From Russian Pipelines With Love
Russia has market power over oil and natural gas, and it is using that market power to finance its military moves. Pipelines ship energy, they also organize power.
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
It’s hard to ignore the invasion of Ukraine, but there’s also a lot of market power news happening. So I’m going to offer some brief thoughts on natural gas and energy, which is directly related to the economics of the Russian invasion. Plus I’ll go over some weird monopolies - a possible wallpaper adhesive monopoly and a street sweeping roll-up. There’s also some good news. The Department of Justice is challenging a major merger that would create the ‘big tech’ of health care.
First, some house-keeping. My video with Breaking Points on the real scam behind Amazon Prime has hit over half a million views, and was cited by Washington, D.C.’s Attorney General Karl Racine, who is bringing the antitrust suit I discussed. One of the reasons I asked for subscribers to this newsletter is so that I could expand the reach of the anti-monopoly movement. And it’s working! If you’d like to become a paid subscriber, you can do so here. And to those of you who have done so, thanks!
The EU-Russian Alliance
I enjoy watching CNBC, because it’s the unvarnished raw ego from Wall Street, broadcast every trading day. The day Russia launched its invasion of Ukraine, I watched multiple angry hosts on CNBC’s Squawk Box trade barbs about how Joe Biden was responsible for the Russian invasion. The thinking was that it’s hard to sanction Russia, because Europe and the U.S. need lower fuel prices, and sanctioning Russia would cause fuel prices to go up. Oil and gas are turned into gasoline, but are also used to produce tens of thousands of products, from shoes to fuels to plastics. Like it or not, the modern economy runs on oil and its byproducts. Putin thus knew he’d face no real consequences for the invasion, because of his leverage he has over these vital materials.
The CNBC horde argued that Russia’s ability to control oil and gas markets wasn’t inevitable. The fault lies with environmentalists, firms like Blackrock, and Biden, for pulling capital out of oil and natural gas drilling, and opposing nuclear energy. They largely scoffed at the argument from environmentalists that the fossil fuel industry has been delaying a long-necessary energy transition, and that this factor also contributed to a lack of leverage against Russia.
This political claim has become a common refrain, a demand that the U.S. drill aggressively to get more gas flowing and bring prices down. Regardless of who is correct, or one’s feelings about the invasion, the geopolitical consequences of insufficient fuel and too much demand are clear. First, it meant Russia, a large energy producer, had the means to finance its military apparatus through oil and natural gas sales. Second, it means much of Europe - especially Germany - is dependent on Russian energy exports, aka the Russian supply monopoly.
And third and most interestingly, it actually defers the cost of the invasion of Ukraine.
Here’s why. Russia exports about 4-5 million barrels of oil a day, and the price of Brent crude has gone up to $100 from about $80 at the beginning of the year. That means an additional $100 million a day of revenue for Russia, purely on the back of geopolitical tensions it created. These are back of the hand calculations, so they aren’t precise, but the reality is that in the last two months, Russia has financed part of its build-up and invasion by selling oil and natural gas at elevated prices, much of it to Western European countries now decrying what Russia is doing. In other words, despite the war of words, in the invasion of Ukraine, as former arms negotiator Lucas Kunce noted, Western Europe has provided some of the financing for the Russian attack.
Russia’s market power and its military power, in other words, are twins.
The Domestic Monopoly Problem
This fact would not have surprised the 19th century anti-monopoly movement. Oil and natural gas are the original industrial monopoly problem, going back to the big Daddy of them all, Standard Oil. Standard Oil actually motivated John Sherman to write our original Federal antitrust law, the Sherman Antitrust Act of 1890, because of how worried he had become over the fate of Ohio wildcat drillers and refiners at the hands of Rockefeller’s monopoly over refining, pipelines, storage, and transportation. After all, if you are drilling a well, there’s usually one pipeline, and few refineries, you can use to get your oil or gas to market, so that middleman can dictate prices. Standard Oil was that middleman.
In 1911, the Federal government finally used Sherman’s law to break up Standard Oil. After the passage of the Hepburn Act of 1906 (34 Stat. 589), Federal regulators at the Interstate Commerce Commission began regulating interstate oil pipelines, making them common carriers and subject to rate regulation. Over the next forty years we regulated wells, pipelines, and refineries to create an uneasy peace between independent drillers, the major vertically integrated oil companies (the ‘majors’), and consumers. The break-up, and regulation, ensured that there was some level of fair dealing to independent producers of oil and gas, with price controls on middlemen so they couldn’t dictate prices.
Prior to the decontrol of US oil prices in the early 1980s, quite a few of the major pieces of the oil supply chain, such as high capacity storage, refineries, oil and refined product pipelines, were still owned by major oil companies. Many of these were offspring of the original Standard Oil Trust, but none of them was so large that they could dominate the US. Natural gas pipelines operated within state borders were often owned by smaller companies, but the long haul pipelines that move gas from producing regions to consumers were owned by separate entities.
Unsurprisingly, after deregulation and consolidation in the 1980s, some of the problems that we addressed by breaking up Standard Oil and regulating the industry returned. First came decontrol of prices. For instance, Congress passed the Natural Gas Policy Act of 1978 and the Natural Gas Wellhead Decontrol Act of 1989 to end price controls on natural gas. By the late 1980s, the supply chain assets - pipelines and infrastructure - were aging, the price of oil and gas collapsed, and the majors had mostly gone offshore to large oil fields.
In 1987, the Federal government passed tax rules that allowed companies organized as Master Limited Partnerships (MLPs) to pass through their revenue without corporate tax to their partners as long as 90% of their income came from certain businesses, which included gas gathering systems, pipelines, gas plants, hydrocarbon storage, and other types of energy assets. Avoiding double taxation on corporate dividends made these entities appealing to investors, and they began to buy up the depreciated assets of the majors. One of the earliest large transactions of this type created DCP, a combination of gas gathering assets, pipelines, processing plants, storage facilities, and distribution systems originally held by ConocoPhillips and P66, who themselves are a result of a combination of two former integrated oil companies.
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The whole industry shifted as well with the fracking boom of the 2000s, as high oil prices and new drilling techniques brought in massive numbers of independent drillers. The capacity in the transportation and distribution grid which had been freed up as conventional oil and gas production declined in the 1990s began to fill up, and producers needed to find ways to get the new volumes to market.
With all of this in mind, I spent some time today researching one niche of this very complex industry, a sector called natural gas liquids (NGLs), which are fuels and inputs to chemical production like ethane, propane, butane, isobutane, and pentane. The liquids are all byproducts of natural gas, and represent a significant chunk of the liquid hydrocarbon supply in the U.S.
Ironically, the market power problem I looked at with this NGL market isn’t with the ‘majors’ like Exxon, who are the direct children of Standard Oil, but with the midstream firms who now own what Standard Oil used to. After a series of mergers - including one earlier this year when Enterprise bought Navitas - there is now an oligopoly of midstream firms, corporations like Enterprise Products, DCP, ONOAK, Targa, Energy Transfer, and DCP. The business model of these firms is similar in some ways to Amazon, in that they make their money not from the end product but by charging fees to the producers who must use their networks, aka the independent drillers, and they force those drillers to take exceptionally low prices. Antitrust violations are rife in the industry, as is insider trading and market manipulation. Remember Enron? That’s this industry.
This dynamic is particularly problematic in the natural gas liquids market, where the rules for pricing over pipelines and infrastructure allows for the exploitation of market power. In the straight-up natural gas market, the Federal Energy Regulatory Commission (FERC) regulates pipelines aggressively. This odd corner of the economy where regulation works quite well only exists because of the Enron scandal, and widespread use of false prices to cheat buyers of natural gas. Because of these scandals, Congress passed the Energy Policy Act of 2005, and FERC mandated posting prices and pipeline capacity publicly, as well as open access for pipelines so producers and end users (like Dow and BASF) can buy capacity to ship natural gas. But natural gas is regulated differently than natural gas liquids, where there are far fewer protections for producers. Natural gas liquids aren’t regulated heavily at all, so exploitation is common.
In the natural gas liquids market, the midstream firms make their money by charging fees to producers at every link of the supply chain from compressors that raise the pressure of gas to get it into pipelines to gas processing plants that separate byproducts. And because of their market power, midstream firms can force drillers to take an artificially low price for what they make, and charge them lots of fees. Like Amazon, which charges third party sellers a range of fees on everything from market access to fulfillment, midstream firms extract from the producer side while keeping prices of natural gas liquids low to the end consumer, which are usually large chemical producers. Indeed, midstream firms brag to investors they have “predominantly fee-based earnings” and are insulated from price volatility. But the producers who have to pay these fees aren’t insulated, indeed they simply have financial problems and stop drilling. FERC rules allow for annual fee increases called “indexation,” which compounds the problem. These increases are also linked to inflation, meaning that fees are escalating rapidly in today’s environment.
This dynamic, of a middleman using their market power to crush suppliers, is pervasive in the economy. It’s happening in online retail, in pharmacies, in meat-packing and grain-trading, and publishing and online advertising. It’s the basis of Lina Khan’s paper on Amazon, the thesis of which is that the consumer price frame of modern antitrust has led to an economy where production itself is under threat. Indeed, the long-term impacts of crushing producers is simple. Less production. And while natural gas is regulated reasonably, natural gas liquids are not. And neither is oil. So a large chunk of the domestic oil and gas market is run by Amazon-style middlemen who take the margin of the firms that actually do the exploration for more oil and gas. And so naturally, we can expect less exploration for more oil and gas, even if buyers were willing to pay for it.
At a moment when Russia is taking advantage of its monopoly power over energy production, it’s worth keeping in mind that market power is political power. This is as true for utilities fighting against the installation of solar power because it undercuts their business model as it is for a Russian invasion of Ukraine. And to my friends on CNBC, it’s not just about how many pipelines you build. If you consolidate energy infrastructure into the hands of monopolists, there simply won’t be enough production, period. And that matters, especially during a time of war and high energy prices.
A Wallpaper Adhesive Monopoly?
There are lots of weird monopolies everywhere… From a reader…
We are DIY-ing a small bathroom with wallpaper. Long story short – Roman appears to have a monopoly on wallpaper adhesives and primers.
Started with local Sherwin-Williams. Roman was only brand offered. $25 for a gallon of glue. Product we were sold didn’t match what we needed.
Visited local Lowe’s. They only offered Roman in-store.
Went online. Lowe’s, Home Depot, Ace Hardware, Sherwin-Williams, Benjamin Moore, Amazon. All lead with Roman.
Per Roman website,
1957 founded in Bloomfield, NJ
1986 moves to Calumet City, Il, south of Chicago
1996 acquires Golden Harvest Adhesives
2021 acquires Gardner-Gibson portfolio of wallcovering products including “iconic 234 Clear and 111 Clay adhesives
Products found in the US, India, and Australia
If I knew how to learn more I would. Thought you might be interested.
I looked into this a bit, and it appears that private equity backed ICP Building Solutions has engineered a roll-up in this space. I’ve also heard of attempted monopolization in the fake eyelash industry, and in hair extensions. If you have any info or work in these industries, let me know.
There are weird attempts to monopolize everything, from puzzles to horse shows. My favorite today is street sweeping, which is being rolled up by a private equity-backed Ohio firm called the Sweeping Corporation of America. That corporation was founded in 2017, and this week it just made its 38th acquisition, and its third of 2022. The latest acquisition is R.F. Dickson Co, Inc, located in Downey, California, which provides sweeping services to municipal entities in Southern California. Sweeping Corporation has bought six firms in California alone.
It’s owned by private equity giant Warburg Pincus, where former Treasury Secretary Tim Geithner serves as President. Gotta love that financial engineering.
The Busy Bees at the Antitrust Division
Justice Dept. Sues to Block $13 Billion Deal by UnitedHealth Group, New York Times. This one’s a big deal, with the Department of Justice Antitrust Division filing a challenge to the merger of UnitedHealth’s Optum and Change Healthcare. UnitedHealth is one of the biggest health insurers, pharmacy benefit managers, and physician practices in America. Change has a database of all health claims, and helps facilitate payments between insurers and providers. A merger between the two would have created the ‘big tech’ of health care, as Krista Brown and Olivia Webb wrote last year.
If permitted to go through, Optum’s acquisition of Change would fundamentally alter both the health data landscape and the balance of power in American health care. UnitedHealth, the largest health care corporation in the U.S., would have access to all of its competitors’ business secrets. It would be able to self-preference its own doctors. It would be able to discriminate, racially and geographically, against different groups seeking insurance. None of this will improve public health; all of it will improve the profits of Optum and its corporate parent.
It’s important that the DOJ is suing to block this one, which is the equivalent of the catastrophic Google-DoubleClick merger in 2007.
There’s more that the DOJ Antitrust Division is doing. Today they filed a statement in court against non-compete agreements forced on two thirds of the anesthesiologists in Northern Nevada. Non-competes cover 30-40 million Americans, and this is part of a campaign to get rid of these indentured servitude style contracts. Last week, the Antitrust Division announced a wholesale global investigation of supply chain market power problems, in conjunction with allies abroad.
That’s a LOT. Antitrust chief Jonathan Kanter is doing a good job so far.
What I’m Reading
White House Lays Out Broad Changes to Address Supply-Chain Shortfalls, Wall Street Journal
How UPN Ushered in a Golden Decade of Black TV — and Then Was Merged Out of Existence, The Hollywood Reporter
FTC’s top economist resigned amid dispute over pharma study, Politico The economist mentioned here, Marta Wosinska, was at the Food and Drug Administration when drug shortages started years ago, and she did not realize that it was group purchasing organization monopolists that caused them. It’s good for policy when people like this leave the government.
Why the White House has stopped telling the truth about inflation and corporate power, Robert Reich
Epic, Apple, and Our Small Knitting App, Craft Industry Alliance
Goldman Sachs CEO says that Lina Khan and Jonathan Kanter have stopped big tech mega-mergers, but the rest of the economy is consolidating, CNBC
Hearing Aid Cartels?! The Lack of Transparency in the Hearing Aid Industry, Hears Hearing & Hearables
This last one is a tweet showing that hospitals simply won’t tell the public what they charge for various procedures, even though the law mandates they do so. Hmmmm.
Thanks for reading.
And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. If you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.
P.S. Mergers are often bad.
BIG fan (Dad joke). Long time listener, first time call. I am a prolific cyclist in New York and have always loved using CitiBike bc the bike is off your hands the moment you arrive at your destination.
However, since Lyft's acquisition, the services and quality have deteriorated tremendously. Every rider you talk to or see at the docks (which are frequently blocked, broken, or along with their bikes) confirms the same story. In turn, prices keep going up.
The ebike is an ongoing source of frustration (at a premium) and the regular bikes are wildly inconsistent in quality. You have to guess which bike will be functioning i.e. brakes intact, gears working etc...and you often guess wrong.
I think people think of CitiBike as a public utility but it is really a private monopoly as there are no other bike share options in New York. I imagine this story is not unique to New York as well.
Not sure if this is up your alley, but if you broke down cheerleading, the bikesharing monopolies might also be good fodder for your sharp pen.
So you know that I'm actually speaking from experience. I've done just under 1500 rides, 1546 miles, 212 hrs and I'm in the top 1% of riders.
I keep trying to explain to people, the leveraging power Putin has with Western Europe's energy dependence, but it's hard to get through to people undergoing moral outrage and watching cable news.
Hi Matt, just subscribed. Great research and explanation once again. I spent my career in supply chain and recall a sales visit in Nashville area to the HQ’s of a company buying salvage and scrap yards…private equity funding it. As you know, historically, family run enterprises. Look forward to future articles. MM