October 3, 2005
ECHOES OF JOHN D.
Oil companies are making fists of money these days, courtesy of the energy bull market. Of course, the notion of Big Oil flush with profits doesn't sit well with the public, which is paying through the nose to drive. But in a nod to political correctness (or should we say, energy correctness?), Big Oil's voluntarily trying to hold down prices at the local gas pump.
It's not a completely altruistic move. What's lost in terms of maximizing revenue might be picked up in market share, or so some are suggesting. The Wall Street Journal (subscription required) over the weekend reported that gasoline sold at the likes of Exxon Mobil and Valero Energy, for example, can be relatively less expensive than at some other stations. "In essence, these giants are using robust refining margins to challenge their competition." Mary Rose Brown, a spokeswoman for Valero, the largest independent refiner in the U.S., was quoted in the article, explaining: "We've made a decision to lag [behind] the market."
The pricing discipline inspired Tom Kloza, chief oil analyst for the Oil Price Information Service, to opine for the Journal, "The majors are practicing defacto price regulation."
Keeping prices artificially lower than they otherwise might be, albeit only modestly thus far, is less than critics of the oil industry expected. Responding to the-then proposed merger of Exxon and Mobil in 1998, BBC News sniffed that "the consolidation of the oil industry will reduce competition in the market and could lead to higher prices at the petrol pump as the new industry Goliath's wield their increased power."
ExxonMobil's predecessor parent, John D. Rockefeller's Standard Oil, was in fact broken up by the government a century ago, in part for the crime of buying up the competition and becoming a monopoly, a feat that subsequently allowed the energy goliath to lower the prices of oil and related products and beat back the would-be contenders in the process.
"Economists have picked apart Standard Oil's bookkeeping entries and concluded that, in fact, Rockefeller paid fair sums for the companies he bought and undercut prices by brilliantly increasing efficiency," wrote Todd Buchholz in a review (free subscription required) of The Tycoons in Sunday's New York Times Book Review. "Rockefeller's competitors were scattershot operations. He beat them by building his own pipelines, manufacturing his own barrels and negotiating volume discounts with the railroads." As a result, the price of kerosene, a staple energy source back in the day, dropped by 60% in the 1880s, Buchholz observes.
Don't hold your breath for a similar decline in oil prices any time soon. Meanwhile, Big Oil's still becoming more efficient, in part out of necessity. That's life when your commodity of preference is a diminishing resource.
As for the stigma of lowering prices by wielding corporate power and efficiency, that's no longer a public disgrace, or so one could argue. As we write, we know of no marches in the Capitol to protest Exxon's price-lowering scheme. Juicy profits from oil refining, however, are still reviled by everyone but the shareholders. Some things, at least, never change in the oil game.
Posted by jp at October 3, 2005 11:12 AM
I wonder about the value to ExxonMobil of increased share. On the wholesale side, I doubt they could gain much. I think U.S. refineries, including ExxonMobil's, were running at near 100% levels before the two hurricanes. On the retail side, the value would seem to be low. As I understand it, ExxonMobil owns and operates less than 10% of their branded stations. I suppose they could eventually raise the lease payments for the Exxon-owned, independent-operated stations. Perhaps those contracts include some percent of revenue payment.
If refinery utilization ever drops below 95% again, I can see how an efficient refiner could gain share. Absent a sharp economic downturn, I don't see that happening.
I admit I don't totally understand supply relationships in the gasoline industry, as these are not simple. The bulk gasoline exchange relationships between refiners, the use of shared bulk terminals, and the entire jobber business make it difficult to understand who really controls wholesale prices.
Posted by: John Dewey at October 14, 2005 2:32 PM