As oil prices turn lower again, many companies in the oil patch face renewed danger of financial distress or even bankruptcy over the next couple of years. The oil market seems more chaotic than ever, and while OPEC meetings still make news, the reality is that the cartel is clearly losing some control over the world’s most important commodity.

With that in mind, it’s time to ask if a new regime makes sense – a North American oil cartel (NAOC). There has been some talk of such a cartel, but no progress of note has been made, and it’s not even clear that U.S. authorities would support such an idea. Strangely, the U.S. has a strong position against cartels and market power in general even though a system of “perfect competition” has many downsides.

In economic terms, perfect competition means a system of numerous small firms competing against one another all with zero pricing power. That’s the ideal of many capitalists, and it is a pretty accurate description of the U.S. oil market currently.

In contrast to the views of most Americans, monopoly and oligopoly, which pervade many other sectors of the U.S. economy, can actually have some economic benefits. To be clear, both monopolies and oligopolies are 100 percent consistent with capitalism and are actually a natural byproduct of unfettered capitalism in some industries.

First, perfect competition requires a lot of firms to move in and out of the market with each economic cycle – that means a lot of bankruptcies and a lot of worker turnover. Monopolies and oligopolies tend to be more stable. One major benefit of a NAOC would be the ability to easily alter production to match demand and the output of OPEC and Russia. This would help prevent the wild gyrations in oil prices that hurt businesses and consumers.

A second benefit to monopolies in some cases is that they actually have lower costs than firms do under perfect competition thanks to the benefits of economies of scale. Again, this would be to the benefit of both business and consumers as it would give NAOC greater ability to compete against OPEC and Russia both of which have easier-to-access oil reserves.

Unfortunately, despite the benefits of a NAOC, it is very unlikely to be formed. First, of course, U.S. law forbids exactly this type of effort to concentrate market power. But setting that issue aside for a minute, the prospect of actually forming a NAOC would be economically unfeasible. OPEC is predicated on having a few large nationally controlled oil companies in each country. That enables effective governing of production by OPEC. The U.S., Canada, and Mexico lack that structure completely. With the widespread availability of unconventional reserves across the continent, there is no real way even for oil majors like Exxon to roll-up the entire industry and consolidate production.

In addition, the major downside of oligopoly and in particular monopoly is a governance one. Big companies tend to rest on their laurels. Having achieved large economic profits, monopolies tend to underinvest in research and innovation, and to start taking on bloated labor and cost structures. Mexico’s oil monopoly is a prime example of this. PEMEX has been a mess for a long time because of exactly these issues.

While a NAOC would be great in times of turmoil or distress like the current period, the reality is that once the crisis passed, any such cartel would find its power quickly diminished. Add to that issue the difficulty of getting hundreds of small oil producers spread out across a continent all backing the same strategy, and it’s clear that a NAOC is just not in the cards today.

Source: oilprice.com

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