The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Oil:
The Jump in World Prices and the "Majors"

Nov 4, 2000

The following article was translated from one which appeared in the November 2000 issue of Lutte de Classe, journal of the French Trotskyist organization, Lutte Ouvrière. (Workers' Struggle).

At the beginning of September, a wave of protests broke out across Europe in response to rising gasoline prices. (While the same kind of organized protests did not spread into the United States, it was clear that the population was angered and shocked by the sudden jump-up in prices at the pump.) These increases, however, did not come out of the blue. They were the result of a long process which had begun in early 1999.

Indeed, in February 1999, the price of crude oil had reached a record low on the world's commodity markets below $10 per barrel (a barrel is equal to 42 gallons). Since 1986, oil had never been so cheap, although motorists never got to notice it since gasoline pump prices always go up when oil prices go up but seldom follow them down.

But then the oil price began to climb. By August 2000, it reached a peak just below $35 a barrel. In just 18 months, it had increased by 25%. Of course, such a sharp increase was not unprecedented. In 1973-74, the oil price had increased by 368% in just 12 months; and, over a period of two years in 1979-81, it increased by 178%. Business commentators even gave a name to these two brutal price hikes. They called them "oil shocks," which, by implication, was a way of blaming the oil crisis (and above all the producing countries) for the economic crisis of the world capitalist system as if the oil market were suspended in mid-air, independent from the rest of the world market!

In terms of magnitude, the current oil crisis seems to fit in somewhere between the two previous oil shocks at least for the time being. In every other respect it has the same features. And just as they did previously, the Western media and politicians are blaming this new oil crisis on "shortages" allegedly engineered by producing countries (and particularly those belonging to OPEC, the Organization of Petroleum Exporting Countries). At the same time, as in the previous crises, they are busy preparing the working class in Western countries for the idea that their cost of living is going to rise and their conditions to worsen all the fault of the oil "shock," of course, rather than the greed of the capitalists.

The Oil-Producing Countries Convenient Scapegoats

We should remember that in both 1973 and 1979, the newspapers and many politicians launched a violent campaign against the OPEC countries, and more specifically against the Arab countries belonging to OPEC, accusing them of "taking the West hostage" in order to impose their rule. With arguments completely lacking in credibility, this campaign went so far as to appeal to racist prejudices.

What did happen to push the prices up during these two oil shocks? In 1973, a number of Arab members of OPEC had threatened an oil boycott against the countries which supported Israel too openly during the Yom Kippur War, but this boycott was rarely implemented and did not last long.

The most that one could say is that both times the OPEC countries tried to use a situation which, for once, was favorable to them, limiting their oil production, albeit with uneven success in an attempt to get a higher price for their oil. Ironically those who, at the time, had the nerve to criticize the OPEC countries' "greed" for trying to use an unusually favorable relationship of forces to their advantage, also happened to be enthusiastic supporters of the capitalist world market, that is of an economic system based on the law of the jungle! But how could anyone blame the oil-producing countries, whose only source of income was and still is oil, for trying to make the best of it?

Oil prices in 1971 were 40% lower in real terms than they had been in 1948, due to the U.S. inflation. And this did not take into account the worsening of the terms of trade at the expense of the Third World, which is a permanent feature of the capitalist market. Third World oil-producing countries had every reason to want to regain some of the ground they had lost, which is what they did to some extent in 1973. However, the following years saw an explosion of world inflation and monetary instability. As a result, the gains made by the oil-producing countries in 1973 were soon eroded. The price increases introduced from 1979 onwards were merely an attempt to make up for the losses of the previous few years.

However, neither in 1973 nor in 1979 was OPEC the real master of the game. The price increases were decided and masterminded by the only real worldwide oil monopoly the cartel of the largest oil companies, the "Seven Sisters" or "Majors," as they were called.

It may have seemed at the time that the grip of the Majors over the oil-producing countries had been reduced by the wave of nationalizations of oil-related activities which started in Algeria in 1971, then eventually spread to all OPEC countries. But it was merely an impression. If regimes subservient to imperialism and to the oil companies like the Shah's regime in Iran and the ruling monarchies of Saudi Arabia and Kuwait followed the example of Algeria, this showed that the oil Majors saw advantages for themselves in these nationalizations. In most of these countries, the oil companies traded their share of the national oil companies against long-term contracts which guaranteed them a large, regular flow of cheap oil, shielded from the ups and downs of world prices. These nationalizations allowed the Majors to get the states of the oil producing countries to share the cost of the investment required for oil production as well as the cost of the fluctuations of the oil market. But in addition, the Majors were soon able to get the states to pay them for providing services such as carrying out exploration projects, developing new fields and even managing them.

The "Majors" in the Previous "Oil Shocks"

To all intents and purposes, therefore, the OPEC countries remained entirely dependent on the oil Majors, who ultimately controlled everything: the technology and equipment required for oil exploration and production, the means of transportation, the refineries and the commercial networks. The oil revenue of the producing countries depended entirely on the goodwill of the Majors, and few of their leaders would ever have considered a direct confrontation with them.

Of course, the oil-producing countries did get increased revenue out of the higher oil prices. But it was the Majors who took the initiative of pushing the oil prices up for their own reasons. As long as they relied on oil coming only from OPEC countries, where the relationship of forces allowed them to impose very cheap production costs, low oil prices did not affect the Majors' profits. But elsewhere, particularly in the industrialized world, the oil companies were confronted with capital's usual problem the tendency of the rate of profit to fall. There were massive oil resources to be tapped, in the North Sea, Alaska, the Gulf of Mexico, etc., but they all involved enormous investment and high production costs. The only means for the Majors to extend their activities in those fields while maintaining their rate of profit was to impose a big increase in crude oil prices. This is precisely what they did, first in 1973, then in 1979.

In carrying out this operation, the Majors benefitted from the support of the American state. The leaders in Washington jumped at the opportunity to increase U.S. oil production, which had been handicapped for so long by high production costs that rendered it unprofitable, or even created deficits.

At a more general level, Washington was ready to support the increase because the two oil shocks did not benefit only the Majors. All the big companies profited since the bulk of the supplementary profits which went to the producing countries came back into the imperialist countries to pay for what the oil producing states ordered, in particular, military goods. They also came back in the form of "petro-dollars," as they were called, that is, investments in Western financial markets.

A Threat of "Shortages"? Not Due to OPEC in Any Case

In September 2000, the Western media launched yet another campaign along the same lines as the ones of 1973 and 1979. They blamed the sharp increase in oil prices on a deliberate cut in oil production by the OPEC countries a cut which, according to the media, was threatening the western world with "shortages." Once again the "cartel" of oil-producing countries was blamed for what was happening.

Yet if OPEC demonstrated anything in recent years, it was precisely its impotence: its inability to act as a "cartel." It was not even able to fulfil the essentially defensive role for which it had been set up forty years ago that is, to prevent the oil companies from increasing their looting of the oil-producing countries by playing them off against one another.

OPEC's failure can be measured in several ways. The first is the evolution of the purchasing power in dollars of a barrel of oil: in February 1999, this purchasing power fell below its pre-1973 level; today, despite the oil price hike, it is still below its level during the whole period running from 1974 to 1985. And this doesn't take into account the fact that OPEC countries usually sell their oil much below market prices. So despite OPEC's efforts, it has failed even to maintain the purchasing power of its members.

Another measure of OPEC's failure is provided by the relative evolution of its oil exports. Between 1974 and 1997, the dollar value of OPEC's oil exports increased by 41%. But over the same period, the dollar value of all exports throughout the world increased by 600%. So by 1997 although it was a relatively good year for the oil market OPEC's oil exports were down to 2.9% of world exports compared with 14.4% in 1974, and this despite a significant increase in volume. In other words, far from being a "cartel" which has the necessary weight to impose its will on the rest of the world, OPEC's economic weight has actually shrunk. To give an idea of how much, in 1997 the value of oil exports coming from the OPEC countries, which have a population of 500 million people, was less than the value of the exports coming from Belgium, whose population is scarcely 10 million people.

It is difficult to see how the OPEC countries would have been able to generate the present price hike when they were unable to stop losing ground during the previous period. And the unfolding of events since the end of 1997 proves this point.

By the second quarter of 1997, there were already warning signals that some sort of crisis was about to break out in Southeast Asia. In particular, oil orders from this region which is a big customer for Middle Eastern oil producers began to shrink, resulting in a moderate fall in oil prices. As a result, a number of OPEC countries (Venezuela and Nigeria among others) decided to increase their oil production beyond the quotas defined by OPEC in the hope that they would be able to maintain their total revenue. When OPEC ministers met in Jakarta in November 1997, they were unable to get a commitment from member states to stick to the previously agreed quotas. So it was decided that, in order to maintain some cohesion within OPEC, the quotas of the offending countries would be increased to their actual production, but this only pushed prices further down.

In 1998, oil prices continued falling due to reduced demand from Southeast Asia, which was by then deep into a recession caused by the financial crisis. Twice, the OPEC council decided to reduce its members' quotas, well below their pre-1997 levels hoping that less oil on the world market would stabilize world prices. But it did not work. All the more so since, as oil prices went on falling, a number of OPEC countries, particularly the poorest, which were being literally strangled, exceeded their production quotas.

Oil prices went on falling until February 1999 when, suddenly, they started going up again without OPEC having done anything about it. The following month, OPEC ministers decided to reduce their production in the hope that this would consolidate the new trend and push oil prices further up. But prices started falling again in May, the fall lasting until August, when another period of increases began, once again without OPEC having intervened at all. The following twelve months saw a long series of hectic ups and downs, leading eventually to the present record price level which has been more or less stable since last fall.

Significantly, neither the decision made by OPEC, in March 2000, to decrease production automatically whenever oil prices stayed below $22 or increase them when they got above $28 a barrel for over 20 days, nor the four production increases decided by OPEC since, seem to have had the slightest influence on events.

The "Majors" and the Shortage of Refined Fuel in the U.S.

If the problem really were one of oil shortages in the West, it would be easy for the Western governments to find a solution. After all, four industrialized countries the USA, Canada, Norway and Britain among themselves produce one-quarter of the world's oil. The eleven OPEC countries produce just over one-third. And while the OPEC countries do not always have the material means to increase production quickly, these four rich countries could have done it easily if only by reactivating the many wells where production has been suspended in the USA and the North Sea when oil prices were low. So far, many of these wells are still idle.

In fact the only measure which was taken by these four countries' governments was Clinton's decision, announced at the end of September 2000, to sell 330,000 barrels of oil a day for 90 days from the U.S. Strategic Petroleum Reserves. But this was only nine percent of the production increase implemented by OPEC during the year, and only five percent of the daily U.S. production. In fact, this announcement was much more aimed at reinforcing the electoral prospects of Vice President Gore, who just a few days earlier had called for this move, than it was aimed at reducing any oil shortage.

To say the least, the Western political leaders, who were so vocal in their attacks on OPEC for orchestrating shortages, displayed a shocking lack of conviction when it came to countering the alleged "shortages." Of course, the Majors did nothing to help them counter the shortages.

While there has been no evidence so far of an actual shortage of oil supply on the world market, the fact is that the oil companies provoked a shortage of refined products essentially fuel oil and gasoline in the U.S. market. This resulted from their policy of systematic concentration and cost-cutting in the sphere of refining during 1998 and 1999.

Here again, it was essentially the Majors, or the companies which they control in more or less hidden fashion to dodge anti-trust regulations, which directed the game. Their policy has resulted in the closure of many refineries something which was facilitated by Clinton's decision to impose new pollution standards for gasoline. This decision benefitted the larger companies, since they were the only ones who could afford the cost of adapting their refineries to the new regulations; many of the smaller independent refineries were forced to close down.

At the same time, cost-cutting was implemented by means of a drastic inventory reduction. By the end of 1999, total oil stocks in the USA dropped to their lowest level in several decades to the equivalent of 47 days consumption, compared with 56 in 1998 and an average of 67 over the 1970s and 80s. As a result, in January of 2000, some areas experienced shortages of heating fuel, which were immediately translated into rocketing prices. Then, from June onwards, there were reports of gasoline shortages, to the point that in some cases as in St. Louis the Federal authorities allowed the temporary suspension of anti-pollution regulations so that "dirty" gasoline could be sold at the pump. Probably they preferred to have a row with the Green lobby rather than a confrontation with irate motorists, who were already incensed by rising gasoline prices!

The Role of Speculation on Oil

Some oil market experts, although openly supportive of the system, are saying today that the main cause of the present oil price hike may well have been this artificial shortage of refined products in the USA, combined with the refining industry's "just-in-time" policy, which reduces oil stocks to a bare minimum, and a shortage of oil tanker capacity worldwide, with all of these factors being the result of reduced investment. They add that the mechanism which translated these imbalances into rising oil prices was financial speculation.

In a review of energy industries published in September 2000, the Financial Times remarked: "Some traders say an unprecedented degree of irrationality has emerged which has made ordinary market analysis irrelevant. Traders in physical oil see no shortages as they assess the energy markets around the world, but on the oil futures market in London and New York, a psychologically-fueled exuberance dominates the virtual world of paper trading."

Indeed, like any other commodity, oil is an object of speculation. This is nothing new. The fact that there were speculators who were prepared to risk funds in gambles over future changes in oil prices has provided traders in real oil with an insurance to protect themselves against unexpected market tremors for example, while a cargo of oil is being transported from one point of the globe to another.

Until the 1980s, the role played by oil futures markets was mostly regional and for small traders. Most big international deals were made within the framework of long-term contracts, often directly between the producing countries' states and the Majors, which guaranteed the stability of prices over the duration of the contract. In addition, many of these contracts provided as is still the case today in contracts made with Saudi Arabia, for instance that the oil involved could go only to a particular refiner and could not be resold to anybody else. As a result, intermediate traders dealt only with a relatively small proportion of the world's total production. The London oil futures market was primarily used by traders operating in Europe from the oil terminal located in Rotterdam and its index, the so-called "Brent crude," was used as a benchmark for oil prices within Europe. Just as the "WTI crude" (West Texas Intermediate) was the benchmark set by the New York oil futures market, which was used by traders operating in the U.S. market.

However, since then, many things have changed. As North Sea oil was bought and exported by traders to other parts of the world, the London oil futures market became an international market. The mushrooming of Third-World oil producing countries, which were too weak to impose any conditions on the Majors, allowed the Majors to auction off more oil to traders rather than deliver it to refiners. Overall the volume of oil traded outside long-term contracts increased considerably. Last, but not least, the rise of financial speculation in the 1990s resulted in the availability of massive amounts of floating capital ready to flow towards the oil futures markets, should they offer the prospect of making a quick buck. One should notice that the Majors themselves took advantage of this situation to put huge amounts of cash into this game of betting on other people's oil.

When oil prices began to react to the spells of increased tension between the USA and Iraq in the period following the Gulf War, this floating capital rushed to the oil futures market to benefit from the new instability. Since 1998, a speculative bubble began to develop on these markets. It is likely that, at the beginning, this bubble played a role in accelerating the fall in gasoline prices but then, after March 1999, in accelerating their movement upwards, as speculators anticipated a rise in oil prices on which everybody wanted to gamble. At the beginning of 2000, the shortages in U.S. refined products brought this speculative anticipation to new heights. It got to the point that, as the chairman of the French oil companies' organization explained in a recent interview, "today the market of paper-oil' is worth around six trillion dollars, as opposed to 800 billion for the physical oil' market" as if, he added, "every oil cargo was traded eight times before it reached its destination." No wonder such a speculative wave should have generated such wild price fluctuations, regardless of the real situation of oil production.

The "Majors" and the Oil Price Explosion

Not only did the Majors facilitate the recent oil price hike, for example by organizing shortages of refined products in the USA, they also prepared themselves to make the best of this hike.

But first, who are these Majors today? There were seven of them in the 1970s; there are only five of them today: Exxon-Mobil, BP-Amoco-Arco, Shell, TotalFinaElf and Chevron-Texaco, with the latter still in the process of completing a merger. As their names indicate, all of them, with the exception of Shell, are the result of a series of mergers and acquisitions. In fact these five giants result from the regrouping of 17 large companies which were still independent at the beginning of 1998.

Indeed, 1998-99 saw a colossal wave of concentration in the oil industry. True, this was also the case in just about every other industry. But the fact that this affected oil as well was all the more remarkable because this industry was already one of the most concentrated, with the last sizeable merger having taken place back in 1984.

Almost as soon as the financial crisis broke out in Southeast Asia, the Majors' investment programs underwent a drastic review. From the end of 1997 on, exploration programs were scaled down or cancelled, exploitation projects were postponed, particularly in areas of high production costs that is mostly in the industrialized countries and the least profitable facilities were mothballed or closed down, particularly in the North Sea and the USA.

It was one thing for the Majors to protect their profits against the fall of oil prices, but quite another to prepare themselves for a future rebound of oil prices. To this end they had to at least maintain, and if possible increase, the size of the oil reserves they controlled, but without devoting to this the large investment usually needed for exploration programs. These requirements were the starting point of the wave of mergers and acquisitions which began in 1998, when BP became the leading partner in a merger with the U.S. company Amoco. The same year Exxon followed suit by absorbing Mobil. These operations allowed economies of scale (mostly achieved by cutting the workforce) while creating industrial giants which were powerful enough to force a reshuffle of the existing hierarchy among the Majors. But above all, these mergers allowed the predators to acquire the oil reserves of their prey without having to make any investment, since the over-abundance of capital on financial markets made it possible to finance most of these deals just by issuing new shares there was no need for the Majors involved to use their war chests or reduce their future investment capacity.

Once started, this wave of concentration had a snowball effect, since none of the rival Majors wanted to find itself falling behind the others. So it went on long after oil prices had begun to rise again, until the announcement of Texaco's absorption by Chevron in October of 2000. It may continue further since Shell makes no mystery of its ambition to find partners in order to regain the ground it has lost to its arch-rival, BP-Amoco.

This being said, the rise of oil prices, starting in March 1999, did not result in a resumption of investment by the Majors with only one exception, a significant one, however: the Majors resumed buying exploitation rights for proven oil reserves. But at the same time, they went on cutting productive investment, so that, by the end of 1999, the total number of active wells in the world dropped to 32,000, compared with 52,000 at the beginning of 1997. They also went on cutting investment in exploration, thereby failing to replace what was being extracted, so that in the industrialized countries of the Organization of Economic Cooperation and Development, proven oil reserves went down by 20% compared with the previous year, while there was an 11% drop in non- OPEC Third-World countries.

And yet, in 1999, all the Majors had registered increased profits thanks to rising oil prices. And this trend was reinforced in 2000, when in the first six months, Exxon-Mobil increased its profits by 116% compared with the first six months of 1999, BP-Amoco by 198%, Shell by 120%, TotalFinaElf by 165% and Chevron-Texaco by 120%.

Of course, the Majors make profits in every sphere of the oil industry exploration, extraction, transportation, refining, production of oil derivatives and wholesale and retail sales. But it is worth noting that, despite the usual claim that oil prices rise only to satisfy the "greed" of Third World oil producing countries, the Majors' own figures show that no less than 80% of their profits come from oil production, whereas production creates only 20% of their revenue. Although the profit figure of 80% may be slightly inflated for tax purposes, this enormous gap nonetheless underlines how small a share is left to the producing countries themselves. Rather than speak of the greed of the producing countries, as the media shamelessly do, they should be speaking about the greed of the oil companies.

Despite their hugely increased profits, the Majors have only begun to make any change in their investment policy, and that a very timid one. In the USA, some wells were reactivated once they became profitable again due to higher oil prices but only the ones which required small investments. At the same time, BP announced its intention to start developing the Clair oil field, Britain's largest undeveloped field in the North Sea, which was discovered 20 years ago but remained untapped due to the large investment it required. However, BP's announcement remains an exception. Exxon-Mobil, for instance, stated in April that it did not intend to invest more in 2000 than in the previous year.

In any case, the Majors' main field of investment remains that of buying proven reserves and oil fields which are already producing oil either by buying shares in existing companies or by setting up joint ventures with them, as they do in China and in the countries which used to be part of the former USSR.

Obviously the Majors are not eager to gamble on oil prices remaining at the present high level nor on taking the risk of pushing these prices down through a significant increase in oil production. But this should not come as a surprise: after all, the fact that they have a de facto monopoly on the world market rests on their ability to maintain a certain level of shortages.

The "Majors" Tighten their Grip on the Poor Countries

Despite scathing attacks against Third World oil-producing countries, the present oil crisis is being used by the Majors to increase their plunder of the poor countries.

After World War II, it took over three decades for these countries to get the Majors to give up the quasi-colonial control they had over the countries' oil resources, their economies and, often, their governments. In the 1950s and '60s, in the Middle East, Northern Africa and Southeast Asia, the privileges of the Majors were at the center of many conflicts in which imperialism intervened, sometimes directly with the full might of its military machine (as Britain did in Palestine and Malaysia, and France in Algeria) and sometimes from behind the scenes (as the USA did in engineering coups in Iran and Iraq in the 1950s).

In most cases, decolonization and the military withdrawal of the former colonial masters did not change much in the situation inherited from the past. It was only in the 1970s that some countries, particularly in the Middle East, were able to gain some concessions from the Majors first, getting them to agree to pay taxes on the oil they produced, and then bringing all oil production and reserves under the control of state-owned companies. When it came to the issue of compensation, the Majors did some tough bargaining, but they did not object in principle, partly because the political instability in the Middle East excluded the option of resorting to military means, but mostly because the compensation they won ensured that their profits would be unharmed.

Not all oil-producing countries were able to gain such concessions or to profit from them. The poorest countries remained subjected to the overt dictatorship of the Majors, as was Gabon, under the thumb of TotalPetroFina. Elsewhere, as in Nigeria, the new state-owned companies played little role except that of a channel used by the Majors to corrupt the ruling clique. However, in some oil-producing countries in the Middle East, Southeast Asia and South America, the nationalization of oil allowed them at least to restrain within certain limits the looting of their natural resources by the Majors. Nationalization also provided these countries with a more significant share of the revenue generated by oil exports.

However, even these limited gains have been put in question by the Majors since 1998, due to the impoverishment of most producing countries.

These countries are no longer the wealthy exporters of petro-dollars talked about in the 1970s and '80s. They have all been affected by the falling purchasing power of oil. It is estimated that in 1998-1999 alone, the OPEC countries took in 82 billion dollars less than they did in 1996-97. During the same period, the economies of producing countries such as Indonesia, Brazil and Venezuela were deeply shaken by the financial crisis in Southeast Asia. In the Middle East, the bill presented by imperialism to the countries that had been drawn to its side in the Gulf War together with the rearmament policy forced on these countries by the USA have crippled their budgets and increased their debt. Even Saudi Arabia, the world's largest oil producer, now has a debt estimated at 130 billion dollars, larger than its GDP.

Lacking funds, most Third World oil-producing countries are no longer able to finance the huge investment required for exploring and developing new oil fields. Nor do they have the funds to buy the advanced technologies and expensive equipment required for offshore production. They can no longer afford to hire the services of the Majors. Worse, they need the Majors' help to fund at least some of the necessary investment. Thus, production-sharing agreements, whereby the Majors get a proportion of the oil produced as a payment for their services or investment are beginning to reappear in countries where they had not been seen for a long time, such as Iran. Elsewhere, as in Saudi Arabia, the state companies are seeking ways to exchange some of their property rights over oil reserves for funds provided by the Majors to develop new oil fields. And in several countries like Brazil, the United Arab Emirates and even Kuwait privatization of the state oil companies has begun.

The capitalist crisis in general, and the present oil crisis in particular, are in the process of dismantling, one after the other, the limited barriers which once existed in these countries against looting by the companies based in imperialist countries. But who actually cares? Certainly not the politicians and the media here, who will go on accusing these same countries of "taking the world hostage"!

As to predicting today how the increase in oil prices if it persists will affect the world economy, this is nigh impossible. Likewise, although it seems obvious that the present oil crisis is a manifestation of the general crisis of the capitalist system, it is impossible to say whether it reflects a deepening of this general crisis or which direction this deepening might take. Only the future will tell. What is clear, however, is that due to their growing monopoly and gigantic size, the Majors represent a growing, permanent threat for the world economy and for the populations subjected to their racket, in the poor countries as well as in the rich countries a threat which will only disappear with the disappearance of the capitalist system itself.