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Can Antitrust Law Help with the Gas Price Crisis?
Yes, But Not By Trying to Block Shell's Decision to Close Its Bakersfield Refinery


Thursday, Jul. 22, 2004

On July 7, bowing to political pressure, the Federal Trade Commission (FTC) announced that it has opened an investigation into the "antitrust implications" of Shell Oil's decision to close its Bakersfield gasoline refinery.

The FTC's decision is unfortunate. Even if the Bakersfield closure might increase California gas prices temporarily, an independent decision by a non-monopolist to close a plant is simply not something that the federal antitrust laws are designed to address.

The FTC is clearly spinning its wheels in order to appear to be doing something - even if something pointless and distracting - about high gas prices. Instead, its energy and resources should be used to do something positive about systemic problems in domestic gasoline markets.

This new investigation is merely a political detour, not a step on the road to actually addressing an important national problem. In this column, I will both explain the context and facts that lead me to doubt that the Shell investigation could possibly be productive - and suggest several alternative ways the FTC could far more effectively address the current gas price crisis.

The Pressure on the FTC to Control Gas Prices Has Been Intense

The Bakersfield refinery, which California officials estimate produces about 2 percent of California's gas supply, is scheduled to close on October 1. Shell announced the decision to close the refinery last year, citing long-term economic problems with its operation.

Since the closure was announced, consumer advocates and politicians have accused Shell of trying to drive up gas prices by diminishing supply. Their theory was that Shell was closing the refinery to reduce the supply of gasoline in California, thereby allowing Shell (and other refiners) to charge more. Many of these critics of Shell have demanded that the FTC block the closure as anti-competitive.

In Congress, Senator Ron Wyden has been particularly critical of what he calls the FTC's "campaign of inaction" on rising gas prices, including its failure to act on the Bakersfield closure. Indeed, Sen. Wyden recently placed a "hold" on confirmation of new FTC Chair Deborah Majoras, citing her failure to endorse aggressive FTC action against price gouging by oil companies.

In addition, the General Accounting Office (GAO) issued a report earlier this year suggesting that the FTC has been too permissive in reviewing oil industry mergers. According to the GAO's report, increasing concentration in the oil industry - which, the GAO claims, has been permitted by this lax enforcement - has led directly to higher prices at the pump.

A Unilateral Decision by a Non-Monopolist to Close a Plant Is Not Illegal

While public dissatisfaction with high gas prices is understandable, an FTC investigation of possible antitrust violations in Bakersfield is the wrong remedy.

In general, the federal antitrust laws prohibit two types of acts or conduct: First, there is anticompetitive collusion between two or more businesses (usually competitors). Second, there are anticompetitive acts by a monopolist to create or maintain a monopoly.

Conversely, business decisions that are independently made by non-monopolists are, except in certain narrow and specified areas, just not something that the federal antitrust laws cover.

Obviously, Shell does not have a monopoly on gasoline -- not even its enemies make that accusation. So the only real antitrust issue in Bakersfield is whether the decision to close the plant was part of a collusive scheme between Shell and its competitors. But in fact, there is no evidence of such collusion -- nor is there any reason to believe that it exists.

As a result, the FTC's investigation is highly unlikely to find anything that would allow it to block the Bakersfield closure.

The FTC does have the power to restrain "unfair methods of competition," a term that might be interpreted to extend beyond the traditional antitrust categories. That interpretation, however, is hotly disputed, and an attempt to use the "unfair methods of competition" power in this fashion would encounter crippling legal difficulties.

This is why, when asked whether the FTC could in fact block the Bakersfield closure, FTC General Counsel William Kovacic could only answer lukewarmly: "In theory." Unless the investigation turns up something very surprising, any attempt by the FTC to block the closure would be futile. Shell would fight the FTC, and Shell would win.

It is possible, of course, that an investigation will indeed turn up evidence of actual collusion. Anything is possible. But government investigations should be undertaken only if there is some evidence of a violation of the law, not merely on the off chance that evidence of a crime might be uncovered.

The FTC Should Be Taking Meaningful, Rather than Cosmetic, Action

Given the lack of a likely remedy, it seems abundantly clear that the FTC is investigating the Bakersfield closure primarily, if not solely, in response to political pressure. This may not be surprising given the intensity of the heat on the FTC, the GAO report, and the delay in confirmation of new FTC Commissioners. But it is still a disappointing use of public resources.

Competition in the refining industry is certainly a matter of enormous importance to consumers and to the U.S. economy generally. The FTC, and the federal government as a whole, should be committed to maintaining and improving competition in this vital industry. But if not Bakersfield, then what?

First, the FTC should hold a conference, jointly with the GAO, to review the GAO report. If the GAO's conclusions are valid, then merger review in this area should be tightened. To its credit, the FTC has in fact proposed such a conference.

Second, the FTC should complete its report on gas prices. In 2001 and 2002, the FTC held lengthy public conferences on this topic, but has yet to produce the report summarizing its conclusions or recommendations.

Third, the FTC should produce a report on domestic refining activity. Although U.S. refining capacity has increased due to technological improvements, no new refineries have been built in over 25 years - and many have closed. The FTC should examine what steps, if any, should be taken to loosen refinery construction.

None of these suggestions involve dramatic, quick fixes of the sort that politicians prefer. Moreover, none involve the identification of specific villains who can be punished for higher gas prices.

Nevertheless, these realistic solutions offer more prospects for addressing real, genuine problems in domestic gasoline markets than investigation of the Bakersfield closure. Therefore, they are a far superior use of the FTC's resources.

David C. Lundsgaard, a 1992 graduate of The Yale Law School, is a partner with the Seattle law firm of Graham & Dunn. Full disclosure: Neither Lundsgaard nor his firm does work for Shell, in connection with the Bakersfield refinery or otherwise. (Lundsgaard has done work for other refiners.)

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