International Economic Law and Policy Blog

More Pressure for an OPEC WTO Case

From a press release by Sen. Frank Lautenberg

Today, a coalition of eleven Senators led by Sen. Frank R. Lautenberg (D – NJ) called on the Bush Administration to take action in the World Trade Organization (WTO) against eight Petroleum Exporting Countries (OPEC) by ordering United States Trade Representative (USTR) Ambassador Susan Schwab to file a complaint with the WTO.  These eight countries, operating as an illegal cartel, have refused to increase production, reduced the supply of oil on the market and driven up the gas prices that consumers pay at the pump.

In a letter to Ambassador Schwab, the Senators wrote, “The very existence of the OPEC cartel violates GATT Article XI, which prohibits nations from maintaining quotas or any other quantitative restriction on exports.  The refusal of OPEC nations who are members of the WTO to play by these rules is inexcusable, and they must be held accountable.  I hope you will inform the President and direct your agency to look into these charges and work to directly confront OPEC’s violations of international law.”

I haven't been able to track down the actual letter.  What I found interesting was the other signatories, which included Bob Casey and Dick Durbin, two big Obama supporters.  Would Obama take up the cause if elected?  Oh, and one other signatory stood out:  Hillary Clinton.  There was a lot of speculation about why she stayed in the race so long and what she wanted from Obama.  Perhaps it was all about OPEC!  OK, probably not.

Via the AP, here was USTR's response:

Gretchen Hamel, spokeswoman for the Office of U.S. Trade Representative, said "We have considered this before and remain of the view that under WTO rules filing a (complaint) case cannot be an effective course of action."

OPEC WTO Legislation Introduced

From a press release by Senator Frank Lautenberg:

Late last week, U.S. Sen. Frank R. Lautenberg (D-NJ) introduced legislation to force action against the Organization of the Petroleum Exporting Countries (OPEC) for its anti-competitive practices and illegal export quotas on oil, which ultimately lead to higher gas prices here at home.

    “While OPEC and the oil companies have seen record profits, American families are paying record gas prices at the pump,” Sen. Lautenberg said.  “The illegal actions of OPEC nations have gone on for too long, and it is time to stand up to this cartel and protect the interests of the American people.”

    Sen. Lautenberg’s bill would require the United States Trade Representative to initiate consultations with countries that are members of both OPEC and the World Trade Organization (WTO).  If consultations failed, the U.S. would request that the WTO convene a dispute settlement panel to judge the case.  If the case were decided in the U.S.'s favor, OPEC would be required to cease its illegal operations or the U.S. would be able to impose trade remedies.

    ...

    Under WTO rules, countries are prohibited from placing restrictions on exports.  Yet despite this prohibition, by negotiating among themselves, OPEC sets export quotas for each of its member nations, and is able to exercise a great deal of control over the international price of oil.

...

    The bill, the OPEC Accountability Act of 2008 (S. 2964), is co-sponsored by Sens. Carl Levin (D-MI), Byron Dorgan (D-ND), Bob Casey (D-PA) and Bernie Sanders (I-VT).  It is based on similar legislation Sen. Lautenberg first introduced in 2004.

Note the statement that "OPEC sets export quotas for each of its member nations."  If they can prove that, maybe they have a case.

Here is the bill: http://www.govtrack.us/congress/billtext.xpd?bill=s110-2964  From the Congressional "Findings" in the bill: "The agreement among OPEC member nations to limit oil exports is an illegal prohibition or restriction on the exportation or sale for export of a product under article XI of the GATT 1994."  Obviously, converting these Congressional findings into WTO panel findings is going to be their challenge. 

The specific actions they complain about are somewhat broader than I expected:

(1) IN GENERAL- Notwithstanding any other provision of law, the President shall, not later than 15 days after the date of enactment of this Act, initiate consultations with the countries described in paragraph (2) to seek the elimination by those countries of any action that--

(A) limits the production or distribution of oil, natural gas, or any other petroleum product;

(B) sets or maintains the price of oil, natural gas, or any petroleum product; or

(C) otherwise is an action in restraint of trade with respect to oil, natural gas, or any petroleum product, when such action constitutes an act, policy, or practice that is unjustifiable and burdens and restricts United States commerce.

High Gas Prices, OPEC and the WTO

It has been a while since we talked about the possibility of a WTO complaint against OPEC.  Given the recent increase in gas prices, I was a bit surprised that it took the U.S. Presidential campaigns so long to raise the issue, but at long last here is something from Hillary Clinton:

Take more aggressive action to pressure OPEC to increase production - OPEC recently reiterated that it will not even consider increasing crude output until September 2008, even though limited supplies are contributing to record oil prices. Hillary believes we should be taking more aggressive action to address OPEC’s control over global production levels and hold OPEC accountable for its decisions. President Bush’s efforts to pressure OPEC over the past seven years have been inconsistent and unsuccessful. Hillary supports sending a strong signal to OPEC that the era of complacency has ended. Hillary will:

• Use the WTO to Challenge OPEC’s Production Quotas - With nine of the thirteen OPEC member countries also being members of the WTO, Hillary believes we should use the tools available at the WTO to address OPEC’s refusal to increase production. WTO rules currently prohibit member countries from imposing export quotas. Yet OPEC member countries are actively and explicitly banding together to restrict oil production and affect global prices. Hillary is calling on the President to engage in immediate negotiations with OPEC members and, if no progress is made, file a formal complaint against OPEC countries at the WTO. Filing a complaint at the WTO will send a clear signal to OPEC countries that the U.S. is committed to an open, transparent global oil market. Such a step will give OPEC members an incentive to increase production as well.

Some of the legal issues involved were discussed at the links provided above.

For good measure, she also wants to take antitrust action:

Allow OPEC Production Decisions to Be Challenged Under U.S. Anti-Trust Law - Currently, OPEC countries cannot be challenged under U.S. anti-trust laws, even when they are engaged in coordinated, commercial activity to control the global oil market. Hillary supports amending the Foreign Sovereignty Immunities Act so that the Justice Department can bring suits against OPEC countries in U.S. courts for price fixing. Changing the rules would help hold OPEC countries accountable for their decisions.

OPEC , WTO and HOTELLING'S RULE

The report of Senator Lautenberg mentioned by Simon Lester in a recent post, does not say a word about two important legal points in the context of this issue (See "OPEC, the WTO, Regionalism, and Unilateralism”, Journal of World Trade, Vol. 37 (2003), by Melaku Desta).

1. Four important OPEC countries -Algeria, Iraq, Iran, Libya- still remain outside the WTO system. Russia, although not a member of OPEC, is known to collude with OPEC quite often. However, Russia is still not a WTO Member.

2. In principle, trade in petroleum products among WTO Members is governed by the rules of the trading system just like other products. Therefore, decisions to restrict supplies on the basis of falling prices below the OPEC-approved price range or any other threshold, could well qualify under Article XI of GATT as quantitative export restrictions through minimum export price requirements. However, the real legal issue is whether these restrictions could qualify in the context of Article XX exceptions as measures relating to the conservation of petroleum. Senator Lautenberg suggests in his report that OPEC’s stated goal is obviously a price target, not conservation, and there is thus no shelter under Article XX because any reference to conservation in such a context is simply a “disguised restriction on international trade” in violation of the Chapeau of Article XX. However, according to Desta it is also plausible to argue that conservation of a mineral resource such as oil cannot be seen in isolation from the financial return of its exploitation for its owners and production restriction decisions caused by falling market prices could be construed as “relating to the conservation” of the resource.

3. Although Desta does not mention the famous Hotelling's rule relating to the optimal exploitation of non-renewable natural resources such as petroleum, it is very likely that all the legal debate in such a case would be centered about this rule. Hotelling's rule and all economic models derived from its perspective deal with the issue of how much of a non-renewable resource must be extracted today and how much must be saved for the future, depending on present and expected economic conditions. If OPEC Members could demonstrate that their behavior is justified under this rule or one of its variants, then a panel may conclude that this behavior is related to the optimal exploitation of a non-renewable resource and thus to its conservation. If they fail in this demonstration, then a panel would conclude that their behavior is an export restriction and that any reference to conservation is simply a disguised restriction of international trade. Once again, we have here a striking example of how legal interpretation could become embedded with economic theory.

4. The rationale behind Hotelling' rule is that someone who sells a disappearing resource today is thereby surrendering the opportunity to sell that commodity in a future market in which it might be more highly valued. The legal challenge for OPEC Members would then be to demonstrate that their announced intention to cut back production as prices go below 60 dollars might be most naturally interpreted from an Hotellig's perspective: producers don't see it as being in their interests to sell for less, given what the oil will be worth in the future (given China's rising demand and the geological availabity of oil).

OPEC and the WTO

I've heard it suggested that OPEC's actions to limit oil supply violate WTO rules.  See, for example, this recent press release and report from Senator Frank Lautenberg.  After running through the legal arguments, the report concludes:

OPEC’s practices are in violation of WTO rules prohibiting quantitative restrictions on exports [under GATT Article XI]. Although there are exceptions that OPEC could attempt to cite, the applicability of these exceptions is tenuous. A WTO case against the six WTO members of OPEC could have immediate, large and lasting benefits to the US consumer and economy by driving down oil and gas prices.

In the press release, the Senator "called on President Bush to file an action in the World Trade Organization against the cartel’s plan to limit crude oil production, which violates Article XI of the General Agreement on Tariffs and Trade (GATT)."

So, is OPEC taking this as a serious threat?  Well, it's hard to say for sure, but today as I was reading the Economist I happened to flip through their job advertisements.  There I saw an ad from OPEC seeking a "Senior Research Analyst for WTO Matters."  I checked the OPEC web site, and here's the position: http://www.opec.org/home/vacancies/Other_vacancies/WTOSenResAnalyst.htm .  It's hard to say if the two are related, but perhaps somebody at OPEC took notice of the report.