Submission to the Federal Trade Commission
Public Conference: Factors that Affect Prices of Refined Petroleum Products
U.S. SENATORS HERB KOHL AND MIKE DEWINE
September 14, 2001
As the Chairman and Ranking Member of the Senate Judiciary Subcommittee on Antitrust, Business Rights and Competition, we have given much consideration to the U.S. oil industry and the volatility of gasoline prices to U.S. consumers. The oil and petroleum industry, like other industries, is complicated and has unique features. However, vigorous application of well-established antitrust laws in this industry can do much to stabilize prices and ensure that consumers obtain fair and competitive prices for products they use on a daily basis. This submission focuses on two areas of concern: First, consolidation within the U.S. oil industry; and second, anticompetitive international cartels that manipulate the supply and price of crude oil in the market.
The U.S. oil industry consolidated significantly in recent years. Those involved in consolidation often discuss the savings they will obtain because of increased efficiencies. And indeed, we have seen increased profits in recent years by many companies in the petroleum industry, perhaps due in part to realized cost savings. It is less clear whether consumers have enjoyed reduced prices as a result of these same cost savings.
Consolidation also has had other effects on the U.S. gasoline industry. One obvious effect is the loss of competitors from the market. Additionally, as firms have consolidated operations and sought to increase efficiencies, rationalization of facilities and equipment and specialization within the industry have increased. Fundamental antitrust principles support the proposition that with a loss of competitors from the marketplace, there is less vigorous competition on price and innovation.
Rationalization and specialization arguably have impacted the ability of the industry as a whole to respond as rapidly to increased demand during high use periods or when there are disruptions in supply. Indeed, the Federal Trade Commission concluded, as a result of its investigation into the causes of the high gasoline prices in the Midwest during the summer of 2000, that a primary factor in the price spikes was disruptions to refining facilities that supplied gasoline to the Midwest. It is arguable that consolidation had some impact on the ability of companies to respond quickly to service disruptions and supply problems.
It is important that each proposed merger in the oil and gas industry be examined closely to ensure that there will be no loss of competition at any stage of the gasoline production process. Lost competition at any level likely will result in harm to consumers and ultimately higher prices.
A second area that has a significant impact on the price of refined oil products is anticompetitive agreements among OPEC nations to artificially limit the supply and raise the price of imported crude oil. The FTC found that artificially high crude oil prices were a secondary factor in the gasoline price spikes experienced by consumers during the summer of 2000. Not only do OPEC’s actions directly increase gasoline producers’ costs, but they also lead to higher prices because buyers of crude oil are kept from generating sufficient reserves when they are priced out of the market by artificially high crude oil prices. In turn, with insufficient reserves, gasoline producers are limited in their ability to respond quickly in periods of increased demand. Shortages of crude oil reserves during such periods will result in even higher retail gasoline prices.
Nation after nation has made price fixing and other restraints of trade illegal. Yet, OPEC is undeterred and continues to flout broadly accepted legal principles and artificially restrain the production of oil. It is time for these internationally recognized principles of competition to operate in the oil and petroleum industry as they do in other markets.
We, along with several of our colleagues, have introduced the No Oil Producing and Exporting Cartels Act of 2001 (NOPEC) to make clear that U.S. enforcement agencies may bring antitrust enforcement actions against foreign states that violate antitrust laws in the production and sale of oil and other petroleum products. The measure also would establish that U.S. district courts have jurisdiction and authority to consider such cases and makes clear that the federal courts should not decline to make a determination on the merits of an action brought under the Act based on the "act of state" doctrine.
It has become increasingly apparent that the OPEC nations are concerned primarily with maintaining their artificially high prices. In the face of slowing economies throughout the world, OPEC has disregarded requests from multiple nations not to further limit oil production. This is unacceptable. NOPEC will send a signal to the OPEC nations that their agreements--which restrain trade, have a negative impact on worldwide economies, and harm American consumers--are subject to prosecution under the antitrust laws.
While there are undoubtedly many additional factors that we could have discussed that have an impact on gasoline prices, excessive consolidation and anticompetitive agreements relating to supply are two that clearly come under the purview of our antitrust laws. We encourage those agencies with responsibility in this area to enforce the antitrust laws in a rigorous fashion. It is only in this manner that consumers of oil and gasoline products can be assured that the price they pay at the pump is a fair one determined by competitive market forces.