In 2007, the United States produced an average of 8.5 million barrels of petroleum per day, or about 10 percent of the global average production of 84.4 million barrels per day. As a percentage of total world consumption, the United States was the largest consumer of crude oil and petroleum products in 2007, with an average consumption of 20.7 million barrels per day. According to EIA statistics, imports provide the United States with about 60 percent of its overall petroleum needs. Of the petroleum refined in the United States, approximately 46 percent is used for gasoline, primarily for use in the transportation sector. Second to gasoline, distillate fuel oil (including diesel)––which is used for a variety of heating, energy, and transportation purposes––accounts for 21 percent of petroleum refined in the United States, followed by kerosene-type jet fuel at 9 percent. The remaining 24 percent of crude is used to make other products, such as heavy fuel oil or asphalt. Firms operating in the petroleum industry range widely, from large corporations that operate in multiple countries and across various segments of the industry, to small firms that operate exclusively in the United States or in only one segment of the industry. Companies operating in the upstream segment––which includes the exploration and production of crude oil––include fully vertically integrated companies as well as independent producers. Fully vertically integrated companies are generally large, multibillion-dollar publicly traded companies, such as Exxon Mobil. By contrast, independent producers range from extremely small, privately owned operations to multibillion-dollar publicly traded companies, such as Occidental. Companies operating in the midstream segment––which includes the transport of crude oil and refined petroleum products––include firms that manage pipelines, marine tankers and barges, railways, and trucks. Midstream companies also range widely in size and can include large, vertically integrated companies as well as smaller independent operators of pipelines or other modes of transportation. Pipelines are the most common, and considered the most efficient, mode of transporting crude oil and petroleum products in the United States from production points to refineries and from refineries to storage terminals. Nationwide, there are about 200,000 miles of pipeline across all 50 States, through which approximately 66 percent of petroleum products are transported. Companies operating in the downstream segment include firms that refine crude oil as well as firms that market refined petroleum products. Refining involves the transformation of crude oil into the various petroleum products, such as gasoline, distillate fuel oil, and jet fuel, as well as heavier products, such as asphalt. According to data from EIA, as of January 1, 2008, there were 150 operable refineries in the United States. In 2002, about 60 firms, including large, fully vertically integrated companies and independent firms, owned these refineries. For example, as of January 2007, ConocoPhillips owned 12 U.S. refineries and 19 refineries worldwide. Petroleum marketing involves purchasing refined petroleum products from refiners and selling them to wholesaler and retail firms. 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. Given the nation’s dependence on gasoline and other petroleum products, competition among petroleum industry firms has long been considered of paramount importance to the economy. In 1890, Congress passed the Sherman Act to counter anticompetitive practices in several industries, including some of Standard Oil’s practices in the petroleum industry. In 1914, Congress expanded its antitrust authority by creating FTC and enacting the Clayton Act. As such, merger activity in all three segments of the industry and the potential for anticompetitive behavior through industry consolidation has long been the subject of interest on the part of many industry observers and government regulators. FTC is the federal antitrust agency that is responsible for reviewing proposed mergers in the petroleum industry, with the goal of maintaining industry competition. FTC reviews mergers of firms in the petroleum industry if their operations are likely to impact U.S. markets, and the agency enforces various antitrust laws. Although FTC says that it scrutinizes mergers in the petroleum industry more than any other industry, FTC’s statutory authority to review proposed mergers in the petroleum industry is the same as in other industries. FTC has enforcement and administrative responsibilities from over 60 laws, but uses 3 statutes to guide its review of all proposed mergers––the Clayton Act, the Federal Trade Commission Act, and the Hart-Scott-Rodino Act–– as outlined in table 1. While the three statues help direct FTC’s review of proposed mergers in all industries, Hart-Scott-Rodino provides the framework for the premerger review. Hart-Scott-Rodino requires all persons contemplating a merger valued at $50 million or more and meeting certain other conditions to formally notify FTC and DOJ. The act imposes a 15-day waiting period for cash tender offers and a 30-day waiting period for most other transactions to allow FTC and DOJ to review the proposed merger in an effort to predict its potential effect on competition. If the initial review does not indicate a need for further investigation, the merger can be completed. To ease compliance with Hart-Scott-Rodino, FTC and DOJ established a premerger notification program in 1978 that set a systematic process for FTC to follow in reviewing all proposed mergers and allows the agencies to avoid the difficulties and expense of challenging mergers that harm competition after they are completed. This gives them the ability to challenge proposed mergers before they are completed when remedial action would be most effective, if warranted. See figure 1 below for a summary of FTC’s merger review procedures. FTC staff and DOJ officials told us that they divided their merger review portfolio, and that FTC handles all of the petroleum industry merger review cases because it has more expertise in that area. FTC’s merger review process is conducted by staff in various bureaus and offices throughout the agency, but mainly by the Bureau of Economics and the Bureau of Competition. The agency also has a Merger Screening Committee composed of at least the Director of the Bureau of Competition, section heads of that bureau’s divisions, representatives from the Bureau of Economics, and other relevant FTC staff. The purpose of the group is to determine whether to recommend that the Chairman approve and issue a request for additional information and to decide other policy matters. markets. For example, FTC staff told us that they generally consider crude producers to compete globally, refiners to compete regionally, and wholesale gasoline suppliers to compete at a more local level. FTC and DOJ merger guidelines define three broad categories of market concentration as measured by HHI: an unconcentrated market has an HHI of 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. More than 1,000 U.S. mergers occurred in the petroleum industry between 2000 and 2007. The largest number and greatest value mergers occurred in the upstream segment, primarily due to increasingly challenging conditions for oil exploration, while midstream and downstream mergers were primarily driven by the desire to improve efficiencies and reduce costs. We also found in our analysis of the upstream crude oil production segment of the industry and the downstream refining and wholesale gasoline supply segments of the industry that, in most regions, petroleum industry market segments were moderately concentrated. Lacking data on midstream, we were not able to determine concentration in this segment of the industry. Between January 2000 and May 2007, 1,088 U.S. mergers occurred in the petroleum industry. The number of mergers that occurred each year during this period generally increased over the period, from 124 mergers in 2000 to 167 in 2006, as shown figure 2. About 75 percent of these mergers were asset mergers, or mergers where one firm purchases only a portion of another firm’s assets, such as Tesoro’s purchase of 140 retail gasoline stations in California from USA Petroleum in early 2007. The remaining 25 percent were corporate mergers, or mergers where one firm generally acquires all of another firm’s stock and assets such that the two firms become one firm. For example, in 2002, Phillips Petroleum acquired all of Conoco’s stock, creating the new firm ConocoPhillips. Reported transaction values for U.S. petroleum mergers during this period ranged widely, from $10 million to over $10 billion. As shown in figure 3, the greatest number of mergers during this period were valued between $10 million and $49 million, and between $100 million and $499 million, accounting for 39 percent and 29 percent of merger activity, respectively. Overall, 61 percent of mergers were valued at more than $50 million, which is the threshold above which merging firms are required to notify FTC so that it can review them for potential anticompetitive effects. The average value for mergers during this period was $497 million, while the median value for mergers during this period was $72 million. Corporate mergers comprised the top 11 most valuable mergers, including 6 mergers valued at over $10 billion each. The largest merger was the 2001 corporate merger of Chevron and Texaco; it was valued at $45 billion. This merger and the other 5 corporate mergers that were valued at over $10 billion during this period are highlighted in table 2. The upstream segment of the industry––comprised of oil exploration and production endeavors—accounted for approximately 69 percent of the 1,088 mergers. The midstream segment of the industry––mainly comprised of firms that operate pipelines and other infrastructure used to transport oil and gas––accounted for about 13 percent. The downstream segment of the industry––comprised of firms that refine crude oil and market petroleum products––accounted for 18 percent. Figure 4 highlights this distribution across the segments.