FTC Testifies on Initiatives to Protect Competitive Markets for Gasoline

In testimony today, the Federal Trade Commission told the Subcommittee on Energy and Air Quality of the House Committee on Energy and Commerce that the price of crude oil, not mergers in the petroleum industry, is the major factor in determining gasoline prices at the pump. William Kovacic, FTC General Counsel said, “When crude oil prices rise, so do gasoline prices. Crude oil prices are determined by supply and demand conditions worldwide, most notably by production levels set by members of the Organization of Petroleum Exporting Countries.”

The Commission testimony observes that the FTC has been very active in reviewing and challenging potentially anticompetitive mergers in the petroleum industry, noting that “since 1981, the Commission has taken enforcement action against 15 major petroleum mergers.” The Commission also noted that “not all oil industry merger activity raises competitive concerns,” and “acquisitions involving firms with de minimis market shares or production capacity or operations that do not overlap geographically are also unlikely to raise antitrust concerns.”

Kovacic reiterated the Commission’s view that a recent GAO report, “Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry,” that reviewed the price effects of a number of oil mergers consummated in the mid to late 1990s is “fundamentally flawed.” Given the importance of this issue, however, he said that FTC Chairman Timothy J. Muris plans to convene a conference of independent experts to discuss whether the GAO report provides credible evidence of anticompetitive effects arising from specific mergers. Chairman Muris has invited GAO to co-host the conference. Kovacic, indicating that the “FTC welcomes rigorous analysis of antitrust policy,” called on the GAO to help inform the proceedings of the proposed conference by “fully disclos[ing] its econometric methodology and all data used to run its models.” Kovacic said, “the FTC welcomes an unflinching assessment of its work. We have confidence in our competition policy program and the analytical techniques on which it rests. If the rigorous public debate we propose shows that this confidence is misplaced, we have the humility and commitment to good public policy to make adjustments.”

Kovacic’s remarks also noted that the Commission, in an Opinion by Chairman Muris, has recently reinstated charges that the Union Oil Company of California violated antitrust laws by defrauding the California Air Resources Board (CARB) in connection with regulatory proceedings regarding development of reformulated gasoline. This opinion overturns an administrative law judge’s decision to dismiss the FTC’s case. In March 2003, the FTC sued Unocal to prevent it from collecting royalties that could cost California consumers hundreds of millions of dollars a year. The agency charged that Unocal deceived the California state regulators who developed the standard for reformulated gasoline for the state.

The testimony also reviewed the FTC’s gasoline price monitoring and investigation initiative, and analyzed recent gas price anomalies in Arizona, Atlanta, the Mid-Atlantic area and the western states of California and Nevada. “The FTC staff’s analysis of pricing anomalies ... provides support for ... concerns” expressed by several participants at prior FTC conferences that “environmentally mandated gasoline blends has reduced the ability of firms to ship gasoline from one region to another in response to supply disruptions.”

On the status of the U.S. refining industry, the Commission’s testimony noted that, while refineries are typically highly utilized, “total refinery distillation capacity has been increasing in recent years,”and the increase of 1.4 MMBD of industry capacity since 1995 “is equivalent to adding more than 12 average-sized refineries to industry supply.” The Commission noted that “while some refineries have closed since 1995, these mainly were small, older refineries with limited gasoline production capacity” and, “despite these closures, refining capacity in each PADD has increased since 1995.”

The Commission also noted that “a number of states have also adopted statutes or regulations that substantially influence gasoline prices” including “bans on self-service sales and restrictions on below-cost sales which appear simply to protect retailers from competition from more efficient competitors.” Additionally, “careful economic analyses of divorcement statutes [requiring the unbundling of retail sales from upstream refining operations] have concluded that such statutes can increase consumer prices.”

“The Commission is, and will continue to be, vigilant in challenging anticompetitive mergers and nonmerger antitrust violations in the petroleum industry and in urging other government bodies to adopt procompetitive policies for this sector,” the testimony says.

The Commission vote to approve the testimony was 5-0.

Copies of the testimony are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws, which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.