Is Big Oil Getting Too Big?

The loss of competition in any industry is a serious matter, and the consolidation in oil has certainly been swift and severe. Where once there were Seven Sisters and a plethora of smaller companies, the industry is now shaped by three supermajors--ExxonMobil, Royal Dutch/Shell, and BP Amoco. They may soon be joined by a fourth, Chevron-Texaco, if anti-trust regulators give that proposed merger the green light. The oil companies argue that mergers are good for both their shareholders and consumers. The numbers show that they may be only half right.

In contrast to Al Gore's attacks, Big Oil has just suffered through a difficult decade. With the world appearing to be awash in oil, prices dropped as low as $10 a barrel, hammering industry profits and stock prices. The industry had little choice but to retrench and consolidate. Exxon set the pace in those years by cutting exploration and production budgets, using the savings to buy back its own stock.

Mergers are merely an extension of this cost-cutting, profit-promoting model for oil. When Exxon later merged with Mobil Corp., it cut 30% off the combined companies' exploration and production budget. The merged Royal Dutch/Shell Group followed suit and cut 30% of its combined exploration budget, plowing the savings into stock buybacks. So did BP Amoco PLC. The supermajors were thus in lean shape with low inventories when oil suddenly shot to $35, boosting their profits.

But what about the energy consumers? Part of the oil companies' rationale for cost-cutting and merging is to improve balance sheets in order to raise investments for new supplies of oil. So far, it's hard to see it in the numbers. Despite record oil and natural gas prices, overall capital spending at ExxonMobil is down 30% for the year. Capital expenditures at BP Amoco are flat.

As for the benefits of merging, BP Amoco's oil and natural gas production is lower than the 1997 pre-merger levels for BP and Amoco combined. ExxonMobil's production is no higher than the pre-merger 1998 levels for Exxon and Mobil.

It is true that the tripling of oil prices caught everyone, including the oil majors, by surprise. And it takes time to set up huge exploration projects. Yet oil prices have been high for some time now, but budgets for exploration remain basically flat. Mergers and the whole shift to cost-cutting and stock buybacks have helped the oil companies and their shareholders, but they have not as yet led to higher investments and production volume that might lower prices for consumers. This is the real situation that the Federal Trade Commission will have to address in returning to the Chevron-Texaco deal.