When a single company, as do each of the major oil companies and many of the minor companies, operate at each step of the way it is called a vertically integrated oil company. When a company operates

at two or more steps of the process it is called a partially

integrated oil company.

Horizontal integration in the oil industry takes place when two or more companies operating at the same functional level of the market join forces. Thus, if two refiners merge, the economist or antitrust lawyer calls that horizontal integration. Likewise when two competitors at the same functional level of the market get together and form a joint venture to engage in a distinct step of the process of producing oil and delivering it to your gas tank in the form of gasoline, they have undertaken horizontal integration of that activity direct elimination of competition between them in performing that particular activity. In the oil industry horizontal integration takes place when two supposedly independent oil companies form a joint venture to build a pipeline or refinery, or get together through a joint venture to bid upon and produce oil from a tract of land, area of the country or concession from a foreign country. A form of horizontal integration by contrast can also take place through something called exchange agreements in the industry. Exchange agreements are long term arrangements by which one company (say Texaco), agrees to supply another company (say Amoco) crude oil at Amoco's Salt Lake Refinery in exchange for gasoline for local distribution by Texaco. Somewhere else in this world, usually, Texaco will do the same thing with its refinery for Amoco. Or two companies may simply agree to supply each other's local needs for finished products on a gallon for gallon or some other basis; Company A agreeing to supply all of Company B's needs for gasoline in Salt Lake in exchange for Company B doing the same from its refinery in Denver. Competition is eliminated by such arrangements since each company foregoes its competitive advantage to serve the common interest of each.

It is important for you to understand these concepts in order to appreciate the urgent need for this legislation and to understand

the misleading rhetoric and half truths usually thrown up like a fog bank by opponents when this kind of bill is under legislative consideration. You will probably hear, in addition to claims that multi-billion dollar oil companies are small entrepreneurs like you and me and the entrepreneur selling lemonade on the street corner, that the industry at each level is highly competitive, fragmented, and the personification of the American way. You will be told that no one company controls an overwhelming share of crude oil production, refining or retailing. As a general proposition, with the important exception of local markets dominated by pipeline, refining or crude production in a few hands, this general proposition is true. So what is the problem, you might ask, if we have thousands of producers, twenty or thirty pipelines, a couple of hundred refiners, thousands of jobbers and tens of thousands of retail outlets?

The problem is that this rosy picture is completely at odds with reality; realities like the domination and control of local markets by a single or small number of producers and refiners. It is at odds with the reality of the growing control over crude and refining by the major oil companies, the reality of the high degree of vertical integration in the industry; and the reality of the host of horizontal interrelationships at every level of the industry. These realities are so significant and pervasive that they have led one of this nation's leading economists, Dr. Walter Adams, to state flatly: "The claim. . . that the petroleum industry fits the structural model of effective competition is pure fiction." Adams, Vertical Divestiture of the Petroleum Majors: An Affirmative Case, 30 Vand. L. Rev. 1115, 1121 (1977). I would put it a bit more strongly: Those who are lulled into believing that the oil industry is competitive in accord with the model of competition probably also believe in the tooth fairy, unicorns and the sandman.

The reasons for Dr. Adams' conclusion I will only briefly outline here by way of background information and to place in perspective the rather extravagant claims made about the competitive nature of the oil industry. Comprehensive studies of the question may be found in J. Blair, The Control of Oil (1976); Allvine &

Patterson, Competition, Ltd./The Marketing of Gasoline (1972); Ruttenberg, The American Oil Industry: A Failure of Anti-trust Policy (1973); Sampson, The Seven Sisters (1975) and many other books and articles of recent note. In addition, several studies by U.S. Senate and House Committees, available on request, document fully the reality that big firm cooperation has displaced competition; uncontrolled economic power has gained control from crude to the nozzle of our most basic resource; and, that a belief that competition is a characteristic of the industry in local markets like Utah, is pure fantasy.

The following outline of the horizontal interlocks and entanglements at each level of the industry is merely the barest outline of the degree to which the competitive process has been displaced in the marketing of petroleum products.

Interlocking Directorates Through Banks.

Commonality of bank

directors on oil company boards is one source of building up a community of interest rather than a high level of competition between oil companies. The following diagram from Blair, The Control of Oil 145 (1976) is but one attempt to trace and demonstrate the identity of interest at the fundamental level of shareholder ownership and management control.

In

Other studies reveal commonality of stock interest in several major oil companies by banks and legatees of the old Standard Oil trust the Rockefeller interests. Such numbers are hard to come by, since secrecy of who owns what is maintained by every device possible. Selected International Joint Ventures of Petroleum Companies. most of the major producing areas of the world, prior to nationalization in some of them, oil production was in the hands of joint ventures formed by our supposedly competitive major oil companies. Today they serve as handmaidens of OPEC; they have become the marketing arm of the producing countries' cartel which have raised crude prices to astronomical levels.

OPEC cannot work without the cooperation of these international joint ventures and vice-versa. The major reason for the

astronomical rise in oil company profits in recent years has been the mutual cooperation of OPEC and big oil in limiting production and raising prices.

Joint Ventures Among Allegedly Competing Oil Companies.

International joint ventures undermining the competitive process are complemented by joint ventures in domestic production. For example, the following is a tabulation of the number of joint bids for federal offshore leases for a two year period. It represents a

series of floating joint ventures, where one of our supposedly vigorous independent competitors join forces with first one and then another oil company to bid on potential lease sites. During the period, for example, Getty made no independent and 281 joint bids with a wide combination of other oil companies; Phillips no independent and 281 joint bids; Union no independent and 245 joint

bids.

79-549 0-81--33