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trunkline, the Texas-Empire Pipe Line, formed in 1928 by the Texas Corp. and the Empire Gas and Fuel Co. (a subsidiary of Cities Service) that ran from Cushing, Oklahoma to Chicago.
By 1930, the development of product pipelines (these lines were called gasoline lines at this time, since the principal product carried was gasoline) had advanced sufficiently so that companies were building new lines rather than using old crude lines. Phillips built an 8 inch line, 681 miles from Borger, Texas to East St. Louis.1 Then came the most extensive pipeline system built to date. Six companies combined to build the Great Lakes product system. In 1930, Continental Oil Company, Barndall Corporation, Skelly Oil Company, Mid-Continent Petroleum, Phillips Petroleum, and Pure Oil Company, with the later additions of the Texas Company and Sinclair Oil and Refining, combined to build and operate the Great Lakes Pipe Line Company that operated pipelines from the Mid-Continent refineries located in Oklahoma and Kansas to markets in Chicago, Minneapolis-St. Paul, Omaha, and Des Moines.72 By the early thirties railroads were no longer a factor in the carriage of crude oil, carrying a mere 3 percent of interstate crude shipments. However, they remained a major factor in the carriage of products, carrying 75 percent of interstate shipments.73 The advent of systems such as Great Lakes, however, would soon see the rapid decline of railroad shipments of products.
World War II brought new changes to the industry. The requirements of the war effort brought about tremendous increases in pipeline mileage. With the Atlantic coast refineries, dependence on crude oil from the Gulf Coast, alternatives to the use of submarine-vulnerable tanker transportation was necessary. At first, the railroads developed the concept of unit trains to carry crude oil from the Gulf Coast.75 This proved insufficient. With Government backing and ownership, two large diameter lines were built the Big Inch, a 24-inch crude line, 1,253 miles long and capable of carrying 300,000 barrels per day of crude from Longview, Texas to Philadelphia, Pennsylvania and Linden, New Jersey and the Little Big Inch, a 20-inch product line, 1,640 miles long and capable of carrying 235.000 barrels per day from Beaumont, Texas to Linden, New Jersey. These two systems and the expanded pipeline network became the predominant carriers of crude and to a lesser extent products."
After World War II, the oil industry's fear that they would not be able to keep the two "Big Inch" sufficiently full to be competitive with tanker transportation, led to the disposal of the pipelines to the Texas Eastern Transmission Corporation for conversion to natural gas use.78 Despite this conversion, the industry was exposed to the significant economies of scale inherent in large diameter pipelines.
Despite the experiment with large diameter pipelines during World War II, the movement to large diameter lines was slow. In 1955, most
product lines were only 8 inches and only 443 miles of 18-inch lines, the largest then in use, were operating." Crude lines on the other hand were using large diameters, up to 24 inches.s0 Following 1950, rapid development of joint venture product pipelines occurred. Up until 1950, product lines generally had been built on an individual basis (with Great Lakes a major exception) and with small diameters.81 But improved pipeline technology and the need to reduce transportation costs by utilizing the economies of scale inherent in large diameter pipelines led companies to join together to build larger joint venture systems. Thus, the fifties saw the construction and operation of such systems as Harbor Pipe Line; 82 Wolverine Pipe Line; 83 Badger Pipe Line; 84 Wabash Pipe Line; 85 and many other systems.s
The sixties and seventies have seen the further development of both crude and product pipeline systems. Larger joint ventures have been built, both crude and product, to meet the needs of the industry. In early 1965 Colonial pipeline was completed, the largest product system in the country, carrying products from the Gulf Coast refining complex through the southeastern United States, and terminating in New York. Other product systems followed, such as Olympic 87 and Explorer.88 Large crude ventures also have been formed, with Capline, Texoma, and Seaway among the most prominent. The seventies also have seen the opening of the most expensive pipeline to date the Trans Alaska Pipeline System, a 48-inch crude line costing approximately $9.3 billion.89 Other larger diameter systems are on the drawing boards-primarily the offshore deepwater ports that will be used to unload very large crude carriers (VLCC's) and connect with onshore pipeline systems. Most, if not all, of these modern large diameter systems are joint ventures.
C. Industry Structure
1. INDUSTRY DESCRIPTION
The petroleum industry can be divided into four basic component segments crude oil exploration and production, refining, transportation, and marketing. The essential characteristic of the leading firms in the industry, however, is vertical integration, defined as vertical combination, uniting in one corporate structure the various operations through which the raw material passes in its transformation into refined products for the ultimate market. Or more simply, a firm
Id. at 381.
80 Id. at 354-60, 372-75.
81 Id. at 382.
Owned by Sinclair, Gulf and Texas, a 16-inch line running from Philadelphia to New York. Id. at 382.
83 Owned by Shell, Cities Service and Texas, running from East Chicago to Detroit and Toledo. Id. at 382.
Owned by Cities, Texas, Pure and Sinclair, running from East Chicago to Madison, Wisconsin. Id. at 382.
Owned by Ohio Oil and Continental, running from Wood River to Chicago. Id. at 382 See Johnson at 382.
Running from the refineries in Northern Washington to Portland, Oregon.
Running from the Gulf Coast through the Mid-Continent to Chicago.
Morner, Aimee L., "For Sohio, It Was Alaskan Oil-Or Bust," Fortune, Aug. 1977 at 172-184.
PICA at 7; see generally, Market Performance, Part 1, 108-116.
91 Wolbert at n.3.
that controls its own crude supply, transportation system, refineries, and marketing facilities.92
Although in terms of numbers, most companies are specialists within one of the four principal segments of the petroleum industry, each segment is dominated by large companies active at every level of the business. The industry normally is split between those companies known as "majors" and those known as "independents." Over the years the number of the majors has fluctuated between 16 and 20 companies, with 20 most usually considered the number of large firms that have an inordinate influence over the conduct and performance of the industry.
A recent analysis 3 focused on 18 firms as constituting the majors of today. These 18 companies are: Exxon Corporation, Texaco, Inc., Shell Oil Company. Standard Oil Company of Indiana, Gulf Oil Corporation, Atlantic-Richfield Company, Getty Oil Company, Union Oil Company of California. Sun Oil Company. Phillips Petroleum Company, Continental Oil Company, Cities Service Company, Marathon Oil Company, Standard Oil Company of Ohio, Amerada Hess Corporation, and Ashland Oil, Inc. The first fifteen of these companies are classified as nonindependent majors by the Department of Energy for the purposes of the entitlements program. This classification is based on refinery capacity plus the ownership or control of at least 30 percent of the company's crude oil needs. Sohio, Amerada Hess and Ashland are ranked by the Department of Energy as large independents. All eighteen companies are involved to a substantial degree in all levels of the domestic petroleum industry and for that reason will constitute the majors for purposes of this analysis, with all others considered independents unless otherwise indicated.
Petroleum is a mixture of hydrocarbons created under pressure from sedimentary deposits in the beds of ancient geologic seas.95 Within the last century active exploration and development of crude resources has become an integral part of our modern industrial economy.
The United States was for many years the world's largest producer of crude oil. Despite this, the Nation has been historically a net importer of crude. In only ten of the 65 years since 1913 were exports larger than imports.96 These years (1933 to 1943, except for 1941) were marked by the Great Depression and initial sharp drop in imports following the U.S. entry into World War II. Since the war imports have grown to the point where they now provide almost one-half of U.S. requirements.
It is often argued that concentration in crude oil production is lower than it is in many other extractive industries in the economy; industry sources frequently claim there are 10,000 producers. Two considerations weigh against this argument. First, given the number of producers in the industry (in contrast to, say, roughly a dozen each
$3 PICA at 16-17. Another study rounds out the top twenty with Occidental Petroleum Company and Tenneco, Inc. Survey Data at 109-111. Occidental. however, has no refinery activity in the United States and Tenneco, a conglomerate primarily engaged in activities other than petroleum, is not a dominant firm in any level of the industry.
Sohio's enhanced crude oil position through its interest in the Trans Alaska Pipeline System and Alaskan Crude oil production post-dates the classification cutoff point. 85 PICA at 7.
96 U.S. Department of Commerce. Bureau of Census. Historical Statistics of the United States, Colonial Times to 1970, Part 1, series M-138-142, at 593.
in copper, lead, or zinc production), observed concentration rates in crude oil production are impressive. Second, there has been a disturbing increase in concentration over the past two decades or so.
The Federal Trade Commission's Bureau of Economics determined that in 1955 the eight largest companies produced 35.9 percent of the Nation's crude oil, while the 20 largest accounted for 55.7 percent; by 1970 these percentages had risen to 49.1 and 69.0, respectively.97 From Census Bureau data, it is clear that by 1975 the share of the eight largest had moved up still farther, to 53.3 percent, with at least 75.0 percent held by the 20 largest.98 The eight largest companies in 1975 had very nearly the same market share as the 20 largest had possessed only two decades earlier.
The shares held by the thousands of producers outside the 20 largest had, of course, declined sharply-from 44.3 percent of the industry's output in 1955 to no more than 25.0 percent by 1975. This occurred in a period when production was rising, from 2.4 billion barrels in 1955 to 3.1 billion barrels in 1975. In other words, while output directly controlled by the major companies increased by 75 percent, from 1.3 to 2.3 billion barrels, that under the control of independent producers fell by 29 percent, from 1.1 billion barrels to less than 800 million annually.
These findings should not be taken necessarily as evidence of the superior efficiency of the major companies in finding and producing oil. The FTC report cited above listed for the 20 largest companies in 1970 some 147 acquisitions of other crude oil producers or their properties between 1956 and 1970, an average of nearly 10 a year. It is possible, in other words, that much of the increase in concentration reflected merger or the purchase of reserves located by smaller exploration and production companies.
Refining is perhaps the fulcrum of the oil industry.99 Refineries are virtually the only buyers of crude oil and the sole means through which commercially useful products can be extracted from crude oil.100
Refineries are complex, synchronized processes for transforming the hydrocarbon mix of different crude oils into a wide range of products, from the "top of the barrel"-gasoline, propane, butane, and petrochemical feedstocks, such as benzene, xylene, and propylenethrough the "middle distillates"-home heating oil, diesel, jet fuel, and kerosene-down to the "heavier end of the barrel"-residual fuel oil, petroleum coke, and asphalt.101
Refining is a capital-intensive enterprise, characterized by economies of scale. Moreover, within the relevant range of operations, average unit costs decline sharply as capacity utilization increases. Thus successful refinery operation requires full plant utilization, placing a high premium on the continuous availability of crude oil supplies. A steady, adequate crude oil input is indispensable to new entry into this seg
Bureau of Economics, FTC. staff report to the Commission, Concentration Levels and Trends in the Energy Sector of the U.S. Economy, March 1974, p. 40.
98 Bureau of the Census, Annual Survey of Oil and Gas, 1975, Table 1. It is necessary to estimate the 20-company shares from data reported for the 16 and the 24 largest producers. PICA at 12.
ment of the oil industry and is vital to the profitable operation of an existing facility.102
Because of the capital-intensive nature of refining, there are only 131 companies active in U.S. refining, in comparison to the more than 10,000 in production and 300,000 in marketing. 103 The average refinery processed 48,000 barrels of crude oil per day in 1973 compared to the average producing well which extracted 18.5 barrels per day and the average service station that sold 23 barrels of gasoline per day.104
Refineries in the largest class (200 to 445 MBPD) constituted 6 percent of the refineries in 1973 but 31.5 percent of capacity.105 New refineries of 200,000 BPD capacity will cost approximately $400 million.106
It appears that concentration in the refining segment of the industry rose sharply from 1920 to the mid-thirties, as technological improvements in refinery design gave the innovating companies economic advantages while the Depression wiped out weaker firms. Since that time, concentration as measured by value of shipments has remained relatively stable.
In 1935, the earliest concentration measurement, the four largest companies had 38 percent and the eight largest 58 percent of the industry's value of shipments.107 There was little change by 1947, with the four largest at 37 percent and the eight largest at 59 percent, while the first ratio computed for the 20 largest was 83 percent. In successive Census of Manufactures years, there was some erosion of the top four firms' market share-down to 31 percent in 1972-but this went to the next four and the following 12 firms. The 8-firm ratio in 1972 was 56 percent, within two percentage points of the 1935 ratio, while the 20-firm ratio in 1972 was 84 percent, one percentage point above the ratio 25 years earlier in 1947.
The stability of market shares in refining over a period of roughly four decades is itself surprising. While shipments data are not available for 1935, from 1947 to 1972 (a period of relatively stable product prices), the industry's value of shipments quadrupled, from $6.6 billion to $25.9 billion. Despite this growth there has been little or no substantial de novo entry into the industry in the last quarter century, and the major companies have successfully maintained their longstanding market shares.
107 U.S. Bureau of the Census, Census of Manufactures, 1972, Special Report Series: Concentration Ratios in Manufacturing, MC72 (SR)−2, GPO, 1975, table 5, p. SR2–24.