Legislation targeting the petroleum exporters group OPEC is advancing in the US Congress, potentially raising new financial and geopolitical challenges for the international oil market.
A House committee last week approved the “No Oil Producing and Exporting Cartels Act of 2019,” or NOPEC and a version of the bill also has been proposed in the Senate. While the legislation enjoys bipartisan support, there is still no timetable for the proposal to be considered by the full Congress.
The bill would seek to prevent the Organization of the Petroleum Exporting Countries and allies from adjusting their production levels to affect oil prices.
Under the bill, sovereign immunity would no longer protect OPEC members from Justice Department antitrust enforcement.
OPEC and its unofficial leader, Saudi Arabia, at the end of 2016 reached an agreement with Russia to limit output in order to lift crude prices.
Long history in Congress
Recent congressional efforts to crack down on OPEC date back to 2000 and various versions of NOPEC have been proposed intermittently since then in spite of opposition from business and petroleum lobbies.
US Presidents George W. Bush and Barack Obama each opposed the measure, limiting its prospects because of the presidential veto power.
Means of applying pressure
Some analysts see the NOPEC debate as boosting US influence.
“Even if the bill never becomes law, it would bring the administration significant leverage should prices start to rise,” Barclays said in a research note.
The bill would provide additional options “that could be seen as punitive” in light of the controversy surrounding the murder of Saudi journalist Jamal Khashoggi, or OPEC’s ongoing efforts to manage prices, as with a meeting next month of OPEC and allies in Azerbaijan, according to Barclays.
US President Donald Trump has at times called on OPEC to keep production high to limit oil prices.
Supporters of the proposal want to keep oil prices from going too high but there is a chance the measure could backfire if Saudi Arabia ends its longstanding practice of keeping “spare production” to lift output in case of a supply crunch. Saudi Arabia has boosted production previously to make up for lost supply from Iraq and Libya and in other cases, keeping prices from shooting higher.
“If you are going to sue them for getting together, then Saudi Arabia would have absolutely no incentive to maintain any barrel of spare capacity, which is expensive,” said James Williams of WTRG Economics.
“Without the spare production capacity maintained by Saudi Arabia and other OPEC members, the price of crude would be more volatile at each supply disruption,” Williams said.
“Ultimately, any NOPEC bill raises the issue of US-Saudi relations,” said Harry Tchilinguirian of BNP Paribas.
While the US shale boom has reduced America’s Middle East oil dependency, Saudi Arabia is “President Trump’s foreign policy cornerstone in the Middle East, notably when it comes to managing and containing Iran,” Tchilinguirian said, adding that Saudi Arabia was also a purchaser of US weapons.
Another risk of NOPEC would be a plunge in oil prices. Under that scenario, “you’ll see protests from the population and you’ll have more Arab springs,” said Williams.
These economic and geopolitical risks probably make Trump’s support of NOPEC unlikely but “with this president, we can never be certain,” Williams said.