Oil Antitrust Exemption Proposed : Commercial Trades Would Be Included in Emergency Policy

After years of lobbying by the petroleum industry, the Reagan Administration has quietly proposed a significant broadening of the antitrust relief granted to oil companies in the event of an energy crisis.

The proposed policy to include commercial oil trades in the exemption permitted under the Energy Policy and Conservation Act of 1975 has angered some members of Congress as well as some federal regulators. The proposal still requires final approval by top Administration officials. A few details are left to be worked worked out and the proposal must be published in the Federal Register before it can take effect.

At stake are policy issues that pit the nation’s ability to provide emergency oil supplies to friendly nations against the checks and balances necessary to protect consumers from price-gouging at the gasoline pump.

Those who favor broadening the antitrust exemption say the change is necessary to insure unfettered cooperation of oil companies in times of emergency. Those who oppose the proposal say it would, in the words of one federal antitrust lawyer, “give the oil industry carte blanche “ to manipulate the market.

‘Price-Fixing Act’

After a report critical of the draft proposal was released last week by the General Accounting Office, Sen. Howard Metzenbaum (D-Ohio) denounced the plan on the Senate floor as one that would transform the 1975 law into “the energy price-fixing and cartel act.”

Passed in the wake of the 1973 oil crisis and renewed last week for at least three more years, the Energy Policy and Conservation Act established the $17-billion Strategic Petroleum Reserve, a federal stockpile of petroleum intended to buffer the effects of an oil shortage. It also sanctioned U.S. participation in the Paris-based International Energy Agency, a consortium of 21 countries that would coordinate an oil-sharing plan should the world’s supply--or that of any member country--fall short 7% or more of a specified level. No antitrust exemption could take effect unless the IEA decided that such an emergency had occurred.

The IEA would act as a clearinghouse for information about the supplies and shortages of each member nation. The agency then would match the haves with the have-nots so that all would share the hardship--and the available oil. Full cooperation from each IEA member--especially the United States, which is home to many of the world’s largest oil companies--is essential for the system to work.

The necessity of cooperation is precisely why an antitrust immunity is needed, proponents claim. “The International Energy Agency system is an agreement among competitors to move supplies in and out of markets,” explains one executive at a major U.S. oil company. “That makes it a violation of the Sherman Antitrust Act by definition. To participate (in the IEA) at all requires some protection.”

Limited Antitrust Protection

Congress acknowledged the problem when it granted, through the Energy Policy and Conservation Act, the departments of Energy and Justice the power to set guidelines for limited antitrust protection during an emergency in the oil industry. At the same time, however, Congress also forbade the use of the exemption for any transaction undertaken with the intent of injuring a competitor or raising prices.

Until recently, the departments of Energy and Justice interpreted the powers granted them to mean they could apply the antitrust exemption only to oil trades requested by the IEA and cleared directly through the international agency each month according to established, well-documented procedures.

The U.S. emergency plan for an emergency, in fact, requires Federal Trade Commission officials be in the IEA Paris office tooversee documentation, making sure that oil companies do not hide behind the exemption to break contracts to drive up prices or manipulate the market in any other way.

Cumbersome Procedure

After four test runs of the emergency allocation system, however, the IEA, which is staffed by workers from member-nations and participating oil companies, said it found that the paper work and time needed to “clear” trades makes the procedure too cumbersome to be effective during a real crisis.

They argue that oil moves fastest when transported through free market mechanisms of supply, demand and price--even during a shortage. As a result, the IEA and Reagan Administration have pushed to extend the antitrust protection to specific “commercial transactions,” or oil trades that occur in the regular course of business. They argue that this would encourage privately held oil companies to move oil where it is needed without IEA interference.

A commercial transaction is a trade that oil executives make without an IEA request and without the responsibility of clearing it. Until now, the Energy Department has refused antitrust protection for these commercial trades, even though allocation system tests indicate that such transactions could shift oil supplies in accordance with IEA goals. In short, oil company executives so far have been barred from discussing private market transactions with each other regardless of whether an emergency exists. Strict monitoring has been the price of antitrust protection.

Justice Won’t Oppose

Under the new proposal, that would change. The new plan would stretch the antitrust protection to trades initiated without IEA request and undertaken without IEA approval; the only requirement as the draft now stands, according to one IEA official in Paris, is that such trades be “based on information supplied by the IEA.”

The Justice Department, after hearing dissenting opinion from the Federal Trade Commission, recently agreed that it would not oppose the Energy Department’s new proposal. Sources say that as soon as details are worked out with the oil industry on how to keep a record of exempt commercial transactions after they occur, the draft plan will be published in the Federal Register for public comment.

The problem that the Federal Trade Commission and others see in the proposal is that commercial transactions, whether undertaken to fulfill emergency IEA allocation goals or not, require no prior clearance, documentation or approval to be granted antitrust protection. The recently issued General Accounting Office report concluded that extending the antitrust defense to any commercial transactions “could result in companies breaking contracts to obtain the benefit of rising prices during an emergency, and the resulting higher price could accelerate world oil prices, contrary to IEA objectives.”

Rely on Commercial Trades

The IEA and the Energy Department say they favor relying on commercial transactions during a crisis because less red tape is involved. But lack of documentation and prior approval are precisely what critics find troubling. How, opponents ask, can the IEA and federal officials monitor these “special case” commercial trades for abuse?

Solving the problem, both sides agree, rests on whether a practical way can be found to distinguish between commercial trades enacted to further IEA goals and those done purely for corporate gain, or worse, to hurt competition or boost prices. Even proponents of the draft plan admit that drawing a line between the two types of commercial transactions has proved elusive.

Lacking readily discernible characteristics, trades would be impossible to monitor and regulate. In fact, the difficulty has been the stumbling block that keeps the draft from becoming official. Government and industry officials simply cannot agree on how to solve it. Once they do, however, the guidelines would be published in the Federal Register and, after some public comment, would take effect.

Maximizing Profits

To further cloud the issue, both sides agree, no law prohibits oil companies from trying to maximize profits while undertaking trades to move oil where IEA says it is needed, and that hampers outsiders’ ability to glean a difference.

Oil companies probably will be required to file documents with the IEA justifying commercial trades, but only after they occur, both sides agree. Even so, they say, the IEA and federal authorities would have to rely largely on the oil companies’ word that certain commercial trades were undertaken to fulfill IEA goals and therefore warrant antitrust protection.

Rep. Mike Synar (D-Okla.), chairman of the Government Operations subcommittee on environment, energy and natural resources, is concerned that extending the antitrust law may go beyond the scope of the Energy Policy and Conservation Act.

“And I also wonder if the extention is really necessary. At least one major oil company has told us it’s not,” he says.

Prices Will Rise

Both opponents and proponents agree that oil prices are likely to rise dramatically during an oil shortage no matter what. But critics say that an antitrust exemption for commercial transactions could boost prices even further through unchecked--and unnecessary--market manipulation. Defenders, however, contend that prices are likely to be higher without the broader protection for the simple reason that all trades would have to go through the time-consuming IEA clearance process. “That extra time is what will hike prices,” one Energy Department official said. “Not our proposal.”

Counters a congressional staffer, “When prices are soaring and the market is in chaos, is that when you want to give the oil industry a free hand?”

IEA’s clearinghouse function would apply to volume trades only; buyer and seller would still have to set prices. Those who back the exemption emphasize that the broader antitrust protection would continue to apply only to collaborations on how to shift volume. That, they say, means companies could discuss the amount of oil being shipped to fuel-strapped customers like Japan or Germany. The countries would then have to settle on a price with each individual corporation.

Impossible to Regulate

But critics say that allowing companies to join forces on transactions that are impossible to monitor, and therefore impossible to regulate, comes perilously close to allowing collusion to fix prices or take advantage of rising prices to the disadvantage of consumers. For these reasons, critics say, the potential hazards of the exemption outweigh any benefits, they say.

Proponents insist that the U.S. must grant the oil industry the broad protection or risk being handcuffed during a crisis.

That was the gist of Sen. James A. McClure’s argument last week when the Idaho Republican countered Metzenbaum’s attack on broadening the extention with a rationale essentially identical to the one Energy Department officials make. Nevertheless, McClure voted for an amendment introduced by Metzenbaum that would require Congress be informed immediately should the draft become official and then be given 60 days to decide whether to try to revoke it.

The amendment, which won final approval Thursday as Congress renewed EPCA, reflects concern about keeping control over such exemptions. But it is unlikely to kill any changes the Energy Department decides to make. Even if Congress were to strike down antitrust protection for commercial oil trades, such a revocation would take effect only with the signature of President Reagan.