The ghost of John D. Rockefeller must have stirred this week that saw two former members of his gargantuan trust reunited. The Standard Oil trust was broken up and out of it came, among others, Standard Oil of New York and Standard Oil of New Jersey. These companies, known today as Mobil and Exxon, have reunited in a corporate merger that will not harm consumers and may indeed prove beneficial to them.
How should the average consumer view a deal that creates a company which, if it were an independent country, would rank third in worldwide control of oil reserves? Some people’s knee-jerk reactions will be to label this another example of big businesses teaming up to take advantage of powerless consumers. Prices will rise, workers will get laid off, service will diminish and a few rich white men will get richer. However, such simple-minded analysis is wrong, and those who propagate it suffer from an attitudinal bias that clouds their judgment.
Mergers between industrial giants are, for the most part, good news for consumers. At the very least, they have no negative effect on the products we purchase. The merger between Exxon and Mobil exemplifies this general truth. It went forward because the two giants, already moving large volumes of oil, looked at a market where the price of oil continues to drop. When oil prices, and consequently gas prices, plummet, oil companies lose profits.
The leaders of Exxon and Mobil realized that their profitability was at risk in an environment where consumers acting collectively determine prices through the action of the free market. The two companies merged to take advantage of what are known as economies of scale, which means the average cost of producing one gallon of gas decreases as the number of gallons refined increases.
One fallacy often heard when gasoline prices are high is that oil companies are somehow banding together to raise profits and cheat the consumer. But what about when oil prices are low, as they are now? Are oil companies banding together to lower their profits so they have an excuse to give less money to charities? Certainly not. The truth of the matter is gas prices are set in a market which takes into account limitless factors.
The world’s oil-producing nations have conspired in the past to limit production and raise prices. However, such a cartel would be illegal in the United States. Our oil companies have little control over the behavior of OPEC and its member nations.
Consumers should definitely not fear, and possibly even cheer the Exxon and Mobil merger. The new company will be capable of exercising never before seen efficiencies, charging lower prices and still remaining profitable. In short, gas will be cheaper. Lower gas prices are certainly something about which to be pleased. Travelers in the new year will find their journeys much more enjoyable so long as they can avoid the negativity fostered by those who condemn corporate mergers because of their fundamental misunderstanding of how markets work.