If OPEC Is a Cartel, Why Isn't It Illegal?

In America, cartels – formal agreements among companies to fix prices and dictate sales rules – are bluntly illegal.

But the world’s largest cartel – OPEC, the Organization of Petroleum Exporting Countries representing 13 major oil producing nations — is not only recognized as a legal entity, it’s protected by U.S. foreign trade laws.

With oil prices careening toward $100 a barrel, some policy makers are wondering why the world community, and the U.S. in particular, doesn’t simply declare OPEC illegal.

“We don’t have to stand by and watch OPEC dictate the price of gas,” says House Judiciary Chairman John Conyers, D-Mich. “We can do something about this anti-competitive, anti-consumer behavior.”

The idea is not so far fetched. Earlier this year, Congress moved to punish OPEC as an illegal cartel. But the Bush administration has blocked such efforts saying they’ll only incite retaliation and hurt American businesses.

In May, the House overwhelmingly passed a bill giving the Justice Department the ability to sue the Middle East-dominated OPEC for collusion and price fixing. A few weeks later the Senate overwhelmingly passed a comprehensive energy bill that included similar anti-OPEC provisions.

Now, the House and Senate are trying to finalize that energy bill by year’s end. President Bush, however, has said in no uncertain terms that he’ll veto any energy bill that includes the anti-OPEC language.

Such a law would “encourage retaliation against American businesses abroad, discourage job-creating investment in the U.S. economy and injure U.S. relations with other countries,” Allan Hubbard, director of President Bush’s National Economic Council, wrote in a letter to House Speaker Nancy Pelosi last month.

OPEC countries, which include the biggest producers in the Middle East and Africa as well as Venezuela and Ecuador, produce about 40 percent of the world’s oil will take in some $500 billion in oil revenues this year, according to U.S. government figures.

The organization was formed in 1960 to give the producers more control over petroleum prices and production. In the early 1970s, OPEC brought the West to its knees with oil embargoes. But the group lost clout in the late 1990s, when oil prices tumbled.

The recent run-up in oil prices has allowed OPEC to reassert itself as a major force in the oil market, experts note.

A 1979 U.S. District Court decision held that OPEC’s pricing decisions are essentially "governmental" acts of state, as opposed to "commercial" acts, and thus are beyond the legal reach of U.S. courts thanks to the Foreign Sovereign Immunity Act of 1976.

The bills in Congress seek to overturn this decision. A similar effort in 2005 failed, however, and insiders say resistance from the Bush administration makes success for so-called NOPEC efforts unlikely this time around as well.

“I don’t think it will happen with that veto threat,” Lucian Puglaresi, president of the Energy Policy Research Foundation in Washington, tells Newsmax. “There are so many other controversial issues on energy that it’s too hard to make it part of the package.”

He notes that Senate Energy Committee Chairman Jeff Bingaman, D-N.M., and the committee’s ranking Republican Pete Domenici, also from New Mexico, are united against the idea.

Conyers disagrees. “The Bush administration’s threat to veto this bill is just further proof that the administration favors the international oil cartel over the American consumer,” Conyers tells the Associated Press.

Industry experts, however, largely side with the administration — and with OEPC.

“It would be silly if it weren’t so troubling,” Chris Joyner, Washington representative of the American Petroleum Institute, tells Newsmax. “For Congress to suggest that foreign governments should be sued for constraining production is somewhat ironic considering energy bills in Congress would do that very thing domestically.”

The House bill was introduced by Conyers and Sen. Herb Kohl, D-Wisc. Kohl, lead author of the Senate’s energy bill, was instrumental in pushing through the provision.

Analysts say the anti-OPEC effort is more a matter of political grandstanding than policymaking.

“People have had their fun, and now it’s outta here,” Puglaresi says. “It doesn’t generate any new production or lower the price of oil.”

With crude oil prices soaring more than 3 ½ times since early 2003, Amy Myers Jaffe, associate director of Rice University’s Energy Program, notes that it’s obviously in U.S. interest to curb OPEC’s monopoly pricing power on crude.

“But there are several ways of doing that, and I’m not sure lawsuits are the most effective way,” she says. “If Congress would pass a bill with more emphasis on alternative energy and dramatically lowering U.S. demand through conservation measures, that might be more effective.”

In addition, if oil consuming nations banded together in the same way that producers do in OPEC, the consumers could break the OPEC stranglehold, she says.

“If we could get all the consuming countries together and said we will apply WTO rules etc., and we will boycott the oil of producers that don’t allow open access to their energy resources, that could be effective too,” she says. “If we got just China and the EU to hold fast, there is a lot we could do.”

Jaffe says Congress is mistaken in focusing so narrowly on OPEC. “A big problem is that major oil companies aren’t spending money on exploration. Instead, they are spending money on share buybacks,” she points out.

“If I’m a Congressman, my interest is not in making Exxon Mobil shareholders rich,” Jaffe says. “You can implement a windfall profit tax that they would have to pay only if they aren’t spending a reasonable percentage of their profits on exploration or alternative energy. You could make share buybacks non-deductible. There are plenty of creative things Congress could do.”

It’s not even clear exactly how much power OPEC has over oil prices, Puglaresi says. “Prices are more a function of supply and demand. I’d be more worried about resource nationalism than OPEC,” he says.

Many countries won’t allow U.S. companies reasonable profit from helping them extract their oil. “Start with Russia and Venezuela and move your way up,” Puglaresi says.

OPEC isn’t holding back on production, Joyner says, noting that the cartel’s output levels rose in both September and October.

“The issue isn’t that production is falling. The question is what demand is doing,” he says. Oil consumption in China and other developing nations is exploding.

Like the Bush administration, Joyner worries how the international oil market would react to U.S. attempts to prosecute OPEC. Foreign nations might be less willing to grant the U.S. access to their energy supplies, he says.

The idea of lawsuits isn’t very practical, Jaffe points out.

“Think about how long a lawsuit takes: it’s a publicity stunt,” she says. “There are so many other policies we could try to limit the powers of OPEC, but they would require sacrifice for people in the U.S.”

If the U.S. were to bring anti-trust suits against OPEC, determining damages and collecting indemnities could turn into very thorny issues, says Douglas Holtz-Eakin, a senior fellow at the Peterson Institute for International Economics in Washington.

Like others, he sees the Congressional effort against OPEC as essentially hot air, but he says it might serve a useful purpose in the end.

“There is always a place in the American political economic system for artful rhetorical assault through legislation,” he says. “You don’t actually want it to happen. You yell instead of doing something stupid. I never took it seriously.”