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Collusion claims in US oil must reckon with record production

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At over 13mn barrels a day, US oil production is running ahead of 2023’s record output. That is still not enough for some. The US Federal Trade Commission (along with several ordinary Americans) have accused US drillers of improperly coordinating their operations to keep the price of oil elevated. 

Lina Khan’s FTC recently wrote in a complaint that Scott Sheffield, the former chief executive of Pioneer Natural Resources, had (alongside OPEC), “embarked on a series of efforts to co-ordinate output levels to keep production artificially low”.

Bar chart of  showing US is now the largest single oil producer in the world

For much of the 2010s, US independent producers like Pioneer spent beyond their means to drill new wells and take as much market share as possible — negative cash flows be damned. By the time of the pandemic bust in 2020, many players went bankrupt.

But for those that survived, they each decided to change course and embrace discipline. Capital expenditure was slashed and revenues diverted to dividends and buybacks.

The question now is if those seemingly rational capital allocation decisions were legally uncompetitive and if businesses have some obligation to keep prices low for the benefit of broader society.

Oil is as textbook a commodity as there is. With virtually no differentiation in the product, individual companies face tough choices on how to react to broader industry choices on output.

Harold Hamm, the billionaire founder of Continental Resources, took his company private at a $27bn valuation. He cited the need to have flexibility in drilling decisions at a time when public market institutional investors monomaniacally wanted regular profits and free cash flow.

In the past three years, the FT calculates that the 10 biggest drillers have amassed net income exceeding $300bn, a record, and one coming during elevated demand post-pandemic. At the same time, the majors have pushed consolidation in order to access the most productive areas, notably the Permian Basin. Exxon acquired Pioneer, a deal which was allowed to close after Scott Sheffield agreed to leave the Exxon board.

Occidental Petroleum and Chevron have their own mega acquisitions navigating regulatory approval. Shareholders of the targets naturally like being paid acquisition premiums but a shrinking set of competitors is bound to set off regulatory worries. Some politicians are already calling for the Chevron/Hess deal to be blocked. 

Americans worried for decades about being held hostage by Opec and Saudi Arabia. US politicians dreamt about being free of “foreign oil” dependence. But it should be no surprise that Texans are themselves capitalists first.


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