Question

The intergrated ownership of pipelines was intially used by some oil companies to gain control of oil-producing area. How did they use their transportation network to gain market control? What other reasons can be offered for intergrated ownership? Are these reasons valid in todays business environment?

Answer 1

Early in the pipeline industry history, oil companies became subsidiaries of pipeline companies. As integrated companies they “cornered the market” by refusing service to new producers of oil. Costs of entry including legal fees and procedures, costs of pipelines, and an oligopolistic market are still valid reasons for integrated ownership in today’s business environment.

Integrated pipeline companies have the necessary high capital to invest in the large-diameter pipelines. Costs to enter the market are high from startup; integration combines assets for investment. Integration of companies prevents duplication of competing pipelines. Integrated ownership of the largest pipelines has economies of scale and lower investment per mile and operating costs per barrel.