“NOPEC” Legislation and U.S. Energy Security

Following the recent spike in gasoline prices, the No Oil Producing Exporting Cartels (“NOPEC”) Act has once again gained popularity. The act seeks to hold OPEC member states liable for violations of U.S. antitrust legislation for what are seen as anticompetitive attempts to limit the world’s supply of petroleum. Here, CSIS scholars weigh in on the act’s history and the possible impacts of the legislation, if adopted.

Q1: What are the precedents for the NOPEC Act and its attempts to punish OPEC member states?

A1: There is a long history of support from some in Congress for this type of anti-OPEC legislation. In 2000, the Oil Price Reduction Act and the International Energy Fair Pricing Act sought to force the president to reevaluate or even suspend economic and security ties to states engaged in “oil price fixing to the detriment of the U.S. economy.” The NOPEC bill currently under consideration in the Senate has been introduced in some form over 15 times since 1999. Yet despite the enthusiasm of some in Congress for these anti-OPEC measures, the legislation has faced considerable opposition from the other two branches of government and the business community. The challenges are on both legal and policy grounds.

For over a century, the federal court system has consistently held that U.S. courts may not judge the legality of the acts of a sovereign foreign state. Furthermore, because oil production decisions occur entirely within producing states and are in compliance with the law of those states, U.S. courts have no jurisdiction over issues of oil production. Courts have repeatedly refused to rule on suits against OPEC member states, citing sovereign immunity and the Act of State Doctrine, and have dismissed suits against companies dealing with OPEC for similar reasons. Federal courts have long relied on these principles to reject antitrust legislation against OPEC or OPEC members, and the notion of “sovereign immunity” dates back to a unanimous Supreme Court decision in 1897. The doctrine was codified in the Foreign Service Immunities Act of 1976 and was upheld in the UN charter, Article 2 (1). No suit in U.S. court on this issue has ever resulted in a judgment against OPEC or a member state’s oil company.

The executive branch, regardless of the party in power, has also consistently opposed the adoption of NOPEC-type legislation. Both the Bush and Obama administrations have formally stated their opposition to such proposals. Treasury Secretary Henry Paulson under President George W. Bush asserted that the adoption of such a law would threaten foreign direct investment in the United States, as OPEC countries might withdraw assets for fear they would be seized. This divestment would harm the U.S. economy and would almost certainly spur retaliatory measures against American-held assets abroad. Likewise, the Obama administration, in a recent amicus brief, cited similar concerns.

Equally important, intrusion of the legal system into this issue would likely violate the constitutional separation of powers. Any decision by a U.S. court on an OPEC-related issue would have deep repercussions for U.S. diplomatic relations with member states. Such a ruling could be construed to interfere with the executive branch’s constitutional power to conduct foreign diplomacy.

Q2: If passed, what impact would the NOPEC bill have on enhancing U.S. energy security or reducing gasoline prices in the United States?

A2: Despite the intentions of its sponsors, the NOPEC Act would have little positive effect on gas prices. Instead, we would anticipate a variety of unintended and adverse consequences.

If NOPEC legislation were enacted, business investments, such as refineries or petrochemical facilities in the United States in which OPEC state oil companies were partners, could be put at risk. Foreign oil companies operating in the United States would, at a minimum, pause to evaluate the new legal landscape and would likely, at least temporarily, suspend new investments in the United States. More seriously, these foreign oil companies, which play an important role in the U.S. energy sector, could begin to divest from the United States and terminate joint ventures with American companies. The loss of investment would lead to the elimination of jobs, while the collapse of joint ventures in the energy sector would further restrain the gasoline supply.

It has long been a central tenet of U.S. international trade and energy security policy to provide an open and competitive investment environment to attract investors and suppliers to compete in this market as the best means to ensure energy security. From a national energy security standpoint, these ventures and investments with foreign companies should be encouraged as a means for securing necessary energy supplies, not targeted for seizure. It is impossible to see how such an action would reduce energy prices for U.S. consumers; in all likelihood, it would result in higher prices as markets and trade routes globally would struggle to adjust.

Adoption of the NOPEC legislation could also spur punitive retaliatory action against U.S. commercial and political interests. Nations targeted under NOPEC might very well restrict access for U.S. exports, seize the assets of U.S. energy companies operating abroad, or even evict those companies entirely. Such action would harm the U.S. economy and decrease the oil available to U.S. and global markets.

Furthermore, NOPEC would damage relations between the United States and OPEC member states, many of which are important U.S. allies that provide military and other support for U.S. forces and support broader U.S. foreign policy goals. NOPEC’s adoption would complicate bilateral relationships and would likely jeopardize cooperation on issues such as counterterrorism and Iranian containment.

In a general sense, NOPEC’s proponents overestimate the impact of OPEC decisions on the global oil market. OPEC has become more of a political institution than an economic power capable of determining oil output. OPEC’s production quotas are notoriously unenforceable and are routinely violated by member states. Most recently, Saudi Arabia and other Gulf Cooperation Council producers announced that they will increase production in defiance of OPEC to satisfy global demand and ease prices. Individual actors within OPEC are becoming more important than the organization itself. U.S. policy should continue its long-range objective to improve bilateral ties with these cooperative producers rather than to isolate them with punitive legislation.

Frank A. Verrastro is senior vice president and director of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. David Pumphrey is senior fellow and deputy director of the CSIS Energy and National Security Program. Alan S. Hegburg is a senior fellow with the CSIS Energy and National Security Program. Marshall Nannes is an intern in the CSIS Energy and National Security Program.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2011 by the Center for Strategic and International Studies. All rights reserved.

Frank A. Verrastro
Senior Adviser (Non-resident), Energy Security and Climate Change Program
David Pumphrey
Senior Associate (Non-resident), Energy Security and Climate Change Program

Alan S. Hegburg, Marshall Nannes