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2. The survey sample was assumed to be representative of all independents. As noted above, our initial objective was to survey the largest firms in each sector, rather than to sample randomly all firms in the industry. Therefore, the results are representative of the class, “large independents” rather than the class, “all independents.” However, since, for example, the majors supply more gasoline to large independents than to small independents, the estimates in this study tend to overstate the importance of majors as sources of gasoline to the independent sector.
3. Since data on concentration of gasoline imports were not available, these market shares were assumed to be identical to shares of crude imports.
4. Relative transfer shares (the eight lar majors vis-a-vis the *: majors) were assumed to be identical to relative production Snares.
It appears that the eight largest firms have avoided market forces in their policy of limited dealings with independent marketers. However, Figure I-1 suggests that the market is less restrained in other sectors of the industry. For example, our sampled refiners purchase 30 percent of their crude inputs from the eight "... majors (365 as a percent of 1,233).”
Figure I-2 indicates that the eight largest majors have dealt hardly at all with independent marketers. Only 4 million of 233 million barrels of gasoline used by independents were supplied by eight majors. However, the eight largest supplied the other majors with approximately half of their requirements. The other majors appear to act as buffers between the eight largest majors and the independent marketers. In 1971, they were net buyers of 96 million barrels of gasoline from the eight largest majors, and net sellers of 91 million barrels to the independents. Therefore, although the eight largest majors do not sell to independent marketers, they can impose shortages upon independent sellers by reducing sales to smaller majors.
19 Our sampled refiners accounted for almost half of all independent refining capacity in Districts 1 and 3.
Figure I-1--District 1 and 5 Crude to Refiners, 1971
Eight Other Majors Independents Imports Largest Majors 333 814 273 1233 53 82 113 78 160 210 0 289 N Eight - Largest Majors Other Majors Independents Transfers to OthcrDistricts 1371 389 365 & Exports 527 REFINER INPUT Figure I-2. - District 1 and 5 Casoline Floos to Marketcrs, i971 (rillions of correls) Refiner Cutput Eight Other Majors - Indcpcndent Motor casolinc Largest Majors 226 Refiners Izoorts 730 171
1N 4. 10. * 24 9 o s 120 w 8 | * 22 / w —l Eight Other Majors T Rci iner Largest Majors Independants Cutlets 212 so? 233 10 RETAIL SALES
NotE.-Dashed lines indicate net sales of the largest majors to other majors and of other majors to the eight largest. Total sales of the eight largest majors to other majors and sales of other majors to the eight largest were not available.
II. INDUSTRY STRUCTURE 1
The petroleum industry is functionally divided into four basic levels: crude oil production, refining, marketing and transportation. While varying numbers of independent companies operate at each level, the industry is dominated by 18 vertically integrated companies that operate at all levels. These firms are large and generally have leading market positions at each level vis-a-vis independents. All 18, according to the Fortune 500 sales ranking, are among the 200 largest industrial corporations. Ten are within the top 40, and seven are within the top 20. Industry concentration has resulted both from the dominant positions of these firms and from institutional constraints peculiar to this industry. In order to examine the industry, each level of activity and each relevant institutional factor on a national basis will be discussed.”
A. Crude Oil Production
Concentration in crude oil production by the majors has increased markedly since 1960. While it has been estimated that the number of oil producers in the United States is somewhere between 10,000 to 12,000," the Top 4, 8 and 20 oil producing companies in 1969 accounted respectively for 31, 51 and 70 percent of the average daily barrels of crude produced domestically. (See Table II-1, infra.) In 1960, the Top 4, 8 and 20 firms accounted for 26, 43 and 62 percent respectively." A clear trend toward even greater concentration is thus borne out by these comparative statistics.
* The discussion of industry structure which follows will provide an overview of the petroleum industry within a national framework. This, however, is not meant to imply that the relevant economic markets for crude oil and refined products are national in scope. Certainly, the market for refined products is less than national in scope, while the market for crude oil may be national or less than national. Defining regional economic markets precisely is not easy ; we have, however, provided some structural data at less than the national level, and, of necessity, have assembled these data according to Petroleum Administration for Defense (PAD) districts utilized by the Bureau of Mines. This information is attached as Appendix A to this report. * Company statistics presented throughout this memorandum may tend to be unsystematically biased downward with regard to their real world representation. This is because it is not completely known to what extent joint ventures, exclusive buying-selling contracts and outright ownership are represented in these statistics. For example, Getty Oil owns 72 percent of Skelly Oil, but most of the present statistical sources represent them as separate companies. * Report on Crude Oil and Gasoline Price Increases of November, 1970: A Background Study, Nov. 3, 1971, p. 48 (Government monograph). * See the first footnote at the bottom of Table II–1.
TABLE II–1.-Company share of domestic net crude production, 1969 and
Production rank in 1969
Company 1960 1
6. 53 8. 93 5. 13 4. 78 4. 75 5. 92 4. 30 3. 42 2. 92 2. 32 2. 65 2. 54 1. 38 1. 79 1. 29 1. 22 NA . 94 1. 39
15. 16. 17 18. 19. 20.
26, 51 43. 76 63. 02
1 1960 combined production of Atlantic Refining, Richfield and Sinclair. Individual company data were not available. Because of the 1960 concentration for the Top 4, 8 and 20 firms may be slightly overstated; accordingly, trend toward greater concentration since 1960 may be even greater.
Company production includes some foreign production, mainly Canada. NOTE.-Individual company production data obtained from the estimates of Rice, Kerr & Co., Engineers. Universe data obtained from Report on Crude Oil and Gasoline Price Increases, cited supra.
While average daily oil production data may yield short-run insight into the structure of the crude producing industry, it is not particularly relevant for long-run considerations. As oil is pumped from a well, its technically efficient rate of production falls. Eventually it becomes a “stripper well” 5 and is operated until the pumping costs make it uneconomic to do so. A more relevant long-run measure of concentration at the crude level is the amount of domestic proven reserves owned by firms in the industry.
While considerable difficulty has been encountered in obtaining proved reserve data, our best estimates, presented in Table II-2, indicate that in 1970, the Top 4, 8 and 20 firms had approximately 37, 64 and 94 percent respectively of domestic crude proven reserves. On the basis of these data, the industry structure viewed in a long-run senso is even more concentrated than short-run statistics have indicated.
The structure of this industry, and hence its conduct and performance, is strongly influenced by certain institutional factors. Basically, these are the import quota, prorationing and special tax regulations.
5 Although state definitions may vary and may be related to both production and well depth, a stripper well or marginal well may be generally classified as a well that produces less than 10 barrels a day. Domestic production accounted for by stripper wells has steadily declined since 1965. In 1970, they accounted for 13.3 percent of domestic production. See Ibid., p. 50.
Table II-2.—Company shares of proved domestic crude reserves, 1970
Share of domestic proved
reserves (percent), 1970
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19 20.
119.92 18 9.31
8. 97 13 8.97 43 8. 46 32 7. 48
15.90 134. 87
$ 3.85 136 3. 55
3. 28 33. 18 36 2.77 13 2. 67 372. 49 13 2. 49 35 2.37
1. 09 18 1.03
.90 37. 17 63. 88 93. 55
i Includes natural gas liquids.
Includes Alaska. 3 Includes Canada. • Official, including natural gas liquids.
Official. • Excludes controlled reserves. 7 Includes equity in Canadian affiliate. • Excludes "probably additional" reserve. These explanatory notes accompanied the reserve estimates.
Note: Individual company reserves obtained from estimates of Rice, Kerr & Co., Engineers. Universe data obtained from “Report on Crude Oil and Gasoline
Price Increases," cited supra. This figure was taken as approximately 39,000,000,000 barrels, including Alaska. Concentration data would be lower the more this figure understates actual proven reserves. Concentration data should be taken to be, at best, only rough estimates. It is not known to what extent both the universe estimate and the individual company reserve data include crude production from secondary recovery techniques.
The single most important federal intervention into the petroleum industry was through mandatory oil import quotas. In order to exercise monopoly power, a firm or firms must be able to control the supply of the industry's product. In the traditional tight oligopoly case, that control is exercised through a combination of few sellers acting in an interdependent fashion and effectively erecting barriers to entry against new suppliers. In the petroleum industry, however, that control of supply is importantly influenced by public policy. Between 1959 when the import quota system became mandatory and May 1, 1973 when the quotas were removed, the entry of foreign produced crude oil was severely limited in the United States. Thus, one of the chief sources of competitive supply was curtailed, and domestic integrated firms were operating in an environment where their domestic prices were protected against large scale alternative sources of supply, namely, imports.