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Oil and Arabs: The Balance Shifts

By Lewis Clayton

THE OIL INDUSTRY is the flagship of capitalism. Oil is the world's most traded commodity, and as a major source of energy, and a raw material for a whole array of products ranging from plastics to drugs, oil is the most important lubricant for the economies of the developed nations. A halt, or even a minor disruption, in the flow of crude oil to the U.S., Western Europe and Japan, results in major economic convulsions.

Not only is oil the biggest industry by sales, but its companies control more physical assets--in tankers, derricks, service stations and office buildings, than any other industry group. Oil companies were the first multinationals, and the wide spaces between deposits and consumers has made oil the world's most international industry. The oil trade is also one of the most concentrated industries--seven companies, Standard Oil of New Jersey, Royal Dutch Shell, Mobil, Texaco, Gulf, Standard Oil of California, and British Petroleum, account for over a third of oil investment, and over half of world-wide sales.

Therefore, the oil industry has signified economic imperialism for the developed countries. At the Arab Petroleum Congress in Baghdad in March 1967, a representative from tiny Qatar, a sheikdom on the Trucal Coast, said, "In the past we were victims of military imperialism; now it is economic imperialism. Under the concessions system the companies are like vampires sucking our blood."

The oil concerns are vast and powerful enterprises, vertically integrated (controlling all aspects of the trade, from production to refining and marketing) and formed into great combinations and cartels to regulate the market. In the U.S., Exxon (originally Standard Oil of New Jersey) stands second only to General Motors in sales, and tops Fortune magazine's 500 industrials in assets. The assets of the three companies which originally formed Rockefeller's Standard Oil--Exxon and the Standard Oil Companies of California and Indiana--taken together are twice GM's.

Around the world, the oil giants are formed into combinations among themselves and with local governments. In the Middle East, the most important producing region, the cartels are arranged by producer nation, and may involve companies from as many as four consuming nations. Although British Petroleum has a 40 per cent interest in Iranian oil, a concern owned jointly by the Dutch and the British--Shell, 11 American companies, and a French concern all have minor interests. The most important of these cartels is Aramco, formed by Standard Oil of New Jersey, Mobil, Standard Oil of California, and Texaco in partnership with the Saudi Arabian government, which controls the richest oil deposits in the world.

Until 1960, the producers' cartels faced disorganized opposition from the producing governments. At that time, the Organization of Petroleum Exporting Countries was formed among the producer governments (including Venezuala, Saudi Arabia, Iran, Kuwait, Qatar, Libya, Indonesia and Abu Dhabi to keep prices high, and prevent the cartels from bringing pressure on single countries. Since that time, producer nations have won a higher share of oil company profits, and begun to establish national companies of their own, often in partnership with western companies.

What has resulted is something very much like a monopsony-monopoly bargaining situation, where the producing nations control reserves, and the companies control the refineries and distribution and marketing networks. Sharply rising world demand, and the strong monetary position of the Arabs, who have more money than they can readily dispose of, have tipped the negotiation situation in favor of the producing nations, but at the same time have enabled the cartels to pass along increased costs to the consumer, retaining their profits.

The situation of the oil industry may become more common as multinational corporations proliferate. The oilmen profit from the special treatment accorded them by home governments--at one time including the gunboat diplomacy that helped American companies negotiate favorable contracts with Venezuala, and eased British Petroleum's entry into the Middle East oilfields, and now incorporated in tax breaks like the U.S. oil depletion allowance. But because of their size, their international connections, and the economic clout of their cartels, the oilmen form a class by themselves, independent of the separate nations they supply and deal with. Negotiating with the Arabs in order to supply western oil needs, the cartels are willing to squeeze money out of either side to make their profits. They are pure middlemen, rather than representatives of the U.S., Britain, or France. Concessions and favors granted them by western governments on the basis of narrow self-interest only strengthen organizations which do not necessarily act in that national interest, however narrowly defined.

At the same time, the strengthening of the Arab position is opening up a whole new area for western exploitation. As the Arabs push up their profit shares, they are beginning to recognize the need for long-term economic development, planning against the day when their wells run dry. The Arabs have turned down requests for increased production, and even set production ceilings. Last year, Kuwait turned down a request from Kuwait Oil Co., a jointly owned subsidiary of Gulf and British Petroleum, for a production increase. Instead Kuwait set a 3 million barrel day limit on oil exports.

Even at reduced rates of production, the Arab states are piling up enormous reserves of gold and currency. Arab oil profits are expected to reach $10 billion this year, and rise to the neighborhood of $50 billion by 1980. Currency and gold reserves of the Arab states are now somewhere between $10 and $15 billion, and could be as high as $70 billion by 1980.

Arab governments are having trouble spending their money. Last year the Saudi Arabian government could only spend 60 per cent of its $4 billion budget. The Kuwaits have tried large giveaway schemes, in which the government practically gave away land to citizens which was bought back at higher prices. At the same time, the Arab governments are eager to industrialize, in order to diversify their economies.

U.S. and Japanese industrial concerns are beginning to negotiate with the Arabs to set up refineries, petrochemical plants, transportation facilities and industrial concerns. American banks like Chase Manhattan and First Ntational City are setting up branches in the Arab world, seeking to tap the capital resources of Arab governments and private citizens. Kuwait, a nation which earned $2 billion in oil revenues last year and a population of 800,000, may become an Arab capitalist--an exporter of capital to other Arab nations. The capital-rich small oil states are beginning to eye populous but backward Egypt as a potential market for cheap, mass-produced goods.

Now that the balance has shifted in the oil negotiations, the thrust of imperialism will shift to seek out Arab gold and dollars. Because the Arabs have gained a measure of control over their natural resources, the struggle to win control over the industrial development that will ensue has begun.

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