Oil price fixing is finally in the sights of regulators

A half-century ago, Philip Verleger, a well-known energy analyst and adviser to American companies that wanted to sue Opec over price fixing, became embroiled as a consultant in an antitrust fight.

That failed. Verleger’s 2000 anti-Opec campaign also failed. Verleger, now 79 years old, is wondering whether a third attempt will finally — and unpredictably — pay off.

The Federal Trade Commission of America made a ruling last week about Exxon’s $64.5bn offer for Pioneer, a shale-oil entity.

The FTC has approved the deal, much to the relief of industry and horror of progressives. The FTC added a shocking caveat. Scott Sheffield, the former Pioneer CEO who created the shale industry, was barred from Exxon’s board for alleged collusion with Opec representatives in order to artificially keep oil prices high and harm consumers.

Kyle Mach, deputy Director of the FTC Bureau of Competition, explained that Mr Sheffield’s previous conduct made it clear that he shouldn’t be anywhere near Exxon boardroom. The FTC claims to have hundreds of WhatsApp messages that Sheffield exchanged with other oil executives. Last week, this trove of information was heavily redacted. Verleger, however, predicts that class-action attorneys will now force “discovery”, i.e. disclosure, with the aim of winning billions in compensation from oil companies.

He tells me that airline groups are one of the victims. “I never imagined I would ever see this in my life.”

Pioneer, unsurprisingly, strongly disagrees. They claim that the lawsuit “reflects a fundamental misunderstanding of the US oil markets as well as the global market, and misreads Mr Sheffield’s intent and nature”.

While the FTC has reportedly recommended the case to the Department of Justice it is not clear if this will work. The idea that anyone would be shocked by the oil market price fixing is ironic, just like the scene from Casablanca where a police inspector pretended to be “shocked to find”. . . It has been a part of this world for a long time.

The 20th century antics of Opec are based on the price-fixing organised by the Texas Railroad Commission in the early 1900s, when the US dominated the oil market and not the Middle East. The US government is also not blameless. During the Covid-19 epidemic, Joe Biden’s administration released strategic reserves of oil in an attempt to lower prices.

The FTC lawsuit will be criticized for its political posture. Biden’s team is motivated to divert voters from contradictions within their own energy policies. The White House, during their tenure, has attacked Big Oil over carbon emissions, and also urged them to maintain production in order to lower prices. This led to a boom for the sector.

Or, as the Democratic Senator Sheldon Whitehouse recently thundered that “the American Big Oil Oligopoly” has been following the lead of an oil cartel for decades to set high prices and make mega profits while destroying the environment.

The FTC’s decision to allow Exxon to acquire Pioneer further complicates its position and leaves it open to criticism. This is either an indication of a lack in courage, or that the price-fixing allegations are being presented as a bug and not a feature of the system.

It is a good thing that the spotlight has finally been shone on a world of lamentably murky affairs. Investors and economists should be paying close attention. It is because it highlights a fact that US C-suites have been slow to grasp: Lina Khan, Biden’s FTC chief , has radical ambitions that extend beyond her attacks against Big Tech.

Second, this saga unintentionally reveals the change in the energy map. Opec made headlines in decades past because the Middle East dominated both production and prices. Today, Opec’s actions are less impactful on the market and less headline-grabbing. This is due to the rapid growth of American shale production and renewable energies. The market has become so fragmented, that the prices, despite the recent Middle East turmoil, have remained relatively stable over the past few months.

This fragmentation can make the timing of the FTC seem strange, especially when you consider that the recent shale-production has been so visibley influenced by issues other than cartels such as interest rate cycles. Politics is an opportunistic game, and it’s important to note that regulators believe they have a smoking-gun in the WhatsApp messages.

Big Oil hopes Donald Trump wins the election and will put an end to this. It would be foolish to underestimate the extent to which American attorneys love class-action lawsuits. It is possible that in 2024, future historians may look back and see the moment that the zeitgeist changed, when cartel-like behavior no longer appeared to be normal in the world of energy. If this is the case, then we should say “hooray”.