The growing surplus of oil and dominance in the market of the Soviets in the late 50’s, became a signal of some probable underlying motives for at some points selling oil significantly cheaper than ME oil. Two examples being: their desire for the dollar, of which they’d use to purchase industrial machinery and agricultural necessities; and second the fact they didn’t have much else to offer the West commercially. “In these Cold War years, many in the West believed that the intensifying Soviet petroleum campaign represented not only a commercial venture, but also a political assault, the purpose of which was to create dependence in Western Europe, weaken the unity of NATO, and subvert Western oil position in the Middle East.” (Yergin 2009, pg. 501)
The West considered banning Soviet oil imports, or further price cuts. “In July of 1960, fifteen months after the Arab Oil Congress in Cairo, the board of Standard Oil of New Jersey met in New York to consider the vexing question of posted price. The meeting was contentious.” (Yergin 2009, pg. 502) ) Domestic oil man and chemical engineer who had his roots in refining at the Baton Rouse, Monroe “Jack” Rathbone led these meetings. Rathbone was constantly at quarrel with Howard Page – an expert Middle East negotiator, who had plenty of international experience, and who was one of Jersey’s experts. Unlike Rathbone, Page was against trying to decrease the posted price, fearing the consequences; and being one of the contributing masterminds of the Iranian Consortium, he understood the necessity of understanding consequences. Despite the warnings by companies such as Standard Oil “On August 9, 1960, with no direct warning to the exporters, Jersey announced cuts of up to fourteen cents a barrel in the posted prices of Middle Eastern crudes—about a 7 percent reduction. The other companies followed in suit, though without any enthusiasm and, in some cases, with a good deal of alarm. (Yergin 2009, pg. 503) Page tried to warn them of the dangers nationalism in the ME poses, but Rathbone and others wouldn’t listen.
Things instantly became chaotic; the Iraqi’s took advantageous of the chaos to create a group of exporting countries, initially Venezuela and Iran, to combat the expanding reach of Nasser’s control, and to combat the Iraq Petroleum Co. which would give them much needed funding. A meeting was called and the Gulf states and Venezuela to take place in Baghdad; days later OPEC was formed. Worth noting --- Qatar didn’t join at this time although they attended. Thus the Organization of Petroleum Exporting Countries was formed “… and made its intention clear: to defend the price of oil—more precisely, to restore it to its precut level. From here on, the member countries would insist that the companies consult them on the pricing matters that so centrally affected their national revenues.” (Yergin 2009, pg. 505) Initially no one took EPEC seriously or really even acknowledged them in a formal sense. OPEC didn’t demand a lot of attention because of the large amount of surplus oil, lack of ownership of a lot of their own reserves and “exporting countries were competitors; they had to worry about holding on to markets in order to maintain revenues. Thus they could not afford to alienate the companies on which they depended for access to those markets.” (ibid)
Iraq suspended its membership after trying to take over the newly independent Kuwait; in 1961 the British rose to defend their old colony. Although the protest ended up only being temporary and the Iraqi’s stopped their venture to seize Kuwait for the time.
“Overall, the circumstances of international politics, including the dominance of the United States and its importance to the security of several of the producing nations, prevented them from challenging too directly the United States and other Western industrial counties.” (Yergin 2009, pg. 506)
There was an increasing surplus of oil accumulating along with discoveries during this time; especially in Africa led by the desperately ambitious French, in places such as Gabon, Algeria, Libya, and Nigeria. “Almost as soon as OPEC was establish, its member counties lost what had been their almost total grip on world oil exports.” (Yergin 2009, pg. 507)
In 1956 Régie Autonome des Pétroles (RAP) found oil in Algeria strengthening the French in a time of dire need, getting the first oil out two years later—which isn’t so terrible considering the desolate environmental challenges of the Sahara. A looming fear amongst the joy of finding a temporary solution to their economic problems was the current struggle for independence in Algeria. “The government’s Economic Council called for a stepped-up international exploration campaign, especially in Africa. ‘The diversification of sources of supply… is for our country an essential condition of security.’” If France lost its grip on Algeria it would likely lose the newfound oil as well. To strengthen Frances oil interest in MENA, a coalition between RAP and several other French companies was formed entitled ELF-ERAP or Elf (See Yergin for full French name)
“By 1961 companies primarily belonging to and controlled by the French state were producing oil around the world equivalent in volume to 94 percent of French demand. The next year, Algeria formally won its independence. But the Evian Agreement that de Gaulle negotiated with the Algerians guaranteed retention of Frances position in Saharan oil.” (ibid).
As more and more fields were found outside of the ME, international companies and governments realized the importance of furthering their search for oil and other resources outside of the Middle East; in order to avoid the stranglehold they knew was possible. The French, as we’ve learning thus far was particularly keen of this strategy and was quick to adapt to it. “Building upon its Algerian base, Elf launched a global exploration campaign and became not only a new major, one of the largest oil companies, but also one of the biggest industrial groups in the world. (Yergin 2009, pg. 509)
“To encourage exploration and development, the Libyan Petroleum Law of 155 provided for a host of much smaller concessions, instead of the very large concession areas characteristic of the Persian Gulf countries.” (ibid) This was made in this particular way to encourage a multitude of independent companies to explore and drill instead of being at the mercy of one mega-company; inciting quick discoveries, which is exactly what the Libyan government so desperately needed. Of course there were setbacks such as millions of mines remaining from WWII. Although things initially looked bleak, in April 1959, Standard Oil Co. of NJ found oil in Zelten, by two years later ten fields were already found, producing “…very high-quality “sweet” (i.e. low-sulfur) crude.” (Yergin 2009, pg. 510)
The location of Libya also was extremely beneficiary; neither requiring the painfully long journey around the Cape of Good Hope, or the proved to be strenuous Suez Canal. The culmination of these factors resulted in a huge success. Libya in 69’ was surpassing SA in production. In 65’ they were responsible for 10% of the world’s petroleum exports. And corruption thrived off of the combination of success of the international oil companies wanting a continuous bigger share, as well as incumbent Libyan officials.
“The flood of Libyan oil picked up where the Soviet oil left off… Between 1960 and 1969, the market price for oil fell by 36 cents a barrel, a drop of 22 percent. Correcting for inflation, the fall was even steeper—a 40 percent decline.” (Yergin 2009, pg. 511)
The US amongst these years were rapidly and to a degree were succeeding in becoming the world’s main hegemonic power, with their political and economic strength and how immensely ingrained they were in the political economics in the ME, and increasingly in North Africa. A large portion of these social relations were through American oil companies—who may have had different interest then the government—but ultimately they were supporting US hegemony.
But with the immense speedy discoveries and continuous establishment of foreign companies it was inevitable that profit would decline, especially after the Suez Canal was opened back up in 57’. “The Persian Gulf became the stabilizer, the control mechanism for balancing supply and demand.” (Yergin 2009, pg. 514) To make matters even more complicated, much of the Gulf strategy—trying to control the supply against the demand—was often disrupted by the fragile relationship between the two oil powerhouses of the region, Iran and SA. In conjunction with the social relations of the incumbent oil companies in the two states trying to further their own agendas as well, the situation was the epitome of complicated. Every action simply had a reaction. The consequential political economics of these actions was usually taken into consideration, but many groups were simply looking to make as much as possible as fast as possible; leaving the damage control to those who had more extensive relations / formations in the region: “Somehow the available growth in requirements had to be allocated in such a way that neither government would feel that the other was getting better deal.” (Yergin 2009, pg. 515)
The Shah was very persistant and aggressive in trying to further his own agenda, sensing he was in the periphal of the international government and oil companies he threatened to increase relations with the Soviets to supply his demands if his voice was not heard. And it worked “Both the American and British governments urged the oil companies to ‘do their best’ to meet Iranian demands.” (Yergin 2009, pg. 516) To make the explosive situation even more complex, Oman’s oil was ripe and ready to be extracted, with increasing discoveries. But decreasing production in SA to start operations in its neighboring country would have proved to be an audacious move unadvised by prominent figures such as Page, who were ingrained in SA’s oil politics. Fearing the reprisal on ARAMCO concessions, “But the members of Jersey’s production department disagree with Page. After all, they were geologist, and as far as they were concerned, discovering and developing new reserves were what the game was all about.” (Yergin 2009, pg 517) But they heeded Page’s advice, and Shell eventually jumped on the opportunity.
While everyone was enjoying the cheap prices of oil, US domestic independent companies saw it was a threat to the domestic industry. They were calling for a sincere raise in prices demanding enormous cuts in imports. But not everyone was on board, in particularly the international oil companies. While the President had the authority granted by congress to restrict imports of oil; he instead chose to support a more “voluntary” role on the part of importers. Which of course did not have the domestic industries desired effect, for that system to actually work efficiently almost everyone would have to comply. And fears of a growing potential antitrust case or the simple fact it’s not in the business interest not every company was going to comply. Whilst some argued increasing imports would preserve domestic supplies which would be necessary in the future. “At that very moment, the Justice Department was suing the majors under the Sherman Antitrust Act for action they had taken during the Suez Crisis in response to encouragement from other branches of the Federal government, which had been worried about shortages.”
“The recession of 1958 did in the voluntary program while oil demand dropped substantially, imports increased further, and the political pressure for mandatory controls was becoming irresistible.” (Yergin 2009, pg 517-20) After years of pressure especially that of incumbent Texas politicians rooted in prestigious positions in the government “on March 10,195, Eisenhower announced the imposition of mandatory quotas on oil imports into the United States.” (Yergin 2009, pg. 520) This limited imports to that of 9% of consumption, lasting 14 years. And as was requested the domestic oil industry was safe, and prospering from increased funds and exploration opportunities that would have been previously impossible. These eventually illuminated a previously equivocal relationship between domestic and international companies. By showcasing their ability to run domestic politics, the domestic oil companies taught the international companies a lesson they would ‘grudgingly’ heed.
Yergin, D. 2009. "The Prize: The Epic Conquest for Oil, Money, and Power." Free Press. New York, NY.
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