In a The Hill article published on March 2nd, BGS Advisor Jeffrey Kupfer discusses the impact of the No Oil Producing and Exporting Cartels Act (NOPEC).
Say no to NOPEC to maintain a stable oil market
By Jeffrey Kupfer March 2, 2019, 2:00 PM
As originally appeared in The Hill
In news seemingly ripped from the 1980s, the United States is once again on the brink of a battle with the Organization of the Petroleum Exporting Countries (OPEC), the 14-nation oil-producing group, and the 10 other countries that often collaborate with it to manage global oil supply.
That’s because the House Judiciary Committee has advanced legislation known as the “No Oil Producing and Exporting Cartels Act” (NOPEC), which gives the Department of Justice the legal teeth to take antitrust action against those oil producers.
But while Presidents George W. Bush and Obama, as well as congressional leaders, stopped previous runs at targeting OPEC through the Sherman Antitrust Act, it’s uncertain where the Trump administration will fall on this issue.
From his social media missives calling OPEC a “total illegal monopoly” and urging its members to “relax,” to telling world leaders at the U.N. General Assembly that OPEC was “ripping them off,” it’s pretty clear that President Trump would at least consider supporting NOPEC.
Former Acting Attorney General Matthew Whitaker intimated as much before the House Judiciary Committee in February, stating that he looked forward to passing and implementing NOPEC.
To be sure, cartels are bad, and free markets are good. We should closely examine and try to eliminate any activity that undercuts competitive commercial markets. On the other hand, NOPEC has been identified time and again as a counterproductive policy response.
This was true when I served at the Energy Department a decade ago, at which time oil prices burst through the $100 mark; and it’s true now when prices are much lower.
On Thursday, Energy Secretary Rick Perry made that precise point, noting that the legislation could drive up energy prices in the long term. So while NOPEC may score some immediate rhetorical points, it is bad for America and the global economy.
Today, U.S. oil production is booming, with 2019 poised to surpass the previous record of 9.6 million barrels per day set in 1970. In recent years, we have seen an increase in American oil exports from more than 3 million barrels per day in 2012 to over 7.3 million in January, according to Energy Information Administration data.
We’re importing the least amount of oil into the U.S. since before the 1970s. In fact, America’s surging export levels have turned into a geopolitical weapon. In short, we are winning when it comes to oil based on greater production and sensible policy.
The reality is that OPEC often plays a stabilizing role in global oil markets. Breaking up OPEC with legal action could leave the global oil market fractured, causing larger and more unpredictable “boom-bust” periods.
After all, as my former Bush administration colleague and current Rapidan Energy Group President Robert McNally explained in his recent book, “Crude Volatility: The History and the Future of Boom-Bust Oil Prices,” from 1932 to 1972, Texas and other oil producing states, with Washington’s blessing, aggressively used oil quotas to keep oil prices stable, setting an example OPEC later tried to follow.
Michael Cohen, head of commodities research at Barclays, underscored this point, explained, “Overall, we believe that if such legislation moved forward, it would threaten the sustainability of the OPEC and OPEC+ grouping, add more volatility to the market, and make the perceived floor under prices even more fragile.”
This possible volatility was also highlighted in 2007 by the Office of Management and Budget, which warned that targeting OPEC could result in oil supply disruptions and actually raise gas prices, not lower them. In the end, passage of NOPEC could make unpredictable oil market issues even more of a political struggle and hurt American consumers in the process.
Retaliation is a significant threat. OPEC nations could pull back on their U.S. investments to prevent them from being seized. Consider that Saudi Arabia is now estimated to own approximately $1 trillion worth of investments in the U.S., including significant downstream oil operations, like a major oil refinery in Texas.
OPEC nations could cut their cooperation with U.S. oil and gas firms to the benefit of nations such as Russia. They could react to U.S. legal action by limiting the import of other major U.S. goods, like agricultural products. Legal action against producing countries could mean that U.S. energy companies are drawn into costly lawsuits themselves.
Even serious consideration of NOPEC could increase instability in the oil market and hurt foreign investment in the U.S. With sanctions currently in effect against Iran and Venezuela, the last thing we need is additional uncertainty.
It remains to be seen how the president will treat NOPEC. Even the politics are muddy, given that anti-OPEC measures like this bill have historically been associated with congressional Democrats. The winning move for America does seem clear.
Let NOPEC die on the vine, focus instead on what has worked for America’s oil success story, and give the American economy and its crucial oil sector the stability and certainty it needs to drive America’s future.