Half a century ago a renowned energy analyst called Philip Verleger became embroiled in an antitrust battle as an adviser to American manufacturers that wanted to sue the mighty Opec oil cartel over price fixing.
That failed. So did a second anti-Opec initiative that Verleger advised on in 2000. Now, however, at the age of 79, he is wondering if a third attack might finally – and unexpectedly – bear fruit.
The reason lies in a ruling made last week by America’s Federal Trade Commission (FTC) about Exxon’s $64.5 billion bid for Pioneer, a shale oil entity.
The FTC is permitting the deal to go ahead, to the huge relief of the industry – and the horror of progressives. But it inserted a startling caveat: Scott Sheffield, the high-profile former Pioneer chief executive who built the shale sector, is barred from the Exxon board after alleged recent collusion with Opec officials to keep oil prices artificially high and thus hurt consumers.
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“Mr Sheffield’s past conduct makes it crystal clear that he should be nowhere near Exxon’s boardroom,” said Kyle Mach, deputy director of the FTC’s Bureau of Competition. Spicier still, the FTC says it has hundreds of WhatsApp messages between Sheffield and other oil executives to back its allegations. This trove was heavily redacted last week. But Verleger predicts class-action lawyers will now force “discovery” – or disclosure – with a view to winning billions of dollars of compensation from oil groups.
“It is a disaster for the industry – the liability could be huge,” he tells me, citing airline groups as one victim. “I never thought I would see this in my lifetime.”
Unsurprisingly Pioneer vehemently disagrees, insisting that the suit “reflects a fundamental misunderstanding of the US and global oil markets, and misreads the nature and intent of Mr Sheffield’s actions”.
And while the FTC is reportedly recommending the case to the department of justice it is unclear if it will fly. After all the idea that anyone might be shocked to see oil market price fixing is as ironic as the scene in the movie Casablanca when a police inspector pretends to be “shocked, shocked to find . . . gambling” in a casino. It has long been integral to this world.
More specifically the 20th century antics of Opec were largely modelled on the price fixing organised by the Texas Railroad Commission a century ago when the US – not the Middle East – dominated oil markets. And the US government itself is hardly blameless: during the Covid-19 pandemic Joe Biden’s administration released strategic oil reserves in a bid to lower prices.
This means the FTC suit will face endless criticism about political posturing. No wonder: Biden’s team has a strong incentive to distract voters from the contradictions in its own energy policy. During its tenure the White House has both attacked Big Oil for carbon emissions and urged it to maintain production to lower prices, delivering a sectoral boom.
Moreover, with an election looming and voters worrying about inflation, Democrats need to find scapegoats for high energy prices. Or, as the Democratic senator Sheldon Whitehouse recently thundered: “The American Big Oil oligopoly has for decades followed the lead of a foreign oil cartel to set high prices for consumers and reap megaprofits while destroying the planet.”
What further complicates the FTC position – and makes it vulnerable to criticism – is its decision to permit Exxon’s acquisition of Pioneer. This either smacks of a lack of courage or suggests that the alleged price fixing is being presented as an idiosyncratic bug, not a feature, of the system.
But even allowing for all these political caveats, it is thoroughly good news that a spotlight is finally being shone on this lamentably murky world – and investors and economists alike should pay close attention. One reason is that it underscores a point that the US C-suite has sometimes been slow to realise: Lina Khan, the Biden-appointed FTC head, has radical ambitions that extend well beyond her attacks on Big Tech.
A second is that this saga inadvertently illuminates the shift in the energy map. In decades past Opec’s actions made headlines since the Middle East dominated production and prices. However, these days its behaviour has become far less market-moving or headline-grabbing. That reflects the explosive rise of American shale oil production and renewable energy. Indeed, the market is now so fragmented that prices have (thankfully) been relatively stable in recent months even amid the recent Middle East turmoil.
In some senses this fragmentation makes the FTC timing seem odd – doubly so, given that shale production has lately been so visibly influenced by non-cartel issues such as the interest rate cycle. But politics is an opportunistic sport, and the key point is that regulators now think they have a smoking gun in the WhatsApp messages.
Maybe Donald Trump will squelch this if he wins the presidential election; Big Oil certainly hopes so. But it would be foolish for anyone to discount the degree to which American lawyers love class-action suits. There is a chance, in other words, that future historians will look back on 2024 as the long-awaited moment when the zeitgeist finally changed – and cartel-like behaviour no longer seemed entirely normal in the energy world. If so we should shout “hooray”. – Copyright The Financial Times Limited 2024
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