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Refiners Maintain a Firm but Legal Grip on Supplies

Clean-gas mandates thinned the competition a decade ago. Companies that stayed 'take advantage of the crazy rules' and enjoy huge profits.

June 18, 2005|Elizabeth Douglass and Gary Cohn | Times Staff Writers

"You have access problems: Those that are there don't want those that are not there to come in," said Drew Laughlin, an energy consultant who has done studies for the California Energy Commission. Compared with New York's harbor, where gasoline imports flow in from Europe, Laughlin said, "you don't have as much storage, you don't have as many importers, and the vast majority of your market is dominated by the refiners."

Consumer Federation and others say such control stems from massive consolidation in the oil business, giving fewer players a bigger share of the market and its key assets. The concentration also has strengthened the industry's political clout, which critics say has thwarted most market-altering legislation.

More than 2,600 mergers and acquisitions have occurred in the U.S. petroleum industry since 1991, according to the Government Accountability Office, Congress' watchdog agency. Some have paired the biggest names in oil, including British Petroleum with Amoco and Arco, Exxon with Mobil, Conoco with Phillips, and Chevron with Texaco.

The trend has been especially acute in California, where six major oil companies control more than 80% of the capacity to refine oil. In 1990, the six largest companies accounted for 69% of refining capacity.

For The Record
Los Angeles Times Friday June 24, 2005 Home Edition Main News Part A Page 2 National Desk 2 inches; 73 words Type of Material: Correction
Gasoline price series -- A map with an article in Saturday's Section A about oil refiners' practices showing gasoline costs gave the correct price of gasoline in South Carolina, $2.01, but pointed in error to North Carolina. Also, an article in Sunday's Business section about how refiners set wholesale gasoline prices misspelled the last name of the director of retail pricing at the Oil Price Information Service. He is Fred Rozell, not Rozelle.

The boiling down of the market brought higher gas prices, according to the GAO report. The agency examined eight oil industry mergers from 1994 to 2000 and found that six raised gas costs in certain places. "The price increases were particularly large in California, where they averaged about 7 cents a gallon," the GAO concluded.

The oil industry rejects any direct correlation between mergers and higher prices, and the Federal Trade Commission called the GAO report "fundamentally flawed."

"It's a nice theory, but every other major industry has a higher concentration than we do," said John Felmy, chief economist for the American Petroleum Institute, an oil industry group.

Nonetheless, the FTC and Lockyer objected to several of the mergers, and their intervention yielded important concessions. Merger-related divestitures required by the government brought Valero and Tesoro into the California market, where the two independent refiners have helped keep competition alive by selling much of their fuel to unbranded dealers.

Despite those efforts, several economists and regulators say California's fuel industry has become an oligopoly, meaning that acts by any one of a handful of operators can move prices throughout the market.

"As California's gasoline market continues to tighten, the result will be both greater price premiums due to real scarcity and the potential for greater premiums due to the ability of some firms to exercise market power," Borenstein of the UC Energy Institute concluded in a recent study for the state Energy Commission.

Tesoro Vice President Lynn Westfall said California's fuel woes stemmed not from oligopoly power but from the state's growing reliance on imported gasoline and gas components. With supplies coming from as far away as Europe, Westfall said, "any disruption in local supply is going to cause a lot of market volatility, which will appear as market power, but it's not."

The mere presence of market power is not illegal under antitrust laws, said Mozelle Thompson, who served on the Federal Trade Commission for 6 1/2 years before resigning in August. "The oil industry hires the best, and they're very good at knowing where the bright lines of antitrust law are and coming in just underneath them," Thompson, who has helped review many of the largest oil mergers, said in an interview.

Even traditional antitrust concepts such as collusion are easy to dodge, critics say. The oil companies, for example, are constantly sharing their sensitive information about supply, pricing and strategies, but the information gets passed through third parties such as consultants, pricing services and others, said Los Angeles lawyer Thomas Bleau, who has sued oil companies on behalf of gas station dealers.

In recent years, several investigations have raised questions about certain retail and wholesale pricing practices but brought no fines, settlements or criminal charges.

"Thirty investigations in the last 20 years have yielded a significant amount of evidence that says there is no wrongdoing, there is no collusion or all the other things that people have called for investigations about," said the oil industry's Sparano.

Even so, the refiners' command over the market can be seen at work at the gas pump, dealers say.

On a Redondo Beach corner, gas station owner Mike Madani has ridden out 14 years of wrenching change.

Four dealers once battled for customers at the intersection of Artesia and Aviation boulevards. Now, Madani's South Bay Shell is the lone survivor. Although his gasoline prices this year were higher than ever, Madani figures he'd be out of business too if he hadn't added a carwash and a convenience store.

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