LMGT-2434 5001 1 Principles of Traffic Management

Assignment 8

1. The integrated ownership of pipelines was initially used by some oil companies to gain control of
oil-producing areas. How did they use their transportation network to gain market control?
What other reasons can be offered for integrated ownership? Are these reasons valid in today’s
business environment?

As noted earlier, due to the decision rendered by U.S. Supreme Court in the Champlin Oil Case,
many pipelines operate as common carriers. Hence, although some private carriers exist today,
the for-hire carriers dominate the industry. Common carriers account for approximately 90
percent of all pipeline carriers.

With some exceptions, oil companies have been the owners of the oil pipelines-beginning with
Standard Oil Company purchasing the pipelines operated by the Pennsylvania Railroad.
Subsequently the oil companies developed pipelines more extensively to control the industry
and enhance its market dominance.

Oil companies became the principal owners of pipelines, but there has been some shift more
recently with an increased number of pipeline companies operating as transport carriers.

The federal government entered the pipeline business briefly during World War II.

 Big Inch
 Little Inch
 Were sold to private companies after the war
 Some pipelines are joint ventures among two or more pipeline companies because of
the high capital investment
 Large-diameter pipelines
Individual, vertically integrated oil companies control the largest share of the pipeline
revenues, followed by jointly owned pipeline companies.
Yes this is still valid in today’s business environment

2. The pipeline industry has approximately 100 companies, as compared to the motor carrier
industry with more than 50,000. What are the underlying economic causes for this difference,
given the fact that they both carry approximately the same volume of intercity ton-miles?

Intramodal competition in the pipeline industry is limited by a number of factors. First, there are
a small number of companies- slightly more than 100. The industry, as noted previously, is
 oligopolistic in market structure, which generally leads to limited price competition. Second, the
economies of scale and high fixed costs have led to joint ownership of large-diameter pipelines
because the construction of small parallel lines is not very efficient. Finally, the high capital costs
preclude duplication of facilities to a large extent.

3. The typical pipeline company has high fixed costs. What economic factors account for the
situation? What advantages and disadvantages does their cost structure present?

Even though pipelines have high fixed costs, the differential pricing practices common in the
railroad industry are virtually nonexistent among pipelines.

 No classification system used due to limited number and specialization of commodities.

 No differential pricing due to nature of operations (one-way movement, limited
geographic coverage, limited variety of products)
 Rates quoted on a per barrel basis
o Point -to-point or zone-to-zone
o Minimum shipment sizes (tenders) required
o Has a high proportion of fixed costs with low capital turnover
o Pipeline owners have to provide their own right-of-way by purchasing or leasing
land and constructing the pipeline and pumping station along the right-of-way.
 Advantages
o Pipeline industry has low rates
o Pipeline has very good loos and damage record (L and D)
o Can provide a warehouse function because their service is slow
o Dependability

Disadvantages

o Companies have to hold high levels of inventory

o Limited geographic flexibility
o Limited number of products to select from
o Small shipment sizes