U.S. gasoline consumers are in for “sticker shock” when they fill their tanks to begin this summer's gasoline season. The U.S. average price for regular gasoline is up $0.52/gal from last year in the latest DOE survey.
Out here in Southern California, we are already paying $4+/gallon for premium in my community. Doubt it will affect driving habits here, but around the globe, higher prices will dent oil consumption growth, at least a little, maybe more than that.
OPEC’s production deals, coupled with geopolitical issues, have caused oil prices to rise unexpectedly fast, even in the eyes of those colluding. A month ago, President Trump tweeted that OPEC is causing oil prices to be "artificially high," referring to OPEC's collusion, as defined under America's antitrust laws.
Saudi Arabia and Russia signaled their intention to increase production in a turnabout today. KSA's decision is clearly part of the bilateral negotiations regarding Iran, though a factor could be KSA is reportedly worried about facing American antitrust laws, if a Congressional bill is passed and signed into law by the president.
President Putin is more concerned that high oil prices are bad for consumers and encourage competitors to take market share. And so the Russians would rather have a lower price around $60/b (Brent, means WTI about $55).
NOPEC
Congress has revived a bill dating back to over a decade that would punish oil cartels that collude on production under the Sherman Act. In the past, courts have decided to give sovereign governments immunity under the Act. The No Oil Producing and Exporting Cartels Act (H.R. 5904 also known as NOPEC) would make OPEC subject to antitrust laws by removing a state immunity shield created by judicial precedent. The bill has bipartisan support.
In a press release dated May 24, the House Judiciary Committee Chairman Bob Goodlatte (R-Va.) stated:
The purpose of antitrust law is to protect consumers from behemoths in any industry that threaten competition and control prices. The fact that OPEC has not been held accountable for its cartel behavior makes a mockery of U.S. antitrust law, threatens the American economy, and has the potential to harm our national security.”
At the Hearing on May 18th, Chairman Goodlatte stated:
As the Supreme Court has explained, “[u]nder the Sherman Act, a combination formed for the purpose and with the effect of . . . stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.” OPEC’s organizational document, under the heading “[o]bjectives,” states that the “[o]rganization shall devise ways and means of ensuring the stabilization of prices in international oil markets.”
The NOPEC legislation under consideration entrusts discretion whether to bring a case solely to the Executive Branch, not a private party. Courts could hear cases that the Executive Branch elected to bring, after considering the foreign policy and national security implications.
Mr. Goodlatte concluded:
Despite strong support in Congress over a period of years, NOPEC has not yet become law. However, recently, President Trump signaled that he may be more receptive than prior presidents to NOPEC. This creates a real opportunity to enact this long overdue law.”
Trump’s View of OPEC
In 2008, Mr. Trump was interviewed by Jim Cramer about OPEC. In this video (starting 5:38), he stated:
The biggest problem I never hear anybody talk about. I told you about it once. Every time they lower interest rates, the cartel, because I call it a cartel - the illegal monopoly - raises oil prices. So the monopoly, because that's what it is, a total illegal monopoly. If businesses ever formed OPEC, everybody would be put in jail. Every time a country hits oil, they are invited into the cartel. It's a disgrace. Now you have oil prices that are going to be over $100, and nobody in this country calls and says. 'Get that goddamn oil price down. You get it down. And you get it down fast.'"
Conclusions
If the NOPEC legislation passes, I expect President Trump would sign it into law as a policy tool. And if any oil producers continued to collude, the Justice Department could bring an action.
Congress passed the Sherman Antitrust Act in 1890, and this is the source of all American anti-monopoly laws. The law forbids every contract, scheme, deal, or conspiracy to restrain trade.
The Saudis are very likely to respect U.S. laws to preserve their access to the U.S. market. And Trump is very likely to negotiate rather than have the Justice Department bring lawsuits. He prefers using the threat of financial impacts (trade wars, sanctions) to achieve his goals.
As a result, oil producers would be competing for market share, as was the case after OPEC decided to open the taps in its November 2014 meeting. Prices would drop again because world production would exceed demand.
The law would put an end to the threat of oil embargoes, such as the 1973-74 oil crisis, when Arab oil producers decided to collude to restrict oil supplies to the U.S. and other European countries. President Nixon was not as adept at negotiating a solution at that time, as this president is at this time. I would say the same about the other U.S. presidents of the modern era since Nixon.
It also would likely reduce the need for oil in the Strategic Petroleum Reserve, most of which could be sold in the market for the benefit of the U.S. Treasury, helping to reduce budget deficits, as the president wants to do.
P.S. U.S House members statements:
Representative Chabot: “When we first introduced this legislation more than a decade ago, gas prices were climbing toward $3 a gallon, and would eventually peak at over $4 a gallon in 2008. In recent years, we have done a good job reducing our dependence on foreign sources of oil, by increasing domestic production. Consequently, we have had much lower gas prices. However, we are still subject to fluctuations in the global market. The lower prices have angered oil cartels around the world, and now OPEC is ramping up its price-gouging efforts once again. The legislation we are reintroducing today would significantly help to fight price-gouging by subjecting OPEC nations to antitrust laws, and prohibiting them from unilaterally withholding supply with the intent of raising prices or creating a shortage. We managed to pass this important legislation in the House a few years back, but now we must finish the job and get this bipartisan legislation to President Trump’s desk for his signature.”
Ranking Member Nadler: “The NOPEC Act will allow aggressive enforcement of U.S. antitrust law against OPEC to keep oil prices in check, and I am proud to see bipartisan cooperation on this important issue. When acting collectively, OPEC can greatly influence crude oil prices—the largest single determinant of retail gas prices—touching almost every aspect of Americans’ daily lives. Because of a series of court decisions, however, U.S. antitrust enforcers are unable to protect American consumers and businesses from the direct harm caused by OPEC’s blatantly anti-competitive conduct. The NOPEC Act directly addresses these decisions by amending procedural law and expressly authorizing the Justice Department to pursue antitrust litigation against OPEC members, should it choose to do so.”
Subcommittee Chairman Marino: “Last week in my Subcommittee on Regulatory Reform, Commercial and Antitrust Law, several experts testified on the importance of the NOPEC Act and the need to hold OPEC responsible for their anticompetitive behaviors that drive up the cost of gas for all Americans. As the summer driving season begins and gas prices begin to rise again, it is important that Congress takes necessary steps to bring relief to our constituents. The NOPEC Act will ensure that United States Antitrust law is applied effectively and fairly while bringing lower prices to the pump for consumers.”
Subcommittee Ranking Member Cicilline: “Since 1960, OPEC has manipulated the supply and price of oil with total impunity under American law. They constantly drive the cost of oil higher, meaning working people in our country end up paying more for gas for their car or heat for their homes. It’s time for this to end. I’m proud to introduce the NOPEC Act to give Americans relief from the high costs OPEC has forced on them for more than half a century.”
Representative Handel: “I’m proud to support Congressman Chabot’s NOPEC legislation to hold OPEC accountable for its anticompetitive behaviors that HARM American families. With Americans hitting the road at record numbers, it is critical that our gas prices are driven by market forces instead of by the whims of a foreign oil cartel. This important legislation will provide relief to consumers, while ensuring that our crucial antitrust laws are applied fairly.”
This article was written by
Managing Director, Boslego Risk Services
Harvard College, Economics (Honors), BA
Undergraduate thesis: "OPEC Pricing Strategy."
Harvard Business School Case Study: "Industrialized World and Oil."
Stanford University Graduate School of Business, MBA
I also provided frequent market assessments and recommended trading positions to major trading firms, such as Enron, Phibro, Sempra and Vitol, and to large hedge funds.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.