In reviewing proposed mergers, FTC follows  guidelines that it developed jointly with the Department of Justice (DOJ)  for predicting the effects of mergers on competition. We recommended that FTC undertake more regular retrospective  reviews of past petroleum industry mergers and develop risk-based  guidelines to determine when to conduct them. Some Petroleum Industry Mergers Were Associated with Small Increases and Decreases in Wholesale Gasoline Prices

We studied the effects of seven petroleum industry mergers that occurred  since 2000 on wholesale gasoline prices and found three that were  associated with small changes in wholesale gasoline prices. As shown in table 1, the seven mergers we analyzed ranged widely in the  number of cities with wholesale terminals that were affected by the  merger. By contrast, the  model suggests that the 2001 merger of Phillips and Conoco, including oil  reserves, as well as refining and marketing, was associated with a  decrease in branded wholesale gasoline prices of approximately 1.64 cents  per gallon and a decrease of 1.14 cents per gallon for unbranded gasoline. Nonetheless, our model provides an indicator of the impact that petroleum  industry mergers can have on wholesale gasoline prices. Analysis Suggests Less Concentrated Markets Were Associated with Lower Wholesale Gasoline Prices

We also used our model to analyze market concentration and found that  less concentrated wholesale gasoline markets—i.e., wholesale terminals  with more sellers—were significantly associated with lower gasoline  prices at terminals located in 78 cities across the United States. For  example, we estimated that prices were about 8 cents per gallon lower at  terminals with, for example, 14 sellers compared with prices at terminals  that had only 9 sellers. We also measured the concentration of groups of  refineries that supplied gasoline to sellers at wholesale terminals in these  cities and similarly found that prices were lower if a terminal was supplied  by a less concentrated group of refineries. Measures of market concentration often take into account both the  number of firms in a market and the market share of each firm, and one  such measure, the Herfindahl-Hirschman Index, or HHI, gives  proportionally greater weight to firms with larger market shares. We found that the terminals with more sellers and therefore lower levels  of concentration would be expected to have lower wholesale gasoline  prices (see table 2). In general, our findings were consistent with the  idea that markets with more sellers or more refiners supplying those  sellers are likely to be more competitive, resulting in lower prices. This included conducting tests for  missing and out-of-range values and checking for completeness and  accuracy of the data. We estimated the model using the logarithm of pri variable. In addition, for both of  these measures, we estimated the price effects under another set of  statistical assumptions, and found and reported in the draft these similar,  though smaller, price effects.
Why GAO Did This Study

In 2008, GAO reported that 1,088 oil industry mergers occurred between 2000 and 2007. Given the potential for price effects, GAO recommended that the Federal Trade Commission (FTC), the agency with the authority to maintain petroleum industry competition, undertake more regular retrospective reviews of past petroleum industry mergers, and FTC said it would consider this recommendation. GAO was asked to conduct such a review of its own to determine how mergers and market concentration--a measure of the number and market shares of firms in a market--affected wholesale gasoline prices since 2000. GAO examined the effects of mergers and market concentration using an economic model that ruled out the effects of many other factors. GAO consulted with a number of experts and used both public and private data in developing the model. GAO tested the model under a variety of assumptions to address some of its limitations. GAO also interviewed petroleum market participants.

What GAO Found

GAO examined seven mergers that occurred since 2000--ranging in value and geography and for which there was available gasoline pricing data-and found three that were associated with statistically significant increases or decreases in wholesale gasoline prices. Specifically, GAO found that the mergers of Valero Energy with Ultramar Diamond Shamrock and Valero Energy with Premcor, which both involved the acquisition of refineries, were associated with estimated average price increases of about 1 cent per gallon each. In addition, GAO found that the merger of Phillips Petroleum with Conoco, which primarily involved the acquisition of oil exploration and production assets, was associated with an estimated average decrease in wholesale gasoline prices across cities affected by the merger of nearly 2 cents per gallon. This analysis provides an indicator of the impact that petroleum industry mergers can have on wholesale gasoline prices. Additional analysis would be needed to explain the price effects that GAO estimated. GAO used two separate measures of market concentration, one which measured the number of sellers at wholesale gasoline terminals and another which measured the market share of refiners supplying gasoline to those sellers, and found that less concentrated markets were statistically significantly associated with lower gasoline prices. For example, for wholesale terminals with more sellers--i.e., terminals that were less concentrated--GAO estimated that prices were about 8 cents per gallon lower at terminals with 14 sellers than at terminals that had only 9 sellers. This result is consistent with the idea that markets with more sellers are likely to be more competitive, resulting in lower prices. Using the second measure of concentration, GAO similarly found a statistically significant association between prices and the level of refinery concentration, with less concentrated groups of refineries associated with lower prices.