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Lessons From AT&T: Should Big Oil Get Scared?

big oilWhen’s the last time you made a long-distance phone call? Do you even notice the difference between local and long-distance charges? Before 1984, only AT&T could sell long-distance telephone service, making a long-distance call to your great aunt cost $3.00 a minute. That monopoly and unfair pricing ended when a federal judge required AT&T to grant access to any carrier that wanted to sell long-distance services. Within three years, the price of a long-distance call decreased from the staggering $3.00 a minute to 30 cents a minute. Today it’s a mere 3 cents a minute, thanks to competition and an open market.

Without the breakup of that monopoly, which brought forth industry competition and consumer choice, we wouldn’t be enjoying rapid advancements in the communication industry, the great and powerful iPhone and the ability to watch, listen, play, tweet and stream from one device.

Here’s a lesson from Economics 101: a monopoly has the power to set the price on a commodity. Although there is more than one oil company (Shell, Exxon, BP etc.), the only fuel they sell to consumers is gasoline. The lack of fuel competition allows “big oil” to set the price. The wide-scale adoption of abundant, domestic fuel supplies (natural gas, methanol, ethanol and electricity) will boost competition and innovation (which we so desperately need), resulting in a wider fuel selection for consumers and lower prices at the pump. This is not to mention protection against resource and price volatility and improved air quality. A transition of this magnitude does not happen on its own. Businesses must invest in innovative ideas; policies must evolve to accommodate a changing world; and organizations must unite to educate, inform and involve the public.

Beneficiaries of an oil-addicted population and economy, or, as many call it, an oil monopoly, will do everything in their power to maintain a situation where they have sole custody over the transportation fuel market. Recent actions from the American Petroleum Institute (API) demonstrate this exact notion. Group Downstream director, Bob Greco, announced that API is “strongly considering” asking the U.S. Supreme Court to hear a case regarding the sale of a high-ethanol fuel blend. Soon after, a press conference ignited news headlines with something along the lines of, “Ethanol destroys cars.” The claims that warn of the dangers of ethanol are based off a research study funded by – you guessed it – the API and automakers. This is yet another representation of API’s attempt to reverse rules and court decisions that are vital to free markets and competition.

Clearly, API is threatened by the “competition” and has good reason to be! The competition – natural gas, methanol and, in this case, ethanol, or any combination of replacement fuels, could cause the oil industry to lose profits, market shares and eventually, their dominant control over the fuel/energy market.

Moreover, the oil industry’s recent investments and interest in natural gas is no coincidence. Natural gas is abundant in America and has the potential to become a dominant transportation fuel. If that is going to be the case, API wants a piece of the pie. 

The breakup of AT&T brought forth a new era of technology – multi-functioning phones and affordable long-distance phone calls. Breaking the oil monopoly would give us far more than that – relief at the pump and a thriving future for years to come. 

Original Article

Zana Nesheiwat's picture

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John Miller's picture
John Miller on Feb 5, 2013 9:14 pm GMT

Zana, interesting perspective on possible monopoly influences.  Something to consider with ATT is what factor had the greatest impact: the breakup of the corporation or the development of alternative wireless technologies?  Yes, the cost per minute for international calls is down, but how does this compare for overall total costs cell phone users pay annually today vs. 10 years ago?  You might find that average customer expenses have gone up overall.

As far as oil economics 101, the price is set by supply 'and demand'.  Beside oil companies trying to maximize their profits (fundamental capital market strategy regardless of the commodity or service involved) the auto manufacturers are also marketing vehicles to maximize their profits.  Which supplier do you believe has had the greatest influence on consumer demand behavior?  Purchasing gasoline and diesel vs. alternative fuels or purchasing large, fast autos and SUV’s that just happen to operate on petroleum motor fuels?

Based on currently available technologies, natural gas alternative fuels have only successfully made significant penetration into commercial and public transportation fleets.  Since methanol is made from natural gas, using the natural gas feedstock directly as a motor fuel is much more efficient and cleaner.  Electric vehicles still want for cost effective battery technology development and the public’s desire to overwhelmingly continue owning and operating larger ICE vehicles.

You may be mistaken about the API’s motivation for challenging E-15 ethanol.  Despite the general belief that big oil only cares about profits, in this case public safety (and the associated liability) is likely the highest priority for the oil industry on this issue.

John Miller

David Gower's picture
David Gower on Feb 5, 2013 11:56 pm GMT

Sorry Zana but I don't think nationally that "Big Oil" is monopolistic. "Big Sovereign Oil" has been in the drivers seat and the current changes in the market place will help lessen the grip of Big Sovereign Oil. Our (U.S. consumer/taxpayer) best ally in this process is our domestic and international oil companies. One might argue that China has used a nationalistic approach in their business dealings across several industries and that we should consider our strategic position(s) more also. Free markets operate relatively well domestically but we (U.S. consumer/taxpayer) need to be more sophisticated  in our approach to the un-level playing field of many of the world markets. Economic and business theory is fine but there are actors in the World not making economic decisions but cultural, religious and "militaristic" positioning decisions. We need to act accordingly. Our very survival depends on it.

Corn ethanol was supposed to be only temporary until cellulostic ethanol could be developed to be commercially viable. I would be willing to try to leave the ethanol supply chain in place a little while longer. The first cellulostic ethanol plant is just now being built. For all the reasons stated above as well as many other reasons we need to get out of the corn ethanol business as soon as we can. Any common inventory of existing engines that should not use E85 will tell you that there is an overwhelming reason to can the E85 idea in its entirety. The blend of ethanol should vary between 0% and 10% and based on many market conditions including feedstock costs due to droughts, floods, stockpiled inventory, etc, etc.. The Baker Institute directly relates our ethanol situation to World food costs which is one of the causes of the Arab Spring as well as difficulty feeding people in many places. We have diverted land from other crops to corn which has caused an unwise ripple effect world wide in many crops, not just corn. We have diverted water during drought conditions to grow corn. Very unwise!

Zana Nesheiwat's picture
Zana Nesheiwat on Feb 6, 2013 5:04 pm GMT

Hi John,

Thank you for your thoughtful response. I would like to offer the following points.  

The break-up of AT&T started in the 1970’s during the Carter administration, where some successes were achieved, and continued for decades.  It was a slow process that is still going on today. It incentivized innovation in the market. We went from clunky phones in the 1970’s to the mass- adoption of multifunctioning phones in the 1990’s. Technology will continue to evolve and respond to consumer needs. Sure, the average person’s cell phone bill is higher due to a myriad of factors- additional options functions and features. Today, consumers don’t have one option if they wish to call internationally. They have many options: prepaid card, viber or vonage, to name a few.

By opening up the market to replacement fuels, suppliers and auto manufactures, will in time, create vehicles that still offer the essential features of today's ICE vehicles – it's not an either or situation. I am not asking people to change their lifestyle. I am advocating for more fuel options. For consumers, competition means more choice and improved quality.

In regards to natural gas and methanol, let’s open the restricted fuel market and let it decide. We can take significant steps to open the fuel market by amending current regulations. Investments in technology and infrastructure will make replacements, including natural gas, more accessible, efficient and affordable, eventually providing a pathway for mass-adoption. We both agree that electric cars have their limitations (costly patents, weak battery supply chain, public charging infrastructure, etc.) but with technological advancements, they can be the wave of the future.

Regardless of API’s motivation, the testing of E15 conducted by the Coordinating Research Council (CRC) neither captures nor represents the reality of the U.S. car market. The DOE indicated that the study reflected weak methodology and that its conclusions were not statistically significant. I invite you to review EPA’s response or Fuel Freedom for additional perspectives. What we need is a fair consumer evaluation of safe/abundant/domestic replacement fuels with a reasonable set of regulations. I envision a future where replacement fuels can be a part of the mix and fairly compete for the American dollar.  

John Miller's picture
John Miller on Feb 6, 2013 6:26 pm GMT

Zana, the market has been fully opened to various alternatives to petroleum fuels (natural gas, methanol, ethanol, EV’s, etc.).  These alternative fuels have been strongly advocated and supported by State and Federal Governments for over 30 years.  The historic and current problem statement is the cost effectiveness of the alternatives to petroleum.  A classical example is methanol.  This alternative fuel’s consumption grew rapidly during the late 1980’s – early 1990’s primarily due to the CA Government’s support, but methanol’s popularity died shortly after this Government support was suspended in the mid-late 1990’s.  Why?  Methanol could not compete with petroleum and other alternative fuels such as natural gas, LPG and ethanol.  Natural gas and LPG popularities have stagnated over the years due to infrastructure and vehicle technology (weight) issues.  Both these alternative fuels, however, have made greatest penetration in medium-heavy duty vehicles (commercial and public transportation).  Due to its low cost and abundance, natural gas could expand much further if it received a little more Government support.

Today the primary reason for ethanol consumption increases is due to the Federal Renewable Fuel Standard (RFS2) blending requirement.  If ethanol were truly competitive to petroleum and other alternatives (CNG, LPG, electric, etc.) why would its consumption require mandated RFS2 blending?  As far as your Fuel Freedom reference, be careful to not over react to very selective analyses.  If all vehicles were built to AFV E-85 standards, no credible concern or issue could be raised.  However, these AFV’s only represent a small fraction of the total vehicle fleets.  Another question to consider, if ethanol was reasonably attractive to the average consumer, why do the vast majority of E-85 AFV’s still operate on E-10? 

Lewis Perelman's picture
Lewis Perelman on Feb 9, 2013 6:36 pm GMT

David's comment is on point. 

Moreover, Zana's AT&T analogy is flawed. There are some monopolistic networks within the overall energy system: e.g., pipelines, electric grid, utilities. But her argument here focuses on the transportation sector.

In transportation, the distribution infrastructure is heavily keyed to petroleum products, true. But that is because of the overwhelming orientation of the installed vehicle base, not because of a monopoly. 

Major oil companies own only 3% of all the service stations in the US. The overwhelming majority are owned by thousands of independent operators. Even the stations licensed to sell the branded products of major oil companies -- e.g., Shell, Exxon-Mobil, Chevron -- comprise only 37% of all service stations.

The electric utility sector may be the closest analogy to the old AT&T national monopoly, although there is not and never was any public utility with anything close to the national footprint of the AT&T network. But somewhat analogously to the opening up of the AT&T network to other suppliers, the Public Utility Regulatory Policies Act of 1978 opened up the electric grid to alternative energy suppliers.

The central problem preventing transformation of the transportation sector is that alternatives to established ICE and petroleum fuel technology cost too much and/or impose unacceptable negative externalities -- such as driving up the cost of food. It was the creation of cost-effective technological alternatives to what AT&T offered that preceded and provided the impetus for deregulation, not the other way around.

Rather than regulatory mandates, an accelerated effort to develop breakthrough energy technology is what is needed. See this for more on how to do it:

Rick Engebretson's picture
Rick Engebretson on Feb 9, 2013 11:26 pm GMT

I think your understanding of AT&T is somewhat flawed, but I think your understanding of the problem with oil in the US is correct. Not sure if a break-up is necessary.

In the early 1970s, for some reason, I was given a gun permit and made night guard for a Bell switchboard. It being downtown St. Paul, they said it would be where "terrorists" would hit. Don't recall hearing the word "terrorist" before. Being alone, I wandered the building and watched 7 floors of relays make sparks to connect wires galore.

After college and grad school, I pushed 50 years of dirt out an abandoned warehouse, and the inventor of digital electronics (by then a friend), computer, manufacturing, and baby Bell execs gathered in fresh paint to make the best business choices possible.

In fact, AT&T supported development and simply morphed into a much larger communications infrastructure. They grew.

That is why I'm puzzled by oil industry behavior today. With rapidly growing demand, and rapidly more difficult extraction, and rapidly growing global industry, they seem determined to go down with the ship. The ultra-flex-fuel turbine engine has been around for 50 years. And matching electric power trains are in production. The oil industry is not leading the US to strength as AT&T did.

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