The U.S. petroleum industry consists of firms of varying sizes that operate in one or more of three broad segments—the upstream, which consists of the exploration for and production of crude oil; the midstream, which consists of pipelines and other infrastructure used to transport crude oil and refined products; and the downstream, which consists of the refining and marketing of petroleum products such as gasoline and heating oil. While some firms operate in only one or two of these segments, fully vertically integrated oil companies participate in all of them. Chevron is an example of a fully integrated petroleum company, with operations in all three segments, while Wawa—the convenience store chain—is an example of a firm operating in only one market segment as a downstream independent fuel retailer. Refiners produce gasoline and then arrange its delivery, usually via pipeline, but also via barge, truck, or rail, from their refineries to any of the nearly 400 wholesale terminals located throughout the country. Terminals can be near refineries, pipelines, or water ports, and can involve a wide-ranging number of wholesale gasoline sellers, including refiners or importers. The number of sellers at a wholesale terminal is not necessarily related to the number of refineries near the terminal; in some markets, a single refinery can produce gasoline for a number of sellers if they have supply arrangements with that refinery. At wholesale terminals, the majority of gasoline is purchased by marketers or distributors, for subsequent resale at retail gasoline stations, while the rest is sold directly to retailers (see fig. 1). Market dynamics anywhere along the supply chain can influence consumer prices, beginning with upstream crude oil production, all the way through downstream refining and retailing. Gasoline from a wholesale terminal can also be either branded or unbranded. Branded gasolines are those supplied from major refiners selling under their trademarks, such as BP or Marathon, and often contain special additives, while unbranded gasolines may be supplied by major or independent refiners, but are not sold under a refiner’s trademark. Branded prices include a premium reflecting the recognized brand name, fuel additives, and other costs, such as advertising. Unbranded prices, which tend to be lower than those for branded, are paid by distributors who deliver gasoline to retail locations ranging from large supermarkets to small independent retailers that are not affiliated with a major refiner. 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. In reviewing proposed mergers, FTC follows guidelines that it developed jointly with the Department of Justice (DOJ) for predicting the effects of mergers on competition. The unifying theme in the guidelines is that mergers should not be permitted to enhance a firm’s market power or to make it easier for a firm to exercise market power. In its review, FTC examines whether market conditions, including market concentration, would be conducive for firms to act unilaterally or to coordinate to raise prices. Unilateral effects occur when the merged firm profitably reduces its own supply and raises prices, even though other competitors may respond by increasing their own output. Such behavior can be profitable if the merged firm has a significant share of sales and the response of competitors is limited. Coordinated behavior occurs when each firm remaining in the market reduces its output, increasing prices. In their reviews of petroleum industry mergers, FTC staff seek to avoid the possibility of price increases even as small as 1 cent per gallon because the petroleum industry sells large volumes of fuel at thin margins, and price changes of this magnitude can affect industry decisions regarding production or sales. In addition, in some markets, even 1 cent per gallon price increases can lead to more than $100 million per year in additional costs for consumers, according to FTC analysis. After reviewing a merger, FTC has three options: (1) to not challenge the merger; (2) to challenge the merger in court; or (3) to not challenge the merger as long as certain agreed upon remedial actions are met, such as firms selling off, or divesting, overlapping assets that have the greatest potential to harm competition. FTC also performs other activities to monitor petroleum markets, including monitoring fuel prices and conducting special investigations. For example, FTC’s price-monitoring program tracks retail gasoline and diesel prices in 360 cities across the nation and wholesale prices in 20 major urban areas. In addition, on April 16, 2009, FTC issued a Revised Notice of Proposed Rulemaking seeking public comment on a revised proposed rule that would prohibit market manipulation in the petroleum industry. The revised proposed rule would prohibit fraudulent and deceptive conduct that could harm wholesale petroleum markets, but it is not yet clear how this new rule will affect FTC’s monitoring of petroleum industry markets. However, FTC staff indicated that because FTC is an enforcement agency, they focus on merger and antitrust enforcement, rather than ongoing monitoring of the petroleum industry, as a regulatory agency would likely undertake. According to FTC, during the latter part of 2008, approximately 125 FTC staff members–-attorneys, economists, paralegals, research analysts, and others–-worked to some extent on matters involving antitrust and pricing issues in the oil and natural gas sectors, and about 6 or 7 staff economists from the Bureau of Economics were involved in ongoing monitoring of the petroleum industry, although these economists also devoted a portion of their time to other industries. These staff economists also occasionally perform analysis of past mergers, and FTC has indicated retrospective merger reviews are a valuable part of antitrust decision making. If FTC finds anticompetitive behavior in retrospective reviews, it has the ability to conduct further in-depth investigations into the merger and collect substantial company-specific data in order to pursue corrective action to reintroduce competition into the market such as forced divestitures or conduct-based remedies. However, as we reported in 2008, FTC does not regularly look back at past mergers in the petroleum industry to assess their actual effects on prices– –there had been only three such retrospective reviews, between 2000 and 2007. We recommended that FTC undertake more regular retrospective reviews of past petroleum industry mergers and develop risk-based guidelines to determine when to conduct them. In commenting on this, FTC noted that our recommendation was consistent with a recent self- evaluation initiative and would consider it in that regard. Although these reviews can be resource intensive, experts, industry participants, and FTC agreed that regular retrospective reviews would allow the agency to better inform future merger reviews and better measure its success in maintaining competition. In this regard, the National Bureau of Economic Research published a study in March 2009 entitled Generating Evidence to Guide Merger Enforcement, which noted the importance of conducting retrospective merger reviews. The study found that retrospective merger reviews can help to evaluate the impacts of past merger enforcement decisions and can allow antitrust agencies to develop better techniques to predict the effects of future mergers on competition. The study also suggested that it made sense to focus retrospective reviews on completed mergers with the greatest likelihood of anticompetitive effects, such as mergers in highly concentrated markets. FTC is currently working on a fourth retrospective review of a past petroleum industry merger, which is expected to be released later this year. We studied the effects of seven petroleum industry mergers that occurred since 2000 on wholesale gasoline prices and found three that were associated with small changes in wholesale gasoline prices. Specifically, we developed an econometric model to isolate the effects on wholesale gasoline prices of seven mergers––(1) Chevron Corporation/Texaco, (2) Phillips Petroleum Company/Tosco Corporation, (3) Valero Energy Corporation/Ultramar Diamond Shamrock Corporation (UDS), (4) Royal Dutch Shell Group/Texaco, (5) Phillips Petroleum Company/Conoco, (6) Premcor/Williams Companies, and (7) Valero Energy Corporation/Premcor. These mergers ranged widely in the size of transaction, from the Chevron/Texaco merger, valued at about $45 billion, to the Premcor/Williams merger, valued at $367 million. Five of the seven mergers were focused primarily on the downstream sector, with refining, marketing, or retail operations as the key assets that changed ownership, while the other two mergers were concentrated in the upstream exploration and production sector, with oil reserves as the key asset that changed ownership. The rationale for some of these mergers, according to industry officials, was generally to increase operational efficiencies and reduce costs through economies of scale. Summary information about the mergers is provided in table 1. As shown in table 1, the seven mergers we analyzed ranged widely in the number of cities with wholesale terminals that were affected by the merger. We analyzed the effects of the seven mergers at terminals in 78 cities across the United States. The three mergers affecting terminals in 35 or more cities each—-Chevron/Texaco, Shell/Texaco, and Phillips/Conoco—-reflect a wide geographic area, as each merger affected cities across a number of regions of the country. The Valero/Premcor and Valero/UDS mergers, each of which affected terminals in 20 or more cities, were more concentrated geographically, primarily affecting cities in the eastern and western United States, respectively. The two mergers affecting terminals in fewer than 10 cities each—-Phillips/Tosco and Premcor/Williams—-reflect narrower geographic areas, with the former affecting a few cities in the Southeast and Southwest and the latter affecting 2 cities in the Southeast. See appendix III for more information on the geographic regions affected by each merger. Antitrust enforcement actions taken in response to the mergers varied, depending on the characteristics of the firms, the geographic areas affected, and the specifics of the transaction. As shown in table 1, the FTC challenged three of the mergers, as originally proposed, on the basis of potential threats to competition in one or more sectors of the industry.