A Line in the Sand

Without a doubt, 1999 has been an eventful year for the international oil industry, even when judged against the standards of the recent past. However, even in this year of extraordinary goings-on (OPEC shaking off its decade-long torpor, Saudi-Iranian rapprochement, the about face in Venezuelan oil policy brought about by the accession of Hugo Chávez to the presidency), the memory of a group of American desperadoes wrapping themselves in Old Glory – Save Domestic Oil (SDO) – and attempting to bring about, single-handedly, a radical realignment of the largest oil market in the world, surely stands out. With the benefit of hindsight, one could think that the jingoistic, isolationist, paranoid and otherwise irrational petition to the US Department of Commerce (DOC) by SDO for the imposition of anti-dumping and countervailing duties on the crude oil imports from Iraq, Mexico, Saudi Arabia and Venezuela was notable chiefly in that it provided an element of comic relief in this most staid and humourless of businesses.

After all, SDO’s petition amounted to nothing less than the denial of the very existence of Ricardian rent: its key premise was that firms whose oil wells produce 10 BD on average are entitled to the same profitability as firms whose wells produce 10,000 BD. Unfortunately, such are the biases embedded in both US anti-dumping legislation and normal operating procedures that this quite audacious piece of economic reasoning came alarmingly near to being validated by the DOC. The author, who was very involved in the case, asks readers to take his word for just how close a shave this was.

As things turned out in the end, the DOC decided to include all the major US oil companies in its calculation of the “standing” of the petition, even though these companies import large volumes of oil from the accused countries (and, therefore, could have been excluded from the calculation). Effectively, given the overwhelming antipathy of the majors for SDO, this decision spelled the end for the petition. This bothersome affair has still not run its full course, though, because SDO has appealed the DOC’s decision, with the argument that the inclusion of the majors in the calculation was both highly irregular (it was unexpected, because the DOC usually goes out of its way to ensure that petitioners win, and this usually means that importers are excluded from standing calculations) and unjustifiable (which it was not, since US legislation gives the DOC total discretion as to whether importing firms should or should not be included in calculations of standing). A verdict on the appeal is to be expected within a year or so, but most legal experts seem to agree that those self-styled defenders of free enterprise who so pine for “American oil from American soil” should not really hold their collective breath waiting for a positive outcome, lest they come down with a terminal case of anoxia.

On a more serious note, the de facto demise of the petition raises the following question: now that Saudi Aramco, PDVSA and PEMEX have had to spend vast sums of money – which they could ill-afford – and man-hours in their defense, will the whole sorry mess created by SDO leave anything positive behind, either for them or for the oil market? One could argue that one thing the companies will take from this ordeal is wisdom. Presumably, much has been learnt by them not only about the intrinsic unfairness and irrationality of US trade laws but also about the alarming lack of political judgement of large sectors of the US oil industry, perhaps best exemplified by the regret voiced by the president of the IPAA, George Yates, in the sense that it was a shame that the DOC’s decision precluded SDO from “having its day in court”, so as to ascertain whether its accusations were groundless or not. The fact that Yates probably knows that if SDO had had its day in court, punitive anti-dumping duties on at least some of the countries would inevitably have been levied (primarily because of their large volume of sales to affiliates) betrays some disingeniousness; the fact that he could say this while praising, almost in the same breath, the Mexican, Saudi and Venezuelan attempt to stabilise the oil market should serve as a reminder to these countries of the sort of sympathy and understanding that they can expect to receive from these particular quarters when the going gets tough.

One can only hope that officials of one of the exporting countries named in the petition have also assimilated the lesson that there is precious little advantage to be derived from stating that they will do all they want to promote lower oil prices so as to eliminate marginal producers from the oil scene, since such statements can later find their way into vexatious anti-dumping petitions initiated by the prospective victims of such a low-oil-price policy.

Now, the oil producers involved in the case could be excused for thinking that its didactic aspects were not worth all their trouble and expense. Surely the case must have produced a more tangible benefit, something along the lines of what the Oil Daily reported at a very early point in the proceedings, when it carried a story that said that “some inside state oil company PDVSA reckon that any exposure that would come with an eventual anti-dumping case could have a silver lining. The company might then be able to shed some of its currently disadvantageous trading practices, including what one source terms netback pricing” (May 3, 1999: 9). We have yet to see whether this particular silver lining will ever materialize but, in the meantime, oil producers large and small, private and state-owned, can take comfort from the fact that SDO probably has managed to draw a line in the sand, in terms of setting a floor of sorts for oil prices.

What exactly do we mean by this? Well, that even though SDO’s petition was ultimately unsuccessful in terms of its stated objectives, it has created a rather obvious but nevertheless important precedent; namely, it has made oil the subject of US anti-dumping legislation. This fact is pregnant with implications for the oil market because DOC’s decision against SDO does not create administrative precedent regarding future standing calculations for any similar anti-dumping cases. In other words, were oil prices to start falling as they did in late 1997, small American oil producers could once again initiate an anti-dumping petition similar to that presented by SDO and, unlike what happened this time round, the DOC might decide not to include oil importers in its standing calculations.

Thus, all the major exporters of oil to the US now have to go about their business in the knowledge that their – willing or unwilling – participation in any open battle for market share in the USA could lead to their involvement in a nasty anti-dumping battle with a potentially disastrous outcome. This would be made all the more unpalatable by the fact that a negative turn of events would affect exporters very differently (it should be born in mind that in SDO’s final revised petition to the DOC, the requested anti-dumping duties ranged from 15 per cent for Mexico to 177 per cent for Venezuela). Perversely enough, then, the Damocles sword which has been created by SDO’s petition will probably exert greater deterrent effect on the production policies and commercial strategies of trigger-happy oil exporters than the knowledge that their national economies – and themselves – stand to be totally ruined by any period of sustained low oil prices. Thus, even though some key national oil company (NOC) officials still subscribe to the theory that posits that big producers should dedicate all their efforts towards driving higher-cost producers out of business, the pernicious effects on the oil price which this theory has had, will hopefully be tempered by these same executives’ unwillingness to risk the imposition of punitive tariffs on their oil exports to the USA.

SDO, then, seems to have inadvertently come up with an antidote of sorts to the disastrous gospel of market share à outrance preached by a number of officials of oil-exporting countries, former oil ministers and consultants, and practised to devastating effects as recently as 1995-98.

By: Juan Carlos Boué


Energy Policy , Oil