Oil Companies Cooperate in a Cartel Covering the Middle East Summary

  • Last updated on November 10, 2022

To curtail competition, American, British, and European petroleum industry executives formed an international cartel controlling production, markets, and Middle East oil exploration.

Summary of Event

At the opening of the 1920’s, the position of major U.S. petroleum companies appeared unassailable in many regards, both at home and abroad. Their ability to furnish the Allied Powers with huge supplies of American oil—80 percent of their requirements—had helped immeasurably in World War I. Profits tended to be high. Consumption, despite plateaus between peaks, grew rapidly with industry’s increased mechanization, with new lifestyles dependent on oil, and with the massive influence of the automotive age. American production of crude oil from domestic fields accounted for 70 percent of the world’s total, and new American oil fields were being discovered with comforting frequency. [kw]Oil Companies Cooperate in a Cartel Covering the Middle East (Sept. 17, 1928) [kw]Cartel Covering the Middle East, Oil Companies Cooperate in a (Sept. 17, 1928) [kw]Middle East, Oil Companies Cooperate in a Cartel Covering the (Sept. 17, 1928) Oil industry Middle Eastern oil Achnacarry Agreement [g]Belgium;Sept. 17, 1928: Oil Companies Cooperate in a Cartel Covering the Middle East[07100] [g]England;Sept. 17, 1928: Oil Companies Cooperate in a Cartel Covering the Middle East[07100] [c]Trade and commerce;Sept. 17, 1928: Oil Companies Cooperate in a Cartel Covering the Middle East[07100] [c]Energy;Sept. 17, 1928: Oil Companies Cooperate in a Cartel Covering the Middle East[07100] [c]Natural resources;Sept. 17, 1928: Oil Companies Cooperate in a Cartel Covering the Middle East[07100] Teagle, Walter Clark Deterding, Henri W. A. Cadman, Sir John Gulbenkian, Calouste Sarkis Rockefeller, John D. (1839-1937)

Customarily, only surpluses of domestic petroleum were marketed abroad. Led by John D. Rockefeller’s Standard Oil Standard Oil and, after the dissolution of Standard Oil in 1911 for federal antitrust violations, by Jersey Standard Jersey Standard (Exxon) and Standard affiliates, American oil companies nevertheless held seemingly impregnable positions in Canada and in Central and Latin America, as well as in much of the Far East. With Russia’s crude oil production curtailed by the 1917 revolution, by ensuing civil war, and then by the Soviets’ impaired diplomatic relations, American oilmen seriously challenged many of their European rivals in their own domestic markets. The American companies had won these international marketing positions without the direct support of the federal government and without direct linkages to the nation’s military or diplomatic objectives.

The Allied Powers’ territorial division immediately following World War I and the U.S. State Department’s affirmation of “open door” diplomacy on behalf of American oil interests abroad set the stage for further international expansion. The private negotiations of four oil company executives were primarily responsible for American companies, by the late 1920’s, joining in the exploration and exploitation of Middle Eastern oil concessions. Three of these oilmen each guided one of the seven leading international oil companies: Henri W. A. Deterding directed Royal Dutch/Shell, Royal Dutch/Shell Corporation[Royal Dutch Shell Corporation] Sir John Cadman led British Petroleum British Petroleum Company as well as Anglo-Persian, and Walter Clark Teagle presided over Jersey Standard. A fourth figure, Calouste Sarkis Gulbenkian, an Armenian investor in the strategically and politically well placed but much smaller Turkish Petroleum Company Turkish Petroleum Company (TPC), was instrumental in persuading British, French, and Turkish interests to accept American participation in Middle East concessions.

Several factors explain why Deterding, Cadman, and Teagle, who had long battled one another for shares of mutually attractive markets, united to divide and cartelize the oil resources of the Middle East. Teagle, who became Jersey Standard’s president at the age of thirty-three and who soon led the Rockefeller firm to unprecedented profitability, was snarled in a price war that during the 1920’s threw Jersey Standard and Standard Oil of New York (Mobil) on the defensive. Profits fell, and the added threat of an oil glut loomed. Jersey Standard was the largest of these international giants. Teagle was laboring to make it a fully integrated concern. Despite marketing 23 percent of the world’s refined oil outside the United States (against 16 percent for Royal Dutch/Shell and 11.5 percent for Anglo-Persian, with most of the rest coming from other companies based in the United States), Jersey Standard, unlike its competitors, enjoyed access to few overseas sources of crude oil. Its crude supplies were drawn overwhelmingly from American fields that were heavily pumped. World War I had proven a serious drain on known reserves. Domestic consumption had reached astronomical proportions, and oilmen and government officials labeled the domestic industry’s future prospects as precarious.

The British government, sensitive to its navy’s role in imperial defense and thus to the oil requirements of that navy, lent strong diplomatic support to Deterding (Shell) and to Cadman (Anglo-Persian) against foreign oil interests. Encouraged by such diplomatic backing, Deterding, with characteristic boldness, subsequently sought control over a substantial proportion of the world’s remaining crude oil resources in Mexico, Venezuela, the Soviet Union, and even California. Standard of New York’s access to Soviet supplies and its subsequent effort to underprice Shell in India had provoked an “oil war” that spread worldwide and into the domestic markets of each company. Like all cutthroat competitions, the “war” was costly to both sides.

With State Department backing, Teagle’s Jersey Standard and several other American companies began protracted negotiations with Deterding’s Shell, Cadman’s Anglo-Persian, France’s Compagnie Française des Petroles (CFP), and Gulbenkian’s Turkish Petroleum. After Turkish Petroleum struck oil in northern Persia (now Iran) in 1927, agreement among the parties came swiftly. The American companies as a group, Anglo-Persian, Shell, and CFP received equal 23.75 percent interests in Turkish Petroleum. Gulbenkian retained the remaining 5 percent. On July 31, 1928, the Americans placed all of their holdings in the Near East Development Corporation Near East Development Corporation (NEDC), 25 percent of which was owned by Jersey Standard and 25 percent by Standard of New York, with equal one-sixth interests belonging individually to Atlantic, Gulf, and Doheny interests. (By 1934, these last three firms had sold their NEDC interests to Standard.) Acting in concert, these companies consented to operate solely through Turkish Petroleum, renamed Iraq Petroleum. Their territory, delineated at a meeting in Ostend, Belgium, by a “red line” drawn by Gulbenkian, encompassed most of the Ottoman Empire before its dismemberment by the victorious Allies after 1918.

To resolve the competing giants’ more discrete problems, Teagle initiated a series of discussions with Cadman and Deterding that led to a meeting of the three at Achnacarry Castle in Scotland during August of 1928. The outcome, which was kept secret until 1952, was the Achnacarry Agreement (or the “As Is” Agreement), "As Is" Agreement[As Is Agreement] finalized on September 17, 1928. The agreement’s seven principles sought to preclude further competition—and its costly disturbances—among their three companies by freezing market shares “as is” and by providing for sharing of existing facilities (at cost), cooperation on extensions of new facilities, and mutual actions to stabilize production. In order to maintain mutually acceptable prices, a “Gulf plus system” was adopted, under which prices were set at the level for oil delivered from the Gulf of Mexico, no matter what the true source of the oil. This consensus was intended to guide the future operations of local cartels.

Significance

The “red line” and the Achnacarry Agreement among Jersey Standard, Royal Dutch/Shell, and Anglo-Persian were only the first of several subsequent arrangements by these dominant international oil companies. Later in 1928, for example, the giants drafted a Memorandum for European Markets (MEM) whereby quotas were allotted to each for petroleum products sold in each country. Each company could fulfill its quota and even increase it, but only at the expense of oil companies not party to the MEM. To ensure compliance, monthly meetings were to be convened for exchange of trade figures. A Draft Memorandum of Principles and its subsequent amendments instituted specific penalties for noncompliance and outlined procedures that were to be invoked when companies retired from the cartel, when they purchased new companies, or when they dealt with newer petroleum products that replaced older ones. Some interpreted the last provision as discouraging innovations.

In all these agreements and statements of principles and procedures, stress was laid on the companies’ cooperation. Rules attempted to prevent members of the cartel from profiting at the expense of the others through unilateral adjustments of quotas and prices in the form of selling more than allowed by quota or at a different price from that charged by the other companies. Increasingly elaborate schemes evolved to ensure that such issues were exposed to frank discussion and that a common front was presented to independent or “outside” oil companies. Governance of the cartel was by vote, the voting power of each member being determined in proportion to its allotted quota. Dominance within the cartel therefore went to those members with the largest quotas, and it was they who set the prices that other participants were obliged to observe.

Cooperation within its ranks, stability within the oil industry and its markets, and moderation in profits were the goals by which the cartel set its course. In language reflective of American antitrust decisions, the cartel agreed that prices in all markets were to be maintained on a basis that yielded fair returns on reasonable investments. Critics at once dismissed such declarations of intent as a mask for profiteering. Nothing in cartel principles or procedures, however, suggested that the giant oil companies had issued themselves a license to gouge the consumers to whom they supplied their products. On the contrary, the cartel’s agreements specifically recognized the consuming public’s interests by explicitly warning cartel members against allowing prices to rise “to a point where the buying public is exploited.”

Furthermore, leaders of the cartel—and, in the background, Rockefeller—were applauded by conservationists in government positions, in the ranks of the general public, and inside the oil industry for acting to curtail the obvious chaos and monumental wastefulness that had been concomitants of the petroleum industry’s rapid development. Frenetic, disorganized drilling in American oil fields had prematurely exhausted some U.S. reserves and had led to the creation of the Federal Oil Conservation Board Federal Oil Conservation Board in 1924. The fact that the board had proved to be ineffectual did not deter the official drive toward some form of governmental regulation of oil production, despite critics’ assertions that regulation was synonymous with keeping oil prices high. Before 1930, while denying oil companies the right to regulate production and essentially abnegating any responsibility to do so itself, the federal government left the drafting of regulatory measures to whatever compacts could be drawn by the oil-producing states. These actions on the American scene lent credibility to the self-disciplinary activities that the NEDC instituted to regulate the cartelization of Middle East concessions.

By 1930, other American oil companies, with strong support from the U.S. State Department, had made ventures of their own in Middle East oil concessions outside the NEDC’s red line. Standard Oil of California (SoCal) bought Gulf Oil’s options in Bahrein. After arranging to do business as a British (Canadian) subsidiary, it began operations in the Persian Gulf as the Bahrein Petroleum Company, Limited. Similarly, Gulf Oil, pending British approval, entered negotiations for concessions in Kuwait.

Taken together, these initial Middle East oil concessions laid the foundations for immense future American investments throughout this vast area. Although no oil was shipped from American wells inside NEDC territory until completion of pipeline facilities in 1934, American interests nevertheless had established a continuing presence there. The monopoly previously enjoyed by British, French, and Dutch oil companies had been broken. Moreover, of the world’s seven great international oil companies—the “Seven Sisters”—five were American: Jersey Standard (Exxon), Standard Oil Company of New York (Mobil), Standard Oil of California (SoCal), Texaco, and Gulf Oil. Furthermore, regardless of where their concessions lay, the companies adhered to the NEDC’s principles and procedures in evolving their own cartels. Oil industry Middle Eastern oil Achnacarry Agreement

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Blair, John M. The Control of Oil. New York: Pantheon Books, 1976. Offers clearly written and informative coverage of the topic. Chapters 2 and 3 discuss American penetration of Middle East oil fields. Stronger on companies’ competition than on diplomatic efforts. Includes tables and charts, notes, and index.
  • citation-type="booksimple"

    xlink:type="simple">Chester, Edward W. United States Oil Policy and Diplomacy. Westport, Conn.: Greenwood Press, 1983. Chapter 1 provides a helpful historical overview. Includes useful chronology, notes, fine bibliographical essay, and index. A valuable work for keeping track of companies’ name changes over the years.
  • citation-type="booksimple"

    xlink:type="simple">Jacoby, Neil H. Multinational Oil: A Study in Industrial Dynamics. New York: Macmillan, 1974. One of the first of many books on the phenomenon of multinationals. Includes individual chapter notes, bibliography, and many tables, graphs, and charts.
  • citation-type="booksimple"

    xlink:type="simple">Nash, Gerald D. United States Oil Policy, 1890-1964. Pittsburgh: University of Pittsburgh Press, 1968. Scholarly work traces a theme of the U.S. government’s continuous cooperation with oil companies. Chapters 2 and 3 are relevant to American penetration of the Middle East. Includes splendid bibliographical essay.
  • citation-type="booksimple"

    xlink:type="simple">Pelletière, Stephen. Iraq and the International Oil System: Why America Went to War in the Gulf. New York: Praeger, 2001. As background to a discussion of American motives for waging war in the Persian Gulf, Chapters 1 and 2 present the history of the U.S. oil industry and its role in the 1928 formation of a cartel with European oil interests.
  • citation-type="booksimple"

    xlink:type="simple">Sampson, Anthony. The Seven Sisters: The Giant Oil Companies and the World They Shaped. New York: Viking Press, 1975. Excellent introduction to the subject for the layperson. Offers good sources, interesting reading, and balanced perspectives. Includes a map, brief page notes, and a splendid index.
  • citation-type="booksimple"

    xlink:type="simple">Shwadran, Benjamin. The Middle East, Oil, and the Great Powers. 3d rev. ed. New York: John Wiley & Sons, 1973. Scholarly work focuses on what happened to Middle Eastern countries after oil development. Includes a good introduction and a useful discussion of the phasing out of the “red line” agreement. Features many tables and charts, a map, notes, and an excellent bibliography.
  • citation-type="booksimple"

    xlink:type="simple">Venn, Fiona. Oil Diplomacy in the Twentieth Century. New York: St. Martin’s Press, 1986. Good source for background. Chapter 4, on the Anglo-American “oil war,” is excellent. Includes ample notes, tables, and select bibliography.
  • citation-type="booksimple"

    xlink:type="simple">Wilkins, Mira. The Maturing of Multinational Enterprise: American Business Abroad, 1914-1970. Cambridge, Mass.: Harvard University Press, 1974. Authoritative, scholarly work is invaluable for placing the oil business in context. Chapters 1 and 2 are most relevant to the topic of oil and the Middle East. Includes many tables, notes, bibliography, and index.

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