Integration and Competition in the Petroleum Industry

By Melvin G. De Chazeau; Alfred E. Kahn | Go to book overview

CHAPTER 2
The Structure of the Industry

THE PETROLEUM INDUSTRY comprises a wide range of activities, spatially separated and technically distinct, but all collaborating in getting oil from the ground to the ultimate user. The main stages in the process are finding and producing the crude oil; transporting it to the point of processing; "refining" it -- that is, converting it into products; transporting the products to regions of use; and finally distributing them at retail.

As soon as one penetrates beyond this rather simple façade, one encounters increasing complexities that make it much more difficult to define or characterize the industry. In the search for oil, producing companies are inadvertently or contingently involved in the production, use, and sale of natural gas, whose processing and channels of distribution are so different from those of oil and its products as to justify regarding it as a distinct, though inextricably related, industry.1 In seeking to assure themselves of future supplies, many refining companies have spent millions of dollars experimenting with alternative sources of oil or oil-like hydrocarbons; and they will almost certainly become increasingly involved in the chemical process of creating or

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1
In recent years, something like one-third of total production of natural gas has been from oil wells, and roughly one-third of estimated proved reserves of natural gas are either in contact ("associated") with or dissolved in crude oil. See, e.g., Petroleum Facts and Figures, 12th ed., pp. 153, 161. Moreover, most of the balance of production apparently comes from wells uncovered in the search for oil. General Ernest Thompson, chairman of the Texas Railroad Commission, the body charged with regulation of oil and natural gas production, has testified: "nearly all gas discoveries in my experience have been found incident to the search for oil." U. S. Senate, Committee on Inter- state and Foreign Commerce, "Amendments to the Natural Gas Act," Hearings on S. 712 etc., 84th Congress, 1st Session ( 1955), p. 55. The overwhelming majority of leading natural gas producing companies are oil companies as well. See the list of the thirty-five largest nontransporting producers compiled by Senator Paul Douglas, Congressional Record ( January 23, 1956), p. 890. Rapidly mounting demand and price moreover have caused the prospect of finding gas to play a role of correspondingly increasing importance in motivating exploration and development in recent years.

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