Let free-market principles, not OPEC, determine the price of oil

Perhaps the time has come for American policymakers to revoke OPEC’s license to disregard our antitrust law, and finally let the free market determine the price of a barrel of oil.

This nation’s fundamental belief in the free market requires us to ensure the laws of supply and demand are not distorted by price-fixing or market-division conspiracies. More than a century ago Congress recognized the threat posed by anti-competitive cartels by passing the Sherman Act, which made such acts a crime.

With the ongoing march of globalization, policing cartels has necessarily become a multinational effort. Cartels have now been outlawed in over 100 countries, including OPEC countries, and many nations have entered into formal cooperation agreements to combat international price-fixing.

Since 1999, the U.S. Department of Justice has prosecuted international cartels involved in rubber chemicals, electrodes, airlines, memory chips, and vitamins — each of which affected more than $1 billion in commerce. Nevertheless, perhaps the world’s most important cartel — OPEC — has been flagrantly violating U.S. and foreign antitrust laws for decades with impunity.

OPEC’s stated mission is to manipulate worldwide oil prices by “coordinating” members’ production. This “coordination” is nothing more than a system of production quotas — the hallmark of illegal cartel activity. By conspiring to keep supply low, OPEC is able to keep oil prices above their natural levels.

The determinants of oil prices are admittedly complex. Rising demand for oil in India and China, along with supply problems in places like Iraq, Venezuela, and Nigeria have clearly played a part in the current price spike. Moreover, the falling value of the U.S. dollar and the inability to explore or refine domestic sources, also have had some effect. OPEC’s significant role however, must be acknowledged. Those who would doubt the cartel’s impact need look no further than the 1970s oil embargo, when OPEC slashed production and pushed oil prices to record highs.

More recently, OPEC decided to cut oil supplies by 1.7 million barrels a day in fall 2007. When questioned about these actions, OPEC’s secretary general, Abdalla Salem el-Badri, brazenly admitted to price-fixing. “That’s true,” he said, “and we do this as we see fit. Beginning in 2004, we increased production by close to 5 million barrels per day by the end of 2006. Then we reduced production by 1.7 million barrels when we felt that the price was too low. It was a very good decision as far as OPEC is concerned.”

Historically, U.S. courts have refused to enforce antitrust laws against OPEC, finding that OPEC cartel participants are protected by statutory-created sovereign immunity and also the “act of state” doctrine. A bipartisan effort to amend the federal statutes at issue, dubbed NOPEC, could change that.

NOPEC would authorize the attorney general to sue OPEC under existing U.S. antitrust laws, and amend the Foreign Sovereign Immunities Act to make clear that OPEC should be treated like any other commercial cartel. As the bill’s primary backer, Sen. Herb Kohl (D-Wis.), argues, “Such blatantly anti-competitive conduct by the oil cartel violates the most basic principles of fair competition and free markets and should not be tolerated. If private companies engaged such an international price fixing conspiracy, there would no question that it would be illegal.” He couldn’t be more correct.

NOPEC has been introduced in the Senate every year since 2000, when Sen. Kohl noted — in what now seems like a charming reminder of days past — that “gas prices have skyrocketed across the country, reaching an average price for regular gas of $1.68 per gallon.”

Last year, the House passed NOPEC by a veto-proof 345 to 72 margin. The Senate followed suit, approving NOPEC as amendment to the Energy Bill by a 70 to 23 vote. Both major-party presidential candidates, Sens. John McCain (R-Ariz.) and Barack Obama (D-Ill.) voted for this legislation and for free markets. Unfortunately, facing opposition from the administration, NOPEC died in conference committee.

Policymakers must correct that mistake. There is simply no reason to treat cartel members differently based on their connection to a national government. Whether they involve Venezuela or Exxon Mobil, anti-competitive agreements cause significant harm to the world economy.

One suggestion for authors to improve this bill and its ultimate effectiveness would be to allow for private antitrust actions rather than just by the Department of Justice. It could well be that for legitimate diplomatic reasons the government would decide not to sue foreign governments in the Middle East. This concern could be addressed if private plaintiff suits or those by state attorneys general could be allowed.

Like any other producer, OPEC nations may individually produce as much or as little oil as they like. What they should not be permitted to do is conspire with others to hold down supply to increase prices. By applying the rule of law and the principles of the free market to private and public producers alike, the United States can loosen OPEC’s unfair control over our economy and provide relief to consumers worldwide.

The time has come to treat OPEC like the international cartel that it is.

Delrahim, an attorney in private practice, was a deputy assistant attorney general in charge of international antitrust in the George W. Bush administration; chief counsel and antitrust counsel to the Senate Judiciary Committee; and commissioner of the U.S. Antitrust Modernization Commission.