CORPORATE FOCUS: Bust Up the Oil Trust

The startling concentration of economic power that has resulted from the U.S. merger wave of the last several years is going to require new levels of government intervention in the marketplace.

Either the federal and state governments will act to break up monopolistic and oligopolistic corporations, or government agencies will assume regulatory authority of a kind largely abandoned in the United States, or consumers will be gouged and innovation stifled.

Case in point: the oil industry and skyrocketing gasoline prices -- now over $2.00 gallon in parts of the Midwest.

Vigorous antitrust enforcement may be preferable to government regulation. But government regulation of industry is certainly preferable to industry regulation of consumers and the marketplace.

A year and a half ago, when Exxon and Mobil merged in an effective effort to begin restoration of John Rockefeller's Standard Oil, the conventional wisdom was that the merger would not affect gas prices.

"The change in the structure of the industry is such that the trend toward lower gasoline prices and more efficient distribution of gasoline is well underway and this is not going to stop it," one analyst said to National Public Radio in a typical remark of the day.

The Fort Lauderdale Sun-Sentinel went so far as to say that predictions that the Exxon-Mobil merger would increase prices were "delusional."

Now, conventional wisdom is rapidly changing.

With oil prices skyrocketing nationwide, prices spiking in the Midwest and industry profits reaching stratospheric heights, even the Clinton administration has called on the Federal Trade Commission to investigate whether the oil industry is illegally colluding to raise prices.

The oil industry, as always, has a series of rationalizations for the sudden jump in gas prices.

OPEC has cut production and world prices have risen, say industry representatives, even as global demand is increasing. That's true, but it does not account either for the unique price spike in the Midwest, nor for the surge in industry profits.

New requirements to sell cleaner-burning gasoline have boosted prices, the industry complains, and led to special difficulties in the Midwest, where refiners use ethanol instead of alternative blending components. That's true, but the Environmental Protection Agency -- noting that the oil industry has had six years to prepare itself for the implementation of cleaner fuel standards that the industry helped negotiate -- says the cleaner-burning gas should only cost 4 to 7 cents more per gallon.

The industry also complains that a Unocal patent on a means to formulate cleaner-burning gas has impeded the use of the most efficient gasoline formulation techniques. That may be, but it doesn't begin to account for the huge price increases, the price spike in the Midwest, or the industry's outsized profits.

It is hard to escape the conclusion that some significant part of the story involves industry profiteering -- with the oil giants using the input cost increases from OPEC and the reformulated gasoline standards as cover to pile on additional charges.

Whether these extra charges were the product of collusive agreements or "conscious parallelism" can only be determined through an investigation that involves close questioning of key industry executives and careful review of industry documents.

Either way, the profiteering is a product of industry concentration. Fewer industry leaders (and there certainly are fewer, following the recent mergers of Exxon and Mobil, BP and Amoco and BP Amoco and ARCO) make price-fixing much easier, whether done through overt and illegal agreement or follow-the-leader pricing without illegal collusion.

There may be legitimate public policy rationales for raising gas prices -- notably, to spur conservation -- but if so, such price increases should be government mandated, with revenues used for appropriate public purposes. They should not be the result of industry rip-offs and profiteering.