The next section of the article describes the USWC oil and refining industry.
During the 1980s, domestic production on the USWC (i.
Imports of foreign crude oils filled the production shortfall on the USWC and accounted for about one-quarter of crude oil consumed on the USWC by the end of the decade.
12) BP owned no USWC refineries when the merger with ARCO was announced, and it sold all of its ANS production on the merchant market.
Both common sense and casual empirical observation suggest that ANS prices on the USWC must be closely related to prices in world crude markets.
USWC refiners can substitute imported crude oils for ANS.
We can represent the key features of ANS price determination in a dominant-fringe model where BP is a dominant firm setting USWC prices for ANS within the arbitrage constraints imposed by world crude prices.
Thus the effective residual demand for ANS on the USWC that BP perceives is represented by the heavy dotted line in figure 4.
The first regime, characterized by observed purchases along the downward sloping demand curve, corresponds with the time period when the USWC was a net exporter of crude oil.
The production and consumption data depicted in figure 1 show that the USWC was no longer a surplus producer of crude oil after about 1992, and from 1996 on, the USWC was clearly a net importer of crude oil.
An important implication of our economic model is that if the USWC is a net importer of crude oil, BP cannot exercise significant market power because it faces direct competition from imported crude oils, competition wholly unaffected by its merger with ARCO.