End immunity for OPEC

August 24, 2005|By Ariel Cohen and William Schirano

WASHINGTON - It's a move that anyone outraged by high gasoline prices would applaud - a nonprofit labor group suing the Organization of Petroleum Exporting States (OPEC).

That was in 1978, though - and the lawsuit failed. A U.S. appeals court threw it out three years later, noting that OPEC's member states enjoy immunity from prosecution under the Sherman Antitrust Act.

Congress recently had a perfect opportunity to change that - and wasted it.

In June, the Senate approved an amendment that would have let the federal government sue OPEC. It was a welcome first step toward re-establishing the free market in this strategically important sector. Indeed, this long-overdue move could have pointed the way to a second step: allowing private antitrust suits against OPEC. But the amendment failed to survive House-Senate negotiations over the energy bill.

The real losers are American consumers. Since its inception in 1960, OPEC, which is dominated by Persian Gulf producers, has successfully restricted its members' petroleum production, artificially distorting the world's oil supply to line their pockets. This supply-fixing strategy has repeatedly wreaked havoc on the U.S. and global economies:

In 1973, OPEC's moves to punish the United States for supporting Israel in the October war sparked a worldwide economic recession that lasted from 1974 to 1980.

In 1980, OPEC's failure to boost production after the Iranian revolution brought historically high oil prices of $81 per barrel (in 2005 dollars).

In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.

Lately, OPEC's resistance to add productive capacity has sent oil prices to more than $60 a barrel, again endangering economic growth for the United States and the world.

The cartel's operations ensure that its members' oil and gas economies remain insulated from foreign investment flows. OPEC members bar foreign investors from owning upstream production assets (oil fields and pipelines), thus perpetuating the cartel's de facto monopoly over the petroleum market.

Indeed, the only serious challenge to the organization came in the 1978 case, when the International Association of Machinists and Aerospace Workers sued OPEC. But the decision to reject the case was wrong. Government-owned companies that engage in purely business activities don't warrant sovereign immunity protection, according to prevailing legal doctrines.

The wealth that's extracted from Western consumers via OPEC's high oil prices does more than just enrich petroleum producers. It's used to fund terrorism through some oil sheiks' individual contributions and government-controlled, Persian Gulf-based "nonprofit" foundations. It also permits hundreds of millions of dollars to be spent on radical Islamist education in extremist madrassas (Islamic religious academies).

Rising concerns over energy prices at last prompted Congress this year to examine the legal hurdles that prevent the United States from defending its economic and national security interests. A group of senators led by Republican Mike DeWine of Ohio introduced the No Oil Producing and Exporting Cartels Act, known as NOPEC, to amend the Sherman Act to make oil-producing and exporting cartels subject to lawsuits in U.S. courts.

On June 21, Mr. DeWine, with the support of Democratic Sen. Herb Kohl of Wisconsin, was able to add a NOPEC-like amendment to the Energy Policy Act of 2005. This amendment would have modified the Sherman Act to allow the Justice Department or the Federal Trade Commission to bring lawsuits against OPEC for its monopolistic practices. It also would have sent a long-overdue signal to OPEC oil barons that they must stop limiting production and investment access.

Of course, more reform would be needed. If the cartel is to be reined in, individuals and companies it has damaged must have the right to sue. As the IAM v. OPEC decision made clear, Congress should amend the Sherman Act to allow private lawsuits against OPEC.

But NOPEC would have been a good start. Without the kind of pressure it would exert, there's no reason for the cartel to cease its monopolistic practices. And there's no reason for Americans to expect anything other than more of the same from OPEC - insufficient production and higher energy bills.

Ariel Cohen is a senior research fellow and William Schirano is a researcher in the Davis Institute for International Studies at the Heritage Foundation.

Knight Ridder/Tribune Information Services

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