THE IMPACT ON PRODUCT PRICES OF MERGERS IN THE PETROLEUM INDUSTRY

Recent oil mergers could have led to oil product price increases by moving the industry closer to an oligopolistic structure which would allow for increased prices. To explore this possibility, we estimate the effects on oil product prices of two large oil mergers in 1984, Texaco-Getty and Socal-Gulf. Reduced-form price equations are used to estimate the impact of the two mergers on petroleum product prices for three U. S. regions. The results indicate that the mergers had no apparent effect on the prices of most products in the sample. INTRODUCTION In the current political and economic atmosphere the pricing of petroleum products such as gasoline and home heating oil is a major issue. Often, high petroleum product prices lead to difficulties for some firms and hardships for many consumers. In the past energy concerns have led to recessions and economic down turns. The concerns at present are the fluctuations in home heating oil and gasoline prices. It is feared by many, including the public at large, that rising petroleum product prices could exacerbate our current economic difficulties. Blame has been levied against many including OPEC and the large oil companies. One can see the effect of OPEC limiting supply on the crude oil prices, an important input into petroleum-based products. This paper focuses on the role of the large oil companies in raising the price of oil-based products. These price raises could happen in conjunction with or independently of OPEC. The oil industry seems to have both monopolistically competitive and oligopolistic characteristics. It may be argued that recent oil mergers could lead to price increases by moving the industry closer to an oligopolistic structure. In 1999, Federal Trade Commission Chairman Robert Pitofsky noted, "There is a significant trend toward concentration in the petroleum industry.It is certainly fair to say that, if the merger trend continues in the oil industry, we would take that consolidation into account each time we review a deal. " Pitofsky feels that left unattended these horizontal mergers could raise oil product prices. This paper illuminates the issue by exploring two earlier oil mergers for which there are enough data to assess their impact on product prices. In the 1980's, the Justice Department and the Federal Trade Commission became much more passive toward horizontal mergers. It was argued that many of Southwestern Economic Review 58 the mergers allowed by this policy could lessen competition and, therefore, lead to higher prices. Empirical studies examining the effects of horizontal mergers have obtained mixed results; apparently some mergers increased prices, while others had little or no effect. Among the mergers singled out by the critics were those in the oil industry. In 1984, FTC Commissioner Michael Pertschuk asserted "there are far more losers in our country from these [oil company] mergers than winners. Far more Americans will have to pay higher gasoline and home heating oil prices from reduced competition and exploration than will receive a stock windfall or handsome brokerage fees. " Before 1980, antitrust fears made oil companies very cautious about horizontal mergers, but the policy changes of the Reagan administration allowed many of these firms to engage in horizontal mergers. The critics maintained that even though national (and sometimes regional and local) concentration ratios in the oil industry appear low to moderate, several circumstances necessitate greater than normal antitrust vigilance of oil mergers. Among these are the history of oil industry collusion, the numerous instances of company cooperation (such as joint ventures), and oil company connections with OPEC. These critics have asserted that the loss of a competitor as a result of a merger will have a greater impact on the petroleum market than on other markets. Noted industrial organization economist, Walter Adams, maintains that oil "seems to be the kind of industry in which a Texaco/Getty or a Socal/Gulf, or Mobil/Superior merger would inevitably lessen competition. " In contrast to these sentiments, other experts do not find the oil industry very different from other industries. A good reflection of this viewpoint is found in the opinions of the Federal Trade Commission and its staff in their analyses of oil company mergers. They believe that the criteria used to evaluate mergers in other industries are also applicable to the oil industry. Their analysis can be summed up as follows. Because the national and global concentration ratios in crude oil and many petroleum products are medium to low, oil company mergers should not be totally proscribed. Nevertheless, geographic regions may exist where concentration in some products is sufficiently high for some mergers to significantly increase prices. Therefore, at least some petroleum company mergers should be examined, if not enjoined. Given these differing characterizations of oil industry competitive performance, it seems appropriate to examine directly how oil mergers have affected the price of petroleum products. Therefore, this article estimates petroleum price effects of two large oil mergers, Texaco-Getty and Socal-Gulf. Since the mergers occurred at almost the same time (within one month of one another), only a test of their joint effect can be made. First we examine the institutional setting in which the particular mergers took place. A model to test the effect of these mergers on certain oil product prices is then developed. Finally, empirical results are described and conclusions drawn. THE S OCAL-GULF AND TEXACO-GETTY MERGERS This paper focuses on two oil company mergers: (1) the combination of Texaco and Getty Oil and (2) the union of Socal (Standard Oil Company of The Impact on Product Prices of Mergers in the Petroleum Industry 59 California) and Gulf Oil Company, both taking place in the summer of 1984. Here we first describe the mergers, and then we examine how and where they might have affected oil product prices. In 1984, Texaco, a fully integrated oil company with $48 billion in sales, bought Getty Oil Company, another fully integrated company with $12.3 billion in sales. Both firms were major producers of light refined products such as gasoline, heating oil, and kerosene. They directly competed against one another in the Northeastern and Southwestern United States as well as in other areas. The FTC allowed the merger under the following major conditions: (1) that the new TexacoGetty to divest itself of certain refineries, pipelines, and terminals, (2) that Texaco as an owner of the Colonial Pipeline (running from the Gulf of Mexico’s to New York Harbor) not vote against any expansion of its capacity for a period of ten years, and (3) that the company continue to supply certain independent California refiners with crude oil. The 1984 combination of Socal ($34 billion in sales) and Gulf ($28 billion in sales) was the largest merger of private companies in history up to that time. Being fully integrated oil companies, both firms faced one another in a number of product markets and geographic areas including the U. S. Atlantic Coast and Gulf Coast areas (called PADDs I and III). In addition, Socal owned a 21.13 percent share of the Plantation Pipeline running from the Gulf of Mexico to the Washington, D.C. area, while Gulf owned a 16.78 percent share in the Colonial Pipeline which runs from the Gulf of Mexico to New York harbor. In order to consummate the merger and avoid an FTC antitrust suit, Chevron, the new company, consented to divest (1) its share in the Colonial Pipeline, (2) the Gulf marketing assets in certain southern states, and (3) one or the other of two Kerojet (jet airplane fuel) refineries in the Southwest along with some connecting pipelines. The Controversy Surrounding the Mergers The controversy over these mergers can be divided into two parts; the first is their impact on the industry as a whole, and the second is their effect on particular geographic markets. Walter Adams contended that these mergers could lead to higher petroleum product prices throughout the industry -not just in areas where the merging parties have major overlaps -arguing that the normal criteria used by the Justice Department and the FTC in analyzing mergers is inadequate for the oil industry. He gave seven reasons why the low to moderate concentration ratios in production or sales even at the regional level are poor indicators of the competitive situation in the oil industry. Reasons given are: (1) high concentration in "gross reserves" of crude oil, (2) joint ventures between the companies, (3) indirect interlocks in the boards of directors through commercial banks, (4) exchange agreements between companies, (5) the interest of the oil companies in other energy industries, (6) vertical relationships between companies, and (7) the political power of the industry. Adams asserted that due to these conditions mergers between large oil companies can raise prices not only in the sectors where the parties compete but also in the whole industry. Thus, mergers between large oil companies should, in effect, be enjoined. The second reason for opposition to oil company mergers was that they could raise prices in particular geographic markets. This thesis was developed in the dissenting opinions on the Texaco-Getty and the Socal-Gulf mergers of Federal Trade Commissioner Michael Pertschuk. While Pertschuk agreed with Adams that the Southwestern Economic Review 60 mergers could increase industry-wide prices, he believed that many of the remedies worked out by the companies and the FTC did not adequately address the competitive problems at the regional level. He questioned whether the divestiture provisions of both the Socal-Gulf and Texaco-Getty cases would stop prices from rising. Thus, the concern was first with the impact of the mergers on the industry as a whole and second with efficacy in the regional mark