IN THE 25 years since the first Arab oil embargo, no one ever predicted that the price of crude oil would drop to $11 a barrel. Nor did most foresee a merger between two oil giants such as Exxon and Mobil. Yet both have come to pass.
Cheap oil and higher production costs are driving the combination -- and fueling talk of other large mergers, including Monday's reports that Shell is interested in acquiring Chevron.
Exploration and production expenses are rising as companies look for oil in remote areas and in deeper water offshore. In addition, the Asian economic slowdown reduced demand, and OPEC's overproduction has produced the lowest priced crude oil since 1986.
Low-priced crude means consumers are buying historically cheap gasoline. The average price for regular gas is about 97 cents a gallon. Adjusted for inflation, that is the same price as in 1918, according to an Energy Department analysis.
Low prices mean integrated oil companies that explore, produce, refine and market petroleum products must operate more efficiently. Although Exxon and Mobil have been cutting jobs and selling marginal properties for five years, the proposed merger means the companies are pursuing even greater efficiencies and economies of scale.
An Exxon-Mobil combination would be the largest U.S. corporation and a formidable presence in the market. But the new company would not be able to dominate the national gasoline market. Exxon and Mobil together will control about 20 percent of the nation's gasoline market and about 14.5 percent of the refining capacity.
While competition will still exist nationwide, in some individual markets, where Exxon and Mobil dominate retail sales, the danger of monopoly arises. When the Federal Trade Commission reviews the merger, the impact on local markets should be scrutinized.
As long as the worldwide petroleum market is glutted, most consumers are unlikely to notice this merger. And while the world is awash in oil, one company -- even as large as Exxon-Mobil -- cannot set prices. Once demand for petroleum picks up, however, this merged giant will be able to exert more leverage.
Pub Date: 12/10/98