Economies of Scale: The Texaco Chevron Merger

The October 2001 merger between Chevron and Texaco produced a company with $104 billion in annual revenue and created cost-cutting opportunities through economies of scale. While it is too soon to report any long-term savings from the merger, says Paul Larson, an analyst who covers ChevronTexaco for Chicago-based financial analyst Morningstar, “that is clearly what the market is expecting and what the stock price indicates.” Since the merger, ChevronTexaco stock has hovered around $90 a share.

There are other advantages as well. The combined entity now has operations in 180 countries and is the largest oil producer in the lower 48 states. John Cross, former CIO of competitor British Petroleum, says that the merger makes ChevronTexaco a global power. “Being midsize helps nothing. The old companies were not big enough to take on the big guys, but they were too big to be efficient like the small guys.”