Around fifty years prior, Philip Verleger, a distinguished energy analyst, found himself in the midst of an antitrust conflict. He served as a consultant to U.S manufacturers looking to challenge the Opec oil cartel’s alleged price manipulation. Unfortunately, the first attempt and a follow-up in 2000 were unsuccessful. However, at 79 years old, Verleger is contemplating whether a third attempt might yield surprising victories.
The potential success lies in a recent decision by the U.S Federal Trade Commission (FTC) regarding Exxon’s $64.5 billion offer for Pioneer, a shale oil concern. Deemed permissible by the FTC, the transaction has induced a sigh of relief within the industry and fear amongst the progressives. A surprising stipulation came with the approval, however, precluding Scott Sheffield, the illustrious ex-CEO of Pioneer who established the shale division, from joining Exxon’s board following accusations of conspiring with Opec officials to keep oil prices unjustifiably high.
“It’s clear that Mr Sheffield’s previous actions mean he should not be allowed in the Exxon boardroom,” stated Kyle Mach, the FTC’s Bureau of Competition’s deputy director. What adds intrigue is the numerous WhatsApp messages between Sheffield and fellow oil executives pointing to the aforementioned conspiracy, withheld from the public thus far. Verleger forecast the exposure of these messages by class-action lawyers hoping to win a hefty compensation from oil companies.
“The consequences for the industry could be massive,” he mentions, identifying airline groups as one likely casualty. “I didn’t think I’d witness this in my lifetime.”
Predictably, Pioneer expressed their vigorous objection, emphasising that the legal dispute indicates a substantial misconception of both the U.S and global oil markets, and as well as Sheffield’s activities.
There is uncertainty surrounding the case’s advancement, with the FTC recommending it to the department of justice, but its success remains ambiguous. The assumption anyone would be astonished about supposed price manipulation in the oil market is as comic as a film scene in which a police officer feigns shock over gambling being discovered in a casino. Such manipulation has always been fundamental to the industry’s operation.
The behaviours of Opec in the 20th century were widely seen as following the pricing structure established by the Texas Railroad Commission a hundred years ago— a time when the US, not the Middle East, held sway over oil markets. The US government, however, is not without fault. During the Covid-19 crisis, it released strategic oil reserves under the administration of Joe Biden in an effort to decrease prices.
The lawsuit by the FTC is likely to face continuous scrutiny for its political motivations. With good reason, as the Biden administration appears keen on drawing attention away from the inconsistencies within their own energy strategy. The White House has simultaneously condemned Big Oil for its contributions to carbon emissions while encouraging them to continue production to keep prices low. This results in a boost for the energy sector.
Moreover, as the election approaches and concerns about inflation grow among voters, the Democrats are in need of someone to blame for rising energy prices. Democratic Senator Sheldon Whitehouse recently voiced this sentiment strongly, accusing the ‘Big Oil oligopoly’ in America of emulating a foreign oil cartel in setting high consumer prices, amassing substantial profits, and ultimately devastating the environment.
The FTC’s decision to sanction Exxon’s takeover of Pioneer, might make their position seem less firm or even suggest that the alleged price fixing is seen as a peculiarity, rather than an intrinsic part of the system, potentially leaving them open to criticism.
Despite the political complexity surrounding these issues, the fact that these opaque practices are finally coming under the spotlight is undeniably positive, and it should be closely monitored by both investors and economists. This reflects a perception that has often been overlooked by US corporate executives: the ambitious goals of Lina Khan, head of FTC appointed by Biden, which go beyond simply tackling Big Tech.
The recent developments in the energy sector also highlight a shift in power dynamics. While Opec’s decisions were once front-page news, owing to the Middle East’s dominance over production and pricing, their influence has waned considerably. This decrease in significance can be attributed to the increased prominence of US shale oil production and the rise of renewable energy. In fact, the market has become so diversified that prices have remained relatively stable in recent months, even amidst the unsettled situation in the Middle East.
The disintegration in some aspects makes the timing of the FTC appear peculiar, even more so considering that recent shale production has noticeably been driven by non-cartel factors such as fluctuations in the interest rate. Nevertheless, politics has a tendency to seize opportunities, and the crucial point here is that regulators now believe they’ve uncovered incriminating evidence in WhatsApp correspondences.
If Donald Trump secures a victory in the presidential race, he may hush this up, which is a result that Big Oil ardently anticipates. However, anyone would be unwise to underestimate the passion American lawyers have for class-action lawsuits. Therefore, there exists a possibility that future scholars might reflect on 2024 as the much-anticipated turning point when the prevailing attitude finally shifted, and cartel-like practices ceased to be entirely commonplace in the energy sector. If that were to happen, we should indeed cheer. © The Financial Times Limited 2024