In this report I will explore this region in 3 sections. The first will be a history of the exploration of the middle east and briefly the regions that have been its main competitors. Then I will look at the changes in how the producing countries and the oil companies have interacted in their share of the profits resulting from the crude oil of the region. Finally, by citing examples, I will explain the several historical and geographical factors that have led to the price jumps of the 1970's and onward, consequently, mapping the price of oil throughout the region. So now, without further ado, lets examine the Middle East and its complex and fascinating oil industry.
The history of the Middle East oil industry is a portrait of the rise of a group of exploited, underdeveloped and impoverished colonies, to one of the wealthiest and politically vital regions of the world. The modern prominence of the Middle East in world affairs has been proven time and time again in events such as the 1973 oil embargo and the Persian gulf war verses Iraq. How did such a rags to riches turnabout develop for the poor colonies of Persia and Arabia? To discover this one must simply follow the development of their oil.
Oil was first discovered in Iran in 1904 in Chiah Surkh (Clark, p. 83). In 1909, William Knox D'Arey, of Britain negotiated the first concession of land from the Iranian Shah, Muzzaffareddin, for the price of £20,000 and a £20,000 stake in the new Anglo-Persian Oil Company (APOC - renamed to the Anglo-Iranian oil company in 1935, and then British petroleum in 1954) (Bild, Carter, p 92, Garfias p 61). More exploration occurred resulting in the first Iranian commercial field: Masjid-a-Sulaiman, which began exporting its oil through the new production facility at Abadan in 1908 (Bild).
The discovery of oil started an explosion of exploration in the Mid East and North Africa. (Bild, Norton) Through the 1920-30's, this exploration was mainly done by the the big oil companies of the time, known then and now as "The Seven Sisters" (See Table 1) whose drilling opened up many of the oil producing areas of today. These companies controlled full rights in the regions conceded to them for exploration, which often resulted in their control of the zones exceeding that of the country who leased it to them. As the amount of drilling and land under control of the corporations increased in the 1930-40's, animosity began to grow in the producing countries. To change the near colonial control the companies had in their areas of control, countries began to offer smaller tracks of land to independent countries instead of the seven sisters. For example Saudi Arabia and Kuwait divided their neutral zone amongst two American independent companies, Aminoil and Getty, rather than allow the big corporations more land. (Bild) This resulted in a lessening of the corporations control and opened the way for the increases profit sharing that will be explained in the next section.
With the onset of World War II, the allies need to secure a supply route that would guarantee safe passage of arms to the Russians on the Eastern front against Hitler. This resulted in the 1941 invasion of Iran and the deportation and replacement of their Shah, thus securing their lines of communications to Russia. (Ashan, Bild) This event didn't directly impact the oil industry at the time but as we will see turned out to cause major problems in the future of the regions oil.
In 1948, Iran's indignity over the WWII invasion, resulted in its nationalization of all oil holdings within its Territory. They formed the first state oil company in the mid east, the National Iranian Oil Company (NIOC). Iranian oil was subsequently boycotted, by the west, until the country's economy collapsed and the Shah was forced to yield to the Western company's demands. The importance of this event , however, was that although Iran retained its nationalized oil industry, until 1973, no other Middle Eastern company would try to nationalize its oil. The time was 1950. (Bild)
In 1957, the NIOC teamed up with an Italian conglomerate to search for oil in its territories. This first step set into motion a series of events that eventually turned the producers into the controllers of their own oil. In 1960, the Organization of Petroleum Exporting Companies (OPEC) was founded by the 5 countries of Saudi Arabia, Iran, Kuwait, Iraq and Venezuela:the worlds top producers. (Carter, p 265) This established the first controls of production and prices in the region, which eliminated uncertainty in the oil market and firmly emplaced the OPEC nations into a position of a global economic power.
The next step in the growth of the oil industry was the nationalization of the producers oil. Algeria was the first to nationalize (After Iran as mentioned earlier) in 1973 and all other producing states soon followed suit between then and 1980. (See Table #2) In 1963 and again in 1972, The Arabs and the Israelis went to war, resulting in two price increases and the Arab Oil Embargo. This raising of prices turned out to be a mixed blessing for the OPEC states for although it resulted in a tremendously higher price of oil, the higher costs made it economical to explore for oil again. consequently, large new finds were made in the North Sea, Venezuela, Mexico, and Indonesia. (Bild, Calvert, Howe, Hobohm, Philip, Europa Staff)These oil regions remain unaligned with OPEC and their introduction of cheap oil has caused much suffering in some of the more oil dependent OPEC countries. (Calvert, Philip)
1980 saw the onset of the Iran-Iraq War, a war that caused much instability in the price of oil, especially with the onset of the tanker war in 1988. Seeds of dissent were sewn by OPEC during this time which eventually resulted in the 1990 invasion of Kuwait. Now the region has stabilized but the continued threat of Iraqi aggression and the problems of quota violations during the wars continue to make the region a lively and unstable market for the commodity of oil.
__________________________________________________________________ Table #1 The "Seven Sisters" and others listed in size from largest to smallest: *1: Standard Oil Company of New Jersey ( Exxon ) *2: Royal Dutch/Shell Group *3: Texaco *4: Standard Oil of California-SOCAL-Chevron *5: Mobile 6: Gulf 7: British Petroleum CFP (French) * Member of ARAMCO Member of Kuwait Oil Co __________________________________________________________________Table 2: Dates of nationalization of oil in the North African and Mid East region Iran 1950 Algeria 1971 Iran 1973 Libya 1973-1974 Upper Gulf State 1973-1974 Saudi Arabia 1974-1976 Kuwait 1975 Lower Gulf States 1976-1980 __________________________________________________________________
Now that the regions history has been covered, it is time to narrow the focus a bit and look at the economics of the producers and corporations. As was alluded to in the history of the region, the power shift from the companies to the producers occurred mainly in the late fifties and early seventies. This power change occurred side by side with changes in the ways the companies shared, or didn't share, profits with the producers. As the producers gained more control over their own resources, organizations such as OPEC began to form and gain the power they have today. So now lets look at the factors that lead to this shifting of control which ultimately leads to the Middle east countries becoming some of the wealthiest countries in the world the world.
When oil was first discovered in the Middle East, the oil companies, specifically the "Seven Sisters", held almost total control of the petroleum resources. The drilling companies owned and operated the wells, as well as all rights to the drilling and sales of the oil extracted from them. All this was done at no taxes or customs from the producing country, who was given a a share of the income or a royalty or dividend on the companies stocks. (Bild) This was the only income from the petroleum that the producing countries received, while the companies who owned the oil profited tremendously from their monopoly on the product. To say the producers were being exploited would be an understatement of epic proportions.
Consequently, when the power of the oil corporations began to rise out of control, the producers offered drilling rights to some of the smaller companies of the West. (Bild) Unfortunately for the 7 sisters, the better deals often offered by these smaller companies allowed the producers to realize that there was more to be gained then the pittance of a concession they had been getting in the past. The time had come for the producers to get the money for the oil.
In 1948, events across the world spawned a new change in the oil business. A revolution in Venezuela, a large oil producing nation, had resulted in the levying of a 50% tax on all income on oil exports by the Gulf Oil corporation. The oil companies, realizing that this tax could then be written off as an expense on taxes back home, soon accepted similar offers of taxation from the Middle Eastern and North African countries, raising the concession moneys paid to the producers from 22¢ p/b to 80¢ p/b. This tax was levied on the profits obtained after production cost was subtracted from the market price of the oil. This change was received warmly in all countries in the region. All except Iran. (Bild)
As mentioned in the previous section, Iran had been harboring poor feelings to the West since its invasion during World War II . When offered the 50-50% profits share, Iran refused and nationalized all oil holdings within its Territory, forming the National Iranian Oil Company (NIOC). Iranian oil was subsequently boycotted until its economy collapsed and the Shah was forced to concede. As a result, the "7 sisters" were awarded 50% of the Iranian oil, therefore setting the 50-50% deal in place in a modified form. (Bild)
1957 marked another major change in the way producers and companies interacted. the NIOC teamed up with an Italian conglomerate to search for oil in its territories. The terms of the deal was that the Italian company would pay the exploration expenses and split the money on any finds with the NIOC. (the 50-50 deal) In addition however the Italian would then sell the NIOC 50% of their half. All oil was, as before, distributed through the foreign firms own appendage companies. This deal was soon mimicked by the other companies. As competition ensued for contracts, the firms started keeping less and less oil in their own share until, in 1966, the practice of service contracts became standard. The rules of the service contracts were simple. The producers owned the oil, but were then obligated to sell the oil to the exploration company who then distributed it to the markets through their appendages. (Bild)
With the rise of their role in the world of oil, the producer companies decided to band together in order to try to set a unified price on oil. Differences in the cost of freight, due to distances from source to market, as well as simple underbidding attempts of the different producers, were causing great difficulty in future planning of the oil business due to the constant motion of the oil price per barrel. In addition, production of oil was skyrocketing, causing an oil glut which threatened to drop the price of oil. In order to address the issue and try to control all of these factors, the Organization of Petroleum Exporting Companies (OPEC) was founded by Saudi Arabia, Iran, Kuwait, Iraq and Venezuela, the worlds top oil producers. Soon OPEC was successful in establishing a universal price per barrel with it's members, and put into effect a yearly oil quota for each. (Bild)
As the service contracts became common the producers began to notice that that were still not getting fair shares of their oil profits. Although they now had 100% of the profits off of sales of the oil, they had no share of the distribution or refining profits. Starting in the early 70's, production agreements started to become common as the companies offered percentages in the profits of the refined oil they purchased from the producers. By 1973 the share was approximately 12%. Negotiations with the companies finally resulted in the General agreement of 1972, which promised a gradual increase in profit sharing up to 25% no later than 1981. This is where the deal stands today between producers and the oil companies. (Bild)
The final step in the growth of the oil industry was the nationalization of the producers oil. Algeria was the first to nationalize (After Iran as mentioned earlier) in 1973 and all other producing states soon followed suit between then and 1980. (See Table #2) With the nationalization of the oil, the producing countries, which already owned all the profits off of the wells, now owned the wells and were free to sell to the oil to any company they wished.
The history of the Middle east oil prices is an interesting topic as there are many geographical and political factors that can influence them. Among these factors are cost of freight, the total production of oil in the world, the mood of the producing nations (OPEC) and the political stability of the producing region. From the sixties, to the present, oil prices have fluctuated wildly from their $1.25 p/b average in the sixties, to the peak of $40.00 p/b in the gulf war. The reasons for this rise are many but they can easily be understood by the examination of the world events that occurred during the price fluctuations. So now let us look at the events that are responsible for the rise of oil in the last 30 years.
First is the rise in late 60's of North African oil due to the cost of freight. Although the cost of oil at the time was set by OPEC members, the actual cost of oil varied from region to region. The reason for this is the cost of shipping the oil that has to be factored with the base cost per barrel. The old methods of freight pricing were set at the standard cost of a trip from the gulf of Mexico to the producing country. Although countries near to the Persian Gulf suffered in price, as the distance from them to the oil was much nearer then the distance to the US, this was offset by corporate losses in other regions. (Great Britain for example is closer to the US than the gulf gaining a benefit) To rectify this situation the freight pricing soon changed to a flat fee per unit distance, leading to true distance variations in oil costs. (Bild) In 1963 the Arab Israeli War erupted, ending in a catastrophic defeat for the Arabs and a closing of the Suez Canal as the Egyptians and Israelis, each owing a separate side of the canal, squabbled over who got the fees for its use. Libya was soon to raise objection to its OPEC partners about unfair prices. The reasons why are simple.
One of the goals of OPEC was to keep the base cost of Oil at a level fee across all its members markets. The problem now was that with the closing of the Suez, the freight costs of getting the oil to Europe jumped dramatically for the Persian gulf states as they had to transport the gas all the way around Africa. Libya was in a position to make a tremendous profits as they were located a short distance from Europe, which cut freight costs by a third at least. The point of contention was that the North African states now a large area to raise prices, and still underbid Persian Gulf oil. The OPEC flat line for crude costs , however forbade Libya to raise the prices on its oil. Consequently, OPEC eventually allowed Libya and the other North African states to raise their prices. The canal remained closed until 1972. (Bild) When it finally reopened, the prices remained high.
The next event was the oil embargo of 1973. With the defeat of Egypt and Syria by Israel in the October War, on Yom Kipper, 1972, Israel occupied more Arab territory. In order to force Western pressure in Israel to withdraw from the captured territories, the OAPEC countries (Organization of Arab Petroleum Exporting Countries) began decreasing oil production by 5% every month the Israelis continued their occupation. This caused a massive rise in prices that lead to a jump in the cost of oil from $1.25 p/b to $10.00 p/b. Production eventually returned to normal as political situations stabilized but prices remained high and were not reduced. (Bild)
In 1979, oil worker strikes in Iran caused another rise as the markets panicked, afraid that a repeat of 1973 would occur. Prices eventually leveled out at $18.00 p/b after a peak of $21.00 p/b. (Bild) This was the time of the imfamous gas lines in America as gasoline prices soared. In the short term, the OPEC nations prospered, deluged with an inflow of Oil profits. Unfortunately this prosperity turned into a double edged sword as will be seen shortly.
The result of this increase in the cost of oil, was a boom in the oil exploration industry. With oil being so costly, it became economical to explore for oil again. Large new finds were made in the North Sea, Venezuela, Mexico, and Indonesia (Bild, Calvert, Howe, Hobohm, Philip, Europa Staff). This produced an oil glut of non OPEC oil that began to undermine the high OPEC costs until 1985 when a crash in oil prices dropped them from $20.00 p/b to $18.00 p/b. (Bild) This proved to be devastating to many of the oil producing countries who had large portions of their governments structured around oil money. (Venezuela is perfect example of this as it had a jump in unemployment to 20% and a total gutting of its social programs when its petroleum industry collapsed) (Calvert)
The next big problem in oil prices was the Iran-Iraq War. During this time both countries severely exceeded their quotas whenever possible to try to pay for their military expenditures. At the same time, they systematically warred on each others ability to export petroleum, ultimately culminating in the Tanker war of 1988. Saudi Arabia and Kuwait made up for the lost production of Iran and Iraq in order to meet orders. The prices of oil held at $14.00 p/b during this time as a result (Bild).
Finally, in 1990, Iraq invaded Kuwait after an unsuccessful attempt to have its production quota raised to make up for Kuwait, over production during the Iran-Iraq war. This proved to be a godsend for the oil countries for after highs of $40.00 p/b the price of oil stabilized at $21.00 p/b (Bild). Continues fluctuations of price occur now due to the continued menace of Iraq but generally, the priced have been maintained at the previously mentioned rate.
It should now be clear that the history of the Middle Eastern petroleum industry has controlled and has been controlled by many factors of modern world events. The OPEC nations, although currently being challenged by the independent oil nations and companies, are still a major economic power whose decisions can effect the well being of the industrialized nations of the world. "King Oil" remains a valid hyperbole in the language of business. Its historical political and geographical effects prove it to be a nickname of truth.
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