A close examination of the entire period from 1870 to 1970 reveals that predominantly administered pricing (i.e., unmediated accounting calculations) and cartelized practices were the rule.
Such a
framework, however, had begun to lose its effectiveness in the 1950s and 1960s,
as proliferating market forces did overcome the Achnacarry networks of the
International Petroleum Cartel (IPC) The 1928 Achnacarry Agreement inaugurated
a new era of cartelization since the US antitrust law of 1911, which had led to
the breaking up of Rockefeller’s Standard Oil Trust.
This was in
response to the worldwide irreconcilable price wars that were in full swing at
the time when there was no adequately developed global oil (capitalist)
structure that would objectively mediate and manage all this perpetual chaos
into a forcible, regulating reconciliation.
This time, the control of oil meant
cartelization of oil under the tutelage of a leviathan, from ocean to ocean,
across the entire geography of the world, minus the Soviet territory. Blair
charmingly summarizes the seven sacred tenets of this infamous agreement as
follows:
Alarmed by the rapidity with which the price war has spread from India to America and then back to Europe, the heads of the three dominant international majors met at Achnacarry Castle in Scotland to prevent the recurrence of such disturbances. Walter C. Teague, then president of Exxon [Standard Oil of New Jersey], was quoted by a trade journal as saying, “Sir John Cadman, head of the Anglo-Persian Oil Co. [BP] and myself were guests of Sir Henri Deterding [head of the Royal Dutch-Shell] and Lady Deterding at Achnacarry for the grouse shooting, and while the game was a primary object of the visit, the problem of the world’s petroleum industry naturally came in for a great deal of discussion.”
Referred to generally as the As Is Agreement
of 1928 or the Achnacarry Agreement, the product of this discussion was a
document, dated September 17, 1928, setting forth a set of seven principles and
outlining in general terms the policies and procedures to be followed in
applying them. The principles provided for:
(1) accepting
and maintaining as their share of markets the status quo of each member;
(2) making
existing facilities available to competitors on a favorable basis, but not at
less than actual cost to the owner;
(3) adding new facilities only as actually
needed to supply increased requirements of consumers;
(4) maintaining
for each producing area the financial advantage of its geographical location;
(5) drawing
supplies from the nearest producing area;
(6) preventing
any surplus production in a given geographical area from upsetting the price
structure in any other area.
The last point
asserted that the observance of these principles would benefit not only the
industry but consumers as well.
Given the
necessity of tight control and awesome task of administration, the cartel had
to issue several supplementary memoranda subsequent to the original agreement.
Blair writes:
As the
companies became increasingly familiar with the troublesome problems of trying
to make a cartel operate successfully, the instructions had to cover a growing
number of issues and at the same time become increasingly specific and precise.
The principal topics with which they dealt were: (a) fixing quotas; (b) making
adjustments for under- and overtrading; (c) fixing prices and other conditions
of sale; and (d) dealing with outsiders.
The first stage
in the development of the Middle Eastern oil industry coincided with the
rudimentary development of capitalism and absence of full-fledged modern landed
property.
The private
ownership of land excluded the ownership of subsoil, including the ownership of
minerals underneath. A typical oil concession included the surrender of the
right to explore, develop, and produce oil, natural gas, and related substances
to the concessionaire, an international oil company.
And from both legal and theoretical
standpoints this surrender of the right to explore, develop, and produce should
not be confused with the surrender of ownership of the resource (i.e., oil
deposits in place) to the contracting oil companies. The term concession, rather
than lease, refers to a contract between a private entity (i.e., a
company) and a government (i.e., a would-be sovereign entity).
The oil
concessions during this first stage (1901–50) had more or less the following
commonalities:
1. They nearly
covered the entire subsurface of the land in a country or territory.
2. They had a
long duration that normally extended beyond 50 or 60 years.
3. They were
only a handful of cartelized concessionaires worldwide.
4. The terms of
the concessions were uniform.
5. The
principal financial obligation was the uniform payment of royalty.
6. The
financial terms were extremely moderate.
7. There was
little change in the terms and conditions of these concessions.
The laws of the
oil concessions [i.e., the colonial contracts] governing the dominated oil
regions of the world, including the Middle East, are substantially different
from the leasing contracts that prevail in the United States.
It should be
noted that the essential characteristic of the U.S. leasing practices stems
from the structure of ownership of the subsoil, which is included as a part of
the ownership of land.
Due to the
observance of the rule of capture, in the United States, the materials
obtained from the subsoil belong to the owner of the land.
Thus, from the
beginning, capital investments in exploration, development, and production of
oil had to come to terms with two separate systems of landed property in the
subsurface across the globe.
At the same time, from the standpoint of the
stage of development, there emerged the tendency to a rudimentary valorization
of landed property in these territories as opposed to a full-blown valorization
in the United States (valorization of the landed property leads to the
formation of rent, as a category, which in turn depends on the prior
establishment of capitalism and capital as a social relation). That is why the
industry as a whole—a disorderly conflation of different social relations in
colonial and semi colonial settings—had to be managed by direct control and
crude and unmediated cost and price calculations.
Basing point
accounting, which is illustrated in a bit of detail in the chapter on OPEC, was
essentially the main springboard of pricing in the period.
The second
stage in the development of the Middle Eastern oil industry was the gradual
objectification of market forces that eventually led to decartelization and
abandonment of administered pricing of oil through the crisis of 1973–74.
This stage saw
the uneasy coexistence of the declining cartelized mechanisms and practices,
and the rising proliferation of market forces that carried and conveyed the
spread of competition against the prearranged production, captive oil
concessions, “gentleman’s agreements,” and arbitrary accounting of oil
royalties (and rents) according to fictitious “posted” pricing.
Any
transitional period, by necessity, tends to portray the amalgam of the
vanishing past and the emerging future.
The breakdown of the cartelization of oil was
the consequence of certain evolutionary changes beyond the cartel’s surrogate
allocation and accounting system that had long been skillfully employed across
the vast, untouched, and presumably passive geography of production.
In one important sense, in contrast to its
American counterpart, the history of the cartelization of international oil is
a remarkable story of “primitive accumulation”. The cartelization of oil is
indeed a prehistory of germinating capitalist social relations in these regions
of the world—a prehistory of capital. Therefore, it would be a partial
assessment if the focus of the analysis were to be merely on imperialism and
outright plundering in this period.
In addition to a more palpable issue of nationalism,
the question of class that is often out of sight and lurking beneath all
these occurrences must be taken to account in itself and as a prerequisite for
organic unity of oil in globalization and thus the relevance of the law of
value in the coming years.
These two issues, although inseparable at the
time, must be analytically dissected for the sake of the evolution of
capitalism as an ultimate trump card and as a durable social relation, and the
identity of imperialism as an unambiguous and identifiable period (i.e., a
specific epoch) in the development of the former.
The transition
in this second stage shows that the spread of capitalist social relations, via
oil, was not only contradictory but also contagious.
Historically,
however, the triumph of cartelization sowed the seeds of its own destruction.
Introduction of foreign capital in the exploration, development, and production
of oil and the germinating capitalist social relations in many of these oil
territories have eventually led to the valorization of landed property under
capitalism.
Therefore, this
transitional stage is the beginning of the unraveling and dismantling of the ad
hoc and fragmented accounting schemes that stitched the US oil basing-point
system, at the Gulf of Mexico, to the newly devised (i.e., the cut-rate) posted
prices at the Persian Gulf.
This provided the companies with an
opportunity to pocket not only the monopoly oil profits but also the lion’s
share of the oil royalties.
Toward the end
of the 1960s, there occurred, inter alia, three major developments that
entirely undermined the cartelized character of the industry in favor of the
rising objective market forces and spot oil prices globally.
First, there
appeared transformative macroeconomic changes in OPEC’s relationship with the
IPC; this was reflective of changes in the internal development and potential
integration of the oil exporting countries into the world economy.
Second, there emerged the proliferation of
independent oil companies, which is a telling story about the internal turmoil
and erosion of power in the cartelized system of Achnacarry (1928–72).
This was a
grand experiment on the so-called barriers to entry, and in retrospect it was
settled unilaterally by the eventual collapse of the IPC in 1972.
To identify
some of these “independents,” names such as Ashland Oil, Occidental Petroleum,
Amerada Hess, Marathon Oil, Continental Oil, City Service, Sun Oil, Union Oil,
Philips Petroleum, and Getty Oil come to mind.
Finally, there was a considerable increase in
the exploration and development costs of US domestic oil, the costliest in the
world, in both per/barrel and absolute magnitude.
Eventually, the
grand cartelized network of Achnacarry was unraveled piece by piece during the
transition period. The gentleman’s agreement gave way to the tumultuous forces
of the market.
The lack of
control over the increasing volume of oil outside of the cartel’s network did
the trick. The development of adequate capitalist structure in the oil
exporting countries led to de facto valorization of landed property in oil.
This in turn
transformed the nature of OPEC, notwithstanding the Trojan horses of the golden
years of Pax Americana within OPEC that desperately searched for a middle
ground.
The US domestic oil fields were rationalized;
the global oil industry was reorganized and unified through the crisis; and the
price of production of the US oil had become the regulating price of production
for the entire industry worldwide.
The world oil entered into the era of
globalization with unified market prices, global differential oil rents, and
plenty of volatility.
The era of
cheap oil/expensive oil was over.
The law of one
price (underpinned by regulating capital in the US domestic oil) had
become a universal rule for all oil across the board.
Yet, in
realpolitik, the deception of national security, via the allegation of
dependency and demand for access, led to tough talks and threats against Pax
Americana’s favorite son, the Shah of Iran, by Henry Kissinger and to the panic
plan of a Rapid Deployment Force by the Carter administration.
On the supposedly analytic front, the
post-1970s geopolitics of oil had essentially centered on the traditionally
fragmented quarrels over the de-Americanization8 of oil and concern over US
domestic oil production, consumption, and imports.
And it took
nearly another decade for the United States, OPEC, and the emerging world to
realize that ultimately these epochal changes were irreversible.
Decartelization
of oil also cut the umbilical cord of the US foreign policy from oil.
The IPC was in
a variety of ways a beachhead with multiple economic and political outposts in
the oil-producing countries. The companies within the IPC often operated as a
government within a government in many of these countries.
The Anglo-
Iranian Oil Company in Iran was a notorious class by itself in this regard.
This was
probably as important, if not more, as the economic aspect of oil, particularly
for the United States.
If you want
to learn more about The Stages of Oil Production you could do so in my book,
Economics of
Oil and Gas Production.
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