Welcome to our “Big Thoughts/Quick Reads” Antitrust Blog. This will be an irregular series. Some posts will be triggered by current issues. Some posts will be triggered by long-settled issues that we think need to be unsettled and reconsidered. All will be issues interesting to us, and we hope to you as well. We welcome your thoughts and look forward to generating interesting conversations.

The Organization of Petroleum Exporting Companies (OPEC) is one of the longest-running and most successful price-fixing cartels in history.

It proved its power in the 1970s by drumming up a “shortage” of oil that resulted in gasoline rationing in the U.S. Here in Washington, D.C. and the surrounding region, you could buy gas for your car only on alternate days, according to whether your license plate ended with an even or odd number. Lines stretched around the block, and people waited for hours.

The oil industry fueled and rolled out a fleet of economists and analysts to “instruct” us that the shortage was due not to agreement among the OPEC cartelists, but rather to ordinary market forces of supply and demand. The world was running out of oil reserves, they said, and we were finally in the last days of exhausting the supply of melted dinosaurs that had long given us plentiful and cheap oil products.

And of course, that was not true. Here we are, nearly 50 years later, and we still have enough oil to burn (literally) and to be partly responsible for climate change.

Price fixing is an instinct, for the simple reason that businesses hate competition. Competition makes life difficult for businesses by creating uncertainty:

Have my competitors figured out a way to become more efficient, so they can lower their prices and still be profitable? How much business will that take away from me? Will that force me to lower my prices? If I do, can my business survive? I need to work on becoming more efficient so that I can lower my prices and take business from my competitors, or at least not lose business to them.

Will my competitors innovate, making my products less desirable? If they do, how much business will I lose to them? Will my business survive? I need to work on innovating so that I can differentiate my products from my competitors’ and take business away from them, or at least not lose business to them.

And no businesses hate competition more than those whose products are homogeneous, essentially indistinguishable from each other.

Milk (adjusted for graded quality) is an example. Grade A milk is Grade A milk; it all tastes the same. We have seen how this has driven innovation and differentiation: whole milk, 2% milk, skim milk, organic milk, vitamin-enhanced milk, and lactose-free milk.

Oil (adjusted for graded quality) is another example. Oil refined by any company for a particular purpose is the same as the oil refined by any other company for that purpose.

But innovating and becoming more efficient are painful and expensive. And both have their limits. So we have seen milk price-fixing cartels, and we have seen oil and gasoline price-fixing cartels.

There are two fundamental ways to fix prices.

The first is just to get together with your competitors and agree on prices. A recent dramatic example is the lysine price-fixing cartel, made famous in the movie “The Informant” starring Matt Damon. Three executives from Archer Daniels Midland each went to jail for three years, and the company paid a fine of $70 million. And the lysine cartel was just one of several similar cartels in additives and ingredients.

The second way to fix prices is to get together with your competitors and agree to limit production or otherwise reduce supply. This works because the demand for the product will drive up the price when the supply of product is reduced (assuming demand for the product has not decreased).

And this second approach is the key to OPEC’s power.

Historically–meaning, for as long as OPEC has existed–the United States has recognized that the OPEC cartel hurts the American economy by driving up prices for a commodity that is an essential input all across that economy. More recently, when the Saudis broke with the cartel by ramping up production, that action boosted the American economy by making gasoline and other petroleum products cheaper. And it significantly hurt the economy of Russia, which is not an OPEC member, but is highly dependent on selling its oil above a certain price.

So it was quite a shock to see that President Donald Trump jumped into this dispute first by arranging talks between Russia and the Saudis; second, by pressuring Mexico (also not an OPEC member) to agree to cut back production to help move prices higher; and third, by agreeing to cut back U.S. oil production to make up the difference when Mexico would not agree to the full production limits asked of it.

We will leave it to others to analyze the politics and incentives behind this historical about-face in American economic policy. Instead, let’s look at the antitrust issue: If American oil companies limit their production, with the effect of raising prices, will that violate U.S. antitrust laws?

Let’s start by asking this obvious question: Does OPEC’s control of oil production, which raises prices, violate U.S. antitrust laws? The answer is no, but perhaps not for the reason you are thinking.

It is not because the OPEC members are not U.S.-based, or are not in the United States when they are agreeing on implementing production quotas; for over a century, it has been clear that U.S. antitrust law reaches illegal activity conducted outside the U.S. when it has a direct, foreseeable effect on the U.S. market. Rather, it’s because the actors in the OPEC cartel are sovereign nations, which cannot be subjected to U.S. antitrust laws. In other words, if the OPEC cartel were made up of private companies, even non-U.S. companies, that agreed to fix prices for oil–including the oil they export to the United States–they would violate U.S. antitrust law. The companies and their executives could be prosecuted and fined, and the executives sent to jail, even if they had never entered the United States.

And a particularly interesting feature of U.S. antitrust law is that those companies and their executives would violate the law simply by the act of agreeing, even if they did not carry through by actually limiting production. The agreement itself is illegal.

That brings us to the hard question: Would private U.S. oil companies violate antitrust law if they agreed to limit oil production at the “request” of the President? That may depend on what form that request takes. The answer is no if Congress passes legislation that specifically requires, or establishes a regulatory body that requires, private companies to reduce production. But the answer is yes if the private companies go beyond the strict bounds of what they are required to do, and it may be yes if they agree to limit production under any government influence short of a legislated mandate.

Moreover, under U.S. antitrust law, companies can ask the U.S. government to order them to fix prices or limit production, without risking antitrust prosecution, under the First Amendment right to petition the government. But the companies violate U.S. antitrust law if they actually engage in the conduct they are petitioning the government to require while waiting for the government to respond, or if the government fails to act or refuses their request.

Future blog posts will consider how this new chapter in U.S. economic policy and antitrust law is playing out.

The post Did We Just Join OPEC? Part 2 appeared first on The “Big Thoughts/Quick Reads” Antitrust Blog.

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