Wednesday, October 12, 2011

oil - The Globalization of Oil - A Prelude to a Critical Political Economy


The Globalization of Oil
A Prelude to a Critical Political Economy

An analytic statement requires us to analyze the statement alone in order
to ascertain its truth. … Synthetic statements are meaningful statements
which are not analytic. The physical theories that we employ to understand
the Universe are always synthetic. They tell us things that can only
be checked by looking at the world. They are not logically necessary.
They assert something about the world, whereas analytic statements do

—John D. Barrow
Theories of Everything (1991)

pg 6:
"...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; and
(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. (1976: 55).."

pg 9:

"...This basing-point system, erected upon the wellhead price of U.S. oil (at the Gulf of Mexico), was used as a universal (accounting) yardstick for pricing of oil anywhere in the world (Federal Trade Commission 1952). Given the new and bountiful discoveries of cheaper oil in the Persian Gulf region, the new oil has not only displaced the U.S. markets in the west of Suez but also continued toward markets on the U.S. eastern seaboard. Thus the regional oil markets adjacent to the Western Hemisphere were supplied with the oil from the Persian Gulf. This has prompted the international oil cartel to cut the Persian Gulf posted prices in order to prevent the interregional flow of oil toward the U.S. market, thus complying with the tenet of the 1928 As Is Agreement reached in the Achnacarry. Historically, the posted price at both Gulfs functioned as an allocating mechanism for transferring and disbursing crude within the worldwide networks of the cartel. Therefore, while cutting the Persian Gulf posted price reduced the flow of oil from this region, it also diminished the oil royalties for this region both in terms of the magnitude (per barrel) and the quantity of output. The founding of OPEC was a response to the continuous cuts in the posted prices by the International Petroleum Cartel in the late 1950s. The posted price of oil was cut due to a combination of factors, such as the 1958 recession, expansion of Russian oil production, and imposition of the 1959 oil import quota on the U.S. domestic oil market, which was by far the largest in the world. The last factor, which was devised to discourage competition from the U.S. independent producers, is indeed the tip of the iceberg of U.S. government endorsement of As Is (the Achnacarry Agreement) at the expense of both the U.S. domestic consumers and the royalty earners of the Persian Gulf oil region. This was, however, concealed by the U.S. government under the convenient cloak of “national security.” It is noteworthy to point out in passing that once the deception of national security—and the pretense of “strategic oil”— was concocted, the tensions between the Anti-Trust Division of the U.S. Justice Department and the State Department over the violation of the Sherman Anti-Trust Act of 1890 and the pertinent antitrust law of 1911 subsided once and for all. This ingenious invention is only the tip of the blunder associated with the myopic, immature, and reactionary foreign policy of this period (see Blair 1976: ch. 7)..."

[Mrt: An interesting opinion, thought supply-demand price leads, important is the production cost & reserves. An insight into pre OPEC world. Needs more study. Some interesting snips.]

Valorization of the Oil Deposits

[Mrt: This part is very interesting. It supports Another´s view that US needed higher oil price at some level.]

"...In U.S. domestic oil, given the rule of capture, the fragmentation of oil leases, particularly when the size of the reservoir is huge, has long been troublesome for adequate unitization of the oilfields for secondary and tertiary oil recovery..."
"...Finally, post-1970s global oil was beset with volatility and universal uncertainty. The lack of rapid response to the increasing access demand by the price relates to two conundrums: (a) the requirement of long lead time for building a new capacity in the presence of market volatility and uncertain future prices and (b) the dilemma of switching off from shuting capacity and back, without sustaining a considerable economic cost due to the loss of technical efficiency and possible damage to the reservoir. This situation is worse in the case of excess supply. The levels of shut-in capacity have already been set normally in advance in the majority of oilfields, including those that regulate the global price of production. These regulating oilfields are particularly hard-pressed in the case of declining prices. The plugging of oil wells is one (costly) option. However, once they are plugged the oil is lost forever. To avoid damaging the reservoir, another option is to keep operating the oilfields and hope for better market prices tomorrow. ..."
"...That is why the regulating price of production does not decline immediately unless there is a prolonged excess supply, in which case the levels of risks and losses are too great for these producers to continue. This situation may indeed trigger an oil crisis, leading to a worldwide restructuring of capital, a new regulating price of production, and the corresponding market prices within the global oil industry...."
"...Thus, the characteristic of such crises must be explained from within, that is, from the standpoint of the oil industry’s internal dynamics, not according to the circumstances arising from the external contingencies. And oftentimes relying on power as both the premise and the end result (such as market power or political power) further mystifies the subject that has already attained the highest degree of complexity in the contemporary political economy...."

"...In the remainder of this section we need to clear up two additional, yet interrelated, issues: (a) the alleged cartelization of oil even after the oil crisis of 1973–74 and (b) the credibility of conspiracy theories. On both of these points that potentially feed each other and that perhaps may have possible implications for the questions, such as U.S. alleged hegemony or U.S. intervention in Iraq, it is worth quoting Fine and Harris at length, via two separate paragraphs. The authors simultaneously illuminate and obscure the very essence of the 1973–74 oil crisis as follows:
If we now put aside the oil crisis of the early 1970s and examine its results, we can see how the oil industry discovered a solution to the erosion of the world cartel and the pressures on domestic U.S. production. The large increases in the price of oil have sustained the profitability of producers in the U.S.A. and have guaranteed sufficient revenue in the world production to bind the majors and nonmajors together in a cartel that now includes both. The result of this has been to create enormous surpluses on the production of oil from those reserves, nearly all, that are less costly to exploit than those in the U.S.A. What . . . OPEC nations and other countries have been able to do is to appropriate some of those surpluses. That they can do so is a result and not the cause of the oil price increase. (1985: 86– 87, emphasis added)
To some extent, this might read like a conspiracy theory of the oil price increases in which the latter was a solution to the problem of the industry. Certainly, such a possibility should not be discounted and such theories abound in discussion of the oil crisis. Some argue that the crisis was a U.S. device to improve its competitive position relative to its industrial rivals by forcing a high price of oil upon them, others that it was a device to improve the U.S. balance of payments position through the recycling of petro dollars. These may or may not have been the effects or the intentions of the actions of the various agencies involved, but the solution to the industry’s problems came about through a definite process that can be recognized. (1985: 87, emphasis added)..."

From Notes:
"The Redline Agreement is the infamous Cartel decision, which made the Iraq Petroleum Company (IPC) conspire against Iraq and withheld 99.5 percent of Iraqi territory from any attempt at exploration. This agreement was a part of a larger gentlemen’s secret arrangement made in the Achnacarry Castle, Scotland, in September 1928. For further suppression of the oil discoveries in the Middle East see Blair (1976: 81–85). Blair rightly observes:
Contrary to the widespread and long-standing impression that cartels are somehow inherent in the nature of things, the fashioning of these arrangements was the product of a great deal of very hard work.
According to the cartel’s minutes, which came into the hands of the Swedish investigating committee, the group held 55 meetings in 1937 at which 897 subjects were discussed; in 1938, 49 meetings were held at which 656 subjects were discussed; and in 1939, 51 meetings were held at which 776 subjects were discussed.
(1976: 65, emphasis added)"




From Q Ball: I would like to ask Another his opinion on this. What are his thoughts on what some people are predicting to be a dominance of OPEC nations in terms of oil production. Specifically forcasted in the following page says that OPEC production will surpass NON-OPEC in about the year 2006.

ANOTHER: QBall, This is true. The Middle East nations, in particular, have shown their reserves to be much greater than ever thought possible. These "new/ larger" reserves have come to be known about, only in the last eight years. It was the "possible existence" of this oil that created much fear in the American Capitol, prior to the 1970s. In that time, it was known that the Western economy was growing on low priced energy. This growth would soon consume all "local / domestic" reserves that, in turn, would bring much dependence on low cost Middle East oil. The reserves in this region were, and now even more so, are the lowest cost to produce in the world. As all oil was sold in dollars, and US$s were then, still somewhat attached to gold, the ME producers had "no need" to raise prices! The political forces in the West needed much higher oil prices to "stimulate exploration" to avoid the "strategic problem" of "all oil supply from one region".


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