The New YorkTimes
December 10, 1998
Exxon-Mobil Merger May Not Be as Dangerous as Critics Contend
By MICHAEL M. WEINSTEINThe proposed $80 billion merger between Exxon and Mobil raises a question: At what point does a company get so big that its size alone becomes a nightmare for consumers?
Critics of the deal have called it "Rockefeller's Revenge," contending that this and other oil mergers threaten to stitch back together the pieces of Standard Oil Co., broken up in 1911.
But the historical analogy is vapid. Exxon-Mobil would control only about 13 percent of the U.S. market. Besides, it is the Organization of Petroleum Exporting Countries, not private oil companies, that controls 40 percent of the world oil market and sets price and output targets. As a group, the private companies help keep OPEC in line, but none controls much of anything.
It is for those reasons that Morris Adelman, an economist at the Massachusetts Institute of Technology, regards the expected antitrust investigation by the Federal Trade Commission "as an exercise in trivial pursuit."
Adelman no doubt exaggerates. But the FTC would hard pressed to persuade a court to block the merger. For starters, bigness is irrelevant to the antitrust law. Only competition matters. And while companies have grown bigger over the decades, markets have not grown significantly less competitive. In effect, there are more big companies competing against one another.
F. Michael Scherer of Harvard University provides unpublished estimates of the trends in concentration. In 1947, he calculates, around 25 percent of the nation's manufacturing output came from highly concentrated industries. By 1992, the number had risen to only about 28 percent. Measured differently, the four largest manufacturing companies in an industry typically controlled about 35 percent of sales in 1947. By 1972, the percentage had risen to 39 percent and did not budge through 1992.
In the case of oil, there is also evidence that bigness helps consumers. Matthew Simmons, an energy investment banker, says that data from company reports show that the largest oil companies spend less on exploration and production for every barrel of oil than do smaller companies.
Philip Verleger, a senior adviser to the Brattle Group, an economic consulting firm in Cambridge, Mass, argues that mergers, by cutting exploration and production costs, ultimately will lead to lower prices for consumers. He also argues oil companies have to become huge, undertaking many projects, in order to spread the risk of putting up the vast sums of money that are now required to explore for oil reserves. Laying pipeline from the Caspian Sea through Turkey, or drilling more than a thousand feet down in the Gulf of Mexico require investments measured in the billions. Indeed, it takes massive investment just to stay alive in the oil business. The Simmons data show that 10 large oil companies have spent over $26 billion a year over the last 10 years to boost output by a mere one percent a year, a process Simmons describes as "running just to stay in place.
But do the large companies achieve low production costs because they are large, or are these companies large because they knew how to find and drill oil cheaply? And there are also reasons to be skeptical about some of the industry's claims. Companies the size of Mobil that contend that they cannot find the money to make risky investment make little sense, Adelman says. Oil companies have been allowed to create joint ventures, free of antitrust challenge, to explore for oil in specific locations. They do not need to merge their entire operations.
With the Exxon-Mobil merger, there are uncontroversial antitrust issues that the FTC will handle with relative ease. There are regions, like the Northeast, where a combination of the two companies would monopolize the retail gas market. Their refineries dominate parts of the South. But the FTC has a successful record forcing oil companies that merge to divest enough gas stations, refineries and terminals to preserve competition. Exxon and Mobil expect such orders.
But the issue at the exploration and production end of the industry cannot be so easily resolved. Perhaps the easiest way to think about the FTC's deliberations is to imagine the world oil market after Asia rebounds and oil prices begin to recover from their recent 40 percent nose dive. At that point, would OPEC have a harder time imposing its will on the market if it faced competition from eight major private oil companies, as would be true today, or if the number of competitors shrank by two, if British Petroleum is allowed to merge with Amoco and Exxon to merge with Mobil.
Said another way, would OPEC plus six be substantially worse for consumers than OPEC plus eight? The problem gets more complicated still, given that Saudi Arabia has recently hinted that it might be prepared to invite the major companies back into their domestic oil operations. Adelman loses no sleep over the prospect of OPEC plus six. Other economists are less sure.
If the economics of the Exxon-Mobil merger poses no grave threat, there is a danger nonetheless. The threat to consumers of huge companies can be offset by the presence of rivals, big or small. But there is no similar offset in the political sphere. Given the nation's porous campaign finance laws, huge companies exert oversized influence. That is not a problem the antitrust can or should solve. But it goes a long way to explain why megamergers make Americans cringe even if, as Adelman says, the economic threat is trivial.