Energy Markets
Mergers and Many Other Factors Affect U.S. Gasoline Markets Gao ID: GAO-04-951T July 7, 2004Gasoline is subject to dramatic price swings. A multitude of factors cause volatility in U.S. gasoline markets, including world crude oil costs, limited refining capacity, and low inventories relative to demand. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several of them between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry (GAO-04-96, May 17, 2004). This report examined mergers in the U.S. petroleum industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the U.S. petroleum industry, how U.S. gasoline marketing has changed since the 1990s, and 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 and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis.
One of the many factors that can impact gasoline prices is mergers within the U.S. petroleum industry. Over 2,600 such mergers have occurred 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. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated on the East Coast and from unconcentrated to moderately concentrated on the West Coast. 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 in the upstream (exploration and production) segment remained unconcentrated by the end of the 1990s. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as firms' ability to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. 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. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. 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 also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models--particularly low gasoline inventories relative to demand, high refinery capacity utilization rates, and supply disruptions in some regions. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound.
GAO-04-951T, Energy Markets: Mergers and Many Other Factors Affect U.S. Gasoline Markets
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Testimony:
Before the Subcommittee on Energy Policy, Natural Resources and
Regulatory Affairs, Committee on Government Reform, House of
Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EDT:
Wednesday, July 7, 2004:
Energy Markets:
Mergers and Many Other Factors Affect U.S. Gasoline Markets:
Statement of Jim Wells, Director, Natural Resources and Environment:
GAO-04-951T:
GAO Highlights:
Highlights of GAO-04-951T, a report to Subcommittee on Energy Policy,
Natural Resources and Regulatory Affairs, Committee on Government
Reform, House of Representatives:
Why GAO Did This Study:
Gasoline is subject to dramatic price swings. A multitude of factors
cause volatility in U.S. gasoline markets, including world crude oil
costs, limited refining capacity, and low inventories relative to
demand.
Since the 1990s, another factor affecting U.S. gasoline markets has
been a wave of mergers in the petroleum industry, several of them
between large oil companies that had previously competed with each
other. For example, in 1999, Exxon, the largest U.S. oil company,
merged with Mobil, the second largest.
This testimony is based primarily on Energy Markets: Effects of Mergers
and Market Concentration in the U.S. Petroleum Industry (GAO-04-96, May
17, 2004). This report examined mergers in the U.S. petroleum industry
from the 1990s through 2000, the changes in market concentration (the
distribution of market shares among competing firms) and other factors
affecting competition in the U.S. petroleum industry, how U.S. gasoline
marketing has changed since the 1990s, and 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 and developed state-of-the art econometric models for isolating
the effects of eight specific mergers and increased market
concentration on wholesale gasoline prices. Experts peer-reviewed GAO‘s
analysis.
What GAO Found:
One of the many factors that can impact gasoline prices is mergers
within the U.S. petroleum industry. Over 2,600 such mergers have
occurred 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.
Partly because of the mergers, market concentration has increased in
the industry, mostly in the downstream (refining and marketing)
segment. For example, market concentration in refining increased from
moderately to highly concentrated on the East Coast and from
unconcentrated to moderately concentrated on the West Coast.
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 in the upstream (exploration and production)
segment remained unconcentrated by the end of the 1990s. Anecdotal
evidence suggests that mergers also have changed other factors
affecting competition, such as firms‘ ability to enter the market.
Two major changes have occurred in U.S. gasoline marketing related to
mergers, according to industry officials. 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.
Based on data from the mid-1990s through 2000, GAO‘s econometric
analyses indicate that mergers and increased market concentration
generally led to higher wholesale gasoline prices in the United
States. Six of the eight mergers GAO modeled led to price increases,
averaging about 2 cents per gallon. Increased market concentration,
which reflects the cumulative effects of mergers and other competitive
factors, also led to increased prices in most cases. 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 also identified price increases of one-tenth of a cent
to 7 cents that were caused by other factors included in the models”
particularly low gasoline inventories relative to demand, high refinery
capacity utilization rates, and supply disruptions in some regions.
FTC disagreed with GAO‘s methodology and findings. However, GAO
believes its analyses are sound.
www.gao.gov/cgi-bin/getrpt?GAO-04-951T.
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]
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to participate in discussing issues
related to the volatility of U.S. gasoline markets. According to data
from the Energy Information Administration (EIA), the average
nationwide price paid for regular gasoline (the type of gasoline used
most in the United States) at the pump was as high as $2.06 cents/
gallon by the end of May 2004, an increase of about 58 cents/gallon or
39 percent over the same time last year. On the West Coast, gasoline
prices reached an average of $2.34 cents/gallon by the end of May 2004,
an increase of about 65 cents/gallon or 38 percent over the same time
last year. Although prices have recently begun to fall, elevated
gasoline prices can be an economic burden to American consumers and the
economy.
A broad range of factors affects the volatility of gasoline prices.
These factors typically include changes in crude oil costs, limited
refinery capacity, inventory levels relative to demand, supply
disruptions, and regulatory factors--such as the many different
gasoline formulations that are required to meet varying federal and
state environmental laws. Federal and state taxes are also a component
of U.S. gasoline prices, but these do not fluctuate often. We have
addressed many of these issues in several studies on energy markets.
Among other things, our past studies showed that:
* the U.S. economy is vulnerable to oil supply disruptions that can
impose significant economic costs, and in our report options were
identified to mitigate their effects;
* the Clean Air Act specifically requires refiners to produce
reformulated gasoline, and the requirement to provide a specific blend
for a specific area can present challenges to refiners and other
suppliers if there are supply disruptions;
* gasoline price spikes were generally higher in California from
January 1995 through December 1999 than in the rest of the nation,
partly because of the difficulty in substituting for the loss of supply
of CARB, the special reformulated gasoline used in California, when
there were unplanned refinery outages;
* retail gasoline prices in California rose faster than they fell in
response to a delayed pass-through in changes in the wholesale price of
gasoline;
* as we testified in 2001, each day vehicles in the United States
consume about 10 million barrels of petroleum fuels, primarily gasoline
and diesel, and according to projections, the figure will rise to about
15 million barrels per day by 2010, raising concerns about the nation's
ability to satisfy this growing demand;
* the transportation sector is more than 90 percent dependent on
petroleum-based fuels, such as gasoline, and this dependence
contributes to our vulnerability to oil supply disruptions and related
price shocks; and:
* existing federal programs to promote alternative fuel vehicles and
alternative fuel use in the transportation sector have faced
significant barriers.
Market consolidation is another factor that can affect the price of
gasoline. Our testimony today will focus on our recent study that
examined the effects of market consolidation and other factors on the
U. S. petroleum industry.[Footnote 1]
Since the 1990s, the U.S. petroleum industry has experienced a wave of
mergers, acquisitions, and joint ventures, several of them between
large oil companies that had previously competed with each other for
the sale of petroleum products.[Footnote 2] A few examples include the
merger between British Petroleum (BP) and Amoco in 1998 to form
BPAmoco, which later merged with ARCO, and the merger in 1999 between
Exxon, the largest U.S. oil company, and Mobil, the second largest. In
general, mergers raise concerns about potential anticompetitive effects
on the U.S. petroleum industry and ultimately on gasoline prices
because mergers could result in greater market power for the merged
companies, potentially allowing them to increase prices above
competitive levels.[Footnote 3] On the other hand, mergers could also
yield cost savings and efficiency gains, which may be passed on to
consumers in lower prices. Ultimately, the impact depends on whether
market power or efficiency dominates.
Our report examined mergers in the U.S. petroleum industry from the
1990s through 2000, the changes in market concentration (the
distribution of market shares among competing firms) and other factors
affecting competition in the U.S. petroleum industry, how U.S. gasoline
marketing has changed since the 1990s, and 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, we purchased and analyzed a large body of data
on mergers and wholesale gasoline prices, as well as data on other
relevant economic factors. We also developed econometric models for
examining the effects of eight specific mergers and increased market
concentration on U.S. wholesale gasoline prices nationwide. It is
noteworthy that using econometric models allowed us to measure the
effects of mergers and market concentration while isolating the effects
of several other factors that could influence wholesale gasoline
prices, such as world crude oil costs, limited refining capacity, or
low inventories relative to demand.
In the course of our work, we consulted with Dr. Severin
Borenstein,[Footnote 4] a recognized expert in the modeling of gasoline
markets; interviewed officials across the industry spectrum; and
reviewed relevant economic literature and numerous related studies. We
also used an extensive peer review process to obtain comments from
experts in academia and relevant government agencies. We conducted our
work in accordance with generally accepted government auditing
standards.
In summary, we found the following:
* Over 2,600 mergers occurred in the petroleum industry from 1991
through 2000. The majority of the mergers occurred during the second
half of the decade, most frequently in the upstream (exploration and
production) segment of the industry. 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.
Ultimately, the reasons cited by both sources generally relate to the
merging companies' desire to maximize profit or shareholder wealth.
* Market concentration, which is commonly measured by the Herfindahl-
Hirschman Index (HHI), has increased in the downstream (refining and
marketing) segment of the U.S. petroleum industry since the 1990s,
partly as a result of merger activities, while changing very little in
the upstream (exploration and production) segment. In the downstream
segment, market concentration in refining increased from moderately to
highly concentrated on the East Coast and from unconcentrated to
moderately concentrated on 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 segment and remained
unconcentrated by the end of the 1990s. Anecdotal evidence suggests
that mergers also have affected other factors that impact 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 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.
Second, industry officials said 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.
* Our econometric analyses, using data from the mid-1990s through 2000,
show that oil industry mergers generally led to higher wholesale
gasoline prices (measured in our report as wholesale prices less crude
oil prices), although prices sometimes decreased. Six of the eight
specific mergers we 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--the change in
wholesale price 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.
* Our econometric analyses also show that 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 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 on the West Coast.
* We also identified price increases of one-tenth of 1 cent to 7 cents
per gallon that were caused by other factors included in our models--
particularly low gasoline inventories relative to demand, high refinery
capacity utilization rates, and supply disruptions that occurred in
some regions.
As I noted earlier, we used extensive peer review to obtain comments
from outside experts, including the Federal Trade Commission (FTC) and
EIA, and we incorporated those comments as appropriate. FTC disagreed
with our methodology and findings and provided extensive comments,
which we have addressed in our report. Our findings are generally
consistent with previous studies of the effects of specific oil mergers
and of market concentration on gasoline prices. We believe, however,
that ours is the first comprehensive study to model the impact of the
industry's 1990s wave of mergers on wholesale gasoline prices for the
entire United States, an effort that required us to acquire large
datasets and perform complex analyses.
Background:
Many firms of varying sizes make up the U.S. petroleum industry. While
some firms engage in only limited activities within the industry, such
as exploration for and production of crude oil and natural gas or
refining crude oil and marketing petroleum products, fully vertically
integrated oil companies participate in all aspects of the industry.
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. Since U.S. oil prices were deregulated
in 1981, the price paid for crude oil in the United States has been
largely determined in the world oil market, which is mostly influenced
by global factors, especially supply decisions of the Organization of
Petroleum Exporting Countries (OPEC) 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: the East Coast
region, the Midwest region, the Gulf Coast region, the Rocky Mountain
region, and the West Coast region.[Footnote 5]
Proposed mergers in all industries, including the petroleum industry,
are generally reviewed by federal antitrust authorities--including 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 how
the merger would change the level of market concentration, among other
things. 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.
According to the merger guidelines jointly issued by DOJ and FTC,
market concentration as measured by HHI is ranked into three separate
categories: a market with an HHI under 1,000 is considered to be
unconcentrated; if HHI is between 1,000 and 1,800 the market is
considered moderately concentrated; and if HHI is above 1,800, the
market is considered highly concentrated. [Footnote 6]
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.
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 a 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 we 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. Ultimately, these reasons
mostly relate to companies' desire to maximize profit or stock values.
Mergers Contributed to Increases in Market Concentration and to Other
Changes That Affect Competition:
Mergers in the 1990s contributed to increases in market concentration
in the downstream segment of the U.S. petroleum industry, while the
upstream segment experienced little change overall. We 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 in concentration, the Rocky Mountain
remained within the moderately concentrated range but the West Coast
changed from unconcentrated in 1990 to moderately concentrated in 2000.
The HHI of refining markets also increased from 699 to 980 in the
Midwest and from 534 to 704 in the Gulf Coast during the same period,
although these markets remained unconcentrated.
* In wholesale gasoline markets, market concentration increased broadly
throughout the United States between 1994 and 2002. Specifically, we
found that 46 states and the District of Columbia had moderately or
highly concentrated markets by 2002, compared to 27 in 1994.
In both the refining and wholesale markets of the downstream segment,
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, we 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, we 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, we 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, our 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 might 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 we 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.
We 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:
Our econometric modeling shows that the mergers we examined mostly led
to higher wholesale gasoline prices in the second half of the 1990s.
The majority of the eight specific mergers we 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. 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 the seven mergers that we 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, on
average.
* For the four mergers that we 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, on
average, for branded gasoline only.
* For the two mergers--Tosco-Unocal and Shell-Texaco I (Equilon)--that
we modeled for 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, on average.
For market concentration, which captures the cumulative effects of
mergers as well as other competitive factors, our econometric analysis
shows that increased market concentration resulted in higher wholesale
gasoline prices.
* Prices for conventional (non-boutique) gasoline, the dominant type of
gasoline sold nationwide from 1994 through 2000, increased by less than
one-half cent per gallon, on average, for branded and unbranded
gasoline. The increases were larger in the West than in the East--the
increases were between one-half cent and one cent per gallon in the
West, and about one-quarter cent in the East (for branded gasoline
only), on average.
* 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 an average of about 1 cent per gallon for boutique fuel sold in the
East Coast and Gulf Coast regions between 1995 and 2000, and by an
average of over 7 cents per gallon in California between 1996 and 2000.
Our 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, on average, when gasoline
inventories were low relative to demand, typically in the summer
driving months. Also, prices were higher by about an average of 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.
Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions that you or other Members of the Subcommittee
may have.
GAO Contact and Staff Acknowledgments:
For further information about this testimony, please contact me at
(202) 512-3841. Key contributors to this testimony included Godwin
Agbara, Scott Farrow, John A. Karikari, and Cynthia Norris.
FOOTNOTES
[1] See U.S. General Accounting Office, Energy Markets: Effects of
Mergers and Market Concentration in the U.S. Petroleum Industry,
GAO-04-96 (Washington, D.C., May 17, 2004). Additional related GAO
studies include U.S. Ethanol Market: MTBE Ban in California,
GAO-02-440R (Washington, D.C., Feb. 27, 2002); Alternative Motor Fuels
and Vehicles: Impact on the Transportation Sector, GAO-01-957T
(Washington, D.C., July 10, 2001); Motor Fuels: California Gasoline
Price Behavior, GAO/RCED-96-121 (Washington, D.C., Apr. 28, 2000);
International Energy Agency: How the Agency Prepares Its World Market
Statistics, GAO/RCED-99-142 (Washington, D.C., May 7, 1999); and Energy
Security: Evaluating U.S. Vulnerability to Oil Supply Disruptions and
Options for Mitigating Their Effects, GAO/RCED-97-6 (Washington, D.C.,
Dec. 12, 1996).
[2] We refer to all of these transactions as mergers.
[3] The Federal Trade Commission and Department of Justice have defined
market power for a seller as the ability to profitably maintain prices
above competitive levels for a significant period of time.
[4] Dr. Borenstein is E.T. Grether Professor of Business Administration
and Public Policy at the Haas School of Business, University of
California, Berkeley. He is also the Director of the University of
California Energy Institute.
[5] These regions are known as Petroleum Administration for Defense
Districts (PADDs).
[6] HHI is calculated by summing the squares of the market shares of
all the firms within a given market.
