Friday, July 06, 2007

Suing OPEC

Today's Wall Street Journal looks at an aspect of the pending energy legislation in Congress that I hadn't really focused on, the so-called "NOPEC" provision that would allow the Organization of Petroleum Exporting Countries (OPEC) to be sued in US court for anti-competitive behavior. The article cites a similar measure in 2000, though the idea is much older than that, going back at least to the time of the first energy crisis in 1973-74. While the reasons for today's high oil prices are complex, as I discussed Monday, there's little doubt that OPEC is acting to restrain supply and drive up prices, as they have on many previous occasions. Taking the cartel to court over this issue is not the worst idea I've ever heard, though it could prove severely counterproductive for a nation as reliant on oil imports as we are. I think it all comes down to how it is pursued.

Including its newest member, Angola, OPEC produced 41.7% of the world's petroleum in 2006. And while Canada and Mexico both deliver more oil to the US than any single OPEC country, the cartel collectively supplied just under half our oil imports last year. With global oil demand having grown more rapidly than non-OPEC production for the last several years, OPEC has regained sufficient market leverage to exert significant control over prices. They may not exactly set the price, but they meet periodically in Vienna to discuss restraining supply to defend their target price range. If the CEOs of BP, Chevron, ConocoPhillips, Shell and ExxonMobil were to meet in Houston to agree on output quotas, they would quickly find themselves in a federal courtroom defending their actions.

While the idea of suing OPEC might sound sensible and even self-evident, it could be quite difficult to mount a successful anti-trust action against them. As the Journal points out, the cartel's members are not companies, but sovereign nations with the same "sovereign immunity" afforded to all governments. Furthermore, they could point to the precedent of the Texas Railroad Commission, which had effectively set world oil prices before OPEC even existed, by setting quotas to prevent unrestrained production that might damage the state's oil fields. Perhaps US prosecutors could finesse OPEC's sovereign defense by going after the national oil companies that carry out OPEC's policies, in order to get a conviction, but at that point our problems would only be starting.

If OPEC's members owned no assets in the US, an anti-trust conviction might provide a satisfying, symbolic victory. However, the Venezuelan state oil company, PdVSA, owns 100% of Citgo. Saudi Refining Inc., a subsidiary of Saudi Aramco, owns 50% of a refining & marketing joint venture with Shell. These two entities alone have billions of dollars worth of assets in the US, without counting the diversified US investments and deposits of many other OPEC countries. Because these countries own a variety of things that a US court could attach or seize in an anti-trust judgment against OPEC, the result could quickly devolve into a very risky game. It is hard to imagine us seizing OPEC's assets here without triggering at least a corresponding seizure of US property or investments in OPEC countries, or an actual OPEC embargo against the US. That would put our current notions of energy independence to the test, exposing just how aspirational they are. Nor is it obvious that the final outcome would actually alter the collusive behavior that prompted the action.

There might be a better alternative. If we are serious about holding OPEC to account for openly conspiring to restrict production and set global oil prices, we should do so in the appropriate multi-lateral body, whether the World Trade Organization or the World Court. Whatever misgivings Americans may have about the institutions of global governance, a finding in an international venue would be the only kind that could be enforced against OPEC across the globe, effectively deterring reprisals by holding every OPEC member's global holdings hostage to their good behavior.

I'm sure it's tempting to believe that previous administrations and Congresses shied away from these steps because they were beholden to oil interests or secretly winking at OPEC's behavior, because it somehow served opaque US interests. While Monday's posting might have convinced you otherwise, I tend to follow Occam's Razor in questions such as this. The simplest reason why we have never gone after OPEC for anti-trust violations is that our elected leaders have always understood that the consequences of winning would not be worth the hollow satisfaction it might provide.

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