No one can deny that the past ten years have witnessed great changes in the international oil industry. A decade ago, the seven largest international oil companies — Exxon, Shell, British Petroleum, Texaco, Standard of California, Mobil and Gulf — still dominated the industry in virtually every respect. In 1972, these seven companies accounted for three fifths of the non-communist world’s production of crude oil and refined products, and similar shares of transport and marketing as well. Even these figures fail to reflect the relative profitability of these “seven sisters.” They controlled only one third of oil production in the United States, where costs were relatively high and profits correspondingly lower. By contrast, they controlled 88 percent of production in the low-cost, high-profit areas such as the Middle East and Latin America. Among these seven major companies, there were sizable disparities. Exxon, for example, had crude oil production that was nearly three times as large as Mobil’s. Taken together, though, the seven big companies probably earned close to three fourths of all oil industry profits.
The massive changes in the international oil industry from 1973 onward have altered the extent of these companies’ control of crude production globally. By 1982, out of a total non-communist world oil production of some 39 million barrels a day (b/d), the seven major companies accounted for only 16 million barrels, or less than two fifths of the total. (This includes both oil they produced under their direct ownership and that which they purchased under “buy-back” arrangements with state oil companies in the producing countries.)
At the same time, in size and profitability the big oil companies have remained among the most significant concentrations of economic power in the capitalist world. After World War II, three of the seven — Exxon, Mobil and Texaco — were among the ten largest US industrial corporations in terms of assets. In 1983, six oil companies — the five US-based majors plus Standard of Indiana — were all in the top ten US industrial firms. In terms of profits, the five US majors had made $3.8 billion in 1972, or roughly one seventh of all the profits of the Fortune 500. By 1982, the same five oil companies accounted for $9.1 billion in profits, still about one seventh of the Fortune group (and this was a year in which Exxon’s profits dropped by one quarter from the previous year, and the profits of Mobil and Gulf fell by more than 40 percent).
The last decade has seen a process of geographical diversification by the companies, in search of new oil supplies. Since OPEC began to take control of pricing in the early 1970s, this search for oil has concentrated in politically “safe” regions such as the US and the (British-Norwegian) North Sea. This is a reversal of the post-World War II pattern, where low-cost crude oil from the Third World in general and the Middle East in particular fueled the growth of these giant firms and the industrial societies of which they were a part.
Until World War II, despite the acquisition of some overseas concessions, most activity of the big US oil companies was primarily domestic. Only Exxon, which drew two thirds of its crude oil from outside the United States, could have been called a truly international company. By 1972, the situation had changed significantly. Exxon was then producing 80 percent of its oil overseas, including 40 percent from the Middle East. That same region accounted for two thirds of Standard of California’s output, three fifths of Gulfs, and half of Texaco’s and Mobil’s. Even a formerly wholly domestic company like Standard of Indiana was producing two fifths of its oil in the Middle East.
In the last decade, however, there has been a general trend in the established crude oil producing areas toward direct government ownership of production facilities. More than 100 countries have established their own national oil companies, with mandates to participate in the exploration, development, production, refining and sale of petroleum, and most of the major producing countries have acquired either full or majority ownership of their oil operations. The international companies’ ownership share of worldwide oil production dropped from 94 percent in 1970 to 41 percent in 1981, while the share of the seven majors declined even more sharply, from 61 percent to 22 percent. As the OPEC countries and other Third World states took over ownership of crude oil production, the oil companies progressively lost their capacity to ensure direct crude supplies to their own refineries.
The big companies nevertheless still account for an important share of the oil traded internationally. In many cases where countries have nationalized their crude production, the companies which formerly had concessions to the oil fields retained the right to purchase much of the crude from the host country’s state petroleum enterprise. This so-called “buy-back” oil in the hands of the seven majors amounted to 15 percent of total non-communist world production in 1982, bringing the proportion under their control to 37 percent. Another 24 percent of the total was produced or purchased by the smaller private companies. Of the remainder, 19 percent was sold in government-to-government deals and 16 percent was consumed directly in the producing countries.
Apart from the matter of direct control, the OPEC-led price increases of the past decade had a very positive effect on oil company profits in the industrialized countries, where the companies’ tax treatment remained very favorable. For example, in Alaska the companies saw their Prudhoe Bay profits reach nearly $10 a barrel by the end of the 1970s — 10 to 20 times the per-barrel profit in the Middle East at that time. The Alaskan situation epitomized the companies’ strong incentive both to seek new oil in the industrialized countries and to support the OPEC price structure.
The major oil companies have come through the changes of the past decade relatively unscathed. While their direct ownership of Third World oil and their control over production have been reduced, their profits have increased and they still occupy a crucial role in linking the oil producing states to consumer markets in the Western countries.
There are four areas where the producing countries’ situation has fundamentally changed in the past decade: 1) control of prices and output; 2) the growth of national oil companies; 3) shifts in the locus of refining and processing; and 4) the size of the surplus revenue generated by oil exports.
Since late 1973, the OPEC governments have firmly established their central role in setting oil price levels. The fall in prices in 1982-1983 demonstrated the limit of OPEC’s power, especially under conditions of severe worldwide recession and effective conservation measures in the industrialized countries, but it is a mark of OPEC’s strength that the price cuts were relatively limited (from $34 to $29 a barrel, or about 15 percent). This drop should be set against the rise in real prices (adjusted for inflation) of more than 400 percent over the decade, and reflects the fact that the cuts were carried out in a relatively orderly manner, negotiated among the producing countries. The chaotic conditions that might have prevailed had the private companies still controlled the market is well illustrated by the experience in the nickel industry: Under the impact of the recession, prices fell by more than 50 percent despite the fact that some four companies controlled over 75 percent of the world market. Thus, in the oil industry, the initiative taken by the producing countries in 1973 has developed into a basic fact of life.
On the other hand, with respect to control of production levels, OPEC as a whole, and Saudi Arabia in particular, have remained in the position of suppliers of the world’s marginal demand, rather than “base load” producers. OPEC collectively may target meaningful national output levels, but its position is somewhat analogous to that of the Federal Reserve Board in the US in terms of controlling the money supply: In boom periods, the Fed can keep money tight, but in slack periods the opposite policy requires the cooperation of the banks and the ultimate users of money. Similarly, in times of high demand for oil, OPEC can easily keep supplies tight with or without the support of the companies; in times of low demand, or “glut” conditions, the companies can rather easily thwart national output targets with their diversified supply sources in many countries. (When, in 1982, the companies felt that Nigeria’s prices were too high, they took relatively little oil from Nigeria and made up the difference from other sources.)
OPEC governments have greater control over national output levels to the extent that they can collectively agree on each country’s allowable production level, and if each country firmly refuses to supply additional quantities in excess of the agreed level. The events of the past year or so raise questions as to whether the necessary level of discipline to support the formal production schedule agreement of February 1983 is present. OPEC’s production behavior can be significantly affected by the levels of production from such non-OPEC sources as Mexico and the North Sea. In the early 1970s, OPEC supplied over 65 percent of the non-Communist world’s production; now OPEC’s share is less than 50 percent. For what they are worth, most recent company forecasts predict that the world demand for oil in 1990 will be great enough so that the OPEC countries will be able to reestablish some degree of control over production. (According to the Department of Energy’s 1982 Annual Energy Outlook, demand for OPEC oil will range from 23 to 29 million barrels a day, compared to the present 17.5 million barrels a day.)
All of the OPEC countries have established state petroleum enterprises. Some of these — Petromin in Saudi Arabia, the Kuwait Oil Company, and Algeria’s Sonatrach — have become significant actors in the world oil industry, with operations extending far beyond the borders of their home countries. The share of the state oil companies in worldwide product sales has doubled in the past decade, and now represents some 20 percent of all sales. Most state oil company sales are direct government-to-government arrangements, and not sales on the commercial market.
Despite these gains, state oil companies in the producing countries have not approached a position of real power in marketing and distribution. Here the multinationals are still dominant. It has, in fact, only been in the last few years that any of the OPEC producers have taken concrete steps to become major forces in the marketing sector. In 1982, for example, Kuwait was negotiating to buy the European refinery operations of Gulf, though the deal ultimately fell through. Saudi Arabia recently formed a trading firm, Norbec, to sell directly in Western markets.
Moreover, the state oil companies have not, for the most part, functioned in ways significantly different from the ways in which the multinationals operate. One of the great successes of the multinationals, in fact, may have been in undercutting the potential of the state companies so that the latter are no real threat to the multinationals’ position. The past decade’s shift in crude oil ownership has not been matched yet by a shift in ownership of refinery capacity. Today, less than 8 percent of non-communist world refinery capacity is in the OPEC countries. Recent moves by Kuwait to purchase refining capacity, and the near-completion of “downstream” processing facilities in Saudi Arabia and other Gulf states, indicate that this picture will change over the next several years. This is complemented by the closing of part of the multinationals’ refining facilities in Western Europe as a consequence of current over-capacity.
One possible reason for the OPEC states’ reluctance to acquire refineries, tankers and other assets in the Western countries might be their fear that these assets could be confiscated in some future conflict with the Western governments. But this fear has not kept them from depositing much of their financial assets in Western banks. Perhaps a more plausible explanation is that the large investments required might interfere with the ongoing transfer of the surplus revenue from the public to the private sectors. The large financial surpluses of the past decade could have been used to finance major industrialization and downstream activity, or to become major forces in the international oil industry. The accumulated surplus of the United Arab Emirates, $101 billion from 1973 to 1982, would have been sufficient to build or buy some 80 million barrels of refining capacity in Europe, Asia or North America — more than the total present world capacity. Saudi Arabia’s accumulation of $487 billion would have sufficed to purchase Exxon at a price twice its current stock market value and still have most of this amount left over for industrialization projects. Such moves would not have been feasible politically, of course, and probably not advisable on other grounds as well. They do, however, show the orders of magnitude of the opportunities which the countries avoided in their readiness to hold their surpluses as liquid assets in the Western banks.
A Decade After
What are the major components of a balance sheet on the decade since the OPEC-led price revolution began? The wealthiest low-population OPEC states have instituted basic welfare systems to provide housing, education, medical care and other necessities. On the other hand, huge sums have been spent on prestige projects of dubious long-term value. The entire disbursement process has been associated with high levels of inflation and corruption. (Another particularly horrendous way in which oil revenues have been wasted is the three-year war between Iraq and Iran, which has consumed enormous amounts of money and physical capital, not to mention killing and maiming hundreds of thousands of people.)
To a considerable extent, the oil surplus has been shifted back to the industrialized West through exorbitant prices charged by construction and engineering firms, and imports of luxury goods. Within many OPEC countries, as the oil industry has been nationalized, the revenue surplus thus generated has been transferred from public to private hands. Huge fortunes have been made by those able to exploit contacts within the regimes. A key question for the oil industry and the producing countries in the decade that lies ahead concerns the likelihood of a reversal of the present “oil glut,” which has provided the oil companies with an opportunity to win more favorable terms from producing countries. As noted earlier, oil companies are predicting a sufficient tightening of the supply/demand situation by the end of this decade to restore OPEC’s power. However, underlying these predictions are projections of a significant revival in the world’s economy. Since in our view the next decade is more likely to see a continuation of the secular stagnation of the 1970s, such forecasts must be suspect. Our skepticism is reinforced by the inevitable depressant on oil demand stemming from growing supplies of non-OPEC energy sources and continuing conservation both in industrial and consumer uses of oil. This conservation factor has essentially broken the historic simple link between overall economic growth and energy consumption. (None of this, of course, precludes the potentially major impact on oil prices of another “oil shock” such as a temporary cutoff of Persian Gulf supplies.)
Our most general conclusion on this key question of oil “gluts” is the same one we reached in The Energy Crisis in 1974:
There is no real energy crisis, in the sense of a physical shortage of energy resources; rather, there is an artificially contrived scarcity generated by various forces operating within the overall framework of the international capitalist economy.
As such, the crux of the oil problem is not nature, but social and economic relations.