OPEC

House Passes NOPEC: Will US Sue OPEC States?

The US House has just passed HR 6074, colourfully titled the No Oil Producing and Exporting Cartels Act of 2008 (NOPEC) allowing the Department of Justice to pursue cases against OPEC member states on antitrust grounds via amendments to the Sherman Act. Although the Senate has yet to approve the bill, it will be interesting to see what will happen if this bill passes into law and is implemented. Like the folly that is the farm bill, this too has the capacity to really rile any number of LDCs, particularly OPEC members. From the Congressional Report Service, here are it main provisions:

Gas Price Relief for Consumers Act of 2008 - No Oil Producing and Exporting Cartels Act of 2008 or NOPEC - Amends the Sherman Act to make it illegal for any foreign state or instrumentality thereof to act collectively or in combination with any other foreign state or any other person, when such action has a direct, substantial, and reasonably foreseeable effect on the market, supply, price, or distribution of petroleum in the United States, to: (1) limit the production or distribution of oil, natural gas, or any other petroleum product (petroleum); (2) set or maintain the price of petroleum; or (3) otherwise take any action in restraint of trade for petroleum.

Denies a foreign state engaged in such conduct sovereign immunity from the jurisdiction or judgements of U.S. courts in any action brought to enforce this Act;

States that no U.S. court shall decline, based on the act of state doctrine, to make a determination on the merits in an action brought under this Act;

Authorizes the Attorney General to bring an action in U.S. district court to enforce this Act;

Makes an exception to the jurisdictional immunity of a foreign state in an action brought under this Act;

Directs the Attorney General to establish in the Department of Justice (DOJ) a Petroleum Industry Antitrust Task Force to, among other things, develop, coordinate, and facilitate the implementation of DOJ investigative and enforcement policies related to petroleum industry antitrust issues under federal law.

Directs the Comptroller General to conduct a study evaluating the effects of mergers addressed in covered petroleum merger consent decrees on competition in the markets involved, including the effectiveness of divestitures required in such decrees in preserving competition in those markets.

I am of two minds about this bill. Having stayed in oil importing countries my entire life, the idea of producer cartels does not appeal to me or my pocketbook. The Heritage Foundation unsurprisingly supports this legislation; here is a historically informative snippet:

The cartel's operations ensure that its members' oil and gas economies remain insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets (oil fields and pipelines). This is a testament to the cartel's de facto monopoly over the petroleum market. Indeed, the only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act, in IAM v. OPEC. But the case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court affirmed, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states.

In practice, however, I do think this bill is more trouble than it is worth. First, I doubt whether OPEC member countries can significantly increase their output at this point in time. Yes, MNCs armed with better extractive technologies can probably eke more output given the chance, but the prospects of allowing MNCs to do so are hardly favourable in petroleum exporting states. Second, and more pointedly, I am convinced that suing a member of OPEC will have the opposite effect of actually slowing OPEC shipments to the US instead of promoting less collusion as intended. As with the farm bill, President Bush plans a veto, but veto-proof majorities appear to exist in both houses of Congress. It's game on although I am firmly convinced that the US would come out on the losing end over any spat with OPEC. Here is a summary from Reuters:

The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.

The bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow. The measure passed in a 324-84 vote, a big enough margin to override a presidential veto. The legislation also creates a Justice Department task force to aggressively investigate gasoline price gouging and energy market manipulation.

"This bill guarantees that oil prices will reflect supply and demand economic rules, instead of wildly speculative and perhaps illegal activities," said Democratic Rep. Steve Kagen of Wisconsin, who sponsored the legislation. The lawmaker said Americans "are at the mercy" of OPEC for how much they pay for gasoline, which this week hit a record average of $3.79 a gallon.

The White House opposes the bill, saying that targeting OPEC investment in the United States as a source for damage awards "would likely spur retaliatory action against American interests in those countries and lead to a reduction in oil available to U.S. refiners." The administration said less oil going to refineries would limit available gasoline supplies and raise fuel prices.

Foreign investment in U.S. oil infrastructure has declined in the last decade. But the state-owned oil companies of several OPEC nations are owners of U.S. refineries, and those investments could be affected if the legislation becomes law, said Arlington, Virginia-based FBR Capital Markets Corp.

The bill also requires the Government Accountability Office to carry out a study on the effects of prior oil company mergers on energy prices.

The Senate would still have to approve the House measure. The Senate previously approved similar legislation as part of a broad energy bill. However, the OPEC-suing provision was removed after White House opposition in order to get the underlying energy legislation signed into law.