BP-Arco: Has the FTC Gone Crazy?

BP-Arco: Has the FTC Gone Crazy?

BP-Arco: Has the FTC Gone Crazy?

Moneybox
Commentary about business and finance.
Feb. 3 2000 5:09 PM

BP-Arco: Has the FTC Gone Crazy?

If you're looking for a reason why the merger between BP Amoco and Arco has been blocked by the Federal Trade Commission, the best available one may be simply bad timing. The BP-Arco deal came in the wake of a host of acquisitions and mergers in the oil industry (and, for that matter, in industries everywhere), and the deal was set to close at a time when oil prices have been on a steady rise. In fact, oil prices are about the only prices that are rising, which has inevitably led people--and the politicians that represent them--to look for simple explanations and simple solutions. (Thus all the calls for President Clinton to authorize sales from the government's Strategic Petroleum Reserve.) In this context, blocking a $30 billion merger--which the FTC decided to do yesterday, after a 3-2 vote--is probably not going to get anyone in trouble with the public.

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The FTC commissioners who voted to take the oil companies to court (BP Amoco and Arco have said they'll contest the ruling) argue that the deal is a clear violation of antitrust law, which presumably means that regardless of when this deal happened, it would have been blocked. But there are a couple of reasons to wonder about this. The first is that it's very hard to see what reading of antitrust law would find Exxon's acquisition of Mobil (which created the world's largest integrated oil company) less dangerous than the BP-Arco deal. The second is that the FTC's explanation of exactly what's wrong with the deal is, shall we say, eccentric.

Essentially, the FTC said this deal violated antitrust law because the combined company will control too much of the supply of Alaska North Slope crude oil. (The FTC also said the deal would give the new company market power in pipeline and storage facilities in Cushing, Okla. I could explain why this matters, but you would fall further asleep than you are now.) And that control of North Slope crude, the FTC argues, would give the new company the power to raise the price that people on the West Coast pay for gasoline. In fact, the commission says that BP has already exercised that power by exporting some of the North Slope Crude it's pumped to the Far East, apparently thereby keeping prices high on the West Coast.

In short, the FTC is saying that even though there is no meaningful difference between Alaska North Slope crude oil and oil that comes from other parts of the world, there is effectively a market for North Slope crude alone, a market in which the new BP would be able to set prices. In other words, there is no global market for oil, as you might have thought given that OPEC's successful curbing of production has driven up oil prices around the globe and that the futures market for oil trades as if there is one price everywhere. Instead, there are lots of mini-markets for oil, and control of any one of them is a violation of antitrust law.

This argument is on its face so crazy that the FTC must have some hard evidence that West Coast refiners at least feel they're totally dependent on North Slope crude. But even if that evidence exists, the FTC's decision is dubious. Oil is, when you get down to it, oil (making allowance for the fact that there are different grades). There is nothing unique about North Slope crude. Oil is a quintessential commodity, which means that is eminently replaceable. If BP is really planning to jack up the price for West Coast refiners, then those refiners will go elsewhere to get their oil. More to the point, other suppliers will step in and seek out those refiners. BP cannot--as a matter of reality--eliminate the leveling effect of commodity markets. Meaningful price differences will be arbitraged away, wiping out the monopoly profits BP thought it could earn.

Oddly, the FTC is also arguing that BP already discriminates between refiners, selling oil more cheaply to those who can substitute other producers for BP and charging more to those who have a harder time substituting. (Why they have a harder time substituting is unclear.) But surely this is both exactly how it should be (BP has no obligation to facilitate competition with itself) and evidence against the FTC's broader argument. If BP has to sell cheaply to those who seek out substitutes for North Slope crude, then there is not a distinct market for BP's product. Its price is determined by the broader global market, of which the new combined company would own just 3 percent.

Monopoly and oligopoly power are not myths. They can exist, and they can be realized as a result of mergers. But BP Amoco's buying Arco is a long way from being something trustbusters should be concerned about. And the fact that the FTC had to construct an imaginary market to protect is all the proof of that we need.