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"Oil Industry Reality Check":

Timothy Muris and Richard Parker, officials at the Federal Trade Commission under the Bush and Clinton Administrations respectively, have an op-ed in today's Wall $treet Journal urging lawmakers to recognize the competitive reality of today's oil industry before adopting additional regulations and controls. Here's a taste:

We've spent years at the Federal Trade Commission enforcing the antitrust laws in this industry and even more time studying oil markets. We have come to this conclusion: When legislators don't completely understand the industry, even their best efforts can harm consumers.

Consider one driver of harmful regulation, the belief that a handful of large oil companies control the industry. In fact, the industry is not highly concentrated. The four largest firms collectively hold a smaller share than the top four firms in many other industries, and these firms face a lot of competition. Valero is the largest U.S. refiner and non-oil companies like Wal-Mart, Sheetz and WaWa sell a significant portion of retail gasoline. Most gas stations are owned and operated independently.

The oil industry's long-term earnings are also typically in line with other industries. Recently, the oil industry has earned above-average profits -- 9.5 cents for each dollar in sales in 2006, compared to 8.2 cents for manufacturers. But U.S. oil took a hit in the 1990s as earnings fell well below those of other industries.

And as economic learning and antitrust enforcement have evolved, we've seen that big and profitable are not necessarily bad. In recent decades, the real oil industry has greatly improved its efficiency through a series of mergers, which have improved resource management, increased innovation and technology diffusion, and moved assets to firms with the ability and expertise to expand capacity. Extensive FTC studies have confirmed that the industry is highly competitive, that concentration and mergers have not increased prices, and that market forces -- most notably the price of crude oil and supply shocks -- cause price increases. . . .

What we need are policies that let the market operate to spur investment in exploration, capacity expansion, operating efficiencies and technology advances.

Instead, Congress is proposing to exacerbate America's energy problems. Some want to make price gouging -- a vague term with no clear legal meaning -- a crime. Such legislation would discourage the industry from responding rapidly to product shortages. As bad as high prices are, no gas at all, or a return to gas lines, is much worse. Moreover, price gouging laws will harm consumers by reducing investment in new refineries.

Steve:
I've worked on several of the big oil industry mergers in recent years. In my view, where the FTC has completely dropped the ball and harmed consumers is on the issue of vertical integration. I don't know if Muris and Parker discuss this issue behind the paywall, but this is what is killing us in terms of refining capacity and everything else.

Also, while it's normally an effective rhetorical device to point out that the Clinton and Bush Administrations agree on something, I'm not sure how many readers realize how little of a gap there was between these two administrations as far as antitrust philosophy and enforcement.
7.17.2007 4:15pm
Ugh (mail):
I would settle for subjecting the Oil &Gas industry to the same tax code that applies to every other corporation.
7.17.2007 4:29pm
Temp Guest (mail):
So little time since the Nixon-Carter gas lines and yet the left wing in Congress is itching to try the same failed tricks again. They're even worse than the Bourbons: they learn nothing and they forget everything.
7.17.2007 4:36pm
Curt Fischer:

In my view, where the FTC has completely dropped the ball and harmed consumers is on the issue of vertical integration. I don't know if Muris and Parker discuss this issue behind the paywall, but this is what is killing us in terms of refining capacity and everything else.



Refining capacity has been increasing since about 1987, according to the EIA. The oil industry has been vertically integrated ever since Rockefeller built up Standard Oil. When he did it, he was the only vertically integrated player and thus could exercise monopoly control. Nowadays, there are many vertically integrated companies that compete on price. These companies say that one reason they don't build more refineries is permiting and siting risks (basically, nimbyism) as well as uncertain future demand trends. This latter point is especially relevant recently, given several Bush policy initiatives aimed at reducing petroleum consumption. If I were an oil company I would be extremely circumspect on the prospect of sinking hundreds of millions of dollars into new refining capacity.

How, then, has the FTC dropped the ball, and how is it "killing us" in terms of refining capacity? I'm not a lawyer but I would love to learn what role the law has to play here.
7.17.2007 4:40pm
Houston Lawyer:
Future sources of oil will come from what are now very risky places to produce -- offshore, in deep water, and in countries where kidnapping is the national pasttime. Small companies cannot muster the capital necessary to operate in these environs.

The oil industry is subject to boom and bust cycles. The last serious boom ended in 1985, just as I began my career. During the last boom, Jimmy Carter introduced the Windfall Profits Tax. The only thing stopping something that stupid from becoming law now is a presidential veto.
7.17.2007 6:51pm
Joshua:
<i>Some want to make price gouging -- a vague term with no clear legal meaning -- a crime. Such legislation would discourage the industry from responding rapidly to product shortages. As bad as high prices are, no gas at all, or a return to gas lines, is much worse. Moreover, price gouging laws will harm consumers by reducing investment in new refineries.</i>

To the Al Gore crowd, and others who believe that severe, prolonged and widespread gas shortages are just what the doctor ordered to convince Americans to change their automobile-dependent lifestyles, this is undoubtedly a feature, not a bug.
7.17.2007 8:47pm
Elliot123 (mail):
Ugh: "I would settle for subjecting the Oil &Gas industry to the same tax code that applies to every other corporation."

That tax code doesn't exist. You can't define a standard set of tax codes that applies to every other industry. They all have their own deals. This will always be the case as long as the tax code is used to influence behavior.
7.17.2007 10:27pm
abb3w:
There's also the problem that the most visible domestic bottleneck is on gasoline production, which in turn is due to limits in refining capacity. The problem is, a refinery is a major capital expense, normally with a long amortization lifetime; however, with the expected Peak Oil limit coming up, the amortization life of that marginal capacity is substantially reduced.

Or, in other words, there's no profit in solving the problem with the oil industry.
7.18.2007 1:53pm
Pierre (mail):
iT has the FTC dropped the ball, and how is it "killing us" in terms of refining capacity? I'm not a lawyer but I would love to learn what role the law has to play here.
7.20.2007 11:20am
Don Edwards:
The stupidest thing about this (that I can think of at the moment) is that Democrats in Congress want to SIMULTANEOUSLY encourage more efficient use of gasoline, and keep the price of gasoline down.

Remember, their last attempt to do this resulted in the replacement of 1.5-ton large cars and station wagons with 2-3 ton SUVs. Even the old station wagons got better mileage than the larger SUVs - new station wagons of similar size do even better.

Further: prices are information. If, as some theorize, we are getting close to running out of petroleum, prices SHOULD rise to communicate that information - and to make alternatives look relatively more attractive. Holding the price down is lying - falsely communicating an abundant supply and the absence of a need to start moving to alternatives.

(Oh, and another thing that's worrying me. Carbon sequestration. With no exception I am aware of, they are NOT talking about stuffing carbon away. They are talking about stuffing carbon dioxide away. Personally, I'm kind of fond of the oxygen and think maybe we need it.)
7.20.2007 4:17pm