Home

GEONius.com
16-Mar-2016
E-mail

The Case for Vertical Divestiture

Walter S. Measday

Chief Economist
Subcommittee on
Antitrust & Monopoly
U.S. Senate

Capitalism and Competion: Oil Industry Divestiture and the Public Interest,
Proceedings of the Johns Hopkins University Conference on Divestiture,
May 27, 1976, Washington, D.C.

Just a year ago this time one of the biggest jokes in Washington was that several Senators and Representatives had put in a variety of bills which would restructure the petroleum industry in one way or another. As recently as late September when Senator Bayh introduced—for himself, Mr. Philip Hart, Mr. Abourezk, Mr. Packwood and Mr. Tunney—the original version of S. 2387, it was still a subject for high humor in places like the Monocle, the 116 Club, and other bistros in which one is likely to bump into his friends from the oil industry.

Less than three weeks later, the mood changed abruptly. A vertical divestiture amendment to the natural gas deregulation bill in the Senate lost by only five votes, 54-45; a lobbyist remarked to me after the vote—"They'll be drinking double martinis all night at the Petroleum Club in Houston."

On April 1, 1976, the Senate Subcommittee on Antitrust and Monopoly voted to report out favorably an amended version of S. 2387. The full Judiciary Committee has agreed to a vote on the bill on June 15. Suddenly, vertical divestiture of the petroleum industry is a deadly serious matter: It is a deadly serious matter to the industry—and it is equally serious to those people who support divestiture. It is not a cloud which will blow away with the first good breeze.

As reported out of the Subcommittee, S. 2387 envisions a three-way split of vertically-integrated operations. Some 18 major companies—those with domestic production of 100,000 b/d or more, or with domestic refinery input or marketing in excess of some 300,000-plus b/d would be required to separate—worldwide—their crude production from their refining and marketing operations. Within the United States all oil companies would be required to divest their oil pipeline interests.

The oil companies have asked, quite reasonably, "Why us?" They point out that there are other more concentrated industries in the economy. Indeed, they have been more than willing to list these other industries for us.

One answer lies in the enormous importance of the petroleum industry to the U.S. economy. Sales of petroleum refining companies reported by the Federal Trade Commission for 1975 came to more than $130 billion. This can be compared to $74 billion for motor vehicles and equipment, $87 billion for all of the chemical industries, or $66 billion for primary metals industries, both ferrous and non-ferrous. Only the whole broad sweep of industries manufacturing food and kindred products had sales greater than those of the petroleum refining industry More than this, of course, what happens in the petroleum industry directly affects the functioning of every other industry in the economy and every aspect of our daily lives. If one were forced to choose a single key industry, it would have to be petroleum.

We may grant that concentration ratios at various levels of the petroleum industry are lower than they are in some other industries, but they are still significant. We've heard a great deal, for example, about the 10,000 crude oil producers in the industry. On a gross operator basis in 1974, the four largest companies produced one-third of our output of crude oil and condensate; the eight largest, 54 percent; and the twenty largest, more than 72 percent. I estimate that the 18 companies which appear to come under the provisions of S. 2387 have 75 percent of the nation's production. Moreover, concentration has been increasing rapidly over the past two decades. Concentration at the 20-company level increased from 56 percent in 1955 to 77 percent by 1974. The eight largest producers today have roughly the same share of the market as did the twenty largest in 1955. Further, the future doesn't look too bright for most of those 10,000 crude producers. According to FTC studies based on 1970 data, the eight largest companies control about 65 percent and the twenty largest more than 90 percent of total United States and Canadian proved reserves.

At the refining level, some 154 companies reported refining establishments to the Bureau of the Census for 1972. Concentration ratios have been remarkably stable over the past twenty years, with the four largest consistently holding about a third of the market, the eight largest about 56 percent, and the twenty largest about 84 percent. The stability itself may be surprising, considering the rate of market growth. And there has been very little really new entry mto refining in the past quarter century—new companies have come in, but m almost every case they have done so by acquiring existing refiners, with established crude oil sources and outlets for their products.

Nevertheless, we concede—particularly with respect to refining—that concentration is moderately, rather than extremely, high. It is this fact which gives us grounds for believing that restructuring will mprove the competitive performance of the industry.

The problem in the oil industry is that what concentration exists is effectively multiplied by other institutional factors which affect the degree of competition. First, vertical integration by the major companies, which means that the firms which are dominant in one level of the industry are dominant in each of the other levels of activit Second, a worldwide network of joint ventures and other inter corporate ties which must greatly moderate the inclinations of any one company to act in an aggressively independent manner.

Let us look at vertical integration in the domestic market. Here the effective control of the majors is extended well beyond the large percentages of total output which they themselves produce. Since the majors hold most of the lease acreage, much of the independent production comes on major company farmouts. It is true that this arrangement permits the survival of many independent producers who lack the financial resources to acquire their own lease blocks But almost without exception, farmout agreements give the leaseholder a perpetual call on the oil produced—in other words, with a farmout a mayor gives up some of his rights to produce oil from his lease but he does not give up any right to control the disposition of that oil.

Next there is the crude oil pipeline system, which moves oil at a small fraction of the cost of any alternative mode of transportation, except for tankers and barges where waterways are available. Customarily, crude oil is sold at the wellhead to a gathering system or pipeline company. Thus, the company which controls the pipeline into a field controls the crude oil from the field. Very little crude moves on a true common carrier basis.

McLean and Haugh, in The Growth of Integrated Oil Companies, quote a 1948 Atlantic Refining Co. memorandum to the effect that owning the pipeline into a producing area is the next best thing to actually owning the reserves. John D. Rockefeller, Sr., knew this and acted on it much earlier.

Well, who owns the pipelines? From the pipeline companies which reported to the Interstate Commerce Commission in 1973, we find that 64 percent of the crude shipments in ICC lines originated in lines owned by the eight largest oil companies; more than 92 percent originated in lines controlled individually or jointly by the sixteen majors.

Next, there is the system of crude oil and product exchanges. While products are normally exchanged on a straight barrel-for-barrel basis, crude exchanges involve simultaneous purchases and sales—I suspect this was, until last year, in order to protect percentage depletion allowances, but it also helps to stabilize posted prices. Within the environment of vertically-integrated companies—and I would like to emphasize this condition—crude oil exchanges make economic sense. If I have a refinery at Point "A" and crude production at Point "B", while you have production at "A" and a refinery at "B", we can each save a lot of grief and cost by agreeing that I will buy your crude for my refinery and you will take my crude for your refinery. But what this does is to replace a competitive crude oil market with a system of bilateral and multilateral barter arrangements—a system from which non-integrated independent refiners may be easily excluded.

Perhaps I can make this clear by abstracting from a letter written by the president of Kerr-McGee to the Secretary of Interior in March 1973—the letter is to protest an order to deliver government royalty oil from Kerr-McGee OCS leases to a small business refiner:

"Kerr-McGee exchanges or trades all of the oil produced by it in the Gulf of Mexico for oil to supply its refineries or for products to meet marketing requirements . . . When there still remained surplus production in the United States . . . there was no obligation to return crude to the various major companies from whom we purchased. Beginning in 1972, . . . we faced increasing demands to sell these companies offsetting barrels of Kerr-McGee's Louisiana production. This situation has continued to deteriorate until today we are literally unable to buy a free barrel of oil from these large producers."

In other words, there is not a workable crude oil market in the United States today, nor has there been one for a long while. Money won't buy domestic crude—unless you have your own oil to sell in exchange.

Perhaps the principal goal of S. 2387 is to create just such a crude market. Separated from their refining and marketing operations, the major crude producers would have no choice but to offer their oil on the market to any buyers, their own former affiliates or independents. They would be faced in the market with aggressive buyers, large and small, each of whom would be trying to get the type and quantity of crude he needs at the best possible price. The market would be competitive.

The second institutional factor I referred to earlier is the network of joint ventures linking every one of the major companies. Within the United States we find these principally in OCS production and pipelines. Overseas, we find them at every level of the industry, from production in Saudi Arabia to the Irish Refining Co. The industry explains that joint ventures perform a risk-sharing function, which may be very important to the companies involved. From the social standpoint, however, we must recognize that each of these joint ventures creates an interface among companies within which cooperative behavior may provide a higher payoff than competitive behavior.

Let me give a dramatic example of the importance of joint ventures to particular companies. Many of the foreign assets of Texaco and Standard of California are jointly held in the Cal-Tex Group of companies. In 1975, according to Petroleum Intelligence Weekly: "Caltex's profits accounted for 59.5% of Texaco's total profits, up sharply from 37.3% and 26.5% in the two previous years. For Socal, the reliance on Caltex also increased, but less sharply, rising to 63.9%, from 59.390 and 40.5% of Socal's total profits in the two previous years." The PIW figures do not include their dividends from Aramco, which they share with Exxon and Mobil, or any of their joint ventures with other companies. Now any disinterested observer would be justified in asking the question, "Are Texaco and Socal competitors or are they partners?" More generally, does the degree to which major oil companies profit from joint ventures with one another in some markets temper the aggressive spirit with which they would otherwise meet in those markets in which they are competitors?

Note that S. 2387 does not prohibit joint ventures. Producers would still be able to share the risks of exploration and development in frontier areas—although I would hope that Interior's present restrictions on OCS joint bidding would continue and the antitrust agencies would monitor joint ventures carefully to ensure that risk-sharing is not used as a vehicle for horizontal cartelization of markets. On the other hand, the separation of production from refining and marketing should do a great deal in itself to prevent such cartelization. At the same time, the required spinoff of pipeline operations to create a true common carrier system would prevent joint control of transportation from serving as a means of market control.

So far I have avoided the $64 question in any discussion of divestiture: What about OPEC? Isn't it true, as the oil companies themselves, and Gerald Parsky, William Johnson, and others have told us, that the integrated majors represent the best hope we have of negotiating with OPEC and holding down the world price of crude? My own feeling is that if this is our only hope, perhaps we'd better check the lifeboats.

Recall if you will the spring of 1973, when many of the OPEC governments secured 25 percent participation and announced that they would develop their own marketing capabilities as rapidly as possible, while President Nixon suspended quantitative controls on imports. Remember the large number of glorious plans for new independent refineries which were announced—and try to remember what happened to all but one or two of these plans.

What happened as the months passed, of course, is that after the first flush of enthusiasm over participation, the host governments came to the conclusion that the major integrated companies offered the best opportunity for marketing their oil in a manner which would avoid a break in OPEC prices. The door to independents appeared to close in Saudi Arabia, for example, last September when the Saudis announced they would not enter any new contracts with private refiners. This appears to have been firmed up in the recent Florida meeting between Sheik Yamani and the Aramco owners. If the press reports are accurate, it was agreed that after nationalization of production the state company, Petromin, would retain only 5 percent of the nation's crude output to maintain the contracts it entered into in 1973 and 1974; 95 percent of the output would continue to be marketed by Exxon, Texaco, Socal, and Mobil.

This makes sense from the standpoint of OPEC. As M. A. Adelman told the Church Subcommittee last January: "The cartel governments use the multinational companies to maintain prices, limit production, and divide markets. This connection, I submit, is the most strategic element in the world oil market. The governments act in concert, the companies do not need to collude. The governments transfer oil to the companies at identical publicly announced prices. . . . The companies produce only what they can sell. So long as the governments are content to accept the market shares that result from the companies' sales efforts, the cartel holds."

I will go farther than Prof. Adelman and suggest that the OPEC nations are confident that the international majors will balance their liftings among the countries in such a way as to maintain satisfactory market shares for everyone. I see a parallel between OPEC's present situation and the debate in our own country in the early 1930's between the proponents of state prorationing and the proponents of federal prorationing. State prerationing won out, but it survived so long only because the large buyers were willing to preserve the posted price system by balancing their liftings among the prorationing states.

From the standpoint of the companies, this relationship with OPEC also makes sense. It's difficult to perceive any titanic struggle between the international majors and OPEC over the absolute level of OPEC prices through the past five years. Rather the negotiations have been over the marketing margins received by the companies, to their own profit, and retention of their ability to control the disposition of OPEC oil. They can pass price increases in OPEC oil on through their own refining and marketing outlets so long as they are assured that none of their independent competitors are getting that oil any cheaper than they are. If they are the sellers, they're safe in this respect.

How could divestiture weaken our posture as a consuming nation with respect to OPEC? The Aramco owners would still be producing Saudi oil. The difference would be that they could no longer pass cost increases through their own integrated channels automatically.

Instead they would be faced by a group of the largest refining companies in the world, each of whose survival depends upon securing crude oil at the lowest possible price. These refiners would be negotiating worldwide, playing off one country against another. There is some price-cheating going on today among OPEC countries with respect to the small volume of their crude oil which moves outside the integrated company channels. With divestiture this area of competition would be vastly enlarged.

Now I am not talking about breaking OPEC or promising that crude prices will drop $5 a barrel the week after divestiture is ordered. What I am saying is that divestiture will help to impose a crude oil market discipline on OPEC oil prices, and that prices will be lower in 1980, or in 1985, than they would be without divestiture.


The Case Against Vertical Divestiture

Annon M. Card

Senior Vice President
Texaco Inc.

Two and a half years ago, American for the first time came to realize what it was like for their lives and our country to be dependent upon other countries for a necessary resource and to be subject to the political motives of those countries. Now, almost three years later, instead of making a concerted effort to change that situation, we are still talking about issues like divestiture and allowing ourselves to continue down the path of greater and greater dependency upon foreign oil and less and less ability to determine our own destiny.

... rest of paper opposing divestiture ...

By realistically facing our energy problems and cooperating with one another, we can lessen our dependency on foreign petroleum and strengthen our nation.


Discussion

Robert Shepherd, Director
Office of Energy Policy & Programs,
Department of Commerce

I think we would all agree that the large integrated and multinational oil companies have developed in response to changes in technology and marketing, as Professor Chandler has indicated. As a result of this they have achieved economies of scale, and by the very nature of that process they have built and extended considerable control over the products the market can handle.

I think most people would also agree that divestiture would be a long, costly and torturous process. I cannot accept offhand the exact figures quoted by Mr. Card. I would want more detailed information, but I agree considerable litigation, some uncertainties, and even additional costs might result from divestiture.

I must ask, then, what are we going to gain by divestiture to make us go through this herculean effort? To my mind, none of the proponents, including Mr. Measday today, has made a convincing case that divestiture would produce products at a significantly lower price, or that divestiture would put the United States in an advantageous position vis-a-vis OPEC.

The proponents of divestiture have argued in large part that the very size of the industry—because petroleum affects all aspects of national life—must be reduced by legislation. But I do not think this case has been made.

One final point: it seems to me that the general trend in the industry is likely to be toward more concentration than less, and that this trend has been reinforced by an overlapping network of federal regulations. There may be in divestiture an objective to insure that smaller firms can operate, regardless of what happens to price. Perhaps this is an object worth pursuing, but that has not been stated in the legislation or by the proponents.

So I would toss to Mr. Measday my proposition that the proponents of divestiture have not made a case that the benefits would be worth the costs involved.

Walter Measday

I would like to briefly cite Maury Adelman's remark in the Washington Post on May 8, that the arguments for efficiencies in vertical integration are unfounded; and Ezra Solomon's statement, as Exxon's expert witness in the Wisconsin tax case, that the advantages of vertical integration are, in effect, trivial compared to other things, because you don't have vertical integration between production and refining in the usual sense.

The type of competition we envision is a little bit different, perhaps, from what free enterprise means to a businessman. We've had to have these regulations to keep the independent sector alive in the past few years.

Now, I'm not making a plea for the independent sector here. I'm saying that if we have a crude oil market available to the independent refiners and to the majors alike then we let the battle be fought on the basis of efficiency. I don't want to save any independent refiner just because he's an independent. But I think if he has demonstrated his efficiency over the years, and if he has access to the crude oil market he should continue to survive on that basis. I think divestiture is a better way to go than greater federal regulation, which I see as the alternative. FEA is not going to disappear 39 months from now unless we do something like restructure the industry to preserve the competitive market.

Annon Card, Senior Vice President, Texaco Inc.

I would like to make three points. The first point involves the direct question which really wasn't answered. What are the benefits that have been anticipated in divesture? Dr. Measday's answer is a typical proponent response. Proponents cannot demonstrate that there will be lower prices and in fact they are 180 degrees off the mark. There will be higher prices under divestiture.

Second, they have not demonstrated that there will be increased energy supply. The best hope is to have the industry doing its job and over a longer period of time become less dependent upon imports.

The third point involves Mr. Measday's contention that some companies have already arranged for divestiture in their organizations. This is totally untrue. There has been no divestiture or any arrangements for it under the operations and reorganizations that are normal occurrences and which take place from year-to-year under normal activities.

William Smith, Business Correspondent, The New York Times

Theoretically at least, a reporter's job is not to make statements but to hopefully ask penetrating questions. No penetrating questions are promised. I have generally been puzzled by the ascendance of the divestiture issue. Because of the potential consequences of this question, it is important to gain as full an understanding of its genesis as possible.

In keeping with the theoretic role of a reporter, I have some questions I would like to ask—maybe not on major issues but on things that tickle me, because there is a little bit of the non-sequitur that happens when people speak.

First, I would like to ask Mr. Measday if Maury Adelman, who has been quoted here, is a proponent of divestiture?

Walter Measday

No, Maury Adelman is against divestiture.

William Smith

I just think that's interesting. (laughter)

Walter Measday

He'd much prefer his own coupon auction plan for purchasing imports, which I think would be incredibly more complicated than divestiture.

William Smith

Now Mr. Card it strikes me how the industry, in its opposition to divestiture, keeps saying how inefficient it's going to be, that it will force duplication of jobs and efforts. Then in your presentation you said there would be a loss of a million jobs. How do you explain this apparent contradiction?

Annon Card

Well, first of all, there is a direct correlation between available energy, the Gross National Product, and unemployment. Historically, prior to 1975, it's taken about 1.2% increase in energy to support about a 1% increase in GNP. Even without divestiture, there's going to be increased dependence on imports, and with divestiture this increase would certainly accelerate. Who is to say that those imports would be available? If they are not available, jobs might be lost and an immediate, chaotic situation would develop in the petroleum industry. I already pointed out it would take management 10 to 20 years to try to cope with any kind of planning, and put the industry back together.

This is a tremendous and complex business. My own company supplies some 34,000 retail outlets, hundreds of thousands of customers in 50 states from over 200 salary-operated terminal points and about that many wholesale operations. To get the product there when you need it is a tremendously large and complex operation. In our case it took some 74 years to put this together as an efficient way of doing business. I pointed out that during the 25 years prior to the embargo, gasoline prices increased 38%. At the same time, the consumer price index increased 85%. We claim this is pretty good efficiency. Now they're proposing to rip this apart. Given problems of supply from chaos in the industry, there will be many people in the country—many hundreds of thousands, even millions—who would not be employed if the energy were not there to support the industry.

William Smith

I want to just get back quickly to Mr. Measday. Now if we break up American oil companies, what are you going to do about someone like Royal Dutch Shell and British Petroleum? And how is this going to affect our posture overseas?

Walter Measday

We would certainly have some diplomatic problems there. I would suspect that it might be easy enough for Shell to spin-off Shell U.S. I think this is what they would do. BP would be faced with a more difficult problem since they are losing so many of their overseas reserves now. They'd have to decide whether to divest themselves worldwide or to give up the North Slope. I don't know what they've got up there, but BP probably has about 10 billion barrels of crude reserves in the North Slope. They'd be faced with a tough problem. If you don't like the laws, you do business someplace else. I doubt, for example, if Aramco is hiring very many Jewish employees to work in Saudi Arabia. Companies run into this all the time. If you want to do business in a country, you obey the laws of the country in which you're doing business.

Lee Richardson, President, Consumer Federation of America

Mr. Card, you've been using the terms efficiency and inefficiency as they relate to the advantages of scale economies. Isn't it true though that the marketing operations of the major integrated companies are generally considered very inefficient and, in effect, are subsidized? It's been said that we've got to reduce retail outlets by a thousand gasoline stations. Isn't the retail system of the majors a case of inefficiency?

Annon Card

Well, the service station program that has been developed over the past several decades has provided the consumer with the high quality products at reasonable prices that they need, wherever they need it, and when they need it. This performance to me is the definition of efficiency. It has been true in marketing throughout the petroleum industry, and I think this has been true regardless of the companies involved.

We've talked about the distribution of crude oil and products in the 50 states. To get product there requires efficiency and planning. You have to have the deliveries there on time whether through pipelines, trucks, or tankers. You have to adjust refinery runs to be sure that you have the right products in the season that they're demanded. As you probably know, refinery runs change in the spring for the gasoline needed during the peak driving season. In the winter they change over to the manufacture of heating oils and other seasonal products. All this is efficiency.

We believe that all the components have been managed in a highly efficient fashion to bring to the American people their petroleum needs at the reasonable prices.

Lee Richardson

Is the increased market share of the so-called independents at retail level evidence of this same efficiency?

Annon Card

The increased market share of the so-called non-branded retailers is actually an indication of the competitive nature of this business. The proponents of divestiture claim that it is not competitive, that by breaking up the oil companies, it will be competitive. The oil industry is as competitive today, as any other industry, as the evidence on the ease of entry, and the independents' share of the market, indicates. All these factors indicate intense competition.

Lee Richardson

I'd like to see more evidence from either speaker on just what the economies of scale are. If we had the economies of scale as we hear from AT&T, ultimately we should have seen this industry evolve into perhaps one large, giant, "efficient" integrated company. If such efficiencies did exist in all areas, AT&T would have continued to grow. These market share figures wouldn't appear as competitive as they do today. Yet we have not seen this kind of growth. Just where are the economies of scale?

Annon Card

Let me give you an example of this. You cannot in most circumstances have a 50,000 barrel a day refinery today or even a 100,000 barrel a day refinery—a sophisticated refinery—and have the economies of scale that are necessary. A 200,000 barrel a day sophisticated refinery can cost as much as a billion dollars, depending on the kind of facilities that you have and the uses you expect to put the facilities to. The cost of a 100,000 barrel a day refinery is not that much less, but with the smaller refinery you'll have no way you can recover the investment over a reasonable period of time.

Pipelines provide another example. The economy of scale between a 12-inch and a 36-inch pipeline is tremendous but the cost differential isn't that great—thus the economy of scale. Comparison of the cost and capacity of a super tanker to a T-2 tanker also demonstrates economies of scale. These economies are one of the principal reasons why the cost of energy in this country has been maintained at what we think are reasonable prices.

Walter Measday

Let me just say on economies of scale—certainly in refining—your long-run average cost curve seems to go down to about 200,000 barrels a day, but its costs are not much greater at 100,000 or 150,000 barrels a day. With geographically dispersed refineries much smaller capacities might be suitable. Texaco, for example, has about a dozen refineries in the United States. One of them is over 400,000 barrels a day, one is 140,000 barrels a day and 10 of them go from about 84,000 down to 17,000 barrels. I assume these are still operating efficiently on a locational basis. When you consider the costs of moving products from a huge refinery to a distant marketing area, perhaps a smaller refinery in the marketing area can operate successfully. I'm not sure there are any multiplant economies of scale in operating a large number of refineries. I can't see, for example, where Exxon get economies above those of a single refinery from operating refineries in Linden, New Jersey; Baytown Texas; and Benecia, California, production and refining, simply because it's not a continuous process. You don't move your own crude to your own refineries necessarily. We asked Exxon this, and Exxon said they cannot tell us how much of their own crude they run in their refineries. They buy and they sell and they trade; they get a pool of crude and it goes to all refineries. But how much of it is theirs they don't know. Furthermore, I doubt if Mr. Card could tell us how much of Texaco's own crude is run in Texaco's own refineries. I don't see vertical efficiencies there between crude and refining. And I think it is easy to exaggerate the economies of scale at the refining level.

Albert J. Anton, Jr., Partner, Carl H. Pforzheimer & Co.

During the last several years, the Federal Trade Commission has been pressing an antitrust case known as the "Exxon Case" against the eight largest oil companies. Thus far they seem unable to develop a case. Perhaps the antitrust laws as they're written don't do what the FTC is trying to do. If the companies are doing something antisocial, perhaps we need a new review of the antitrust laws. My question, to perhaps both of our speakers, is if monopolistic elements do exist in our economy, shouldn't they be addressed through existing or revised antitrust laws? And furthermore, shouldn't they be addressed fairly and equitably to all sectors of the economy—to business, finance, labor (which is basically exempt from antitrust), and to government policy itself—not just the oil industry.

Annon Card

Well, I've said in my prepared talk that such charges of monopolistic practices, etc. are totally without substance. No cases to date indicate that such charges are valid. So I say that no such practices are in effect.

Walter Measday

Even though S. 1284 (The Antitrust Improvements Act of 1976) would improve antitrust, still the problem remains, that major antitrust cases take too darn long. For example, the IBM case was filed in January, 1969. It finally went to trial just last summer. The trial will go on for another year, and with appeals a final decision may come sometime in the early 1980's. The Exxon case was filed in July, 1973, and the FTC is still in the discovery process. In cases which have been handled—and it may be a failure of antitrust law or antitrust resources—the antitrust agencies have acted upon minor conduct issues without making any changes.

I'll give you an example: the case of a supplier requiring his retailers to carry a certain line of tires, batteries, and accessories. The first case that I know of was about 1940. There have probably been 40 of these TBA (tires, batteries and accessories) cases since then, and in everyone of them the suppliers are told that they can't tie the station lease to TBA's. But the companies go right on doing it. The cases keep coming up.

In another case, the Socal case of 1950-51, the courts ruled that you cannot require your dealers to carry only your brand of gasoline. Yet at hearings on gasoline marketing we asked a number of majors, Mr. Staub of Shell, for example, if Shell required its dealers to carry only Shell gasoline? And he said absolutely not, as long as they don't sell it under a Shell label, they can carry somebody else's gas. Asked how many of your dealers do it, he said none of them. He said they're all convinced of the superiority of the Shell product. I submit that at least the Shell dealer I know might be willing to sell other brands of gasoline, although I don't know how long he would be in business if he added a Texaco pump in a Shell station.

The antitrust people have only gone after these fringe aspects. The last real structural case we had was the Standard Oil case in 1911. The Committee thinks that we've got to deal with industry structure. And the only way we can correct that structure within a reasonable period of time is actual congressional legislation.

Albert J. Anton, Jr.

I'm not denying that perhaps legislation is required. I just wonder if in the structure of labor unions and in industries other than oil there aren't inflationary elements which a review of the antitrust laws could address. Such a step would eliminate the need for this bill and put the whole economy on a fair and even basis.

Walter Measday

We've given these questions a lot of thought and come to the conclusion that divestiture is the way to go for the petroleum industry. I will also point out that Senator Philip Hart has put in the Industrial Reorganization Bill which deals with other sectors of the economy.

Albert J. Anton, Jr.

Does it comment at all on labor?

Walter Measday

Yes, we've gotten a lot of flak on that. The Industrial Relations Commissioner is required to examine labor contracts and practices and would have to report to Congress any of those who appear to have anti-competitive effects for congressional action.

Annon Card

I'd like to comment on the Committee's consideration of alternatives and its decision that divestiture would be best for this country. In making this decision they are gambling recklessly with the welfare of this nation, its national security, the employment of the American people, the very basic resources of the petroleum industry and the welfare of all of us.


Alex Measday  /  E-mail