The High Court of Justice Ruling and the Gas Deal

Prime Minister Benjamin Netanyahu signed a gas deal last December 2015 which allowed a consortium of the US Noble Energy and the Israeli Delek Group to begin work on extracting gas from the Leviathan gas field off Israel’s coast.

Activists have been furious with the deal’s ‘lack of transparency’ and the terms that they claimed were excessively favorable to the government’s corporate partners. Three months onward, the High Court of Justice ruled that the deal will be canceled within a year unless a central tenet of the agreement is significantly changed or canceled: the stability clause that would have barred future governments from altering the deal.

February 14, 2016, REUTERS/ Jim Hollander/ POOL

Antitrust across jurisdictions supposedly aims to keep markets competitive by preventing behaviors that allegedly harm consumers (e.g. collusion among rivals, mergers that threaten to create excessive monopoly power, predatory pricing, etc) and hamper rivals’ ability to compete. Brilliant! But we have to be careful here:

1. Modern economic theories of competition are merely theories of price and output determination under certain assumed conditions. Nothing in these models explains how or why markets become competitive or monopolized. Even best-intentioned bureaucrats and judges cannot foresee products, industries, or organizational and contractual forms yet to be tested in the market.
2. Several studies of actual antitrust cases found that regulators at the US Department of Justice, for example, were not guided by a concern for economic efficiency or competition when pursuing antitrust actions. It is apparent (from the United States and elsewhere) that antitrust owes its survival to the same forces that created it—namely, interest groups using antitrust to further their own narrow agendas at the expense of consumer well-being or public welfare.
3. Antitrust also increases transaction costs because firms must hire lawyers and often must litigate to avoid antitrust liability.

In other words, it is highly unlikely that the net effect of actual antitrust policy is to deter inefficient or anticompetitive behavior. Factors other than a search for efficiency must be driving antitrust policy: it may seem strange, but economists nowadays see no reason to criticize monopolies simply because they transfer wealth from customers to monopoly producers as the transfer itself does not present an “economic” problem. Rather, the purely economic case against monopoly is that it reduces aggregate economic welfare (as opposed to simply making some people worse off and others better off by an equal amount)—in short, reducing society’s income. Still, several kinds of empirical evidence suggest that monopolies have limited power to earn much more than competitive rates of return on capital.

Another reason most economists were indifferent to antitrust was their belief that any higher prices achieved by the supposed anticompetitive acts were more than outweighed by the price reducing effects of greater operating efficiency and lower costs. Thus, both judges and antitrust administrators in Israel should prove whether the gas deal (had it been passed without any changes) would have created a cartel, reaping monopoly profits, and whether future practices of Noble Energy and Delek Group (now deemed suspects!) would be typically anti-competitive.

Whatever the ideological leanings, one should respect the way Israeli institutions function: an antitrust authority, an independent judiciary, and an active civil society, all instituting a system of checks and balances over the executive branch. As a matter of fact, the antitrust authority’s chief was a vocal opponent of the draft agreement between the Israeli government and the gas companies, saying that it would have left too much power in the hands of Noble Energy and Delek Group.

Such a historic ruling by the High Court of Justice was indeed a brave and necessary decision for the protection of “democracy, transparency, and the rule of law.” Nevertheless, one should not neglect the fact that judicial intervention and populist activism might negatively affect Israel’s business environment and its energy security. The deal would have transformed the country into a regional energy powerhouse as many countries had already expressed interest in buying natural gas from Israel, such as Greece, Cyprus, Jordan, the Palestinian Authority, Turkey and Egypt.

Israel’s gas deal has a high-level strategic “balance sheet” to assess carefully: transparency, democracy, competition promotion, and judicial independence versus energy security, strategic interests, regional ties, and massive revenues for the State of Israel and its citizens. The thing is: countries like Lebanon and Iraq which had always let populist battles and interest-group politics dominate their strategic reserves have clearly failed to reap neither democracy nor energy self-sufficiency; neither transparency nor national security; neither competition nor citizens’ well-being.

That is exactly why Israel’s policy makers and civil society should reach a realistic solution to the country’s strategic gas reserves.