Question 2:

Rockefeller's Revenge By William L. Randol on, the nation's largest oil company, on to consumers. We've seen this in and Mobil is the prospective loss of up , the Mobil-British Petroleum joint ven- to 9,000 jobs, or more than 7 percent of : ture in Europe and the Texaco-Shell BEDFORD, N.Y. the companies' combined payroll. But ; alliance in the United States. ving followed the in- cost-cutting and job cuts should come : . If the Exxon-Mobil merger goes H ternational oil indus- as no surprise to either company's : through, it will doubtless lead to more try for a quarter cen- employees, since both have been cut- industry marriages. It is difficult to tury; I have heard the ting back for years. "see how companies like Chevron and chairman of Exxon, In fact, Exxon has shed 4 percent of " Atlantic Richfield would be able to Lee Raymond, say on its work force every year for more . remain independent and competitive more than one occasion that his corpo- than a decade. And many Mobil em- . in the wake of the economies of scale ration had nothing to gain from merg- ployees were shed when the company . achieved by Exxon Mobil, which ing with (a euphemism for acquiring) moved its headquarters from Manhat- would be the world's largest company, another oil company and that only tan to Fairfax, Va., in the late 1980's. and by the recent merger of British weaker competitors would be com- To put the potential job loss in per- Petroleum and Amoco. Exxon Mobil pelled to do so. But who could have spective, remember that the oil indus- would be able to undertake giant new predicted that the price of a barrel of try has lost at least 500,000 jobs since oil and gas projects around the world West Texas crude oil would plunge . oil prices plunged in the mid-1980's. that would pre-empt smaller compa- from $23 in October 1997 to barely The most important question for the nies from even thinking about them. above $11 today? Federal Trade Commission and the The mere prospect of this makes The most immediate concern raised other regulatory bodies, which would many analysts doubt whether the Gov- by the proposed merger between Exx- need to approve the merger, is its' ernment will allow the merger to take effect on consumers. If experience is place. But I think it will, with a few William L. Randol recently retired any guide, they will benefit. The driv- divestitures. When Chevron acquired as an oil industry analyst on Wall ing force behind the merger is to re- Gulf Oil in the early 1980's for $13.2 Street. He also worked as an analyst duce costs by eliminating redundan- billion, a record at the time, the anti- for Exxon from 1967 to 1974. cies - savings that would be passed trust authorities forced Chevron to sell off certain refining and marketing properties, principally in the South- east, where the combined companies market share was found to be anti- competitive. Op-Art Today, no single oil company has STEVE BRODNERWhy regulators won't block the new Exxon Mobil. more than about 7 or 8 percent of the national gasoline market. Consider comparisons with other industries. Microsoft totally dominates the Amer- ican software market, and although Federal regulators are prosecuting it for practices the Government says are anti-competitive, no one is serious- ly talking about breaking up the com- pany, which has the highest market capitalization of any company on earth. Coca-Cola and Pepsi control about 65 percent of the soft-drink market, and no one has batted an eye at $1-a- can sodas at your local deli, when the cost of manufacture is a fraction of that. (It galls the Organization of Pe- troleum Exporting Countries, by the way, that a barrel of Coke sells for a huge multiple of the price of a barrel of crude oil, a finite natural resource.) So don't be surprised if the regula- tory hurdles fall away, one by one. John D. Rockefeller Sr. will have the last laugh. O2) Answer the following questions about the article on the Exxon-Mobil merger: a) Why did the industry reduce its labor force since the mid-1980's? (Draw a picture based on one of the decision rules we saw.) b) Why does the article state that the merger would lead to job cuts? (Again, a picture might be useful.) 0) What are the main factors that the FTC takes into account when evaluating a merger? d) Why does the article claim that this merger could lead to more mergers? Did this prediction materialize? (Find out if there were more mergers in the oil industry after this one.) e) Why does the author think that the merger will be approved? Substituting Capital for Labor Due to Increase in the Wage Rate KA I I soquant F New cost-minimizing K- B point due to higher wage Initial point of cost A minimization K - H 20 L G