ExMo Pricing Draws Congressman’s Scrutiny

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An Illinois congressman asked the U.S. Federal Trade Commission last week to investigate whether ExxonMobil is using its power in the base oil market to grab a bigger share of the market for motor oils.

In a Nov. 24 letter, Rep. Bobby L. Rush also questioned whether actions taken by the commission in approving large mergers have succeeded in keeping the base oil market competitive.

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Independent lubricant blenders said Rushs letter echoed concerns that they have had for some time and which have deepened since base oil prices rose in August. Opinions varied as to whether the commission could or should do anything to address the situation.

ExxonMobil contended that the base oil market is competitive and that its decisions on pricing for base oils and finished lubricants are sound and reasonable.

Rush, a Democrat representing the Chicago area, is a member of House Committee on Energy and Commerce, which oversees the trade commission. He said he sent his letter after discussions with a constituent, an independent lubricant manufacturer whom he did not identify.

The letter notes that ExxonMobil led a round of base oil price hikes in August and says that action was followed by markups from most of the markets major motor oil suppliers, including Pennzoil, Quaker State, ChevronTexaco, ConocoPhillips, Valvoline, Castrol and Citgo. ExxonMobil alone among major finished oil suppliers has not raised prices, Rush said. His letter further stated that officials with the Independent Lubricant Manufacturers Association told his staff that ILMA members reported ExxonMobil sales representatives telling distributors that the company intends to go after market share aggressively in coming weeks.

Rush suggested that such tactics would represent unfair use of ExxonMobils power in the base oil market over its customers, which are also competitors in the market for finished lubes. ExxonMobil produces 23 percent of the base oil manufactured in the United States, and observers have estimated that it supplies at least 40 percent of paraffinic oils sold on the merchant market.

The trade commission cited concerns about that level of market concentration when – at the time of Exxons merger with Mobil in 2000 – it required the company to enter long-term contracts to sell 12,000 barrels per day of production. Those contracts went to Pennzoil-Quaker State and Castrol, which, as others in the market frequently note, have since been acquired by major oil companies.

I do not question ExxonMobils ability to determine the selling prices for its products, but I do question whether the companys decision to build market share is the result of its sheer size from the merger, Rushs letter states. I am worried that my constituent and similarly-situated independents will be forced out of business by such market power and manipulation. In the long run, such actions by ExxonMobil cannot be good for competition or consumers.

Rush asked the commission to investigate and determine whether its requirements at the time of the Exxon-Mobil merger have been effective.

Lube Report sought comments from several independent blenders who agreed it was unfair for ExxonMobil not to raise finished lube prices after hiking base oil prices.

There is only one manufacturer that has failed to raise prices for finished products, said John S. McCollister, president of McCollister and Co., of Council Bluffs, Iowa. You always see a lag between price movements on base oils and finished products, but its usually a couple weeks, or three or four weeks. This is unusual and I hope we see a return to a more rational and fair market.

While acknowledging that ExxonMobils share of the finished lubricant market is not as dominant as its share of the base oil market, independents argued that it does make an impact in the finished lube market. At least one other oil company rescinded its recent price hike on finished products, they said, apparently in response to ExxonMobils decision not to raise prices.

Its an issue of fairness, said one independent, who spoke on condition of anonymity. All we ask is that, when they move their base oil prices, they correspondingly move their prices on finished products.

Some of those contacted said it is too early to want the trade commission to intervene. Others questioned whether it is plausible to expect any help from the commission.

Im not sure there is anything to be done other than asking the FTC to go back and unravel the consent agreement from the merger, said John Payne, chief financial officer of Olympic Oil Ltd., in Cicero, Ill. I dont think theyre going to do that.

ExxonMobil told Lube Report that it defends its pricing practices for both base oils and finished lubes.

Our pricing policy for base oils is really driven by basic demand-supply fundamentals, and it was those fundamentals that caused us to raise prices in August, spokesperson Barbara Leatherwood said. She added that the same approach led the company to lower prices for Group II-plus base oils two weeks ago. We believe the trade commission took appropriate actions at the time of the merger and that the base oil market today is competitive.

As for finished lubes, we routinely assess market conditions, Leatherwood continued. Based on how we are priced compared to our competition, we felt that a price increase was not warranted at this time. She noted that ExxonMobil did raise prices for finished lubricants several times earlier this year.

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