Crude oil prices are the fundamental determinant of gasoline prices. As figure 1 shows, crude oil and gasoline prices have generally followed a similar path over the past three decades and have risen considerably over the past few years. Refining capacity also plays a role in determining how gasoline prices vary across different locations and over time. Refinery capacity in the United States has not expanded at the same pace as demand for gasoline and other petroleum products in recent years. The American Petroleum Institute recently reported that U.S. average refinery capacity utilization has increased to 92 percent. As a result, domestic refineries have little room to expand production in the event of a temporary supply shortfall. Furthermore, the fact that imported gasoline comes from farther away than domestically produced gasoline means that when supply disruptions occur in the United States it might take longer to get replacement gasoline than if we had excess refining capacity in the United States. This could cause gasoline prices to rise and stay high until the imported supplies can reach the market. Gasoline inventories maintained by refiners or marketers of gasoline can also have an impact on prices. As have a number of other industries, the petroleum products industry has adopted so-called “just-in-time” delivery processes to reduce costs leading to a downward trend in the level of gasoline inventories in the United States. For example, in the early 1980s private companies held stocks of gasoline in excess of 35 days of average U.S. consumption, while in 2004 these stocks were equivalent to less than 25 days consumption. While lower costs of holding inventories may reduce gasoline prices, lower levels of inventories may also cause prices to be more volatile because when a supply disruption occurs, there are fewer stocks of readily available gasoline to draw from, putting upward pressure on prices. Regulatory factors also play a role. For example, in order to meet national air quality standards under the Clean Air Act, as amended, many states have adopted the use of special gasoline blends—so-called “boutique fuels.” As we reported in a recent study, there is a general consensus that higher costs associated with supplying special gasoline blends contribute to higher gasoline prices, either because of more frequent or more severe supply disruptions, or because higher costs are likely passed on, at least in part, to consumers. Finally, the structure of the gasoline market can play a role in determining prices. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase prices above competitive levels. On the other hand, mergers could also yield cost savings and efficiency gains, which may be passed on to consumers through lower prices. Ultimately, the impact depends on whether market power or efficiency dominates. During the 1990s, the U.S. petroleum industry 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. More than 2,600 merger transactions have occurred since 1991 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 about 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 since the second half of the 1990s, including those involving large partially or fully vertically integrated companies. For example, in 1998 British Petroleum (BP) and Amoco merged to form BPAmoco, which later merged with ARCO, and in 1999 Exxon, the largest U.S. oil company merged with Mobil, the second largest. Since 2000, we found that at least 8 large mergers have occurred. Some of these mergers have involved major integrated oil companies, such as the Chevron- Texaco merger, announced in 2000, to form ChevronTexaco, which went on to acquire Unocal in 2005. In addition, Phillips and Tosco announced a merger in 2001 and the resulting company, Phillips, then merged with Conoco to become ConocoPhillips. Independent oil companies have also been involved in mergers. For example, Devon Energy and Ocean Energy, two independent oil producers, announced a merger in 2003 to become the largest independent oil and gas producer in the United States. Petroleum industry officials and experts we contacted cited several reasons for the industry’s wave of mergers since the 1990s, including increasing growth, diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers, which could reduce competition and lead to higher prices. Ultimately, these reasons mostly relate to companies’ desire to maximize profits or stock values. Mergers in the 1990s contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry, while the exploration and production segment experienced little change in concentration. Econometric modeling we performed of eight mergers that occurred in the 1990s showed that the majority resulted in small wholesale gasoline price increases. 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. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential additional effect on wholesale gasoline prices, these mergers would further increase market concentration nationwide since there are now fewer oil companies. Proposed mergers in all industries 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 and consumer prices. According to FTC officials, FTC generally reviews proposed mergers involving the petroleum industry because of the agency’s expertise in that industry. To help determine the potential effect of a merger on market competition, FTC evaluates, among other factors, how the merger would change the level of market concentration. Conceptually, when market concentration is higher, the market is less competitive and it is more likely that firms can exert control over prices. DOJ and FTC have jointly issued guidelines to measure market concentration. The scale is divided into three separate categories: unconcentrated, moderately concentrated, and highly concentrated. The index of market concentration in refining increased all over the country during the 1990s, and changed from moderately to highly concentrated on the East Coast. In wholesale gasoline markets, market concentration increased throughout the United States between 1994 and 2002. Specifically, 46 states and the District of Columbia had moderately or highly concentrated markets by 2002, compared to 27 in 1994. While market concentration is important, other aspects of the market 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. Mergers may have also contributed to changes in these aspects. However, we could not quantify the extent of these changes because of a lack of relevant data. To estimate the effect of mergers on wholesale gasoline prices, we performed econometric modeling on eight mergers that occurred during the 1990s: 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. 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 were about 7 cents per gallon, on average. 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. Our past work has shown that, crude oil price is the fundamental determinant of gasoline prices. Refinery capacity, gasoline inventory levels and regulatory factors also play important roles. In addition, merger activity can influence gasoline prices. During the 1990s, mergers decreased the number of oil companies and refiners and our findings suggest that this change caused wholesale prices to rise. The impact of more recent mergers is unknown. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential additional effect on wholesale gasoline prices, these mergers would further increase market concentration nationwide since there are now fewer oil companies. Our analysis of mergers during the 1990s differs from the approach taken by the FTC in reviewing potential mergers because our analysis was retrospective in nature—looking at actual prices and estimating the impacts of individual mergers on those prices—while FTC’s review of mergers takes place necessarily before the mergers.