Middle East Oil Crises Since 1973

Benjamin Shwadran

• Editorial: Routledge
• Año: 2019
• ISBN:
  9780429717871
• Edición: 1
• Categoría: Politics & International Relations
• Categoría: Middle Eastern Politics

The production and consumption of oil has emerged as a major factor in international economics in general and in regional and national development in particular. The struggle for access to oil and gas resources has become even more fierce, affecting the long-range strategic planning of the superpowers and causing a shift in the world balance of trade. Middle East Oil Crises Since 1973 is the logical sequel to Dr. Shwadran's classic, The Middle East, Oil and the Great Powers. In this new work, Dr. Shwadran delineates the changes in the power equation, the political atmosphere, and the resources of the participants since 1973. He marshals persuasive evidence to show that economic forces, narrow vision, and the absence of strategic planning were the major contributing factors for the oil crises of the past decade, rather than the Arab-Israeli war.

1
Introduction: 1901-1971

The development of the oil industry in the Middle East in the first seven decades of the twentieth century is marked by three major struggles. First was the battle among the powers—Germany, Great Britain, the Netherlands, France, and the United States—to obtain concessions in the area. The most outstanding contest was among the major international companies to eliminate rivalries and competition and establish an international cartel of oil supplies and prices (although the effort to unite against outside obstacles was a common objective). The third struggle, perhaps the longest, most persistent, and most decisive was the one between the oil-producing countries and the foreign companies. These struggles were not chronologically separated and will therefore be treated collectively and simultaneously.

The Struggle for Concessions

The general pattern of development of the Middle East oil industry was through exploitation concessions granted by the ruling authorities to foreign companies. The first major concession was obtained in Iran (then Persia) by William Knox D'Arcy in 1901. Subsequently the concession became the Anglo-Persian Oil Company in which the British government became a majority owner. Anglo-Persian (later Anglo-Iranian) remained an exclusively British company until 1954.

The contest for the concession in the territory that is now Iraq and was then part of the Ottoman Empire began during the first decade of the century. The British, German, Dutch, and Americans were vying for the concession. The three European nations united and, through their influence on the Turkish government, eliminated the Americans and obtained the concession, which became the Turkish Petroleum Company. The British obtained about 50 percent, the Dutch about 25 percent, and the Germans about 25 percent. After World War I the United States demanded a share in the spoils of war. After long and acrimonious charges and countercharges between the British Foreign Office and the U.S. State Department, the Americans were given a share of about 25 percent from the British share and the German share was transferred to France. In 1928 the Turkish Petroleum Company became the Iraq Petroleum Company (IPC).

In 1930 Standard Oil Company of California (Socal) obtained the Bahrain concession, the first full U.S. concession in the Middle East. Three years later the same U.S. oil company, because of better and more venturesome business tactics, outsmarted the British oil companies and acquired the concession in Saudi Arabia. In 1934, after protracted and difficult negotiations between British and U.S. oil companies and diplomats, the Kuwait concession was granted to an equal partnership of the U.S. Eastern Gulf Oil Corporation and the British Anglo-Iranian Oil Company. Finally, in 1954 the Anglo-American rivalry for Middle East oil concessions came to an end when the U.S. oil companies were given 40 percent of the Iranian concession, now nationalized and organized as the International Iranian Oil Consortium. The Americans emerged from this long struggle as the owners of the lion's share of Middle East oil resources: 100 percent in Bahrain and Saudi Arabia, 50 percent in Kuwait, 40 percent in Iran, and 25 percent in Iraq and in all affiliates of the Iraq Petroleum Company operating outside Iraq.

The Struggle for Control

The first move by the oil companies to control oil production in the Middle East was made in 1914 by the three partners in the Turkish Petroleum Company in the "Red Line" agreement. In it the three partners obligated themselves not to seek oil concessions in the territories of the Ottoman Empire except jointly through the company. When the Americans became partners in the company the U.S. government objected strenuously to this monopolistic restraint of trade, which was a violation of U.S. antitrust laws. Yet, after years of discussions and deals, the United States condoned the provisions of the Red Line agreement. In 1928 the U.S. companies, Standard of New Jersey and Standard of New York, became equal partners in their new Near East Development Company and thus in the 25 percent U.S. share in the Iraq Petroleum Company, which it held.

The second, more inclusive move of the international oil companies was the Achnacarry "As Is" agreement (so called because the companies agreed to leave things as they were). Meeting in Sir Henri Deterding's castle in Scotland, representatives of Standard Oil Company of New Jersey, Anglo-Persian Oil Company, and Royal Dutch-Shell Oil Company signed an agreement on September 17, 1928, which set up six basic principles for the conduct of the oil companies. Its aim was to control world oil supplies, to eliminate competition, and to maintain prices—in other words, to become an international oil cartel. Over the years other major international oil companies joined the "As Is" group.

As the international oil companies entrenched themselves in the Middle East, they operated in accordance with the principles of the "As Is" agreement. Because the general clamor of all the Middle East producing countries was for ever-greater production levels, the companies had to decide, after assessing the size and importance of their respective concessions, from which country to restrict production in order to regulate the world oil trade. Saudi Arabia and Iran were the two largest producers, and they had been rivals as to who was first in production rate. The companies dared not offend either of them; the victim therefore was Iraq. Iraq Petroleum Company systematically held down production by misrepresenting drilling results. It was discovered in 1974-1975 that IPC drillers had found wildcat wells capable of producing 50,000 barrels of oil a day, but the wells had been plugged and had not been classified at all. Company representatives denied any knowledge of this, while Iraq constantly charged that IPC was deliberately holding down production in Iraq and increasing production in Iran. In fact, the rates of growth of oil output during 1958-1972 for Iraq and Kuwait were 5.12 percent and 5.93 percent respectively, less than half the rates for Saudi Arabia and Iran. Indeed, a U.S. State Department memorandum in 1964 supported the Iraqi contention that IPC had been using Iraqi oil production as a control mechanism to regulate the world market rather than increasing Iraqi production for the benefit of Iraq.

The question of control of production and prices also affected intercompany relations. During 1943-1945, Aramco (Arabian-American Oil Company) of Saudi Arabia, owned jointly by Standard of California and Texaco, had been frustrated by the other U.S. majors in its efforts to obtain U.S. government support in building a pipeline from Saudi Arabia to the eastern Mediterranean, or even a refinery in Saudi Arabia. It found itself with an abundance of oil from the fabulous new Saudi resources. Two options were open to the partners: either underprice the oil and develop new markets, or unite with the other U.S. majors who had markets but were supposedly short of oil supplies. One member of the Board of Directors of Standard of California favored the first alternative. He believed that the two original owners of Aramco, whose marketing outlet was Caltex, could build up world markets by lowering the price (production cost was less than ten cents a barrel). From this proposal it is obvious that Aramco was not then a member of the international cartel.¹ However, the other US. companies exerted pressure on the board, and in 1946 Standard of New Jersey and Standard of New York were permitted to buy shares of 30 percent and 10 percent, respectively, of Aramco. They paid very handsomely for their 40 percent share in the company. It has been suggested that the interlocking financial interests of both Standard of New Jersey and Standard of California brought about the merger.

For the two new companies to join Aramco they had to break out of the restriction of the Red Line agreement. At first it looked as if there would be an open row among the international companies. Some of the other IPC members sued the two U.S. companies in a British court. Apparently, to avoid washing their dirty linen in public the plaintiffs withdrew their complaint, and the companies were permitted to join Aramco. The Red Line agreement died. Intra-Aramco company difficulties, however, soon developed. It appeared that the new companies did not need as much oil as they had appeared to need at first. Their primary purpose in buying into Aramco had been to prevent the original partners of Aramco from selling their oil in the international market below market price. Aramco operated as a nonprofit company; the two members were charged production costs and made royalty payments to the Saudi government. The new partners insisted that Aramco become a profit-making concern and charge members the going price of oil. The profits would then be divided among the partners according to their equity shares. The newcomers were underlifters, that is, they lifted less than their percentage share in the company, for they were not in great need of additional oil supplies. The original partners became overlifters, lifting more than their equity shares. Yet, the division of profits was according to equity shares. The newcomers' profit shares were greater than the original partners at the expense of the latter. This situation created constant friction between the partners, even after 1951, when the 50/50 profit-sharing arrangement between the producers and the companies was instituted.

Through the merger of Socal-Texaco with Exxon-Mobil (formerly Standard of New Jersey and Standard of New York), all four of these major U.S. companies became integral members of the international oil cartel. In 1952 the U.S. Federal Trade Commission staff report, The International Petroleum Cartel, revealed the existence of this international cartel, in violation of U.S. antitrust laws. On the basis of this report the U.S. Justice Department in 1953 instituted criminal proceedings against the U.S. companies through a grand jury investigation.

The Struggle between the Producers and the Companies

The concessions granted by the producers to the foreign companies were very broad and sweeping, covering countrywide areas and granting extraordinary privileges, facilities, and advantages. In return, the oil-producing countries received rather limited benefits in the form of either 16 percent of the profits or 4 to 6 shillings per ton of oil produced. The differences in general knowledge and development, political experience and maturity, economic and financial resources between the awarders of the concessions and the receivers determined both the nature and contents of the contracts and relations between the two groups. The foreign companies possessed the technical ability to develop the industry; they had the financial means to operate and expand it; they owned the refining and transportation facilities and the markets to dispose of the oil produced; they had the best legal advice; and they had powerful home governments, which in some cases were partners in the undertakings, to back and protect them. The countries that granted the concessions possessed, at first, neither technical knowledge, financial resources, refining and transportation facilities, nor markets for the products; above all, they had no political or other power to back up their demands. The inevitable result was total and exclusive control of the industry by the foreign oil companies.

The history of relations between the oil-producing countries and the concessionaire companies was of a struggle between the two, the nature of which, over the decades, was determined by the progress made by the producing countries in the areas listed above. When, for instance, Shah Riza of Iran comprehended the contents of the concession granted by his predecessors, he pressed the Anglo-Persian Oil Company for modification of the concession. In 1931, when negotiations with the company failed, he cancelled the original concession but did not nationalize the oil industry. Finally, better terms were offered that limited to some extent the powers and privileges of the company, and the Shah issued a new concession. Between 1933 and 1973, the oil-producing countries made greater demands, and with the changes in world political, economic, and financial conditions, the oil companies conceded new and better terms to the oil-producing countries.

Equal Profit Sharing

An important milestone in the struggle between the oil companies and the oil-producing countries was reached in the early 1950s. The postwar aspirations of the small and newly established nations for greater importance and power encouraged the oil-producing countries to increase their demands. At the same time, the Marshall Plan for the rehabilitation of Europe and Japan had increased tremendously the demand for Middle East oil, a major element in the plan. The result was a new pattern of payments for oil: a 50/50 profit-sharing arrangement between the companies and the producers.

The chain of events that led to this far-reaching change reveals the relations of the major U.S. oil companies with the U.S. government and the tactics used by the companies to gain their ends. The major U.S. oil company operating in the Middle East was the Arabian-American Oil Company (Aramco), which owned the concession in Saudi Arabia—the largest oil-rich concession in the world. From 1941 to 1943, Aramco had successfully convinced the U.S. government of the vital importance of the Saudi Arabian concession to the national interest and security of the United States and its allies. So thorough was the job done by the Aramco representatives that the United States was ready—indeed, anxious and determined—to take over the entire concession. At this, of course, the company stopped short, and the U.S. government was powerless to force the company's hand.

Ever since the beginning of the competition between the Soviet Union and the West for the control of the Middle East, even as long ago as during World War II, the State Department had been working hand in hand with the oil companies. On September 11, 1950, the State Department invited the major U.S. oil companies to discuss means of stabilizing U.S. oil operations in the Middle East in view of the rapidly increasing threat of Communist aggression. Company representatives were handed a policy paper that concluded with the assertion that the U.S. oil companies played a vital role in the achievement of U.S. foreign policy objectives. Royalty payments by the companies to the oil-producing countries provided the economic base for the stability of the Gulf oil states and guaranteed the oil supply on which the economic, political, and strategic security of Europe depended. The State Department urged the companies to sweeten the financial terms of their contracts with the Middle Eastern governments in order to keep their concessions.

In order to facilitate this role of the oil companies in U.S. foreign policy, new agreements would have to meet the demands of both the oil-producing countries and the oil companies and also free the U.S. government from the need to extend direct aid to those countries. How to do this was obvious—increase oil-company payments to the producing countries. Existing payments were in the form of royalties that were reported as expenses on the oil companies' U.S. income-tax returns. Should Saudi Arabia, for example, impose an income tax on the companies, it would receive a much higher revenue and the companies could then receive foreign-tax credit, dollar for dollar, on their U.S. tax returns. The only loser in this arrangement would be the U.S. taxpayer; this even the State Department admitted.

Article 21 of the 1933 Saudi Arabian concession provided that the company (Aramco) and its operations were to be exempt from all direct and indirect taxation. For Aramco, therefore, agreeing to an income tax would be surrendering this established right. Moreover, the possibility that "a change in the United States income tax law might reduce the privilege of deducting such a tax as a foreign tax credit,"² could place Aramco in a difficult position, as Saudi Arabia would surely resent any corresponding reduction in an established tax. Aramco was not ready to give up its rights without obtaining an ironclad guarantee that it would be fully protected. However, the U.S. government was apparently determined to change the royalty system to an income-tax system. In 1948, with the approval of the U.S. ambassador, a Treasury Department official (sent to Saudi Arabia to advise on monetary policies) explained to Saudi officials the difference between royalty and income tax.

Meanwhile, negotiations continued between the State Department and Aramco representatives. Aramco expressed doubts and hesitation, but the State Department urged acceptance of the new policy. The issue came before the National Security Council. Former assistant secretary of state for Near Eastern affairs, George McGhee, testified: "The Department, through the National Security Council, made known its views on the overall political situation, and in the Council the U.S. policy was put together which led the Treasury Department to making the tax credit concession."³ On December 30, 1950, Aramco agreed to give Saudi Arabia a 50/50 profit-sharing tax.

The immediate results of this move were summarized by the Senate Subcommittee on Multinational Corporations: "In 1950, Aramco paid the United States $50 million in income taxes; in 1951, the company paid only $6 million. Conversely, payments to the Saudis increased from $66 million in 1950 to almost $110 million in 1951. In 1952, the net tax paid by Aramco to the United States Treasury amounted to less than $1 million. In each of the years since that time the credit has completely offset United States income tax."⁴ Subsequently, all the other Middle Eastern oil-producing countries adopted the income-tax system. The British and other home governments adopted the policy of giving foreign-tax credits in order to maintain the co...