Going After the Oilmen

The huge corporations that dominate the U.S. oil industry have long occupied one of the most lucrative areas in the American economy. Because they are so powerful and pervasive, they have been under almost constant Government scrutiny--and the investigations have intensified as a result of the nation's first peacetime gasoline shortages. Last week the Federal Trade Commission filed a massive antitrust complaint, charging the nation's eight largest oil companies with illegally monopolizing refining, driving competitors out of business, aggravating recent gasoline scarcities and reaping excessive profits. The complaint may drag through courts and hearing rooms for years, but it could lead to the most significant restructuring of the industry since the trustbusters cracked Standard Oil in 1911.

All eight companies rank in the top 25 of the FORTUNE 500. In order of size of assets, they are: Exxon, Texaco, Gulf, Mobil, Standard of California, Standard of Indiana, Shell and Atlantic Richfield. Among them, they have assets of $76 billion; their profits last year totaled nearly $4.6 billion. All are vertically integrated, that is, involved in every phase of the industry--exploring for oil, pumping it from wells, shipping it by pipelines, refining it, and selling it at service stations. Together, they control 51% of domestic crude-oil production, 64% of proven domestic reserves, 58% of refinery capacity. Their brandname service stations account for 55% of all retail gasoline sales.

The FTC charges that at least since 1950 the firms have been "pursuing a common course of action" to "maintain and reinforce a noncompetitive market structure." During a two-year investigation of the industry, the commission staff concluded that the companies have been: 1) controlling supplies of crude oil and refined products through a complicated series of pricing and production decisions; 2) using oil-depletion allowances and other tax regulations to reap huge profits at the production level while running their refining, distribution and marketing operations so cheaply that other companies could not effectively compete; 3) ensuring a sufficient supply of crude and refined products for their own refineries and service stations through cozy exchange agreements among themselves and with certain independent refiners, while refusing to sell to other refiners and service stations.

As a result, more than 1,000 independent service stations were forced to close down this year, and gasoline shortages were particularly severe in the areas where independent refiners and marketers are concentrated. Moreover, the FTC contends, many users of gas and oil have had to pay higher prices than if a "competitively structured market" were in play.

The FTC complaint does not charge the companies with conspiring to bring about their dominant market position. Rather, it seeks to make illegal a form of business behavior known to antitrust lawyers as "conscious parallelism." According to the FTC, the companies--simply by keeping close watch on one another--were able to coordinate their pricing, production and marketing decisions in ways that restrained trade. The courts will have to determine whether these actions--which have not previously been held to be illegal--violate the antimonopoly laws. The FTC does not specify what it wants the companies to do in order to end these alleged abuses. For the moment, it asks only "such relief as is necessary or appropriate." This might include forcing the companies to divest themselves of their refining or marketing operations or both.

Such a shift would end a pattern of vertical integration that has prevailed in petroleum since the heyday of John D. Rockefeller. Harvard Economist Marc J. Roberts argues that the indus try is dominated by vertically integrated firms because the action against Rockefeller's Standard Oil Co. in 1911 did not go far enough. Instead of carving the empire into its functional parts--production, refining and marketing--Roberts says, "the Government split it along geographical lines, thus making every successor company vertically integrated." In fact, five of the charged firms --Exxon, Standard of Indiana, Mobil, Atlantic Richfield and Standard of California--were created by the breakup of Rockefeller's trust.

The companies contend that vertical integration is an economic necessity that works in the best interest of consumers. By controlling production, they say, they ensure that their refineries will be supplied, and by operating retail outlets, they guarantee that the refineries will turn out products that are in demand. They also argue that their industry is intensely competitive. Says a Texaco spokesman: "No single company has as much as 12% of the crude production, refining capacity or product sales." Atlantic Richfield President Thornton Bradshaw sums up industry feeling about the charges: "Baloney!"

While the FTC battle proceeds, the Administration is considering a mandatory program of allocating both crude oil and refined products to assure the survival of independent refiners and almost all of the independent gas stations. There is also the possibility that Congress will enact a law that would break up the big oil companies along functional lines. Currently, such legislation stands only a slim chance of passing. But if this winter brings fuel oil shortages or next summer brings a repetition of the gasoline scare, sentiment could swing in favor of such a law.

This file is automatically generated by a robot program, so reader's discretion is required.