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. Last Updated: 07/27/2016

Is Bigger Better for Oil?




Does it matter that the proposed Exxon-Mobil merger will create the world's biggest company? In fact, there's not much evidence that business size has much to do with power. The biggest manufacturer in the world is General Motors, a struggling giant tripping over its own oversize shoes. Even its annual report speaks of the "heavy burden" of size in a world that favors the lean and the quick.


The pending merger of Deutsche Bank and Bankers Trust will create the world's biggest bank - and one of the weakest. Both institutions have been wracked with scandals, and both are known for strategic confusion and bumbling management. Deutsche Bank, desperately trying to build a global presence, badly flubbed its $1.4 billion takeover of the British investment bank Morgan Grenfell in 1989, while Bankers Trust bollixed its acquisition last year of Baltimore-based Alex Brown, once an innovative technology-stock underwriter, whose key employees have been departing in droves.


Microsoft is in the antitrust dock for allegedly monopolizing key segments of the computer industry. IBM, however, has five times the sales of Microsoft, though it's been a long time since anyone believed IBM was capable of monopolizing anything. Sun Microsystems, one of the "little" companies seeking government protection from the Microsoft juggernaut, had $10 billion in sales last year, compared to Microsoft's $15 billion. If size equated to power, the informal anti-Microsoft alliance of IBM, Sun, Oracle, Netscape and others could crush Bill Gates like a bug.


The Exxon-Mobil merger at least seems to have an economic rationale.


The last time oil companies held real power was during the reign of the "seven sisters" in the 1950s and '60s. Three of the seven - Standard Oil of New Jersey, which we know as Exxon, Standard Oil of California (now Chevron) and Mobil - were progeny of the old Rockefeller trust. The others were Gulf, Texaco, British Petroleum and Royal Dutch Shell. Their tankers ruled the world's shipping lanes, their employees staffed the governments of the Persian Gulf and their bosses divvied up markets and revenues during grouse hunts in Scotland, safely out of reach of U.S. regulators.


The oil companies' power wasn't their own. It reflected postwar American hegemony, and the companies were convenient agents of the Pax Americana - the guys on the ground to buy off local politicians, keep Russia out of the gulf and protect Western energy supplies.


The companies' power faded as soon as the pace of development in the rest of the world outran America's global reach. Just as the war in Vietnam defined the limits of U.S. military power, the formation of the Organization of Petroleum Exporting Countries, and the threefold increase in the price of crude oil in 1973, marked the end of U.S. global economic hegemony. During most of the 1970s, the erstwhile sisters paid lip service to confused Western energy policies but basically danced to the OPEC tune, hoping no one would notice as they socked away record profits by passing along price increases to their retail customers.


But OPEC proved a far less durable foundation for a global business than Western military power had. As soon as the industrialized countries stopped trying to manage oil prices, markets adjusted with astonishing speed. The ratio of energy consumption to output dropped steadily throughout the 1980s and most of the '90s, and oil prices dropped along with it. Desperate to support their newly acquired fleets of Mercedes, oil-kingdom sheiks routinely flouted OPEC production quotas. Even before the recent economic crisis in Asia, crude prices were close to post-1973 lows in real dollars. Traders in the oil-futures market are currently betting that prices will keep falling all the way back to 1960s levels.


That price pressure is driving the Exxon-Mobil merger. Oil refining is one of the few industries that has almost unlimited economies of scale. Both companies earned profits last year only because retail prices didn't fall as fast as the price of crude oil. But the glut of oil hanging over world markets is now threatening to drive retail prices below the cost of refining. Exxon and Mobil are hoping the combined company, Exxon Mobil Corp., can cut overhead and streamline operations to keep pushing costs down. The same logic is driving the mergers of Total and Petrofina in Europe, and British Petroleum's takeover of Amoco.


The mergers are more bad news for oil-producing countries. Exxon and Mobil have made no secret of the fact that the market power of the combined company should be able to extract even more price concessions from the sheikdoms. Antitrust regulators will rightly take a skeptical look at the proposed merger, but the smart money is guessing it will pass muster, possibly on the condition that the companies divest some of their retail service stations in areas where both have a heavy presence.


The shifting antitrust landscape in oil underscores the difficulty of keeping regulatory policy current with the pace of business transformation. The forced breakup of the Standard Oil Trust in 1911 is the classic exercise of the antitrust club, but even that case is fraught with ambiguity.


John D. Rockefeller's trust was the world's biggest company before the breakup and unquestionably the most powerful. But historians have argued that its power was already slipping away. Standard Oil was rapidly losing global market share to the newly merged Royal Dutch Shell; had missed out on the spectacular oil finds in Texas; and was facing aggressive U.S. competition from upstarts like Gulf and Texaco, which had access to better, cheaper oil. Standard Oil was still a monopolist, but only in the kerosene market, and the company was far weaker in gasoline, the fuel of the future.


The biggest antitrust case of today is the one against Microsoft. But if regulators had trouble keeping up with the pace of change in the oil industry in the early 1900s, how likely is it that they can get it right now?


Charles R. Morris is a Wall Street consultant. He contributed this comment to The Los Angeles Times.