LEVER TIME: What A Fracking CEO’s Text Messages Tell Us About Inflation

12:08AM May 9, 2024

Speakers:

Joe Biden

Matt Stoller

Arjun Singh

FOX NEWS GUEST

larry summers

Stephanie Ruhle

Documentary Tape

Keywords:

price fixing

price

ftc

opec

inflation

oil

happened

shale producers

production

called

company

oil companies

oil reserves

merger

oil industry

lever

big

government

money

market

From the levers reader supported newsroom, this is lever time. I'm Arjun saying inflation, inflation inflation. Ask someone about politics today and it's likely that will be one of the first things they bring up since 2021. The media and politicians have wrestled with what to do about the rising costs of goods and services. For much of the pundit class. The answer was to blame it on rising wages and low unemployment. And a lot of people seem to buy it. But there's another issue at play. One that's uncomfortable for a lot of people in power to acknowledge corporate greed that greed can be seen everywhere from the grocery store to the gas pump, and now the FTC says they have evidence of it. In a recent complaint regulators say they found evidence of an oil CEO colluding with governments like Saudi Arabia to keep gas prices high. Today, on lever time, we'll hear how oil companies participated in a price fixing scheme that helped send a shockwave through the American economy and government.

Call me naive, but I used to think that low unemployment and rising wages were good things for the economy. Usually that'd be the kind of thing that you'd hear from a candidate running for office. In fact, as a candidate, Joe Biden said he wanted to raise the minimum wage nationally to $15 an hour. I'm

Joe Biden, it's time we had a $15 an hour minimum wage, so families can earn a living and get ahead. As President, I'll make sure we get it done, if that never

happened. But since 2021, it's indisputable that wages have been going up and unemployment is at historic low. But according to television pundits and economists, apparently that's bad.

If we want to get get inflation under control, we've got to get wage growth down to something close to 3%, we're worried

that the plane will overshoot the runway. If you look at wage inflation, it was faster for the month than for the quarter, faster for the quarter than for the year and running for the quarter at about 4.9%. We

don't have enough people to fill our current jobs and his argument there going to be jobs at higher wages. Higher wages are one of the contributing factors to inflation. The

logic goes that higher wages means people are spending more and that spending is overheating the economy bringing up the price of everything. It's why the Federal Reserve embarked on a campaign to cut interest rates and make it more expensive to borrow money and in the process, making it more expensive to get a mortgage or take out a car loan. That theory might make sense on paper. But is that really all there is to it? According to new reports and the Federal Trade Commission, the answer is no. In a recent complaint, the FTC said they had evidence that the founder of oil company pioneer natural resources was trading dozens of text messages with representatives of the government of Saudi Arabia and other oil producing nations to keep prices high. And in a recent lawsuit, plaintiffs say that multiple oil firms were working together to fix prices. I can't say that I'm shocked though. That's because when I was a kid growing up in California, the state was going through its own energy crisis, which saw blackouts happening all over the place. And at the center of it was this company called Enron. In California, Enron took advantage of the state's deregulated electricity market, and they'd artificially create shortages to increase the price of power. That was the focus of an Oscar winning documentary by the filmmaker Alex give me called Enron the smartest guys in the room. And

there's not much demand for power at all. And if we shut it down, can you bring it back up? And three or four hours? Oh, yeah. Why don't you just go ahead and shut her down and I want you guys to get a little creative, okay, come up with a reason to go down, like a forced outage type thing, right?

Those guys at the flip of a switch could just yank the California economy on its leash when ever they wanted to. And they did it. And they did it. And they did it. And they made so much money that

was in the 2000s. But that mentality still exists today, especially in the energy sector. And that's exactly what I'm going to discuss today on lever time with my guest, Matt Stoller. Matt's the director of research at the American Economic liberties project and the author of the newsletter big recently, he just published a pair of articles outlining the relationship between American oil companies and oil producing nations like Saudi Arabia, and according to Matt, how they engaged in a price fixing scheme that may have contributed to almost a third of the inflation that was seen in 2021. That's right now on lever time. So let's start with what you reported on last week. You had written a really good article in your newsletter big that American oil companies were colluding with OPEC before we get more into what actually happened there. You explain what OPEC is exactly. Sure.

OPEC Stan. As for the Organization of Petroleum Exporting Countries, it's composed of government's, mostly in the Middle East, but in a few other places that have proven oil reserves. And in the 1970s, they got together and decided that they were going to not compete against each other for market share, which would lead to lower prices for oil, but that they would coordinate their production so that they could control the price of oil. So it's a cartel, and cartels are illegal, according to domestic US law, but domestic US law only applies in this case, antitrust law applies to corporations. It doesn't apply to governments, and OPEC is composed of governments.

So that seems like something that the US and other nations would normally try and squash, but they haven't. What's their approach to dealing with OPEC? And have they ever tried to kind of break up that cartel? So

OPEC is basically run by Saudi Arabia, because Saudi Arabia has the biggest has the most oil reserves, and they can increase production or reduce production as they choose. So you know, the US has, the US is the biggest buyer of oil. So the US has a lot of power in the market based on our buying capacity. But we also spend a lot of money on our military to keep sea lanes open to you know, I don't know, notice there's a bunch of there a bunch of wars in the Middle East. There's big US presence in the Middle East. So the answer is yes, the US has many, many, many, many different levers to work with or against OPEC. And OPEC members have many, many levers to work with or against the US, Europe, and so on and so forth.

Back to your piece, you had talked about shale producers, the fracking companies, it sounds like they were actually colluding directly with OPEC, what were what did you discover,

right, so the US has oil reserves, we have private companies. So our mineral rights are not owned by the government. They're owned by private, private actors. And so we have oil companies that drill for oil. And they are subject to us antitrust laws, unlike the governments of OPEC, and so they're not allowed to price fix with each other, or with foreign actors. And there was this new technology that developed in the early 2000s, known as fracking, where you're where they were able to get access to oil reserves they couldn't get access to before in the US is a very, we've drilled we've poked holes in everything to get at oil for 100 years or more. But there were certain oil reserves you couldn't get to because we just didn't have the technology and fracking allowed us to get to these extra oil reserves. So you saw a tremendous increase in production. And what happened is that OPEC, the way they control the market is they allocate production to different companies, they say your countries, they say you Ecuador, you get to sell X amount or Y amount, you know, if they want to increase the price, then they reduce the amount they're producing. And everybody takes a haircut if they want to increase production, to lower the price, everybody can produce and sell a little bit more. There's cheating and whatnot. Well, what happened in the 2000 and teens is that the US shale oil producers were producing so much oil, that they actually challenged that whole structure. So if you have OPEC is like alright, we're going to allocate markets, you get to sell X amount of barrels, and we're going to sell Y amount of barrels. And all of a sudden you have this uncontrolled set of actors coming in and just taking market share, you lose control over the price. And that's what happened. So in 2014 to 2016, the Saudi Saudi led OPEC decided that they were going to punish the US shale producers. So they engaged in a fierce competition to produce more and lower the price. And so from 2014 to 2016, the price of oil dropped to about 40 to $60 a barrel, which is fairly low. And they did this to punish the US shale producers. You know, it hurt the US shale producers, but it didn't totally work. And so what happened in 2016, the end of 2016 is the US shale producers and OPEC got tired of the low prices. And this guy named Harold Hamm, who runs a company called Continental. He said, Look, I think OPEC should start cutting production. And that was a signal that the US shale producers really wanted to start working with OPEC. And so in 2017, the industry main industry conference was called Zero week, the fracking CEOs and OPEC officials they got together at a dinner. And after that started a ton of correspondence, a lot of public statements saying, you know, we need to collaborate more, you know, we need to get better relationships. So from about 2017 to 2019 2020. They were building relationships and investment in oil, oil production, which is really what drives the ability to produce started going down. So 2020 COVID happens. And all of a sudden demand just collapses. Because people are saying, they're not driving anymore, the global supply chain shut down. That was like a crisis for the industry. But then in 2021, what you saw was a bounce back for COVID. Right? And the price of oil went way up, which makes some sense, right. But what was sort of weird is that prices went kind of much higher than you would have expected. And the fracking companies which have the ability to ramp up production pretty quickly, that's the thing is they're they're like, they can act like Saudi Arabia, if they want to as the swing producers, because they have reserves and capacity, they wouldn't increase production more than a certain amount. But then once it becomes clear that the economy is back, why aren't you competing for share like you used to. And then in 2022, oil prices just went crazy high. And at that point, there's this guy named Scott Sheffield, who is the CEO of pioneer natural resources was one of the biggest fracking companies. And he said, you know, no matter how high the price goes, and this is, you know, it went really high after Russia invaded Ukraine, because Russia's big oil producer, he was like, no matter how high it goes, go to $200 a barrel, we are not increasing investment, and not any all of our, I've talked to shareholders, they're gonna punish anybody who does that. Right, which is collusion, or like, feels very much like collusion. And Biden said, You guys gotta increase production, because oil prices are really high. And that's causing prices throughout the economy to start going up. And one of the things that happened, as you know, inflation has been bad in the last few years. And it started in the oil patch, what was happening is a bunch of companies, CEO, every CEO in the country, saw that the oil industry was raising prices. And they were like, Maybe we should try that. And so it kind of had this catalytic effect where the prices in the oil industry were going up. And that wasn't because costs were going up, it was just dropping to profit. And then a bunch of other corporations saw that too. And while their costs went up a little bit, their profits went up a lot more. So in 2021, profits went from about a trillion dollars prior to, you know, they had been about a trillion dollars for most of the 20 teens, and 2021, they went up to $1.73 trillion. And then they went the next year, they went up to more than $2 trillion, which was a very, and they haven't come back down and they're still kind of going up. So in a competitive economy, profits get competed away. So there clearly is something's going on with competition. And I guess I'll finish by offering like, this is a very I'm not super partisan, but this is the oil industry is a conservative leaning industry. But politically, there were two main groups, I should say, three main groups who were kind of supporting the oil industry in the high prices. And the first were economists who said, there's no price fixing. This is just how markets work. Demand came back and supply and demand. Right?

Yeah, agree inflation isn't a thing. It's just a liberal wishlist Thing? Thing,

right? And this is like Larry Summers, right? Who, who was like, all these prices are going haywire. And he didn't want to look at profits. And so what he said is, the problem is ordinary people have too much money. That's what's driving up prices. So what we need to do is we need to throw a lot of people out of work. So he said that we need to keep unemployment above 5%. For at least five years, we need a massive recession. That's what we'll deal with inflation. And that's what Larry Summers argued for Jason Furman, there were many economists who argued this because their models are built on the idea that what causes inflation is workers having too much money. They can't they don't have models that describe corporations, making a lot of just increasing prices, so that they can make more money. So the economists were really important. The second group was sort of like the the conservative movement, politician types. Who made the argument. The problem The reason oil prices are so high is because the Biden administration won't allow more drilling was actually kind of funny is that the oil industry itself was like, No, we're not going to drill because we're making more money not drilling. You know, we're now all environmentalists. We don't want to drink whatever drill, right? They were trying to blame it on the Democrats and Biden because they were saying, well, they're not letting us drill. They're not public lands, and so on and so forth. So they were pushing their preexisting agenda and their political position. And then the third group, were actually environmentalists who liked high oil prices, because they think it pushes towards a green transition. So they weren't going to say we need cheap oil again. So there was like, normal people. We're all really mad but the kind of this elite, this set of elite groups, we're making different arguments because they actually like high oil prices. So that's that's what how happened. And there were a couple of things that broke the high oil prices, something I didn't put in my piece. But oil prices are now like they're not. They're not as high as they were. And the reason is, because the by demonstration actually broke the price fixing cartel by releasing oil from the we have a petroleum reserve. And he started releasing oil in 2022, from the petroleum reserve. And that actually broke the I think that I suspect that actually broke the cartel. I'm not totally sure. But oil prices did come down, and they haven't kind of gone. Like back up, even though China came online. And there are reasons that demand came back. So it sounds

like in a lot of ways the problem was sitting right in front of people's faces, but nobody actually wanted to investigate what the root cause was. They sort of added in their own interpretations based on ideology or preconceived notions, right. I

mean, if you look at the polling is 85% of Americans think that corporate greed is causing inflation? Right, right. Everybody, all the normal people are looking at corporate CEOs making a lot of money. And they're, you know, hearing investor calls. I mean, not that people as an investor calls, but they know that corporations are making a lot of money. And on investor calls, CEOs are pretty upfront about it. They're not hiding it. They're just like, yes, we're, we're cutting capacity. The industry is disciplined to all these code words for price fixing. And we're making a lot of money we're taking, we're making, you know, taking margin, all these kinds of, you know, they're noticing that prices are going up, and they're noticing the corporations are making more money, and they're putting, you know, two and two together, because people are not idiots. You have to be extremely, like well trained in economics to become an idiot. And the problem is that policymakers, politicians are hearing from ordinary people and politicians were also really frustrated with corporate profits. It was the economists and you know, the activists who like expensive oil, that were saying that what everybody knew, was crazy, right? Everybody knew this was happening. It was public, like the FTC confirmed a story we already basically knew the scandal here to me is not Oh, my God, there was price fixing that. And by the way, the cost was really high. It was about to two to $400 billion a year. Oh, man, wow. Which is like a substantial chunk of the inflation that we experienced was just that was like oil price fix.

But that's, that's wild, because that's what almost everyone has been so angry about the last couple of years is inflation. Is everything being expensive. And yet, you're like the first time I've heard anyone, peg it to oil companies. And that sounds like that was something that maybe could have been resolved at least had a finger pointed at a long time ago. Yeah.

I mean, it isn't just oil companies. Right. You see, you see, like, so oil companies, I think, are not an anomaly. Right? You've seen there is now a huge scandal, because there is a software and consulting company called Real page, which works with all of the big landlords in the country, millions of units to coordinate supply of rental units and raise rents. So there's a huge price fixing scandal in the rental rental markets. You see this in meat as well, there's a huge price fixing scandal in in meat markets, because there's a company called agri stats, which coordinates all of the production of the giant meat packers, you know, and they just are like, Oh, you're selling? How much bacon are you selling? What's the price you're charging? Send us and then we'll send you reports from everyone in the industry, because they get it from all the people in the industry? And we'll send you you know, we'll just suggest to you that you raise prices. Oh, wow. So

their business is basically price fixing, but sort of mocked up in a different way. It's not

just based it's up basically price fixing. It is price fixing. The DOJ has a price fixing case against Agra stats for what they're doing. And there are price fixing cases against real page. There's dozens of them, actually. And so you know, and there are states that have these and you also see price fixing in hotels, there's an allegation there's a company called costar which has this does the same thing. It just says to all of these hotel chains. Here's what your competitors are charging. Here's what we think you should charge. Right? And what this does is it causes them in meat in, in hotels, in rent, it causes them to hold off hold things off the market. So, you know, landlords are like being told don't rent quite as many units just charge more. And you'll make more money, right? It's the same thing as the oil companies withholding production so that they can get higher prices on the production that they are. You know, as it turns out, it's more profitable not to do business when you're in a price fixing cartel than to do more business, right? It's why the Sherman Act, the antitrust law prohibits what are called restraints of trade, right restraints. They're restraining trade. So, and there's also one on, there's a price fixing scandal around casinos. There's a company. There's a software package called Rainmaker will all the Las Vegas casinos collaborate on rooms and pricing. And they use this software package called Rainmaker, which tells them what they should be charging. And so I suspect that you will find in if it's happening in these segments, it's probably happening in almost every segment of the economy, why wouldn't it? And that's really why you have this line, or that's probably one of the main reasons you have this line. That's just like, well, corporate profits just went way up, which, okay, that could happen, right? Once the economy comes back, but they didn't come down, right. They didn't get they didn't normalize, they are still really high. And as it turns out, this is probably the reason why that is. And that's why prices didn't come back down.

So what drew the FTC is attention to this case, with Scott Sheffield at Pioneer? Why were they looking into that? And I know, we're talking about Sheffield and pioneer, but what you're describing is across multiple shale companies, right? Not just this specific company. Yeah,

it's like continental and diamond back and pioneer. And there's a there's a bunch of them. Not this not the little ones that but the major, the big, you know, the big independents. Yeah.

And we should say, though, that's separate from like Chevron, Exxon. Yeah,

those are called the those are like the integrated giants, right? They're not in I mean, they made they, they benefited tremendously from the price fixing, but they didn't engage in the price fix. And there's something called an umbrella effect in when a certain portion of the market is engaged in price fixing or is engaged in predatory behavior to raise costs to consumers. Oftentimes, other entities in the market will benefit as well, because the overall market price goes up. So you know, this happened with like, liing T Mobile bought sprint a few years ago, and they stopped. They were in a price. They were in, they were competing aggressively against ATT Verizon, they stopped doing that. And so 18 T, Verizon, didn't do anything wrong. They didn't, they weren't part of the merger. But they benefited from the merger, because the merger made it so that they there wasn't as much competition in the industry, that's called the umbrella effect. So so the big integrators didn't, you know, really profited off of this. But you know, they weren't engaged in the price fixing. But what the FTC was doing so in 2023, I think, because for a variety of reasons, having to do with the oil industry dynamics, but also I think the by demonstration, breaking the cartel with the, with those strategic petroleum reserve releases, there was a view that well, we should all merge, now, merge away the problem. And so there was a series of about $200 billion of announced mergers in late 2023 are most through throughout 2023. And the Federal Trade Commission has got to examine these mergers to see if they lessen competition or substantially lessen competition, that because if they do that violates the law. So the the big, the first one that they looked at was Exxon bought pioneer. And so in this merger, you know, when there's a merger, like, this is a $60 billion merger, the FTC is going to go through all of the documents about why they're merging, and they're going to look at emails and whatnot. And then they let the merger go through. Because Exxon and pioneer are about two to 3% of the global oil market. So it's not very much, you know, they don't have control over price, just based on their own existence. But what they did find was all of this coordination. And so the remedy that the FTC put forward is, you're not allowed to have this guy, Scott Sheffield, who was engaged in the coordination, he can't be on the board of the new company, he can't be involved in the new company, and a bunch of the executives from Pioneer are not going to be involved in the new company. And so what this is effectively doing is, is it's effectively saying the exon you guys are going to you took over a crime syndicate, get rid of the criminal element and do your drilling. Right.

Interesting. So to just Sheffield then face any sort of prosecution or liability for the price fixing aspect of this or is this coming up mostly in a decision of whether to allow these companies to merge or not?

So the price fixing law and merger law are different, right one of them is that Eaton Act which says, you know, mergers that may substantially lessen competition are unlawful. The other one is that section one of the Sherman Act, which says that, you know, restraints of trade are unlawful. And so the FTC, and by the Sherman Act is a criminal statute as well as civil right, the merger, one is just civil, the FTC doesn't have criminal jurisdiction. So the FTC, I think, didn't find that the merger violated the Clayton act. But they said, actually, they did think it violated the Clayton act in the sense that if you bring people who are colluding with rivals into the new company, the new company is more likely to collude. And therefore, that's substantially lessening competition. So the remedy was, punish the executives by not letting them be involved in the new company, which sends a signal by the way to every executive. Because, you know, when you go after our company, you know, the executives don't really care that much, because it's not their money. It's not their reputation. When you go after an executive, the decision maker, it's really upsetting for that whole CEO class. They're very upset about this. You haven't seen a lot coverage of this in the in the media. And I'll tell I can tell you that I think a lot of editors are scared to write about it, because it does go after the CEO class. I mean, you've seen it in Bloomberg in the ft and like the business press is covering it. But what the FTC did do is they referred the Scott Sheffield evidence to the criminal justice, the division of the antitrust part of of the Department of Justice. So they are like, yes, there's a price fixing problem here. Here's all the evidence we found. Go on and use handcuffs if you think that's foreign.

Thanks for listening to this episode of lever time. Lever time is a production of the lever. This episode was produced and engineered by me Arjun sang with editing support from David Sirota, Lucy Dean Stockton and Joe Warner. Our theme music was composed by Nick Campbell. We'll be back later this week with another episode of Levertov