Issues & Opinions

In a Houston Chronicle (AP) story from yesterday evening that I initially missed, I find that the “House approves anti-OPEC bill“.

WASHINGTON — Decrying near-record high gasoline prices, the House voted Tuesday to allow the government to sue OPEC over oil production quotas.

The White House objected, saying that might disrupt supplies and lead to even higher costs at the pump. The Organization of Petroleum Exporting Countries is the cartel that accounts for 40 percent of the world’s oil production.

My reaction wouldn’t be much different if they’d deigned to “allow the government to give every citizen a unicorn”.

The current, nominally “record high”, prices at the pump are a populist’s dream come true. They provide a platform from which our congressmen can cater to the least-intelligent of their constituents, those who think Congress can solve all problems.

“We don’t have to stand by and watch OPEC dictate the price of gas,” Judiciary Committee Chairman John Conyers, D-Mich., the bill’s chief sponsor, declared, reflecting the frustration lawmakers have felt over their inability to address people’s worries about high summer fuel costs.

Actually, John, yes you do have to stand by and watch, because it’s their oil, and they control both the price and the market availability of the basic commodity from which we get our gasoline.

Conyers accused the OPEC engaging in a “price fixing conspiracy” that has “unfairly driven up the price” of crude oil and, in turn gasoline.

His measure would change antitrust laws so that the Justice Department can sue OPEC member countries for price-fixing, and would remove the immunity given a sovereign state against such lawsuits.

OPEC is often referred to by its common name. No, not “The Organization of the Petroleum Exporting Countries”, the other one - “The OPEC cartel”. Here, from Chapter 1, Article 2 of the OPEC charter:

A. The principal aim of the Organization shall be the co-ordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively.

B. The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.

C. Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry.

Sure, they mention, in passing, the “economic and regular supply” for consuming nations, but their prime purpose for existence is to ensure their own well being. And everyone, with the exception of those impressed by this symbolic populism in Congress, knows this. The situational congressional populists themselves even know it.

I was initially left wondering what jurisdiction the US Congress and court system has on this matter. There isn’t an international law of which I’m aware that forbids cartels, even those which blatantly (and transparently, in OPEC’s case) seek to control price via production changes.

Consider as a case study in extraterritorial law enforcement the divergence between US laws on bribery (verboten) and those elsewhere outside the OECD (winked at in some places, positively ingrained in the social fabric in some others). Solution? Easy - the Foreign Corrupt Practices Act (as extended in 1988 and amended in 1998) attempts, and largely succeeds, to ensure that US persons and issuers of joint stock cannot pay (and therefore, presumably, can’t be forced to pay) bribes outside the US.

But applying such reverse judo to those within the US whose business involves transactions with OPEC isn’t so simple. If the government were to try clamping down on the buyers of OPEC oil, it would crush the US & world economies, long before it motivated change on the part of OPEC. It would likely be a massive failure, even as it separately had the desired effect. And perhaps worse, if OPEC blinked, and Congress’ effort didn’t fail, how would the US be any better than Hugo Chavez, another well known expropriator of others’ property?

Changing antitrust laws probably seemed like a great idea, until one realizes that the targets of such legal maneuvers are not subject to US law, being themselves sovereign states. So Conyers took it a step further, proposing the removal of sovereign immunity in an attempt to extend US law internationally. This is clearly bad policy, as the administration points out,

…because such suits could spawn retaliatory measures and lead to oil supply disruptions and an escalation in the price of gasoline, natural gas, home heating oil.

Just what we need - more oil supply disruptions, and the price eruptions that go with them. Thanks, Mr. Conyers! Assuming the Senate is equally so ill-advised as to attempt economic alchemy, Bush will surely pull out his veto sword for the third, count ‘em, third time. Won’t he?

In that same article, there was a vague hint of light near the end:

“Increased crude oil prices have played a relatively minor role in (the recent) increase in retail prices,” William Kovacic, a member of the Federal Trade Commission, told Stupak’s subcommittee. He said the price of benchmark West Texas crude increased no more than 15 cents a gallon over the last three months, while retail gas prices jumped 80 cents to 90 cents a gallon, depending on location.

But it was quickly overwhelmed by the acrid smoke of more economic illiteracy from Rep. Bart Stupak, of Michigan:

“Big Oil is often quick to blame world crude oil prices, but that argument doesn’t appear to be the full story,” said Stupak.

“While consumers pay record prices, oil companies are making record profits,” said Stupak. Refinery profits have jumped sharply to as much as 70 cents for every gallon of gasoline produced, he said.

No kidding? He’s saying that crude oil prices don’t appear to be the full story? Of course they’re not - once the oil is extracted, it has to be turned into gasoline and other byproducts. “Big Oil” knows this, just as Stupak does. And the economics behind that aren’t linearly related to the price of the inputs. Supply and demand play a huge part, and the availability of refinery capacity hasn’t exactly been steady this year. As an example, see the Reuters story from last Thursday, entitled “Oil surges to $70 on U.S. gasoline concerns“.

Despite record gasoline pump prices above $3 a gallon, there has been no let up in robust demand in the world’s top consumer.

That increase in demand, particularly in advance of the “summer driving season” starting Memorial Day weekend, coupled with refinery and pipeline disruptions is easy to pinpoint as the main driver in gas prices. (How that would drive the price of oil up escapes me just now, but if I’m eventually able to attribute rational basis to the Reuters headline writer, I’ll make an addendum to this piece.) If supply of refinery capacity increased along with the demand, price would stay steady, given steady input pricing.

But over the last 10 years, according to the US Energy Information Agency, refining capacity has increased from 15.6 million BPD in March 1997 to 17.5 million BPD in February 2007. That’s roughly 1.1% per year, and has come without the completed construction of a single new refinery in more than 30 years, relying instead on capacity upgrades at existing facilities, and even then at a rate too low to keep up with demand growth. Why? The cost of upgrades, let alone brand new plant, is out of control. From an Apache Corp report in March, 2007:

Many refiners now express reluctance to invest in expensive upgrades. Bruce Smith, Tesoro’s chief executive officer, noted recently that industrial development in India and China have forced materials costs (such as steel) upward, which in turn has pushed refinery construction costs higher. In some instances, costs have doubled from original bids.

While the latest figures as of this writing available at the DOE are for 2004, even then the daily demand for distilled oil products exceeded 20 million BPD. Stupak’s not alone in thinking the market’s rigged - the San Francisco Chronicle’s March 9 2007 story, “Refinery profit margins double in West“, tried hard to make the case that refiners in CA and elsewhere were “pulling an Enron”, by withholding supply in order to increase prices. Read the entire article, however, and both the refiners and the California Energy Commission make clear that there’s no incentive for them to do so.

So, among many factors, there’s your problem, Messrs Conyers and Stupak. Why not just force the US refiners to build even more capacity? Or force those greedy souls in China and India to quit competing for commodities that refiners need in order to build refineries affordably? Doing either would make precisely as much sense as pretending to force OPEC to quit being OPEC.

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