The Truth Behind the Latest Oil Price-Fixing Scandal

It was not Scott Sheffield’s job, as the former CEO of oil and gas company Pioneer Resources, to keep oil prices low. Neither is it the job of any of his colleagues, who run companies that, like all for-profit companies, are propelled by a single mission: to make money. Yet in announcing last week that it would approve a $60 billion merger between ExxonMobil and Pioneer, the Federal Trade Commission made one caveat: that Sheffield not be allowed to join Exxon’s board or serve in an advisory capacity and that all Pioneer employees be barred for five years. The FTC cited “voluminous evidence” that Sheffield collaborated with fellow U.S. producers and the Organization of Petroleum Exporting Countries in order to keep crude oil prices “artificially” high. Exxon accepted and completed the acquisition—its largest since it added the “Mobil” to its name—on Friday. 

Hundreds of messages between Sheffield and higher-ups at OPEC, the FTC argues, show that Sheffield’s presence on Exxon’s board would “artificially reduce growth in the development, production, and sale of crude oil.” Kyle Mach, deputy director of the FTC’s Bureau of Competition, wrote in announcing the decision that “American consumers shouldn’t pay unfair prices at the pump simply to pad a corporate executive’s pocketbook.”

Part of the FTC’s narrative, here, is that prodigious U.S. crude oil production growth—spurred by Permian Basin shale drillers like Pioneer—have “injected new competition into the market and ultimately saved American consumers and businesses at the pump,” according to the FTC statement. “But it has also frustrated OPEC representatives, Wall Street investors, and some shale executives themselves, who view this expanded production as lowering prices below the artificially high prices the OPEC cartel seeks to set and impose.”

There are a couple strange things about this account of the shale boom. First, it sort of gives the impression that ever-expanding fossil fuel development is an unambiguously good thing—dubious given the climate crisis, as well as evidence showing a far from straightforward relationship between U.S. production and prices at the pump. Second, saying the shale boom “saved American consumers” from high oil prices ignores the fact that the shale boom happened in no small part because of high prices. The entire history of the oil industry, moreover, is one of anti-competitive practices of one form or another. 

Hydraulic fracturing (“fracking”) is expensive, requiring companies to constantly drill deep new horizontal wells into tight shale rock formations as older ones run dry. For decades, shale drilling was thought to be too costly to be worth doing. It was only after considerable support from the U.S. government for basic research, feasibility studies, and generous, long-standing tax credits that drillers, most famously George P. Mitchell, agreed to start pursuing it. 

The real inflection point came when conventional oil production in the United States continued to wane though the early 2000s, and prices went up. Drillers were accordingly able to fetch more money for their products, allowing them to justify costlier extraction methods like fracking. Then, after the Great Recession, interest rates dropped to almost nothing as the Fed sought to stimulate the economy. Wealthy investors found themselves with lots of cash and were eager to find places to stash it. Some poured funds into companies like Theranos and WeWork. Others funded fracking, encouraged by similarly enterprising and unscrupulous salesmen. For a time, shale drillers’ success was judged by how much they could drill, not by how much money they made. Frackers struggled to turn a profit for nearly a decade, drilling as much as they could, as quickly as they could. That rapid-fire drilling, to which the FTC alludes, helped to drive down the price of crude oil and, in turn, gas prices. Contributing to that was the fact that producers were still mostly barred from exporting crude oil abroad. 

The economics of fracking, though, rely on higher prices. Drillers that don’t—who rely on cheaper, conventional production—saw an opportunity. In November 2014, OPEC decided to maintain its members’ existing production rather than cut it, as is customary when prices get too low. That’s arguably because Saudi Arabia—the most dominant producer in that alliance—could afford to weather lower prices, and cared more about not losing too much market share to U.S. producers. Smaller frackers buckled as prices dipped below the “break-even” levels needed to justify their expensive production habits, at least on paper; larger drillers (ExxonMobil, Shell, etc.) had bigger and more diversified balance sheets that could take the hit. Congress’s decision to repeal the crude oil export ban in 2015 offered a lifeline and “allowed U.S. crude oil producers to charge higher prices relative to comparable foreign crude oil,” the U.S. Government Accountability Office explained. 

In the years that followed, investors who’d spent years letting frackers burn through their cash started to get frustrated. Wall Street and corporate managers eager to protect themselves against future volatility wanted to get their own balance sheets in order, cutting back on costly drilling binges and delivering more cash to disgruntled shareholders. The onset of Covid-19 and ensuing travel restrictions—when the world’s demand for oil and gas dropped considerably—cemented that trend. Companies eager to stay in business through future booms and busts embraced “capital discipline,” focusing on efficiency and bringing the boom times to an end.

So what does this have to do with the FTC’s complaints about Sheffield? He’s long been one of the most vocal narrators of the industry’s shift back to basics. “Everybody’s going to be disciplined, regardless of whether it’s $75 Brent, $80 Brent, or $100 Brent,” Sheffield said publicly in 2021, as quoted by the FTC. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.” He said something similar at an industry conference the following year, as U.S. officials urged American producers to increase production after Western sanctions on Russia dealt a shock to global oil supplies. Sheffield certainly wasn’t alone in thinking output had to be curtailed to maintain  profitability, even despite higher prices, but he was particularly outspoken about it. Kimmeridge Energy Management founder Ben Dell, for instance, told Bloomberg at the time that oil exploration and production was “not a public service industry.… For 10 years we made no money. The industry is profitable for two months, and the argument is that we’re supposed to price down the product or give away margins to support the consumer.”

High prices, recall, played an essential role in driving the production boom that “saved American consumers and businesses at the pump,” per the FTC. The drillers who propelled that boom need those higher prices to keep that production going over the long run. Most of the evidence the FTC compiled against Sheffield was from the period when those prices had tanked dramatically in 2020, or just afterward, when prices began to creep back up as governments eased pandemic-era travel restrictions, and as Russian oil came under sanction.

The purview of antitrust regulators like the FTC, of course, is to protect economic competition. In its complaint, the FTC wrote that “OPEC representatives and Mr. Sheffield responded to this new competitive dynamic” represented by the shale boom “by resorting to a classic tactic to tame the competition: embark on a series of efforts to coordinate output levels to keep production artificially low.” 

For as long as there has been an oil industry, though, it’s relied heavily on precisely these methods—some form of price coordination, usually anchored by one cartel or another—to protect the long-term viability of that sector. That didn’t end when John D. Rockefeller’s Standard Oil trust was broken up in the early twentieth century, sparking a period of price instability as oil—now gushing from new parts of the United States—became an ever more important commodity.

For much of the twentieth century, the U.S. essentially controlled the global price of oil through a de facto cartel run by the Texas Railroad Commission, which toggled production in the country’s biggest oil-producing state to protect the interests of the country’s oil and gas industry. OPEC was modeled on that very system, and took over the mantle of swing producer as control over the Middle East’s abundant oil reserves shifted from U.S. companies and colonial powers to newly sovereign governments looking to develop and profit from those resources themselves. To help deal with that shift, the U.S. government put in place price controls on oil in the 1970s, as it had during World War II.

The history of the oil industry, that is, has been defined by booms and busts, wherein companies try to drill as much as possible, chasing their own rational self-interest while undermining those of the industry as a whole, as well as (often) the best interest of consumers. As far back as the 1920s, oil tycoons were pleading with regulators to step in to enforce production quotas and pry drillers from their rigs. Today, institutions like the Strategic Petroleum Reserve exist to insulate the country from price swings, and even offer drillers a price floor to spur production. U.S. presidents, including Biden, regularly plead with OPEC to help manage prices.

Given the prime importance of oil—to transportation, industry, and even inflation—individual producers left to their own devices will subject the public to their painful booms and busts, wreaking havoc on the economy. That’s why most major oil-producing countries handle their fossil fuel sectors differently, usually through some combination of national oil companies that oversee production or more robust price controls that balance the industry’s long-term interests with those of consumers. The oil industry as a whole is not especially, let alone perfectly, competitive; if it were, consumers would probably be worse off, not better. 

I won’t dispute the facts of the FTC’s case against Sheffield, which it will reportedly refer to the Justice Department. I also don’t particularly care what happens to him. Neither, though, does it seem right to portray the shale boom as the wholly positive outcome of a perfectly competitive fossil fuel sector that—when such competition is maintained—will keep oil prices perpetually low. The core problem with the oil industry isn’t its lack of competition or its leaders’ refusal to drill fast enough. It’s that the U.S. has entrusted a handful of reactionary CEOs with stewarding and distributing the country’s biggest and most important resources and exports, which have an outsize impact on how affordable life is and—crucially—by how much the planet will warm. Fossil fuel companies’ only obligation is to their bottom line, and it’s exceedingly rare for that to dovetail with the interests of consumers, the economy, or the planet.