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Job Name:2176590 Date:15-03-10 PDF Page:2176590pbc.p1.pdf Color: Cyan Magenta Yellow Black HORIZONTAL DIVESTITURE IN THE OIL INDUSTRY A Conference Sponsored by the American Enterprise Institute for Public Policy Research HORIZONTAL DIVESTITURE IN THE OIL INDUSTRY Proceedings of a Conference Addressing the Question: Should Oil Companies Be Prohibited from Owning Nonpetroleum Energy Resources? Edited by Edward J. Mitchell American Enterprise Institute for Public Policy Research Washington, D.C. Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036 or call 1-800-862-5801. The publisher wishes to thank The Twentieth Century Fund for per mission to reprint an excerpt from "The Role of I.G. Farben" (chapter 11) in George W. Stocking and Myron W. Watkins, Cartels in Action, The Twentieth Century Fund, New York, © 1946. Library of Congress Cataloging in Publication Data Main entry under title: Horizontal divestiture in the oil industry. (AEI symposia; 78E) Conference held Jan. 27, 1977 in Washington, D.C. and sponsored by American Enterprise Institute for Public Policy Research. 1. Petroleum industry and trade-United States Congresses. 2. Corporate divestiture-United States Congresses. I. Mitchell, Edward John, 1937- II. American Enterprise Institute for Public Policy Research. III. Title. Series: American Enterprise Institute for Public Policy Research. AEI symposia; 78E. HD9566.H66 338.8 78-18367 ISBN 0-8447-2131-X ISBN 0-8447-2130-1 pbk. AEI Symposia 78E ©1978 by American Enterprise Institute for Public Policy Research, Washington, D.C. Permission to quote from or to reproduce materials in this publication is granted when due acknowledgment is made. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. Printed in the United States of America CONTRIBUTORS Walter Adams Distinguished University Professor, Professor of Economics, and Past President Michigan State University M. A. Adelman Professor of Economics Massachusetts Institute of Technology Betty Bock Director, Antitrust Research, The Conference Board Adjunct Professor of Law, New York University School of Law Darius W. Gaskins, Jr. Director, Bureau of Economics, Federal Trade Commission Thomas E. Kauper Professor of Law, University of Michigan Law School Former Assistant Attorney General, Antitrust Division U.S. Department of Justice Richard Mancke Associate Professor of International Economic Relations Fletcher School of Law and Diplomacy, Tufts University Jesse W. Markham Charles Edward Wilson Professor Harvard Graduate School of Business Administration Edward J. Mitchell Professor of Business Economics University of Michigan Graduate School of Business Robert Pitojsky Professor of Law, Georgetown Law Center Former Director, Bureau of Consumer Protection Federal Trade Commission F. M. Scherer Professor of Economics, Northwestern University Former Director, Bureau of Economics, Federal Trade Commission Gary L. Swenson Senior Vice-President, The First Boston Corporation David I. Teece Assistant Professor of Business Economics Graduate School of Business, Stanford University I. Fred Weston Professor of Managerial Economics and Finance Graduate School of Management University of California at Los Angeles CONTENTS INTRODUCTION 1 Edward J. Mitchell PART ONE COMPETITIVE ASPECTS Chairman's Remarks ................................... 5 Thomas E. Kauper Horizontal Divestiture in the Petroleum Industry: An Affirmative Case ................................. 7 Walter Adams Market Structure and Horizontal Divestiture of the Energy Companies ............................. 21 Jesse W. Markham Commentaries M. A. Adelman 29 Darius W. Gaskins, Jr. 31 Robert Pitojsky 34 Richard Mancke 37 Discussion 41 PART TWO ECONOMIC EFFICIENCY ASPECTS Chairman's Remarks. .................................. 55 Edward J. Mitchell Horizontal Integration in Energy: Organizational and Technological Considerations .................. .. 57 David I. Teece The Implications of Divestiture on Investment in the Coal Industry ........ 73 Gary L. Swenson Commentaries Betty Bock 89 F. M. Scherer 91 J. Fred Weston 94 Discussion ........................................... 101 INTRODUCTION Edward /. Mitchell The upsurge in oil prices of the past few years has restored the American oil industry to a financial health that it has not enjoyed for some time. However, it has also presented the industry with a serious problem. It must do something with the profits it is taking in. If that sounds like the kind of problem you would like to have, consider this exhaustive set of options available and their implications. • Option 1-The money could be reinvested in the petroleum busi ness by searching for more oil and gas. • Option 2-The money could be invested in nonenergy industries, such as department stores and circuses. • Option 3-The money could be paid out to stockholders in the form of dividends. • Option 4-The money could be invested in nonpetroleum energy sources, such as coal and uranium. President Carter, especially through one of his energy lieutenants, Mr. John O'Leary, has informed us that there is not much oil or gas to be found. Just in case the industry does not believe this, it is to be dis couraged from exploration by price ceilings on oil and gas. And just in case that does not work, the leasing of federal lands, notably the outer continental shelf, has been held to a snail's pace. In brief, • Option 1 is regarded as largely a waste of money by the adminis tration, and its energy policy has been designed to discourage it. • Option 2 is frowned upon by the Congress, some of whose mem bers regard it as "obscene" for an oil company to invest in some thing other than oil. 1 • Option 3 leads to the gradual liquidation of the oil industry. This choice seems to have met the least political resistance, but it is understandable that oil executives are not excited by the prospect. • Option 4 is the subject of this volume. Oil company investment in nonpetroleum energy resources has been met by vigorous political opposition on the grounds that the oil companies possess signif icant market power in the oil market; it is argued that their move into coal, uranium, and other energy resources would only extend that power. The argument against horizontal diversification of the oil companies is essentially an argument against monopoly. The central question is, Would expansion by the oil industry into non petroleum energy sources result in more or less production of energy? In addition to the monopoly issue there is the question whether the oil companies possess some unique attributes that would make them highly efficient producers of other forms of energy. Could it be that curtailment of oil industry investment would leave us with weaker, smaller, and less technically advanced coal and uranium industries? To answer these questions AEI brought together a group of the most knowledgeable economists, lawyers, and other experts on indus trial organization. Many of them have distinguished careers of public service as former Washington trust-busters. Others have patrolled the energy beat primarily from the universities. All are well acquainted with the horizontal divestiture issue and its ramifications. I think the reader will find that their varied perspectives give rise to a stimulating discussion. 2 PART ONE COMPETITIVE ASPECTS Chairman's Remarks Thomas E. Kauper On the issue of horizontal divestiture, as indeed on the issue of vertical divestiture, it is clear that, while we may talk in terms of competitive and economic aspects, we are also dealing with political and social issues. These will not be the major focus of this discussion, but they surely do playa major role in the present controversy. An observation one might make is that the very title of this program assumes a conclusion. The program refers to horizontal di vestiture. By my definition, that means relationships that are directly competitive, and we are, therefore, assuming a degree of interfuel com petition since horizontal divestiture proposals seek only to confine par ticular energy companies to particular categories of energy production. Hence, the title does assume an answer to one important question that there is considerable competition among the various fuels. Many of us do, indeed, assume that, but we may get some disagreement. We should also keep in mind, as we go through the program, that horizontal divestiture really involves divestiture in part and something else in part. While it is true that legislative proposals under discussion require divestiture of assets of companies currently operating in more than one fuel market, they also contain prohibitions on future entry into other fuel markets. Such prospective prohibitions cannot be char acterized as divestiture and may raise somewhat different issues. We may want to draw some distinction between these two, since divestiture may involve some costs that a future ban might not. Today we will not be directly discussing questions relating to vertical dissolution, though as we listen to some of the discussion, we may find that part of the case to be made for horizontal divestiture may rest on the presence of vertical integration. 5 Horizontal Divestiture

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