Want lower diesel prices? Preserve competition

By James Aaron Cooke -- Logistics Management, 8/1/2005

Even the strongest proponents of free trade found this one tough to swallow: State-owned China National Offshore Oil Corp. (CNOOC) wanted to purchase Unocal Corp., the ninth-largest U.S.-based oil and gas producer. One of a handful of remaining independent oil companies, Unocal was "in play" when ChevronTexaco offered $16.7 billion for the El Segundo, Calif.-based company. Then the Chinese oil giant came along and trumped that bid by offering $18.5 billion.

The prospect of a foreign government buying an American oil producer troubled some federal legislators. By a vote of 398 to 15, the House of Representatives passed a resolution declaring that such a sale would threaten national security. "This is not a free-market deal," said C. Richard D'Amato of the U.S.-China Economic and Security Review Commission, a congressional advisory panel. "This is the Chinese government acquiring energy resources."

With opposition brewing on Capitol Hill, CNOOC dropped its bid, leaving ChevronTexaco as the only suitor. Even without CNOOC in the picture, though, there's reason for shippers to oppose the sale of Unocal: Consolidation in the oil industry has played a significant role in the dramatic rise in gasoline and diesel prices.

Oil industry analysts say insufficient refinery capacity is helping to push gas and diesel prices to historic highs. The oil industry blames costly environmental regulations for the dearth of new refineries, but environmentalists counter that mergers have pushed smaller, independent refining companies out of business, and that the bigger producers have purposely limited refining capacity.

They may have a point. The past decade has seen a spate of mergers between large oil producers. According to the advocacy group Public Citizen, five companies—ExxonMobil, ChevronTexaco, ConocoPhillips, BP Amoco-ARCO, and Shell—now control half of all U.S. domestic oil production and half of the country's refinery capacity.

Before CNOOC became a suitor for Unocal, Sen. Charles Schumer (D-N.Y.) called on the Federal Trade Commission (FTC) to block Unocal's proposed merger with ChevronTexaco, on the grounds that the merger would reduce competition and raise prices. Sen. Schumer is correct that right now, when a barrel of crude oil sells for $60, the nation needs intense competition in the oil industry, not more consolidation.

Next year, when the oil producers must begin producing low-sulfur diesel fuel to comply with federal law, shippers can expect that constraints on refining capacity will cause pump prices to soar again. As a result, they can also expect to pay double-digit fuel surcharges to their motor carriers. Clearly, eliminating another oil producer from the national scene would make a bad situation worse.

In 1911, the U.S. Supreme Court ensured competition in the oil industry when it applied antitrust laws to break up the monopolistic Standard Oil empire into 34 independent companies. Today, the federal government seems indifferent toward the enforcement of antitrust laws. If shippers want to stop fuel-price gouging, therefore, they need to call the FTC and the Justice Department and demand that the government enforce antitrust laws in the oil industry as vigorously as it did nearly 100 years ago.

James Aaron Cooke, Executive Editor