NOPEC Oil Nonsense
On February 7, 2019 the House Judiciary Committee passed H.R. 948, the No Oil Producing and Exporting Cartels Act, also known as the NOPEC bill. A companion bill is under review in the Senate Finance Committee. The bill has broad support among both Democrats and Republicans.
The proposed legislation would allow the United States government to pursue Sherman Antitrust Act lawsuits against any oil producing country, or their agents, that engage in cooperative agreements with other oil producers to limit oil production.
The legislation would remove a long standing practice that grant nation-states freedom from legal jeopardy under established “Sovereign Immunity” provisions in U.S. and international laws. While undertaking measures to stop anti-competitive practices seems like a good idea, the legislation is bad law and unlikely to achieve any of its goals.
It is important to understand that the most important counter-weight to OPEC is sustaining the rapid reduction in U.S. net oil imports. A combination of unprecedented expansion of domestic oil production from unconventional geologic formations and improved efficiency of the U.S. automobile fleet has reduced U.S. net imports from over 13 million barrels/day in 2008 to only 545,000 barrels/day in November of 2018.
These are official numbers from the U.S. Energy Information Administration (EIA). More domestic production is on the way as EIA has concluded that the U.S. could add another 5-10 million barrels/day in the coming years and will become a net oil exporter.
U.S. shale production alone accounted for 30 percent of world capital expenditures for oil and gas extraction in 2018 and not all this capital was sourced domestically. Sustaining an effective counter OPEC strategy will require paying attention to common sense opportunities and policies that permit continued expansion of U.S. oil production as well as infrastructure and processing facilities to move crude oil and petroleum products to domestic and export markets.
OK, but shouldn’t we also go after the OPEC producers. The problem with the legislation is that it is extremely broad and divorced from the real world. It comes with a long array of unintended economic and legal consequences. The language in the bill is so broad that it could be used to sue non-OPEC states and U.S. energy companies that do business with OPEC members.
Some foreign investment in the U.S., particularly in the refining sector would be subject to seizure by the government. The bill applies not only to foreign states, but to any instrumentality or agent of a foreign state as well as “any other person” that acts collectively or in combination with a foreign state or instrumentality or agent of a foreign state.
It also seeks to eliminate a key legal defense that U.S. energy companies have long relied on as a bulwark when caught between the competing dictates of the U.S. antitrust laws and the legal requirements of the foreign jurisdictions in which those companies often do business.
The potential economic downsides of the legislation are substantial. As assets get tied up in court we can expect retaliation and asset flight out of the U.S. by OPEC and non-OPEC nations that are aligned with OPEC. Although some OPEC nation states may restrict crude production, their national oil companies are heavily invested in U.S. refining and related energy companies. We may find OPEC and aligned nations refusing to work with U.S. firms and reduced trade with OPEC and aligned countries is a likely outcome.
The bill eliminates sovereign compulsion defense. As a result, U.S. energy firms could be sued as a co-defendant in any action against an OPEC or aligned nation. Protection against sovereign compulsion is vital for U.S. energy firms faced with a situation where it is impossible to comply with both U.S. antitrust laws and foreign law.
For example, if a host country dictates a change in oil output, a U.S. producer operating under an agreement with the host government would be subject to Sherman anti-trust penalties under the NOPEC legislation.
Retaliation would be commonplace as OPEC and aligned nations could take U.S. companies into local courts. Most importantly, it eliminates sovereign immunity a long standing common law and statutory defense which protects U.S. assets from capricious behavior abroad. Open capital markets and freedom from uncertain and capricious behavior by the U.S. government is one of the hall marks that makes domestic oil and gas reserves a magnate for foreign capital. It would be a tragedy if in an attempt to address real or presumed threats from OPEC, we undermined our domestic energy security.
Lucian Pugliaresi is President of the Energy Policy Research Foundation, Inc. (EPRINC), a public policy think tank located in Washington, DC. He served on the NSC staff during the Reagan Administration.