Last week I provided my reactions to Senator Feinstein’s letter to the Federal Trade Commission (FTC) on market manipulation of gas prices after the Chevron Richmond refinery fire. Speaking of prices at the pump in California, how will Tesoro’s pending acquisition of BP’s Carson refinery in Southern California affect gasoline prices in California?
Today in California, there are 9 refiners that own and operate 14 refineries that produce California-blend (CARB) motor gasoline. While some California-blend gasoline comes from outside of California from places such as Tesoro’s Anacortes Washington refinery and, from time to time, the US Gulf Coast as well as a variety of foreign refineries, nearly all of the CARB gasoline consumed in California is produced within the State of California.
Tesoro currently owns two refineries in California that produce California-blend gasoline. One of Tesoro’s refineries, the Wilmington refinery, is adjacent to BP’s Carson refinery.
Three thoughts occur to me in thinking about what effect this transaction may have on prices in California:
- On the one hand, the transaction will increase the concentration of refining capacity in California. Increased concentration often leads to higher prices post-transaction. As the Table shows, Tesoro and BP each currently have about a 13% share of refining capacity. Post-transaction, Tesoro’s combined share would be about 26%, roughly as a large as Chevron’s current share of about 26%. By the metrics that antitrust practitioners, including the FTC, use as an early merger screening tool, Tesoro’s acquisition of BP’s Carson refinery would create a “moderately concentrated” market.
- On the other hand, the close proximity of the Carson refinery to Tesoro’s Wilmington refinery may result in operational synergies that reduce Tesoro’s marginal costs. Tesoro announced that it expects to operate these two refineries as a single integrated refinery. Lower marginal costs, or other output enhancing behavior, typically argues in favor of lower prices post-transaction.
- As well, Tesoro has stated the acquisition will reduce its costs of complying with AB32, California’s regulations which aim to reduce greenhouse gas emissions. By reconfiguring the two refineries into a single integrated refinery, Tesoro has stated that it will reduce CO2 emissions at its current Wilmington refinery without reducing yields. To the extent Tesoro’s anticipation of lower compliance costs translates into lower marginal costs of production, then this too argues in favor of lower prices at the pump compared to business as usual.
There is little recent precedent for how the FTC and California Attorney General will consider the effect of this acquisition on wholesale prices and/or prices at the pump. The last big refinery deals in California were over ten years ago: Exxon-Mobil (1999), Chevron-Texaco (2001), and Valero-Ultramar Diamond Shamrock (2001). More recently, in 2007, Tesoro purchased the 97,000 barrel per day Wilmington refinery from Shell.
To an economist, it seems silly but in these types of regulatory reviews, optics can prove to matter more than the economics. One obvious optic is that none of the previous deals resulted in the combined firm owning more than two CARB-producing refineries in California — and where the parties would have — the FTC required the combined firm to divest one of the three refineries. Tesoro’s acquisition of the Carson refinery would result in it owning three CARB-producing refineries in California: Wilmington, Golden Eagle, and Carson. A good bet, based on this reasoning, would be that Tesoro will have to divest one of these three refineries to get this deal done.
Another solid bet, however, is the opposite side of that same wager. Why? If Tesoro can make a convincing argument that Wilmington and Carson will be operated as a single integrated refinery, then this might be a case where two plus one equals two.