Market Concentration and Implicit Grants in the Energy Industry: Some Observations

Abstract

Statistical evidence shows that the seven international oil companies dominate the oil market in the Free World. This group is the hard nucleus of what has been labeled as the Energy-Industrial Complex with virtual control ranging from the oil well to the gas station. Beyond the high level of vertical integration, major U. S. oil companies have recently increased the pace of penetrating into the non-oil energy industry and, thus, are trying to extend their control to competing energy sources via conglomerate expansion. Apart from the natural gas industry, prominent targets are coal and uranium companies. Both vertical integration and conglomerate expansion would not have been possible without the implicit subsidies inherent in the Internal Revenue Code in its special tax provisions for the oil industry. To supplement this already ample supply of internally generated funds available for mergers and acquisitions, oil companies like firms in other industries can benefit from another generous source of implicit subsidies in the Internal Revenue Code, viz.the tax-free re-organisation according to Sec. 368 IRC. Consequently, it is not surprising to learn that from the 32 large acquisitions of oil companies during 1965 - 1979 only 10 were taxable. In order to assess the impact of this conglomerate expansion, new avenues in concentration measurement had to be paved. As is shown in two fictitious case studies, Horvath's comprehensive industrial concentration index has proven to be perhaps best suited for that purpose.