However,  the structure of the world crude oil market has dramatically changed as a  result of such factors as the nationalization of oil fields by oil-producing  countries, the emergence of independent oil companies, and the evolution  of futures and spot markets in the 1970s and 1980s. Companies that supply gasoline to U.S. markets also post the domestic  gasoline prices. 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 (refining and marketing) segment of the U.S. petroleum  industry, while the upstream segment experienced little change. 2). Consequently, this market went from moderately concentrated to highly  concentrated. 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 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. The increases were larger in the West than in the East—the increases were  between one-half cent and one cent per gallon in the West, and about one- quarter cent in the East (for branded gasoline only), on average. Price increases for boutique fuels sold in some parts of the East Coast and  Gulf Coast regions and in California were larger compared to the increases  for conventional 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, including gasoline  inventories relative to demand, supply disruptions in some parts of the  Midwest and the West Coast, and refinery capacity utilization rates. For  refinery capacity utilization rates, we found that prices were higher by  about an average of one-tenth to two-tenths of 1 cent per gallon when  utilization rates increased by 1 percent.
Why GAO Did This Study

Gasoline is subject to dramatic price swings. A multitude of factors affect U.S. gasoline markets, including world crude oil costs and limited refining capacity. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several 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 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 industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the 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

Mergers have altered the structure of the U.S. petroleum industry, including the refining market. Over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s, mostly later in the period. 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 in the East Coast and from unconcentrated to moderately concentrated in 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. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as the ability of new firms 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 1 cent to 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 example, wholesale prices for boutique fuels sold in the East and Gulf Coasts--fuels supplied by fewer refiners than conventional gasoline--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, supply disruptions in some regions, and high refinery capacity utilization rates. For example, we found that a 1 percent increase in refinery capacity utilization rates resulted in price increases of one-tenth to two-tenths of a cent per gallon. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound.