Making Opec+ subject to US antitrust law will backfire

The last thing the global bond market needs on top of aggressive interest rate hikes is more trouble. Yet, there's more coming, and from an unlikely source: a rapidly deteriorating relationship between the US and Saudi Arabia.

Earlier this month, Riyadh defied Washington, leading the OPEC+ cartel, which includes Russia, to cut oil production. The move has put a floor on oil prices, which have stabilised between $90 and $100 a barrel. As a result, inflation is likely to be more persistent than previously expected, probably forcing central banks into further monetary tightening, which would bite bond investors. This enraged the US. 

Now American-Saudi relations are at their worst than since the assassination of journalist Jamal Khashoggi in October 2018. Since Riyadh agreed to cut oil output, the kingdom and the White House have engaged in a war of words. The Saudi Foreign Affairs Ministry released a statement saying that Washington wanted OPEC+ to delay the cut by a month — implying that the problem was really the US midterm elections. The White House responded accusing Riyadh of "spinning" excuses. 

The key for what comes next is NOPEC. This is the "No Oil Producing and Exporting Cartels" Act, a bill that proposes subjecting OPEC to the Sherman antitrust law that was used more than a century ago to break up the oil empire of John Rockefeller. If enacted, the White House would be able to sue Saudi Arabia and its allies, currently protected by sovereign immunity, for manipulating the global oil market.

There's a real possibility the bill may see the light of day. But despite how much Biden wants to punish Saudi Arabia and OPEC for cutting oil supply, it would be far wiser to avoid escalating the legislation. Otherwise, the risk is that Saudis dump US financial assets, redirect oil sales and openly talk about pricing oil in other currencies. 

For the last 25 years, NOPEC has been a staple of Washington — always a threat but never a law. President after president, whether Republican and Democrat, have argued against passing it. But Joe Biden, who once supported a similar bill as Senator, has said he's ready to work with Congress to curb OPEC influence.

If NOPEC was to become law — a big if — OPEC nations may retaliate by dumping some of their financial holdings in America. This means that NOPEC could come at a big price for the US. 

As of the end of July, Saudi Arabia, the United Arab Emirates, Kuwait and Iraq altogether held, directly, about $246 billion in US Treasuries, according to government data. The real number is likely to be higher, as Middle East nations also hold bonds via tax havens such as Luxembourg, the Cayman Islands, Bermuda, Switzerland and Ireland. Although their cache is unlikely to be higher than 5%-10% of total foreign holdings of American sovereign debt — and they are likely to be significantly lower than the $970 billion held by China — dumping those assets will rock an already jittery Treasuries market.

"There is a real risk that this diplomatic dispute could intensify," said Helima Croft, an oil analyst at RBC Capital Markets who's well connected in Washington and Riyadh. "We would not be surprised to see suggestions in the coming days that Gulf countries could liquidate their US financial holdings if NOPEC becomes law."

From what I hear from officials in the Middle East, the suggestions are already coming loud and clear. Are those empty threats? Maybe. After all, OPEC nations would likely suffer losses if they were to offload the assets and have few other options to park their money. But does anyone in Washington really want to test them?

NOPEC has long been considered the nuclear option. No one has answered what would happen next if the bill was passed. Would the US government ask for an antitrust investigation into OPEC? Would it actually go as far as suing the Saudis in federal court? And if a lawsuit is filed and the US does win, can it enforce any compensation? Would it be worth the potential retaliation? 

The White House needs to think about those questions — and whether it really wants to answer them. Senator Chuck Grassley, a Republican from Iowa, has now attached NOPEC as an amendment to the annual Pentagon spending bill, giving it a serious chance of getting a vote on the floor of the Senate next month. It's unclear if the amendment has the votes. But the last time the bill came this close to passing was in 2007, when it got approved by the House of Representatives in a 345-72 vote and the Senate by 70-23, only to die after George W. Bush threatened a veto.

Biden must finally decide where he stands. In 2000, when oil prices were rising, he co-wrote a letter as senator to then-President Bill Clinton urging the White House to sue OPEC either in US federal court or at the International Court of Justice in the Hague. In 2007, Senator Biden was the co-sponsor of a version of the NOPEC bill, but then he abstained during the vote. For now, the White House hasn't said whether it supports the legislation.

NOPEC goes hand-in-hand with oil prices. If Brent crude stays under $100 a barrel, the bill may die. But if prices rise, just a touch, it has a fighting chance of passing. If that's the case, it's likely to create more problems than it would resolve.

Sketch: TBS

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of "The World for Sale: Money, Power and the Traders Who Barter the Earth's Resources."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.