Well, Laurel, I hope I don’t send anyone screaming out of a house into a yard with my reply to you.
I owe all FlaglerLive readers an apology. For three years now, I have consistently argued that OPEC+ is responsible for the rise in energy prices, alongside Russia, including the high gasoline and diesel prices right here in Flagler County. ‘
More recently, I argued that American energy companies had not participated in OPECs voluntary production cuts. Therefore, American energy companies should not be blamed for taking advantage of a worldwide shortage of crude oil; they were, therefore, entitled to their profits, no matter how obscene.
Imagine my surprise Sunday afternoon when I found out I had probably been wrong all that time.
I read a Wall Street Journal article. The editor had approved a headline stating it really wasn’t all that bad for an American oil company to collude with OPEC. The author/reporter referenced an early May Federal Trade Commission action that had found that the CEO one of the larger American shale oil producers had colluded with OPEC to keep domestic oil prices high for profit. As I read more and more of the article, I formed the sense that the Journal was publishing a “puff piece”, that things weren’t adding up to my way of thinking.
As I commonly do, I decided to fact check the source, in this case the Journal.
Scott Sheffield, the CEO of Pioneer Natural Resources, was the subject of the FTC action. The Journal’s reporter accurately relayed that much. So, I started with Mr. Sheffield. What wasn’t told to Journal readers was that the FTC had, concurrent with its findings, also referred Sheffield’s case to the Department of Justice for possible criminal prosecution for collusion. How could the Journal miss that fact? How could a potential criminal prosecution of a major shale oil company CEO be characterized as really not all that bad?
Digging further, I found a January 2024 federal civil action that was filed against eight (not just one) major American shale oil companies, alleging that all eight of them had colluded with OPEC+, starting with their preliminary informal meetings in 2017, and gaining consensus toward an ultimate goal of restricting American crude oil production, which was implemented in February 2021.
I read most of the 76-page complaint (I skimmed a few pages). If what is claimed is true, Americans have been gouged out of billions of dollars due to collusion between OPEC and the eight major American shale oil producers. How the Journal missed the possibility of there being eight CEOs, not just one, colluding with OPEC is beyond my understanding? If they knew, would the editor still approve a headline proclaiming that it still was not bad?
The good news for FlaglerLive readers is that the plaintiff’s asked the court to find that their action meets the statutory definition of a class action suit. The original plaintiffs seek damages from the eight American shale oil producers, i.e., they want to be reimbursed for the extra money they spent for gasoline and diesel fuel over the last three years due to the collusion. While not every state was named in the suit, Florida is. If I understand class action law accurately, if the trial judge grants class action status to Florida residents, perhaps some FlaglerLive readers can join the suit and seek reimbursement for their own damages.
Perhaps JimboXYZ and Dennis C. Rathsam could join as plaintiffs. Of course, if they did join the action, they would have to risk being sworn under oath should the case have to be tried instead of settled. They would have to abandon their claims that the Biden administration is responsible for the rise in Flagler County gas prices, else they lose their claim for damages against the energy companies. What a delicious irony that would be! Inflation due to colluding oil companies cannot also be due to the Biden administration at the same time. High gas prices due to colluding oil companies cannot also be due to the Biden administration at the same time.
The chronology outlined in the complaint details multiple meetings between OPEC leaders and American shale oil company executives, beginning in 2017. From here on out, if I already kn0w an industry fact, I will say so. Otherwise, the facts below come from the text of the complaint.
For context, the plaintiffs allege, it is important to list the background of the American oil industry.
For the first 45 years of OPEC, American shale oil companies were niche players in the overall industry. Technological limitations kept shale wells from consistent inexpensive production. The major players were those that looked for large, pooled deposits of oil. This type of exploration was expensive and time consuming. It commonly took years to find and develop such large reservoirs of pooled oil. Shale oil is not pooled. The slow response rate of American oil companies meant that OPEC had the upper hand in manipulating international crude oil prices.
According to the complaint, three technological factors emerged at around the same time that changed forever the imbalance between OPEC and American oil producers. Improvements in horizontal drilling technologies meant that new efficiencies in shale oil extraction brought down the cost of producing oil. Improvements in 3-D seismic imaging technology meant that shale oil deposits could be more easily located and gauged for quantity, meaning fewer wasted drills and more productive wells. If you can predict where to most efficiently drill, costs of extraction go down. Improvements in chemical compounds used in fracking meant that a single hydraulic shock would release greater amounts of oil for extraction. These three concurring breakthroughs led to a rapid growth in fracking efficiencies. From 2008 to 2014, American shale oil companies drilled for so much oil that industry observers began calling it the “Shale Revolution.” What used to take years for companies to ramp up production became a few months.
OPEC, now facing a rapid response by American oil companies whenever OPEC tried to manipulate oil prices, started a price war to force American oil companies out of business; they flooded the international market with cheap oil. OPEC, primarily through Saudi Arabia, still held one important advantage. Even I know that Saudi Arabia does not have to frack for oil. Its oil is easily pumped out, because it is pooled. From my own reading, I know that it costs on average about $8 per barrel to extract a barrel of Saudi oil. Even with advances today, I know that the average cost of extracting American fracked oil is just over $25 per barrel. Ten years ago, in the early fracking years, the average cost was well over $50 per barrel.
The OPEC price war drove international crude oil prices below $30 per barrel for a brief time. That was when I purchased gasoline at BJ’s for $1.49.9 per gallon, though only once. The price went up a few pennies, but it stayed below $1.60 per gallon for some time.
A number of American shale oil companies failed. Some merged with other companies. Others sold off their assets and ceased operations. The price war hurt every company. But it hurt OPEC, too. OPEC decided to switch tactics. First, it invited ten nations to join as non-voting members. OPEC became OPEC+. Second, OPEC invited for the first time American shale oil company executives to meet with them.
In February 2017, after the first meeting, it was announced that oil inventories were to be limited to “better balance” markets. On its own, this was a small but important step. Another report detailing the results of the meeting was that during that initial meeting, “OPEC told U.S. shale producers that they (OPEC) would not maintain high oil prices if shale producers kept adding production to take advantage.” In other words, OPEC officials warned American shale oil executives to stop riding OPEC’s coattails. OPEC said if shale oil producers kept profiting off OPEC price manipulations, OPEC would start another price war.
At the next meeting, in February 2018, the lead OPEC representative said that the meeting was to “further explore the mechanics of achieving our common objective.” After the meeting, OPEC Secretary General Barkindo openly stated during a panel discussion that included Hess Oil CEO John Hess: “We have to continue to collaborate. It’s one industry. It’s a global industry and I think our colleagues in the U.S. are on the same page with us and we will work together to exchange views.”
In July 2020, OPEC’s Secretary General said: “Everybody has a role to play. We are very much appreciative of the support and cooperation we are getting from the U.S., both at the level of policymakers as well as from industry.” This comment really caught my attention. Was the Secretary General saying that U.S. policymakers, meaning the Trump administration, were colluding with OPEC? It can be read that way, but there is more than one inference that can be drawn from that statement.
On November 23, 2020, one of the major American shale oil company CEOs said: “We don’t want to put OPEC in a situation where they feel threatened, like we’re taking market share while they’re propping up oil prices.” This, too, can be taken two ways, because economies around the world were emerging from the pandemic, a time when crude oil prices actually went negative for a short time. But it also can be inferred that American shale oil producers had reached an agreement not to interfere with OPEC’s future efforts to raise crude oil prices.
At around the same time that OPEC announced its 6 million barrel per day production cut, with Saudi Arabia voluntarily cutting another one million barrels per day, several American shale oil executives stated that major American shale oil producers would not raise production.
In June 2021, Scott Sheffield spoke of his confidence that U.S. shale producers “will not respond” to high crude oil prices by increasing production; they would instead focus on shareholder profits.
On October 3, 2021, Scott Sheffield said Pioneer Resources would not try to curb soaring oil prices, stating that his company would cap any increase in oil production at 5% for the year, regardless of price. “[E]verybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, $100 Brent.”
During the 2021-2022 year of scarce OPEC oil, a minor American shale oil company, Tall City Exploration, responded to the higher crude oil prices by tripling its production. The major shale oil producers all limited production gains to no more than 5%.
In February 2022, Scott Sheffield commented that U.S. oil independents were “staying in line.” Crude oil prices were steadily rising, peaking at over $120 per barrel in June 2022. Sheffield went on to add: “Whether its $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans.”
At the time of Sheffield’s comments, Russia was in the final preparations for war. Other American shale oil company executives said that they intended growth discipline, that 5% growth was the target, that the goal was “returning capital to investors.”
In March 2023, two dozen oil executives met with the president-elect of OPEC “to reaffirm their mutual commitment to withholding production, ‘despite record profits.’”
On April 3, 2023, Bloomberg News reported that U.S. shale oil companies would not increase production, would not “rescue” U.S. consumers from high gas prices, despite record profits and abundant cash reserves. One industry expert was quoted: “OPEC and shale are very much on the same team now, with supply discipline on both sides.”
