Integration and Competition in the Petroleum Industry

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

CHAPTER 15
The Patterns of Competition Where Firms Vary in Size and Integration

COMPETITIVE strategy has many facets, especially in an industry as dynamic and turbulent as this one. Integration itself has been one of those facets. Investment, innovation and non-price competition are others. Yet historically and traditionally, the aspect of competitive structure that has received primary attention has been the number and relative size of firms -- with a heavy emphasis on the importance of numerous small, independently acting buyers and sellers -- and the aspect of competitive behavior, rivalry in price. The two are interrelated, although by no means uniquely or exclusively. The principal criticisms of integration in oil, as found in association with business size, have referred not importantly to its impact on innovation, or on output-expanding investment (with the outstanding exception of investments in marketing facilities), but to its alleged blanketing of the field against price-dickering, and the entry and survival of smaller, nonintegrated rivals. These contentions must now be specifically analyzed.


COST AND DEMAND INFLUENCES

The outstanding economic characteristic of petroleum production, transportation, and processing is low variable and high fixed costs at each stage of operation. But as oil passes through each of its stages of processing, these costs are transmuted into a price, and therefore into a variable cost from the standpoint of the operator at the succeeding stage. For the vertically integrated firm no such transmutation occurs, except as a fiction of interdepartmental bookkeeping. But costs for the nonintegrated operator beyond the crude production stage will be weighted heavily with the variable cost of the oil or the oil product itself, a very high portion of total costs at each individual stage of this industry.1 Apart from any consideration of size or financial strength,

____________________
1
McLean and Haigh supply the following computations of gross margins at

-375-

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