COMPETITIVE ASPECTS OF OIL SHALE DEVELOPMENT FRIDAY, MAY 5, 1967 U.S. SENATE. SUBCOMMITTEE ON ANTITRUST AND MONOPOLY Washington, D.C. The subcommittee met, pursuant to recess, at 10 a.m., in room 2226, New Senate Office Building, Senator Philip A. Hart (chairman) presiding. Also Present: Senator Hansen, S. Jerry Cohen, staff director and chief counsel; Charles E. Bangert, assistant counsel; Peter N. Chumbris, chief counsel for the minority; James C. Schultz, counsel for the minority; Gladys E. Montier, clerk; Patricia Bario, editorial director, and David Dominick, legal assistant to Senator Hansen. Senator HART. The committee will be in order. First, let me apologize for being delayed this morning. Our opening witness is one who we know well here at the Antitrust Committee, and for whom we have the very highest respect. He is the director of the Bureau of Economics of the Federal Trade Commission, Dr. Willard F. Mueller. We see you are joined this morning by Roy Prewitt. Let me indicate both to Dr. Mueller and Pat Greathouse, both of whom have given us statements in advance which we appreciate that the statements will be printed in full in the record as though given in full. As our witnesses proceed they should feel free to present extensions, additions, footnotes, and summaries they care to make. STATEMENT OF WILLARD F. MUELLER, DIRECTOR OF THE BUREAU OF ECONOMICS, FEDERAL TRADE COMMISSION, ACCOMPANIED BY ROY A. PREWITT, ASSISTANT DIRECTOR Mr. MUELLER. Thank you very much. It is always a pleasure to appear before this subcommittee, Mr. Chairman, and in this case to participate in your inquiry on the competitive aspects of oil shale development. Mr. Roy Prewitt, the Assistant Director of the Bureau of Economics is with me this morning. He is one of the leading experts on the organization of the petroleum industry and the Commission is fortunate to have him on its staff. I should like to make a general disclaimer of any special knowledge or expertise pertaining to the technological or geological aspects of oil shale development. My remarks will be confined to the subject of the structure of the petroleum industry. I shall try to indicate some of the significant changes in that structure during the past few years 80-344-67-pt. 1-27 and comment briefly upon the implications in terms of to the development of the oil shale industry. Since petroleum companies are considered to be the most likely entrants into oil shale development, it is hoped that this brief description of the structure of this industry will be a useful addition to the record of these hearings. Senator HART. If I may interrupt you-perhaps we should have suggested you come earlier in the series of hearings. In any event, it is our feeling that the record is made more useful by an objective evaluation and description of the structure of the petroleum industry. As has been said before, our sole, primary concern with respect to the resource we are talking about is to insure, if possible, that any program will increase competition, and at a minimum be cast in such fashion as will not contribute to further concentration. And to the extent there is or is not concentration now, I think it useful that the reader of the record have available to him this, your analysis. Mr. MUELLER. What I tried to do in this statement is to set forth the general characteristics of this industry, and as I explain later on, I think it is extremely important, as you have just suggested, that we view the commercial development of oil shale, in a longrun perspective. This is particularly true, and experience teaches this, in the case of the petroleum industry, where the great Standard Oil case of 1911 had a tremendous impact on this industry for the last 50 years. Had it not been for that action, we would have an entirely different structure, or so I believe. In making these comments, I would not want them to be misunderstood. I think the competitive performance of the petroleum industry over the last 50 years has been quite effective. And as I will explain a little later, there have been various forces at work that have been responsible for this. And certainly the longrun structure of this industry is going to depend upon the way this particular resource is absorbed into our industrial organization. First, I would like to just make a few comments on the diversification of the major oil companies into other energy sources. It is rather generally known that the largest oil companies are not only large relative to other petroleum companies, but are also large relative to other industrial corporations. Appendix table 1 (see p. 618) attempts to bring together some of the significant items of interest concerning the energy diversification activities of the 20 largest petroleum companies (largest based on assets). It may be of interest to note that the eight largest are multibilliondollar companies and that they rank among the 20 largest industrial corporations in the country. The top 20 petroleum companies are fully integrated in their domestic operations. They produce more than half of all the crude oil. Approximately 80 percent of the crude oil and refined oils shipped by pipelines move through lines under their control. They account for more than 80 percent of the crude oil refining capacity and more than 85 percent of the crude oil refinery runs and are the largest sellers of natural gas to interstate pipelines. They also have access to large crude oil sources abroad. Although our information regarding the detailed activities of these companies is incomplete, the information available to us indicates that all of the top eight, and 16 of the 20 largest petroleum companies have an interest in oil shale either by engaging in oil shale research or by investing in shale lands. Some companies have done both. Union Oil of California, for example, extensively researched an oil shale recovery process from 1955 through 1958 and it also owns several thousand acres of oil shale lands. Previous witnesses already have indicated an interest by Standard Oil Co. of New Jersey, Mobil Oil Co., Standard Oil Co. of Indiana, Phillips Petroleum Co., Sinclair Oil Co., and Continental Oil Co. in the oil shale development with the Colorado School of Mines, as well as the interest of Standard Oil Co. of Ohio in a joint venture with Cleveland Cliffs Iron Co. and the Oil Shale Corporation. Referring again to Union Oil Company of California, I think it should be noted that this company's interest in oil shale dates back to 1920 when it purchased its first oil shale property. It was perhaps the first oil company to research actively and publicly an oil recovery process. Union Oil reportedly still owns 50,000 acres of field land in Colorado.2 Continental Oil is reported to have a controlling interest in more than 10,000 acres of oil shale lands in Colorado which it is holding for future development. In 1965 it was reported that Texaco and Shell had extensive holdings, interest and research in oil shale. The supervisor of Texaco's Montebello, Calif., research laboratory is reported to have said in 1966 that "We are getting ourselves into a position to move into oil shale when we have to." 5 The large oil companies are also interested in other energy sources such as coal and uranium and two companies-Cities Service and Sun-have considerable investments in the Canadian tar sands. It is quite clear that many of the large oil companies are on their way to becoming "total energy" companies and the traditional lines of corporate separation between competing sources of energy are becoming blurred if not obliterated. As to the structure of the domestic crude oil industry: A report published by the Department of Interior in 1965 characterized the petroleum industry as ". ... concentrated and fragmented." 6 The report went on to say that "Twenty companies produce half the oil and 9,000 others produce the rest." Although there are thousands of small crude producers, the 20 largest integrated petroleum companies produced 59 percent of total domestic crude in 1966 (appendix table 2) (See p. 619). However, the same companies accounted for 87.10 percent of the total domestic crude runs to refineries. The ratio of domestic production of crude oil to domestic refinery runs indicates of the degree of self-sufficiency of a company in domestic crude oil production. In 1966 only one company (Skelly) had a ratio of a hundred or more (appendix table 2). It is quite evident, therefore, that the 20 largest integrated companies must purchase or import substantial quantities of crude to meet their refining requirements. As will be noted, the 20 largest oil companies are among the most important producers of foreign oil and are large importers of crude into the United States. a Union Oil Co. of California quarterly and annual reports for this period. 2 Oil & Gas Journal, Aug. 26, 1963, p. 58 3 Moody's Industrial Manual, 1966. p. 1799. Chemical Engineering, Aug. 30, 1965, p. 53. Wall Street Journal, Sept. 16, 1966, p. 8. • An Appraisal of the Petroleum Industry, U.S. Department of the Interior, January 1965. p. VI. 7 Ibid. They nevertheless purchase large quantities of oil from the thousands of small producers in the United States and many of these small producers rely upon the large companies not only to buy their crude, but to transport it to market. The top 20 companies transport about SO percent of the crude oil and refined products that move by oil pipeline in the United States (appendix table 3). (See p. 620.) There are a few large independent crude producers but most of the independent producers are relatively small. In 1966 almost 60 percent of the domestic production was produced by the top 20 integrated firms. Appendix table 4 shows the domestic crude oil production of the top 20 firms for the years 1956, 1959, and 1966. It is of interest to note that the share of total crude production by the top four, the top eight and the top 20 all increased during the period 1956-66. The significant point shown by these data is the general trend in the concentration of production among the top four, the top eight and the top 20 large integrated oil companies. Undoubtedly part of this increase is due to acquisitions by major companies. During the period 1952-63 major oil companies acquired 57 oil-producing companies with a total daily crude production of more than 250,000 barrels. In addition to being important domestic producers of crude the large American firms, either directly or through subsidiaries, have significant production in Canada, South America, the Middle East, Africa, and the Far East. In 1965, 29 large American petroleum companies, including the top 20 listed in appendix table 4 (see p. 621) produced 68 percent of the crude produced in the United States and 56 percent of all the crude oil produced outside the United States. Appendix table 2 shows that the top five American companies, based on assets, are also the top five American producers of foreign crude. These firms are also important importers of crude and unfinished oil. With one exception the top 20 companies are also the largest suppliers of natural gas to interstate pipelines, supplying more than 60 percent of the natural gas supplied by domestic producers to these lines in 1965 (appendix table 5, see p. 622). I will turn to the structure of the domestic refining industry. Some of the structural characteristics and changes that have ocurred in the domestic refining industry are indicated by appendix table 6 (see p. 623). This table shows the four, eight, and 20 largest oil refining companies as of January 1, 1951, 1959, and 1966. The position of the four largest shows a steady decline over the period, dropping from 34.6 percent of the industry capacity in 1951 to 32.5 percent in 1959 and down to 30.9 percent in 1966. The percent of the industry's capacity held by the 20 largest refiners declined from 83.3 percent in 1951 to 80.7 percent in 1959, but it rose to 83.7 in 1966. The change in relative position of the group can probably be explained by dynamic factors operating in the industry. During the period 1951 to 1959 there was a strong move on the part of independent refiners and marketers to improve their market position. Crude oil was plentiful and both refiners and marketers were introducing new marketing methods such as multibay service stations and one-stop delivery. Larger and better designed stations were intro 8 "Concentration Trends in the Production Phase of the Oil Industry," presented as part of the record in U.S. v. Standard Oil Co. (Indiana) et al., U.S. District Court, Northern District of California, 1964. "Financial Analysis of Petroleum Companies, 1965," the Chase Manhattan Bank, p. 7. |