Integration and Competition in the Petroleum Industry

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

CHAPTER 4
The Economic Setting of Integration in Oil

THE STRUCTURE of an industry is not an historical accident. It is shaped by the interplay of objective, conditioning forces, internal and external to it, and must be regarded as the response to those circumstances, as well as an independent factor in turn affecting them. Since the United States oil industry is characterized by integrated business organization to an outstanding degree, explanation must be sought in forces peculiar to it -- reasons inherent in the physical and economic characteristics of the product, and traceable in its own history. These reasons are the subject of this chapter and the next. The two chapters therefore represent an essay in the economic interpretation of integration as it has evolved in oil, presented as background for analysis of its operation today and its desirability tomorrow.


THE PHYSICAL PECULIARITIES OF OIL

The oil industry is what it is very largely because of the peculiarities of its raw material. First and foremost, petroleum is a fluid, both as "captured" from the hidden recesses of the earth and as it passes through processing into final uses.1 Second, it is concealed in the earth: all the advances of modern science have been incapable of eliminating the high element of gamble in its quest. Third, it is a raw material of almost infinite potentialities -- some will be lost forever if care is not taken, some can be secured simply, others only with costly special equipment -- from which a varying pattern of final products can be procured at a price. And finally, oil is an exhaustible resource, dissipated as used, of which the quantity of ultimate supply is not known. No one of these characteristics is unique to oil; but their combination is truly unique, and it imparts an unmatched potentially explosive vehemence to competitive forces in the industry.

Oil lies concealed beneath the earth's surface, entrapped in porous

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1
For a lucid account of the physical and economic characteristics of oil and their consequences see P. H. Frankel, Essentials of Petroleum ( London, Chapman and Hall, 1946), Pt. II of which is entitled "Economics of a Liquid." Also Watkins, chaps. 2, 4.

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