OPEC cartel faces lawsuit for price fixing

Cartels are formal collusive agreements between firms, typically to fix prices, restrict output or divide up markets. As in the case of monopoly, the lack of competition may harm consumers, who are likely to have to pay higher prices. This, as economic theory demonstrates, results in a reduction in overall welfare.

For this reason competition authorities throughout the world now impose substantial fines on firms found to be involved in collusive activities and participants also face the threat of substantial jail sentences.

One of the most famous cartels is the Organization of Petroleum Exporting Countries (OPEC). This is an agreement between 12 countries to limit their production of oil. The OPEC cartel has been in place for over 50 years. Arguably, the intergovernmental nature of the cartel and political ramifications of intervening have meant that OPEC has been able to operate free from prosecution for so long.

However, very interestingly Freedom Watch, a US public interest group founded by a former US Department of Justice lawyer, has this week filed a lawsuit against OPEC for violation of competition laws. Quoted in the above press release, Larry Klayman, the founder of Freedom Watch, says that:

These artificially-inflated crude oil prices fall hard on the backs of Americans, many of whom cannot afford to buy gasoline during these severely depressed economic times.

Furthermore, how some of the members use the profits gained from the cartel is also called into question. He also goes on to suggest that the lack of intervention from US government agencies may be because the leaders of both political parties:

… line their pockets from big oil interests and are just sitting back and not doing anything.

This is not the first time that Freedom Watch has served a lawsuit on OPEC. In 2008, at an OPEC meeting in Florida:

In a bold move in front of members of the news media, Freedom Watch Chairman and Chief Legal Counsel Larry Klayman literally jumped out from behind a line of TV cameras and microphones on Friday, October 24, to serve a complaint on an OPEC oil minister.

That complaint was unsuccessful.

It will be fascinating to see the outcome of this latest case and, if successful, the implications for OPEC – updates to appear on this blog in due course.

Articles

Profile: Opec, club of oil producing states BBC News (01/02/12)
OPEC accused of conspiracy against consumers WND World, Bob Unruh (09/05/12)
Freedom Watch Attorney Sues OPEC Oil Minister for Economic Terrorism Conservative Crusader, Jim Kouri (31/10/08)

Lawsuits
Lawsuit brought by Freedom Watch inc. against OPEC (7/5/12)
Lawsuit brought by Freedom Watch inc. against OPEC (9/6/08)

Questions

  1. Why are cartels so severely punished?
  2. Why might it be important to punish the individuals involved as well as fine the cartel members?
  3. Why is fixing the price of oil particularly harmful for the economy?
  4. Why do you think the OPEC cartel has survived for so long?
  5. What do you think might be the long term implications of the lawsuit for OPEC?