Senators are only making fools of themselves by attacking oil company mergers

In a recent letter to the Federal Trade Commission Chairman Lina Khan, Senate Majority Leader Chuck Schumer (D-N.Y.) and 22 other Democratic senators stated that they are concerned “about 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.”

The senators’ basic complaint is that the mergers “are likely to harm competition, risking increased consumer prices and reduced output throughout the United States.” The letter then summarizes the long-term process of consolidation in the fossil energy sector since the 1990s, asserting that the result has been “anticompetitive coordination in the industry” allowing the producers to direct “their individual supplies into, or away from, particular regions of the country enabl[ing] them to achieve ‘price uplift scenarios’ and to ‘leverage up’ prices.”

This takes even Washington’s political silliness to new heights. Where even to begin?

Nowhere do the senators ask the obvious question: Why would market forces have caused a consolidation process for at least the last 30 years?

One factor, both large and obvious, is the technological revolution behind hydraulic fracturing and horizontal drilling in oil and gas exploration and production. Horizontal drilling can extend for several miles, meaning that leasing rights for parcels must be contiguous; the alternative is an expensive and complex system of contracting under conditions of great uncertainty about the resources to be discovered and their market value over ensuing decades. Is it really so difficult to see that the allocation of risk under such hypothetical contracts would be exceptionally difficult to negotiate?

The senators signing the letter are not renowned for their expertise in economic analysis, but that is no excuse for their apparent nonrecognition of another important parameter: Most technological advances have the effect of both reducing costs and increasing scale economies. Consolidation occurs even in cases of perfect competition. It has nothing to do with purported attempts at monopolization or other dark conspiracy theories.

These senators’ view of market dynamics largely ignores that there is a global market for both crude oil and refined products, both of which are imported into and exported from the U.S. in substantial quantities. The ability of U.S. producers to manipulate prices or engage in monopolization is nonexistent.

Schumer and his pals attempt to circumvent this fact using the fallacy of assertion: “Focusing only on the global market is improper,” they state. They add the irrelevant point that “even if these energy firms represent a small fraction of the global petroleum market, the question before the FTC is whether these proposed transactions may substantially lessen competition in any line of commerce.”

Given that they chiefly address the “line of commerce” for crude oil and refined products, it is worth following the senators’ point to its conclusion there. With respect to the “[risk] of reduced output throughout the United States,” are the senators actually oblivious to the long-term trend in U.S. oil and gas production during the very period whose trend toward consolidation they bemoan? Crude oil production is up 138 percent since 2008. Natural gas production is up by more than 100 percent since 2005. Gasoline production is up 23 percent increase since 1991.

And with respect to the regional price horror stories imagined by the senators, we have the Energy Information Administration data on regional differences in gasoline prices going back to April 1993. The data show no pattern of changes in those differences, except in California, whose refinery capacity and pipeline constraints have raised prices for the special gasoline blends required by both federal and state regulations. Do Schumer and the other senators really want to blame the fossil fuel producers for California’s regulatory choices?

So utterly determined are the senators to find a basis for attacking the oil producers that they ignore other obvious factors. For example, thanks to higher interest rates, it is significantly cheaper for producers to borrow if they are more diversified geographically and across sectors, and this adds to the pressure to consolidate. Meanwhile, production decline rates, new discoveries, and field expansion are not uniform across 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 assault on fossil energy producers has created an artificial scale economy. Larger producers are in a better position to resist such attacks. Perhaps Schumer and these other senators should look in a mirror, given that higher gasoline prices are a central goal of the climate change policy beliefs to which they all subscribe.

In short, industry consolidation has not been the result of the conspiracy that these senators theorize. Rather, it is a natural outcome of various forces at work in the market, including policy preferences by the very senators who wrote that letter.

Schumer and the others are among the many public officials, rent-seeking corporate types, and ideologues arguing that fossil fuels are going to be “transitioned” out of the market over the next several decades. So why would they not attempt to speed up the process with such a perverse “analysis” as that offered in their letter?

They are engaged in an ideological campaign aimed at deluding public officials, the media and the citizenry writ large. The underlying reality is that they have deluded only themselves.

Benjamin Zycher is a senior fellow at the American Enterprise Institute.