UNDIVIDED JOINT INTEREST PIPELINE SYSTEMS AS OF DEC. 31, 19751

[Key to abbreviations: C-crude line; P-products line; Ggathering line]

UNDIVIDED JOINT INTEREST PIPELINE SYSTEMS AS OF DEC. 31, 1975 1-Continued

[Key to abbreviations: C=crude line; P=products line; G-gathering line]

Annual reports form P (carriers by pipeline) to the Interstate Commerce Commission for year

As the ICC staff has observed, "pipelines affiliated with major oil
companies clearly dominate the industry." 139 As demonstrated in the
tables below, reproduced from the ICC staff statement, pipelines affili-
ated with major oil companies accounted for 74.2 percent of total pipe-
line mileage and 76.5 percent of total pipeline operating revenue in
1975. Major oil companies' crude pipelines comprised 82.4 percent of
total gathering line mileage and 89.3 percent of crude trunkline mile-
age. These crude trunklines handled 90.3 percent of all crude trunk
traffic and 94.5 percent of crude barrel mile movements. Corresponding
figures for product pipelines are lower due in part to the inclusion of
LPG pipelines and other pipelines carrying products other than refined
petroleum products. Nevertheless, major oil company affiliated pipe-
lines represented 54.0 percent of total product pipeline mileage in 1975
and handled 72.9 percent of all pipeline product movements, constitut-
ing 78.1 percent of product barrel mile traffic. A full 93.6 percent of
undivided interest system mileage operated by pipeline companies was
reported by the major oil company affiliated pipelines.

Source: Interstate Commerce Commission, "Transport Statistics in the United States," pt. 6, Bureau of Accounts.

Source: Interstate Commerce Commission, "Transport Statistics in the United States", pt. 6, Bureau of Accounts.

3. VERTICAL INTEGRATION: THE OIL INDUSTRY AND PIPELINE

TRANSPORTATION

The pervasiveness of vertical integration in the petroleum indus-
try and petroleum pipelines prompts consideration of the causes
and effects of that industry structure. Vertical integration occurs as a
ans to supersede the price mechanism or marketplace. Although

ment of David L. Jones, supra at 11.

integration for effective operation, the historic domination of each of the levels by vertically integrated firms and the consequent thinning of free markets at the intermediate stages of the industry has dictated conformance to a vertically integrated structure as a condition for survival in the industry.

Thus the existence of vertical integration or a trend towards vertical integration can foreclose markets to nonintegrated competitors, denying them access to raw materials or outlets for their products and thus threatening their survival. Such foreclosure results from the tendency of vertically integrated firms to divert from the open market those sources or outlets which are needed to fuel or absorb the production of the vertically integrated firm.

Vertical integration can also aid creation or strengthening of a monopoly or oligopoly by confronting nonintegrated competitors with a price squeeze or supply cutoff, thus impeding their ability to compete. Competing with its own customers, the vertically integrated firm can impose a price squeeze or can cut off supply altogether. By charging all customers including itself a high price for inputs or raw materials, while maintaining a stable output price, the vertically integrated firm can make it difficult for nonintegrated concerns to compete.

Further, vertical integration may contribute to tightening of an oligopoly structure by shielding oligopolists from price instability. Aggressive pricing by competitors may be discouraged by threats of a price squeeze or a supply cutoff. Through assured outlets and sources of supply resulting from downstream and upstream integration, the oligopolist further reduces price instability by eliminating the vying among competitors for major accounts. By internalizing cost adjustments in the form of transfer prices, destabilizing pressures on market prices may be minimized.

Lastly, vertical integration may raise barriers to entry by necessitating coordinated multistage entry.

While a variety of justifications for vertical integration have been. offered by petroleum industry spokesmen, that most frequently heard is the role of vertical integration in reducing uncertainty.140

Observing that the processes for transporting and refining oil are such that substantially increased average costs are incurred if these. facilities are not fully utilized, the industry spokesmen point out that refineries and pipelines are each characterized by both a substantial predominance of fixed over variable costs (at normal operating levels), and a tendency for variable costs to be low and constant until the utilization rate begins to approach capacity. If vertical integration could serve to ensure full utilization this would be an important justification for vertical integration. However, it is important in this context to distinguish between the role of vertical integration in ensuring full utilization for individual integrated firms and its role in ensuring full

140 P. Markun (ed.). Witnesses for Oil, the Case Against Dismemberment. American Petroleum Institute (1976), statements of W. T. Slick. Sr., vice president. Exxon at 7: Annon M. Card, Sr., vice president, Texaco at 36-37; Michael E. Canes, economist. API at 52: W. Glenn, "The Need for Integrated Petroleum Operations," Southwest Legal Foundation 210 (1970) (divisional president. Continental Oil). See E. Mitchell (ed.). Vertical Integration in the Oil Industry at 123-26 (1976). This study funded by the National Science Foundation and the petroleum industry was prepared under the aegis of the American Enterprise Institute and generally endorses the arguments made by the integrated major oil companies.