Is Big Oil A Rigged Cartel? Lawsuit Alleges Price Fixing

Oil is a highly regulated industry in most places in the world. Environmental laws have the potential to be used to keep out new entries into the industry and thus allow the established oil companies to cartelize and restrict production for the sake of higher prices. This has happened in the past. For example:

The majors [major oil companies] now began to promote policies under the cloak of “conservation” that would limit “wasteful” production: it was already clear that pumping oil too rapidly from a field could damage long-term production. The ends were entirely correct and respectable, of course, but certainly the conversion to conservation was well timed. As the majors decided that free-for-all production must stop, they filled Austin, Texas with lobbyists, and in November 1932, the Texas legislature passed the Market Demand Act. Under “conservation,” the law defined as “prohibitable waste” any production that was in excess of “market demand.“…

In 1935 Congress passed an Interstate Compact to Conserve Oil and Gas and the Connally Act. Between them, these laws assigned strict production quotas to each State. In the end, US domestic production was limited under the cloak of conserving natural resources. Once again, the ends were admirable, but it’s clear that the legislation was passed on behalf of the majors. By 1958 Texas oil wells were allowed to pump oil for only 97 days a year. The legislation was used to hold down production in order to maintain stable prices.

Of course, “stable” prices means higher prices and profits. With laws limiting the amount of oil that was permitted to come to market, competition was restricted. I’m much more suspicious than the writer that the need for conservation was anything more than a ruse to manipulate higher prices.

Now, Bloomberg reports a lawsuit alleging some are currently engaged in oil price-fixing.

Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed – and that they can prove it.

Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil…

The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court…

I don’t yet understand how the scheme supposedly worked, but after news of the LIBOR scandal it is certainly not hard to believe that the system is rigged and corrupt.

If these charges are true it means that the plausibility of “alternative energy” may be, to some extent, based on a fraud.