State Energy Cartels

Abstract

Fracking has made America the center of global oil production and the engine of the world’s economy. But haste makes waste. America’s new oil wells are releasing natural gas as well, which is prized as a clean and reliable fuel around the world, but must be simply burned off or “flared” if there are no pipelines to bring it to the customers that need it. The pace of the oil boom, and the challenges of building new pipe-lines have forced oil companies to flare staggering quantities of natural gas. Texas and North Dakota are now flaring—that is, wasting—more gas than many states or even nations consume. This Article shows that to stop this economic and environmental waste, states must develop a new approach to antitrust law. It makes the case for state energy cartels.

One of the few consensus grounds for regulation is combating market power—preventing dominant suppliers from increasing their profits by selling less at higher prices. States break up producer cartels so that competition provides consumers with lower prices. But what happens when a state’s interest coincides with producers rather than consumers? The economic health of major energy exporters depends on the price of the products they export. That is, these states, provinces, and countries can benefit by increasing the price of the oil and gas. For the first half of the twentieth century, the United States was the world’s premier oil exporter; during that time, U.S. states cooperated as a de facto cartel to ensure higher oil prices. When other countries overtook the U.S. as the world’s top oil producers, they formed the Organization of Petroleum Exporting Countries to play a similar role.

This article explains how state cartels offer the best solution to the flaring crisis and a unique opportunity for productive global cooperation to address climate change. It shows how states can slow production, protect the environment, and increase their industries’ profits by adapting and perfecting tools that the United States stumbled upon in the first half-century of oil production. And it shows how these tools can be tailored to protect consumers, industry, and the environment.

Keywords: energy, cartels, antitrust, oil & gas, exports, climate change, OPEC, markets, flaring, pipelines, competition

JEL Classification: F42, F53, D43, L40, L41, L43, L50 L51, L70, L71, L78, K20, K21, K23, N52, N72, Q30, Q31, Q33, Q35, Q