|Troubled Waters in Oil Industry|
|Subject||Cartels and Mergers|
|Key Words||Costs, Emploment, Merger, Producers, OPEC, Output, Prices, Regulators|
Exxon Corp. and Mobil Corp. are considering merging to create the biggest oil company in the world. The rationale is to reduce costs. In spite of new technology which has decreased the costs of extracting oil, and reducing employment and exploration, costs are still too high. A merger would enable duplicate staff to be released. Also, aggressive Mobil, which has significant reserves, would complement conservative Exxon, which is financially sound.
Cost reduction is necessary due to low oil prices. U.S. oil producers need to receive $12 to $15 a barrel in order to break even, and oil prices are now under $12 a barrel. The Organization of Petroleum Exporting Countries (OPEC), whose members produce 40 percent of the world's oil, have been unable to agree on production cutbacks to force price up. They are concerned that non-OPEC producers like Russia would simply increase output. Perhaps they also realize that high prices would only keep high-cost producers, such as those in the U.S., in business.
One disadvantage of the merger is that the two firms have different cultures. Also the merger would undoubtedly attract the attention of regulators - Exxon and Mobil were created when Standard Oil was broken up in 1911.
(Updated January 1, 1999)
|Source||Wall Street Journal, "Sinking oil prices prompt merger talks among giants", St. Petersburg Times, November 28, 1998.|
Return to the Oligopoly Index
©1998 South-Western College Publishing. All Rights Reserved webmaster | DISCLAIMER