or distributors need to be large enough to secure credit
lines to make large volume purchases or minimum volume requirements set
by refiners. Also, in some markets, such as California, boutique fuel
specifications to meet clean air requirements limit the ability of
potential independent wholesalers to enter the market because the
unique gasoline blends are not widely produced in other refining
centers.
At the retail level, industry officials pointed out that mergers have
exacerbated the barriers for potential retail entrants because there
are fewer companies to supply gasoline to retailers and, as discussed
in more detail in chapter 4, retailers must operate at a large scale in
order to meet minimum volume requirements preferred by refiners. They
also indicated that restrictive land-use laws and permitting processes
in some areas of the country, such as California and Washington, D.C.,
constitute a barrier for potential retailers seeking to build new
stations.[Footnote 46]
[End of section]
Chapter 4: Gasoline Marketing Has Changed in Two Major Ways:
According to industry officials, two major changes have occurred in
gasoline marketing since the 1990s, partly related to mergers. First,
the availability of generic (unbranded) gasoline has decreased for
various reasons; more gasoline is now marketed as branded, under the
refiner's trademark. Branded gasoline is generally higher priced than
unbranded. We could not statistically quantify the extent of this
change because no data on the supply of unbranded gasoline exist.
Second, refiners now prefer dealing with large distributors and
retailers. This preference, officials told us, has motivated further
consolidation in both the distributor and retail sectors, including the
rise of "hypermarkets"--a relatively new breed of gasoline market
participants that include such large retail warehouses as Wal-Mart and
Costco.
The Availability of Unbranded Gasoline Decreased:
Refiners market either branded or unbranded gasoline through several
wholesale channels, but since the 1990s the availability of unbranded
gasoline from refiners has decreased substantially, according to
industry officials. Officials generally attributed this decrease to a
reduction in the number of independent refiners, the sale and/or
mothballing of refineries by mostly fully vertically integrated oil
companies, and better inventory management by major branded refiners.
The decrease cannot be precisely quantified because the data are not
adequate to do so.
Refiners Market Either Unbranded or Branded Gasoline through Several
Channels:
The gasoline market consists of various supply arrangements that
ultimately influence gasoline prices throughout the supply chain.
Gasoline flows through several marketing channels, as shown in figure
20. The refiner can market gasoline to the consumer through a direct
distribution system and an indirect distribution system.
Figure 20: The Flow of Gasoline Marketing:
[See PDF for image]
[End of figure]
The direct system typically involves the sale and/or supply of branded
gasoline by a refiner to its company-operated stations or other retail
outlets operated by lessee dealers who lease the service station and
basic equipment from the refiner or distributor but operate their own
retail outlets. Branded gasoline is marketed under the refiner's
trademark. Refiners can also sell unbranded gasoline directly to
hypermarkets--including such large retail warehouses as Wal-Mart and
Costco, as well as grocery store chains such as Safeway--that have over
the last decade added gasoline retailing to their locations. (The role
of hypermarkets is discussed later in this chapter.) Retailers of
unbranded gasoline can sell it as a generic/private brand and tend to
compete mostly through lower prices than their branded competitors. In
the direct distribution system, these hypermarkets have, over the last
decade, taken the place of open dealers who either own their own
stations or lease them from distributors or third parties in the supply
structure.
In the indirect distribution system, refiners sell branded or unbranded
gasoline to independent middlemen--generally called distributors,
marketers, or jobbers--who resell the gasoline to other retailers or
sell to consumers through their own retail operations. Branded gasoline
that flows through the indirect system must also be marketed by
distributors or retailers under the refiner's trademark, while
unbranded could be sold under the distributor's or retailer's private
name. Many market participants told us that much of the gasoline sold
through both the direct and indirect channels is now branded.
Depending on the type of supply arrangement with the supplier, gasoline
distributors and retailers may pay one or more of the distinct
wholesale prices summarized in table 3 below. Under normal market
conditions, the spot price is the lowest wholesale price, followed by
the unbranded rack price, branded rack price, and dealer-tankwagon
price. Because, as discussed below, transfer prices are generally
considered proprietary, it is not clear how high or low they are
relative to the other prices.
Table 3: Types of Wholesale Prices Paid for Gasoline:
Wholesale purchaser of gasoline: Distributor;
Spot: Yes;
Unbranded rack: Yes;
Branded rack: Yes;
Dealer-tankwagon: No;
Transfer[A] price: No.
Wholesale purchaser of gasoline: Company-operated outlet;
Spot: No;
Unbranded rack: No;
Branded rack: No;
Dealer-tankwagon: No;
Transfer[A] price: Yes.
Wholesale purchaser of gasoline: Lessee dealer;
Spot: No;
Unbranded rack: No;
Branded rack: No;
Dealer-tankwagon: Yes;
Transfer[A] price: No.
Wholesale purchaser of gasoline: Open dealer;
Spot: No;
Unbranded rack: Yes;
Branded rack: Yes;
Dealer-tankwagon: Yes;
Transfer[A] price: No.
Wholesale purchaser of gasoline: Hypermarket;
Spot: Yes;
Unbranded rack: Yes;
Branded rack: No;
Dealer-tankwagon: No;
Transfer[A] price: No.
Source: GAO.
[A] Transfer prices are internal prices at which refiners and
distributors supply gasoline to their company-owned and -operated
stations.
[End of table]
Spot Prices are generally the lowest wholesale price under normal
market conditions because there is no binding contract between the
seller and the buyer, and gasoline sold in the spot market is typically
unbranded. Market participants typically use the spot market when faced
with surpluses or shortages that may arise from their contractual
transactions. The spot market accounts for only a small portion of
domestic gasoline sales, even smaller than it was a decade ago, partly
because just-in-time inventory management leaves less gasoline for spot
sales. Nonetheless, spot prices, as well as futures prices, strongly
influence the other wholesale prices.
Rack Prices are the prices that distributors and retailers pay for
gasoline supplied at a refiner's wholesale terminal or rack. Typically,
rack prices are set daily by refiners and are generally influenced by
prices in the spot and futures markets, as well as by the extent of
competition among refiners within a particular market. Average rack
prices are generally higher than spot prices under normal market
conditions. There are two types of rack prices--branded and unbranded.
* Branded rack prices are paid by distributors who buy gasoline
supplies from major refiners selling under their trademarks. Branded
rack prices include a premium reflecting the recognized brand name, the
costs of issuing company credit cards, and other costs such as
advertising. In addition, when refiners sell branded gasoline to
distributors and retailers, the contracts tend to be less flexible than
contracts for unbranded gasoline but guarantee a more secure supply.
Thus, branded rack prices may also include a premium for this
additional security.
* Unbranded rack prices are paid by distributors, hypermarkets, and
open dealers for unbranded gasoline supplied primarily by independent
refiners and, to a small extent, by fully vertically integrated
refiners. Under normal market conditions, unbranded rack prices tend to
be lower than branded rack prices. Buyers of unbranded gasoline may or
may not have a binding contractual arrangement with a refiner.[Footnote
47] Therefore, a buyer of unbranded gasoline may not be guaranteed a
secure supply or lower prices, particularly during a market shock
involving a reduction in overall gasoline supply. Thus, when there is a
disruption in the supply system, such as those caused by pipeline or
refinery breakdowns, unbranded rack prices can be higher than branded
rack.[Footnote 48]
Dealer-tankwagon (DTW) prices are contract prices paid by lessee
dealers and some open dealers to refiners or distributors for branded
gasoline delivered at the dealers' stations. DTW prices, which are set
by suppliers, include the cost of transporting the gasoline to the
stations and a premium associated with the suppliers' brand name.
Suppliers set their DTW prices using the futures and/or spot prices as
a reference, as well as the DTW prices of other suppliers in the market
area. In general, DTW prices are less volatile and higher than spot and
rack prices.
Transfer Prices are internal prices at which refiners or distributors
supply gasoline to their company-owned and -operated stations at the
retail level. Oil companies generally regard their transfer prices as
proprietary information and do not publicly disclose them. Several oil
companies told us that transfer prices are based on market prices such
the DTW, but we were unable to confirm this.
Based on data on gasoline sales reported to EIA by major U.S. energy
companies under the EIA's Financial Reporting System (FRS),[Footnote
49] about 46 percent of U.S. refiners' gasoline was marketed through
distributors in 1990; this share increased to over 50 percent in 2000
(see figure 21). Despite distributors' significant role in gasoline
marketing, the distributors we interviewed stated that their marketing
activities are generally confined to rural or less urban areas.
Distributors said that refiners who supply them with branded gasoline
preclude them from operating stations within certain proximities of
major metropolitan markets where the refiners generally prefer to
locate their company-owned and -operated and lessee dealer stations--a
phenomenon the distributors described as "redlining." We did not
explore the impact, if any, of this practice on the gasoline market
because it is outside the scope of the present study.
Figure 21: Percentage Volume of Gasoline Sold through Different
Marketing Channels:
[See PDF for image]
[End of figure]
In 1990, refiners marketed about 31 percent of their gasoline through
lessee dealers who pay DTW prices and open dealers who pay rack and/or
DTW prices; this percentage declined to 26 percent in 2000.[Footnote
50] Lessee dealers that we spoke with attributed their declining role
as a marketing channel to high DTW and rent costs charged by their
suppliers. The dealers also alleged that continued decline in their
market participation could ultimately lead to reduced competition and
higher gasoline price to consumers. Again, we did not attempt to
further analyze these claims because they are not within the scope of
our study.
The percentage of gasoline sold by refiners to consumers through
company-operated stations remained virtually unchanged between 1990 and
2000--16 percent and 13 percent, respectively.
Industry Officials Cited Several Reasons for the Decrease in the
Availability of Unbranded Gasoline:
Oil industry officials whom we interviewed indicated that the
availability of unbranded gasoline has decreased since the 1990s.
According to these officials, more branded gasoline is now sold at a
price that is generally higher than that of unbranded gasoline, as
discussed above. This premium is presumably justified because of
certain additives in branded gasoline and consumer brand loyalty.
In general, industry officials cited one or more of the following
reasons for the decrease in the availability of unbranded gasoline.
* Fewer independent refiners are supplying gasoline. Independent
refiners generally supply unbranded gasoline, but since the 1990s their
numbers have decreased as they merged with branded companies, grew
large enough to be considered a brand, or closed down. For example,
Tosco was one of the largest independent refiners selling unbranded
gasoline in the United States. However, the company made several
acquisitions--some involving purchases of retail stations from branded
companies like British Petroleum--which allowed it to market some of
its gasoline through branded outlets. Tosco also acquired downstream
assets on the East Coast that were divested from Exxon and Mobil as a
condition for their merger. These acquisitions allowed Tosco to market
gasoline under the Exxon and Mobil brands under a consent agreement
worked out with FTC and ExxonMobil. Moreover, in 2001 Tosco was
acquired by Phillips Petroleum, a large branded refiner. According to
some gasoline distributors who used to purchase unbranded gasoline from
Tosco, their ability to purchase unbranded gasoline has decreased
substantially because of Tosco's acquisition by Phillips. They said
that Phillips now sells a greater share of its gasoline as branded so
that they no longer have access to as much unbranded gasoline.
* Fully vertically integrated oil companies have decided to sell some
refineries to independents or to mothball inefficient refineries. Fully
vertically integrated oil companies have, in recent years, sold off or
mothballed refineries they deemed to be unprofitable.[Footnote 51] As a
result, some of them now have only enough refinery capacity to produce
gasoline to meet their branded supply needs, while others said that
they have even become net buyers of gasoline. Moreover, independent
refiners, some of whom bought refineries from the fully vertically
integrated oil companies, also sell a portion of their gasoline to
these companies, further reducing the amount of gasoline that the
independent refiners can sell to unbranded distributors and retailers.
* The major branded refiners have increased the efficiency of their
inventory management systems. Some unbranded supply came from excess
gasoline production. Synergies developed through mergers have increased
the industry's ability to use just-in-time inventory management system,
which ensures that refiners produce an amount of gasoline sufficient to
meet their current branded needs without producing any excess that can
be sold as unbranded. For example, officials from one large fully
vertically integrated oil company told us that its refineries produce
just enough gasoline to cover its company-operated stations and lessee
dealer sales.
Data Are Not Adequate to Precisely Quantify the Decreasing Availability
of Unbranded Gasoline:
Although oil industry officials we interviewed overwhelmingly said that
the supply of unbranded gasoline in the U.S. has decreased
significantly in the 1990s, we could not statistically quantify this
change because the data required for such an analysis do not currently
exist. DOE's EIA is the federal agency mandated by Congress to collect
energy data. EIA collects data on gasoline supply and prices, but EIA
officials told us that the agency does not require petroleum companies
to report gasoline data in the form that would permit the
identification of branded and unbranded sales for two reasons: (1) the
agency lacks the resources to properly track these data and (2) the
industry has sued the agency on several occasions on the grounds that
tracking this type of information was too burdensome. EIA, however,
acknowledged that unbranded gasoline provides a low-cost competitive
option for consumers. EIA also acknowledged that data on unbranded
gasoline supply would facilitate better monitoring of the overall
competitive trends in the gasoline market.
Refiners Prefer Dealing with Large Distributors and Retailers:
Market participants that we spoke with told us that refiners now prefer
dealing with large distributors and retailers for two reasons: (1)
large distributors and retailers are a much lower credit risk than
their smaller counterparts and (2) it is more efficient to sell a
larger volume through fewer entities than to sell a smaller volume
through many entities because minimizing the number of transactions
reduces administrative and distribution costs. As mergers have occurred
among refiners, fewer supply options exist for distributors. This
consolidation at the refining level has allowed large refiners to
dictate the terms of supply contracts, including minimum volume
requirements. Partly in response, distributors are becoming larger
through mergers and consolidation. In addition, hypermarkets, which
often buy gasoline in large quantities from the refiners and so receive
volume discounts on the unbranded rack price, are becoming major
unbranded retailers.
Distributors Are Becoming Larger and Fewer in Several Markets:
Distributors, through whom about half of all gasoline is sold, are
themselves merging or entering into joint ventures with branded
refiners to enlarge their scale of operation, which has ultimately led
to a reduction in their number. For example, at the end of 2002, there
were about 7,000 distributors and dealers who were members of the
Petroleum Marketers Association of America (PMAA), compared to about
10,000 in 1991. PMAA officials attributed this decline mostly to
mergers and consolidations among their members. According to a PMAA
official, the trend since the 1990s has been not only for large
distributors to absorb smaller ones but for large ones to merge among
themselves to enhance their competitive position. This pattern of
consolidation has been particularly noted in some areas, such as parts
of Colorado and Michigan. For example, one industry official told us
that the number of distributors in some rural Colorado communities has
decreased from about seven or eight distributors a decade ago to
generally only one today. According to market participants,
distributors have several incentives for consolidation. First, it gives
the distributors the ability to meet minimum volume requirements.
Second, it increases distributors' ability to negotiate volume
discounts in supply contracts. Finally, by increasing their scales of
operation, distributors can enhance their access to capital, allowing
them greater flexibility in purchasing gasoline on credit.
Hypermarkets Are Becoming a Significant Player in U.S. Gasoline
Marketing:
Our interviews with oil industry officials and available data suggest
that hypermarkets are playing a significant and growing role today in
U.S. gasoline marketing to consumers. As noted above, hypermarkets
generally buy directly from the refiner and typically deal in heavy
volumes. For example, two hypermarkets that we spoke with reported that
they sold about 420 million and 470 million gallons, respectively, of
gasoline per year. This is comparable to the volume sold by some of the
largest distributors we interviewed, whose sales volume ranged between
200 million and 700 million gallons per year. Hence, the typical
hypermarket fits the profile of the large wholesale purchasers that
refiners now prefer to deal with. Hypermarkets purchase and sell almost
entirely unbranded gasoline and are becoming a channel for the sale of
the dwindling unbranded gasoline supply.[Footnote 52] Hence, they are
rapidly displacing the "mom and pop" open dealers who used to dominate
the unbranded retail market. These dealers are now either "branding
up"[Footnote 53] or going out of business.
Although the overall market share of hypermarkets in U.S. gasoline
marketing is currently relatively small, it is projected to grow very
rapidly, at least in the short term. According to a study by Energy
Analysts International, Inc. (EAI), a consulting firm that has analyzed
hypermarkets, there were between 1,230 and 1,250 hypermarket locations
selling gasoline in the U.S. in 2000, and these locations collectively
sold over 4 billion gallons of gasoline, or 3.3 percent of total
gasoline sales to consumers.[Footnote 54] Furthermore, EAI projects
that by 2005, hypermarkets' gasoline sales will increase more than
five-fold to 22.7 billion gallons, or 16 percent of gasoline sales to
consumers.
In general, it appears that hypermarkets are gaining market share in
gasoline retailing through an aggressive pricing strategy--on average,
their pump prices are lower than those of their competitors--a
situation that has raised concern among some of the traditional
competitors, especially distributors. Many distributors contend that
hypermarkets use their gasoline as a "loss leader" and subsidize
gasoline sales with profits from store sales. For their part,
hypermarkets told us that because they often buy in large volumes, they
are able to negotiate and receive discounts on their unbranded rack
price. Lower purchase prices allow them to set lower pump prices.
However, if the supply of unbranded gasoline continues to dwindle
because of the attrition, acquisition, and/or vertical integration of
unbranded refiners, it is not clear how the hypermarkets will respond.
The hypermarkets that we spoke with said that if they could not obtain
an adequate supply of unbranded gasoline in the future, they would have
to switch to branded gasoline. Some of them have considered purchasing
refineries to produce their own gasoline and/or importing gasoline.
[End of section]
Chapter 5: Mergers and Increased Market Concentration Generally Led to
Higher Wholesale Gasoline Prices in the United States:
The results of our econometric analyses suggest that six of eight
specific oil industry mergers--which mostly involved large, fully
vertically integrated, companies--generally led to increases in
wholesale gasoline prices (which in this report are measured by
wholesale prices less crude oil prices) for branded and/or unbranded
gasoline of about 2 cents per gallon, on average. Two of the mergers
generally led to price decreases, of about 1 cent per gallon, on
average. These findings imply that the combined effects of market power
(which tends to increase prices) and efficiency gains (which tend to
decrease prices) from the mergers led to increased prices. These
findings applied to both conventional gasoline, the dominant type of
gasoline sold nationwide, and to "boutique fuels"--gasoline that has
been reformulated for certain geographical areas to mitigate
environmental pollution.
In a complementary analysis, we found that increased market
concentration, which captures the cumulative effects of mergers as well
as other market structure factors, generally resulted in increased
wholesale prices for conventional and boutique fuels. For conventional
gasoline, the increases in prices were larger in the western half of
the United States than in the eastern half, in part because the West
has limited access to gasoline supplies from abroad and from the Gulf
Coast region, which has high refinery capacity. For the boutique fuels-
-which are sold only in certain cities in the East Coast and Gulf Coast
regions, or in California--increased market concentration led to higher
wholesale prices than for conventional gasoline. This difference likely
stems from the limited availability of the boutique fuels, which can
only be produced by a few refiners. The changes in the wholesale prices
can be attributed partly to the wave of mergers that reduced the number
of suppliers in the affected geographic regions. Our results also
suggest that lower gasoline inventories relative to expected demand,
higher refinery capacity utilization rates, and supply disruptions in
the Midwest and West Coast led to higher wholesale gasoline prices.
As part of our methodology to model the effects of mergers and market
concentration, we used extensive peer review to obtain comments from
outside experts and made changes as appropriate. However, due to the
complexities of analyzing the effects of mergers and market
concentration on wholesale gasoline prices, there are some limitations
to our econometric methodology, including the time periods over which
we could model the effects of the mergers and the market concentration
data that we used.
Econometric Models Developed to Estimate the Effects of Mergers and
Market Concentration on Wholesale Gasoline Prices:
In developing our econometric models, we relied on information from
previous studies, industry experts, and our own analysis of the oil
industry, specifically wholesale gasoline markets. We developed two
groups of econometric models to estimate the effects of individual
mergers and increased market concentration on wholesale prices of
different gasoline types--conventional, reformulated, and
CARB[Footnote 55]--in the second half of the 1990s. To estimate effects
on wholesale gasoline prices, we used wholesale prices minus crude oil
prices,[Footnote 56] with crude oil prices serving as our proxy for
marginal input costs (crude costs constitute about two-thirds of total
refining costs).[Footnote 57] We focused our study on wholesale
gasoline markets because trends in gasoline prices usually are observed
in wholesale markets before the retail markets and because more
comprehensive data on volumes were available at the wholesale level
than the retail level.
For both models, we used panel data--data pooled across all cities
where wholesale gasoline terminals or racks are located and over time.
This enabled us to account for variations in prices across rack cities
(city-specific effects) and over time (time effects). Also, for
mergers, the panel data allowed us to estimate the effect on prices in
the rack cities where the merging companies operated, relative to
prices in rack cities where they did not, taking into account other
variables. In addition to mergers, which are measured by indicator (or
dummy) variables for consolidations between the merging companies, and
market concentration, which is measured by the Herfindahl-Hirschman
Index (HHI) of refinery capacity, we included in our models other
relevant variables that could affect wholesale gasoline prices, such as
gasoline inventories relative to demand and refinery capacity
utilization rates, and supply disruptions.
There were supply disruptions that caused price spikes in the Midwest
in 2000 and on the West Coast in 1999 and 2000. The immediate causes of
the disruptions included refinery outages and pipeline ruptures and, in
the case of the Midwest, changes in gasoline formulations. It is
difficult to determine the timing, duration, and the extent of the
geographical impact of the disruptions, all of which makes it difficult
to construct reliable and accurate measures of the supply
disruptions.[Footnote 58] Nonetheless, we constructed crude measures of
these supply disruptions that we included in our models for the markets
that were affected.
There are two common approaches for estimating panel data--the "random-
effects" model and the "fixed-effects" model. The random effects model
is preferred when observations (rack cities) are drawn randomly from a
common population and any difference in individual effects can only be
attributed to chance. Otherwise, the fixed effects model is preferred.
The selection of the rack cities used in our study was based on data
availability and not random choice. Furthermore, in wholesale gasoline
markets, unobserved city-specific differences might include unmeasured
supply or demand effects such as different pricing strategies of the
refiners at different rack cities and the level of development of the
transportation system in the different areas. These differences are not
random. We, therefore, prefer the fixed-effects model, which--unlike
the random effect model--remains valid even when the unobserved city-
specific effects are not independent of the included explanatory
variables.
Although we preferred to use wholesale gasoline prices minus crude oil
prices as the dependent variable for economic and statistical reasons,
as part of our sensitivity analysis, we reestimated the models with the
crude oil prices as an explanatory variable. We found that these
results were similar, but the explanatory power, as expected, increased
significantly. Also, because some of the explanatory variables are
likely to be determined simultaneously with gasoline prices
(particularly gasoline inventories and refinery capacity utilization
rates), we estimated our models taking this into account. Furthermore,
it is likely that prices of wholesale gasoline would be correlated
across nearby racks, partly due to spatial competition. Our estimation
technique accounts for possible contemporaneous correlations across the
racks. A complete discussion of our econometric approach, including
model specifications, variables used, data sources, and estimation
techniques, is provided in appendix IV.
Mergers in the Second Half of the 1990s Mostly Led to Increases in
Wholesale Gasoline Prices:
The results of our econometric modeling indicate that most of the
individual mergers we examined led to increases in the prices of
wholesale gasoline for the time periods we analyzed, while a smaller
number of mergers led to price decreases. Overall, we examined eight
mergers, shown in table 4, including the two largest in the petroleum
industry in history--the BP-Amoco and Exxon-Mobil mergers.[Footnote 59]
We selected these mergers because of their transaction size, FTC's
review of them,[Footnote 60] or concerns expressed by some industry
participants and state officials we interviewed about their potential
anticompetitive effects.[Footnote 61]
Table 4: Selected Oil Industry Mergers Affecting Wholesale Gasoline
Markets, 1994-2000:
Merger[A]: Tosco-Unocal;
Effective date of merger[B]: April 1, 1997[E];
Acquirer: Tosco;
Target: Unocal;
Relevant geographic region[C, D]: PADD V;
Markets in which FTC identified competitive concerns: Not applicable.
Merger[A]: UDS-Total;
Effective date of merger[B]: October 1, 1997[F];
Acquirer: UDS;
Target: Total;
Relevant geographic region[C, D]: PADD II, III, IV;
Markets in which FTC identified competitive concerns: Not applicable.
Merger[A]: Marathon-Ashland;
Effective date of merger[B]: January 5, 1998[E];
Acquirer: Joint venture;
Target: Joint venture;
Relevant geographic region[C, D]: PADD I, II, III;
Markets in which FTC identified competitive concerns: Not applicable.
Merger[A]: Shell-Texaco I[G] (Equilon);
Effective date of merger[B]: February 1, 1998[F];
Acquirer: Joint venture;
Target: Joint venture;
Relevant geographic region[C, D]: PADD II, III, IV, V;
Markets in which FTC identified competitive concerns: Refining;
Wholesale; Retail.
Merger[A]: Shell-Texaco II[G] (Motiva);
Effective date of merger[B]: July 1, 1998[E];
Acquirer: Joint venture;
Target: Joint venture;
Relevant geographic region[C, D]: PADD I, II, III;
Markets in which FTC identified competitive concerns: Pipelines.
Merger[A]: BP-Amoco[H];
Effective date of merger[B]: December 31, 1998[E];
Acquirer: BP;
Target: Amoco;
Relevant geographic region[C, D]: PADD I, II, III;
Markets in which FTC identified competitive concerns: Wholesale.
Merger[A]: MAP-UDS;
Effective date of merger[B]: December 13, 1999[E];
Acquirer: MAP;
Target: UDS (Michigan);
Relevant geographic region[C, D]: PADD II;
Markets in which FTC identified competitive concerns: NA.
Merger[A]: Exxon-Mobil[H];
Effective date of merger[B]: March 1, 2000[F];
Acquirer: Exxon;
Target: Mobil;
Relevant geographic region[C, D]: PADD I, III;
Markets in which FTC identified competitive concerns: Refining;
Pipelines; Retail.
Legend:
UDS = Ultramar Diamond Shamrock;
BP= British Petroleum;
MAP = Marathon Ashland Petroleum:
Sources: GAO's analysis of EIA, FTC, OPIS, and Thomson Financial data.
[A] The first company is the acquirer and the second company is the
target.
[B] The effective dates are either the merger completion date or the
date when FTC's merger remedies became effective.
[C] Both merging companies operated in rack cities located in these
geographic regions.
[D] Traditionally, the United States has been divided into five
Petroleum Administration for Defense Districts (PADD): PADD I, the East
Coast region; PADD II, the Midwest region; PADD III, the Gulf Coast
region; PADD IV, the Rocky Mountain region; and PADD V, the West Coast
region. (See figure 11.):
[E] The merger completion date.
[F] The date when FTC's merger remedies became effective. The merger
completion date for the UDS-Total merger was September 25, 1997; for
the Shell-Texaco I (Equilon) merger, January 23, 1998; and for the
Exxon-Mobil merger, November 30, 1999.
[G] The Shell-Texaco II joint venture involved Shell, Texaco, and Star
(jointly controlled by Texaco and Saudi Refining Company). The Shell-
Texaco mergers ended in 2000 when Chevron and Texaco merged to form
Chevron-Texaco. Shell then acquired the Shell-Texaco assets as a
condition by FTC to allow the Chevron-Texaco merger.
[H] This merger also involved upstream assets of these companies, but
our modeling focused on the effects at the wholesale gasoline level.
[End of table]
In tables 5-7 we present the effects of the mergers we modeled on
wholesale prices of conventional gasoline, reformulated gasoline, and
CARB gasoline, respectively. The tables show (1) the geographic regions
that the mergers affected and (2) the estimated changes in wholesale
gasoline prices associated with each merger in the relevant geographic
areas.
Our estimates in table 5 show that of the seven mergers we analyzed for
conventional gasoline sold nationwide, five--the Marathon-Ashland, the
Shell-Texaco I (Equilon), BP-Amoco, MAP-UDS, and the Exxon-Mobil
mergers--led to price increases for both branded and unbranded gasoline
ranging from about 0.39 to 5.00 cents per gallon.[Footnote 62] The two
other mergers, UDS-Total and the Shell-Texaco II (Motiva), led to price
decreases for both branded and unbranded wholesale conventional
gasoline ranging from about 0.89 to 1.77 cents per gallon. Similarly,
for reformulated gasoline, which is sold mainly in cities in the East
Coast and Gulf Coast regions, table 6 shows that the mergers of
Marathon-Ashland and Exxon-Mobil increased wholesale gasoline prices
from about 0.71 to 1.61 cents per gallon. The Shell-Texaco II merger
led to decreased prices of about 0.39 cents per gallon for branded
gasoline and the BP-Amoco merger was not associated with price changes.
For CARB reformulated gasoline, as shown in table 7, the Tosco-Unocal
merger led to price increases for branded gasoline of about 6.87 cents
per gallon, while the Shell-Texaco I merger led to price decreases of
about 0.69 cents per gallon. Neither the Tosco-Unocal merger nor the
Shell-Texaco merger affected the prices of unbranded CARB gasoline.
Table 5: Estimated Changes in Conventional Wholesale Gasoline Prices
Associated with Individual Mergers (1994-2000):
Merger: UDS-Total[B]: Branded;
Estimated change in prices (cents per gallon)[A]: - 0.89.
Merger: UDS-Total[B]: Unbranded;
Estimated change in prices (cents per gallon)[A]: - 1.25.
Merger: Marathon-Ashland[C]: Branded;
Estimated change in prices (cents per gallon)[A]: 0.70.
Merger: Marathon-Ashland[C]: Unbranded;
Estimated change in prices (cents per gallon)[A]: 0.39.
Merger: Shell-Texaco I[D]: Branded;
Estimated change in prices (cents per gallon)[A]: 0.99.
Merger: Shell-Texaco I[D]: Unbranded;
Estimated change in prices (cents per gallon)[A]: 1.13.
Merger: Shell-Texaco II[E]: Branded;
Estimated change in prices (cents per gallon)[A]: - 1.77.
Merger: Shell-Texaco II[E]: Unbranded;
Estimated change in prices (cents per gallon)[A]: - 1.24.
Merger: BP-Amoco[F]: Branded;
Estimated change in prices (cents per gallon)[A]: 0.40.
Merger: BP-Amoco[F]: Unbranded;
Estimated change in prices (cents per gallon)[A]: 0.97.
Merger: MAP-UDS[G]: Branded;
Estimated change in prices (cents per gallon)[A]: 1.38.
Merger: MAP-UDS[G]: Unbranded;
Estimated change in prices (cents per gallon)[A]: 2.63.
Merger: Exxon-Mobil[H]: Branded;
Estimated change in prices (cents per gallon)[A]: 3.71.
Merger: Exxon-Mobil[H]: Unbranded;
Estimated change in prices (cents per gallon)[A]: 5.00.
Sources: GAO econometric analysis of EIA, FTC, QPIS, and Thomson
Financial data.
Notes:
See table 15 in appendix IV for additional information.
The average estimated prices (measured as wholesale gasoline prices
less crude oil prices) were 19 cents and 17 cents per gallon for
branded and unbranded gasoline, respectively. (See table 20 in appendix
IV.):
[A] The effective date, which is the first date in the postmerger
period, is based on either the merger completion date or the date when
FTC's remedial actions became effective. The time periods over which
the estimates were obtained are provided in table 15 in appendix IV.
The estimated changes associated with the mergers are statistically
significant at the 1 percent level or lower.
[B] The UDS-Total merger affected rack cities in the Midwest, Gulf
Coast, and Rocky Mountain regions.
[C] The Marathon-Ashland merger affected rack cities in the East Coast,
Midwest, and Gulf Coast regions.
[D] The Shell-Texaco I merger affected rack cities in the Midwest, Gulf
Coast, Rocky Mountain, and West Coast regions.
[E] The Shell-Texaco II merger affected rack cities in the East Coast,
Midwest, and Gulf Coast regions.
[F] The BP-Amoco merger affected rack cities in the East Coast,
Midwest, and Gulf Coast regions.
[G] The MAP-UDS merger affected rack cities in the Midwest region.
[H] The Exxon-Mobil merger affected rack cities in the East Coast and
Gulf Coast regions.
[End of table]
As shown in table 5, for conventional wholesale gasoline, we found the
following effects of individual mergers on prices.
UDS-Total: This merger led to price reductions for both branded and
unbranded gasoline of about 1 cent per gallon. FTC did not identify
potential anticompetitive concerns for this merger.
Marathon-Ashland: We found statistically significant increases in
prices of branded gasoline of about 1 cent per gallon and in unbranded
gasoline of about one-third cent per gallon due to this merger. FTC did
not identify potential anticompetitive concerns.
Shell-Texaco I (Equilon): This merger led to price increases of about 1
cent per gallon for both branded and unbranded gasoline. FTC identified
this merger as raising potential anticompetitive concerns at the
refining, wholesale, and retail levels in certain markets. Thus, the
agency sought to preserve competition by taking remedial actions.
Shell-Texaco II (Motiva): This merger led to decreases in prices of
about 1 cent to 2 cents per gallon for both branded and unbranded
gasoline. This finding is consistent with FTC's determination that the
merger was not likely to reduce competition in the affected wholesale
gasoline markets.
BP-Amoco: We found that this merger led to increases in prices of about
one-half to 1 cent per gallon for both branded and unbranded gasoline.
FTC identified many cities or metropolitan areas in the eastern half of
the United States (East Coast, Midwest, and Gulf Coast) where this
merger could reduce competition in wholesale markets. The agency,
therefore, took remedial actions to preserve competition in wholesale
gasoline markets affected by this merger.
MAP-UDS: This merger led to price increases of about 1 cent to 3 cents
per gallon for both branded and unbranded gasoline. FTC did not
identify this merger as raising potential anticompetitive concerns in
the wholesale gasoline markets and so did not take remedial action.
Exxon-Mobil: This merger led to increases in prices of about 4 to 5
cents per gallon for both branded and unbranded gasoline. The merger
was identified by FTC as raising potential anticompetitive concerns in
some retail markets, but not in wholesale markets. Thus, FTC required
divestitures of retail assets in the affected wholesale markets.
Table 6: Estimated Changes in Reformulated Wholesale Gasoline Prices
Associated with Individual Mergers (1995-2000):
Merger[A]: Marathon-Ashland[C]: Branded;
Estimated change in prices (cents per gallon)[B]: 0.71[D].
Merger[A]: Marathon-Ashland[C]: Unbranded;
Estimated change in prices (cents per gallon)[B]: 0.86[D].
Merger[A]: Shell-Texaco II[E]: Branded;
Estimated change in prices (cents per gallon)[B]: - 0.39[F].
Merger[A]: Shell-Texaco II[E]: Unbranded;
Estimated change in prices (cents per gallon)[B]: 0.09.
Merger[A]: BP-Amoco[G]: Branded;
Estimated change in prices (cents per gallon)[B]: 0.55.
Merger[A]: BP-Amoco[G]: Unbranded;
Estimated change in prices (cents per gallon)[B]: 0.40.
Merger[A]: Exxon-Mobil[H]: Branded;
Estimated change in prices (cents per gallon)[B]: 1.61[D].
Merger[A]: Exxon-Mobil[H]: Unbranded;
Estimated change in prices (cents per gallon)[B]: 1.01[F].
Sources: GAO econometric analysis of OPIS, EIA, FTC, and Bureau of
Labor statistics data.
Notes:
See table 16 in appendix IV for additional information.
The average estimated prices (measured as wholesale gasoline prices
less crude oil prices) were 20 cents and 18 cents per gallon for
branded and unbranded gasoline, respectively. (See table 20 in appendix
IV).
[A] No estimates are reported for the UDS-Total merger because data are
available for only one rack city.
[B] The effective date, which is the first date in the postmerger
period, is based on either the merger completion date or the date when
FTC's remedial actions became effective. The time periods over which
the estimates were obtained are provided in table 16 in appendix IV.
[C] The Marathon-Ashland merger affected rack cities in the East Coast,
Midwest, and Gulf Coast regions.
[D] The estimated changes associated with the mergers are statistically
significant at the 1 percent level or lower.
[E] The Shell-Texaco II merger affected rack cities in the East Coast
and Gulf Coast regions.
[F] The estimated changes associated with the mergers are statistically
significant at the 5 percent level or lower.
[G] The BP-Amoco merger affected rack cities in the East Coast,
Midwest, and Gulf Coast regions.
[H] The Exxon-Mobil merger affected rack cities in the East Coast and
Gulf Coast regions.
[End of table]
The results presented in table 6 for reformulated wholesale gasoline
sold in cities in the East Coast and Gulf Coast indicate the following
effects of the individual mergers on prices.
Marathon-Ashland: This merger led to increases in prices of about 1
cent per gallon for both branded and unbranded gasoline. As already
indicated, FTC did not identify potential anticompetitive concerns.
Shell-Texaco II (Motiva): This merger led to price reductions of about
0.39 cents per gallon for branded gasoline. As already indicated, this
finding is consistent with FTC's determination that the merger was not
likely to reduce competition in the affected wholesale gasoline
markets.
BP-Amoco: The effects of this merger were inconclusive. As already
indicated, FTC took remedial actions to preserve competition in
wholesale gasoline markets affected by this merger.
Exxon-Mobil: This merger led to increases in prices of about 1 cent to
2 cents per gallon for both branded and unbranded gasoline. As already
indicated, FTC required divestitures of retail assets in the affected
wholesale markets.
Table 7: Estimated Changes in CARB Reformulated Wholesale Gasoline
Prices Associated with Individual Mergers (1996-2000):
Merger: Tosco-Unocalb[B]: Branded;
Estimated change in prices (cents per gallon)[A]: 6.87[C].
Merger: Tosco-Unocalb[B]: Unbranded;
Estimated change in prices (cents per gallon)[A]: -1.58.
Merger: Shell-Texaco Id[D]: Branded;
Estimated change in prices (cents per gallon)[A]: - 0.69[C].
Merger: Shell-Texaco Id[D]: Unbranded;
Estimated change in prices (cents per gallon)[A]: -0.24.
Sources: GAO econometric analysis of OPIS, EIA, FTC, and Bureau of
Labor Statistics data.
Notes:
See table 17 in appendix IV for additional information.
The average estimated prices (measured as wholesale gasoline prices
less crude oil prices) were 36 cents and 31 cents per gallon for
branded and unbranded gasoline, respectively. (See table 20 in appendix
IV).
[A] The effective date, which is the first date in the postmerger
period, is based on either the merger completion date or the date when
FTC's remedial actions became effective. The time periods over which
the estimates were obtained are provided in table 17 in appendix IV.
[B] The Tosco-Unocal merger affected rack cities in the West Coast
region (California only).
[C] The estimated changes associated with the mergers are statistically
significant at the 5 percent level or lower.
[D] The Shell-Texaco I merger affected rack cities in the West Coast
region (California only).
[End of table]
As shown in table 7, for CARB wholesale gasoline sold in California, we
found the following price changes associated with individual mergers.
Tosco-Unocal: This merger, which affected both refining and marketing
(wholesale and retail), led to higher prices of branded gasoline--
increases of about 7 cents per gallon. FTC did not take remedial
actions in the merger.
Shell-Texaco I (Equilon): This merger led to decreases in prices of
about 1 cent per gallon. As already indicated, FTC sought to preserve
competition by taking remedial actions in this merger.
Increased Market Concentration Generally Led to Higher Wholesale
Gasoline Prices:
Based on our econometric analyses, we found that increased market
concentration led to higher wholesale prices for all gasoline types.
This finding is consistent with the fact that the wave of oil industry
mergers in the second half of the 1990s reduced the number of
competitors in the wholesale markets. As shown in table 8, the
estimated increases in wholesale prices of branded and unbranded
conventional gasoline from 1994 to 2000 were less than one-half cent
per gallon for all regions. The increases in prices of wholesale
gasoline were larger, especially for unbranded gasoline, in the western
half of the United States, which generally has limited access to
gasoline supplies from other regions or from abroad, potentially
exacerbating the effects of market concentration.
Table 8: Estimated Changes in Conventional Wholesale Gasoline Prices
Associated with Increased Market Concentration (1994-2000):
All regions[A];
Market concentration (HHI): 1994: 803;
Market concentration (HHI): 2000: 1101;
Market concentration (HHI): Increase in HHI: 298.
Branded;
Estimated change in prices due to increase in HHI (cents per gallon):
0.15[B].
Unbranded;
Estimated change in prices due to increase in HHI (cents per gallon):
0.33[B].
Geographic area;
Market concentration (HHI): Increase in HHI: 298.
Eastern United States[C];
Market concentration (HHI): 1994: 773;
Market concentration (HHI): 2000: 1090;
Market concentration (HHI): Increase in HHI: 317.
Branded;
Estimated change in prices due to increase in HHI (cents per gallon):
0.25[B].
Unbranded;
Estimated change in prices due to increase in HHI (cents per gallon):
0.10.
Western United States[D];
Market concentration (HHI): 1994: 1032;
Market concentration (HHI): 2000: 1180;
Market concentration (HHI): Increase in HHI: 148.
Branded;
Estimated change in prices due to increase in HHI (cents per gallon):
0.56[B].
Unbranded;
Estimated change in prices due to increase in HHI (cents per gallon):
1.29[E].
[End of table]
Sources: GAO econometric analysis of OPIS, EIA, FTC, and Bureau of
Labor statistics data.
Note: See table 18 in appendix IV for additional information.
[A] All states except Alaska, California, Connecticut, Delaware,
District of Columbia, Hawaii, Massachusetts, New Hampshire, New Jersey,
and Rhode Island.
[B] The estimated changes in prices are statistically significant at
the 1 percent level or lower.
[C] The Eastern U.S. consists of the East Coast, Midwest, and Gulf
Coast regions.
[D] The Western U.S. consists of the Rocky Mountains and West Coast
(excluding California) regions.
[E] The estimated changes in prices are statistically significant at
the 5 percent level or lower.
As shown in table 9, we also found that increased market concentration
led to higher wholesale prices of about 1 cent per gallon for
reformulated gasoline sold in certain cities in the East Coast and Gulf
Coast regions from 1995 through 2000. As also shown in table 9, for
CARB gasoline (sold only in California), we estimated that prices of
both branded and unbranded gasoline increased by about 7 and 8 cents
per gallon, respectively, from 1996 to 2000. The California market is
isolated from refinery centers in rest of the United States both
geographically and in terms of its gasoline type.
Table 9: Estimated Changes in Boutique Fuels Wholesale Prices
Associated with Increased Market Concentration (1995-2000):
Reformulated wholesale gasoline 1995-2000[A]: Branded;
Market concentration(HHI): 1995: 1,237;
Market concentration(HHI): 2000: 1,477;
Market concentration(HHI): Increase in HHI: 240;
Estimated change in price margin due to increase in HHI (cents per
gallon): 0.98[B].
Reformulated wholesale gasoline 1995-2000[A]: Unbranded;
Market concentration(HHI): 1995: 1,237;
Market concentration(HHI): 2000: 1,477;
Market concentration(HHI): Increase in HHI: 240;
Estimated change in price margin due to increase in HHI (cents per
gallon): 0.89[B].
CARB reformulated wholesale gasoline: 1996-2000[C]: Branded;
Market concentration(HHI): 1995: 965;
Market concentration(HHI): 2000: 1,267;
Market concentration(HHI): Increase in HHI: 302;
Estimated change in price margin due to increase in HHI (cents per
gallon): 7.19[B].
CARB reformulated wholesale gasoline: 1996-2000[C]: Unbranded;
Market concentration(HHI): 1995: 965;
Market concentration(HHI): 2000: 1,267;
Market concentration(HHI): Increase in HHI: 302;
Estimated change in price margin due to increase in HHI (cents per
gallon): 7.94[D].
Source: GAO econometric analysis of OPIS, EIA, FTC, and Bureau of Labor
statistics data.
Note: See table 19 in appendix IV for additional information.
[A] The area consists of Connecticut, Delaware, Maryland,
Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island,
Virginia in the East region; Kentucky in the Midwest region; and Texas
in the Gulf Coast region.
[B] The estimated changes in prices are statistically significant at
the 1 percent level or lower.
[C] The area consists of California.
[D] The estimated changes in prices are statistically significant at
the 10 percent level or lower.
[End of table]
Other Factors Also Resulted in Higher Wholesale Gasoline Prices:
In addition to the price increases resulting from the mergers and
market concentration, we found that low gasoline inventories relative
to demand, high refinery capacity utilization rates, and supply
disruptions in the Midwest and West Coast resulted in higher wholesale
gasoline prices[Footnote 63]--a finding generally consistent with the
expected effects.
Our econometric models indicate that when gasoline inventories are low
relative to demand, there is less protection against unexpected or not
fully anticipated supply problems, thereby increasing prices.[Footnote
64] Based on our analysis of EIA's data, low inventories relative to
demand occurred mostly between May/June and October, the summer driving
months. We found that wholesale prices were about 1 cent per gallon
higher between May/June and October compared to the other months of the
year. As shown in figure 22, both the inventories of gasoline and
expected demand for wholesale gasoline follow seasonal patterns, but
they move in opposite directions.
Figure 22: Normalized Inventories and Expected Demand for Wholesale
Gasoline (1994-2000):
[See PDF for image]
[End of figure]
The ratio of gasoline inventories to expected demand, shown in figure
23, demonstrates a seasonal pattern, and prices are expected to
increase when the ratio is less than one, which is from about May/June
to October, and to decrease when the ratio exceeds one, which is from
about November to April.
Figure 23: Ratio of Inventories to Expected Demand for Wholesale
Gasoline (1994-2000):
[See PDF for image]
[End of figure]
Our econometric models also indicate that when refinery capacity
utilization rates were high--averaging about 93 percent over the period
of our study--wholesale gasoline prices increased. In general,
refineries are utilized at high rates when gasoline demand increases
relative to gasoline inventories, all other things being constant. High
utilization rates increase operating costs, hence higher prices. We
estimated that a 1 percent increase in refinery capacity utilization
rates was associated with about one-tenth to two-tenths of 1 cent per
gallon increase in wholesale prices. The effect of high refinery
capacity utilization rates on prices has not been analyzed in previous
studies.
We found that both the Midwest and West Coast supply disruptions led to
higher wholesale gasoline prices, as expected, in the areas that were
affected by these disruptions. Specifically, prices of conventional
gasoline were about 4 to 5 cents per gallon higher on average during
both the Midwest and West Coast supply disruptions. The increase in
prices for:
CARB gasoline was about 4 to 7 cents per gallon, on average, during the
West Coast supply disruptions.[Footnote 65]
Our Findings Are Generally Consistent with Previous Studies' Empirical
Results:
Although our econometric models differed from the few previous studies
in the 1990s in several aspects, our results are generally consistent
with previous studies' findings that specific oil industry mergers or
increased market concentration have generally led to increases in
wholesale gasoline prices. For example, one study (Hastings and
Gilbert) examined the effects of changes in vertical and horizontal
market structures on the wholesale prices of unbranded
gasoline.[Footnote 66] Two kinds of analyses were performed--one for 26
rack cities on the West Coast from 1993 to 1997 and the other for the
effect of the 1997 merger between Tosco and Unocal in 13 West Coast
cities. The authors found that an increase in vertical integration was
associated with higher wholesale prices for unbranded gasoline. In
particular, consistent with the strategic incentive to raise
competitors' input costs, they found that wholesale gasoline prices
were higher in cities where there was greater competition between
integrated refiners and independent retailers. As discussed earlier,
our model of the effects of the:
Tosco-Unocal merger, using data from 1996 to 2000 in six rack cities,
found increases in the prices of branded gasoline.[Footnote 67]
Another study (Hendricks and McAfee) analyzed the effects of the then
proposed merger between Exxon and Mobil--two fully vertically
integrated oil companies--on CARB wholesale gasoline prices.[Footnote
68] The authors found the gasoline industry in California to have 20
percent price-cost margins (or markup), and that the merger would
increase the margins by about one or two percentage points for prices.
In addition, most of the postmerger changes would result from changes
at the refining rather than retail level, emphasizing the vertical
links in these markets.[Footnote 69]
In another study (Chouinard and Perloff) examining the determinants of
wholesale and retail gasoline prices in the United States, using data
for 48 states covering 1989 to 1997, the authors analyzed the effects
of 8 mergers affecting refining and wholesale markets in 5 states and
of 27 mergers affecting retail markets in 19 states.[Footnote 70]
Unlike our study, this study found that, overall, there were more
decreases in prices than increases for these mergers. However, none of
the mergers was large and none affected many regional markets.
Moreover, the mergers did not include any of the eight specific mergers
we studied.
We reviewed a study by FTC staff on the effects of the Marathon-Ashland
merger on reformulated wholesale gasoline prices and retail prices in
only one city, Louisville, Kentucky, using data from 1997 to 1999. The
FTC study found that wholesale prices increased, consistent with our
findings, while retail prices did not increase.[Footnote 71]
Although we developed our models drawing on insights from some of these
and other studies, and there are some similarities with them, the
models that we estimated differ from most existing ones in several
ways. First, ours is a comprehensive study of wholesale gasoline
markets that examines the effects of major individual mergers that were
part of the petroleum industry's merger wave in the 1990s. Second, we
examined the cumulative effects of these mergers as well as the effects
of other market structure factors, using the market concentration
index. Third, we performed our study for different types of gasoline--
conventional gasoline sold nationwide and boutique fuels sold in
California and in certain cities in the East Coast and Gulf Coast
regions. Fourth, we focused on the changes in wholesale price-crude
cost margins (wholesale prices less crude oil prices) instead of
wholesale prices because this allowed us to capture the net effects of
any potential market power and efficiency gains from mergers and market
concentration.[Footnote 72] Fifth, unlike most previous studies, we
included the effects of gasoline inventories and refinery capacity
utilization rates on wholesale prices, whereas previous studies have
typically included either none of the factors or only gasoline
inventories.
As we have already indicated, there are limitations to our methods for
estimating the effects of individual mergers and market concentration
on wholesale gasoline prices.[Footnote 73] First, we based the timing
of the mergers on the effective dates as provided by FTC. These are
either the merger completion dates or the dates when FTC's merger
remedies became effective for mergers that were subject to remedies. In
reality, the effective dates of some of the mergers could be some time
after the dates we used. However, because the mergers typically
occurred very close to one another and there were overlaps, we could
not perform sensitivity analyses on the timing of the mergers since
changing the timing of one merger could cause it to coincide with the
timing of another merger. Furthermore, the effective date is what most
experts use to date mergers, and it is expected that using these dates
would generally underestimate the effect of the mergers. More
importantly, we used the dates that FTC indicated as the merger
effective dates. Second, to estimate the effects of mergers on prices,
we would have preferred to use market shares of the merged companies.
These data are not usually available because they are proprietary. We
therefore determined the effects of the mergers by estimating the
difference in average prices before and after the effective dates of
the mergers. Also, because of the closeness in the timing of the oil
industry mergers in the second half of the 1990s as well as the
overlapping nature of the mergers, estimates from our econometric
models captured the mergers' effects on prices over shorter time
periods. However, because our estimate of a merger's effect starts from
the date that FTC indicated to be the effective date of the merger, we
believe that our results are sound and reasonable. Third, the market
concentration variable, measured by the Herfindahl-Hirschmann Index
(HHI) of refinery capacity at the refining (or PADD) level, includes
the production of other products in addition to gasoline. Also, the
data were not available for 2 years (1996 and 1998), and we constructed
the missing data using the average of the values of the adjacent years.
Nonetheless, we believe that in a vertically integrated gasoline
market, market power is better captured by production of gasoline at
the refinery level since it captures the ability of refiners to control
gasoline sales. Also, previous studies have identified some conceptual
limitations of price-concentration relationships, in particular the
problem of obtaining meaningful estimates from these relationships due
to possible endogeneity of market concentration. This issue is less
relevant to our models because it is not likely that prices at the rack
cities would affect decisions on refinery capacity, which is made for
the broader regional (PADD) market. Also, we chose to use the mergers
and market concentration models and found that the effects from both
models are generally consistent.
We utilized an expert in econometric modeling of the petroleum
industry, Dr. Severin Borenstein, as a consultant/peer reviewer, and he
provided us with comments on our econometric methodology and results,
which we incorporated in our report. Other experts that reviewed a
detailed outline of our econometric methodology also provided comments,
which we incorporated as appropriate.
Agency Comments and Our Evaluation:
We provided a draft of this report to FTC for its review and comment.
FTC strongly disagreed with our econometric approach and findings,
stating that the draft report was flawed and did not provide a basis
for reliable judgments about the competitive effects of mergers in the
petroleum industry. However, we believe that its analyses are sound and
consistent with the views of independent economists and experts that
peer reviewed our overall modeling approach and with previous studies.
We also believe that our model specifications captured key variables
that could affect wholesale gasoline prices. Partly in response to
FTC's comments, we reestimated its models to account for the effects of
gasoline supply disruptions that occurred in some parts of the West
Coast and Midwest regions.
The full text of FTC's comments and our responses are included in
appendixes V and VI. Appendix V contains the comments from FTC
Commissioners and appendix VI contains the comments from FTC's Bureau
of Economics staff.
[End of section]
Appendixes:
Appendix I: Companies, Agencies, and Organizations Contacted by GAO:
Integrated Oil Companies:
British Petroleum:
ChevronTexaco:
ExxonMobil:
Shell Oil Company:
Exploration and Production Companies:
Apache Corporation:
AROC, Inc.:
Devon Energy Corporation:
Dominion Oil and Gas:
Kerr-McGee:
Independent Refiners:
Kern Oil:
Flint Hills Resources, LP (wholly owned by Koch Industries):
Sunoco:
Valero:
Pipelines and/or Terminal Operators:
Kinder Morgan Energy Partners, LP:
Holland Terminal Company:
Independent Distributors:
Barger:
Cato, Inc., MD:
CMS Oil Company:
Congress Gas & Oil:
Cross Petroleum:
Downeast Energy:
Free Enterprise, Inc:
Global Petroleum, LLC:
Holland Oil:
Johnson and Dicks:
Karbowski Oil Company:
Lykins Companies, Inc.:
Ocean Petroleum:
Primar Petroleum, Inc:
Quality Oil:
Rice Oil Company:
Rusche Distributors:
Silco Oil:
Southern Counties Oil Company:
Speigel & Sons Oil Company:
Van Manen Petroleum Group:
Westco, Inc:
World Oil:
X-Vest, Inc.:
Federal Agencies:
Federal Trade Commission:
Department of Energy/Energy Information Administration:
Federal Energy Regulatory Commission:
State Agencies:
Michigan Assistant Attorney General's Office:
Michigan Public Service Commission:
Associations Association of Oil Pipelines:
American Petroleum Institute (API):
California Independent Oil Marketers Association (CIOMA):
California Service Station Dealers' Association:
Colorado Petroleum Marketers Association:
Independent Petroleum Association of America (IPAA):
Michigan Petroleum Association/Michigan Association of Convenience
Stores:
Michigan Service Station Dealers' Association:
National Petrochemical & Refiners Association:
New York Service Station Dealers' Association:
Ohio Service Station Dealers' Association:
Pennsylvania Service Station Dealers' Association:
Petroleum Marketers Association of America (PMAA):
Society of Independent Gasoline Marketers Association:
Texas Marketers Association:
Hypermarkets/Unbranded Retailers:
Rotten Robbie:
Fuel Mart:
Wawa:
Sheetz:
Safeway:
Meijer:
Costco:
Kroger:
Consultants:
PIRA Energy Group:
Industry Data Sources:
John S. Herold, Inc.:
Oil Price Information Service (OPIS):
Thomson Financial.
[End of section]
Appendix II: Experts Who Reviewed GAO's Econometric Models:
Peter Ashton:
President, Innovation and Information Consultants:
Hank Banta, Partner:
Law Firm of Label, Novins, Lamont (Antitrust Issues):
Severin Borenstein, Ph.D.:
E. T. Grether Professor of Business Administration and Public Policy,
Haas School of Business, University of California at Berkeley:
Director, University of California Energy Institute:
Research Associate, National Bureau of Economic Research:
John S. Cook, Ph.D.
Director, Petroleum Division, and his staff:
Energy Information Administration:
Lawrence Goldstein, Ph.D.
President, Petroleum Industry Research Foundation, Inc.
Justine Hastings, Ph.D.
Assistant Professor of Economics, Yale University:
Kenneth Hendricks, Ph.D.
Professor of Economics, University of Texas:
Louis Silva, Ph.D.
Assistant Director, Antitrust 1, and other economists
Federal Trade Commission:
[End of section]
Appendix III: Correlation Analysis of Mergers and Market Concentration
in the U.S. Petroleum Industry:
In this appendix, we present levels of wholesale gasoline market
concentration as well as the results of our correlation analysis
between mergers and market concentration for the petroleum refining and
wholesale gasoline markets. We found that levels of wholesale gasoline
market concentration increased--in some cases dramatically--in all but
five states from 1994 to 2002. Our correlation analysis for petroleum
refining showed a positive and statistically significant correlation
between the average transaction value of mergers (henceforth mergers)
and market concentration in three of the five geographic regions of the
U.S. including--the East Coast, the Midwest, and the West Coast. For
wholesale gasoline markets, we found a positive and statistically
significant correlation between mergers and market concentration in
nearly all states from 1994 through 2001. This correlation was
generally highest in states that experienced large changes in market
concentration over this period.
Wholesale Gasoline Market Concentration by State:
As seen in table 10, most states experienced moderate to high levels of
market concentration in wholesale gasoline by the year 2002, using
thresholds defined by the 1992 Horizontal Merger Guidelines jointly
issued by the Department of Justice and the Federal Trade
Commission.[Footnote 74] Also, 43 states had increases in market
concentration of well over 100 points, as measured by the Herfindahl-
Hirschman index (HHI) between the years 1994 and 2002. Only 4 states--
New York, Idaho, Montana, Oregon--and the District of Columbia
experienced decreases in market concentration during this period, and
in those cases the decrease did not change the category of market
concentration under the Guidelines. For PADD I, market concentration
levels in 2002 ranged from a low of 986 in New Hampshire to a high of
2,967 in the District of Columbia. In addition, market concentration
increases ranged from 28 in Maryland to 652 in Rhode Island from 1994
through 2002. Decreases in concentration during this period were found
in both New York and the District of Columbia. In PADD II,
concentration levels in 2002 ranged from a low of 951 in Iowa to a high
of 2,162 in North Dakota. Increases in concentration in this PADD
ranged from 152 in Illinois to 911 in Kentucky from 1994 through 2002.
In PADD III, market concentration levels in 2002 ranged from a low of
857 in Arkansas to a high of 1,326 in New Mexico, with increases in
concentration ranging from 228 to 432 in Arkansas and Alabama,
respectively. PADD IV experienced concentration levels ranging from
1,222 in Idaho to 2,316 in Montana, with changes in concentration from
1994 through 2002 ranging from a decrease of 40 in Idaho to an increase
of 477 in Colorado. Finally, in PADD V, concentration levels in 2002
ranged from a low of 1,171 in Arizona to a high of 3,123 in Hawaii,
with changes in market concentration ranging from a decrease of 143 in
Oregon to an increase of 596 in Hawaii from 1994 through 2002.
Table 10: State-level HHI for Wholesale Gasoline (1994-2002):
: PADD[A]: I;
State: CT;
Year: 1994: 1028;
Year: 1995: 1110;
Year: 1996: 1223;
Year: 1997: 1248;
Year: 1998: 1292;
Year: 1999: 1374;
Year: 2000: 1302;
Year: 2001: 1418;
Year: 2002: 1501;
Change: 473.
PADD[A]: I;
State: MA;
Year: 1994: 966;
Year: 1995: 1023;
Year: 1996: 1130;
Year: 1997: 1107;
Year: 1998: 1218;
Year: 1999: 1249;
Year: 2000: 1079;
Year: 2001: 1185;
Year: 2002: 1280;
Change: 314.
PADD[A]: I;
State: ME;
Year: 1994: 1171;
Year: 1995: 1193;
Year: 1996: 1305;
Year: 1997: 1385;
Year: 1998: 1435;
Year: 1999: 1423;
Year: 2000: 1349;
Year: 2001: 1340;
Year: 2002: 1453;
Change: 282.
PADD[A]: I;
State: NH;
Year: 1994: 749;
Year: 1995: 810;
Year: 1996: 917;
Year: 1997: 844;
Year: 1998: 855;
Year: 1999: 997;
Year: 2000: 884;
Year: 2001: 920;
Year: 2002: 986;
Change: 237.
PADD[A]: I;
State: RI;
Year: 1994: 1037;
Year: 1995: 1073;
Year: 1996: 1154;
Year: 1997: 1167;
Year: 1998: 1180;
Year: 1999: 1513;
Year: 2000: 1470;
Year: 2001: 1647;
Year: 2002: 1689;
Change: 652.
PADD[A]: I;
State: VT;
Year: 1994: 1061;
Year: 1995: 1164;
Year: 1996: 1134;
Year: 1997: 1111;
Year: 1998: 1114;
Year: 1999: 1148;
Year: 2000: 1015;
Year: 2001: 1198;
Year: 2002: 1164;
Change: 103.
PADD[A]: I;
State: DC;
Year: 1994: 3474;
Year: 1995: 3465;
Year: 1996: 3249;
Year: 1997: 3117;
Year: 1998: 3245;
Year: 1999: 2997;
Year: 2000: 3033;
Year: 2001: 2784;
Year: 2002: 2967;
Change: -507.
PADD[A]: I;
State: DE;
Year: 1994: 865;
Year: 1995: 839;
Year: 1996: 884;
Year: 1997: 975;
Year: 1998: 1002;
Year: 1999: 1076;
Year: 2000: 1044;
Year: 2001: 1182;
Year: 2002: 1283;
Change: 418.
PADD[A]: I;
State: MD;
Year: 1994: 1120;
Year: 1995: 1095;
Year: 1996: 1060;
Year: 1997: 1117;
Year: 1998: 1041;
Year: 1999: 1179;
Year: 2000: 1148;
Year: 2001: 1105;
Year: 2002: 1148;
Change: 28.
PADD[A]: I;
State: NJ;
Year: 1994: 828;
Year: 1995: 834;
Year: 1996: 882;
Year: 1997: 907;
Year: 1998: 889;
Year: 1999: 1018;
Year: 2000: 1026;
Year: 2001: 955;
Year: 2002: 1130;
Change: 302.
PADD[A]: I;
State: NY;
Year: 1994: 1087;
Year: 1995: 1094;
Year: 1996: 1146;
Year: 1997: 1113;
Year: 1998: 1130;
Year: 1999: 1075;
Year: 2000: 927;
Year: 2001: 977;
Year: 2002: 1048;
Change: - 39.
PADD[A]: I;
State: PA;
Year: 1994: 946;
Year: 1995: 945;
Year: 1996: 956;
Year: 1997: 967;
Year: 1998: 927;
Year: 1999: 1076;
Year: 2000: 1167;
Year: 2001: 1203;
Year: 2002: 1341;
Change: 395.
PADD[A]: I;
State: FL;
Year: 1994: 839;
Year: 1995: 860;
Year: 1996: 844;
Year: 1997: 828;
Year: 1998: 743;
Year: 1999: 997;
Year: 2000: 1093;
Year: 2001: 1070;
Year: 2002: 1043;
Change: 204.
PADD[A]: I;
State: GA;
Year: 1994: 715;
Year: 1995: 722;
Year: 1996: 723;
Year: 1997: 715;
Year: 1998: 694;
Year: 1999: 1152;
Year: 2000: 1151;
Year: 2001: 1088;
Year: 2002: 1089;
Change: 374.
PADD[A]: I;
State: NC;
Year: 1994: 831;
Year: 1995: 888;
Year: 1996: 886;
Year: 1997: 893;
Year: 1998: 846;
Year: 1999: 1160;
Year: 2000: 1222;
Year: 2001: 1138;
Year: 2002: 1117;
Change: 286.
PADD[A]: I;
State: SC;
Year: 1994: 814;
Year: 1995: 820;
Year: 1996: 817;
Year: 1997: 833;
Year: 1998: 823;
Year: 1999: 1007;
Year: 2000: 1023;
Year: 2001: 1029;
Year: 2002: 1023;
Change: 209.
PADD[A]: I;
State: VA;
Year: 1994: 895;
Year: 1995: 957;
Year: 1996: 948;
Year: 1997: 963;
Year: 1998: 921;
Year: 1999: 1124;
Year: 2000: 1083;
Year: 2001: 1162;
Year: 2002: 1116;
Change: 221.
PADD[A]: I;
State: WV;
Year: 1994: 1654;
Year: 1995: 1374;
Year: 1996: 1446;
Year: 1997: 1602;
Year: 1998: 2356;
Year: 1999: 2487;
Year: 2000: 2020;
Year: 2001: 1785;
Year: 2002: 1744;
Change: 90.
PADD[A]: II;
State: IA;
Year: 1994: 765;
Year: 1995: 778;
Year: 1996: 806;
Year: 1997: 931;
Year: 1998: 828;
Year: 1999: 849;
Year: 2000: 866;
Year: 2001: 834;
Year: 2002: 951;
Change: 186.
PADD[A]: II;
State: IL;
Year: 1994: 1147;
Year: 1995: 1140;
Year: 1996: 1173;
Year: 1997: 1176;
Year: 1998: 1188;
Year: 1999: 1260;
Year: 2000: 1253;
Year: 2001: 1281;
Year: 2002: 1299;
Change: 152.
PADD[A]: II;
State: IN;
Year: 1994: 1599;
Year: 1995: 1636;
Year: 1996: 1644;
Year: 1997: 1676;
Year: 1998: 1966;
Year: 1999: 1983;
Year: 2000: 1917;
Year: 2001: 2069;
Year: 2002: 2117;
Change: 518.
PADD[A]: II;
State: KS;
Year: 1994: 873;
Year: 1995: 888;
Year: 1996: 912;
Year: 1997: 875;
Year: 1998: 923;
Year: 1999: 944;
Year: 2000: 992;
Year: 2001: 1023;
Year: 2002: 1214;
Change: 341.
PADD[A]: II;
State: KY;
Year: 1994: 1216;
Year: 1995: 1285;
Year: 1996: 1392;
Year: 1997: 1437;
Year: 1998: 2170;
Year: 1999: 2116;
Year: 2000: 2033;
Year: 2001: 2161;
Year: 2002: 2127;
Change: 911.
PADD[A]: II;
State: MI;
Year: 1994: 1150;
Year: 1995: 1156;
Year: 1996: 1158;
Year: 1997: 1091;
Year: 1998: 1241;
Year: 1999: 1337;
Year: 2000: 1838;
Year: 2001: 1861;
Year: 2002: 1884;
Change: 734.
PADD[A]: II;
State: MN;
Year: 1994: 1162;
Year: 1995: 1183;
Year: 1996: 1204;
Year: 1997: 1211;
Year: 1998: 1268;
Year: 1999: 1298;
Year: 2000: 1340;
Year: 2001: 1362;
Year: 2002: 1383;
Change: 221.
PADD[A]: II;
State: MO;
Year: 1994: 739;
Year: 1995: 770;
Year: 1996: 818;
Year: 1997: 850;
Year: 1998: 899;
Year: 1999: 884;
Year: 2000: 908;
Year: 2001: 895;
Year: 2002: 983;
Change: 244.
PADD[A]: II;
State: ND;
Year: 1994: 1761;
Year: 1995: 1815;
Year: 1996: 1845;
Year: 1997: 1916;
Year: 1998: 1516;
Year: 1999: 2292;
Year: 2000: 2278;
Year: 2001: 1892;
Year: 2002: 2162;
Change: 401.
PADD[A]: II;
State: NE;
Year: 1994: 898;
Year: 1995: 878;
Year: 1996: 856;
Year: 1997: 844;
Year: 1998: 874;
Year: 1999: 943;
Year: 2000: 898;
Year: 2001: 987;
Year: 2002: 1307;
Change: 409.
PADD[A]: II;
State: OH;
Year: 1994: 1540;
Year: 1995: 1508;
Year: 1996: 1495;
Year: 1997: 1536;
Year: 1998: 2058;
Year: 1999: 2147;
Year: 2000: 2132;
Year: 2001: 2040;
Year: 2002: 1943;
Change: 403.
PADD[A]: II;
State: OK;
Year: 1994: 895;
Year: 1995: 927;
Year: 1996: 991;
Year: 1997: 944;
Year: 1998: 944;
Year: 1999: 957;
Year: 2000: 1001;
Year: 2001: 933;
Year: 2002: 1048;
Change: 153.
PADD[A]: II;
State: SD;
Year: 1994: 845;
Year: 1995: 934;
Year: 1996: 927;
Year: 1997: 887;
Year: 1998: 760;
Year: 1999: 898;
Year: 2000: 957;
Year: 2001: 943;
Year: 2002: 1153;
Change: 308.
PADD[A]: II;
State: TN;
Year: 1994: 742;
Year: 1995: 806;
Year: 1996: 835;
Year: 1997: 853;
Year: 1998: 871;
Year: 1999: 1215;
Year: 2000: 1251;
Year: 2001: 1224;
Year: 2002: 1231;
Change: 489.
PADD[A]: II;
State: WI;
Year: 1994: 944;
Year: 1995: 999;
Year: 1996: 1003;
Year: 1997: 1123;
Year: 1998: 1187;
Year: 1999: 1120;
Year: 2000: 1201;
Year: 2001: 1235;
Year: 2002: 1275;
Change: 331.
PADD[A]: III;
State: AL;
Year: 1994: 713;
Year: 1995: 718;
Year: 1996: 762;
Year: 1997: 809;
Year: 1998: 779;
Year: 1999: 1216;
Year: 2000: 1170;
Year: 2001: 1150;
Year: 2002: 1145;
Change: 432.
PADD[A]: III;
State: AR;
Year: 1994: 629;
Year: 1995: 637;
Year: 1996: 625;
Year: 1997: 633;
Year: 1998: 772;
Year: 1999: 817;
Year: 2000: 840;
Year: 2001: 784;
Year: 2002: 857;
Change: 228.
PADD[A]: III;
State: LA;
Year: 1994: 897;
Year: 1995: 912;
Year: 1996: 941;
Year: 1997: 936;
Year: 1998: 845;
Year: 1999: 1055;
Year: 2000: 1105;
Year: 2001: 1098;
Year: 2002: 1157;
Change: 260.
PADD[A]: III;
State: MS;
Year: 1994: 711;
Year: 1995: 731;
Year: 1996: 738;
Year: 1997: 771;
Year: 1998: 727;
Year: 1999: 1025;
Year: 2000: 1043;
Year: 2001: 1019;
Year: 2002: 1063;
Change: 352.
PADD[A]: III;
State: NM;
Year: 1994: 938;
Year: 1995: 966;
Year: 1996: 1030;
Year: 1997: 1111;
Year: 1998: 1225;
Year: 1999: 1305;
Year: 2000: 1192;
Year: 2001: 1236;
Year: 2002: 1326;
Change: 388.
PADD[A]: III;
State: TX;
Year: 1994: 794;
Year: 1995: 825;
Year: 1996: 852;
Year: 1997: 850;
Year: 1998: 837;
Year: 1999: 941;
Year: 2000: 977;
Year: 2001: 970;
Year: 2002: 1117;
Change: 323.
PADD[A]: IV;
State: CO;
Year: 1994: 1002;
Year: 1995: 1029;
Year: 1996: 1039;
Year: 1997: 1039;
Year: 1998: 1240;
Year: 1999: 1282;
Year: 2000: 1278;
Year: 2001: 1274;
Year: 2002: 1479;
Change: 477.
PADD[A]: IV;
State: ID;
Year: 1994: 1262;
Year: 1995: 1272;
Year: 1996: 1151;
Year: 1997: 1120;
Year: 1998: 1035;
Year: 1999: 1098;
Year: 2000: 1130;
Year: 2001: 1089;
Year: 2002: 1222;
Change: -40.
PADD[A]: IV;
State: MT;
Year: 1994: 2339;
Year: 1995: 2290;
Year: 1996: 2282;
Year: 1997: 2079;
Year: 1998: 2024;
Year: 1999: 2064;
Year: 2000: 2303;
Year: 2001: 2380;
Year: 2002: 2316;
Change: -23.
PADD[A]: IV;
State: UT;
Year: 1994: 1142;
Year: 1995: 1153;
Year: 1996: 1161;
Year: 1997: 1146;
Year: 1998: 1270;
Year: 1999: 1320;
Year: 2000: 1305;
Year: 2001: 1200;
Year: 2002: 1391;
Change: 249.
PADD[A]: IV;
State: WY;
Year: 1994: 1115;
Year: 1995: 1129;
Year: 1996: 1070;
Year: 1997: 992;
Year: 1998: 1107;
Year: 1999: 1291;
Year: 2000: 1402;
Year: 2001: 1325;
Year: 2002: 1350;
Change: 235.
PADD[A]: V;
State: AK;
Year: 1994: 2505;
Year: 1995: 2577;
Year: 1996: 2679;
Year: 1997: 2975;
Year: 1998: 2828;
Year: 1999: 2719;
Year: 2000: 2599;
Year: 2001: 2721;
Year: 2002: 2746;
Change: 241.
PADD[A]: V;
State: AZ;
Year: 1994: 1142;
Year: 1995: 1069;
Year: 1996: 1151;
Year: 1997: 1215;
Year: 1998: 1427;
Year: 1999: 1331;
Year: 2000: 1175;
Year: 2001: 1045;
Year: 2002: 1171;
Change: 29.
PADD[A]: V;
State: CA;
Year: 1994: 1122;
Year: 1995: 1144;
Year: 1996: 1200;
Year: 1997: 1310;
Year: 1998: 1488;
Year: 1999: 1511;
Year: 2000: 1356;
Year: 2001: 1395;
Year: 2002: 1597;
Change: 475.
PADD[A]: V;
State: HI;
Year: 1994: 2527;
Year: 1995: 2575;
Year: 1996: 2339;
Year: 1997: 2271;
Year: 1998: 2222;
Year: 1999: 2813;
Year: 2000: 2890;
Year: 2001: 2942;
Year: 2002: 3123;
Change: 596.
PADD[A]: V;
State: NV;
Year: 1994: 1417;
Year: 1995: 1463;
Year: 1996: 1425;
Year: 1997: 1339;
Year: 1998: 1361;
Year: 1999: 1354;
Year: 2000: 1282;
Year: 2001: 1359;
Year: 2002: 1555;
Change: 138.
PADD[A]: V;
State: OR;
Year: 1994: 1867;
Year: 1995: 1495;
Year: 1996: 1406;
Year: 1997: 1445;
Year: 1998: 1699;
Year: 1999: 1734;
Year: 2000: 1594;
Year: 2001: 1556;
Year: 2002: 1724;
Change: -143.
PADD[A]: V;
State: WA;
Year: 1994: 1421;
Year: 1995: 1381;
Year: 1996: 1398;
Year: 1997: 1427;
Year: 1998: 1572;
Year: 1999: 1557;
Year: 2000: 1423;
Year: 2001: 1376;
Year: 2002: 1579;
Change: 158.
Source: GAO analysis of EIA data.
[A] Petroleum Administration Defense Districts (PADD) are regional
districts defined by the Department of Energy.
[End of table]
Correlation Analysis of Mergers and Market Concentration:
To determine the degree of association or connection between changes in
merger activity and market concentration we analyzed correlations for
both petroleum refining and wholesale gasoline supply.[Footnote 75] For
both correlations, we used average merger transaction values from John
S. Herold, Inc., as a proxy for merger activity and market
concentration data from the Energy Information Administration (EIA) of
the Department of Energy.[Footnote 76] Transaction values were reported
for nearly 60 percent of the mergers in the John S. Herold merger
database, including all mergers during the period valued at over $1
billion. We performed the correlations using the Pearson correlation
coefficient from the SAS (Statistical Analysis System) statistical
package. This coefficient measures the strength of the linear
relationship between two variables and ranges from -1 to +1, with a
positive number corresponding to a positive or direct association and a
negative number corresponding to a negative or inverse association. In
addition, we used the SAS package to test the statistical significance
for each pair of variables in the correlation.
Correlation Analysis for Petroleum Refining:
To perform the correlation analysis for petroleum refining, we used
market concentration data at the regional or PADD level because we were
able to obtain data at this level and were told by experts and
academicians that this was a relevant geographic market for refining.
We used yearly average merger transaction values and yearly market
concentration (HHI) data from 1991 to 2000, omitting the years 1996 and
1998 because market concentration (HHI) data were unavailable for these
years. Table 11 presents the results of our correlation analysis
between the average transaction value of mergers and market
concentration for the petroleum refining market.
Table 11: Correlation between the Average Transaction Value of Mergers
and Market Concentration (HHI) for Petroleum Refining by PADD (1991-
2000):
Petroleum Administration for Defense Districts (PADD): Market
concentration (HHI);
range of lowest to highest;
PADD I: East Coast: Region: 1,150-827;
PADD II: Midwest: Region: 674-004;
PADD III: Gulf Coast: Region: 520-704;
PADD IV: Rocky Mountain: Region: 1,029-1,128;
PADD V West Coast: Region: 877-1,267.
Petroleum Administration for Defense Districts (PADD): Correlation
coefficient between the average of transaction value of mergers and
HHI[A];
PADD I: East Coast: Region: 0.80[B]; (0.0177);
PADD II: Midwest: Region: 0.93[B]; (0.0091);
PADD III: Gulf Coast: Region: 0.53; (0.1773);
PADD IV: Rocky Mountain: Region: 0.37; (0.3652);
PADD V West Coast: Region: 0.91[B]; (0.0018).
Source: GAO analysis of data from John S. Herold, Inc., and the EIA.
Notes: (1) The correlation between mergers and concentration by
Petroleum Administration for Defense Districts (PADDs) does not include
years 1996 and 1998 because HHI data are unavailable for these years.
(2) We calculated the average transaction values of mergers using the
transaction values of mergers divided by the total number of mergers,
as reported in the John S. Herold, Inc., dataset. John S. Herold
defines transaction value as the value of the merger at the time of the
offer, based on either the value of the seller's assets or the offer
from the buyer.
[A] Numbers in parenthesis indicate the statistical significance of the
estimate of correlation.
[B] Eestimates are statistically at the 0.05 level or below.
[End of table]
As table 11 shows, the average transaction values of mergers and
petroleum refining market concentration (HHIs) are positively
correlated and highly statistically significant for the regions of PADD
I (the East Coast), PADD II (the Midwest), and PADD V (the West Coast).
Correlation Analysis for Wholesale Gasoline:
To perform the correlation analysis for wholesale gasoline supply, we
used market concentration data at the state level because we were able
to obtain data at this level and were told by experts and academicians
that this was the relevant geographic market. We estimated correlations
between the transaction values of mergers and market concentration
(HHI) for wholesale gasoline supply from 1994 through 2001. Although we
were able to obtain monthly HHI data from 1994 through 2002 for each
state, we only had yearly merger transaction data. Therefore, for this
correlation, we matched lagged values of the yearly average merger
transaction from 1993 through 2000 with monthly observations of the HHI
for each state from 1994 through 2001. Table 12 presents the results of
our correlation analysis between the yearly average transaction values
of mergers and market concentration for wholesale gasoline supply. The
correlation was positive and statistically significant in almost all
states.
Table 12: Correlation between the Average Transaction Value of Mergers
and Market Concentration (HHI) for Wholesale Gasoline (1994-2001):
PADD: I;
State: GA;
Correlation coefficient: 0.92;
Statistical significance:
