The Oil Company is the target of a witch hunt

With its ill-advised witch hunt, the Biden administration should not aim to vilify the oil and gas industry.

President Biden has issued firm instructions to FTC Chair Lina Khan to investigate whether big oil should be held legally accountable for the recent runup in oil prices. The fact of some price increase seems beyond dispute. The average monthly Brent crude price dropped as low as $18.38 in April 2020, at the onset of the COVID crisis, but had risen to $83.54 in October 2020. However, a closer examination reveals that things are not that straightforward, since the price had decreased to $78.60 by November 19, 2021. Indeed, there were significant price swings during the course of this nineteen-month period. Despite this, Biden stated without citing any price data that "growing evidence of anti-consumer conduct by oil and gas firms" should prompt an investigation into possible collusion.

Given that "gasoline prices at the pump remain high, even as oil and gas corporations' expenses decline," Biden estimates that such claimed behavior has allowed large oil companies to treble their profits since 2019, allowing for stock buybacks and dividends in the following year. He has urged the FTC to bring "tools to bear" to ferret out and punish any possible wrongdoing because "hard-working Americans" should not be "paying more for gas because of anti-competitive or otherwise potentially illegal conduct," which is why he has urged the FTC to bring "tools to bear" to ferret out and punish any possible wrongdoing.

It should be clear that in Biden's perspective, it doesn't take much to start a protracted and hostile probe. When rising earnings create dividends, many of which wind up in the pension accounts of those hardworking Americans, there is no antitrust infringement. Furthermore, share repurchases and dividends free up funds for consumption or additional investment. Unfortunately, in Lina Khan’s new age of antitrust enforcement, it appears unnecessary to allege anything that would make the price-fixing claim credible, for just how are the oil companies able to conspire to keep prices artificially high? Even with its formal agreements and enforcement tools, OPEC finds this mission challenging. However, in order to dissuade individual enterprises from deviating from the cartel pricing by granting secret discounts to its chosen consumers, any efficient covert oil and gas price-fixing plan must have a small number of possible members. That does not seem possible when the roster of the ten largest oil companies reads as follows:

The oil and gas business is worldwide, therefore any attempt to probe the three largest corporations on the list, all of which are state-owned, will be futile. In any case, a market with at least 10 large competitors is hardly ripe for price-fixing—the whole thing appears to be a political stunt by a president who is losing ground in the polls. The FTC will have to show some coordinated action by the targeted corporations in order to construct a convincing case for price fixing, something neither the White House nor any independent source has discovered to yet. To be sure, it may be possible in some limited settings to infer coordination of prices from parallel behavior in select product markets. Nonetheless, even the most aggressive version of this theory is restricted to examining prices of a single product in a limited geographical area.

Thus, in the Petroleum Products Antitrust Litigation of 1990, Ninth Circuit Judge Dorothy Nelson allowed a price-fixing case to go forward solely on circumstantial evidence of variations in observed retail “pricing patterns.” Judge Nelson agreed with the premise that businesses may regulate retail gasoline prices by adjusting the discount from the "dealer tankwagon" benchmark price at which they supplied gasoline to dealers in four Western states: Arizona, California, Oregon, and Washington.

In contrast, it is wholly impossible to apply the same theory to a scenario with multiple producers in a global market, relying on a supposed connection between sales of “unfinished gasoline” of different types and the price at the pump—especially when the current US government predictions call for an easing of prices in 2022. Simpler causes for price swings, such as the comeback of crude oil demand following a massive downturn in demand in 2020, make this link even more dubious. Even if costs remain constant, the increase in overall demand will result in an increase in gasoline prices. The same thing might happen if the upward shift in the demand curve is greater than any reduction in production costs.

To make matters still more complicated, total American daily output at about 11.4 million barrels today is about 12 percent below the pre-COVID highs of about 13.0 billion gallons, when a limited supply points to higher prices. It is also well understood that the price of gasoline at the pump is only imperfectly correlated with the price of crude oil at the wellhead, and that deviations between the two sets of prices are common occurrences, happening on an annual basis in both good times and bad. Total transportation costs could have easily spiked given the well-documented supply chain difficulties. In addition, crude oil needs additives to become gasoline, which offers yet another wedge between prices at the wellhead and those at the pump. Hence, it is highly likely that this particular investigation will draw a blank, just like previous ones by both parties attempting to detect price-rigging in this market, including the 2006 efforts of the George W. Bush administration to go after price gouging in the gasoline market.

But when the FTC proves unable to identify “any anti-competitive” behavior that leads to a decline in consumer welfare, Biden’s further reference to “otherwise potentially illegal conduct” leaves enough wiggle room for Khan and her fellow Neo-Brandeisians to concoct some novel charge against big oil, without proving any impact on either prices or quantities of oil and gas sold.

Instead of going up this dead end, the proper course of action for the FTC is to look at the other side of the problem and to ask, as the American Petroleum Institute insists, about the constraints that the Biden administration has placed on production and distribution of crude oil in the United States. On the former, the Biden administration has taken a consistent anti-fracking stance with respect to leases of federal lands as part of its campaign to reduce American dependence on fossil fuels. Yet at the same time, it has begged OPEC to substantially increase its output in order to reduce the shortages at home, stemming from Biden’s fixation with global warming, which has led him to champion extensive limits on the domestic production of fossil fuels. But of course, any harm from greenhouse gases released by foreign oil and gas is every bit as great as that from American sources.

Moreover, the Biden decision plays into the hands of Vladimir Putin by giving his Gazprom operations a chokehold position over the sales of natural gas to Western Europe. Hence, the Biden policies produce no net reduction in global warming while also compromising American power in foreign relations. What is needed now is a firm commitment to spur American production of oil and gas for the export market to counterbalance, even belatedly, the Russian geopolitical advantage.

But far from taking this view, Biden has done the exact opposite. His decision to pull the plug on the Keystone XL Pipeline the day he assumed office signaled his misconceived priorities: preferring wind and solar to fossil fuels, even when they cannot do the job. He is now seeking to double down on his efforts to strangle the production and use of fossil fuels by taking seriously the shutting down of existing pipelines. Thus, the prolonged battle over the possible closure of the Enbridge Line 5 pipeline near the Straits of Mackinac again reveals the high cost of indecision. Shutting it down would distort energy markets throughout the state. But a decision to engage in prompt repair, improvements, or even reconstruction could avert that prospect while minimizing the risk of spillage.

A similar battle is going on with respect to the operating $3.8 billion Dakota Access Pipeline, which runs about 1,172 miles from the Bakken fields in North Dakota to Patoka, Illinois, and which currently ships some 570,000 barrels of oil. It is a sign of the skewed energy policy that there continue to be intensive efforts to shut down the pipeline even after it has been in operation for over three years without any incident, because the Standing Rock Sioux Tribe insists that its treaty rights to the “undisturbed use and occupation” of its territory gives the tribe the right to shut down the entire pipeline to prevent a highly remote probability of damage. 

Removing impediments to fossil fuel shipping is a win-win situation. The increased availability of fossil fuels will lower costs while also removing the larger environmental concerns associated with delivering crude oil by truck and rail. With its ill-advised witch hunt, the Biden administration should not aim to vilify the oil and gas industry. Instead, it should use its investigation powers to examine its own energy policies that are harmful to the environment.

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