CONCESSIONARY SYSTEM & THE BIRTH OF OPEC
The members of OPEC came from extremely diverse backgrounds, located in different parts of the globe, with varying histories, political systems, languages, cultures, domestic economies, and geopolitical alliances and relations. Even their individual national experiences with the rise of the global oil industry were vastly different from one another other, as some members became enmeshed in hierarchical concessionary agreements to major international oil companies (IOC), often with consent from a great power, while others experienced more favorable conditions within the concessionary system as junior partners. But regardless of the disparities amongst them, three broader attributes that each shared, united their collective experience and ultimately laid the foundation for OPEC’s formation: all were members of the developing world with little power in international institutions as well as being militarily weak, all had substantial amount of hydrocarbon reserves in their territory that they did not have dominion over, and all, in the years prior to OPEC’s formation, had their economies, of which oil exports to varying degrees was a major factor, negatively impacted by forces outside their control.
Within the environment preceding OPEC’s entrance on the world stage, a confluence of factors at the national, interstate, and international levels ultimately led to the group’s configuration. These factors, while ostensibly economic in nature, chiefly as it relates to price and volume of the oil exports from what eventually became OPEC members, also had a major geopolitical and strategic genesis. What led to OPEC’s formation was only partially economic in nature, specifically a reaction by the developing world’s exporters to the lack of price and export control that existed in the global oil
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industry in the late 1950s. However, there were also important geopolitical factors at work as well. OPEC’s formation happened in the aftermath of the wave of independence movements within the developing world, which invariably left indelible marks in regions that great powers had dominated, primarily the Middle East, North Africa, and to a lesser extent Latin America. 21 Moreover, OPEC’s birth happened in the midst of a bipolar international system dominated by the US and the USSR, where virtually every domestic and regional development, particularly, in the developing world, was viewed by great powers through the zero-sum logic of Cold War dynamics. 22 Internally within OPEC states, as the revenue from oil exports made up a sizeable portion or even the brunt of member states’ economies, the survivability of the political regimes in power and even the cohesion and continuance of certain post-colonial states lay in the balance, many times inviting intervention by regional actors or great powers, whose home multinational firms had a major interest in petroleum-endowed developing countries.
Accordingly, to understand the Organization’s creation, it is crucial to link the larger macro influence of market forces in the context of the geopolitical dimensions of great power rivalries, the changing nature of the global oil trade, the internal political and economic dynamics within the states that became members of OPEC, and later, their relations with one another. This chapter lays out the environment before the Organization’s formation, the first decade of OPEC’s institutional life, and how powerful
21 See: D. Fromkin, A Peace to End All Peace: The Fall of the Ottoman Empire and the Creation of the Modern Middle East (H. Holt, 2001), 43. & D. Little, American Orientalism: The United States and the Middle East since 1945 (University of North Carolina Press, 2008).
22 Odd A. Westad, The Global Cold War: Third World Interventions and the Making of Our Times
(Cambridge University Press, 2005); M.P. Leffler, For the Soul of Mankind: The United States, the Soviet
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outside forces dealt with OPEC’s formation, both the great powers and the major international oil companies, with the domestic political and socioeconomic realities within the states that would eventually became OPEC members.
The geo-economic and geopolitical context Creating the Home-IOC-Host triangle
At the dawn of the globalization of the oil industry, when exploration and production began the expansion outside the initial American and Russian centers, the growing international oil companies (IOC) quickly understood the significance of market share accumulation, from the upstream component to the downstream consumer level. This was seen initially in the domestic US and Russian contexts in which they operated and their eventual ventures abroad. This expansion had its genesis at the beginning of the 20th century, in the major shift in strategic thinking as it related to energy transportation and for the major economies of the world – specifically the mass transition from coal to crude oil. As with many future technologies that eventually spread to societies writ large, the invention of the internal combustion engine quickly became a key area of interest to the militaries of major powers. As Leonardo Maugeri has catalogued, crude oil’s attractiveness lay in the following qualities: its 1.) Higher thermal efficiency, enabling large vessels to ‘travel faster and cover greater distances while enjoying greater self- sufficiency’’ 2.) Versatility of use, in that ‘with oil a ship could be refueled while underway, whereas the loading of coal required a ship to stop in ports equipped with the necessary facilities’; and 3.) Storage, in that ‘oil products were far simpler to store and
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move once on board than coal, ‘ requiring less space and significantly fewer personnel. 23 As the major economies of the day, gradually grasped the efficiencies and benefits of oil and its clear advantage over coal, which up until that time, had been the lifeblood of the 19th century’s economy, grand strategies of the world’s major powers now shifted to having access to this vital commodity. In doing so, the major powers, took a new or renewed interest in the activities of their still nescient multinational oil companies that were based out of their respective territories. And either by default and design, the foreign acquisition activities of oil firms based in their countries, which was profit- motivated, came to be mutually reinforcing with the strategic imperatives of great powers, not just for their economies, but to enhance their military might. The result, as the unique characteristics of crude oil elevated it from being just another commodity to a crucial factor in grand strategy, military dominance, and economic vitality, was that the home governments of these multinational oil firms, such as the US, France, and Britain, became enmeshed in their firms’ foreign dealings in their hunt for oil.
What would become the major catalyst for the grand strategic shift towards crude oil was World War I, and its immediate aftermath, as petroleum products ‘emerged as the leading fuels for moving people, armies, airplanes, and naval fleets throughout the world.’
24 Moreover, the dramatic increase of oil consumption during the war caused world
markets and the major powers to augment their concern about supply and access, even spurring a decline in confidence in American crude reserves, though the US was still
23 L. Maugeri, The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource (Abc-Clio Incorporated, 2006), 22.
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major exporter of crude oil. 25 Compounded by the increase in consumption because of the War, what exacerbated concern was the October 1917 Bolshevik Revolution in Russia and the devastating civil war from 1917-1920, which dramatically cut production from Russia and within months, led to full nationalization of Russia’s oil fields in June of 1918. 26 Realizing the extent that political and economic volatility in a major producing countries could impact access to supplies, creating shortages and mass panics, the international oil companies, already engaged in broadening their acquisition and production activities outside their home countries, accelerated the pace – in Latin America, and more consequentially, the Middle East, where the brunt of conventional petroleum reserves are located. 27 It was this initial catalyst that not only laid the groundwork for the home government/IOC/host government nexus, and the complications that it brought, but also, the future coordination between the international oil companies, to protect their market shares, which later became a consequential factor in the creation of OPEC.
The Companies scramble
Creating the Concession System
In the Middle East, even before the anticipated demise of the Ottoman State, once its disastrous entry into WWI ended its political viability as a unitary state, diverse European powers, including Russia and the United States, had become aware of the large
25 Mira Wilkins, "The Oil Companies in Perspective," Daedalus 104, no. 4 (1975): 159-61.
26 See: Goldman, Petrostate: Putin, Power, and the New Russia, 24. & Sheila Fitzpatrick, The Russian Revolution (New York Oxford University Press, 1982. 1994).
27 Mira Wilkins, "Multinational Oil Companies in South America in the 1920s: Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, and Peru," The Business History Review 48, no. 3 (1974): 425-26. & Maugeri,
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amount of oil deposits in the frontiers beyond the Turkish Empire, in Iran, and its former colonies in the Caucus, particularly in and around the Caspian city of Baku. 28 Once the Ottoman Empire was dismantled by force by the victorious British and French in the aftermath of WWI, ‘enormous new commercial opportunities throughout [its] former territories’ now lay open for both private European enterprise as well as the national designs of their home states. 29 For years, various entrepreneurs of European, and later American origin, traveled to the Ottoman territories and Iran in search of lucrative business opportunities in the newfangled petroleum industry. 30 Eventually, these individual missions, because of the confluence of regional circumstances, were able to obtain significant concessions in developing states, becoming the forerunners for the entrance of powerful European and US multinational firms. 31
With the centrifugal forces intrinsic to the decaying Ottoman Empire, compounded by its consequential loss in the first World War, dramatically disintegrating the state, for the first time in the history of the collective memory of the contemporary Middle East, the once bifurcated political design that comprised two stable Ottoman and Iranian states morphed into a 21-state sub-system, comprising of a weak Iran, a truncated Turkish Republic, later a resurrected Jewish entity, with newly created Arab states that were mostly vassals and protectorates of the British and French. 32 Suffice it to say,
28 Goldman, Petrostate: Putin, Power, and the New Russia, 17-24.
29 R. Howard, The Oil Hunters: Exploration and Espionage in the Middle East (Bloomsbury, 2008), xi. 30 Ibid., 1-22.
31 See: V. Marcel and J.V. Mitchell, Oil Titans: National Oil Companies in the Middle East (Chatham
House, 2006). Howard, The Oil Hunters: Exploration and Espionage in the Middle East; Yergin, The
Prize: The Epic Quest for Oil, Money, & Power.
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juxtaposed to the ‘centuries of domination in Latin America and South Asia, the period of formal European colonialism in the Middle East was short-lived’ as the ‘Ottoman territories appropriated after World War I were given independence within a decade or two.’ 33 However, sovereignty, either for newly created entities with no history of a political culture or for weakened states in transition, such as Iran, with feeble civil institutions and a corrupt ruling apparatus, was quite an elusive notion. As such, this reality ebbed into every aspect of governance, particularly the state’s economic dealings. In this new regional reality, the economic designs of the British, French, and later the Americans, while at times being visibly antithetical to each other, were now mostly unimpeded by any indigenous forces within the developing states that possessed large amounts of hydrocarbon reserves.
Reeling from internal political turmoil and edging closer to state bankruptcy, the first noteworthy Middle Eastern oil concession was made by the Iranian Qajar court to British businessman, William D’Arcy in 1901. Whether by reason of extreme naïveté or desperation, the Shah of Iran gave exclusive rights for vast swaths of Iranian territory for oil exploration and production for the next 60 years, in exchange for a paltry £20,000, an equal amount in shares of D'Arcy's company, and a promise of 16% of future revenue. 34 Coincidentally, this was the same Qajar court that a decade earlier had granted a monopolistic concession for the entire handling, buying, and selling of all tobacco raised in the country to a British firm, eliciting massive public discontent to the point that the concession was revoked a short time later. Yet, though the weak Qajar potentate was
33 F. Halliday, The Middle East in International Relations: Power, Politics and Ideology (Cambridge
University Press, 2005), 82.
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virtually stripped of most kingly powers in Iran’s constitutional revolution in 1906, the newly formed parliament found itself devoid of any meaningful liquid assets in the national treasury, and thus, the concessions to D’Arcy remained. 35 After years of toil in the Iranian hinterland, William D’Arcy discovered that his own funds were drying up, and in a last ditch effort to save his enterprise, he combined investments in Iran with the British-owned Burma Oil Company in 1905. 36 After striking the first well in 1908, the first payment of £2,900 came to a cash-strapped Iranian government in the years of 1912–13. 37 With now tangible proof that Iran contained oil, this allowed D’Arcy to continue his business endeavors, transforming Burma Oil into the Anglo-Persian Oil Company (later to be renamed the Anglo-Iranian Oil Company, the modern day British Petroleum).
As ‘the world’s great industrial and military powers’, realized that unlike other commodities and resources, oil was an unique strategic asset for the long-term advancement and economic, political, and military aggrandizement of their nations, both domestically and globally, they implemented policies to control ‘critical strategic resources as an advantage over their geopolitical and economic competitors.’ 38 For this
reason, Iran, like many of its neighbors and other developing states with large quantities of oil reserves, quickly transformed into an arena of confrontation amongst the major powers, often times in collaboration with powerful multinational oil firms. 39 For the
35 E. Abrahamian, A History of Modern Iran (Cambridge University Press, 2008), 54-56. 36 Marcel and Mitchell, Oil Titans: National Oil Companies in the Middle East, 16. 37 Abrahamian, A History of Modern Iran, 55.
38 Marcel and Mitchell, Oil Titans: National Oil Companies in the Middle East, 14.
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British, noticing that a domestic firm had unimpeded access to large quantities of this strategic resource was an opportunity that had to be harvested, protected, and exploited. This strategic repositioning merely coincided and, in many ways, was a response to the British Royal Navy’s decision to convert its warships from coal-fired boilers to diesel motors, prompting London to acquire a 51 percent interest in D’Arcy’s enterprise. 40 Britain’s fateful decision, providing ‘a monopoly over Iranian oil for the next forty years’,
41 to be maintained at all cost, despite indigenous resistance that witnessed a change of
Iranian dynasties, massive internal modernization efforts, and transformational regional events, 42 essentially marrying the national interests of the empire, the profit motivations of the firm (Anglo-Iranian), with internal events within Iran. In other words, there now was clear link between domestic Iranian politics and socio-economics, the profitability of the Anglo-Iranian Oil Company, and the domestic and international interests of one of the globe’s superpowers. Although initially, the British were focused on obviating Russian/Soviet attempts at forcing concessions upon the feeble Iranian court, fearing that any concession may undermine its own interests in the country, (only to be proven later by kinetic Soviet attempts at occupying Iranian territory in World War II), London’s efforts quickly moved to quelling any indigenous nationalistic tendencies at concessional revisionism, which became a hallmark of the Iranian government’s dealings with the UK and the US, in nationalization attempts in 1933, 1953, up until undisputed total dominative control in the OPEC era.
40 Little, American Orientalism: The United States and the Middle East since 1945, 46. 41 Ibid.
42 Abrahamian, A History of Modern Iran, 63-96. S.A. Arjomand, The Turban for the Crown: The Islamic Revolution in Iran (Oxford University Press, 1988), 34-69.
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The interaction between Iran, its internal dynamics, and the great powers in the height of geopolitical factors disallowed any firm to enter into the Iranian state, granting the Anglo-Iranian Oil Company, buttressed by British military, economic, and diplomatic might, total and complete monopoly over all of Iranian energy. Within this dynamic, a weak Iranian state, trapped in the contours of power politics, became incapable of mustering the negotiating power to alter its fortunes. It was this dynamic, also evident in other developing, oil-endowed countries, that formed the underlying basis for the internal modernization and later nationalization efforts that would be witnessed intermittently in the decades ahead.
Expanding the Concession System in the Middle East
As developments were progressing in Iran, and partially spawned by Anglo- Iranian’s successful efforts, German firms were garnering simultaneous interest in the Ottoman Mosul province. Just as the British synthesized attempts to maximize domestic corporate profits with the national security interests of the state, German entrepreneurs began a rigorous campaign at exploration in establishing the Turkish Petroleum Company (TPC). 43 Albeit, as war broke out in August of 1914, only to be followed by Germany’s
defeat four years later, all Turkish rule over what later became Iraq, fell under Allied control. Naturally, Anglo-Iranian and Royal Dutch Shell, a hybrid Dutch/British venture created a little more than a decade earlier, ‘gained a controlling interest in the TPC’, while turning Germany’s share over to France. 44 As the limbs of the former Ottoman state were being strewn to France and Britain, the mandate that the League of Nations set
43 Maugeri, The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource, 27-28. Little, American Orientalism: The United States and the Middle East since 1945, 46. 44 Little, American Orientalism: The United States and the Middle East since 1945, 46.
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forth allocated Syria and Lebanon to France while Britain controlled Jordan, greater Palestine, and Iraq, with Turkey, Yemen and what would later become Saudi Arabia, emerging as independent entities. 45
In this geopolitical flux, the US, under the Wilson administration, realized that sole European attempts at dominating large tracts of oil-endowed territory would have a possible long-term impact on US energy needs and would surely disadvantage domestic corporate profit potential, with the possibility of leaving the US in an vulnerable position. 46 This was only
to be reinforced by the secretive San Remo agreement, which temporarily precluded any American multinational from the petro- spoils of the Great War. 47 For its part, France, realizing the strategic value of oil,
45 M. Kamrava, The Modern Middle East: A Political History since the First World War (University of
California Press, 2011), 43-47.
46 Yergin, The Prize: The Epic Quest for Oil, Money, & Power, 194-95.
47 Little, American Orientalism: The United States and the Middle East since 1945, 46.
Anglo- Iranian Oil Company 23.75% SOCONY Vacuum (Mobil) 11.875% Standard Oil of New Jersey (Exxon) 11.875% Compagnie Française des Pétroles (CFP) 23.75% Calouste Gulbenkian 5% Royal-Dutch