CONTENTS Introduction I. History and methodology of the current petroleum investigation_ 1. Overview of prior FTC antitrust litigation in petro- 2. The need for a new approach to the petroleum B. The current investigation of the petroleum industry_ 2. Survey data: Tables and discussion__ 3. Implication for the petroleum industry. PRELIMINARY FEDERAL TRADE COMMISSION STAFF REPORT ON ITS INVESTIGATION OF THE PETROLEUM INDUSTRY INTRODUCTION During the last 22 years, the U.S. energy demand has exploded. Total energy consumption more than doubled from 37 trillion BTUs in 1950 to 76 trillion BTUs in 1972. Petroleum and natural gas, which provided 45 percent of all energy needs in 1950, now account for 70 percent of the energy supply. And the consumption of gasoline, which had risen steadily at about 3 to 5 percent a year since World War II, is now increasing at a 7 percent annual rate. This recent acceleration in refined product consumption can be attributed to a number of factors. For years, coal was the dominant heating fuel. But with the demand for more convenient operation and regulations requiring cleaner fuel to reduce environmental contamination, factories, electric utilities and homes have turned to oil and natural gas. Because natural gas was in limited supply initially, an even greater overall energy demand has been placed on supplies of oil. Another important factor accounting for increased gasoline consumption is that Americans are driving heavier and more powerful cars and are adding more power-assisted devices, such as air conditioners, that result in greater fuel consumption per mile. Additionally, the changes that auto manufacturers have made and must continue to make in engines to meet air pollution control standards are further reducing gasoline mileage. Because of these factors, in early 1973 a number of energy experts and oil companies began predicting shortages of gasoline and other petroleum products by midyear. In April of 1973, many major oil companies stopped soliciting business from new customers and began allocating product to existing customers. As of May 30, 1973, 1,200 gas stations had closed due to lack of product, and all but a handful of these were independents. Many of the majors' branded stations have been forced to curtail their hours of operation or limit the gallonage to each customer. Despite an increase in gasoline consumption of approximately 60 percent over the past 15 years, there has not been one new entrant into refining of any significant size since 1950. "There is just not sufficient refining capacity in the U.S. to meet the total needs of the American public for petroleum products," Frank N. Ikard, the president of the American Petroleum Institute, which is the leading association of major oil companies, told a Senate Committee last May. The oil companies claim that they have not been able to construct new refineries because of environmental constraints, preventing them from using certain supplies of crude oil and from locating refineries at the most efficient sites. Delay in construction of the Alaska pipeline is also cited as a hindrance to new refinery construction. Evidence gathered by the Commission staff tends to raise questions about the sufficiency of these explanations. Independent gasoline marketers and other contract buyers, who buy much of their gasoline from all but the largest major companies, claim that the present shortage has been created by the largest major oil companies to drive the independents out of business and to raise the majors' prices. They point to sharp increases in the profits of the major companies this year as an indication that the squeeze has been successful. The major oil companies counter that they were unable to forecast the tremendous increase in the demand for gasoline that has occurred this year and that they plan to expand their refining capacity substantially over the next few years. Since May of this year, Exxon, Mobil, and Standard Oil Company of California have all announced significant new refinery construction. However, it may well be three years before these refineries are in production. There can be little doubt that the independent sector of the petroleum industry, especially at the marketing level, has suffered most as a result of the present gasoline shortage. In the final analysis, it is gasoline consumers who will eventually pay higher prices and are presently inconvenienced due to evening and weekend closings of gasoline stations. The petroleum industry is one of the largest and most complex in the world, and there are no simple explanations of industry behavior. The origins and nature of the present gasoline shortage can only be understood with reference to the structure, conduct and performance of the entire industry. Our focus accordingly turns to a discussion of these topics. In the following sections, we will discuss in turn: Background and Methodology of the Current Petroleum Investigation. Structure, Conduct, and Performance of the Petroleum Indus try. Staff Conclusions. I. HISTORY AND METHODOLOGY OF THE CURRENT PETROLEUM INVESTIGATION A. Background of Federal Trade Commission Activity in the Petroleum Industry The current investigation of the structure, conduct, and performance of the petroleum industry is by no means the first time the Federal Trade Commission has investigated the petroleum industry. During the past 50 years, the Commission staff has been involved in a continuing examination of the marketing practices in the gasoline industry, primarily initiated in response to thousands of complaints received from members of Congress, government agencies, state and local officials, independent gasoline refiners, associations of both major and independent gasoline marketers, as well as members of the public. Over 300 formal investigations have been docketed during these years and almost all of the integrated major oil companies have been the subject of one or more of these investigations. Two Trade Practice Conferences have resulted, in addition to 22 formal complaints involving restraint of trade matters and numerous deceptive practices. In 1939, the Commission presented to the Temporary National Economic Committee a summary of the complaints it had received regarding marketing practices in the retailing of petroleum products, including the following: 2 Unjustified price difference and discrimination; Use of tying and exclusive dealing contracts; Retail price fixing in gasoline; Contracts with tire and auto accessories manufacturers; and 1. OVERVIEW OF PRIOR FTC ANTITRUST LITIGATION IN PETROLEUM INDUSTRY Since 1939 the Federal Trade Commission has brought three basic types of cases against companies in the oil industry. First, cases were directed at price discrimination whereby the major oil companies use selective wholesale price cuts to enable certain of their marketers to reduce their retail prices in order to combat an independent retailer 1 The Commission authorization for the investigation was as follows: The Commission approved, adopted and entered of record a resolution as submitted by the Bureau of Competition with memorandum of September 14, 1971, directing the use of compulsory process to investigate the acts and practices of firms engaged in the production of refining of crude oil or the distribution of petroleum products to determine the effect of vertical integration and joint ownership and operating arrangements on the structure, conduct and performance of the petroleum industry and whether such firms are engaged in unfair methods of competition or unfair acts or practices which are in violation of section 5 of the Federal Trade Commission Act. FTC, "A Survey of Controversial Marketing Practices in the Petroleum Products Retail Industry," presented to the TNEC, Oct. 16, 1939. 98-209, 98-345 O 73 - 3 who poses a threat to the major's share of the market. Two parties are injured: the independent retailer and the major's marketers who do not receive a wholesale price cut but, because of geographical proximity, must compete with the marketer who does. Secondly, cases were prosecuted which were directed at vertical price fixing, which grew out of the same circumstances as the price discrimination cases. To insure that the major marketers would reduce their retail prices when they received a wholesale price cut, the major employed price fixing agreements to enforce the wholesale price reductions in the retail market. Several of these cases, as well as some of those directed at price discrimination were dismissed without final adjudication as a prelude to the Commission's Conference on Marketing of automotive Gasoline." Thirdly, cases were brought which were directed at commissionoverrides on tires, batteries and accessories (TBA) agreements, whereby the major oil companies were forcing their retailers to purchase a certain brand of TBA, and in return the oil companies would receive a commission on all net sales." The history of the Federal Trade Commission's activity in the petroleum industry has been characterized by a case-by-case attack on specific anti-competitive marketing practices. This approach has, in general, been of limited success in controlling wasteful marketing practices, dealer coercion, and the lack of competition in the petroleum industry. Despite the staff's success in bringing and winning cases before the Commission and in the courts, as well as obtaining compliance orders, the petroleum industry over the last 50 years has managed to circumvent the orders in many cases by subtle changes in policy or practices. 2. THE NEED FOR A NEW APPROACH TO THE PETROLEUM PROBLEM The reason for the limited success of the early petroleum cases is not to be found in the cases or remedies themselves. The staff did a thorough job in researching, developing and prosecuting the individual cases. The remedies applied in each case were directed at the particular abuse. But the practice-by-practice approach to antitrust attack, which sought to correct specific anti-competitive conduct at the marketing level, did not adequately address the industry's vertically integrated structure or its multi-level behavior. The major oil companies operate on four levels-crude production, refining, transportation, and marketing. To fashion a remedy for one level without considering the performance of a company, or the industry, at the other levels, ignores 3 Examples of price discrimination cases: Standard Oil Co. v. Federal Trade Commission, (D. 4389), 340 U.S. 231 (1951), again before the Supreme Court at 355 U.S. 397 (1958) affirming 233 F.2d (6th Cir. 1956); Federal Trade Commission v. Sun Oil Co., 371 U.S. 505 (1963), reversing 294 F.2d 465 (5th Cir., 1961), reversing 55 FTC 955 (1963). Examples of vertical price fixing cases: Sun Oil v. Federal Trade Commission, (D. 6934), 350 F.2d 624 (7th Cir., 1965), cert. denied, 382 U.S. 982 (1966): The Atlantic Refining Co. v. Federal Trade Commission, (D. 7471), 344 F.2d 599 (6th Cir., 1965), affirming, 63 FTC 1407 (1963). 5 See Pure Oil Co. (D. 6640): Texas Co. (D. 6898); Standard Oil (Ind.) (D. 7567); Shell Oil Co. (D. 8537). All were dismissed on December 28, 1964. Record of hearings: "FTC Industry Conference on Marketing of Automotive Gasoline," Hearings Before Subcommittee No. 4 on Distribution Problems of the Select Committee on Small Business, House of Representatives. 98th Cong.. May and Jun 1965. 7 Examples of TBA cases: The Atlantic Refining Co. v. Federal Trade Commission, 381 U.S. 358 (1965), affirming 331 F.2d 394 (7th Cir. 1964): The B. F. Goodrich Co. and The Teras Co. (D. 6485); The Goodyear Tire and Rubber Co. and The Atlantic Refining Co. (D. 6486): The Firestone Tire and Rubber Co. and Shell Oil Co. (D. 6487). |