Processing arrangements and exchanges also affect these figures. One study indicated that in 1972, only two percent of total refinery runs were involved in processing arrangements and majors tended to work with majors while the independent refiners tended to service both more evenly. 108 The lack of adequate data prevents a full analysis of the exchange situation; however, one study indicated that somewhat less than one half of the petroleum products refined in the United States in 1973 were sold to the final consumer by companies other than those that refined the products. 109 The occurrence of processing arrangements and exchanges may lead to the conclusion that refining is more concentrated than the capacity figures indicate. c. Marketing Gasoline marketing is the most competitive segment of the oil industry and has the largest number of competitors when defined to embrace the vast network of wholesalers or jobbers, fuel oil dealers and branded and unbranded retail service station operators who move finished petroleum products through a wide array of distribution channels from the refinery to the ultimate consumer.110 Gasoline is basically a fungible product. It consists of many chemically identifiable individual components that may be blended differently yet produce similar performance characteristics. Gasoline is routinely exchanged among companies using agreed upon specifications. There is no guarantee that the gasoline bought from company A was refined by company A. At least as likely, it was refined by another company and sold or exchanged to the selling company. 111 Although national marketing figures indicate that concentration in gasoline marketing is relatively low,112 these figures ignore the consequences of sales by major companies to unbranded marketers. Thus there is significant trading by the companies in finished products that is not reflected in current published data. This leads to the conclusion that concentration measured on a total supply basis may be greater than that measured on a final sales basis. Certainly, for individual states, concentration is substantially higher than national concentration.113 d. Transportation Transportation is the vital link between the other three segments of the industry. Transportation and refining have been characterized as the bottleneck in the hourglass of the industry-crude from many thousands of producers must pass through the relatively small and concentrated transportation and refining segments and again be distributed by many thousands of firms in the marketing segment of the industry.114 Transportation in the industry is accomplished by pipelines, tankers, barges, railroad tank cars and tank trucks. The most economical 113 ERC at 17. 113 Survey Data at 71. 114 Harmon, George M., Effective Public Policy to Deal with Oil Pipelines, 4 Amer. Bus. L. J. 113, 1966 at 116 [Hereinafter cited at "Harmon"]. form of overland transportation is pipelines. In 1974 some 87 percent of refinery receipts of domestic crude oil were delivered by pipeline, compared to 11 percent by tankers and barges and only 2 percent by rail or truck.115 Approximately 50 percent of all product movements are by pipeline.116 Certainly, most long distance movements of products are by pipeline. Thus pipelines are the fundamental element of petroleum transportation. The most significant characteristic of both crude and product pipelines is that they are subject to very substantial economies of scale up to the largest available pipe diameter. The existence of these scale economies has been established by a number of independent studies.117 The scale economies are due to the simple proposition that the ratio of the circumference to the area of a circle is a decreasing function of the radius (which decreases capital costs) and to the less obvious proposition that pipe friction is basically a function of surface area per barrel of liquid carried (which reduces both capital and operating costs). The classic study of pipeline costs was done by Cookenboo for crude oil pipelines. In his analysis Cookenboo assumed a 4 percent cost of capital, 25-year depreciation and a 1 percent property tax rate for the case of a 1,000 mile pipeline. Cookenboo found that the optimal pipeline diameter for a given volume of crude was fairly insensitive to variations in the cost of capital and that substantial cost savings are possible by utilizing one larger diameter pipeline rather than several smaller ones. Another important characteristic of petroleum pipelines is that once built the line's capacity may be increased with only slight changes in average cost by adding pumping stations. This is important because it means that only very occasionally will new pipelines by built as the demand for crude increases: instead, most of the increases in demand will be met by adding pumping stations to existing pipelines. Beyond the economies of scale in constructing the initial pipeline, there are some economies associated with looping (paralleling) an existing line rather than constructing a new line. Capacity underutilization, however, substantially increases average cost due to the extreme preponderance of capital costs over operating costs at suboptimal operating levels. A visual comparison of crude oil and product pipeline capacities indicates the growth of the pipeline sector over the past twenty years. 118 115 PICA at 11. 116 ERC at 14. 117 Pearl & Enos, "Engineering Production Functions and Technological Progress,” XXIV Journal of Industrial Economics No. 1 (1975); White, "Economies of Scale Applies in Long-Distance Pipeline Transport." Oil & Gas Journal at 149-154. (Jan. 27, 1969); Kennedy & Stueve, "Sizing Crude Oil Pine Lines," Oil & Gas Journal (Sept. 21. 1953): L. Cookenboo. Costs of Operating Crude Oil Pipelines (Rice Institute pamphlet) (1954); J. McLean & R. Haigh, The Growth of Integrated Oil Companies at 184 (1954). 118 NET at 187-188, 191-192, 203, 205. |