marketing in an attempt to block the new oil from forward markets. As a result, nonintegrated crude producers were forced to integrate into refining and marketing in order to have outlets for their oil. Kahn and deChazeau sum up the historical record of vertical integration by stating:

All it really says is that companies have sought managerial control over their raw material supplies and product distribution because they wanted the greater assurances that financial control brings. Attempts to supply narrower and more precise interpretations invariably lack conviction.

Thus, in the early period of the industry, vertical integration served as a means of introducing stability into the raw materials markets.

Vertical integration, per se, does not create monopoly power. However, in situations where integration encompasses a market where such power exists, vertical integration can serve a means by which this power can be used to affect events at other markets within the integrated operation. It has been alleged that because institutional features have made crude oil production relatively more profitable than other stages, integrated firms have been able to establish a vertical price squeeze on nonintegrated rivals.

Professor Alfred Kahn, a long time student of the economics of petroleum, argues that nonintegrated refiners have been subject to the type of price squeeze indicated above. An independent refiner buys crude oil inputs in a market where price has been held above marginal costs because of government sponsored controls over supply and sells his output, gasoline in a relatively competitive market. The price at which crude oil can be obtained in the market is a crucial matter to the independent refiner but the price to the integrated firm represents only a transfer price. The high crude prices create a squeeze on the independents' margin but have no real effect on the operation of the integrated firm. The only effect in the integrated firm is that more of its profits will occur at the crude level than at other stages. In this situation, independent firms are likely to integrate backwards into crude production in order to (1) ensure adequate crude supplies and (2) eliminate their susceptibility to any price squeeze.