[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]



 
                         THE EXXON-MOBIL MERGER

=======================================================================

                                HEARINGS

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                         MARCH 10 and 11, 1999

                               __________

                           Serial No. 106-12

                               __________

            Printed for the use of the Committee on Commerce


                                


                      U.S. GOVERNMENT PRINTING OFFICE
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Okayea Oklahoma       ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RALPH M. HALL, Texas
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    March 10, 1999...............................................     1
    March 11, 1999...............................................    47
Testimony of:
    Baer, William J., Director, Bureau of Competition, Federal 
      Trade Commission...........................................     9
    Hakes, Jay, Administrator, Energy Information Administration, 
      Department of Energy.......................................    16
    Lichtblau, John H., Chairman, Petroleum Industry Research 
      Foundation.................................................    77
    McAlevey, Michael, Deputy Director, Division of Corporate 
      Finance, Securities and Exchange Commission................    23
    Noto, Lucio A., Chairman and Chief Executive Officer, Mobil 
      Corporation................................................    50
    Raymond, Lee R., Chief Executive Officer, Exxon Corporation..    49
    Reidy, Tom, Service Station Dealers of America...............    86
    Shotmeyer, Charles, President, Shotmeyer Brothers Petroleum 
      Corporation................................................    89

                                 (iii)



                         THE EXXON-MOBIL MERGER

                              ----------                              


                       WEDNESDAY, MARCH 10, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton, 
(chairman) presiding.
    Members present: Representatives Barton, Largent, Burr, 
Rogan, Shimkus, Wilson, Bryant, Ehrlich, Bliley (ex officio), 
Hall, McCarthy, Sawyer, Markey, Gordon, and Wynn.
    Also present: Representatives Engel and Jackson-Lee.
    Staff present: Cathy VanWay, majority counsel; Ramsen 
Betfarhad, majority counsel, Donn Salvosa, legislative clerk; 
Rick Kessler, minority professional staff member, and Sue 
Sheridan, minority counsel.
    Mr. Barton. The Subcommittee on Energy and Power of the 
Commerce Committee hearing on the Exxon-Mobil merger will come 
to order.
    I would like to welcome everyone to today's hearing on the 
recently announced merger between Exxon and Mobil. As everyone 
knows on December 1, 1998, Exxon, the Nation's largest domestic 
oil company, agreed to buy Mobil Oil for $77 billion.
    This merger, if approved, would represent the largest 
industrial merger in history, exceeding the $54 billion 
acquisition of Amoco by British Petroleum. Exxon-Mobil 
Corporation would have a combined 1998 revenue of $170 billion.
    It would create the largest non-state-owned integrated oil 
and gas company in the world. It would have a market 
capitalization of over $240 billion. The new company will have 
a work force of 122,700. Approximately 40 percent of which 
would be based in the United States.
    A very important fact is that this merger, if approved, is 
just one of several energy mergers that have been announced or 
completed in the last 2 years. Because of the size and scope of 
the transaction, it is important that this subcommittee, which 
has jurisdiction over the oil and gas industry in the United 
States, find out more about this merger, what is driving it, 
and its impact on consumers.
    This is not a confrontational hearing. It probably could be 
said that it's not even controversial. But it is an important 
hearing because, if there is a problem in this merger, it needs 
to be put before the American people. It would be irresponsible 
of this subcommittee and the full committee, which has 
jurisdiction for the House of Representatives, to not assure 
ourselves and the American public that consumers at a minimum 
will not be harmed and, hopefully, will benefit from the 
merger, again, if it's approved.
    It's important to put this merger into context. The major 
integrated oil companies are operating in an increasingly 
competitive and an increasingly global marketplace. As we 
speak, world oil prices have languished at record lows for 
several months. Every oil company, large or small, is looking 
for ways to cut costs, eliminate duplication, and increase 
efficiency.
    New international opportunities for oil exploration and 
production require ever larger capital and resources in order 
to compete for these new sources of oil and gas. When we look 
at the globalization of the oil market, mergers such as Exxon-
Mobil appear to be a natural way of life.
    While we say that and while we can appreciate the market 
factors that drive such a merger, we must assure ourselves that 
they do not have anticompetitive impacts for the American 
consumer. Service station dealers, jobbers, and independent 
refiners have raised concerns about certain aspects of the 
merger. None of the parties have argued that the merger should 
not go forward, but all believe steps may need to be taken to 
assure that their subsets of the oil industry do not get harmed 
in the interim.
    We will hear from those witnesses or representatives of 
those witnesses tomorrow. Today we are going to hear from the 
Federal Trade Commission, the Energy Information 
Administration, and the Securities and Exchange Commission 
about how they look at mergers in general and the impact of 
these mergers. I hope today's testimony will create a framework 
for us to ask questions of the companies' representatives 
tomorrow and the other interested parties tomorrow that will 
appear before this subcommittee.
    I want to note that today's hearing will just be the first 
of a number of hearings the subcommittee intends to undertake 
on the domestic oil and gas industry.
    Today's low oil prices may pose a risk to our national 
energy security because, if they continue, they will discourage 
domestic production, domestic exploration, and threaten to make 
the independent oil and gas producer a thing of the past.
    The United States is now dependant for over 50 percent of 
its oil from foreign sources and that dependance is likely to 
grow if today's low oil prices persist. This is an issue that 
should be addressed and will be addressed by this subcommittee.
    I want to welcome our witnesses today. We look forward to 
your testimony. I am sure that we will find it very 
informative.
    I would like to recognize Mr. Bliley, the chairman of the 
full committee, for an opening statement.
    Chairman Bliley. Thank you, Mr. Chairman, and I would like 
to commend you for holding this timely hearing on the merger 
between Exxon and Mobil, two of our Nation's largest integrated 
oil companies.
    I think this hearing is timely because it gives us an 
opportunity to explore not only what is happening in the oil 
industry, but what is happening in the larger energy industry 
as it becomes more competitive.
    The past 2 years have been record-breaking in terms of the 
number and size of mergers being announced and completed across 
the energy industry. Oil companies are merging with oil 
companies like the recently completed British Petroleum-Amoco 
merger. Electric companies are merging with electric companies 
as in the American Electric Power Central and Southwest 
proposal. Electric and gas companies are merging with each 
other as in the recently announced acquisition of CNG by 
Dominion Resources. Importantly, everyone thinks this trend 
will continue.
    So I believe it is important that we take a look at these 
mergers, what is driving them, and how they will impact 
consumers and U.S. global competitiveness. It is clear in the 
global economy in which business now operates that they must be 
as efficient as possible. Some of these companies clearly 
believe being efficient also means being big, but this is not 
necessarily bad.
    As a general rule that efficiency benefits consumers as 
they see lower prices in the goods they purchase. Consumers 
also benefit because companies focus more on customer service 
and adding value for their customers. The consumer benefits of 
competition is, in fact, the reason why I support customer 
choice for electricity. However, mergers can become harmful 
when companies use their size or market power to restrict 
competition.
    Today the Federal Trade Commission will tell us about some 
of the things we should look at in evaluating whether a merger 
is benign or harmful. Tomorrow we will hear from Exxon and 
Mobil and other interested parties about how this merger, in 
particular, stacks up against the FTC's standards.
    While I think it is important that we look closely at these 
mergers, I do not start, as some do, from the assumption that 
all mergers are bad. I believe each needs to be judged on its 
own merits.
    Again, Mr. Chairman, I commend you for holding this 
hearing. I look forward to hearing the testimony of the 
witnesses as well. Thank you very much.
    Mr. Barton. I thank the full committee chairman. We would 
now recognize the distinguished senior member from 
Massachusetts, Mr. Markey, for an opening statement.
    Mr. Markey. Thank you, Mr. Chairman, very much, and I would 
like to begin by commending you for holding the first of two 
oversight hearings on this proposed merger of Exxon and Mobil. 
I think it is altogether appropriate that we have created this 
winter wonderland outside as a nostalgia day, remembering what 
winters used to be like in the United States when oil companies 
were really big and supply was limited and $30-a-barrel oil 
escalating up to $90-a-barrel oil was predicted. It is kind of 
like a nostalgia day here, remembering the way it used to be 
and oil companies as a result are going to come in and argue 
that they should be able to merge, to deal with this pressing 
issue of the fact that we don't have winters any longer.
    But, of course, the fact that we don't have winters any 
longer doesn't have anything to do with the greenhouse effect, 
either, they will testify. So we will leave that as kind of a 
mystery to be resolved at another hearing unrelated to this 
one.
    The merger of Exxon, our Nation's largest domestic oil 
company, and Mobil, the Nation's second largest domestic oil 
company, would represent the largest industrial merger in 
history. Exxon's buyout of Mobil in a nearly $80 billion stock 
deal dwarfs BP's $54 billion acquisition of Amoco and would 
create the world's largest private corporation.
    It has been said that current trends in the domestic and 
global oil and gas markets, persistent low prices, and 
increased exploration and production costs are driving the 
current trend toward concentration in the oil industry. The 
recent wave of mergers, we are told, has been driven by the 
need to achieve the savings and the synergies made possible by 
combining assets and resources.
    All of this may be true and there may be a compelling 
business and economic rationale for a consolidation in the oil 
industry, but a transaction of this size and scope clearly 
merits very serious scrutiny by our Nation's antitrust 
regulators. For in allowing Exxon and Mobil to merge, we must 
carefully guard against recreating Standard Oil, one of our 
Nation's most notorious monopolies.
    In 1911 the courts approved the breakup of John D. 
Rockefeller's giant monopoly into 34 independent companies. We 
have now seen BP, the acquirer of Standard Oil of Ohio, the 
original Rockefeller company, take over Amoco, the successor to 
Standard Oil of Indiana. Now we have before us a proposal to 
merge Exxon, the successor to Standard Oil of New Jersey, with 
Mobil, the successor to Standard Oil of New York.
    If we allow these mergers to proceed without assuring that 
appropriate safeguards are established that protect against 
anticompetitive actions, including requiring divestiture of 
assets, where appropriate, consumers may find that the 
synergies and efficiencies resulting from these deals amount to 
little more than higher prices at the gas pump.
    So while I am very sympathetic to the notion that the 
consolidation in the industry that the Exxon-Mobil represents 
may make a great deal of sense in order to facilitate more 
efficient exploration and production, I believe it is 
absolutely essential for the FTC to look very carefully at the 
impact of the proposed merger on regional wholesale and retail 
markets in the United States.
    During today's hearing I will be particularly interested in 
hearing whether the FTC plans to look at market concentrations 
in the Northeast, and whether it intends to move aggressively 
to address any potential anticompetitive effects on our 
markets.
    I thank you, Mr. Chairman, for calling this hearing and I 
look forward to the testimony from our witnesses.
    Mr. Barton. I thank the gentleman from Massachusetts. I 
personally don't remember $90-a-barrel oil but maybe we had it 
for half a day in Massachusetts----
    Mr. Markey. Would the gentleman yield?
    Mr. Barton. [continuing] and I just missed that.
    Mr. Markey. Would the gentleman yield?
    Mr. Barton. I will be happy to yield.
    Mr. Markey. The nuclear utility executives who ordered 200 
nuclear power plants in the 1970's premised upon $90-a-barrel 
oil. At this time they remember it because they no longer----
    Mr. Barton. Oh, ``premised upon.'' I am glad for that 
clarification. I am glad for that clarification. I do remember 
$14 an MCF natural gas. Those were the good old days in the 
natural gas market.
    I would now recognize the distinguished ranking member from 
Texas, Ralph Hall, for an opening statement.
    Mr. Hall. You go back to talking about 5 cent cotton while 
you are getting into there that I remember and I think we just 
charged those folks around Boston that 90 bucks a barrel.
    I thank the chairman for convening these hearing. I think, 
of course, it is important that we do so. All of us, I suppose, 
have emotions. I can't say that they are even mixed emotions, 
but I think the enormity of it requires the hearing that the 
chairman has called, and I thank you for calling it.
    I have pretty much of an open mind on it. It probably would 
be very good for stockholders, for employees, and may not raise 
significant competitive issues or at least none that can't be 
resolved before the deal is done.
    I am extraordinarily interested in the factors that drive 
this merger. Certainly one of them has to be the historic low 
oil prices. Never have I seen the concern in my district--and, 
yes, the fear in my district--shown by the leaders of the 
independent petroleum industry there in Texas. I have the oil 
patch in my district, Tyler, Longview, Bladewater, Kilgore in 
that area.
    A viable domestic onshore petroleum industry represents a 
very best defense that we could have against the possibility of 
skyrocketing oil prices in the future. Yet, producers are 
leaving the business daily, and the associated businesses that 
provide the infrastructure for producers really is melting 
away. It is atrophying away.
    What we don't realize is that the same infrastructure that 
supports oil producers also supports the continued exploration 
and development of natural gas reserves in the country. This 
administration and industrial America has bet an awful lot on 
the continued availability of natural gas at reasonable prices, 
and I know we had the Fuel Use Act in the late 1980's. I think 
that was Mr. Carter's, and it was passed on the basis that we 
were out of natural gas. Of course, that was not true. What we 
were out of was out of incentive to look for it and reward for 
finding it.
    I think if the producers and the infrastructure that's 
required to get natural gas out of the ground and deliver it to 
where it is consumed, if that disappears, then I really fear 
that the country is in for a rude awakening when, and not if, 
the prices for these products sudden spike upward.
    I guess like a lot of other people, like the current low 
prices at the pump, but I realize that the consequences for 
huge economic disruptions when prices rise sharply, they rise 
sharply upward, could be very great, indeed.
    So I hope, Mr. Chairman, with your cooperation, to actually 
review this proposed merger, we will convene some more hearings 
to take a serious look at the causes and effects of unstable 
and fluctuating oil prices.
    We probably need to make a Paul Revere's ride through the 
country and begin to warn people, particularly in the non-
producing States, those 40 States that use energy and don't 
produce any of it, that they, too, need to join with us now to 
help dampen the effects of future price spikes.
    In closing, Mr. Chairman, I welcome our witnesses here 
today and I thank you for the time you give us here today and 
the time it has taken to get ready to come with us. We need to 
understand better the criteria by which these present-day mega-
mergers are being judged. Yours in not an easy job and we 
appreciate what you do to protect the public interest.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Barton. I thank the gentleman from Rockwell and say 
that the subcommittee could not have a better member who knows 
more about the oil and gas industry at this point in time than 
Mr. Hall.
    I would recognize the gentleman from California, Mr. Rogan, 
for a brief opening statement.
    Mr. Rogan. Mr. Chairman, thank you. I thank you for calling 
this hearing. I ask unanimous consent to allow my opening 
statement be made a part of the record.
    Mr. Barton. Without objection.
    Mr. Rogan. Thank you. I yield back.
    [The prepared statement of Hon. James Rogan follows:]
 Prepared Statement of Hon. James Rogan, a Representative in Congress 
                      from the State of California
    I thank the Chairman for holding this hearing today. And I thank 
the panel for being here to discuss the largest merger in history. I am 
glad to have the opportunity to learn directly from them how this 
transaction will impact business owners and consumers in California.
    As we hear your testimony, it is my hope that we can all 
concentrate on the primary focus for the hearing: The merger of the 
Exxon Corporation and the Mobil Corporation.
    Some may have interest in discussing legislation and policies that 
may impact the companies in this merger, but not the merger itself. It 
would be refreshing, Mr. Chairman, if we all could pledge to keep our 
eye on the ball today and tomorrow.
    One issue I hope the witnesses will discuss concerns the fact that 
we have an outflow of oil in California. As you know, given this 
condition, it is a challenge for independent refiners in the Golden 
State to acquire crude oil to refine.
    Many refiners in California are concerned that the Exxon/Mobil 
Merger will generate such a strong upstream demand for oil that the 
smaller refiners will be negatively impacted.
    I am eager to hear how this problem for our small refiners can be 
mitigated. The Exxon/Mobil merger is an exciting byproduct of a healthy 
global economy. I am pleased to have the opportunity to learn of the 
good things to come from this merger, and look forward to Teaming more 
about how our interests in California will be enhanced by this merger.

    Mr. Barton. Is that the only statement you wish to make at 
this point in time.
    Mr. Rogan. Just unless you are inviting further commentary.
    Mr. Barton. No, no, no. I am just giving you an 
opportunity.
    Mr. Rogan. Mr. Chairman, as we say back home, that will do 
it.
    Mr. Barton. I recognize the gentleman from Ohio, Mr. 
Sawyer, for an opening statement.
    Mr. Sawyer. Thank you, Mr. Chairman, and I thank you and 
our witnesses for your attention to this issue today.
    I do not have an extended opening statement, but I would 
just like to make an observation and that is that I come from 
Akron, Ohio. I represent a community that has been known by its 
signature industry, the tire and rubber industry, for the 
largest part of this century.
    In recent years we have seen exactly the same kind of 
phenomenon globally in the tire industry that we are seeing 
evidenced here in the hydrocarbon industry. It is probably only 
coincidental that the rubber industry is a heavy user of 
hydrocarbon feedstocks in the production of synthetic rubber.
    But it is remarkable to me, and I think to most Americans, 
when they realize that, despite the enormous number of brand 
names, that the actual number of producers globally in the tire 
industry, the major producers are probably just about four with 
most other producers affiliated, with those four major 
producers, and only one real American producer of any size. 
Fortunately, that American producer is very powerful in the 
market and is a strong provider of portable products.
    Our only concern at this point is to assure that we have 
the same kind of capacity to provide for American consumers and 
the capacity to have access to global resources in an industry 
where the competition for those resources is fierce. The 
capacity to market into this country is every bit as important 
as the ability of those who are domiciled here to be able to 
have a substantial portion of that market.
    With that, Mr. Chairman, I yield back the balance of my 
time and look forward to the testimony both today and tomorrow.
    Mr. Barton. I thank the gentleman from Ohio. The Chair 
would recognize the gentleman from Illinois, Mr. Shimkus, for 
an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I am going to be 
following these hearings the next 2 days very closely, focusing 
on the consumers of this Nation, the station owners, small 
independent producers of oil.
    As many people may know, Illinois is the 11th largest oil-
producing State and the two largest fields are in my district.
    I have two primary concerns with the low prices today, and 
that is the decision that many of these marginal oil producers 
are making in going out of business, which obviously affects my 
district just as a means of production and employment.
    But the second issue that I have been trying to trumpet 
since becoming a Member of Congress is energy security of our 
Nation. I think these marginal wells play an important role in 
energy security, and my question will be--and I will try to 
listen to answers--how is this merger going to affect our 
energy security as a Nation?
    With that, Mr. Chairman, I appreciate you taking time for 
these hearings and I yield back the balance of my time.
    Mr. Barton. The Chair is going to recognize the gentlelady 
from New Mexico for a brief opening statement and then we will 
come to the gentleman from New York.
    Mrs. Wilson. Mr. Chairman, in the interest of time, I will 
ask unanimous consent that my opening statement be put in the 
record.
    Mr. Barton. I thank the gentlelady. Does the distinguished 
gentleman from New York wish to make a brief opening statement? 
Not at this time, all right. The gentleman from Tennessee, Mr. 
Bryant.
    Mr. Bryant. I thank the chairman for calling this hearing 
and I thank the very distinguished panel that we have before us 
today. I look forward to hearing their testimony and also 
reading their statements, and with that, I will also pass.
    Mr. Barton. Does the gentlelady from Missouri, Ms. 
McCarthy, wish to make a brief opening statement?
    Ms. McCarthy. Thank you very much, Mr. Chairman, no, not at 
this time.
    Mr. Barton. All members being present and having been given 
the opportunity to make an opening statement, for all members 
not present we ask unanimous consent that they be given the 
requisite number of days to put their statement into the 
record.
    Hearing no objection, so ordered.
    [Additional statement submitted for the record follows:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you, Mr. Chairman. I appreciate this opportunity to learn 
more about the Exxon-Mobil merger. As a member of this Subcommittee, my 
interests regarding this merger lie in the areas of national energy 
policy, impact on consumers, and interstate commerce.
    I understand that, if we were here 20 years ago having this 
discussion, a merger between Exxon and Mobil would have been nearly 
impossible. It would have been much more difficult due to the 
companies' larger global market share. However, with the 
nationalization of crude-producing assets and the growth of state-owned 
oil companies, major oil companies were reduced.
    Thus, the present Exxon and Mobil combined production accounts for 
less than 4 percent of the world production, and a merger between these 
two companies is now possible.
    Exxon and Mobil seem to be following a trend in the industry of 
consolidation--recently, we saw the merger of BP and Amoco. However, 
despite their reduced production, these two companies will still 
produce the largest industrial merger ever and will create the largest 
private oil company worldwide.
    With such a large merger, the implications for our national energy 
policy, consumers, and interstate commerce are not immediately clear. 
How will our panel members, in their various capacities, evaluate the 
merger with respect to these areas? I look forward to learning the 
opinions of our panel members today, as they speak on behalf of the 
FTC, the SEC, and DOE. Thank you.

    Mr. Barton. The Chair now wishes to recognize our panel for 
the opening of today's hearing. It is a distinguished panel. 
Representing the Federal Trade Commission we have Mr. William 
Baer, who is the Director of the Bureau of Competition; 
representing the Energy Information Administration we have the 
Administrator, the Honorable Jay Hakes; is that correct?
    Mr. Hakes. Yes, sir.
    Mr. Barton. And representing the Securities and Exchange 
Commission we have Mr. Michael McAlevey; is that correct?
    Mr. McAlevey. ``McAlevey.''
    Mr. Barton. McAlevey, who is the Deputy Director of the 
Division Corporate Finance.
    We are going to recognize Mr. Baer, and because this is the 
only panel that we have today we will recognize each of you 
gentleman for as much time as you may consume. We will put your 
entire written statements into the record and then at the 
conclusion of your oral testimony we will have a question 
period.
    So the Chair is glad to welcome Mr. William Baer for his 
statement.

STATEMENTS OF WILLIAM J. BAER, DIRECTOR, BUREAU OF COMPETITION, 
  FEDERAL TRADE COMMISSION; JAY HAKES, ADMINISTRATOR, ENERGY 
 INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY; AND MICHAEL 
   MCALEVEY, DEPUTY DIRECTOR, DIVISION OF CORPORATE FINANCE, 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Baer. Thank you, Mr. Chairman. Good morning and good 
morning to members of the subcommittee.
    We appreciate the opportunity to appear to discuss the 
FTC's role in enforcing the antitrust laws to make sure that 
consumers of petroleum products are fully protected.
    We at the agency appreciate that a viable and competitive 
energy sector is vitally important to the economic health of 
the United States and to the world. At the same time, our job 
at the FTC is to make sure that consolidations in the energy 
field do not put consumers at risk of higher prices, namely, 
paying more for gasoline at the pump and other fuels, and the 
consequent harm that those higher prices would cause to our 
economy, both specific regions of the economy and the Nation as 
a whole.
    Mr. Chairman, as you noted, this merger, the largest 
industrial merger ever, creates the largest private oil company 
worldwide and the largest U.S.-based company of any type on the 
basis of its revenues.
    Today, Mobil and Exxon face each other at just about every 
level of the industry, exploration and production of crude, 
refining of crude into petroleum products, manufacture of 
petrochemicals and lubricants, and the transportation and 
marketing of gasoline and other fuels in many parts of the 
United States, in particular the Northeast, the Gulf Coast, and 
California. Exxon and Mobil combined would likely be the 
largest or one of the largest players in each of these sectors 
of the American economy.
    Obviously, a transaction of this size alone merits our 
attention. As antitrust enforcers, we need to consider whether 
Exxon-Mobil's size, or other attributes, will somehow change 
for the worse the competitive dynamics of the industry.
    While I cannot comment in any detail on the specifics of a 
pending non-public law enforcement investigation, I can, by 
referring to what we have done in the past, give you some sense 
of the process the FTC follows and the issues that are likely 
to be important to us as we examine the Exxon-Mobil 
transaction.
    As I noted, this merger doesn't occur in a vacuum, but 
appears to be part of an ongoing trend of consolidation and 
concentration in the industry. In recent months we have seen 
the merger of British Petroleum and Amoco, until now the 
largest industrial merger in history, and the combination of 
the refining and marketing businesses a year or so ago of 
Shell, Texaco, and Star Enterprises. That created the largest 
refiner and marketer of petroleum products in the United 
States. Other transactions are either proposed, as the chairman 
indicated, or rumored to be on the drawing boards.
    Our job at the FTC is to review these transactions 
carefully and where appropriate to intervene to prevent the 
merger from significantly reducing competition in any sector of 
the industry that affects the U.S. or its citizens. This is the 
basic goal of antitrust and it is particularly vital with 
respect to the petroleum industry, where even very small prices 
increases can have a direct and lasting impact on the entire 
economy.
    Now in the past we have looked at a number of mergers and 
sought relief where we thought it appropriate. In the British 
Petroleum-Amoco deal, which was consummated earlier this year, 
we preserved local competition in 30 retail markets across the 
United States by requiring divestiture of retail business and 
also terminals, the terminals that supply the retail outlets.
    A little over a year ago in the Shell-Texaco joint venture 
we worked to protect competition in the western part of the 
United States, where we were concerned with an undue 
concentration the joint venture would have, an undue market 
share they would have at the refining level. We remedied that 
by insisting that the parties, as a condition of merging, 
divest a refinery in Washington State, a refinery that served 
the northwestern part of the United States, as well as making 
CARB II gasoline, the specially formulated gasoline that is 
sold uniquely in California.
    We also were concerned about transportation of refined 
product from the Gulf Coast up to the East Coast along the 
Colonial and Plantation pipelines and required divestiture of 
interests there to make sure that those pipelines continued to 
compete aggressively with each other to offer as low a tariff 
as possible for the transportation of refined product.
    We also were concerned that the transaction would adversely 
affect consumers in local markets in California, particularly 
San Diego, as well as in Hawaii, and required divestitures 
there as well.
    In recent years we've also seen smaller deals like Shell 
and Exxon's proposed merger of assets in Guam. A company called 
PRI and Shell in Hawaii also proposed to consolidate their 
assets. We threatened to go to court to enjoin those 
transactions because we could not see any legitimate pro-
competitive functions served by them and saw considerable risks 
to consumers as well. Both transactions were abandoned.
    Now how do we go about doing our job? What do we look at 
when we are confronted with a transaction? One thing we look at 
is the trend toward concentration in an industry. Where we find 
evidence that an industry is consolidating, i.e., there are 
fewer players, the risk to consumers that those fewer players 
will behave anticompetitively over time grows. We also want to 
know whether the merger will yield efficiencies that might 
counteract the anticompetitive effects the merger would 
otherwise threaten.
    Just claiming cost savings is not enough to allow an 
anticompetitive merger. So cost savings must be real; they must 
be substantial. They should not result from reductions in input 
and they must counteract the merger's anticompetitive effect, 
not merely be cost savings that flow to the shareholders' 
bottom line and result in higher consumer prices.
    Now where we find problems, we do not, as I have indicated, 
automatically seek to block a transaction. Where we can isolate 
the problem, as we did in the Shell-Texaco merger and in other 
mergers, we seek to require divestiture of the assets, assets 
sufficient to restore the status quo-ante, to ensure that 
competition remains healthy in the sectors of the economy where 
we thought there could be a problem. But where we have an 
anticompetitive concern that infects so much of the deal that 
there's no practical way of working out a negotiated solution, 
we go to court and ask the court to enjoin the transaction.
    In the petroleum industry we do our job by looking at each 
level of production separately, from exploration and production 
down to refining, and finally, to local markets. In the 
exploration and production sector upstream we observe that the 
crude oil market is for most purposes worldwide, and we 
recognize that there have been some major changes since the 
1970's with lots of producing nations being more of a 
significant factor in the marketplace than they had been at the 
time of the Arab oil embargo.
    And we have not, in reviewing prior transactions, found 
problems of undue concentration at the exploration and 
production level. That doesn't necessarily mean that further 
consolidation is harmless, but it does mean that we need to 
look carefully and cautiously at that aspect of this proposed 
transaction.
    Refining is the second sector we look at closely, and that 
has been an area where we have had concerns in various parts of 
the county over time. The Nation's principal refining market, 
the Gulf Coast, not only serves that immediate area, but sends 
substantial amounts of its product by pipeline to the Midwest, 
to the Southeast, and the Northeast, and it is vitally 
important for nearly all of the country east of the Mississippi 
to maintain a competitive Gulf Coast market.
    The two firms, Exxon and Mobil, have considerable refining 
capacity in the Gulf Coast, and we need to look at whether 
combining those assets potentially puts consumers at risk. If 
you go west of the Rockies, there are fewer refineries and less 
competition and, not surprisingly, there tends to be higher 
prices for gasoline and other fuels west of the Rockies. That's 
why in the Shell-Texaco matter we required divestiture of a 
significant refinery in the Pacific Northwest to make sure that 
there would be remaining competition for the Shell-Texaco joint 
venture and the other firms operating in the northwestern 
United States.
    California refining markets are an area of concern to the 
Commission. Mr. Hakes of the Energy Information Administration 
has studied the supply situations in California, where the 
market is so concentrated that even a little bit of a change in 
supply can have a significant affect on prices.
    According to press reports, there was a terrible fire at 
Tosco's Avon refinery last month. That refinery only provided 6 
percent of California's product, but having that refinery out 
of business for a short while raised prices 30 percent.
    So while a fire taking a refinery out, is an act of God, 
doesn't raise antitrust concerns, the ability of firms in a 
concentrated market to take a little bit of capacity out of the 
market and drive prices up is the sort of thing we look at 
carefully in performing our antitrust analysis.
    Gasoline marketing is another area of concern. On several 
occasions we blocked mergers or required divestitures where we 
thought there was going to be undue concentration at the 
marketing level. We are concerned not only that one firm might 
be a near monopolist in a local market, but in places like San 
Diego even re-

ducing the number of firms from 6 to 5 or 5 to 4 can cause a 
reduction in the intensity of price competition and allow 
prices to be higher than they otherwise would, and that is why, 
in looking at the Shell-Texaco joint venture, the Commission 
ordered divestiture of a substantial number of retail gas 
stations in California.
    Mr. Chairman, what we have learned from our investigations 
is that competition is critical to this industry and that 
concentration, as well as increases in concentration, can have 
serious adverse affects on competition.
    We are at a very early stage in our investigation of the 
Exxon-Mobil merger. We have made no conclusions about the 
nature and extent of any problems we might find. The attorneys 
general of many States are highly interested in this deal. We 
are working closely with them as well as with our counterparts 
overseas.
    I can assure you, sir, that the Commission will do its job 
as thoroughly and as expeditiously as we can. We have received 
pledges of full cooperation from both Exxon, and Mobil and we 
intend to rely on those pledges in making sure we get our job 
done right and done quickly.
    Thank you, Mr. Chairman.
    [The prepared statement of William J. Baer follows:]
Prepared Statement of Statement of William J. Baer, Director, Bureau of 
           Competition,1 Federal Trade Commission
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    \1\ The written statement reflects the views of the Federal Trade 
Commission. My oral remarks and responses to questions reflect my views 
and are not necessarily the views of the Commission or of any 
Commissioner.
---------------------------------------------------------------------------
    Mr. Chairman, our thanks to you and the Committee for the 
opportunity to discuss the Federal Trade Commission's role in enforcing 
the antitrust laws to protect consumers in the petroleum industry. The 
Commission shares the view that a viable and competitive energy sector 
is vitally important to the economic health of the United States and 
the world. The Commission has an extensive history of carefully 
examining mergers in the petroleum industry, and has used its authority 
to enforce the antitrust laws to assure that mergers in this industry 
do not lead to lessened competition or its consequence--higher prices 
for gasoline and other fuels, and the consequent harm to the economy of 
the nation or of any region.
    As has been publicly observed, the combination of Exxon and Mobil 
is the largest industrial merger ever, and will create the largest 
private oil company worldwide and the largest US-based company of any 
type (by revenues). Today, Exxon and Mobil face each other at just 
about every level of the industry--exploration for and production of 
crude oil, refining of crude oil into petroleum products, manufacture 
of petrochemicals and lubricants, and the marketing of gasoline and 
other fuels in many parts of the United States (in particular the 
northeast, the Gulf Coast, and California). Exxon/Mobil is likely to be 
the largest or one of the largest players in each of these market 
sectors.
    Obviously, a transaction of this size alone merits our close 
attention. As antitrust enforcers, we need to consider whether Exxon/
Mobil's size--or other attributes--will change the competitive dynamics 
of this industry. This merger will be scrutinized carefully, not only 
by us and by our colleagues, 21 State Attorneys General, but also by 
antitrust enforcers in Europe and possibly elsewhere.
    As you know, the Commission cannot comment in any detail on the 
specifics of any pending nonpublic law enforcement investigation. 
However, the Commission can provide a general discussion of how it 
approaches its merger investigation responsibilities, the special 
issues that arise with respect to petroleum industry mergers, and our 
prior enforcement experiences in this sector. We will begin by 
reviewing recent merger activity in the petroleum industry, and then 
describe how antitrust analyzes mergers generally, as well as in this 
sector specifically, and the relief we are authorized to seek.
    As many have noted, this merger does not occur in a vacuum, but 
appears to be part of an ongoing trend of consolidation and 
concentration in this industry. In recent months, we have seen the 
merger of BP and Amoco--which was the largest industrial merger in 
history until Exxon/Mobil was announced--and the combination of the 
refining and marketing businesses of Shell, Texaco and Star Enterprises 
to create the largest refining and marketing company in the United 
States. In addition, Tosco acquired Unocal's California refineries and 
marketing business; Ultramar Diamond Shamrock acquired Total's North 
American refining and marketing operations; and Marathon and Ashland 
combined their refining and marketing businesses. We also have seen the 
worldwide combination of the additives businesses of Shell and Exxon. 
Other combinations, such as the pending combination of the refining and 
marketing businesses of Ultramar Diamond Shamrock and Phillips (which 
we are currently examining), likely will follow. These consolidations 
and joint ventures are not limited to the United States: BP and Mobil 
have combined their refining and marketing operations in Europe, and 
Total and Petrofina have recently announced their own merger plans.
    This is the second wave of consolidation in this industry in the 
last 20 years. The first wave, in the 1980s, saw Mobil's attempted 
takeover of Marathon, which was blocked by the courts, 2 and 
the mergers of Standard of California and Gulf (into Chevron) and 
Texaco's acquisition of Getty, as well as many smaller deals.
---------------------------------------------------------------------------
    \2\ Marathon Oil Co. v. Mobil Corp., 669 F.2d 378 (6th Cir. 1981).
---------------------------------------------------------------------------
    During that earlier merger wave and today, the Federal Trade 
Commission has carefully reviewed each proposed merger, and intervened 
where appropriate to prevent those mergers from significantly reducing 
competition in any sector of this industry that affects the United 
States or its citizens. The Commission's inquiry is and has been to 
determine whether a merger would make it substantially likely that the 
remaining firms in the industry could reduce output and raise prices by 
even a small amount, to the detriment of consumers and, in this 
industry in particular, of the competitiveness of the American economy 
or the economy of any particular region. This is the goal of antitrust 
enforcement across all industries; its vital role is particularly clear 
in the petroleum industry, where even small price increases can have a 
direct and lasting impact on the entire economy.
    As a general matter, the Commission approaches its antitrust 
mission by examining the areas in which merging companies compete, 
looking at the existing state of competition in that marketplace and 
the likely changes in that marketplace in the future--both from new 
competition entering and from existing competition exiting. We also 
look at the effect of recent mergers on competition in the particular 
marketplaces at issue. And we look at the trends in the industry, 
including trends toward further concentration. The Commission has 
recognized the existence of such a trend toward consolidation in this 
industry.3
---------------------------------------------------------------------------
    \3\ Analysis to Aid Public Comment, British Petroleum Company 
p.l.c., FTC File No. 981-0345 (Dec. 30, 1998). The Supreme Court has 
found the existence of a trend toward concentration to be highly 
relevant in examining the competitive consequences of a merger. United 
States v. Pabst Brewing Co., 384 U.S. 546, 552-53 (1966); United States 
v. Von's Grocery Co., 384 U.S. 270, 277-78 (1966); United States v. 
Philadelphia Nat'l Bank, 374 U.S. 321, 362-63 (1963).
---------------------------------------------------------------------------
    We also want to know whether a merger will yield efficiencies that 
might counteract the anticompetitive effects the merger would otherwise 
threaten. Merely claiming cost savings is not enough to allow an 
anticompetitive merger. The cost savings must be real; they must be 
substantial; they cannot themselves result from reductions in output; 
they cannot be practicably achievable by the companies independently of 
the merger; and they must counteract the merger's anticompetitive 
effect--not merely flow to the shareholders' bottom line.
    In examining mergers, particularly in this industry, the Commission 
recognized--and continues to recognize--that it must look both at broad 
effects on broad markets, such as the worldwide crude oil market, and 
narrow effects on specific local and regional markets. A merger that 
did not substantially reduce competition nationally might nonetheless 
substantially reduce competition in specific parts of the country--as 
the Commission found in both BP/Amoco and Shell/Texaco. When the 
anticompetitive problems could be isolated, and when businesses and 
operating assets could be divested to new competitors and thereby 
restore the competition lost by the merger, the Commission has 
frequently entered into consent orders allowing the merger to proceed 
while preventing the anticompetitive harm through divestiture. When, 
however, anticompetitive problems infect the entire merger, so that 
there is no practical way to allow the companies to merge without 
threatening consumers with a substantial loss of competition, the 
Commission can go to federal district court to seek an injunction 
blocking the merger. The Commission has not hesitated to seek to block 
mergers, in this industry and elsewhere, where other remedies were 
insufficient.4
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    \4\ In 1987, the Commission successfully challenged the proposed 
acquisition by Pacific Resources, Inc. of Shell Oil Company's assets in 
Hawaii, which the Commission believed (and proved) would reduce 
competition in the terminaling and wholesale marketing of gasoline and 
other fuels. In 1997, the Commission prepared to challenge Shell's 
proposed acquisition of Exxon's operations on Guam, which would have 
had a similar effect; the parties abandoned the transaction. Last year, 
the Commission successfully challenged proposed mergers among the 
nation's four largest drug wholesalers, which wanted to become two; the 
Commission recognized--and the Court agreed--that nothing short of a 
full stop injunction would preserve competition and prevent the 
elimination of two significant competitors. FTC v. Cardinal Health, 
Inc., 12 F. Supp. 2d 34 (D.D.C. 1998).
---------------------------------------------------------------------------
    In the petroleum industry, we apply these general points of 
antitrust analysis by looking at each level of production separately. 
Some firms, such as Exxon and Mobil, are vertically integrated through 
all levels of the industry; there are ``upstream only'' companies, such 
as Unocal and Occidental, that are only engaged in exploration and 
production; ``downstream only'' companies, such as Tosco and Ultramar 
Diamond Shamrock, that are only engaged in refining and marketing; and 
other firms that are even more specialized. Most firms do not operate 
at every level in every geographic market. Therefore, the Commission 
begins its analysis by asking at what specific level do these companies 
compete, and who else competes with them at that level.5
---------------------------------------------------------------------------
    \5\ For example, although BP and Amoco were each substantial 
companies, and their merger created the second largest privately owned 
oil company in the world (after the Royal Dutch/Shell Group), the 
Commission found that BP and Amoco did not overlap significantly in 
most of their operations, but did overlap in terminaling and wholesale 
marketing in particular geographic areas. In those areas where BP and 
Amoco would have substantial market shares, and there would be few 
significant competitors, the Commission required divestiture and other 
relief.
---------------------------------------------------------------------------
    Exploration and Production. In looking at the ``upstream'' or 
exploration and production sector, we observe that the crude oil market 
is for most purposes a worldwide market.6 We recognize that 
major oil producing nations (such as Saudi Arabia, Iran, Iraq and 
Venezuela) are significant factors in this worldwide market. 
Consolidation in this industry in the 1980s does not appear to have 
given the merging companies, such as Standard of California and Gulf 
into Chevron, or Texaco and Getty, the ability to increase the price of 
crude oil by withholding production or exploration and development of 
reserves. That does not necessarily mean that further consolidation in 
exploration and production will be equally harmless. It may well be 
that the Exxon/Mobil merger will not reduce competition in the 
worldwide crude oil market. However, because of the significance of 
this merger to the industry, creating the world's largest privately 
owned oil producer, it is important for the Commission to examine 
carefully its likely effects on the exploration and production sector.
---------------------------------------------------------------------------
    \6\ There can be specific local crude oil and natural gas 
production markets, and the Commission has acted to preserve 
competition in local crude markets. In both Texaco/Getty and Shell/
Texaco the Commission required pipeline relief to prevent a lessening 
of competition in California heavy crude oil from harming refineries in 
the San Francisco Bay area that relied on that crude oil.
---------------------------------------------------------------------------
    Refining. Mergers involving oil refineries have long been a matter 
of intense interest to the Commission. The nation's principal refining 
market, the Gulf Coast, not only supplies that immediate area, but also 
sends substantial amounts of gasoline by pipeline to the southeast, the 
northeast and the midwest. It is vitally important for nearly all of 
this country east of the Mississippi to maintain a competitive Gulf 
Coast refining market. Similarly, we must ensure that the pipelines 
that deliver Gulf Coast product to these markets remain competitive. In 
the 1980s, the Commission acted to preserve competition in Gulf Coast 
refining in connection with Standard of California's merger with Gulf 
by requiring the divestiture of a Louisiana refinery and an interest in 
the Colonial Pipeline, one of the two pipelines that carries gasoline 
and other fuels from the Gulf Coast to southeastern and northeastern 
markets. When Shell and Texaco combined their refining and marketing 
arrangements, the Commission required a similar pipeline 
divestiture.7
---------------------------------------------------------------------------
    \7\ Chevron Corp., 104 F.T.C. 597, 608 (1984); Shell Oil Co., 
Docket No. C-3803 (April 21, 1998).
---------------------------------------------------------------------------
    Not all parts of the country have access to Gulf Coast gasoline 
supply, and some areas--in particular the Rocky Mountains and the West 
Coast-- have substantially less refinery competition. Not surprisingly, 
these areas also tend to have higher prices for gasoline and other 
fuels. In Shell/Texaco, we therefore prevented the parties from 
combining two of the four major refineries in the Pacific Northwest. 
One refinery that the Commission required to be divested also supplied 
California markets, and its operation by a new competitor in West Coast 
markets should ameliorate some of the effects of concentration in 
California.
    Even so, California refining markets remain an area of concern to 
the Commission. Our colleagues at the Energy Information Administration 
have studied the tight supply situations in California, where the 
unexpected shutdown of even one refinery can significantly disrupt 
supply and lead to sharp price increases.8 According to 
press reports, the tragic fire at Tosco's Avon refinery last month 
already has caused a 30% wholesale price increase in California, even 
though that refinery produces only six percent of California's gasoline 
needs.9 While the supply disruption caused by that fire 
obviously does not raise antitrust issues itself, it does show how a 
small reduction of supply by firms in a concentrated market can provoke 
huge price increases.
---------------------------------------------------------------------------
    \8\ Energy Information Administration, ``Motor Gasoline Assessment: 
Spring 1997,'' pp. 25-30 (1997).
    \9\ ``Refinery Closure Hasn't Hit Retail Gas Prices--Yet'' San 
Francisco Chronicle (March 4, 1999).
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    Refineries--and oil companies--make more than just fuels. The 
Commission has examined refinery mergers and other oil company 
combinations to ensure that competition will not be reduced in 
petrochemical and lubricant markets. After examining the proposed joint 
venture combining Shell's and Exxon's additive business, the Commission 
ordered divestiture of Exxon's viscosity index improver business to 
Chevron, rather than allow them to create a joint venture that would 
have controlled more than half of the U.S. market for that motor oil 
additive.
    Gasoline Marketing. The Commission is also concerned about the risk 
to competition in the marketing of gasoline and other fuels once they 
leave the refinery and reach their local markets. On several occasions, 
the Commission has blocked mergers or demanded divestitures to prevent 
the elimination of competition at the terminal or tank farm level--thus 
ensuring that there are competitive sources of supply to local 
marketers.10
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    \10\ BP/Amoco, FTC File No. 981-0345 (Dec. 30, 1998) (terminals in 
nine markets); Shell/Texaco, Docket No. C-3803 (April 21, 1998) 
(terminal in Oahu, Hawaii); Shell/Exxon, FTC File No. 971-0003 
(terminal on Guam; transaction abandoned); Sun/Atlantic (1988) 
(terminals in Pennsylvania and New York); FTC v. Pacific Resources, 
Inc., (1987) (terminal in Oahu, Hawaii); Texaco, Inc., 104 F.T.C. 241 
(1984); Chevron Corp., 104 F.T.C. 597 (1984).
---------------------------------------------------------------------------
    Competition between branded marketers in local markets can be 
reduced by merger. As a result, a relatively small number of branded 
marketers in a local gasoline market may have the ability to raise 
price oligopolistically, without fear that the price increase will be 
eroded by a small fringe of independent marketers or by new entry. That 
appeared to be the case in San Diego, California, where branded 
marketers were able to maintain higher prices even in a market defined 
as ``moderately concentrated'' by the Merger Guidelines. The Commission 
therefore ordered divestitures of gasoline stations in San Diego as a 
condition precedent to the Shell/Texaco merger, and is continuing to 
examine the marketing of gasoline in California. Based on this 
experience, the Commission in BP/Amoco required divestitures and other 
relief intended to prevent substantial increases in concentration in 
branded gasoline marketing.
    Prior Commission Enforcement Actions. The Commission has examined 
every significant petroleum industry merger over the last 20 years, and 
has used its enforcement authority to protect consumers from petroleum 
mergers that would lessen competition on at least 10 occasions during 
that period, several of which I have already mentioned:

--In BP/Amoco, the Commission acted to preserve marketing competition 
        in 30 local gasoline markets.
--In Shell/Texaco, the Commission acted to preserve competition in 
        local gasoline markets in San Diego and Hawaii, and to preserve 
        competition in broader refining and pipeline markets in the 
        Pacific Northwest, California and the Southeast.
--In Shell/Exxon (additives), the Commission required the joint 
        venturers to sell Exxon's viscosity index improver business to 
        Chevron, rather than allow them to create a joint venture that 
        would have more than half the U.S. market for that motor oil 
        additive.
--In Shell/Exxon (Guam), the Commission prepared to challenge Shell's 
        acquisition of Exxon's gasoline marketing on Guam, which would 
        have left Guam with only two gasoline marketers-- Shell and 
        Mobil. The parties abandoned the deal.
--In PRI/Shell, the Commission prevented a merger that would have 
        reduced gasoline marketing competition in Hawaii.
--In Chevron/Gulf, the Commission required the divestiture of a 
        refinery and marketing assets in the southeast, as well as 
        pipelines and other assets, to prevent a reduction in regional 
        competition from that merger.
--In Texaco/Getty, the Commission required the divestiture of a 
        refinery and marketing operations in the northeast, and 
        pipelines and other assets, to prevent a reduction in regional 
        competition from that merger.
    These are all cases where the Commission believed that local or 
regional competition was sufficiently threatened to require enforcement 
action. We carefully tailored our relief to address the problems and to 
restore any competition that would have been lost from the merger or 
other combination. If competition could not be preserved through 
divestiture, the Commission has gone to court to block anticompetitive 
mergers in the petroleum industry in their entirety.
    What we have learned from these and other investigations is that 
competition is critical to this industry and that concentration, as 
well as increases in concentration--even to levels that the antitrust 
agencies call ``moderately concentrated''--can have substantial adverse 
effects on competition.
    Our investigation of the Exxon/Mobil merger is still at an early 
stage, and neither the Commission nor its staff has reached any 
conclusions about the effects of the merger on competition, or whether 
the merger violates the antitrust laws in any respect. We are working 
closely with the Attorneys General of many of the states in which Exxon 
and Mobil compete, as well as with our European allies, to understand 
this merger and its likely effects on competition locally, nationally 
and internationally.
    I can assure you that the Commission will examine these issues 
thoroughly and expeditiously. We appreciate the parties' pledge of full 
cooperation with our investigation, and we intend to rely on that 
cooperation to do our job quickly and completely.
    Thank you.

    Mr. Barton. We have two 15-minute votes pending on the 
floor. We have a 15-minute journal vote and then there's a 15-
minute recorded vote. We are going to have to take a recess.
    So my question to Mr. Hakes, is your oral statement less 
than about 10 minutes? If it's less than 10 minutes, we will 
hear you right now. If it's more than 10 minutes, we will go 
vote and hear you in about 35 minutes.
    Mr. Hakes. My schedule is flexible, but I think it is less 
than 10 minutes.
    Mr. Barton. Then if you would proceed, and then at the 
conclusion of your oral statement we will take a recess to go 
vote.

                     STATEMENT OF JAY HAKES

    Mr. Hakes. Thank you, Mr. Chairman, and members of the 
committee. I am pleased to testify today on the proposed merger 
of the Exxon and Mobil Oil companies.
    The Energy Information Administration cannot answer all the 
questions affecting the wisdom of this merger, and I am glad 
that the Federal Trade Commission and the Security and Exchange 
Commission are also here at today's testimony. But I think our 
agency does have some relevant data that can assist the 
subcommittee and others in their deliberations.
    What I would like to do is start by talking about the 
global ramifications. It may be helpful to start with the role 
of major oil companies in the global production of oil.
    As figure 1 in my testimony shows, the picture has changed 
dramatically since the early 1970's, and you can seen before 
you a color version of that graphic. In the early 1970's many 
major oil-producing countries nationalized many of the assets 
of private oil companies. The results of this action can been 
seen in table 1 and figure 1.
    In the early 1970's many major oil-producing countries 
nationalized many of the assets of private oil companies. The 
results of this action can be seen in table 1 and figure 1 of 
my testimony.
    In 1972 Exxon was still the world's largest oil-producing 
company and Mobil ranked seventh. Together they accounted for 
about 16 percent of world oil production.
    You can see there, the orange part of that pie reflecting 
1972, national oil companies were only 6 percent of the world 
situation. Exxon alone was almost twice as much as those 
national oil companies.
    But if we turn over to the pie graph on the right side we 
see a different situation. The five largest companies in oil 
production in 1997 were the national companies of Saudi Arabia, 
Iran, Venezuela, Mexico, and China, each larger than a combined 
Exxon and Mobil.
    The share of world oil production coming from these two 
majors had dropped from 16 percent down to 4 percent. By 1997, 
despite an expansion of the world's oil markets, the combined 
production of Exxon-Mobil was less than Mobil alone in 1972. Of 
course, what is clear from the graphic is the orange part has 
expanded dramatically from 6 percent to 52 percent.
    The nationalization of a major share of world oil 
production tended to leave the major private companies with 
areas of high-cost production. As a result of this development 
and a competitive market, there has been great emphasis in the 
industry on lowering costs. Adoption of new technologies, 
restructuring, and downsizing have been important parts of this 
process.
    As seen in figure 2 of my testimony, the major oil 
companies dropped about 60 percent of their employees worldwide 
from 1980 to 1997. Although the decline seemed to have slowed 
in 1997, the low oil prices of 1998 may accelerate the descent 
again. Announced cutbacks resulting from the Exxon-Mobil merger 
are estimated to be about 9,000 people. With or without the 
merger, there will likely be a continuation of downsizing 
pressures in all areas of energy production and generation.
    Now I would like to turn to refining and marketing. Major 
oil companies do a lot more than produce oil, and consumers may 
be more concerned about their activities downstream in areas 
such as refining and marketing.
    A merger of these activities could raise competitive 
concerns. These will be addressed by other Federal agencies. 
EIA does, however, collect data that will be relevant for any 
investigation.
    In the United States the major oil companies have been 
shifting out of the refining, and in 1997 they accounted for 
less than 60 percent of the capacity, as independent refiners 
and foreign producing countries have grown in importance. In 
1997 Exxon and Mobil together controlled about 12 percent of 
U.S. refining capacity.
    As table 2 of my testimony indicates, there is considerable 
regional variation, however, in the extent to which refining by 
Exxon and Mobil overlap. The overlap is largest in the Gulf 
Coast region, by far the largest of the refining regions. Their 
share of refining in the Gulf Coast would constitute about 18 
percent.
    In 1997 Mobil and Exxon together controlled about 9 percent 
of U.S. branded retail stations. Again, however, there are 
regional differences in overlap, as can be seen in figure 3, 
which we also have with us upfront.
    In the States of the Northeast marketing area, there is a 
green area here that sort of stops at Pennsylvania and West 
Virginia, where it turns into dark blue, and all the way up to 
Maine, absent Rhode Island. All those States are over 15 
percent Exxon-Mobil stations.
    Mr. Barton. What year is that? Is that 1998 or 1997?
    Mr. Hakes. That's 1997.
    Mr. Barton. 1997?
    Mr. Hakes. 1997, and within those individual States it 
ranges from about 14 percent in Rhode Island to as high as 35 
percent in some jurisdictions. Elsewhere in the country, once 
you get outside of that dark blue area into the rest of the 
country, the share ranges from zero percent in some States to 
14 percent.
    In conclusion, I would be glad to furnish any additional 
data requested by the committee. I have also been testifying 
before other committees on the causes of low oil prices. So I 
would be glad to answer questions on that and certainly any 
questions that the members have this morning.
    [The prepared statement of Jay Hakes follows:]
  Prepared Statement of Jay Hakes, Administrator, Energy Information 
                  Administration, Department of Energy
    I wish to thank the Committee for the opportunity to testify today 
on impacts of the proposed merger between Exxon and Mobil. As 
Administrator for the Energy Information Administration (EIA), which is 
an independent analytical and statistical agency within the Department 
of Energy, I will focus on the business environment leading up to the 
BP-Amoco and Exxon-Mobil merger announcements and highlight several 
areas where large overlap of operations occur.
Exxon-Mobil Merger Recombines Two Standard Oil Spin-Offs
    Exxon and Mobil were two of the seven largest companies that were 
spun off from the Standard Oil Company breakup by the Supreme Court in 
1911. The seven companies are known today as Exxon, ARCO, Conoco, 
Amoco, Mobil, Chevron, and BP America.
    Prior to the Arab Oil Embargo in 1973, mergers between British 
Petroleum and Amoco and between Exxon and Mobil would have been 
unthinkable due to the sheer sizes of these entities in the global 
market (Figure 1). In the upstream or exploration and production 
business segment, Exxon ranked first in world production, supplying 
almost 11 percent of the world's crude oil. Mobil ranked seventh and 
produced about 5 percent of the world's oil supply. Had BP-Amoco and 
Exxon-Mobil merged in 1972, the two resulting organizations would have 
controlled almost 28 percent of world oil production.
    Up until the early 1970's, virtually all non-communist areas in the 
world had been open to U.S. major oil companies.1 But in the 
late 1960's and early 1970's, many of the major oil companies' 
producing assets abroad were nationalized, and state-owned oil 
companies were formed to carry on the production. Private oil companies 
not only lost assets, but also access to some of the world's lowest-
cost producing areas. North America and Europe are high-cost regions in 
which to explore and produce.
---------------------------------------------------------------------------
    \1\ Major oil companies are the U.S.-based companies required to 
report to EIA's Financial Reporting System (FRS). Included U.S. 
companies must be among the top 50 worldwide oil producers and account 
for 1 percent or more of U.S. production or reserves of oil, gas, or 
coal, U.S. refinery capacity, or U.S. refined product sales. In 1997, 
24 companies were included in the FRS.
---------------------------------------------------------------------------
    In 1997, state-owned or national oil companies represented the 
world's top 6 producers. Exxon ranked number 7 with 2.4 percent of the 
world's production (1.6 million barrels per day), and Mobil was down to 
number 18, producing only 1.4 percent (0.9 million barrels per day) of 
the world's supply (Table 1). The combined production of both Exxon and 
Mobil (2.5 million barrels per day) is only slightly more than Mobil's 
crude oil production was alone in 1972 (2.3 million barrels per day).
    Exxon and Mobil combined share of world oil reserves is much 
smaller than their share of production, since a very large share of the 
world's reserves lie outside of the private sector in the Middle East. 
In 1997, the two companies accounted for 1 percent of world reserves 
(10.7 billion barrels), down from about 2.6 percent in 1973. Their U.S. 
share of reserves in 1997 was just under 12 percent of total.
    Strongly limited access to low-cost foreign areas continued until 
the time around the oil price collapse in 1986, when some countries 
again began to open to private investment. The new opportunities in 
these foreign areas have attracted oil company interest. Between the 
oil price drop in 1986 through 1997, more than 40 percent of the growth 
in exploration and development expenditures of the major oil companies 
has been in countries outside of North America and Europe. In spite of 
the majors refocusing in these foreign areas, over three-quarters of 
the majors' current oil and gas production is from relatively high-cost 
United States, Canadian, and North Sea properties.
    Participation by the majors in world refining has also changed over 
the years, but to a lesser extent than exploration and production. Many 
more national oil companies own refining capacity now than 25 years 
ago. Today, 9 out of the largest 20 refiners are state-owned companies. 
In the United States, the major oil companies have been shifting out of 
refining, and in 1997 they accounted for less than 60 percent of 
capacity as independent refiners and foreign producing countries have 
grown in importance. Mobil and Exxon have also participated in this 
shift. In 1993, Exxon sold its Bayway, New Jersey, refinery to Tosco; 
in 1997, Mobil sold a 50 percent interest in its Chalmette, Louisiana, 
refinery to the Venezuelan state-owned company, PDVSA; and in 1998, 
Mobil sold its Paulsboro, New Jersey, refinery to Valero. In 1997, 
Exxon and Mobil together controlled almost 12 percent of U.S. refining 
capacity, and just under 9 percent of U.S. branded retail stations.
Average Performance and Low Oil Prices Drive Oil Company Actions in the 
        1980's and 1990's
    Many U.S. major oil companies were already cutting costs and 
rationalizing after deregulation in 1981, but after the oil price drop 
in 1986, companies engaged in further cost cutting in an attempt to 
improve performance. Figure 2 shows evidence of the cost reductions in 
the steady loss of personnel from the major oil companies alone through 
the 1980's and 1990's. The majors dropped about 60 percent of their 
employees worldwide between 1980 and 1997. Although the decline seemed 
to have slowed in 1997, the low oil prices in 1998 may accelerate the 
descent again. The announced cutbacks resulting from both the Exxon-
Mobil and BP-Amoco mergers amount to 15,000 people (9,000 from the 
Exxon-Mobil merger), which represents about 3 percent of the worldwide 
employees of the majors and about 1 percent of total oil industry 
employment in the United States.
    The low prices since 1986 and pressure to improve performance have 
resulted in application of new technologies that have reduced costs 
both to produce oil and to add new reserves. In the downstream we have 
seen closure of many small inefficient refineries and a trend toward 
increasing volume throughput of gasoline stations to gain economies of 
scale. Refineries have changed hands, with the majors selling U.S. 
refineries to growing independent refiners as companies re-position 
themselves for growth in the future. We also have seen a number of 
joint ventures formed between U.S. refiners and producing countries 
that can provide the U.S. partner with additional financial resources 
and crude oil supply agreements. More recently, a wave of mergers, 
acquisitions, and alliances began, even before the most recent price 
decline.
Overlaps in Refining and Marketing Vary by Region
    EIA data can provide information on areas in U.S. refining and 
marketing in which Exxon and Mobil overlap, but EIA does not make 
determinations about the competitive implications of these overlaps. 
Competitive issues arising from major oil company acquisitions are 
largely the responsibility of the Federal Trade Commission (FTC), and 
sometimes involve the Antitrust Division of the Department of Justice. 
EIA data may suggest where the FTC reviews are likely to be 
concentrating.
    Table 2 shows that the U.S. areas in which Exxon and Mobil overlap 
in refining are on the West Coast (PADD 5) and the Gulf Coast (PADD 3). 
Gulf Coast refineries are the major supply sources for markets east of 
the Rocky Mountains. These refineries processed 56 percent of the crude 
oil used in PADDs 1 through 4 in 1997. While Exxon and Mobil account 
for less than 12 percent of U.S. capacity, they control 18 percent of 
the Gulf Coast capacity. This 18-percent share is comparable to the 
combined BP-Amoco share of refining capacity in the Midwest (PADD 2).
    Exxon and Mobil are also strong players on the West Coast (PADD 5). 
The Exxon Benicia refinery serves the Northern California area, and the 
Mobil Torrance refinery serves the Los Angeles area. The refinery 
outputs may not pose a problem since refineries in northern and 
southern California tend to serve different regions. Furthermore, 
Equilon, the joint venture between Shell and Texaco, has about as much 
capacity in PADD 5 (250 thousand barrels per calendar day) as do Exxon 
and Mobil combined. We have no data on local domestic crude purchasing 
issues.
    Gasoline is the most visible petroleum product to consumers and is 
the focus of many concerns over the impacts of mergers. Figure 3 shows 
that Mobil and Exxon have the largest overlap in marketing areas in the 
Northeast. This figure is based on branded retail station counts, but 
it is consistent with the regional concentration of EIA volume sales 
data as well.
    This concludes my testimony before the Subcommittee. I would be 
glad to answer any questions at this time.

[GRAPHIC] [TIFF OMITTED] T5637.001


                                           Table 2. Refining Capacity
                                       (Thousand Barrels per Calendar Day)
----------------------------------------------------------------------------------------------------------------
                                                                               Combination
                                                           Exxon      Mobil      of Exxon     Total     Percent
                                                                                and Mobil               of Total
----------------------------------------------------------------------------------------------------------------
U.S. Refining Capacity
Total U.S..............................................      1,017        952       1,969      15,827       11.5
PADD 1.................................................                     0           0       1,637        0.0
PADD 2.................................................                   200         200       3,444        5.8
PADD 3.................................................        843        470       1,313       7,293       18.0
PADD 4.................................................         46                     46         520        8.8
PADD 5.................................................        128        130         258       2,932        8.8
Foreign Refining Capacity
Total Foreign..........................................      2,747      1,312       4,059      62,325        6.5
Europe.................................................      1,625        368       1,993      16,425       12.1
Asia-Pacific...........................................        642        751       1,393      17,595        7.9
Other..................................................        480        193         673      28,305        2.4
----------------------------------------------------------------------------------------------------------------
Note: PADD--Petroleum Administration for Defense Districts. Mobil's PADD 3 capacity includes the 50 percent
  interest of PDVSA in the Chalmette, LA refinery. Chalmette has 159 thousand-barrel-per-calendar day capacity.
Sources: Company information: 1997 annual reports and statistical Supplements; U.S. totals: Energy Information
  Administration, Petroleum Supply Annual 1996 Volume 1, Tables 37 and 40, with Tosco Trainer and TransAmerican
  Norco refineries added; Foreign totals: British Petroleum, BP Statistical Review of World Energy (June 1998),
  p. 16.

  [GRAPHIC] [TIFF OMITTED] T5637.002
  
  [GRAPHIC] [TIFF OMITTED] T5637.003
  
    Mr. Barton. Thank you, Mr. Hakes. We are going to take a 
recess to go vote. We have this vote and then one other vote. I 
would think we could be back over here by about 11:10.
    So the committee stands in recess until 11:10.
    [Brief recess.]
    Mr. Barton. The subcommittee will reconvene, a quorum being 
present.
    We now hear from our last witness for the day, Mr. McAlevey 
for such time as you may consume.

                STATEMENT OF MICHAEL R. MCALEVEY

    Mr. McAlevey. Mr. Chairman, members of the subcommittee, my 
name is Michael McAlevey. I am the Deputy Director of the 
Division of Corporation Finance at the Securities and Exchange 
Commission. I am pleased, on behalf of the Commission, to 
testify today.
    While I recognize that the focus of this hearing is the 
proposed Exxon-Mobil merger, those companies have not publicly 
filed with the Commission a document soliciting shareholder 
approval of the deal. Consequently, my statement will discuss 
generally the SEC's role in regulating mergers of public 
companies and the procedures that we employ in reviewing merger 
filing.
    The Federal Securities laws are designed to protect 
investors by requiring full and fair disclosure of all material 
information about publicly traded securities. Full disclosure 
ultimately benefits both investors and the capital markets. By 
enhancing investors' confidence in the completeness and 
accuracy of information about pubic companies, these full 
disclosure requirements encourage investor participation in the 
capital markets.
    It is important to bear in mind that the Commission does 
not have the authority to approve or disapprove a security or 
transaction on its merits. Rather, the Commission's job is to 
ensure that the company fully discloses material information 
about a transaction or a security, so that investors can make 
informed investment decisions.
    Ordinarily, when a company proposes to merge with another 
company, it is required to obtain shareholder approval of the 
transaction. If shareholder approval is required, the Federal 
security laws require a public company to deliver a proxy 
statement to its shareholders. This document discloses the 
material terms of the transaction to shareholders, so that they 
can make an informed decision when they vote on the 
transaction.
    In addition, when a public company proposes to issue stock 
in a merger transaction, it must register the offer and sale of 
that stock under the Securities Act. The registration statement 
that covers that offer and sale includes a prospectus that 
discloses material information about both the companies and the 
proposed transaction.
    Information about the transaction is always included in the 
prospectus itself. Information about the companies, however, 
may be incorporated by reference into the prospectus from the 
companies' Exchange Act reports if the companies meet certain 
requirements.
    While the entire registration statement must be filed with 
the SEC and is publicly available, only the prospectus must be 
actually delivered to investors who will receive stock in the 
transaction. The prospectus also serves as the proxy statement 
for the company's solicitation of shareholder approval of the 
transaction.
    After drafting the proxy statement prospectus, the 
companies file it with the Commission. The proxy rules allow 
companies to file preliminary proxy statements relating to 
merger transactions confidentially, so that the proxy statement 
prospectus is not available to the public when it is initially 
filed.
    The Commission's rationale, when it adopted this position, 
was that it wanted to allow companies to go through the review 
and comment process without prematurely disclosing confidential 
information to the market about merger transactions. The 
document only is made available to the public when the final 
proxy statement that will be delivered to shareholders is 
filed.
    When a filing is made with the Commission, it is routed to 
the appropriate industry group for processing. We do not have 
sufficient resources to review all registration statements and 
other filings that are made with the Commission. Therefore, we 
use a selected review process by which we review some, but not 
all, of the filings that are made with the Commission.
    A filing is screened to determine if it will be subjected 
to full financial and legal review, a partial review for 
specific issues only, or no review. In order to preserve the 
integrity of the selective review process, we do not publicly 
disclose our screening criteria. If the filing is selected for 
full review, a staff attorney and an accountant are assigned to 
examine the filing. Senior-level staff is also assigned as a 
second level of scrutiny. If necessary, the filing also is 
referred to special offices within the Division of Corporation 
Finance for an additional level of specialized review. For 
example, mining or gas and oil filings are referred to a mining 
or petroleum engineer.
    A filing is reviewed to determine whether it complies with 
the requirements of the security laws and regulations and that 
it fully discloses all required material information.
    Much of this review involves us stepping into the shoes of 
a potential investor and asking questions that investors might 
ask on a reading of the document.
    All of the comments that the staff members generate on the 
filing are incorporated in one comment letter to the company. 
The company then responds to the letter by sending us a 
responsive letter and revising the document in accordance with 
our comments.
    When we receive the company's response and revised filing, 
we review them to make sure the company has complied with our 
comments. We issue additional comments, if necessary, until all 
material concerns are resolved. The company then requests that 
the registration statement be declared effective so that the 
transaction can proceed. If all material concerns are resolved, 
the Commission, through delegated authority to the Division of 
Corporation Finance, issues an order declaring the registration 
statement effective.
    The review of the Exxon-Mobil filing generally would follow 
the procedures outlined above. Our concern with respect to this 
transaction, as with any transaction, is that the companies 
make full and fair disclosure of all material information that 
they are required to disclose. The determination of the merits 
of the transaction will be left to the shareholders.
    Mr. Chairman, this concludes my oral statement. I am happy 
to answer any questions that you or other members of the 
subcommittee have. Thank you.
    [The prepared statement of Michael R. McAlevey follows:]
Prepared Statement of Michael R. McAlevey, Deputy Director, Division of 
        Corporation Finance, Securities and Exchange Commission
    Mr. Chairman, Members of the Subcommittee: My name is Michael 
McAlevey. I am the Deputy Director of the Division of Corporation 
Finance at the Securities and Exchange Commission. I am pleased, on 
behalf of the Commission, to have the opportunity to discuss our role 
in regulating mergers of public companies. I want to state at the 
outset that the Commission does not, nor is it charged with, 
determining the merits of mergers or regulating the terms of 
transactions. In the context of the merger of two public companies, the 
federal securities laws require that the companies disclose all 
material information about the proposed merger so that investors can 
make a fully informed decision about the proposed transaction. In 
general, this disclosure appears in filings with the Commission and in 
a prospectus that is publicly available. I will outline the procedures 
that the SEC employs in reviewing merger filings. These procedures will 
apply to the proposed merger between Exxon Corporation and Mobil 
Corporation.
  1. the role of the securities and exchange commission in reviewing 
                                filings
    The Commission is responsible for administering the federal 
securities laws. These laws are designed to protect investors by 
requiring full and fair disclosure of all material information about 
publicly traded securities. Full disclosure ultimately benefits both 
investors and the capital markets. By enhancing investors' confidence 
in the completeness and accuracy of information about public companies, 
these full disclosure requirements encourage investor participation in 
the capital markets.
    The Commission's Division of Corporation Finance has primary 
responsibility for overseeing disclosures by issuers of securities. The 
Commission does not have authority to approve or disapprove a security 
or a transaction on its merits. If a transaction appears to involve a 
high degree of risk to investors or if a company involved in a 
transaction is experiencing financial difficulty, we do not, and we can 
not, stop the transaction from proceeding on that basis. Rather, the 
Commission's job is to ensure that the company fully discloses these 
risks and fully informs investors of its financial condition so that 
investors can make informed investment decisions. This system is 
designed to maintain market transparency. It allows market forces 
rather than regulatory controls to determine what transactions will 
proceed and at what prices a company's securities will trade. In this 
way, even small companies and companies with financial difficulties may 
have access to the public capital markets on an equal footing with 
larger, or more financially secure companies. Full and fair disclosure 
allows markets to assign an appropriate value for the securities of all 
public companies.
    Under the securities laws, public companies file registration 
statements, periodic reports and other disclosure documents with the 
Commission. All registration statements are subject to review by the 
staff of the Division of Corporation Finance. Given the volume of 
filings each year, we fulfill this obligation by selectively reviewing 
registration statements and other documents that companies file when 
they engage in public offerings and other transactions in publicly 
traded securities. These filings include documents concerning mergers 
and acquisitions. We also selectively review periodic reports that 
public companies are required to file with the Commission. These 
reports are designed to keep investors apprised of the companies' 
financial condition on a continuing basis.
    The Division's role in the registration process is to use 
reasonable means to encourage companies to make full and fair 
disclosure to investors of all material information. Our principal 
means of accomplishing this is through dialogue with the companies. 
This makes sense because the companies themselves possess the 
information that they are required to disclose. When we review a 
registration statement, we ask the company about any disclosures that 
are: unclear, incomplete, inconsistent with disclosures elsewhere in 
the document or in other publicly available materials, or do not comply 
with the specific disclosure standards in the federal securities laws 
and regulations.
    The company then responds to our questions by amending the document 
or supplying us with information to respond to our concerns. 
Registration statements will not be declared effective--permitting the 
sale of the securities--until we have no reason to believe that the 
disclosure is not materially complete, accurate and meaningful. I will 
discuss this process, which we call the ``review and comment'' process, 
in greater detail below. We rely on the company's responses to our 
comments and on the company's legal obligations to respond to us in a 
truthful manner. In addition, the legal, financial and accounting 
professionals who are involved in preparing and/or auditing the 
company's disclosures have professional obligations and may be subject 
to legal liability if the disclosures contain material misstatements or 
omit material information.
    The Division of Corporation Finance does not independently audit 
the company or its operations. If we have significant concerns or 
become aware of information that suggests that a company may have 
violated the securities laws, we may refer the matter to the Division 
of Enforcement. The Division of Enforcement has broad authority to 
investigate possible violations of the securities laws and may bring 
actions against a company if information in its registration statement 
proves to have been materially false or misleading.
   2. procedures that the division of corporation finance employs in 
                        reviewing merger filings
A. The companies file the proxy statement/prospectus with the SEC
    Ordinarily, when a company proposes to merge with another company, 
it is required to obtain shareholder approval of the transaction. 
Whether shareholder approval is required in a particular situation 
depends on the significance of the merger to the company and the 
requirements of the state of incorporation or the stock exchange or 
market on which the company's shares are traded. If shareholder 
approval is required, the federal securities laws require a public 
company to deliver a proxy statement to its shareholders. This document 
discloses the material terms of the transaction to shareholders so that 
they can make informed decisions when they vote on the transaction.
    In addition, when a public company proposes to issue stock in a 
merger transaction, it must register the offer and sale of that stock 
under the Securities Act. For example, assume that company A, a 
publicly traded company, proposes to merge with company B, also a 
publicly traded company. The companies have negotiated to exchange 
company A's stock for company B's stock. Before company A can offer its 
shares to company B's shareholders, it must file a registration 
statement with the SEC. The registration statement includes a 
prospectus that discloses material information about the companies and 
the proposed transaction. In addition to the prospectus, the 
registration statement contains exhibits, which include, among other 
filings, the company's articles of incorporation and bylaws, opinions 
of counsel and material contracts to which the company is party.
    While the entire registration statement must be filed with the SEC 
and is publicly available, only the prospectus must actually be 
delivered to investors who will receive stock in the transaction.\1\ 
The prospectus also serves as the proxy statement for the companies' 
solicitation of shareholder approval of the transaction.\2\ As a 
result, we usually refer to the disclosure document that the companies 
distribute to shareholders as the proxy statement/prospectus. The 
disclosure about each company must include, among other things, a 
description of: its business, its property, any material threatened or 
pending legal proceedings against the company, historical financial 
results, and a textual discussion of the company's financial condition 
and historical results of operations.
---------------------------------------------------------------------------
    \1\ The prospectus that is delivered to investors also includes the 
merger agreement as an appendix.
    \2\ Rule 14a-6(j) under the Securities Exchange Act allows 
companies to use the same document as the proxy statement for purposes 
of soliciting shareholder proxies, and the prospectus for purposes of 
offering and selling the securities in the transaction.
---------------------------------------------------------------------------
    If the companies have a reporting history with the Commission, are 
current in their reports, and have at least $75 million in market 
capitalization held by the public, they can incorporate their Exchange 
Act reports by referring to them in the registration statement.\3\ 
These reports include quarterly and annual reports and special reports, 
which typically are used to announce unusual developments or events. 
Incorporation by reference can reduce the length of the document and 
the burden on the companies to disclose information that is already 
available in the companies' periodic reports. The reasoning behind this 
accommodation is that larger companies with reporting histories 
generally are followed sufficiently closely by the markets so that 
information about them is already publicly available. Further, the 
markets usually will have absorbed the public information about these 
companies and used it to establish a fair trading price in their 
securities. Therefore, receiving delivery of full information about 
such companies generally is not as important to investors as is 
information about smaller companies or companies without solid 
reporting histories. When companies incorporate their periodic reports 
by reference, they still are liable for the information in the reports 
that they incorporate by reference in the same manner as they would be 
if they included all of the information from the reports directly in 
the registration statement itself.
---------------------------------------------------------------------------
    \3\ A Company may also incorporate its Exchange Act reports by 
reference if it has been subject to the reporting requirements for 
three years, has been timely for the last year, and sends the 
incorporated Exchange Act reports with the prospectus. This option is 
rarely used.
---------------------------------------------------------------------------
    In addition to this information about the companies, the disclosure 
in the proxy statement/prospectus also must include material 
information about the proposed merger including: any material risks 
associated with the proposed transaction, pro forma financial 
information for the combined company after giving effect to the merger, 
the material terms of the proposed transaction, a discussion of how the 
companies negotiated the transaction, any material contracts between 
the two companies, information about the proposed management of the 
combined company after the transaction is completed, and a description 
of how shareholders' rights will change if the merger is completed.
    After drafting the registration statement, the companies file it 
with the Commission. The proxy rules allow companies to file 
preliminary proxy statements related to merger transactions 
confidentially, so the proxy statement/prospectus is not available to 
the public when it is initially filed.\4\ The Commission's rationale 
when it adopted this position was that it wanted to allow companies to 
go through the review and comment process without prematurely 
disclosing confidential information to the market about merger 
transactions. The document only is made available to the public when 
the final proxy statement that will be delivered to shareholders is 
filed. Domestic companies are required to electronically make all of 
their non-confidential filings and, as a result, the final, or 
definitive, proxy statement/prospectus is available on the Internet in 
the SEC's EDGAR database generally within 24 hours after it is filed. 
Companies are required under state law to deliver the proxy statement 
to shareholders sufficiently in advance of the meeting to allow them 
time to consider the information before voting on it. The specific 
amount of time that the company must give shareholders varies by state.
---------------------------------------------------------------------------
    \4\ SEC Release No. 34-30849. 57 FR 29564 (June 24, 1992).
---------------------------------------------------------------------------
B. The staff's review of the filing
    1. Routing to the appropriate industry group--The Division of 
Corporation Finance is divided into 12 industry groups, each of which 
is headed by an Assistant Director. Each industry group is responsible 
for reviewing filings in one or more related industries.\5\ This system 
allows members of the staff to develop expertise in their industries 
and to better identify issues that are of particular concern within an 
industry. When a filing is made with the Commission, it is routed to 
the appropriate industry group for processing.
---------------------------------------------------------------------------
    \5\ The industry groups are: (1) health care and insurance, (2) 
consumer products, (3) computers, (4) natural resources, (5) 
transportation and leisure, (6) manufacturing and construction, (7) 
financial services, (8) real estate, (9) small business, (10) 
electronics and machinery, (11) telecommunications, and (12) new 
products and structured fiance.
---------------------------------------------------------------------------
    2. Selective review process--The Division does not have sufficient 
resources to review all registration statements and other filings that 
are made with the Commission. Therefore, in 1980, we implemented a 
``selective review'' program by which we review some, but not all, of 
the filings that are made with the Commission. When a filing is made 
and routed to the appropriate industry group, it is then ``screened'' 
to determine if it will be subjected to a full financial and legal 
review, a partial review for specific issues only, or no review. We 
conduct a full review of all initial public offerings. In order to 
preserve the integrity of the selective review process, we do not 
publicly disclose our screening criteria for other filings.
    3. Assignment of filing to staff--If the filing is selected for 
full review, a staff attorney or financial analyst and an accountant 
are assigned to examine the filing. Senior level staff are assigned as 
a second level of scrutiny to review the filing and the comments 
drafted by the examining attorney or financial analyst and accountant. 
This second level of review helps us to ensure the thoroughness of our 
reviews and the consistency of our comments across filings. If 
necessary, the filing also is referred to special offices within the 
Division for an additional level of specialized review. For example, 
mining or oil and gas filings are referred to a mining or petroleum 
engineer, international filings may be referred to a separate 
international office in the Division of Corporation Finance, and some 
complex mergers, acquisitions and tender offers are referred to a 
separate mergers and acquisitions office within the Division.
    4. Examination of filing to staff--The attorney or financial 
analyst and accountant who examine the filing review it to determine 
whether it complies with the requirements of the securities laws and 
regulations, that it fully discloses all required material information, 
and that the disclosure is meaningful to investors. Much of this review 
involves stepping into the shoes of a potential investor and asking 
questions that investors might ask on reading the document.
    As a result, some comments that we issue in the review and comment 
process are quite common and others are unique to the particular filing 
under review. For example, today, we commonly ask companies to expand 
their discussion of the risks associated with the Year 2000 problem. 
Often, companies make only generic disclosures indicating that they may 
have liability if their computer systems are non-compliant. We often 
ask companies to discuss specifically what they have done to evaluate 
and address their Year 2000 problem, what the costs associated with the 
Year 2000 problem are, what special risks are presented by the Year 
2000 issue, and what contingency plans the company has established.
    Some other comments that we issue are unique to the company's 
industry, the company itself and the filing. In oil and gas filings, 
the petroleum engineer assigned to the filing typically will request 
from the company underlying documentation to support its calculation of 
reserve estimates. This documentation often includes detailed reserve 
reports prepared by the company's independent engineering experts. The 
staff engineer then will issue further comments if any disclosures in 
the proxy statement/prospectus are not materially consistent with the 
underlying reserve reports. Similarly, if a company is doing business 
in a politically unstable part of the world, we might ask it to 
disclose the risks associated with doing business there. If a company 
incurred a large, unexpected expense, we might ask for disclosure of 
the impact that expense has had on other planned capital expenditures. 
If the disclosure of the transaction or the companies is unclear or if 
important questions are left unanswered, we would ask the company to 
revise the document to clarify it. The range of possible comments is 
practically limitless and depends on the issues that arise in the 
particular filing.
    One important focus of the staff's review is in ensuring that the 
prospectus is clear and readable. As of October 1, 1998, our rules 
require that prospectuses be written in plain English. We want 
investors to be able to pick up the prospectus and understand the 
material information about the transaction on first reading. They 
should be able to do this without a legal dictionary, without 
diagramming the transaction, and without having to flip back and forth 
to different parts of the document to decipher the disclosure. We have 
made significant efforts to enforce this rule and are finding that 
prospectuses now are significantly more user friendly.
    5. Issuance of comment letter--All of the comments that the staff 
members generate on the filing are incorporated in one comment letter 
to the company. The company then responds to the letter by sending us a 
responsive letter and revising the document in accordance with our 
comments. The staff often also discusses any of the company's questions 
with the company and its legal, accounting, engineering and other 
advisors.
    6. Comment clearance--When we receive the company's response and 
revised filing, we review them to make sure that the company has 
complied with our comments. If we have further comments, we issue 
additional comment letters until all material concerns are resolved.
    7. Declaring the registration statement effective--The company then 
requests that the registration statement be declared effective so that 
the transaction can proceed. At that point, the Assistant Director of 
the group conducts a final review of the filing and makes a public 
interest finding that he or she has no reason to believe that the 
disclosure is not complete, accurate and meaningful. If the Assistant 
Director is unable to make such a finding, he or she will issue further 
comments. When all material concerns are resolved, the Commission, 
through delegated authority to the Division, issues an order declaring 
the registration statement effective. This allows the company to 
proceed with the transaction.
   3. the proposed merger of exxon corporation and mobil corporation
    The review of the Exxon/Mobil filings generally will focus on the 
same substantive issues outlined above. Our concern with respect to 
this transaction, as with any transaction, is that the companies make 
full and fair disclosure of all material information that they are 
required to disclose. We will not scrutinize the transaction to make an 
independent assessment of whether its terms are fair or whether the 
merger would benefit shareholders. That determination will be left to 
shareholders, after they have received full and meaningful disclosure 
of the material terms of the transaction.

    Mr. Barton. Thank you. The Chair is going to recognize 
himself for the first 5 minutes of questions.
    Could we put the chart up that shows the percentage of oil 
markets that are controlled by that national oil companies from 
1972 to 1997? It was either the first or second chart.
    Thank you. The Chair recognizes himself for 5 minutes.
    My first question, and it is primarily to Mr. Baer, but 
possibly to Mr. Hakes, historically, when we have looked at 
mergers in the United States, the private entities that are 
looked at from the FTC or the SEC are domestic companies that 
are manufacturers or retailers and they are selling in the 
domestic market. In this case we have a situation where, 
according to the EIA information in 1997, 2 years ago, national 
oil companies controlled 52 percent of the world oil market. So 
the Exxon-Mobil merger is not just competing against Texaco and 
Royal Dutch, Shell, and Arco, but you are competing against 
Aramco and the Venezuelan oil company and the Mexican oil 
company and the Chinese oil company.
    So my first question is to Mr. Baer: How did the FTC 
evaluate such a merger when you are really looking more 
internationally than nationally, and when you look 
internationally, you are really looking at state-owned 
competition as opposed to the privately owed competition?
    Mr. Baer. It is a great question, Mr. Chairman.
    Mr. Barton. Thank you. Give me a great answer.
    Mr. Baer. And the answer is a little complicated. The fact 
that a market is international does mean, first of all, we need 
to take into account all the folks overseas who are doing 
energy exploration and production. In order to assess 
competitive effect, you need to figure out how many players 
there are and how aggressive they are going to be. Will a 
merger such as Mobil-Exxon reduce the number of players 
unreasonably?
    Where it gets more complicated is where you do have 
national oil companies in the mix. On the one hand, if they are 
out there competing to generate as much revenue as they can for 
themselves, if they are competing aggressively, they ought to 
have some of the same competitive instincts private firms have, 
that is, to bid their price of oil low enough so that they make 
the next sale. At the same time sometimes State interests do 
change that behavior a little bit and we need to factor it in.
    There's another concern here that is raised by Mr. Hakes' 
chart, and it is the second part of my answer to your question. 
That is, what do we do if this 52 percent behaves not as a 
bunch of different firms, but as a bunch of nations that might, 
as we had back in the 1970's, decide they had a common 
interest, either by engaging in an embargo for political or 
other reasons, or by deciding that the way to maximize their 
return is to behave as a cartel, and so you have over 50 
percent of the market raising price? We need to assess the 
likelihood those sorts of things would happen, and those are 
issues we consult with our sister agencies who know more about 
international issues and trends than we do at the FTC.
    But, also, what is the likely competitive impact of this 
merger if the market were to change dramatically and we were 
confronted with an international model of a cartel? Would 
having a firm the size of a combined Exxon-Mobil give them an 
undue percentage of the remaining market in the event of an 
embargo? Could they do more with price then, and should that be 
of concern to us?
    So those are the sorts of issues we are going to be working 
through in the course of our investigation.
    Mr. Barton. Could one conclude that you actually need such 
a hat is being proposed in order to give an economy of scale to 
compete against a State-owned oil company or against a 
collection of State-owned oil companies in a cartel like OPEC? 
I mean, is it possible that the conclusion could be, for 
national security interests, you want a privately owned mega-
merger because it gives the economies of scale to participate 
and to prevent the cartelization of world oil markets?
    Mr. Baer. That certainly could be a legitimate efficiency 
or overall economic benefit for a merger that needs to be 
factored into the analysis. I agree with that, Mr. Chairman.
    Mr. Barton. Now, Mr. Hakes, again in this chart--my time 
has expired, so this will be my last question--we just show one 
big orange slice of pie that says 52 percent. Within that 
orange slice, which is the biggest State-owned oil company, and 
approximately what is its market share and its revenue?
    I would assume it would be Saudi Aramco?
    Mr. Hakes. That is correct, Mr. Chairman. Their share is 
about 14 percent.
    Mr. Barton. So the single largest State-owned oil company, 
if Exxon-Mobil goes through, Exxon-Mobil would be slightly 
smaller than Saudi Aramco; is that correct?
    Mr. Hakes. It would be substantially smaller. Their 
production worldwide would be about 4 percent. So they would be 
below also Iran, Venezuela, Mexico, and China.
    Mr. Barton. So they would be in the same league, but they 
would be at the bottom of the standings, not at the top of the 
standings?
    Mr. Hakes. Well, there are a lot of producers. So there 
would be a lot of companies and countries below them, but they 
would be in between China and Kuwait.
    Mr. Barton. The Chair would recognize Mr. Hall for 5 
minutes.
    Mr. Hall. Mr. Chairman, I am going to hold my questions and 
probably present them in writing. I think they are in the 
review process and there would be a lot of things that you 
could not comment on now, except to say what you have done 
before in the same or similar situation. We will present 
questions to you in writing, if that is all right, and you can 
timely answer them.
    Mr. Barton. The Chair would recognize Mr. Shimkus for 5 
minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. I'm trying to make 
sure I get the names right.
    For the FTC, Mr. Baer, what effect will the prospects of a 
long period of lower oil prices have on your merger analysis in 
the energy industry? Will that play any role in your analysis?
    Mr. Baer. It will, sir. To the extent that current 
depressed prices for oil are a reflection of intense 
competition at the production and exploration level, that would 
tend to suggest that a merger of two big companies is unlikely 
to have an impact on what is, for purposes of hypothetically 
speaking, an intensively competitive market. So if the market 
is competitive and two guys are merging and it is unlikely to 
change the competitive dynamic, that would tend to be a reason 
not to intervene on antitrust grounds to block a transaction.
    Mr. Shimkus. And in analyzing the retail gasoline markets, 
how local is local?
    Mr. Baer. Well, we look at a metropolitan area, you know, 
city by city. In San Diego, as I indicated, in the Shell-Texaco 
joint venture, we looked at that market, and realized that 
there are only a few majors present there. There was not a lot 
of independent competition. San Diego is a tight market in 
terms of real estate. So the prospect that someone would enter 
and replace lost competition was quite slight. So we required 
divestiture of a significant number of retail gas stations.
    Ultimately, ironically, Exxon came in and bought them up 
and maintained what was, I believe, a five-firm presence in 
that market, ensuring that we would not have lessened 
competition as a result of that transaction.
    Mr. Shimkus. And in your opening statements you talked 
about the State attorney generals. Can you explain to me the 
role between you all and the State attorney generals and what 
impact they have or they do not have?
    Mr. Baer. Fair enough. Most States have their own antitrust 
laws which they can apply under principles of federalism to 
transactions that affect constituents in their States.
    Over the last 10 years or so, to avoid balkanization of 
antitrust enforcement, we have developed a terrific working 
relationship with the State attorney generals. They try to act 
collectively in consultation either with the FTC or for mergers 
over at the Antitrust Division, the Justice Department, to make 
sure we are coordinating our requests for information from the 
parties, so we aren't unnecessarily burdening them.
    But, ultimately, each State may have an interest. In the 
Northeast, for example, as Mr. Markey commented, whether there 
would be an undue increase in concentration; we would work 
together to identify the concerns. To the extent we share a 
view, we would approach the companies collectively in an effort 
to see if we cannot work out a disposition that would address 
those competitive concerns on a State-by-State basis.
    Mr. Shimkus. Is that process done through their association 
or their coordination with the State attorneys general? Is that 
basically done through the national association?
    Mr. Baer. It is done generally under the auspices of NAAG, 
but what they do is they have a buy-in process where States in 
a particular merger who have an interest let each other know 
through--they've got an efficient e-mail system--and they 
appoint one State to be the lead and then we end up working 
both with that one State and with the group collectively to 
make sure we are focused and as efficient as we can be in 
pursuing our common goals.
    Mr. Shimkus. Thank you very much. Mr. Chairman, I yield 
back my time.
    Mr. Barton. The gentleman from Illinois yields back the 
balance of his time. The Chair recognizes the gentleman from 
Maryland, Mr. Wynn for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. Mr. ``Baer,'' is it?
    Mr. Baer. Yes, sir.
    Mr. Wynn. I am not sure if this has been covered and it may 
be somewhat tangential. But what I would like to know is 
whether or not the FTC is going to take into consideration the 
effect of this merger on dealers, any rights that they may have 
with respect to their stations and their contractual 
relationships with Exxon-Mobil in evaluating this merger. Any 
comments you could share about that I would appreciate.
    Mr. Baer. Sure, I could perhaps, Mr. Congressman, put my 
answer in the context of the BP-Amoco deal which we worked 
through in late December and January. We have a process where 
we consult with dealers and with jobbers to understand their 
sense of the competitive picture and also make sure we 
understand any unintended consequences that might flow from our 
effort to preserve competition. Our job is to make sure that 
somebody doesn't get too big as a result of the deal and have 
the ability to raise consumer prices.
    But in terms of designing remedies, part of our job as well 
is to avoid unduly disadvantaging folks who are caught in the 
middle. We have gotten some comments in the BP-Amoco consent 
decree where we have a formal comment period, from dealers 
expressing some concerns about whether they ought to have a 
right--these are dealers who are lessees of BP or Amoco--
whether they ought to have the right to go in and buy out BP or 
Amoco on a station we required BP or Amoco to divest. Those are 
legitimate, important issues. I realize that you have got some 
legislation you are introducing, sir, to address that issue.
    We are hopeful we can work with the dealers to understand 
their concerns and figure out if there is a way, in terms of 
making sure we get the relief we think consumers need, that we 
adequately protect legitimate interests of local dealers.
    Mr. Wynn. Can I interpret what you said to indicate that 
with the BP merger there were some problems with respect to 
individual dealers who were not accorded a right of first 
refusal?
    Mr. Baer. They expressed concern that, if the station which 
they operated, but didn't own, was going to be sold, that our 
divesture order did not give them a right to buy out that 
station. What our order required is that BP-Amoco find a buyer 
for all the divested stations in a particular market, and the 
rationale for that was you have five firms in a market today, 
and after BP-Amoco, it is down to four. What you want to do is 
have some other significant flag carrier, you know, a Texaco, 
whoever, to come in and fly that flag on all of the stations to 
be divested, so you have a significant competitive presence.
    What my understanding is, lessee dealers have filed some 
formal comments with us which are on the public record--which 
is why I can talk about them--where they expressed those 
concerns. We have met with them and are going to continue to 
talk to them to see if there is a way to accommodate those 
concerns. I do not have an answer for you yet other than to say 
that we are working with them to see whether we can get there.
    Mr. Wynn. One follow up question: Do you believe it is 
within the purview of the Commission's jurisdiction to provide 
that right of first refusal by way of consent decree or some 
other mechanism?
    Mr. Baer. We don't have the right to interfere with pre-
existing contract rights. We have the right to insist that, as 
a condition of settling a deal, allowing their transaction to 
go, that BP and Amoco take certain actions.
    The question we need to work through is whether the 
conditions we have imposed--that is, divestiture to a single 
buyer--is a condition that we really need in order to protect 
consumers or whether allowing there to be buyouts from the 
lessee dealers is something that would make sense from the 
antitrust point of view, as well as give those understandably 
concerned lessee dealers an opportunity to pay fair price for 
the station they have invested in.
    Mr. Wynn. Thank you very much. Mr. Chairman, I relinquish 
the balance of my time.
    Mr. Barton. Thank you, Congressman. The Chair recognizes 
Mr. Largent of Oklahoma for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Hakes, most industry analysts have said that, as a 
result of this merger, there could be possibly 9,000 to 12,000 
jobs lost. How many of those would be jobs in the United 
States? Do you have any idea?
    Mr. Hakes. I don't have a breakdown on that, I don't 
believe. That does reflect international numbers. So it would 
not all be domestic. I am sorry, we don't have that broken 
down.
    Mr. Largent. And would the total number of employees be 
after the merger before they let people go, around 122,000? Is 
that what I read?
    Mr. Hakes. I don't know if we have that number. We have 
tracking systems for overall employment in the industry. We 
don't collect that information, I don't believe.
    Mr. Barton. I can answer that. The current number is 
122,700.
    Mr. Largent. Mr. Hakes, let me ask you another question. 
What percentage of the world's oil production is currently 
controlled by OPEC, currently, as opposed to what it controlled 
in the 1970's?
    Mr. Hakes. OPEC, I don't remember the exact number. It is 
less than it was in the 1970's. We are importing more oil than 
we were in the early 1970's. The latest figure is 43 percent is 
produced by OPEC and 28 percent in the Persian Gulf.
    One of the problems that OPEC had after prices ran up in 
the 1970's and early 1980's was they sort of priced themselves 
out of the world market a little bit, and so their share has 
gone down. However, since the late 1980's, it has been creeping 
back up, and most of our projections suggest that the OPEC 
share and the Persian Gulf share will rise in the coming 
decades, but right now it is lower than it was in the 1970's.
    Mr. Largent. And what percent of the oil do we currently 
import in this country?
    Mr. Hakes. If you use net imports, it is a little bit over 
half. If you use gross imports, it is somewhat higher than 
that. But, again, our forecasts indicate that, if current 
trends continue, we could be up to 60 percent in the not-too-
distant future.
    Mr. Largent. And does that create national security 
concerns?
    Mr. Hakes. Well, I think, yes, it does. I mean, as we saw 
during the Persian Gulf War, it is possible for major supplying 
areas to be taken off the world market and depending on a lot 
of other things that are going on at the same time, that could 
have a big impact or a huge impact. At the time of the Persian 
Gulf War there was a lot of excess capacity in Saudi Arabia, so 
the interruption was not as big in its impact as it might have 
been. But I think everybody is always concerned about possible 
interruptions of supply, particularly from regions of the world 
that are unstable.
    Mr. Largent. One of the things that is going on, as you are 
probably aware, in oil patch States like Oklahoma and Texas, 
and many others, is that, because of the low cost of oil today, 
it is driving many of the independent producers out of 
business. What do you view as being a price per barrel that is 
needed to sustain a domestic production industry?
    Mr. Hakes. Well, I think that varies a lot. I mean, 
clearly, these low prices have had a big impact. When the 
quarterly figures for the end of last year came out, we showed 
a drop of production of 500,000 barrels a day over the year 
previously and that is a sizable drop in domestic production.
    Onshore you tend to have stripper wells which have a high 
cost and offshore they seem to be able to sustain this a little 
better.
    I don't know exactly the answer to that question. For West 
Texas Intermediate we consider the normal range for that has 
normally been in the $17 to $21 range. Probably 15 is a number 
that a lot of people use to make investment decisions.
    But these numbers are a little bit misleading because West 
Texas Intermediate is a good quality of oil and some of the 
producers have actually been getting as low as $6 a barrel for 
heavy oils. So they would have to be higher than they are now, 
I think, certainly, for onshore producers to be able to 
continue to produce.
    Mr. Largent. Mr. Baer, I wanted to ask you one question, 
and that is, in your statement you talked about that moderate 
concentration levels in this industry may have substantial 
adverse effects on competition. My question is, why would that 
be true or maybe that is true in any industry, but from your 
comments I thought you were saying that perhaps this industry 
is a little unique in that the moderate concentration would 
have adverse effects?
    Mr. Baer. Mr. Largent, you read my comment accurately. That 
is, we do think that our experience in the petroleum industry 
suggests that the ability of firms at retail-wholesale and 
refining to price in what we call an interdependent fashion. 
That is not an allegation of an illegal cartel, but simply 
refers to the ability of the firms to be very conscious of each 
other's firm price is setting their own prices, and therefore, 
maybe work price up a little bit.
    That tends to be a factor we see more in certain markets, 
certain industries than others. Petroleum is what we call an 
undifferentiated product. Gas is gas. Heating oil is heating 
oil. They may add a little additive to it, and differentiate it 
in their advertising, but essentially it is a commodity, a 
commodity product. Where you have commodity products and 
published prices, there is a tendency for firms, when there are 
fewer of them, to be able to price a little less aggressively 
against each other.
    So the concern is with consolidation in petroleum, and we 
have seen this in our prior investigations in some markets 
where you have five firms, which might be enough to make a 
market competitive in some industries, may not be enough, 
depending on the market shares, in some other industries. That 
is what I was trying to suggest. This is one of those 
industries where we tend to get to a concern level a little 
earlier.
    Mr. Largent. I see. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Largent. The Chair recognizes 
Mr. Burr of North Carolina for 5 minutes.
    Mr. Burr. I thank the chairman, and I apologize to the 
witnesses that I have not been here for the majority of it. It 
is not because of lack of interest. I am going to try to limit 
my questions to you, Mr. Hakes, because I am not sure what I 
can and cannot ask the other ones. But if they have some 
relevant answer, I will be happy to take it.
    Tell me, if you will--I was curious with your comment about 
the 30 percent increase in cost after a fire at a refinery in 
California. What made that happen? Was that supply?
    Mr. Hakes. Well, in the California market it is a more 
isolated market as opposed to the East Coast, where there are a 
lot of refineries and they can trade back and forth easily. In 
California they have different clean air standards, and 
therefore, it is difficult to move product in and out of there. 
So when a refinery goes down in California, it has a much 
stronger impact on price there than, say, a refinery elsewhere 
in the country if it went down.
    Mr. Burr. But there are clearly refineries that refine 
California fuel elsewhere other than California?
    Mr. Hakes. Yes, ultimately, that is the case. So, you know, 
the market has self-corrective mechanisms for a lot of these 
things. In the short term there is a price runup. That usually 
is a signal to the market that California needs product and it 
is possible to produce it elsewhere.
    Mr. Burr. So it is really the structure of the refinery 
network in total, the time that it takes to get from one that 
is not in California to California?
    Mr. Hakes. Right, and to make sure they are adapting to the 
kind of gasoline that they use in California.
    Mr. Burr. So, using that analogy, we should not be 
concerned, then, that this merger would cause a price spike for 
a refinery reason?
    Mr. Hakes. Well, I think I agree with the point you are 
making in that you have to look at sort of the transportation 
infrastructure, and one of the reasons petroleum is attractive 
as a fuel is it is relatively easy to transport from one area 
to another. I mean, it can be imported from Europe, if need be, 
to offset a shortage. So I am certain that transportation is 
one of the things that would be taken into account for looking 
at competition, and petroleum does tend to be a competitive 
fuel, more than some other commodities, because it is so easy 
to transport.
    Mr. Burr. From where you observe this, does this merger 
make sense?
    Mr. Hakes. The Energy Information Administration has sort 
of earned its credentials over the years by providing 
information to the Congress and administration. We try not to 
take a position on policy issues. I think it keeps our data a 
little cleaner that way. I would like to be able to answer that 
question.
    Mr. Burr. I will let you maintain that neutral setting, 
but, clearly, from some of the things that we have looked at 
with production and retailing and refinery, though the size of 
the merger in dollars is not necessarily replicated in market 
share, and I think that is the disconnect that a lot of us 
have, because it is very small in proportion to the rest in 
totality of what you accumulate.
    But let me ask you about job loss specifically. Have you 
broken job loss down by the different sectors within these 
businesses, i.e., exploration and production, refinery, and 
retail?
    Mr. Hakes. I don't have that certainly available today. I 
might be able to get it for you.
    [The following was received for the record:]

    EIA's data on employment within the major oil companies and the 
potential job losses resulting from the mergers come from publicly 
available information provided by the companies. EIA revisited that 
information, but we can find no breakdown of how the Exxon-Mobil 
merger-related job losses may be distributed across the companies.
    For your information, in 1997, Exxon employed about 29,700 in the 
United States and 50,300 internationally. Mobil employed about 20,500 
people in the United States, and another 22,200 abroad. Mobil also 
publishes a distribution of its employees across business segments as 
shown in the table below. One logical target area for reductions is 
corporate overhead and staff support, which seems to be a large part of 
Mobil's 1997 ``Other'' category. The ``Other'' category accounts for 
3,000 employees in the U.S. and represents almost 15 percent of Mobil's 
U.S. force.

             Mobil Oil Corporation Employee Statistics 1997
------------------------------------------------------------------------
                                          US     International    Total
------------------------------------------------------------------------
Exploration & Production.............     1,800        4,200       6,000
Marketing & Refining.................     7,300       14,300      21,600
Chemical.............................     2,600        1,300       3,900
Technology...........................     1,700          100       1,800
Other*...............................     3,000        1,300       4,300
Salaried Service Station & Other Non      4,100        1,000       5,100
 Regular Employees...................
Total................................    20,500       22,200      42,700
------------------------------------------------------------------------
*Includes operations of Real Estate and Mining and Minerals (both
  businesses substantially divested in 1996), Corporate Administration,
  and other activities. Staff support groups are reported in Other as
  well.
Source: Mobil's Financial Fact Book (available on Mobil's Web Site)


    Mr. Burr. In your capacity do you believe that these 
companies, were they not to merge, would have job reductions 
within their companies to meet the changes in the marketplace 
and the pressures that are in the market today?
    Mr. Hakes. Yes, there has been a long-term trend in all the 
energy industries to reduce employment. If you look at the 
electricity industry or the coal industry, and certainly the 
oil and gas industry, there has been a pretty consistent trend 
now since the early 1980's to reduce the number of employees, 
and again, we project that trend as likely to continue into the 
future. So, with or without mergers, there are downsizing 
pressures on all these firms to reduce costs.
    Mr. Burr. So we can safely expect that there would be some 
job loss with the merger because of the duplication of jobs, 
but even if we didn't have the merger, we would likely trend 
toward fewer jobs within these two companies without the merger 
just from the market?
    Mr. Hakes. I think that is a likely assumption, yes.
    Mr. Burr. Let me ask one final question with the chairman's 
indulgence: Tell me, if you will, how will oil prices be 
affected by this merger?
    Mr. Barton. So we can go out and invest in the market when 
you give us the answer. We are hanging on every word here.
    Mr. Hakes. Most of what we do is on an aggregate national 
and international level, and I am not sure there is anything 
here that would cause us to change our price forecast.
    As has been suggested in other testimony, the issues may be 
more regional and local in nature. I mean, if you look at some 
States, they have not had one station from Amoco, BP, Exxon, or 
Mobil, and you get into some other area and over half the 
market would include those particular companies. So I think 
from an aggregate level it might be hard to find, and I think 
most of the tension will probably be focused on more regional 
and local issues.
    Mr. Burr. Can I ask it in a slightly different way? Does 
this merger increase or decrease our reliance on imported oil?
    Mr. Hakes. There may be some indirect effects, but I 
wouldn't see any direct effects that come immediately to mind.
    Mr. Burr. I thank the three of you, and I yield back, Mr. 
Chairman.
    Mr. Barton. The Chair would recognize the distinguished 
gentleman from Tennessee, Congressman Bart Gordon, for 5 
minutes for questions, if he so wishes.
    Mr. Gordon. I will pass at the moment and reclaim my time 
later if that is possible.
    Mr. Barton. Sure. All members present of the subcommittee 
have had an opportunity to ask questions. By an agreement with 
the minority leadership, Mr. Dingell and Mr. Hall, the Chair 
would recognize the gentlelady from Houston who is not a member 
of the committee, but who has an interest in the issue, 
Congresswoman Sheila Jackson-Lee for 5 minutes.
    Ms. Jackson-Lee. I thank the chairman very much, my 
colleague from Texas, and I will be brief in my question to the 
Director of the FTC.
    We have come to understand that all bigness is not bad. 
There are some concerns, of course, as we watch the prevailing 
impact of low price per barrel on various companies with 
downsizing.
    My question to you, on your ongoing investigation on this 
merger, what are the other criteria other than business, if you 
want to cite two or three or four, that are extremely singular 
in their importance in your analysis? And my question goes to 
the ultimate impact on the consumer, how you look at these 
factors as you move toward your conclusions.
    Mr. Baer. Thank you, Congresswoman. The simple answer is, 
first of all, we agree with you that bigness does not 
necessarily imply badness, but bigness can be bad if it is big 
in a relevant market, and that is really what we look at.
    We look at, if I start from the place closest to the 
consumers heart, the retail pumps. Will a few firms, as a 
result of this transaction, control in a local community a 
significant percentage of the gas stations? If so, there is a 
risk that either one company acting alone or two companies 
being a little less aggressive with each other could raise 
prices a penny, two cents, three cents. It doesn't sound like 
much until you multiply it out, and it obviously matters to the 
individual consumer.
    As you go further up the distribution chain, there are 
regional areas where there are terminal networks, and if 
somebody basically is in control of an undue percentage of the 
terminal, the storage facilities, they can raise the price that 
the jobbers who come and pick up the gas, and transport it to 
the stations must pay. So there is a potential anticompetitive 
effect there. I am not saying there is in this transaction, but 
just that is what we look at.
    If you go up to pipelines, where I mention in my opening 
statement that Texas and the Gulf Coast has an undue percentage 
of the refining capacity, and they need to get that to the 
country some way. One way is through pipelines, and if one or 
two firms controlled an undue percentage of the pipelines they 
potentially could raise the tariff rates and extract, what we 
call, a monopoly rent, but basically raise prices and injure 
consumers a little bit indirectly but ultimately injure 
consumers. Going up one more level to the refining level, if 
one firm or a few firms control an undue percentage of the 
refining in any particular area of the country.
    We analyzed that in the Shell-Texaco joint venture. We were 
concerned that the firms would combine four refineries, I 
believe it is, on the West Coast with potential for them to 
have some impact both on prices for what they call the CARB II 
gasoline that is used exclusively in California, but also for 
the more standard gasoline and aviation products used elsewhere 
on the West Coast.
    We required a divestiture of one of the four refineries to 
make sure that there in fact would be significant competition 
after the fact.
    Then, finally, we go all the way up to exploration and 
production, both domestic, Gulf, Alaska, and elsewhere around 
the world, to see whether there is a potential impact there.
    At any level if somebody is too big or a few firms are too 
big, that is the mechanism by which prices can get raised to 
consumers' detriment. Long-winded answer.
    Ms. Jackson-Lee. Not at all. Thank you very much and thank 
you, Mr. Chairman, for allowing me this time. I yield back my 
time.
    Mr. Barton. I thank the gentlelady. The Chair would now 
recognize Mr. Gordon of Tennessee for his 5 minutes.
    Mr. Gordon. Thank you. In the past we have seen where world 
events, whether they be the Mid-East or potentially I guess 
they could even occur in Venezuela, Mexico, that have an impact 
on prices and consumers. What is your opinion as to this type 
of merger having either benefiting or being a detriment to 
consumers as a result of international activities? When I said, 
``international activities,'' crises or bad happenings.
    Mr. Baer. It is a fair question. As one who is an antitrust 
lawyer and not either a diplomat or an international 
specialist, we go to our sister agencies and ask them to help 
play out that scenario and then----
    Mr. Gordon. I think we can assume something is going to 
happen. We may not know when or where, but we know there is 
going to be an international problem, and we know that, 
ultimately, it will have some impact on the production of oil.
    Mr. Baer. There are two possible outcomes--one 
procompetitive, one anticompetitive, and I believe Mr. Largent 
suggested a possible procompetitive outcome.
    If the national oil companies engaged in a cartel or 
withhold product entirely, as they did in the Arab oil embargo, 
it may well be that having a couple of big U.S. firms with the 
resources to exploit opportunities overseas independent of 
nationally owned oil companies will be a net benefit to 
competition, because in the event of a national emergency, we 
will have exploited or developed resources we otherwise 
wouldn't. I think the companies fairly see that as an upside 
for America from this deal.
    At the same time it is----
    Mr. Gordon. It's better to have one than two in those types 
of circumstances?
    Mr. Baer. I think they would say that--and they will be in 
tomorrow; you can ask them--that the scale of investing 
overseas is such that there is an upside from having one firm 
at the scale needed to invest. That's a factual question that 
we would need to investigate in any merger.
    The flip side, sort of the bad scenario for consumers, is 
that if somehow an embargo takes a lot of production off the 
market, are you going to have one firm with 15, 20, 25, 30 
percent of production that is imported into the United States, 
and if so, is that going to increase the likelihood that that 
firm could manipulate supply, manipulate price in a way that 
would injure consumers? Those are the sorts of questions we try 
to work through in our analysis.
    Mr. Gordon. Now if you had a situation where you had a 
national oil cartel that got together and then we had a large 
American-based firm, what is your opinion as to them putting 
their country above their shareholders?
    So in other words, if the world market went up to whatever, 
$25 a barrel, and it was $18 just a month before and it is 
artificially up to $24, are they going to say that they don't 
have a responsibility to their shareholders to maybe take it up 
to a dollar less rather than keep it down below so that the 
U.S. economy can keep purring?
    Mr. Baer. We assume for antitrust purposes that companies 
are going to be profit maximizing; that they are going to take 
advantage of every opportunity that they have to make the next 
dollar, and that is not a pejorative statement; it is just, I 
think, a statement of how our American economy operates and 
should operate.
    The way antitrust comes into the picture is to say, all 
right, now is a particular transaction going to actually give 
somebody the ability to get price artificially high? If so, we 
ought to stop that deal or restructure that deal so that 
eventuality cannot happen. That is how we factor in. We assume 
that people are going to act in the best interest of their 
companies and in the best interest of their shareholders and we 
just got to make sure that is not inconsistent with the 
American consumers' interest.
    Mr. Gordon. Thank you.
    Mr. Barton. Does that conclude your questions?
    The Chair recognizes the distinguished gentleman from 
Tennessee, Mr. Bryant for 5 minutes.
    Mr. Bryant. I thank the chairman.
    Mr. Hakes, I am over here on the end.
    Mr. Barton. We have two gentlemen from Tennessee.
    Mr. Bryant. I wanted to ask you, Mr. Hakes, if I could, if 
you see a trend in energy mergers to form combinations that cut 
across product lines, for example, natural gas and electric 
mergers, and if so, what do you think would be behind this 
trend?
    Mr. Hakes. Well, I think there is a tendency to say that 
the customer at the end of the purchase wants to buy energy and 
they don't sort of care what it is. For instance, when you are 
heating your home you may heat it with gas or with electricity, 
and there may be some reason for one company to be able to 
offer a customer the choice between natural gas and 
electricity. So, historically, that has not been the way those 
industries have operated, but it is the way they may operate in 
the future.
    Oil went through a fairly early restructuring of the laws 
governing competition. So it has been operating in a 
competitive market for some time. Electricity and gas are in a 
way still going through this. Gas is further along. This is 
leading to a lot of restructuring in how products are offered 
to consumers.
    I don't really pretend to be an expert on the motivations 
for mergers. I am sure there are a lot of reasons companies 
have, but I think there is a sense in energy to see that fuels 
are to some extent interchangeable and you probably want to be 
aware of and be able to operate in several different fuel 
areas.
    Mr. Bryant. Thank you. Mr. Baer, sort of a followup to that 
question: Is oil a separate product market from natural gas, 
and do petrochemicals also represent a separate product market?
    Mr. Baer. Mr. Bryant, I think for most purposes the answer 
would be yes. I didn't mention this in my prepared remarks, 
but, for example, petrochemicals, if you look down the food 
chain, consumers, ultimately--if oil additive prices were 
raised, there is no substitute for them. So they really are the 
sort of separate market we would look at.
    We had a transaction involving Exxon and Shell involving 
viscosity improvers, oil additives. We thought the merger in 
many respects didn't have problems. However, with respect to 
that separate product market, the VIs, the Commission concluded 
that a divestiture was appropriate in order to prevent 
anticompetitive effects.
    So the short answer is, yes, we look at them separately.
    Mr. Bryant. Another question, Mr. Baer, a little bit bigger 
picture here from a historical standpoint: When specifically 
looking at the oil industry mergers, what countervailing 
efficiency considerations has the FTC identified that might 
mitigate against the anticompetitive impact of such a merger?
    Mr. Baer. In the past, Mr. Bryant, we have taken a look at 
claims that by combining two oil companies they will be able to 
invest overseas, have the resources, the capital to invest that 
they might not otherwise have.
    It tends to be a very factual-specific question and it gets 
to the question of: How big is big enough? Are they competing 
effectively already? Do you really need this? Those are the 
sorts of questions we work through in a transaction.
    You can see efficiencies in refining. For example the 
refineries on the West Coast that split their output between 
regular West Coast product and CARB II formulated for 
California.
    Sometimes firms have come in and explained that by 
rationalizing how they would run a group of refineries they 
actually can reduce their cost. So we look at those sort of 
claims and credit them where we think factually they bear out.
    At the same time you still have to weigh those claims of 
efficiency gains against the increase in concentration, and if 
the efficiency, the lowered cost, is occurring in a merger to 
monopoly, for example, the monopolist will have the ability to 
take price up, and it may well be that ultimately the 
efficiencies are modest and the price risk is high, in which 
case we tend to discount the efficiency.
    Where you have the possibility that the market is 
sufficiently competitive, that the firm's cost savings will be 
competed down to consumers in some substantial measure, then 
under our guidelines we tend to weigh those efficiencies and 
stay out of the way.
    So our analysis tends to be case-by-case, fact-specific, 
always considering the efficiencies in light of the competitive 
harms that we might be able to identify.
    Mr. Bryant. Mr. Chairman, I see my time is out. I just have 
probably three or four or five other questions. Could I submit 
those in writing to the FTC?
    Mr. Barton. You can certainly submit them in writing or we 
are going to have a second question round, at least I am. So if 
you want to wait another 10 minutes, you can probably ask them. 
It is whatever your preference is.
    Mr. Bryant. Thank you.
    Mr. Barton. The Chair would recognize the gentleman from 
Massachusetts, Mr. Markey, for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Baer, on page 9 of your testimony you note that the FTC 
has on several occasions blocked mergers or required 
divestitures to prevent the elimination of competition at the 
terminal or tank farm level, thus, ensuring that there are 
competitive sources of supplies to local marketers.
    Now I understand that in Boston there are six terminals 
through which gasoline, home heating oil, and other fuels must 
pass on the way to reaching their local markets, Exxon, Mobil, 
Gulf, Citgo, Global, and Irving. Exxon and Mobil, however, 
reportedly control the only two real deep water terminals in 
Boston Harbor that are capable of accommodating the largest 
tanker ships. The other four terminals reportedly can 
accommodate only smaller ships, and therefore, have higher 
costs, reportedly of up to 1 cent per gallon. Of these four, I 
understand that one is in the process of being closed down.
    In the course of the FTC's review of this merger, will the 
FTC be examining the transaction's impact on competition at the 
terminals in Boston?
    Mr. Baer. I am committed not to getting into the details of 
where we are going to look and how we are going to look, but I 
can assure you, Mr. Markey, that those are the very sorts of 
issues that we are obligated to look at, and look at carefully. 
Six going to five in any market may be benign, but it also may 
be there are special characteristics of a market that make it 
much less than benign and worthy of your consideration.
    Mr. Markey. And as you look at it generically, ``B'' is at 
the top of the alphabet and, as a result, would probably be one 
that you will look at?
    Mr. Baer. As one who had the nuns calling him frequently 
because he had a ``B'' to start his last name, I am sensitive 
to those issues.
    Mr. Markey. I see.
    Mr. Baer. And the priorities that----
    Mr. Markey. You are so right, you know, people whose name 
begins in ``M,'' we are in the best of situations because even 
when Sister decided that she had overdone the ``A,'' ``B,'' 
``C's'' she always said, well, let me go now to you, Mr. W; you 
know, ``R'' and the ``M's'' were always protected. We never got 
the first question in class. It was a nice place to be.
    Now I understand that oil companies frequently enter into 
agreements with what are called through-puts or exchanges in 
which they supply one another with fuel. If the combined Exxon-
Mobil were not to renew such agreements following the merger or 
raise the price they charged other oil companies for such 
through-puts or exchanges, might they raise anticompetitive 
concerns with the Federal Trade Commission?
    Mr. Baer. The possible price increases resulting from a 
transaction in any merger are the sorts of things we look at. 
What you look at is the real risk that would happen, and if 
somebody was faced with that kind of price increase, would they 
have alternatives to go to? If they don't have sufficient 
alternatives, then there is a real antitrust concern.
    Mr. Markey. So you will be looking at those contractual 
relationships?
    Mr. Baer. I am not promising to look at anything. I am 
trying to stay out of the specifics of this transaction. I am 
saying, Mr. Markey, that those are the sorts of issues it is 
our job to look at.
    Mr. Markey. Okay; good. Now I also understand that, in the 
course of reviewing the BP-Amoco merger and the Shell-Texaco 
joint venture, the FTC required those companies to divest 
themselves of a number of retail gas stations. In addition, in 
the BP-Amoco case the FTC also ordered the companies to allow 
their wholesale customers, both open dealers and so-called 
jobbers, to switch their gas stations to other brands.
    Mr. Hakes' testimony suggests on page 6 that Mobil and 
Exxon have the largest overlapping marketing areas in the 
Northeast. In fact, it is my understanding in the Northeast 
Exxon and Mobil has a combined market share of between 15 and 
27 percent of the branded gas stations in the region.
    Will the FTC be closely examining the local market impact 
of the merger in this region to determine whether divestiture 
of gas stations or facilitating switching by open dealers or 
jobbers might be needed to assure competition?
    Mr. Baer. Local impact is a critically important issue for 
us to look at in any petroleum company merger, including this 
one.
    Mr. Markey. Now a December 4, 1998, article in the Wall 
Street Journal reports that in Massachusetts Mobil has 511 
branded gas stations while Exxon has a much smaller presence in 
the State. According to this article, this is in part because 
Exxon is known to charge dealers much higher rents. The article 
reports that, quote, ``A Mobil station, for instance, might 
carry $4,000 or $5,000 rent while an Exxon station pumping the 
same amount of fuel might pay monthly rent of $10,000 or 
$12,000.''
    Would the FTC be at all concerned if this merger 
transaction lead to more than doubling of the rents that local 
dealers must pay, given the fact that those costs most likely 
would be passed right along to consumers in the form of higher 
gas prices?
    Mr. Baer. Our job is to be concerned about any price change 
that might ultimately affect consumers and limit competition, 
sir.
    Mr. Markey. Mr. Chairman, I have 20 seconds of a question 
left. I would beg your indulgence.
    Mr. Barton. Sure.
    Mr. Markey. Thank you.
    Finally, I have heard that one business practice now taking 
place in the retail gasoline marketplace is that the major oil 
companies are refusing to allow their existing distributors to 
build any new gas stations within 30 to 35 miles of any big 
city or metropolitan area that would use their brands. Instead, 
the major oil companies are limiting new stations that they own 
themselves.
    Does this practice raise any potential anticompetitive 
concerns on the part of the FTC? Would you expect that the FTC 
might examine such practices in the course of reviewing the 
merger?
    Mr. Baer. The antitrust laws give a manufacturer or 
distributor of a product some ability to choose how it will go 
to market, that is, through company-owned retailers or through 
independent retailers and to some extent those decisions, as 
long as there is not a long-term anticompetitive consequence 
from it, are not the sort of things we normally are empowered 
under the law to go after.
    There are circumstances where if, for example, one or two 
firms dominate a particular market, their ability to impose 
that kind of restriction can have a long term anticompetitive 
effect, and in those circumstances we are able to act. So it 
would depend on the facts we found in our inquiry, sir.
    Mr. Markey. Mr. Chairman, I am a big admirer of Mr. Baer 
and the other two witnesses, and I thank you so much for your 
good work. Thank you.
    Mr. Barton. Thank you, Mr. Markey. The Chair is going to 
recognize himself for a few questions. I may not have time to 
do them all because we have two pending votes.
    Mr. McAlevey, you sit there somewhat neglected. I don't 
think anybody has asked you a question.
    Mr. McAlevey. I have an ``M'' in my name. There it is.
    Mr. Barton. There you go. Well, I have a ``B'' in my name, 
and I am going to ask you a few here.
    You gave us a pretty straight forward text book synopsis 
about what the SEC does when mergers are presented that have 
stockholder investment. Is it random whether you look, as you 
put it, look at the file, or the bigger, the greater likelihood 
it is that the file will be looked at?
    Mr. McAlevey. It is not random. We participate in a process 
known as selective review because we don't have enough 
resources to single filing that comes----
    Mr. Barton. But there is a high likelihood that your agency 
will look at the largest merger in the history of the United 
States of America?
    Mr. McAlevey. That may be a consideration that we take into 
account. As a matter of policy, we don't disclose what the 
selective review criteria are for a number of reasons. But a 
merger, size and magnitude would be something that we may take 
into account.
    Mr. Barton. Well, be prepared to have the Chairman of the 
SEC come back before this committee if this one is not looked 
at. I will put it that way.
    Mr. McAlevey. I will bring that message home.
    Mr. Barton. You can send that message.
    I want to go back to some of the global implications of 
this. Is OPEC today an effective cartel, either Mr. Baer or Mr. 
Hakes?
    Mr. Hakes. Well, I think in the mid 1980's it was evidenced 
that OPEC had lost some of its ability to control the world 
market, and I think since that time there has been a 
continuation of their influence to erode. I think some of the 
members actually compete against each other on production and 
distribution and sometimes they have difficulty getting people 
to comply with the quotas. I still am of the judgment, however, 
that they are a factor in setting the world oil prices and 
prices might be different if the cartel wasn't there. But 
particularly countries like Venezuela have begun acting much 
more independently in recent years.
    Mr. Barton. Mr. Baer, we do have a cartel called OPEC. You 
are aware of that. That has to play some role in the evaluation 
of this merger.
    Is the FTC aware that recently several CEOs of major 
privately owned oil corporations have been invited to private 
meetings with the Saudi minister here in the United States and 
on at least several occasions their CEOs have also been invited 
to Saudi Arabia to have private meetings with Saudi Aramco?
    Mr. Baer. We are generally aware that, based on published 
press reports, that there have been some discussions and that 
there is some consideration on the part of some national oil 
companies to inviting the private U.S. oil companies back into 
markets in which they had a significant presence back in the 
1970's and before. So we are aware of that.
    To the extent that your question raises a concern about 
whether there might be a collusive concern, coordinated 
behavior by firms resulting from that, that is the sort of 
thing we look at. In an investigation, any investigation, we 
want to find out what contacts merging parties have had with 
other players in the industry and whether there is any evidence 
that people have behaved in a coordinated fashion.
    Mr. Barton. Well, the potential exists that, if you have a 
cartel, admittedly, the cartel has not been very effective in 
the recent past in coordination of its production policies. But 
the fewer the number of players in the private sector, the more 
likelihood that there could be an effort between the cartel and 
the private sector to collude in a way that would be 
detrimental to the consumer. So I would hope that that would be 
a consideration that the FTC would look at.
    My last question because of time I am going to ask again, 
and primarily to Mr. Baer, this merger is between two 
integrated oil companies. They are vertically integrated. Is 
there any one particular phase of the chain that is a greater 
potential for a bottleneck which would, if the merger were to 
occur, would result in an anticompetitive nature?
    In other words, is the retail level more likely to present 
a bottleneck or the distribution level or the refiner level or 
the production level in terms of the way the FTC looks at this?
    Mr. Baer. It is a question that I need to answer 
generically without regard to what we are finding, or expect to 
find, with respect to the Exxon-Mobil merger.
    But if you look at the history of our investigations of 
mergers in this industry, we have found problems at the 
refinery level that concerned us and have ordered divestitures 
in the late 1970's and most recently involving the Shell-Texaco 
transaction. We found problems with pipeline transportation and 
have required companies to divest ownership interest in 
pipelines, so that they cannot straddle two pipelines and 
manipulate prices there. We have found problems at terminaling 
and at retail. We have also found problems with respect to the 
byproducts, the chemicals that are made out of the refining 
process. So at each of those levels a transaction, if both 
firms are present in that market, potentially raises concerns. 
So we need to be alert really across the waterfront.
    Mr. Barton. We are going to have a number of questions for 
the record. I know Mr. Bryant of Tennessee said he would have 
some questions. Mr. Hall said he was going to present his 
questions for the record.
    So we are going to recess this hearing until tomorrow 
morning at 10:30. We do thank you, gentlemen, for attending. 
You will have questions. We hope you will reply in the very 
timely fashion. Tomorrow at 10:30 we will have the two CEOs of 
Mobil and Exxon Corporation.
    The hearing is recessed until 10:30 in the morning.
    [Whereupon, at 12:20 p.m., the subcommittee recessed, to 
reconvene at 10:30 a.m., Thursday, March 11, 1999.]



                         THE EXXON-MOBIL MERGER

                              ----------                              


                        THURSDAY, MARCH 11, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:38 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Stearns, Shimkus, 
Pickering, Fossella, Bryant, Hall, McCarthy, Sawyer, Markey, 
Gordon, and Wynn.
    Staff present: Cathy VanWay, counsel; Ramsen Betfurhad, 
counsel; Donn Salvosa, legislative clerk; Rick Kessler, 
minority professional staff member; and Sue Sheridan, minority 
counsel.
    Mr. Barton. If the subcommittee could come to order.
    We have had a series of votes on the House floor which has 
delayed our 10:30 hearing until just now. I am going to wait a 
few more minutes to see if the ranking Democratic member, Mr. 
Hall, will be in attendance. I saw him leaving the floor the 
same time I did, so I want to give him the courtesy of coming. 
If he is not here in about 2 minutes, we will go ahead and 
start, but we are going to start very shortly.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. We are 
going to convene the second day of hearings on the merger of 
Exxon and Mobil. This is a continuation of a series of hearings 
that we started yesterday where we heard from the Federal Trade 
Commission, the Energy Information Agency, and the Securities 
and Exchange Commission.
    Today we have two panels. On our first panel, we have Mr. 
Lee Raymond, who is chief executive officer of Exxon 
Corporation. And with him, we have Mr. Lucio Noto, who is the 
chairman and chief executive officer of the Mobil Corporation.
    The second panel, we will have a representative of the 
Petroleum Industry Research Foundation, a gentleman who 
represents an analytical firm, and a gentleman who represents 
the Service Station Dealers of America.
    I want to point out to the audience, this is an open, 
public hearing. Everyone is welcome, but we do expect that the 
rules of the decorum, in terms of committee meetings, be 
adhered to.
    [Additional statements received for the record follow:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you, Mr. Chairman. I appreciate this opportunity to learn 
more about the Exxon-Mobil merger. I am interested to hear from today's 
two panels about how they view the impact of this merger on national 
energy policy, consumers and interstate commerce.
    Exxon and Mobil seem to be following a trend of consolidation in 
the industry--recently, we saw the merger of BPAmoco and Shell-Texaco. 
However, despite their reduced production, Exxon and Mobil will still 
produce the largest industrial merger ever and will create the largest 
private oil company worldwide.
    The companies are targeting a 10 percent reduction in annual 
spending. Exxon and Mobil have stated that as a result, 9000 jobs will 
be lost in to the merger. 'How many of these cut jobs will be in the 
US? Will the number be closer to 12,000 employees, as some observers 
suggest? I would like to here more from our first panel about this 
projected job loss.
    The CEO's of both Exxon and Mobil have indicated that to secure FTC 
approval of the $77 billion merger, the companies will be required to 
divest some assets. This means that they may sever contracts with more 
than 1,000 gas stations and sell one or more refineries. This problem 
is significant in the Northeast and Middle Atlantic states, where the 
two companies have significant market share. I expect our second panel 
will have much to tell us about their view of these divestitures.
    With such a large merger, the implications for our national energy 
policy, consumers, and interstate commerce are not immediately clear. I 
look forward to hearing from our panels today to help us understand the 
Exxon-Mobil merger's effects. Thank you.
                                 ______
                                 
   Prepared Statement of Hon. Edward J. Markey, a Representative in 
                Congress from the State of Massachusetts
    Thank you, Mr. Chairman. I would like to begin by commending you 
for calling this second oversight hearing to review the proposed merger 
of Exxon and Mobil.
    As the Subcommittee heard yesterday, the merger of Exxon, our 
nation's largest domestic oil company, and Mobil, the nation's second 
largest domestic oil company, would represent the largest industrial 
merger in history. The testimony we heard from the Federal Trade 
Commission at our last hearing indicated that presently Exxon and Mobil 
face each other at just about every level of the oil and gas industry--
from the exploration for and production of crude oil, to the refining 
of crude oil into gasoline, home heating oil, or other petroleum 
products, to the manufacture of petrochemicals and lubricants, to the 
marketing of gasoline and other fuels to the consumer. We also heard 
that this proposed merger is not occurring in a vacuum, but appears to 
be part of a larger ongoing trend of consolidation and concentration in 
the oil and gas industry. The FTC noted, and I agree, that the 
existence of a trend towards concentration in an industry is highly 
relevant in examining the consequences of a merger and compels us to 
carefully consider the consequences of further concentration.
    Today we will be hearing directly from the Chairman and Chief 
Executive Officers of Exxon and Mobil. We will be examining the trends 
in the domestic and global oil and gas markets--such as persistent low 
prices and increased exploration and production costs--that are said to 
be driving the current trend towards concentration and consolidation in 
the oil industry. We will be hearing about the potential benefits that 
the proposed merger could produce in terms of the increased savings and 
synergies that could accompany the combination of the assets and 
resources of these two industry leaders.
    As I indicated yesterday, I am willing to accept the proposition 
that there may be a compelling business and economic rationale for a 
consolidation in the oil industry, particularly in the areas of 
exploration and production. But I also believe that a transaction of 
this size and scope clearly merits serious attention and scrutiny by 
our nation's antitrust regulators to assure that it does not stifle 
competition or result in higher prices for consumers purchasing gas at 
their local service station or heating oil for their homes. It is 
therefore absolutely essential for the FTC to look very carefully at 
the impact of this proposed merger on regional wholesale and retail 
markets in the United States. The new company to be created out of this 
merger reportedly will be called Exxon-Mobil. It is our duty to assure 
that its real name does not become ``Standard Oil''--a name synonymous 
in this country with excessive monopoly power.
    During today's hearing, I will be particularly interested in 
hearing from both Exxon, Mobil, and the other witnesses about how we 
can assure that merger, if approved, can be structured to address any 
potential anti-competitive effects on regional wholesale and retail 
markets, particularly in the Northeast. Thank you, again, Mr. Chairman, 
for calling today's meeting. I look forward to hearing the testimony 
from our witnesses.

    Mr. Barton. I want to welcome our first panel. Your entire 
statement is in the record in its entirety, that has been 
presented to the subcommittee.
    I am going to recognize Mr. Raymond for such time as you 
may consume to elaborate on your statement, and then Mr. Noto, 
and then obviously the subcommittee will have questions.
    Gentlemen, welcome.
    Mr. Raymond, you are recognized for an opening statement.

 STATEMENTS OF LEE R. RAYMOND, CHIEF EXECUTIVE OFFICER, EXXON 
 CORPORATION; AND LUCIO A. NOTO, CHAIRMAN AND CHIEF EXECUTIVE 
                   OFFICER, MOBIL CORPORATION

    Mr. Raymond. Thank you, Mr. Chairman.
    I think, in the interest of time, I would just like to add 
a few comments in addition to the material that we have 
submitted for the record.
    Fundamentally, the driving force that is behind this merger 
is the very competitive nature of the oil and gas industry, 
both in this country and around the world. If anything, the 
competitive forces over the last several years have continued 
to intensify and become even more difficult in terms of being 
able to provide an adequate return to our shareholders, while 
at the same time providing the kinds of goods and services that 
we think are important for our customers.
    Of course, the competitive landscape in our business 
started to change significantly some 25 years ago with the 
arising of state-owned oil companies and the nationalization of 
many interests that we and other companies had, both in Latin 
America and the Middle East. Those companies, of course, have 
developed and continued to grow their businesses and, as a 
matter of fact, some of them are major competitors of ours in 
the downstream operations in this country today.
    But, of course, the fundamental point that is behind all of 
this is the direct link between economic growth and 
availability of competitive energy supplies to our economy, as 
well as to all the economies of the world. There is no question 
that this country continues the need to have a strong and 
viable energy industry. Without it, the engine of economic 
growth, which is access to energy, simply won't be there, and 
eventually that will become a significant problem for the 
country.
    But from my point of view, in terms of managing a company 
in that industry, success in this environment means we have to 
manage the factors over which we have control, which are costs. 
I think the events of the last 18 months, in terms of what has 
happened to the variability of crude price and the volatility, 
illustrate once again--and even more so than in the past--that 
for our company to continue to be successful, means we have to 
more and more focus on those activities where we have the 
control and that, primarily, is focused on costs.
    Those companies that can control costs and have access to 
potential resources are the ones that will be able to meet 
future energy demand and will be successful in the longer term. 
But what this calls for, of course, is efficiency, quality 
people, strong finances, development of leading-edge and 
applying leading-edge technology, and economy of scale. In that 
sense, mergers help capture these benefits, in the short term, 
through savings and efficiency steps, and in the longer term, 
in more effective use of capital.
    We think the Exxon merger with Mobil will, first of all, 
create synergies and efficiencies that will enable the new 
company to provide high-quality products to our consumers at 
more competitive prices, provide to us and our shareholders a 
more diverse business portfolio which we think is essential in 
the volatile environment that this industry has to operate in. 
And, last, it will allow the new entity, which is a combination 
of two strong American oil companies, to compete more 
efficiently with foreign-based multinationals and the very 
large state-owned oil companies.
    With that, Mr. Chairman, I would really like to move to try 
and be able to respond to questions that the committee may 
have.
    Mr. Barton. Thank you, Mr. Raymond.
    We would now recognize Mr. Noto.
    Again, your statement is in the record in its entirety, and 
we will give you such time as you may consume to elaborate on 
it.
    For members who weren't here yesterday, we did opening 
statements by members yesterday. Any member present today that 
wishes to put an opening statement in the record, it will be 
put into the record at the beginning of the hearing process.
    Mr. Noto, you are recognized.

                   STATEMENT OF LUCIO A. NOTO

    Mr. Noto. Thank you, Mr. Chairman. Thanks for the 
opportunity to be in front of your subcommittee today.
    Mr. Barton. You need to put the microphone closer to you, 
sir----
    Mr. Noto. Sorry.
    Mr. Barton. [continuing] so that the recording clerk can 
hear you.
    Mr. Noto. Is that better?
    Mr. Barton. That's better.
    Mr. Noto. Thank you.
    Mr. Barton. Yes, sir.
    Mr. Noto. It is a pleasure to be with you today. Thank you 
very much for giving us this opportunity to testify.
    I think Lee has given you a picture of the new industry for 
us--much more competitive, dealing with projects that are much 
more complex. A lot of the ``easy oil''--if you will let me use 
that expression--has been found, and it is being produced. The 
world is going to need more energy in the future, 
notwithstanding the fact that right now there is a surplus. The 
combination of Mobil and Exxon is certainly going to be better 
poised to be able to develop more diverse sources of energy for 
U.S. and worldwide consumers than they would on separate 
companies.
    These projects are complex; they are technologically 
demanding. They are in, frankly, riskier places--the Caspian, 
the Middle East, West Coast of Africa. Even a company the size 
and with the experience that Mobil has, is having difficulties 
managing its programs right now, wanting to do enough of these 
new projects and develop new energy in the future and still 
manage its existing business, and still keep its shareholders 
happy with dividends. We did this, recognizing that we had a 
history of 130 years as a separate company, and a proud 
history.
    We are absolutely convinced that being part of this 
combination is going to be better for our shareholders, better 
for our customers, and, ultimately, better for the people who 
consume our products. From a shareholder point of view, I think 
it is obvious. From a customer point of view, the efficiencies 
that we are talking about generally get flowed into the 
marketplace in the form of lower prices. Some of our major 
competitors have put their businesses together here in the 
U.S.--BP and Amoco, Shell and Texaco. They expect--and I 
suspect--that they will be able to realize savings in the 
hundreds of millions of dollars. That exceeds the amount of 
money that I am making in the U.S. downstream, and my U.S. 
downstream is a good business. So for me to stay competitive, 
and for me to be able to satisfy my shareholders and my 
customers, I am going to need a level playing field. I'm going 
to have to be able to accomplish the same kind of savings.
    We have done a lot in the last 7 years on our own. 
Regrettably, we have shaved about one-third of our manpower. We 
have sold billions of dollars of assets that weren't producing 
the right kind of returns. And we got to the point where 
further cost savings will not be easy to accomplish. So far, we 
put $4 billion of savings on the books. We got to the point now 
where we are talking about muscle and not fat. We are getting 
to the point now where if we try to take hundreds of million 
dollars out of our business, we are really going to impact our 
ability to grow in the future, so this merger for us represents 
a very, very important step.
    We think our customers are going to be better off. We will 
be able to be fully competitive. I am--we are committed to do 
this merger. We want to try to do it in an expeditious fashion. 
And we would be very happy to try to answer any of the 
questions that you might have today.
    Thank you.
    [The joint prepared statement of L.R. Raymond and Lucio A. 
Noto follows:]
Joint Prepared Statement of L.R. Raymond, Chairman and Chief Executive 
   Officer, Exxon Corporation and Lucio A. Noto, Chairman and Chief 
                  Executive Officer, Mobil Corporation
    Mr. Chairman, we appreciate this opportunity to appear before the 
subcommittee to discuss the proposed merger between Exxon and Mobil and 
to answer any questions you may have.
    For a number of reasons, we believe this merger is compelling for 
our two companies, our customers and our shareholders. In addition, we 
believe it to be an important step in strengthening the ability of 
American industry to compete in an increasingly challenging global 
business environment.
    The principal driving force behind this proposal is the intensely 
competitive nature of our industry. We will outline the elements of the 
environment in which we are operating, discuss why mergers are an 
appropriate response to that environment, then turn to the specific 
advantages of the Exxon-Mobil merger.
Petroleum Industry Environment
    The key characteristics of the current environment are intense 
competition and a changing business landscape, compounded by an 
imbalance between oil supply and demand. Oil demand showed essentially 
no growth over the past year while supplies rose, creating an increase 
in inventories. The reasons include the Asian economic crisis and mild 
winters as well as increased production by OPEC countries, including 
the near-doubling of production from Iraq in 1998.
    In the upstream--or exploration and production sector--of the 
energy business, one of the most significant developments has been the 
growth of state-owned oil companies and their expansion beyond their 
traditional boundaries. The nationalization of assets of private oil 
companies by OPEC countries in the 1970s established for many of these 
state-owned companies a significant concentration of productive 
capacity and reserves, especially in the Middle East, with the 
competitive advantage of relatively low development and operating 
costs. As outlets for their production, many state oil companies have 
established refining and marketing operations in other countries, 
including the United States.
    In some countries that are net importers of oil, government 
companies have been aggressively acquiring foreign reserves to improve 
the security of their supplies.
    During this period, private companies have focused on using 
advanced technology in existing non-OPEC producing areas such as 
Alaska, the North Sea, the Gulf of Mexico and Canada. However, as 
fields in these areas have matured, exploration efforts have shifted to 
prospects in more remote and challenging areas such as the deep waters 
off West Africa and Brazil. The opening of the former Soviet Union, and 
in particular the Caspian region, has created additional opportunities 
for private investment, but at higher cost and increased levels of 
risk. Overall, the trend has clearly moved in the direction of higher-
risk, geographically remote, and technically challenging production 
opportunities in politically sensitive areas. Competition for these new 
prospects is intense, as is the need for technology advancements that 
will deliver lower finding and recovery costs. This is critical in a 
business where the cost of single projects can run into billions of 
dollars.
    To the consumer, perhaps the most visible change has been the 
increased competition in the downstream--or refining and marketing 
business--particularly at the retail level. Independents have 
established a growing presence in the marketplace, as have non-
traditional retailers such as ``hypermarkets,'' whose core business may 
be food or general retail, but who provide fuelling facilities as a way 
of attracting customers to their stores.
    Refining capacity has continued to grow because of expanded 
production from existing facilities and the start-up of idle capacity. 
Finished product imports from Europe, the Middle East and Latin America 
are now competing for the consumer's dollar. The relatively low returns 
and weak margins in the refining and marketing sector have forced many 
companies to take steps to improve financial performance--steps such as 
consolidation, joint ventures, restructuring and divestitures. Cost 
control, manufacturing efficiency and yield maximization remain 
industry priorities.
    Another major issue in the refining and marketing business has been 
the emergence of low-cost, highly competitive independent refiners and 
marketers as industry trend-setters, often acquiring and effectively 
operating facilities that major oil companies considered non-core 
assets. Independents' share of retail gasoline sales in the U.S. has 
grown from around 41% to over 45% since 1992. Independent marketers 
have experienced similar rapid growth in many other countries.
    Looking ahead, over the near term, supply and demand should 
eventually come back into balance as Asian economies recover and 
surplus inventories are drawn down. With the eventual restoration of a 
more balanced market, the industry will be better able to finance new 
oil and natural gas developments, but there will still be intense 
competition for the more attractive exploration and production 
opportunities, continued downward pressure on costs and the need to 
apply increasingly sophisticated technology. There is more than 
adequate refining and marketing capacity to meet consumer needs, for 
the next few years at least, but the industry will need to invest large 
sums for increased fuel quality.
    The longer-term outlook is governed by the unarguable link between 
energy demand and economic growth and the vital role of fossil fuels in 
meeting future energy needs. With continued expansion of world 
economies, oil consumption is projected to grow at an average annual 
rate of about 2 percent over the next 20 years. Much of this growth 
will be in the transportation sector, especially in less developed 
countries, where there is no practical alternative to oil.
    Natural gas demand is expected to grow even faster--at roughly 3 
percent annually on average--spurred by electricity market deregulation 
in developed countries and the increasing electrification of developing 
nations.
    Industry's principal challenge will be to find economically viable 
sources of oil and gas. As production from mature fields declines, 
replenishment of reserves coupled with growing demand will require the 
application of technologies not yet developed and the deployment of 
best industry practices for operational efficiency and cost 
effectiveness. Wise choices in investment selection and management in 
this capital-intensive business will be essential.
    This is increasingly important as the United States' dependence on 
oil imports continues to grow. We need energy to support economic 
growth, but we can't solve the import-dependence problem simply by 
stopping imports. The solution is to manage the risk by seeking 
additional diversification in our own sources of supply. This means 
that we must encourage the development of resources and production 
capacity from diverse areas of the globe, in addition to the Middle 
East. A significant portion of the world's future oil and gas supplies 
will come from remote, politically sensitive regions involving projects 
that require technological advances and large amounts of investment 
capital.
    In the downstream, large investments will be required to meet ever-
tighter environmental requirements--such as reducing sulfur in 
gasoline--higher product quality standards, and the need for research 
in developing the fuels of the future.
Managing an Energy Company in the Current Environment
    The energy business has always been challenging, but today 
companies seeking to supply their customers at a competitive price and 
deliver an appropriate return to their investors face new difficulties.
    The petroleum business is inherently unpredictable and always full 
of surprises. We have no control over basic raw material costs. And we 
cannot know when the economic rebound will occur in Asia or whether a 
supply disruption is on the horizon--nor can we make any safe 
assumptions about the specific impact of such events on oil markets.
    In other words, the industry must deal with a high level of 
uncertainty and volatility. Combine that with the fact that the energy 
business is very capital-intensive and involves projects that take many 
years to develop and repay their investments, and it becomes clear that 
any company hoping to do its job must have its house in order. It must, 
in other words, consistently strive to do its business in the most 
efficient manner possible.
    A truly efficient company has:
    Economies of scale. Large energy projects require large 
organizations for two reasons. One is the magnitude of physical, 
financial and technological resources they can bring to a job. The 
other is their ability to use their size to lower operating costs as 
well as justify the development and use of the most advanced technology 
in order to be competitive.
    Financial strength. To compete and to meet its commitments to 
customers and shareholders, a company must have the requisite financial 
resources: both substantial cash flow and a strong credit rating. These 
assets keep financing costs low, provide the reach to consider a spread 
of opportunities around the world to better manage risk, and make it 
possible to fund the research needed to develop new technology.
    Operating synergies. Simply put, this entails finding ways to 
combine elements of different operations in a way that yields more 
product, cost savings, service, profits or other benefits than could be 
achieved by the individual operations themselves. This helps create a 
far more competitive company, able to serve customers more efficiently 
and at lower cost.
    Investment selectivity. Investment decisions are often challenging, 
but it is essential to develop a broad range of investment options and 
to rigorously test them against a wide range of scenarios, then move 
ahead decisively with commitments that make the most economic sense.
    Quality portfolio of exploration and production investment 
opportunities. In today's environment, it's essential to assemble 
project opportunities that offer the highest return at the lowest cost. 
There is simply no room or reason for maintaining marginal prospects.
    Cutting-edge technology. Technology has long played a key role in 
the energy business, which is one of the world's highest-tech 
industries. For example, developing an oil discovery in very deep 
water, at a cost that makes the project economic, has required major 
technological advances. In addition, today's environmentally sound 
fuels and high-performance lubricants have required major technical 
advances in refining.
    Talented people. For all the material resources a successful energy 
company requires, none of them matter without intelligent, well-
educated, highly motivated people of integrity to put them to work.
    In sum, the energy industry must today work vigorously to adapt to 
increasingly difficult conditions. A logical and positive part of that 
adaptation process is a phenomenon we have seen increasingly in recent 
years: the merger.
The Value of Mergers
    The driving imperative in succeeding in today's energy business is 
to manage those factors over which we have some control, as opposed to 
oil prices, which are set by the marketplace. There is much that can be 
done to manage costs and future capital programs. This is essential if 
a company is to be competitive, profitable and able to make the large 
investments needed to ensure future customer energy demand can be met. 
Mergers are an excellent way to enhance the ability to manage costs 
better and be a more efficient competitor. And in the case of combining 
two American companies, a merger creates an entity able to compete on a 
level playing field with the largest global firms in the industry.
    Mergers can lead to a new entity that can do a better job of 
supplying energy, and at a lower cost, than the two original companies 
could on their own. Combining redundant operations, for example, 
creates significant opportunities to achieve improved efficiencies--
efficiencies that result in lower costs and ultimately benefit the 
consumer.
    Moreover, where the merger parties have complementary operations, 
mergers enhance the important business advantages of functional and 
geographic diversity as well as financial strength--all of which are 
essential to succeeding in a highly volatile price environment.
    More broadly, the rationale for mergers encompasses both near-term 
and longer-term benefits.
    In the early years following a merger, cost savings can be expected 
from improved organizational efficiency, the high-grading of programs 
throughout the business, optimal use of raw materials and intermediate 
products, implementation of each company's most effective and efficient 
operating practices and optimizing procurement activities across the 
two companies' supply, refining and chemicals networks.
    Capturing these near-term advantages is important, but we believe 
the key driver in many oil industry mergers is the longer-term 
opportunity to improve capital productivity--to get the most out of 
invested dollars in an industry where time horizons can be quite long.
    More specifically, the merged company will be able to choose from 
an extensive portfolio of investment options in all parts of its 
business. It can also benefit from improved investment selectivity by 
realizing comparable or higher earnings contributions from lower annual 
capital expenditures than the two companies could have realized 
separately.
    In addition to these prospective investment opportunities, the 
combined company should also benefit from continued application of a 
systematic and disciplined asset management program.
The Exxon-Mobil Merger
    We believe the Exxon-Mobil merger will create synergies and 
efficiencies enabling the new company to provide high-quality products 
to consumers at more competitive prices. It will also allow us to 
provide shareholder value to the hundreds of thousands of people who 
invest in Exxon and Mobil directly and the many more who have an 
indirect stake in our performance through mutual funds and pension plan 
investments.
    It's important to note that both companies share a large number of 
common values.
    First and foremost, Exxon and Mobil share a common resolve to 
maintain the highest standards of safety, health and environmental 
care.
    Both companies also have a long-term commitment to creating 
shareholder value and to meeting the needs of our customers as 
efficiently as possible.
    Most important, we have the high-quality people necessary to get 
the job done right.
    In other words, the two companies line up very well with each other 
and make what we believe to be an excellent fit.
    As is not unusual in cases such as this, the Exxon-Mobil merger 
will have an impact on the combined worldwide staffing of both 
companies, currently about 123,000. At this point in time, we estimate 
a surplus of about 9,000 employees worldwide. Transition teams composed 
of representatives from both companies are carefully evaluating the 
staffing needs of the new organization.
    On the issue of jobs, we believe it's important to bear in mind 
that staffing reductions have occurred continually over the past two 
decades in the oil and gas industry and are likely to remain a part of 
the ongoing industry rationalization process, whether or not mergers 
occur.
    The merger will provide the new company with a more functionally 
and geographically diverse business portfolio, which is essential in a 
highly volatile industry environment. In many of the most promising 
areas around the world, our existing assets are very complementary. For 
example, Exxon's deepwater exploration position in West Africa will 
combine with Mobil's existing production in Nigeria and Equatorial 
Guinea. In the Caspian, Exxon's presence in Azerbaijan will combine 
with Mobil's presence in Kazakhstan and Turkmenistan. And Mobil's 
position in liquefied natural gas should complement Exxon's involvement 
in this high-growth clean fuel business, both in traditional pipeline 
sales and in gas-to-liquids technology.
    This proposed merger of two American companies, with headquarters 
in the United States, will allow the new entity to compete more 
efficiently with the foreign-based multinational oil companies and the 
very large state-owned oil companies that are rapidly expanding outside 
their home bases--both geographically and functionally. Unless we are 
able to compete on the same scale as these other recently merged 
companies, they may lock in a cost advantage that will not be passed on 
to consumers. The merged company's larger resources--financial, 
technological and human--will increase our ability to participate in 
more of the difficult and risky new opportunities in the global oil and 
chemical business. This broader resource base will help ensure that we 
are able to make the very large investments needed to meet the energy 
needs of our customers in the next century.
    Another key reason for the merger is the opportunity to increase 
the company's competitiveness through business synergies, or savings. 
Those synergy benefits come as a result of the merger and would not be 
available to either Exxon or Mobil individually. Put another way, this 
is a case of the whole being greater than the sum of the parts.
    Anticipated savings fall broadly under two categories--near-term 
synergies and capital productivity steps.
    We expect to achieve substantial annual synergies from a diverse 
set of initiatives ranging from organizational efficiencies to more 
efficient and profitable product manufacturing--what we call ``molecule 
management.'' They include expense reductions as well as revenue 
enhancements.
    The new company will also have a larger, more diverse asset base, 
which will provide opportunities to optimize capital productivity. It 
is the opportunity to improve capital productivity that drives the 
merger rationale longer-term--and ours is a very long-term business. 
Combined with expected cost savings, these synergies will help the 
combined company compete for the consumer's business even in a 
prolonged low-price environment. Only by operating as efficiently as 
possible will we be able to carry out the costly and complex projects 
and continue to develop and apply the cutting-edge technology needed to 
provide additional energy supplies in the next century.
    Past experience in both our organizations would suggest there is 
plenty of room in a merged Exxon and Mobil for an active asset 
management program, in discrete steps, over a period of years.
    Looking to the future, we expect to benefit from enhanced 
investment selectivity, which should allow the combined company to 
operate more efficiently than the two on a stand-alone basis.
    The merger will provide the combined companies with a more complete 
portfolio of petroleum and petrochemical operations around the world.
    It will significantly improve the new company's ability to compete 
with other shareholder-owned companies, as well as state oil companies, 
both of which are strong competitors.
    It will enhance the new organization's financial, technological and 
human resources, which will improve its ability to take on new 
challenges.
    These factors add up to running the business in a way that is 
significantly more cost-effective and makes the most productive use of 
the organization's capital. This is a plus for the company's 
shareholders, but it's also a major benefit to consumers because it 
gives the company the means to deliver its products to the public more 
efficiently and at lower cost.
    The merger will also mean that the Exxon Mobil company will be able 
to compete on the same scale as the largest foreign firms. The U. S. 
energy industry is one of America's most important strategic resources. 
In order to remain viable and to continue to meet society's needs, it 
must have the flexibility to adapt as times change and circumstances 
dictate.

    Mr. Barton. Thank you, Mr. Noto.
    The Chair is going to recognize himself for the first 5 
minutes of questions, and we will go in alternating order. And, 
obviously, we may need more than one round, so if members have 
numerous questions, you will be given at least two 
opportunities.
    So, the Chair recognizes himself for the first 5 minutes.
    My questions are going to be general to both of you, so 
which ever one of you wishes to take it, it is directed at 
both.
    When the Energy Information Agency was here yesterday, they 
put a little pie chart up that showed that in 1997, 52 percent 
of the world oil market was controlled by state-owned oil 
companies like Saudi Aramco and the Venezuelan company, Pemex, 
and the like. So when we look at Exxon-Mobil, obviously, if the 
merger goes through, it is the world's largest privately owned 
oil company, but you are only in the top five, in terms of oil 
companies worldwide.
    So, my first question is, how big does a company need to be 
in order to compete in the world market, given the economies of 
scale that you are not competing against other private 
companies as much as you are competing against state-owned, and 
in some cases, monopoly companies?
    Mr. Raymond. Well, I don't think there is an answer that 
you can give to that from the standpoint--I'll say it, from a 
top-down point of view.
    I think that the only way you can begin to answer that 
question is if you look at companies like ours--and Lou can 
speak for Mobil--all we can do is look at the position we have 
relative to our competitors. And in the case you are talking 
about now is in the upstream business, because these companies 
are largely in the upstream, although in some cases, they are 
in the downstream, too. But they are in the exploration and 
production business.
    And the question is, as we look at the kinds of 
opportunities we have and the kind of risk management we think 
we need to undertake, in order to continue to have a strong and 
viable company, that is the only measure we can use. And the 
conclusion we have come to is that by putting Mobil and Exxon 
together, that, particularly in the upstream, we will have a 
portfolio of upstream activities around the world which will 
diversify our asset base to the point where we think we can be 
a more effective competitor than we are now.
    That doesn't answer your question, ``Are we absolutely able 
to compete on an absolute basis?'' But we know that if we do 
this, we will be much more effective than we would be if we do 
not do it.
    Mr. Barton. Well, here is my concern. We have an obligation 
to provide an open marketplace for the American public--we, the 
Congress, and the executive branch. You have got an obligation 
to provide the highest rate of return possible to your 
shareholders and to provide products that are quality and 
competitively priced in whatever markets you participate in, 
which are not just in the United States, but overseas.
    But if you look at the domestic--as you put it--downstream 
market, the market that most impacts the average Americans, is 
the gasoline market, and you go to the gas station to get gas. 
And most people know Citgo. Citgo is owned by Venezuela.
    Mr. Raymond. That is correct.
    Mr. Barton. It is a state-owned oil company, competing at 
the retail level in the United States. Saudi Arabia has a 
Aamco; they have a 32.5 percent stake in a company called 
Motiv, which is a joint venture between Texaco and Shell, and 
they have 14,000 gas stations in the United States.
    So, I think the Congress has an obligation, not only to 
look and insist that there is competition in the marketplace, 
but that it is of such a nature that it is the classic so-
called ``private'' competition. If we get to where the only gas 
stations on the corners in our neighborhoods are owned by 
state-owned oil companies overseas, I don't think they 
necessarily have the best interest of the American consumer at 
heart.
    So, that is what I am trying to get to, is, you know, when 
you look at this merger at first glance, you think, ``My, God, 
why does Exxon and Mobil need to be merged? They are among the 
largest privately owned oil companies in the world.''--or at 
least Exxon is. But then when you look at all the charts, and 
you get all the information, you are not competing against Arco 
and some of the retail providers like Phillips 66. You are 
competing against state-owned oil companies, including the 
Iraqi oil company.
    Mr. Raymond. You are right, Mr. Chairman, and that is 
particularly true in the upstream part of the business, which 
the average consumer in this country isn't aware of and I am 
not being critical, I am just saying they aren't aware of what 
goes on in the exploration and production side of the business.
    Now in the downstream, you are right, in terms of Petroleos 
de Venezuela and Saudi Aramco. But I guess I would point out 
that in the downstream business in the country, 45 percent of 
the gasoline that is sold at the retail level--gas at what you 
and I would call ``service stations''--are not owned by major 
oil companies. They are owned by independent retailers, 
independent marketers. And even Exxon and Mobil, when it is put 
together, will only have 12 percent of the U.S. retail gasoline 
market. Now that is a lot of gasoline; I'm not saying that is 
not true. But when you look at it, in terms of concentration, 
there are very few industries in this country as broadly based, 
that touch as many people every day as our industry does, but 
at the same time, has as many players in it as our industry 
does. The contrary is the case--the automobile industry, for 
example. You can just name almost any other industry, and they 
are very few players. Ours is unusual in that it has very many 
big companies as well as independent retailers.
    Mr. Barton. My time has expired.
    The Chair recognizes the distinguished ranking member, Mr. 
Hall, for 5 minutes.
    Mr. Hall. Mr. Chairman, I thank you.
    I guess my first question would be directed to Mr. Noto 
whether or not--what would have happened to Mobil if this 
merger hadn't come around, and whether or not you could have 
gone it alone and still be the company that we know today and 
we respect today? Just what are the facts surrounding that?
    Mr. Noto. Sir, I am reasonably satisfied that we could have 
existed--continue to exist on our own. I think we could have 
survived. I think we have the skill base, the history, the 
reach. But my issue is, is that the best alternative for my 
shareholders, and really also for my customers? Because, 
ultimately, if it is not a good deal for my customers, it is 
not a good deal for anybody.
    We looked at a lot of alternatives. There have been a lot 
of changes in this industry. Lee touched on the arrival of new 
foreign competitors, these combinations in the U.S. 
downstream--Texaco and Shell, very formidable combination, 
probably has 14 to 15 percent of the U.S. gasoline market--the 
biggest of any marketer, and certainly would still be bigger 
than the combination of Mobil-Exxon. They have taken a lot of 
costs out of their business. For me to be competitive, I had to 
do something. Status quo just didn't work.
    We looked at a lot of alternatives, both inside the company 
and with outside help. We looked at buying some; we looked at 
making some acquisitions. We looked at merger of equals, if you 
will--two similarly sized companies. At the end of the day, we 
concluded, based on everything we knew, the combination of 
Exxon and Mobil could create the kind of company that could be 
top quartile.
    Our business is a great business. As long as you are either 
No. 1 or No. 2 in everything you do, you can make a living. If 
you are not, you are in trouble. There are a lot of companies 
in our business not making it and won't be able to satisfy 
their shareholders' aspirations.
    Mr. Barton. Second place in election, you don't make it a 
living. So----
    Mr. Noto. So, we concluded that this was, even though we 
could survive on our own, we concluded that this was a better 
alternative, notwithstanding the fact that it meant quite a bit 
of change. It meant a change for me personally, and it meant a 
change for a company that had survived for 130 years as a 
independent entity.
    Mr. Hall. What regulatory body will give you the most 
scrutiny? And what is the, I guess, the program for that? And, 
time-wise, what kind of time are we talking about?
    Mr. Noto. Sir, we have a number of things happening 
simultaneously. We have filed a preliminary proxy statement 
with the SEC, and we have gotten some comments back, and we are 
working with the Commission. And we hope to be able to issue a 
final proxy to our shareholders in time for a shareholders' 
action at the end of May.
    We are working with the FTC, who has jurisdiction over this 
proposed merger. They have made certain requests for 
information, and our people are meeting with them. We are 
trying to cooperate with them.
    And outside the United States, the principal area of 
activity will be in Europe with the Director General of 
Competition, the so-called ``DG IV,'' in the Economic Union in 
Brussels, and we have also started that process.
    Mr. Hall. I yield back my time, Mr. Chairman.
    Mr. Barton. It is rare for a Member of Congress to yield 
back anything, so we appreciate that.
    Mr. Hall. I don't have any problem with the merger. I don't 
want to ask too many, and I don't know how to lobby him an easy 
one to knock out of the park, so----
    Mr. Barton. The Chair would recognize the vice chairman of 
the subcommittee, Congressman Stearns of Florida, for 5 
minutes.
    Mr. Stearns. I thank my chairman.
    It is not often that you get an opportunity to ask 
questions of two high-ranking CEO's like this, so I am going to 
take a little bit a different approach here.
    The question is, is big always better? And in this case, 
you think it is. But when you look at the landscape in your 
competition, particularly dealing with Texaco and Chevron, our 
staff points out that both Chevron and Texaco outperform Exxon 
in both production costs and net income as a percentage of 
revenue, and yet, Exxon still dwarfs Chevron and Texaco if you 
combine them.
    So the question, ``is big always better?''--it would appear 
from these facts that both of these companies outperform Exxon 
in these areas, so why do we need to merge?
    Mr. Raymond. Well, I don't know the data you are looking 
at, but just let me comment that the standard which is 
universal in the industry is not percent of revenues, because 
percent of revenues in our business isn't a particularly useful 
piece of information. The standard that is used universally to 
judge the performance of companies is return on capital 
employed. And Exxon, for the last I will say 30 years that I 
know of, has always led the industry in return on capital 
employed. That is, we have made the most effective use of our 
capital as we have deployed it around the world and in our 
various businesses. And I, without fear of contradiction, I can 
tell you that in 1998, Exxon clearly led the industry in return 
on capital employed.
    Mr. Stearns. You don't dispute, then, that perhaps the 
facts that there are production costs and net income as a 
percentage of revenue?
    Mr. Raymond. I would be amazed because our production costs 
are interesting, but the relevant issue is production profits. 
And the per barrel production profits that Exxon has had, have 
always led the industry. And I would dare say, without even 
looking at it, I would be amazed if our profit per barrel did 
not exceed that of Chevron and Texaco by at least $1 a barrel.
    Mr. Stearns. Okay.
    Let me move to a real local level. You have a gas station 
on the corner. It is a Mobil station, and then you have a gas 
station right next to it that is an Exxon station. Now what is 
going to happen when you merge? You are going to have to divest 
yourself of some of these probably. And can you assure the gas 
owners, the people that are your franchisees that they are 
going to be protected as this moves--because you own the 
properties perhaps in many cases, in some cases? Explain to us, 
and what kind of assurances service station owners will have, 
that if they have a Mobil and an Exxon right next to each 
other, what you are going to do.
    Mr. Raymond. Well--and Lou, you might add to this. First of 
all, the question of what happens where there is--I will call 
it both Exxon and Mobil service stations--is the issue that is 
really before the FTC. And in that sense, I can't answer that 
question.
    They are looking at the data; they are looking at the 
information, and they will draw some conclusions, one way or 
another, of what needs to be done--if anything--for them to 
approve the merger.
    Mr. Stearns. Mr. Raymond, if we take a record, the FTC, 
with the BP-Amoco, required the company to divest of 134 gas 
stations and to allow branded resellers supplying over 1,600 
gas stations to cancel existing supply contracts without 
penalty.
    So we have a history here that this has occurred before. So 
we know that the FTC is probably going to force you to do the 
same. And so, again, going back to the service station people, 
you know----
    Mr. Raymond. Not to be argumentative, but I am not going to 
conclude that, because it turned out in the BP-Amoco, that was 
the first time that the FTC had ever taken a position like that 
with regard to retail service stations. So I think it is an 
issue to be discussed with the FTC, and I am not going to 
prejudge----
    Mr. Stearns. Oh, I know.
    Mr. Raymond. [continuing] a conclusion one way or another.
    Mr. Stearns. I understand. But wouldn't you agree that FTC 
is probably going to rule something similar to that, which 
would affect not only the gas stations, but the refineries 
also?
    Mr. Raymond. I would hope not.
    Mr. Stearns. Okay.
    Okay, thank you, Mr. Chairman.
    Mr. Raymond. But they are protected by PMPA, the Petroleum 
Marketing Practices Act.
    Mr. Noto. Could I just add two things?
    Mr. Raymond. Could you add to that one?
    Mr. Noto. First of all, on the second question--you need to 
remember that the dealers are an integral part of our business. 
We operate only about 8 or 9 percent of our service stations; 
the rest are dealer-operated stations. Sometimes they are 
dealer-owned, and sometimes they are dealer-leased from the 
company. They are an integral part of our business. We spend a 
lot of time and effort working together to try to get the best 
outcome for both of us.
    So, start with the principle that we are going to behave in 
a responsible manner, because if we don't behave in a 
responsible manner, it is going to cost us.
    Let me go back to your first question, ``Is big, better?'' 
We never put this together because we wanted to be the biggest 
in anything. We want to be the most efficient. Sometimes that 
means you are going to be the biggest. We are going to be more 
efficient in the U.S. downstream, but we are not going to be 
the biggest in the U.S. downstream. We are not concerned about 
that.
    But we want the opportunity to get the efficiencies, both 
short-term cost efficiencies because we have overlapping 
operations, and long-term capital efficiencies because we can 
run our business better.
    One day in--I think it was in October or November--the New 
York Times ran two stories on the front page--one about 
problems in Nigeria and one about problems in Indonesia. Those 
are two important core assets for me. I am a big company; those 
two represent a big piece of my business. My shareholders lost 
something in the order of $8 billion in capitalization that 
week because I do not have the kind of spread among different 
kinds of projects that I think is going to be necessary to 
manage the business successfully for the shareholder in the 
future and also to satisfy the requirements that the market is 
going to want. They want more energy.
    I can't do everything I want. I would like to be able to be 
there. I would like to be able to be here. I would like to be 
able to be here and be big everyplace, because those are big 
projects. I can't do it. This price problem that we have today 
is exacerbating my issues. I just don't have the cash-flow to 
allow me to support a budget which gives the U.S. public 
confidence that we can have a wide variety of diverse energy 
sources like this, even though we import 50 or 60 percent of 
our energy, it is relatively secure, and at the same time, give 
my shareholders the kind of return they need.
    So, bigness is not bad. It gives you spread; it lets you 
manage risk. But we didn't do this just to be No. 1 on some 
Fortune chart. We did this because we think it would be a more 
profitable company than anybody else.
    Mr. Barton. We are going to have a second round for this 
witness panel, so we want to resume regular order.
    Mr. Sawyer, of Ohio, is recognized for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Thank you, gentlemen, for your presence here today.
    I mentioned in opening statement yesterday that I live in 
Akron, Ohio, and represent that community, a community that has 
been known for a signature tire industry for most of this 
century. It is an industry where, from the time that I was a 
kid, there were between 30 and 40 tire companies in Akron, 
alone. They rapidly began to coalesce into smaller numbers of 
companies and to the point where, today, we have some four 
global giants in that industry. The mergers and acquisitions 
and alliances that were put together were viewed as needed to 
survive changing times and the competition for capital and 
rapidly changing product and production technologies.
    To what degree is that kind of analogy similar to the kinds 
of forces that you have been facing in your businesses and are 
likely to confront other large businesses that play on a 
transnational and global scale?
    Mr. Raymond. Well, I think my reaction to that would be 
that while every business or every industry probably has its 
own unique characteristics, I think there are a few that are 
relatively similar.
    I have often said that our industry is the largest high-
tech commodity business in the world. For example, in 
exploration and production, some of the activities that we 
undertake, in terms of seismic technology--the offshore 
platforms we build are space-age type technologies--the facts 
are most people never see them because they are hundreds of 
miles offshore and there is no way to get there, and we, 
obviously, aren't in the tourism business and we are not about 
to take people out there.
    But the facts are, in order to have that kind of 
technology, you have to have a very large enterprise to support 
it. To have leading-edge technology, it costs you a lot of 
money. You have to a have a large base over which to allocate 
the costs. The more and more we see the pressures on technology 
which are critical to our industry and the development of that 
industry, the more and more pressure you are going to see for 
companies to have to have the scale to support it. And the 
people who don't have the technology, almost by definition as 
time goes on, get farther and farther behind.
    I suspect there are many industries like that. The tire 
industry was one. We know that because we supply a lot butyl to 
the tire industry.
    Mr. Sawyer. You are a feedstock supplier to----
    Mr. Raymond. We are feedstock suppliers; we watch that very 
carefully. But the point is, that big isn't necessarily bad in 
the sense to be able to do the kinds of things you need to do 
on a world-scale basis and have the technology, you need to 
have that scale. You need to have the kind of financial 
resources that come from putting companies like ours together.
    And, ultimately, everybody benefits from that because 
there, then, is available a broader array of supply sources to 
the United States--for example, to import crude oil or whatever 
else you want to do.
    The facts are this country is a major importer of crude 
oil, and it is going to continue to become a larger and larger 
importer of crude oil. And the only real way you have of being 
able to protect that is have a wide array of sources. What you 
can't stand to be is an importer and have only a single source. 
And we found that out in the early 1970's.
    Mr. Sawyer. Yes.
    Mr. Raymond. And it is the ability of companies like ours 
to have that portfolio that really builds the kind of resources 
that you need to have so you do have some security of supply.
    Lou, do you want to add to that?
    Mr. Noto. Yes. It would probably be nice to be able to go 
back to a world where you could support 40 family tire 
companies. And if you had not allowed those 40 to become 4, you 
might have 0 today, because Bridgestone, because Pirelli, 
because Michelin are as competitive with your Akron companies 
as they are with one another. So you may not like it, but at 
the end of the day, you have more competition because you have 
4, and the consumer has more choice because you have 4 than 
conceivably he could have had if you had blocked those 40 from 
becoming 4.
    Mr. Sawyer. Well, I am not suggesting that at all. I am 
suggesting that the decisions that we are seeing here today are 
not unique to your business----
    Mr. Noto. I don't disagree.
    Mr. Sawyer. [continuing] and that they are driven by 
similar global forces over which you have little control but to 
which you can respond in the interest of survival--and not just 
survival, but thriving--in a rapidly changing environment.
    Mr. Noto. What is interesting about our business is that 
while we are facing that kind of international competition, we 
are also facing a brand-new innovative type of marketer--
Costco's hypermarkets, perhaps Wal-Marts, in the future--that 
sell our main product at rock-bottom prices in order to attract 
customers to go inside their markets where they can buy higher 
margin products from them.
    So this is a diverse, very competitive, very, very 
interesting marketplace that this business operates in.
    Mr. Sawyer. Mr. Chairman, I appreciate your flexibility, 
and thank you for your insights.
    Mr. Barton. The gentleman's time is expired.
    I would just make the point, before I recognize Mr. Bryant, 
there is a grocery store chain in Texas called HEB, H.E. Butt, 
and it is Tyler, Texas. I can buy gasoline at their pump for 
75.9. I guess a gallon of gasoline is 64 fluid ounces, I am not 
sure. But then I go in the store, I can buy Coke for 79 cents.
    Mr. Raymond. You have got it.
    Mr. Barton. So I am paying--if I had to pay the same for 
the Coke that I paid for the gasoline, I would be paying about 
$5 for the Coke, or visa versa.
    Mr. Raymond. Mr. Chairman, there is no liquid in a grocery 
store that is as cheap as gasoline.
    Mr. Barton. So, the point about your competitive situation 
is well taken.
    Mr. Sawyer. Mr. Chairman, my guess is the same thing 
applies to spring water that you can get in there. I just urge 
you not to carbonate your gasoline--the prices of----
    Mr. Barton. The gentleman from Tennessee, Mr. Bryant, is 
recognized for 5 minutes.
    Mr. Bryant. Thank you, Mr. Chairman.
    And let me just follow my colleague's question with, I 
guess, a direct question--and probably you have answered it 
generally, but you can comment further if you would like to.
    Some observations have been made--not in here, but outside 
here--that, as with other industries high fixed costs and low 
marginal costs, 5 to 10 giant, vertically integrated oil 
companies will emerge globally which will serve most markets, 
with many niche players filling gaps or providing the unique 
services. Do you share that observation?
    Mr. Raymond. In general, I would share that observation; 
yes. I think the pressure of competition all around the world--
I don't think the points that we are seeing that we judge to be 
important for Exxon and Mobil are any different than anybody 
else. We are a very highly capital-intensive industry, very 
long-term capital investment. We make 20- and 30-year decisions 
which means that, in order to assure that over time you have 
the kind of economic performance that you need to have for your 
shareholders, that you are going to be forced into assuring 
that you are among the most efficient in everything you do. A 
certain element of that is capital; a certain element is 
technology, and a certain element is size.
    Mr. Noto. I do think though, Congressman, that the 
``vertical'' integration is a buzzword. I think people worry 
that that means reduced competition. It means some dominance. 
And very frankly, our business--you could divide our business 
into three separate businesses: the upstream, the refining, and 
the marketing. We have different competitors at each level. 
There is a very clear, transparent price interface between each 
of those functions. People are in the upstream business but are 
not in the refining business; people are in the marketing 
business but not in the other two segments.
    But I think vertical integration has really been changed 
dramatically. We make an investment in the upstream because we 
think it makes money. We don't build a refinery just because we 
found an oil field. And so the old concern--I would say 
bugaboo--about the control of molecules from well head to 
customers' tanks, I think really is an issue that has passed 
us.
    Mr. Bryant. Okay. Let me ask you another question along 
that line. Exxon has power generation assets overseas, and 
Exxon-Mobil will become the second-largest gas producer in the 
world, behind Russia's Gasprom. Moreover, the combined company 
will have the largest natural gas reserves in the United States 
and become the largest producer among the majors. Do these 
facts spell out a recipe for a future with Exxon-Mobil 
operating as an integrated energy company, and not just as an 
oil and gas company?
    Mr. Raymond. Well, in that sense, Exxon has been an 
``integrated''--I use that word carefully--an ``integrated'' 
oil and gas company for 100 years. We have been a producer of 
crude oil in this country and around the world. We have had 
refining and marketing assets in 120 countries around the 
world. If you mean ``integration'' in the sense that the 
management is involved in all phases of the business, the 
answer to that is, ``yes.'' If you mean or imply that because 
we produce crude oil, for example, in Malaysia, that that would 
impact our decision as to how large our marketing activity 
should be in Japan, those are totally one unrelated to the 
other. They are separate decisions.
    It probably would surprise people to know, for example, 
that we sell today about 5.5 million barrels a day of petroleum 
products, but we only produce 1.5 barrels a day of crude oil. 
The rest we buy--and we generally buy from Saudi Aramco; we buy 
from the National Iranian Oil Company; we buy from Petroleos de 
Venezuela. So in that sense, we are not integrated today, but 
we are integrated in the sense that the management is involved 
in all activities of the business.
    And I would expect that we would continue to be involved in 
all aspects of the business. But I would emphasize that each 
decision is made on its own bottom. It has to be economic on 
its own. And we don't take credits from some other place and 
say that means we should do something else.
    Mr. Bryant. Thank you, Mr. Chairman.
    Mr. Barton. Okay.
    The gentleman from Massachusetts, Mr. Markey, is recognized 
for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Welcome, gentlemen.
    Twenty years ago, companies like Exxon and Mobil 
represented big oil before this committee. They were the big 
fish in the small pond of global oil companies. Today, Exxon 
and Mobil are small fish in a big pond of giant, state-owned 
oil companies across the planet, but they remain very big fish 
in the small pond of regional or local oil and gas markets in 
cities and towns across the United States.
    So, as a liberal Democrat from Massachusetts, I do not 
oppose the merger of Exxon and Mobil. But, I believe the FTC 
has a responsibility to make sure that in individual markets 
and cities and towns across the United States--where state-
owned foreign oil companies do not dominate, but Exxon and 
Mobil do dominate--that your companies, as they merge, are not 
put in a position in individual cities and towns to 
artificially increase the price of oil and gas to consumers in 
those communities.
    And I think that is the basis for this entire discussion 
and debate here today. So I have a couple of questions which I 
would like to pose.
    In a December 4, 1998, article in the Wall Street Journal, 
there was a report that Mobil has 511 branded stations in 
Massachusetts, while Exxon has a much smaller presence in 
Massachusetts. According to that article, this is in part 
because Exxon is known to charge dealers much higher rents. The 
article reports that a Mobil station, for instance, might carry 
a $4,000 to $5,000 a month rent, while an Exxon station pumping 
the same amount of fuel might pay monthly rent of $10,000 to 
$12,000.
    Mr. Reidy's testimony--that is the Service Station Dealers 
of America that are in the second panel--raises similar 
concerns about the prospect for the merger to result in higher 
rents for many independent dealers. What assurances can you 
provide us here today that, if the transaction is approved, 
that you will not increase the rents charged to your 
independent dealers, and as a result, the price of gasoline for 
our consumers in those communities?
    Do you want to comment?
    Mr. Noto. It is difficult for me to be able to make a 
sensible comparison between those numbers. I am not doubting 
them, but there is a whole package of issues involved--the size 
of the facility, when the facility was built, the cost 
associated with it, whether there is a market in it that 
generates additional revenue for the dealers. It is very hard 
for me, and I apologize; I can't really comment directly on 
your point, and I don't really know what Exxon's policies are, 
frankly. I mean we are still competitors in Massachusetts, 
until we can merge.
    So I would suggest to you that it may be a more complex 
issue than it appears on the surface, and that I will ask my 
people to try to educate me on this and----
    Mr. Bryant. But if it is not more complex? If all it is, is 
twice the rent----
    Mr. Raymond. But it is not.
    Mr. Bryant [continuing] what do we do then?
    Mr. Noto. Frankly, I think the market is so competitive 
that it would be very difficult for it to be simply that, 
because I think Exxon, at the end of the day, wouldn't have any 
dealer stations in Massachusetts.
    Mr. Raymond. If I could make a couple of comments. First of 
all, as you properly point out, the forum for this issue is the 
FTC, and that is exactly what they are doing, and that is what 
they should do. And as I have said to them and to the head of 
the FTC--and I will say here today--I don't doubt their role. 
We are going to work with them, in terms of how they implement 
what they judge to be the right things that should take place 
in order for this merger to be approved. How that will affect a 
specific market in Massachusetts, at this point, I don't know.
    Mr. Markey. Okay. Well, let me ask another question.
    Mr. Raymond. I don't have any idea. But the next point I 
would make, with regard to rents, is you can't look at rents in 
isolation. You have to look at all kinds of others things for 
the economics of the total unit. The rent--if you take out the 
rent, then I have to ask you, ``Well, what other goods and 
services do you apply? How many tanks are at the service 
station?''
    Mr. Markey. Again, I appreciate----
    Mr. Raymond. All of them.
    Mr. Markey. [continuing] all of what you are saying, but 
the disparity is so great that I just want to make sure that we 
don't wind up with everything going up to the higher number----
    Mr. Raymond. Sure.
    Mr. Markey. [continuing] even for the old stations that 
presently have this very low rent. That is all I am saying. So 
whatever economies of scale exists in the old stations today, 
it seems to me, should still hold----
    Mr. Barton. The gentleman's time has expired.
    Mr. Markey. [continuing] in the future.
    Mr. Barton. But I think you had one more question.
    Mr. Markey. I do, and if you don't mind.
    Mr. Barton. And if you could ask that one and then----
    Mr. Markey. Another concern which Mr. Reidy raises--I thank 
you, Mr. Chairman--in his testimony is what he refers to as the 
refiner policy of ``zone'' or ``pad'' pricing.
    He warns that the merger of your two companies will only 
exacerbate the oligopolistic tendency toward zone pricing 
throughout many geographical markets which could result in 
higher prices for consumers, particularly in urban markets.
    How do you respond to that criticism? Does zone or pad 
pricing really amount to price fixing, in your opinion?
    Mr. Raymond. The answer to that is, ``No.'' And to the 
extent that you would have what I would call an ``extreme 
concentration.'' Let's take a case where Mobil and Exxon, 
together, had half of the service stations. Then, that is where 
the FTC shows up. If, in fact, we are much smaller and have 10 
percent of the service stations and there are many competitors, 
then this will not be an issue.
    So I think it really comes back to the same point we were 
on before, and that is the FTC looking at the concentrations 
and the competitive landscaping each one of these locations.
    Mr. Markey. Mr. Chairman, I thank you.
    Mr. Barton. Thank you, and I, with you, will work on the 
pronunciation of ``oligopoly.'' It is hard.
    Mr. Markey. ``Oligopolistic'' is definitely----
    Mr. Barton. You did well.
    Mr. Markey. Well, let's hope it is word we don't have to 
know in the future.
    Mr. Barton. That's true. We don't want monopoly, and we 
don't like oligopoly.
    Mr. Markey. Maybe the times have changed so much in the 
last 28 years, it has become chaotic in its usage.
    Mr. Barton. Mr. Pickering is recognized for 5 minutes.
    Mr. Pickering. Thank you, Mr. Chairman. It is always good 
to follow a liberal Democrat from Massachusetts, as a 
conservative Republican from Mississippi. But who shares in 
agreement of support of this merger.
    And also I would have to admit that the two questions you 
focused on were the two questions that I wanted to focus on as 
well.
    And, Mr. Chairman, I commend you for focusing on the merger 
and the effect on competition, as well our competitiveness. And 
I wanted to follow up on some of the questions that have been 
asked as to how this really relates back to the service station 
dealers. Some are concerned that if Exxon and Mobil are ordered 
to divest themselves of service stations, they will choose to 
assign leases as a block to a third-party distributor.
    Do you anticipate such an outcome? And will you offer 
station owners the right to buy their stations prior to 
offering to assign it to a third party?
    Mr. Raymond. Well, in a sense, we are getting ahead of 
ourselves because I think this, again, is an area where the FTC 
gets involved, in the sense that, if we are required to divest 
of some service stations, they also get involved, not only in 
that you have to sell them, but who you sell them to and how 
you sell them.
    And while I might have some views on if you had to do it, 
what would be the best way to do it, I think we are probably 
getting a little bit ahead of the, you know, the cart ahead of 
the horse here. But let me just make the comment; it would not 
be our intention--and I think I can speak for Lou from Mobil--
it would not be our intention to ever use anything that the FTC 
required us to do to put a dealer at a disadvantage, that we 
would take the step to put him at a disadvantage. If the FTC 
requires something be done in a way that the dealer interprets 
it as a disadvantage, I can't deal with that. But we would not 
use it as a basis to try and put somebody at a disadvantage.
    Mr. Pickering. Do you have anything to add? And I 
understand the sensitivity as you go through with the FTC 
process. I do hope that we can address that concern adequately 
at the appropriate time.
    My second question is more of a macro question as far as--
and Mobil and Exxon both have had tremendous expertise and 
capability in projecting supply and demand and production. If 
one of the outcomes of this is that you have a more efficient 
production-exploration capacity in the capital that you can 
bring to bear on that, how does that play into supply and 
demand and price? And what are your projections for the next 
year to 2 years in relation to supply and price?
    Mr. Raymond. Yes.
    The only thing I can tell you about the price for the next 
2 years is we don't have a clue--which, of course, is one of 
the reasons we are here, because we have to work on the things 
that we can control, which is our costs. But when I say, ``we 
don't have a clue,'' I don't mean that to try and be humorous.
    The facts are that if you look at the fundamentals of 
supply and demand, left totally unfettered--and, clearly, we 
are in an environment where the supply is in excess--but as you 
can tell by just reading the newspapers in the last couple of 
days, there are a lot of other issues that get involved in the 
balance of what supplies are actually available to the market. 
And I wouldn't begin to be able to think that I could forecast 
how various governments and various state oil companies will 
respond, given the kind of price environment that we have just 
been in.
    Mr. Pickering. Let me ask just a quick followup question, 
Mr. Chairman. I hope my time has not extended too far.
    Mr. Barton. You still got a green light.
    Mr. Pickering. Well, how do you forecast--or can you 
forecast--how the merger may affect domestic production? Are 
your plans for domestic production exploration any relation to 
what we are seeing in the oil and gas industry right now, as 
far as independent production?
    Mr. Raymond. Well, I think it would be fair to say that at 
least Exxon--and I think Lou should answer for Mobil, because 
this is kind of a competitive issue at this point--that the 
recent low prices will not have a significant, immediate impact 
on how much Exxon produces in this country. There is some 
volume at the margin, but it is not large. But if these prices 
were to persist for a significant length of time, then you 
would begin to revise your investment programs, and that could 
have a significant impact as we go down the road.
    I would not expect that it will have a major impact once we 
put the two companies together, in the sense that--my sense is 
that the projects that both of us have under consideration are 
probably reasonably robust to most price environments.
    Mr. Noto. I would add two quick points, if I could, Mr. 
Chairman.
    No. 1, we have seen a reduction in our U.S. production as a 
result of this price environment. We have cut back some 
discretionary spending which has resulted in lower than 
anticipated production levels. There is no question but that 
this price environment has hurt us.
    No. 2, I don't think that independent producers in the 
United States should fear that the proposed combination of 
Exxon and Mobil, somehow, is going to adversely affect their 
price deck as we go forward in the future. I mean if you look 
at the two of us, we account for roughly 4 percent of the 
world's hydrocarbon production--in the United States, probably 
around 7-8 percent.
    Anything we would do to bring to bear the efficiency that 
we anticipate would not have a significant impact on the 
world's balances. Remember, every day, 75 million barrels of 
oil is traded, more or less, around the world. So, I would not 
expect any kind of a negative impact on independent producers 
as a result of what we are talking about today.
    Mr. Pickering. Thank you very much.
    Mr. Barton. Thank you, Mr. Pickering.
    The Chair recognizes the gentlelady from Missouri, Ms. 
McCarthy, for 5 minutes.
    Ms. McCarthy. Thank you very much, Mr. Chairman.
    Gentlemen, I am glad we are having this continued hearing 
to talk about the future and, particularly for your industry, I 
have some concerns--as I know other members of this 
subcommittee do--with regard to the kind of future your 
industry and your companies will be unfolding for us.
    Sub-large oil companies are responding to calls for 
voluntary action to reduce emissions of greenhouse gases. 
British Petroleum comes to mind immediately to me because they 
are investing in solar energy and participating in efforts to 
provide credit for early action to reduce carbon emissions.
    We are in competition with other countries on developing 
the technologies--the new cars of the future, as Japan has 
already done and is marketing--that will help us toward this 
goal of a cleaner and better air quality.
    I wonder if you would share with us some of the actions 
that you are taking, with regard to diversifying us out of our 
dependence on fossil fuels and helping us, as a Nation, to 
compete globally with the technologies and the new autos that 
we will deal with in our own country and abroad, so that what 
we are turning this opportunity into is a win-win for the 
country, that we can be on the cutting-edge of those new 
developments. And I would like to know what you are doing 
toward that goal.
    Mr. Noto. Want me to start?
    Mr. Raymond. Yes, go ahead.
    Mr. Noto. Ms. McCarthy, let me start with that.
    No. 1, I think you have to live with the proposition that 
the world will depend on fossil fuels for the immediate future 
to fuel the kind of economic growth that we are going to see.
    Ms. McCarthy. That is not in question here today----
    Mr. Noto. Good.
    Ms. McCarthy. [continuing] or in doubt.
    Mr. Noto. Good.
    Ms. McCarthy. My question is----
    Mr. Noto. But the real issue is, how do we use----
    Ms. McCarthy. My question is----
    Mr. Noto. [continuing] the fossil fuel more efficiently?
    Ms. McCarthy. Yes?
    Mr. Noto. Okay. And that, I can assure you, the industry is 
working on very, very diligently. I can talk about Mobil's 
activities in this area, and I will let Lee comment on Exxon's 
activities.
    Ms. McCarthy. Well, and would you talk about your 
commitment to that in the future after your merger?
    Mr. Noto. Well, as vice chairman of the proposed company, I 
have no reason to believe that both of us will have a different 
view, with respect to our commitment to this issue.
    We do not dismiss the risk of global warming. That doesn't 
mean we support the Kyoto Agreement, but we do not dismiss the 
risk. Each of the companies--and many companies in the 
industry--are taking steps to reduce emissions from their own 
facilities, but the bulk of the emissions associated with our 
business comes from our customers' use of our products and, 
therefore, we are committed to making sure our customers use 
our products more efficiently.
    In Mobil's case, we have a number of research activities 
going on right now. One I would mention is with Ford, where we 
are working on a hydrocarbon feed to a fuel cell which should 
be able to increase well to wheel efficiency dramatically.
    We are working with Ford on an advanced diesel engine 
program, which also has promise of being able to increase the 
well to wheel--when I say ``well to wheel,'' I think if you 
just look at any part of this chain, you could fool yourself 
into saying, ``Gee, electric cars look great.'' But somebody 
has got to generate the electricity to charge the batteries, 
and somebody has got to make the batteries, and somebody has 
got to get rid of the batteries when they are no good anymore. 
So, you have got to look at the whole process.
    I am convinced that hydrocarbons will continue to play an 
important and vital role in the future. If you look at a new 
car in the United States running on new fuel and compare it to 
a 10-year-old car running 10-year-old fuel, the new car is more 
than 90 percent more efficient and cleaner. I think that is a 
great step in the right direction.
    If you look at where the emissions in the United States are 
coming from, the bulk of the emissions come from 25 to 30 
percent of the cars on the road which are old, which are pre-
catalytic cars. There is a lot of social issues around that 
question. A lot of people have thought about buying back old 
cars; a lot of people have thought about a lot of things, but 
the fact is that new cars and new fuel are doing the job they 
are intended to.
    And I am very optimistic that over the next 10 years, we 
will continue to see significant efficiency gains. We will use 
hydrocarbons; solar and electric cars will not supplant the use 
of fundamental hydrocarbons for transportation. And our job is 
to satisfy the customer, that we are doing it as efficiently as 
we can, and they can get more ``bang for the buck'' when they 
buy our stuff.
    Mr. Raymond. I think, if I could--and perhaps I am 
misreading where you are coming from, and if I am, please, 
correct me--but the old canard that oil companies are against 
the efficient use of energy is wrong. I have always been for 
the efficient use of energy, whether it is in how our 
refineries operate, how our chemical plants operate, how our 
customers use the fuel. This notion that somehow people have 
that all we are interested in doing is selling more volume, if 
that was ever true, that is an historical perspective. That is 
not the perspective of today.
    For those who talk about solar, I would have to remind you 
that back in the late 1970's and the early 1980's, Exxon, in 
today's dollars, probably spent $300 million in the solar 
business. We were the first major oil company to spend money in 
solar energy and in fundamental research in solar--the same in 
batteries. So we have been there.
    When I say that, how it fits into the future and whether it 
is economic in the future, is another set of issues. Because, 
fundamentally, what we want to make sure is that there is 
available to the economies of the world, the most efficient, 
lowest cost sources of energy there can be, because, after all, 
that is what really fuels the economic growth and economic 
activity in the world. And if you don't have economic growth--
well, if we have economic growth, we may be able to deal with 
some of our social issues. If we don't, we are going to have a 
set of issues that are going to overwhelm all of us.
    Mr. Barton. The gentlelady's time, unfortunately, has 
expired.
    The witnesses, at the beginning, were a little tense, and 
they were responding quickly, but they are comfortable now, and 
they are responding like Senators at some length. So----
    Ms. McCarthy. Mr. Chairman might I just have a brief 
extension in order to comment on their answers?
    Mr. Barton. Yes, we will give the gentlelady a brief 
extension and a comment.
    Ms. McCarthy. I thank you.
    Gentlemen, I did not mean in my questioning to put you on 
the defensive which, obviously, I did. What I was listening 
for, I did not hear. I did hear what I expected. But I am 
looking for a new way of thinking, and I am looking for a 
large, merged company like yours in the future to lead the way 
for this Nation.
    And I thank you, Mr. Chairman, for the extension.
    Mr. Barton. Thank you.
    I must say that, as an observer to the Kyoto Agreement and, 
also, to Buenos Aires, the Chair is not a supporter of the 
Agreement as it was initialed in Buenos Aires. But I think the 
gentlelady from Missouri is onto something. We need to work to 
find a way to seriously see if there is something that can be 
done about the emissions issue. And we do expect Exxon-Mobil to 
participate in that in a meaningful way.
    The Chair would recognize the gentleman from New York, Mr. 
Fossella, for 5 minutes.
    Mr. Fossella. Thank you, Mr. Chairman. I compliment you for 
holding this hearing.
    And just at the outset, gentlemen, I believe, 
fundamentally, that you are moving in the right direction. That 
anywhere we can control costs, become more efficient, enhance 
productivity, I think we are better off. I think the more that 
we have a stronger Exxon-Mobil, we have a stronger American 
economy, whether it is for your workers or your shareholders, 
so I applaud the decision.
    However, if you answer my question the wrong way, I am 
going to have a different response, and that is that we have a 
Mobil terminal on Staten Island and integral to, I guess, your 
distribution center in the Northeast. And I am curious as to 
what, if any, change you envision with respect to that 
facility.
    Mr. Noto. Congressman, are you talking about Port Mobil?
    Mr. Fossella. That is correct.
    Mr. Noto. Formerly Port Socony--it has been an important 
part of the Mobil distribution system. We move a lot of volumes 
through there. I can't make the final comment on it, because we 
don't have the two companies together, but I see no reason to 
think that it is not going to continue to be an important 
location for us and an important point in the combined 
company's distribution up the coast.
    Mr. Fossella. Congratulations.
    As I say, I think what you are doing is moving in the right 
direction. Overall, what we need to do as a country is, if we 
are concerned about economic growth--not just in this Nation, 
but beyond--become the most efficient company you can become. 
Create wealth for your shareholders, and, in the end, we will 
all be better off.
    So, that is all, Mr. Chairman, thank you.
    Mr. Barton. I thank the gentleman, and would recognize the 
gentleman from Tennessee, Mr. Bart Gordon, for 5 minutes.
    Mr. Gordon. Thank you, Mr. Chairman.
    Let me add my welcome to Mr. Raymond----
    Mr. Raymond. Thank you.
    Mr. Gordon. [continuing] and Mr. Noto.
    I am sure that you want to get on with business, and you 
don't really have much interest in being here so we appreciate 
your time. This is an important issue----
    Mr. Raymond. Yes.
    Mr. Gordon. [continuing] that faces all of us.
    Mr. Raymond, in your testimony and in many other releases 
and justification that has been put forth for this merger, the 
discussion about how it is important for the United States to 
have a major player in the international energy market, I would 
like to get your thoughts, please, if you could better help me 
understand. Do you see, as chairman of this new company, do you 
think it would ever be appropriate for you to put the well-
being of the United States above your shareholders?
    Mr. Raymond. Well, that is a hard question to answer in the 
sense that it is a hypothetical. There is no question that we 
are, and will be, an American company. And, as such, we 
obviously have to be very, very sensitive to U.S. interests. 
And we will continue to be sensitive to U.S. interests. That 
isn't surprising because I would suspect that way over 90 
percent of our shareholders are also American shareholders.
    Mr. Gordon. But part of the justification for the merger is 
that it would be good for this country, and that, you know, 
that we need to have a major player. And so I am just trying to 
understand how that would be, you know, how this country is 
going to be better off, and if that would somehow mean you 
choosing between your shareholders and our country?
    Mr. Raymond. Well, I don't think the issue is going to be 
one of choosing between our shareholders and our country.
    And the point I would make, I guess--and perhaps you are 
reading it somewhat differently than I thought we wrote it--we 
did not put these companies together because they were both 
American companies and, therefore, there is a larger American 
company.
    We put these two companies together because, in our 
judgment, it was the best we could do to create the most 
efficient international oil company. At the same time, it 
turned out it will be the largest American company. And by 
being the largest American company, I think it maintains what 
has been historically the U.S. position that in the world, the 
technology in this industry has been led by American companies.
    It will enable us to continue to be the leader in 
technology in this industry, and that technology will be based 
in this country. And that, I think, is of value to this 
country.
    Mr. Gordon. And if there was two different companies, you 
wouldn't be competing with each other to have better 
technology?
    Mr. Raymond. What do you mean two different companies?
    Mr. Gordon. I mean if Mobil and Exxon stayed as separate 
companies, rather than a merger.
    Mr. Raymond. Oh, I think we would compete. But the ability 
to be able to develop technology is a function also of scale 
and your economic capability to develop that technology. You 
have to have a broad enough base of investment to justify the 
kind of research and development you need to have in order to 
be able to afford that technology. The scale that we have will 
give us more ability to develop and deploy that technology than 
if either of us had remained alone.
    Mr. Gordon. Well, let's say that a country or a company 
based in another country had better technology than we did. How 
would our country be disadvantaged?
    Mr. Raymond. Well, the way it is going to be disadvantaged 
is that that other company will have better access, more 
effective access to resources--for example, crude production--
than the company with the lesser technology.
    Mr. Gordon. So, how was our country going to be 
disadvantaged? If other countries and other companies have the 
ability to produce more oil, then it will be likely to have a 
more stable price. How is our country going to be----
    Mr. Raymond. It is not--it is more oil cheaper; it is not 
just volume.
    Mr. Gordon. Yes.
    Mr. Raymond. It is the competitive landscape. And to the 
extent that they are able to do that, then the profitability of 
our company will be less because, obviously, they will be able 
to have acceptable profitability at lower prices than we can 
have and, therefore, ultimately, our shareholders--largely 
Americans--are at a disadvantage.
    Mr. Gordon. But they could own stock in British Petroleum 
or some other company----
    Mr. Raymond. Oh, sure they could.
    Mr. Gordon. Yes. I am just trying to better understand----
    Mr. Raymond. I would prefer they owned it in us.
    Mr. Gordon. Sure, sure; I understand. I am just trying to--
I think there are lots of valid reasons for the merger. One 
that has been given is that, as a country, it helps us, and I 
am trying to better understand what that help is. Is it--and I 
am not sure I have gotten that quite yet----
    Mr. Raymond. Well, I----
    Mr. Gordon. [continuing] but your shareholders could invest 
in another company. I mean your shareholders are probably 
investing because they should; they want to get a good return.
    Mr. Raymond. That is right.
    Mr. Gordon. They have no particular affection for the 
company, other than they want to get, you know, a good return. 
So, they could be investing elsewhere.
    Mr. Raymond. And they always have that capability. But the 
point being is that our job, as a company, is to provide the 
return by how we manage our business, how we select our assets, 
how we deploy those assets around the world so that people see 
it attractive to own our shares, as opposed to some other 
people's shares.
    Mr. Gordon. Well I totally agree.
    Mr. Raymond. Correct.
    Mr. Gordon. I think that is your job. I am just trying to--
but if part of the reason for the merger is to make America 
better, how does that make America better?
    Mr. Raymond. Because it seems to me that America always 
comes out better if the most efficient companies in the 
industry are American companies, whether that is aircraft 
industry, the petroleum industry, the tire industry--you name 
it.
    Mr. Gordon. So can you be more specific on how we are going 
to be better off?
    Mr. Raymond. Because you are going to have--if it is an 
American company that it is the leader, there are going to be 
more Americans, in this sense, in our company working on things 
that are of value to us in terms of technology, goods and 
services that flow from us being in this country, than if we 
were not.
    Mr. Barton. We are going to have to----
    Mr. Raymond. And that flows all the through the economy in 
everything we do.
    Mr. Barton. The Chair is going to have to ask the gentleman 
from Tennessee to hold that thought if we wants to ask another 
round of questions.
    But I have got some----
    Mr. Gordon. I think I was going to say to say how many 
layoffs would be on it, too?
    If we are going to be better off, do the layoffs make us 
the better, or the country better?
    Mr. Raymond. Well the question is, what would the layoffs 
be if we do this versus if we hadn't done it now?
    Mr. Gordon. Yes. That is----
    Mr. Raymond. That is a relative judgment.
    Mr. Gordon. Yes.
    Mr. Noto. I would have to reduce----
    Mr. Gordon. The answer is know what that would be.
    Mr. Noto. I would have to reduce my staffing. Even if I did 
not do this merger, I would lose jobs. I mean you have to face 
that. And there are many companies is our industry--Shell just 
announced 6,000 people; Arco, 1,500 people. They are not 
involved in mergers. It is just the competitive nature of the 
markets that we are dealing with.
    Mr. Gordon. Which is----
    Mr. Barton. There have been a half a million jobs lost in 
the oil industry in the United States in the last 10 years. We 
have lost a half million barrels of production in the United 
States in the last year. The pure fact of the matter is that it 
is more and more an international marketplace, and it is more 
and more difficult to find the oil and gas in this country. And 
for environmental reasons, it is more and more difficult to 
refine it in this country. And that is a subject that is larger 
than whether Exxon and Mobil should merge.
    The Chair is going to recognize himself for 5 minutes. And 
then if Mr. Gordon wishes to stay, we will give you an 
opportunity for another 5 minutes also.
    But then we are going to have to let this panel go because 
we have got another panel, and we have got a series of votes on 
House floor.
    So, the Chair recognizes himself for 5 minutes.
    These are kind of followup, more or less, nuts and bolts 
questions. My assumption is that once the SEC and the FTC have 
reviewed the merger that it will be presented to your 
shareholders for approval. Is that not correct?
    Mr. Raymond. Actually, it will be presented to the 
shareholders probably before those reviews are----
    Mr. Barton. The shareholders have to agree to it before it 
is signed of on.
    Mr. Raymond. Yes, I think the shareholders' meetings are 
scheduled for May 27.
    Mr. Barton. Okay; well that was my next question' what is 
the time table? So that the Exxon shareholder meeting is May 
27? What about----
    Mr. Noto. And the Mobil shareholder meeting is exactly the 
same day.
    Mr. Barton. Okay. Are they in the same location or are they 
different?
    Mr. Noto. They both happen to be in Dallas, but that was 
purely fortuitous in terms of----
    Mr. Barton. Purely--well, it is fortuitous for me since if 
I wanted--I don't own any stock in either of your companies 
which is unfortuitous for me, I must say.
    Going back to the situation about the globalization--when 
Mobil or an Exxon are out exploring for new oil fields, what is 
the minimum size field that you ask your explorationists to try 
to find? What is the magnitude? How many millions or hundreds 
of millions of barrels?
    Mr. Noto. Do you want to start?
    Mr. Raymond. Well, that is a function, Mr. Chairman, of a 
number of things. Most fundamentally, it is a function of--for 
example, if we are in deep water, how deep is the water? And it 
is also a function of the fiscal regime that you have in the 
country where you are operating. For example, just in ballpark 
numbers, for a field to be economic in deep water Nigeria, it 
is 300 million barrels, more or less.
    Mr. Barton. Well the reason I asked, I have been told and 
it is just--I have not verified this--that, at your level, your 
size companies don't look for fields of less than 100 million 
barrels?
    Mr. Raymond. That is not true.
    Mr. Barton. So, there are----
    Mr. Raymond. That is not true.
    Mr. Barton. [continuing] occasions, if it is near the 
surface and----
    Mr. Raymond. Yes, and, for example, in the North Sea these 
days, where there is a large infrastructure that has been put 
in place because of large projects we have had there. Then, 
what you do is you--there are many smaller opportunities that 
are directly available that can be hooked into the 
infrastructure at relatively low cost. In that case, a find of 
perhaps 20 million barrels could be economic.
    Mr. Barton. Well let me ask it this way; what is the last 
elephant field--so-called, however you define an ``elephant 
field''--found in the United States or in the offshore waters 
that are controlled by the United States?
    Mr. Raymond. The last elephant field is Prudhoe Bay, 
Alaska.
    Mr. Barton. And when was that?
    Mr. Raymond. In 1973.
    Mr. Barton. In 1973. What is the likelihood of there being 
another find of that kind again in the United States or in the 
offshore waters controlled by the United States?
    Mr. Raymond. I think the geologists would say it is remote.
    Mr. Barton. Okay. So isn't it a given that if an United 
States' company that is registered as a United States' 
corporation is going to maintain any type of a presence in the 
international oil markets, you are going to have to go 
overseas?
    Mr. Raymond. Oh, absolutely.
    Mr. Noto. There is no question.
    Mr. Raymond. Absolutely.
    Mr. Barton. And isn't it also a given that if you are going 
to do that, you are going to automatically be competing against 
these state-owned oil companies?
    Mr. Raymond. Absolutely.
    Mr. Barton. And if that is the case, isn't it an automatic 
for the U.S. national security purposes, that companies of your 
sort are going to have to be big enough to have the capital 
resources to do that?
    Mr. Raymond. Well, yes; I think that is the point. And, 
ultimately, security, as applied in this country, is going to 
come down to assuring, as best we can, that there are multiple 
sources of supply.
    Mr. Barton. Okay. Now, in the last fiscal year that each of 
you are CEO's of your company--I don't know if that is this 
year or last year--what was Exxon's exploration budget 
worldwide?
    Mr. Raymond. Well, it was about the same in both years--
about $1.1 billion.
    Mr. Barton. $1.1 billion, and what was it for Mobil?
    Mr. Noto. About $700 million I would say.
    Mr. Barton. So the combined was about $1.8 billion. What do 
you expect--and, again, you have not merged, but if the merger 
is approved--what do you expect the exploration budget for the 
combined company to be next year? Would it be that same order 
of magnitude?
    Mr. Noto. If they are not merged?
    Mr. Barton. No, if they are merged?
    Mr. Noto. Well, I think we could keep on the same level of 
activity and be able to save money, because we both have some 
duplicative functions.
    Mr. Raymond. Right.
    Mr. Barton. Well, my time has expired. I am the only one 
here, but my time has expired.
    Here is the point that I am trying to get at. You are 
playing in a world marketplace. You spent $1.8 billion last 
year separately trying to find oil. Your fact sheet shows that 
if the merger is approved, you are going to save about $2 
billion a year. Does not some of that $2 billion savings go 
into exploration to try to find another elephant field?
    Mr. Noto. It goes into more efficient exploration.
    Mr. Raymond. It goes into more efficient exploration.
    Mr. Noto. I think that is the key for us.
    Mr. Barton. I am trying to help you.
    Mr. Raymond. Yes, I know but----
    Mr. Barton. Okay?
    I am trying to give a reason that it is in the national 
interest of the United States of America to approve this 
merger.
    Mr. Noto. Sir, I appreciate the help.
    Mr. Barton. Okay.
    Mr. Noto. And the facts support your position. I think what 
we are trying to say is that it would be premature for me to 
judge what the exploration budget will be next year because it 
is also a function of opportunity. I mean you need to have the 
potential.
    Mr. Barton. I understand that. But if you save money----
    Mr. Noto. It was not our objective to reduce the 
exploration effort of the combined companies, but it was our 
objective to upgrade the exploration effort and to make it more 
likely that we will actually discover hydrocarbons by spending 
this money.
    Mr. Barton. And it is a good thing for the average motorist 
in this country if an American-owned, private company has more 
money to spend to find oil fields overseas so that oil can be 
transported and refined and made available for sale in the 
United States of America. That is a good thing.
    Mr. Noto. I would say it was a good thing.
    Mr. Barton. Okay. My time has expired. We are going to have 
other questions.
    We have two votes on the floor. We are going to recess the 
committee for 30 minutes. We are going to let this panel go. 
And then when we come back at 1:30, we will hear from our 
second panel.
    I want to thank you, gentlemen, for your----
    Mr. Noto. Mr. Chairman, thank you.
    Mr. Raymond. Thank you, Mr. Chairman.
    Mr. Barton. [continuing] cooperation today.
    Mr. Noto. It was a pleasure to be with you.
    Mr. Barton. Thank you.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. A quorum 
being present, we are going to reconvene the continuation of 
our hearing on the Exxon-Mobil merger.
    On our second panel of witnesses, we have Mr. John 
Lichtblau who is the chairman of the Petroleum Industry 
Research Foundation, and we have Mr. Tom Reidy, who is with the 
Service Station Dealers of America. And, hopefully, at some 
point in time, we will be joined by Mr. Charles Shotmeyer--who 
is here--who is president of Shotmeyer Brothers Petroleum 
Corporation.
    Each of you gentleman's statements is in the record in its 
entirety. I am going to recognize Mr. Lichtblau, and then we 
will just go right down the line. And I am going to set the 
clock on 7 minutes, and if you need a little bit more time, we 
will give you that opportunity.
    Mr. Lichtblau, welcome to the committee.

 STATEMENTS OF JOHN H. LICHTBLAU, CHAIRMAN, PETROLEUM INDUSTRY 
  RESEARCH FOUNDATION; TOM REIDY, SERVICE STATION DEALERS OF 
 AMERICA; AND CHARLES SHOTMEYER, PRESIDENT, SHOTMEYER BROTHERS 
                     PETROLEUM CORPORATION

    Mr. Lichtblau. Thank you very much, Mr. Chairman.
    In addition to my presentation here, I would like to submit 
for the record a paper we did about a month ago entitled, ``How 
Big are the Oil Majors Now and After They Make a Merger?'' Mr. 
Barton. Without objection.
    Mr. Lichtblau. Thank you very much.
    Mr. Barton. Has our staff seen that?
    Mr. Lichtblau. I think they have; yes.
    Mr. Barton. Has the minority staff seen it, also?
    Let's make sure than the minority doesn't have an objection 
to it, but if not, we will put it in the record at this point 
in time.
    Mr. Lichtblau. Okay.
    Mr. Barton. But we need to get a copy----
    Mr. Lichtblau. All right; fine.
    Mr. Barton. [continuing] so that they can look at it.
    Mr. Lichtblau. We have copies here.
    Mr. Barton. Okay.
    All right; continue, please, sir.
    Mr. Lichtblau. The Exxon-Mobil proposed merger is another 
step in a long period of consolidation that has been taking 
place in the domestic oil industry. Ever since the end of price 
allocation controls in 1981, the industry has been adapting to 
an increasingly competitive environment. With no letup in 
competitive pressures, and diminishing returns from internal 
cost-cutting, attention has shifted toward strategic alliances 
and mergers, which are now taking place.
    To a large extent, these pressures and the industry 
response reflect which is happening also in other industries 
exposed to growing competition. But there are also some 
important differences. The oil industry is much less 
concentrated than many others. For instance, the top three car 
makers in the United States account for over 75 percent of the 
domestic car market, the top three soft drink producers, about 
85 percent of the market. It would take more than the 25 
largest private oil companies to match the lower of these 
concentration ratios in the United States. Moreover, among the 
larger U.S. companies, retrenchment and rationalization has 
gone even further than for the industry as a whole.
    Another big difference are the drastic declines in the 
price of the industry's major product, namely, crude oil.
    So overall, the retrenchment is inevitable for an industry 
facing low growth, depressed prices, and intense competition. A 
process of consolidation offers the best opportunity for 
preserving the core strengths of what remains a critical 
industry for the United States.
    In my testimony, I would focus partly on a group of major 
companies which are surveyed regularly by the Department of 
Energy and then the seven largest private U.S. oil companies.
    As part of the long-term consolidation process, there has 
been a slowdown in the pace of the investment of these major 
oil companies, especially in the United States.
    The worldwide value of petroleum-related property, plant 
and equipment reported by these companies remained more or less 
constant in 1997, but that was because the value of foreign 
fixed investments kept growing, while the domestic value 
declined.
    The sharp decline in the U.S. oil industry's earnings in 
1998--and apparently also in the first quarter of 1999--is a 
clear sign of the industry's competitiveness. The beneficiaries 
are, of course, consumers who now pay the lowest price for oil 
products, ex tax, since 1987 in nominal dollars and the lowest 
since the 1940's in real dollars, which has caused a decline in 
the consumer price index.
    Now I would like to turn briefly to some of the specific 
domestic developments in production, refining, and marketing 
among the major companies. The trends is, in all of these, 
toward rationalization and a declining role in the market.
    The major companies' shares of total oil and gas production 
is significantly lower now than in the early 1980's, a sign 
that the consolidation process so far has not added to industry 
concentration in the producing sector.
    In refining, the early 1980's left majors with substantial 
spare refining capacity which has been eliminated during the 
last decade. This process included outright withdrawals of the 
majors from this segment. In 1997, the major companies 
accounted for 60 percent of U.S. refinery output, down from 74 
percent in 1990 and 83 percent in 1980. Incidentally, Exxon and 
Mobil have both been part of this withdrawal process. Both sold 
refineries that are continuing in full operation by their 
independent owners.
    The process of share reduction has also occurred in 
gasoline marketing. In 1997, the reporting companies' gasoline 
sales through their associated automotive outlets amounted to 
33 percent of national consumption, down from 42 percent in 
1990.
    We now look at the seven largest private oil companies in 
the United States which show the same trend. The role of these 
seven majors in U.S. and global crude production is now 
declining, both in share and in volume. Their low share of 9 
percent in world oil production outside the United States 
reflects the large share of world oil production concentrated 
in OPEC and other producing countries where state oil companies 
predominate. The world's largest oil-producing companies 
currently are the state-owned companies of Saudi Arabia, Iran, 
Mexico, China, and Venezuela.
    An important factor in analyzing the competitiveness of the 
refining sector of the U.S. oil industry is the composition of 
this sector. Between 1985 and 1999, the U.S. majors' share of 
refining capacity dropped from 65 percent to 36 percent as both 
independents and new foreign players came into the market and 
gained share.
    My conclusion is that the U.S. oil market is highly 
competitive at all levels. It is an international market; 50 
percent of all crude oil is imported; 10 to 12 percent of all 
oil products are imported, and there is an open market so that 
the price is an international price at all times. There is no 
company that has a dominate share of any segment of the market 
currently, and this would still be true after the Exxon-Mobil 
merger.
    Equally important is the U.S. markets'--I just mentioned 
it--open access to the global oil market. Even in the most 
concentrated oil region, the Gulf Coast, Texas and Louisiana, 
the Exxon-Mobil combined share of refinery capacity is only 20 
percent of the area's total refining capacity.
    So we expect the U.S. oil industry to continue to be a 
competitive part of the world oil market. It is always part of 
that market. Since companies can't control the price of crude 
oil or the price of the products they sell, they can only 
respond to difficult market conditions by acting on what they 
do control, namely, costs. Last year simply intensified the 
presence, the pressures, on the industry to move faster. Even 
the largest companies can no longer consider themselves exempt 
from this pressure.
    Thank you very much, Mr. Chairman.
    [The prepared statement of John H. Lichtblau follows:]

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    Mr. Barton. Thank you, sir.
    We would now like to hear from Mr. Reidy, who represents 
the Service Station Dealers of America, and we'll note that 
there are a number of your members in the audience, and they 
have been very well-behaved so far in the hearing. So----

                     STATEMENT OF TOM REIDY

    Mr. Reidy. So far, Mr. Chairman.
    Mr. Barton. Yes.
    Mr. Reidy. Mr. Chairman, and members of the subcommittee, 
my name is Tom Reidy, and I appreciate the opportunity to 
appear before you today to present the dealer community's views 
and concerns about the proposed Exxon-Mobil merger and the need 
for the provisions contained in H.R. 811.
    I am a second-generation service station dealer who 
operates two Exxon stations--Reidy's Exxon in Greenbelt, 
Maryland, and Milestone Exxon in Germantown, Maryland. I am the 
past president of Washington/Maryland/Delaware Service Station 
and Automotive Repair Association, and I am here today 
representing the Service Station Dealers of America and Allied 
Trades; that is SSDA-AT. It is a 53-year-old national 
association representing 22 State and regional associations 
with a total membership in excess of 20,000 small businesses in 
38 States and individual members in all 50 States, the District 
of Columbia, Puerto Rico, and Guam.
    It is overwhelming for an independent small business 
service station dealer to comment before the U.S. House of 
Representatives on a proposed merger which would result in the 
world's largest oil company, valued at some $82 billion.
    The dealer community recognizes that overlaps exist between 
Mobil and Exxon in the areas of refining, marketing, and 
production. One would think that the new Exxon-Mobil company 
will eliminate excess refining capacity, thus limiting product 
and consumer choices and would close stations that are now 
competing against each other. This merger could result in a 
``squeeze out'' of many independent dealers. For example, many 
Mobil dealers are very concerned that they will face higher 
rents that Exxon has historically imposed on its dealers.
    Assuming that the merger is approved, conditioned on the 
divestiture of some service stations in certain markets, lessee 
dealers should be given a fair opportunity to acquire their 
businesses before they are sold off. This, we believe, is in 
accord with Congress' intent as set forth in the Petroleum 
Marketing Practices Act, PMPA.
    Sales of stations to individual dealers will likely 
introduce more competition into the marketplace than would the 
sale in bulk of a large number of stations to another supplier. 
Once the dealer owns his or her station, he or she will have 
more freedom to acquire product on a competitive basis. As long 
as the stations are not deed restricted, which is prohibiting 
motor fuel sales, first right of refusal will make the market 
more competitive and will result in lower prices to consumers.
    Another concern with the proposed merger is that it will 
only strengthen the refiner pricing policy of zone pricing or 
pad pricing. Exxon and Mobil utilizes zone prices, and 
eliminating another com-

petitor in the market will only exacerbate the oligopolistic 
tendency toward zone pricing through many geographical markets. 
This could result in higher prices for consumers, particularly 
in urban areas.
    Not only is the proposed Exxon-Mobil merger huge in and of 
itself, it is part of a continuing trend that has made the 
market more and more oligopolistic. This trend not only 
includes other mergers but also the sale and exchange of 
service stations in different markets.
    On February 23, 1999, Congressman Albert Wynn, from 
Maryland, introduced legislature, H.R. 811, to amend PMPA to 
address two issues of great concern.
    The first amendment would remedy the effect of the Supreme 
Court's opinion in the State Oil v. Khan on dealer pricing 
independence by establishing a motor fuel dealer's unequivocal 
right to control his or her own retail prices. The impact of 
the Supreme Court's ruling could challenge the independence of 
service dealers. Independent dealers have invested significant 
capital into their businesses with the expectation that they 
would remain free to make their own pricing decisions and not 
be subject to prices set by distant suppliers having limited 
knowledge of the local market conditions.
    Gasoline suppliers enjoy enormous leverage over dealers 
because they are typically the dealers' landlords, licensers, 
and exclusive suppliers, as ascertained in the reports 
accompanying the passage of the PMPA in 1978. Many 
jurisdictions, including Delaware, the District of Columbia, 
Florida, Hawaii, Maine, Maryland, Minnesota, Oregon, and 
Washington already prohibit suppliers from fixing retail prices 
charged for motor fuel by independent dealers. Such statutes 
could serve well as a model for congressional protection.
    The second amendment would provide motor fuel dealers a 
first right of refusal to purchase their service stations prior 
to any assignment of the franchise agreement to a distributor 
or any other assignee. This addresses a loophole that presently 
exists in PMPA.
    The last few years have witnessed a growing number of lease 
assignments to the harm of independent dealer service stations. 
Typically, the supplier who is a service station dealer's 
landlord, supplier, and franchisor will sell the service 
station to a third-party distributor to whom the supplier will 
also assign the dealer's franchise agreement. Such a 
circumstance requires the dealer to purchase through a 
middleman who is very likely to increase the dealer's price in 
order to generate profits for himself. Further, the dealer's 
continued right to use the supplier's name and mark is in 
danger. Finally, the dealer is likely to face increased rental 
demands when his or her lease comes up for renewal.
    SSDA-AT urges this subcommittee and this Congress to pass 
H.R. 811 in a timely manner. At a minimum, we would hope that 
the Federal Trade Commission would include first right offers, 
similar to the provisions of H.R. 811 in any possible decree 
ordering the divestiture of service stations if the Exxon-Mobil 
merger is approved.
    True, consumers are now enjoying low motor fuel prices 
because there is a glut of petroleum products. But as you 
know--and as you have seen in the last few days with the price 
of gasoline going anywhere from one to three cents increase--
gluts have come and gone in the past. The long-term effect of 
the proposed merger should be considered, mainly in view of the 
oligopolistic trend in the industry. That long-term view is not 
comforting.
    Thank you.
    [The prepared statement of Tom Reidy follows:]
   Prepared Statement of Tom Reidy on Behalf of the Service Station 
                  Dealers of America and Allied Trades
    Mr. Chairman and Members of the Subcommittee on Energy and Power, 
my name is Tom Reidy and I appreciate the opportunity to appear before 
you today to present the dealer community's views and concerns about 
the proposed Exxon/Mobil merger and the need for the provisions 
contained in H.R. 811.
    I am a second-generation service station dealer who operates two 
Exxon stations--Reidy's Exxon in Greenbelt, Maryland and Milestone 
Exxon in Germantown, Maryland. I am past president of the Washington/
Maryland/Delaware Service Station and Automotive Repair Association and 
I am here today representing the Service Station Dealers of America and 
Allied Trades (SSDA-AT). SSDA-AT is a 53 year-old national association 
representing 22 state and regional associations with a total membership 
in excess of 20,000 small businesses in 38 states; and individual 
members in all 50 states, the District of Columbia, Puerto Rico, and 
Guam.
    It is overwhelming for an independent small business service 
station dealers to comment before the U.S. House of Representatives on 
a proposed merger which would result in the world's largest oil 
company, valued at some $82 billion. The dealer community recognizes 
that overlaps exist between Mobil and Exxon in the areas of refining, 
marketing, and production. One would think that the new Exxon/Mobil 
company will eliminate excess refining capacity thus limiting product 
and consumer choice and would close stations that will be competing 
against each other. This merger could result in a ``squeeze out'' of 
many independent dealers. For example, many Mobil dealers are very 
concerned that they will face higher rent terms that Exxon has 
historically imposed on its dealers.
    Assuming that the merger is approved conditioned on the divestiture 
of some stations in certain markets, lessee dealers should be given a 
fair opportunity to acquire their businesses before they are sold off. 
This, we believe, is in accord with Congress' intent as set forth in 
the Petroleum Marketing Practices Act (PMPA).
    Sales of stations to individual dealers will likely introduce more 
competition into the marketplace than would the sale in bulk of a large 
number of stations to another supplier. Once the dealer owns his or her 
station, he or she will have more freedom to acquire product on a 
competitive basis. As long as the stations are not deed restricted 
prohibiting motor fuel sales, first right of refusal will make the 
market more competitive and will result in lower prices to consumers.
    Another concern with the proposed merger is that it will only 
strengthen the refiner pricing policy of zone or pad pricing. Exxon and 
Mobil utilize zone pricing, and eliminating another competitor in the 
market will only exacerbate the oligopolistic tendency toward zone 
pricing throughout many geographical markets. This could result in 
higher prices for consumers, particularly in urban markets.
    Not only is the proposed Exxon/Mobil merger huge in and of itself, 
it is part of a continuing trend that has made the market more and more 
oligopolistic. This trend not only includes other mergers but also the 
sale and exchange of service stations in different markets.
    On February 23, 1999 Congressman Albert Wynn (D-MD) introduced 
legislation, H.R. 811, to amend PMPA to address two issues of great 
concern.
    The first amendment would remedy the effect of the Supreme Court's 
opinion in State Oil v Khan on dealer pricing independence by 
establishing a motor fuel dealer's unequivocal right to control his or 
her own retail prices. The impact of the Supreme Court's ruling could 
challenge the independence of service station dealers. Independent 
dealers have invested significant capital into their businesses with 
the expectation that they would remain free to make their own pricing 
decisions, and not be subject to prices set by distant suppliers having 
limited knowledge of local market conditions. Gasoline suppliers enjoy 
enormous leverage over dealers because they are typically the dealers' 
landlords, licensers, and exclusive suppliers, as ascertained in the 
Reports accompanying passage of the PMPA in 1978. Many jurisdictions--
including Delaware, the District of Columbia, Florida, Hawaii, Maine, 
Maryland, Minnesota, Oregon, and Washington--already prohibit suppliers 
from fix-

ing retail prices charged for motor fuel by independent dealers. Such 
statutes could well serve as a model for congressional protection.
    The second amendment would provide motor fuel dealers a first right 
of refusal to purchase their service stations prior to any assignment 
of their franchise agreements to a distributor or any other assignee. 
This addresses a loophole that presently exists in the PMPA. The last 
few years have witnessed a growing number of lease assignments to the 
harm of independent service station dealers. Typically, the supplier 
who is the service station dealer's landlord, supplier, and franchisor 
will sell the dealer's station to a third-party distributor to whom the 
supplier will also assign the dealer's franchise agreement. Such a 
circumstance requires the dealer to purchase through a middleman who is 
very likely to increase the dealer's price in order to generate profits 
for itself. Further, the dealer's continued right to use the supplier's 
name and mark is in danger. Finally, the dealer is likely to face 
increased rental demands when his or her lease comes up for renewal.
    SSDA-AT urges this Subcommittee and this Congress to pass H.R. 811 
in a timely manner. At a minimum, we would hope that the Federal Trade 
Commission would include rights of first offer similar to the 
provisions of H.R. 811 in any possible decree ordering the divestiture 
of stations if the Exxon/Mobil merger is approved.
    True, consumers are now enjoying low motor fuel prices because 
there is a glut of petroleum products. But as you know, gluts have come 
and gone in the past. The long-term effect of the proposed merger 
should be considered. Particularly in view of the oligopolistic trend 
in the industry, that long-term view is not comforting.
    Thank you.

    Mr. Barton. Thank you, Mr. Reidy.
    We now would like to hear from Mr. Shotmeyer. Again, your 
statement is in the record, so we will give you 7 minutes to 
elaborate on it.

                 STATEMENT OF CHARLES SHOTMEYER

    Mr. Shotmeyer. Thank you, Mr. Chairman, for allowing me to 
be here.
    My name is Charles Shotmeyer, president of Shotmeyer 
Brothers Petroleum Corporation, of Hawthorne, New Jersey, a 70-
year-old family business distributing Mobil products.
    The first station to sell Mobil gas--then Socony-Vacuum--in 
New Jersey after the Standard Oil breakup was owned by my dad 
and uncle when the market was dominated by Exxon--then 
Standard, of New Jersey. Our business was built station by 
station to become a significant factor in the eight counties of 
northern New Jersey. Today, the Mobil gas sold by stations we 
own and operate is 20 percent of the Mobil gas sold in northern 
New Jersey.
    Today, I speak on behalf of the Fuel Merchants Associations 
of New Jersey, FMA, whose over 300 independent marketers sell 
90 percent of the fuel oil sold in New Jersey and 20 percent of 
the gasoline. While I am speaking on behalf of FMA's full 
membership, I am particularly addressing issues of FMA's seven 
Mobil distributors impacted by the proposed Exxon-Mobil merger. 
The number of years, number of stations, vary, but we have 
common concerns regarding the Exxon-Mobil merger, not only for 
ourselves, but for our dealers and the consumers as well. These 
seven family owned businesses distribute Mobil gas to roughly 
25 percent of the total Mobil stations in New Jersey in each of 
the 21 counties.
    The proposed Exxon-Mobil merger is disconcerting to Mobil 
distributors who could literally see generations of families' 
efforts go for naught in a single ruling by the FTC. If this 
merger is not properly consummated, the impact in New Jersey on 
both consumers and small businesses could be devastating.
    Many in the public--and possibly even some at the FTC--do 
not realize that when they are filling up at a service station, 
such as a Mobil station, they may be filling up at a location 
where the land, buildings, labor, underground storage tanks, 
property taxes, insurance, canopies, and signs are owned by a 
Mobil distributor who has a contract with Mobil to ``fly their 
flag.'' Mobil's current corporate policy is to allow 
distributors to compete directly against Mobil where they are 
both competing in the same market.
    Exxon, by contrast, does not allow distributors to compete 
against it in the areas where it markets directly. Since Exxon 
is the former Standard Oil Company of New Jersey, and the 
State's market so urban, Exxon supplies almost every one of 
their branded stations directly.
    The branded wholesale distributor performs a vital service 
to the consumer by offering intrabrand competition which exerts 
a corresponding downward pressure on prices. This service is 
all the more valuable with a brand that the public perceives at 
having a tremendous value such as Mobil.
    New Jersey's concentration of Exxon-and Mobil-branded 
outlets--probably 35 percent combined marketshare--including 
the outlets owned by Mobil distributors where they proudly fly 
a Mobil flag, makes it highly likely that the FTC could order a 
divestiture of service stations.
    It is imperative that the FTC not force our members to 
divest service stations they own that are branded Mobil. 
Hundreds of thousands of dollars have been invested in each of 
these locations, and the only way the investment will be 
recouped is to preserve the Mobil brand.
    To fully appreciate the concerns of FMA's members, 
regarding the proposed Exxon-Mobil merger, it helps to 
understand the recently announced joint marketing venture 
between Shell and Texaco. While not an actual merger, the 
joining of the downstream marketing operations has the same 
real world effect in the marketplace.
    The facts of Shell-Texaco alliance are striking in their 
similarity to the Exxon-Mobil merger. Shell--Exxon--the larger 
of the two companies is merging/buying Texaco--Mobil--the 
smaller of the two companies. Shell--Exxon--has a corporate 
philosophy of not allowing competition against it by its 
distributors in the same market. Texaco--Mobil--has a corporate 
philosophy which does allow competition with their distributors 
in the same market.
    It has been widely rumored in the industry and published in 
the trade press that Texaco was preventing jobbers from opening 
new stations and branding them Texaco. This is the result of 
the Shell philosophy taking precedence in the arrangement in 
the joint venture.
    I shudder to think that the fate of the Texaco distributors 
has been sealed. If a branded wholesale gasoline distributor 
cannot have the opportunity to expand its business, it will 
die. If the Exxon philosophy prevails in the same manner, FMA's 
Mobil distributors will eventually no longer exist.
    In closing, it is imperative that the FTC understand that, 
in New Jersey, consumers and Mobil distributors must be 
protected by somehow allowing the Mobil brand to remain a 
strong factor in the marketplace, providing competition and 
growth, even after it is purchased by Exxon. This type of 
arrangement has been previously sanctioned by the FTC when it 
allowed for the continued use of the Getty and Gulf brands 
after the companies had been purchased in the mid 1980's when 
Chevron purchased Gulf and Texaco purchased Getty.
    Being a pragmatist, I understand that the FTC will allow 
the merger to be completed, and we are not opposed to that. 
However, FMA urges you to please help educate the FTC on how 
the Exxon-Mobil merger in New Jersey will impact not only the 
small family businesses your represent, but consumers as well--
for it is the branded gasoline wholesale distributor who 
ensures that competitive pressures are exerted against the 
major oil companies.
    Thank you.
    [The prepared statement of Charles Shotmeyer follows:]
Prepared Statement of Charles Shotmeyer, President, Shotmeyer Brothers 
 Petroleum Corporation on Behalf of the Fuel Merchants Association of 
                               New Jersey
The Implications of the Exxon-Mobil Merger
    My name is Charles Shotmeyer, President of Shotmeyer Bros. 
Petroleum Corp. of Hawthorne, NJ, a 70 year old family owned business 
distributing Mobil products.
    The first station to sell Mobil gas, then Socony-Vacuum, in New 
Jersey after the Standard Oil breakup, was owned by my dad and uncle 
when the market was dominated by Exxon, then Standard of New Jersey. 
Our business was built station by station to become a significant 
factor in the eight counties of Northern NJ. Today the Mobil gas sold 
by stations we own and operate is 20% of the Mobil gas sold in Northern 
NJ.
    Today, I speak on behalf of the Fuel Merchants Association of NJ 
(FMA), whose over 300 independent marketers sell 90% of the fuel oil 
sold in NJ and 20% of the gasoline. While I am speaking on behalf of 
FMA's full membership I am particularly addressing issues of FMA's 
seven Mobil distributors impacted by the proposed Exxon-Mobil merger. 
The number of years /number of stations vary but we have common 
concerns regarding the Exxon-Mobil merger not only for ourselves, but 
for our dealers, and the consumers as well. These seven family owned 
businesses distribute Mobil gas to roughly 25% of the total Mobil 
stations in NJ in each of the 21 counties.
    The proposed Exxon/Mobil merger is disconcerting to Mobil 
distributors who could literally see generations of their families' 
efforts go for naught in a single ruling by the Federal Trade 
Commission (FTC). If this merger is not properly consummated, the 
impact in New Jersey on both consumers and small businesses could be 
devastating.
    Many in the public, and possibly even some at the FTC, do not 
realize that when they fill-up at a service station, such as a Mobil 
station, they may be filling at a location where the land, buildings, 
labor, underground storage tanks, property taxes, insurance, canopies, 
and signs, are owned by a Mobil distributor who has a contract with 
Mobil to ``fly their flag''. Mobil's current corporate policy is to 
allow distributors to compete directly against Mobil where they both 
compete in the same market. Exxon by contrast does not allow 
distributors to compete against it in areas where it markets directly. 
Since Exxon is the former Standard Oil Company of New Jersey and the 
state's market so urban, Exxon supplies almost every one of their 
branded stations directly.
    The branded wholesale distributor performs a vital service to the 
consumer by offering intrabrand competition which exerts a 
corresponding downward pressure on prices. This service is all the more 
valuable with a brand that the public perceives at having a tremendous 
value, such as Mobil.
    New Jersey's concentration of Exxon and Mobil branded outlets, 
(probably 35% combined marketshare), including the outlets owned by 
Mobil distributors where they proudly fly a Mobil flag, makes it highly 
likely that the FTC could order a divestiture of service stations. It 
is imperative that the FTC not force our members to divest stations 
they own that are branded Mobil. Hundreds of thousands of dollars have 
been invested in each of these locations and the only way the 
investment will be recouped is to preserve the Mobil brand.
    To fully appreciate the concerns of FMA's members regarding the 
proposed Exxon/Mobil merger it helps to understand the recently 
announced joint marketing venture between Shell and Texaco, (while not 
an actual merger, the joining of the downstream marketing operations 
has the same real world effect in the marketplace).
    The facts of Shell/Texaco alliance are striking in their similarity 
to the Exxon/Mobil merger. Shell (Exxon), the larger of the two 
companies, is merging with (buying) Texaco (Mobil), the smaller of the 
two companies. Shell (Exxon) has a corporate philosophy not allowing 
competition against it by its distributors in the same market. Texaco 
(Mobil) has a corporate philosophy which does allow competition with 
their distributors in the same market.
    It has been widely rumored in the industry and published in the 
trade press, (US Express, 2/8/99) that Texaco is preventing jobbers 
from opening new stations and branding them Texaco. This is the result 
of the Shell philosophy taking precedence in the arrangement in the 
joint venture. I shudder to think that the fate of the Texaco 
distributors has been sealed. If a branded wholesale gasoline 
distributor cannot have the opportunity to expand its business, it will 
die.
    If the Exxon philosophy prevails in the same manner, FMA's Mobil 
distributors will eventually no longer exist.
    In closing, it is imperative that the FTC understand that, in New 
Jersey, consumers and Mobil distributors must be protected by somehow 
allowing the Mobil brand to remain a strong factor in the marketplace, 
providing competition and growth, even after it is purchased by Exxon. 
This type of arrangement has been previously sanctioned by the FTC, 
when it allowed for the continued use of the Getty and Gulf brands 
after the companies had been purchased in the mid-1980's, when Chevron 
purchased Gulf and Texaco purchased Getty).
    Being a pragmatist, I understand that the FTC will allow the merger 
to be completed. However, FMA urges you to please help educate the FTC 
on how the Exxon/Mobil merger in New Jersey will impact not only the 
small family businesses you represent, but consumers as well. For it is 
the branded gasoline wholesale distributor who ensures that competitive 
pressures are exerted against the major oil companies.

    Mr. Barton. Thank you, sir.
    The Chair is going to recognize himself for 5 minutes and 
recognize Mr. Shimkus. We notice that Mr. Shimkus' legislative 
assistant seemed to be barely above the child labor wage rate.
    So we assume those are visitors from his district and being 
educated on the Congress at work.
    The Chair recognizes himself for 5 minutes for the first 
question period.
    Just so we have a complete record of the three witnesses 
before us in this panel, do any of you, individually or 
representing your associations collectively, formally oppose 
the Exxon-Mobil merger? Is there anybody here that--I know you 
have got some concerns about it, but does anybody here express 
total opposition to it?
    Mr. Lichtblau. No.
    Mr. Reidy. No.
    Mr. Shotmeyer. No.
    Mr. Barton. Okay.
    Mr. Lichtblau, you have got the broader perspective in your 
testimony. What is your opinion of the OPEC cartel right now, 
as an effective cartel in the sense that they are able to 
control supply of the world's oil?
    Mr. Lichtblau. Well, sir, everything is different since 
yesterday. As you know, prices just jumped because OPEC started 
to discuss the possibility of reclusing their supplies in order 
to strengthen the world price market. Whether they will succeed 
or not, we don't know.
    OPEC has been generally and relatively an ineffective 
organization in terms of what they want to achieve, but if they 
want to, they control 40 percent or so of the world's oil 
exports. So, they are definitely in a position to strengthen--
up--prices by cutting their production. If they cut by 
something like 2 or 3 percent, it will be enough to raise 
prices maybe 3 or 4 times that much. And this is what the 
market is looking for.
    But if you look at OPEC over the last 15-20 years, the only 
time prices really rose, was when there were external 
extraneous events of which OPEC had no--like a war or something 
like over which OPEC had no control. But it is an organization 
of the world's most important oil exporters. It has the largest 
oil producing companies, so that it is in a position to affect 
the world oil supply. But it has no plan to do this beyond the 
present situation in which prices are so low that their 
governments are politically in trouble because of it.
    Mr. Barton. Do any of the OPEC state-owned oil companies 
explore for oil outside of their national boundaries?
    Mr. Lichtblau. OPEC oil companies?
    Mr. Barton. Of the member states in OPEC----
    Mr. Lichtblau. Yes.
    Mr. Barton. [continuing] that they are state-owned 
companies, do any of them explore for oil outside of their 
national----
    Mr. Lichtblau. Yes; on a small scale, they do.
    Mr. Barton. They do?
    Mr. Lichtblau. Some of them have but----
    Mr. Barton. But, basically, they manage their oil----
    Mr. Lichtblau. Mostly they develop their own resources; 
yes.
    Mr. Barton. Okay.
    Mr. Lichtblau. The state oil company does, but they have 
gone abroad, but not on a large scale.
    Mr. Barton. Okay. How does----
    Mr. Lichtblau. Because they--and also their basic interest 
is to develop their own resources.
    Mr. Barton. Right. How does an Exxon-Merger, if it takes 
place, from a national perspective, does that give the United 
States a larger player to compete against these state-owned 
companies, or does it matter?
    Mr. Lichtblau. Not really; not really, because these state 
companies are so much bigger--Saudi Aramco and Petrogal-
Petroleos de Portugal--that a Mobil-Exxon merger would still 
keep a share of this company of total world production--very 
small, maybe a few percent of the total world--so they don't 
compare anywhere near with any of these major OPEC national 
companies.
    It would strengthen them somewhat, but marginally. It would 
still be--the prices would still be determined internationally, 
and OPEC would still have, whenever it can, an influence on it. 
And right now it does, but as I said, it was driven to it by an 
incredible price drop which affected or threatened their 
economy.
    Mr. Barton. Okay.
    Mr. Reidy, the Service Station Dealers Association--
obviously, your membership--and the--I know there is another 
association, also, of service station dealers--your concern is 
that the dealers that own their stations or the dealers that 
lease their stations will not be given an opportunity to 
maintain their lease or their contract with a merged Exxon-
Mobil? Is that correct?
    Mr. Reidy. Our concern is that the station which a majority 
of us are lease dealers from the oil company, we would like to 
be able to get the opportunity, if they decide to divest or if 
they have to divest so many of the stations, we would like the 
opportunity, first, to be able to go and purchase the property 
and everything involved with it.
    Mr. Barton. So you would like, as a part of the merger 
agreement, that the FTC put in there a stipulation that your 
membership be given a right to maintain the lease or to 
purchase outright?
    Mr. Reidy. We would like the first option to purchase the 
property and everything involved with it.
    Mr. Barton. The property?
    Mr. Reidy. Now, we might----
    Mr. Barton. The actual tangible land----
    Mr. Reidy. Exactly.
    Mr. Barton. [continuing] and pumps and building.
    Mr. Reidy. What now belongs to the oil company--rather than 
them give it to the distributor, a handful of stations at one 
time--we would like to be, on each individual case, we would 
like to be able to at least have the opportunity to purchase a 
station and equipment and everything we need.
    Mr. Barton. Now would that mean, in addition to purchasing 
the tangible property, you would maintain the right to use that 
brand of gasoline?
    Mr. Reidy. Well at that particular point, what you would 
more than likely have to do is get a contract with a supplier--
and it might be stay with Exxon; I've dealt with them for 
years.
    Mr. Barton. So your concern is a physical location and a 
property, as opposed to maintaining the brand?
    Mr. Reidy. Right. I am concerned because--as we have seen 
in the past, and the history will show you that--a lot of times 
when these distributors and groups like this take over a group 
of stations, the dealers will maintain their stations, quite a 
few will maintain. But there is also a problem or a chance that 
a lot of these dealers will be forced out by higher rents if 
they have a very nice location, and the company, themselves, 
will operate that. And these people that are with us will no 
longer be in business.
    Mr. Barton. Okay. Now, Mr.--my time has expired but I am 
going to ask unanimous consent to extend a little bit.
    Mr. Shimkus. I object, Mr. Chairman--no.
    Mr. Barton. The Chair has the power of recognition.
    Mr. Shotmeyer, now your concern is different. Your concern 
is--if I understand it--that your distributors and the dealers 
in New Jersey that have been using the Mobil name, the brand, 
may not have the opportunity to continue to sell or use that 
brand. Is that correct?
    Mr. Shotmeyer. That, sir, is correct. In New Jersey, 
because of the highly concentrated market--and I don't think 
there is another market in this country, with the combined 
Exxon-Mobil merger, that will have as high a concentration as 
the whole State of New Jersey will have.
    It is so important that the dealers and us, as 
distributors, have the Mobil brand to continue on and build on, 
because we have invested large sums of money, gone into long-
range planning, based on Mobil's encouragement to do such, to 
put forth their image, buy locations and to develop locations 
and spend a lot of money, time, and energy to develop the 
market so that the consumer has a choice.
    Mr. Barton. Now are you concerned that the Mobil brand will 
disappear, and it will just be an Exxon brand? Or are you 
concerned that Mobil will still have the brand, but they will 
have it owned by the company, as opposed to an independent 
distributor?
    Mr. Shotmeyer. All of the above, sir.
    Mr. Barton. All of the above?
    Mr. Shotmeyer. We are--if I could elaborate just for a 
short----
    Mr. Barton. Yes, and then I am going to recognize Mr. 
Shimkus.
    Mr. Shotmeyer. The possibly that the FTC would say that the 
Mobil brand has to be sold off to a large supplier, another 
supplier, not dealers or distributors, is something that has 
happened in the past. And we need to have some protections 
against that.
    Mr. Barton. Okay.
    Mr. Shimkus, we will recognize you for such time as you may 
consume.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I want to focus on the dealer issue in a minute, but I--one 
of the reasons why I love this subcommittee is I am continually 
concerned about our national energy policy and energy security, 
and I think it is in the national interest that we have a 
readily reliable, readily accessible supply of fuel.
    So, Mr. Lichtblau, if I may start with you.
    Mr. Lichtblau. Yes.
    Mr. Shimkus. How vulnerable is the United States to 
interruptions in imported petroleum supplies today?
    Mr. Lichtblau. The interruption--well, it could happen any 
time.
    Mr. Shimkus. So we are very vulnerable?
    Mr. Lichtblau. Pardon me?
    Mr. Shimkus. So we are very vulnerable?
    Mr. Lichtblau. Well, in theory, we are very vulnerable. 
But, of course, we have a diversification of supply sources. We 
now have a strategic petroleum reserve, which I think it is a 
very good idea; it is being increased, if only slightly. It is 
up nearly 600 million barrels, so that it could, for awhile, if 
we lost 2-3 million barrels a day for quite some time, it could 
offset that loss.
    But we are no more, no less vulnerable than any other 
country, in fact, somewhat less because most European countries 
and Japan import 100 percent of their oil requirements, while 
in our case, it is only about 50 percent so that--and, of 
course, any of these disruptions also hurt the disrupting 
country more than the receiving country because they stop their 
oil exports. And for them, it could be a 100 percent loss.
    But we are vulnerable, and we have to live with this 
vulnerability; we have for the last 50 years. So do most all 
other countries which are oil importers including, as I say, 
Europe and Japan.
    And between a growing strategic petroleum reserve--I think 
it should be built up some more--and the policy of 
diversification of supply sources and, of course, any kind of 
benefit, any kind of stim-

ulant that we can give to developing additional domestic 
sources, particularly in the Gulf Mexico, would be very 
desirable.
    Mr. Shimkus. What percentage of the world oil production is 
controlled by OPEC today?
    Mr. Lichtblau. Oh, I would think about 40 percent roughly. 
They produce nearly 30 million barrels, 28 million barrels, out 
of a world production of 74-75 million barrels. So it is in 
that range altogether.
    Mr. Shimkus. Okay.
    Mr. Lichtblau. Not everything, of course, is exported, but 
their total production is, as I say----
    Mr. Shimkus. And that percentage, how does that compare to 
the percentage in the 1970's?
    Mr. Lichtblau. Well, at one time it was much higher when 
OPEC was producing in the 32-33 million barrels, then it 
dropped and the prices went to $25-$30. World oil demand 
dropped substantially, and all of the reduction came from OPEC 
countries, while countries like the United States actually 
increased their production because of the very high prices, and 
60 percent came from OPEC, of the decline. And then it moved in 
the other direction.
    But when you look at OPEC production today, it is not much 
bigger than it was a few years ago. Now, of course, you have 
one OPEC member, Iraq, which is really not a member of OPEC, 
but it is under the jurisdiction of the United Nations. The 
Iraqi oil exports are determined by the U.N. Security Council.
    And one of the reasons why you had this price decline in 
1998, is because the U.N. Security Council permitted Iraq--for 
very good reasons--to substantially increase its exports by 
almost a million barrels a day from the beginning of 1998 to 
the beginning of 1999 in order to pay for food and medical 
supplies. But it did enter the world market, of course, and it 
was a major factor--almost offsetting the attempt of the other 
OPEC nations to reduce their production in order to stay in the 
price structure.
    Mr. Shimkus. Okay. And following this line of questioning, 
would the Exxon-Mobile merger, specifically--and consolidation, 
in general--have an effect on the U.S. dependance on imported 
oil, in particular, a Middle Eastern oil?
    Mr. Lichtblau. No, it wouldn't; not really. It may make 
that company stronger. The merged company might be stronger; 
therefore, it might be in a better position to bargain with 
foreign governments then because, instead of two major 
companies competing with each other for access to a specific 
area, you have one company which is much stronger, and it is in 
the better bargaining position. So it could possibly, when it 
comes to getting access to Saudi Arabia to Venezuela, be in a 
stronger position. So it might possible help, but, basically, 
it wouldn't make any--basically, any changes.
    Mr. Shimkus. Thank you.
    Mr. Reidy--and I am trying to find the exact words, but you 
talked about the pricing aspects, and you mentioned padding.
    Mr. Reidy. Padding and zone pricing.
    Mr. Shimkus. Yes. Can you explain that in layman's terms?
    Mr. Reidy. Well, what padding and what zone pricing is, if 
you would take like a State, and we will say it has 10 counties 
in it. You might think that each county has a different price 
for one rea-

son or another--and you have that now with the taxes, the metro 
taxes, and things like that. What is happening in the 
marketplace now, is that 1 company might have 230-240 locations 
within their--we will say their sales' territory--the territory 
of Maryland, and D.C., and Virginia, because I am familiar with 
this area. They will have like 240 locations. In that 
particular 240 locations, there might even be 240 different 
prices to the dealer. You can go out right now, in just about 
every area, every street in this area, and you can go a mile 
and a mile and a half, and the price that these dealers are 
paying will vary anywhere between 1 and 4 and 5 cents. And that 
is just in a mile and a half.
    So, it is not like it is a general location--like I said in 
the counties--it is just all over the place. And the situation 
with that is when all of you are out there buying gasoline 
today, you might think that the gentleman with the lowest 
prices is a hero, and the guy with the highest price is just 
squeezing everybody or just overcharging, when it is just the 
opposite. He might be making less money than the gentleman or 
the lady at the five cents below. So that is what it is.
    And when I first heard about this Exxon-Mobil merger, I 
figured this is tremendous. I have a Citgo by me and a Cosco. I 
was hoping that this would really work, that they would be able 
to get pricing so cheap that I can face these dealers every day 
because they are selling the gasoline at prices lower than I am 
even paying for it at this particular time. But as we found out 
from some of these other mergers, it just doesn't seem to be 
working that way. And that is one of our great concerns, that 
with the less competition there, the chance of this zone 
pricing and padding will just get even higher.
    Mr. Shimkus. And then in your statement, you mentioned that 
this merger will eliminate excess refining capacity, thus, 
limiting product and consumer choice.
    Considering that Exxon-Mobil will control 12-13 percent of 
the refining capacity in the United States, is that a large 
enough of that refining sector to do what you think it will?
    Mr. Reidy. I am not sure. I don't have any handle on how 
that part of the business works. All I know is when they send 
me their price increase everyday.
    Mr. Shimkus. All right.
    Mr. Reidy. That is where I get in there.
    Mr. Shimkus. And the last question I will have, Mr. 
Chairman--in this round of questions.
    Oh, this is ``the'' round; Okay.
    Mr. Shotmeyer, could you explain to me who bears the cost 
of brand naming a product? Is it the dealers, the distributors, 
the major oil company, or a combination of these?
    Mr. Shotmeyer. All----
    Mr. Shimkus. If dealers or distributors have spent 
resources building up a brand name, what is the impact if they 
are no longer allowed to market under the brand name?
    So there are two questions there.
    Mr. Shotmeyer. They are well put questions, and it is 
really one question. The value of the brand name is built by 
the dealers, the distributors, and the major supplier. And the 
consumer gets to appreciate that brand name for quality 
products and associates that brand name in his mind with 
something that he wants. And that is why it is valuable to us 
to be able to continue to have that brand name.
    Mr. Shimkus. And, Mr. Chairman, if I may. The last question 
I wanted to ask kind of goes back to my first series.
    During the oil crisis of the 1970's, under the dealers--and 
this is really initially for Mr. Reidy--under the dealers, how 
did that shift out through the dealers? And am I wrong to 
assume that the independent dealers bore a major brunt of the 
effect of the embargo?
    Mr. Reidy. Oh, sure. At that particular time, we were 
limited as to the number of gallons of gasoline that we could 
purchase per month. But you were told, based on some formula, 
how much gasoline you would get each day. Now granted, it 
looked like everything was nice because we were closed 
Saturdays, and Sundays, and evenings. We didn't have any 
product, but we still had all the expenses, all the rents that 
you heard about today; all those were still there.
    And, yes, it was a very tough time.
    Mr. Shimkus. So, in essence, the industry acts as a 
commodity so you have to--your profit is based upon volume?
    Mr. Reidy. Yes.
    Mr. Shimkus. For the most part?
    Mr. Reidy. Very little margin and, hopefully, a lot of 
volume.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Shimkus.
    I just have a few wrap-up questions.
    Now I thought I understood pad pricing and zone pricing, 
until I heard Mr. Reidy's explanation, and now I am confused 
so----
    Mr. Reidy. So are we, Mr. Chairman.
    Mr. Barton. Beg your pardon?
    Mr. Reidy. So we are very confused on how it works, too.
    Mr. Barton. Oh, okay. Well----
    Mr. Reidy. You might not want to ask the question.
    Mr. Barton. Let me ask Mr. Shotmeyer. Let's do it one step 
at a time. Define, in your term--understand what a ``pad 
price'' is, or ``pad pricing.''
    Mr. Shotmeyer. Sir, we buy at a rack price.
    We don't get involved--we don't get involved in the kind 
of----
    Mr. Barton. I know, but you ought to know. I am trying to 
get somebody who knows it but is not involved in it.
    I know what a rack is; I think I know what a rack price is.
    Mr. Shotmeyer. We buy as the distributor at a rack price at 
the terminal, which is the price the company sets for us at the 
terminal. And much the same, as I understand, the pad pricing, 
even though I am not involved directly in the pad pricing, 
those can vary from terminal to terminal by reasons of which I 
have no clue of why.
    Mr. Barton. Well who sets the pad price? Who is the----
    Mr. Shotmeyer. The major oil company.
    Mr. Barton. But at what level? Do they have a marketing 
director at the refinery, or is it done at a higher level than 
that?
    Mr. Shotmeyer. Traditionally, in the past, pricing used to 
be done either in a regional division office or corporate 
headquarters. More recently, from what I understand, the pad 
pricing is done more in the field, and they have relegated the 
responsibility to field personnel to respond to competitive 
situations in the marketplace.
    Mr. Barton. Now the zone price, as I thought I understood 
zone pricing, was the dealers needed to compete against 
independent operators, and they set a zone price that they 
could vary so that you would be able to compete against the 
independent across the street who had been underselling you. 
Was that the theory, or not the----
    Mr. Reidy. Yes. I guess it depends on who you are asking if 
that is the theory. Yes, it----
    Mr. Barton. Well, I am--well, I don't know.
    Mr. Reidy. We look at it differently, as the dealers. In 
theory, right. You are supposed to be able to lower the price 
to the guys that need the help because they are going up 
against the Coscos and the----
    Mr. Barton. But would a zone price theoretically be 
available to anybody within that zone? Any dealer within that 
zone should get that zone price?
    Mr. Reidy. Well, the problem with that is there really 
isn't a zone. A zone is established by one dealer having a 
different price than the other.
    And to continue what I was saying, a lot of times--and we 
found when this zone pricing in our area first came out, it 
wasn't established to help the dealers with the lower prices, 
the lower market. It seemed like it was starting with the 
dealers with the higher prices, and it is almost as though that 
the dealer can charge a little bit more because, once again, he 
is in a nicer neighborhood. He has got higher expenses; his 
rent could be anywhere from $17,000 to $20,000, so he might 
need--as opposed to making 6 cents a gallons, he might need 7. 
And so they were the guys--and ladies, I am sorry--that seem to 
have gotten the higher prices at one time. Then it started 
going all over the place. So, really it is tough question.
    Mr. Barton. So whatever the pricing mechanism is--and we 
can find that out. We can do followup, written questions. How 
does the merger affect those kinds of--the zone and pad 
pricing? Why would the pricing mechanism be a concern in a 
merger?
    Mr. Reidy. Because we found, like in the last Texaco and 
Shell merger, where they had very few zones at one time--and I 
think when it first came around in my particular area, it was 
like county by county, like I spoke. But now since this merger, 
for one reason or another, the problem has gotten a lot worse. 
And I call it a problem, especially if I am the guy with the 
higher price.
    So we are just saying because of the last--historically, on 
that last merger we just saw--or buyout or whatever you want to 
call it--we found that the problem has gotten even worse.
    Mr. Barton. Okay. Do either of you two gentlemen expect, if 
the merger goes through, that there will be fewer Exxon-Mobil 
stations than there are today? That stations will close because 
of the merger?
    Mr. Reidy. Well, I would--speaking for my particular self 
and my location in Germantown, Maryland. It is right out here, 
not too far from here. If you go down within 1.5 miles on the 
straight line on Route 355, there are three Mobil stations, two 
Exxons, and one Chevron. So you would have to think, out of 
those five stations, somebody is going to go.
    Mr. Barton. Okay.
    Mr. Shotmeyer?
    Mr. Shotmeyer. In New Jersey, as having the highest 
concentration of both Mobil and Exxon, there are several Mobils 
directly across the street from an Exxon. And for economies of 
scale, if one company is allowed to totally dominate that 
market. They are going to say, ``Yeah, we can have an economy 
of scale by getting rid of the one location.''
    Mr. Barton. If I understood you correctly, your family has 
been in the Mobil distribution business since there was a 
Mobil. You said your father was the first Mobil distributor in 
New Jersey, I think?
    Mr. Shotmeyer. That is right.
    Mr. Barton. Okay.
    Mr. Shotmeyer. That was correct, sir.
    Mr. Barton. So, let's don't go back to, I guess, 1906 or 
whenever it was. Let's go back, say, 20 years ago. What would 
an average station's volume expected to be then as opposed to 
today?
    Mr. Shotmeyer. Twenty years ago, an ideal volume for a 
station would be a half a million gallons a year.
    Mr. Barton. Half a million a year. What would that be 
today?
    Mr. Shotmeyer. Today, the minimum is a million three, for 
Mobil to take a look at.
    Mr. Barton. So it is almost tripled.
    Mr. Shotmeyer. That is right.
    Mr. Barton. So regardless of whether we have this merger, 
this economy of scale issue is going to be there. And not only 
are you going to bigger and bigger station volumes, in terms of 
gasoline, but my understanding is, now, that you have also got 
to have a little supermarket and something there because you 
almost can't make it just on gasoline and--what we would call 
them--``traditional service station operations.'' Is that 
correct?
    Mr. Shotmeyer. You have a very good working knowledge of 
the business, sir.
    Mr. Barton. Well, I shouldn't admit this, I worked as a 
gasoline station attendant when gasoline was 25 cents a gallon. 
And they got their car filled up, you washed the window, you 
checked the oil, you swept it out. And if you didn't do those 
things with a smile on your face, they went in and told the 
owner, who was my uncle--what a rude young man there was out on 
the pump.
    And he chewed my rear out pretty good. So, I learned your 
business from ground up. I also changed flats and would even go 
out and change the flat on the side of the road for no extra 
charge if it was a friend of my uncle. And he had lots of 
friends. So I have been around the business a little bit.
    But I mean the point is that some of what--you all are both 
in a business that is changing the way----
    Mr. Shotmeyer. Yes, it is.
    Mr. Barton. [continuing] the way oil and gasoline is 
marketed. In my hometown now, in Ennis, I can only think of one 
what we would call full-service station. Everything else is 
self serve. So it is very, very competitive.
    My assumption is that the FTC is going to allow both Mr. 
Reidy's association and Mr. Shotmeyer's association to submit 
your concerns for the record. I would be stunned if that is not 
correct. But if you have any problems, work with the committee 
staff, because we will certainly make sure that your issues are 
something that they seriously look at.
    Mr. Shotmeyer. Thank you.
    Mr. Reidy. Thank you, sir, very much.
    Mr. Barton. While I support the merger, because I think it 
is in the best interest of the country, and I think most--if 
Mr. Markey supports it--it is pretty safe to say that, as a 
panel, we are not going to oppose it. But that doesn't mean we 
don't have serious concerns about the independent dealers and 
distributors and market concentration that you all have 
highlighted.
    We will have written questions for each of you gentlemen. 
Seeing no other members present, we are going to adjourn the 
hearing. We thank you for your attendance. We apologize for the 
delay in doing the hearing today because of some of the votes.
    [Whereupon, at 2:28 p.m., the subcommittee adjourned.]