Gas War: U.S. Oil Companies Accused of Price Fixing With OPEC, Increasing Inflation

Last week, the Federal Trade Commission (FTC) shared documents that would seem to suggest that U.S. shale oil firms purposefully colluded with the government of Saudi Arabia to fix oil prices between 2021 and 2023. The report was followed by a piece from BIG journalist Matt Stoller alleging that American oil companies and Saudi leadership likely cost the average American household $3,000 via fuel price hikes and the subsequent inflation created by artificially spiking the market.

Stoller alleges that price fixing between oil companies and the government of Saudi Arabia effectively forced prices to spike after their 2020 slump and are responsible for an estimated 27 percent of all monetary inflation for the following year.

His investigation comes in tandem with the FTC investigation looking into the $60 billion Exxon-Pioneer merger. The concern was that the companies were effectively creating a monopoly in what’s already a business sector composed largely of massive multi-national corporations. But the FTC permitted the merger, provided that a certain former Pioneer CEO wasn’t allowed to have a seat on the executive board.

From BIG:

Yesterday, the Federal Trade Commission released evidence confirming that collusion played a serious role in hiking oil prices at that time. Pioneer Natural Resources CEO Scott Sheffield, a leader in the fracking field, “exchanged hundreds of text messages with OPEC representatives and officials discussing crude oil market dynamics, pricing and output.” Sheffield was explicit about his goal, saying that “if Texas leads the way, maybe we can get OPEC to cut production. Maybe Saudi and Russia will follow. That was our plan,” he said, adding: “I was using the tactics of OPEC+ to get a bigger OPEC+ done.” He talked to shareholders, publicly threatened rivals, and ultimately achieved output cuts across the industry regardless of price. “Even if oil gets to $200/barrel,” he said, “the independent producers are going to be disciplined.”

There’s more about Sheffield in the FTC complaint, though a lot is redacted. Investment data bears out what the FTC found, with lower production despite variations in price.

Since the U.S. consumes 7 billion barrels of oil annually, the amount saved by shale oil drillers during their price war with OPEC was $140 billion to $210 billion a year. Once that price war ended, presumably so did the savings. The cost itself is likely a lot higher because pulling shale off the market when demand spiked probably caused prices to increase by much more than $20-30 a barrel. Anyway, we’re talking $500-1000 dollars of extra cost per year to Americans through direct and indirect effects of this conspiracy. This cost shows up most obviously in the form of more expensive gas, but higher oil prices increase the price of everything right down to potato chips because of gas being a primary cost in distribution of goods and services. For a family of four, that’s two to four thousand dollars a year in higher costs.

However, we don’t want to oversimplify the issue by suggesting this was the singular factor in how we got to where we are today.

Getting the ball rolling was the United States government pushing through repeated multi-billion dollar spending packages in recent years, including the ironically named Inflation Reduction Act. These choices undoubtedly played a major role in all of this by diluting the value of the dollar. The same is true in other nations where decisions were made that harmed GDP or resulted in spending more money than governments technically had.

Meanwhile, corporations were smelling blood in the water globally and undoubtedly noticed they could use rising inflation as an excuse to jack up their own prices after 2020. We’ve seen such allegations launched against major food producers, automakers, and now oil companies. Stoller estimated that large corporations saw about $700 billion in profits they otherwise wouldn’t have in 2021 and that it added about 60 percent of the inflation witnessed above normal.

There were a lot of contributing businesses. Oil companies and food producers just happened to be responsible for the largest share of the pie and is alleged to be the result of industry price fixing.

Unfortunately, one industry jacking up prices to maximize profitability has a tendency to impact the rest of the market (something Stoller mentioned) and what could have previously been excused as a bout of corporate greed starts to have unavoidable ramifications. In the case of oil, higher prices means more expensive fuel and higher shipping costs. But it also might mean fewer people are willing to take their summer vacation, further reducing the earning potential of brick-and-mortar stores who now have less disposable incomes of their own. This continues until literally every industry within a given market is being impacted.

In the case of oil companies, production costs have actually declined over the last decade with the per barrel price of crude dropping by at least $20 dollars on average. We’ve also increased the frequency of drilling permits under the Biden administration, despite campaign assertions that he would be going to war with the oil industry as part of the White House environmental agenda. But those companies continue to earn record-setting profits, undermining any claims the Biden administration has to make on the subject. Ironically, it’s actually the oil companies themselves that have walked back production as a way to maintain higher prices.

Government regulators that are supposed to help prevent these exact things from happening likewise don’t appear to be doing their jobs. Monopolies that wouldn’t have been deemed acceptable in prior eras have become the norm and modern regulations are often so expensive to comply with that only the largest companies of a given industry can afford to.

As you might have imagined, lawsuits are already being worked up based on the details in the FTC report. But the law hasn’t had the best track record for actually dealing with antitrust or industry cartel suits and these things take years to push through the courts. The typical solution is that large settlement payouts are made, with enough money left over for the relevant bad actor to keep their incentive to try something similar in the coming years — perhaps a little more carefully.

But did these oil companies actually collude with the Saudi government or are things being taken out of context? From the evidence provided, that certainly seems to be the case if the communications in the report are indeed true.

However, Stoller claimed real action will only come if the matter becomes a political issue. While neither side is actually doing much to prevent the oil sector from acting badly, there’s a chance one of them (presumably the Democrats) could use this issue to make antitrust rules a major campaign item. But this likewise presumes they’ll be sufficient public awareness for that to matter and we haven’t seen this story gaining much traction in mainstream media, despite the majority of the relevant evidence coming straight from federal regulators.

[Image: Maridav/Shutterstock]

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