Energy Markets: Mergers and Many Other Factors Affect U.S.
Gasoline Markets (07-JUL-04, GAO-04-951T).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-951T
ACCNO: A10814
TITLE: Energy Markets: Mergers and Many Other Factors Affect
U.S. Gasoline Markets
DATE: 07/07/2004
SUBJECT: Corporate mergers
Fuel prices
Petroleum industry
Petroleum prices
Prices and pricing
Econometric modeling
Gasoline
Competition
Cost analysis
Energy marketing
Petroleum products
California
East Coast
Gulf Coast
West Coast
Herfindahl-Hirschman Index
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GAO-04-951T
United States General Accounting Office
GAO Testimony
Before the Subcommittee on Energy Policy, Natural Resources and Regulatory
Affairs, Committee on Government Reform, House of Representatives
For Release on Delivery
Expected at 9:30 a.m. EDT ENERGY MARKETS
Wednesday, July 7, 2004
Mergers and Many Other Factors Affect U.S. Gasoline Markets
Statement of Jim Wells, Director Natural Resources and Environment
GAO-04-951T
Highlights of GAO-04-951T, a report to Subcommittee on Energy Policy,
Natural Resources and Regulatory Affairs, Committee on Government Reform,
House of Representatives
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.
www.gao.gov/cgi-bin/getrpt?GAO-04-951T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells at (202) 512-3841
or wellsj@gao.gov.
July 7, 2004
ENERGY MARKETS
Mergers and Many Other Factors Affect U.S. Gasoline Markets
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.
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to participate in discussing issues
related to the volatility of U.S. gasoline markets. According to data from
the Energy Information Administration (EIA), the average nationwide price
paid for regular gasoline (the type of gasoline used most in the United
States) at the pump was as high as $2.06 cents/gallon by the end of May
2004, an increase of about 58 cents/gallon or 39 percent over the same
time last year. On the West Coast, gasoline prices reached an average of
$2.34 cents/gallon by the end of May 2004, an increase of about 65
cents/gallon or 38 percent over the same time last year. Although prices
have recently begun to fall, elevated gasoline prices can be an economic
burden to American consumers and the economy.
A broad range of factors affects the volatility of gasoline prices. These
factors typically include changes in crude oil costs, limited refinery
capacity, inventory levels relative to demand, supply disruptions, and
regulatory factors-such as the many different gasoline formulations that
are required to meet varying federal and state environmental laws. Federal
and state taxes are also a component of U.S. gasoline prices, but these do
not fluctuate often. We have addressed many of these issues in several
studies on energy markets. Among other things, our past studies showed
that
o the U.S. economy is vulnerable to oil supply disruptions that can
impose significant economic costs, and in our report options were
identified to mitigate their effects;
o the Clean Air Act specifically requires refiners to produce
reformulated gasoline, and the requirement to provide a specific blend for
a specific area can present challenges to refiners and other suppliers if
there are supply disruptions;
o gasoline price spikes were generally higher in California from January
1995 through December 1999 than in the rest of the nation, partly because
of the difficulty in substituting for the loss of supply of CARB, the
special reformulated gasoline used in California, when there were
unplanned refinery outages;
o retail gasoline prices in California rose faster than they fell in
response to a delayed pass-through in changes in the wholesale price of
gasoline;
o as we testified in 2001, each day vehicles in the United States
consume about 10 million barrels of petroleum fuels, primarily gasoline
and diesel, and according to projections, the figure will rise to about 15
million barrels per day by 2010, raising concerns about the nation's
ability to satisfy this growing demand;
o the transportation sector is more than 90 percent dependent on
petroleumbased fuels, such as gasoline, and this dependence contributes to
our vulnerability to oil supply disruptions and related price shocks; and
o existing federal programs to promote alternative fuel vehicles and
alternative fuel use in the transportation sector have faced significant
barriers.
Market consolidation is another factor that can affect the price of
gasoline. Our testimony today will focus on our recent study that examined
the effects of market consolidation and other factors on the U. S.
petroleum industry.1
Since the 1990s, the U.S. petroleum industry has experienced a wave of
mergers, acquisitions, and joint ventures, several of them between large
oil companies that had previously competed with each other for the sale of
petroleum products.2 A few examples include the merger between British
Petroleum (BP) and Amoco in 1998 to form BPAmoco, which later merged with
ARCO, and the merger in 1999 between Exxon, the largest U.S. oil company,
and Mobil, the second largest. In general, mergers raise concerns about
potential anticompetitive effects on the U.S. petroleum industry and
ultimately on gasoline prices because mergers could result in greater
market power for the merged companies, potentially allowing
1See U.S. General Accounting Office, Energy Markets: Effects of Mergers
and Market Concentration in the U.S. Petroleum Industry, GAO-04-96
(Washington, D.C., May 17, 2004). Additional related GAO studies include
U.S. Ethanol Market: MTBE Ban in California, GAO-02-440R (Washington,
D.C., Feb. 27, 2002); Alternative Motor Fuels and Vehicles: Impact on the
Transportation Sector, GAO-01-957T (Washington, D.C., July 10, 2001);
Motor Fuels: California Gasoline Price Behavior, GAO/RCED-96-121
(Washington, D.C., Apr. 28, 2000); International Energy Agency: How the
Agency Prepares Its World Market Statistics, GAO/RCED-99-142 (Washington,
D.C., May 7, 1999); and Energy Security: Evaluating U.S. Vulnerability to
Oil Supply Disruptions and Options for Mitigating Their Effects,
GAO/RCED-97-6 (Washington, D.C., Dec. 12, 1996).
2We refer to all of these transactions as mergers.
them to increase prices above competitive levels.3 On the other hand,
mergers could also yield cost savings and efficiency gains, which may be
passed on to consumers in lower prices. Ultimately, the impact depends on
whether market power or efficiency dominates.
Our 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, we purchased and analyzed a large body of data on
mergers and wholesale gasoline prices, as well as data on other relevant
economic factors. We also developed econometric models for examining the
effects of eight specific mergers and increased market concentration on
U.S. wholesale gasoline prices nationwide. It is noteworthy that using
econometric models allowed us to measure the effects of mergers and market
concentration while isolating the effects of several other factors that
could influence wholesale gasoline prices, such as world crude oil costs,
limited refining capacity, or low inventories relative to demand.
In the course of our work, we consulted with Dr. Severin Borenstein,4 a
recognized expert in the modeling of gasoline markets; interviewed
officials across the industry spectrum; and reviewed relevant economic
literature and numerous related studies. We also used an extensive peer
review process to obtain comments from experts in academia and relevant
government agencies. We conducted our work in accordance with generally
accepted government auditing standards.
In summary, we found the following:
3The Federal Trade Commission and Department of Justice have defined
market power for a seller as the ability to profitably maintain prices
above competitive levels for a significant period of time.
4Dr. Borenstein is E.T. Grether Professor of Business Administration and
Public Policy at the Haas School of Business, University of California,
Berkeley. He is also the Director of the University of California Energy
Institute.
o Over 2,600 mergers occurred in the petroleum industry from 1991
through 2000. The majority of the mergers occurred during the second half
of the decade, most frequently in the upstream (exploration and
production) segment of the industry. Petroleum industry officials cited
various reasons for this wave of mergers, particularly the need for
increased efficiency and cost savings. Economic literature suggests that
firms also sometimes use mergers to enhance their market power.
Ultimately, the reasons cited by both sources generally relate to the
merging companies' desire to maximize profit or shareholder wealth.
o Market concentration, which is commonly measured by the
Herfindahl-Hirschman Index (HHI), has increased in the downstream
(refining and marketing) segment of the U.S. petroleum industry since the
1990s, partly as a result of merger activities, while changing very little
in the upstream (exploration and production) segment. In the downstream
segment, market concentration in refining increased from moderately to
highly concentrated on the East Coast and from unconcentrated to
moderately concentrated on the West Coast; it increased but remained
moderately concentrated in the Rocky Mountain region. 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
decreased somewhat in the upstream segment and remained unconcentrated by
the end of the 1990s. Anecdotal evidence suggests that mergers also have
affected other factors that impact competition, such as the ability of new
firms to enter the market.
o According to industry officials, two major changes have occurred in
U.S. gasoline marketing since the 1990s, partly related to mergers. First,
the availability of unbranded (generic) gasoline has decreased
substantially. Unbranded gasoline is generally priced lower than branded
gasoline, which is marketed under the refiner's trademark. Industry
officials generally attributed the decreased availability of unbranded
gasoline to, among other factors, a reduction in the number of independent
refiners that typically supply unbranded gasoline. Second, industry
officials said that refiners now prefer dealing with large distributors
and retailers. This preference, according to the officials, has motivated
further consolidation in both the distributor and retail markets,
including the rise of hypermarkets-a relatively new breed of gasoline
market participants that includes such large retail warehouses as Wal-Mart
and Costco.
o Our econometric analyses, using data from the mid-1990s through 2000,
show that oil industry mergers generally led to higher wholesale gasoline
prices (measured in our report as wholesale prices less crude oil prices),
although prices sometimes decreased. Six of the eight specific mergers we
modeled-which mostly involved large, fully vertically integrated
companies-generally resulted in increases in wholesale prices for branded
and/or unbranded gasoline of about 2 cents per gallon, on average. Two of
the mergers generally led to price decreases, of about 1 cent per gallon,
on average. For conventional gasoline-the predominant type used in the
United States except in areas that require special gasoline
formulations-the change in wholesale price ranged from a decrease of about
1 cent per gallon to an increase of about 5 cents per gallon. The
preponderance of price increases over decreases indicates that the market
power effects, which tend to increase prices, for the most part outweighed
the efficiency effects, which tend to decrease prices.
o Our econometric analyses also show that increased market
concentration, which captures the cumulative effects of mergers as well as
other market structure factors, also generally led to higher prices for
conventional gasoline and for boutique fuels-gasoline that has been
reformulated for certain areas in the East Coast and Gulf Coast regions
and in California to lower pollution. The price increases were
particularly large in California, where they averaged about 7 cents per
gallon. Higher wholesale gasoline prices were also a result of other
factors: low gasoline inventories, which typically occur in the summer
driving months; high refinery capacity utilization rates; and supply
disruptions, which occurred in the Midwest and on the West Coast.
o We also identified price increases of one-tenth of 1 cent to 7 cents
per gallon that were caused by other factors included in our models-
particularly low gasoline inventories relative to demand, high refinery
capacity utilization rates, and supply disruptions that occurred in some
regions.
As I noted earlier, we used extensive peer review to obtain comments from
outside experts, including the Federal Trade Commission (FTC) and EIA, and
we incorporated those comments as appropriate. FTC disagreed with our
methodology and findings and provided extensive comments, which we have
addressed in our report. Our findings are generally consistent with
previous studies of the effects of specific oil mergers and of market
concentration on gasoline prices. We believe, however, that ours is the
first comprehensive study to model the impact of the industry's 1990s wave
of mergers on wholesale gasoline prices for the entire United States, an
effort that required us to acquire large datasets and perform complex
analyses.
Background Many firms of varying sizes make up the U.S. petroleum
industry. While some firms engage in only limited activities within the
industry, such as exploration for and production of crude oil and natural
gas or refining crude oil and marketing petroleum products, fully
vertically integrated oil companies participate in all aspects of the
industry. Before the 1970s, major oil companies that were fully vertically
integrated controlled the global network for supplying, pricing, and
marketing crude oil. 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. Since U.S. oil prices were deregulated in 1981,
the price paid for crude oil in the United States has been largely
determined in the world oil market, which is mostly influenced by global
factors, especially supply decisions of the Organization of Petroleum
Exporting Countries (OPEC) and world economic and political conditions.
The United States currently imports over 60 percent of its crude oil
supply. In contrast, the bulk of the gasoline used in the United States is
produced domestically. In 2001, for example, gasoline refined in the
United States accounted for over 90 percent of the total domestic gasoline
consumption. Companies that supply gasoline to U.S. markets also post the
domestic gasoline prices. Historically, the domestic petroleum market has
been divided into five regions: the East Coast region, the Midwest region,
the Gulf Coast region, the Rocky Mountain region, and the West Coast
region.5
Proposed mergers in all industries, including the petroleum industry, are
generally reviewed by federal antitrust authorities-including FTC and the
Department of Justice (DOJ)-to assess the potential impact on market
competition. According to FTC officials, FTC generally reviews proposed
mergers involving the petroleum industry because of the agency's expertise
in that industry. FTC analyzes these mergers to determine if they would
likely diminish competition in the relevant markets and result in harm,
such as increased 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. Conceptually, the higher the
concentration, the less competitive the market is and the more likely that
firms can exert control over prices. The
5These regions are known as Petroleum Administration for Defense Districts
(PADDs).
Mergers Occurred in All Segments of the U.S. Petroleum Industry in the 1990s
for Several Reasons
ability to maintain prices above competitive levels for a significant
period of time is known as market power.
According to the merger guidelines jointly issued by DOJ and FTC, market
concentration as measured by HHI is ranked into three separate categories:
a market with an HHI under 1,000 is considered to be unconcentrated; if
HHI is between 1,000 and 1,800 the market is considered moderately
concentrated; and if HHI is above 1,800, the market is considered highly
concentrated. 6
While concentration is an important aspect of market structure-the
underlying economic and technical characteristics of an industry-other
aspects of market structure that may be affected by mergers also play an
important role in determining the level of competition in a market. These
aspects include barriers to entry, which are market conditions that
provide established sellers an advantage over potential new entrants in an
industry, and vertical integration.
Over 2,600 merger transactions occurred from 1991 through 2000 involving
all three segments of the U.S. petroleum industry. Almost 85 percent of
the mergers occurred in the upstream segment (exploration and production),
while the downstream segment (refining and marketing of petroleum)
accounted for about 13 percent, and the midstream segment (transportation)
accounted for over 2 percent. The vast majority of the mergers-about 80
percent-involved one company's purchase of a segment or asset of another
company, while about 20 percent involved the acquisition of a company's
total assets by another so that the two became one company. Most of the
mergers occurred in the second half of the decade, including those
involving large partially or fully vertically integrated companies.
Petroleum industry officials and experts we contacted cited several
reasons for the industry's wave of mergers in the 1990s, including
achieving synergies, increasing growth and diversifying assets, and
reducing costs. Economic literature indicates that enhancing market power
is also sometimes a motive for mergers. Ultimately, these reasons mostly
relate to companies' desire to maximize profit or stock values.
6HHI is calculated by summing the squares of the market shares of all the
firms within a given market.
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. We found that market
concentration, as measured by the HHI, decreased slightly in the upstream
segment, based on crude oil production activities at the national level,
from 290 in 1990 to 217 in 2000. 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.
The increases in market concentration in the downstream segment varied by
activity and region.
o 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. In the Rocky Mountain and the West
Coast regions, it increased from 1029 to 1124 and from 937 to 1267,
respectively, in that same period. 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. The HHI of
refining markets also increased from 699 to 980 in the Midwest and from
534 to 704 in the Gulf Coast during the same period, although these
markets remained unconcentrated.
o In wholesale gasoline markets, market concentration increased broadly
throughout the United States between 1994 and 2002. Specifically, we found
that 46 states and the District of Columbia had moderately or highly
concentrated markets by 2002, compared to 27 in 1994.
In both the refining and wholesale markets of the downstream segment,
merger activity and market concentration were highly correlated for most
regions of the country.
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.
However, we could not quantify the extent of these changes because of a
lack of relevant data.
Vertical integration can conceptually have both pro- and anticompetitive
effects. 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.
For example, we identified eight mergers that occurred between 1995 and
2001 that might have enhanced the degree of vertical integration,
particularly in the downstream segment.
Concerning barriers to entry, our interviews with petroleum industry
officials and experts provide evidence that mergers had some impact on the
U.S. petroleum industry. Barriers to entry could have implications for
market competition because companies that operate in concentrated
industries with high barriers to entry are more likely to possess market
power. Industry officials pointed out that large capital requirements and
environmental regulations constitute barriers for potential new entrants
into the U.S. refining business. For example, the officials indicated that
a typical refinery could cost billions of dollars to build and that it may
be difficult to obtain the necessary permits from the relevant state or
local authorities. At the wholesale and retail marketing levels, industry
officials pointed out that mergers might have exacerbated barriers to
entry in some markets. For example, the officials noted that mergers have
contributed to a situation where pipelines and terminals are owned by
fewer, mostly integrated companies that sometimes deny access to
third-party users, especially when supply is tight-which creates a
disincentive for potential new entrants into such wholesale markets.
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. They generally attributed the
decreased availability of unbranded gasoline to one or more of the
following factors:
o There are now fewer independent refiners, who typically supply mostly
unbranded gasoline. These refiners have been acquired by branded
companies, have grown large enough to be considered a brand, or have
simply closed down.
o Partially or fully vertically integrated oil companies have sold or
mothballed some refineries. As a result, some of these companies now have
only enough refinery capacity to supply their own branded needs, with
little or no excess to sell as unbranded.
U.S. Gasoline Marketing Has Changed in Two Major Ways
o Major branded refiners are managing their inventory more efficiently,
ensuring that they produce only enough gasoline to meet their current
branded needs.
We could not quantify the extent of the decrease in the unbranded gasoline
supply because the data required for such analyses do not exist.
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. Refiners manifest this preference by
setting minimum volume requirements for gasoline purchases. These
requirements have motivated further consolidation in the distributor and
retail sectors, including the rise of hypermarkets.
Mergers and Our econometric modeling shows that the mergers we examined
mostly
led to higher wholesale gasoline prices in the second half of the 1990s.
The Increased Market majority of the eight specific mergers we
examined-Ultramar Diamond Concentration Shamrock (UDS)-Total,
Tosco-Unocal, Marathon-Ashland, Shell-Texaco I
(Equilon), Shell-Texaco II (Motiva), BP-Amoco, Exxon-Mobil, and Generally
Led to Marathon Ashland Petroleum (MAP)-UDS-resulted in higher prices of
Higher U.S. Wholesale wholesale gasoline in the cities where the merging
companies supplied
gasoline before they merged. The effects of some of the mergers
wereGasoline Prices inconclusive, especially for boutique fuels sold in
the East Coast and Gulf Coast regions and in California.
o For the seven mergers that we modeled for conventional gasoline, five
led to increased prices, especially the MAP-UDS and Exxon-Mobil mergers,
where the increases generally exceeded 2 cents per gallon, on average.
o 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. In contrast, the Shell-Texaco II (Motiva) merger
led to price decreases of less than one-half cent per gallon, on average,
for branded gasoline only.
o For the two mergers-Tosco-Unocal and Shell-Texaco I (Equilon)-that we
modeled for gasoline used in California, known as California Air Resources
Board (CARB) gasoline, only the Tosco-Unocal merger led to price
increases. The increases were for branded gasoline only and exceeded 6
cents 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.
o 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 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
onequarter cent in the East (for branded gasoline only), on average.
o 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-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. Also, prices were higher
by about an average of one-tenth to two-tenths of 1 cent per gallon when
refinery capacity utilization rates increased by 1 percent. The prices of
conventional gasoline were about 4 to 5 cents per gallon higher, on
average, during the Midwest and West Coast supply disruptions. The
increase in prices for CARB gasoline was about 4 to 7 cents per gallon, on
average, during the West Coast supply disruptions.
Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions that you or other Members of the Subcommittee may
have.
GAO Contact and For further information about this testimony, please
contact me at (202) 512-3841. Key contributors to this testimony included
Godwin Agbara,
Staff Scott Farrow, John A. Karikari, and Cynthia Norris.
Acknowledgments
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