Philip B. Nelson is a Principal at Economists Incorporated, where he has worked on many large mergers in the petroleum industry. Prior to joining EI, he was an Assistant Director in the FTC’s Bureau of Economics, where he worked on the FTC’s petroleum industry investigations.

The GAO Report on the FTC’s Policy Towards Petroleum Mergers

This fall, the Government Accountability Office (GAO) released a 63-page report that summarizes the findings of its 19-month study of the FTC’s policy towards petroleum mergers (“Analysis of More Past Mergers Could Enhance Federal Trade Commission’s Efforts to Maintain Competition in the Petroleum Industry”). The study was done because members of Congress asked the GAO to examine mergers in the U.S. petroleum industry and the FTC’s review of these mergers. The GAO report finds little at the FTC that deserves changing, but a few points merit some attention.

First, the GAO’s major recommendation is that the FTC conduct more regular analyses of past petroleum industry mergers. As part of this recommendation, GAO recommends that the FTC employ “risk-based guidelines” that “provide criteria for taking action based on the likelihood that agency goals were not met,” since this “would allow FTC to selectively use resources to evaluate past merger decisions in circumstances where it deems there is greater likelihood, and hence risk, that the goal of maintaining competition was not met.” However, the GAO’s guidance as to how these risk-based guidelines would work is not clear, since no mechanism for assessing risk is provided and no risk thresholds for selecting cases are identified. (The cross-reference to a similar GAO recommendation related to FERC’s review of utility cross-subsidization adds little relevant detail.)

Nonetheless, there is a good chance that the FTC will start a retrospective study of one or more oil mergers in late 2009 or early 2010 (even though, as FTC Chairman Kovacic points out in his response to the GAO report, it has already completed three retrospective reviews). The recent political concerns with high oil prices, the GAO’s recommendation, and recommendations from other sources, such as the American Antitrust Institute, for retrospective studies, all increase the likelihood the FTC will begin such a study after a new Chairman is appointed. In addition, the ongoing FTC self-assessment may trigger an increase in retrospective analyses. Finally, the incoming FTC Chairman probably will be grilled during the confirmation process on what will be done about the petroleum industry, likely leading to some sort of promise to undertake a study, with a review of historical petroleum mergers being a particularly likely type of study to promise.

Second, the GAO Report contains some data that, if accurate, suggest that the FTC’s policy on petroleum mergers has been more aggressive than some might think. In particular, the report contains a series of charts that report estimates of concentration levels (some of them over time) for different levels of the industry. While, as FTC Chairman Kovacic points out, “concentration is just a starting point” and the GAO’s concentration statistics may be somewhat misleading because they are not based on well-defined antitrust markets, GAO’s charts suggest some fundamental facts that should be recognized when considering the likely competitive effects of historical mergers in the petroleum industry:

(1) Worldwide crude production is very unconcentrated (HHI around 400) and there has not been any significant increase in concentration from 2000 to 2006.

(2) US regional refining markets vary in concentration levels, but only the San Francisco area has HHIs around 1800. (While New York is shown as also having an HHI level above 1800, the GAO Report correctly points out that this statistic is an overestimate because it ignores the significant flow of refined products into the area by pipeline, ship, and barge.) Moreover, concentration has not significantly increased in any region from 2000 to 2007.

(3) Based on state level data, wholesale gasoline concentration levels vary regionally, with only a handful of states (mostly upper Midwest and low population density states) having HHIs above 1800. Moreover, concentration has not changed much from 2000 to 2007.

Third, the report is largely silent on competition among pipelines (crude oil pipelines, natural gas pipelines, natural gas liquids pipelines, and petroleum product pipelines). The GAO indicates that this silence is largely due to the absence of data. For this reason, the silence on pipeline competition should not be taken as a sign that the FTC will not be aggressively investigating mergers between petroleum companies that involve pipeline overlaps. To the contrary, there is every reason to believe that the FTC will continue to break out detailed pipeline maps to figure out what transportation options exist for moving petroleum products out of or into particular areas. In particular, with the potential expansion of exploration efforts in the deepwater portions of the Gulf where there are fewer pipeline options, the FTC likely will seriously review mergers that combine pipelines that overlap in these areas (or are particularly well-positioned to expand into these deepwater areas).

Finally, the GAO reports that the FTC “has said publicly that it scrutinizes mergers in the energy industry more closely than those in any other industry.” This comment, which aligns with data-based studies of FTC merger investigations, should be taken seriously. The FTC has historically been subjected to tighter Congressional oversight with respect to the petroleum industry than any other industry. Moreover, the career FTC staff members who work on these mergers have historically been dedicated enforcers who have reviewed mergers in this industry quite carefully. Even under President Reagan, the FTC intervened in petroleum mergers (e.g., Mobil’s attempt to acquire Marathon led the FTC to vote out a complaint). As a result, while a new administration may look somewhat harder at the industry, the fundamental standards are unlikely to change significantly, since these standards have historically been quite tough under both Republican and Democratic administrations. Only extreme political pressure from Congress would pose a serious risk that the FTC might abandon its long-standing analytical approach to petroleum industry investigations.

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Implications of the Recent Cipro Decision

Sampling Methodology in Merger Analysis: the Whole Foods Survey

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