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PETROLEUM SWAPPING BETWEEN OIL GIANTS

�Exchanges�: An Elephant In Our Living Room

David I. Haberman, J.D.

April 19, 2002

(Statement submitted to the Federal Trade Commission Second Conference re: Factors that Affect Prices of Refined Petroleum Products)

Introduction

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.�

Need for Special Study

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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