It has been frequently
observed that the petroleum industry is one of the most
extensively reported, measured, and analyzed of modern
industries. In spite of this, for more than a half
century there has existed a singularly persistent and
pervasive commercial practice (broadly institutionalized
within the industry) which has largely escaped critical
public scrutiny.
That industry practice,
and subject of this paper, is the systematic cooperative
reciprocal barter (variously called �swaps� or
�exchanges�) of gargantuan bulk supplies of domestic and
foreign petroleum between ostensibly-competing giant
international oil companies.
How and why this
practice has so long escaped critical public attention
is a mystery when one considers that it not only affects
daily many millions of barrels (and billions of dollars)
of domestic and international oil commerce, but what is
more, such petroleum exchanges have flourished
continuously for over 75 years between virtually the
same vertically-integrated industry giants.
This writer�s
first-hand knowledge of oil exchanges was gained as a
20-year veteran trial attorney in two of the largest
Federal antitrust oil- industry cases since the landmark
1911 Standard Oil Case.
These two later actions
(by Justice in 1953 and FTC in 1973) were significant as
the first to comprehensively challenge dominant oil
companies� use of systematic exchanges as a vehicle for
monopolizing petroleum commerce. After many years of
trial preparation, for policy reasons, both major cases
were inconclusively terminated by the Government without
trial of issues.
Although now
long-retired from both Government and oil matters, this
writer has retained an abiding curiosity about the
unresolved question of petroleum exchanges. To the best
of the writer�s knowledge, the issue of oil giants�
systematic exchanges has never again been
comprehensively tested as a possible illegal trade
restraint in any other antitrust proceeding since the
two failed Government initiatives.
(In 1993, an
exceptional US Tax Court opinion meticulously examined
exchanges between Exxon and Texaco, but only in the
context of tax issues.)
Nor, to my knowledge,
has this trade practice otherwise ever received the
sustained rigorous academic analysis it would seem to
warrant given its historical prevalence, and its
potential economic and legal significance. The few
occasional published treatments have generally been
fragmentary and superficial. Apart from richly detailed
� but rarely published � revelations found in the
Government�s terminated antitrust cases, on the whole,
the subject of exchanges has remained mostly arcane and
shrouded in mystery. It is therefore gratifying to find
this topic publicly mentioned as a subject for new FTC
inquiry.
The following brief
exposition does not presume to supply the deficiencies
of prior treatments of this subject. Its more modest
goal is simply to open the curtain to expose this
enigmatic trade practice to the clear light of day. At
the very least, it is hoped that this perspective may
challenge a new generation of economic and legal
scholars and investigators to take up the chase to hunt
down and ensnare this elusive critter called
�Exchanges�: The �elephant in our living room.�
In this writer�s
opinion, there is urgent need for a fresh examination of
the issue of systematic reciprocal bulk petroleum
exchanges between dominant vertically-integrated
companies (�Exchanges�), sui generis, as a species of
contract or combination in restraint of trade, or an
unfair trade practice, whose ultimate purpose and effect
is to gain, maintain, or extend control of markets and
prices by monopolizing petroleum supply.
Some idea of the scope
of such Exchanges was suggested in this writer�s 1975
note indicating that � An executive of one of these [FTC
Case respondent] companies has estimated that such
reciprocal exchanges account for approximately 15 to 20
percent of his company�s total gasoline output
(equivalent to about 160 million barrels or almost 7
billion gallons per year).
The Commission already
possesses a rich treasure trove of relevant information
on Exchanges (both crude oil and refined products) in a
significant 394-page pleading filed by the Bureau of
Competition in the Commission�s aborted case against 8
dominant American oil Companies. (See: In the Matter of
Exxon Corporation, et al., Docket No. 8934, �Complaint
Counsel�s First Statement of Issues, Factual Contentions
and Proof,� dated October 31, 1980.) That document (�CounselDoc�)
is extensively annotated to copious company microform
documents (530,000 pages) gathered during discovery.
Such supporting company
evidentiary documentation is probably still available
within the Commission�s own archives. Although the
CounselDoc is quite detailed and far-ranging,
nevertheless, with respect to the phenomenon of
Exchanges, the treatment is fragmented and unfocused. A
substantial number of Exchange references appear
scattered throughout several topical sections, but in
the end there is no comprehensive assessment of this
singularly pervasive trade practice in any larger
economic and legal context. The remainder of the present
paper undertakes to fill that conceptual void in the
CounselDoc.
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