The Solution to Rising Gas Prices: Antitrust Action

Merger mania in the oil industry demands more government intervention in the market, in the style of the Microsoft breakup. The only other choice is anathema to big business: federal regulation.

| Fri Jul. 7, 2000 2:00 AM EDT
The startling concentration of economic power that has resulted from the US merger wave of the last several years is going to require new levels of government intervention in the marketplace.

Either the federal and state governments will act to break up monopolistic and oligopolistic corporations, or government agencies will assume regulatory authority of a kind largely abandoned in the United States, or consumers will be gouged and innovation stifled.

Case in point: the oil industry and skyrocketing gasoline prices--now more than $2 gallon in parts of the Midwest.

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Vigorous antitrust enforcement may be preferable to government regulation. But government regulation of industry is certainly preferable to industry regulation of consumers and the marketplace.

A year and a half ago, when Exxon and Mobil merged in an effective effort to begin restoration of John Rockefeller's Standard Oil, the conventional wisdom was that the merger would not affect gas prices.

"The change in the structure of the industry is such that the trend toward lower gasoline prices and more efficient distribution of gasoline is well underway and this is not going to stop it," one analyst said to National Public Radio in a typical remark of the day.

The Fort Lauderdale Sun-Sentinel went so far as to say that predictions that the Exxon-Mobil merger would increase prices were "delusional."

Now, conventional wisdom is rapidly changing.

With oil prices skyrocketing nationwide, prices spiking in the Midwest and industry profits reaching stratospheric heights, even the Clinton administration has called on the Federal Trade Commission to investigate whether the oil industry is illegally colluding to raise prices.

The oil industry, as always, has a series of rationalizations for the sudden jump in gas prices.

OPEC has cut production and world prices have risen, say industry representatives, even as global demand is increasing. The industry also complains that a Unocal patent on a means to formulate cleaner-burning gas has impeded the use of the most efficient gasoline formulation techniques. All of that's true, but those factors do not account either for the unique price spike in the Midwest, nor for the surge in industry profits.

New requirements to sell cleaner-burning gasoline have boosted prices, the industry complains, and led to special difficulties in the Midwest, where refiners use ethanol instead of alternative blending components. That's also true, but the Environmental Protection Agency -- noting that the oil industry has had six years to prepare itself for the implementation of cleaner fuel standards that the industry helped negotiate -- says the cleaner-burning gas should only cost 4 to 7 cents more per gallon.

It is hard to escape the conclusion that some significant part of the story involves industry profiteering -- with the oil giants using the input cost increases from OPEC and the reformulated gasoline standards as cover to pile on additional charges.

Whether these extra charges were the product of collusive agreements or "conscious parallelism" (raising or lowering prices in response to a competitor's price changes on the same product) can only be determined through an investigation that involves close questioning of key industry executives and careful review of industry documents.

Either way, profiteering is a product of industry concentration. Fewer industry leaders (and there certainly are fewer, following the recent mergers of Exxon and Mobil, BP and Amoco, and BP Amoco and ARCO) make price-fixing much easier, whether done through overt and illegal agreement or follow-the-leader pricing without illegal collusion.

There may be legitimate public policy rationales for raising gas prices -- notably, to spur conservation -- but if so, such price increases should be government mandated, with revenues used for appropriate public purposes. They should not be the result of industry rip-offs and profiteering.

Absent government initiative to bust up the oil trust, these kinds of price increases are bound to continue haunting the United States -- unless the government chooses to regulate Big Oil.

The first and most pressing need is for a windfall profits tax, to put an end to the industry's gain from consumer's pain due to OPEC and other input cost increases.

A second and relatively modest step would involve the issuance of a compulsory license to require Unocal to let competitors use its clean-burning gas patent. A patent monopoly cannot be permitted to block implementation of effective technologies to clean the environment. Representatives Dennis Kucinich, D-Ohio, John Baldacci, D-Maine, Frank Pallone, D-NJ, and Tom Barrett, D-Wisc., have introduced legislation to make this possible.

Finally, it is time to think seriously about price controls. Richard Nixon did. Although the oil giants clearly do not have complete control over gas prices, they do have the ability to set prices above competitive rates. Why should industry regulate the market instead of democratic government authorities?

There are many needed measures on the demand side -- to increase energy efficiency and facilitate a rapid transition to solar and other clean energy alternatives -- but these are not a short-term solutions. Only direct government regulation will stop the oil oligopoly from persisting in its price gouging.

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