Entry into the Oil Refining Business: Vertical Integration Re-Examined

Abstract

In a study made some years ago, one of the authors of this article concluded that the petroleum industry structure contained substantial elements of monopoly, as that term is defined by economists and lawyers; that its market performance under present methods of regulation showed distinct symptoms of effective monopoly in pricing, in selling costs and in the determination of output; and that it was legally and technologically feasible to seek a more competitive form of organization for the industry, without abandoning the economies of the large scale of production, or other economic advantages. On the contrary, it was thought that a reorganization of the industry in the interest of increasing the degree of competition should eliminate significant wastes associated with its methods. A central finding of that enquiry was that the control of transportation facilities—particularly of pipe lines—by the major oil companies was an important factor in permitting those companies as a group to maintain a material degree of monopoly power over the prices at which they bought crude oil, and sold gasoline and other products. In the setting of the oil industry, it was contended that this form of vertical integration constituted a barrier to the possible entry of new firms into the refining and distribution phases of the oil business. The purpose of the present paper is to consider whether recent changes in the pipe line sector of the industry require a change in the analysis and conclusions of A National Policy for the Oil Industry. Under the combined influence of regulation and taxation, pipe line rates have been falling for some years, a time when other transportation costs have been rising. Despite some recent increases, pipe line rates have probably risen less in the last few years than other transportation costs and charges. And they have now been held at a relatively low level long enough to permit some tentative inferences as to their significance in impeding the competitively favorable entry of new firms, especially in the refining and marketing stages of the oil business.