The Fuse

UPDATE: House Bill Seeks to Establish OPEC Commission to Assess Impact of the Cartel’s Policies

by Matt Piotrowski | January 17, 2017

Legislation to establish a one-year commission to better understand the role of OPEC, its member nations, and other national oil companies (NOCs) in bringing about conditions of an unfree global oil market was re-introduced in Congress late last week. Four members of the House of Representatives, Kevin Cramer (R-ND), Trent Franks (R-Ariz.), Collin Peterson (D-Minn.) and David Scott (D-Ga.), introduced HR-545 on Friday to look into OPEC’s influence in the oil market and its strain on the U.S. economy.

Since the first bill was introduced in early 2016, OPEC has switched its strategy, from driving down prices in an effort to undermine U.S. shale production to restraining supply to boost prices, a move that will increase costs for consumers. In the past year or so, OPEC has successfully talked up oil prices from below $30 to above $50 as its members discussed, along with a number of non-OPEC producers, efforts to freeze or cut output. The cartel’s agreement in November to slash production by 1.2 million barrels per day, has worked to put a floor under prices for the time being and is set to tighten the global oil market in 2017 by eroding the stock surplus and possibly shifting supply-demand balances into a deficit.

Below is the story when the original bill was introduced last February

The commission would look at whether the cartel’s action is “designed to disadvantage U.S. oil producers and secure market power through anti-competitive behavior.”

Three members of the House of Representatives introduced a bill on Friday to establish a commission that would study the market behavior of the Organization of the Oil Producing Countries (OPEC) cartel. H.R. 4559, sponsored by Congressman Trent Franks (R-AZ), Collin Peterson (D-MN) and Kevin Cramer (R-ND), seeks to examine the ongoing impact of OPEC’s production decisions, the role that OPEC and other national oil companies (NOCs) play in the global oil market, and the impacts these decisions have had on the U.S. economy.

H.R. 4559 was referred to two committees: Energy & Commerce and Foreign Affairs.

The commission would look at whether the cartel’s action is “designed to disadvantage U.S. oil producers and secure market power through anti-competitive behavior” and “assess the impact of OPEC’s policies on U.S. economic and energy security interests, including on innovation in both energy production and the transportation of goods and people.”

The commission’s report would also include details about how U.S. agencies are working to alleviate negative impacts of the cartel.

The commission, to consist of a bi-partisan group of experts chosen by the leadership of both parties in the House and the Senate and appointed by the president, would submit the report to Congress and the president within 12 months after passage of the legislation, and offer policy recommendations for trade, defense, diplomacy and other areas where OPEC’s behavior is found to cause negative impacts.

“America has recently adopted a policy to export our oil and gas resources on a competitive level,” said Congressman Franks in a statement. “All we seek is a fair and competitive environment in the world market. The commission proposed in this bill is designed to ferret out and address any anti-competitive practices on the part of OPEC.”

“The domestic oil and gas industry has strengthened our energy security and created good paying jobs in North Dakota and Western Minnesota. I will continue to support efforts to ensure that our energy producers can compete on a fair playing field,” said Congressman Peterson.

The legislation is expected to face opposition from special interests that support the petroleum industry and Gulf oil states, particularly Saudi Arabia.

Securing America’s Future Energy (SAFE), which worked with the legislators to formulate the bill to establish the commission, applauded the news.

Fred Smith, Chairman, President and CEO of FedEx Corporation and co-chair of SAFE’s Energy Security Leadership Council (ESLC), said: “By investigating OPEC’s history, analyzing the effects of the decisions made by the cartel and other NOCs on the U.S. economy, and putting forth recommendations to make America less vulnerable to the unfree oil market, we can make substantial gains in improving our country’s economic and national security.”

General James Conway, co-chair of the ESLC, stated: “Through the creation of the commission proposed by Congressmen Franks, Peterson, and Cramer, America’s foreign policy and economic leaders can gain invaluable insight into the inner workings of the global oil market—which does not abide by free market principles—and how our country can best defend itself against the adverse impacts of decisions made by OPEC members and other national oil companies.”

OPEC versus shale

It may seem ironic that the bill is being introduced at a time when U.S. motorists are seeing some of the lowest retail gasoline prices in more than a decade and OPEC is pumping at high levels, but low oil prices have generated negative economic effects in the U.S. OPEC, led by Saudi Arabia, has not cut production to stabilize prices during the current market downturn that began in mid-2014. The Saudi-led strategy is, in part, to grab market share in Asia and Europe as the Kingdom competes against rivals Russia, Iraq, and Iran. But perhaps the most important reason for the Saudis failing to cut output is the country’s determination to undermine U.S. shale production and put the industry out of business. Just last year, more than 40 shale oil and gas companies in the U.S. went bankrupt, and even bigger firms are expected to go under this year.

The Saudi-led strategy is in part to grab market share in Asia and Europe, but perhaps the most important reason for the Saudis failing to cut output is the country’s determination to undermine U.S. shale production.

Some OPEC members, along with Russia, agreed on Tuesday to “freeze” production at current levels, but their decision does not change oil market dynamics in the short run. In fact, oil prices gyrating over the past several weeks as a result of headlines about possible OPEC action in coordination with some non-OPEC actors reflects the instability that the cartel engenders.

The collapse in prices has decimated the oil industry and is undermining investment plans from private oil companies, which will ultimately lead to a long-term mismatch in supply and demand, likely to drive another price spike and reestablish OPEC’s market power. With shale production such an integral part of the U.S. economy, and massive energy security gains seen from the growth in output, the sharp reversal in the industry’s fortunes will have significant implications for the economy and energy security moving forward. In fact, imports from OPEC have started to pick up again with the decline in shale production.

U.S. shale’s ability to upend the world’s oil market and become the “marginal barrel” altered Saudi Arabia’s thinking and overall strategy. “Naimi [Saudi Arabia’s oil minister] spoke about market share rivalry with the United States. And those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle,” said a source who was briefed by a non-Gulf OPEC minister after the seminal November 2014 meeting when the cartel failed to take action to stabilize the market.

A number of prominent market analysts have openly stated the Saudi position to undermine U.S. shale production. “Saudi Arabia is now looking to destroy them,” said Danilo Onorino, portfolio manager at Dogma Capital, referring to independent shale producers. Fadel Gheit of Oppenheimer stated that the Saudis will not allow prices to recover until they “take care” of shale industry. Phil Flynn, senior energy analyst at Chicago-based The Price Futures Group, said: “Saudi Arabia is raising oil production, along with other OPEC members. They wouldn’t be doing that if they weren’t concerned about losing market share to non-OPEC producers such as the United States and Russia. We’re in this dynamic because the U.S. oil producers are shaking up the Saudis a little bit. And in return, the Saudis are trying to send the U.S. oil producers a message by producing more oil.”

Even though some OPEC members and Russia have agreed to freeze output, the idea to cut has not gone forward, as it is complicated by the shale factor.

If the Saudis were to cut production, they would be giving the shale industry a lifeline. The Saudis have said since the November 2014 meeting that the country would indeed take part in a cut if non-OPEC producers went along and executed their part of the deal. Even though some OPEC members and Russia have agreed to freeze output, the idea to cut has not gone forward, as it is complicated by the shale factor. An OPEC delegate recently told Dow Jones: “If we … cut, we are potentially subsidizing shale production.”

These issues, and their impact on American economic and national security, would be examined in depth by the commission, creating an opportunity for the United States to fully address and understand how OPEC has shaped our energy security over the decades.