Testimony 

Before the Subcommittee on Energy and 

Air Quality, Committee on Energy and 

Commerce, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 11:00 a.m. EDT 

Thursday, July 15, 2004 ENERGY MARKETS 

Mergers and Other Factors 

that Affect the U.S. Refining 

Industry 

Statement of Jim Wells, Director 

Natural Resources and Environment 

GAO-04-982T 
www.gao.gov/cgi-bin/getrpt?GAO-04-982T.

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. 

Highlights of GAO-04-982T, a report to 

Subcommittee on Energy and Air Quality, 

Committee on Energy and Commerce, 

House of Representatives 

July 15, 2004

ENERGY MARKETS

Mergers and Other Factors that Affect the 

U.S. Refining Industry 

Mergers have altered the structure of the U.S. petroleum industry, including 

the refining market. Over 2,600 mergers have occurred in the U.S. petroleum 

industry since the 1990s, mostly later in the period. 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 in the East Coast and from unconcentrated to 

moderately concentrated in 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. Anecdotal evidence suggests that mergers also have changed other 

factors affecting competition, such as the ability of new firms 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 1 cent to 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 example, wholesale prices for boutique 

fuels sold in the East and Gulf Coasts—fuels supplied by fewer refiners than 

conventional gasoline—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, supply disruptions in some regions, and 

high refinery capacity utilization rates. For example, we found that a 1 

percent increase in refinery capacity utilization rates resulted in price 

increases of one-tenth to two-tenths of a cent per gallon. 

FTC disagreed with GAO’s methodology and findings. However, GAO 

believes its analyses are sound. 

Gasoline is subject to dramatic 

price swings. A multitude of factors 

affect U.S. gasoline markets, 

including world crude oil costs and 

limited refining capacity. Since the 

1990s, another factor affecting U.S. 

gasoline markets has been a wave 

of mergers in the petroleum 

industry, several 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 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 

industry, how U.S. gasoline 

marketing has changed since the 

1990s, and how mergers and 

market concentration in the 

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 stateof-the art econometric models for 

isolating the effects of eight 

specific mergers and increased 

market concentration on wholesale 

gasoline prices. Experts peerreviewed GAO’s analysis. 
Page 1 GAO-04-982T Refining Industry 

Mr. Chairman and Members of the Subcommittee: 

We are pleased to be here today to participate in discussing issues related 

to the “Status of the U.S. Refining Industry.” Refining transforms crude oil 

into a wide range of petroleum products, with gasoline accounting for 

about half of U.S. refinery output. 

Data from the Energy Information Administration (EIA) indicate that there 

are currently 149 refineries in the United States with a total crude oil 

distillation capacity of about 16.9 million barrels per day. 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 our ability to satisfy this growing demand. 

According to the United States Energy Association, no new major refinery 

has been built on the U.S. mainland in the last 25 years, and the nation’s 

overall distillation capacity has declined more than 10 percent since the 

peak in 1981. 

Concerns have also been raised about recent price increases for gasoline. 

EIA data show that the average retail price for regular gasoline (the type of 

gasoline used most in the United States) recently hit a nationwide high of 

$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. In some parts of 

the country, such as 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 gasoline prices and its volatility. These 

factors typically include changes in crude oil costs, refinery capacity, 

inventory levels relative to demand, supply disruptions, and regulatory 

factors—such as 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 and options were 

identified to mitigate their effects; 
Page 2 GAO-04-982T Refining Industry 

• 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; 

• most spikes in gasoline prices appear to result from such factors as 

increases in world crude oil prices, unexpected refinery outages, or largerthan-expected increase in demand; and 

• gasoline price spikes were generally higher in California from January 

1995 through December 1999 than in the rest of the nation, partly because 

there were unplanned refinery outages and it was difficult to substitute for 

the loss of supply of CARB, the special reformulated gasoline used in 

California. 

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—including increased market 

concentration in refining—and other factors related to the U. S. petroleum 

industry.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.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 

 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. 
Page 3 GAO-04-982T Refining Industry 

them to increase prices above competitive levels.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) in the different segments, 

including refining, 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, including refinery capacity. 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. For our market concentration model, we 

used concentration data measured at the refining level. We believe that the 

source of potential market power in the wholesale gasoline market is at 

the refining level because the refinery market is imperfectly competitive 

and refiners essentially control gasoline sales at the wholesale level. 

In the course of our work, we consulted with Dr. Severin Borenstein,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 

 3

Federal Trade Commission and Department of Justice have defined market power for a 

seller as the ability profitably to 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. 
Page 4 GAO-04-982T Refining Industry 

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, mostly during the second half of the decade. 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 HerfindahlHirschman 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. Of particular interest to this 

subcommittee, market concentration in refining increased, although the 

levels as well as the changes varied geographically. For example, 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. Anecdotal evidence suggests that mergers 

may 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. 
Page 5 GAO-04-982T Refining Industry 

• 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 averaging 

about 1 cent 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: high 

refinery capacity utilization rate; low gasoline inventories, which typically 

occur in the summer driving months; and supply disruptions, which 

occurred in the Midwest and on the West Coast. We 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. For example, we found 

that a 1 percent increase in refinery capacity utilization rates resulted in 

price increases of one-tenth to two-tenths of a cent per gallon. We found 

that prices were higher because higher refinery capacity utilization rates 

leave little room for error in predicting short-run demand. During the 

period of our study, refinery capacity utilization rates at the national level 

averaged about 94 percent per week. Just last week, DOE testified that 

U.S. refineries are running at near total capacity of about 96 percent. 

As I noted earlier, we used extensive peer review to obtain comments 

from outside experts, including 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 
Page 6 GAO-04-982T Refining Industry 

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. 

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 Stated 

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. 

(See fig. 1.) These regions are known as Petroleum Administration for 

Defense Districts (PADDs). 

Background 
Page 7 GAO-04-982T Refining Industry 

Figure 1: Petroleum Administration for Defense Districts 

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 
Page 8 GAO-04-982T Refining Industry 

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.5

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. 

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. 

 5

HHI is calculated by summing the squares of the market shares of all the firms within a 

given market. 

Mergers Occurred in 

All Segments of the 

U.S. Petroleum 

Industry in the 1990s 

for Several Reasons 
Page 9 GAO-04-982T Refining Industry 

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 in the 1990s contributed to increases in market concentration in 

the downstream (refining and marketing) segment of the U.S. petroleum 

industry, while the upstream segment experienced little change. 

Overall, the refining market experienced increasing levels of market 

concentration (based on refinery capacity) in all five PADDs 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 fig. 2). 

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.6

 6

However, if the same PADD I refiners are also mostly responsible for importing gasoline 

into the PADD, it could have implications for the PADD’s wholesale gasoline market 

concentration. In addition, the extent to which these companies control vital 

infrastructure, such as terminals and pipelines, within the region could impact competitive 

conditions. 

Mergers Contributed 

to Increases in Market 

Concentration and to 

Other Changes That 

Affect Competition 
Page 10 GAO-04-982T Refining Industry 

Figure 2: Refining Market Concentration for PADD I Based on Crude Oil Distillation Capacity (1990-2000) 

Note: Data for 1996 and 1998 were unavailable. 

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 3 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. 
Page 11 GAO-04-982T Refining Industry 

Figure 3: Refining Market Concentration for PADD II Based on Crude Oil Distillation Capacity (1990-2000) 

Note: Data for 1996 and 1998 were unavailable. 

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 fig. 4). 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. 
Page 12 GAO-04-982T Refining Industry 

Figure 4: Refining Market Concentration for PADD III Based on Crude Oil Distillation Capacity (1990-2000) 

Note: Data for 1996 and 1998 were unavailable. 

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 fig. 5). 
Page 13 GAO-04-982T Refining Industry 

Figure 5: Refining Market Concentration for PADD IV Based on Crude Oil Distillation Capacity (1990-2000) 

Note: Data for 1996 and 1998 were unavailable. 

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 fig. 6).7

 7

Some industry officials and experts believe that the California refining market, which is a 

part of PADD V, is more concentrated than the PADD as a whole because a unique (CARB) 

gasoline consumed in the state and the production of the gasoline is dominated by a few 

large refiners. 
Page 14 GAO-04-982T Refining Industry 

Figure 6: Refining Market Concentration for PADD V Based on Crude Oil Distillation Capacity (1990-2000) 

Note: Data for 1996 and 1998 were unavailable. 

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. 

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. 

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. 
Page 15 GAO-04-982T Refining Industry 

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. 

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. 

U.S. Gasoline 

Marketing Has 

Changed in Two 

Major Ways 
Page 16 GAO-04-982T Refining Industry 

• 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. 

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. 

Mergers and 

Increased Market 

Concentration 

Generally Led to 

Higher U.S. Wholesale 

Gasoline Prices 
Page 17 GAO-04-982T Refining Industry 

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 onequarter 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, including gasoline 

inventories relative to demand, supply disruptions in some parts of the 

Midwest and the West Coast, and refinery capacity utilization rates. For 

refinery capacity utilization rates, we found that prices were higher by 

about an average of one-tenth to two-tenths of 1 cent per gallon when 

utilization rates increased by 1 percent. We found that prices were higher 

because higher refinery capacity utilization rates leave little room for error 

in predicting short-run demand. During the period of our study, refinery 

capacity utilization rates at the national level averaged about 94 percent 

per week. 

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. 

For further information about this testimony, please contact me at (202) 

512-3841. Key contributors to this testimony included Godwin Agbara, 

John A. Karikari, and Cynthia Norris. 

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