"The American Beauty Rose can only be coaxed to that degree of splendor and fragrance that enchants us by sacrificing the other buds growing around it. In the business world, the same operation is the result not of an unhealthy trend, but simply of a law of nature and of God."
JOHN D. ROCKEFELLER, Jr.
Oil is the lifeblood of modern civilization. It provides the fuel for our planes, our ships, our trucks, and our 180 million automobiles, and it is the source of some 300,000 petro-chemical products. Oil accounts for more than half of the maritime freight tonnage, and furnishes more than 60% of the world's energy. It is the number one industry in the world today.
The budget of the oil industry is larger than the budget of the United States government. The annual revenue of the largest oil company in the world, Standard Oil of New Jersey, is greater than the revenue of the government of Canada. Directly or indirectly, through American domestic production(1) as well as overseas holdings, the American oil industry controls 80% of the world market.(2)
Through their overseas domination and the steady growth of the oil market in the past fifty years, the big companies have grown increasingly bigger.(3) Their interests, however, do not always coincide with those of the continents and the peoples they control. Europe, which consumes 25% of the oil produced in the world today, accounts for only 0.7% of world reserves, and for only 1.4% of world production. In the coming decade and probably until the end of the century, Western Europe's major problem will be how to obtain enough oil.(4)
Oil is no longer an exclusive capitalist commodity. The International (mainly American) Consortium that dominates the world market, after attempting unsuccessfully following World War I to gain control of Russian resources, saw them pass under Soviet control. In 1962 the Soviet Union (with an annual production of 1.3 billion barrels) had little surplus oil to export, but since then the situation has changed. Soviet production in 1968 is estimated at more than 2.1 billion barrels. Simultaneously with its ideological and political transformation, the USSR is converting its coal-burning industry (including its armaments industry) into an oil-burning consumer industry. In a few years it will have the same proportion of consumer to heavy industry as the countries of Western Europe. Its desire for international commercial expansion and its need for foreign currency have led the Soviet Union to abandon its socialistic oil policy. The consequences of this change are these:
- an increase in production, in order to export more oil;
- the creation of a distribution network which, because the USSR has relatively few tankers, is largely dependent on the COMECOM pipeline which runs to the heart of Western Europe;(5)
- the adjustment, with certain exceptions (barters such as that practiced with Italy, or agreements based on political considerations, as with Cuba) of Soviet prices to bring them into line with the prices of the Consortium.
At the present time, the USSR is feeling its way into the world petroleum market. This has led to a change in its Middle East policy following a series of instructive failures in the area. The neo-Soviets have come to understand the ground rules of the petroleum industry, and Soviet influence in the Middle East is steadily rising. By 1980, Soviet oil production is expected to exceed 3.5 billion barrels. Through the pipeline, it will provide an increasing percentage of Western European consumption. But before that date the conflict of interests between the Soviet Union and the International Consortium will either be resolved or will come to a head. In the latter event, there will be economic warfare; in the former, the United States and the Soviet Union will set revolutionary principles aside to carve up the world oil market among themselves.
If Soviet expansion continues at its present rate, the oil market in the 1980's will be dominated by a Communist-capitalist cartel that will swallow up Western Europe while continuing to juggle with the Middle East. For beneath the golden sands of the Persian Gulf lie the most important oil reserves on the globe, $300 billion worth (in terms of current prices), on which the Consortium hopes to earn $75 billion at its usual rate of commission.
About one-fourth of the price of refined oil goes to the companies of the Consortium in the form of clear profits. In the Middle East, another fourth goes to the countries that own the concessions. The remaining half not only covers the cost of production, transportation and refining, but provides profits comparable to those earned in other industries.
Oil as an industry is in a class by itself. No other economic activity offers such high profits, to the detriment of the consumers and the producing countries. In the Middle East, the people gain nothing from the riches extracted from their soil. The royalties paid by the Consortium go to the rulers and their relatives, the ruling classes, high government officials, and a few local businessmen. By supporting the emirates of the Persian Gulf and protecting their rulers, Great Britain, now supplanted by the United States, has contributed to the preservation of archaic social structures and paved the way for revolution.(6)
In 1968, the overseas investments of American oil companies total more than $30 billion (nearly 40% of all American investments abroad.(7) The giants of the oil industry not only control the world market, but governments and foreign and military policy as well. In the United States, the Republican and a portion of the Democratic Party get much of their financial backing from the oil industry. The State Department and the White House and a substantial portion of the press give systematic support to the industry. Even college graduates in quest of jobs are warned of the danger of opposing it.(8)
Four oil companies were classed in 1966 among the ten largest American corporations: Standard Oil of New Jersey, which ranked third (after General Motors and Ford), Socony Mobil, fourth, Texaco, seventh, and Gulf Oil. which ranked tenth. But this list is open to question. It fails to take account of the most important factor in economics, profits.
Although the combined personnel of these four oil companies totaled only 346,846 (388,016 persons are employed by General Motors alone), their net profits, $2,661,684,000, exceeded those of the entire automobile industry ($2,603,638,000) -- in other words, the combined profits of General Motors, Ford, and Chrysler, which together employ four times as many people. But General Motors, Chrysler, and Ford, together with deficit-ridden American Motors, comprise almost the entire American automobile industry . The fourteenth, fifteenth, and sixteenth places on the list of the top 500 companies are held by Shell Oil, Standard Oil of Indiana, and Standard Oil of California, whose combined net profits exceed $1 billion, and further down the list are 15 other oil companies whose profits add another million to industry profits. It can be said that the combined profits of the American oil industry (which in addition to these 22 top companies include several thousand smaller ones) are greater than the annual turnover of General Motors.(9)
Standard Oil of New Jersey is symbolic of the oil industry. It is also its moral leader. At first glance, it looks like just another corporation. In theory, it is what is left of the empire created by John D. Rockefeller, which was broken up by anti- trust legislation in 1911.(10) But half a century later Jersey Standard, which theoretically neither produces nor refines nor transports nor sells any oil, controls one-fifth of the world market. It owns the largest private tanker fleet in the world (126 ships totaling 5,096,000 tons), ranking 12th in 1967 on the world list of fleets, along with the national fleets of Panama, Sweden, Denmark and Spain. It has a security department eight times larger than the security department of General Electric, employing about 30 special agents who are graduates of the CIA or the FBI. Its 14 top executives control more than 300 subsidiary companies, one-third of which rank among the largest corporations in the world.(11)
The history of Standard Oil is the history of the oil industry, which was born a little more than a century ago at Titusville, Pennsylvania in 1859.(12) Oil, however, has always existed. In ancient times it was used for eternal flames and torches, but no one ever thought of commercializing it. Until the 19th Century commerce was based on grain, and it was there that personal fortunes were made and power won.
Standard Oil was founded in 1860, and for nearly half a century the oil industry and the life story of John D. Rockefeller were one. During 51 years Standard eliminated its competitors by every means at its disposal, corrupting public officials and violating or getting around the laws, until it was dissolved in 1911.
Around 1890, its world monopoly began to slip. The Russo-Swedish Nobel group inaugurated operations in the Caucasus, and between 1891 and 1901 Russian production actually exceeded that of the United States. The British Rothschilds, realizing the future possibilities of oil, in particular with regard to modern shipping, aided the Royal Dutch Company to escape the control of Standard and conquer some of Rockefeller's markets in the Far East.(13) In 1907 Royal Dutch merged with the Shell Transport and Trade Company, which until then had specialized in mother-of-pearl. With the backing of the Foreign Office and the privileges it enjoyed in the British and Dutch colonies overseas, the Anglo-Dutch company, headed by Henry Deterding, expanded rapidly. Contrary to Standard, which had patterned its commercial policies after the isolationist principles of Theodore Roosevelt and Taft and sought only markets abroad, Royal Dutch Shell carried out explorations and extended its operations throughout the world.(14) In 1912 it began operating in the United States and soon controlled half of American production. It also forced its way into Mexico, where it bought out the Pearson group that owned the No. 4 well at Potrero del Llano, with a production of 91 million barrels. By 1921 Mexican production equaled 40% of United States production, but foreign companies (British and American) sacrificed everything to the present and devastated the Mexican reserves. Gas pressure was wasted and the Golden Way oil field near Tampico was invaded by salt water. By 1930 Mexican production had dropped far behind, and she was soon eclipsed by her neighbor to the south, Venezuela. In 1963, Mexican production equaled only 4% of American and 20% of Iranian production.
In the Middle East, where oil reserves are at least 100 times greater than those of the United States, a British adventurer, William Knox d'Arcy , obtained a concession from the Shah of Persia in 1901 covering five-sixth of his lands. In 1908 the Anglo-Persian Oil Company (later the Anglo-Iranian Oil Company, and later still British Petroleum or BP) was founded. The British Navy had just switched to oil-burning ships, and Winston Churchill, First Lord of the Admiralty, persuaded His Majesty's government to purchase a majority share in the new company.(15) At that very moment, America and Europe discovered the automobile. In 1908 Henry Ford began producing his famous Model T. The rush was on. In 1911 there were 619,000 automobiles. By 1914 there were 2 million, and by 1924 there were 18 million cars on the road, 16 million of them in the United States. That year the United States alone consumed more oil than Europe consumed in 1960.
The war revealed the strategic importance of oil. Not only did it contribute heavily to the allied victory, but it became part of the stakes of the game. Wilhelm II wished to destroy British oil domination and give Germany a share in Mesopotamian oil. He built the Berlin-Bassorah railway (via Constantinople and Baghdad) to compete with the route of the Indies. Once Germany had been defeated, the British and the French divided up the oil of the former Turkish Empire.(16) In 1920, Royal Dutch Shell circled the globe. It had subsidiaries in the United States, Mexico, Venezuela, Trinidad, the Dutch East Indies, Ceylon, Romania, Egypt, the Malay Peninsula, North and South China, Siam, the Philippines, and Burma. In association with other British companies it acquired concessions in Colombia and Central America, and it was trying to establish itself along the Panama Canal. Soon it would extend its activities to Honduras, Nicaragua, and Costa Rica. It also bought out the Rothschild holdings in Russia for far less than they were worth. Banker Sir Edward Mackay declared that ..all of the known, probable or possible oil fields outside the territory of the United States were either British property, under British direction or control, or financed by British capital," and added that "the world was solidly barricaded against an attack from American interests."(17)
Jersey Standard realized that Woodrow Wilson's policy of isolationism and pacifism represented a threat to its future. A. C. Bedford, President of Jersey Standard, declared, "What we need is an aggressive foreign policy," and the Interstate Commerce Commission recommended that the United States give diplomatic support to the acquisition and exploitation by American companies of oil properties overseas. The State Department dispatched a series of diplomatic notes, the tone of which grew more and more violent, demanding that the United States be given a share in the Turkish and German holdings.
In 1922 talks opened between Bedford and Sir Charles Greenway, President of Anglo-Iranian. They dragged on for six long years, but Gulf in the meanwhile had obtained a concession on the island of Bahrain (which it later ceded to Standard of California) which the British geologists had somehow overlooked. At the same time Socony Mobil (which when Standard Oil was dissolved in 1911 had inherited most of its Asian interests) and Shell were engaged in a struggle to the death in India. Their price war brought prices down all over the world. In 1928 Sir Henry Deterding (founder and promoter of Royal Dutch Shell) invited Sir John Cadman of Anglo-Iranian and Walter C. Teagle, new President of Jersey Standard, to his home in Scotland. At the conclusion of what has since been known as the Achnacarry Conference, it was agreed that outright competition had resulted in excessive overproduction. The Big Three decided:
1. to maintain the status quo of 1928 (in other words their respective positions) on the world market;
2. to fight overproduction and the waste of new, non- competitive installations;
3. to fix uniform production prices;
4. to supply markets from their closest source of supply through a series of reciprocal agreements between companies;
5. to avoid producing in excess of demand.
The companies signing the agreement explained that these measures were designed to protect the consumers from price hikes resulting from a multiplicity of separate operations. In actual fact, they laid the foundations for an arrangement by which the members of the international cartel would cooperate in the most profitable exploitation of world oil reserves. They brought the war between Shell and Socony to an end by making it possible to fix prices in India, and prevented a new price war in Mexico. A sort of line of demarcation was drawn between the British and American zones of influence. It was nothing short of a monopoly.
American anti-trust legislation was no problem. It was expressly stipulated that the Achnaccary Agreement did not apply within the United States. But in 1929, 17 companies joined to form the Oil Exporters Association, which set quotas and established prices, which were aligned with the highest costs in the country, those prevailing in Texas and the Gulf of Mexico. The British had no objection to this arrangement, as it enabled them to make high profits on their low-cost crude from Iran and Iraq. As for the American companies, which were already making good profits from domestic production, they intensified their overseas explorations, which would earn them even higher profits.
The "Red Line" agreement concluded in 1929 consecrated America's entry into the Middle East. The holdings of Turkish Petroleum were divided up again, this time between four partners which joined to form the Iraq Petroleum Company: Anglo-Iranian (still controlled by the British government), Royal Dutch Shell, the Compagnie Francaise des Petroles, and Standard Oil of New Jersey (in association with Socony Mobil). Each was given a 23.75% share in the venture.(18) The Red Line agreement stipulated that the four associates undertook to maintain the same percentages in all of the countries that lay within a red line on the map. The red line ran all the way around the Middle East.
At the time that the Iraq Petroleum Company was founded, Iraq was the only oil-producing country in the region. But Standard of California discovered oil at the edge of the sea on the concession it had acquired from Gulf at Bahrain. As it had no distribution network in the Orient, it signed an agreement with the Texas Company (becoming Caltex in 1936). Standard of California also began operating in Saudi Arabia, on the territory of El Hasa which King Saud had seized from the bedouin princes. With Texaco it formed the Arabian American Oil Company (Aramco).
Caltex and Aramco soon proved to Standard and Socony that the reserves on their concessions far exceeded those of Iraq. The latter two companies regretted having signed an agreement to share their future discoveries with the French and the British. But American solidarity and Jersey's power soon overcame that obstacle. Jersey Standard, Caltex and Socony joined with Aramco, excluding Royal Dutch Shell, Anglo-Iranian and the Compagnie Francaise des petroles. Great Britain already controlled sufficient resources in Iran, Venezuela, the Malay Peninsula, and Burma. France was traditionally a non-commercial country, and she had no petroleum policy. Like Gulbenkian, she was given an indemnity.
The Iraq Petroleum Company faced the difficult problem of income taxes. In order to benefit to the maximum from American and British tax provisions that favored the overseas activities of their companies, it was decided that any profits earned would not go to IPC, but would appear instead on the balance sheets of the constituent companies. Obviously, this was contrary to the interests of the government of Iraq. IPC sold oil to Iraqi consumers at its usual Texas-based prices, and the company was not eager (or perhaps unable) to calculate its actual net cost, which would have brought its excessive profits to the attention of the Iraqi government.(19)
By the time of the Second World War, the world had been divided up between the Big Seven (Jersey Standard, Royal Dutch Shell, Socony, Texaco, Gulf Oil, Standard of California, and BP). The war caused a few minor annoyances, and there was concern as the Germans neared the Caucasus and Egypt, but the oil business was booming.(20)
The requirements of the war nevertheless led the Allies to impose quotas on raw commodities throughout the world, and even the distribution of oil was controlled. The experts on the War Production Board demanded that the United Nations be given the power to administer world stocks of raw materials, and in Britain the Labour Party proposed a similar plan. In 1945 at the Washington Conference, Sir Anthony Eden and Secretary of State Cordell Hull legalized and completed the old Achnacarry Agreement that divided up the world's oil reserves between Great Britain and the United States. Highly displeased, the Soviet Union that same year signed the Moscow Agreement with France.
In 1947 the International Cooperative Alliance proposed that the petroleum industry in the Middle East be nationalized in order to eliminate the nascent rivalry between Russia and the West, raise the living standards of the Arabs, and diminish the price of oil to the consumer. It proposed that the United Nations create a special agency to control the petroleum resources of the Middle East and admit all buyers on an equal footing, in accordance with the Atlantic Charter. But when the United Nations Economic and Social Council voted on the measure on August 12, 1949, only Norway and Colombia supported it. Eight member countries abstained (including the Communist states), and eight others voted against it, including the United States, Great Britain and the Netherlands.(21)
The international oil cartel was in greater danger when, in December 1952, the Economic and Financial Commission of the UN approved a joint Iranian-Bolivian resolution in favor of the right of nationalization. The United States was the only country to vote against it.
Iran was Britain's private preserve. Sinclair (42nd largest American corporation in 1966, with $1,377 billion in sales) and Standard had carried out some explorations there, but had withdrawn at London's insistence. In 1959 Iranian Prime Minister Mossadegh demanded an increase in royalties, the rate of which had remained unchanged since before the war, as well as a 50-50 split in profits. Anglo-Iranian refused, whereupon Mossadegh nationalized the company,(22) and the crisis was on. The American firms profited from the operation. Aramco's production rose from 196 to 280 barrels, that of Kuwait from 126 to 266 million. In 1955 Iran began to export oil in small quantities and at reduced prices to non-producing countries such as Italy and Japan. But the Consortium regarded Iran as an ominous sign. To its great relief, the CIA went into action, and Mossadegh was replaced by Zahedi.(23)
The American intervention aroused a storm of ill-feeling against the United States that has not yet been dissipated. The Iranians claimed they had been exploited by Anglo-Iranian for forty years.(24) John Foster Dulles turned the Iranian problem over to Herbert Hoover, Jr., who formed an alliance of five big companies (Jersey Standard, Socony, Texaco, Gulf, and Standard of California) which formed a common front in the interminable negotiations with the British and demanded that the Iranian holdings be divided equally between Anglo-Iranian and themselves. The new company was called Iranian Oil Participants, Ltd. The British (who received an indemnity of $510 million) kept their majority with 54% of the shares (40% went to Anglo-Iranian, now BP, and 14% to Shell), while the five American concerns got 8% each.(25) The new agreement was signed on October 21, 1954 and ratified by the Iranian Parliament, which recognized the validity of the new Consortium for a period of 40 years.(26)
But the American independent companies were annoyed. They felt the Big Five were deliberately shutting them out from their overseas treasure chests, while continuing to benefit from domestic sales prices for their low-cost crude from the Middle East and Venezuela.(27) The Consortium, however, was more concerned about the reaction of the other oil-rich states, which were carefully scrutinizing every clause of the agreement signed with Iran. The latter country had obtained nothing more than a 50% share of the profits, the same accorded the other producing states, plus the promise of a gradual increase in production. This new agreement raised the American share in the oil production of the Persian Gulf to 55% in 1955 (as compared to 14% in 1938). The British and the Dutch were declining in power.
In 1956 came the Suez crisis. On July 26, Egypt nationalized the canal. Since that date, the Middle East has become a battleground of vested interests(28) where the member countries of the Consortium, the United States, Britain and France, struggle for predominance under the interested gaze of the Russians, whose problems are simpler because, unlike the French, they have enough oil for their own needs, unlike the British their power does not depend on their position in the Persian Gulf, and unlike the United States they are not subjected to private industrial pressures.
The USSR is content to sit back and watch as the cracks grow wider between the Western powers, between the Western powers and the Arab states, and between the Arab states themselves. In 1956 half the oil consumed in Europe was imported from the Persian Gulf, and 60% of it was shipped through the Suez Canal.(29) Britain and France risked a war to ensure control of their oil supplies, and only the intervention of the United States stopped them. During the winter of 1956- 1957, American companies took advantage of the European shortage to raise the price of fuel oil $1.50 a ton, and the price of crude $2 a ton. The price hikes affected American consumers as well. They cost the Americans $1.25 billion and the Europeans $500 million. Suez brought Jersey standard $100 million in additional profits. Toe Big Five beat all records for profits during the first quarter of 1957. Jersey Standard's profits rose 16% (compared to the last quarter of 1956), Texaco's 24% and Gulf Oil's 30%.(30)
The Persian Gulf brought the Consortium more than $1 billion a year. Continuing the policy followed by the Department of State since 1920, John Foster Dulles lent his support to the big American oil companies, and when necessary the intelligence services and the military backed him up. The Middle East was almost completely encircled, and Britain was losing her foothold. In 1957 the King of Jordan, hitherto subsidized by the British, switched his allegiance to the Americans. Saudi Arabia's King Saud renewed his country's agreement with the US Air Force and the Strategic Air Command in exchange for $10 million in weapons. The London Times wrote, somewhat maliciously, that "The bizarre combination of a large American company (Aramco) and an ancient feudal kingdom constitutes a real threat to Anglo-American cooperation in the Middle East."
The growing demands of the Saudi Arabian King were not the only problem the Consortium had to face. It had managed to gain a foothold in the Sahara,(31) but it was deeply concerned when the Italian firm ENI (Ente Nazionale Idrocarburi) proposed an agreement giving the government of Iran a 75% share of profits (at a time when a 50-50 split was still the rule in the Middle East).(32) ENI's President, Enrico Mattei, had the courage to defy the Consortium. He declared: "The oil companies have built their power by concentrating control of production and distribution in a few hands, by maintaining a relationship of supplier to client with the consumers in a closed and rigid market, by refusing to grant compensation other than tax revenues to the countries owning the reserves, by excluding all agreements and arrangements between states for a more rational organization of the market, but they have also created the conditions for a breaking up of the system or its transformation under the pressure of new forces and new problems . . . The price of crude oil is based not on production costs in the Middle East, but on the much higher costs in the United States . . . As a result of the rivalry between the various nations and the Western oil companies, oil has become an element of disorder and instability that gives rise to nationalist demands in the oil-rich countries and arouses the jealousy of those states that have none.
"Italy, France, Belgium, Germany and Japan are anxious to free themselves from their subservience and that of the consumers to the traditional organization of the oil industry . . . For the first time in a century we have the possibility of substituting a buyers' market for a sellers' market. An orderly market is necessary if we are to change the order established by the big international companies. The supremacy of what is known as the international cartel is not 'taboo,' and Italy is not obliged to respect it when this supremacy is breached on all sides by public and private initiatives.
"Oil is a political resource par excellence. What must be done now is to see that it is made to serve a good policy which is free, in so far as possible, from all imperialist and colonialist reminiscences, devoted to the preservation of peace, to the welfare of those whom nature has provided with this resource, and of those who make use of it in their industry." A short time later, in 1962, Enrico Mattei was killed in the crash of his private plane.(33)
At the beginning of the Sixties, the Consortium's problems multiplied. The evolution of the market revealed growing competition,(34) but what was even more serious was the wave of popular revolts. Fortunately, for every Mexico(35) there were two or three Venezuelas,(36) but nations all over the world were suddenly becoming conscious of the importance of the minerals in their soil. Those that had been bypassed by nature realized that the balance of their economy depended on the security of their supplies. The Consortium knew that the Italian ENI, the French ERAP, the Mexican Pemex, and the Argentinean YFP could easily be copied elsewhere. It began to pay special attention to its sources of supply in the Middle East and to its principal clients in Western Europe.(37) Their hatred of the foreigners who depleted their soil, however, was not strong enough to forge the peoples of the Middle East into a powerful and united community.
In January, 1968, the principal oil-exporting countries of the Middle East -- Saudi Arabia, Kuwait, Iran, Iraq, Qatar, Syria and Libya -- joined with Indonesia and Venezuela to form an organization to commercialize the oil of its member states, to defend their economic and commercial interests, and to examine ways to develop the oil industry and its derivatives. The principal object of this agreement was to raise prices and create a fleet of tankers and a petrochemical industry under the control of the producing countries themselves.
The Consortium is fighting every foot of the way, but it is beginning to realize that its days in the Middle East are numbered. On the other hand, it has sufficient political power to maintain its position for the moment in Venezuela. Caution, however, has led it to concentrate its exploration efforts in South America and Africa, where the oil fields of Libya, the Sahara, Nigeria, and Gabon produce more than 700 million barrels. For Jersey Standard, the future lies in Africa.
The Consortium also had problems in Europe. In 1966 Western Europe consumed 2.9 billion barrels of oil, only 126 million of which came from her own soil. Britain is a member of the Consortium. Her oil policy is patterned after that of the United States, and despite the promise of important oil discoveries in the North Sea, she remains dependent on her concessions in the Persian Gulf and has not yet resolved her coal problem.(38) The Common Market is a bigger headache for the Consortium. Germany produces only 56 million barrels of oil a year, plus an additional 14 million barrels in Libya, but the distribution networks in Germany are almost entirely controlled by American concerns. (Texaco was able to buyout DEA, an important Germany company, with only one-fourth of its annual profits.)
Italy is less aggressive but just as realistic as France. Her oil policy is that defined by Enrico Mattei, and she is linked to the Soviet COMECOM pipeline at Trieste. The Italians have undertaken explorations in the Adriatic, Somalia, the Sinai, the Gulf of Suez, Tunisia, and the Persian Gulf. In December, 1967 they obtained a 12,000 square kilometer concession at Rub El Khali in Saudi Arabia, together with permission to construct a petrochemical complex.
In France the present Minister of Agriculture and former Prime Minister, Edgar Faure, wrote in 1939 that "If the government has an oil policy, the leaders of the oil industry will have a policy in the government." Until 1939 France too was dominated by the Consortium. Since De Gaulle's accession to power in 1958, and in particular since 1963, France has stood in direct opposition to the interests of the American oil industry. The French government already controlled a portion of the third-largest non-American company in the world, the Compagnie Francaise des Petroles, and it spent several billion dollars drilling for oil in the Sahara. When political considerations forced De Gaulle to give the Sahara back to the Algerians, the government, desirous of obtaining oil independence, began looking in other directions. A state oil company, ERAP, was created which today ranks 17th in the world, and whose activities and policies in the Middle East (notably in Iraq and Iran) run contrary to the methods and interests of the International Consortium.(39) Today, France is the most active supporter of the idea of a Common Market oil organization. Such a body is indispensable to Europe, but it is contrary to the interests of the Consortium in other words, to the interests of the big American companies.(40)
In November 1966, Walter J. Levy, an American expert, submitted a 52-page confidential report to the European Economic Community (Common Market). Levy noted that "eighteen percent of the oil importations of the Common Market are controlled by the companies of the Common Market.(41) As things stand now, this figure is destined to drop." Levy recommended the adoption throughout the Common Market of fiscal measures of the type already existing in France, which are aimed at stimulating oil explorations. These measures are specifically directed at the oil industry and are nearly as favorable as the tax privileges granted oil companies in the United States, with the difference that in France any amount deductible from taxes must be reinvested within five years in explorations or related activities. Levy suggested that this provision be included in any fiscal measures adopted by the Common Market countries.
This report, which was submitted to Dr. Walter Hallstein, was an indication of the Common Market's preoccupation with the development of the oil industry of its member states in order to be able to compete with the Consortium.(42)
This orientation of the oil policy of the Common Market was hardly welcomed by the Consortium. The battle was on.(43) The measures proposed by France and Walter J. Levy to enable the Common Market to regain its oil independence were identical to those that had enabled the United States to gain control of the market.
The oil industry has dominated the American economy formerly 40 years.(44) The 1930 crisis enabled it to eliminate the independent prospectors and made possible the establishment of federal and especially state controls the likes of which existed in no other industry, and which had the effect of maintaining artificially high prices for petroleum products. You will find no mention of price fluctuations for crude oil and gas in any financial publication. Almost all of the world's raw commodities are quoted on the stock exchange, with the exception of oil.(45)
The oil market is no freer in the United States than it is in the rest of the world.(46) The rules that govern the activities of the Oil Empire within the United States are particularly advantageous for prospectors and land owners,(47) which explains why there are more than a million oil wells on US territory, and why 400,000 of them produce, or are permitted to produce, only 10 barrels a day (while one well in Mexico has an annual production of 7 million barrels, and several wells in Iraq produce more than 500,000 barrels a year).
Mackay, the British oilman, once remarked, "The Americans are plundering their natural resources." Under the rules that have governed the American oil industry for nearly 40 years, two-thirds of the United States reserves have been wasted. Henry M. Bates, Dean of the University of Michigan Law School, remarked in 1935 that "the losses resulting from the rule that any oil discovered belongs to the property owner can be evaluated at several billion dollars and constitute the most ruthless and the most unjustifiable destruction of our natural resources ever perpetrated by the American people."
Nevertheless, the oil industry justifies its privileged position by pointing to the need to conserve American oil reserves, a major part of the wealth of the nation and a strategic necessity in time of war. But, as Harvey O'Connor remarks, the word "conservation" must be taken with a grain of salt. When oilmen talk about conservation, they are speaking of the conservation of their profits.
The problem emerged for the first time in 1930, when the immense reserves of the East Texas oil fields upset the balance of the market. It was decided that production quotas would be established each month in accordance with the demand. A national quota was set, and in each oil-producing state a special body was established to see that it was respected.(48) In Texas, this task was assigned to the Texas Railroad commission, which had been created in 1891 to regulate the railroads. In 1919 its authority was extended to the oil industry. Given the dominant position of the state of Texas in the Oil Empire, the Texas Railroad Commission serves as a model for the other state regulatory bodies. The annual variations in the quota bear no relation to scientific conservation techniques.(49) Nor are the consumers represented on these commissions. The system is, in effect, a monopoly, and it enables the oil industry to top all other American industries in sales per employee(50) and to maintain a steady rate of profits regardless of the national economic situation and international events.(51)
The system of "posted prices" is one of the pillars of the industry. These prices do not represent the net cost increased by a normal margin of profit. Instead, they are fixed by the Consortium. While it is difficult to determine the actual net cost of crude oil, it can be estimated at one-tenth the wholesale sales price. The companies of the Consortium and the company-backed local rulers (in Venezuela as in the Middle East) pocket most of the difference.(52) The Consortium's profits were and are excessive when calculated on production costs in Texas, but the latter, which already include profits for the local operators, are four or five times higher than net costs in the Middle East, and three times higher than net costs in Venezuela.
The American independent producers are constantly urging higher production quotas for themselves. In 1954 twenty-nine companies were forced to lower production as a result of competition from foreign oil. Even Standard of Indiana complained that imports had increased by 35% between 1951 and 1954, while at the same time its Texas production had been ordered cut by 35%. (It was as a result of these complaints that the members of the Consortium agreed to sell the independents 5% of the shares in their Iranian operations}. But the independents' protests had little effect. The big corporations had friends in Washington. In 1952 a commercial treaty concluded with Venezuela set the import duty for Venezuela oil at 2% of its value, rather than the 20% requested by the American producers. The National Security Resources Board, backed by the Mutual Security Agency, recommended that import duties be abolished altogether "if necessary."
In 1955 the government considered limiting oil imports to 10% of national production, but the big corporations promised not to exceed their importation level of the preceding year, and this apparently satisfied Eisenhower. Actually, Jersey Standard and the other members of the Consortium had little to fear from any restrictions imposed by Congress. Their foreign market was growing steadily, and they had diversified interests within the United States. Their importations of foreign oil brought them super-profits, but they made money from their integrated operations in Texas, Oklahoma, and Louisiana as well.
Conflicting interests can rarely be reconciled. Texas and Venezuela seemed destined to clash, but the men from Jersey Standard were well versed in the art of the most profitable compromise. The big integrated corporations make profits on all four sectors of their activities: extraction, transportation, refining, and retail sales. Distribution is sometimes run at a loss and pipeline profits are largely fictitious. Refining is an indispensable intermediate operation of which the independents are purposely deprived. Extraction is the main source of revenue, but it is the interlocking operations as a whole that provide the profits.(53)
The profit margins of small, strictly producing companies are extremely precarious, particularly in the case of the independent refineries, which are at the mercy of a slight increase in the cost of crude or a slight drop in the price of gasoline.(54)
The independent, integrated producers and the small producers of crude are in a somewhat better position. They benefit not only from the posted prices, but also from the special tax privileges accorded the oil industry as a whole. These fiscal privileges enable the Big Five to earn colossal profits while guaranteeing super-profits to the big independent and integrated companies. They also provide large profits for the medium-sized concerns, particularly the producers, and it is to them that the small producers, which in any other sector of the American economy would have been swallowed up long ago, owe their survival.(55)
A booklet entitled "An Appraisal of the Petroleum Industry of the United States," published in 1965 by the Office of Oil and Gas (headed by Rear Admiral Onnie P. Lattu) devotes only one line in 96 pages to the depletion allowance.(56) But Milton Friedman, who can hardly be accused of being a socialist, wrote a whole article on the subject in the June 26, 1967 issue of Newsweek:
"Few US industries sing the praises of free enterprise more loudly than the oil industry. Yet few industries rely so heavily on special governmental favors. These favors are defended in the name of national security. A strong domestic oil industry, it is said, is needed because international disturbances can so readily interfere with the supply of foreign oil. The Israeli-Arab war has produced just such a disturbance, and the oil industry is certain to point to it as confirmation of the need for special favors. Are they right? I believe not.
"The main special favors are:
"1. Percentage depletion. This is a special provision of the Federal income tax under which oil producers can treat up to 27.5% of their income as exempt from income tax -- supposedly to compensate for the depletion of oil reserves. This name is a misnomer. In effect, this provision simply gives the oil industry (and a few others to which similar treatment has been extended) a lower tax rate than other industries.
"2. Limitation of oil production. Texas, Oklahoma, and some other oil-producing states limit the number of days a month that oil wells may operate or the amount that they may produce. The purpose of these limitations is said to be 'conservation.' In practice, they have led to the wasteful drilling of multiple wells draining the same field. And the amount of production permitted has been determined primarily by estimates of market demand, not by the needs of conservation. The state regulatory authorities have simply been running a producers' cartel to keep up the price of oil.
"3. Oil import quotas. The high domestic prices enforced by restriction of production were threatened by imports from abroad. So, in 1959, President Eisenhower imposed a quota on imports by sea. This quota is still in effect. Currently it is slightly more than 1 million barrels a day (under one-fifth of our total consumption).
"Foreign oil can be landed at East Coast refineries for about $1 to $1.50 a barrel less than the cost of domestic oil. The companies fortunate enough to be granted import permits are therefore in effect getting a Federal subsidy of this amount per barrel -- or a total of about $400 million a year .
"These special favors cost US consumers of oil products something over $3.5 billion a year. (Gibert Burck, Fortune, April, 1965). This staggering cost cannot be justified by its contribution to national security.
"The following points indicate the basis for this judgment:
"1. Restricting imports may promote the domestic industry, but why pay a $400 million subsidy to oil importers? A tariff of $1.25 a barrel would restrict imports just as much -- and the US Government rather than the oil importers would get the revenue. (I do not favor such a tariff but it would be less bad than a quota).
"2. Oil from Venezuela -- after the U.S., the largest oil producer in the world -- is most unlikely to be cut off by international disturbances threatening our national security. Yet it too is covered by the import quota.
"3. Restrictions on domestic oil production at least have the virtue that domestic production could be expanded rapidly in case of need. But such restrictions are an incredibly expensive way to achieve flexibility.
"4. The world oil industry is highly competitive and far-flung and getting more so. The Mideast crisis has let large oil-producing areas undisturbed. Moreover, the Arabian countries themselves cannot afford to refuse to sell for long. Only World War III is likely to produce severe disruptions of supply -- and then the emergency is likely to be brief.
"5. If all the special favors to the oil industry were abandoned, prices to the consumer would decline sharply. Domestic production also might decline -- but then again, if the industry were freed of all the artificial props that raise costs and stifle initiative, production might rise rather than decline. In either event, a vigorous and extensive domestic industry would remain, protected by the natural barrier of transportation costs.
"If domestic production did decline, we might want to insure against an emergency by stockpiling oil, paying for holding reserve wells in readiness, making plans for sharp reductions in nonessential consumption, or in other ways. Measures such as these could provide insurance at a small fraction of the $3.5 billion a year the US consumer is now paying.
"The political power of the oil industry, not national security, is the reason for the present subsidies to the industry. International disturbances simply offer a convenient excuse.(57) Indeed, the American oil industry enjoys extraordinary political power. When Kennedy entered the White House, the American fiscal system, and in particular the system of the depletion allowance, had enabled a few operators in the oil industry like H. L. Hunt to amass in only a few years the kind of fortune it had taken Rockefeller a half-century and a great deal of patience to accumulate.
If a person had enough capital, speculation in oil operations carried virtually no risk. He could take capital which normally would have been taxed at the rate of 90% and invest it in new oil wells. A speculator with $900,000 in this tax bracket could drill nine wells (at an average cost of $10,000). The odds were that one well out of nine would be productive. The eight dry wells would have cost him $10,000 each, all tax-free, and the ninth would earn him a fortune. With a little perseverance, any speculator could make a million.
Pools or joint ventures enabled citizens with more modest revenues, but whose income was still partly taxed in the 90% bracket, to do the same thing. These persons would purchase fractional interests in an oil well. Some of them never even got to see "their" well, but every tax dollar they invested represented a gain of approximately 25% on their capital. In the war and immediate post-war period, investment in the petroleum industry was one of the most obvious and attractive ways of reducing personal income tax liability. For the non-professionals this system was still, to a certain extent, a speculation, but the same was not true of the big companies, which employed experienced geologists and commanded unlimited capital.(58)
These special privileges constituted an international anomaly, and they cost the nation several billion dollars every year.(59) It has been estimated that the abolition of these favors would have enabled the government to avoid the 1951 tax increase that applied to taxpayers earning as little as $4,000 a year. The oilmen, conscious of the importance of these privileges, have always claimed that their abolition would hinder new explorations. But the fantastic number of wells drilled in the United States represents a waste of natural resources.
In 1963, the oilmen advanced other arguments.(60) They noted that the market for American crude had grown from 1 billion barrels in 1930 to nearly 2 billion in 1950 and almost 3 billion in 1963, and they made known their "concern" about a future shortage. Their cautious and seemingly pessimistic prognostics, however, were not confirmed by more independent-minded experts. Professor A. I. Levorsen of Stanford University had declared in 1949 that world oil reserves were sufficient to cover the world's needs for the next five centuries, and other scientists estimated that only l/1,000th of the surface of the earth and sea had been explored thus far.(61)
The oilmen also complained that it was becoming harder and harder to find oil in sufficient quantity to make it as easily extractable and as profitable as in the past. Between 1956 and 1967, it took twice the number of new field wildcats to make one profitable discovery compared with 10 years earlier.
These arguments became the theme song of the National Petroleum Council, the only lobby representing c private interests that enjoys official standing. The NPC was founded in 1946 and is composed of representatives of the front offices of the big companies. It elects its own President. In reality, it is the NPC that defines the oil policy of the federal government, in the spirit of John Jay's maxim: "The country should be governed by those who own it."(62) The President of the United States has no business interfering.
A half-century ago, the oilmen lacked the influence in the White House that they had over Congress. They regarded the President with suspicion. For them, the country had been going to the dogs since McKinley. The power of the oil lobby was a concern to every President who entered the White House after the accession to power of Jersey Standard and its little brothers and sisters. In 1920 President Harding was elected with the massive backing of the oil industry. Two members of his Cabinet were oilmen (Hughes of Standard and Fall, an associate of Sinclair). Coolidge, and after him Hoover, did nothing to displease the oil magnates. On the day of Franklin D. Roosevelt's death, a San Antonio oilman threw a huge party to celebrate. Roosevelt, nevertheless, had not been particularly aggressive towards the oil industry. The pre-war climate was hardly favorable, and the war, which was still going on at the time of his death, had brought a boom in the oil business.
In 1950 President Truman examined the depletion allowance system, and the oilmen learned that the President felt that an exoneration that withheld such amounts from the Treasury was not equitable. That same year Hubert H. Humphrey, then a political neophyte and regarded as a liberal, introduced an amendment to the tax bill that would reduce the depletion allowance. The amendment was rejected. It was re-introduced in 1951 but rejected again by a margin of 71 to 9. In 1952 President Truman turned again to the problem, but any decision he might make was at the mercy of Congress, and Harry Truman liked the quiet life. Nevertheless, during his last days in office he adopted one of Roosevelt's ideas and declared that the continental shelf (an extension of the American coastline) was part of the national reserves and should be placed under the control of the Department of Defense. The value of the oil beneath the sea had been estimated at $250 billion, and Truman felt it would be madness to let this oil, which was vital for national defense, fall into private hands, obliging the government to buy it back at high prices.
In 1952 Eisenhower received heavy financial backing from the oil industry in his campaign against Adlai Stevenson. Ike knew how say thanks. When Truman's bill came up before Congress, the House rejected it in favor of a measure recognizing the property rights of the states over any oil discovered within ten and a half miles (twelve for Texas and Florida) of their coastline. The federal government was left with only a right of preemption over the resources of its former territory .The bill was later voted into law by the Senate.(63)
In 1954 Senator Humphrey's timid offensive was taken up by Senators Douglas (Illinois) and Williams (Delaware), both of whom introduced amendments concerning the depletion allowance. Senator Douglas noted that in 1953 one company with a net income of $4 million had paid only $404 in taxes, that another had paid nothing on a revenue of $5 million, and that a third company with profits of $12 million had received a $500,000 subsidy. The amendments were rejected.
On March 27, 1957, Senator Williams again introduced an amendment that would reduce the depletion allowance from 27.5% to 20% .He explained to Congress that this privilege had been instated during the First World War, when it amounted to only 5%. Later it had been increased to 12.5%, then to 25%, and finally to 27.5%. Originally it had been a discovery depletion, permitting the recovery of the investment, "but the present 27.5% oil depletion rate obviously gives a special tax advantage to the oil industry above that enjoyed by other taxpayers." He added that when the present rate of 27.5% had been adopted in 1926, the corporate tax rate had been approximately 14% .The depletion allowance therefore did not represent a huge sum of money. But in 1957, "with our present corporation rate, this 27.5% gross sales deduction, or depletion allowance, represents a tremendous tax-free bonanza.(64)
"The importance of percentage depletion is more glaringly emphasized in connection with the operations of foreign companies," he continued. "The Treasury Department has submitted three examples as to how this works. Corporation A with total earnings of approximately $200 million reported a United States tax liability of $103,887,000. They paid foreign taxes which are deductible from United States taxes in the amount of $103,323,000, leaving a United States tax liability of $564,000. This company has a total allowable depletion allowance of $91,879,000.
"Corporation B reported an income of approximately $150 million. Their total allowable depletion was $123,977,000, and they reported a United States tax liability of $78,961,000. The taxes reported as paid to foreign countries by Company B amounted to $98,319,000, and the credit allowed for foreign taxes paid was $77,087,000, leaving a United States tax liability after foreign tax credit of $1,874,000. Corporation C reported an income of approximately $33 million. The total allowable depletion of Corporation C was $44,895,000. The United States tax liability of this company was $17,325,000, and foreign taxes paid were of the same amount, with credit being given for the full total, leaving Company C with no United States tax liability."
Senator Williams cited and inserted in the Congressional Record the testimony of Mr. Paul E. Hadlick, general counsel of the National Oil Marketers Association, to the Senate Finance Committee. Mr. Hadlick had prepared a list of the incomes and taxes paid by the 23 largest oil companies. His figures indicated that Humble Oil had paid $30 million in federal income taxes on a net income of $145 million, that Socony Vaccuum Oil had paid $51 million on a net income of $171 million, that Standard Oil of California had paid $40 million on an income of $174 million, and that the Texas Company had paid $47 million in taxes on an income of $181 million.
Senator Barrett (Wyoming) retorted that "the depletion allowance is based upon the great risk involved in drilling and discovering oil," and he drew Senator Williams' attention to the fact that "our first line of defense will rest in air power, but the planes will not be able to deliver the bombs without high octane gasoline and plenty of it, I might say."(65) Senator Carlson (Kansas) declared: "Those of us who are familiar with the reserves in the stripper well are in a position to know that the producers must have the 27.5% depletion allowance and any other encouragement they can get, or the United States will lose millions of barrels of oil, which will never come out of the ground." Senators Monroney (Oklahoma) and Martin (Pennsylvania) joined in the chorus. Senator Williams quoted a statement by the Secretary of the Treasury in 1937: "This is the most glaring loophole in our present revenue law." Nevertheless, he noted, depletion had not been discussed during the 1937 hearings, and the committee had made no recommendation in its report on the subject "because of lack of time."
"Mr. President," Senator Williams continued, "today we hear the same argument: lack of time." Senator Williams spoke for another 15 minutes and then called for a vote. Senator Johnson (Texas) suggested the absence of a quorum. But there was a quorum, the vote was held, and the amendment was rejected.
Senator Douglas of Illinois then introduced his amendment, which maintained the percentage of 27.5% on revenues not exceeding $1 million, but lowered it to 21% for revenues of between $1 and $5 million, and to 15% for revenues exceeding $5 million. Senator Aiken (Vermont) supported the Douglas amendment. "I believe that when these enormous depletion allowances are given to one segment of our economy, it means that other people must dig into their pockets to make up for them," he said, adding that in 1955, "the total depletion deductions were approximately $2,800,000,000. Since the corporate tax would have been 52%, this resulted in a tax saving of $1,500,000,000 to the oil companies. "My amendment," he continued, "would save approximately $700 million for the Treasury. I wish to emphasize again that it would not hit the small driller. The weight would fall almost entirely upon the big companies." He went on to cite examples of oil companies that didn't pay a cent of taxes (on $7 million in income), or 1% of taxes (on $1,800,000 in income), or 6% (on $95 million in income), while in other industries companies were taxed at the rate of 52%.
The parade of lobbyists for the oil industry began. Senator Long (Louisiana) declared: "I must oppose this amendment. I submit that in many respects it works out to be the absolute epitome of unfairness and injustice. This is an amendment which proposes to say: Oilman Rich can earn and receive $1 million a year and still retain the 27.5% depletion allowance. On the other hand, Grandma Jones who does not have the importance or prominence of an independent oil and gas man owns $200 worth of stock in an oil company, and she receives an income of $20 a year from that ownership . . . I would like to protect Grandma Jones' little $20 dividend."
Senator Johnson (Texas) again suggested the absence of a quorum. The legislative clerk called the roll. Eighty-seven Senators were present. There was a quorum. Senator Douglas then asked for the yeas and nays, but his request was not sufficiently seconded. The yeas and the nays were not ordered, and the amendment was rejected. The Senate turned to the examination of an amendment concerning transportation taxes, which were considered too high for the Western states.
The following year, on August 11, 1958, Senator Williams introduced his amendment once again. He was obliged to wait for four hours until there were enough Senators present. He reminded them of what Senator La Follette had said in 1942: "In my opinion this percentage depletion is one of the worst features of the bill, and now it is being extended. We are vesting interests which will come back to plague us. If we are to include all these things, why do we not put in sand and gravel; why do we not provide for the depletion the farmer suffers through erosion of the soil of his farm?"
Senator Taft had followed up Senator La Follette's remark with one of his own: "I think with the Senator from Wisconsin that the percentage depletion is to a large extent a gift . . . a special privilege beyond what anyone else can get." Senator Dirksen (Illinois) made a long speech declaring that the problem of national defense needs and the precarity of oil supplies in the Middle East "is worth infinitely more than a question of whether the oil companies get a few million dollars more or a few million dollars less . . . the oil companies," he added, "which have given their best to the country."
Senator Williams acknowledged that "it is always popular to defend the little fellow, but what is small about a man with a million dollar income?" He noted that in 1955 depletion deductions for all corporations had totaled $2,805,500,000, and that 67% of these deductions had benefited companies with net assets of more than $100 million. He asked why the deduction for oil depletion wasn't the same as that for metal (15%) or coal (5%). He concluded: "One of the really major loopholes in the tax code is the method by which capital gains may be applied to oil and gas properties," and he produced a document which explained exactly why the leaders of the oil and natural gas industry were opposed to a reduction in the tax rate for the highest income brackets.(66) Such a reduction, which was supported by the majority of the nation's corporations and taxpayers, would mean a decrease in the incomes of the oilmen.
Senator Williams' amendment was put to a vote and defeated by a margin of 63 to 26. A similar but less liberal amendment introduced by Senator Proxmire (Wisconsin) was also defeated, this time by a majority of 58 to 43. Senator John Kennedy (Massachusetts) voted against the Williams amendment and in favor of Senator Proxmire's amendment. When the vote on the second amendment was announced, Senator Johnson (Texas) remarked, "Mr. President, I do not think we should ask the Senate to stay any later this evening."
The oilmen and their representatives in the Senate were all the more concerned about these amendments because 1957 had been a record year for oil production in the Middle East, and everything indicated that the expansion would continue. (In fact, Middle East production rose from 6 billion barrels in 1958 to 9.7 billion barrels in 1963.) In 1959 President Eisenhower imposed import quotas on foreign oil. The sales price of domestic American oil, which had been steadily rising since the end of the Depression and had dropped in 1959, held steady in 1960.(67)
On June 18, 1960 Senator Douglas re-introduced his amendment. He noted that the total depletion allowances taken could amount to $4 billion that year. He presented his Congressional colleagues with 20 pages of documents, remarking that if the other Senators were unable to hear him (for there were only three other people on the floor), they could perhaps read them. The following day, June 20, his audience was larger. Senator Douglas described his amendment as "a very moderate attempt to reduce the greatest tax racket in the entire American revenue system. It is probably safe to say," he continued, "that the depletion allowances given to the gas and oil industry now amount to well over $2.5 billion a year. I have put into the Record time and time again the records of 28 oil companies -- which I do not name, and which I identify only by letter, but which I could name -- that show that there was one company which in 5 years had net profits of $65 million and not only paid no taxes, but received $145,000 back from the Government. There are many other corporations which have a similar favored record.
"My proposal is a modest one. I do not propose to abolish the depletion allowance. I do not propose to reduce it across the board. I merely propose to introduce a moderate, graduated reduction. On the first $1 million of gross revenue there would be no reduction whatsoever. That would remain at 27.5%. On gross income from $1 million to $5 million, the depletion allowance would be 21 percent. On gross income in excess of $5 million, the depletion allowance would be 15 percent. This is a very moderate proposal.
"Mr. President, this issue has faced the Senate and the Nation for at least a decade. It is now before us again. We must make our decision as to what we shall do. It is time that we put our fiscal system in order. In our fiscal system some people pay too much because others pay too little. The time has come when we should deal with this issue. The depletion allowance can continue without any time limit. It occurs after depreciation has been allowed and fully taken account of. As long as the oil and the gas run, the depletion allowance can continue to be taken. There are cases in which the amount of the depletion is many, many times the total original cost, which bear in mind has already been deducted under the depreciation practice. I think the Senators are aware of the issues at stake. I wish to say to the gas and oil industry, which has been fighting this amendment for years, that if they are once again successful in beating this amendment, as they may well be, there is likely to arise in the country a storm of indignation."
But indignation is not a common emotion in the Senate. Senator Douglas' amendment would have resulted in a $350,000,000 loss to the oil industry. A vote was held, and the amendment was defeated by 56 to 30.(68) Senator John Kennedy (Massachusetts) voted in favor of it.(69)
At the 1960 Democratic Convention, the representatives of the oil states, headed by Sam Rayburn, supported the candidacy of Lyndon Johnson, but Kennedy won the nomination. In the spring of 1961, Mr. Morgan Davis(70) remarked during a private luncheon, "It's impossible to get along with that man."
As a Senator, John Kennedy had not been popular with the oilmen, but they weren't afraid of him. They knew that his father Joseph had invested a large part of his fortune in the oil business, and they couldn't conceive that his son, even if he were to become President, would dare take a position that would go against his own and his family's financial interests.(71) H. L. Hunt expressed the same opinion when he confided to Playboy in 1966, "Catholics are known for being anti-Communist, and I had never seen any evidence of fiscal irresponsibility in the Kennedy family."
The oilmen were wrong. The new President decided to broach the issue. Although he didn't go as far as John Ise,(72) he felt, like Roosevelt, that the control of the national economy should not be allowed to continue in the hands of the few, but should be enlarged to include millions of citizens or be taken over by the government, which in a democracy is responsible to the people. But he knew also that any re-examination of the principles of profit-making and free enterprise from the moral, social or even national point of view would be rejected not only by the oilmen, but also by a good many other citizens as an attack on the American way of life. In the past, such attacks by the administration and the Justice Department had been defeated.(73)
The only chance for a modification of the structures of the Oil Empire lay in a major crisis, internal or external -- an economic crisis or a war. But President Kennedy was working for peace and economic expansion, and he knew that his objectives could not be attained unless the principles of the American autarchy were re-examined and their destructive action brought progressively to a halt.
A year after he entered the White House, in 1962, the new President studied the reports of his advisers and decided to act. He had reacted with violence to the dictates of the steel industry; in the case of oil, he laid his plans more cautiously. On October 16, 1962, a law known as the Kennedy Act removed the distinction between repatriated profits and profits re-invested abroad in the case of American companies with overseas operations. Both were henceforth subject to American taxation. The law also sought to distinguish between "good" earnings resulting from normal commercial operations, and "suspicious" revenues siphoned off at some point in the commercial circuit by subsidiary companies located in tax havens abroad.
This measure was aimed at American industry as a whole, but it particularly affected the oil companies, which had the largest and most diversified overseas activities.(74) At the end of 1962, the oilmen were estimating that their earnings on foreign invested capital, which in 1955 had equaled 30%, would fall to 15% as result of these measures.
But Kennedy's second measure was far more important and infinitely more dangerous. It affected not only the companies with overseas investments, but all companies which, in one way or another, benefited from the privileged status of the oil industry. It called into question both the principle and the rates of the fiscal privileges, the improper use of tax dollars, and the depletion allowance. If adopted, it would undermine the entire system upon which the Oil Empire was based.
On January 24, 1963, in presenting his bill to Congress, President Kennedy declared, "Now is the time to act. We cannot afford to be timid or slow." For him, the fact that it was going to be difficult made it all the more necessary to act. But the Oil Empire wasn't the steel industry. Its leaders were of a different mettle. Ludwell Denny had said, "We fight for oil." By tangling with the oilmen, Kennedy was commencing the last year of his life. He considered his fiscal measures as the first step in a vast national reform.
As George Washington said to Henry Lee on October 31, 1786, "Precedents are dangerous things." The oilmen thought so too. "Think" is the motto of the businessman. Once they had determined what had to be done, they set about choosing their battleground and meticulously laying their plans.
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1. The evolution of world oil production between 1860 and 1966 was as follows:
|USA||476,000 b||861 million b||2.9 billion b|
|USSR||135 million b||1.9 billion b|
|Venezuela||140 million b||1.2 billion b|
|Middle East||42 million b||3.3 billion b|
|Rest of the world||21,000 b||2.2 billion b|
|(in millions of dollars)|
|Standard Oil (NJ)||USA||$12, 191|
|Royal Dutch Shell||GB-Holland||7,711|
|Standard Oil (Ind.)||USA||2,708|
|Standard Oil (Calif.)||USA||2,698|
|Union Oil California||USA||1,364|
|Signal Oil and Gas||USA||847|
|Ashled Oil and Refining||USA||699|
In 1938, the world consumed only 2.1 billion barrels of petroleum products. By 1971 it will be consuming 14 billion barrels per year, and by 1980 28 billion barrels.
4. In Europe, despite the increasing use of natural gas (which in 1965 provided 4% of all the energy consumed, as compared with 0% in 1950) and the advent of atomic energy (0.4% in 1966), oil consumption has risen steadily (from 10% in 1945 to 45% in 1965), while coal consumption has steadily dropped (38% in 1965, as compared with 75% in 1945).
5. The temporary outlets of the COMECOM pipeline are located at Neutspils and Klaipeda in the Baltic states, East Berlin, Most (Czechoslovakia), Vienna, Budapest, and Trieste (Italy).
6. 95% of the population of Saudi Arabia is still illiterate. The country has 750,000 slaves. Trade unions are prohibited by law, and the death penalty is inflicted with the bastinado.
If the royalties paid to the Sultan of Kuwait were divided equally among his people, each Kuwaiti citizen would have an annual income of more than $1,500, giving Kuwait one of the highest standards of living of any underdeveloped country. Instead, the average annual income in Kuwait is $100. 98% of the population is illiterate, and 85% suffers from tuberculosis.
An exception to this rule is the Sultan of Bahrain, who contributes a large portion of his royalties to the state treasury. In his territory, most dwellings have running water, sanitary conditions are satisfactory, and public education is developing rapidly. Nevertheless, the Sultan of Bahrain is the poorest of the Middle East rulers. In 1955 he received only $8.5 million in royalties, as compared to $36 million paid to Qatar, $84 million to Iran, $223 to Iraq, and $280 each to Saudi Arabia and Kuwait. Iran is relatively prosperous, but Iraq is continually shaken by corruption, political intrigue and assassinations.
7. American investments abroad rose from $1.4 billion in 1943 to $10 billion in 1958 ($5.1 billion of which was reported) and to $28 billion in 1967 ($15 billion of which was reported). In 1967, American investments in Europe totaled $10 million in the mining industry, $290 million in miscellaneous industries, $640 million in the chemical industry, $795 million in the machinery industry, and $1,200 million in the oil industry.
8. Frank W. Abrams, past President of Jersey Standard, jointed with General Motors, US Steel and several other corporations to form a committee for economic aid to education in an effort to stave off what he considered a future threat to industrial investments.
In 1955 Senator Fulbright cited a brochure edited by Socony Mobil for job-hunting students which warned them that their "personal opinions" could cause them difficulties in their career. His criticism, together with a protest from the Princeton Alumni magazine, caused the brochure to be withdrawn, but the paternalistic and totalitarian attitude of the oil companies continued unchanged.
9. Figures released by the Chase Manhattan Bank show that between 1934 and 1950, the 30 largest oil companies moved more than $121 billion, with net profits of $12 billion and taxes of $4 billion. These companies had taken out so few loans that only $700 was paid out in interest. $12 billion appeared on the balance sheets in the form of stock depreciations, amortizations, and reserves. Of the $12 billion in profits, $7 billion was reinvested and $5 distributed to stockholders.
10. The Rockefeller family's holdings are now limited to 15%, but the 100 most important stockholders (out of a total of 300,000), most of whom are descendants of John D. Rockefeller and his partners, own more than 40% of the shares.
11. One of its "little sisters," Socony Mobil (actually Standard Oil of New York) has assets of nearly $5 billion, and Standard Oil of Indiana has nearly $4 billion in assets. In 1966 Jersey Standard earned $1,090,944,000 in profits, two-thirds of which came from its overseas subsidiaries. Of the latter, Creole of Venezuela, for example, generally earns profits of around 30% . Creole and Lago, Standard's second Venezuelan subsidiary, together with Imperial of Canada, Imperial Petroleum in Latin America, Esso Standard, and its other foreign subsidiaries, earned more than $800 million in profits in 1966.
12. The first oil well was drilled by Edwin Laurentine Drake. better known as Colonel Drake, who discovered oil at 69 feet at Titusville on September 8, 1859. Nevertheless, he was fired in 1864 by his employer, Seneca Oil, and given the paltry sum of $731 in compensation. The state of Pennsylvania showed its gratitude by granting him an annual pension of $1,500.
13. Today, Royal Dutch Shell is the most important private industrial concern in Western Europe, and perhaps in the world (with the exception of the United States).
14. Shell has a policy of forming a national company in every country where it operates.
15. The British government invested approximately two and a half million pounds, and got back several billion pounds on its investment. It was represented on the Board by two administrators and exercised its veto only on political and naval questions, never interfering with commercial policies.
16. The Turkish Petroleum Company (which wasn't Turkish at all) owned oil fields in Mesopotamia. Before World War I it was divided up between Anglo-Iranian (50%), Royal Dutch (20%), and the Deutsche Bank, whose share of 25% was seized by the British at the start of the war. For having allied itself with Germany, Turkey was dismembered in 1918, and Britain appointed the rulers of the former Ottoman colonies. But the war booty was divided up under the cover of the League of Nations mandates. Germany's share of 25% was handed over to the Compagnie Francaise des Petroles in exchange for an indemnity and French permission to install a pipeline across its Syrian and Lebanese mandates.
17. It is difficult for us today to imagine a time when United States foreign policy was based on the rivalry between Shell and Standard, when Shell was refused the right to participate in bids for federally-owned concessions, and when writers prophesied war between Great Britain and the Union.
18. The remaining 5% went to the broker, Gulbenkian.
19. Moreover, the companies mixed the Iraqi oil with oil from Iran and Saudi Arabia, making it difficult to determine the actual cost.
In 1939 Jersey Standard felt that it had gotten back all of its original Iraqi investment. Nevertheless, Iraqi production was held back in favor of production in Saudi Arabia and Iran, where the royalties paid were very low (4 shillings per ton of crude in Iran, plus 20% of the profits).
20. At the beginning of the war, the difficult position of the Allies in the Middle East led Roosevelt to consider government participation in Aramco, in the same way that the British government had held a majority in Anglo-Iranian since 1914. But Standard of California and Texaco kept delaying the talks, and once Rommel was defeated, the two companies even refused to consider admitting the government as a minority stockholder. They felt, and there was little evidence to contradict them, that they already enjoyed government protection.
The companies of the Aramco-Caltex group managed to avoid American taxes on their wartime profits by founding new companies in the Bahamas and Canada.
21. Dutch Shell is richer and more influential than the l of the Netherlands. Two other Dutch companies, Phillips and Unilever, have international standing. These three it difficult for the government of the Netherlands to independent economic policy.
22. Iranian assets of Anglo-Iranian have been estimated at $1 billion.
23. The CIA's action is accounted for not only by the singular nature of the American intelligence agency (see Chapter 15, Spies), but also by the fact that the Pentagon and the ion in Washington feared that with the Abadan refinery closed down, the Air Force might run short of fuel in the event of World War III. Such a shortage had already occurred during the Korean War.
24. They estimated Anglo-Iranian's gross profits since 1914 at $5 billion, $500 million of which had gone to the Admiralty in the form of low-cost fuel oil, $350 million to the stockholders, $1.5 million to the British treasury, and $2.7 million to the corporation for depreciations and new investments.
To these sums they compared the royalties paid to Iran: before 1920, none; from 1921 to 1930, $60 million; between 1931 and 1941, $125 million, mainly in the form of military equipment which was later used against them by the British and the Russians.
In 1951, Iran received 18 cents on every barrel of oil (a barrel equals 42 gallons and weighs an average of 306.6 pounds). In comparison, Bahrain received 35 cents, Saudi Arabia 36 cents, and Iraq 60 cents.
The Iranians also complained that nearly all the gas from their wells was burned by Anglo-Iranian, when it could have been put to the benefit of the population.
25. The Compagnie Francaise des Petroles, which by the terms of the Red Line agreement had a right to its share, was granted 6%.
26. In 1966 the Consortium was forced to yield to new demands from the government of Iran and surrender one-fourth of its concessions (the 1954 agreement provided for the surrender of one-fifth in 1979). It was also obliged to increase production by 13% in 1967 and 1968. The Arab blockade in June, 1967 enabled it to go well over this figure.
27. The Big Five managed to pacify the most voracious of the independents by each sacrificing 1% of their shares. The 5% distributed was sold in April 1955 to the following companies: Atlantic Richfield, Tidewater Oil, Aminoil, Atlantic Refining, Getty Oil, Continental Oil, Signal Oil and Gas, Standard Oil (Ohio), and American Independent Oil. Harvey O'Connor states that each company paid $1 million for its shares, which few years later were earning them $850,000 a year. Such a good investment was also a kind of indemnity, but the independents continued to demand a share for themselves in the Middle East.
In 1947 Aminoil (American Independent Oil Company), an association of independents made up of Phillips Petroleum, Hancock, Signal, Ashland, Deep Rock, Sunray, Globe, J. S. Abercrombie and the promoter, Ralph K. Davies, had been given a bone to gnaw in the form of a neutral zone between Arabia and Kuwait theoretically reserved for the nomads. But the Sultan demanded high royalties, and 10 years later the reserves were estimated at only 50 million tons. It looked like the independents were stuck with the leftovers, but in 1966 the neutral zone was producing 133 million barrels.
28. Biafra is the latest battleground of the oil companies -- American, British and French.
29. Twelve years later, giant tankers of up to 1 million tons designed to detour around the Cape have apparently condemned the Suez Canal to a position of minor importance.
30. Gulf and Jersey Standard increased their Venezuelan production, while Texaco expanded its operations in Indonesia and Canada. In this way, they were able to sell their oil at higher prices while maintaining stable production costs.
31. Jersey Standard was admitted to the Sahara, then French territory, following a request from French Premier Guy Mollet for a $100 million loan from Washington which was eventually granted by the Chase Manhattan Bank. (Jersey Standard is a member of the Chase group.)
32. On the surface, ENI continued to respect the 50-50 rule, but by associating with an Iranian company, INOC, it actually granted 75% of the profits to Iran. In the midst of the negotiations concerning ENI's concession in the rich Koum basin, the Iranian Prime Minister was overthrown.
33. In 1932 Andre Maginot, a French Minister who had founded the Union Petroliere Latine, was poisoned. His death was also the death of the UPL.
34. Between 1950 and 1962, the American share in world production dropped from 69.8% to 57.9%, and its share in refining from 65% to 52.1%. Jersey Standard, which in 1958 accounted for 10.8% of all production, had dropped to 10.3% in 1961.
35. In 1938 Mexico expropriated Royal Dutch Shell, Standard Oil, and several other foreign companies which refused to grant wage increases demanded by the oil workers union (which amounted to $1.7 million per year). Mexican President Cardenas founded Pemex, a state company which was boycotted at first by its powerful neighbors. The British government even broke diplomatic relations with Mexico. It was not until the Second World War that the Consortium forgave the Mexicans. Today Pemex pays the Mexican government nearly a billion pesos a year in taxes, while before the nationalization the amount paid by private companies operating in Mexico never exceeded 44 million.
In 1963 Mexico, once considered incapable of exploiting her own resources, was producing 115 million barrels (16 million tons), and oil was her most important source of revenue. These expropriations ensured her prosperity if not her economic independence for the Mexican economy is still closely bound to that of the United States.
36. Shell was the first oil company to operate in Venezuela. In 1922 it was joined by Standard of Indiana, followed by Gulf. In 1932 Standard of New Jersey took over Standard of Indiana's operations at Maracaibo and began offshore drilling. In 1937 Venezuela accounted for 40% of world production. Gulf was obliged to make concessions to Jersey, whose local subsidiary Creole became the giant of Venezuela. In 1938 Jersey, Gulf and Shell formed a pool to exploit their reserves and naturally applied Texas prices. In 1943 the companies were obliged to split their profits 50-50 with the Venezuelan government. In 1948 the "Democratic Action" government that had come to power in 1945 demanded a revision of this agreement, but was overthrown by a military junta backed by the United States. Between 1949 and 1954, Creole reduced its personnel from 20,500 to 14,400 persons while increasing its production by 35%. In 1949 the company earned net profits of $336 million.
The revenue paid by the oil companies covered three-quarters of the Venezuelan national budget (the government's revenues from other sources were lower in 1956 than Creole's profits). But Venezuela produces only half the grain, milk and meat, and only one-third of the vegetables, that she consumes. The wide plains of Orinico support fewer cattle today than during the revolution of 1812. From their mountain conucos or their huts on the latifundia, nine-tenths of the Venezuelan population can watch the distant lights of fabulous Caracas.
37. In January, 1957, Anthony Nutting, a member of the British Cabinet, suggested a form of internationalization -- a kind of "Schuman plan" for Middle East oil.
In March, 1957, Walter J. Levy wrote in Foreign Affairs:
". . . The demands and responsibilities which have devolved on our international oil companies go far beyond the normal concerns of commercial operations. Public and private responsibilities become increasingly intertwined. Our existing arrangements for government-industry relationships in this new uncharted area appear to be inadequate to cope with the broad range of new problems."
On April 10, 1957, Lord Henderson suggested before the House of Lords that her Majesty's Government "take the initiative, through the United Nations, to get an International Oil Convention for the Middle East which would ensure a just distribution of oil to consumer countries, as well as a fair deal for the oil-producing countries. 'Oil politics' have been a disturbing factor in the Middle East situation over many years," the British peer added.
And Walter Lippman wrote in November of the same year:
"We should, it seems to me, have it clearly in mind that we are on the threshold of a new situation in regard to the oil in the Middle East. This is often taken to mean that the Arab countries, infiltrated by the Soviet Union, may attempt to ruin Western Europe by depriving it of access to the oil.
"Theoretically, that could happen if we take the simple view that Russia may conquer and occupy the oil countries. But in fact, this is not likely to happen, since it would precipitate a world war. What is likely to happen is that the Arab countries, using Soviet influence as a lever, will attempt to force the Western oil companies to a radical revision of the existing contracts. The Middle Eastern countries have no interest in cutting off the export of oil to Europe. On the contrary, it is their vital interest that the trade should continue. What they will seek, both the oil-bearing countries around the Persian Gulf and the transit countries like Syria and Egypt, is a bigger share of the profits of the oil business.
38. The British continue to work the unprofitable coal mines of Wales, the Midlands, Yorkshire, Nottinghamshire, and Lancashire, immobilizing some 700,000 workers, and British explorations in the North Sea area are carried out in collaboration with the big American firms.
British fiscal legislation is far less favorable to the oil industry than American legislation. Britain's energy policy consist of penalizing the use of oil in order to protect her coal industry. British tax legislation does not appear to have contributed significantly to the overseas expansion of British oil companies, and it offers no special privileges designed to stimulate new explorations by British firms.
39. On February 4, 1968, ERAP signed an agreement with the Iraq National Oil Company (INOC) giving the French company onshore and offshore exploration rights on a 10,000 square kilometer concession along the Persian Gulf. Mr. Jean Blancard, Vice-President of ERAP, declared that the agreement "follows in the footsteps of history. The era of traditional concessions, when the oil power established their hegemony over huge areas, is a thing of the past."
At the same time. another French company. the Societe Nationaledes petroles d'Aquitaine, was competing with the Freeport Co. for the right to work an Iraqi sulfur deposit which would make it the second largest producer of sulfur in the world.
Also in Iraq, the Compagnie Francaise des Petroles was negotiating for the North Rumeila concession which the Iraqi government had seized from the Iraq Petroleum Company.
The economic and political differences between France and the United States are partly the result of French oil policy.
40. The only company producing any significant quantity of oil in France thus far has been an American firm, Esso Rep, which is 90% controlled by Jersey Standard (Esso Standard 89%; Finarep 1%). Esso Rep has an annual production of 21 million barrels.
The most important French oil company, the Compagnie Francaise des Petroles, founded by Raymond Poincare, is not a state concern. Mr. Jeanneney, French Minister of Industry, declared in 1960 that "state control of the CFP is extremely theoretical" and that "the interests of the 'oil franc' are not always given priority." In actual fact, according to well-informed sources, control is held by a number of different companies acting for Royal Dutch Shell.
ERAP, the state-owned company, has not quite caught up with the CFP, but it already holds first place among the state-owned companies in continental Europe, and it is evident that the French government is anxious to see it expand.
41. The European companies concerned by this report were: Ente Nazionale Idrocarburi (ENI, Rome), Entreprise de Recherches et d'Activite Petrolieres (ERAP, Paris), and several German companies belonging to the Deutsche Mineraloel-Explorations-gesellschaft MBH (DEMINEX).
42. Ten European companies (ERAP, ENI, C. Deilman Bergbau GmbH, Preussag AG, Deutsche Schachtbau und Tiefbohr GmbH, Saarbergwerke AG, Schlolven Chemie AG, Union Rheinische Braunkohlen Kraftstoff AG, Wintershall AG and Gelsen- kirchener Bergwerks AG) followed up this report with one of their own that was nothing less than a declaration of war on the Consortium. It concluded:
"If the Common Market is to have an energy policy, the oil and natural gas sector, which constitutes the most important element in this policy, must not escape the action of the Common Market. To prevent this from happening, the Common Market must create conditions which enable this policy to exist through legislation and regulations adapted to the circumstances, and it must safeguard the instruments of this policy, in other words the companies of the Common Market."
43. A German, firm, Saarwerke, and an Italian company, ENI, have received permission from the French government to install a distribution network in France. Other measures and agreements are currently under discussion.
This new European energy policy explains a great deal, and in particular De Gaulle's position with regard to the Israeli-Arab conflict of 1967. De Gaulle is neither pro-Arab nor pro-Zionist; he is merely a realist.
44. Twenty-two companies account for 65% of all the oil produced and 87% of all the oil refined in the United States. Nine thousand other companies account for the rest.
In 1963, oil and natural gas provided 75% of all the power consumed in the United States (as compared with 60% in 1950). Their combined value was eight times that of all the ferrous and non-ferrous metals (iron, copper, lead, zinc, gold, silver, bauxite, manganese, tungsten, titanium, and uranium) mined in the United States.
45. An Oil Exchange did exist in the 19th Century, but in 1895 Standard Oil of New Jersey announced that henceforth it would set its prices itself. At that time, Jersey Standard was buying 80% of all the oil produced in Pennsylvania and controlled all of the pipelines (which enabled the companies to enforce their production quotas and the quotas set by the states).
46. There are 200,000 sales outlets for petroleum products in the United States, mainly service stations. To all appearances there is open competition, but actually the big oil corporations control 85% of the market. Service station managers are bound by contract to the big companies, which supply their gasoline and cover their operating and advertising expenses.
47. Contrary to what is true in Europe, in the United States any oil discovered belongs to the owner of the land on which it is found. Generally, the owners lease their rights to the companies. In 1963 the oil companies paid nearly $2 billion in leasing rights to property owners spread over one-tenth of the area of the United States, principally in Texas. Since 1859 these leases have cost the companies an estimated $40 billion.
48. Ninety percent of the American Oil Empire is concentrated in only seven states: Texas, Louisiana, California, Oklahoma, Wyoming, New Mexico, and Kansas. The combined production of Texas and Louisiana alone accounted for 55% of American domestic production in 1963. Most of the oil companies based in Texas have important investments in Louisiana, which is closer to the Eastern market: Louisiana, where the most important oil fields since Spraberry Fields in the 1930s were discovered in 1956, is also favored by a larger "acreage-to-well" ratio than Texas. The average well in Louisiana is currently allowed 79% more oil daily than the average well in Texas.
Most of these oil wells produce only two or three weeks per month. In Texas, the number of production days was reduced from 171 in 1957 to 104 in 1960. During the second quarter of 1960, the oil wells in Texas were worked an average of only 9 days per month, and during these 9 days they were limited to two-thirds of their maximum output. The producers estimated their losses at $6 million per year, but prices remained stable. On the other hand, the number of people employed was reduced by 25% (from 164,904 in 1958 to 124,922 in 1963) and the corresponding expenses dropped from $967 million to $880 million Nevertheless, despite this reduction in output, nearly 200 new wells are drilled every day (43,300 in 1950, 58,200 in 1956, and 43,600 in 1963).
49. Petroleum engineers have their own techniques of conservation, which can be resumed as follows:
1) the elimination of gushers and uncontrolled flows that waste gas pressure
2) the limitation of the number of wells to the minimum required by the geological structure of the oil field. Too many wells reduce the gas and water pressure, while too few result in the loss of a certain amount of oil
3) the regulation of the output of each well so as to maintain a uniform pressure throughout the oil field
4) the maintenance in each well of a sufficient proportion of gas to oil to ensure a continuous flow (Harvey O'Connor, The Empire of Oil)
50. The figures given by Fortune for the year 1967 are:
51. Standard Oil of New Jersey earned $758 million in 1961 and $840 million in 1962; Gulf Oil earned $338 million in 1961 and $340 million in 1962; Socony Mobil earned $210 million in 1961 and $242 million in 1962; Standard Oil of Indiana earned $153 million in 1961 and $162 million in 1962.
52. The net cost of oil as it comes out of the well in the Middle East is around 20 to 30 cents per barrel. The same oil is sold by the Consortium at between $2 and $3 a barrel.
Oil in Kuwait costs approximately 5 cents a barrel (0.12 cents a gallon); oil in Saudi Arabia costs 10 cents a barrel (0.24 cents a gallon); and oil in Libya costs 40 cents a barrel (1 cent a gallon). In March, 1965, Consortium prices for oil leaving these countries was as follows:
Kuwait: $1.59 a barrel
Iran: $1.78 a barrel
Saudi Arabia: $1.80 a barrel
Iraq: $1.95 a barrel
Sidon: $2.17 a barrel
Libya: $2.21 a barrel
Sahara: $2.30 a barrel
The companies charge 60 to 70 cents a barrel for transportation. The considerable increase in the tonnage of today's oil tankers (100,000 and 200,000 tons, and soon even more) ensure even greater profits than those earned by the oilmen in the Fifties and Sixties (a 100,000 ton tanker earns approximately $500,000 gross per cargo).
Excluding these transportation charges (the companies generally use their own fleets of tankers), the profits per barrel of oil are 3 to 4 times higher for overseas than for domestic production.
The net cost to the companies of the Consortium has remained relatively stable since 1954. The retail sales price for gasoline in American service stations in November, 1967 was $9.51 a barrel (plus tax). This gasoline was sold at an average price of 33.33 cents a gallon (which included 10.68 cents in taxes). The break-down of this final price was as follows:
Retails profits: approximately 20%
Taxes: approximately 30%
Transportation, refining, refinery labor, miscellaneous costs and refining costs, transportation from the Gulf to the refinery, delivery to the retailer, storage, and wholesale profits: 20%
Price of the crude: 20%
(But the latter price already included the company's profits on production and transportation.)
The United States is the only important industrial nation in the world where the oil industry makes more on a gallon of gasoline than the government (70% as opposed to 30%). In Europe in particular , these proportions are generally the reverse, to the benefit of the countries concerned.
53. Beneath the Big Five and the twenty-odd large companies are a multitude of independent producers. Concentration has been the rule in the oil industry for the past ten years. Between 1959 and 1963, the big corporations of the Chase Manhattan Group increased their production by 526,000 barrels per day, while the production of other companies dropped by 37,000 barrels.
In 1956 the ten largest companies in Texas produced 41% of all the oil in the state; by 1963 they were producing 51%. The decline of the small producers was due in part to the quota system (proration) imposed by the States (actually by the big companies). In addition, a number of independent producers were bought out by larger companies.
The independents still accounted for half of national production, but pipeline fees considerably reduced their independence.
54. Oil cooperatives are virtually unknown in the United States. The first was the Consumers Cooperative Association of Kansas City, Missouri, founded in 1929 with a capital of $3,000. In 1962, however, the total production of the cooperatives equaled only 200,000 barrels, while a single unit at Baytown, Texas belonging to Humble Oil produced 300,000. The cooperatives own less than 1% of the wells in the United States, and their refiners can handle only a fifth of the oil they produce. Nor do they have a pipeline or other organized means of transportation.
Cooperatives do not aspire to control the market, but in countries where they are sufficiently powerful (such as Sweden, where they account for 12% of the market), they serve as a restraint on the conduct of the other companies.
55. As Walter J. Levy notes: "The companies which are integrated from the well to the service station have obvious competitive advantages over the strictly producing companies, for they can temporarily do without their profits from one sector of their operations."
Standard Oil of New Jersey, for example, is apparently content with a profit rate of approximately 17% which, taking into account its super-profits from its foreign operations, necessarily reduces its profits from its domestic operations and, given its nearly complete control of the market, the profit margins of the independent producers as well.
But the big oil companies conceal some of their profits in companies incorporated in privileged territories. Jersey Standard, for example, uses the International Corporation registered in Liechtenstein. (In the United States, the tax haven for H. L. Hunt and many other oilmen is the state of Delaware.)
56. The depletion allowance is based on the notion that the more oil has been extracted from a well, the less there is left. This, of course, is nothing more than a special version of what is known in industry as depreciation.
If a $100,000 factory operates for ten years, its owner is entitled to deduct $10,000 a year from his gross profits for plant depreciation. In the oil industry, on the contrary, the rate of depreciation applied has nothing to do with the cost of running a well. A well which costs $100,000 and produces $500,000 worth of oil each year for ten years until it runs dry would normally justify a depreciation of $10,000 a year.
An oil company, however, is entitled to deduct 27.5% per year from its gross income, which amounts, in the case cited above, to $137,500 per year, or to $1,375,000 in ten years, on an investment of only $100,000.
The Common Market has considered applying this system to its own industry, but with certain basic differences. Europe, contrary to the United States, needs first to find oil in her own soil. As a result, the Common Market measures would grant a tax reduction to companies carrying out explorations, on the condition that the amount of this deduction be re-invested within five years in new explorations (French PRG system).
57. Not only did the activities of the Consortium hurt the American consumer and the American taxpayer; they also had serious repercussions in underdeveloped countries and affected the international monetary situation.
The Consortium sold its oil from Venezuela, Colombia, Kuwait, Saudi Arabia, Iraq, Iran, etc. exclusively in dollars and pounds sterling. (Even the internal operations of the members of the Consortium were carried out in dollars or in pounds.) As a result, the sales made in "oil dollars" and "oil sterling" swelled the treasuries of the United States and Great Britain, to the detriment of the currencies of the producing and consumer countries, in particular, and to the world financial situation in general.
This system contributed to the disequilibrium in the British balance of payments which led to the November, 1967 devaluation, and has forced the United States to take measures to protect the dollar. The financial difficulties besetting both countries today are symptoms of 20 years of abusive business practices, particularly. in the marketing of raw commodities.
58. The Humble Oil and Refining Co. declared that in 40 years it had sunk $500 million (a figure which represents less than half of its present capital) in deep, dry wells. But although these dry wells cost it $62 million in 1957, the same wells cost the federal government more than half a million in lost revenues, and Humble Oil that year earned $175 million in profits.
59. In Britain, oil companies are not permitted to deduct their losses from unsuccessful explorations from their income from sources other than oil production. If the explorations are successful, the entire cost of the original installation can be written off, but may not be deducted as expenses, and there is no provision for a percentage depletion allowance deductible from revenue from current production.
60. In 1965 the oil industry claimed that American reserves were no more than 31 billion barrels. The Office of Oil and Gas of the Department of the Interior commented, however, that "Reserves so defined are probably on the conservative side" and added:
"A study compiled in late 1964 by the US Geological Survey puts the amount of crude oil originally in place in known deposits as of January 1, 1964, at over 400 billion barrels. The study goes further to conclude that an additional 2 billion feet of exploratory drilling in favorable but as yet unexplored areas would yield an additional 600 billion barrels of crude oil in place. Of this, 73 billion had actually been withdrawn as of the end of 1963. On the basis of these cold figures, it would appear that the US is in no danger of running out of oil for many years."
Additionally, it is now possible to extract oil from deposits of bituminous shale (a ton of bituminous shale yields 30 gallons of oil). The bituminous shale reserves of the United States have been estimated by the UN at 320 billion tons.
61. The average depth of the wells drilled increased from 3.900 ft. in 1950 to 5,000 ft. in 1963 (an increase of 29%).
62. In 1948, the oil shortage revealed the need for a national oil policy. The Secretary of the Interior, J .A. Krug, and his successor, Chapman, wanted to preclude a future shortage by the development of synthetic motor fuels, if necessary with government backing. The N PC opposed this plan. It assured the government that private industry would produce substitutes if the need arose, but insisted that there was no need to constitute stocks of synthetics for the present. The plan was dropped, and protests about the waste engendered by industry production method were stifled.
63. The states of Rhode Island and Alabama contested the validity of this law in the Supreme Court, claiming that Congress had no right to hand over a part of the national wealth to a few privileged states without their consent. They lost the case.
In the meantime, Senator Butler (Nebraska) was already preparing a bill that would recognize state ownership of the bituminous shale deposits in the Rockies.
64. "The tax laws since 1926 have authorized an oil or gas company to deduct 27.5% from the gross income from any property producing oil or gas. This 27.5% depletion allowance or deduction is computed as a percentage of the investment or of the amount of prior depletion deductions. One saving condition was attached, namely: In no case may the deduction exceed 50% of the net income from the property -- something that 1 do not believe happens very often.
"Obviously, over the life of an oil or gas-producing property the depletion allowance will not only exceed the investment or cost, but it will go on and on and possibly exceed the value on date of discovery.
"The committee can, no doubt, secure accurate up-to-date figures from the Treasury Department on what the 27.5% depletion allowance means to every company or individual taking this on tax returns. However, there is in existence some few pieces of information denoting its tremendous size. Recently I tried to secure from Standard & Poor's Corp. reports the amount of Federal income-tax paid by Amerada Petroleum Corp., but I find this item is buried in a classification reading: ' Operational, general expenses, taxes, etc. It is quite obvious that Amerada pays little, if any, Federal income taxes, though in the year 1952 this company made net profits of $16,296,652. In the January 1946 issue of Fortune magazine there appeared a long article on Amerada Petroleum Corp., which is a crude-oil producing company. The article stated in part, 'Amerada's tax situation is a businessman's dream. The corporation quite literally does not have to pay any Federal income tax it does not want to. This is due to the highly reasonable provisions of the internal revenue law designed for producers of crude oil. Amerada pays so little in Federal income taxes that it does not even segregate the tax item in its annual reports. In wartime, though Amerada's profits soared, it made no provision for excess-profits taxes, and from 1943 until 1944 its normal Federal income tax actually declined. In 1944, on a gross of $26 million, a gross profit of $17 million, and a net after all charges of $5 million, Amerada's allowance for its Federal income tax was only $200,000.'
"It is among these strictly producing companies that one can get an idea of the magnitude of the twin subsidy of depletion and write-off of drilling and development costs. The major integrated companies benefit to the degree that they produce oil and gas, though they have other operations upon which taxes are paid.
"In addition to Amerada Petroleum Corp. referred to above, here are a few other examples of companies producing oil and gas:
"Argo Oil Corp. for the year 1952 made net profits after taxes of $3,496,477 and paid Federal income taxes of $91,660.
"Kerr-McGee Oil Industries, Inc. for the year ended June 30, 1952 had net income after taxes of $2,234,688 and paid Federal income taxes of $78,032. For that same period the 27.5% depletion allowance for this one company amounted to $607,611. For the year ended June 30, 1953, this company had net income after taxes of $3,072,723. But in Standard & Poor's there is just a line where the amount of tax is usually indicated, so I do not know what Federal income taxes this company paid for that period. During this latter year its depletion allowance was $858,795.
"The Superior Oil Co. (California) for the year ended August 31.1952 had net income of $11,900,165 and paid Federal income taxes of $200,000."
65. In 1963 the Department of Defense purchased 278 million barrels of oil (1963 production equaled 2.75 billion barrels).
66. This was a paper written by Paul Haber, JD, Ph. D, entitled, "Write-offs, Cost Depletion and Percentage Depletion -- An Appraisal." It said in part:
"Our Federal tax system is supposed to be based on the principle of progressive taxation or 'ability to pay' -- the higher the net income, the higher the rate of tax. In the case of taxpayers who engage in the business of crude oil, however, this principle is made to work in reverse -- the higher the net income from the production and sale of crude oil, the lower the rate of tax . . .
"Drilling for oil is like playing dice with the Treasury: 'Heads I win, tails you lose,' with the Treasury always on the losing end. As a matter of fact, high tax rates are a boon to the crude oil industry rather than a burden, because the higher the rate of tax the lower the net cost (the after-tax cost) of the drilling operation. This explains why the American Petroleum Institute does not support the National Association of Manufacturers in its fight to reduce the top tax bracket from 90 percent to 40 percent. If the rate were reduced to 40 percent, the search for crude oil would falloff tremendously, because the taxpayer's share of the cost of the search would have been increased from 10 percent (100 percent less 90 percent) to 60 percent (100 percent less 40 percent). As a matter of fact, the phenomenal growth of the crude oil industry dates back to the year 1940, the year in which the wartime rates were first brought into the statute."
67. It dropped again during President Kennedy's last year in office. The evolution of domestic prices (per barrel) was as follows:
|1959, 1960, 1961 and 1962:||$2.97|
68. The vote was as follows:
Yeas -- 30
Nays -- 56
Byrd (W. Va.)
Case (S. Dak.)
Young (N. Dak.)
Not Voting -- 14
69. In 1964, the depletion allowance issue came up before the Senate again. On February 3 Senator Lausche (Ohio) offered an amendment that would diminish the depletion allowance privileges by $850 million, which sum could be used to compensate the revenues lost to the government by a tax credit granted to needy families with children in college proposed by Senator Ribicoff (New York). But Senator Lausche's amendment was considered not germane.
On February 6, Senator Williams re-introduced his traditional amendment and was defeated again (by 61 to 33). As Senator Javits was to remark, "This is the sacred cow of sacred cows."
70. Chairman of the Board of Directors of Humble Oil and Refining Co. (1961-63), Director of the First National City Bank of Houston, member of the National Petroleum Council and the American Petroleum Institute.
71. In January 1968, Senators Robert F. Kennedy (New York) and Edward M. Kennedy (Massachusetts) joined with several other Congressmen in urging that import limits be eased for home-heating oil. They were concerned about a threatened shortage and high prices.
72. John Ise, a professor of economics at the University of Kansas and author of The United States Oil Policy, recommended in 1929 the nationalization of all natural resources, including oil. "Private property has undoubtedly brought about more unfortunate consequences in the case of oil and natural gas than in any other domain. It has resulted in overproduction, instability, incessant price fluctuations, a waste of natural resources, capital, and labor, speculation, fraud, foolish extravagances and flagrant social injustice, and, finally, in the establishment of a monopoly," he wrote.
73. Since the Clayton Antitrust Act of 1914 (which outlawed Drice discrimination and exclusive contracts between wholesaler and retailer) and the National Recovery Act of 1933 (which eliminated unfair trade practices and destructive price cutting and established fair codes of competition), the Justice Department had tried unsuccessfully on several occasions to break down the oil monopoly by halting mergers and opposing exclusive contracts, price, fixing, and production restrictions. Congress, and on occasion the Supreme Court, had defeated all its attempts.
74. Previously, while the profits earned abroad by American firms were subject to American taxation, the profits of subsidiary companies which were subject to local taxation (except in the tax havens) were only taxed in the United States when their dividends were distributed to the head companies in the United States. The Kennedy Act abolished this regime for the subsidiaries registered in tax haven countries, which were henceforth subject to American taxation whether or not their dividends were distributed to the head companies in the United States.
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