Mergers in the Oil Industry
Authors: Archer Richard J. 
Published: December 2007

This paper discusses the legal aspects of mergers in the oil industry. Frequently used terms are defined. Then follows a history of antitrust decisions and investigations involving mergers and divestitures in the industry, and significant facts which influenced decisions adverse to the defendants are pointed out. Generally these facts involve percentage shares of markets in which the merging companies competed against each other. Some general rules for testing mergers are derived from these cases, followed by comments by officials in enforcement agencies on their views of antitrust policy. Joint ventures are also discussed.

Introduction

By definition, the terms "merger" or "acquisition" are used to include any kind of purchase or exchange of assets or stock, including the formation of new corporations where new assets are acquired. Mergers can be attacked either under Section 1 of the Sherman Act or Section 7 of the Clayton Act. Section 1 of the Sherman Act condemns mergers the immediate effect of which is to unreasonably restrain trade. Section 7 of the Clayton Act condemns mergers or acquisitions the effect of which will only be substantially to lessen competition or tend to create a monopoly. Although in a recent unique case involving a bank merger it was held that the Sherman Act had a broader application than previously supposed, the Clayton Act generally poses a more difficult hurdle for mergers or acquisitions in the petroleum industry. It is concerned with probabilities, "incipient" restraints, while the Sherman Act is limited to immediate effects. The terms, "unreasonably restrain trade", "substantially to lessen competition" and "tend to create a monopoly" are admittedly vague,* and generally speaking they include eliminating competitors or gaining some unusual competitive advantage.

History

People in the oil industry have perhaps been more conscious of antitrust problems involved in mergers than have people in other American industries. While there might be good reasons for this, many mergers in the oil industry have gone and will go unchallenged, and might even receive clearance from the Dept. of Justice. To place antitrust action in context, it might be wise to refer to historical landmarks in the petroleum industry. The classic and leading case, decided in 1911 against Standard Oil Co. (N.J.), was a Sherman Act case in which the government successfully brought about the dissolution of the Standard Oil "trust". Historically speaking, it is probably the best argument for antitrust laws. Many people assume that if Standard Oil had not been broken up we would not have the number of competing oil companies we now have. On the other hand, some economists argue that, even if we did not have antitrust laws, our industrial structure today would not be much different than it is. Those who oppose this view point to the break-up of Standard Oil in support of their position. The next landmark case in petroleum annals was United States vs American Petroleum Institute, the "Mother Hubbard" case filed in the District of Columbia in 1940 against 366 oil companies. This case was subsequently dismissed, perhaps because it was too big to handle. This was not a merger case but instead involved charges of conspiracy to restrain trade, to monopolize and to discriminate. Because of the comprehensive allegations in the complaint, however, if the government had been successful some of the defendants probably would have been ordered to divest themselves of part of their operating assets. The next point in the petroleum industry from an anti-trust standpoint was not a case but a book: A National Policy for the Oil Industry, by Eugene V. Rostow, published in 1948. It probably resulted from the studies by the Temporary National Economic Committee in the latter years of the Roosevelt administration and from the Senator O'Mahoney hearings. Rostow asserted the following on the basis of the government's successful prosecution of the Aluminum Co. of America and the American Tobacco Co.:

Against the, background of these cases, an action againstthe major oil companies as a monopoly, as well as acombination in restraint of trade, should not face insuperableobstacles.

He argued that under the Sherman Act the major oil companies should be broken into separate corporations, specializing in production, refining, transportation and marketing.

JPT

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