History of the Multinational Oil Market - Literature review Example

? Multinational Oil Contents Gilbert Holland Montague, “The Rise and Progress of the Standard Oil Company,” Business (1970). Robert Wooster, Christine Moor Sanders, "SPINDLETOP OILFIELD," Handbook of Texas Online (http://www.tshaonline.org/handbook/online/articles/dos03), accessed January 08, 2013. Published by the Texas State Historical Association. Thomas Ladenburg, “The Supreme Court Decides,” Digital History (2007). Mar Rubio, “Oil and economy in Mexico, 1900-1930s”. Edward Peter Fitzgeral, “Compagnie Francaise des Petroles and the Defense of the Red Line Regime in Middle Eastern Oil, 1933-36 “ Giacomo Lucciani, “ Oil and political economy in the international relations of the Middle East “ (2008). Joshua S. Goldstein,Xiaoming Haung, Akan Burcu. “ Energy World Economy, 1950-1992” (1997). Ammy Jafe, Wallace Wilson, James Baker, “ The International Oil Companies” (2007). Robert A. James, “Strategic Alliances Between National and International Oil Companies” (2011). Robert J. Weiner, “Do Crises Tear the Fabric of Oil Trade?”(2006). Introduction There are many relates of oil discoveries from American explorers. They encountered oil deposits in some forms. Also there is early discovery of oil in the Middle East. On a 1775s map of the English Middle Colonies, Louis Evans located deposits along the easter seaboard. The oil was used for many purposes. Before the Industrial Revolution the main usage was for kerosene. The regular oil lamps were upgraded to kerosene lamps and in 1859 Samuel Downer, Jr. patented “kerosene” as a trade name and licensed its usage. In the same year a 69 feet deep was drilled at Titusville, Pennsylvania ( U.S.) to tap oil. This was the beginning of the operations of the first oil corporation.As whale oil increased in price because of the scarcity of that mammal, the rock oil industry boomed in the United States. The success of the Titusville’s oil-well stimulated consumers to increase the use of oil. The purpose of this article is to provide an historical overview of the multinational oil market and explain how it influences the political relationships between countries. Standard Oil Company Montague, in the article “ The rise and Progress of the Standard Oil Company” relates this discover with the production of crude, and explain it contributed to the rise of the first oil corporation.In the next years many successful oil wells were discovered. In 1865 Mr. Rockefeller was constructing a refinery in an oil exploitation ( Pithole Creek). The demand of the petroleum products was increasing exponentially and so the wells. Mr. Rockefeller saw the exigency of secure the business and increase their capital. And in 1870 he promoted the Standard Oil Company with the union of Rockefeller, Andrews & Flagler the refineries of William Rockefeller & Co., Rockefeller & Andrews, Rockefeller & Co., S. V. Harkness, and H. M. Flagler ( Montague, 1904). As Mr. Rockefeller said the reasons for this union were: “The cause leading to the combination was the desire to unite our skill and capital, in order to carry on a business of some magnitude and importance in place of the small business that each had separately heretofore carried on.” With the Standard Oil Alliance Mr. Rockefeller controlled not only the oil production but also the transportation system ( better rates were granted for them). In those years the Standard Oil Alliance achieved the monopoly of the oil industry ( Montague, 1904). The Spindletop Oilfield There was an important oil discovery near Beaumont, Texas in 1901 that modified the course of the oil industry in those days. It was the Spindletop Gusher one of the largest oil strikes rise up. With this discovery many oil companies has been founded ( more than fifteen hundred) and others moved to Beaumont. Robert Wooster and Christine Moor Sands in their article “Spindletop Oilfield” relates the Spindletop Gusher with the start of many oil companies. Most of those companies which chartered with Spindletop are associated with very well known oil companies of the last century. Examples are Shell Oil Company, Texaco, Cities Service, Gulf Oil, Sun Oil, Magnolia Oil, Humble Oil (now Exxon). "Spindletop could produce more oil in one day than the rest of the fields of the world combined” (Clark, J., Halbouty, M., 2000, “Spindletop”). In 1902 the annual production was 17.500.000 barrels. After this boom wells starts to diminish till 1925. With a 5400 feet drill the production achieves the maximum with 21.000.000 barrels per year. In 1985 were extracted from Spindletop 153.000.000 barrels. The Spindletop oilfield discovery in January 1901 revolutionized the oil industry. It increased the competition and the production, the prices become more competitive prices, and the transportation rates became lower.Therefore it becomes a threat to the Standard Oil Octopus. The Supreme Court decision In those times the oil industry begins to be a political and governmental concern. Although the increase of the number of oil companies in 1911 the Standard Oil Alliance still had the monopoly of the oil industry. Thomas Ladenburg describes the Supreme Court Decision about the Standard Oil Alliance. On May 15th 1911 the Supreme Court declared that the Standard Oil Alliance had operated in an unreasonable conspiracy to restrain trade and commerce petroleum. The Supreme Court ordered that the Standard Oil Alliance should be dissolved in several companies with different sets of directors and officers and these do not consult with one another. As a result the Standard Oil Alliance was divided in 33 limited territories. But this measure did so little to the Rockefeller’s empire that their shares continue to increase (Ladenburg, 2007). Tomas Maning defends that for many years after 1911 the companies still respect the Standard Oil territory and therefore the Supreme Court Decision didn’t increase the competition as it should be. The shares of the companies were in practice owned by the same small group, so the Standard Monopoly of the oil industry continues. The supreme court decision didn’t have the effect expected. In the early 1900s with the internal combustion engines ( first the automobile and latter the airplane) the oil market become larger and more global. The oil industry became more competitive. As a result the Standard Oil Octopus became to lose his force not because the federal laws but mostly by the increase of the economic development. Mexico oil industry As the oil industry became more global, the oil producers began to develop all over the world. In 1910s the competition became international. Oil explorations were developed in other countries: Iran, Sumatra, Venezuela, Peru, and Mexico. The Mexico example is very interesting. In two decades Mexico became the greatest oil exporter and the second producer in the world ( Rubio, M., 2003). Mexico began to produce oil in 1900 and to export during the next decade 1900 - 1911. In Mexico a license exploration didn’t mean success, “Existed in Mexico in 1919, only 24 produced in exportable quantities. “(Rubio, M., 2). Yet from 1901 till 1911 Mexico exported 25 million barrels. The oil production grew exponentially till 1920. It was the first Mexico’s boom. After 1920s the consequences of the Mexican Revolution and the spread of the nationalism in the economy began to develop consequences on the oil industry. The policies of oil production were based on the domestic demand. The oil production in Mexico began to decrease. Another important fact of oil production in Mexico was the taxes “scenario” and changes in those days. Till 1911 the oil exportation was tax free. So Mexico exported 25 million barrels without payment of taxes. After 1912 the taxes on the oil production were implemented. They were related to the use of natural resources and to the unit of the oil produced. With the Mexican oil boom (1920) these taxes represented a 20% of the government revenue.Although important the oil industry in those times, Mexico was not an oil exporter dependent. On the exportation peak oil represents a half of the total exports. Even on his exporter peak, the rate is still lower than other pure oil exporters economy as Venezuela (where oil represented two third of the exportation) or Arabic countries. ( Rubio, M., 2003). The Red Line Agreement A very important mark related to oil exploration on the Arabic countries and its exportation polices is the “Red Line Agreement”. Edward Peter Fitzgeral in his article “Compagnie Francaise des Petroles and the Defense of the Red Line Regime in Middle Eastern Oil, 1933-36 “ explains how this agreement influenced the oil industry. At 1920s there were three main accords which regulate the international oil commerce. In the United States there was a regime which regulates the internal commerce in order to avoid the cheap oil. The second agreement was related to the commerce overseas. The third one was related to the Middle East and was focused to the rivalry of the Iraq oil fields. In 1920s the Middle East oilfields were dominated by France companies (Compagnie Francaise des Petroles) and by Britain companies (Royal Dutch-Sheel). United States encountered a monopoly with this scenario which they opposed. They defend that the Middle Eats oilfields should be open to all commercial enterprises. In 1928 was signed the “Red Line” Agreement, between American, British, and French oil companies. This accord allowed Americans firms to explore the Iraq oildfields in an international consortium. As a result was fixed a non-competition zone outlined in red colour “ The Red Line Agreement” This agreement was related to the oil resources within the territories that formerly comprised the Ottoman Empire within the Middle East. As a result was establish the Iraq Petroleum Company. This company had the monopoly of the oil in the Middle East. In the post World War II the American diplomacy made several efforts in order to eliminate the Red Line Agreement for the purpose of the opening the exploitation of the Saudi Arabian oil. However it was only the diplomatic purpose. In fact the Americans wanted to monopolize the Saudi Arabian oil with an Arabian – American Company (ARAMCO). And the American diplomacy wans one more time. The end of the Red Line Agreement results in the policy of the Middle East oil exploitation that is practiced nowadays. In the next three decades ( 1930 till 1960) the control of large oil reserves allowed this small group of companies to make large amount of profits. The Middle East The importance of the Middle East in the international oil industry is large: “Five Gulf producers possess 65 per cent of the world’s proven oil reserves.” (Luciani, G., 2008, 82). Therefore the attention of powerful governments in that region is huge. The governments fight to have no oil dependence, so they focus their attention in the Middle East region. Giacomo Luciani in the article “ Oil and political economy in the international relations of the Middle East” describes this situation with historical facts. In 1965 the Organization of the Petroleum Exporting Countries (OPEC) was created. It is an Intergovernmental organization of the petroleum producers. Since then the oil monopoly is owned by OPEC. They control the oil market, keeping high prices and reaped high rents ( Luciani, G., 2008). In this region the oil production is characterized by a web of interests of the consortium producers and the national governments. The most important company ( having the major reserves) was BP ( first Anglo-Iranian company and British Petroleum) and one of the most influence one was Iraq Petroleum Company. Iraq Petroleum Company was formed by five international companies: Anglo-Iranian and Royal Dutch-Shell (50%) , Standard Oil New Jersey and Mobil (25%), Compagnie Francaise des Petroles (25%). Anglo-Arian and Royal Ducth-Shell detained represents the British interest, Standard Oil New Jersey and Mobil the American interest and finally the French interest by the Compagnie Francaise des Petroles. The IPC was bounded by the red line agreement. So those companies were supposed to explore in that region only with the IPC structure. The oil market in the world Therefore the oil production and consumption has become a global matter with governmental interest. Goldstein J. Haung X. and Akan B in the article “ Energy World Economy, 1950-1992” analyzed the oil production and consumption by world regions from 1950 till 1992.With this approach Goldstein and the colleagues related the energy to the different patterns of industrialization and trading all over the world and also how the price shocks influence the economy. They divided the world in two main regions: . The global North includes North America, Western Europe, and Japan/Pacific Australia, New Zealand, Korea and Russia/Eastern Europe. . The South includes China, the Middle East, Latin America, South Asia and subsaharan Africa. Based on this division they collect data related to the energy consumption, production and trade and related this information to the local/global economy. During the years 1950 till 1992 there was a model of North-South relations. In general the less developed South produce and the industrialized North consumes. Also all the south regions exports oil while mostly North regions imports. In the North Russia appears as an export region that is growing. In the South Goldstein and the colleagues concludes that Middle East, China, Africa and Latin America have particular characteristics. The size of the exportation from the Middle East is very variable. In the 1980s the economic energy in China and Latin America have grown on the opposite in Africa. In this article is also concluded that the oil price is related not only to the consumption but also to the GPD growth. The trade between North and Middle East is critical for the economy. The relationship between North and Middle East trade became very complex. Examples are the Suez Crisis, the Kuwait War, the Iraq Invasions. An important question is: How the international oil companies influence the economy? International oil companies Ammy Jafe, Wallace Wilson, James Baker in their article and Ronald Soligo in their article: “ THE INTERNATIONAL OIL COMPANIES” describes the importance of the main international oil companies. Since World War II till 2000s the most powerful international oil company were the seven sisters: . Anglo-Irinian Oil Company ( later BP - United Kingdom); . Royal Dutch Shell (Netherlands/United Kingdom); . Standard Oil of New Jersey (Exxon, United States); . Standard Oil of New York (Mobil, United States); . Standard Oil of California (Chevron, United States) ; . Gulf Oil Corporation ( United States); . Texas Oil Company (later Texaco, United States); They controlled the oil industry in those times: price, consumption and production. Regarding the “Top 50” oil company ranking by Petroleum Intelligence Weekly in 2005 only few remain in the top. Since 90s the oil prices have become very volatile which origins many consolidations process between the oil companies. Therefore the structure of the international oil company changes and so its web. Canada, Europe and Japan witnessed the process of consolidation of Conoco Inc. and Phillips Petroleum Co. Similar. As a result this firm turns into a megafirm which stated in the international ranking. With this firm was formed the so-called Big Five BP, Chevron, ConocoPhillips Company, ExxonMobil, and Royal Dutch Shell. Although the great power of those companies they are dependents of the exploration of the oilfield all over the world. It’s important to emphasize the dependence between North and South explained by Goldstein and the colleagues. Since 2005s that the countries that owns the larger reserves in the world ( as Russia, Venezuela and Saudi Arabia) are not motivated in sharing their wells. This began to be a problem with the International Oil Companies. The oil companies owned by national governments began to conquer control of their own resource exploration. In 2006 the “Big Five” oil firm's production represented more than 20% of OPEC, on the other hand Saudi Arabi production represents 33% of the total OPEC production. These two great forces do not work in the same direction. The big five companies want to increase their profits to the shareholders and do not reinvest their revenues in new reserves and increase the production. Therefore it increases the oil prices. On the other hand Saudi Arabia acts as a balance of the oil prices by increasing or decreasing their production. As shown by Soligo R. and the colleagues the OPEC since 1998 till 2005 the OPEC didn?t make efforts to increase their capacity. The global capacity in oil sustainable production has been increased by investments in Iran, Saudi Arabia, Kuwait, Algeria, Qatar, and Libya. International Oil Companies and National Oil Companies On the article “Strategic Alliances Between National and International Oil Companies” Robert A. James studied the alliances between national and international oil companies. Those companies are very powerful, they manage huge amounts of capital and are social and political influencers and decision makers. Both national oil companies and international oil companies began to feel the necessity of a joint-venture. Nowadays there are many examples of international and national oil company's alliances (IOC - NOC): “. BP and Statoil created (and then dissolved ten years later) a joint venture for international exploration and production activities. . Aramco was essentially such an alliance during its initial phase, with the Saudi Arabian government and the Western oil company shareholders (first Standard Oil Company of California (now Chevron), later joined by Texaco and the predecessors to Exxon and Mobil). . Texaco set up downstream U.S. joint ventures with the Saudis, first the Star Enterprise venture and then (along with Shell) the Motiva venture. . ConocoPhillips acquired 9.9% of the common stock of the Russian oil company LUKoil. . Abu Dhabi National Oil Company (ADNOC) entered into an agreement with Occidental Petroleum whereby ADNOC will hold a 60% interest and Occidental will hold a 40% interest in a 30 year deal to develop reservoirs in the Shah field southwest of Abu Dhabi city. . Eni and PetroChina entered into a memorandum of understanding to develop unconventional resources (such as shale gas) in China and elsewhere. . Rosneft and ExxonMobil will form a joint operating company (66.7% and 33.3% ownership interests, respectively) to develop Black Sea oil and gas resources. . Sinopec agreed with Australia Pacific LNG to purchase a 15% stake in the AP LNG project from ConocoPhillips and Origin Energy Limited.” ( James, R., 2011, 13). James, R. in his article gave also some example of national oil companies joint ventures as (NOC – NOC): “. China National Petroleum Company (CNPC) and Cuba’s NOC, Cupet, signed anagreement to allow Cupet to leverage CNPC’s technological capabilities, increase output and decrease operational costs. . Petroleos de Venezuela (PDVSA) and Ecuador’s NOC, Petroecuador, entered into oil and gas cooperation deals to develop blocks in Ecuador and explore blocks in Venezuela. . ADNOC and KNOC created a joint venture for the exploration and development of three blocks with estimated reserves of 340-570 million barrels of oil in Abu Dhabi. . Korea Gas Corporation (KOGAS) and Uzbekneftegaz to build a network of compressed natural gas stations in Uzbekistan.” ( James, R., 2011, 14). Both IOC – NOC and NOC-NOC have obstacles and restrictions. Yet the IOC-NOC is a more complex operation. The author leads the reader into interesting questions related to the NOC-NOC development. The grow of the NOC-NOC could lead the national oil companies into the oil monopoly. It means that all the economy will be influenced by the taxes, rates and political issues of those countries. In this article is suggested that that the IOC should be more flexible in order to develop responsible and strategic alliances. The Gulf Crisis In the 1990s there was a great increase in the oil prices. This spike in the oil prices was a result of the Gulf Crisis: Kuwait/Iraq war and the invasion of Iraq and Kuwaiti by the Allied Forces. As said the oil production is centered in these countries and others. So the question is how a crisis can influence the oil production? Robert J. Weiner studied this topic in the article “Do Crises Tear the Fabric of Oil Trade?” . This article is very important because focuses on a part of the oil market on the opposite of the other articles studied.Robert focused his research on the international trade companies and their role in the oil market during the Gulf Crisis. During the Gulf Crisis these companies began to compete directly with the international oil companies. He analyzed his hypothesis with an empirical and statistical model of trade patterns. He concludes that the international trade intermediary role has changed during the Gulf Crisis. Before the Gulf crisis these companies have a more powerful role than after. The companies that produce oil began to depreciate the international trade companies' role in the oil market. Also their credibility decreased. Conclusion This paper aimed to give a historical overview of the multinational oil market. The first oil corporation Standard Oil Company began operations with a successful oil strike in the United States. With the discoveries of other oil wells and the Supreme Court decision in 1911 the Standard Oil Company monopoly began to lose power. Soon the oil exploration was developed in other countries. In 1920s, Mexico became the greatest oil exporter and the second producer in the world. The Middle East producers had (and still have) great influence in the oil market. Since the Red Line Agreement, international oil companies are focused on developing and explore Arabic oilfields. Nowadays the influence of the Arabic producers is so huge that could change the oil market policies, as proved by the Gulf Crisis example. References . Ammy Jafe, Wallace Wilson, James Baker, “ The International Oil Companies” (2007). . Edward Peter Fitzgeral, “Compagnie Francaise des Petroles and the Defense of the Red Line Regime in Middle Eastern Oil, 1933-36 “; . Giacomo Lucciani, “ Oil and political economy in the international relations of the Middle East “ (2008). . Gilbert Holland Montague, “The Rise and Progress of the Standard Oil Company,” Business (1970); . Joshua S. Goldstein,Xiaoming Haung, Akan Burcu. “ Energy World Economy, 1950-1992” (1997). . Mar Rubio, “Oil and economy in Mexico, 1900-1930s”. . Robert A. James, “Strategic Alliances Between National and International Oil Companies” (2011). . Robert J. Weiner, “Do Crises Tear the Fabric of Oil Trade?”(2006). . Robert Wooster, Christine Moor Sanders, "SPINDLETOP OILFIELD," Handbook of Texas Online (http://www.tshaonline.org/handbook/online/articles/dos03), accessed January 08, 2013. Published by the Texas State Historical Association. . Thomas Ladenburg, “The Supreme Court Decides,” Digital History (2007). References Gilbert Holland Montague, “The Rise and Progress of the Standard Oil Company,” Business (1970). Robert Wooster, Christine Moor Sanders, "SPINDLETOP OILFIELD," Handbook of Texas Online (http://www.tshaonline.org/handbook/online/articles/dos03), accessed January 08, 2013. Published by the Texas State Historical Association. Thomas Ladenburg, “The Supreme Court Decides,” Digital History (2007). Mar Rubio, “Oil and economy in Mexico, 1900-1930s”. Edward Peter Fitzgeral, “Compagnie Francaise des Petroles and the Defense of the Red Line Regime in Middle Eastern Oil, 1933-36 “ Giacomo Lucciani, “ Oil and political economy in the international relations of the Middle East “ (2008). Joshua S. Goldstein,Xiaoming Haung, Akan Burcu. “ Energy World Economy, 1950-1992” (1997). Ammy Jafe, Wallace Wilson, James Baker, “ The International Oil Companies” (2007). Robert A. James, “Strategic Alliances Between National and International Oil Companies” (2011). Robert J. Weiner, “Do Crises Tear the Fabric of Oil Trade?”(2006). Read More