Price-fixing at the pump. Is the OPEC oil conspiracy beyond the reach of the Sherman Act?

I. INTRODUCTION

In both the U.S. Senate and the U.S. House of Representatives, resentment has been building (1) against the relentless increases in the price of oil (2) resulting from the cornering of the oil market by the Organization of Petroleum Exporting Countries ("OPEC"). (3) At the 106th Congress, Rep. Benjamin Gilman (R-N.Y.), chairman of the House International Relations Committee, introduced two bills targeting OPEC's pricing practices. (4) The first piece of legislation would have barred countries participating in the OPEC cartel from receiving U.S. economic or military aid. (5) Because few OPEC member states receive significant foreign aid from the United States, that legislation, if enacted, was expected to have little impact. (6) The bill would also have required the Administration to review its policies with respect to international financial institutions funded in part by the United States, such as the World Bank, to ensure that they do not indirectly support OPEC's price-fixing activities. (7)

More interestingly, the second bill introduced by Rep. Gilman would have allowed U.S. citizens to sue foreign energy cartels. (8) In the Senate, a number of proposals to facilitate lawsuits against OPEC were also floated. Sen. Mike DeWine (R-Ohio) introduced legislation that would allow the Department of Justice to sue foreign countries, such as OPEC members, for price-fixing activities. (9) Moreover, describing OPEC as "an old-fashioned conspiracy in restraint of trade," (10) two senior senators, Arlen Specter (R-Pa.) and Joe Biden (D-Del.), wrote a letter to President Clinton urging him to immediately institute legal action against OPEC. (11)

Sens. Specter and Biden suggested legal action on two fronts. First, the U.S. should file a lawsuit before the International Court of Justice at the Hague, on the grounds that conspiracies and cartels in restraint of trade are a violation of international law. (12) Second, the United States should pursue OPEC in federal court, on the grounds that OPEC's price-fixing behavior violates U.S. antitrust law. (13) Sens. Specter and Biden were quick to recognize that any lawsuit against OPEC, particularly if undertaken by private individuals, would face considerable roadblocks under current legal doctrines and well-established precedents. (14) Legal experts generally share this view and regard lawsuits against OPEC with some degree of skepticism. (15)

Sens. Specter and Biden also favored legislation that would remove legal obstacles and ease the deeply ingrained discomfort of U.S. courts confronting antitrust claims involving foreign sovereigns. (16) Even under current law, however, it is not perfectly clear that a U.S. court would necessarily reject an antitrust claim against OPEC, particularly if sponsored by the Justice Department. After all, it has been over twenty years since the last such lawsuit, filed on behalf of a trade association of transport workers, met a negative response in the Ninth Circuit. (17)

This article is intended as a roadmap for practitioners and policy analysts interested in the legal obstacles that prevent litigants from successfully pursuing antitrust claims against OPEC, effectively sanctioning the cartel's price-fixing activities. OPEC's antitrust conspiracies expressly violate the language of the Sherman Act (18) and related legislation. (19) However, under current legal precedents (20) and absent specific sponsorship by the Executive, an antitrust lawsuit against OPEC is unlikely to succeed. This article argues that although the judicial bias against such litigation is clear, there is no fundamental legal reason why it may not ultimately be successfully pursued. It has been the long-standing policy of the U.S. government, clearly articulated by the Clinton administration, not to implicate OPEC member states in antitrust litigation. (21) Should the Executive announce a contrary policy, however, the judicial bias against OPEC-related claims probably would change.

Part I of this article provides a general background of OPEC, including its history, current structure, and its impact on the oil industry and gasoline markets. Part II will discuss the development and evolution of U.S. law with respect to the extra-territorial enforceability of the Sherman Act. Part III will examine the hostility of U.S. courts to lawsuits implicating foreign sovereignties in oil-related antitrust conspiracies.

Part IV will try to account in part for this hostility, by discussing the various common law principles that apply when the acts of a foreign sovereignty are implicated in domestic litigation, as well as the statutory enactment of these principles. Part V will discuss the most recent legal standards, as developed by the Supreme Court and the Circuit Courts, with respect to antitrust conspiracies involving foreign sovereigns. Part V will also attempt to apply these standards to the OPEC oil conspiracy. The article will conclude by briefly discussing the failure of the case of International Ass'n of Machinists & Aerospace Workers ("IAM") v. OPEC, (22) specifically evaluating the prospects of that litigation should it replay itself in U.S. courts under current law.

II. OPEC--THE CARTEL'S HISTORY, IMPACT, AND PROSPECTS

A. The World is Awash with Oil

There is no shortage of oil. (23) During the last two decades, the costs required to exploit and discover oil reserves have fallen by over 80%. (24) Technological advances, including improved platform designs and drilling methods, allow companies better access to hard-to-tap oil. (25) Computer-assisted three-dimensional imaging allows geologists to "see" underground oil pockets, slashing the costs of developing oil reserves, as well as improving the chances of discovering virgin oilfields. (26)

Oil production is now profitable even at slim $7-$8 per barrel margins. (27) As a consequence, the world's proven oil reserves (i.e., oil profitably recoverable at current prices under current conditions) stand at over one trillion barrels. (28) According to the International Energy Agency (IEA) in Paris, those reserves may actually exceed 2.3 trillion barrels. (29) Even if the world maintains its currently high consumption rate of 73 million barrels a day, there is enough oil available today to last for over 70 years. (30)

Estimates vary, but between two and six trillion tons of oil remain in the ground. (31) At the present rate of use, it may take two centuries before the world runs out of oil. (32) Of course, by that time, new technologies could be available that render oil-based energy obsolete. (33) The impact of technological trends on oil consumption patterns can be remarkable. As a result of improved efficiency of use, the amount of oil needed to generate a dollar of economic production in the U.S. has been slashed by about 50% during the past 25 years. (34)

Unfortunately, the price of oil is driven by politics, not geology.

B. A Primer on OPEC--Some Basic Facts

Until 1950, the United States, Britain, and the Netherlands effectively controlled the production and distribution of world oil through their influence over the "Seven Sisters," as Exxon, British Petroleum (BP), Royal Dutch-Shell, Gulf, Texaco, Standard Oil of California, and Mobil came to be known. (35) In those days, four out of these seven vertically integrated multinational corporations (Exxon, BP, Shell and Gulf) accounted for over 83% of the world's production of crude oil. (36)

Before the emergence in the 1970s of the "independents," or smaller American oil companies (e.g., Hunt Oil, Getty Oil), the Seven Sisters were the only buyers of the global supply of crude oil. (37) Confronted by this monopsony, (38) five oil-producing countries (Venezuela, Saudi Arabia, Kuwait, Iraq and Iran) agreed in 1960 to form OPEC, in order to increase their bargaining leverage, thereby asserting firmer control over the exploitation of their oil reserves. (39)

As OPEC matured, it progressively tightened control over its membership's market positions. (40) On the advice of Venezuelan experts, by 1950 oil producers in the Persian Gulf region had changed their contracts with the foreign multinationals to require an equal split in profits. (41) By 1964, OPEC began requiring generous per barrel royalty payments instead. (42) On October 16, 1973, however, OPEC for the first time substituted negotiation for legislation, and resolved to fix the price of oil unilaterally. (43) Accordingly, the posted price for oil was raised from $3.011 to $5.119, an increase of almost 70%. (44)

The political environment at the time facilitated the consensus necessary to cement such a steep price hike. As a result of the third Arab-Israeli War, newspaper editorials and public opinion in the Arab world forcefully clamored for retaliation against the United States for its "war-like behavior" towards Arabs and its pro-Israel policies. (45) Accordingly, the OPEC membership met in Riyadh, and declared an embargo on oil exports to the United States and the Netherlands. (46) The oil embargo of 1973 not only inconvenienced consumers with increased gas prices and long lines at the pump, it also set off a series of financial dislocations--including runaway inflation and crippling interest rates--that damaged the global economy, causing widespread recession. (47)

Politics often serve to cement consensus among the OPEC membership, but can also have a destabilizing effect. For example, although the outbreak of the Iran-Iraq war resulted in historically high oil prices, (48) the late stages of that conflict and its aftermath provoked a contrary effect. (49) Although Iran sought to halt the 1986 slump in the price of oil by reintroducing oil production quotas, Iraq begrudgingly accepted any quota at all, and flatly refused to comply with any quota lower than Iran's. (50) Between 1986 and 1990, Iraq continued to favor a pricing strategy that downplayed national self-interest and was explicitly designed to injure the economic interests of its old antagonist. (51)

Another source of cartel instability results from the lack of homogeneity within the OPEC membership, which erodes its ability to reach internal agreement on policies. (52) For example, countries like Kuwait, the United Arab Emirates, and Saudi Arabia have plentiful 0il reserves that can be tapped cheaply. (53) Consequently, the stabilization of oil prices at high levels entails relatively more significant production restrictions and foregone profits for these countries. (54)

Although the members of OPEC have often failed to achieve consensus, when they agree on a policy--and ignore the obvious temptation to cheat (55)--national governments generally can effectively implement it. (56) For the most part, OPEC countries tightly regulate the exploitation of domestic oil. (57) In fact, to varying degrees, Arab states have sought to nationalize their oil businesses not only as a political weapon, but to further centralize control over domestic oil. (58) Libya was a trailblazer in this regard, and set up a model of national government control over oil resources that other OPEC members have sought to emulate. (59) Although OPEC governments implicate themselves in almost every facet of the oil business, they are not wholly intermeshed with the entities that exploit domestic oil resources, which remain distinct corporations. (60)

For example, despite a recent rash of colossal mergers among Western oil companies, (61) Saudi Arabia's national oil corporation, Saudi Aramco, remains by far the largest vertically integrated producer of oil in the world. (62) Although Saudi Aramco's anchor asset is its control over liquid reserves estimated at 259 billion bbl, or 25% of the world's total, (63) the company is broadly diversified, and has made major investments in refineries and distribution networks in the United States, the Far East, and Europe. (64) In fact, for over two decades the state oil companies of Saudi Arabia, Venezuela, Iran, Indonesia, Mexico, and Kuwait have dominated the top ten spots in the authoritative Petroleum Intelligence Weekly ranking of the world's major energy companies. (65)

Currently, OPEC dominates approximately 76% of the world's known oil reserves. (66) However, it has the capacity to pump only about 42% of the global demand for oil, (67) limiting its ability to raise prices, as well as diluting any profit resulting from price increases. (68)

III. U.S. LAW--THE DEVELOPMENT OF SOME BASIC CONCEPTS

A. The Extraterritorial Reach of U.S. Antitrust Law--The Tensions Between the Effects Doctrine and the Territoriality Principle

Domestic antitrust law could conceivably find jurisdiction against a foreign cartel on the basis of either the effects doctrine or the territoriality principle. (69) Under the effects doctrine, the court would focus the jurisdictional inquiry on whether a given conduct has anticompetitive effects within the U.S. (70) If anticompetitive effects are found, then the court will extend jurisdiction, regardless of where the conspiracy was organized or advanced, or of the nationality of the persons involved. (71)

By contrast, the territoriality principle focuses the jurisdictional inquiry on the situs of the conspiracy and the citizenship of its perpetrators. (72) Accordingly, conduct perpetrated abroad by foreign nationals would be free from liability, even when the anticompetitive effects in the United States are severe. (73)

1. The Schooner Exchange v. McFaddon--The Birth of the Territoriality Principle under U.S. Law

As discussed below, the territoriality principle no longer measures the reach of U.S. antitrust law. (74) However, the territoriality principle has been a formative element in the development of the act of state doctrine, (75) which in turn has deep repercussions with respect to any potential lawsuit (antitrust or otherwise) targeting OPEC. (76) The origin of the territoriality principle, as well as its subsequent development, therefore warrants a brief review.

Shortly after the Revolutionary War, the army of Napoleon, emperor of France and king of Italy, commandeered an American ship. (77) The ship, now flying the French colors, docked in the port of Philadelphia, where its former owners filed a libel suit to reclaim the ship. (78) In 1812, The Schooner Exchange v. McFaddon reached the Supreme Court, which declined to return possession of the ship to the original owners. (79)

Chief Justice Marshall, writing for the majority, reasoned that a French warship was immune from the in rem jurisdiction of a U.S. court. (80) However, he noted that this result was discretionary, and resolved the matter not as an issue of any overriding principle of universal law, but of sound policy. (81)

In fact, because the ship was in their waters, U.S. courts had an authority over the ship that was both inescapable and absolute. (82) To emphasize this point, the Chief Justice explored the fundamental origin of the jurisdiction of the courts of any sovereign government, and thereby articulated the territoriality principle for the first time in U.S. law: (83)

 
   The jurisdiction of the nation within its own territory is necessarily 
   exclusive and absolute. It is susceptible of no limitation not imposed by 
   itself. Any restriction upon it, deriving validity from an external source, 
   would imply a dimination [sic] of its sovereignty to the extent of the 
   restriction, and an investment of that sovereignty to the same extent in 
   that power which could impose such restriction. (84) 

In other words, once territoriality has been established, a court may decline to exercise jurisdiction only as a conscious act, and immunity is therefore never an automatic, preordained result. (85) Instead, it is a deliberate result sought by a sovereign court, in order to achieve a higher objective, distinct from that which a simple exercise of jurisdiction would have achieved. (86) Friendly governments owe each other good faith and respect, and these qualities are best promoted through mutual restraint. (87) Therein lay an excellent reason, according to the Chief Justice, for the court to decline jurisdiction as a matter of policy. (88) After all, the practice among civilized nations had theretofore been "that national ships of war, entering the port of a friendly power open for their reception, are to be considered as exempted by the consent of that power from its jurisdiction." (89)

According to the Chief Justice, the immunity resulting from judicial restraint among sovereigns is not an exception to the principle of territoriality. (90) In fact, it is its natural consequence. (91) Reflecting on what later on came to be known as the act of state doctrine, the Chief Justice thus explained:

 
   The world being composed of distinct sovereignties, possessing equal rights 
   and equal independence, whose mutual benefit is promoted by intercourse 
   with each other, and by an interchange of those good offices which humanity 
   dictates and its wants require, all sovereigns have consented to a 
   relaxation in practice, in cases under certain peculiar circumstances, of 
   that absolute and complete jurisdiction within their respective territories 
   which sovereignty confers. (92) 

a. The OPEC Oil Conspiracy & Territoriality--Legal Impact of a Venerable, if Time-Worn, Doctrine

It would not bode well for litigation against OPEC if the territoriality principle were applied. The oil ministers of the OPEC member states have always met abroad. (93) In 1960, the representatives of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela assembled themselves as the first OPEC conference, held in Baghdad. (94) Between 1961 and 1973, eight other countries would join OPEC, (95) which moved its institutional headquarters from Geneva to its current property in Vienna in 1965. (96) The OPEC Conference of Ministers meets at least twice a year in regular session. (97) Including extraordinary sessions, over 100 such meetings have been held in various cities around the world (mainly Vienna and Geneva), but never in the United States. (98)

During OPEC conferences, a consensus policy is developed, setting specific barrel per day production levels for each member state, to be followed at its own government's discretion. (99) The decision to implement the production cuts requested by OPEC is determined at the highest ministerial levels within each member state, (100) and the acts necessary to actually cut production occur in the course of exploiting domestic oil fields. (101) OPEC's conspiracy thus consists of three distinct phases: a meeting, where oil production rates are fixed; a ministerial decision to implement agreed upon production rates; and the actual setting of those production rates in the ordinary course of managing and operating the oil fields. (102) All of these activities take place abroad.

For at least two centuries, the territoriality principle has colored judicial attitudes towards foreign sovereigns. However, although the territoriality principle remains the "grandfather" of many venerable doctrines, such as the principle of comity and the act of state doctrine, its legal influence has been progressively eroding. (103) With increased globalization, whether the territoriality principle continues to make any sense at all remains an open question.

2. American Banana Co. v. United Fruit Co.--A View of the Sherman Act Faithful to the Principle of Territoriality

In American Banana Co. v. United Fruit Co. (1909), the Supreme Court spoke for the first time on the extraterritorial application of U.S. antitrust law, articulating a rigorous principle of territoriality that focused exclusively on the situs of the disputed conduct, disregarding even questions of citizenship. (104) The plaintiff was an American company that alleged serious anticompetitive behavior in Central America by the United Fruit Company, a New Jersey corporation exporting fruit to the United States. (105) The defendant had threatened to drive the plaintiff off the market unless it voluntarily combined, which the plaintiff refused to do. (106) The defendant retaliated by influencing local officials to deploy armed men to drive the plaintiff off its premises in Panama, thereby securing a local monopoly in the production of bananas grown for export to the United States. (107) Soldiers seized part of the plaintiffs plantation, a cargo of supplies, interrupted construction of a railway serving the plantation, and effectively shut it down. (108)

Justice Holmes, whose views on the recently enacted Sherman Act were notoriously narrow, (109) summarily dismissed the plaintiffs suit, stating: "We think it is entirely plain that what the defendant did in Panama or Costa Rica is not within the scope of the statute so far as the present suit is concerned." (110)

In other words, the Court was not exercising its discretion to decline jurisdiction. Quite simply, it instead lacked so-called "prescriptive" jurisdiction, because Congress had not intended that the Sherman Act cover conduct committed abroad. (111) Therefore, the Court lacked statutory authority to address or remedy the plaintiffs grievances. (112)

The Supreme Court has never formally overruled American Banana, but has in numerous occasions explicitly distanced itself from its reasoning. (113) American Banana has been described as an "artifact and museum piece of no precedential value" in litigation before the Second Circuit Court of Appeals. (114) According to that court, the decision has indeed been overruled, at least insofar as its narrow reading of the jurisdictional reach of the Sherman Act is concerned. (115) In Continental Ore v. Union Carbide & Carbon Corp., the Supreme Court itself came close to explicitly overruling American Banana, flatly stating, "A conspiracy to monopolize or restrain the domestic or foreign commerce of the United States is not outside the reach of the Sherman Act just because part of the conduct complained of occurs in foreign countries." (116)

However, eighty-four years after American Banana, Justice Scalia would attempt to revive Justice Holmes's prescriptive jurisdiction argument in his vigorous dissent in Hartford Fire Insurance Co. v. California. (117) According to Justice Scalia, a fundamental canon of statutory construction is that "an act of [C]ongress ought never to be construed to violate the law of nations if any other possible construction remains." (118) Therefore, a federal court has no jurisdiction over an alleged Sherman Act violation arising from anticompetitive conduct committed abroad that does not violate local ordinances. (119) Whether or not American Banana is good law, its influence continues to be felt.

3. United States v. Sisal Sales Corp.--The "Liberal" Approach to an Inherently Restrictive Theory

In United States v. Sisal Sales Corp., the Supreme Court again confronted an antitrust conspiracy implicating the acts of a foreign government, where all of these acts had been perpetrated abroad. (120) However, when this case was decided in 1927, the influence of American Banana had already begun to wane. The controversy at issue in Sisal Sales involved a conspiracy to control the importation of sisal, a fiber of the henequen plant in Mexico commonly used as binder twine for grain crops. (121) The defendants had accumulated large stocks of sisal in both the United States and Mexico, as well as extensive land holdings in Yucatan, where henequen is grown. (122) The defendants then allegedly induced the governments of Mexico and Yucatan to pass discriminatory legislation in their favor, including for financing. (123) The Comision Exportadora de Yucatan, a government agency, was created and became the sole purchaser of sisal from producers in Mexico. (124) Through a series of contracts, defendants then arranged to become the sole agent and distributor of sisal in the United States for that government agency. (125)

The Court highlighted the role of the three U.S. banking corporations that bankrolled the conspiracy and brought it to fruition by entering into a series of contracts. (126) Crucially, U.S. persons had committed acts critical to the success of the conspiracy in the United States. (127) Despite the active participation of the Mexican government, this was not a homegrown Mexican conspiracy. (128) The mere fact that a conspiracy involves activities conducted abroad does not foil the Sherman Act. (129) Moreover, the participation of a foreign government in an antitrust conspiracy does not immunize from liability the U.S. nationals that promoted the conspiracy. (130)

Although at first blush it may seem that Sisal Sales is a first step away from American Banana, the analysis that the Court applied in Sisal Sales remains faithful to the territoriality principle. (131) Nonetheless, Sisal Sales is distinct from American Banana in at least two ways. First, it construes the situs of a conspiracy more widely to include the places where activities collateral to the main conspiracy are undertaken. Second, it introduces issues of citizenship into the jurisdictional analysis under the territoriality principle.

Sisal Sales remains a far cry from the "effects" doctrine as developed in Alcoa, discussed below. Under the legal analysis applied in Sisal Sales, an antitrust claim arising from a conspiracy that implicates a foreign government is ineffectual unless the participation of a U.S. national can also be identified. (132) Moreover, the U.S. national--and not the foreign government--bears all the liability. (133)

In fact, Sisal Sales has colored the reaction by policymakers to increases in the price of oil induced by production cuts within OPEC countries. Traditionally, U.S. oil companies have been subject to public ire and heightened scrutiny, even abuse, when they "profiteer" from oil price increases resulting from production cuts within OPEC. (134) Because OPEC controls only 42% of the world's oil production, (135) OPEC production cuts are a financial bonanza for the Western oil companies that produce the bulk of the world's supply of oil. (136) Moreover, unlike the OPEC membership, these oil companies do not sacrifice profits by cutting back production to secure OPEC's target price. (137) They are veritable free riders. For example, during the run-up in oil prices throughout the year 2000, the earnings of most oil companies more than doubled, with the ten largest non-OPEC oil companies piling up over US $40 …