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I had no idea we were a member of OPEC?

I'm not running around as the first member of the tribe to wear a turban!

Biden Turns the U.S. Into a Shadow Member of OPEC

Deliberately constraining U.S. supply helps the cartel keep oil prices high and profits up.

By Tomas J. Philipson, Univ of Chicago/WSJ

Dec. 13, 2022 5:51 pm ET

President Biden has urged the Organization of the Petroleum Exporting Countries to increase production of oil and criticized the cartel harshly when it declines to do so—most recently on Dec. 4. But actions speak louder than words. Under the Biden administration, the U.S. has been acting as shadow member of the cartel.

America has committed itself to constrain its own supply through regulations and legislation, which has enabled OPEC to achieve record profits. The White House response to higher cartel profits was to double down by proposing a profit tax that would further limit U.S. supply. The new House Republican majority could help consumers by blocking further cartel-enabling policies.

A cartel in any industry attempts to raise profits for its members by increasing prices above costs through coordinated supply cuts. Although antitrust laws ban such collusion in the private sector, government collusion is commonplace and often protected by the doctrine of state immunity under international law. The most recent example is the Organization for Economic Cooperation and Development, led by the U.S. Treasury Department, proposing price-fixing through corporate tax floors to limit tax competition. Collusion on prices that are mandated to be paid—taxes—is allowed, while collusion on market prices, which are paid voluntarily, isn’t.

The most famous government cartel is OPEC, which since 1960 has coordinated oil supply among its members. They decide jointly on supply decisions to capture profits that are higher than if they competed. Such an arrangement is inherently unstable, because members can opportunistically “cheat” by selling more than their allotment, thereby increasing supply. Cheating can’t be prevented by contract in the private sector, as collusion is illegal, and cheating is difficult to prevent between governments as well owing to lack of international enforcement. Thus OPEC constantly needs to renegotiate with countries that would like to divert from the agreed-on supply schedule.

The U.S. has traditionally responded to OPEC supply cuts by increasing its own production, thereby constraining the cartel in raising prices. But the Biden administration has committed to constrain U.S. supply, through regulation and legislation—not only through direct energy measures but also through financing restrictions under the rubric of environmental, social and governance investing. Washington has worked with Europe to cut Russian supplies as well, through price controls of $60 a barrel. Little wonder that OPEC has cut supply by two million barrels a day since last month.

With the U.S. as a new shadow member, cartel profits have soared compared with pre-pandemic levels. Chevron, Exxon, Shell, Saudi Aramco and Norway’s Equinor all reported record third-quarter earnings.

The Biden administration wants to double down by further limiting U.S. supply. That would be the consequence of the White House’s proposed profit taxes. A 2006 Congressional Research Service study found that the Crude Oil Windfall Profit Tax Act of 1980 led to domestic supply cuts, increased imports and higher prices.

One may argue that cartel behavior isn’t present because oil prices have dropped from $115 a barrel in June to around $75 today. But many market participants attribute this to demand cuts owing to economic slowdowns and continuing Chinese Covid lockdowns. The relevant comparison is between prices with and without a stronger cartel regardless of demand.

The administration will argue that higher prices is a necessary but unfortunate side effect of efforts against global warming. This may be a worthy policy goal, but a more sensible approach is a greater focus on clean-energy innovation rather than constraining the supply of the energy we need now.

A wholesale change in U.S. policy is unlikely before 2025, but there are steps the new House majority could take to limit the damage. It can refuse to pass “green new deal” legislation that would further constrain U.S. oil supply. It can conduct rigorous oversight of the many energy provisions in the Inflation Reduction Act to eliminate excessive supply constraints inconsistent with the law. It can reintroduce the No Oil Producing and Exporting Cartels Act, or Nopec, that aimed to enhance U.S. antitrust authority against foreign government oil cartels.

If Republicans take the White House and the Senate in 2024, Congress could permanently codify the deregulatory measures that helped expand supply during the Trump administration.

Without the U.S. as a shadow member, OPEC would have a harder time imposing supply cuts. Consumers in the U.S. and across the world, especially the poor, would benefit.

Mr. Philipson, an economist at the University of Chicago, was a member of the White House Council of Economic Advisers, 2017-20, and its acting chairman, 2019-20.

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