As the Organization of Petroleum Exporting Countries and cooperating producers approach their decision whether to retain group management of oil supply, attention will rise to this year’s version of the No Oil Producing and Exporting Cartels Act, or NOPEC. Bills introduced in the US House and Senate last February would enable the Justice Department to enforce US antitrust laws against cooperative production restraint abroad. The first such legislation appeared 19 years ago.
Prospects are good for passage of NOPEC legislation. Officials of OPEC and 10 collaborating countries will meet Jan. 26 in Vienna to decide whether to extend production cuts implemented in January 2017. They probably will do so, defying tweeted complaints certain to emanate from US President Donald Trump, who would not hesitate to sign NOPEC legislation into law. For US national interests, this scenario is not constructive.
Bills overreact
NOPEC bills overreact to a demonstrated feature of a surfeit oil market: the inescapable need for coordinated management of supply. Without it, market fundamentals lurch among extremes harmful to producers and consumers alike. Although US producers account for most recent growth in global oil production, they can’t legally cooperate. The function thus falls to OPEC in league with Russia and lesser producers.
Contrary to the insinuations of NOPEC supporters, the OPEC-plus group is not a monopoly engaged in what Senate bill sponsor Chuck Grassley (R-Iowa) called “illegal price-fixing.” Crude production represented by the group represents less than half of global oil supply. At most, the group is trying to align supply within its control to imperfect estimates of contemporaneous demand, aiming to keep prices within an ill-defined range supportive of both consumption and investment in future supply.
The group’s influence, moreover, is shrinking. The production agreement is remarkable for having remained in effect for so long, thanks to equally remarkable adaptability. It successfully hastened a grotesquely oversupplied market’s return to balance, moderating the price gyrations that would have characterized the process if the market had done the job alone.
But the agreement is fragile. It increasingly depends on the willingness of Saudi Arabia and its Persian Gulf neighbors to sacrifice sales volumes, which in turn depends heavily on Russian resolve reported, at times, to waiver. And OPEC’s quantitative importance to the oil market is slipping. The global need for OPEC crude, calculated from US Energy Information Administration data, fell from 33.18 million b/d in 2017 to 31.28 million b/d last year—more than can be explained by changes in the group’s membership. According to EIA projections, the need for OPEC crude will fall further to 30.38 million b/d this year and to 29.89 million b/d in 2020. These declines occur amid steadily increasing global oil demand as supply unaffected by the production accord grows.
Developments in the main source of that growth, meanwhile, promise to further erode OPEC’s influence. Because US tight-oil production responds quickly to price changes, it represents especially potent swing supply. With production decisions dispersed among many operators legally precluded from colluding, however, that supply has been unmanageable. Those conditions are changing. A recent charge into tight-oil plays by major oil companies will consolidate decision-making about production into a diminishing population of operators controlling large tranches of supply and equipped with sophisticated tools of competitive analysis. For OPEC, therefore, competition means much more than rising oil production outside its control.
Welcome changes
Congress should welcome these changes. The US is no longer mainly an oil-consuming country. It’s now a top-tier oil producer, too. US energy and economic interests thus increasingly align with those of OPEC as they relate to the price of oil. Moderation and stability, not the highest or lowest possible price, are best for everyone.
NOPEC legislation addresses an obsolete problem with a diplomatic affront helpful to no one. An increasingly competitive and scrutable oil market is evolving away from historic reliance on coordinated management of supply. Congress should acknowledge improvement and let it proceed.
