Companies operating in the downstream segment include firms that refine  crude oil as well as firms that market refined petroleum products. Petroleum marketing involves purchasing refined petroleum  products from refiners and selling them to wholesaler and retail firms. markets. More than 1,000 U.S. Mergers Occurred in the Petroleum Industry between 2000 and 2007, and Market Concentration Changed Little but Varied by Market Region and Industry Segment

More than 1,000 U.S. mergers occurred in the petroleum industry between  2000 and 2007. We also found in our analysis of the upstream crude oil production  segment of the industry and the downstream refining and wholesale  gasoline supply segments of the industry that, in most regions, petroleum  industry market segments were moderately concentrated. A key reported driver of U.S. mergers in the upstream segment was the  increasing challenge associated with exploring and producing oil in  extreme physical environments. This  activity was also driven out of concern for reliable access to oil, since  Canada is considered more politically stable than many other regions of  the world with oil reserves. 8). Under these circumstances, the  crude supplier market would be more concentrated, and there could be  more potential for the crude producers to raise prices. In our analysis of downstream wholesale gasoline suppliers, we found that  most states had a moderately concentrated number of wholesale gasoline  suppliers between 2000 and 2007. Fewer states were unconcentrated or highly  concentrated, and this overall trend was fairly stable over time (see   fig. In addition, we found that eight states in 2007 were highly  concentrated: Alaska, Hawaii, Indiana, Kentucky, Michigan, North Dakota,  Ohio, and Pennsylvania (see fig. FTC Primarily Reviews Proposed Mergers to Maintain Petroleum Industry Competition, While FTC and Other Agencies Also Have Roles in Monitoring Petroleum Industry Markets

FTC primarily reviews proposed mergers to maintain competition in the  petroleum industry, while other federal and state agencies, including FTC,  have roles in monitoring petroleum industry markets. FTC does a review  to predict the effects of proposed mergers on competition, but generally  does not look back to evaluate the actual effects after the merger has been  completed, even though experts and FTC agree that postmerger reviews  would allow the agency to better inform future merger reviews and to  better measure its success in maintaining competition. The unifying theme in the  guidelines is that mergers should not be permitted to enhance a firm’s  market power or to make it easier for a firm to exercise market power. For example, some mergers have the  potential to make the merged firms more efficient in their daily operations  by allowing them to achieve economies of scale, and this may result in  lower prices for consumers. However, we found that after reviewing proposed mergers,  FTC does not regularly look back at past decisions to determine the actual  effects of the merger on competition or prices. A number of petroleum industry experts, industry participants, and FTC  all view retrospective merger reviews as a potentially valuable part of  FTC’s efforts to maintain competition in the petroleum industry. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to examine (1) mergers in the U.S.  petroleum industry and changes in market concentration since 2000 and  (2) the steps that the Federal Trade Commission (FTC) uses to maintain  competition in the U.S. petroleum industry, and the roles other federal and  state agencies play in monitoring petroleum industry markets. We used a single global market to calculate HHI in this  segment because, according to experts with whom we spoke, crude oil  prices are set on world markets. We  worked with EIA to identify these and then used data from company publications to  account for the gasoline production capacity of these refineries. We conducted interviews with several federal officials from  the aforementioned federal agencies. Our report, therefore,  indicates that there are regions that may have more or less potential  for firms to exercise market power, and we did not draw further  conclusions about the impact of market concentration on competition  in any given region.
Why GAO Did This Study

During the late 1990s, many petroleum companies merged to stay profitable while crude oil prices were low, and in recent years mergers have continued. Congress and others have concerns about the impact mergers might be having on competition in U.S. petroleum markets. The Federal Trade Commission (FTC) has the authority to maintain competition in the petroleum industry and reviews proposed mergers to determine whether they are likely to diminish competition or increase prices, among other things. GAO was asked to examine (1) mergers in the U.S. petroleum industry and changes in market concentration since 2000 and (2) the steps FTC uses to maintain competition in the U.S. petroleum industry, and the roles other federal and state agencies play in monitoring petroleum industry markets. In conducting this study, GAO worked with petroleum industry experts to delineate regional markets and to develop estimates of refinery gasoline production capacity in order to calculate market concentration. GAO used public and private data as well as interviews for its analyses.

What GAO Found

More than 1,000 U.S. mergers occurred in the petroleum industry between 2000 and 2007, mostly between firms involved in crude oil exploration and production. According to experts and industry officials, mergers in this segment were generally driven by the challenges associated with producing oil in extreme physical environments, such as deepwater, as well as increasing concerns about competition with national oil companies and access to oil reserves in regions of relative political instability. Industry officials from the segments of the petroleum industry that transport, refine, and sell petroleum products reported that mergers were generally driven by the desire for greater efficiency and cost savings. Despite these gains, mergers have the potential to enhance a firm's ability to exercise "market power," which potentially allows it to raise prices without being undercut by other firms. GAO measured market concentration with an index that FTC uses, where market regions with few, large firms are considered to be highly concentrated and have a greater potential for market power. Conversely, market regions with many smaller firms are considered to have low or moderate concentration and generally have less potential for firms to exercise market power. GAO found that market concentration changed little but varied by industry segment and market region. GAO found that market concentration among firms involved in crude oil exploration and production was low and stable between 2000 and 2006, while concentration among refiners was generally moderate across those years. Regarding wholesale gasoline suppliers on a state-by-state basis, 35 states were moderately concentrated in their number of wholesale gasoline suppliers in 2007, and this number was fairly stable from 2000. GAO found that the following 8 states had highly concentrated wholesale gasoline supplier markets in 2007: Alaska, Hawaii, Indiana, Kentucky, Michigan, North Dakota, Ohio, and Pennsylvania. While FTC reviews evidence and considers a number of competitive factors to predict a merger's potential effects on competition in its analyses of proposed mergers, it does not regularly look back at past merger decisions to assess the actual effects of the merger on competition or prices after the merger has been completed. Although these reviews can be resource intensive, experts, industry participants, and FTC agree that regular retrospective reviews would allow the agency to better inform future merger reviews and to better measure its success in maintaining competition. In addition to FTC's efforts in reviewing proposed mergers, other federal agencies, including FTC, and some states also monitor aspects of petroleum industry markets. For example, the Federal Energy Regulatory Commission monitors petroleum product pipeline markets and regulates pipeline rates accordingly.