Is Oil Industry Consolidation Something to Worry About?

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By Jacob Maslow

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Usually, when companies consolidate, it means the consumer loses out. Whenever there are fewer players in any kind of market, there is less selection. Whenever there is less selection, the remaining players have a lot more power in drying up supply to boost up demand, or cutting back on consumer choices. This is precisely the reason why the United States has some of the strongest antitrust laws on the planet. They are very big about keeping equal playing field. This is to ensure that enough economic players in any given market operate unhampered and don’t burden each other so as to make it hard for the consumer.

Consumers are burned either in terms of choice, service quality, or pricing. There is a lot of great argument to be made for anti-monopoly laws. In fact, it seems like common sense that if you want consumers to spend less money, have more choice, and get more value for their hard-earned dollars, you need as many players in any local market as possible.

Unfortunately, reality is not as cut and dried as we want it to be. There are many market factors and economic realities that we have to face. There are such things as natural monopolies and unnatural monopolies.

A natural monopoly is when a company does such a bang-up job of providing services and products that people just gravitate towards that company and forget everybody else. All other competitors die a natural death. It doesn’t make sense for the state to step in and penalize that company for doing such a great job. Everybody loses if such regulations are passed.

On the other hand, the state should be vigilant when companies connive and scheme with each other to keep prices high and selection low. This reduces the purchasing power of consumers, and unjustly enriches companies when consumers are not getting the full value of their hard-earned dollars. In this case, companies are getting rich not because they provide a superior value, but because they are manipulating the market. This is an unhealthy monopoly.

The problem with this dichotomy, however, is that it is not that cut and dried. We would like to imagine that all cases of monopoly can be reduced into either of these scenarios. This is far from the case. In many cases, it is not really practical to cut down on monopolies due to consolidations.

Take the oil industry, for example. Due to the crash of oil prices, more and more companies are consolidating. This is happening in the oil services industry currently. I suspect that it will spread to other sectors in the global oil industry.

While we would like to say that too much consolidation can lead to monopolized markets, this is not a very easy argument to make. Why? There are so many players in the global petroleum market that a global consolidation is simply not possible. While there may be one mega-company that may arise, there are just so many smaller players that can nip at the heels of that global player. There will still be a lot of choices in the market. Simply put, the market is too fluid for investors to truly worry about the monopolistic threats of consolidation.

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