Before the 1970s,  major oil companies that were fully vertically integrated controlled the  global network for supplying, pricing, and marketing crude oil. To determine the potential effect of a  merger on market competition, FTC evaluates how the merger would  change the level of market concentration, among other things. Mergers Occurred in All Segments of the U.S. Petroleum Industry in the 1990s for Several Reasons

Over 2,600 merger transactions occurred from 1991 through 2000 involving  all three segments of the U.S. petroleum industry. Economic literature indicates that enhancing market  power is also sometimes a motive for mergers. Mergers Contributed to Increases in Market Concentration and to Other Changes That Affect Competition

Mergers in the 1990s contributed to increases in market concentration in  the downstream segment of the U.S. petroleum industry, while the  upstream segment experienced little change overall. Moreover, based on benchmarks  established jointly by DOJ and FTC, the upstream segment of the U.S.  petroleum industry remained unconcentrated at the end of the 1990s. For example, the HHI of the refining market in the East Coast region  increased from a moderately concentrated level of 1136 in 1990 to a highly  concentrated level of 1819 in 2000. Thus, while each of these refining  markets increased in concentration, the Rocky Mountain remained within  the moderately concentrated range but the West Coast changed from  unconcentrated in 1990 to moderately concentrated in 2000. In wholesale gasoline markets, market concentration increased broadly  throughout the United States between 1994 and 2002. Evidence from various sources indicates that, in addition to increasing  market concentration, mergers also contributed to changes in other  aspects of market structure in the U.S. petroleum industry that affect  competition—specifically, vertical integration and barriers to entry. Based on anecdotal evidence and economic analyses by some  industry experts, we determined that a number of mergers that have  occurred since the 1990s have led to greater vertical integration in the U.S.  petroleum industry, especially in the refining and marketing segment. U.S. Gasoline Marketing Has Changed in Two Major Ways

According to some petroleum industry officials that we interviewed,  gasoline marketing in the United States has changed in two major ways  since the 1990s. First, the availability of unbranded gasoline has  decreased, partly due to mergers. Officials noted that unbranded gasoline  is generally priced lower than branded. The second change identified by these officials is that refiners now prefer  dealing with large distributors and retailers because they present a lower  credit risk and because it is more efficient to sell a larger volume through  fewer entities. These requirements have  motivated further consolidation in the distributor and retail sectors,  including the rise of hypermarkets. Mergers and Increased Market Concentration Generally Led to Higher U.S. Wholesale Gasoline Prices

Our econometric modeling shows that the mergers we examined mostly  led to higher wholesale gasoline prices in the second half of the 1990s. For the four mergers that we modeled for reformulated gasoline, two— Exxon-Mobil and Marathon-Ashland—led to increased prices of about 1  cent per gallon, on average. For market concentration, which captures the cumulative effects of  mergers as well as other competitive factors, our econometric analysis  shows that increased market concentration resulted in higher wholesale  gasoline prices. Prices for conventional (non-boutique) gasoline, the dominant type of  gasoline sold nationwide from 1994 through 2000, increased by less than  one-half cent per gallon, on average, for branded and unbranded gasoline. The wholesale prices increased by an average of  about 1 cent per gallon for boutique fuel sold in the East Coast and Gulf  Coast regions between 1995 and 2000, and by an average of over 7 cents  per gallon in California between 1996 and 2000. Our analysis shows that wholesale gasoline prices were also affected by  other factors included in the econometric models—particularly, gasoline  inventories relative to demand, refinery capacity utilization rates, and the  supply disruptions that occurred in some parts of the Midwest and the  West Coast. In particular, wholesale gasoline prices were about 1 cent per  gallon higher, on average, when gasoline inventories were low relative to  demand, typically in the summer driving months.
Why GAO Did This Study

Gasoline is subject to dramatic price swings. A multitude of factors cause volatility in U.S. gasoline markets, including world crude oil costs, limited refining capacity, and low inventories relative to demand. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several of them between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry ( GAO-04-96 , May 17, 2004). This report examined mergers in the U.S. petroleum industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the U.S. petroleum industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level. To address these issues, GAO purchased and analyzed a large body of data and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis.

What GAO Found

One of the many factors that can impact gasoline prices is mergers within the U.S. petroleum industry. Over 2,600 such mergers have occurred since the 1990s. The majority occurred later in the period, most frequently among firms involved in exploration and production. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated on the East Coast and from unconcentrated to moderately concentrated on the West Coast. Concentration in the wholesale gasoline market increased substantially from the mid-1990s so that by 2002, most states had either moderately or highly concentrated wholesale gasoline markets. On the other hand, market concentration in the upstream (exploration and production) segment remained unconcentrated by the end of the 1990s. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as firms' ability to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon. For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. GAO also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models--particularly low gasoline inventories relative to demand, high refinery capacity utilization rates, and supply disruptions in some regions. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound.