Competition in Oil: The Gulf Coast Refinery Market, 1925–1950 [Reprint 2014 ed.] 9780674494329, 9780674494305

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Competition in Oil The Gulf Coast Refinery Market,

1925-1950

Competition in Oil The Gulf Coast Refinery Market,

1925-1950

Daniel C. Hamilton

Harvard University Press

· Cambridge

·

1958

© 1958 by the President and Fellows of Harvard College Distributed in Great Britain by Oxford University Press, London

Library of Congress Catalog Card Number 58-7249 Printed in the United States of America

To my mother and father

Preface This monograph is a modest revision of a doctoral dissertation in the Department of Economics at Columbia University, The Gulf Coast Refinery Market from 1925 to 1950: A Study in Market Behavior (1954). The modest scope of the revisions, however, is a function of available time rather than of complacency. Special thanks go to Professor George J. Stigler who, as research director for the manuscript, contributed time, patience, and criticism beyond reasonable expectation. Thanks are also due to Dean Edward S. Mason, who first aroused my interest in economics and who has taken a lively interest in the monograph, and to Professors Morris A. Adelman, Joel Dean, and Leslie Cookenboo for criticism and encouragement. I must also express my obligation to Walter J. Levy, whose extensive knowledge of the oil industry and whose encouragement and support contributed much to the fact that this volume has finally seen the light of day. Pride of authorship in such errors and dubious opinions as remain is claimed by the writer. DANIEL C . PHILADELPHIA,

PENNSYLVANIA

November 5, 1957

HAMILTON

Contents I. Introduction

1

II. Structure of the Gulf Coast refinery market A. B. C. D. E. F. G.

Vertical structure of the oil industry Geographic pattern of the refining industry Definition of the Gulf Coast market The buyers and sellers in the Gulf Coast refinery market Price reporting in the Gulf Coast market The nature of demand for refinery products Summary and conclusions

4 7 10 15 19 29 39

III. The conditions of entry into the Gulf Coast refinery market A. B. C. D. E.

The economies of scale Access to technology Access to crude and to markets Capital requirements Concluding considerations and summary

43 56 70 86 87

IV. Price behavior in the Gulf Coast refinery market A. B. C. D. E.

Y.

Gross product realizations and crude costs, 1925-1950 The time pattern of price and output behavior Cost behavior and price-output relations Price discrimination in the Gulf Coast refinery market Concluding remarks

91 101 123 129 138

Other aspects of market performance A. B. C. D. E.

Plant-output relations Capacity-output relations Progressiveness Prices, profits, and output Summary

140 146 153 166 173

χ

Contents

VI. The Gulf Coast refinery market: effective competition? A. Summary of the

findings

B. The Gulf Coast refinery market: effective competition?

175 181

Appendices A. Construction B. Tables

of the Gulf Coast refiners' margin

193 207

Bibliography

219

Index

231

Tables 1. Gulf Coast refiners as of January 1, 1926-1951

14

2. East Coast refiners as of January 1, 1926-1951

15

3. Concentration of Gulf market capacity in selected years

18

4. Sales of distillate by principal uses, 1937 and 1950

33

5. Total energy consumption for all residential uses and commercial space heating, 1935 and 1950

35

6. Sales of residual by principal uses, 1937 and 1950

37

7. Effect of refinery size on investment requirements and operating costs

46

8. Cracking plants by types of process, January 1, 1933

63

9. Annual crude purchases and sales of twenty majors, 1929-1938

70

10. 1950 prime fuels consumption by principal uses

82

11. Estimated construction costs of a (then) modern 25,000-barrel refinery in five selected years

86

12. Entries and exits in the Gulf Coast refinery market

89

13. Monthly crude and products price changes

94

14. A comparison of cyclical fluctuations in crude prices and gross receipts 15. Seasonal variations in demand and gasoline price changes

97 105

16. Seasonal variations in demand and distillate price changes

107

17. A comparison of the timing and percentage change between the refiners' margin and crude runs over several specific cycles, 1925-1950

122

18. Typical unit cost breakdown for 1950 refinery

127

19. Distribution of Gulf and East Coast refinery capacity by size range as of January 1, 1926, 1941, 1951 20. Grades of prime fuels listed in Piatt's Gulf cargo quotations

143 165

21. Percent of Gulf and East Coast capacity held by individual firms at five-year intervals, 1926-1951

174

xii

List of

Tables

Appendix Β 22. Man-years and wage cost per barrel of crude run, 1879-1947

208

23. Average monthly Gulf Coast realization per barrel of crude run, 1925-1950 24. Weighted average crude costs f.o.b. Gulf, 1925-1950

209 210

25. Gulf Coast refiners' margin, 1925-1950

211

26. Refiners' margin, production and shipments bases, 1946-1950

212

27. Annual average crude runs, refiners' margin, and refinery stocks

213

28. Gulf and East Coast refinery capacity data

214

29. Fuel efficiency in petroleum refining, 1909-1950

215

30. Price per octane and fuel cost per ton-mile, 1920-1950

216

31. Rates of return on investment, 1925-1950

218

Charts 1. 2. 3. 4.

Industry operations controlled by integrated refiners in 1950 Oklahoma gasoline and distillate prices as a percent of Gulf prices Annual production of prime fuels, 1899-1950 Average refinery size, 1918-1950

5. Effect of refinery size and rate of operations on average total unit costs 6. Estimated installed catalytic cracking capacities, 1937-1953 7. Wholesale and retail gasoline distribution channels 8. Average monthly gross realization, crude costs, and refiners' margin per barrel of crude run, 1925-1950 9. Crude price changes v. changes in gross receipts 10. Annual average crude prices v. annual average gross receipts 11. Annual ratios, gross receipts to crude costs 12. Gulf and East Coast gasoline production, refinery stocks, and Gulf cargo prices, 1925-1950 13. Gulf and East Coast distillate production, stocks, and Gulf cargo prices, 1930-1950 14. Gulf and East Coast crude runs and refinery stocks of prime fuels, 1925-1950 15. Gulf and East Coast refinery shipments (four prime fuels) and refiners' margin (ratios to 12-month moving average) 16. Refiners' margin, production and shipments bases 17. Annual average crude runs, stocks, and margins 18. Annual average crude runs, stocks, and margins expressed as ratios to trends 19. Refiners' margin, crude runs, and refinery stocks, 1925-1950 20. Refiners' margin (12-month moving average) and crude runs (ratios to trend) 21. Crude costs f.o.b. Gulf and Gulf cargo prices for gasoline, distillate, and residual, 1925-1950

7 11 32 44 46 66 77 92 95 99 100 104 106 108 110 112 114 114 117 118 120

xiv

List of Charts

22. Distribution of Gulf and East Coast refining capacity by plant size, 1926, 1941, and 1951 23. Annual Gulf and East Coast refining capacity and crude runs, 19251950

144 148

24. Capacity, utilization, net additions, and gross additions and retirements, 1925-1950

151

25. Fuel consumption per barrel of crude run in U. S. refineries, 19091950

158

26. Wage earners employed per barrel of crude run in U. S. refineries, 1879-1947

160

27. Octane rating, price per gallon, and price per octane of regular grade gasoline, 1920-1950

163

28. Ton-miles per gallon and cents per ton-mile, 1930-1950

164

29. Capacity, utilization, net additions, and profits, 1925-1950

171

MAP Bureau of Mines' refinery districts

14

Competition in Oil The Gulf Coast Refinery Market, 1925-1950

CHAPTER

I

Introduction

The nature of this study is suggested by its title. It is a market analysis with a policy orientation. Focused chiefly on price behavior, its endeavor is to judge, within the twin limitations of the applicability of theory and the availability of data, the character of this and related aspects of market performance. It must be admitted that precise guides to policy still elude the economist. In a sense this will always be so. Agreement upon policy postulates agreement upon objectives. But the proper ends of social policy are in part noneconomic and are in all cases a problem in applied ethics that is not easily resolved. Even if consideration is limited to the economic ends of antitrust policy, the objectives may be mutually exclusive, and it becomes a matter of opinion as to which should give way. More pertinent for our purpose, and equally perplexing, agreement upon policy further postulates agreement upon — and preferably a firm knowledge of — the relation between means and ends. Neither such agreement nor such knowledge is available. To cite a well-worn example: No one seriously disputes that if concentration is low and firm numbers are large, competition (in the absence of collusion) will be effective. Again, if the market is properly defined and entry is blockaded, few would look with complacency upon market occupancy by one or two 1

2

Competition

in Oil

firms. But most markets fall between these extremes, and the level of concentration which, given other elements of market structure, seriously threatens competition has not been determined. In short, the causal implications of certain market structures are by no means firmly established. W e can specify conditions (structural features) which are necessary to certain ends (performance). W e can also specify some sets of conditions which seem sufficient for certain ends. But there remains a considerable range of market structures whose performance implications are uncertain. In such cases, it becomes a matter of judgment whether actual performance could be improved by specific alterations in structure. In recent years, much discussion has been directed at overcoming this problem. The point of departure for much of this thinking has been the recognition that policy involves a choice among attainable alternatives. It is further recognized that inescapable differences in the technological and institutional structures of various industries create inescapable differences in the attainable force and character of competition. The problem is to achieve, industry by industry, the optimum realizable extent of competition through judicious manipulation of the controllable elements in the market structure. The central question is whether any feasible alteration in existing conditions would alter results in ways deemed desirable. In general, improved answers to this question have been sought through improved understanding of the relation between market structure and market performance. The process has been one of elaboration, of investigating the performance implications of various combinations of structural features which, for either a priori or a posteriori reasons, have seemed important. This has been supplemented by a more explicit recognition of the limitations of static models and of the importance of innovation. But the hypotheses thus developed have necessarily been tentative, eclectic, and in a process of formulation and refinement in which great stress is placed upon an ad hoc approach and on Marshall's caveat against "long chains" of deductive reasoning. Fortunately for our purposes, this process has disclosed a measure of agreement with respect both to the relevant dimensions of performance and to the potential significance of certain structural features. These suggest the plan of this book. It falls into three parts. Chapters II and III define the Gulf Coast refinery market and describe certain of its structural features. Chapters IV and V supplement this examination of structure with an analysis of price behavior and of related aspects of market performance. Finally, in Chapter VI, we consider whether any of the tentative hypotheses relating structure to performance which have been advanced in the literature in recent years suggest alterations in the Gulf

Introduction

3

market structure which might reasonably be expected to improve its performance. At the same time, the author would stress the subjective nature of the interpretation of both the facts and the literature. Were they available, a series of comparable industry studies should make possible a comparison of the performance of firms and industries following different practices within similar structures and following similar practices within different structures. This should yield better informed judgments concerning the significance of specific structures and practices. In the meantime, a single industry study can hardly demonstrate that the relation between structure and performance was necessary and unique. Individual studies such as the present one must be limited to essentially deductive analysis. In this process others, given the same empirical findings, might well reach divergent conclusions.

CHAPTER II

Structure of the Gulf Coast refinery market

It is the purpose of this and the following chapter to define the Gulf Coast refinery market and to describe certain of its structural features. The question of definition is taken up first. Section A of the present chapter locates the refining function within the vertical structure of the oil industry; Section Β describes the geographical pattern of refining; Section C discusses the geographic and product limits of the Gulf Coast refinery market. The remainder of the chapter is devoted to a survey of certain structural features of the market. Section D describes the buyers and sellers in the market, and Section Ε examines the method of price quoting. In the final section a brief analysis of the demand for refinery products is undertaken. Continuing the analysis of market structure, Chapter III is devoted to the conditions of entry. This chapter also analyzes the cost curves of the refinery, since these are most conveniently discussed in connection with the economies of scale. Finally, the nature of the refining process is briefly reviewed in the discussion of access to technology. A. VERTICAL STRUCTURE OF THE OIL INDUSTRY It is commonplace that the three divisions of the petroleum industry are crude producing, refining, and marketing. Actually, there are more. 4

5

Structure of the Market 1

The various facets of the producing function, for example, though often handled by one firm, are more often handled by separate firms,2 and are therefore separated by the market mechanism. Similarly, there is the transportation function. This, too, for both crude and products, is often handled on an integrated basis, but is also available on a commercial basis.3 Yet there is sense in the commonplace notion, for crude producing, refining, and marketing are the three successive stages which are separated by substantial markets for petroleum, rather than by some service incidental to its production or distribution. Thus, production and refining are separated by the market (wellhead or field price) for crude. Crude producers appear as sellers in this market, refiners as buyers. Crude transport is a separate function, it is true. Certainly transport costs must be added to the wellhead price to obtain the delivered cost to the refiner. But there is not a "delivered market" and "delivered price" for crude that corresponds to the field price.4 The same is true for product transport. There is a refinery market over which products pass from refiner to marketer. There are also wholesale and retail markets which, together with the refinery market, demarcate the wholesale and retail functions. But, as in the case of most commodities, transport costs are reflected in subsequent prices without giving rise to additional markets of their own. Although the transport function may be purchased per se, it is not demarcated by successive markets for the "untransported" and "transported" commodity. From the standpoint of successive markets, therefore, we may distinguish crude producing from refining, and refining from marketing, with the latter subdivided into wholesaling and retailing. If there were no integration, all crude and products would pass over these markets. Conversely, if every company were fully integrated and completely balanced, there would be no markets beyond those over which the final products passed into the possession of the ultimate consumers. But neither is true. There is much integration, but no company is integrated and completely balanced. And there are nonintegrated concerns as well. 1

Exploration, drilling, producing as ordinarily conceived, and stripper-well opera-

tion. 2

See Hodges and Cookenboo, "The Oil Well Drilling Contractor Industry: A Case Study in Pure Competition," The Rice Institute Pamphlet (1953). See also McLean and Haigh, The Growth of Integrated Oil Companies, pp. 392-412. 3 Truck, rail, and tanker facilities are available from firms specializing in supplying this service, and pipelines must be operated as common carriers. 4 "It may be stated categorically that the producer has no market at the refinery and prefers to sell in the field." (Wolbert, American Pipe Lines, p. 47.) There are exceptions, particularly in the case of foreign crudes, which are sometimes sold on a c.i.f. basis with the seller providing tanker transportation. These are, however, exceptions to the general practice of selling domestic crude at the wellhead, foreign crude f.o.b. port of loading.

Competition in Oil

θ

Thus there are nonintegrated producers of crude. These dispose of their output to refiners. There are nonintegrated refiners. These purchase crude and dispose of their products to a variety of marketers or direct to the final consumer (thereby in essence absorbing the marketing function). And there are nonintegrated marketers who must purchase the products they sell. There are also partially integrated concerns. These may produce crude and refine it, but engage in no marketing operations. Or they may refine and market, but purchase their crude from nonaffiliated sources. In each case, the intermediate markets are again called into play. Finally, and most important, there are fully integrated concerns. These span the producing-refining-marketing segments of the industry. Even these, however, are never completely balanced. They may produce more crude than they refine, or refine more crude than they produce. They may refine more products than they market, or market more than they refine. Moreover, the extent of their recourse to the intermediate markets is frequently greater than the simple imbalance of their successive stages would imply. As a result, for example, of the unpredictable occurrence and exhaustible nature of crude deposits, more than one company has found itself with crude that it was more economical to sell than to refine, replacing it with purchases from crude sources more advantageously located with respect to its own refineries. A fully integrated concern will thus to some extent by-pass all but the final market, and yet it will also appear as a buyer or seller in each. Indeed, because concentration in the petroleum industry tends to be highest at the refining stage, the integrated refiner tends to be a purchaser in those markets which precede him in the chain (that is, a purchaser of crude and crude transport), and to be a seller in those which come after (that is, a seller at the refinery and wholesale levels). This was clearly brought out in a 1950 survey 5 of the refining industry. This survey was based on information received from 59 percent of the operating refiners who accounted for 97.3 percent of industry crude runs in that year. The results show that at least 48.6 percent of the operating refining companies, representing 93.2 percent of industry capacity, had some type of vertically integrated structure in 1950. They also show that the most prevalent type of structure among these companies was that which embraced activities at all levels of the industry. At least 30.1 percent of the refining concerns, representing 89.1 percent of industry capacity, fell in the producing-refining-marketing category. This survey also confirmed the wide variations in the proportion of industry facilities owned or leased by integrated concerns at the successive levels of the industry. Among integrated refining concerns, concentration was greatest in refining and tapered off rapidly as one moved 5

McLean and Haigh, The Growth of Integrated Oil Companies, chapter ii.

7

Structure of the Market P E R C E N T OF T O T A L 40 50 60 WELLS

DRILLED

CRUDE P R O D U C E D

CRUDE

FROM

PIPELINES

Β

CRUDE RUNS TO S T I L L S

PRODUCTS

VIA

PIPELINES

TERMINAL AND BULK STATION S A L E S 0 SERVICE STATION S A L E S OF G A S O L I N E

LEGEND:

CHART

1.

Industry operations controlled by integrated refiners in 1950

Source: McLean and Haigh, The Growth of Integrated a

R E S T OF INDUSTRY

: FULLY INTEGRATED: i:·:·:·:: REFINERS: ; : : : ; :·::

Oil Companies,

p. 35.

Gasolines, naphthas, kerosene, and distillates.

backward to crude production or forward to marketing activities (see Chart 1). In focusing on refining, therefore, we are focusing on a concentrated, hence potentially oligopolistic, sector of the industry. And in focusing upon the refinery market, we are focusing on a market that is important in its own right and also of substantial interest in that it creates an economic opportunity value for the integrated products which by-pass it. B. THE GEOGRAPHIC PATTERN THE REFINING INDUSTRY

OF

Viewed vertically, the oil industry is thus a chain of markets and prices that stretches from wellhead to consumer. Viewed horizontally, each link becomes a mosaic of regional markets. Refining is no exception. The nation's refining capacity is not concentrated at one point, nor is it spread uniformly over the nation. As in most industries, refining capacity tends to be clustered at: ( 1 ) raw material sources, ( 2 ) major consuming centers, and (3) intermediate points along the routes of most economical shipment. For this reason, it is necessary to distinguish between the refining industry, on the one hand, and specific markets, on the other.

8

Competition in Oil

There are several important areas of refining capacity. Major coastal centers include California (principally in the San Francisco Bay and Los Angeles areas), the Texas and Louisiana Gulf coasts, and the East Coast north of Charleston. Inland, a belt of refineries stretches across northern Louisiana, Arkansas, and East, Central, and West Texas. Just north of them lie the mid-continent refineries of North Texas, Oklahoma, and Kansas. Proceeding northeastward, there are concentrations of refining capacity in southern Illinois, the Chicago and Toledo areas, central Michigan, and western Pennsylvania. Finally, a thin scattering of refineries stretches northwestward through the Rocky Mountain states. In general, the inland refineries are crude-oriented, and are usually small or medium-sized refineries serving local markets. This is true of the plants in northern Louisiana, Arkansas, inland Texas, Oklahoma, Kansas, southern Illinois, central Michigan, western Pennsylvania, and of many in the Rocky Mountain area. More important from the point of view of capacity than the crude-oriented refineries are those located along transportation routes and at major consuming centers.6 The first tend to locate at natural points of transshipment of crude from land to water transportation. Preferably these points are places where crude from more than one field would be brought to tidewater in the absence of refineries. Such refineries are thus not dependent upon a single crude source; they may bring crude from several fields to the coast, where it is refined for local consumption or for shipment by water. The best example of such a location is the Gulf Coast, where there is a substantial market on the site, where crude would be transshipped if there were no refineries, and where crudes from several sources are obtainable (East Texas, West Texas, the prolific coastal fields, and, in the 1920's, even the mid-continent area). The second type, those located at major consuming centers, are found at large or small market centers, such as those in the Chicago, Toledo, and Cleveland areas. The great refining area on the East Coast is located, first, next to the principal market area of the United States and, second, as a sort of Gulf Coast in reverse. It is a natural point of transshipment from tanker to land for foreign crude imported from Venezuela or from the Middle East, as well as for crude brought by sea from Gulf Coast ports. This geographic pattern of refining activity is paralleled by a roughly similar segmentation of the industry into a series of regional refinery markets. It is, of course, at the various refining centers that the pricemaking forces tend to come into focus, and it is also at these points that regional price quotations tend to emerge. The most important of these 6 For an excellent analysis of orientation and refinery size, see Cookenboo, Crude Oil Pipelines and Competition in the Oil Industry, pp. 43-65.

Structure

of the

Market

9

are the Gulf Coast, which also supplies (and therefore includes) the Atlantic seaboard; the mid-continent or Group 3 market, 7 which governs prices through much of the north-central portion of the country; and the Pacific Coast, which also supplies part of the Rocky Mountain region. The physical basis of this segmentation lies in the pattern of crude production, which is concentrated within a few limited areas of the country, and in a distribution of population which is such that a major consuming area is economically tributary to each of the three largest producing areas. Thus, the dense population centers of the Atlantic seaboard are more cheaply reached by tanker from the Gulf Coast than by pipeline from the mid-continent; the great population of the metropolitan Midwest is readily accessible by pipeline from the mid-continent and Wyoming fields; and the consumption centers of the Pacific Coast are fortuitously contiguous to the California crude deposits. There is competition between these areas in border zones. In addition, the minor refining centers affect the price structure in many sections, such as western Pennsylvania, central Michigan, inland Texas, and the like. This occurs through the establishment of local prices which are beneath the ceiling of major-market-plus-transport which would otherwise tend to prevail. It also occurs through the medium of a great deal of unsystematic freight absorption, either to "meet competition" or, on occasion, simply to dump "distress stocks" in some other refiner's backyard. Nevertheless, these markets are sufficiently independent so that, for the purpose of price analysis, their distinction is warranted. 7 Shortly after World War I, the Interstate Commerce Commission designated groups of refineries which were given identical rail rates, and also established differentials between the groups so that each had a certain area in which it enjoyed a freight advantage. Group 1 consisted of the Kansas City refineries. Group 2 was formed around the refineries of Coffeyville, Chanute, Neodesha, and Joplin. Group 3 was originally a group of refineries in northeastern Oklahoma, but was later extended to include most of the state. Group 4 was formed around refineries in the vicinity of Arkansas City, Wichita, Potwin, El Dorado, and McPherson. As new refining centers developed, still further groups were formed (for example, the North Texas, the Shreveport-El Dorado, the Panhandle, and the East Texas or Longview group). Because the Group 3 refiners were originally the dominant supply source for the mid-continent area, and because buyers were interested in the delivered cost to them and the Group 3 freight rates were well and widely known, the custom arose of quoting on a Group 3 basis regardless of origin. Other refiners, particularly when selling outside their preferential territory (called "differential territory" in the trade), converted their prices to the f.o.b. Group 3 equivalent for ease of comparison by prospective buyers. Similarly, the brokers in the Chicago resale market, who also followed the trade custom of quoting f.o.b. prices but who might pick up their supplies from any of several refining centers, converted all prices to f.o.b. Group 3 equivalents, again for easy comparison by the buyers. Although "the" actual Group 3 price is that set by the Oklahoma refiners, the entire mid-continent area is often referred to as "Group 3" because of this long-established custom. (National Petroleum News, May 17, 1933, pp. 69-75; January 5, 1927, p. 71; May 11, 1927, pp. 78-9; July 6, 1927, pp. 87-8; February 20, 1929, p. 87; October 12, 1938, pp. 11-13.)

Competition in Oil

10

C. DEFINITION OF THE GULF COAST MARKET Historically, this independence has been clearest in the case of California. As long as California was self-sufficient, the geography of the Pacific Coast region was such as to lend a rather obvious degree of autonomy to the price-making process. With respect to sea-borne supplies, the California market was sheltered by the long and expensive tanker haul from the Gulf Coast and by the additional protection of the tariff on foreign supplies. Overland, the Pacific Coast market did not overlap significantly with the contiguous Rocky Mountain, mid-continent, and Texas areas because of the dearth of population in the buffer zones. "In the region where freight absorption might loom large, therefore, there is slight incentive to engage in it." 8 California prices could thus move over a considerable range before attracting outside supplies or before "export" to other consumption centers became profitable.9 The independence of the mid-continent and Gulf Coast markets is a priori less clear. The population density of the intermediate states is far higher than that of the Rocky Mountain area. In addition, there are a considerable number of inland Texas, northern Louisiana, and Arkansas refiners who not only cater to local markets but are readily able to ship products in either direction or in both directions. The insulation of the two markets is thus less clear, and one would expect their scope of independent movement to be accordingly restricted. In these circumstances, an examination of the relative prices can shed light on the degree of independence involved. At first this is not reassuring. If one charts the successive January, April, July, and October average low Oklahoma refinery tank-car and Gulf Coast bulk-cargo prices for regular grade gasoline for the years 1925-1950, one finds that with respect to the broader long-run changes in the price level, the cyclical movements, and even the seasonal movements, the two price series behave in remarkably parallel fashion.10 But this is to be expected. Bain, Economics of the Pacific Coast Petroleum Industry, I, 21. It should be added that California was subject to occasional imports of distress or "hot" gasoline, which were in effect being dumped by outside suppliers. However, Bain found these occurred "in a volume certainly insufficient to have any consistent influence on the California market." More important has been dumping by the California refiners themselves. "In recent times, the significance of the 'free' range and the independence of the California market seem to have hinged upon the practice of exporting from California at an f.o.b. refinery price lower than the domestic. . . . Sufficient supply has thus been disposed of that the California price could move in response to purely local competitive conditions. . . . The fact that California is traditionally an exporting area . . . therefore, has not served to bring the California coast and Texas (or any other point) together in a single competitive market area." (Ibid., I, 16, 18.) 1 0 In inland areas, where the original method of transport was the tank car, prices are still quoted in "tank-car lots." Along the Gulf, where the main medium of transport is the tanker, prices are customarily quoted for "bulk cargoes," minimum 20,000 barrels. 8 9

11

Structure of the Market PERC

CENT

140

140

GASOLINE 120

iflK

l·S A

A

Κ is

•

/i

f

•

l| / vΛ

\'

1 1

• 1

λΛΛv

y ν/

1 _1

•

100

1 · .

DISTILLATE

rV i *ϊ ι V

IΛ ' »'ν

λί

,

1

r/v "A V

, .,.> I9Z5

ι

ι

ι

•— 1930

•

'J

Λ-'\

l\

(

ι

· 1935

\

ν Λ'

>

1

-

\

/\' '

»V 1—i \

\

Λ

1 /

100

v

-ν

γ __J 1940

ΙΪ0

60

I

•

ι 1945

•

. 1 . 1950

c h a r t 2. Oklahoma gasoline and distillate prices as a percent of Gulf prices a Source: Piatt's Oil Price Handbook, editions of 1925-1950. 1 1 1 1 a Average monthly low of Piatt's for the months of January, April, July, and October.

These factors are common to both markets and should make for similar price behavior. More revealing, therefore, is the comparison in Chart 2. At the top are plotted the successive January, April, July, and October Oklahoma gasoline prices expressed as a percentage of the corresponding Gulf Coast bulk prices. At the bottom Oklahoma middle distillate 11 prices are plotted, again as a percentage of the corresponding Gulf quotations. In both cases, a considerable degree of independence is suggested. During this period, Oklahoma gasoline prices ranged from 64 percent to 120 percent of their Gulf Coast counterparts, staying both above and below parity for long intervals. The same is true of distillate. While these markets may have been similar with respect to the broader 11 Crude petroleum is a mixture of thousands of complex hydrocarbons. To be utilized, these hydrocarbons must to some extent be separated and processed. This is achieved by distillation, which is the basic refining process. There are four major products or "cuts": ( 1 ) gasoline, ( 2 ) kerosene, ( 3 ) distillate — also known as middle distillate, heating oil, or gas oil; and ( 4 ) residual fuel oil, which is simply the residue. These four are known as the "prime fuels," and there are in turn a number of grades of each of the prime fuels.

12

Competition in Oil

cyclical and secular forces at work, and while they are undoubtedly linked through freight absorption and intermediate buffer markets, they also appear to possess sufficient independence so that local peculiarities of demand and supply may find ready and persistent expression. Although by no means insulated, and though important events in one frequently are reflected in the other, it seems permissible, as a starting point for analysis, to regard them as economically distinct.12 1 . GEOGRAPHICAL L I M I T S OF THE GULF COAST MARKET

It is easier to identify a market than to define it. Yet if one is to analyze the number of firms in a market, or to collect statistics on production, inventories, and shipments, the geographic and product limits of the market must be specified. This is difficult. The limits of a market will vary over time, and statistics are usually collected by and for political entities whose areas need not coincide with those of the market in question. The basic difficulty in fixing the geographic limits of the market occurs because its size depends upon the price of the commodity. As Gulf prices fluctuate relative to those in adjacent producing centers, the boundary of the market will shift. With advancing Gulf prices, the area of demand will recede toward the Gulf and Atlantic coasts, while the area of supply will enlarge to include more distant refiners who could not, previously, sell profitably to Gulf buyers. The reverse will occur as prices fall. Indeed, during the 1920's and 1930s trade journals often referred to the vital role of Gulf demand (prices) in the position of inland refiners. When the Gulf market was strong, inland Texas, Louisiana, and Arkansas refiners shipped south to the export trade and for coastwide movement. But when the Gulf market was weak, Gulf production moved inland, and Texas, Louisiana, and Arkansas production was backed into the mid-continent in search of more profitable outlets. Similarly, when the Export Petroleum Association, composed of sixteen major firms, sought to hold export prices above Gulf domestic quotations, 1 2 Lending support to this view is the regional specialization of sellers. The smaller refiners (those below the largest twenty) are almost all confined to one or another of these three major market areas. Among the largest twenty, at least as of 1939, only four or five might be regarded as having nationwide distribution. About ten operated in but one of the three major markets. The remainder operated in both the midcontinent and the Gulf-East Coast areas. "Although any regional subdivision will therefore include a few sellers who operate elsewhere in the country on a large scale, the majority will be predominantly regional sellers. Regional segregation is further fortified by the fact that in each particular area a nationwide company ordinarily operates a subsidiary which is dependent on the local supply of crude and on its local refining facilities, and which is otherwise influenced by local price-determining forces." (Bain, Economics of the West Coast Petroleum Industry, I, 15. See also T.N.E.C. Monograph No. 39, Control of the Petroleum Industry by Major Oil Com>panies, pp. 88-9.)

Structure of the Market

13

the trade journals reported many foreign buyers going inland for products, as well as many Midwestern refiners seeking sales at the Gulf by shading the Association's prices. Finally, there has been a varying but persistent amount of market overlap due to the equally varying but equally persistent practice of freight absorption by refiners located along the border zones of the major markets and in the minor refining centers.13 Under such conditions, "the" geographical limits of the Gulf Coast market do not exist. Both the area of supply and the area of demand — and they need not coincide — are bounded by ill-defined and shifting zones which bear no necessary relation to the geographical subdivisions for which statistics are available. This hinders analysis, but it does not make it impossible. The map on the following page outlines the districts for which the Bureau of Mines collects refinery data. Monthly statistics on crude runs, output by product, and inventories are available for each district. Annual statistics on the number of refineries and their estimated capacity are also published. Three of these districts — the Texas Gulf Coast, Louisiana Gulf Coast, and East Coast — coincide with the great bulk of the Gulf Coast marketing area. The data for these districts may therefore be taken as a reasonable approximation of total market capacity, production, and inventories, with their interpretation conditioned, where necessary, by a consideration of events in contiguous districts. 2 . PRODUCT LIMITS OF THE GULF COAST MARKET

Refining is a multiproduct industry.14 In defining the Gulf Coast market, it is therefore necessary to specify its product limits as well as its geographical boundaries. Much of our analysis will be concerned with price behavior, that is, with the price of refining. Since the price of the refining function — or the "refiners' margin," as it is known in the trade — consists of the margin between crude prices and gross receipts per barrel of crude run, the limits of the refinery market might properly be taken to include all the products of the refining process. This would include the several grades of each of the four prime fuels. It would also include the various minor products and specialties, such as the many lubricating oils, greases, waxes, and coke, asphalt, road oil, and the like. In practice, this is neither feasible nor necessary. Volume data are compiled only by major class of products; a breakdown by grades of 1 3 See various issues of the National Petroleum News. See also The Tank Car Market and The Jobber Should Know These Facts on 1929 Tank Car Markets, two pamphlets published by the W . C. Piatt Company in 1928 and 1929, respectively. See also T.N.E.C. Monograph No. 1, Price Behavior and Business Policy, pp. 3 4 1 - 2 . 1 4 See footnote 11, p. 11.

Table 1. Company 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48» 49. 50. 51. 52. 5354. 55· 56· 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

Chalmette Petroleum Corp. Gulf Coast Refilling Co. Liberty Oil Company Standard Oil Co. (Ind.) New Orleans Refining Co. Sinclair Standard Oil Co. ( N . J . ) Crown Central Petroleum Corp. Freeport Asphalt Co. Galena-Signal Oil Co. Gulf Oil Corp. Houston Terminal Refining Co. Keen & Woolf Oil Co. Socony-Vacuum Oil Co. P i e r c e Petroleum Corp. Pure Oil Company Southwestern Refining Co. Terminal Oil & Refining Co. The T e x a s Company Deepwater Oil Refineries Shell Union Oil Corp. Petroleum Conversion Corp. Houston Oil Co. of T e x a s Houston Oil Terminal Co. Stone Oil Company U. S. Refining Company American Petroleum Co. Republic Oil Refining Co. Coastal Petroleum Corp. Conroe Refining Company Maritime Oil Company Phoenix Refining Company Corpus Christi Refining Co. Bennett Refining Co. Coastal Refineries» Inc. Refugio Refinery Washington Refining Co. Wood-Moore Corporation Davis Refinery, Inc. Eastern States P e t . Co. MacCook Oil Company Shelly Refining Company Southport Petroleum Co. Southwestern Oil & Refining Co. Terminal Refining Corp. Atlantic Refining Co. Alpine Refining Corp. Barnsdall Refining Corp. Pontiac Refining Co. Alto Refining Company Green Bayou Refining Corp. Taylor Refining Co. Bradley Oil & Refining Co. Evangeline Refining Co. General Oil Corporation Hamman Exploration Co. Hutex Oil & Refining Co. Continental Oil Company Cities Service Oil Co. Meraux Petroleum Storage Co. P e t c o Corp. J. S. Abercrombie Co. Southern States Refining Co. American Republic Corp. Eddy Refinery Sid Richardson Refining Co. Beaux Ridge Oil Refining Co. Alamo Refining Co. ( P h i l l i p s ) Bennett Oil & Refining Co. of T e x . Petrol Terminal Corp. Gilcrease Oil Co. American Bitumuls (Cal. Std.) Rosewood Oil & R f g . Co. Oil & Chemical Products, Inc. W. C. McBride, Inc.

1926 4.5 (10.0) 3.0 25.0 20.0 26.0 110.0 3.0 9.0 10.0 102.0 (3.5) 1.5 50.0 (5.0) 10.0 (1.0) 10.0 65.0 3.3

471.8

1927 4.5 3.0 25.0 20.0 51.0 120.0 3.0 9.0 10.0 125.0 (3.5) 1.5 50.0 (5.0) 10.0 (1.0) 10.0 65.0 3.3

519.8

1928 4.0 3.0 26.0 20.0 50.5 170.0 7.3 5.0 (12.0) 125.0 (1.0) (1.5) 55.0 (5.0) 10.0 (5.0) 80.0 2.5

582·8

1929

1930

Gulf Coast refiners

1931

1932

1933 6.0

1934

5.0

5.0

5.0

6.0

4.0 30.0 20.0 53.0 185.0 5.0 5.0

25.0

20.0

20.0

20.0

20.0

43.0 240.0 3.0 6.0

51.0 240.0 3.0

51.0 240.0 10.0

53.0 182.0 10.5

66.0 192.0 15.0

125.0 0.5

125.0 1.2

125.0

125.0

125.0

100.0

65.0 (5.0) 30.0

75.0

80.0

80.0

80.0

80.0

30.0

30.0

30.0

30.0

26.0

3.0 80.0 2.5 20.0

(3.0) 100.0 2.5 35.0 (n.a.)

100.0 2.5 37.0 (n.a.) 1.0 3.0 3.0

100.0 (3.0) 42.0

100.0 (3.0) 45.0 (n.a.) 1.0

105.0

638.0

693.7

700.5

1.0 (3.0) 4.0 4.0 5.0

724.0

(5.0) (4.0) 4.0 5.0 (6.0) (0.5)

680.0

7.0

58.0 1.0 7.0 6.0 6.0 6.0 (0.5) 10.0 2.5

708.0

Unit: crude-distillation capacity in thousands of barrels per day. Parentheses indicate the plant was shutdown Source: Bureau of Mines, Petroleum Refineries, Including Cracking Plants, in the United States, issues of Janu; Note: T h e tabular summaries of regional refining capacities which are also contained in these issues disagree : 1947, 1642.9; and 1949, 1997.1. T h e source of these discrepancies could not be determined.

a s of January 1, 1926-1951 1935

1936

1937

7.0

5.0

5.0

8.5

8.5

8.5

8.5

10.0

14.0

41.0

41.0

46.0

73.0

89.0

97.0

107.0

104.5

114.5

44.0 220.0 15.0

44.0 220.0 15.0

55.0 236.0 16.0

55.0 250.0 20.0

55.0 259.0 18.0

60.0 265.0 18.0

60.0 270.0 18.0

100.0 372.0 18.0

94.0 394.0 32.0

100.0

100.0

100.0

115.0

128.2

125.0

130.0

198.0

206.4

90.0

90.0

130.0

110.0

104.0

100.0

100.0

125.0

27.0

27.0

35.5

44.0

74.0

71.7

71.7

64.5

115.0

122.0

145.0

163.0

183.0

196.0

200.0

63.0

77.0

77.0

95.0

95.0

95.0

95.0

1.0

1.0

1.0

1.0

1.0

1.0

0.5

7.5

7.5

7.5

7.5

7.5

7.5

7.5

10.0 5.0 4.0

10.0 5.0 4.0

10.0 12.0 4.0

10.0 20.0 4.0

(10.0) 16.0 4.0

5.0 3.5 4.0 5.0 0.3

12.0

5.0 0.8

6.5 1.0

(2.5) 5.0 1.0

1.5 1.0 12.0 0.3 1.0 10.0 4.0 3.0

1.5 (1.0) 12.0

10.0 6.0 4.0 (0.5) 4.5 2.5 3.5

761.5

1938

4.5 3.5 4.0 5.0 0.3 (0.5) 1.5

787.8

918.6

1.0 15.0 6.0 6.0 18.0 2.5 5.0 4.0

1059.5

1939

1940

1941

1942-6

1947

1948

1949

1950

1951

11.0

11.0

123.5

123.5

129.0

101.0 472.0 32.0

106.0 505.0 32.0

118.0 490.0 32.5

230.0

230.0

230.0

135.0

150.0

150.0

150.0

67.0

70.2

70.7

58.2

202.5

212.5

230.0

230.0

230.0

120.0

138.0

155.0

155.0

165.0

7.5

5.0

26.0

34.0

34.0

34.0

34.0

5.0 1.5

5.0 0.8

5.0

5.0

5.0

5.0 1.0

5.0 1.0

6.0 1.5

6.5

6.5

6.5

12.0

15.0

15.0

30.0

35.0

35.0

35.0

40.0

1.0 15.0 17.0 11.0 18.0

1.2 20.0 12.0 12.0 22.6

1.2 20.0 12.0 12.0 20.6

17.5

18.0

18.0

18.0

30.0

27.0

33.0

40.0

45.0

50.0

5.0 10.0 0.3 1.0 10.0

10.0 10.0

15.5 15.0

19.0

19.0

19.0

16.8

16.8

20.0 (0.4) 1.0

20.0

17.0

31.0

31.0

31.0

25.0

1.0 4.0 1.0 0.2

1.0

1.0

1.0

1.0

1.0

3.0 0.8 10.0 110.0 (3.0) 5.0

2.1 1.0 11.0 110.0

11.0 130.0

11.0 150.0

5.0

5.0

6.0

1.0 (6.5) 2.0 20.0 0.5 35.0 2.0 17.0

1.0 2.2 (20.0) (0.5) 45.0

2.2 20.0 1.2 45.0

(50.0) (4.0) (5.0) 2.0

(50.0) (4.2) 6.0

(10.0) 16.0 4.0

14.0

(1.5)

1171.5

1210.7

1248.2

3.0 0.8 9.5 100.0 (3.0) 3.5 (18.0) 0.8 (6.5) 2.0 (20.0)

1639.9

1810.7

2.2 20.0 0.5 45.0 1.5 15.6 4.0 8.0

(2.1)

1994.1 2082.3

(2.0)

5.0 (2.0) 2115.1

as of the reporting date. uy 1, 1926, through January 1, 1951. is follows with the totals built up in this table from the listings of individual plants: 1936, 786.3; 1937, 915.0;

Table 2. East Coast refii Company 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

1926

1927

1928

1929

1930

1931

1932

1933

Atlantic Refining Company 54.5 54.5 55.0 55.0 55.0 55.0 55.0 55.0 Interocean Oil Co. of Del. (1.2) (6.2) (6.2) (8.0) (6.0) (6.0) Prudential Oil Corporation 7.0 7.0 7.0 7.0 222.0 227.0 227.0 227.0 254.0 254.0 246.0 226.5 Standard Oil Company (N.J.) U. S. Asphalt Refining Co. (5.0) Beacon Oil Company 15.0 15.0 16.0 25.0 15.0 20.0 20.0 Cities Service 7.5 7.5 10.0 15.0 15.0 New England Oil Refg. Co. 30.0 30.0 35.0 30.0 Barber Asphalt Co. 4.0 4.0 4.0 4.0 3.0 5.0 4.0 4.0 Tide Water Oil Co. 36.0 36.0 50.0 50.0 50.0 50.0 50.0 50.0 Vacuum Oil Company 13.0 15.0 16.0 18.0 20.0 20.0 Wamer-Quinlan Co. 5.0 5.0 5.0 5.0 18.0 18.0 18.0 18.0 Socony-Vacuum Oil Co. 33.0 29.0 29.0 33.0 29.0 29.0 49.0 44.0 Pure Oil Co. 10.0 8.0 10.0 10.0 20.0 20.0 20.0 20.0 Sinclair Refining Co. 10.0 16.0 15.0 17.0 17.0 20.0 20.0 20.0 Sun Oil Co. 15.0 25.0 45.0 45.0 20.0 25.0 25.0 40.0 The Texas Company 15.0 15.0 4.2 4.5 4.5 4.5 4.5 7.5 Standard Oil Co. (Ind.) 8.0 8.0 8.0 8.0 12.0 12.0 12.0 Gulf Oil 20.0 50.0 62.0 70.0 70.0 62.0 60.0 Crew Levick Co. 6.0 4.0 5.5 5.0 8.0 8.0 Continental Oil Co. 10.0 10.0 10.0 10.0 Braintree Oil Processing Corp. n.d. n.d. n.d. n.d. Eastern Oil Processing Corp. n.d. n.d. n.d. n.d. Middlesex Refg. Co. (5.0) n.d. Vapor Phase Oils, Inc. Seaboard Refining Co. Standard Oil Co. (Calif.) Total

482.2

528.2

581.7

603.2

611.0

632.5

623.5 602.0

Unit: thousands of barrels per day of crude distillation capacity. Parentheses indicate plant Source: Bureau of Mines, Petroleum Refineries, Including Cracking Plants, in the United Stat* Note: n.d. means no distillation; cracking capacity only.

ers as of January 1, 1926-1951 1934

1935

1936

1937

1938

1939

1940

1941

70.0

75.0

80.0

85.0

89.0

89.0

83.0

90.0

100.0 112.0 117.0 117.0

117.0

208.5 208.5 213.0 227.5

172.2

191.6

191.6

170.1

221.8 232.2 274.2 247.0

259.5

1942-6

1947

1948

1949

1950

1951

20.0

20.0

20.0

32.0

43.5

48.6

52.0

52.0

27.0

37.0

40.0

15.0

15.0

7.5 50.0

7.5 50.0

7.5 50.0

10.0 55.0

10.0 55.0

10.0 55.0

10.0 55.0

13.8 57.0

70.0

70.0

70.0

74.0

77.0

18.0 48.0 15.0 28.0 63.0 6.0 12.0 45.0 8.0 10.0 n.d.

18.5 44.0 16.0 28.0 63.0 6.0 12.0 45.0 10.0 10.0

18.0 44.0 16.0 28.0 63.0 6.0 12.0 45.0 5.1 10.0

12.0 51.0 20.0 38.0 63.0 7.5 12.0 45.0

51.0

53.2

53.2

53.2

68.6

67.4

81.0

92.0

88.5

40.0 70.0 7.5 12.0 47.0

40.0 63.0 9.0 12.0 44.0

45.0 82.0 9.0 12.0 43.0

45.0 90.0 9.0 12.0 53.0

65.0 65.0 70.0 80.0 135.0 135.0 140.0 140.0 7.0 7.0 7.0 57.0 13.5 13.5 12.0 12.0 84.0 94.7 96.7 127.0

90.0 140.0 67.0 12.0 127.0

7.5

7.5

7.5

7.5

7.5

(5.0)

(5.0) (6.0)

(6.0)

(6.0)

n. d.

609.0 613.5 617.6 670.5

(6.0) 615.7

628.9

647.3

658.6

was shutdown as of the reporting date. ;s, issues of January 1, 1926, through January 1, 1951.

31.5

33.7

861.4 853.4 935.1 992.5

19.5

19.5

27.2

1026.7

Structure of the Market

15

gasoline or of distillate, for example, is not available. Price statistics are equally sketchy. While reasonably good price series may be had for the prime fuels, there is nothing comparable for the other products. For the purpose of long-period analysis, it is therefore necessary to consider the refinery market as bounded by the four prime fuels and, further, to consider each prime fuel category as unchanging with respect to grade mix and the relation of the various grades' prices. The limitations implied by these assumptions will be considered further in connection with the construction of the refiners' margin. At this point, only two extenuating circumstances — apart from the lack of alternatives — will be mentioned. First, the prime fuels account for the great bulk of refinery sales. Out of total industry shipments of $6,624 million in 1947, the four prime fuels accounted for $5,369 million, or 82 percent.15 Second, a great many refineries, particularly the smaller plants which are not engaged in specialty operations, turn out only the prime fuels. For them, the prime fuels are indeed the product boundaries of their markets. D. THE BUYERS AND SELLERS IN THE GULF COAST REFINERY MARKET Having identified and defined the geographic and product limits of the Gulf Coast refinery market, we may begin our study of its structure by examining the types of buyers and sellers and the degree of concentration. 1 . TYPES OF BUYERS AND SELLERS

Broadly speaking, the Gulf Coast refinery market comprises several categories of buyers and sellers. As sellers are found the large, integrated refiners; the smaller, less integrated refiners; and the brokers. As buyers are found the same large and small refiners, brokers, various types of domestic marketing organizations, and foreign buyers. From the point of view of volume, the most important of the various types of sellers is the group of refiners physically located in the Texas and Louisiana Gulf Coast refining districts. A roster of these, as compiled from the Bureau of Mines' annual surveys of refining capacity, is presented in Table 1. This table shows the crude distillation capacity of each refiner listed by the Bureau of Mines as of January 1 for the years 1926 through 1951. Note, however, that not all of the output of these plants passes over the Gulf market mechanism. Production of the large integrated concerns for the most part by-passes the market, moving di1 5 Bureau of the Census, 1947 Census of Manufacturers, Petroleum and Coal Products Section, p. 8.

16

Competition in Oil

rectly into its own marketing organizations. The large integrated concerns therefore appear as sellers only to the extent that their refining capacity exceeds the requirements of their marketing departments. This will vary over time, and also from product to product. The case is different with the smaller, less integrated refiners. Accordingly, they account for a share of Gulf market transactions that is disproportionate to their share of Gulf Coast capacity. "In the opinion of well-informed men in the industry, at least half of the transactions in the open Gulf market are contributed by small refiners not connected with marketing organizations which provide an outlet for their output. . . . Indeed, it may be truly said that a primary influence from the supply side of the market on the direction of price movements in the Gulf is exerted by the presence or absence of offers from small refiners." 16 The third type of Gulf seller is the broker. His functions are implied by his name: he acts as an intermediary between the refiner and the purchaser. As sellers, the brokers may be utilized by small refiners who maintain no sales force of their own. Or they may be employed by outof-district refiners who wish to dispose of a temporary surplus of some product without cutting prices in their own, or "differential," territory. They may also be used by large local refiners, or those equipped with their own sales force, who wish to dispose of "distress" products without revealing their identity. Finally, the broker may offer for resale gasoline which he himself has purchased, either because he anticipates a rise in the market, or because he could pick up a cargo at an unusually favorable price from a refiner short of storage space or hard pressed for cash.17 It is true that the Gulf and East coasts form a single market geo16 T.N.E.C. Hearings, Part 15, p. 8693. See also Part 14, pp. 7266, 7274, 7 2 8 5 - 6 ; and Part 17, p. 9936. 1 7 Purchases by brokers for resale on their own account have probably been more extensive in the mid-continent markets than at the Gulf. This is true in part because the number of small, nonintegrated refiners is greater in the mid-continent, in part because the unit of sale in inland markets (the tank car) is smaller than at the Gulf ( t h e 20,000-barrel-mimmum c a r g o ) , and in part because the Chicago area has been a dumping ground for distress gasoline by out-of-district refiners. Particularly during the late 1920's and early 1930's, Chicago brokers were constantly selling gasoline for practically every refining group east of the Rockies. In many cases, these brokers (or "tank car marketers," as they prefer to be called) resold for their own account instead of confining themselves to the brokerage function. As an editorial explained: " A certain class of brokers make their money, or try to, from their speculations in the market. They are not satisfied with the eighth of a cent a gallon generally considered a broker's commission. They go into the market when they think it is low and buy outright and resell when the market gets higher. And they sell in a high market at a lower price when they think they will be able to buy the necessary material later on, just before they have to ship, at a lower price. In other words, they go l o n g ' and 'short' of the market. They speculate." ( " A Tank Car Market is Largely Geography," National Petroleum News, September 5, 1928, p. 119. See also W. C. Piatt Company, The Tank Car Market, p. 3 7 . )

Structure of the

Market

17

graphically, since over half of the products consumed on the East Coast are produced on the Gulf Coast. It is also true that a number of refineries are scattered between Charleston and Boston. Yet it should be noted that these East Coast plants appear to have relatively little independent participation in the Gulf refinery market. Table 2 suggests the main reason for this. It contains a roster of East Coast refiners as of January 1 for the years 1926 through 1951, and a comparison with Table 1 will reveal that, as of the latter date, all East Coast plants were owned by large integrated concerns, all but two East Coast refiners also operated Gulf Coast plants, and in most of these cases the refiner had more Gulf Coast than East Coast capacity. Under these conditions, it seems reasonable to surmise that the output of the East Coast refineries probably passes directly into integrated marketing channels, by-passing the refinery market. It also seems reasonable to surmise that what little they may from time to time have for sale does not ordinarily constitute an independent influence on Gulf market prices: a company will not compete with itself. Turning now to the buyers, we find the same participants. From time to time the larger integrated refiners will find themselves short of one or more products. They then enter the market as purchasers rather than as sellers. The smaller refiners purchase less often, and they customarily seek to buy only when they have received an order for a "split cargo" (that is, a cargo made up of gasoline of several different octane ratings, not all of which they themselves manufacture). More important is the role of the broker as purchaser. Before the war, when product exports were greater than they now are, it is reported that brokers typically engaged in transactions between foreign buyers on the one hand, and the smaller refiners on the other who did not have their own foreign representatives to whom foreign inquiries might customarily be addressed.18 "Indeed, it is not too much to say that the foreign buyer [was at that time] the primary reason for the existence of the broker." 19 In addition to these buyers, however, a large share of the Gulf buying for domestic shipment is done by marketing organizations. Such buying is done both under contract and on a shipment-by-shipment or "spot" basis. These marketing organizations may operate exclusively as whole1 8 The huge postwar expansion of European and other foreign refining facilities, fostered by the development of Middle East crude supplies and the persistent dollar shortage, has gone a long way toward the ultimate elimination of U. S. product exports except where certain specialties are concerned. (See the First, Second, and Third Report on Coordination of Oil Refinery Expansion in the O.E.E.C. Countries, Paris: Organization for European Economic Cooperation, 1949, 1951, and 1953, respectively. ) 1 9 Swensrud's testimony, T.N.E.C. Hearings, Part 15, p. 8693. See also Fleming, Oil Prices and Competition, p. 26.

Competition in Oil

18

salers (terminal operators and jobbers), reselling in smaller quantities to service stations, commercial accounts, and other bulk-station operators. More commonly, however, they will be partially integrated into the retailing function of the industry, selling part of their purchases at wholesale and the remainder through their own retail service stations.20 It should be stressed that these buyers are not all located along the Texas and Louisiana Gulf Coasts. Rather, many are spread eastward along the seaboard (Tampa, Pensacola, Miami, Jacksonville, Wilmington, Baltimore, Philadelphia, New York, Providence, Boston, Portland) and along inland waterways (New Orleans, Memphis, Albany, Buffalo, and so forth). Like the foreign buyers, they often use brokers in place of or in addition to their own purchasing departments. 2 . CONCENTRATION

The only data from which estimates of concentration in the Gulf market may be derived are those relating to refinery capacity. For reasons now clear, such data have certain shortcomings from the standpoint of their direct relation to refinery prices. Although the Gulf and East Coasts form a single market geographically, not all of the output of Gulf and East Coast refineries moves over the refinery market. An unknown but very large proportion of total output passes into integrated marketing channels, by-passing the market mechanism. Since it is the larger refiners that are also the more highly integrated, concentration ratios computed from total capacity figures probably overstate the degree of concentration that obtains in the market itself. Nevertheless, these figures are all that we have, and a glance at them is not without interest. In Table 3, data on the concentration of capacity in the hands of the ten largest Gulf and East Coast refiners are presented for five-year intervals from 1926 through 1951. The picture is one of moderately high and persistent concentration. In terms of the largest ten firms, the concenT A B L E 8. C O N C E N T R A T I O N OF G U L P M A R K E T CAPACITY SELECTED YEARS

IN

Controlled by:

1926

1931

Percentage 1936 1941

1947

1951

Largest firm 2 largest firms 3 largest firms 4 largest firms 5 largest firms 10 largest firms

34.4 45.0 53.6 61.9 67.6 82.8

37.1 51.7 59.9 67.7 73.0 90.0

30.1 41.1 50.1 59.8 65.5 87.8

23.7 35.0 43.3 51.1 57.7 82.7

23.9 35.3 44.8 52.4 59.0 83.9

Source: Tables 1 and 2. 20 T.N.E.C.

Hearings,

Part 15, pp. 8 6 9 2 - 3 .

23.1 34.0 43.6 51.7 57.9 82.6

Structure of the Market

19

tration ratio stood at 82.8 in 1926 and, despite some intervening oscillations, at 83.9 in 1951. On the other hand, during this interval the share of the largest firm fell from 34.4 percent to 23.9 percent, and the share of the largest four firms — the conventional concentration ratio — fell from 61.9 to 52.4 percent. As the table makes clear, the stability of the share of the largest ten was made possible only by the gain of the second five offsetting the decline of the first five. Since the number of refiners hovered around thirty throughout this period, the structure of the market, in terms of capacity, must be classed as moderately oligopolistic. Something over four fifths of capacity has persistently been accounted for by the largest ten firms, with the remainder divided among twenty or more smaller concerns. E. PRICE REPORTING IN THE GULF COAST MARKET The prevalence of intrafirm transfers which by-pass the refinery market and the fact that the Gulf market is not an organized commodity exchange raise certain questions concerning the organization, operation, and representativeness of the price-reporting mechanism. What is the nature of the market's price structure? How is information collected and disseminated? How representative are the data available? The answers to these questions are of twofold interest. First, they reveal the adequacy and scope of the price data upon which much of our analysis is based. Second, they outline the price-making process through which the market functions. This can be exceedingly important. Particularly in markets of few sellers and high concentration, the mechanics of price making and the completeness of price reporting can do much to determine the independence with which competitors act and the consequent responsiveness of the over-all price structure to the shifting tides of supply and demand. 1. NATURE OF THE PRICE STRUCTURE

At the refinery level, products are transferred from refining to marketing organizations under a wide variety of arrangements. These range from isolated or "spot" transactions for immediate delivery, in which each shipment is a separate transaction with its price independently set, through verbal or written contracts which for varying periods and in various degrees by-pass the market mechanism, to the movement of products through completely integrated channels without formal recourse to the market at any time. An equal variety of prices is possible. Spot sales will be made at one price if the seller performs the entire selling function. They will often be made at a slightly lower price if arranged by a broker, the dif-

20

Competition

in Oil

ference being the brokerage charge. Spot prices may also vary with the unit of shipment21 and with the destination.22 But spot sales are not the only sales that refiners make, and spot prices are not the only prices that refiners receive. The McLean and Haigh study suggested that over 60 percent of total industry refinery output of gasoline, kerosene, and distillate in 1950 moved via integrated channels, and hence presumably bypassed the market completely.23 No statistics are available which indicate the breakdown of the remaining 40-minus percent between contract and spot sales. However, various articles in the National Petroleum News plus conversations with industry people suggest that the spot market has never loomed large in the over-all picture, and that today, as a rough guess, it may account for less than five percent of the total movement. This would leave some 35 percent of present-day volume moving under contracts of one type or another. Insofar as these contracts specify "market date of shipment" prices, the contract movements occur at spot prices and no additional set of prices is created. But not all contracts are written on this basis. Some contracts have from time to time specified a fixed price over the contract life. Some have contained escalator provisions linking contract prices to the price of crude. Others have provided for a formula price which, while linked to the spot market, yet swings less widely and/or, in some instances, provides a small discount below the spot market. At some times and in some areas, many refiners have written annual "marginal" contracts with their jobber customers.24 Finally, over the past twenty years there has been an increasing tend2 1 Along the Gulf, for example, where products may move coastwise by tanker, upriver by barge, or inland by tank car, different prices in each case may be quoted. Thus, Piatt's Oil Price Handbook for 1950 gives the following average low quotations for regular-grade gasoline for the month of December: Gulf cargoes, 10.Ί5Φ per gallon; Baton Rouge, barge shipments, ll.OOff; Baton Rouge truck or tank-car shipments, 11.101. For other months, the average lows for the three types of shipment were identical. The explanation may be that while some sellers attempt to maintain these differentials as a type of quantity discount based upon the lower unit loading costs of the larger transport media, others will shade them as a method of competition, so that for the Gulf market as a whole these differentials shift about with the vagaries of demand and supply in the different market segments and often completely disappear. The process is facilitated by the fact that some Gulf refiners sell only in cargo lots, others only to truck and tank-car buyers, and hence they can alter the differentials for the market as a whole simply by altering their own single price. 2 2 Due to the widespread but unsystematic practice of absorbing freight, some refiners have occasionally quoted one price for their differential territory and another for outside sales. This is particularly true of the inland Texas refiners and other minor centers. It has been relatively unimportant in the Gulf. 2 3 See Chart 1, p. 7. For lack of information we must assume that the Gulf and East Coast region does not markedly diverge from the country-wide pattern in this respect. > 2 4 Under these, the jobber is billed at either the spot price or a specified margin under the posted service station price in his territory. It is this guaranteed margin feature that has led to the term "marginal" contract.

Structure of the Market

21

ency to write contracts at seller's posted price date of shipment rather than at market date of shipment. 2 . COLLECTION AND DISSEMINATION OF INFORMATION

The market in which these various prices are created is not a trading floor on which buyers and sellers assemble, nor is it located at a specific spot in the Gulf. Rather, it is more like the "telephone market" in overthe-counter securities. There is no formal organization for the execution or recording of transactions. Each sale or contract is the result of individual bargaining between buyer and seller. To keep abreast of developments, both must rely on the traditional process of "shopping around" and on the price-reporting services of the various trade journals. Among others, the New York Journal of Commerce, the Chicago Journal of Commerce, the Petroleum Times, the Petroleum Press Service, the Oil and Gas Journal, the Oil Daily, Piatt's Oilgram, and the National Petroleum News all carry Gulf market quotations. Of these, Piatt's is generally regarded as providing the most complete and authoritative service. 25 This is implicit in the widespread use of Piatt's by the industry in "market date of shipment" contracts. It is also implicit in the long standing practice of foreign governments that are pressed for foreign exchange to look to Piatt's as the authoritative guide on Gulf prices, and in the recognition of Piatt's during the ΟΡΑ period as the most reliable source of price quotations. 26 Piatt's prices will therefore be used in this study, and it will be worthwhile to consider briefly Piatt's coverage of the price structure. Largely because they are not consistently available, Piatt's cannot and does not report on the entire spectrum of prices. What Piatt's does quote is the "open-spot" market. The definition of these prices, found on the reverse side of the Oilgram's invoice as well as on the masthead of the Oilgram, is as follows: Prices shown in the tables are sales prices or quotations or general offers or posted prices reported to Oilgram by refiners, by pipeline terminal operators, and by tanker terminal operators, for current sales and shipments, except as otherwise specified. Prices arrived at by discounts off a specified price or "market date of shipment," prices named in contracts or prices arrived at in accordance with any arrangement made prior to date of sale, are not "open spot" transactions and 25

See, for example, Swensrud's testimony, T.N.E.C. Hearings, Part 15, p. 8692.

See also FTC, The International Petroleum Cartel, p. 350; U.S. v.

Socony-Vacuum

Oil Company, 310 U.S. 193-200 (1940); and the following issues of the National Petroleum News: April 4, 1928, pp. 59-60; October 2, 1935, p. 70; September 10, 1953, p. 30; September 17, 1953, pp. 43-4. 26 Portens, "The Price Structure of the Oil Industry," Piatt's Oilgram, October 24, 1949. See also "The Open Spot Market — What It Is," National Petroleum News, May 6, 1953, p. 49.

22

Competition

in Oil

therefore are not considered in making the price tables. Prices made to brokers and prices in "inter-refinery" transactions are also not included in price tables, except as noted, but are reported in the price-news leads. During periods of short supply, some sellers, and at times all sellers, withhold quotations to new customers or the posting of firm prices but give Oilgram the prices they otherwise would quote to the trade in general and which they confine to their regular customers only. All prices are for "immediate" shipment except in Gulf Coast cargo transactions where shipment is generally to be made in 60 days. Prices are for f.o.b. refineries, pipelines, or tanker terminals in districts designated, for unrestricted shipment, except as noted.27 Piatt's Gulf Coast bulk market quotations are thus the summations of actual spot-transaction prices and/or the posted prices or asked prices, at Gulf points, of a variety of companies. Each day Piatt's consults all Gulf Coast refiners, known buyers, and brokers and other sellers, and publishes the resulting price spread in the following day's issue of the Oilgram. The Monday price spread for each week in the year is published in the annual editions of Piatt's Oil Price Handbook. These quotations do not exclude "distress" cargoes provided the other conditions of an open-spot transaction are met. At the same time, it should be stressed that only open-spot prices, as Piatt's defines them, are included. Prices arrived at by discounts oif specified prices are excluded.28 Prices made to brokers or by brokers are also excluded. The latter may account for the seeming omission of certain distress quotations from Piatt's tables, since brokers are frequently used in such instances to disguise the identity of the seller. 3 . ADEQUACY OF PUBLISHED PRICE DATA

Because of Piatt's limitation to open-spot quotations, a question arises as to its accuracy as a barometer of price fluctuations and market conditions. In fact, of course, the adequacy of Piatt's in this respect depends upon the interplay between these open-spot prices, on the one hand, and the host of other prices — including short-, medium-, and longterm contracts, premiums, discounts, intracompany transfers, and resellers' prices — on the other. 27

gram.

Courtesy of McGraw-Hill Publishing Company, current publishers of the Oil-

2 8 The reasoning behind this was explained to the author as follows: "The Oilgram low today, for example, is 12^. A supplier sells at 0.25( under today's low Oilgram, but he won't know until tomorrow, when he gets the Oilgram, what the Oilgram is showing today. If Oilgram, knowing of the transaction, reduced the low to 11.75»? today, then the price governing the transaction would be 11.5Φ. That could be the result. But how could Oilgram reduce the low to 11.75^ today when the supplier didn't sell at 11.75^, but at 0.25^ under Oilgram low (whatever that might be today) and won't know until tomorrow what Oilgram low is?"

Structure of the Market

23

There is not much published material on this. However, there is some reason to believe that, over any significant time interval, Piatt's prices provide a rather good barometer of price fluctuations and market conditions in the Gulf. We may approach this problem by way of two questions: (a) How limited is Piatt's coverage of the open-spot market? (b) How representative are open-spot prices of contract and intrafirm transfer prices? (a) Piatt's coverage of the open-spot market. To the author's knowledge, no analysis of the extent of Piatt's coverage of the Gulf openspot market has ever been published. In considering this question, one is therefore reduced to speculation based upon the confidence accorded Piatt's by the industry and upon whatever other fragments of evidence are available. In an editorial commenting upon the Federal Trade Commission report, The International Petroleum Cartel, the National Petroleum News rather acidly observed: The statement that Oilgram "samples" the market for prices is a plain unvarnished falsehood. . . . Oilgram has repeatedly said . . . , and Oilgram can prove it, that it calls daily on all sellers who are in the market or who Oilgram· has reason to believe will be in the market and Oilgram then prints what it finds according to its published rules. 29

The author has uncovered no reason to doubt the truth of that statement. Nevertheless, there are at least five reasons why Piatt's quotations fall short of complete coverage of the open-spot market. First, Piatt's is not always able to contact every refinery every day. "We say frankly that a shrewd buyer, who is willing to put in the time and labor, can generally buy some petroleum products below the current price which we give. Also a careless buyer, an ignorant one, or one who is not greatly concerned to get the last 1/8 cent, may buy some material at above the prices we quote. . . .To do that, however, one must be constantly on the job, in daily or even hourly touch with a large number of these plants. That is work and it is also expensive." 30 This was particularly true of the inland tank-car markets in years past when shoestring 2 9 Reprinted from National Petroleum News, copyrighted by The National Petroleum Publishing Company, September 10, 1952, p. 30. See also "The Gasoline Tank Car Market Explained," ibid., April 4, 1928, pp. 59-60; "Testimony Given on Oilgram Ownership and Methods of Compiling Prices," ibid., October 2, 1935, p. 70; and U.S. v. Socony-Vacuum Oil Company, 310 U.S. 168, 194, 197 (1940). 3 0 Reprinted from National Petroleum News, copyrighted by The National Petroleum Publishing Company, April 29, 1925, pp. 102, 104. It correctly adds: "If every buyer undertook to keep an eye out for these bargains there would be such a demand for them that they would not exist." The market, in short, is not perfect, and in this case the marginal cost of information exceeds its marginal revenue to the buyer.

24

Competition

in Oil

refiners who had sprung into being with flush production from a new field were approaching the twilight of their business careers. It has probably been less true of the Gulf cargo market, although by no means unknown to it. Second, refiners do not always divulge the price of every sale to Piatt's. This is why Piatt's checks with buyers and with brokers as well, and why Piatt's sometimes asks permission to review sales records for confirmation. Nevertheless, a refiner will from time to time hold back information by agreement with the buyer, attempting to keep an "under the market" sale secret as long as possible so as to facilitate sales both by forestalling competitive price cuts and by holding forth to the buyer the prospect of a cost advantage over his competitors in the next market forward. This is particularly apt to be the case in the early stages of a downward price adjustment. Often there will then be unconfirmed rumors of price shading. As long as they are unverified, Piatt's comments upon them in the news leads but excludes them from the price tables. As soon as a sale at a shaded price (or, in a strong market, at a premium) is verified, however, it is included in Piatt's tables, provided that it otherwise meets the Oilgram, definition of an open-spot transaction. Generally speaking, moreover, as soon as premiums or price shading become reasonably persistent and extensive, posted quotations are revised accordingly. But there is undeniably a fluctuating fringe of transactions which, particularly in the early stages of a price change, Piatt's will miss. Third, Piatt's does not report sales to, by, or through brokers in its Gulf cargo tables. This does not mean that Piatt's prices are not indicative of broker transactions. Whether acting as agents or buying and selling on their own account, brokers are competing with refiners as sellers, with refiners and marketers as buyers. One would therefore expect brokers' activities to have the same impact upon Piatt's prices over any reasonable time interval as the activities of refiners and marketers themselves. But since brokers receive a commission when acting as agents, and since they are often used to dispose of material at cut prices, the average realization of refiners on sales to or through brokers is probably slightly below that on direct sales. Fourth, Piatt's does not report sales at discounts off specified prices. Some of these, of course, represent off-specification goods. Others represent off-season price discounts; for example, to induce purchasers to fill their tankage during the slack season. And some represent a simple de facto price cut. Here again, Phtt's prices will more accurately reflect the movement than the absolute level of refiners' realizations. Finally, Piatt's does not tabulate sales on a delivered rather than an f.o.b. basis. According to trade sources, these are not a large propor-

Structure of the Market

25

tion of the total, but they do occur. This is especially true when the market is weak. Then refiners also owning tankers may sell a cargo on a delivered basis, with the c.i.f. price below the current f.o.b. plus the last reported spot tanker charter or current tanker offers.31 If this occurred in volume, it would force the tanker and/or spot cargo market down to combined parity with c.i.f. prices. There is, of course, no very good way of deciding at the time whether such a reduction is a cut in the freight or in the product component. In sum, Piatt's prices may be taken as embracing the range within which the great bulk of spot transactions occur. But there is a fluctuating yet persistent fringe of sales which, for the reasons enumerated, will be excluded from Piatt's tabulations, and which probably occur at average realizations slightly below those which Piatt's reports. (b)

Open-spot versus contract and intrafirm transfer prices. If Piatt's

is accepted as reasonably indicative of the open-spot market, a further question remains: how indicative are spot prices of contract and intrafirm transfer prices? On a priori grounds, one would expect a fairly intimate relation to exist between spot prices and contract prices. There is, after all, competition between different terms of sale as well as between different sellers of identical terms of sale. With respect to contract prices, it must be remembered that the buyer presumably often has the option of buying spot or of meeting his needs by way of at least a short-term contract. When this is the case, and when such contracts are available on other than a basis of "market date of shipment," the contract seller must presumably make his terms to the buyer at least as attractive as the available spot terms. Particularly in a weak market, one would expect to find sellers eager to offer price concessions to obtain some future business, just as, in a rising market, one would expect to find sellers reluctant to contract ahead on a flat basis without some premium for so doing. In fact, when interviewed, Piatt's and also industry people stated that the great bulk of contract movements out of the Gulf is either at Piatt's on the basis of a "market date of shipment" (and usually at the low of Piatt's, though some contracts are written at the mean of the high and the low), or else is linked directly to PZait's.32 Many contracts, 3 1 For example, the National Petroleum News of February 2, 1938, noted a "report" that a Gulf refiner had sold a cargo of No. 2 fuel oil c.i.f. New York at 0.25" Γ-ί

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