No Oil Producing and Exporting Cartels (NOPEC) Act of 2018

No Oil Producing and Exporting Cartels (NOPEC) Act of 2018

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November 7, 2018
No Oil Producing and Exporting Cartels (NOPEC) Act of 2018
Since the beginning of the oil industry, there have been
NOPEC Overview
multiple periods when a supply manager has influenced
The NOPEC Act of 2018 proposes to modify the Sherman
production and price levels. Generally, a supply manager
Antitrust Act (15 U.S.C. 1 et seq.)—an act that led to the
has the capacity to adjust production rapidly in order to
dissolution of the Standard Oil Trust in 1911 and prohibits
respond to changing market conditions. The limited ability
U.S. oil companies from engaging in collective market
of oil production and consumption to adjust in the short
management—to criminalize actions by a foreign state,
term, coupled with long development cycles for most oil
collectively or in combination with other foreign states or
production assets, a desire for price stability, and volatile
persons, that limit the production or distribution, maintain
price movements when the market is imbalanced by as little
the price, or restrain trade of oil, natural gas, or petroleum
as 1% to 2% are some stated justifications for supply
products (e.g., gasoline) in a way that affects markets and
management. In the past, the Standard Oil Company, the
prices for these commodities. The bill would also eliminate
Texas Railroad Commission, and international oil
the application of sovereign immunity and Act of State
companies have functioned as supply managers. Today, the
doctrines to foreign nations found to be in violation.
15-member Organization of the Petroleum Exporting
Countries (OPEC)—representing approximately 40% of the
Potential Countries Affected
nearly 100 million barrels per day (mbpd) of world liquid
The Declaration of Cooperation oil production agreement
fuels supply (see Figure 1)—makes oil production
includes 22 of 25 countries in the collective group (OPEC
decisions that can affect global petroleum prices.
members Libya, Nigeria, and Congo are exempt from the
2016 agreement; Iran was allowed a small increase). For
Figure 1. World Oil Production
reference, OPEC and non-OPEC countries currently
1965-2017
engaged in supply management activities are listed below.
Equatorial Guinea was originally one of the 11 non-OPEC
countries when the agreement was executed. The country
joined OPEC in 2017 and is listed below as an OPEC
country.
OPEC Countries: Algeria, Angola, Congo, Ecuador,
Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and
Venezuela.

Non-OPEC Countries: Azerbaijan, Bahrain, Brunei,
Source: BP Statistical Review of World Energy, 2018.
Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan,
Notes: Oil production includes crude oil, shale oil, oil sands, and
South Sudan.
natural gas liquids.
Combined petroleum production of OPEC and non-OPEC
Following a period of petroleum oversupply and rapidly
countries—hereinafter referred to as OPEC+—represents
declining prices in 2014 and 2015—a situation some
approximately 60% of world supply.
analysts attribute to OPEC not intervening in the market—
OPEC, led by Saudi Arabia, along with 11 non-OPEC
Consideration of Possible Oil Market and
countries, led by Russia, entered into an agreement (the
Price Effects
“Declaration of Cooperation”) in December 2016 to
Exactly how enactment of the proposed NOPEC legislation
collectively reduce crude oil production by approximately
might affect the oil market is uncertain. The perceived
1.8 mbpd. Implementation of the agreement contributed to
potential risk of the United States imposing Sherman Act
the benchmark U.S. crude oil price—West Texas
penalties, which could be severe, would likely determine
Intermediate or WTI—rising from $42/barrel to $72/barrel
the extent to which the NOPEC legislation might affect oil
between June 2017 and June 2018. As prices were
markets and prices. However, potential impacts would
increasing, the No Oil Producing and Exporting Cartels
likely be within a spectrum of possible outcomes that might
(NOPEC) Act of 2018 (H.R. 5904 and S. 3214) was
range from marginal to highly impactful. The following
introduced in both the House and Senate with the implied
discussion is focused on market impacts but does not
goal of reducing petroleum prices paid by consumers. The
discuss potentially significant retaliatory measures, risks to
OPEC/non-OPEC production agreement is set to expire at
seizure of U.S. assets abroad, or other potential U.S. foreign
the end of 2018, although the parties have expressed
policy or military impacts.
interest in institutionalizing their collective efforts to
manage oil supply.
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No Oil Producing and Exporting Cartels (NOPEC) Act of 2018
Marginal Impact: OPEC+ Continues Supply
An oil market without spare production capacity and a
Management Role and U.S. Has a Negotiating
supply management organization would simply respond to
Lever
price movements. Since the ability of oil supply and
At one end of the outcome spectrum is a scenario where
demand to respond to price is limited in the short term, and
OPEC+ continues its oil market-influencing role. The
since a relatively small market imbalance—either surplus or
NOPEC Act would provide the Department of Justice with
deficit—can translate into large price movements, the oil
sole enforcement authority for any violations. The bill does
market could potentially enter a period of price volatility.
not expose foreign countries to broader civil litigation. It
Prices could reach high levels when the market is
may be possible for affected countries to manage the
undersupplied and prices could be very low when the
proposed Sherman Act modification diplomatically, should
market is oversupplied. Academic research suggests that the
these countries determine that their collective supply
presence of a market-intervening supply manager can
management role is more valuable than the risks associated
reduce crude oil price volatility. However, this research also
with potential legal actions. If this were the approach
suggests that an oil market without a supply manager could
employed by the affected countries, then OPEC+’s role in
have periods—the trough portion of price movements—
the oil market may not substantially change and supply
when price levels could potentially be lower when
management would potentially continue. However, the U.S.
compared to an oil market where a supply manager is
executive branch could possibly use the NOPEC Act, if
present. Furthermore, oil price volatility may also affect the
enacted, as a diplomatic negotiating lever to motivate
fiscal health and political stability of producing countries,
market intervention when oil prices are deemed to be too
which arguably might affect broader U.S. interests in
high for U.S. consumers or too low for U.S. producers, or to
certain regions.
perhaps support broader geopolitical objectives.
Alternatively, some analysts suggest that a functioning oil
Even if managed diplomatically, enactment of proposed
futures market combined with the price-responsive and
NOPEC legislation could potentially affect economic
short-cycle development attributes of U.S. tight oil (also
reform efforts in some OPEC+ countries. For example,
referred to as shale oil) production could possibly smooth
Saudi Arabia is embarking on several programs to
volatile price movements and provide supply management
restructure its economy to be less dependent on oil-related
functions. However, when considering the relatively recent
revenues. In order to finance some of these efforts, Saudi
development of U.S. tight oil, crude oil quality, and
Arabia leadership is looking to raise capital via the bond
possible infrastructure bottlenecks that can limit the ability
market and possibly through selling shares of Saudi
of crude oil being transported to global buyers, the potential
Aramco, the national oil company. If the NOPEC Act were
for U.S. tight oil to smooth price volatility is uncertain.
passed, the potential for the United States to pursue Saudi
Arabia for Sherman Act violations could be viewed as a
Legislative History and Recent Action
significant risk by the financial community and could
NOPEC legislation was first introduced in 2000 and a
possibly affect the Saudi Aramco valuation and/or result in
version of the bill was introduced in each Congress from
increased borrowing costs for the country.
the 106th to the 112th. In 2005 (109th Congress), the Senate
passed a version of the bill in the Energy Policy Act of
High Impact: OPEC+ Ceases Supply Management
2005, but it was not included in the enacted legislation. In
Role and Produces at Full Capacity Potential
2007 (110th Congress), the House of Representatives passed
At the other end of the outcome spectrum is a potential
NOPEC legislation (H.R. 2264) by a vote of 345-72. The
scenario where the NOPEC legislation achieves its intended
committee report (H.Rept. 110-160) on H.R. 2264 includes
objective of eliminating the collective actions of OPEC+
supplemental views that express concern about the potential
countries to influence the world oil market. If the affected
for retaliatory measures from affected countries. The report
countries perceive the litigation and financial risks
mentions the ability to station U.S. troops in the Middle
associated with NOPEC to be high, OPEC+ ceasing its
East, an oil export embargo, and the potential for seizing
supply management activities might be the result.
U.S. assets abroad as possible unanticipated outcomes
associated with enacting NOPEC legislation.
Under this scenario, OPEC+ countries might choose to
produce at their full capacity potential, thereby eliminating
During a recent period (June 2017 to June 2018) of rising
the International Energy Agency (IEA)-estimated OPEC
crude oil and consumer gasoline prices that were influenced
spare production capacity of over 2 mbpd in September
by production decisions made by OPEC+ countries, the
2018 (IEA does not estimate spare production capacity for
NOPEC Act of 2018 (H.R. 5904) was introduced in the
non-OPEC countries). Most of this spare capacity (71%) is
House of Representatives and was ordered reported by the
in Saudi Arabia. This additional oil production entering the
Committee on the Judiciary in June 2018. A companion
market would likely result in downward pressure on oil
Senate bill (S. 3214) was introduced in July 2018. The
prices over the short term. However, the downward price
current Administration has not expressed an official
pressure effect would likely be counter-balanced to some
NOPEC position. However, in a book published in 2011,
degree by the elimination of spare production capacity that
President Trump indicated support for passage of similar
may be needed in the event of unplanned outages resulting
NOPEC legislation.
from a variety of world events (e.g., geopolitical unrest or
sabotage). Spare production capacity is one of many factors
Phillip Brown, Specialist in Energy Policy
identified by the U.S. Energy Information Administration
(EIA) that can influence global oil prices.
IF11019
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No Oil Producing and Exporting Cartels (NOPEC) Act of 2018

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