Consumers Won’t Pay . . . Yet

Exxon and Mobil are the largest oil companies in the world. Combined, they’d be the world’s largest company. Is this good or bad? How can we tell?

Put to one side legitimate concerns about the effects of huge combinations of corporate power on the political process. Trustbusters no longer worry about this sort of thing, although it animated the antitrust movement in the first decades of this century. Put to one side as well concerns about loss of jobs. The Exxon-Mobil combination will result in about 9,000 layoffs. Today’s antitrusters don’t worry about this either. It’s assumed that so long as the U.S. economy continues to barrel along, people who lose jobs can find new ones fairly easily.

The issue at stake is what happens to prices. Will consumers benefit from Exxon-Mobil in the form of lower prices, or will they be hurt because prices rise?

From the standpoint of consumers, there are two different kinds of combinations, one bad and one good. The bad kind allows companies to dominate their market and charge higher prices because consumers have less choice. It’s called a monopoly. In 1911, the Standard Oil Trust--from which both Exxon and Mobil are descended--was broken up because it was monopolizing the oil market, controlling 90% of U.S. refining.

The good kind of combination allows companies to become more efficient. If they can pool their resources, they can gain economies of scale. So long as there’s plenty of competition around, this means lower prices for consumers.

Exxon and Mobil say that by combining, they’ll save $2.8 billion a year. They say that they’ll pour those savings into long-term energy projects, which will translate into lower oil prices over the long term. So this is a good combination, right? Not so fast.

There’s a much simpler explanation for why Exxon and Mobil want to combine right now. It’s the same reason other major oil companies are now courting one another. Last Monday, the day before their plan was unveiled, world oil prices hit a 12-year low. Since last spring, oil prices have averaged 25% to 45% below what they’ve been for the past several years. Last year, oil prices hovered around $20 a barrel; early last week, the price was $11 a barrel.

Oil prices plunged for two reasons. Both are likely to be temporary. First, last winter was warmer than usual. That meant less than average demand for oil to keep people warm. It’s perfectly possible (indeed likely) that the globe is warming up. But don’t bet on warm winters from now on. Demand for oil will shoot back up in the next freeze.

The more important reason for the recent drop in oil prices is that almost half of the global economy is now in recession. The developing world isn’t using much oil these days because it doesn’t need energy to power industries that are shrinking. Japan, the world’s second-largest economy, isn’t moving. Not much need for oil there, either.

But the global recession won’t last forever. Within two or three years, Asia and Latin America will be steaming ahead again. And demand for oil will soar.

The only way Exxon and Mobil can sail through the doldrums of the next few years and maintain some profit (and keep their share prices from plummeting) is by cutting costs. That’s why they want to combine their operations. Forget the blather about new exploration.

Other U.S. oil companies are in the same predicament. They too have to combine and cut costs in order to survive the next few years. They’re watching to see whether the proposed Exxon-Mobil deal gets the nod from Washington. If it’s a go, everyone else will marry up as well.

In the short run, these combinations don’t pose any risk to consumers. As long as world demand for oil continues to be low, oil prices are likely to stay around $10 to $15 a barrel--regardless of what Exxon and Mobil or any other oil companies decide to do.

But the crunch will come in a few years when demand surges again. When that happens, you can bet that OPEC--the cartel of oil producers from developing nations--will take the opportunity to push prices as high as possible.

This is precisely when price competition among major oil companies will be most important. But this also is precisely when an Exxon-Mobil colossus--along with any other big combinations--will use newfound market power to push oil prices through the stratosphere.

When winter turns cold again and the global economy is surging, we’ll wish Exxon and Mobil had never even held each other’s hands.