Merger Is a Bad Deal for California Motorists
When Shell Oil Co. and Texaco Inc. announced last March that they were merging their oil refining and petroleum marketing operations, they spoke of “substantial efficiencies” and significant savings. In fact, this merger will mean less competition in the marketplace, which in turn means higher prices for consumers and bigger profits for the companies.
California already has the most concentrated oil market in the United States. A handful of giant companies--Chevron, Arco, Tosco, Shell, Texaco, Mobil and Exxon--dominate the market, from production to retail. A merger between Shell and Texaco would only make a bad situation worse. Consumers in Los Angeles, San Diego and San Francisco are already paying some of the highest prices in the nation, even after accounting for the higher cost of cleaner gasoline.
The Federal Trade Commission is conducting an antitrust review of the merger. The objective of federal antitrust enforcement is to prevent the monopolization of markets by companies that prefer to comfortably cooperate rather than vigorously compete. The recent acquisition of Unocal’s refining and marketing operations by Tosco and the disappearance of independent refiners and marketers has sharply diminished competition in the state. Nearly six years ago, there were 17 refiners in California with more than 2 million barrels a day of capacity. Today, there are just 11 refiners with 1.8 million barrels of capacity. Shell and Texaco claim that their combined operations will have less than 13% of U.S. refining capacity and less than 15% of U.S. branded gasoline sales. These percentages are misleading and irrelevant. What matters to consumers as well as antitrust enforcers is the share of market in the relevant geographic market--in other words, metropolitan Los Angeles, San Francisco and San Diego.
A Shell/Texaco combination would mean that five major companies would have 89% of the Los Angeles gasoline market. While comparable figures are not available for San Diego and San Francisco, the percentages are likely to be even higher than those in Los Angeles, which still has a few independent supply sources.
Growing consolidation of the oil industry, as the Federal Reserve Bank of San Francisco concluded, “has effectively reduced competition in the production of gasoline products. Reduced competition, in turn, insulates gasoline prices from changes in crude oil prices, allowing refiners to boost profit margins when crude oil costs fall.”
A comparison of Los Angeles and Houston, for example, shows that prices (excluding taxes) over the past five years have been on average about 10 cents a gallon higher in Los Angeles. With far fewer refiners and retailers in Los Angeles, supplies are more limited, allowing refiners to charge above-market prices. Gasoline prices elsewhere in the state are even higher. The San Francisco Chronicle reported that consumers in the Bay Area were paying between 10 cents and 19 cents more per gallon of gasoline than their Los Angeles counterparts. The San Diego Union-Tribune reported that San Diego motorists have paid about 15 cents more per gallon for unleaded regular gasoline.
Clearly, the primary objective of the merger is California’s lucrative gasoline market. Arco, the region’s leading gasoline marketer, says California “has been and continues to be the best refining and marketing environment in the U.S.”
Moreover, indirectly acknowledging how much market power the companies already have in the state, an Arco official recently blamed consumers for high gasoline prices in areas where nearly every station is charging the same high price. Charging what the market will bear is just another way of describing monopoly pricing.
By further consolidating an already tight market, the Shell/Texaco merger would make it virtually impossible for any new competitors to enter the market and would guarantee that motorists will pay more for gasoline. The merger must be stopped, not just because it is anti-competitive and anticonsumer, but because antitrust enforcers must send a strong message to other companies seeking similar consolidation.
