Oil and World Power (Routledge Revivals)

Background to the Oil Crisis

Peter Odell

• Publisher: Taylor & Francis
• Year: 2013
• eBook ISBN: 9781134101788
• Edition: 1
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

The oil industry is the world's largest commercial enterprise. Its extent is global; international issues are consistently influenced by considerations of oil production and consumption, while the international communications networks of the larger oil companies rival those of many nations. In this, the eighth edition of Oil and World Power, published in 1986, Peter Odell explains the complexities of this gigantic empire and its influence on the world. The far-reaching chapters discuss the U.S.A, the Soviet Union, O.P.E.C., Japan and the oil-consuming countries of the developing world. Evaluating the changing patterns of oil supply and the dramatic fall in oil prices in 1986, Odell proposes a number of forward-thinking conclusions surrounding the relationship between oil in global politics and economic development. This is an exceptionally interesting and relevant work, of great value to those with an interest in the oil industry, global power and international economic development.

1. Introduction:

The World’s Oil Industry

A description of the world’s oil industry demands the use of many superlatives. By any standards it is the world’s leading industry in size; it is probably the only international industry that concerns every country in the world; and, as a result of the geographical separation of regions of major production from regions of high consumption, it is first in importance in its contribution to the world’s tonnage of international trade and shipping. Because of these and other attributes, such as its involvement in both national and international affairs, a day rarely passes without oil being in the news. Often the significance of such news items is not apparent in isolation or without some background knowledge of the way in which the industry has been and is organized internationally, and of its impact upon individual countries and groups of countries in which its operations and interests lie. This book aims at providing such a background by describing and analysing the oil industry’s affairs and relationships around the world.

It is concerned almost exclusively with the period of over forty years since the end of the Second World War, when, except for the last five years, growth in the oil industry was faster than that in most other large-scale economic activities. Already by 1950 twice as much crude oil was produced as had been produced in 1945. Ten years later, in 1960, production had doubled again to 1,000 million tons. The high rate of expansion continued, and it took only five years more for the next additional 500 million tons annual output to be achieved. In 1968, only three years later, another leap of 500 million tons in annual output of a total of 2,000 million tons was achieved and at that time the prospect of an annual output of almost 3,000 million tons by 1975, and of 4,000 million tons by the early 1980s was considered to be as near certain as any forecast could be. Since 1973, however, for reasons which we shall discuss later, the outlook for the future production and use of oil has changed. Annual increases in the size of the industry ceased in 1979 since when production and use has declined and is now back to pre-1973 levels. Even so, there are still possibilities for growth in the size of the industry, though the doubling rate will now be decades rather than less than ten years, as over the two and a half decades from 1948. By 2035 a world oil industry of up to twice its present size is likely to develop. If this is so, then more oil tankers on the roads and railways, new pipelines to major consuming centres in most countries of the world, additional refineries on major estuaries and elsewhere, more tankers for moving oil around the world, and a continued flow of news items about oil exploration and development efforts in hitherto unexpected places such as offshore China, the Arctic, and Antarctic and even under the deep oceans can be expected for as far ahead as we can see.

But such generalizations about the future of the oil industry at the world level are somewhat misleading, particularly as the industry has never been a fully interlocking system and it now seems likely, in view of recent events, to split up even more – perhaps to become, as we shall show later in the book (in Chapter 10), an industry which is essentially regionally organized (see Map 12), rather than international in structure. Meanwhile, there is at the present time, as one would expect from the international division between the communist group of countries and what the Americans call the ‘free world’ (a description often used in oil company literature), a relatively clear break between the oil industry of the communist nations and that of the rest of the world – though, as we shall see later, there are certain interrelationships between them which do appear to be of increasing significance. Moreover, even within the communist world the deep cleavage between the Soviet Union and its European allies on the one side, and China and some of its friendly neighbours on the other, has also been reflected in a lack of contact between the oil industries of these countries. Until the mid 1960s increases in Soviet oil output were planned on the assumption of an increasing oil import requirement by China. Since then oil trade between the Soviet Union and China has been eliminated and China’s recent successes in achieving the expansion of its own oil industry have already made it self-sufficient in oil and now seem likely to make it an important exporter to other parts of the world – particularly Japan – by the end of the 1980s.

In the rest of the world, early in the post-war period, a split emerged between the oil industry of North America (mainly the U.S.A., but including Canada and, to a lesser degree, Mexico) and that of the remaining non-communist world. Before the war and up to 1945, in as far as wartime supply contingencies made this possible, the U.S.A. was the leading exporter of petroleum products to Europe and to other parts of the world. The U.S.A. continued to export oil to Western Europe after 1945 but it soon lost its dominant position as its relatively slowly growing oil production was required at home to sustain the country’s rapid economic development. Thus its oil industry became a largely separate entity from the international industry, with such differences in price levels and in organization from the industry in the rest of the world as to necessitate an increasingly autarkic policy on the part of the U.S.A. Indeed, the domestic U.S. oil-producing industry would have been greatly diminished in size had it been subjected to competition from lower cost crude oil from abroad in the 1950s and the early 1960s. This situation, however, changed in the second half of the 1960s because of the seeming inability of the U.S. oil industry, protected though it was, to produce enough oil to meet the country’s growing needs. Imported oil gradually increased in importance from its earlier controlled level of about 12 per cent of total supply to more than 30 per cent by the late 1970s. Then, in light of the changed international oil supply situation and higher prices, coupled with weakness in the demand for oil, imports of oil began to decline and domestic production to increase so that the latter was able to meet an increasing proportion of the country’s total needs. A reappraisal of this new U.S. situation is made in Chapter 2.

Outside North America and the communist world we have the territory of the so-called ‘international industry’. ‘International’ as used in this context does not, however, imply an industry owned and/or controlled by the world’s many nations. Instead, it refers to the fact that the oil industry is one which operates internationally, within the framework of a complex network of relationships which connect most countries of the non-communist world. It was originated and initially controlled by a very small group of companies known, in oil industry terminology, as the ‘international majors’. These seven companies (which are described below) were, until recently, responsible for something like 80 per cent of all oil production in the world outside the communist countries and North America.¹ In the same areas they still own or control over 70 per cent of the total refining capacity and they operate either directly or indirectly, through long-term charter, well over 50 per cent of the tonnage of internationally operating tankers. Just a few years ago these percentage figures were even higher.

The companies concerned are international in a number of particular ways: first, in that their operations are world-wide; second, in that they employ nationals of many countries; and third, in that they have locally (that is nationally) registered subsidiaries in many countries of the world. But their ownership and their ways and methods of working are limited to those of just three countries, most especially to those of the U.S.A. Thus, of the ‘international majors’ no fewer than four have their headquarters and the overwhelming majority of their shareholders in the U.S.A., which also provides all the top management and a high proportion of the lower echelons as well. The largest is Standard Oil of New Jersey, which throughout most of the world traded, until recently, under the Esso (‘tiger in your tank’) sign – except, ironically, in the U.S.A., where the nationally trading subsidiary was, rather amusingly in the light of the group’s strength and size, known as Humble Oil! In 1972, however, there was a corporate decision, taken after considering many alternatives and after much debate by top management, to establish a new worldwide name for the company – the Exxon Corporation. This name has already been generally adopted in the United States and is gradually spreading to other parts of the world.

Another Standard company, Standard Oil of New York (almost every state in the U.S.A. secured a ‘Standard’ company when the coast-to-coast ‘empire’ of Rockefeller’s Standard Oil was broken up by anti-monopoly legislation early in the century), is the parent company of many subsidiaries around the world trading as Mobiloil or, simply, Mobil. The other Standard company which achieved a place amongst the international ‘majors’ is Standard Oil of California (Socal), which, after many years of operating abroad jointly with one or other of the other majors, is now ‘going it alone’ under the Chevron sign. In 1983 it took over Gulf Oil in the U.S. and most of its activities elsewhere in the world. Gulf Oil was one of the original ‘seven sisters’ (it had its headquarters in Pittsburgh) but it no longer exists as a corporate entity. It had earlier become a major force in the Middle East when it secured a 50 per cent interest in the extremely prolific Kuwait oilfields in the late 1930s. When it was finally able to develop production from these fields on a large scale after the Second World War, it rapidly diversified into refining and marketing operations throughout Europe and in parts of the Far East and South East Asia. It was, however, terminally weakened by the nationalization of its oil reserves and production in the Middle East. It was in these circumstances unable to operate its remaining activities profitably enough and thus succumbed to Chevron’s take-over bid. Finally, there is the Texaco oil company, which, as its name suggests, operates out of Texas. It achieved the reputation of being an aggressive company with major overseas interests in the Caribbean and South America and with important shares in joint producing companies in the Middle East. It too is involved through a wide range of subsidiaries in refining and/or marketing oil products in some forty countries.

Though these companies have – and, indeed, deliberately foster – different corporate images, they do have one overriding attribute in common: their Americanism. Although most of their subsidiaries appear to have a management consisting mainly of nationals of the country concerned, it is seldom necessary to dig very deeply into their so-called ‘organigrams’ to find the key U.S. personnel whose job it is to ensure that American professionalism and expertise in oil reaches into the furthest parts of the company’s empire. At the same time the U.S. managers have the responsibility for ensuring that the policy of the subsidiary is in line with the authorized interpretation of centrally taken decisions. The essential communications infrastructure of these U.S.A.- centred ‘international’ firms certainly rivals that of the foreign services of the majority of the world’s nations and they have, indeed, been in the forefront of the efforts to secure private global communications by means of orbiting satellites.

This is also true of the two remaining ‘international majors’ – the Royal Dutch/Shell group and British Petroleum. The former is an Anglo-Dutch enterprise with the larger shareholding interests of the Royal Dutch parent making the Dutch element the more important in the ratio of 60:40 (a division which is also reflected in the 4:3 split of the seven managing directors in favour of the Dutch component). The company’s operational and commercial headquarters are, however, in London from where the day-to-day business is run, whilst the head office in The Hague is more concerned with fundamentals such as exploration and production activities, refining and research. The Royal Dutch/Shell group is second only to Standard Oil of New Jersey in size, while the complexity of its operations is probably even greater, given Shell’s even wider international commitments – even in areas such as Eastern Europe where the U.S. companies are not represented. There are, indeed, still only a handful of countries in the world in which there is no local Shell company. British Petroleum, or B.P. as it is generally known, is a wholly British-owned enterprise (except for some foreign ownership of its shares) in which, incidentally, the state had a more than 50 per cent holding from 1913 to 1979, except for a short period in the 1960s when it was reduced to ‘only’ 49 per cent. However, this dominant state holding, much to the disbelief of foreigners, did not result in the British government as such exercising a dominant role in the company. In fact, successive governments over many years elected to exercise no influence at all. They nominated only two directors to the seven-man board and until recently the government-appointed directors did not even ‘report back’ to the government, let alone seek instructions or advice on how to vote on major B.P. policy decisions. They apparently remained quite free to act as they themselves thought best. In other words the state remained a sleeping partner in the enterprise, content to let B.P. operate just like the other private-enterprise international oil companies. The possibility that this might have been changed after 1974 when the new Labour government came to office with the declared intent of creating a state oil company did not materialize as the government decided, instead, to create an entirely new state oil entity – the British National Oil Company (B.N.O.C.). B.P. was left severely alone. Thus, the state’s interest continued to lie only in drawing its considerable dividends from the company, which, like Gulf Oil, had the advantage of access to massive supplies of crude oil from the Middle East in the post-war period and on the basis of which it had both the wherewithal and the incentive to diversify into refining and marketing operations in an increasing number of countries. These eventually included the U.S.A., where, after a series of small incursions to test the market, and in the light of what appeared to be important oil discoveries in Alaska, B.P. made up its mind in 1968 to go into refining and marketing in a very big way. It thus made takeover bids for a number of medium-sized oil companies. Favourable decisions by the U.S. Department of Justice (which is responsible for investigating all take-over bids in the light of the country’s anti-trust legislation) gave the green light for the implementation of this major policy development by the company. This has had the effect of making B.P. about the ninth or tenth largest oil company in the United States. It has, moreover, since become one of the country’s very biggest producers as a result of its oil discoveries in Alaska. These turned out to be very large indeed and have now achieved full production.

These then are the major international oil companies and, as the figures given earlier indicate, they constituted the dominant elements in the international oil industry until just a few years ago. Before the Second World War they collectively created a cartel-type arrangement, having agreed in the post-depression of the early 1930s on ways to hold their traditional market shares. Effects of the Second World War and postwar U.S. anti-trust legislation then eliminated the possibility of a continuing formal agreement between them, but nevertheless, until the late 1950s – because of their international organization and structure and their effective control over supplies and reserves of crude oil – they were able to make the industry work in the way in which they wanted. The mutual understanding between the companies over supply and pricing policies ensured their ability to earn high profits in this period.

Thereafter, their ability to dominate the industry began to fall away. This change was the result of the growth of new elements in the international oil business. One element was the rapid growth of important state-owned or state-supported European enterprises, such as Compagnie Française des Pétroles (C.F.P.) of France and Ente Nazionale Idrocarburi (E.N.I.), the Italian state company. The interests of these companies did not remain confined to Europe, though this is where they remained strongest. They also spread their activities to many other parts of the world, where they began to participate not only in production ventures, but also in refining and marketing activities.

An even more important new element in international oil arose from the growing international activities of many U.S. oil companies which had formerly had interests only within the U.S.A. but which, since the early 1950s, sought both oil supplies and markets abroad. They did this initially in order to obtain lower-cost crude oil supplies than they could produce from their fields in the U.S.A., with the intention of shipping the foreign oil back to the United States so as to increase the profitability of their domestic refining and marketing operations. The U.S. government, however, imposed oil import quotas in 1959 and thus severely limited the amounts of oil these companies could supply from overseas to the U.S.A. Thus, they had further to diversify their activities geographically by going into refining and selling oil in other parts of the world – notably Western Europe – so that they could secure revenues from the crude oil supplies that they had discovered and developed abroad, often at a high capital cost. In a world of generally booming markets for oil they did not find such expansion too difficult, even though of course, their expansion in such markets was partly at the expense of business that might otherwise have gone to the major companies. Somewhat later, however, as the growth of markets for oil in Western Europe and Japan began to slow down, these companies new to the international business had to face more intensive competition for business. Some of them, in fact, have since been taken over by the ‘majors’ as a means whereby the latter could reduce the risk of losing any further percentage share of the total markets available.

Neither did most of the companies new to the international oil business show much willingness to get involved with refining and marketing oil in Asia, Africa and Latin America, where the methods of doing business were very different from those in the U.S.A. or Western Europe. They thus chose not to take particular advantage of the increasingly strong reaction in the developing world in the 1950s and the 1960s against the control effectively exercised over most of the oil business in Latin America, Asia and Africa by the seven major international companies, which, through the subsidiary companies they established in the earlier days of the oil industry in most Third World countries, sought to sell crude oil and products from their larger-scale operations in the major oil-producing areas.

The reaction against the international oil companies in the Third World emerged from an enhanced degree of economic and political nationalism in a period in which colonialism in any shape or form has been highly suspect. Many countries of the developing world viewed the control over their oil industries exercised by one or more of the major international companies very much as a form of economic colonialism, and thus incompatible with the status of a sovereign nation. The result was a growing tendency for such nations to introduce increasingly effective controls over the companies concerned through import quotas, price controls, and insistence on the employment of nationals rather than expatriates, together with the imposition of unfavourable taxes and other regulations. Some of the countries concerned even established and encouraged alternative systems for securing their supplies of oil from overseas, and it was in such cases that entities and companies new to the international oil business could find opportunities for cooperation with the countries concerned. E.N.I. and the French state-sponsored entities did so to some extent in Africa and Asia, but the American ‘independents’ (that is, U.S. oil companies other than the five American ‘majors’ at that time) only followed suit to a limited degree, before deciding that they also were not particularly welcome in most developing nations.

This nationalist reaction against the major oil companies arose first amongst the larger Latin American nations, which, after a century or so of political independence dating from the mid nineteenth century, also sought their economic independence from what they considered to be an important element of American imperialism. Thus, countries such as Chile, Brazil and Argentina gradually restrained the freedom of the international companies to operate within their territories. The companies were, for example, refused permission to expand their activities beyond those existing at a certain date, or were obliged to integrate their own operations into a framework establish by state control and direction. Moreover, to supplement and intensify these measures the countries concerned often created their own state-owned oil entities which were charged with the overriding responsibility for ensuring the provision of the countries’ needs for petroleum. Today, of the fourteen nations of South America only Paraguay is without its state oil company. This trend towards oil nationalism has also been taken up by many of the more recently independent countries in Asia and Africa, and today over forty countries in these two continents have state-owned oil entities with responsibilities extending from exploration to final marketing. The trend towards state control and/or ownership appears likely to continue amongst the world’s developing nations, where suspicions about the wisdom of permitting the international companies to look after the oil sector are still widely held. Such suspicions have, indeed, been enhanced by the...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• List of Maps, Figures and Tables
• Preface
• 1. Introduction: The World’s Oil Industry
• 2. The U.S.A. and World Oil
• 3. Soviet Oil Development
• 4. The Major Oil-Exporting Countries
• 5. Oil Policies in Western Europe
• 6. Japan: Growth and Dependence on Oil Imports
• 7. Dependence on Oil in the Developing World
• 8. Oil in International Relations and World Economic Development
• 9. The Revolution in the World of Oil Power, 1970–75
• 10. The Response to O.P.E.C.’s Challenge
• 11. Postscript
• Suggestions for Further Reading
• Index