To its targets, the oil and gas antitrust reform bill introduced in the US Senate this month will do little more than irritate. Congress can create task forces, launch investigations, and ask antitrust enforcement agencies to consider tightening their scrutiny of industry mergers. But nothing substantial will come of it.
The oil and gas business, primary target of S 2557, is very competitive, no less so now than ever. Every witch hunt with which Congress has reacted to price increases in recent years has confirmed its brisk competition and absence of price collusion. If Congress enacts S 2557, any inquiry it spawns will reach the same conclusion. And like its predecessors, it will waste public money and distract officials from real energy problems.
Targeting OPEC
The other target of the legislation, the Organization of Petroleum Exporting Countries, wouldn’t suffer much from the measure, either. The bill would allow OPEC members to be sued under US law for conspiring to control output and fix the price of crude oil. Antitrust experts point out that the provision would dislodge sovereignty protections, put judges and juries inappropriately in diplomatic roles, and invite repercussion (OGJ, Apr. 10, 2006, p. 18). Its passage is improbable, its enforcement even less so.
So the bill would accomplish little. It would, however, perpetuate the discredited but prevalent view that high oil prices result more from sinister behavior than market dynamics.
“This legislation would keep fuel prices low by preventing companies from withholding oil and gas in an effort to raise prices,” says a statement from the Judiciary Committee, where the bill originated. The promise reflects two misconceptions. The first is that legislation can “keep prices low.” That’s wrong. Markets set prices. Legislative intrusions only distort markets, hurt consumers, and ultimately give way to the forces they try to constrain. History is clear on this. No one should want to repeat the error.
The second misconception is that “withholding oil and gas in an effort to raise prices” is a common practice. In fact, rational producers and refiners refrain from selling oil and gas only when they can’t make money doing so, nearly always when prices are low. Even then, they often sell below cost to keep product flowing, although they can’t do so forever. At other times, holding commodities off the market to await price increases is both costly and risky. It’s costly because of storage and interest expenses. It’s risky because prices fall as well as rise, and predicting their turns is impossible.
Industry operations provide no evidence of withheld supply. Producers and refiners have been operating at perilously close to capacity rates for more than 2 years to keep up with demand. The absence of spare capacity is the main reason oil prices are high. It obliterates any notion that oil is being kept off the market.
Yet the suspicion is central to the antireform legislation introduced by Sens. Arlen Specter (R-Pa.), chairman of the Judiciary Committee, and Herb Kohl (D-Wis.). The premise of the bill is that the power of companies to manipulate prices by withholding supply developed from mergers of the past decade.
Unfounded concern
This concern about mergers is unfounded and ignores much. An August 2004 report by the Federal Trade Commission, which reviews mergers for competitive effects, said concentration in the petroleum industry remains low to moderate despite recent mergers. Questions about mergers’ effects on fuel prices arose in a 2005 report by the General Accountability Office, but FTC promptly discredited the correlation analysis on which they were based. Moreover, worriers about oil company combinations tend not to recognize that a strong compulsion to merge is also a large factor in fuel prices. It’s the scale refining companies need in order to afford investments necessitated by environmental regulations. The costs of those regulations influence fuel prices more than mergers ever will.
Congressional obsession over oil company mergers accommodates popular mythology but won’t help fuel consumers. Responsible political leadership would refrain from exploiting ignorance and work to dispel the misperceptions on which S 2557 is based. ✦