OPEC, CIA, and the Seven Sisters
Early History
Early EgyptBitumen was much in demand by the Egyptians for use in preserving mummies, and a bitumen trade built up across the Sinai Desert. Nasty little wars broke out over these trade routes, and the rise and fall of the Nabateans of Petra is linked with this trade.
Early ChinaThe Chinese invent oil drilling. The Chinese used oil from natural seeps as fuel to boil salt. They invented the oil pipeline, using lengths of bamboo to take oil to the salt pans. As an extension of this technology, they pounded bamboo vertically into the seeps, thus inventing oil drilling as they penetrated deeper and deeper.
Early 1880 The Chinese technology was much admired by a European visitor, and
(with iron pipe instead of bamboo) was transferred to the west.
1800’s and John D. Rockefeller
The modern oil era began in northwest Pennsylvania in the mid-19th century, as shallow fields were tapped. The demand for oil was not great: its major use,
after refining, was as kerosene for oil lamps. Even moderate discoveries (by today's standards) flooded the market, crashing prices at least temporarily. The
early days of the oil industry were characterized by boom and bust, as new discoveries first overwhelmed demand, then lagged behind it. Prices fell from $10 a
barrel in January 1861 to 10¢ a barrel in December 1861, but were up to $7.25 a barrel again by September 1863, down to $2.40 in 1867. Fortunes were made
and lost in boom towns and stock speculations that rivaled any in the gold industry.
The innovation that allowed some control over the chaos was the oil pipeline. Barrels (real barrels, made of oak) were expensive, sometimes worth more than the
oil they contained. They were expensive to transport on wagons, too. By 1866, pipelines, made of wood at first, had been built to the major producing fields,
transporting oil to railheads where tanker cars could be filled. After that, there was only one real choice: the oil flowed to the nearest industrial city for refining,
Cleveland, Ohio.
It was the genius of John D. Rockefeller that found a way to take advantage of this situation, which was merely a matter of simple geography. The oil fields
were scattered in rough country, owned by small-time entrepreneurs, and new discoveries were unpredictable in location and size. They were, however, likely to
occur in the same region, and they would be connected by pipelines to the existing rail network, and funneled to Cleveland. After refining, the kerosene was
marketed nation-wide.
Rockefeller reasoned that the way to control the oil industry was within the transportation and refining section. In particular, refineries were comparatively
long-term investments. At the age of 20, Rockefeller had entered business just as the Civil War began, and made a lot of money supplying the Army with wheat,
salt, and pork. In 1863 Cleveland was connected with the Pennsylvania oilfields by rail, and Rockefeller and a partner opened an oil refinery in Cleveland. In
1866 he bought out his partner, and at the age of 26 owned the largest refinery in the city. Using the size of his shipments to negotiate low prices for railroad
transport, outcompeting his rivals for price and quality, Rockefeller and his Standard Oil Company became the largest oil company in North America,
amalgamating and controlling the refining side of the industry. By 1879 Standard Oil controlled 90% of the refining capacity in the United States, and all the
pipelines flowing out of the Pennsylvania oilfields.
In the 1880s, Standard moved into oilfield production too. By 1890, it was producing or buying over 80% of the oil produced in the United States, and refining
and selling it. Standard was exporting kerosene, too: half of the kerosene it produced was exported, mainly to Europe, and kerosene was the fourth-largest
American export commodity.
At the end of the century, the Standard Oil Trust controlled the oil industry of the Americas, while Shell was a major player in much of the rest of the world.
Three major events altered this situation: in 1901 the great Spindletop gusher brought Texas oil into the picture, eventually bringing Gulf and Texaco into the
big leagues; in 1911 the US Government used anti-trust legislation to break up the Standard company; and the World War of 1914-1918 brought to everyone's
attention the fact that petroleum was now vital to waging and winning wars. The scene was set for oil to dominate much economic, political, and military
thinking, and that situation continues today.
Early 1900’s and The Seven Sisters
We know now that most of the world's oil production and most of the world's oil reserves will be in the Middle East for the foreseeable future. The predominant
oil-bearing region lies in an arc from Iraq and Iran through Kuwait and Saudi Arabia, with the smaller Gulf States like Abu Dhabi and Bahrain on the fringe of
the belt. But that was not known until early in the 20th century.
In 1904 an Armenian businessman, Calouste Gulbenkian, reported to the Turkish Sultan Abdul Hamid on the oil potential of the then Turkish provinces in Iraq:
the Sultan promptly transferred large areas into his own personal possession. The Iraq Petroleum Company was formed in 1914, with capital coming from a
consortium of British and Dutch companies.
The Anglo-Persian Oil Company, which eventually evolved into BP, struck oil in Iran in 1908, and in 1911 Winston Churchill, then head of the British
Admiralty, used Government money to buy half of the company on behalf of the Royal Navy. Churchill also decided that new British battleships would be
fueled by oil rather than coal, and the Iranian supplies were very valuable to the British in World War I.
By the end of World War I the central place of petroleum in world strategy had become obvious, and the dramatic thirst of military operations had led to fears
that there would be a global oil shortage, and to quick appreciation of the profits to be made in such circumstances. American companies, who had been
unwilling to explore abroad when vast oilfields were being discovered at home in Texas and California, began to look overseas, and the American government
began to use considerable political and economic pressure to try to force American companies into the European-dominated consortia in the Middle East.
However, new fields came on line in the 1920s, and the big companies were soon worrying instead about an oil glut. By 1928 there were negotiations between
BP, Shell, and Exxon*
*I have used the modern names of oil companies in the discussion that follows to save confusion: thus, "Exxon" rather than "Esso"; I call the largest oil
companies "the majors".
in a Scottish castle, and the so-called Achnacarry Agreement set out working principles to avoid competition at the marketing end of the oil industry. The
agreement specifically excluded the US market because of its powerful anti-trust legislation, but there is no question that the companies had no intention of
serious competition there if they could hammer out an agreement for the rest of the world.
The Economist of London praised the Achnacarry Agreement as "an example of the effectiveness of international cooperation in oil marketing." The Economist
was pleased with the "stability" of the prices of oil and gasoline, but it's not clear whether the articles was written with the seller or the consumer in mind. Mobil,
Gulf, and Texaco had joined the three founder companies by 1932, to make six. The results for producers were very rewarding: stable (but higher) prices
gouged the consumer for decades, and "pirates" were dealt with summarily whenever possible.
With the Achnacarry Agreement in hand, each large company could feel that it would be able to negotiate a market share for its oil without seeing petroleum
prices crash. The stage was now set for serious prospecting, and for staking out major oilfields, even though every company could see that it would not be in a
position to pump all the oil that it found. After 1928, therefore, the era of the great Middle East oil strikes began, though Middle East production remained low.
In 1928 the six-year negotiations over Iraq were completed, and the Iraq Petroleum Company was re-divided. 5% went to the formidable Mr. Gulbenkian, and
the other 95% was shared equally between the British (BP), the Dutch (Shell), the French (CFP, the Compagnie Française Pétrole), and a Rockefeller-controlled
American group (Exxon + Mobil). The Iraq company was essentially set up as an accounting company, to share the production costs and the crude oil between
the partners.
On June 1, 1932, Socal (now Chevron) struck oil in Bahrain, the first strike in the Arabian peninsula. In 1933 BP extended its Iranian lease for another 60
years. Gulf joined with BP to explore a Kuwaiti concession in 1934. But 1938 marked the major turning point in Middle East oil history: Gulf and BP struck
the Burgan field in Kuwait, and Chevron struck oil in Saudi Arabia.
Oil did not begin to ship from Saudi Arabia until 1946 because of World War II, but it was clear that Chevron's discovery had made it overnight into a major,
globally powerful company. Its oil was marketed through Texaco's global sales network under the name Caltex, while the Saudi part of the partnership was
called Aramco, the Arabian American Oil Company.
King Ibn Saud of Saudi Arabia became impatient for more cash return from his oil fields, and Aramco (Chevron + Texaco) began to expand Saudi production
and to sell oil at a price that undercut Texas prices. Even so, production costs in the Saudi oilfields were so low that the partners were making a larger profit than
anyone could make from Texas production. The implied threat and gentle pressure brought the other companies into negotiation, and soon Chevron became a
seventh major partner in the international selling agreements. (This may have had something to do with the fact that at the time the Rockefeller interests were still
the largest shareholders in Mobil, Exxon, and Chevron.) By a major reorganization in 1947, Mobil and Exxon bought into Aramco, leaving Chevron, Exxon,
and Texaco with 30% each, and Mobil with 10%. This meant, in essence, Rockefeller control over Aramco.
Even so, Saudi production was nowhere near full capacity. Complex conditions were negotiated between the big companies to ensure that new production from
the Middle East would be marketed without major competition. A US government report said in 1952 that the seven international oil companies operating in the
Middle East were jointly controlling oil prices. This report gave rise to the expression The Seven Sisters for the companies involved: the four Aramco
members, Exxon, Mobil, Chevron, and Texaco; the Kuwaiti partners Gulf and BP (British Petroleum); and Shell, which had a share in the Iraq Petroleum
Company, and had enormous marketing capacity. Although they had a stranglehold on Middle East oil as early as the 1930s, the Seven Sisters were still in
control as late as 1972, when they produced 91% of the Middle East's oil and 77% of world supply outside the US and the communist countries.
The Seven Sisters thus controlled Middle East production, in a way that would have seemed inconceivable to John D. Rockefeller. It was also obvious that the
oil industry was susceptible to control at the refining and marketing end of the market, as the Standard Oil Trust had shown at the turn of the century. The
break-up of the Standard Oil in 1911 had effectively warned off any overt attempts at controlling the large American market for a long time, but the same
constraints did not apply to the rest of the world. The cartel's activities in controlling marketing were widely known and often approved during the 1930s, as we
saw. The United States.‹In the United States, the oil companies had to be much more circumspect in their efforts to control production or marketing. Although
the Standard Oil Trust was broken up into several dozen "independent" units in 1911, there was a great deal of interlocking share holding, and the Rockefeller
interests held enough shares in enough of the companies to influence mutual interactions. In 1938, for example, Rockefeller interests held 20% of Exxon, 16%
of Mobil, 12% of Chevron, and 11% of Amoco, and since all the other shares were widely dispersed, that was considered "working control" in all four
companies by the Government.
Fortunately for them, the major oil companies (majors) had already negotiated the basic Achnacarry Agreement when a major crisis erupted for them in Texas.
On October 3, 1930, the gigantic East Texas field was discovered by an independent wildcatter, and new crude oil began literally to pour into the domestic
market in 1931. The oil companies were faced by a dramatic new source of oil that they did not control. They began to buy up leases in the new fields, but the
quantity of oil was too great to be absorbed easily, and the East Texas fields were soon producing a million barrels a day, one-third of all United States
production.
The majors were able to survive the crisis by their control over refining and marketing. However much new crude oil was found, it still had to be refined and
marketed through a system that was already tightly controlled. The majors, in effect, could simply state what they would pay for crude oil from the new fields.
As new oil began to flow, that price was about 70¢/barrel.
The majors now began to promote policies under the cloak of "conservation" that would limit "wasteful" production: it was already clear that pumping oil too
rapidly from a field could damage long-term production. The ends were entirely correct and respectable, of course, but certainly the conversion to conservation
was well timed. As the majors decided that free-for-all production must stop, they filled Austin, Texas with lobbyists, and in November 1932, the Texas
legislature passed the Market Demand Act. Under "conservation," the law defined as "prohibitable waste" any production that was in excess of "market
demand."
As soon as the Act became law, the majors dropped their offering price to 25¢ a barrel on January 1933, and then to 10¢ a barrel. Naturally this cut production
dramatically, as "market demand" dropped. The majors bought up tens of millions of barrels at give-away prices before many of the independents went out of
business, and the price did not rise back up to $1 a barrel until September 1933, as the majors gained control.
In 1935 Congress passed an Interstate Compact to Conserve Oil and Gas and the Connally Act. Between them, these laws assigned strict production quotas to
each State. In the end, US domestic production was limited under the cloak of conserving natural resources. Once again, the ends were admirable, but it's clear
that the legislation was passed on behalf of the majors. By 1958 Texas oil wells were allowed to pump oil for only 97 days a year. The legislation was used to
hold down production in order to maintain stable prices.
Oil companies of all sizes acted through Congress to keep down their taxes through the infamous depletion allowance. In 1972 the IRS estimated that the nation
was losing $2.35 billion a year in tax avoidance through the depletion allowance. In 1974, while corporate tax rates were 48%, the 19 largest oil companies paid
an average of 7.6% as taxes. This had repercussions throughout American business: for example, if one combines the petroleum, motor vehicle, and aircraft
industries of the United States as vital to its economic and military security, the petroleum companies held 60% of the assets of this part of US industry and
paid 9% of its taxes. The auto industry held 32% of these assets but paid 79% of the taxes.
The other major (and frightening) post-war impact on domestic US oil supplies was a deliberate policy decision to serve the domestic market largely from
American oil wells. Under the pretext of a quota system to protect "national security," (so that the US would not become too dependent on foreign oil), cheap
foreign oil was kept out of the United States, while domestic fields were rapidly depleted. In the 1960s, for example, domestic prices rose gradually, although
prices dropped by about 40% in foreign markets. Furthermore, overseas competitors like the Western Europeans and the Japanese benefited from low energy
prices, while US industry paid increasingly higher prices.