How Oil Companies Play Monopoly

The New Republic, November 6, 1971

SINCE the end of the 19th century it has been characteristic of the oil industry to restrain competition through one means or another, the aim being to administer production and prices so as to maximize profits.

John D. Rockefeller did it by driving most of his competitors out of business or buying them out. After Standard Oil was broken up the industry relied on various tacit and formal agreements to divide markets, limit production and keep prices high. One of these was a 1928 “treaty” between Jersey Standard, Royal Dutch-Shell and Anglo-Persian (now British Petroleum) providing that each company would maintain its existing share of the world market, add new facilities only as required by increased consumer demand, and prevent any surplus production in one geographical area from upsetting the price structure in any other area.

Such formal cartel agreements were, of course, in violation of the U.S. antitrust laws and eventually were replaced by more devious but equally effective arrangements—for example, the joint ventures and long-term contracts through which the seven major international oil companies (Jersey Standard, Shell, BP, Socony-Mobil, Standard of California, Gulf and Texaco) control production and marketing of almost the entire Middle Eastern output.

Collaboration between theoretical competitors is only one way the oil companies restrict supply and control prices; two others are vertical integration and government intervention. Thus, each major oil company not only pumps out crude but also transports, refines and markets most of what it produces. The effect of such wellhead-to-service-station integration is to allow a much greater retention of earnings (one trick of the American oil companies is to shift as much income as possible to production subsidiaries, where it is sheltered by tax loopholes) and to deter unpredictable behavior (i.e., price-cutting) by independent producers, refiners or marketers.

The icing on this cake has been the oil industry’s ability to persuade government to do what the industry itself is legally barred from doing: formally restrict the amount of oil that can be produced in or imported into the U.S. Thus, Texas and Louisiana, which account for three-fourths of the oil produced in the U.S., allocate the extraction of oil among producers in accordance with market demand, while the federal government maintains an elaborate system of import quotas that prevents cheap international oil from pulling the domestic price down.

All these arrangements have worked wondrously to make oil the most profitable industry in the U.S. by far. In the first half of 1971, according to the First National City Bank of New York, the after-tax net income of the major oil companies was nearly $3 billion, more than 20 percent of all industrial profits and almost twice the combined profits of the auto companies.

UNTIL recently, however, there had been a soft spot in this otherwise sturdy structure. The major oil companies had established hegemony over the entire worldwide economy of petroleum, but they lacked the same kind of control over other fuels. It was a significant omission since, to a limited degree, competition and potential competition from natural gas, coal and uranium provide a restraint on the price of oil. Both coal and natural gas can be used, like residual oil, to heat buildings and generate electricity. As the technology improves for converting coal into synthetic oil, coal will become substitutable for oil in a broader spectrum of uses. If by some miracle the internal combustion engine is outlawed or goes out of fashion and we all shift to battery-driven engines, oil will lose its single largest advantage over other fuels.

About ten years ago the oil companies began to deal with these potential sources of competition. Today, twenty of the largest oil companies account for 60 percent of American natural gas production and reserve ownership. The oil industry moved into coal. In 1963, Gulf purchased Pittsburgh and Midway Coal. In 1966 the nation’s largest coal company, Consolidation, was acquired by the ninth largest oil company, Continental. Since then the list of oil companies branching into coal includes Jersey Standard, Atlantic-Richfield, Sinclair, Standard of Ohio and Occidental. As of 1970, 29 of the top 50 coal companies, accounting for 28 percent of total production, had become oil company subsidiaries, and oil companies were actively scrambling for coal lands (often on Indian reservations) in Montana, Wyoming, Colorado, Oklahoma, Illinois, Kentucky and North Dakota.

The pattern has been much the same in uranium, with oil companies now in control of some 45 percent of known reserves. Kerr-McGee alone owns 23 percent of America’s uranium milling capacity, with Jersey Standard coming up fast. Gulf is active in uranium exploration, reactor manufacturing, fuel core fabrication and reprocessing of used fuels.

Other major potential sources of energy—oil shale in the Rockies and tar sands in Canada—are likewise falling increasingly into oil company hands. Even geothermal power, produced by underground steam, has caught the eye of the oil industry. Union Oil, Signal, Getty and half a dozen others have been grabbing all available steam sites in the West.

The total picture is one of high concentration in the energy industry. Of the 25 biggest oil companies, according to testimony last year before the Senate Antitrust and Monopoly Subcommittee, all have positions in natural gas, 18 are in oil shale and uranium, eleven are in coal and seven are in tar sands. Three of the four largest, and six of the ten largest, are in four domestic fuels—oil, gas, coal and uranium.

THE CONSEQUENCES are not difficult to foresee: there will be less inter-fuel competition and higher prices, all to the oil companies’ benefit and at the public’s expense. Since the oil companies’ chief concern will be to protect the already inflated price of crude, it is unlikely that synthetic oil from coal will be introduced in any quantity, or at a low price, or that non-fossil sources of energy (e.g., from the sun or hydrogen fusion) will be vigorously pursued. Electric utilities will lose flexibility in choosing among competing generating fuels, and their higher costs will be passed on to consumers, probably under the guise of paying for a cleaner environment.” The same patterns of carefully restricted supply and conveniently divided markets that currently characterize the oil industry will, in all probability, spread to other fuels.

Some of this has already started to happen. In the last two years, for example, coal prices have jumped 70 percent on the average, and more than 100 percent in some localities, though demand and production both rose at about the same five percent rate. Industry spokesmen attribute the price increases to a shortage of rail cars, higher wages and the impact of new mine safety legislation, but these hardly account for the magnitude of the jump. Rural electric cooperatives and public power companies that rely on coal for generating electricity have a different explanation. In their view the spectacular coal price increases can only have come from concerted action by the oil/coal companies; they have asked for a grand jury investigation.

The situation has been much the same in natural gas, the one fuel whose interstate price is federally regulated. Oil/gas companies, including Jersey Standard, Gulf, Texaco, Shell, Sunoco, Mobil and Phillips, have been pressing the Federal Power Commission for enormous gas rate increases on the grounds that current price levels do not provide sufficient incentive for exploration. Figures provided by the companies purport to show that proved natural gas reserves are lagging behind current consumption. But Senator Philip Hart (D-Mich.), Reps. Joe Evins (D- Tenn.), Neal Smith (D-Iowa) and Torbert Macdonald (D-Mass.) and some of the FPC’s top staffers are skeptical of industry figures. In their view the alleged drop-off in proved reserves is a result of oil/gas company collusion and statistical juggling, and they have persuaded the Federal Trade Commission to investigate.

The oil companies’ plunge into geothermal power exploration has likewise had anticompetitive effects. When a small northern California public power agency sought last year to purchase underground steam from Union Oil and two other companies holding leases in a major hot springs area, the agency was bluntly told that Union had an exclusive contract with Pacific Gas and Electric. Besides exclusivity the contract provided that the price charged PG&E for steam would vary according to the price of fossil and nuclear fuels. Thus, not only would steam not compete in price with other energy sources in northern California, but the public would be denied access to thermal power sites except through two layers of private profit the oil companies and private utilities.

THE TREND toward energy monopoly is a logical consequence of government policies, both of commission and of omission. Notable among the latter is the Justice Department’s failure to apply the antitrust laws either to the oil companies’ joint production and marketing arrangements or to their acquisitions of competing energy sources.

Among the many policies that positively, encourage fuel monopoly, the most significant are those involving taxes. The oil depletion allowance, non-recoverable drilling-cost write-offs and foreign tax credits make the American oil industry one of the largest welfare recipients in the world. What is not so clearly perceived is where these tax windfalls wind up. They do not go to consumers in the form of lower prices, since prices are propped up artificially by state pro-rationing and federal import quotas. They go only partially to shareholders in the form of higher profits. Primarily they are retained by the oil companies and plowed back into new ventures. The tax laws, in other words, give the oil companies an enormous cash flow enjoyed by no other industry, and with so much acquisitive capital on hand they cannot help but expand vertically, horizontally and geographically across the globe. The oil import quota system, by contributing mightily to the oil companies’ cash flow, has a similar effect.

None of these policies was established deliberately for the purpose of promoting fuel monopoly; usually the rationale was to encourage discovery of domestic reserves that, without added incentives, the oil companies presumably would not bother to look for. But even if it is true that incentives of some sort are needed to expand domestic reserves, the price that is paid, both in terms of money and the bolstering of monopoly, is excessive.

It has been calculated that the exclusion of low-cost imports adds about five cents per gallon to the price of gasoline and about $100 a year to the average household’s oil heating bill, for a total cost to consumers of $5 to $7 billion annually. Tax loopholes and state pro-rationing cost several billion dollars more. Yet all these subsidies contribute only marginally to the size of proved reserves (a Treasury Department study in 1969 concluded that if the oil depletion allowance were eliminated entirely, proved U.S. oil reserves would drop from a 12-year to an 11- year supply). If Congress were directly asked to appropriate $10 billion each year to buy a small increase in proved oil reserves and concomitantly, to underwrite fuel monopoly, it undoubtedly would have refused to do so. The genius of oil industry politics is that the question is never posed in those terms.

WHAT CAN BE DONE? In the oil companies’ view there is nothing wrong with fuel monopoly; the problem is to condition American consumers to accept higher prices for all forms of energy. President Nixon sees things in much the same light. His energy message last June avoids mention of the trend toward fuel monopoly or of government policies that permit and abet it. He envisions the importation, without quotas, of Canadian crude, but offers no other initiative aimed at keeping energy prices down. Natural gas rates, the President made clear, should be allowed to rise, and consumers should expect to pay more for all clean fuels. Oil and gas leasing on the outer continental shelf will be accelerated, apparently without prohibiting the joint venture arrangements under which the major oil companies now operate off shore. Federal oil shale lands in the Rocky Mountains will be opened up to private enterprise that is, the oil companies. Mr. Nixon even anticipates that the AEC’s uranium enrichment plants will eventually be sold—again, presumably, to the oil industry.

Can the nation’s rising demand for energy be satisfied without unduly enriching a few privately owned corporations? Should energy resources that took millions of years to form be surrendered to anticompetitive profit-making, or developed in the public interest? The questions have philosophical as well as practical overtones, but the striking thing is that they are so little debated.

One alternative is simply to restore some competition to the energy industry—by modifying or eliminating state pro-rationing based on market demand, scuttling the federal import quotas, halting tax subsidies for anti-competitive acquisitions, and dismantling the largest oil companies vertically as well as horizontally, as Beverly Moore of the Center for the Study of Responsive Law has suggested. The ensuing competition between independent, nonintegrated companies at all levels would lower prices and probably force some of the less efficient wells, of which there are many, to shut down.

A second alternative would be to move the public sector actively into the fuel business. This is the approach of almost every other country in the world. There are state-owned or state-backed oil companies in Britain, France, Germany, Italy, Canada and Spain, and most of the developing nations, as they gain in expertise, are moving toward government participation or nationalization. Only in America does the notion persist that the public should not only refrain from participating in the development of resources that, at one point or another, were publicly owned, but should subsidize the private interests to whom these resources are bequeathed at giveaway prices.

That this notion should persist is all the more remarkable in view of the fact that over half of the nation’s oil and gas reserves are still located under public lands, as are 80 percent of our oil shale deposits, 40 percent of our coal and uranium, and 60 percent of our geothermal sites. Alaska conservationist Robert Weedon has urged creation of a federally controlled corporation to develop Alaska’s vast public oil and gas resources in an ecologically safe and orderly manner. On a broader scale, a federal energy corporation could be established to develop off-shore, shale, geothermal and other energy resources, to assure TVA-type competition as well as environmental caution.

Both these approaches to U.S. energy development—greater private competition and new state participation—would keep down the price not only of energy, but also of petrochemical products such as synthetic fibers, synthetic rubber, paints, fertilizers and plastics, thereby cooling inflation and strengthening our position in world trade. Fuel prices kept low by increased private and public competition would also give the government, rather than a few private corporations, more power to determine how billions of dollars of public wealth should be spent. The government could, if it chose, adjust fuel prices upward with taxes so as to discourage excessive consumption, and direct the revenues raised thusly and by elimination of present tax loopholes toward socially valuable uses.

None of these approaches will appeal to the oil companies, who would have us believe that what is needed is not more competition but more backdoor subsidies, else they will cap their derricks and go home. That seems unlikely, in view of the fact that the oil companies are nowhere near the brink of bankruptcy—profits rose 13 percent in the first half of 1971, according to Oil and Gas Journal, considerably more than most workers’ wages. Nor is it likely that hostile foreign governments will collectively cut off our entire oil supply for five or ten years—or however long it takes to run us dry. Any fears along those lines could be allayed by having the federal government develop its off-shore resources and hold enough in escrow to provide for emergencies, as Senator William Proxmire (D-Wisc.) has proposed.

Energy needs are rising, but unless intense public pressures are brought to bear quickly, American consumers will needlessly pay billions of dollars annually to the oil industry, reflecting the cost not so much of “clean energy” as of monopoly.