Hearing: Joint Economic Committee-Debate on Consolidation in U.S. Oil Industry and its Impact on Consumers and Energy Security

SHOULD WE BEGIN TO EXAMINE THE RASH OF OIL COMPANY MERGERS IN THE LAST 20 YEARS? CONSOLIDATION RAISES SERIOUS ECONOMIC, CONSUMER, AND ENERGY SECURITY QUESTIONS

Has U.S. Policy on Oil Company Mergers Hurt Refining Capacity, Alternative
Energy Development and Raised Gas Prices for Consumers?

Congressional Joint Economic Cmte Begins Overdue Debate on Consolidation in
U.S. Oil Industry and its Impact on Consumers and Energy Security
Senator Charles E. Schumer
Joint Economic Committee Hearing: Opening Statement

May 23, 2007

Thank you all for coming to today's critical hearing on the state of competition in the market for
U.S. petroleum. We have a lot of business to cover today, so I am going to ask that Ranking
Member Saxton and Vice Chairman Maloney offer their opening statements, and our fellow
Members to please submit their opening statements for the record so we can get right to it.
After a wave of mergers in the industry over the past two decades, we have an elite group of five
very large, integrated oil companies dominating our domestic petroleum market, and there has been
very little analysis on the impact of those mergers.
The looming question hanging over us that we will strive to answer today is whether the lack of
competition in this market is harming consumers: Should we begin a serious exploration of whether
or not to undo some of these mergers?
To answer this question, we need to explore three areas—price-manipulation, refining capacity, and
barriers to entry for renewable energy alternatives:
1. PRICES: Are oil companies exploiting their market control prices? If this market is, as
some say it is, an oligopoly, then the oil companies don't have to meet behind closed doors
to set the price of oil—one company can take the lead, and the rest can all wink at each
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other. Economists call this "price leadership," and the more concentrated the oligopoly, the
more market power they have to set prices above competitive levels.
2. REFINING CAPACITY: Are oil companies strategically under-investing in refinery
capacity and maintenance in order to constrict supply, drive up prices and maximize profits?
3. BARRIERS FOR RENEWABLES: And third, are oil companies using their market power
to block the availability of alternative energy choices, such as E85, at the pump?
The goal of this hearing is to examine in depth whether the oil industry's market structure is to
blame for the sky-high gas prices, lack of adequate refining capacity, and lack of alternative fuels at
the pump that are harming consumers today.
And frankly I can't imagine a more appropriate time to have this hearing -the national average
gasoline price reached $3.22 a gallon last week—the highest level on record.
We are here today because the American people suspect that the high prices they are paying at the
pump go straight to oil companies' profits. They're concerned that these profits are not going
towards renewable energy alternatives or curbing the cost of gasoline at the pump.
We are here today because, in the words of Teddy Roosevelt, "We demand that big business give
people a square deal." A square deal means passing along efficiencies achieved through mergers to
consumers, investing in new production and refinery capacity, and ensuring reliability of supply so
that gas prices don't shoot up by over $1 a gallon in a matter of months. Today, American families
are getting a raw deal, while oil companies make out like the robber barons of Roosevelt's time.
And finally, we are here today because competition in the petroleum industry is critically important
to the health of the economy of this nation—an economy that has been dragging its feet in recent
months. And the federal government has an important role to play in ensuring that this market is
competitive.
Scanning the landscape of the U.S. petroleum market, it isn't clear that we have anything that can
remotely be called competition:
Since the late 1990's—mergers between the giant oil companies, like Exxon and Mobil in 1999,
Chevron and Texaco in 2001 and Conoco and Phillips in 2002—have left us with only 5 major
domestic oil companies controlling the majority of our domestic refining capacity.
In 1993, the largest five oil refiners controlled one-third of the U.S. market, while the largest 10 had
56 percent. By 2005, the largest five controlled 55 percent of the market, and the largest 10 refiners
dominate the market with over 80 percent market share.
Despite ever-increasing petroleum prices, our major oil companies don't feel they need to compete
to create new domestic gasoline supply. All things being equal, high gas prices should be an
incentive for increased refining capacity. But we haven't had a new refinery built in 30 years,
forcing refineries to operate longer and harder, and at capacity levels that are overtaxing the system.
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The oil companies tell us that instead of building new refineries, they are focused on upgrading
existing refineries to keep up with increasing demand. Yet it isn't clear how much they are really
investing in their existing refining plants when "unexpected" refinery accidents and unplanned
maintenance closings have become a regular occurrence, choking off supply and causing steep price
surges at the pump in recent months.
The rust and neglect has crept into the pipelines as well. Just yesterday, BP announced that it would
shut down 100,000 barrels a day in capacity "for a few days" because of a pipeline leak. Just the
latest in a series of missteps for BP in their production and distribution systems.
Meanwhile, even as oil prices are dropping, gas prices are going through the roof! Right now, crude
oil prices are lower than they were last year at the onset of the summer driving season. But gas
prices this morning, at $3.21 a gallon, are 34 cents higher than they were a year ago. The
Department of Energy is predicting that crude oil prices will average about $66 a barrel this
summer, versus $70 a barrel last summer. But the agency is predicting that gasoline will average
about $2.95 a gallon this summer, up from an average of $2.84 last summer.
As a result, with capacity as tight as it is, and the spread between oil and gas prices widening,
refining profit margins are at historical highs - ConocoPhillips, the largest U.S. oil refiner, posted
its biggest quarterly profit since its merger in 2002. ExxonMobil, the second-largest U.S. refiner,
just reported its highest first-quarter refining earnings in 13 years, and Valero, #3, nearly tripled its
profits during the first quarter of this year.
I don't understand how an industry that makes tens of billions per year can still have rusty refining
plants that constantly break down. I don't know of any other business where the ratio of profits to
infrastructure breakdowns is as high. And I don't know any other industry where an equipment
break down in one company benefits every other company by raising prices.
On the surface, it seems that Big Oil is pumping cash rather than petrol, strengthening profits rather
than fixing rusty pipes, and they're using their dominant market positions to buy back their own
stock rather than meet the growing demand for fuel in this country.
Here's just one example. ExxonMobil—the world's most profitable company—dolled out $29
billion (or 60% of its cash flow)—on stock buybacks last year alone. This was more than any other
company in the S&P 500. And this was $9 billion much more than Exxon invested back into its
business. Meanwhile, according to news reports, Exxon's overall production as "barely budged"
since its 1999 merger.
ExxonMobil is not alone. Overall, the oil industry spent $52.4 billion on buybacks last year, nearly
double the amount in 2005. And like ExxonMobil, production levels at the rest of the Big 5 have
been flat.
If there was more competition in this market, wouldn't these companies be investing in new
production rather than sending their oligopolistic profits back to shareholders? Wouldn't they have
the incentive to take more risks in and innovate to get ahead on the renewable energy curve?
This is a long overdue debate, and my instinct tells me that a reconsideration of oil company
mergers in the last two decades may be in order.
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When markets have been distorted from lack of competition in the past, the federal government has
taken action. Standard Oil, U.S. Steel, and AT&T come to mind.
It's no coincidence that I again quote Teddy Roosevelt, a great New Yorker, who had a lot to do
with restoring competition in markets that had been lost, once said "Rhetoric is a poor substitute for
action, and we have trusted only to rhetoric. If we are really to be a great nation, we must not
merely talk; we must act big."
It's time to consider acting big.
We're looking forward to learning from our witnesses today more about what is going on in the
market so we can best figure out how to proceed from here. I will first introduce our witnesses
before we proceed to my colleagues opening statements.
On our first panel we welcome:
Mr. Thomas McCool from the Government Accountability Office, who is the Director of their
Center for Economics in the Applied Research and Methods Group. He has been at GAO for 20
years.
Dr. Michael Salinger is the Director of the Federal Trade Commission's Bureau of Economics. He
previously taught at the business schools at Columbia and MIT, and is currently on leave from
Boston University.
On our second panel we today we will have:
Dr. Diana Moss who is the Vice President of the American Antitrust Institute. She is an economist,
and has expertise in antitrust issues across a wide range of industries, including: electricity, oil and
gas, appliances, and agricultural biotechnology.
Mr. Dennis DeCota, who is the Executive Director of the California Service Station and
Automotive Repair Association. In addition, Mr. DeCota is himself a service-station owner.
Ms. Samantha Slater is the Director of Congressional and Regulatory Affairs at the Renewable
Fuels Association.
Dr. James Smith is the Chair of Oil and Gas Management at Southern Methodist University in
Dallas, Texas, and specializes in both economics and energy. Dr. Smith is an expert energy
economics and policy.
Now let's get down to business.

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