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CU/CFA Statement on GAO Mergers Report

FRIDAY, MAY 28, 2004
Mark Cooper, CFA, (301) 384-2204
Adam Goldberg, CU, (202) 462-6262

Statement of Consumer Federation of America & Consumers Union
on GAO Mergers and Market Concentration Report

(Washington, D.C.) – The Consumer Federation of America and Consumers Union released the following statement today about the General Accounting Office’s latest report on mergers and market concentration in the U.S. petroleum Industry:
Yesterday, the General Accounting Office (GAO) released a study entitled Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry. It concludes that: “market concentration has increased substantially in the industry…mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States from the mid-1990s through 2000.”
This confirms our analysis of the industry and agrees with academic and governmental studies of recent years. While this GAO report clearly supports the experience of average consumers, that they are being abused at the pump, it only scratches the surface of the needed analysis.

  • The study considers only the effect on wholesale gasoline prices, but concentration in retail markets also contributes to higher prices.
  • Its data stops in 2000, when the gasoline price problem was just beginning. Additional mergers took place thereafter and the price increases attributable to the domestic refining and marketing sectors grew substantially thereafter.
  • It does not consider how strategic gaming in an increasingly consolidated industry raised the general price level, as the tight oligopoly of oil giants learned how to exploit its market power with experience.
  • The study shows that increased refinery utilization rates and decreased inventories of product add a great deal to price on a seasonal basis, but does not consider the fact that the trend of tightening markets across, time that company documents show was an intended consequence of the merger wave, raised the overall level of price.
  • The study shows that “supply” disruptions also have a large impact on price, but does not consider slow reactions to disruptions as a consequence of the merger wave.
Given the fact that data runs only through 2000, and the narrow scope of the analysis, the GAO finds a substantial increase in wholesale prices associated with the mergers and market concentration, enough to catch the attention of antitrust authorities. This report should put to rest the claim that market structure does not affect petroleum prices and lays a good foundation for the thorough examination of the industry that agencies with the authority to take action should conduct. It supports our call for an investigation of recent developments.
To underscore the need for increased scrutiny of the industry, we note that on Wednesday the Energy Information Administration weekly figures on petroleum markets showed that since this time last year, crude oil prices have increased about 25 cents per gallon, but gasoline prices have increased about 53 cents per gallon. In other words, domestic refining and marketing have imposed a 28 cents per gallon price increase on consumers.
Moreover, since about 40% of crude oil is domestic in origin, another 10 cents per gallon of the total goes to domestic companies. In other words, about three quarters of the increase – 38 cents per gallon — goes to domestic companies. The total cost is almost $4 billion per month. Our recent report that analyzed longer-term trends reaches exactly the same conclusion. A copy of the report can be found here.
Thus, when the President says, as he did in a recent radio address, that the problem is dependence on foreign crude, he is ignoring three quarters of the problem. When he says, as he has several times, that the failure to pass the energy bill in Congress caused the problem, he is ignoring his own Department of Energy which concluded that the bill would do virtually nothing to lower the price of gasoline.
When the Administration claims that eliminating reformulation requirements for local markets (boutique fuels) will solve the problem, it ignores the fact that the price increases have been across the board for all gasoline blends, regardless of reformulation. When the Administration blames the failure to build new refineries on environmental laws, it ignores that fact that oil companies closed over 50 refineries in the past decade or so, as a business decision intended to tighten domestic refinery markets, and ignores the fact, as Bloomberg reported, that the Administration has approved an average of almost one refinery merger per month since it took office.
When the President pushes legislation that would give another $20 plus billion in subsidies to oil companies, he is ignoring the $100 billion increase in before tax profits the oil companies have enjoyed in the past four years, and he is ignoring recent reports from Standard and Poors and the Wall Street Journal that pointed out that the major oil companies are not putting their record profits into exploration.
The energy bill that is stalled in Congress would be a windfall for big oil and a disaster for consumers and the environment as much for what it does not do as what it does. It fails utterly to make a serious start on the real solution to both the tight global markets and the uncompetitive domestic markets decreasing demand and increasing competition.
Increasing the efficiency of the vehicle fleet is the key to taking the pressure off of both domestic and global markets. The public opinion poll results released yesterday by Consumers Union shows that the American people fully support such a change in direction for energy policy (click here).
Breaking the hold of the oil companies on local markets would lower the record margins on refining and marketing, as the GAO analysis suggests. The $20 plus billion of subsidies that would be wasted on oil companies would be better spent on reducing demand in this country, or even building a domestic refinery, which the oil industry has refused to do.
We commend Congress for refusing to be railroaded into passing a bad bill that will do no good for consumers and for requesting the GAO study. We call on the Bush Administration to rethink its narrow minded, shortsighted approach to the energy crisis in America.
For more information www.consumerfed.org or www.consumersunion.org, or contact Dr. Mark Cooper at (301) 384-22204 or Adam Goldberg at (202) 462-6262.