Dec 31, 1980
Today, despite the current glut of crude oil, we are once more hearing predictions of a new oil shortage and of another round of price increases. Both the shortage and the price increases are attributed to the destruction of oil fields and refinery facilities caused by the Iran-Iraq war; in addition, OPEC’s control over the oil supposedly makes it likely that OPEC will unilaterally decide to raise prices once again.
Can there already be another shortage? Does OPEC really control the oil resources of the world?
In order to answer these questions, it’s useful first to look at what happened during the last 2 rounds of price increases, which were also supposedly the results of shortages of crude oil shipped by OPEC or OPEC’s decision to raise prices.
In 1978-79, U.S. consumers endured the second energy crisis to hit in one decade. The news media, oil companies and government all blamed the Iranian revolution and OPEC for a supposed oil shortage and the quickly rising gasoline and fuel oil prices. But was there really an oil shortage?
If there was, it certainly appeared on short notice. Only a year before the supposed shortage, the Oil and Gas Journal had been complaining about a glut of oil: “record crude oil production during the first half of 1977 has virtually flooded non-Communist markets. Crude stockpiles in the United States and Europe are nearly brimming. Tankers are slow-steaming on the high seas to delay oil deliveries, and many are lying idle in or near ports, unable to unload cargoes.”
W.H. Blackridge, assistant to the president of Gulf Oil, confirmed the same surplus in May of 1978: “About 3 million barrels of crude oil goes up for sale every day in non-Communist countries without finding a buyer. And there is an additional estimated 6 million barrels per day of hooked-up capacity that is not being produced because of the surplus market.”
In other words, as late as May of 1978, there was an oil surplus equaling 9 million barrels a day. The disruptions to oil production caused by the social upheavals of the Iranian Revolution at the end of 1978 cut off only 4 million barrels a day of that excess capacity. But this still should have left 5 million barrels a day in excess capacity by the end of 1978. Despite this excess unused capacity, the oil companies declared a shortage of oil on the world market and began to cut the amount of gasoline they allocated to the gas stations. It was this cut-off by the oil companies which created the lines at the gas station pumps in the U.S.; it was the oil companies’ own cut-off which they used as the excuse to raise prices. As a result of this contrived shortage, the oil companies were able to double their prices on gasoline in less than a year.
However, the oil companies’ own actions proved that there was not a shortage. At the very same time that they were cutting off supplies to retail dealers, they and the U.S. government were inexplicably deciding–for the first and only time–to fill the Strategic Oil Reserve. They were stockpiling hundreds of thousands of barrels of oil each day into the newly dug wells, at the very moment they were saying there was not enough oil for consumers’ needs.
This was not the first time the oil companies had created an oil shortage for their own purposes. In 1973, they had used the pretext of the OPEC oil embargo to create a shortage. In that year, OPEC supposedly had cut off all shipments of oil to the U.S. In fact, OPEC actually shipped as much oil as they had in the previous year. The only difference was that it was all shipped in the first half of the year and then stockpiled apparently in anticipation of the embargo which was to come. The proof that there was not a real, but only a created, shortage appears in the behavior of the American oil companies who market the oil in the U.S. In the very midst of the supposed shortage, when they apparently could not find oil to ship to retail dealers, they stopped their tankers in mid-ocean or refused to unload them if they were already in port. A strange behavior, certainly, if there had been a shortage of crude oil.
In fact, there was no shortage of crude oil coming to the giant oil companies from OPEC. There was only a shortage of gasoline and fuel oil going to consumers from the giant American oil companies.
This artificial shortage was created at the market place, at the fuel pumps, and this market place has nothing to do with OPEC. The market place in the U.S. as well as in most of the world is controlled by a handful of oil companies. The major oil companies which dominate world distribution of oil are either American-owned (Exxon, Mobil, Standard Oil of California, Texaco and Gulf) or British-dominated (B.P. and Royal Dutch Shell). OPEC may have been a useful scapegoat, but it was the American companies who used their control of the market place to choke the supply of oil and gasoline to the consumer.
Are we now about to be put through this same charade for the third time in 10 years? Already, the financial pages of the New York Times and Business Week are carrying predictions of new shortages. Already, they are trying to explain away the glut of oil which currently marks the market place; through a complicated set of reasonings they explain that what you see is not really what you see. If we face a new round of increases, we can bet the blame will once more be placed on the supposed control OPEC exerts over the world’s oil.
The behavior by the giant oil companies during the last two crises throws some light on the supposed control exerted by OPEC over oil.
The world-wide oil industry has been controlled for most of this century by these seven major oil companies. They have divided up the world, both in terms of production and distribution. Before the emergence of OPEC, these companies’ domination over the oil producing countries was absolute. The oil companies often forced long-term leases on these countries, giving up rights to their oil. For example, after oil was discovered in Saudi Arabia in May, 1933, the Saudi government granted concessions to Standard of California that gave the company the right to take oil out of the eastern part of the country for about $15,000 a year–for 60 years.
The example of Iraq, when it gained its independence, gives an idea of how total the control was. In 1925, Iraq was nominally granted “independence” by Great Britain. At the same time, Great Britain imposed an oil treaty on Iraq which was so unpopular the entire cabinet of the Iraqi King resigned. The British high commissioner took dictatorial powers over newly “independent” Iraq. He deported the treaty’s most vocal opponents, and he instructed the Iraqi King to appoint a new cabinet whose sole purpose was to ratify the oil treaty.
This kind of absolute control was not restricted to the earlier years of colonialism. As late as 1955, when Libya became a major oil producer, its oil laws were literally written by “advisers” imposed by the major oil companies.
The imperialist countries dominated political life in the oil-producing countries in the interest of the major oil companies. For example, through most of the 1960s, Libya was known as the North African Klondike, because profits on its oil were a bonanza even by the oil producers’ standards. These profits went overwhelmingly to the British Petroleum Company, which together with Standard Oil of California and Texaco, controlled Libya’s oil and benefitted from its laws.
How big were the profits which the oil companies drained out of the Middle East? Of course, the oil companies keep all this information secret. However, M. Tanzer (in a book titled The Energy Crisis) estimates that from 1900 to 1960 the oil companies reinvested only about $1.7 billion of their profits, while they shipped out $14.6 billion in profits. In Iran, between 1955-64 the oil companies’ rate of return on investment was estimated to be 70 per cent a year. In comparison, American company profits are usually considered very respectable with a 15 per cent return. In Iran the oil companies made an original investment of $50 million. Between 1925 and 1963, the oil companies took back over $2.5 billion, that is to say 50 times the original investment.
This was what imperialist control meant to the oil producing countries before OPEC: an incredible drain of wealth to the oil companies. The result in the oil producing countries was an economy that was devastated, its wealth drained out of the country and with only a terrible and growing poverty left inside.
No wonder, then, when there was a nationalist upsurge in many of these countries after World War II, that some governments focused on the necessity to take a larger part of the revenues from their oil. These demands from the governments often reflected the wish of people to benefit from the resources of their own country. They began to call into question the oil companies’ absolute control of oil in the Middle East.
The first response of the oil companies and the U.S. government was to refuse those demands. For example, the oil companies and the U.S. government opposed Mossadeq in Iran in the 1950s, when the Iranian government tried to unilaterally increase and even to nationalize the production of oil. The U.S. government and oil companies isolated Iran and arranged the overthrow of the Mossadeq government.
However if the overthrow of Mossadeq constituted a victory for the oil companies, Mossadeq also stood as a warning to them. The oil companies knew that their control could be weakened. When the young Turks of the army took over in Egypt, the new Nasser regime nationalized much of industry and the Suez Canal. Although there was no crude oil production in Egypt, these nationalizations gave a further warning to the big companies and an example to the regimes and peoples of the Middle East.
Even sections of the most reactionary, almost feudal-like ruling classes, such as that in Saudi Arabia, began to speak of increasing their oil revenues. On the one hand, the changing situation in the Middle East gave them the possibility to demand more from the oil companies. On the other hand, they, too, were feeling the pressures of nationalism in the whole area, and they began to demand more money from the oil companies in order to deflect some of the anger of their own populations.
The oil companies agreed to some small increases paid to the governments of the oil producing countries; and they also accepted–in fact, probably encouraged–the founding of OPEC. When OPEC was formed in 1960, it was dominated by the regimes most tied to the U.S.: Iran of the Shah, Arabia of the Saudis and Venezuela of the Rockefellers. The oil companies paid a small price to the oil producing countries, but this in no way compromised their control over crude oil production. Given their enormous profits, it wasn’t a very big price. The oil giants still maintained a rate of profit much higher than ordinary.
It was not until the 1970s that the OPEC countries began to receive big price increases, but these increases didn’t compromise the profits of the oil companies–in fact, it was just the opposite. When OPEC demanded a big increase on crude oil prices in 1971, the oil companies surprisingly went along. Certainly, this price hike meant more revenues to the OPEC governments. But the oil companies benefitted even more so; first, because they split the take on crude with the OPEC governments; second, the oil companies also used the OPEC price increase as a cover to boost profit margins on all other aspects of oil production, including that on shipping and even that on crude produced in the U.S. And this happened again each time OPEC raised its prices.
Moreover, the oil companies used the threat of a potential oil embargo to justify further increasing their rate of profit. Their argument went something like this: “The 1973 OPEC embargo proved how dependent the U.S. is for its oil. If American companies are to develop more domestic oil production and other energy sources, we will have to increase our super profits still further.”
The oil companies wanted higher prices for crude that they produced in this country. They also demanded that the government subsidize research into the production of other forms of energy, so that these new fields would become immediately profitable. And the oil companies pushed to lessen environmental restriction on energy production and thus lower their production costs.
The oil companies got most of what they wanted. Of course they sold their oil at higher prices. And they were also able to push aside limits on environmental hazards: for example, the oil companies were able to push through the Alaska pipeline and greater use of coal and nuclear power. They began to reap tremendous profits on these other forms of energy.
By the 1973 oil crisis the top 15 oil companies owned almost 60 per cent of all coal production in the U.S. The production costs of coal suddenly became competitive when the oil companies increased the price of oil. The oil companies had put themselves in line to profit not only from oil and coal, but also from what they considered other energy sources for the future, most importantly nuclear energy. By 1973, 40 per cent of the proven uranium reserves were also owned by these same oil companies. After 1973, as demand rose for nuclear fuel and coal, the oil companies raised the price on these other fuels. In effect, their prices followed the rise in price of oil.
In fact, the way the oil companies profited from coal is indicative of how far ahead they had planned the gigantic price increases of the 1970s. Back in the 1950s and 1960s coal appeared to be an obsolete fuel, because coal’s cost of production was so much higher than oil’s price. Nonetheless, in the early 1960s, the oil companies bought up coal reserves which appeared to be bad buys. In fact, the oil companies knew even then that the price of oil would skyrocket–way before OPEC had even dreamed of pushing up its prices.
Of course, it must be added, that the major oil companies undoubtedly would have preferred completely acquiescent countries producing oil for them. But given the fact of the big movement for independence following the end of World War II and all the subsequent outbreaks of nationalist demands in the countries of the underdeveloped world, the oil companies have made the best of a less than perfect situation. And best is still good enough for the major oil companies to exert their control over the OPEC countries.
It was not only the big oil giants who were happy to make use of OPEC’s price hikes. The U.S. government, despite all its protestations for propaganda purposes, was ready to accept the increases.
First, the OPEC increases gave a competitive trade advantage to American industry. Since World War II, Middle Eastern oil had fueled European and Japanese industries while American industry was fueled roughly half by its own oil. In 1974, only 20 per cent came from the OPEC countries. Middle Eastern oil was cheaper, by about $1 a barrel, than oil produced in the U.S. And this helped to give a competitive advantage to European and Japanese industries over those in the U.S. However, the quadrupling of OPEC’s crude prices ended this advantage, and in fact reversed the advantage.
Second, OPEC returned more than all of the proceeds from the oil it sold to the U.S. back to industry and the banks in the U.S. It imported many more goods from U.S. industry: military, technological and agricultural. The OPEC governments also looked for ways to get the highest profits from the oil money. Many times it was not profitable, since their own economies are so underdeveloped, to pour money into their own countries. And so they invested their money right back in the U.S., in other industry, in bank deposits, or in U.S. government bonds. To carry out such huge financial transactions, the OPEC countries used the big international banks, especially U.S. banks. And the banks have made very big profits from this.
Between 1974 and 1977, the U.S. bought $106 billion in oil from OPEC. In that same period OPEC returned $108 billion. Over 4 years’ time OPEC ran a $2 billion balance of payments deficit to the U.S.
The fact that the OPEC countries still price their oil in dollars is an important sign of their weakness vis-a-vis the U.S. Over the years, the U.S. government has printed up enormous sums of dollars to finance the government’s budget deficit. These pieces of paper flood the world markets and depreciate the value of the dollars held in other countries. In the four years after the 1974 OPEC price increase, the dollar lost 50 per cent of its value, while OPEC’s prices remained relatively stable at about $12 a barrel.
The loss of value of the dollar effectively cut the OPEC countries’ income in half, and pushed several OPEC countries, like Algeria, Venezuela and Nigeria into trade deficits by 1978. Even Saudi Arabia, by far the biggest oil producer in OPEC, was under financial pressure to raise the price of its crude. The new round of price increases in 1978 brought up OPEC’s income to roughly the point that it recouped the bigger share of its losses, but OPEC was still not able to solve the problem that it is paid in a currency that it does not control, that is controlled by a foreign government. Meanwhile, the dollar continues its de facto deflation, and OPEC is already falling behind again. It is the reason why every 3 or 6 months, OPEC tries to raise the price of its oil.
This is an important symptom of the OPEC countries’ weakness. For while they hold a privileged position among underdeveloped countries because of their oil, they are still very dependent on the imperialist countries. Just as they have never gained complete control over how they are paid for oil, so they don’t really control the oil either. In the end they are totally dependent on the major oil companies to transport, refine and market their oil. They have no basis to compete with the oil companies in these other operations, since the capital involved in setting up refinery and transportation facilities would be prohibitive, not to mention the fact that such an attempt would not be tolerated by the major companies nor by the American government.
In some cases, the added income they have won since 1973 may have helped some of the OPEC countries to begin to industrialize. But this has hardly put a dent in their great underdevelopment. Not even the high returns they have made in past years are sufficient to build the infrastructure needed for any industrialized country.
On the other hand, the oil companies have never stopped benefitting from the energy crisis. After the OPEC price hikes of 1978-79, the government deregulated much more of the pricing system for domestic oil. In fact, the major companies got the go-ahead from the government to raise the prices on crude oil produced domestically to world prices by October 1981. This will mean in the near future very fast oil price increases in the U.S. and much higher profits for the oil industry.
In fact, this is the substance behind the prediction of a new shortage, supposedly caused by the Iran-Iraq war. This shortage, which will not exist in reality, which will not be caused by this war since the two countries together produce less than today’s current surplus capacity, will be blamed for the new round of price increases to be put in place in coming months. In fact, these price increases had already been agreed to long before the beginning of the Iran-Iraq war.
And so, despite all the barrage of propaganda from the oil companies, the U.S. government and the news media, the main beneficiary of the price hike is none other than the major oil companies, the U.S. oil companies. They, along with the U.S. banks, and the U.S. government, have used OPEC and the so-called energy crisis to hide their own control over the oil of the world.