If Exxon, Mobil Merge, Would Biggest Be Best?

TIMES SENIOR ECONOMICS EDITOR

Will the consequences be good or bad for consumers if the oil giants Exxon and Mobil combine to produce the largest nongovernment oil company?

Is sheer size a threat or a boon? Would the new company ensure a secure supply of energy at reasonable prices or hold the world ransom?

Those questions are posed by reports Wednesday of merger negotiations between Exxon Corp. and Mobil Corp.

Most energy experts conclude that an Exxon-Mobil combination, on balance, would be good for oil and gas production worldwide, thus benefiting consumers. Given the heft of its $230 billion in stock market value and the breadth of its skilled personnel, the larger company would have greater capability to develop new oil deposits.

The need to do this underlies the merger talks because such capital investment is not attractive at today's low oil prices.

Oil prices have fallen below $12 a barrel for basic grades, a level at which it is hard for even efficient companies to produce, refine and distribute oil profitably as gasoline, heating oil and jet fuel.

And prices are likely to remain low. The once powerful Organization of Petroleum Exporting Countries, the 11-nation OPEC cartel that ruled the oil world in the 1970s, lacks the will or ability to control oil supplies these days. On Thursday, OPEC ministers at their winter meeting in Vienna, Austria, failed to agree on even a slight production cutback to ease the current oil glut. That signals continued low prices through this winter.

It also means that Exxon, Mobil and other oil companies face declining profits and a need to cut their costs. A merged Exxon and Mobil would eliminate duplicate facilities in their worldwide empires and undoubtedly let go sizable numbers of their combined 123,000-person work force. British Petroleum and Amoco, just completing their merger announced in August, foresee $2 billion in cost reductions.

But oil companies can't simply cut costs and stand still. They must develop new oil to replace their annual production. Exxon and Mobil each draw down about 10% of their respective oil reserves annually. To replenish their reserves, the two companies need to develop about 1 billion barrels of new oil every year.

A combination of these giants would encourage exploration or investment in promising technologies to convert heavy tar sands in Venezuela, Canada and Australia to usable oil. Big oil, seen as a public threat through most of its history, could be seen today as a potential boon.

To be sure, the resulting colossus would have market power. Together Exxon and Mobil would hold a 14% share of the U.S. gasoline market and refine more oil than any company in the world. Undoubtedly, a merger would be scrutinized by the U.S. Justice Department and by competition regulators in Europe, where Exxon is a leading provider of oil products. A merged company probably would have to dispose of some assets to gain regulatory approval.

But at 14% of the market, there is nowhere near the dominance that led the U.S. government in 1911 to break up the Standard Oil Trust, ancestor of both Exxon and Mobil. Then John D. Rockefeller's Standard Oil held a 90% share of U.S. refining, a chokehold on a scarce resource that antitrust law found to be inimical to the public interest and to the development of new supplies of energy.

Today the resource is in oversupply, and concentration in oil is much less than in other industries--such as automobiles where General Motors and Ford hold about 50% of the U.S. market. Dominance is still a fear taken seriously, which is why the Justice Department has brought antitrust action against Microsoft.

But once-mighty oil is an industry merging and changing out of weakness. As in banking, paper and other traditional industries, oil companies are consolidating in hopes of cutting costs and achieving acceptable profitability. Such mergers are seldom challenged.

Indeed, oil is an industry on its last legs, insofar as its products are used today. Air pollution and global warming concerns are certain to bring about a transformation of energy in the next two decades.

Major companies, such as Exxon, recognize this and are devoting research to developing new uses for natural gas, potentially a clean fuel for the long-term future as the basic energy power for fuel cells. Exxon has tremendous reserves of natural gas: 42 trillion cubic feet. A merger with Mobil would add up to an impressive 60 trillion cubic feet in gas reserves.

Exxon is also developing economical ways to liquefy natural gas for ease of transportation.

But times have changed. In the past, news that a giant company was working on such advances would arouse distrust, a belief that the big company would hold advances off the market or monopolize their use.

Today's environment is different. Exxon is hardly the leader in fuel cell work. Major public universities, such as UC Davis, lead in fuel cell research and the products themselves are already in development by small companies backed by such automotive giants as Ford and DaimlerChrysler.

If Exxon and Mobil agree to combine, the company's fuel cell work will be welcomed as a contribution to useful technology. And approval of their union by governments here and abroad will be a sign that sheer size is no longer seen as a threat, and may even be welcomed as a boon.

Times staff writer James F. Peltz contributed to this story.

* NO OIL PACT: OPEC failed to reach an agreement to extend oil production cuts. C1

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