Yunki Jo | November 16, 2023
Since the 1910s, with a rapid surge in petroleum supply and escalating price competition in the oil market, giant oil comapnies such as the Big 3 (New Jersey Standard, Royal Dutch Shell, APOC) initiated maneuvers reminiscent of the Mafia to secure their dominance in the industry.
Their motivation for deploying unconventional methods to control every stage through which petroleum translates into consumer demand stemmed from the fact that the Middle East had emerged as a new oil production center. This narrative will commence by conveying the historically significant background of the increased importance of the Middle East.
The importance of the Middle East as a petroleum production base (1908 onwards)
The point at which the Middle East began to attract attention is the discovery of oil in Iran in 1908. Prior to that year, the Middle East was largely disregarded by Europe. The term “Middle East” itself implies a region situated between Europe, particularly the influential Near East (including the Ottoman Empire, which was Turkey at the time), and the Far East, which had been a subject of greedy interest from European powers since the 19th century. With the discovery of oil in the previously less notable Middle East, powerful European nations started showing interest in the region.
The turning point when the Middle East started to capture attention was the discovery of oil in Iran in 1908. Prior to that year, the Middle East was largely disregarded by Europe. The term “Middle East” denotes a region located between Europe, especially the influential Near East (encompassing the Ottoman Empire, then known as Turkey), and the Far East, a region that had been a target of interest from European powers since the 19th century. The unassuming Middle East gained significance with the revelation of oil, prompting powerful European nations to start showing interest in the region.
The United Kingdom was the pioneer in acknowledging the value of the Middle East. In 1901, a British mining magnate secured oil development rights from the Iranian government. After extensive exploration, a large oil reservoir was discovered in southern Iran in 1908. The company formed during this period was one of the Big 3, APOC (Anglo-Persian Oil Company, presently BP). As mentioned last week, it became the property of the British government in 1913.
The fate of the Middle East determined by World War I (1916 ~ 1920)
Britain’s desire for oil remained unabated. In 1916, amidst the ongoing First World War, Britain and France forged the Sykes-Picot Agreement, carving up the Middle East according to their preferences to safeguard their post-war interests in advance.
The Sykes-Picot Agreement, a secret pact established in 1916 between Mark Sykes, a British diplomat representing the Allied Powers in World War I, and François Georges-Picot, a French diplomat, aimed to pre-determine territorial matters in the post-war Middle East. Meeting in secret, they divided the Arabian Peninsula and the Arab region of the Ottoman Empire (Turkey) based on their preferences. The enduring conflicts in the Middle East today are, in part, attributed to the boundaries delineated over the region by Britain and France during this agreement.
Commencing with the Sykes-Picot Agreement, Britain, with the intention of monopolizing the Middle East’s oil extensively, dispatched more than a million soldiers throughout the entire region and asserted full dominance over the Persian Gulf. In 1920, at the San Remo Conference in Italy, where the Allies gathered to allocate the spoils of World War I, Britain solidified its predominant stake in the Middle East’s oil through the San Remo Agreement.
The shift of petroleum dominance (1927 onwards)
The United States, excluded from the Allied Powers’ partitioning of the Middle East, voiced discontent, citing the San Remo Agreement as a breach of the principle of equal rights among the victorious Allied Powers outlined in the Treaty of Versailles. Perhaps spurred by this protest, the U.S. became involved in the development of the Kirkuk oil field in northeastern Iraq starting in 1927. In the Iraq Petroleum Company (IPC), initially established as the Turkish Petroleum Company (TPC) with British and German capital (later transferred to France after Germany’s defeat in World War I), U.S. companies secured around 24% of the shares.
Later, the U.S. company Standard Oil of California (SOCAL, now Chevron), which held exclusive rights to explore Saudi oil fields from 1933, made a substantial discovery in the eastern part of Saudi Arabia in 1938. Beginning in 1939, it commenced production at a rate of 500,000 barrels per day, solidifying its monopoly on Saudi oil.
The pivotal moment for U.S. oil companies to assert dominance in Saudi Arabia’s oil industry and the shift of petroleum control to the United States took place when the “Seven Sisters,” referring to the major global oil companies, established a cartel to safeguard their interests.
The beginning of the cartel era (1928~1973)
In a capitalist system, amassing wealth is often most effectively achieved through monopolies. Recognizing the adverse impacts of monopolies — controlling supply and prices while impeding new competitors — most capitalist countries enforce stringent regulations to curb them.
The powerful oil companies, eventually recognized as the Seven Sisters, successfully navigated governmental monopoly regulations to accumulate considerable wealth in the petroleum industry. This was achieved through the establishment of a cartel via two agreements: the Red Line Agreement and the Achnacarry Agreement (also referred to as the “As Is” Agreement.).
| Red Line Agreement (1928):
Up until the early 20th century, the primary players in the oil industry and market leadership were the United States, the United Kingdom, and France. Wishing to prevent other nations from accessing the oil reserves in the Middle East and partaking in the wealth distribution, these countries, excluding Iran and Kuwait, entered into the Red Line Agreement in 1928. This agreement applied to major oil-producing nations in the Middle East, encompassing present-day Turkey, Syria, and Iraq, and delineated a red line symbolizing that no company could breach it without their approval.
The Red Line Agreement is the accord among companies participating in IPC (Iraq Petroleum Company), as mentioned in the discussion of the shift of oil dominance. It was crafted by entities such as the UK’s APOC (now BP), Royal Dutch Shell (now Shell), the United States’ New Jersey Standard (later Exxon, now ExxonMobil), Socony (later Mobil, now ExxonMobil), Gulf, Texaco (Gulf and Texaco later merged into California Standard, now Chevron), France’s CFP (Compagnie Française des Pétroles, now TOTAL), and the Turkey Petroleum Company, the precursor to IPC, established by the Armenian-British individual Calouste Gulbenkian.
The companies engaged in the mentioned agreements, with the aim of regulating oil prices, agreed to pursue new oilfield developments in the Middle East exclusively through joint development (consortium) arrangements. They explicitly prohibited individual oil exploration and production by each company to prevent surplus oil production. Crossing the red line drawn on the Arabian Peninsula was strictly forbidden for any external entity, except for those companies that were part of the agreement.
| Achnacarry Agreement (August 1928):
As Soviet oil entered the market and oil production began in the 1920s in areas like Venezuela and Mexico in Central and South America, the persistent decline in oil prices due to oversupply became a pressing issue. The leaders of the Big 3 were compelled to take action to prevent the erosion of their meticulously accumulated wealth.
In August 1928, they convened in secret at Achnacarry Castle in Scotland, supposedly for a grouse hunting expedition, and signed the Achnacarry Agreement. The primary objective of this agreement was to regulate oil prices in accordance with their preferences.
The companies agreed to the following seven provisions:
- Maintain the market share of the agreement participants as it is currently (As Is) — Freeze oil production at current levels.
- Joint utilization of oil transportation vessels and refining facilities is allowed among agreement participants, ensuring that the payment is not lower than the actual cost to the owner.
- New production facilities should be added only when there is a genuine need to meet increased demand in the market.
- Agreement participants must uphold the existing economic advantages of the geographical location for each production area.
- Procure crude oil from the geographically nearest production facility of the agreement participant and prohibit the purchase of oil from a third party.
- Prevent excess oil produced in a specific region from being distributed to another region, disrupting the price structure (surplus oil sold only to agreement participants at agreed-upon prices).
- Adherence to these principles benefits not only the industry but also consumers.
Following the Achnacarry Agreement, the Big 3, later joined by Gulf and Standard Oil, established a cartel which persisted until the first oil crisis in 1973. The actions of these companies were as follows:
- Since 1932, they partitioned overseas markets into multiple zones, assigned production quotas for each region, and set oil prices.
- Additional production increases were allowed only in the case of increased demand.
- High-ranking executives from the Big 5 convened monthly to verify adherence to allocated production quotas and formulate future strategies.
- Contracts were signed between cartel members to supply oil at discounted prices.
- To prevent potential competitors from entering the oil business, they jointly purchased oil storage areas.
In essence, the participants in the Achnacarry Agreement, known as the Big 5, wielded influence over the oil market through collaborative effort and monopolistic practices, regulating the supply and pricing of oil during the era of petroleum dominance from the agreement’s inception until the initial oil crisis in 1973.
This week, we explored the rise of the Middle East as the Mecca of oil, the impact of World War I on the Middle East and the petroleum industry, and examined the actions of entities striving for oil supremacy. Next week, I will discuss the birth of Saudi Aramco, the world’s largest oil company, and how the United States came to exert oil dominance, along with the challenges encountered in that process.
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