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Oil mergers may raise prices, alter market

By DAR HADDIX, UPI Business Correspondent

WASHINGTON, May 28 (UPI) -- U.S. consumers may be paying more today at the gas pump because a spate of oil mergers during the 1990s reduced competition and drove up prices, a General Accounting Office report shows. But the merger has also resulted in changes to the market structure and increased difficulty in breaking into the market, the report said.

The 240-page report, "Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry," released Thursday, examined eight major oil mergers between 1994 and 2000, and found that six of the eight mergers have resulted in 1 to 2 cent increases, on average, in wholesale gasoline prices.

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More than 2,600 mergers have occurred in the oil industry since the 1990s as oil companies looked to cut costs, but "economic literature suggests that firms also sometimes merge to enhance their ability to control prices," the report said.

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The GAO report authors said they "isolated the effects of mergers and market concentration from several other factors that could influence wholesale gasoline prices, such as crude oil costs, gasoline inventories relative to demand, refinery capacity utilization rates, and gasoline supply disruptions," in creating the report.

Sen. Carl Levin, D-Mich., commissioned the report in 2001.

The Exxon-Mobil merger resulted in the highest increase: on average, 3.7 cents for unbranded gasoline, sold from its own stations, and 5 cents for gasoline it sold to other retailers.

Overall, "For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon," the report said.

Markets that use "boutique" gasoline, gasoline that is reformulated to lower pollution, fared a bit worse. "For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon," the report said.

The mergers have also reduced the availability of unbranded or generic gasoline, which is cheaper than branded gasoline, the report said. One reason was that independent refiners merged with bigger companies and sold gasoline under the bigger company's brand. Others sell some of their gasoline to bigger, branded companies. In the end, there is less generic gas to sell to consumers at a generic price.

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GAO found that market concentration increased across the United States between 1994 and 2002. "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."

Forty-six states and the District of Columbia had "moderately or highly" concentrated markets by 2002, compared to 27 in 1994. For both the refining and wholesale markets of the downstream segment of the industry, which deals with refining and selling gasoline, GAO found that merger activity and market concentration were "highly correlated" in most geographic areas.

Evidence also indicates that mergers, besides increasing market concentration, contributed to changes in other aspects of the U.S. petroleum industry's market structure that affect competition: vertical integration and barriers to entry, the report said.

The vertical integration of the industry, or the creation of companies that are involved in more than one stage of production or distribution, can also affect prices, the report said.

The mergers are also making it hard for new actors to enter the gasoline market. Refiners now prefer to deal with large distributors and retailers, requiring the purchase of a minimum volume of gas and further encouraging consolidation. This has led to "hypermarkets," a new kind of gas retailer that includes retail warehouses like Wal-Mart and Costco. The current market share of hypermarkets is small but projected to grow very fast, at least short-term, the report said.

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"Hypermarkets purchase and sell almost entirely unbranded gasoline and are becoming a channel for the sale of the dwindling unbranded gasoline supply ... Hence, they are rapidly displacing the 'mom and pop' open dealers

who used to dominate the unbranded retail market. These dealers are now either 'branding up' or going out of business," the report said.

In some markets, the special fuel blends designed to reduce air pollution are also making it hard for new market players, since not many refineries make the reformulated gasoline used in those markets. As pipelines and terminals, which necessary to transport and store petroleum and its products including gasoline, come under ownership of fewer companies, this also acts to shut out new market competitors.

Much of the report details disagreements between the FTC and the GAO on the effect of the petroleum-company mergers. The FTC, along with the Department of Justice, have responsibility for enforcing anti-trust

laws that make it illegal for companies to monopolize a business and control prices. It would appear that a significant finding by the GAO of oil-industry mergers leading to higher prices would imply a poor job

on the part of the FTC as it reviewed the more than 2,600 oil-industry mergers in the in the 1990s. In Appendix V of the report, the FTC levels strong complaints about the method and validity of the GAO's work.

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The FTC says that the GAO failed to account for important reasons why gasoline prices might fluctuate, that it used statistics improperly, that it did a poor job in collecting geographically representative data, that its econometric model was not robust, and that it did a poor job in documenting its work. The GAO vigorously defends against each FTC complaint.

The American Petroleum Institute cited the FTC's comments in its response to the GAO report. "Importantly, the Federal Trade Commission had found the report 'so flawed that reliable judgments cannot be formed regarding the competitive effects of mergers in the petroleum industry."

But GAO, in the report, called its analyses "sound and consistent with the views of independent economists and experts that peer-reviewed GAO's overall modeling approach."

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