"Thus the oil companies' strategically placed Western coal reserves give them a strong competitive position."

The top five oil companies are among our nation's ten largest industrial corporations, and twelve are among the twenty-five largest. Because of the industry's size and scope and because of the critical role of energy in modern life, the policies, actions and performance of these firms affect virtually every aspect of our nation's economy, and they deeply influence the welfare of every consumer of oil and natural gas and every purchaser of industrial or commercial products whose manufacture and transportation depend upon the availability and price of energy.

Despite its size, conventional concentration ratio measurements indicate that oil is not particularly concentrated in comparison with other major industries. As shown in Table 3, while the concentration ratios for the top four or top eight crude oil producers have increased substantially in the last twenty years, the industry still seems to compare favorably with other leading manufacturing industries such as automobiles, copper, computers and aluminum. Thus, argue the industry's defenders, right-thinking rational men should direct their antitrust interests toward more critical targets like breakfast cereals and beer and leave oil alone. After all, if the petroleum industry is already so unconcentrated, what harm can come from the industry's expansion into the production of other fuels? The implication, of course, is that the consequence of petroleum industry expansion into other energy fields will be no less competitive than are present conditions in the petroleum industry itself. I see two problems with that line of reasoning. First, for reasons which I discuss below, the premise that the petroleum industry is competitive is inaccurate. Second, in addition to existing competitive shortcomings, the petroleum industry's expansion into other fuels undermines the potential for interfuel rivalry.

The key structural feature of the petroleum industry is that virtually all of its corporate entities are extensively tied together through a very large number of joint venture arrangements and other types of intercorporate interlocks. Consequently, these firms cannot be viewed in parallel with independent unrelated market rivals in other industries.

Whether or not an industry is competitive depends upon whether there is an adequate number of truly independent and self-motivated sellers. Without independence, self interests bind interdependent sellers together in the mutual pursuit of common objectives which may not conform to the broader public interest. Market concentration measures provide some limited insight on the matter of seller independence in that they are a simple analytical base from which prob abilistic conclusions can be deduced. If concentration is high, it is generally inferred that firms are not likely to behave independently, and if they don't behave independently, the market will not function pursuant to competitive ground rules. That, in essence is the significance of concentration ratios; they are a simple empirical foundation from which a limited form of deductive logic may proceed. Of course, where direct evidence bearing on corporate independence is available that would be a preferable basis for conclusions.

Most U.S. oil and gas production is now done through extensive joint venture partnership arrangements. In addition, crude oil and refined product transportation is carried out by joint venture pipeline enterprises, and refining and marketing operations are frequently dependent upon crude oil and product exchange agreements with other companies. Specifically, the individual firms in the petroleum industry are interlocked with each other in the following ways: Production. Most oil and gas production, both domestically and abroad, is now done through extensive joint venture partnership arrangements. Most producing oil and gas wells are owned jointly rather than individually. Additionally, both exploratory drilling and developmental drilling for oil and gas is more frequently undertaken through partnership arrangements as opposed to independent competitive corporate enterprises. Also, lease acquisition (especially in federal offshore lease sales) is frequently undertaken as a joint endeavor. Consequently, virtually all aspects of oil and gas production involve substantial joint venture partnership activity among the various corporate entities which constitute the industry. Both major vertically integrated companies and smaller independent producers have joined together with other firms in the mutual pursuit, development, and production of crude oil and natural gas. Indeed, every significant oil company is involved in these joint pursuits. The industry's largest integrated firms such as Exxon, Texaco, Mobil, Gulf, Amoco, and Arco share joint partnership interests with each other and with other big and small producers alike.

As would be logically expected, a given company's partnership patterns tend to carry over from exploration to development to production. In addition, there is great similarity between a company's partnership patterns in crude oil and natural gas.

Oil Pipelines. Most major intergrated petroleum companies hold joint interests with each other in the transportation network that moves crude oil and refined products from producing regions to refineries and markets. Transport control was an important monopolistic element in the industry's early history. By virtue of this control, independent producers were dependent on Standard Oil for shipment of their production, and independent refiners with few other sources of supply had to obtain their refinery feedstocks from the Trust. Today's major oil pipelines are jointly owned by the integrated majors. These jointly owned and operated links between producing, refining, and marketing operations (about three-fourths of all crude and one-fourth of refined products are transported by pipeline) means that the various partners' activities must be coordinated if the whole vertically integrated system is to function efficiently. Moreover, this situation suggests that each firm has reasonably good information concerning the operations of everyone else's refineries. Moreover, smaller independent crude oil producers must rely upon the majors who own the pipelines, and independent refiners must similarly gain access to these shipments if they are to survive. In addition, the major oil companies also have substantial ownership and lease control over the world tanker fleet, the principal alternative to pipeline transportation.

Gas Pipelines.-In contrast to the ownership pattern in the oil pipeline industry, natural gas pipelines are typically owned by a single corporate entity. Frequently, however, they are owned in whole or in part by major oil companies, and even those which are not so owned are now, more than ever before, involved in oil and gas exploration and production joint ventures with the major producers. Interstate gas pipelines and their affiliates have become increasingly important participants in federal offshore oil and gas lease sales, and they have also been active in acquiring onshore producing interests. Moreover, most of this expanding enterprise activity in the oil and gas producing business has been in partnership with major petroleum producers.

For example, since 1970 (excluding lease sales since October, 1974), Texas Eastern, a major East Coast natural gas pipeline, has acquired interests in forty-one major offshore leases along with Standard of Indiana, Union Oil, Marathon, Signal Oil, Amerada Hess and Louisiana Land and Exploration Company. Similarly, United Gas Pipeline, the largest system in the Southeast, has acquired interests in forty-eight leases with Exxon, Texaco, Mobil, Ashland, Mesa, Getty, Cities Service, Occidental and others. In all, the major interstate pipelines have obtained working interests in nearly 50 percent of federally leased offshore oil and gas property during the last four years. Their acquisition expenditures have totaled well over $1 billion or about 20 percent of the total lease sales receipts of the federal government. Since most of these pipeline companies operate in monopoly franchised markets and have "purchased gas adjustment clauses" which permit them to automatically pass through higher wellhead prices to their customers, and since their production earnings are not subject to a rate of return constraint, they have a clear and growing interest in high field prices for natural gas. Thus it is very unlikely that consumers can trust that unregulated, free market bargains struck between producers and pipelines would produce a fair and reasonable price.

Other Interlocks.-In addition to these operational interlocks, major firms have extensive joint foreign operations with each other, they own the great bulk of this nation's natural gas processing plants jointly, they are significantly dependent upon each other for crude oil, gasoline and other product exchanges, and there are a significant number of indirect (and some direct) interlocks between the Boards of major oil and gas companies.

It is not necessarily the case that any single one of the thousands of interlocks or joint venture arrangements which permeate so much of the petroleum industry in itself undermines workable competition between the joint venture partners. Nor would it be correct to conclude merely from their existence that joint venture interties are necessarily collusive arrangements consciously aimed at restraining competitive conduct. Rather, it is the totality of all of the individual partnerships which constitutes the petroleum industry's unique form of structural integration. Regardless of the specific motives which may justify any individual combination, because of the extensive and widespread nature of

mutual intercorporate interests it cannot be presumed that the competitive result will be the same as if the proprietary and commercial interests of each firm were independent of and competitively opposed to the self-interests of the other market participants. Whether or not one believes that certain combinations constitute collusive restraints of trade, when the entire mosaic is viewed in context, the extent to which these interlocks dominate the industry's structure is undeniable. The principal conclusion which emerges from these underlying facts is that elementary concentration ratio comparisons with other industries or even elaborate econometric models based on the usual competitive market assumptions are not likely to result in optimal public policy decisions. Nevertheless, analysis of that type continues to be thrust upon policy makers who must decide whether deregulation of petroleum markets or improved public control and reform offers a reasonable solution to present energy supply and price difficulties.

The fundamental problem, from a national welfare viewpoint, is that without a competitive infrastructure, market forces simply cannot be relied upon to curb inflation and unemployment or to allocate our nation's economic resources in an equitable and efficient manner. If non-competitive circumstances persist, directly imposed and effectively administered market controls will be essential to the restoration of economic order. The only alternative, if we hope to establish a stable economic equilibrium within the context of an unregulated free market economy, is to assure that private industry is sufficiently competitive so that market forces can function effectively and in the public interest.

A frequent assertion in this regard is that we already have antitrust laws on the books, and that if there is really a serious problem, the Justice Department or the FTC will deal with it; no additional legislative mandate or specific direction is necessary. History, however, belies that contention.

The last major petroleum industry antitrust case brought by the Justice Department occurred during the 1930's, and withered away after more than twenty years without any significant remedies. On that occasion (i.e., the American Petroleum Institute or "Mother Hubbard" case), the government charged 22 major integrated oil companies and 379 of their subsidiaries with monopolizing crude oil production, transportation and marketing. The monopoly and conspiracy charges against the majors included predatory and discriminatory conduct against independent operators, tying arrangements, exclusive dealing and a variety of other anticompetitive practices which were illegal under the Sherman and Clayton Antitrust Acts and the Elkins Act. In addition to injunctive relief against these oil industry practices, the Justice Department's suit sought divestiture of the transportation and marketing operations of vertically integrated firms. That action was never taken. As World War II intervened, Attorney General Jackson worked out a consent decree with the advice of the oil advisory committee of the Council for National Defense. Nine of the eleven committee members were connected with either Standard Oil or Shell, both defendants in the case.

Following the Federal Trade Commission Staff Report on the international oil cartel published in the early 1950's, a Federal grand jury was empaneled in 1952 to investigate criminal antitrust charges against the multi-national oil companies. President Truman offered to dismiss the grand jury and substitute a civil case instead if the companies would voluntarily supply documents subpoenaed by the government. That offer was refused by Standard Oil's lawyer Arthur Dean on grounds that the information sought by antitrust authorities would help the Communist cause. In 1953 Dean's law partner, John Foster Dulles, became Secretary of State, and the new administration dismissed the grand jury investigation citing "national security reasons."

In 1957 when twenty-nine U.S. oil companies were accused of using the Suez crisis as an opportunity to raise gasoline prices, another Federal grand jury empaneled in Virginia returned antitrust price-fixing indictments. The case was then transferred to Tulsa, where Judge Royce A. Savage dismissed all charges against the companies despite the fact that executive diaries showed that telephone meetings had taken place and companies know what price levels others were going to invoke prior to their public announcements. One year later Judge Savage resigned from the bench to become a vice president of Gulf Oil, one of the defendants in the case.

In 1962, the Antitrust Division undertook an investigtaion of the potential anticompetitive consequences of the Colonial Pipeline joint venture involving Mobil, Texaco, Gulf, Standard of Indiana, Atlantic Richfield, Cities Services, Continental, Union Oil and Sohio. Today, twelve years later, the Justice Department says that investigation is still "active."

More recently, in 1972, the Antitrust Division prepared civil investigation demands to investigate potential antitrust problems pertaining to the TransAlaska Pipeline which will be largely controlled by Exxon, B.P., and Atlantic Richfield in proportion to their control over Alaskan oil reserves. Senate testimony alleges that this investigation was vetoed by Attorney General John Mitchell. He and Maurice Stans were then in the process of collecting over $3 million from oil interests for the Nixon reelection campaign, and when Attorney General Mitchell learned of the Division's proposed petroleum investigation he wrote to Antitrust Chief Richard McLaren that, “in view of what is going on, this is not the time.”

Returning specifically to the integration problem, there are a number of clear examples in the petroleum industry which demonstrate the harmful social and economic consequences of parallel participation in interrelated markets by the same firms. Similar problems can be anticipated to the extent that interfuel diversification expands.

For example, in the future it is reasonable to believe that coal will become a major source of methane-based pipeline gas. What would be the consequences on coal markets if the same integrated petroleum companies are both the buyers and sellers of gas and coal? Consider the somewhat parallel situation at present wherein the major interstate gas suppliers are also intrastate gas buyers! They are, therefore, in a unique position to manipulate the so-called "market" price: e.g., Producer X buys gas in the intrastate market from another producer, Y, at a high price (perhaps X uses this gas as fuel in his oil refinery). Then X and Y both turn to the interstate market (and to the FPC) and say, "Look at the high price level that has been established in the intrastate market; it's only reasonable that you allow interstate prices to rise to this 'natural', 'free market' level."

Companies such as Standard of Indiana, Texaco, Exxon, Phillips, Continental and Atlantic Richfield are among the major intrastate buyers who determine socalled "nonartificial," "free market" prices in intrastate markets. These firms both buy large quantities of natural gas for their own industrial use (largely in oil refineries) and, as in the case of the large Monterey Pipeline system in Louisiana which is a 100 percent Exxon subsidiary, they buy natural gas at the wellhead and resell it to utility companies and other industrial consumers in intrastate markets. Clearly when market prices are substantially influenced by large buyers like Exxon, Texaco, Continental and Shell, who derive substantial benefits from higher rather than lower rates, the meritoriousness and competitive authenticity of such prices must be questioned. This type of market failure can be expected to grow as interfuel interests expand.

Not long ago professional economists could express righteous indignation over the nation's economic debacles which were created in large measure without professional guidance. But, that comparatively innocent era is past. Probably more so now than ever before our economic policy is at least in part a product of economic analysis, and obviously the result is not overly complimentary.

There is today a good deal of discussion about letting free market forces resolve our energy woes. I support that concept in principle, but a simple "hands off" policy, by itself, won't achieve the desired end. The establishment of a competitive market structure is an indispensable prerequisite. What seems to be missing in such appeals is an adequate realization that "free markets" and "competitive markets" are not necessarily synonymous concepts. Particularly in the petroleum industry, where short-run supply and demand are price inelastic, a non-competitive free market is likely to produce grossly suboptimal allocative and distributional results.

Following the congressional elections in the winter of 1918, Senator Boies Penrose, the political boss of Pennsylvania who was generally renowned for a wide range of excesses introduced a proposal to base depletion for oil and gas wells on "market value" instead of "cost". La Follette, Borah, and Norris,who warned that this would permit income-tax write-offs to oil producers ten times as great as actual cost depletion, were able to muster only four votes from that lame duck Congress to oppose Penrose. Today the oil industry's representatives are again urging Congress to opt for "market value" instead of "cost"-this time as the legitimate basis for pricing natural gas and other fuels. Some awarneness that "market value" is a derivative of market structure would be a worthwhile addition to the present debate. Quite obviously, to the extent that the same companies control both petroleum products such as oil and natural gas as well as

2 See testimony of Mark Green in Hearings on Market Performance and Competition in the Petroleum Industry Before the Special Subcommittee on Integrated Oil Operations of the Senate Comm. on Interior and Insular Affairs, 93rd Cong., 1st Sess., pt. 1, at 375 (1973).

coal, uranium, oil shale, and geothermal power, it would be foolhardy in the extreme to expect that interfuel "market value" relationships will work out to the benefit of energy consumers.

Education

BIOGRAPHY OF JOHN W. WILSON

B.S. (Senior Honors)-University of Wisconsin, 1965; M.S. (Economics)University of Wisconsin, 1966; Ph.D. (Economics)-Cornell University, 1969. Previous Employment

1973-1974-Independent Economic Consultant.

1972-1973-Chief, Division of Economic Studies, Federal Power Commission. 1971-1972-Economist, Federal Power Commission.

1969-1971-Assistant Professor of Economics (and Captain, U.S. Army); United States Military Academy; West Point, New York. Also varsity debate coach, USMA; and antitrust consultant, U.S. Department of Justice. 1966-1969-Teaching Assistant, Cornell University.

1965-1966-Research Assistant, University of Wisconsin.

1961-1965-Independent Insurance Agent (Licensed in State of Wisconsin).

Publications

"Adam Smith Abandoned: Big Oil is Big Coal is Big Natural Gas," in Business and Society Review, Spring 1974; also in Skeptic: The Forum for Contemporary History, Special Issue No. 5, January 1975; also being published by Robert Heilbroner in a forthcoming book of readings, Addison-Wesley, 1975.

"Market Structure and Interfirm Integration in the Petroleum Industry," presented at the annual meeting of the Association for Evolutionary Economics, San Francisco, December, 1974; scheduled for publication in the Journal of Economic Issues, 1975.

"Competitive Market Structure and Performance in the Energy Resource Industries," presented at the University of Oklahoma, May, 1974, scheduled for publication in Public Administration and Policy in an Era of Energy Scarcity, (Walter Scheffer, ed.), University of Oklahoma, 1975.

The Burmah-Signal Merger, published as a Special Report together with dissenting views, Special Subcommittee on Integrated Oil Operations, Committee on Interior and Insular Affairs, U.S. Senate, 1974.

"Competition in the Petroleum Industry," presented at the Southern Economic Association Conference, Atlanta, Georgia, 1974.

"Inverted Electric Utility Rate Structures: An Empirical Analysis," (with R. G. Uhler); publication forthcoming. This paper was awarded first prize for economic research at the 1974 Iowa State University Conference on Public Utility Valuation and the Rate Making Process.

"Electricity Consumption: Supply Requirements, Demand Elasticity and Rate Design," presented at the annual meetings of the American Economic Association, December, 1973; published in the American Journal of Agricultural Economics, May, 1974.

"The Computerized Rate Case: Rate of Return," presented at the Regulatory Information Systems Conference, Missouri Public Service Commission, October, 1973; published in Proceedings.

"Rate of Return Regulation Under Changing Economic Conditions," Public Utilities Fortnightly, July 1972.

"An Economic Analysis of Combination Utilities," The Antitrust Bulletin, Spring, 1972 (coauthor).

"Residential Demand for Electricity," Quarterly Review of Economics and Business, Spring, 1971.

"Managerial Efficiency and Interutility Cost Variations," Proceedings of the Iowa State University Conference on Public Utility Management, 1969.

"Government Intervention in a Failing Competitive Market: A Case for Public Action in the Interest of Conservation," Cornell Plantations Magazine, Winter Research Issue, 1967-68.

"The Use of Public Mass Transportation in the Major Metropolitan Areas of the United States," Land Economics, August, 1967 (coauthor).

The Port of Milwaukee: An Economic Review, University of Wisconsin Press, 1967 (collaborator).

Residential and Industrial Demand for Electricity: An Empirical Analysis, (Ph.D. dissertation), Cornell University, 1969.