In a recent letter to Federal Trade Commission Chairman Lina Khan, Senate Majority Leader Chuck Schumer (DN.Y.) and 22 other Democratic senators stated that they are concerned “about the two blockbuster oil-and-gas deals announced in October: ExxonMobil’s proposed $60 billion acquisition of Pioneer Natural Resources and Chevron’s proposed $53 billion acquisition of Hess Corporation — two of the largest oil-and-gas deals of the 21st century that century.
The senators’ basic complaint is that mergers “could harm competition, risk higher consumer prices and reduce output across the United States.” The letter then summarizes the long process of consolidation in the fossil energy sector since the 1990s, stating that the result is “anticompetitive industry coordination” that allows producers to manage “their individual supplies to, or away from, particular regions. of the country enablel[ing] to achieve ‘price rise scenarios’ and ‘raise’ prices.
It takes even the craziness of Washington politics to new heights. Where to start?
Nowhere did the senators ask the obvious question: Why have market forces been driving the consolidation process for at least the last 30 years?
One reason, big and obvious, is the technological revolution behind hydraulic fracturing and horizontal drilling in oil and gas exploration and production. Horizontal drilling can extend several miles, meaning that the lease rights for the parcels must be contiguous; the alternative is an expensive and complex contracting system under conditions of great uncertainty about the resources that will be discovered and their market value in the following decades. Is it so hard to see that the allocation of risk under such hypothetical contracts would be more difficult to negotiate?
The senators who signed the letter are not famous for their skills in economic analysis, but that does not excuse their apparent ignorance of another important parameter: Most technological advances have the effect of reducing of cost and rising economies. Consolidation occurs even in cases of perfect competition. This has nothing to do with alleged monopolization attempts or other dark conspiracy theories.
The view of these senators on market dynamics largely ignores that there is a global market for crude oil and refined products, both of which are imported and exported from the US in large quantities. The ability of US producers to manipulate prices or create monopolization does not exist.
Schumer and his friends tried to avoid this fact with the wrong saying: “To focus only on the global market is not correct,” they said. They added the unrelated point that “although these energy companies represent a small portion of the global petroleum market, the question before the FTC is whether these proposed transactions can would lessen competition in any line of commerce.”
Since they mainly talk about the “line of commerce” for crude oil and refined products, it is worth following the point of the senators in its conclusion there. In relation to “[risk] of declining output throughout the United States,” are the senators truly oblivious to the long-term trends in US oil and gas production at the very time whose trend toward consolidation they deplore? Crude oil production has increased 138 percent since 2008. Natural gas production has increased more than 100 percent since 2005. Gasoline production has increased 23 percent since 1991.
And in relation to the regional price scare stories that the senators are thinking about, we have Energy Information Administration data on regional differences in gasoline prices going back to April 1993. The data shows no pattern of changes in differences, except in California, whose refinery capacity and pipeline constraints raise prices for special fuel blends required by federal and state regulations. Do Schumer and other senators want to blame fossil fuel producers for California’s regulatory choices?
The senators are so determined to find a basis to attack oil producers that they ignore other obvious reasons. For example, thanks to higher interest rates, it is cheaper for producers to borrow if they are more diverse geographically and across sectors, and this increases the pressure to consolidate. Meanwhile, rates of production decline, new discoveries, and field expansion are uneven among producers and geographic regions. This means that consolidation can create a “smoothing” efficiency effect, another incentive for it.
Finally, the ongoing political, regulatory and litigious attacks on fossil energy producers have created an artificial economic scale. Larger producers are in a better position to resist such attacks. Perhaps Schumer and these other senators should take a look in the mirror, because higher fuel prices are a central goal of the climate change policy beliefs to which they all subscribe.
In short, industrial consolidation is not the result of the conspiracy these senators believe. Rather, it is a natural consequence of various forces at work in the market, including the policy preferences of the senators who wrote the letter.
Schumer and others are among the many public officials, rent-seeking corporate types, and ideologues who argue that fossil fuels will be “phased out” of the market in the next few decades. So why don’t they try to speed up the process with a perverted “analysis” like the one offered in their letter?
They operate in an ideological campaign aimed at deceiving public officials, the media and citizens writ large. The underlying truth is that they are only deceiving themselves.
Benjamin Zycher is a senior fellow at the American Enterprise Institute.
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