Business as Standard

Exxon/Mobil merger: brand new efficiency or the old Standard monopoly?

by Jonathan W. Cuneo, Free Press contributor

on't be misled by today's low oil prices. Exxon and Mobil have enjoyed multi-billion dollar profits in recent years. They are two huge, profitable, mature, well-capitalized, fully integrated multinational enterprises in an industry with historical monopoly and cartel problems. Moreover, while the BP-Amoco merger did not raise a serious-enough antitrust concern for the Federal Trade Commission (FTC) to stop it outright, it reflects and exacerbates a trend toward rapid industry concentration. The "red flags" for deep antitrust concern are present.

The FTC reviews mergers under Section 7 of the Clayton Act. Significantly, the legal test for determining whether a merger is legal is not whether it will certainly lead to a diminution in competition, but whether its incipient effect "may be substantially to lessen competition, or to tend to create a monopoly."

The 1976 Hart-Scott-Rodino Act (HSR) requires merging entities to notify the federal antitrust authorities in advance of a merger, and empowers the governmental agency (either the FTC or the Antitrust Division) to seek relevant information to determine whether to mount a court challenge to the merger. The law protects this information from public disclosure, so only the agency and the merging parties have full access to the relevant information. After the expiration of the HSR time periods, entities are free to merge unless the government has obtained a federal court order to enjoin the merger. Under current practice, the antitrust agencies typically inform merging parties of their specific concerns about a proposed transaction to afford the merging entities an opportunity to "cure" any problem. As a practical matter, once the parties merge, the government will not come back to attack the merger later. Thus, the decision made under the time constraints of the premerger process will dictate the outcome.

The FTC must determine if the proposed Exxon-Mobil combination, the largest industrial merger in history, violates Section 7 of the Clayton Act in whole or part. The agency's responsibility is immense. A merger can create efficiencies, which may be beneficial to consumers only if they are passed on to them, or create bottlenecks that squeeze us all. Proclaimed efficiencies are very often overblown in projections of what a merger will bring. The FTC should take a skeptical attitude toward the claims being made. Why do the companies need this merger to become more efficient?

Such a merger can also lead to less competition, diminished productivity, lost jobs, and wrecked communities. The current airline service situation, which leaves many areas and communities at the mercy of a single air carrier, is the direct result of lax federal merger policy in the 1980s.

Unlike previous mergers that were approved with divestiture, the FTC should consider opposing the merger outright unless it is completely satisfied that it will not result in diminished competition. Under current doctrine, size alone is not a sufficient legal reason to block a merger, but size should be a factor in how closely the FTC looks at whether consumers will be harmed. The FTC must forecast the likely effects of a merger on competition in specific product and geographic markets.

To do so, the FTC must undertake an intense market-by-market analysis of the likely competitive impact of the merger. The oil business is a complex one and the participants employ a dizzying array of joint ventures, supply and marketing arrangements, and other cooperative, noncompetitive arrangements. Any organizational chart resembles a bird's nest. Given this complexity, the size of the merger, and the costs of a mistake, the FTC should be extremely cautious in providing the type of informal merger advice it sometimes gives.

Distribution arrangements are extremely important to both price and service. In the BP-Amoco merger, the FTC primarily focused on refining markets, which are regional, and distribution markets, which are local. Statistics showing that Exxon and Mobil control only a modest share of refining and distribution markets nationally are irrelevant. Gasoline refined along the Gulf Coast is not transported to Spokane, Washington, for retail sale. For example, California may really be a separate market. Prices there have stayed higher than the rest of the country.

The oil companies themselves regard retailing as local. They perform exhaustive studies by metropolitan area. No one who lives in Michigan travels to Kentucky, Maryland or Montana to buy gas. If the FTC finds that the proposed merger would create anticompetitive consequences, then it can condition its approval on the divestiture of overlapping assets. It is important that any such divestitures be real--that the merger participants be viable and actually put those assets to full competitive use.

One detrimental effect of a merger such as this could be that some communities lose competing retailers. Decisions about where to locate retail outlets, what their operations will be (e.g., will they be full service or combined with convenience stores), what prices they will charge, and what hours of operation they will observe are all-important to consumers. For example, in California, San Diego and San Francisco have particularly high retail gas prices--they also have fewer competing retailers.

Jonathan W. Cuneo is a member of the Board of Directors of the American Antitrust Institute, a nonprofit educational and research organization. This article is adapted from his testimony for the Committee on Energy and Natural Resources, US Senate, 1/28/99.