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Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 82d Congress 2d Session THE INTERNATIONAL PETROLEUM CARTEL " STAFF REPORT TO THE FEDERAL TRADE COMMISSION SUBCOMMITTEE ON MONOPOLY SELECT COMMITTEE ON SMALL BUSINESS UNITED STATES SENATE AUGUST 22, 1952 Printed for the use of the Select Committee on Small Business UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON : 1952 25 YEAR RE-REVIEW Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 SE ECT COMMITTEE ON SMALL BUSINESS (Created pursuant to S. Res. 58, 81st Cong.) JOHN SPARKMAN, Alabama, Chairman RUSSELL B. LON Louisiana CHARLES W. TOBEY, New Hampshire GUY M. GILLETT , Iowa LEVERETT SALTONSTALL, Massachusetts HUBERT H. HUM HREY, Minnesota EDWARD J TTIYE, Minnesota LESTER C. HUNT Wyoming ROBERT C. IIENDRICKSON, Now Jersey WILLIAM BENTO , Connecticut ANDREW F. SCHOEPPEL, Kansas BLAIR MOODY, M ichigan JAMES H. DUFF, Pennsylvania LAURANCE G. HENDERSON, Staff Director WALTER B. STULTS, Assistant Staff Director CHARLES M. NOONE, Connsel MiNNA L. RUPPERT, Clerk SUBCOMMITTEE ON MONOPOLY RUSSELL B. LONG, Louisiana, Chairman JOHN SPARKMAN Alabama WILLIAM BENTO , Connecticut CHARLES W. TOBEY, Now Hampshire ANDREW F. SCHOEPPEL, Kansas Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 STEPHEN J. SPINGARN, Commissioner. IIOil. JOHN SPARKMAN, FEDERAL TRADE COMMISSION, Washington 25, D. C., August 18, 196',2. Chairman, Select Committee on Small Business, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: Pursuant to the request made in your letter of August 18, 1952, I transmit herewith a copy of the staff report of the Federal Trade Commission on the International Petroleum Cartel. It is understood that this report will be published by your Monopoly Subcommittee, which is currently holding hearings on the effect of cartels and monopolies on small business. If and when hearings are scheduled concerning our staff report on the International Petroleum Cartel, the Commission will be glad to designate personnel to appear before your committee and discuss the contents of the report. By direction of the Commission. Sincerely, STEPHEN J. SPINGARN, Acting Chairman.. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 PREFACE We are happy to have this staff report by the Federal Trade Com- mission on the International Petroleum Cartel. Our Monopoly Subcommittee, headed by Senator Long, has already held several hearings and issued a number of reports on monopolistic practices and cartel arrangements, particularly as they affect small business. This subcommittee was appointed in February 1952, and practically from its inception has been beleaguered by requests to investigate the alleged restrictive practices of the international oil industry. On April 23, April 29, and July 16, the subcommittee-in the course of public hearings-announced its keen interest in the staff report of the Federal Trade Commission on international petroleum cartels, and expressed the belief that the report should be released. On July 28, a letter was dispatched to the White House requesting that the report be made public. Now. that the President has approved this request, it is entirely appropriate that the report be included as part of our subcom- mittee's, series on monopolies and cartels. The Senate Small Business Committee has a profound and abiding interest in the effect of monopolistic and restrictive activities on the survival of independent competitive enterprise. Such activities are not always regional or even national in scope. When in exceptional, circumstances the fate of competitive free enterprise at home is inextricably linked with the pattern of business operations abroad, this committee will not hesitate to extend its investigations so as to determine the exact nature of these operations. However, our purpose is always the same: to discover the effect of certain business practices and arrangements on the American small-business man and on the American consuming public. With reference to the alleged Oil Cartel, it has been the aim of this committee to learn (1) whether or not five major integrated American oil companies have joined two foreign companies in a series of inter- national monopoly agreements;. (2) whether or not the structure of international oil prices has imposed an excessive burden on the economies of friendly nations, and thus on the American public which- is extending economic and military assistance to these nations; and, perhaps most important of all, (3) whether or not the dumping of foreign oil in the United States, at a net cost far below the price charged in Europe and the Middle East, is causing injury to inde- pendent American oil producers. It is our hope that publication of this report will contribute mate- rially to public knowledge and understanding of international business arrangements. It is a factual report and as such is subject, of course, to a variety of interpretations. If any interested party wishes to be heard, this committee will make time available so that all shades of opinion may be represented. Only after such hearings are completed, however, will our committee issue its final conclusions and recom- mendations on the effect of the alleged International Oil Cartel on Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 small busine s, in particular, and the consuming public of America, in general. I want to make it clear that this report is being published by our committee only after careful study and deliberation. It is my opinion that its release at this time is not likely to jeopardize our national security or undermine the aims of our foreign policy. The security aspect of the matter has been cleared with responsible agencies of Government. As to foreign policy, the goals of the United States in international affairs are clear: To attempt in every way possible to assure justice and freedom, under law, to all peoples of the earth. Publication of this report will certainly not interfere with the attain- ment of thes goals. There is another important reason for making this report available, and that is t subject the activities of great concentrations of economic power to the spotlight of publicity. It has long been the public policy of the United States to supple- ment the leg 1 provisions of the antitrust laws with broad, fact-finding powers. The fundamental purpose of fact-finding is to prevent the abuse of power. Where power exists there also exists the possibility of its abuse. Some two decades ago the Federal Trade Commission, through an e onomic investigation, restrained the abuse of power by the private u ility holding companies. Today the power of. the inter- national oil companies is so vast as to invite its abuse. By focusing the spotlight of publicity on the activities of these oil companies, the present r .-port of the Federal Trade Commission, like the earlier investigation of the utility companies, should prevent any possible abuse of pow r, either at home or abroad. The Senate Small Business Committee believes that it is the basic philosophy o the United States to oppose vast monopolistic con- centrations economic power. Practically alone among the great nations of the world, the United States-through fact finding and through enforcement of its antitrust laws-endeavors to hold in check the power o giant organizations. Whether privately or publicly owned, such organizations carry with them the inherent possibility that their overwhelming power may be abused to the' detriment of the people. The Senate Small Business Committee, in publicizing the operations of the international oil companies, wishes to reaffirm the determin tion of the American people that American companies, whether at home or abroad, shall so conduct themselves as to promote the interests f all people .everywhere. The Senat Small Business Committee, in issuing this report, is expressing its faith in Justice Brandeis' belief that sunlight is the best of disinfectar is and electric light the most efficient policeman. JOHN SPARKMAN, Chairman, Select Committee on Small Business. WASHINGTON, D. C., August 22, 1952. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CONTENTS rage Letter of Transmittal--------------------------------------------- III Preface----------------------------------------------------------- --------------- --- 1 ---------------------------- Introduction------------------------------------------------------ PART I. RESOURCES AND CONCENTRATION OF THE WORLD PETROLEUM INDUSTRY Chapter 1. The World's petroleum resources: 5 World's reserves -_--_____-_ ---- Principal crude producing areas of the world________________ 10 6 World crude oil refining capacity --------------------------- 12 World petroleum consumption and supply ------------------ The pattern of international trade in petroleum-------------- 14 II. Concentration of control of the world petroleum industry: 21 Control of the international petroleum industry------------- 21 Control by government monopoly_____________________ Control by seven international petroleum companies----- 23 22 Control of world crude reserves____________________ Control over world crude-oil production ------------ 224 4 Control over world crude-oil refining capacity ------- 25 Control of world cracking capacity_________________ Control of world petroleum transportation facilities-- 266 ------ ------------------- - Control over marketing Importance of intercorporato relationships in the international ------------------- - d t il i 29 ---------- n us o ry----;-------- Joint ownership of subsidiary and affiliated companies--__ 29 Interlocking directorates among the international petro- companies ---------------------------------- leum 31 32 Summary----------------------------------------------- PART II. DEVELOPMENT OP JOINT CONTROL OVER THE INTERNATIONAL PETROLEUM INDUSTRY' III. Development of joint control over foreign oil: Introduction: Background of interest in foreign oil---------- 37 _ _ _ _ _ _ _ _ _ _ _ _ _ Fear of an oil shortage in America--------------------- h cost of purchasing private mineral rights in America- Hi 7 39 g 4 0 Discovery of foreign reserves ------ s------------------- 40 Fear of foreign monopoly ----------------------------- Summary: The techniques of control------------- 45 IV. Joint control through common ownership: The Iraq Petroleum Co., Ltd.: History and early development---------------------------- en " d th 47 op e American-British dispute over Mesopotamia an 51 door-------------------------------------------------- ------- ------- ---------- -- ---- - foothold i bt n a a Early efforts of American oil companies to o 52 in Mesopotamia ------------------------------------- Negotiations with the Turkish Petroleum Co. (TPC), 53 1922-28----------------------- --------------- d 55 ----------------------- The open door plan is propose 55 The open door is partially closed---------------- ------ The open door is closed by the "self-denying clause -- _ _ - 56 The working agreement and the Gulbenkian controversy- _ i A 61 can mer Anglo-Persian's overriding royalty and the 63 group's share interest in TPC_________ ___ __ __ _ The scope of the restrictive provisions of the group (red-line), 65 agreement of 1928------------------------------------- Operations within the red-line area, 1922-39 ---------------- 67 VII Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Chapter IV. Joint control through common ownership-Continued page Th Iraq concession of March 24, 1931_____________________ 68 Eff et of restrictive provisions of the 1928 group agreement- 71 Gulf Oil Corp.'s option on Bahrein__________________ 71 Negotiations regarding Standard Oil Co. of California's Bahrein a d Saudi Arabian concessions--------------------------- 72 The discovery of oil in Bahrein alarms Anglo-Persian--------- 72 Standard Oil Co. of California and IPC compete for Saudi Arabia but IPC withdraws--------------- The Big Three attempt to reduce the red-line area- _ _ -------- 74 74 Att mpts to work out a compromise with the French and Gulbenkian -------------75 Big Three forced to meet demands of French and Gulbenkian or. price question-------------------------------------- 78 Big Three permitted to continue negotiations with Standard of 1 California but Gulbenkian blocks a group arrangement--- 78 The agency agreement-------------------- 80 Big Ifrhree continues to seek a better deal with Caltex but war ends negotiations---------------------------------------- 82 Summary----- -------------------- Add tional IPC concessions---_-_----_ ----- 84 Iraq Petroleum Co., Ltd ---------------------------- 84 Mosul Petroleum Co., Ltd-_-_-_____.______________ 85 Basrah Petroleum Co., Ltd------------------------ 85 utside Iraq -------------------------------------- 85 Petroleum Concessions, Ltd ------------------------ 86 Petroleum Development (Qatar), Ltd______________ Petroleum Development (Western Arabia), Ltd_ _ _ _ _ 61 Other Middle East areas ------------------------- 87 Miscellaneous subsidiaries and affiliates 8 9 Som operating policies, problems, and results _______ ______ --------------- 89 ax matters ------ _------------ ------------- ----------------------- 82 oyalty problems with the Iraq Government -_ _ - _ - _ - _ _ _ _ 91 rites charged Iraq consumers for petroleum products supplied by IPC-------------------- ---- 94 Worl~ War II and postwar developments___________________ 96 ff f ects o war upon IPC operations____________________ 96 Shipments disrupted_____________ 96 Red line arrangement for sharing crude is frustrated-_ 97 Ad hoc arrangements in lieu of red-line agreement 97 ostwar settlement--------------------- --- 99 CFP and Gulbenkian reinstated in IPC and war claims settled ______________-___ 99 The American group declare the red-line agreement dissolved ------------------------------------101 CFP takes the matter to court --------------------- 103 NEDC files a counter suit ----------- 104 Revised agreement negotiated and court actions withdrawn ----------------------._ 104 ---- ome postwar management policies and problems-------- 107 IPC opetates the Tripoli refinery------------------- 108 IPC's price policy ---------------------------- 108 Control over distribution ---------------------- Summary -----------------------109 V. Other common ownerships in the Middle East: The Arabian American Oil Co----------------------------- 113 he original Aramco con i cess on_______________________ 113 he Texas Co. obtains a 50-percent interest in the Arabian concession 114 n d .,.. . ., .,a,.... Arabia an a supplemental agree- ment concluded_116 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Chapter V. Other common ownerships in the Middle East-Continued The Arabian American Oil Co.-Continued Page Developments during World War II___________________ 117 Aramco's position at the end of the war_________________ 119 Jersey Standard and Socony-Vacuum purchase an interest in Aramco and Trans-Arabian pipeline--------------- 119 The Jersey-Socony-Aramco arrangement opens up mar- kets for Aramco's oil_______________________________ 120 Agreements and terms of the participation of Jersey Standard and Socony-Vacuum in Aramco and Trans- Arabian pipeline ----------------------------------- 122 The Aramco-Jersey and Aramco-Socony agreements----- 123 The Trans-Arabian pipeline agreements----------------- 124 The off-take agreements------------------------------ 125 Aramco's 1950 concession agreement with the. Saudi Ara- bian Government_____________________________ ____ 128 Kuwait Oil Co., Ltd.: Introduction---------------------------------------- 129 International background..--------------------------- 129 The Anglo-Persian, Gulf Exploration Co. agreement, De- cember 14, 1933 ---------- _ 131 Operation of Kuwait Oil Co--------------------------- 133 Reiteration of restrictive clauses in 1937---------------- 134 Postwar development________________________________ 134 Summary: Aramco-------------------------------------------- 134 Kuwait Oil Co., Ltd_________________ _ 136 VI. Joint control through purchase and sale of oil in the Middle East: Introduction-------------------------------------------- 137 Gulf-Shell agreement, 1947-------------------------------- 137 Source and nature of material discussed---------------- 137 Nature and effects of the Gulf-Shell agreement of 1947___ 138 Anglo-Iranian agreements with Jersey Standard and Socony- Vacuum for the sale of crude oil_______________________ 145 Jersey Standard-Anglo-Iranian crude-oil sales contract_- 147 Socony-Anglo-Iranian first purchase agreement---------- 152 Socony-Anglo-Iranian second purchase agreement -------- 152 Middle East Pipelines, Ltd___________________________ 154 Supplementary agreements--------------------------- 156 Postponement of the construction of the Mediterranean pipeline.------------------------------------------ 158 Summary----------------------------------------------- 160 VII. Joint control through purchase and sale of oil in Venezuela: Introduction-------------------------------------------- 163 Background of the agreements: Identification list of comppanies________________________ 164 Mene Grande Oil Co. (TV. eneg)------------------------ 164 Standard Oil Co. of Venezuela (SOV), Lago Petroleum Co. (Lago), and Creole Petroleum Co. (Creole)--------- 165 Venezuelan Oil Concessions, Ltd., Caribbean Petroleum Co., and Colon Development Co., Ltd. (Shell) --------- 166 The International Petroleum Co. (International) _ _ _ _ _ _ _ _ - 166 The N. V. Nederlandsche Olie Maatchappij (NOM) ----- 166 The Venezuelan petroleum industry in 1937_____________ 166 Western Venezuela______________________________ 167 Eastern Venezuela------------------------------- 168 Markets for Venezuelan oil in 1937________________ 169 Sale of oil and related agreements__________________________ 170 The joint enterprise__________________________________ 171 The Meneg-SOV agreement of December 15, 1937__ 171 "Pooled concessions"________________________ 171 Joint management of the "pooled concessions"_ _ 172 The Meneg-International (principal) agreement_-__ 173 Sale of oil----------------------------.------ 173 Sale of physical assets________________________ 174 The surrender of management prerogatives----- 174 The quid pro quo--------------------------- 1 76 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 X CONTENTS Chapter, VII. Joint c Sal ntrol through purchase and sale of oil in Venezuela-Con. of oil and related agreements-Continued The Joint enterprise-Continued The International-NOM main agreement----------- Page 178 Participation in the joint enterprise, sale of oil and properties----------------------------- 179 The quid pro quo---------------------------- 180 Production of quota agreements______________________ 181 The four-party ratio agreement___________________ 182 Principles and goals --------------------------- 182 Production quotas, 1938-49-------------------- 183 Quota machinery for 1950 and thereafter------- 186 The saving clause____________________________ 187 The International-NOM ratio agreement ----------- 188 Cancellation of the four-party ratio agreement----__- 189 Summary : The significance of the agreements----------- 190 PA VIII. Producti compa Bac T III. PRODUCTION AND MARKETING AGREEMENTS n and marketing agreements among international oil ies: ground for international agreements -------------------- 197 Division of the Indian market -------------------------- 197 The Achnacarry agreement_______________________________ 199 Governing principles ---------------------------------- P 200 olicy and procedural provisions ----------------------- 201 The field of cartel action --------------------- _____ 201 Quotas------------------------------------------ 202 Pooling transportation facilities------------------- 203 Reciprocal exchange of supplies -------------------- 204 Method of effecting exchange of supplies ----------- 204 Intracartel pricing methods----------------------- 205 Operation of the exchange and pricing system ------- 205 Cartel versus world pricing methods--------------- 206 Administration of the agreement ------------------ 208 ature and limitations of the Achnacarry agreement- _ _ _ 210 Wor d proposals of the American Petroleum Institute-------- oordination of U ited St t ith t l 210 n a es conserva ion w carte objectives ---------------------------------------211 iperation under interstate compact____________________ 213 United States petroleum export associations_________________ 218 tandard Oil Export Corp.--------------------------- 218 Limitations of Standard Oil Export Corp's. au- thority------------------------- ----- 219 Export Petroleum Association, Inc.-------------------- 220 Membership and terms of membership agreements__- 221 Price actions by the association------------------- 222 Efforts to obtain adherence of western independent producers------------------------------------- 223 Final collapse of Export Petroleum Association efforts---------------------------------------- 223 roportions of United States total exports controlled by Webb Act associations_____________________________ 224 oreign influence in Export Petroleum Association opera- tions--------------------------------------------- 225 elation to Achnacarry agreement____________________ 226 Memorandum for European markets, 1930_________________ 228 erms of the memorandum for European markets------- 230 Quotas and maintenance of "as is" positions -------- 230 Prices and conditions of sale ----------------------- 232 Management of local cartels ----------------------- 234 Other provisions--------------------------------- 234 Operations under the memorandum ----------------- 235 New distribution agreements under the memorandum- 236 he Rumanian agreements ----------------------------- 236 ontrol of Russian oil, New York Conference, May 1932__ 239 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CONTENTS XI Chapter VIII. Production and marketing agreements among international oil 'Page companies-Continued Heads of Agreement for Distribution, 1932_________________ 241 Origin and nature of the Heads of Agreement ----------- 241 General terms of Heads of Agreement------------------ Quotas----------------------------------------- 242 Trade and quota adjustments and penalties -------- 2243 44 Admitting outsiders------------------------------- ? 245 Purchase of outsiders____________________________ 245 Virginal markets-------------------------------- Central "As Is" Secretariat --------------------------- 246 Additions to previous agreements------------------ 247 Secrecy regarding the Heads of Agreement -------- -__ - 248, Operations under the Heads of Agreement -------------- 248 Rumanian and United States production ----------- 249 Operational problems in other areas areas---------------- Preparation.for a new international agreement. _ _ _ _ _ _ _ - 252 Draft Memorandum of Principles, 1.934 --------------------- 253 Nature of the draft memorandum_____________________ 253 Terms of the draft memorandum______________________ 255 Determination of quotas and adjustments for undertrading 256 and overtrading------- ------------------------------------- 258 Revision of quotas---------------------------------- Prices and terms of sale ------------------------------- 261 Competitive marketing expenditures------------------- 264 Operations under the draft memorandum ---- ------------ 265 Summary 268 IX. Case studies in the application of marketing agreements in selected areas: Problems in the application of the agreements--------------- 275 6 Consumption of petroleum products------------------- 27 The structure of competition-------------------------- " 277 277 group------------------------------- The "as is Other major American oil companies--------------- 277 The Russians ------------------------------------ competitors ------------------------------- 278 278 National economic policies____________________________ 279 9 Other problems-------------------------------------- 27 Case studies: 280 Sweden--------------------------------------------- The oil investigating committee of 1945 ------------ 280 A summary of cartel arrangements, 1930-47 -------- 280 Cooperation in the 1930--33 period----------------- 280 Agreements under the Draft Memorandum of Princi- 1934-38----.---- ples ) Drafts and agreements, 1939-47 ------------------- 286 Administration of the cartel arrangements---------- 288 Cartel operations--------------------------- Quota arrangement ----------------------------- 290 297 Trading results, 1928-36----------------------- 301 Attempts to obstruct and mislead the committee---_ 304 Statements of Standard (New Jersey) and Gulf 306 Statements of the other companies_____________ 307 Comments of the committee--____--__--.____-__ 3 08 Summary and review of the Swedish ease history-_:__ n th d N 309 or er The United Kingdom of Great Britain an 311 Ireland------------------------------------------ Cartel arrangements in the United Kingdom-------- 313 Operations under "as is" and other cartel arrange- ments ---------------------------- 317 ------------- - 320 --------------- Summary---- 320 France--------------- --------------------------- French petroleum policies------------------------- 321 Cartel operations in France_______________________ 322 -------------------------------------------- Germany ---- - ------------------------------- - ----- - 325 328 Belgium and the Netherlands________________________ _ , Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 XI1 CONTENTS Chapter IX. Case stidies in the application of marketing agreements in selected areas Continued Page The Scandinavian countries ----------- .--------------- 331 Argentina ------------------------------------------- 335 Chile------------------------------------------------- 337 Brazil----------------------------------------------- 338 Mexico--------------------------------------------- 339 Cuba----------------- ---------------------------- 339 The Lesser. Antilles --------- ---- 340 ---- ----------------- Other countries ----------------------------------------341 X.- Summary ----------------------------------------------- 346 Price d-termination in the international petroleum industry: Introduction -------------------------------------------- 349 Pri e reporting in the oil industry__________________________ 350 De elopment of basing point pricing _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 352 th hi t f G e s ory o ulf plus 352 ------------------------------- A new basing point, the Persian Gulf_____________ 355 The propriety of the Persian Gulf price 356 _________________ Cri#de oil pricing after World War II_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 360 Increases in production and prices in the Middle East_ _ _ _ 360 Prices equalized at United Kingdom, the $2.22 price----- 362 Changes in freight rate, the $2.03 price ------------ _ 363 ECA pressure, $1.88 price_________________________ 364 Prices equalized at New York, the $1.75 price ----------- 367 The "tapline" price, $2.41 based on the $1 75 price 368 . -__ Ref nod products pricing after World War II________________ 370 General ch t i ti f h arac er s cs o t e refined productsii prcng structure------------------------------------------ 370 Base price-------------------------------------- 371 Phantom freight_________________________________ 371 Freight absorption------------------------------- 371 The shift to a Caribbean freight base------------------- 372 Middle East prices based on USMC minus 30 percent---- 372 ECA reestablished Middle East prices based on straight USMC rates-------------------------------------- 372 unRmary----------------------------------------------- Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 INTERNATIONAL PETROLEUM CARTEL INTRODUCTION On September 19, 1944, the. Federal Trade Commission passed a tee,?olutiot directing its economic staff to conduct a long-range in- westigation of international cartels. The resolution stated in part that: Whereas the Federal Trade Commission Act authorizes the investigation of trade conditions in and with foreign countries where associations, combinations or practices of manufacturers, merchants, or traders, or other conditions may affect the foreign trade of the United States; and to report to Congress thereon * * * and Whereas there is evidence that agreements detrimental to the trade, commerce, and security of the United States existed prior to the war, between German ancll American, British and American, German and British, and between industry groups in other nations * * * * * * * Now, therefore, be it Resolved, That the Federal Trade Commission * * * herewith directs the chief economist to make an investigation and inquire into- The practices, arrangements, agreements, and operations of manufacturers, merchants, or traders operating in export trade. The effectiveness of the said agreements, arrangements, and associa- tions The effects resulting from the operations of foreign cartels or other combina- tions of foreign manufacturers; merchants, and traders upon the export trade of the United States of America and the American consumer. Under that general resolution the Commission has prepared and issued reports dealing with international cartels in seven major indus- I. . Report International Phosphate Cartels ---------------------------------- I t --- d Issued 1946 1947 uas n - 2. The Copper ry---------------------------------------- 3. The Sulphur Industry and International Cartels-------------------- 1947 4. International Electrical Equipment Cartel------------------------- 1948 5. International Steel Cartels--------------------------------------- 1948 -----____ ---------------------- 6. The Fertilizgr Industry ------------------------------------------ 7. The International Cartel in the Alkali Industry--------------------- 1949 1950 The Commission felt that the basic purpose of its resolution of 1944 would not have been accomplished without the preparation of a report on one of the most important of the international cartels-the inter- national petroleum cartel. To facilitate the preparation of this report, the Commission on December 2, '1949, passed a supplemental resolu- tion calling for an investigation of the international cartel in this specific industry. This resolution provided as follows: Whereas the petroleum industry is one of the largest and most important industries in the United States; And whereas this industry is very highly concentrated, with the preponderance of total assets, proved reserves, crude production, and refining capacity held by a relatively few large companies; Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 And wherea i it is reported in authenticated, secondary sources that over a long period of years American petroleum companies operating in foreign countries have entered i to restrictive agreements among themselves and with petroleum companies of other nations, many of these agreements having reportedly been recently exten ed and reinforced; And wherea. such restrictive agreements are reported to have had the effect of restraining trade and of affecting prices of petroleum and petroleum products in the United States; And whereas this problem has been intensified by the importance of recent discoveries of it in foreign nations: Now, therefore, be it Resolved, That the Federal Trade Commission, in the exercise of the powers vested in it by section 6, paragraphs (a), (b), and (h) of the Federal Trade Com- mission Act, a d with the aid of any, and all powers conferred upon it by law, do forthwith proceed to make an investigation of agreements entered into by Ameri- can petroleum companies among themselves and with petroleum companies of other nations i connection with foreign operations and with international trade in petroleum a d petroleum products and of the relationship of such agreements to domestic tr de in and pricing practices of the American petroleum industry; and that the D rector of the Bureau of industrial Economics be hereby authorized to conduct such investigation on behalf of the Commission. Like its p edecessors, the present report,, which was thus prepared under a gene al resolution of 1944 and a specific :resolution of 1949, is merely descriptive and fact finding in character. It contains sum- maries of th facts presented but no recommendations. These sum- maries are presented at the end of each of the report's 10 chapters . One of the petroleum companies voluntarily submitted to the Com- mission certain agreements made subsequent to the date of the Com- mission's su pena, since, in the opinion of this company, these agree- ments cast 1 ght upon the meaning of some of the documents sub- penaed. Th discussion in the report makes reference to this supple- mental information; but otherwise the analysis of the subpenaed ma- terial has no sought to take account of developments subsequent to the date of t e subpenas nor of any new agreements that may have been entered into subsequent to that date. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 PART I RESOURCES AND CONCENTRATION OF THE WORLD PETROLEUM INDUSTRY Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CHAPTER I THE WORLD'S PETROLEUM RESOURCES Petroleum is an exhaustible natural resource; it is of fundamental importance to all phases of industrial activity and indispensable to industrial progress. At times it has been the subject of competition and rivalry; more frequently it has been the subject of agreement and international cartel arrangements. Over the years an international petroleum industry has developed, not only because of the importance of petroleum products, but also because these products are so stand- ardized as to have almost universal acceptance, irrespective of the source of the crude from which they are derived. WORLD'S RESERVES The world's petroleum reserves are concentrated in a few countries. As of January 1, 1949, these reserves, excluding those of Russia, were estimated at 73.7 billion barrels, of which more than 90 percent or 69 billion barrels were in six countries: United States, Venezuela, Iran, Iraq, Kuwait, and Saudi Arabia. The following table shows the estimated proved reserves by geographical areas and by countries. TABLE 1.-Estimated crude petroleum reserves for world, by areas and principal producing countries, Jan. 1, 1949 [In thousands of barrels] N Areas and principal countries Estimated reserves Percent of world reserves North America: 28,000,000 35.75 United States-------------------------------------------------- ---- 850, 000 1.09 Mexico ----------------------- 500,000 ,64 ---- ----------- 3,000 Other -------- Total South America: 9,000, 000 11.49 Venezuela - ----------?----------- --- -------------------------- 300, 000 .38 32 --- Argentina---------------------------- ----- --- ------ ------- - -- 250, 000 250, 000 . .32 Trinidad ---------------------?----- - -- - - - -------- - ------------ 160, 000 70,000 21 09 Other--------------------- -- --------- --------- -------------- Total Europe (excluding U. S. S. R. and countries under its control): 75,000 ,10 Austria- --`------------------ ----------------_--------- 50, 000 .06 Netherlands ----------- -- -- - --------------------------------------- Gerrnany ------------------------ Other ---------------- 45, 000 9, 000 .06 .02 - ---------------------------------- ----- --------- --- Total--------- Africa: ---- -------- 120,000 .16 --------------------------- 2,000 ,16 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE THE INTERNATIONAL PETROLEUM CARTEL imated crude petroleum reserves for world, by areas and principal producing countries, Jan. 1, 1949-Continued [In thousands of barrels] Estimated reserves Percent of world reserves Middle East: Kuwait Saudi Arabia__ ___ 10, 950, 000 13.98 Iran- 9,000,000 11.49 Iraq ---------- 7,000,000 8.94 atar ..-- - ----- ----------------- ----------------------- 5,000,000 6.39 Bahrein - ----- 500, 000 64 Other________ _ ----------------------------------------------------------- 170, 000 . 22 ----------------------------------------------------------- 76,000 . .08 Total Far East: Netherlands Ea British Borneo t Indies ---------------- 1 000 000 1 28 - Burma r ----- ------- 1 , 150, 000 . .19 New Guinea____ -------- ------- -------------------------- ---------- - 50, 000 .06 Other---------- - ---------------------- ---------------------------------------------------- 50, 000 67, 000 .06 .09 Total Total Total otal above co world untries _ _ _ _ _ _ _ _ - _ _ ------------------------ 73,697,000 94. 11 78, 322, 000 100.00 Source: DeGolyor nd MacNaughton, Twentieth Century Petroleum Statistics, 1949, p. 4. The distrib tion of world reserves among the major geographical regions is as f llows: i Middle East... Percent --------------------- ---------- 42 North America- _ ----------------- South America..................................................... -------------------------------------------------- 37.8 12.8 Russia and its a uropean satellites _ _ ._ _ _ _ _ _ Far East ---------------------- Western Europe less than__________________ ---------- 3 -- Of the worlds total crude reserves, including those of Russia, Ameri- can companie control approximately 63 percent, and if Russian- controlled reserves are excluded, the share rises to about 6.7 percent. The most important discoveries of new reserves in recent years have been in he Middle East and in Canada. New discoveries in Canada are expected to add more than 1 billion barrels to the total reserves of that country,2 while the tremendous new 'discoveries in the Middle E st have made that area the most prolific potential sup- plier of oil in the world. PRINC PAL CRUDE PRODUCING AREAS OF THE WORLD Crude petroleum is produced in more than 40 countries, but in 1949, 7 countries accounted for about 85 percent of the world's total pro- duction. Thee seven countries were the United States, Venezuela, Iran, Saudi Arabia, Kuwait, Mexico, and Iraq. If the production of Russia and Russian-controlled countries is excluded, these seven countries prod ced more than 92 percent of the world's crude in 1949. 1 The estimates on w ich table l is basod vary in accuracy depending on the data available in each country, the expertness of those making tiie estimates, the assumptions underlying the data and so on. Estimates for well-developed field are more dependable than those for newly opened fields, such as those in the Mid- dle East. fl World Oil, July 15, 119m, p. 65. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 O G O O O O O O 0 0 0 0 0 0 0 0 0 0 N O Ai o 0 ? y w w pp "' 6 I 0 w 6 kMM 6 W 0 O 0 0 z Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 7 The production ' of crude is concentrated in three geographical areas: North America, South America, and the Middle East. In North America, the principal producers are the United States, Mexico, and Canada. In 1949, those three countries produced more than 57 percent of the world's total crude. Table 2 gives world production in 1949 by country and by geo- graphical area. The United States has long been the world's most important pro- ducer of crude petroleum, and has maintained. a relatively constant proportion since the turn of the century. For sereral years produc- tion in the United States has averaged about 60 percent of world production. In 1949, however, this percentage declined to 54.7 percent. In 1949, production in the United States averaged about 5 million barrels per day from more than 449,000 wells, or an average produc- tion of approximately 11 barrels per day per well.' In the average of barrels per well per day, the United States ranks far below most other important oil-producing countries. In 1949, Mexico produced about 60 million barrels of crude, and had seventh place among the important oil-producing countries of the world. Peak production in Mexico was reached in 1921, with 193 million barrels. At that time Mexico was the second largest crude producer in the world. However, production declined rapidly and reached a low of 33 million barrels in 1032. Since the end of World War II, production in Mexico has increased from 43 million to more than 60 million barrels annually. Daily output per well averaged about 160 barrels in 1949,4 nearly 15 times that of the United States. ' world Oil, July 15, 1950, p. 54. 4 Ibid., p. 44. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 8 HE INTERNATIONAL PETROLEUM CARTEL France 1.1 French Morocco 4 Oermany------------ --------------------- 16.3 Italy-- -------------- ---------------------- .2 Netherlands-_-? 11.8 ?--------?---------- ERYpt ----------------------- ------------------ 2.9 United Kingdom 7 9 a Total Europe _ Ba hrein ------------- Irtbn ________________ Ipa n - Kuwait Saudi - audi Arabia ------- - E st______________________ Total Middle --- British IIorneo _______ Burma r r---------------------- India -------------- China--------------- -------------------~---- Indonesia spa___..______ ---r- -'---- ------ -------- J aPan---------------- -------- ------------- New Guinea P Pakistan TABLE 2.-World crude oil production, 1949 [Annual average in thousands of barrels daily] Percen t increase C unt ry 1949 1948 1939 1949 ove r 1949 over 1948 1939 Canada ------------- Cuba ------------------------ - 59.0 32.5 21.5 81.5 .4 174 --------------- t Mexico ______________ ------------------------- 4 - 166,8 3 159 5 .3 117 7 33.3 33.3 United States ------- ---------------- __........ . 6,043.0 . b, 512.0 . 8,465.6 4.6 -8.6 41.7 46.5 Total North A merica ------------------- - 3,260.2 5, 704.3 3,605.1 -7.6 46. 1 Argentina ----------- Bolivia ------------------------- - 63.0 64.8 ' 51. 1 -2.8 23.3 Brazil --------------- 1.8 3 1.3 .6 38.4 200.0 Colombia ____________ Ecuador --------- ------------------------- - . 82.3 .4 64.9 ____---65.5 -26.0 26.8 ------ 25.6 u ----------------- Peru ---- Trinidad ------------ ------------------------- ----------------------- -- 7.3 40.5 7.0 38.4 6.3 37.1 4.3 5.5 15.9 9.2 ------------ Venezuela ----------- ----------------......... -------------------------- 56.5 1 320 0 54.9 1 338 8 52.8 566 2.9 7.0 , . , . .0 -1.4 133.2 Total South Am erica ------------ 1,571.7 1,570.5 779.4 .1 101.7 1.1 1.4 --- - 21.4 .2 12.1 12.1 12.3 100.0 34.7 2.5 32.5 .2 9 4 3 ____ _ _ -33. 3 . 36. 0 - .5 12.8 19.2 - 235- .2 9 ~l dAfrica ---------------- 73 6 59 9 26 . . .8 22.9 174.6 - ------------------------- 30.0 29.8 20.8 .7 44.2 - ------------------------ 552.0 518.5 214.0 6.5 157.9 - - ---- ------- ------------------------- 84.0 245 0 72.2 127 2 84.3 16.3 -.4 _ _________________________ . 475.0 . 390.0 - 10.8 21.7 _ 4,298.1 1,386.0 1,138.0 329.9 21.8. 320.1 68.0 55.0 19.5 23.0 248.7 .5 .8 5 .5 21.6 6 4 - 1 1.8 1 8 . 112.0 . 86.61 05 170. 29 .3 343 - 3 . 3.7 4 9 3.1 7.3 19.4 49 .3 . .4 - 1,125.0 1.8 1.2 (9 50.0 Total other Asia (Far East) ------------- 198.0 153.9 225.3 28.7 -12. 1 Total (less Rossi and Eastern Europe) - 8, 498. 5 8, 626.6 4,966.5 -1.5 71.1 lbania.... ustria -------------- -------- -- 2.5 1.0 2.6 150.0 -3.8 ------ --------- zcchaslovakia-------- ------------------------ -------------- 18.0 g 17.0 3.4 5.9 429.4 ungary---- --------- ofand--------------- . a-------------- ussia_________________ --------- ----------------- _- ---------------------- _------- .------------- L0. 5 2.7 86.0 600.0 6 10.0 2.7 93.4 600.(1 3 3.0 10.7 - 125.0 605.0 80.0 5.0 --------- -7.9 15.0 200.0 250.0 -74.8 -31.2 14.0 ---------------- --------------- 2.5 1.0 150.0 813.1 725.6 1 750.0 12.1 8.4 Total world - _ _ _ _ ----------------- 9,311.6 9, 352.2 ! ` 5, 716.5 4 1 -6Z 9 A A C II P R R I Included with Ind! Source: The Oil and Canada is a producing coon covered in Ca development: of rate of 59,000 percent over 193 prior to 1947. 3as Journal, Jan. 26, 1950, p. 206, relatively new addition to the list of important oil- tries. Since 1947, many new oil fields have been dis- nada. These discoveries, coupled with additional older fields, enabled Canada. to produce at an average arrels per dap in 1949. - This was an increase of 174 9, and 81.5 percent over 1948. As additional pipelines. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 9 and refineries are constructed, and as the new fields are extended and developed, further increases in production may be realized. Ranking second to the. United States in production of crude is South America, especially the Venezuelan-Caribbean area. In addi- tion to Venezuela, which produced at the rate of about 1,320,000 barrels daily in 1949, crude oil is produced in significant amounts in Colombia, Argentina, Peru, and Trinidad. The total crude output of the-latter four countries averaged 240,000 barrels per day in 1949. Total production in South. America accounted for more than 16 percent of the world's output in. 1949.6 Production per well in the Venezuela-Caribbean area is generally much higher than in the United States, and is exceeded only by the wells of the Middle East. In 1949, the average production per well per day in Colombia was 69 barrels, in Argentina 47 barrels, in Trinidad 25 barrels, in Peru 11 barrels, and in Venezuela-South America's most important crude producer-200 barrels.' The third important area of crude oil production is the Middle East, which includes Iran, Iraq, Saudi Arabia, Kuwait, and Bahrein. In 1949, about 15.5 percent of the world's crude output was obtained from this area. The average daily rate of production for the five most important Middle Last countries was close, to 1,400,000 barrels daily.' Although oil was produced in the Middle East prior to World War I, it is only since World War II that the Middle East haq developed into an important potential supplier of the world's crude. The vast potential of this area is indicated by the fact that total production in 1949 came from only 287 wells, with an average output per well per day of 5,143 barrels. In Iraq, the average production per well per day was no less than 11,200 barrels, in Iran 2,190 barrels, in Saudi Arabia 6,083 barrels, and in Kuwait, almost 4,450 barrels.' By drilling more wells and building more pipe lines, the Middle East could undoubtedly become the leading oil producing area of the world. Despite the difficulties in obtaining supplies and equipment during World War II, production increased 320 percent between 1939 and 1949. 'In the Far E4st, the important producing countries are the Nether- lands East Indies and British Borneo, which, however, produced in 1949 only about 2 percent of world production e This area has not fully recovered from war damage, and during the past year political disturbances have hampered operations. Russia and Eastern Europe, including Rumania, produced about 8 percent of the world's crude in 1949, nearly all of which was used by countries under Soviet influence.10 Although the world's production of crude petroleum is derived from the same areas and countries that have the crude reserves, a comparison of the distribution of reserves with crude production in 1949 reveals wide disparities in the relative positions of some countries, as is indicated in table 3. It will be seen from table 3 that some countries are drawing on their reserves at a much faster rate than others. For example, in E Ibid., p. 54. 6 Ibid., p. 54. 7 Estimates of production do not always agree. World Oil July 15, 1950, gives the average daily produc- tion of the Middle Fast (including Iran, Iraq, Saudi Arabia, Kuwait and Bahrein) as 1,473,718 barrels, while the Oil and Gas Journal, January 26, 1950, gives production for the same countries as 1,386,000 barrels daily. e World 011, July 15, 1950, p. 54. o Ibid., p. 42. '? Ibid., pp. 4213. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 1949, the United States produced about 55 percent of the world's crude but held only 35.8 percent of the world's crude reserves. The percentages of world production by Venezuela and Mexico also exceed their respective percentages of world reserves. On the other hand, Kuwait and the other major holders of reserves in the Middle East had a percentage of world production much below their per- centage of world reserves. The Middle East, however, is developing rapidly, and its reserves, as well as its annual share of the world's crude production, are expected to increase in the future. WORLD CRUDE OIL REFINING CAPACITY A country's ability to convert crude petroleum into usable products is indicated by its refining capacity. The statistical picture of refining capacity, crude runs to stills, and production is presented in table 4, by' country and by geographical area for the year 1949. TABLE 3.-Percent of world crude reserves and production, 1949 Percent of estimated world reserves United States -------- ------------------------------------------------------ 35.8 - IKuwait---------------------------- ------------------------------------------ 14.0 Venezuela------------------------------------------------------------------- 11.5 Saudi Arab'a------------------------------------ ---------------------------- 11.5 Iran------------------------------------------------------------------------- 8.9 Iraq ------------------------------------------------------------------------ 6.4 - Netherlands East Indies----------------------------------------------------- 1.3 Mexico----------------=----------------------------------------------------- 1.1 Total----------------------------------------------------------------- 90.5 All other countries----------------------------------------------------------- 9.5 Percent of world crude production 2 54.66 2.67 13. 58 5.16 6.08 .94 .21 1.80 85.09 14.91 I Source: DeGolyor and MacNaughton, Twentieth Century Petroleum Statistics, 1949, p. 4. (For com- ments on the accuracy of these estimates see p. 3, footnote 1.) 2 Source: World Oil, July 15, 1950, p. 42. TABLE No. 4.-World crude oil refining capacity, crude runs to stills and production,. 1949, by country and geographical area Crude refin- ing capacity barrels daily as of July 1, Crude runs to stills 1940 2 Production 19492 19501 North America: Canada-------------------------------------------------- 341,550 263,216 57,562 Cuba ---------------------------------------------- 6, 080 5,389 477 ------- Mexico 201,190 136,003 166,877 United States--------------- ----------------- 6,750,000 5,330,189 5,041,937 Total--------------------------------------------------- South America and Caribbean: Argentina------------------------------------------------ 129,800 100,000 62,907 Bolivia ---------------------------------------------- 2,790 1,658 1,858. ----- Brazil----------------------------------------------------- 3, 615 1,622 299 Chile ------------------------------------------------- 360 ------- --- 301 ---- Colombia------------------------------------------------ 30,000 23,167 81,430 Ecuador-------------------------------------------------- 5, 700 4,340 7,170 Netherlands West Indies--------------------------------- 657,000 696,405 -------------- See footnotes at end of table, p. 11. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 11 TABLE No. 4.-World crude oil refining capacity, crude runs to stills and production, 1949, by country and geographical area-Continued [In thousands of barrels daily] Crude refin- ing capacity barrels daily as of July 1, Crude runs to stills 1949 2 Production 19492 1950 r South America and Caribbean-Continued Peru ------------------------------------------------ 34, 000 33,660 ------ Trinidad ---------------------------------------------- - 99,000 80,310 -- - Urugugy ----------------------------------------------- - 25, 000 13, 973 - - Venezuela------------------------------------------------ 287:950 145,389 Western Europe: Belgium --------------------------------------------- 16, 500 7,263 ---- Denmark------------------------------------------------- 665 663 France ----------------------------------------------- - 293,100 230,879 - -- Western Germany---------------------------------------- 71, 070 33,863 Italy and Trieste -----------------------'------------------ 128, 280 60, 729 Netherlands---------------------------------------------- 53,600 53, 425 Portugal ------------------------ ------------------------ 7, 000 5, 378 -- Sweden ----------------------------------------------- 24,800 8,948 Kin--- United gdom----------- ----------------------------- 206,680 120,712 Total-------------------------- ------------ ------------- Middle East: Bahrein Island-------------------------------------------- 165,000 153, 589 Egypt---------------------------------------------------- 47,000 42,660 Iran and Kuwait----------------------------------------- 572,100 487,118 Iraq ---------------------------------------------- 9, 500 6,115 -------- Israel ------------------------------------------------- 83, 000 1, 616 ---- Lebanon-------------------------------------------------- 11, 000 6, 236 Qatar ---------------------------------------------------- -------------- - Saudi Arabia--------------------------------------------- 140,000 126, 767 Turkey-------------------------------------------I------- 1,400 142 Total-------------------------------------------------- Other Asia: China---------------------------------------------------- 10,000 4,364 India-Burma and Pakistan------------------------------- 12, 800 7, 658 Japan ----------------------------------------------------- 51,127 3,610 Other Africa: Canary Islands and Spain________________________________ 23,600 11,482 French Morocco------------------------------------------ 800 290 South Africa---------------------------------------------- 2,000 -------------- Total--------------------------------------------------- Oceania: Australia -------------------------------------------- 17, 17,600 10,959 ----- British Borneo-------------------------------------------- -35, 000 (175,860) Indonesia-- ------- ------------------------------------ -------------- -------------- - Netherlands East Indies---------------------------------- 146, 300 -------------- Total--------------------------------------------------- Total above countries___________________________________ 10,714,547 U. S. S. R. and Eastern Europe: It U S. S ----------------------------------------- 675,000 640,000 . . ------- Other Eastern Europe------------------------------------ 209,235 131,096 Total--------------------------------------------------- 771,096 Switzerland, Norway, Korea__________________________________ 7, 850 World total--------------------------------------------- 11,606,632 I Source: World Petroleum Annual Refinery Review 1950, vol. 21, No. 8. 2 Source: Bureau of Mines. World Petroleum Statistics, 1949. 8 Includes production of New Guinea. 40, 521 56,485 1, 321, 414 30,359 30, 096 43, 458 807, 238 84, 932 -------------- -------------- 2,055 476,734 260 2,060 8,274 3,707 -------------- 373 -------------- 3 68, 789 8 123,101 -------------- 658, 000 130,068 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 As the to are the Unit East. In 1 United Stat West Indie U. S. S. R. refining cap These areas ception of t In the Mi at Abadan, crude from large consu sarily move Far East. Western THE' INTERNATIONAL PETROLEUM CARTEL le indicates, the three leading refining centers of the world d States, the Venezuela-Caribbean area, and the Middle 49, 58 percent of the world's refining capacity was in the s, about 8 percent in Venezuela and the Netherlands , and nine percent in the Middle East. Excluding n.d eastern Europe, more than 86 percent of the world's city was located in these three important refining areas. are all important crude producing centers, with the ex- quantities of crude imported from Venezuela and other dle East, large refineries are located. on the Persian Gulf ahrein, and Ras Tanura. At the eastern end of the n are refineries at Haifa and Tripoli, which operate on he Middle East fields. Since the Middle East is not a o other parts of the world-principally Europe and the urope held in 1949 approximately 7.5 percent of the fineries was lands West tendency to ng capacity. The total refining capacity of its 82 re- ess than that of the three large refineries in the Nether increase the capacity of the European plants. Since pe is not an important producer of crude, practically all runs to stills duction of cr de in the area was only 30,000 barrels per day. Exactly the opposite condition exists in South America and the Middle East There, refinery runs in 1949 .were less than daily crude produc ion, indicating exportation of crude. In 1949, t e United States had refinery runs of almost 300,000 barrels per day in excess of crude production. Barring any reduction in crude stoc s, the excess of crude runs is an index of the volume of crude import . Only- a sm 11 -percentage of the world's refining capacity i~ located in the Far last. This part of the world is neither an important producing no consuming area, and refining capacity is about equal to crude production. W RLD PETROLEUM CONSUMPTION AND SUPPLY Just as th geographic pattern of reserves differs from that of production, and the pattern of production differs from that of refining, so also does t ho pattern of consumption differ from the other variables. The. geograp is differences in "demand" and "supply," which are synonymous terms in the petroleum trade for consumption and production, are indicated in table 5 for the years 1947 and 1949. Thus the table reveals those areas of the world which consumed more oil than they produced, as well as those areas which produced in excess of domes tic needs. The only two areas of the world that produced more petroleum than they consumed in 1947 and 1949 were the Caribbean and the Middle East. All other areas were dependent upon the surplus- Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 WORLD CRUDE RUNS TO STILLS AND REFINING CAPACITY BY GEOGRAPHIC AREA (in barrels, daily) 11 608,832 9,188,844 7,208 820 5,734,797 Crude Runs to Stills, 1949. Crude Refining Capacity, July 1, 1950. Switzerland Runs to Stills - None Reported. Norway and Korea Refining Capacity - 7,850. Africa Runs to Stills - 11,772. Refining Capacity - 20,400 Asia Runs to Stills - 15,532 Refining Capacity - 82,927 Oceania Runs to Stills - 186,819 Refining Capacity - 198,900 1 029 000 1 278 915 1,100,523 801,585 521,880 771,098 882 235 824,244 Western Europe U.S.S.R. and Middle Eastern East Europe South America and Caribbean North Total America World Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 13 producing regions to make up the balance between their consumption and production. These deficit areas were Europe, Africa, the Far East and Oceania., and parts of North and South America. One of the most striking developments revealed in table 2 is the rise of the Middle East as an important supplier of the world's petro- leum needs. In ,1947, the Middle East had an excess of supply over consumption of about 671,000 barrels daily; by 1949, this excess had nearly doubled, reaching 1,191,000 barrels daily, which was almost enoumh to surpass the Caribbean area as a surplus producer of petroleum. In the United States in 1949 consumption exceeded domestic supply. by about 322,000 barrels daily, while in 1947 consumption and supply were approximately equal. 'raking the 'major. producing areas as a whole, in 1949 the United. States, the Caribbean, and the Middle East supplied 85 percent of the world's oil but consumed only 64 percent. Thus a surplus of 21 per- cent, or about 2,120,000 barrels per day, was available for the deficit- producing countries. :FABLE 5,-Petroleum demand and supply by areas, 1947 .and 1949 [In thousands of barrels daily] Percent of world Excess of Excess of supply Domestic Domestic supply demand Country demand supply over over demand supply Domestic Domestic demand supply 1949 United States___________ 5,792.4 5,470.4 322.0 59.42 65.70 Other North. America_____________________ 478.2 232.2 ___.__ 246.0 4.91 2.36 Total, North America______________ 6,270.6 5,702.6 __________ 568.0 64.63 58.06 Caribbean area___________________________ 212.9 1,464.1 1,251.2 - 14.91 Other South America_____________________ 897.5 117.8 __________ 279.7 4.08 1.20 Total, South America___________ 610.4 1,591.9 971.5 _^ 16. 11 Europe (excluding U. S. S. R.) ----------- 1,226.7 176.2 __________ 1,050.5 12.59 1.79 Africa--------_----_?------------------- 236.8 44.5 _ 2.43 .45 Middle Fast_ 211,8 1,402.9 1,191.1 ---------- 2.17 14.29 Far East and Oceania-a ___________________ 484.0 205.7 ---------- 278.3 4.07 2.10 Total, world (excluding U. S. S. R,)_ 9,040.3 9,113.8 73.5 __-------- 92.75 92.80 1917 United States_____________________________ 5,449.2 5,449.2 __________ ---------- 62.36 62.02 Other North America_____________________ 487.3 176.8 -------- __ 310.5 5.58 2.03 Total, North America______________ 5,936.0 5,626.0 -------- 310.5 67.94 64.65 Caribbean area_______________ --------------------------- 181.6 1,318.4 1,136.8 _______ 2.08 15.16 Other South America_____________________ 262.3 106.0 -------- 156.3 3.00 1.22 Total, South America_______________ 443.9 1,424.4 980.5 ---------- 5.08 16.37 Europe (excluding U. S. S. R.)______-_____ 1, 010.6 161.9 _ 11.67 1.86 Africa_____________________________________ 180.3 26.5 _________ 153.8 2.06 ,30 Middle East______________________________ 168.8 840.3 671.6 ______ 1.93 9.66 Far East and Oceania____________________ 419.6 70.5 -------- 349.0 4.80 .81 Total, world (excluding U. S. S. R.) _ 8,159.8 8,149.6 ____ 10.0 93.38 93.65 Demand," as used by the industry trade press, equals consumption plus or minus additions to or "11;. ctions from stocks. 2 Includes production of crude oil, natural gasoline, and synthetic products, Source: C. J. Bauer, petroleum economist, Standard Oil Co. (New Jersey), published in World Oil, Jnly 15, 1950, p. 40. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Excluding the U. S. S. R., the United States is the only important tra ized country which is able to supply its own petroleum needs. any of the major crude-oil-producing countries are not highly i dustrialized and, therefore, have a limited demand for petroleu . Typical of such countries are the nations of the Middle East and South America. The converse is true of most of the coun- tries of Western Europe and Canada (the latter prior to recent dis- coveries), which are highly industrialized but produce little pe- troleum. TH PATTERN OF INTERNATIONAL TRADE IN PETROLEUM In the receding sections it has been shown that the geographic distributi n of the world's petroleum production differs widely from the geogr phic distribution of consumption.. This wide disparity has given rise to it rather well defined pattern of international trade in the ind istry. The pr' cipal movements of crude petroleum in international trade are shown for 1948 in table 6. It will co seen that in 1948 there were three dominant movements of crude-- all of course, from surplus areas. From the United States, the principa, l crude movements were to Canada, Cuba, Argen- tina, Fran e, and the United Kingdom. From Venezuela and Colom- bia, large uantities of crude moved to the Netherlands West Indies, United St tes, and Europe, with small ? amounts going to Africa, Argentina, and Uruguay. The third major international movement of crude was from Iran and the Persian Gulf 11 to North and South America, urope, Africa, and Asia. 11 In preceding sections Iran and the Persian Gulf are included under the more general term "Middle East." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 '.,nmrc 1 0. WORLD PETROLEUM "DEMAND"* AND PRODUCTION BY GEOGRAPHIC AREA, 1949 (in thousands of barrels doily) 9,113.8 9,040.3 Domestic Demand i S l ^ upp y Domest c 6,270.6 5,702.6 1,581.9 1,402.9 610.4 484.0 238,8 176.2 226.7 205,7 211.8 rA m 44.5 WMAN Africa Europe Far East Middle Total Total Total World (Excluding and East South North (Excluding U.S.S.R.) Oceania America America U.S.S.R.) * "Demand" as used by the industry trade press equals consumption plus or minus additions to or subtractions from stocks. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 . noon MM MOlo0J0~ M~'i ?+~O rn c0 O ppp0a S N t~ r. O M R 3 p`) t~op ~ WNOvi N Mti ~HH c0 "m w McOMM ~i N' n ~ F O C to ~yy C] N ~ i`'i 5 v~ oo to 52 to o) g 52 I N 1 5 ~ I I '0 I cS ci II ao II c F y N N00 00 ~C"J~ N ~ ~ ~ !I ~I h I O I ' ' ~C`dtl i~O" cD Oi P~ A iNry ids ep c0 M O itp`. iS lam- ~ O+O NNNN ice] i~C~V~ ~G~V~ c N Ou'JM io'0 Oti GnV CNO iM m M l~ O ti ~O M dC7 I M i0~0 N N' ~~.) M ~N '-i c+1 iM .. iC-- M ~J N to CV p9 .. oMopp i pN~ pp O M ppN uJ c~pp i ti ' I pip pip 52 cyp~ p W o d~ ~ N V 4 iep 0 M I ' 'D ~M II 1 ' C) oh t t` CO tio" O to 0i m t ro C ~ w ~ ~N to I d' W '~ N W W c i~C+J 00 N to 'd ~ M h M ~N W N N I N ~' m II V I 'I0) rn I Il I {I I I to II I I I ~ i I ~ M'-' + M ~. N to M Vl O qq i i 1 v C P4 0 1 o C4 o ~+ ~a. o im ? P. .d H E m 0pA F E E ~b E UUzEG ~wG raw~~za~p r~w 0 15 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 16 THE'' INTERNATIONAL IwETROLELFIM CARTEL The movement of crude from the Persian Gulf to North America (United States and Canada) is a relatively new development in the general pa tern of international trade in crude. In 1948, about 23 million barrels of crude moved from the Middle East to the United States an Canada, representing approximately 12 percent of all crude exported from the Middle East. As would be expected, the international movements of crude are from the producing areas to countries which have the refining capacity to convert crude to products, rather than to the important consuming countries. Thus a considerable proportion.of the international trade in petroleum moves indirectly to the consuming countries, by way of those ar as which possess, refining facilities'. "Rafining facilities are frequently located where neither production nor consumption of petroleum is important. For example, in 1.948, large quantities of crude prod ced in Venezuela were exported to the Netherlands West Indies for efining, with the products then exported to the consuming countries. In 1948, Venezuela exported 437,700,000 barrels of crude petroleum. Of this total, 270,992,000 barrels, or approximately 62 ? percent, w lit to the Netherlands West Indies, which is neither an important producing nor consuming area. Since most of the refined products d rived from this crude must be moved to consuming areas, the result is a corresponding increase in the volume of international trade. Similarly, the..Inovements of crude from: the Persian Gulf to Bahrein Island and Palestine; (as shown in -table 6) are -movements to refining centers, ra her than to consuming areas.. From these refineries, finished petroleum products are shipped to Europe and Asia. Another type of movement is the shipment of crude to countries which are important consumers of petroleum products, have consider- able refining capacity, but are deficient in crude production. In 1948, France had about 50 percent of the refining capacity of Western Europe, hub its crude production accounted for only about six-tenths of 1 percen of refinery runs. About 72 percent, or roughly 40 million barrels, of the imports on which France depended came from the Middle East; while 28 percent, or approximately 14.5 million barrels, came from , the United States and Venezuela--primarily from the latter.12 - Since France's refinery output could not satisfy her requirements, these imports of crude were inadequate. As a result, France im- ported approximately 7 million barrels of refined, petroleum products (motor gasoline and' distillate fuel oil)-principally from the United States and ho Persian Gulf.13 The flow f refined products is shown in table 7, which reveals three principal ex orters of,refined products: the United States, Netherlands West Indie and Venezuela, and the Persian Gulf. As importers, the major geog aphical areas stood, in order of importance, as follows: Europe, As a, North America, Africa, Oceania, and South America. The principal movements of refined products were: (a) from the United States to other North American countries, to South America and Europ , with small quantities to : Oceania, Asia, and Africa; ' Bureau of M es, International Petroleum Trade, May 31, 1949, pp. 127-128. Is Ibid., P. 119. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 EXPORTS OF CRUDE PETROLEUM FROM MAJOR EXPORTING AREAS, 1948 (In thousands of barrels) Trinidad Ecuador Other Mexico British Borneo Colombia Iran and and Peru Indonesia Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 17 (b) from the Netherlands West Indies and Venezuela to North and South America, Europe, and Africa; (c) from the Persian Gulf to Europe, Asia, Africa, and Oceania. In summary, there are four principal movements of petroleum and its products: (1) Crude from producing areas to consuming areas; (2) crude from producing areas to refining centers which are not con- suming areas; (3) refined products from such refinery centers to con- suming areas; and (4) refined products from producing areas with refinery facilities to consuming areas. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 18 THE INTERNATIONAL PETROLEUM CARTEL y 'N ?N F N H y ,c p o Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 19 ncessions or exploration permits in Turkey and in the of Kuwait and Saudi Arabia. ions carried on by IPC are conducted through a series and affiliated companies, which are named on chart 20. describes the scope of IPC operations, both within and in its own name and through its various subsidiary and paries. turn Co., Ltd.-This is both the parent holding company kiting company. As has been noted, IPC secured its in in Iraq in 1925, which was originally limited to a total luare miles (24 plots of 8 square miles each). In 1931, oncession was revised, and IPC was given an exclusive er the whole area. in Iraq east of the Tigris River except Leld by the Anglo-Iranian Oil Co. on the Iranian border.77 fly concession which IPC holds directly. All others are subsidiary and. affiliated companies. lie area cast of the Tigris that IPC has obtained most of Kirkuk field is located here and is connected by a system the Mediterranean, with terminals at Tripoli and Haifa. 76 Brief historical utline of Oil Developments to Date, op. cit. "-The Anglo-Irani n Oil Co. holds the concession over a small area in Iraq which borders on Iran. This territory was, for so to time, in dispute between Turkey and Persia: but, v' hen. the boundary was finally settled, the territory formerly claimed by Persia was transferred to Turkey, which had control over Meo- potamta. now Iraq. In view of claims by a subsidiary of Anglo-Iranian Oil Co., Ltd., to the Persian terri- tory which was gran ed to D'Arcy in 1901, this company retained its concession rights to the territory whrn it was transferred fro Persia to Iraq. (Memorandum from Guy Wellman to the members of the American group, January 18, N28, and letter from Walter C. Teagle to Guy Wellman, November 6, 1924.) Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 o out z.4 a 405 4 wQ FF uaa -4 wQ as w w a wF O mU a .: w4 z a aw m? w w a F . Pm a ww m 4 a 0m z < w PZ wa zQ OF ,r the red-line agreement. Backed by the unwilling- dsh Government to have an American company obtain he area, IPC decided that, as a participant in the red- Gulf could not exercise its option. Thereupon, Gulf Bahrein option to Standard Oil of California on Decem- nd, at that time or soon thereafter, withdrew from its ( IPC. Gulf, however, retained its option with Eastern indicate, Ltd., for the Kuwait concession.14 n Eastern Gulf Oil Co., acting as an independent Ameri- ny no longer participating in IPC and the red-line ght to take up the Kuwait option through Eastern and cate, opposition again arose from. both British oil he British Government. The British Colonial Office, with its long-time policy respecting British colonies tes, insisted that only a British subject or firm should )ncession. Gulf thereupon brought the matter to the e United States Department of State, which, through mbassy in London, requested equal treatment of Ameri- Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 131 can firms under the open-door policy. The ensuing negotiations were complicated by the fact that Anglo-Persian, which had previously expressed disinterest in Kuwait, also opened negotiations with the Sheikh of Kuwait for a concession. The Sheikh thus found himself confronted by two bidders.", The Anglo-Persian, Gulf Exploration Co. agreement, December 14, 1933.-After 3 years of negotiations involved in this competitive struggle for the yet-undiscovered Kuwait oil, Anglo-Persian and Gulf decided to make common cause in endeavoring to secure one or more concessions in Kuwait, which they would operate jointly. On December 14, 1933, they accordingly entered into an agreement: 1. To exercise Eastern Gulf Oil Corp.'s option on any concession or concessions which Eastern and General Syndicate might obtain in Kuwait; 2. To use the agencies and facilities at the disposal of each to obtain these concessions on terms not substantially more onerous to the con- cessionaire than those of a draft concession which, by reference, was made part of the agreement; 3. To assume on a 50-50 basis any expenses subsequently incurred by either party in obtaining these concessions, including a cash pay- ment of ?36,000 due to Eastern and General Syndicate if and when Eastern Gulf Oil Co. took up its option with the syndicate; 4. To form an operating company (Kuwait Oil Co., Ltd.) to be financed and owned equally by Anglo-Persian Oil Co., Ltd. and Gulf Exploration Co., whose production would be shared equally by Anglo- Persian and Gulf at cost, the ownership of which could not be sold or transferred except (a) with the consent of the other party and (b) subject to the provision that any transferee would become fully bound by the terms of the 1933 agreement.1e Two other important provisions relating to the disposal of oil which the Kuwait Oil Co. might produce in the future were covered by the agreement. In the first place, each gave assurance to the other that Kuwait oil would not be used to "upset or injure" the other's "trade or marketing position directly or indirectly at any time or place." In the second place, each party undertook "to confer from time to time as either party may desire and mutually settle in accordance with such principles any question that may arise between them regarding the marketing of Kuwait oil and products therefrom." It was further stipulated that Anglo-Persian's marketing position in India as a sup- plier of Burmah Oil Co. was recognized even though its marketing position: * * * is on an in and out nature dependent on the relation from time to time between Burmah Oil Co.'s and/or the Burmah-Shell Co.'s outlet there and the volume of indigenous production * * * even though in pursuance of such arrangement it [Anglo-Persian] may not at any given time actually be supplying oil or the full range of its products to that market. Notwithstanding these restrictive provisions, the agreement stated: Anglo-Persian recognized, however, that Gulf will wish to have outlets for Kuwait oil, if and when produced; and therefore has no desire that Gulf should 15 '1 he reason for A nglo-Persian's sudden change of interest appears to have been the discovery by Stand- ard Oil Co. of California of oil in quantity in nearby Bahrein in an area previously considered by British geologists to be unfavorable to oil production. Specifically, the agreement was that if either party proposed to sell or transfer bis interest in whole or in part to a third party, all the facts as to purchaser, price, etc., had to be reported to the other party who then had the option of approving the sale or of buying the shares at the price offered by the third party. Only if the other party was wlling neither to approve the third party nor to buy the shares at the price offered by the third party, could the sale or transfer to an outsider be completed without the consent of the other party. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 132 HE. INTERNATIONAL PETROLEUM CARTEL assume any restrictions with respect to the marketing of such oil products there- from which would in any way interfere with Gulf's freedom to obtain such outlets consistently with the observance of the above assurance. Thus, Angl -Persian assured Gulf that it would have freedom to seek markets for Kuwait oil, while both bound themselves not to compete with ach other in such a manner as to endanger each other's marketing po ition. These provisions were entirely consistent with the international cartel agreement, heads of agreement for distribu- tion, which had been formulated with the participation of Gulf and which was the in effect. Under this agreement the market positions of all participants were to be determined on the basis of their 1928 volume of b siness and their proportion of any future increase in production," 1 and quotas so determined were to apply in every country of the world except the United States.18 In entering into this agreement Gulf, which bad a "recognized marketing po ition" in European and Western Hemisphere foreign markets, but one in the Far East, was seeking a Middle East source of supply and r its own control. If it obtained such a source free from restrictions o its sale of Kuwait oil, not only would its competitive position be greatly strengthened in European markets, but also it would be able to enter the Far East markets. Naturally Gulf wished to retain these advantages. It declare in an application to the Securi- ties and Excha go Commission, in 1946, that the restrictive marketing provisions were obnoxious to both Gulf Exploration Co. and its 1 parent compa y. 9 On the oth r hand, as noted in a subsequent chapter, Gulf had participated i the formulation of the world cartel's heads of agree- ment for distribution. Hence, the company was fully aware of the cartel's attempt to divide world markets on the basis of the percentages of trade done i each market in 1928.20 Its participation in the form- ulation of the artel agreement obviously weakened Gulf's position in resisting the marketing restrictions insisted upon by Anglo-Iranian, which were based on the cartel agreement itself. Thus even though Gulf had the upport of the United States Department of State's "open-door p licy," it was virtually compelled to accept various restrictive conditions. Gulf's counsel has stated that further efforts were made to ave the British Government modify or remove these restrictions but without success.21 Gulf was also obliged to accept a condition, insi ted upon by the British Government, that only a British compa y could hold a concession to produce Kuwait oil.22 17 Principle No. 1 of he Achnacarry Agreement of 1929. Soo pp. 200 and 242. 18 Furthermore, bolo e Anglo-Persian Oil Co., Ltd., would sign the Kuwait agreement with Gulf Ex- ploration Co., Gulf Of Corp. was required to sign a subsidiary agreement, also dated December 14, 1933. This agreement, which was comparatively short, merely stated that in view of Anglo-Persian entering into the main agreement w th Gulf Exploration Co., and of Gulf Oil Corp. procuring Gulf Exploration Co. to enter into the main ag cement, the two parent companies bound themsel d h ves an eac of their respective subsidiary and associat d companies directly or indirectly under their control to observe two paragraphs of the main agreement. These were respectively-par. 3 which provided that any concession obtained in Kuwait by either party, either singly or jointly, would be held in trust for the benefit of both parties, and par. 7 which eliminate competition between the parties in. marketing Kuwait oil as already described. . iB Gulf's application for Nondisclosure of Certain Documents, filed with the Securities and Exchange Com- mission October 31, 1943, p. 4. 21 Gulf's application o the Securities and Exchange Commission, p. 7. 22 It appears that the British Government's part in the matter first took the form, in 1929, of notifying Eastern and General S ndicate that any concession it obtained would have to go to a concessionaire hound at all times to be and re sin a British company, and of insisting that other restrictive provisions intended to keep American interes s out be written into the concession agreement. (For the basis for such insistence, soo treaty agreements with the Sheik quoted on p. 129 Later, but only-folio by the United States Department of State in 1932, His Majesty's Government modified i s position to the extent of waiving the nationality clause in the concession, but stood by its requirement tha the concessionaire must be and always remain a British company. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Operation of Kuwait Oil Co.-Paragraph 6 of the joint ownership agreement of December 14, 1933, between Gulf Exploration Co. and Anglo-Persian stated that the quantity of oil to be produced by Kuwait Oil Co., Ltd., would be determined as follows: 1. Either party would have the right to require Kuwait Oil Co., Ltd., "to produce such quantity of crude oil as may be decided by the party making the request;" 2. That all production from Kuwait produced at the request of both parties would be allocated "50-50 to Gulf and Anglo-Persian at cost;" 3. That any additional oil produced at the request of either Gulf or Anglo-Persian would "be allocated in full to the party making the request, at cost for all such oil." 23 In addition, section 8 of the agreement stated: The parties have in mind that it might from time to time suit both parties for Anglo-Iranian to supply Gulf's requirements from Persia and/or Iraq in lieu of Gulf requiring the company to produce oil or additional oil in Kuwait. Provided Anglo-Persian is in position conveniently to furnish such alternative supply, of which Anglo-Persian shall be sole judge, it will supply Gulf from such other sources with any quantity of crude thus required by Gulf provided the quantity demanded does not exceed the quantity which in the absence of such alternative supply Gulf might have required the company to produce in Kuwait- at a price and on conditions to be discussed and settled by mutual agreement from time to time as may be necessary-such price f, o. b., however, not to be more than the cost to Gulf of having a similar quantity produced in and put f. o. b. Kuwait. Thus Gulf and Anglo-Persian could order jointly or separately as much oil out of Kuwait as either desired. The above provisions, however, gave Anglo-Persian a powerful voice in determining the actual amount of Kuwait production. Anglo-Persian, having exten- sive interests in Iran and Iraq, could determine for itself how much of its own requirements would be ordered from Kuwait rather than from Iran and Iraq. Whenever convenient, moreover, a matter of which it was the sole judge, Anglo-Persian, in consultation with Gulf, could decide that part or all of the oil ordered out of Kuwait by Gulf would actually be produced by Anglo-Persian in either Iran or Iraq or both. The provision that such alternative oil would not cost Gulf more than if it had been "produced in and put f. o. b. Kuwait" made it a matter of indifference to Gulf, insofar as price was concerned, whether Kuwait oil or "alternative oil" were actually supplied. Anglo-Persian's power to substitute, with Gulf's consent, alternative oil for increased Kuwait output accorded perfectly with the principles of the international cartel agreement of 1928, commonly known as the Achnacarry agreement. Under that agreement the major inter- national oil companies, including Anglo-Persian, endeavored to control production by such means as (1) joint use of existing facilities, (2) constructing only such additional facilities as were necessary to supply increased demand, and (3) shutting in any excess of production over consumption. If and when Kuwait produced oil, it would of course become a new source of supply in the international market. Some means of controlling its production by the substitution of oil from other established producing regions would be a logical cartel objective under these principles. The substitution of Persian or 28 "Cost" was defined as the actual out-of-pocket expenses incurred by the company, including explora- tion. drilling, royalties, duties, taxes, and all other expenses whatsoever applicable to such oil, and deprocia- tion, amortization, and interest on capital at reasonable rates to be agreed upon. 23541-52-10 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Iraq oil would c equivalent to sh Reiteration of March 23, 1937, consisting of 10( Oil Co., Ltd. (fo wholly owned at The effect of sions of the ma: provisions respf other sources fc restrictive provi consented to the only because of Postwar develo pended in 1942 Transportation shipments begat Kuwait produce Royal Dutch-S] Iranian was adv In May 194' contract to sell the Shell Petro] Dutch-Shell sul type commonly discussed in the onstitute a use of existing facilities and, in effect, be utting in an equal quantity of Kuwait oil. restrictive clauses in 1937.-By agreement dated the 50-percent stock interest in Kuwait Oil Co., Ltd., ),000 shares of ?1 par value owned by Anglo-Iranian rmerly Anglo-Persian) was transferred to the latter's ibsidiary, D'Arcy Exploration Co., Ltd.14 this 1937 agreement was to reaffirm all of the provi- m. agreement of 1933 and to continue the restrictive acting marketing and the substitution of oil from rr Kuwait oil. Gulf Oil Corp. has stated that the ;ions always were objectionable, and that it originally ,se provisions in 1933 and continued to do so in 1.937 the insistence of the Anglo-Iranian Oil Co., Ltd.25 pment.-Operations in Kuwait were entirely sus- , and were not resumed again until after the war. and loading facilities were completed and commercial about August 1946, with Gulf selling its share of ion to Asiatic Petroleum Co., a subsidiary of the tell. In 1946, Gulf Oil Corp. stated that Anglo- ised of this sale and raised no objection." T, Gulf Exploration Co. entered into a long-term much larger quantities of its share of Kuwait oil to cum Co., Ltd., of London, England, another Royal sidiary. This commercial contract, which is of the referred to in the trade as "sale of oil agreements" is following chapter. When Standa negotiations to tically newcome the closely coop trolled Middle I prevent Gulf an and when this f: the newly disco` of the developTr is a history of tl- in obtaining a f for flush produc Aramco.-In about 360,000 rd Oil Co. of California and Gulf Oil Corp. first began obtain concessions in Saudi Arabia, both were prac- rs in the world oil trade and both were acting outside ,rating group of international oil companies that con- cast production. The older companies first tried to d Standard of California from obtaining concessions, tiled, attempted to devise other means of preventing ered oil from disturbing world markets. The history .ent of Aramco and Kuwait Oil Co., Ltd., therefore, .e difficulties faced by independent American interests 3othold in the Middle East and of finding a market ion. winning an exclusive concession covering an area of square miles in Saudi Arabia, Standard Oil Co. of 24 In making this trap for, the various companies made the following agreements having to do with the continued observance of the main agreement of December 14, 1933, between Anglo-Persian Co., Ltd., and Gulf Exploration Co.: 1. D'A rcy Exploration Co., Ltd., agreed to become bound by all terms of the main agreement upon the transfer, and Gulf Oil Corp. and Gulf Exploration Co. agreed to continue to be bound by all terms of the main agreement after the transfer. 2. Angle-Iranian Oil Co., Ltd., agreed to continue to be bound by and observe the provisions of clauses 3, 7, and 8 of the ma' agreement of December 14, 1933. Clause 3 provided tha any concession obtained in Kuwait by either party would be held in trust for the bonclt of both parties; el use 7 provided that neither party would use Kuwait oil to encroach on the market- 1ng position of the other irectly or indirectly at any time or place; and clause 8 covered the substitution by Angle-Persian of oil pro aced in other areas for oil which Gulf had the right to demand from Kuwait. It was also mutually a reed that the 1937 "supplemental agreement" would be binding upon and accrue to the benefit of all oft a parties and their respective permitted successors and assigns. 25 The Anglo Persian- Ulf Exploration Co. agreement of December 14,1933,'wo~ epncele. d in an agreement dated November 30, 1951; see p. 141, footnote 17. 26 Gulf's application to the Securities and Exchange Commission, loc. cit. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE: INTERNATIONAL PETROLEUM CARTEL 135 California faced the competition of Iraq Petroleum Co. representing the combined interests that controlled all production in Iraq and Iran, as well as in most of the remainder of the Middle East. To obtain the concession California Standard agreed to make loans and advances to the Arabian Government in the amount of ?150,000; to pay an- nually a cash rental of ?5,000; and if oil were discovered, to pay a royalty of 4s. per ton and to furnish free to the Saudi Arabian Govern- ment 200,000 gallons of gasoline and 100,000 gallons of kerosene, annually. Further advances of ?100,000 and an increase in the annual rental of ?20,000 was the price for obtaining a second conces- sion in 1939 which extended the concession area to 440,000 square miles. The loans and cash advances were recoverable by the com- pany only by deductions from royalties, and the Government also hoped to augment its income through royalties. From the outset, therefore, Aramco's financial relationships with the Saudi Arabian Government required a market outlet for any oil discovered. With no established position in the Eastern Hemisphere, Standard of California had already come face to face with the difficulty of finding a market for its Bahrein oil without engaging in a competitive struggle with the established international companies. The Bahrein problem was solved on July 1, 1936, when Standard of California bought a half interest in the far eastern marketing facilities of the Texas Co., which already had an established position east of Suez, with the Texas Co. buying a half interest in the Bahrein Petroleum Co. Aramco also obtained access to these limited eastern markets when the Texas Co., in December 1936, bought a half interest in Aramco. A trade press comment at the time of the first acquisition stated that- * * * it assures that Bahrein production as well as any output that may eventually come from countries now being developed by Standard Oil Co. of California will have assured and regulated outlets and will so lessen any possible danger of upsetting the equilibrium of international markets.27 Up to 1941, Caltex, the marketing company owned jointly by Standard of California and Texas, was able to find markets cast of Suez for only 12,000 to 15,000 barrels daily of Aramco's oil. This was reported to be less than one-seventh of what Aramco's developed fields could have produced in 1941. During the war, production was gradually increased to 58,386 barrels daily in 1945. Since a large proportion of this output, however, was refined and sold to the Allied Governments, this proved to be only a temporary outlet, leaving Aramco at the end of the war with crude oil and refining facilities, but no market. Moreover, Aramco's need for markets was aggra- vated by the discovery of additional fields in 1945 and 1947. At this point, Aramco proposed to build a pipeline to the Mediterranean. This proposal caused great concern to the established international companies, which immediately endeavored to open up additional markets to Aramco, both east and west of Suez, but in such a manner as not to disturb world markets. This involved several coordinated steps. First, the Texas Co. sold its European marketing facilities to Caltex, thus making its markets west of Suez available to Aramco. Second, Standard of California and Texas permitted Standard Oil Co. (New Jersey) and Socony-Vacuum Oil Co., together, to purchase a 40-percent interest in both Aramco and Trans-Arabian Pipe Line 37 The Petroleum Times, July 4, 1036, p. 8. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 136 THE INTERNATIONAL PETROLEUM CARTEL Co. And third Jersey Standard and Socony-Vacuum entered into contracts to buy oil from Aramco. Thus, while new markets were opened up to ramco, the recognized marketing positions of the international of companies were preserved. The principal change was a shift in their sources of supply on the part of three of the four American companies which now own Aramco in order to make room for Aramco's production, which they are now in a position to control. Kuwait Oil Co , Ltd.-The history of Kuwait Oil Co., Ltd., is likewise one of an American company which, single-handed, sought to obtain a foothold in Middle East production. In 1931, both Eastern Gulf Oil Co., a subsidiary of Gulf Oil Corp., and Anglo-Persian, separately, began negotiating for a concession in Kuwait. After about 3 years, during which time oil was discovered in nearby Bahrein, Anglo- n Persian and Gu Ltd:, on a 50-5 At the insist operating comps position directly or indirectly at any time or place," and that they basis to operate the concession. nee of Anglo-Persian, the contract establishing the to upset or injure the other's "trade or marketing m time to time to settle any questions_that might tion, the contra Kuwait would t provided that the quantity of oil to be produced in onsist of two parts: (1) such quantity as the two owners agreed t quantity as eith the parties, actu r party might order out for its own account. Part lly be supplied by Anglo-Persian "from Persia and/or quiring the company to produce oil or additional oil no more than if Kuwait, this, in Kuwait by subs tions proving th of transportatio after the war. cial sales began i Shell contracted for a long perio next chapter. the oil actually had been produced and delivered in effect, gave to Anglo-Persian a continuing option, consent, to control the quantity of oil produced in ituting oil from its other sources. as discovered in Kuwait in 1938 and further explora- existence of large reserves continued until 1942, lack .'he necessary facilities were completed and commer- Royal Dutch-Shell subsidiary. Nine_ months later, nto the world market under this commercial agree- sturbing competitive positions is discussed in the Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 JOINT CONTROL THROUGH PURCHASE AND SALE OF OIL IN THE MIDDLE EAST Throughout the world the Big Seven oil companies transfer large quantities of crude oil and refined products among themselves, through contracts to purchase and sell. When these purchase agreements are discussed publicly by representatives of the petroleum companies, emphasis is usually placed on the ordinary commercial purchase and sale aspect which they share with all other sales contracts. -However, since the companies participating in them often are already bound together through joint-ownership arrangements and participate in various production and marketing agreements, purchase and sale contracts among them often lack many of the arm's-length features that characterize ordinary commercial agreements among mutually independent buyers and sellers. Under these circumstances, the sales of oil covered by the contracts can often be utilized as an instrument to divide production, restrain competition in marketing, and protect the market positions both of the buyer and the seller. They deter- mine who may or may not buy crude oil from particular producing properties. They tend to funnel the production from more or less diversified ownerships into the centralized marketing organizations of the large companies. They tend to keep surplus supplies of crude oil out of the hands of independent oil companies. The existence of these contracts in an atmosphere of joint ownership of production and marketing, the long periods for which they run,' the manner in which prices are determined under them, and the marketing restric- tions often written into them, indicate that they are something, more ,than ordinary commercial purchase and sale contracts. The present chapter and chapter VII discuss respectively long-term contracts for the purchase of Middle East oil, and long-term contracts for the purchase of Venezuelan oil. The first agreement to be ex- amined is between Gulf and a subsidiary of Royal Dutch-Shell, involving oil produced by Kuwait Oil Co., Ltd., which in turn is jointly owned by Gulf and Anglo-Iranian, as described in the preceding chapter. GULF-SHELL AGREEMENT, 1947 Source and nature of material discussed.-As has been noted in .chapter V, Gulf Exploration Co., a subsidiary of Gulf Oil Corp., on May 28, 1947, entered into a long-term agreement with the Shell Petroleum Co., Ltd., of London, England, a subsidiary of Royal I Because of the long periods for which they run, sales contracts may be substituted for joint ownership of reserves and production. Chapter.VII below discusses such an instance in which the total production of 'important concessions in Venezuela, which are owned by Gulf Oil Corp., is divided exclusively among Gulf, Standard Oil Co. (Now Jersey), and Royal Dutch-Shell interests for the full life of the concession. 137 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 138 T} E. INTERNATIONAL PETROLEUM CARTEL Dutch-Shell. his agreement covers the sale by Gulf Exploration. Co. of oil produ ed by Kuwait Oil Co., a producing company organized in 1933 on a 50--50 basis by Gulf Oil Corp. and Anglo-Persian Oil Co., Ltd. (now Angl -Iranian Oil Co., Ltd.). The Gulf-Shell agreement,. therefore, relates to Gulf's share of the joint production of the Kuwait Co. At the tine it was made it appears to have covered all of Gulf's share.2 Nature and c Teets of the Gulf-Shell agreement of 1947.-Gulf began selling Kuwait it to Shell as soon as Kuwait Oil Co. began producing at about the middle of 1946. The arrangement under which these sales were mad appears to have been temporary, and to have covered only relatively small quantities of oil. However, under a long term contract, dated May 27, 1947, between Gulf Exploration Co.. and the Shell etroleum Co., Ltd., Shell agreed to buy increasing quantities of of out of Gulf's share of crude produced by Kuwait Oil Co. during the period from February 1, 1947, to December 31, 1956.. Subsequently, t is agreement was extended definitely to December 31, 1969, and inde nitely beyond that date through a provision that either party, b giving notice five calendar years in advance, may terminate the c ntract on December 31, 1969, or at the end of any succeeding calendar year. The quantities of oil covered by this contract range upward from 15,000 barrels d ily, in 1947, to a maximum of 175,000 barrels daily in later years of the contract period. The total quantity for the entire period covers aout 1Y billion barrels of oil, or about one-fourth of Gulf's share oft e already-proven Kuwait reserve. [f Gulf and Anglo Iranian share e ually any quantity of oil that they jointly order out of Kuwait, the fat that Gulf has agreed to deliver a minimum of 175,000 barrels daily to Shell implies a production of a minimum of 350,000 barrels daily on of Kuwait.3 The ability of Kuwait Oil Co. to meet, such a joint requirement already has been demonstrated; daily produc- tion has increased since shipments began on a commercial basis from 30,000 barrels, pon which Gulf's delivery of 15,000 barrels to Shell for 1947 was based, to an average of 242,000 barrels for the year 1949; to 345,000 barrels or 1950; and to 380,000 barrels for the first quarter of 1951.4 When, its a result of trouble in Iran, Angl.o-Iranian needed more oil from K wait as a substitute for shrinking Iranian production,. Kuwait's daily production was increased sharply to about. 500,000 ' In submitting a cop of the 1947 contract and two subsequent supplemental agreements in response to subpena, counsel for Gulf Oil Corp. declared that the agreement itself is not relevant to the announced purpose of the present i vestigation; that it is purely a purchase and sales agreement between the two parties; that the agreem nt does not restrict either Shell's or Gulf Exploration Co.'s right to dispose of Kuwait oil; that it throws no light on the allegation that over a long period of years American petroleum companies operating in orcign countries have entered into restrictive agreements among themselves and with petroleum companies of other nations; and that the disclosure of its terms would be detrimental to both Gulf Oil Corp. and Shell, which have hitherto carefully kept its terms secret. Counsel for Gulf, therefore, requested confidential treatment and prompt return of the documents without any of their contents having being included in any re ort. The Federal Trade C remission has examined the Gulf-Shell agreement of May 28, 1947, obtained by subpena, with the Gulf Oil Corp.'s contention as to confidentiality in mind. After careful examination, the Commission has deeded that a description of the general nature of this agreement is pertinent to the- present investigation ma o pursuant to the Commission's resolution of December 2, 1949. It is recognized, however, that full disclosure of the terms of the agreement of May 28, 1947, might be detrimental to the interests of one or both parties. Therefore, those terms are not disclosed. It is a fact, however, that, although its exact terms may not be known to-the. other international oil companies, the existence of the agreement and the nature of its economic effects are well known in the industry. The Commission finds, there ore, that a discussion of the general nature and economic effects of this particular agreement does not const tute a disclosure of trade secrets ornames of customers as prohibited by the Federal Trade Commission Act. ' In addition to oil join ly ordered out of Kuwait, both of the parties had the right to order for their sops rate accounts such addit onal oil as they desired; see pp. 3$9-380. 4 World Petroleum, M y 1951, p. 47, and July 1951, p. 24. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 139 barrels in both April and May 1951,5 and by the middle of July to a reported 650,000 barrels.6 It will be remembered that in 1951 Anglo-Iranian still had the option, with Gulf's consent, of controlling Kuwait production by substituting oil from Iran or Iraq for delivery by. Gulf to Shell.' This option of Anglo-Iranian to substitute oil from other sources was in no way modified by the fact that substitution was working in reverse during the unforeseen emergency in 1951 when Kuwait oil was being substituted for Iranian oil to meet Anglo-Iranian's needs. Considered merely as a commercial contract for the purchase and sale of oil, the agreement between Gulf and Shell, in and of itself, would not appear to have impaired either Shell's right to dispose of the oil in any way it sees fit or Gulf's right to dispose of additional Kuwait oil as it sees fit. Actually, however, this apparent freedom is limited in at least three respects: (1) if Gulf, using Kuwait oil or any other oil, should cut prices or cause price cutting in any attempt to increase its business in any Eastern Hemisphere market, Gulf would thereby not only receive less for its own sales of oil, but also, under the terms of the agreement, would receive a lower price on its sales to Shell; (2) under the agreement, Gulf's deliveries to Shell would be reduced, should Gulf, through the use of Kuwait oil, increase its business at Shell's expense; and (3) Shell's marketing activities were already restricted because of certain other relationships among Shell, Anglo-Iranian, and other international oil companies. Under the pricing terms of the Gulf-Shell contract, Gulf became- mutually interested with Shell in the profitable marketing by Shell of large quantities of Kuwait oil over a 22-year period. These terms provided for the sharing of profits between Gulf and Shell under an intricate formula for calculating the amount of profits realized on the production, transportation, refining, and marketing of the oil sold to, Shell.' For the purposes of the contract, the parties assumed that a representative proportion of the volume of Shell's sales in each of the "listed territories" named in the contract would be derived from Kuwait oil. It was stated in the contract that Shell was not bound, in fact, to market the indicated amounts of Kuwait oil in each of these "listed" marketing territories which includes practically all petroleum markets in the Eastern Hemisphere." In assuming that Shell would distribute its Kuwait oil in each of these markets, it was also assumed that Shell would incur certain costs of transportation, refining, and marketing, and that Shell's total receipts from the sale of the oil would likewise reflect this pattern of distribution. By ? subtracting Shell's assumed costs and the actual costs of production and delivery incurred by Gulf from Shell's assumed receipts, an annual profit, or loss, figure would be determined. It was agreed that this profit would be shared equally by Gulf and Shell. Thus, Gulf did not receive a stated price for its oil,'(' but instead received a 50-percent financial interest in Shell's disposition of that 5 Platt's Oilgram News Service, July 2, 1051, p. 3. Journal of Commerce (Now York), July 20, 1951, p. 1. 7 This is further evidenced in the Gulf-Shell agreement by the statement that Gulf's obligations are sub- ject to the agreement of December 14, 1933, between Anglo-Persian and Gulf. 8 More than half of the approximately 170 printed pages constituting the Gulf-Shell contract are devoted to "schedules" setting out the complicated statistical and accounting procedure by which the profits' to be, divided between Gulf and Shell are to be determined. V For further comment on this point, seep. 140, footnote 12. 10 The contract states that the price formula was agreedupon because there was no published market price for crude oil in the Persian Gulf and the parties could not agree upon a stated sum per barrel for the, duration of the contract. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 140 T E INTERNATIONAL PETROLEUM CARTEL oil. This price was contingent upon the prices received by Shell in its marketing territories described above. Gulf, therefore, received through this contract a direct interest in Shell's marketing activities in the Eastern Hemisphere and in the maintenance of the prices received by She 1 marketing subsidiaries and joint marketing organi- zations. If Gulf were to invade those markets and establish a marketing posit on at the expense of companies other than Shell and were to thus depress prices, it would receive a lowered price not only on its own sales, but also on its sales to Shell, since Shell's profits would be thereby also lowered. In addition to this general restriction on Gulf, flowing from its acquired interes s in successful marketing by Shell of its Kuwait oil, the Gulf-Shell contract specifically provided penalties on Gulf should Gulf take any usiness away from Shell in any Eastern Hemisphere market. Claus 6, paragraph (6) (a) of the Gulf-Shell contract states: If any Gulf corn any should in any year of the delivery period except the last year of that period through its utilization of Kuwait crude oil increase its propor- tion of the sales o any petroleum product in any of the listed territories at the expense of any She 1 company, then Shell shall have the right, by notice in writing to Gulf, to reduce n the following year the quantity for that year by an amount ,which shall not exceed (i) 70 percent of the crude oil equivalent (as hereinafter defined) of the qua tity of such increase or (ii) the quantity of the oil attributable for that year, whit ever is the smaller.]' In this parag aph, delivery period means the period running from 1947 to 1969 or hereafter until the contract is canceled. The "listed territories" are arketing territories listed in the agreement covering all of Europe and Asia not under Russian control, the islands of the Atlantic as far est as Iceland, the Canary and Cape Verde Islands, all of Africa, An tralia and most of the islands of the Pacific.12 "The crude oil equivalent" refers to an agreed upon method for converting Gulf's increased sales of refined products into an equivalent number of barrels of cr do oil. "The quantity of oil attributable for that year" refers to the quantity of Kuwait oil which the parties assume, for purposes of he agreement, will be used by Shell in marketing in the marketing territories in question. . Under this provision, therefore, Gulf's sales of Kuwait oil to Shell would be restric ed if its use of Kuwait oil in any marketing territory of the Eastern Hemisphere resulted in an increase in Gulf's business .at at the expense of Shell. The restriction would be a reduction in Gulf's to Shell equivalent to the smaller of either (a) 70 percent of the amount of Gulf' increase in sales or (b) the whole amount of Kuwait oil deliverable t Shell in the following year and allocable, under the contract to the arketing territory. 'these provisions, moreover, are so worded as to rovide protection for all of Shell's business, whether based on Kuwai oil or on oil from other sources, in each of Shell's Eastern Hemisphere markets. Thus, Gulf was effectively proscribed 11 Quoted as amended y the Supplemental Agreement between Gulf and Shell, dated February 14, 1950, the only change fro the original text being to extend the application of this provision to the longer delivery period therein agreed upon, i. e., 19,17 to 1969 or until cancellation of the agreement at a later date. 12 The contract lists ca h Shell marketing subsidiary and joint marketing organization in the Eastern lie ore and lists the territories served by each. The contract states that these listings were madam Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL . from using additional Kuwait oil so as to encroach upon any of Shell's markets in the Eastern Hemisphere.13 The expression, "proportion of the sales of any petroleum product" is nowhere defined in the agreement, nor is any method set up for determining that proportion or for determining whether any increase in that proportion is "at the expense of Shell." To give effect to this language, however, the following information regarding such petro- leum product in each "listed territory", i. e., all markets in the Eastern Hemisphere, would have to be known for the year preceding the effec- tive date of the contract, i. e., 1946, and for each succeeding year: (a) the total of Gulf's sales; (b) the total of Shell's sales; (c) the total sales of all marketers; (d) the proportion that Gulf's sales and Shell's sales, respectively, bear to the total sales of all marketers; and (e) the fact as to whether any increase in Gulf's proportion of business is made at the expense of Shell.14 The effect of this provision, therefore, is to discourage, and thus tend to prevent, any increases over Gulf's established position in any petroleum product in any market in the Eastern Hemisphere where such increases are at Shell's expense. This restriction was not in con- flict with the provisions in the agreement of December 14, 1933, under which, with respect to the utilization of Kuwait oil, Gulf was obliged to confer with Anglo-Iranian to prevent encroachment on the latter's marketing position at any time or place. This is evidenced by the fact that the restrictions of the 1933 agreement were included by reference in the Gulf-Shell contract and by Gulf's statement that, while Gulf had advised Anglo-Iranian in 1946 of Gulf's sales to Shell, which began as soon as Kuwait Oil Co., Ltd., started producing com- mercially about the middle of 1946, Anglo-Iranian had made no objec- tion to such early sales.16 Furthermore, as will presently appear, the long-standing intimate relationships of Anglo-Iranian and Shell are such that the long-term commitments to Shell entered into by Gulf in 1947 effectively supersede and render unnecessary the earlier re- strictions on Gulf of the 1933 agreement. The above-mentioned restrictions are consistent with the principles and procedures governing "as is" relationships among cartel members under the international agreements described in chapter VIII of this report. Under the cartel agreements, restrictions on producing and marketing petroleum products were accepted not only by the principal "as is" partners, Shell, Anglo-Iranian, and Standard Oil Co. (New Jersey), but also by many other petroleum companies as well.'6 The general application of the "as is" principle in the Far East, for exam- ple, was made known by Sir John T. Cargill of Burman Oil Co., Ltd., who stated, in 1934: We have agreements with our most powerful geographical and other competitors which respectively accept that principle in whole or in part.17 13 The limitations on Gulf applied to all the "listed territories" enumerated in the contract, and any business done by Shell in the Eastern IIemisphere in markets not included in the comprehensive list would be a negligible part of Shell's Eastern Hemisphere operations. 14 Clause 6, par. (6) (c) provides that, where this fact as to whether increases in Gulf's sales are at Shell's expense cannot be determined, then the above-mentioned penalties on Gulf do not apply. 15 Gulf's application to the Securities and Exchange Commission, loc. cit. 18 For details on these restrictions and their application, see chg. VIII and Ix: 17 The Petroleum Times, June 9, 1934, p. 622, quoting remarks by Sir John T. Cargill in reviewing the This the time the Shell, and Standards(N of Burmah w Oil Co., Ltd. companies were operating in European and Far Eastern marketsa under cartel agreements intended to implement the "as is" principle. Burmah Oil Co. has been previously mentioned on page 131 as a customer of Anglo-Persian and as a joint marketer in India with Shell. The 1933 restriction on Gulf applied to the relationships between Anglo-Persian and Burmah Oil. Burmah Oil was also a large stockholder in Anglo-Persian and Shell. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 142 TIE INTERNATIONAL PETROLEUM CARTEL Gulf's entry solution to the mercial product have an outlet f Persian's trade tion on Csulf wa marketer in mai to the Gulf-Shell contract of 1947 apparently was a roblems raised by the beginning of large-scale com- r its oil, but was bound not to upset or injure Anglo- r market position at any time or place. This restric- a serious one, since Anglo-Iranian was an important y of the areas most accessible to Kuwait production. Finally, these accessible markets were strongly cartelized, and Gulf would have had heavy expenses in building the necessary facilities and in forcing ts way into these markets against the opposition of the established companies. The way in which the Gulf-Shell contract solves these pro lems becomes apparent in considering Shell's circum- stances at the time it entered into the contract and the terms as to price that have een discussed above. As has been Indicated, Shell was for many years a principal par- ticipant in the f`as is" cartel arrangements, and thus was interested in preventing the entry of large amounts of uncontrolled oil into con- trolled markets. Shell's interest in the Gulf-Shell contract was dic- tated also by is long-standing intimate relationship with Anglo- Iranian, particu arly in marketing arrangements, and by its unfavor- able situation with regard to crude oil supplies for most Eastern Hemisphere markets. Shell's and A g1O-Iranian's marketing interests reach into practically every market, 1 rge and small, in the Eastern Hemisphere." While the two companies maintain separate organizations in many markets, they operate joint marketing organizations in many other markets." This fact and the fact of long-term intimate cooperation of Shell and Anglo-Iranian, together with other companies, in the formulation and application of "m is" cartel principles tended to produce a solidarity of. interests in the two companies. However, Sh 11 had not participated to the same extent as other companies in the joint development of the oil fields of the Middle East, which were adv ntageously located with reference to many markets of Europe, Afric , and Asia. Except for its interests in Iraq, Shell had s Shell's marketing s bsidiaries and the marketing organizations owned jointly by Shell and Angle Iranian are listed in the ulf-Shell contract, pp. 132-139. These appear to include all Eastern Hemisphere markets outside of Russ an-controlled territories except for such unimportant areas as Assam, Chittagong, -and Borneo. 1s Gulf-Shell contract, May 28, 1947, pp. 132-139. The companies indicated as joint marketing organiza- tions and the markets ]i ted as served by them are as follows: Company Markets served 1. Shell Max. & B. P., Ltd________________________ British Isles. 2. The Shell Co. of Palestine, Ltd_________________ Cyprus. 3. The Shell Co. of Aden, Ltd_____________________ Aden, including Perim, Kamarin, and Kuria Muria Islands. 4. The Shell Co. (Red Sea), Ltd___________________ Eritrea, Somaliland (British, French, and Italian), Ethiopia, Hejaz, Asir, Yemen, Hadramaut, Sogetra, and Red Sea islands, except Egyptian territory. 5. The Shell Co. of the Sudan, Ltd________________ Anglo-Egyptian Sudan. 6. The She]] Co. of East Africa, Ltd____________ __ Kenya, Tanganyika, Uganda, Zanzibar, and 7. Anglo-Iranian Oil Co. (East Africa), Ltd_______ the Seychelles Islands and their dependencies. 8. The Shell Co: f Portuguese East Africa, Ltd____ Portuguese East Africa (or Mozambique). 9. The Shell Co. of Rhodesia, Ltd_________________ Northern and Southern Rhodesia and Nyasa- ]and. 10. The Shell Co. f South Africa, Ltd-------------- JUnion of South Africa, Bechuanaland, Basuto- 11. Anglo-Iranian Oil Co. (South Africa), Ltd------ J land, Swaziland, Madagascar, and Mauritius. 12, The Shell Co. f South West Africa, Ltd----- __- South West Africa and Walvis Bay. 13. The Shell Co. f Ceylon, Ltd___________________ Ceylon, Maldive Archipelago, and Chagos Islands. 14. Burmah-Shell Of] Storage & Distributing Co. of India (including French and Portuguese India India, Ltd. and the Laccadive, Andaman, and Nicobar Islands but excluding Assam and Chitta- gong), Afghanistan, Nepal, Bhutan. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 played a small role, compared with other international oil companies, in the Middle East. In fact, its sources of production were, and still :are, located mainly in the Western Hemisphere and the Far East, both areas being far away from Eastern Hemisphere markets important to Shell.20 In contrast, Anglo-Iranian controlled the production of Iran, shared Iraq production with Shell and other international oil -companies, and shared the production of Kuwait with Gulf. It was into this structure of controlled production and marketing that both Anglo-Iranian's and Gulf's Kuwait oil was being fitted in 1947. The Gulf-Shell contract became the means of carrying over into the postwar period the observance of the cartel's prewar "as is" principle of preserving marketing positions.21 Gulf, with a large volume of production newly developed at Kuwait, was hemmed in by the restrictions in its 1933 agreement with Anglo-Iranian and by the fact that the natural markets for that oil were strongly cartelized. Under the Gulf-Shell agreement, Gulf obtained an outlet for about out-quarter of its share of Kuwait's proven reserves, with deliveries spread over more than 20 years. Thus Gulf was able to dispose of this oil without competitively entering markets in which it did not already have a recognized marketing position. Anglo-Iranian recognized -Gulf's need for a market and apparently regarded the sale to Shell as ,giving relief to Gulf while at the same time placing the control of the marketing of this important part of Gulf's share of Kuwait oil in strong hands where it would be marketed in such a manner as not to upset or injure existing market positions of either Anglo-Iranian or Shell. Thus, Shell at one stroke gained control of a potential dis- turbing element in its and Anglo-Iranian's markets and secured a 'substantial source of supply more advantageously located with respect to many of its markets than its owned sources of supply. In summary, Gulf, at the time that Kuwait production began on a commercial scale in 1946, was restricted. tinder the December 14, 1933, .agreement with respect to any market in which Anglo-Iranian had distributing interests. Gulf, moreover, had neither an established marketing position nor a distribution organization and facilities in many Eastern Hemisphere markets. At the same time, Shell was ,operating with established positions vis-h-vis Anglo-Iranian under cartel agreements of long standing in markets throughout the Eastern 20 Shell had some productionin the MiddleEast and Europe, but its supply from these areas was inade. quate to moot its needs in those markets. As late as 1949 and 1950, the sources from which Shell drew its total supply, including purchases from Gulf and others under long-term contracts, as reported in The Economist of June 0, 1951, p. 1380, were as follows: Millions of barrels Millions of barrels Western Hemisphere ----------------------- ------------- 255.1 66.5 279.3 61.5 Far Fast -------------------------------------------------- 46.7 12.2 61.2 13.5 Middle East--------------------------------------------- 18.6 4.8 22.6 5.0 Europe--------------------------------------------------- 3.2 .8 3.5 .7 Total produced by Shell--------------------------- 323.6 84.3 366.6 80.7 Purchased under long-term contract---------------------- 60.1 15.7 87.7 19.3 Total produced and purchased------------------ 383.7 I 100.0 21 Anglo-Iranian also similarly contracted in 1947 to sell part of its Kuwait production to Standard (New Jersey) and Socony-Vacuum, as described later in this chapter. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Hemisphere. tributed thro rangements. By entering Gulf found an Kuwait oil, wit while Shell obt position in ma Moreover, Gut that it can co arises because and because o should, by the where in the E . The new 19 restrictions on Actually, the r the salve mark joint marketing cooperatively i Shell the ulti Gulf's share of Lions of both S Thus, it app tional oil out o exclusively,, to marketing posi these circumst world left ope Western Hemis such movement In the light of profitable to ma registrant [Gulf] a few years it ca * * * Thus, objectionable the total enterprise r n many such markets, Shell and Anglo-Iranian dis gh a single company under joint marketing ar- into a long-term marketing arrangement with Shell, outlet for at least 1Y billion barrels of its share of i deliveries spread over a minimum period of 22 years, fined crude oil which it needed, to supply its established kets which it shared With Anglo-Iranian and others. is restricted during this minimum 22-year period so pete with Shell only to its own disadvantage. This of the profit-sharing provisions of the 1947 contract the limitations stated therein, which apply if Gulf use of Kuwait oil, encroach on Shell's business any- stern Hemisphere. 7 Gulf-Shell contract incorporated, by reference, the Gulf of the 1933 Anglo-Iranian-Gulf agreement. strictions on Gulf in both agreements apply to much ting areas. Insofar as Anglo-Iranian and Shell have organizations in many of these territories, and market many others, the 1947 contract merely transfers to ate responsibility of controlling the distribution of Kuwait production so as to protect the trading posi- ell and Anglo-Iranian.22 ars probable that Gulf's opportunity to market addi Kuwait is limited quite largely, though possibly not those markets in which it already has an established ion accepted by the British-Dutch interests. Under aces, the most important unrestricted markets of the to Gulf for Kuwait oil appear to be those of the here, and especially the United States.23 Respecting of oil, counsel for Gulf stated, in 1946: present transportation costs, it is likely that it would not be ket Kuwait oil in the Western Hemisphere. However, the elieves, it is the opinion of the oil industry in general that in be made profitable to bring the oil into the United States. chile admittedly the marketing provisions are restrictive and probably will not have a material adverse effect upon the presented by the registrant and its subsidiaries 24 - Shortly after this statement was made, postwar price controls in the United Sta es were removed in November 1946, whereupon the price of crude oil advanced at Gulf ports, with the result that Kuwait oil began to be imported into the United States in 1.947.26 Gulf Oil Corp. was amo g the importers. It imported at an average rate of 4,232 barrels daily in 1948, 29,745 barrels daily in 1949, and by the middle of 1950 at an estimated rate of 40,000 barrels daily. Two as About 21 months after the Federal Trade Commission served a subpena on Gulf Oil Corp., requesting the documents ,on w ich the above discussion is based, Gulf and Anglo-Iranian, in a document dated November 30, 1951, agr ed to cancel the Anglo-Persian-Gulf agreement of December 14, 1933. Gulf Oil p,a o~,i, ~i,~u~co .i~~ru~ui ouuau?ii2Idi1Y 1110 unJll; IC:i ltieLluil.~', discussed above, w~ ieh hampered Gulf's marketing of Kuwait oil. Once Gulf was tied to Shell under the terms of the ].947 contra t, the interests of Anglo-Iranian, as well as those of Shell, were protected, since the restrictive provisions of1the 1947 agreement will operate in lion of the restrictive provisions of the 1933 agree- 23 Anglo-Iranian does to either Gulf's or Shel 24 Gulf's application 1 24 Minerals Industry 178--179. of market in the Western Hemisphere, and the Gulf-Shell contract does not apply s business in the Western Hemisphere. led with the Securities and Exchange Commission, loc. cit., pp. 9-10. (Report No. 308, p. 13; International Petroleum Trade, September 30, 1948, pp. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE -INTERNATIONAL PETROLEUM CARTEL 145 other American companies, Socony-Vacuum Oil Co. and Atlantic Refining Co., also imported Kuwait oil in increasing quantities dur- ing this period.28 In December 1950, Atlantic Refining Co. an- nounced that it had entered into a contract with Gulf to buy approxi- mately 12,000 barrels daily of Kuwait oil for a period of 5 years beginning in 1951.27 This apparently about doubled Atlantic's daily average rate of purchases of Kuwait oil. Thus it appears that as soon as the price of crude oil in the United States advanced suffi- ciently to make it profitable to sell crude oil for importation into the United States, Gulf found outlets for Kuwait crude in the United States. Such sales were, of course, completely in accordance with its 1933 agreement not to use oil from that source to upset Anglo- Iranian's trade or marketing position directly or indirectly at any time or place. ANGLO-IRANIAN AGREEMENTS WITII JERSEY STANDARD AND SOCONY- VACUUM FOR TIIE SALE OF CRUDE OIL Soon after the Gulf-Shell sale of oil agreement was concluded, three other major international oil companies-Anglo-Iranian, Jersey Standard, and Socony-Vacuum-entered into similar long-term ar- rangements providing for the sale of Middle East oil owned by Anglo- Iranian to the two American companies. As in the case of the Gulf- Shell agreement, the sale of large quantities of oil over a long period of time, the unusual provisions with regard to price, the insertion of provisions governing the marketing of the oil, and the close relations otherwise existing between the three parties indicate that these agree- ments were not in the nature of an ordinary business transaction, but rather represented a mutual sharing of oil production on terms that harmoniously effected still another merging of interests in Middle East oil. A large volume of oil was involved in the contracts. Jersey Stand- ard agreed to purchase 800,000,000 barrels of crude oil over a 20-year period; and Socony, under two purchase contracts, agreed to take 500,000,000 barrels-or a rate of 110,000 barrels daily for Jersey Standard and 70,000 barrels daily for Socony. In 1949, Anglo- Iranian's average daily crude oil production in Iran and Kuwait, by 26 Effects of Foreign Oil Imports on Independent Domostic Producers, a report of the Subcommittee on Oil Imports to the Select Committee on Small Business, House of Representatives, 81st Cong., 2d seas., pursuant to H. Ros. 22, H. Rept. No. 2344, June 27, 1950, pp. 18-23. According to the subcomreittec, the American companies known to be importing Kuwait crude oil, and the daily average quantities imported during the years 1943 and 1949, and the last half of 1960 wore: [Barrels] Atlantic Refining Co__________________________________ 1,235 1, 211 6, 665 Cities Service Co. ................................. Inc 646 ------- , . Gulf Oil Corp --------------- 4, 232 29,745 35,000-45,000 Socony-Vacuum Oil Co_________________________________ 3, 230 2 19, 748 31,000 Standard Oil Co. (Now Jersey)----------------------_- 12, 400 11, 968 ----------- - 1 Actual daily average imports for the year. 2 Estimated daily average imports for the last 6 months. Kuwait and Iran oil combined. 3' National Petroleum News, December 6, 1050, pp. 30-31. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 way of comps seem evident, t and Socony w4 production. 'I substantial int 20-year period, they became, i producing ente enterprise, Mic and to continu, rison, was about 715,000 barrels daily.28 It would uld take a substantial proportion of Anglo-Iranian's he two American companies, in fact, acquired such a with special terms as to price and -other matters, that dle East Pipelines, Ltd., was a logical way to solidify The stated purpose of the crude oil sales contracts was to provide production an d continuing market" for Anglo-Iranian's crude-oil decision of the their oil to the Anglo-Irania tinuing market Jersey Standar Trans-Arabian off-take agree agreements and At the same ti chided and was was well ad van crude oil prod Middle East naturally wish from a purely Anglo-Iranian's bargain with A to build a pip Mediterranean ; undoubtedly fa dollars which On their part terms a long-te gated. requirem benefit from chi And perhaps o and Socony wo taming world p d companies" of Jersey Standard and Socony. The three parties to build a Middle East pipeline to move was obviously interested in "an assured and con- ' for its output, particularly in view of the increase It production as, a whole.. In the spring of 1947, and of California for their entry into Aramco and into ents, and other collateral papers. The negotiations to settle other IPC matters had fairly well crystallized. in operation, and the building of now pipelines in Iraq iction in Saudi Arabia, Iraq, and Kuwait. With o keep pace with the growth of Middle East produc- fallen behind would not only have been undesirable ommercial standpoint; it would also have weakened prestige in the Middle East.30 Another factor in the line from the vicinity of the Persian Gulf to the ilitate the procurement of both American steel and ere necessary but scarce. Jersey Standard and Socony gained under favorable m., substantial supply of crude to meet their antici- ;nts in foreign markets. Moreover, this oil would ap transportation via the projected MEPL pipeline.. Id all benefit in that the increases 'in Iranian produc- y the 1946-47 events in the Middle East oil industry, gr.)up oP men represonti g the companies in.volved. 3' f . g., Ang1o-Iranian s inRigtonce, on MEPL being incorporated in the United Kingdom rather than in the United States. Se p. 154. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TIIEI INTERNATIONAL PETROLEUM CARTEL 14 Thus the making of the long-term sale of crude oil agreements between Anglo-Iranian, Jersey Standard, and Socony added sub- stantially to the interlacing and merging of oil interests that had developed in the Middle East over the course of 25 years. These developments tended to create common and identical interests among the major international oil companies in the Middle East through their joint and interlocking enterprises. The crude oil sales agree- ments, therefore, emerged as the last of -the long series of events tending toward a unified oil industry in the Middle East. Jersey Standard-Anglo-Iranian crude oil sales contract.-The agreements for the sale of crude oil and for the establishment of Middle East Pipelines, Ltd. originated in conversations apparently held sometime in August or September 1946 between Orville Harden, vice president of Standard Oil Company (New Jersey) and Sir William Fraser, chairman of the board of directors of Anglo-Iranian Oil Co., Ltd.31 An unsigned memorandum, dated October 4, 1946, in Jersey Standard's files set forth the outlines of the preliminary agreement, in which the sale of oil and the pipeline are tied together in one package. The crude oil contract was to provide for the sale by Anglo-Iranian over a 20-year period of 160 million long tons (1,200,000,000 barrels) to Jersey Standard. Other features of the preliminary agreement, such as those relating to price, to Anglo-Iranian's option of supplying the oil either from its Iran or Kuwait sources, and to Jersey Stand- ard's rights of termination of the contract at earlier dates were substantially the same as those in the final agreement. The two parties were to jointly finance and operate a pipeline of 300,000 barrels per day capacity, i. e., 15 million long tons annually, which was to run from the Persian Gulf to the Mediterranean. Socony-Vacuum was brought into the agreement, apparently some- time in November,32 being. given 20 percent of Jersey Standard's crude oil purchase, (200 million barrels) 33 over a 20-year period, and a 10-percent interest in the ipeline, taken from Jersey Standard's share which was thus reducped to 40 percent.' However, Socony's position was that of an adherent or lesser partner, and until late in the negotiations with Anglo-Iranian, Jersey acted on both its own and on Socony's behalf.34 Although the guiding principles were agreed upon at an early stage,36 10 the ensuing negotiations proved long and tedious. In late August 1947, it became apparent that the pipeline agreement could not be concluded for some time, although the crude oil contracts were in 31 In a cable, dated October 15, 1946, to D. A. Shepard, Mr. Harden makes it clear that lie and Sir William had personally agreed upon these projects. The time of the discussions is suggested by the memorandum discussed above. During the period August-December 1946, extensive discussions were being carried on by officials of Jersey Standard, Anglo-Iranian, Royal Dutch-Shell, and Socony-Vacuum about proposals for the diss3lution of the red-line agreement, the development of a new IPO agreement, the entry of Jersey Standard and Socony into Aramco, and the building of the Trans-Arabia pipeline. At this time also an arrangement for sale of oil was already in effect between Gulf and Shell, although the agreement between them was not signed until May 28, 1947. 32 The first mention of Socony in Jersey Standard's files appears in a memorandum dated December 3, 1946, and signed by 0. Harden. 23 Jersey Standard's purchase was previously reduced to 1 billion barrels according to a document Principles of Agreement, dated October 29, 1946. 34 This is clcai from numerous rererences in. Jersey Standard's files. With regard to the Heads of Terms and supplemental letters, signed by the three parties on December 20, 1946 the following comment appears in a letter from B. It. Jackson (Anglo-Iranian) to O. Harden, dated December 17, 1946: "I suggest that they are in sufficiently final form, however, to be handed to Socony." Another example is given below, p. 148, footnote 43. 35 The basic understandings between Jersey Standard and Anglo-Iranian were fully elaborated and set forth in a document known among the parties as the Heads of Terms. This document, which was initialed by the parties on December 20, 1946, stated the, principles of agreement between the two parties that would govern the writing of the crude-oil contracts and the creation of the joint pipeline enterprise. Since the basis of Socony's participation in these projects was included in a letter supplementary to the Heads of Terms, a representative of that company also initialed. that document and its two supplementary letters. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 148 TU E INTERNATIONAL PETROLEUM CARTEL nearly final for Iranian signed c and Socony, the respects. The Jersey Standard a statement of chase contract. Jersey Standi about 800,000,0( cries to common ranean and to c for deliveries at million barrels a of 114,000 bare succeeding 7 ye barrels, was to 1_ ties to be detern option, cancel tli 5-year notice be negotiations wit with regard to t] The contract i pipeline agreeme was completed, t plated that the 3. Accordingly, on September 23, 1947, Anglo- ntracts for the sale of crude oil with Jersey Standard ollowing statement of the main-provisions of the -Anglo-Iranian contract, therefore, will serve also as he contents of the Socony-Anglo-Iranian first pur- rd agreed to purchase 106,400,000 long tons 37- 0 barrels-of crude oil from Anglo-Iranian, the deliv- ontinue over a 20-year period. The contract called the average rate of 90,000 barrels daily (nearly 33 Is daily (nearly 42,000,000 barrels annually) for the rs. The remaining part of the purchase, 410 million e delivered over a 10-year period, the annual quanti- e contract at the end of its tenth or fifteenth year, a ing required.39 In the event that the then-current Aramco failed, Anglo-Iranian agreed to negotiate or sale of oil was contingent upon the making of the nt 41 and was to go into effect only when the pipeline he target date being January 1952.42 It was contem- owned and oper 'fed pipeline at which point ownership of the oil would pass from Angl -Iranian to Jersey Standard. The latter company, however, was gi en the right to lift up to 5 percent of its annual tak- ings by tanker i the Persian Gulf.43 se See letter, T. E. Monaghan (Jersey Standard) to Joseph Addison (Anglo-Iranian), dated August 27, 1947. 87 Quantities are given n the contracts in long tons. Since the general practice in the United States is to state quantities in bar els, the barrel equivalents, as suggested by various correspondence in the files of Jersey Standard, will be. given in this discussion in place of the figures in tons given in the contracts. 88 Jersey Standard was to state by the end of the fifth year the quantities It desired to take during the eleventh through the fift onth year, the total for the 5 years to be between 190 and 230 million barrels (25 to 30 million tons). A similar notice was to be given by the end of the tenth year specifying the quantities of the balance of the contr ct to be taken during the sixteenth through the twentieth year. Provisions were Included to insure that there should not be a great variation in the quantities nominated by Jersey Standard during any two succcedin years. Daily average deliveries for the 10 years were to be about 114,000 barrels. 89 No right of cancellati n was given to Anglo-Iranian, because Jersey Standard required "definite assur- ance" of a "20-year commitment" on the part of Anglo-Iranian in order to justify its investment in the pipeline. (In other word , while Anglo-Iranian would continue to have use for the pipeline which would run from its concessions t the Mediterranean, Jersey Standard would require it only during the period in which it purchased oil.) Jersey Standard required a right of cancellation on its part, however, to guard against "unforeseen conditions." (Cable from O. Harden to D. A. Shepard, dated October 15, 1946.) Provisions were later put into the pipeline contract that, in effect, depreciated the investment in the first 10 by?ars of pipeline operation. a Sir William Fraser declined to put this offer in a formal letter, but agreed to make it verbally or in an informal letter. Letter fr m T. Monaghan to 0. Harden, dated July 3, 1947. In a draft of a formal letter, attached to a letter from R. Jackson to O. Harden, dated December 9, 1940, it is provided that Jersey's purchase could be inertias d to 1.25 billion barrels (165 million tons) in the event negotiations with Aramco +1 It was provided thatleither party could terminate the contract if a pipeline agreement were not con- cluded by December 31, 1948, or a later date mutually agreed upon. 42 Jersey Standard executive committee meetings, January 15, 1947. AS The 5-percent figure as arrived at after much debate by the two parties. Jersey Standard was anxious to insert a high figure to sin flexibility in the late years of the contract when it might want to make its annual takings considers ly in excess of its share of pipeline capacity. Ina "second draft" of the contract, probably drawn up in J nary 1947, it is provided that up to 25 percent of the purchased oil could be taken by tanker In the Persian ulf. Anglo-Iranian, on the other hand wanted to insure pipeline operations at the "hichest possible poi t", i. o., at the most economic levels. Ketter from L. C. Stevens to 0. Harden, dated January 27, 1947. The issue was settled at the 5-percent level apparently without consultation with Socony, although an identical provision was in its contract. Socony's subordinate position in the negoti- ations is again shown I. t is regard by the following interoffice note from Orville Harden to S. P. Coleman, dated February 4, 1947. `Dear Stewart: Before we definitely agree with the Anglo-Iranian as to the per- centage of oil that we hav the right to take delivery of in any one year In the Persian Gulf, I think we owe it to Socony-Vacuum to confer with them. O. H." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 149 Anglo-Iranian was given the option of making its deliveries either from Kuwait or Iran at its pleasure. This flexibility option was in- serted to allow Anglo-Iranian to determine the source of supply as indicated by "political considerations". 14 Among the provisions to insure that the average quality of the oil delivered from either Iran or Kuwait was not less than the average quality of oil produced in either country, the following safeguard was included in the contract. Anglo-Iranian--- shall keep currently during the supply period [20 years] * * * adequate records of the quality of oil produced in each field in Kuwait and * * in Iraii.45 These records were to be made available to Jersey Standard. The price to be paid for this oil was determined by a cost-plus "principle" described in the contract as "a cost plus' basis independent of market fluctuations in the prices of crude oil or petroleum products." The cost element of this formula included all costs of production and gathering per ton allocable to the oil delivered under the con- tract,46 including the costs of delivering it into the eastern terminal of the Mediteranean pipeline or, in. the case of the small quantities of oil to be lifted by tankship in the Persian Gulf, the costs of delivering the oil f. o. b. tankship.41 The "plus" element of this formula con- sisted of a fixed money profit per ton, which was to apply throughout the 20-year supply period of the contract. This profit element paid to Anglo-Iranian was the factor that made the total price payable by Jersey Standard "independent of market fluctuations" since it stabil- ized that price for a 20-year period, subject only to changes in the actual costs of production and gathering of the oil.48 It would seem clear that extensive information would necessarily have to be made available to Jersey Standard so that it could deter- mine whether the costs charged to it were properly determined. This is an essential characteristic of any cost-plus contract and dis- tinguishes it from ordinary business transactions in which buyers and sellers "haggle" in arm's-length bargaining, independently of each other's conduct of their business affairs. Early in the negotiations for this contract, the principal negotiator of Jersey Standard referred to "our need for clearly knowing the definition of each cost factor and the proposed allocation of all items of expense, as well as having all documents and other factors that would affect the contract." 49 In a 44 Cable from D. A. Shepard to O. Harden, dated January 23, 1947. 4' Except for fields reserved for meeting domestic requirements in Iran. 49. The provisions relating to price and to accounting records and procedures occupied 37 of the 81. pages of the contract. The accounting schedules In the contract set forth in detail the principles to be applied in determining and allocating each element of the costs Incurred by Anglo-Iranian which would enter Into the price per ton for the oil sold under the contract. 47 The interests of Jersey Standard were safeguarded by the inclusion of various clauses in the contract which limited or shifted unusual or unfavorable cost burdens. The most interesting of these was a pro- vision which stipulated that the royalty component in the costs to be paid by Jersey Standard on either Kuwait or Iran oil would never be higher than the concurrent royalty paid per ton, Including payments for tax immunity, by IPC in Iraq or by NEDC as Its share of the royalty per ton on any royalty oil deliverable to D'Arcy Exploration Co. (Anglo-Iranian). (This had reference to the Kirkuk field arrange- ments of IPC.) These provisions gave Jersey Standard a "guaranteed royalty ceiling." Memorandum fromE. L. Estabrook to L. P. McCollum, dated January 24,1047 (files SONS, part 14-B.) 48 Jersey Standard's Interests were further safeguarded by a "most favored nation" clause which stipulated that the total price paid by Jersey Standard would in no case exceed the price charged by Anglo-Iranian or Kuwait Oil Co., Ltd., to any other long-term purchaser of Iran or Kuwait oil. Spot sale and short-term contract prices were excluded from this guaranty. Kuwait Oil Co. was included to guard against the possi- bility of sales by It being used as a subterfuge by Anglo-Iranian to escape this clause In the contract. Letter from L. C. Stevens to O. Harden dated January 27, 1047. If a lower "differential," 1. e., fixed nayment per ton over costs, were granted any other customer, then Jersey Standard would receive the benefit of such 4'differe.ntial." If the prices to another customer, as determined by any other "principle" than cost plus, were, In sum, lower than the price to Jersey Standard, its price was automatically lowered accordingly. 40 Letter from O. Harden to B. R. Jackson (Anglo-Iranian), dated November 7, 1946. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 letter supplem ntal to the "Heads of Terms," dated December 20, 1946, initialed by officers of Jersey. Standard, Socony, and Anglo- Iranian, the following appears: 3. We feel obliged to ask that Jersey be permitted from time to time to audit so much of the books of Kuwait Oil Co., Ltd.,50 as may be necessary to verify accounting statements relevant to the crude-oil contract. We would prefer that this be done by Jersey employees, but if this is unsatis- factory to AIOC, we would probably be willing to agree that such audits would be made by independent accounting firms-such as Price, Waterhouse & Co.-re- tained and paid for by Jersey. The issue as not settled this easily, however. Although the parties soon c me to an agreement upon the accounting principles to be applied and the allocation of the elements of cost among capital and current charges," the question of who would make audits re- mained in disp te. Jersey Standard officials were unyielding in their stand that the accounts be audited by their own. or by independent auditors retained by them, insisting that such a review of the account- ing books was necessary to fulfill their definite responsibilities to their stockholders.52 Anglo-Iranian countered by stating that "we are not in a position to give them access to the Kuwait Co.'s books without previo is reference (to) Kuwait partners." It proposed., "in conformity wi h usual practice on this side," that a "certificate given by Kuwait Co.'s auditor * * * would be satisfactory safeguard by loth parties." 53 It insisted that the, procedure pro- posed by Jersey Standard "might reflect on (the) reputation and professional status of auditors and involve ethics questions as between (Kuwait's) and tors and (Jersey Standard's) independent auditors." 54. Under the final compromise on this issue, as stated in the contract, the annual audit of the books and records of the Kuwait Oil Co. was to be made by the statutory auditors of that company, who were to be specially retained and paid for this work as "independent auditors" by Jersey Sta dard and Anglo-Iranian. The statutory auditors of Anglo-Iranian were to be similarly specially retained by the two parties to examine the relevant books and records of the Anglo-Iranian and render a certificate to the auditors of Kuwait. It was further provided that Jersey Standard would be "entitled to receive" fro Anglo-Iranian "any and all information which buyer (Jersey Standa d) may reasonably request, from time to time, as to any of the mat ers enumerated" in the preceding parts of the article in the contract, namely, the books and records relating to all the elements of cot which entered into the price to be paid by Jersey Standard. ' Th disclosure of such information would result, in effect , 50 Kuwait Oil Co. w s specified because the parties had agreed that the cost of production per ton of Kuwait oil should apply to all oil delivered under the contract regardless of whether it was produced in Kuwait or in Iran,. although the costs of royalties, gathering, and so on were to be separately determined and ap lied for Kuwait an Iran oil. This use of Kuwait costs was feasible because the differences in the costs of )reduction in Iran a .d Kuwait were, according to Sir William Fraser, "unknown but probably small." Cable from D. A. Shepard to 0. Harden, December 4, 1946. A preliminary review of "very approximate data" supplied by Angl -Iranian indicated that producing costs in Kuwait, including gathering costs, would be about 27 cents per b rrel for the purchased crude. This estimate was based on estimated reserves of 4 billion barrels and pro uetion of 300,000 barrels per day. All estimates, however, were tentative, since commercial production in Kuwait had been started only in July 1946. Cable from L. C. Stevens to J. C. .Anderson. November 2 . 1946. 61 Such agreement wa reported in a letter from L. C. Stevens to J. C. Anderson, November 20, 1946. A draft of the accounting chedules to the contract substantially in the form finally adopted was prepared and signed on December 13, 1946. 52 Memorandum of a telephone conversation on February 21, 1947, between L. C. Stevens and T. Mon- aghan. Socony concur ed with Jersey Standard in its demands for an independent audit. Cable from C+..V. Holton to W. L. King, Jr., dated March 3, 1947. s3 Cable from the chairman (Sir William Fraser) to B. R. Jackson, dated January 2, 1947. "Cable from T. Monaghan to L. C. Stevens, dated February 24, 1947. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 in opening up to Jersey Standard nearly all the details of the opera- tions of Kuwait Oil Co., Ltd., and many details about Anglo-Iranian's business in Iran." The crude-oil sales contract, therefore, implied a long-term close association between Jersey Standard and Anglo-Iranian. This con- clusion is supported by the details given above on the quantities of oil to be supplied, the length of the supply period, the nature of the pricing principle (cost plus), the stipulations regarding the disclosure of information as to quality and as to costs, etc. Underscoring the fact of this contemplated long-term association was the joint partici- pation of the parties in the financing and construction of the Medi- terranean pipeline. An understanding between the two parties defining the ultimate market for which this oil was destined further emphasizes their close association. The contract for the sale of oil included the following provision: Nothing in this agreement shall limit or restrict buyer (Jersey Standard) as to the sources from which it supplies any area or as to the areas to which it delivers supplies from any source. It is, however, buyer's intention in entering into this agreement to use oil receivable by buyer hereunder in supplying buyer's business in Europe (including the British Isles), North Africa (including the whole of Egypt), and West Africa, all of which areas are hereafter referred to as "the reference area". [Italics added.] The meaning of this provision, i. e., limiting the areas within which the purchased oil is to be ultimately distributed, becomes clear on reviewing the discussions of the parties in its preparation. Early in the negotiations, a Jersey Standard official stated: I told Basil (B. R. Jackson of Anglo-Iranian) that so far as crude oil deliverable by pipeline was concerned, it was for the purpose of helping to supply the require- ments of our total business in the European and North African countries along with IPC, Saudi Arabian, Venezuelan, and * * * other The first draft of the contract which included a definition of "the reference area" read as follows:57 Europe (including the British Isles), Africa, Asia Mirror, and India. This proved to be unacceptable to Anglo-Iranian which objected to the specification of "particular countries", and was "unwilling to include areas east of Suez." 18 The wording that was finally settled on was substantially that proposed by Anglo-Iranian except for the specific mention of the British Isles and Egypt.69 The restrictive nature of the above-quoted provision of the crude- oil contract is further revealed by the context in which it was placed. This provision introduced the "Force Majeure" article which provides for adjustment of the contract in the event of unforeseen events such as acts of God and of governments, insurrections, and the like. The intentions of Jersey Standard in negotiating the lengthy and compli- cated clauses in this article were succinctly stated by a Jersey Standard 55 This conclusion is put in these wards, because, while the Kuwait costs of production, gathering royalties, and so on were all applicable to the price formula, the applicable elements of cost for Iranian of Included only the costs of royalties and gathering; see p. 150, footnote 50. 56 Letter from Orville Harden to D. A. Shepard, December 16, 1946. No mention was made in the letter about the oil to be lifted by tanker in the Persian Gulf. It maybe presumed that this small part of the total purchase was destined for distribution in the Far East by Jersey Standard's affiliate, Standard-Vacuum. 59 "Second draft" of the crude-oil contract, undated. 5e Cable from T. Monaghan to E. Johnson, March 4, 1947. This sensitiveness to the inclusion of areas oast of Suez reappeared in the supplementary agreement of April 5, 1949; see below, p. 157. 55 These were included because Jersey Standard thought it was necessary that they go in. Memorandum attached to letter from T. Monaghan to J. Addison (Anglo-Iranian), April 30, 1947. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 .official: 80 "I sai.c .because of its be to reduce the tr total business in .remaining count appears to have of the contract, of the loss of pa Standard was nt that in the event of a market being lost to us, say ing nationalized, I thought the fairest plan would be kings under the contract in proportion to what our such market represented to our total business in the ries of Europe and North Africa." This intention been carried out in the "Force Majeure" provisions for the, effect of these provisions is that in the event rt or all of any markets, the oil purchased by Jersey t to be diverted to any market outside the "reference area," but rath r the amount of oil deliverable under the contract would be reduced. Socony-Anglo Iranian first purchase agreement.-The Socony- Vacuum Oil Co. Inc., signed a sale of oil agreement, dated September 25, 1947,11 substantially the same as that signed on the same day by Jersey Standard and Anglo-Iranian. This agreement, known amolag the parties as he first purchase agreement, differed from the one ,previously described only in the definition of the "reference area." The total quantity of oil 0 be purchased by Socony over the 20-year period was 26,6 0,000 long tins (200,000,000 barrels). During the 'first 10 years of he contract, Socony was to take delivery of 10,000,000 barrels annuall (28,000 barrels daily). The balance of the oil (10,000,000 barrels) was to be taken during the last 10 years in quantities to be specified by the same procedure as that provided in the contract between Jersey Standard and Anglo-Iranian.82 . Socony's "reference area" differed from that of Jersey Standard only by the inclusion of "the countries bordering on the eastern Mediterranean (including any islands within or adjacent to this Socony-Anglo- raniam second purchase agreement.-Sometime during the summer of H47,11 Socony and Anglo-Iranian agreed that a second agreement for the sale of oil would be arranged between them under substantially the same terms as the contracts that were then in the final stages of n igotiation. Accordingly, on March 1, 1948, the two companies enter ,,O into an agreement, known as the second purchase agreement, whe eby Anglo-Iranian agreed to sell to Socony over a 20-year period 0,000,000 long tons (300,000,000 barrels) of crude oil. Over the first 10 years of the contract, Socony was to accept deliveries into the pipelin 64 at the rate of 15,000,000 barrels annually, i. e., at the rate of 42,000 barrels daily. The balance of the oil (150,000,000 barrels) was to e delivered during the last 10 years of the contract in annual quantities nominated by Socony.86 This contract was to go into effect and elivery of the oil to commence, as in the previous 66 Letter from Orville ardon to D. A. Shepard, December 16, 1.946. 6i This is the date given on the contract. Actually, however, the definition of the "reference area" st.ppears to have been agreed on and the contract signed at a somewhat later date. Letter from C. L. Harding to B. R. Jackson, Octob r 15, 1947. 62 Sea p. 148, footnote 3 . 63 On September 5, 194 , Socony made a formal request that capacity be reserved for it in Middle East Pipelines Ltd., to move he additional oil it expected toacquire under this second. contract. Memorandum from T. F. Monaghan to B. B. Howard, September 6, 1947. 64 However Socony co Id elect to take 5 percent of the annual quantities at Persian Gulf ports, a provision included in ail three sale-of-oil contracts. 63 As in the Jersey Standard contract, the quantities nominated for any two successive years could not vary greatly. Socony cold terminate the contract, after giving a 6-year notice, at the end of the tenth or fifteenth year. t Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 contracts, with the beginning of operations of the Mediterranean pipeline.66 With regard to the markets for the crude oil purchased under this second contract, the intention of Socony and Anglo-Iranian was to direct the oil principally to the United States. The following appears in the contract: It is, however, buyer's (Socony's)) intention in entering the agreement that the oil receivable hereunder should be utilized to supplement buyer's available supplies for importation into the United States. ? This oil was not to enter the reference area stated in the first purchase contract, since,the force majeure article in which the above sentence appears, was designed "to keep United States separate from [the] other reference area." 67 Nevertheless, the contract appears to give Socony some latitude in disposing of the oil, since the above language would permit, and other provisions of the contract make provision for, the export of products refined from this oil to foreign m.arkets.118 The second purchase agreement thus incorporates the same general principles as those in the Jersey Standard and first purchase agree- ments, differing from the two earlier agreements only in minor details. Thus the oil in all three cases is to be supplied at the option of Angle Iranian from its Kuwait or Iranian fields, and is to be directed to speci- fied markets. The contracts are all contingent upon the building of the Mediterranean pipeline and are to be in effect for 20 years. All three contracts provide for cost-plus pricing principles. In each contract substantially identical provisions are inserted relating to cost accounting, auditing, and the obligation of Anglo-Iranian to supply "any and all information" which Socony or Standard might "reasonably" request relating to these matters. In short, except for ae The price to be paid for this oil was determined by a cost-plus principle that varied somewhat from the formula in the earlier contracts in that it incorporated a profit-sharing element. The "cost" element in this formula was the cost per ton determined in accordance with the procedure set forth in the Jersey Standard contract. The "plus" or "differential" element in the formula was one-third of the difference between the total average cost per ton of the oil delivered I. o. b. tankship at the Mediterranean terminal of the pipeline and the "average open market value" per ton of oil at that point. Since this "value" corresponded to the world market price as a plied in eastern Mediterranean ports, this was, in effect, a plan for sharing the profits on the crude oil-one-third of the profit per ton, i. e. the differential, being payable by Socony to Angle- Iranian, and two-thirds of the profit being retained Socony. Although Anglo-Iranian got only one-third of the profit per ton, it is probable that this formula gave Anglo-Tranian a better return than under the two earlier contracts. This is suggested by the statement of Angle-Iranian that "they have no present contracts other than Jersey and Socony which are more favorable and have no present intention of making more favorable contracts." (For this reason, Anglo-Iran(an refused to grant Socony a "most-favored-nation clause", I. e., an agreement such as that in the Jersey contract guaranteeing to extend to Socony lower prices granted to any other buyer and also because such a clause "does not apply to profit-sharing arrangements".) Cable from Harding to Sheets, October 7, 1947. The "differential," however, was free to fluctuate only within maximum and minimum figures which wore. stated in the contract. The minimum figure put a floor under Anglo-Iranian's profit per ton and the maxi- mum figure put a ceiling on the amount that,Socony would have to pay to Anglo-Iranian per ton as profit. Thus the total price per ton paid by Socony under this contract was more subject to variation than the prices under the two earlier contracts, since both elements of the cost-plus formula were subject to fluctuation. A7 Cable from Harding to Sheets, October 7, 1947. ee It is not clear just how broad this latitude was intended to be. The force majeure article of the contract indicates that products refined from this oil might be sold in foreign markets and even that some crude of might be refined in foreign areas, the latter being regarded fls improbable, however. It is provided that, in the event force majeure makes it impractical to import the oil into the United States, the quantities taken annually during the period such force is in operation will be reduced "appropriately." However, in the event force majeuro makes it impractical to,deliver the products refined from the oil in a foreign market, the oil is to be utilized in the United States. The possibility of the oil or its products being utilized in foreign markets is also provided for in the terms of payment, the oil to be paid for in dollars when de- livered to the United States, to countries having currency freely convertible into dollars, or to countries which will allot dollars for the purchase of the oil, and to be paid for in sterling in all other cases. The parties primarily intended that this oil be paid for in dollars, unlike the oil deliverable under the first pur- chase agreement which was to be paid for in sterling, and agreed that oil delivered under the first purchase agreement and sold in any such "dollar" areas would be substituted for any oil delivered under the second purchase agreement and sold in "sterling" areas. Letter from C. L. Harding to B. H. Jackson, October 17, 1947. Taking all these provisions into consideration, the primary intention of the parties seemed to be to restrict the market for oil deliverable under the second purchase agreement to the United States and possibly other "dollar" marketing areas. The marketing areas are not so specifically delimited, however, as in the Jersey Standard and first purchase contracts. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 HE INTERNATIONAL PETROLEUM CARTEL some differences in details or in wording, the three agreements are substantially the same.f9 Middle East Ppelines, Ltd.-In the first discussions between Jersey Standard and A glo-Iranian regarding a long-term contract for the sale of crude oil, it was agreed that this contract would be contingent upon the "commissioning" of a jointly owned pipeline from the vicinity of the 'ersian Gulf to the Mediterranean. This pipeline project, therefore, was conceived of as an integral. part of the total bargain between the parties. Accordingly, the three parties-Anglo- Iranian, Jersey Standard, and Socony-negotiated a pipeline agree- merit, signed o March 23, 1948, which set forth their detailed agreements on he size, financing, and operation of the proposed pipeline. Altho gh construction of the pipeline has been repeatedly delayed and is now postponed for several years at least,70 a review of the provision of this agreement throws additional light on the close association of the interests of the three parties that was con- templated. under the contracts for the sale of oil. The three par ies created a joint enterprise, Middle East Pipelines, Ltd. (MEPL), to finance, construct, and operate the pipeline, the shares of owners ip being: Anglo-Iranian, 60.9 percent; Jersey Stand- ard, 24.7 percent; and Socony, 14.4 percent." It was agreed that "none of the shares in the capital of the pipeline company" held by the three share olding companies could be "sold, transferred, hy- pothecated, or o herwise disposed of," except to a subsidiary or to a successor company, during the life of the agreement. However, should any of the crude-oil supply contracts be terminated," Anglo- Iranian was giv n the right to acquire the shares of the company terminating a contract by paying in sterling "the fair value" of the shares or a price equal to that of any bona fide offer of a third party. The capacity of the proposed pipeline was fixed at 535,000 barrels daily, each of the owning parties to have the right to utilize the line, for its own requirements or on behalf of others, in the proportion represented by heir share ownership in MEPL. This meant that there was nos rplus capacity available to Jersey Standard and Socony.73 The capacity available to Anglo-Iranian-326,000 barrels daily- was considerably in excess of its projected requirements, which Anglo- Iranian had estimated would average 210,000 barrels daily in 1952 e2 Socony entered into wo other agreements with Anglo-Iranian in the spring of 1948. One of these agree- ments was of a short-ter nature, providing for the purchase from Anglo-Iranian by Socony of 6,500 barrels of crude oil daily from June 15, 1948, to the end of the year. The other agreement, described variously as "interim purchase agreement" and the "interim crude supply contract," became effective on January 1, 1049, and is to "expire on the day that contract No. 2 [the second purchase agreements becomes operative." The quantity of oil to be urchased and the terms and conditions of sale under this 3-year agreement are not known to the Commission. Socony'a imports from be Kuwait-Iran area into the United States in 1.949- 50 were apparently made under this contract. (Effects o Foreign Oil Imports on Independent Domestic Producers, hearings before the Select Committee on Small Business, Ifouso of Representatives, 81st Cong., 1st sees., pursuant to H. Res. 22, pt. I f, 1949, p. 504.) Theo imports totaled about 7,440,000 barrels in 1949, and were estimated at 10,780,000 barrels in 1050. (Effects of Foreign Oil Imports on Independent Domestic Producers, a report, op. cit., p. 21.) Jersey Standard also imported oil from the Kuwait-Iran area in 1948 and the first 7 months of 1949, but it is not known undo what arrangements the oil was purchased. Its imports in 1948 were about 7,300,000 'barrels, and in 1949 about 5,250,000 barrels. 70 See pp. 158-160. 71 A two-thirds vote o the directors of shareholders was required to pass any resolution, i. e., Angle- Iranian could not carry a y resolution without the support of one of the American companies, but had a veto in that no action could b carried without its approval. 72 See p. 148. 72 This followed from tl o fact that their share of the capacity of the line was roughly equivalent to the daily volumes of oil, that they were committed to take under the crude oil supply contracts, plus allowances for a 10-percent variation ab ve average requirements and for contingencies. The pipeline capacity allotted to and the contract require ents for Jersey Standard wore in each case 132,000 barrels daily, and for Socony, 77,000 barrels daily. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 155 (the expected first year of operation of the pipeline), 250,000 barrels daily in 1960, and 275,000 barrels daily in 1965.74 While not stated in the agreement, it is apparent that Anglo-Iranian's excess capacity was to be allotted to Gulf Oil Corp. and to Royal Dutch-Shell, pre- sumably to move Kuwait oil. It was anticipated that Anglo-Iranian would come to a separate agreement with Gulf and Shell with regard to the amount of capacity that would be allotted to them, their share in financing Anglo-Iranian's share of the pipeline, and so on.70 Thus, although the pipeline agreement provides for only three shareholders in the pipeline company, it was anticipated that five international oil companies, controlling a large share of Middle East oil, would share in the utilization of the capacity of the pipeline. .It was agreed that the pipeline project would be financed by the three oil companies in proportion to their stock ownership, each party providing its due share of the dollars and sterling that would be required.78 To solve the problem of the companies in providing the currencies required, reciprocal loan agreements were signed to- gether with the pipeline ab eement, whereby the American com- panies agreed to lend dollars to Anglo-Iranian to supply part of their anticipated needs, and Anglo-Iranian agreed to lend equivalent amounts in sterling to the American companies. Those loans were to be called by the parties and re-lent to MEPL to meet MEPL's money requirements from time to time. The loans were to be repaid during the 10 years following the commissioning of the pipeline or January 1, 1955, whichever was earlier. On its part, MEPL was to repay its loans from the parent companies "as soon as practicable" and in any event within 15 years from the date on which crude oil would be first delivered through the pipeline. The loans were further safe- guarded by a provision that, as permitted by English income-tax laws, the "initial allowances", I. e., all capital costs incurred before the date of commissioning of the pipeline, would be "depreciated" or amortized over the first 10 years of operation.77 The recitation of the provisions of this or of the related crude oil supply contracts, however, does not reveal the breadth and generality of the considerations that influenced the negotiations and shaped the final agreements. For example, one of the many -issues that was discussed at considerable length was that of the "nationality" of the pipeline company.78 The importance of the pipeline project arises from the fact that it was conceived of as an integral part of the agreements for the sale of crude oil. The relations between the participating companies in. all these agreements were well typified by the comment of an official of 74 Memorandum from C. L. Lockett to H. W. Page, May 0, 1947. 75 The question of the amount of capacity to be offered to Gulf and Shell and their participation in the financing of the pipeline occurred frequently in the negotiations as to the size of the pipeline, Anglo-Iranian appearing as an advocate of a large capacity line. The final solution of this problem, as above stated, was proposed by theAmerican companies and was reluctantly accepted by Anglo-Iranian. Cable from Mona- ghan to Howard, October 10,1947. It was anticipated that Anglo-Iranian's arrangementwith "outside ship- pers," i.. e:, Gi}lf and Shell, for disposition of their unused space "would probably be a reasonably long-term one." 76 The stated money requirements, including construction costs and working capital, were ?20,000,000 plus $100,000,000,1. e., the equivalent of $200,000,000. Soon after the agreement was concluded, MPPL officers prepared a "project budget," i. e., a budget for construction of the line, dated April 20, 1948, esti- mating the cost at $232,000,000. MEPL Management Report No. 11, October 4,.1948, p. 2. 77 Schedule to the pipe line agreement. This also protected the American companies in the event they elected to terminate the crude oil contracts at the end of the tenth or fifteenth year of the supply period; seep. 148. 7e This was an important issue because it affected the tax liabilities of the owners of the company, im- portant featuresof the control and operation of the pipeline, currency and procurement matters, and the problems of financing and disposing of the revenues of the company. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 156 THE INTERNATIONAL PETROLEUM CARTEL one of the companies made in the course of debate during the nego- tiations: I underlined to the Anglo-Iranian gentlemen that we were not endeavoring to make a "trade" in the generally accepted sense of the word, but were trying to find a basis on which partners could cooperate.79 Supplementary agreements.-It had been originally anticipated that the pipeline project would be completed by the end of 1951 so that the first full_ye r of operation of the pipeline and of the contracts for the sale of oil ould be 1952.80 Due to the slowness of negotiations for wayleavo conventions with Syria and Iraq, across which the pipe- line was to be built, and to expected delays in obtaining steel pipe, it soon became apparent that this target date could not be met.81 Accordingly, su plementary agreements to the three contracts for the, sale of oil and to the pipeline agreement were negotiated by the three parties and were signed on April 5, 1949. These supplementary agreements readjusted the rights and obligations of the three oil companies so. that, the appropriate safeguards to their respective interests being made, the crude oil contracts would become effective as of January 1, 1952, the purchased oil being lifted by Jersey Standard and Socony b tanker at Persian Gulf ports. The pipeline project in the supplementary agreements was reduced from a settled matter to a tentative ne, and due to the continued operation of the above- mentioned del ing factors, it was decided, in 1950, to postpone the project for at 1 ast 3 years.82 On the same day that the pipeline agreement was signed, March 23, 1948, an "agreement in principle with details to be worked out later" was reached between Jersey Standard and Anglo-Iranian which would permit ersey Standard "to take crude by tanker in lieu of pipeline, such eliveries to be applied against crude contract and to begin July 1, 1 1,51, and to continue until pipeline is completed and in operation." 83 This preliminary understanding was developed into a formal propo al by Jersey Standard, dated August 30, 1948, that was accepted as the basis of negotiations by Anglo-Iranian.S4 The principles of a reement set forth in this letter were substantially incorporated i the elaborate and complicated documents that were written to pros rve the rights and obligations of the parties that had been agreed upon in the earlier agreements. It was agreed that, even though the M ditcrranean pipeline were not constructed by that time, the "sup fly period"-the 20-yearperiod during which the crude oil contracts w to be in effect-would begin on January 1, 1952. The crude oil as to be delivered into tankships in the annual quanti- ties agreed upon in the basic contracts at Mashur, Iran, and was to be of the average utility of the total gross production, in Iran."' These tankship deliveries were to be suspended when the Mediterranean 70 Letter from R. H. criers to Leo D. Welch, February 18, 1948. ,0 MEPL, Managem nt Rept. No. 7, June 3, 1948, p. 6. 91 Idem. The slowncSqs of negotiations for wayleaves up to the sprine of 1948 was due in part to the fact that no direct approach to the Syrian or Iraq. Governments could be made until after the incorporation and registration of MEPL were completed and power of attorney could be given the negotiators. MEPL, Management Rcpt. N , 1, December 3, 1047. s2 See below, p. 158. &9 Cable from Orville Harden to Abrafran (F. W. Abrams), March 23, 1948. 64 While Socony apps ently did not submit a companion letter to this, its files show that it participated in its preparation and in t e negotiations that were had on the basis of this letter. " In the event that it of such quality could not be delivered at Mashur, it could be lifted at Abadan. It was anticipated tha the oil delivered at Mashur would be produced at the Agha Jahrf field in Iran. This oil was of average ranian quality and was produced in. sufficient quantities to meet contract require- ments. Cable from C Leman to D. A. Shepard, November 10, 1948. Production at the Agha Saint field was nearly 67 million ba rels in 1948 and more than 84 million barrels in 1949 (World Oil, July 15,1950, p. 203). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 157 pipeline was completed, and the provisions of the basic contracts would then come into effect. The price to be paid for this oil was to be determined in accordance with the procedure described in the basic contracts, that is, it included all the costs of producing and gathering the oil, including the costs of delivering it f. o. b. tankship at Persian Gulf ports, i. c., Mashur.88 With regard to this last price element, a new formula for its determina- tion was agreed upon for the oil purchased under Socony's second pur- chase agreement which preserved the principal that the "differential" should consist of one-third of the gross profit per ton, i. c., the differ- ence between total costs and world market prices.87 The provisions of the basic contracts relating to accounting, auditing, the furnishing of information about costs, and so on, were to apply under the supple- mental agreements without change. One of the features of the basic contracts was the definition of "reference areas," i. e., markets in which it was the stated intentions of Jersey Standard and Socony to sell the oil delivered through the pipeline. The contracts provided, however, that 5 percent of the annual quantities purchased could be lifted by tanker in the Persian Gulf; that provision presumably permitted the delivery of 5 percent of the oil in far-eastern markets. The intention of the parties in preparing the supplementary agreements was to preserve these market- ing arrangements,"' and to this end the following provision was included in each supplementary agreement-to the crude-oil contracts: If in any year of. the supply period during which f. o. b. tankship deliveries are made * * * more than 5 percent of the quantity deliverable in the year in question pursuant to the supply agreement is shipped by buyer [i. e., Jersey Standard or Socony] to destinations cast of Suez, then the price for each such cargo of such excess quantity shall be seller's [Anglo-Iranian's] established spot cargo price f. o. b. tankship for shipment to destinations east of Suez in effect at the Persian Gulf port at which the particular delivery was made at the time such delivery was made.?? The effect of this provision. is to penalize all oil, in excess of 5 percent of the quantities acquired annually under the contracts, which is shipped to destinations in the Middle East (except Turkey), all of Africa (except West Africa), India, and the Far East, and Australia and Oceania, and to direct up to 95 percent of the oil to the areas which Jersey Standard and Socony would "normally have supplied with such oil after transportation through, the pipeline, were the pipeline completed." 90 88 The Iranian royalty, however, in accordance with the terms of the basic contracts, could apply only to 50 percent of the oil purchased annually, the Kuwait royalty applying to all Iranian oil in excess of 50 per- cent. This provision had originally been inserted in the contracts to protect Jersey Standard and Socony against the contingency that the higher Iranian royalty would apply on more than 50 percent of their annual purchases.. The provision that the royalties would not exceed, in any event, that paid by IP C also applied under this contract. 87 The elements of this formula were necessarily rather arbitrary. The value clement in the formula- "the average open market value of oil f. o. b. tank ship Mediterranean terminal" was to be determined in accordance with the procedure proscribed in the second purchase agreement except that the "Mediterranean terminal" would be "assessed as for export delivery f. o. b. tankship Haifa, or Tripoli, or other representative oil-export terminal." The cost clement of the formula was to consist of the costs per ton of production, gathering and loading, and royalties, plus the difference between the cost per ton in sterling of transporting oil by tanker from Mashur to the United Kingdom and the corresponding cost per ton between Haifa to the United Kingdom. A "tanker freight differential" schedule was appended to the supplementary agreement showing how this last cost factor was to be determined. The difference between the "value" and the "cost" of the oil represented the "gross profit." One-third of this sum was the "differential" which was to bo paid to Anglo-Iranian, while two-thirds was retained by Socony. Maximum and minimum limits to the amount of this differential were included in the supplementary agreement. 88 Letter from Jersey Standard to Anglo-Iranian, August 30, 1948. 88 "Destinations east of Sues" was defined as meaning "destinations in the Eastern Hemisphere either (I) east of longitude 60? cast or (ii) both cast of longitude 16? east and south of latitude 30? 30' north." 90 Letter from Jersey Standard to Anglo-Iranian, August 30, 1948. The restrictive effect of this provision might be cited as evidence supplementary to that given inch. V, with regard to the Bahrein Petroleum Co.'s marketing problems prior to 1948, suggesting that marketing cartels were in operation in these areas oast of Suez. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 .158 T The other pr( contracts for tl designed to pro' project and to parties under a by Orville Hard visions in the agreements supplementary to the three o sale of crude oil and the pipeline agreement were ,ide a procedure for settling the future of the pipeline afeguard and preserve the rights and interests of the I contingencies. These provisions were summarized mn as follows: oil contract is not thus terminated, but Jersey terminates it at agreement terrnin tes.91 This summary equally applies to the Socony-Anglo-Iranian supple- mentary agreements as well. None of the supplementary agreements were intended, parties that the as promptly as Postponement The problems t continued, to ha were signed. T to be settled u were made for " 1951." This w the pipeline co the Mediterran wayleaves from obtain an accep postponement o 1951 to 1954. suspensive until tide that condit After protrac with Syria on Ji wayleave conve issue, as far as being the volu titularly anxiou Basrah Petrole terms of this co of the oil produ from the outset th( was in connection i to be against the creased Iraqui pro Thus, the negot cu.ssions of this 91 Executive committe 99 Provisions to this Cl 93 Letter from C. L. L 95 See p. 95. owever, to affect in any way the agi eem.ent of the would "proceed with the construction of the pipeline circumstances. permit." 92 at had led to the delays in getting MEPL under way ie problem of the procurement of steel did not appear til sometime near January 1950, when arrangements tool pipe production to begin in the third quarter of Id begin.93 The most important factor in delaying an pipeline, however, was the difficulty in obtaining Syria and Iraq; and, in fact, it was the failure to able wayleave convention from Iraq that led to the Thus, the present status of the pipeline project is 1954 or such later time as the parent companies de- ons are suitable for its implementation. red negotiations, a pipeline convention was signed ne 7, 1949. It proved to be impossible to make a Lion with Iraq, however, because MEPL was a side he Iraq Government was concerned, the main issue of domestic production of crude oil. Iraq was par- s to push the development of production by the in Co., Ltd., an affiliate of IPC, because under the ed.9b The situation, therefore, was that- only attraction the MEP project has seemed to have for them uction.. ations throughout consisted for the most part of dis- matter, the attitude of the Iraq negotiators being Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 159 colored with the "fear that their aspirations for Iraqui production are still being ignored in certain quarters." 98 The various proposals of the Iraq negotiators, therefore, were de- signed to achieve this one main purpose. They vigorously pressed a proposal that MEPL commit itself to reserve space for the transpor- tation of Basrah oil. The MEPL negotiators, however, were in- structed in the summer of 1948 that since IPC and its associated companies in Iraq were planning to develop broad-scale discussions with the Iraq Government in the near future, it was probable that a full understanding would be developed satisfying the Government's desires to see a "continued active development of the oil resources of Iraq." In these circumstances it was hoped that MEPL would not have to make a commitment to transport the oil of outsiders.97 While the negotiators held this matter in abeyance, it appears that the Iraq Government was not satisfied with the assurances given by IPC and was determined to press the point. The negotiations came to a halt after the following demands were made by the -Iraq Minister of Economics: Firstly, that a letter be written by Sir William Fraser (and no one else), safeguard- ing production of the IPC fields, Sir William, chairman of Anglo-Iranian, was specified because "every- one in Iraq believed that it was he and he alone who had the anal word with the (IPC) group." The second demand was that MEPL "would be requested to assume the role of a common carrier." This actually meant that MEPL was- to obligate itself to carry 8 million tons annually of Basrah oil,98 i. e., 165,000 barrels daily. Such a proposal was unacceptable to the parent companies of MEPL, since it would reserve nearly 30 percent of MEPL capacity for "outsiders." This would mean that each of them would have to surrender some part of their space for this purpose for an unknown period of time, since the Iraq negotiators had not mentioned any time limit.99 It will be recalled that the owners of MEPL-Anglo-Iranian,. Jersey Standard, and Socony-together owned 47.5 percent of Basrah Petroleum Co.' Hence they would have recovered only about half of the capacity they surrendered in this way to Basrah. Further- more, Jcrrey Standard and Socony were committed to long-term -con tracts for the purchase of oil with Anglo-Iranian which would require their full share of MEPL capacity.2 The result of these proposals was to further delay the date of the beginning of the construction of MEPL. At a meeting of the board of directors of MEPL on June 1, 1949, a decision had already been made that "the implementation of our construction program be deferred for the present and reviewed at the next board meeting." a At a meeting on October 19, 1949, it was resolved "that the project should be delayed for a minimum of one (1) year, except as to continuance of go Letter from L. C. Rice to C. L. Lockett, July 2, 1948. 97 Letter from W. L. Butte to C. L. Lockett, July 20, 1948. - 98 Letter from D. R. deL. Macpherson to C. Saunders, February 24, 1950. w Letter from C. L. Lockett to B. B. Howard, March 17, 1950. 1 Soo chart 20, following p. 84. 2 The situation was made more difficult by an additional Iraq proposal that "MEPL should transport at cost price the share of oil in kind allotted to the Government under the Basrah Convention," i. e., 20 per- cent of Basrah production. Since this oil could not be exported or sold for export by the Iraq Government but could be resold at the "well head market value" to the Basrah company, it was supposed that the pur- pose of this proposal was to enhance this value of the royalty oil as agaipst that of the remaining Basrah_ prodduucti n. Letter me H. . W. Page to F. 0. Canfield, March 27, 1950. Minutes of the Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 way leave negot an informal meet ft reed to "discc MggEPL for at le the end of 1954 is INTERNATIONAL PETROLEUM CARTEL ations in Iraq." 4 As a result of the Iraq proposals, ing of MEPL was held on April 4, 1950, where it was ntinue negotiations indefinitely" and to "postpone tst 3 years," i. e., construction would commence at istead of 1951, as had been planned." The contracts sent still anothe tional oil comp Middle East, wh on production, lit to joint owners chapter have pr duction and mar] oil production in market in the ha prices and mark Middle East, joi effect, served to interests of the marketing of won The contracts a long period of control over 11/4 delivered over Under the Angl Iranian agreed billion barrels o Thus these contr and Iran betwee mutual and con many years. or the sale of crude oil discussed in this chapter repro- intermingling of the interests of the major interna- ?nies in Middle East oil. Joint ownerships in the ch have resulted in extensive controls and restrictions ve been described in chapters IV and V. In addition ips, the crude-oil supply contracts described in this vided another basis for joint control over oil pro- ceting. These contracts have resulted in a sharing of Kuwait and Iran and a channeling of the oil to the ds of firms able and interested in maintaining world ts. These two instruments of control utilized in the it ownership and crude-oil supply contracts, have, in complement each other in protecting the mutual international oil companies in the production and ld oil. rovide for the sharing of large quantities of oil over Lime.. Under the Gulf-Shell contract, Shell acquired billion barrels of Kuwait oil owned by Gulf to be n open-end contract period of at least 22 years. -Iranian-Jersey Standard-Socony contracts, Anglo- o turn over to the two American companies 1.3 Kuwait-Iran oil over a 20-year contract period.' cts result in the division of the production of Kuwait the buyers and the sellers and, in effect, give them inuing interests in that production over a period of 4 Ibid. 6 Letter by C. Saunders to C. L. Lockett, April 5,1950. Despite these decisions, however, the negotiations apparently were not im ediately broken off, for further negotiations were held with Iraq representatives in London in July 1950. Letter from H. W. Page to B. B. IIoward, July 19, 1950. About this time the basis of an agreement with the I ?aq Government on an MEPL convention was being laid in IPC group discussions, where a representative o Jersey Standard was proposing that Basrah Petroleum Co. should agree to produce a minimum of 2, 00t000 tons of crude annually and that, on this basis, there was a "chance of satis- fying the Iraq Govornme t that by 1954 total production from Iraq sources will be up to about 26,000,000 tons per year (540,000 barrels per day) and therefore, comparable with production from the other large Middle East sources." Letter from II. W. Page to F. 0. Canfield, March 27, 1950. In this letter Mr. Page also said: "Naturally the Ira Government would like to have maximum output of the Kirkuk pipeline plus 8 000,000 barrels from Base h. This cannot be guaranteed by Iii' C at present. * " * I agree with de Metz that we must actually pr duco minimum concession requirements from Basrah (and probablysettle on 2,500,000 tons per year as minimum) if we are to get anywhere with the negotiations." These comments were followed by the rem rk quoted above. ([t is difficult to tell whether he is here referring to MEPL or Due to the construction of the IPC 30-inch pipeline, such production would be possible if MEPL agreed to carry 2,500,000 tons annually of Basrah oil. Such a proposal was then under consideration by the repre- sentatives of the three co panics which owned MEPL. Letter from IT. W. Page to B. B. Howard, July 19, 1950. This last matter would appear to he cleared up by the decision of IPC to build a pipeline from the Zubair oil field in Basrah to Fao on the Persian Gulf. See map following p. 60. 6 Angle-Iranian thus acquired, through its contracts with Jersey Standard and Socony and through its 1933 agreement with Gulf a powerful voice in determining the volume of production in Kuwait and Iran. Under its joint-ownershi agreement with Gulf, Anglo-Iranian, with Gulf's consent, could substitute oil from Iran or Iraq for the Kuwait oil ordered by Gulf for itself or for Shell. Under the three contracts with Jersey Standard and Saco y, Anglo-Iranian could supply the amounts contracted for from Kuwait or Iran at its option. Thus Ang] -Iranian could restrict or expand the production of Kuwait or Iran to meet the combined requirements o the five oil companies, I. e., Anglo-Iranian, Gulf, Shell, Jersey Standard, and Socony, in accordance with such "political" or other considerations as it judged to be important. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 161 These mutual -interests are tvnified by the unusual terms as to; price that were agreed upon by the parties. Under the Gulf-Shell contract, no price is stated, but elaborate provisions were written providing for the division of profits between the two parties. The profits are determined and shared for the entire integrated process of producing, transporting, refining, and marketing for a minimum period of 22 years. Thus, to all intents and purposes, Gulf and Shell are joined together in a long-term integrated oil enterprise. A cost-plus pricing principle was adopted for the three contracts for the purchase of oil owned by Anglo-Iranian. The price under the Jersey Standard and Socony first purchase agreements was fixed at the actual cost of production plus a fixed sum of money per ton, and under the Socony second purchase agreement, at actual cost plus. one-third of the gross profit per ton realized on the crude oil. Such a pricing principle gives the purchaser a direct and strong interest in the costs of the seller, since the purchaser will benefit from any, economies achieved by the seller in his operations. This interest, was evidenced by the extensive provisions in the contracts setting forth the method for determining and allocating costs and for the. delivery by Anglo-Iranian of "any and all information" relating to. the cost elements entering into the price which Jersey Standard and Socony might "reasonably" request. The significance of the contracts as instruments for the control of Middle East oil is further evidenced by the provisions 'restricting and controlling the marketing of the oil. Under its 1933 joint-ownership agreement with Anglo-Iranian, Gulf was bound not to disturb Anglo- Iranian's marketing position at any time or place, a restriction which had particularly restrained Gulf from entering markets "east of Suez." The terms and nature of the Gulf-Shell contract of 1947, however, imposed new restrictions on Gulf which largely superseded the re- strictions of the 1933 agreement:' Thus if Gulf should use Kuwait oil to increase its business in any Eastern Hemisphere market at the' expense of Shell, it would be penalized by an equivalent reduction of its deliveries to Shell. Similarly, Gulf would share, under the profit- sharing principle, in the losses occasioned by any price cutting in any Eastern Hemisphere market. Such price cutting would be expected to result if Gulf, in the utilization of Kuwait or any other oil, tried to invade any new markets or to increase its share of business in any established market. The Gulf-Shell contract thus appears to limit Gulf to those markets in which it holds a historic marketing position but to allow it, through the profit-sharing arrangement, to participate in the marketing of oil in those territories in which Shell holds a marketing position. The extensive joint marketing arrangements of Shell and Anglo-Iranian assured the integrity of the marketing posi- tions of both. Thus the effect of these arrangements is to carry forward into the postwar period, the "as is" principle, to be described' in chapters VIII and IX, preserving the historic position of partici- pants in each market, The areas in which Jersey Standard and Socony could dispose of the large quantities of oil acquired from Anglo-Iranian were similarly specified in the contracts. Not more than 5 percent of this oil could be distributed "east of Suez," a provision penalizing any excess ship- The Anglo-Iranian-Gulf agreement of 1933 was terminated on November 30, 1951. Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 m ents to this are ments to go int( Socony, under tl oil in Europe second purchase States. In shor upon the market Thus the crud quantities of oil also because of constitute effecti As such, they c( over Middle Ea; described in the instruments of companies, contr, together into a :n INTERNATIONAL PETROLEUM CARTEL a being inserted in each of the supplementary agree- effect on January l,'1952. Jersey Standard and e first purchase agreement, were to distribute their nd north and west Africa.' Socony, under the agreement, was. to import its oil into the. United under these agreements, the three parties agreed into which this oil was to flow.' '0 I il supply contracts, not only because of the large nd the long periods of time that were specified, but the unusual provisions as to price and marketing, ve instruments for the control of Middle East oil, )mplement and increase the degree of joint control ;t oil resulting from the pattern of joint ownership preceding chapters. The operation of these two ontrol, in effect, brings the seven international oil (oiling practically all of the Middle East oil resources, utual community of interest. 9 Socony was also perm tted to distribute its oil in "the countries bordering on the eastern Mediterranean (including any islands within or adjacent to these areas)." C Insofar as Jersey Standard was concerned, it bad an established marketing position in each market within the permitted arcs. Socony's business was not so extensive, however, in Europe as that of Jersey Standard, and the agree ent does not restrict Socony to areas in which it already had a marketing position. For details on marketing positions before world war II, see ch. IX. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CHAPTER VII JOINT CONTROL THROUGH PURCHASE AND SALE OF OIL IN VENEZUELA The use of crude-oil supply contracts to control the production of oil had effectively bound together the major oil interests in Venezuela a decade before this instrument of control was adopted in the Middle East. In Venezuela, however, such contracts were of a far more com- prehensive nature, welding the interests of the parties together in an explicit joint enterprise lasting for the life of the concessions owned by the joint enterprise. Under this agreement the price paid by the pur- chasers, except for the sum initially paid as a consideration for the agreement, was merely the actual costs of production of the oil. The contracts, therefore, were again devices for sharing the ownership of the oil. Another important feature of the contracts was certain con- trols that were laid on production. The Venezuelan petroleum industry has been an important factor in world petroleum markets for about 25 years. Throughout this quarter of a century of almost uninterrupted growth, three great international petroleum companies-Royal Dutch-Shell, Standard Oil Co. (New Jersey), and Gulf Oil Corp.-have been closely associated in the exploitation of this rich Venezuelan resource. These three companies have jointly maintained a pervasive control and influence over the Venezuelan industry in all its aspects, from exploration and development to the marketing of the end products. During the period before World War II, practically all of Vene- zuelan petroleum had been produced in -western Venezuela.' How- ever, in the mid-1930's, a mounting tide of discoveries indicated that a resource of unpredictable magnitude and richness existed in ,eastern Venezuela. While practically all of these newly discovered oil fields were held by subsidiaries of Standard (New Jersey) and Gulf, it was evident that the impact of the new production upon world petroleum markets would concern all of the international oil companies, particularly Standard and Shell. Accordingly, the vari- ous subsidiaries of Standard, Shell, and Gulf entered into agreements designed to attain the following objectives: 1. The virtual elimination of Gulf as an independent factor in Venezuela. This was accomplished by the transformation of the Mene Grande Oil Co., Gulf's operating Venezuela, into a joint enterprise, owned and controlled by Gulf, Shell, and Standard (New Jersey), and by the attendant surrender by Gulf of valuable. management prerogatives. Two so-called sale of oil agreements were the principal medium for this transformation. I Specifically, up to October 1, 1038, nearly 03 percent of total accumulated production. More than 73 percent of accumulated production, as of this date, had come from the east shore of Lake Maracaibo alone. The Oil Weekly, November 7, 1938, pp. 16-27; December X9,1938, pp. 18-26. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 2. The contro and regulation of petroleum production of all Vene- zuela, eastern arid western alike, so that Venezuelan output would, at all times, actor with the current world market situation as seen by the producing c meanies. A production quota system was set up to achieve this goal. 3. The controand regulation of the development of the newly dis- covered eastern enezuelan oil fields. This was accomplished partly by the re-creation of Mene Grande as a joint enterprise, partly by the production quot system, and partly by the .merging of a major por- tion of the eas ern Venezuelan holdings of Mono Grande and of Standard (New Jersey) into a joint enterprise. BACKGROUND OF THE AGREEMENTS The agreements that are to be described were designed to meet a specific situation and to gain specific ends. They were signed in December 1937, a year which is thus of critical importance in the analysis of the Venezuelan oil industry. The following discussion presents backgr and information necessary to an understanding of the purposes of he parties to these agreements. Identification list of companies The principal operating companies in Venezuela in 1937, with ,identi- fying abbreviate names, were as follows: (a) Gulf O1 Corp. subsidiary: Mene Grande Oil Co., C. A. (Men g). (b) Standa d Oil Co. (New Jersey) subsidiaries: La, go Petroleum Co. (Lago). Standard Oil Co. of Venezuela (SOV). Cr ole Petroleum Co. (Creole). (c) Royal utch-Shell group subsidiaries: Venezuelan Oil Concessions, Ltd. (Shell.). Caribbean Petroleum Co., Ltd. (Shell). Colon Development Co., Ltd. (Shell). In addition, t o companies whose principal activities were in other countries entered into the Venezuelan picture by virtue of partici- pation in the ag eements. These were, (d) Standard Oil Co. (New Jersey) subsidiary: International (e) Royal Olie The properti subsidiary of tl tholess, at the t 1937, Meneg al control over its by a sharing of as a joint enter further. During its on business of. pro cum Co., Ltd. (International). utch-Sholl group subsidiary: N. V. Nederlandsche s and business of these companies at the time the concluded in December 1937 were as follows: Oil Co. (Meneg).-Meneg has been a 1.00-percent e Gulf Oil Corp. throughout its existence.' Never- e the various agreements were signed in December eady represented a tangle of corporate interests, its roperties and property interests having been diluted ights and benefits with others. With its re-creation ire existence, Meneg has been engaged solely in the cing crude oil, or acquiring it through share inter- Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL ests, and transporting that oil by pipeline or lake steamer to shipping points on the Venezuelan coast. As of December 1, 1937, Meneg owned varying kinds of interests in exploitation concessions in Venezuela totaling about 4,300,000 acres in extent.3 Only a small part of this, comprising about 109,000 acres, was in western Venezuela,' chiefly in the oil-rich Lake Mara- caibo area. Other corporations owned royalty and other interests in at least 40 percent of this property." Until 1938, practically all of Meneg's production came from these prolific acres. In eastern Venezuela, Meneg owned or had interests in about * 4,191,000 acres of exploitation concessions.' These properties fell into three general classes: (a) Meneg held title to about 1,112,000 acres of this on its own account, (b) it held title to about 1,148,000 acres for the joint account and at the joint expense of itself and the Standard Oil Co. of Venezuela (SOV), and (c) it held a 50-per- cent interest in about 1,931,000 acres, title to which was held by SOV similarly for joint account.' Besides these exploitation con- cessions and interests, Gulf owned on its own account about 50,000 acres of exploration concessions and held joint interests with SOV in about 415,700 acres of exploration concessions. All of the joint properties of Meneg and SOV were brought into the Meneg-SOV agreement as described below. In December 1937 Meneg had a total production of 70,000 barrels of crude oil daily, all but token amounts being produced on its Lake Maracaibo properties. Its properties and interests in eastern Vene- zuela, moreover, promised to be of great value. Standard Oil Co. of Venezuela (SOV), Lago Petroleum Co, (Lago), and Creole Petroleum Co. (Creole).-These three companies were the principal subsidiaries of Standard (New Jersey) in Venezuela in December 1937. Standard Oil Co. of Venezuela has already been mentioned as the principal partner with Meneg in the ownership and operation of various concessions in eastern Venezuela. SOV also operated concessions on its own account in eastern Venezuela and a comparatively small acreage in western Venezuela. Lago Petroleum Co., operating entirely in the rich oil fields of western Venezuela, produced nearly twice the volume of crude oil produced by SOV. Lago also operated a small refinery and marketing organization for the Venezuelan trade. Both Lago and SOV transported their crude oil production by pipeline and lake steamer to the Venezuelan coast, whence it was shipped to the large refinery at Aruba or to other refineries of Standard (New Jersey) in the United States and Europe. Creole Petroleum Co. acted, in 1.937, chiefly as a holding company subsidiary of Standard (New Jersey). It controlled 100 percent of 3 Mono Grande Oil Co., Identification List of Oil Concessions in Venezuela. 4 Royalty interests were and are still held in some, of these properties by Venezuelan Petroleum Co. (sub-, sidiary of Sinclair Corp.) and by the Maracaibo Oil Exploration Co. (See Moody's Industrials, 1937 and 1950.) Gulf's prospectus, dated June 7, 1943, pp. 29-30, reveals that the Creole Petroleum Co. (Jersey Standard) hold a royalty interest in seine properties, and had a joint (50 percent) interest in the crude oil produced on other properties of Meneg, paying half the costs incurred. In 1937 these three companies alone held interests in 40 50 percent of Meneg's properties in western Venezuela. 5 Identification list of oil concessions in Venezuela. a in addition to this, S O V in December 1937, was in the process of transferring about 17,000 acres of oxploita- tion concessions to the joint account. Ibid. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 166 THE INTERNATIONAL PETROLEUM CARTEL SOV and owned the royalty and joint interests in Meneg's Lake Maracaibo properties mentioned above.8 In 1943, all of Standard (New Jersey) properties and interests in Venezuela, except certain interests in M neg, 9 were consolidated into Creole, which became Standard's sol operating subsidiary in that country. Standard's ownership of Creole increased from 74.62 percent in 1937 to 93.12 percent in 1949. Venezuelan Oil Concessions, Ltd., Caribbean Petroleum Co., and Colon Development Co., Ltd. (Shell).--'These three subsidiaries to of the Royal Dutc -Shell group operated in western Venezuela, and were principally in he business of producing crude oil and transporting it to shipping p ints. Since 1938, certain Western Hemisphere assets of the Shell gro p, including its interests in Meneg, have been trans- ferred or conso idated into the Caribbean Petroleum Co., the name of this compa y being changed in 1948 to the Shell Caribbean Petroleum Co." The International Petroleum Co. (International) .-International was a fully integrate d?petroleum enterprise at the time the agreements were concluded. It as engaged in all phases of the petroleum business from crude oil production to the marketing of finished petroleum prod- ucts. It opera ed in Colombia directly and in Peru through the me- dium of the Tropical Oil Co., a 99.9-percent owned subsidiary.12 It became interes ed in Venezuelan crude oil by virtue of its purchase agreement with Meneg, which is described below. The Imperial Oil Co., Ltd. (Canada), owned 60.09 percent of International's com- mon stock in 1937 and an unstated but substantial amount of the preferred stock, which elected two-thirds of the board of directors." Standard Oil Co. (New Jersey), in turn, owned 69.79 percent of Im- perial's commo stock in 1937. In 1948 Imperial sold all its holdings of International stock. Standard emerged from this and other re- lated transactions with 83.58 percent ownership of International. The N. V. NeIderlandsche Olie Maatchappij (NOM).-NOM did not own or operate Ipetroleum concessions in South America, but rather, was a refining and transportation subsidiary of the Royal Dutch group.14 The NH and the interests it had acquired in Meneg under the agreements described below were consolidated into the Shell Caribbean Petroleum Co. in 1948. .The Venezuel n petroleum industry in l937.-Venezuelan oil fields yielded about 9.1 percent of the total world production of petroleum in 1937.15 Practically all of this production was in excess of domestic requirements and hence was exported for ultimate sale in world B See footnote 2, p. 165 e These interests in M neg were held by International under the agreements described in these pages. 14 Royal Dutch-Shell, n 1950, owned 100 percent of Venezuelan Oil Concessions, Ltd., and of Caribbean Petroleum Co., and mar than 90 percent of the ordinary (voting) stock of Colon Development Co., Ltd. u Included in its asset is Shell's (15.44 percent interest in the Shell Oil Co. (United States). Shell's transfer of its interests in Meneg to Caribbean was consented to by Meneg in a letter dated October 15, 1948. This consent was necessary u der the Meneg-International-NOM agreement of January 28, 1939. See below, p. 179. 12 In 1937 International produced 100 percent of Colombian and 83 percent of Peruvian crude oil produc- tion. The Oil Weekly , February 21, 1938, p. 160, and April 11, 1938, p. 65. International's relative position in 1949 was 80.8 percent t Peru and 42.3 percent in Colombia, where new oil fields, controlled by Shell, and by the Texas Co. and Scony-Vacuum jointly, have come into production. World Oil, July 15, 1950, pp. 124 and 139. 13 Moody's Industrials, 1941 gave this ownership as 09.99 percent. 14 It operated in the, Dutch West Indies. 13 World Oil, July 15, 1950, pp. 44-46. This was measurably greater than the combined yields of the important producing countries of the Middle and Far East. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 167 petroleum markets. Thus, 'Venezuelan oil probably accounted for about 40 percent of world trade in petroleum in 1937.18 In 1937 and, in fact, throughout the period between World War I and World War II, more than 99 percent of the production of this .country was owned by the throe companies that dominated the Vene- zuelan industry.l7 During the late 1930's, subsidiaries of Standard Oil Co. (Now Jersey) produced from 48 to 53 percent of Venezuelan production, Shell subsidiaries from 35 to 38 percent, and the Gulf subsidiary from 10 to 14 percent.18 In 1937 more than 73 percent of Venezuelan production came from the Lake Maracaibo region, and about 12 percent from other oil fields in western Venezuela. Practically all the remaining production came from a large oil field in eastern Venezuela.l9 For the most part, these ? fields produced heavy, low-gravity, low-value oils. Commercial pro- duction of the newly discovered light oils of eastern Venezuela had barely begun and could not be an important factor for several years. Western Venezuela.-The most important oil fields of Venezuela, the rich properties located on the eastern shore of Lake Maracaibo, were and are owned by subsidiaries of Shell, Jersey Standard, and Gulf 20- under a pattern of ownership that has lent itself to close cooperation among the three companies. These properties, under the pattern that had developed, were each divided into three roughly parallel strips, one owned .by each company.21 According to the an- nual reports of Venezuelan Oil Concessions, Ltd., Shell's subsidiary in these oil fields, the three companies had agreed upon a program of "offset development" in this area within agreed-upon "zones" or "areas open to development." In this way, it was said, "wasteful" practices were eliminated, and drilling was carried on under "condi- tions of sound well spacing." 22 The annual report for 1937 stated: Development of the fields of offset character in the Maracaibo Basin remained confined to zones agreed upon by the Lago Petroleum Corp., the Mene Grande Oil. Co., and this company 23 The annual report for 1938 stated: Close cooperation. was maintained locally with the Lago Petroleum Corp. and Mene Grande Oil Co., especially in all matters pertaining to the develop- ment of areas of offset character. Strips of territory 2 kilometers in length at r I' Total international trade in petroleum in 1937 was 409,132,000 barrels. The Oil Weekly, February 27, 1939, p. 48. Venezuelan exports of crude oil, in 1937, totaled 178,312,0 00 barrels (about 95 percent of production). In addition, Venezuela usually exported a large proportion of the refined products manu- factured from the 5 to 8 percent of its crude oil that was run to stills in the pro-World War II period. Bureau of Mines, International Petroleum Trade, September 30, 1941, p. 257. 17 Even the production accruing to the two "independent" petroleum companies then owning properties in Venezuela was largely subject to control by Standard (Now Jersey) and Shell. Shell held and holds crude-oil purchase options upon the output of British Controlled Oilflelds, Ltd., while Standard (New Jer- sey) manages some of this company's properties and all of the property of North Venezuelan Petroleum Co., Ltd., on a royalty basis. Moody's Industrials, 1938 and 1950. ]E The 011 Weekly, February 28, 1938, pp. 52-54; August 22, 1938, pp. 37-38; July 24, 1939, pp. 32-34. 03 Idem. 20 The subsidiaries were, respectively, Venezuelan Oil Concessions, Ltd., Lago, and Meneg. 21 The ownership pattern in these areas was described in 1931 as follows: "The Standard Oil Co. of Indiana' through its subsidiary the Lago Petroleum Corp., controls the concessions under the lake bed except the 'marine zone,' a strip 3,300 feet wide extending under the water around the entire shore of the lake, which is controlled by the Venezuela Gulf Oil Corp., subsidiary of the Gulf Oil Corp. of Pennsylvania, and the Creole Petroleum Corp., subsidiary of the Standard Oil Co. of Now Jersey. The Royal Dutch-Shell Co., through its subsidiaries, controls the concessions on the shore." U. S. Tariff Commission, Report to the Congress on the Cost of Crude Petroleum, Rept. No. 4, second series, pp. 18-19. Lago was sold to Jersey Standard in 1932. (See above, p. 70.) This same ownership pattern was later extended to new oil-field developments in this area, such as that at Buchaquoro, according to a report by W. V. Gross, foreign editor, The Oil Weekly, November 18, 1938, p. 71. 22 The Petroleum Times, June 10, 1939, p. 764, 23 Ibid., June 11, 1938, p. 765. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Tia Juana and 5 kilometers in length in southern Lagunillas were added to the areas open to cur cnt development 2h The effect of harmonious de relative positi( concerned. In March 14 crude oil prod fields; Shell at major compani these properti duction, about percent of Gul in 1937.2? Most of the oil fields was I Standard (New companies toge zuelan producti Eastern Vene this cooperative program tended to be a unified and ns insofar as the "fields of offset character" were 38, Jersey Standard owned about 40 percent of the used from the jointly owned Lake Maracaibo oil out 38 percent, and_ Gulf about 22 percent.25 The s. More than two-thirds of Shell's Venezuelan pro- Ps production came from these jointly owned fields estern Venezuelan petroleum production from other roduced by Shell, with small proportions owned by Jersey) and by two small companies. The two small ther accounted for about 0.3 percent of total Vene- on in 1937. oil field in east rn Venezuela had been the highly productive Quire- quire field owned by Standard (New Jersey).'-! However, this property, like hat in western Venezuela,, generally produced only heavy oils, us (d principally to manufacture fuel oils and related low-value prod cts.23 Eastern Venezuela was the center of the most active exploratory and developmental work.29 Standard (New Jersey) already had developed smal production at two new oil fields, and Gulf was active at Oficina, which was to become the most productive of the new fields. Drillin was in progress or planned at eight sites or more, four of which ere to become important producers, and no less than seven geophysical crews were operating in eastern Venezuela. There was every indication that these new oil fields would yield more valuable oils than those of western Venezuela-lighter oils that would be more suitable for high-value products.30 The first com- mercial production of these "Oficina" crudes, as determined officially by the Venezuelan Government, established the fact that they were 40 to 50 percen more valuable than the best Maracaibo crudes, and 50 to 90 perce t more valuable than the general run of Maracaibo and Quirequire prudes." To sum up, i 1937 more than 99 percent of Venezuelan production was directly controlled by Shell, Standard (New Jersey), and Gulf subsidiaries. bout 73 percent of this was recovered from lands hav- ing a closely in egrated ownership pattern in which the three shared, and the remai der was separately produced by Shell in western Venezuela and U, Standard (New jersey) in eastern Venezuela. P4 Ibid., dune 17, 1939, 785. 25 The Oil Weekly, June 6, 1938, p. 68. 29 Ibid.. February 21, 938, p. 52. 21 Standard's subsidiary in eastern Venezeula was SOV. 49 The Oil Weekly, November 7, 1938, pp. 111-27; December 19, 1938, pp. 18-26; International Petroleum Trade, May 31, 1941, p. 52. These crudes had gravities of 11.5? to 20? API. However, there was a small production at Cumareb with a gravity of 50? API, and the LaRosa crudes had gravities ranging from 12.9? to 30? API. 2 The Oil Weekly, November 7, 1938, pp. 16-27. 30 Idem. 31 International Petrol um Trade, September 30, 1941, p. 255. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The discovery of additional reserves of high-value oil in eastern Venezuela presented the major Venezuelan companies with a difficult problem: How could this new production be marketed without disturb- ing the established price structure? Existing capacity in Venezuela was by no means fully utilized: in late 1937 and in 1938, fully 17 per- cent of the capacity of the Lake Maracaibo fields was shut in.32 By this time, also, the marketing cartels described in chapter IX had been in operation for several years in Europe and South America. Existing world resources were more than adequate to meet the needs of Venezuela's natural markets. At the time, the United States offered only a small and limited. mar- ket for Venezuelan oil. Among the various actions taken in the early 1930's to stabilize United States petroleum markets were two steps designed to limit imports, namely: (a) A substantial increase in excise taxes on crude oil and refined products, when imported for domestic consumption, made in the Revenue Act of 1932; (b) A voluntary agreement made by the principal importing com- panies wills the Secretary of the Interior in 1933 to limit imports of crude oil and refined products to the average for the last 6 months of 1932.33 The provisions of this agreement, which was made in the midst of agitation by "independent producers" for emergency legislation restricting or laying prohibitive taxes on imports, were later incor- porated into the Petroleum Code under the National Industrial Re- covery Act.34 The import quota under the NIRA was fixed at 4.5 percent of domestic production, and even after the NIRA was de- clared unconstitutional, imports into this country continued at about the same levels." Thus, total imports of crude oil and refined prod- ucts, including imports bonded for reexport or for supplies for ships in foreign trade (bunker oils), in 1933 were 4.8 percent of domestic crude- oil production; in 1937, 4.6 percent; and in 1939, 4.7 percent.3' This restricted importation was attributed to "voluntary action" on the part of the few oil companies dominating crude-oil production in Venezuela and Latin America, and which were also major producers and refiners in the United States.37 A formal restriction of imports of crude oil, topped crude, fuel oil, and gas oil to 5 percent of the quantity of crude oil processed in domestic refineries during the preceding calendar year was included among the provisions of the reciprocal trade treaty with Venezuela in 1939. This quota arrangement was suspended in the reciprocal trade treaty with Mexico in 1943. In 1937, total imports of crude oil and petroleum products into the United States were about 4.6 percent of domestic production.38 More than 99 -percent of these imports consisted of crude oils, residual fuel oils, and other unfinished oils. About 87.5 percent of the total origi- 82 The Oil Weekly, February 21, 1938, p. 52; December 19, 1938, pp. 18.26. as Testimony of Joseph E. Pogue. TNEC hearings, p. 7447. 34 U. S. Tariff Commission, War Changes in Industry Series, Report No. 17, Petroleum, pp. 76-77. 8 'Idem. 3 8 Ibid., p. 46. The Tariff Commission reported that "since 1933 the bulk of the imports of crude oil have been brought in by two companies, Standard Oil Co. (New Jersey) and Gulf Oil Corp. Five other major companies * * * have imported relatively small quantities of crude oil. Standard, Gulf, and Shell have been principal importers of fuel oil." Ibid., p. 77. 87 Ibid., p. 77. See also, 13. M. Murphy (ed.), Conservation of Oil and Gas, p.. 657. 38 All figures in this paragraph calculated from data in Foreign Commerce and Navigation of the United States, 1937, p. 179, and The Oil Weekly, February 27, 1939, p. 56. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 1.70 the Netherla only about 1 directly or ind that country's In effect, t shut off from impact of the i side the Unite, ducers were cc documents of most vulnera accounted for uela, being shipped directed to this country-or through ercent from all other countries. The imports coming rectly from Venezuela amounted to about 28 percent of erefore, the world's largest market for petroleum was the major fraction of Venezuelan production. The ew production was, therefore, primarily in markets out- J States. While all three of the Venezuelan major pro- oncerned about this problem, Shell was probably in the le position, since in 1937 the Royal Dutch-Shell group 22.4 percent of world petroleum production outside of To bring th agreements subsidiaries o agreements, r from Mene Grande. In the various annual reports and other public Industrials, tll broader and implied in an agreements, 1 at the same, these agreem s potentially explosive situation under control, various ,re concluded in 1937 and 1938 by the Venezuelan Standard (Now Jersey), Royal Dutch-Shell, and Gulf. agreements, those known as the principal and main ceived some attention in the trade press,41 where they ed as being "contracts" for the purchase of crude oil the companies and in such publications as Moody's ey have been referred to as "long-term sales contracts" i As a matter of fact, however, they represent a far rdinary business transaction. More than this, related ss well known to the public or secret, were concluded Imes as the principal and main agreements. All of nts were designed to be read together as a unified nstituting a broad. program for the control of Venezuelan crude-oil prod regulate the that a "fair" world produc allowable pro The nature a similar agree existent or co two limited Mono Grande in the agreem evelopment and output of the Venezuelan industry so elationship would be maintained at all times with total ion, outside of the United States, and to divide the uetion among the participants to the agreements. d wording of a number of their provisions _suggest that templated in other petroleum producing areas. agreements of 1937 and 1938 were designed to perform nd specific functions: (1) ' the transformation of the owned subsid ary of the Gulf Oil Co.; (2) the fixing of production quotas for M neg and Jersey Standard subsidiaries for a minimum period of 12 ears on a ratio basis, the quotas being fixed so as to maintain a `fir" relationship of the parties to all Venezuelan produc- tion and. of a 1 Venezuelan production to total world crude oil pro- 80 In 1938, with Me, Netherlands West In nine of Venezuelan is lower in 1938 than in. learn Requirements- 40 The Oil Weekly, 41 See, for example, 1938, p. 864. lco largely eliminated from the United States market, the share of Venezuela and the Lies rose to more than 90 percent of imports. This meant little or no change in the vol- 1ports, however, as the total volume of United States production and of imports was .937. U. S. Senate Committee Investigating Petroleum Resources, hearings, Petro- Postwar, 1946, p. 103. fuly 25, 1938, p. 240. Phe Oil Weekly, December 26, 1938, p. 48, and The Petroleum Times, December 31, Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 duction outside of the Ignited States, "to the extent that it is within the control of Meneg and Lagosov [Standard (New Jersey)]." 42 Although the various agreements were a unified whole, the provi- sions of the agreements may be most conveniently discussed under the functional headings Nos. (1) and (2) above. The joint enterprise The Mene Grande Oil Co. (Meneg) was transformed, in effect, into a joint enterprise of Gulf, Standard (New Jersey), and Shell through three agreements: (1) The Meneg-SOV agreement, December 15, 1937, (2) The Meneg-International principal agreement, December 15, 1937, (3) The International-NOM main agreement, November 30, 1938. As has been noted, these agreements left undisturbed Gulf's 100- percent ownership of the shares of stock of Meneg. However, they transferred an undivided one-half interest in all the physical assets and production of Meneg to Standard (New Jersey) and Shell, with the result that Meneg retained only a one-half interest in all the properties and rights to which it held title. In fact, to all intents and purposes Gulf became a junior partner in the enterprise, since important management functions were transferred to the other two parties. The Meneg-SOV agreement of December 15, 1937.-On December 15, 1937, simultaneously with the signing of the principal agreement and the ratio agreement in Toronto, Canada, both described below, a third agreement was signed in Caracas, Venezuela, by Meneg and the Standard Oil Co. of Venezuela (SOV). This agreement was appar- ently designed to regulate and bring up to date an earlier series of agreements between these parties, the details of which are not in the possession of the Commission.` The main purpose of the agreement was declared to be the achieve- ment of "economy of operation" of certain concessions owned by the two parties in eastern Venezuela.44 To that end, the management and operation of these "pooled" properties were coordinated and intermingled, so that, in effect, a joint enterprise emerged. V "Pooled concessions": The properties held by Meneg and SOV for their joint benefit and at their joint cost were declared to be "pooled concessions." 1,1 As has been indicated, these include about 3,078,000 acres in exploitation concessions, about 17,000 acres of exploitation 4 concessions in process, and about 415,700 acres of exploration con- cessions. SOV's share of oil from about 61,700 acres of exploitation concessions held jointly with third parties was included in the terms of the agreement.41 42 Quoted more fully on p. 183 below. [Italics added.1 43 An agreement between Meneg, International, and NOM, dated February 10, 1939, refers to the "so- called B/L agreement of November 3, 1933, and existing amendments thereto." Likewise, a letter from International to NOM, dated November 30,1938, refers to Meneg-SO V contracts dated November 3,1933. September 23, 1936, and December 15, 1937. The context suggests that these 2 references refer to the same documents, and it also implies the conclusion stated. 44 Art. I. 46 Art. 2. The properties, as listed in schedules A and B to the agreement, are Identical with those indi- cated as joint concessions in the Identification List of Oil Concessions in Venezuela. 4e These "pooled concessions" appear to have Included both proven oil fields, e. g., the Oficina field of Meneg, and unproven areas where drilling was being actively carried on. It may bo noted that not all the holdings of Meneg and SOV in eastern Venezuela were pooled, each retaining some properties and interests in properties on their separate accounts. It was provided that any pooled concessions could be eliminated from the agreement by mutual consent of the parties (art. 3). Similarly, any concession or interests in con- cessions hereafter acquired, by the parties could be made a pooled concession (art. 4). Pooled concessions could be surrendered by mutual consent, or, if one party would not give its consent, solo ownership and control of the concession would pass to the party wishing to retain it (art. 4). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 It was agre pooled concess production or which party h to be oil prod the oil produc The conside reciprocal obli reciprocal obli concessions.41 concessions wa burdens, and therefore, the d that the party owning title to and operating each on or concession interest would transfer one-half of its hare of production to the other. Thus, regardless of ld title to concessions which subsequently should prove cers, both of the oil companies would share equally in d on the pooled.concessions.47 'ation.paid for the transfer of this oil consisted of the rations of the parties tQ make such transfers plus a Thus, while the ownership of the titles to these pooled undisturbed by the agreement, all the rights, benefits, bligations arising out of the ownership of the conces- d on an equal basis between the two parties, In effect, roperties became jointly owned and operated conces- sions of the t o companies. Joint many ement .of the pooled concessions: With the creation of a do facto joint ownership of the pooled concessions by Meneg and SOV, there was created similarly a de facto joint management organi- zation of the oncessions. Nominally, each concession was operated by its separate "owner," but in fact the. management, manpower, and material resources of the two partners, were pooled in the operation of the pooled oncessions. A committe of four was designated as the top management. of the pooled concessions. Two members of the committee were to be nomi- nated by each arty, each such group, however, to have but one vote.49 The powers of this committee were stated as follows: operations, contra ment.50 The entire c of Meneg and the representa designed to pr parties had an More than agreement, ho 1 allocate areas for development and select the operator therefor, o exclusive right and obligation to decide all questions of policy, and management of the interests acquired under this agree- ntrol and management, therefore, of those properties OV designated as pooled concessions passed to a joint minittee of the two companies. The provision that ion of each company should have but one vote was equal voice in the, proceedings.51 union of top Inana~ement was contemplated by the ever. The accounting manual attached to the agree- 47 R)valties paid in k{lnd, or the ratable proportion of such royalties in the case of concessions held jointly with outsiders, were tope deducted before the production was measured. Cash royalties were to be included thereto, carrying charg s of the concessions, including taxes, cash royalties, and all costs of operation, and the costs of development of the concessions (art. 4). An accounting manual with detailed instructions for deter- mining and allocating t he amounts of these costs was included in the aereement (art. 3). 99 Art. 5. These nom noes, of course, were top officials of Moneg and SOV. ,0 Ibid. [Italics added.] The article also states: "In principle, it is contemplated that the parties shall operate equal parts of he total area insofar as practical." 81 Novel provisions ere included to deal with situations where disputes or disagreements arose with respect to any partical r area included under the agreement or in those cases where decisions could not be reached, i. o., cases wh re a party could not or would not cast its veto with respect to an area. Such cases take proposition for the respect to the areas in was to force a sottlem c in the event of serious ul (P. A. Leovy) were designated as the first members of the co mmittee. If this me to an agreement, "then either party may make to the other in writing a give or purchase of the other party's interest or the sale of its own interest hereunder, with question" (art. 5). [Italics added.] The other party was given a 30-day period in alternative or the other, and if it took neither alternative, it would have the effect lternative of selling its interest at the price offered. The purpose of these provisions At of all issues arising in connection with the pooled concessions, while Insuring that, isputes, none of the rights and benefits in the concessions would be transferred to Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL . 173 ment suggests that the material and manpower resources of the two companies were to be pooled in the operation of the concessions. Detailed instructions are given for allocating costs incurred by pooled labor, equipment, and professional and technical services in the developmental projects, the drilling of wells, and so on. While separate organizations were to be maintained, in many respects they would act jointly and as one. The Meneg-International (principal) agreement.-On December 15, 1937, representatives of Menc Grande Oil. Co. and of another Jersey Standard subsidiary, International Petroleum Co., Ltd., signed in Toronto, Canada, an agreement known among the parties as the principal, agreement. A number of supplementary agreements, de- signed to clarify or to spell out in some detail the meaning of various provisions of the principal -agreement or to set up administrative procedures and machinery for its operation, were signed on the same date and at later dates. These agreements were represented to the public as a contract for the sale of oil between Meneg and Inter- national, an arm's-length bargain in which Meneg gained a long-term outlet for its surplus crude-oil production and International was assured of an additional supply of crude to meet its own and its customers' long-range requirements.52 If the principal agreement is read in conjunction with the other agreements, however, the provi- sions of that agreement appear to be part of a broad merging of interests going far beyond that implied in the Meneg-SOV agreement. Sale o, f oil: The provisions relating to the sale of oil constitute generally an agreement of Meneg to sell, and of International to buy, one-half of Meneg's total net production of crude oil, the sale to commence on December 15, 1937.63 No commitment was made in the agreement as to the quantities of oil to be made available from year to year, this matter being dealt with in the ratio agreement discussed below. The sale was to continue throughout the life of any concessions or interests owned or subsequently acquired by Meneg.54 No machinery was created for determining the price to be paid for the oil or its value, nor was any price or value agreed upon, as the oil was to be sold at cost of production, an additional consider- ation being paid for the agreement as a whole, including the sale of oil prOvisions,55 fia See the statement on the Gulf Oil Corp. in Moody's Industrials, 1938 and subsequent years. In 1938 the following remarks were made: No change in ownership of Mene Grande's oil concessions was involved and it retains control of the development and operations of the properties." Cash payments were repre- sented as being in consideration of and advances on crude oil to, be dellvered. At the time Gulf filed its first registration statement under SEC regulations, in connection with its stock issue of 1943, full details of the principal agreement were made public. 63 Not production includes Meneg's total production, after deducting royalties paid in kind, from proper- ties owned for its sole benefit, and Meneg's share of the production, after deduction of that portion of royalties paid in kind applicable to that share, from concessions in which Meneg owns an interest (I. C., joint properties to which Meneg holds title) or in which Meneg owns an interest in production (f. o., joint properties to which others hold the title). 64 The life of the agreement was declared to be that of the life of any or all of the various concessions and interests covered by the agreement. This includes all concessions and interests owned by Meneg for its own account or jointly with SOV or other third parties on December 15, 1937, and all such properties acquired after that date and for which International has paid half the costs of acquisition. Extension of the life of any of these concessions and interests would operate as an extension of the life of the agreement. No right of cancellation of the agreement prior to this defined termination was granted to either party (art. 17). 67 The consideration paid for the sale of oil and for the agreement is described more fully on p. 176 ff. Further provisions in the sale of oil agreement include: (1) In the event that Meneg, for any reason, failed to deliver any part of the crude oil accruing to International under the agreement, it was agreed that International, upon request, would receive an equivalent volume of oil from the Standard Oil Co. of Venezuela (SOV) taken from Meneg's share of the production from joint properties hold by SOV. (2) Royalties paid in cash rather than in kind by Aleneg on its production and the ratable share of such royalties paid on production from joint properties were to be included in the carrying charges. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 174 THE INTERNATIONAL PETROLEUM CARTEL Sale of physical assets: Included in the sale to International was "an undivided one-half interest in Meneg's physical plant and equipment of every charact r." This was defined so as to include not only such tangibles as "marine equipment, tanks, and pipelines, * * * fee lands, * * also materials and supplies on hand in Venezuela," but also such. rights and interests as "surface .leases, easements, licenses, and permits." Excluded from the sale were only it refinery site and the oil stored in tanks located off the concessions or in transit to shipping p ints.5? This undivided one-half interest was to be recorded in M eg's books of account at one-half the net book value of this propert ; i. e., Meneg's assets would continue to be held in Meneg's name but a one-half interest in those assets would be recognized as " ested" in International. . A similar "undivided one-half interest in all property of every kind hereafter acquired by Meneg, of which one-half the cost is * * * reimbursed Meneg by International" was also trans- ferred in the sale; i, e., International was to participate at its option after December 15, 1937, in all property acquired by Meneg.57 To record and represent International interests in Meneg's assets, special reserve accoun s were established and maintained in Meneg's books and auxiliary r cords, these accounts being "adjusted monthly, so as to represent 50 percent of the net book value of property * * * in which International has the aforesaid interest." 68 The surrender of management prerogatives: The Meneg-SOV agree- ment brought u der the joint management and effected a joint owner- ship by the tw companies of exploitation concessions totaling some 3,079,000 acres and exploration concessions totaling about 415,700 acres. It was contemplated that other concessions would be brought into the joint enture from time to time. Meneg retained its inde- pendent contr of 1,112,000 acres of exploitation concessions and 50,150 acres of xploration concessions in eastern Venezuela and of its holdings in wes ern Venezuela." In the Men g-International principal agreement, Meneg traded away this equal voice in the "pooled concessions" and also its freedom of action with respect to its wholly controlled concessions. In doing so, it surrender d to International the ultimate and basic management rights over the ontrol and direction of operations and the disposition of concessions. In order toe ercise the management rights granted to International and to safeguard its interests in Meneg, International required com- plete and intim to acquaintance with all of Mcneg's information and activities. Me eg, therefore, agreed to allow International or its nominee 69 "ful and complete access to all parts of the properties" of which Mene had sole control, and to "all geological and any other information pos essed by or available to Meneg and relating thereto." This grant included full access to Meneg's books of account relating to all. its oper tions.61 Similar provisions were ? unnecessary with respect to the "pooled concessions" since SOV participated fully in their ownership and management by virtue of the terms of the 66 .Art. 3, [Italics add d.] 67 Idem. 68 Supplementary agr ement (Accounting Requirements and Instructions * * *) dated January 29, 1938, sec. III (4). 5D Boo below, p. 16.5. 601, e., Standard oper ting subsidiaries in Venezuela. 61 Art. 11. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL, 175 Meneg-SOV agreement. Standard (New Jersey) therefore, through one subsidiary or another, had access to every detail of Meneg's business, International was granted a right of general supervision over Meneg's operations and an absolute veto over certain important matters. Meneg agreed to prepare and submit to International, on or before November 1 of each year, beginning in 1938, a "budget of capital and operating expenditures for joint account," 62 i. e., a budget covering all of Meneg's proposed capital and operating expenditures, 4 and a "statement of general operating policy." Both the budget and the policy statement were to be prepared for the ensuing calendar year.63 Neither document was to be adopted until after it had been discussed by representatives of Meneg and International. It was provided, moreover, that in the event these representatives could not agree upon the budgets or upon general operating policy, the approval of International was necessary before Meneg could approve or make expenditures in relation to "major projects." Such projects were defined as including "geophysical work, permanent camps, hospitals, recreation buildings, water and light systems, pipe- lines, terminals, tank farms, and permanent facilities involving large expenditures." A disagreement between the parties did not bar Meneg from adopting that part. of the budget "which covers expenditures on such matters as geological work (including test wells in connection therewith), drilling and completion of wells and the production of oil therefrom, the erection of field working tankage, construction and location of gathering lines, location and construc- tion and moving of temporary field camps or any other usual operating matter relating to the reasonable and normal development of the property and the production of oil therefrom." It was agreed finally that "Meneg shall have the control of the actual operations in connection with the properties and concessions held by it," including the pooled concessions, but that these operations were to be governed by the budgets and general operating policies as agreed on above.6" To sum up, International would not participate directly in Meneg's operation of the wholly owned properties or in the joint operation of the pooled concessions, but, rather, would have a supervisory control over all of these activities. International had an absolute power of veto over "major projects", i. e., the exploration, development, and permanent establishment of new crude-oil productive capacity and J facilities. This restriction has considerable meaning in view of the intensive program of exploration and development then being carried on by Meneg and SOV in eastern Venezuela. The activities over which Meneg retained final authority relate to the further develop- ment of established oil-field projects and the maintenance of the pro- duction of crude oil therefrom;86 i. e., Meneg's properties in the jointly owned oil fields of Lake Maracaibo. 62 As part consideration for the agreement, International agreed to pay 50 percent of these expenditures. (See p. 176.) 'a Art. 12. It was further provided in the Supplementary Agreement dated January 20, 1038, that the form of budget to be developed and adopted was to be one mutually agreed upon fart. III (13)]. e4 Art. 12. 4'. This Interpretation flows from the specific detailed provisions cited in the text; e. g., the veto power over geophysical work suggests that the permitted geological work and drilling of wells relate to exploita- tion rather than exploration of properties. The context of the sentences in which these terms appear further emphasizes the limitations on Meneg. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 176 Through th se powers of International over Meneg's operations and through he participation of SOV in the pooled concessions, Standard (No Jersey) thus obtained substantial control over Meneg's business, and he Gulf Oil Corp. became a junior partner in the Vene- zuelan crude-o 1 production business. It will be noted that the sale of physical property to International included the s le of one-half the book value of "surface leases" and, in fact, of "all property of every character." The terms relating to the sale of oil a d of physical assets are so broadly written as to include all of the rights., benefits, burdens, and obligations commonly recog- nized as app" taining to ownership. In addition, a number of pro- visions were included in the agreement restricting and delimiting in detail Meneg's power to sell or transfer, to surrender, and to acquire concessions and interests in concessions."' Meneg agreed to notify International romptly of the details of any contemplated sale or transfer of con essions, including the name of the proposed purchaser and the price or consideration to be received by Meneg. Inter- national then 1 ad 30 days in which to decide whether or not it would take the prope rty itself.87 Meneg's freedom to surrender concessions or interests in concessions was similarly circumscribed."8 Finally, International was given the option of taking an undivided one-half interest in any new concessions or interests in concessions acquired by eneg after December 15, 1937.89 International agreed to pay one-half the costs of such acquisitions in which it elected to participate, eneg was to hold the title of these joint properties. The effect o all those provisions was to strip Meneg of any inde- pendent pow" s insofar as concessions were concerned. In the case of the "pooled concessions," Standard (New Jersey) now had control, through its subsidiaries, of both partners in the joint enterprise. The provisions of the principal agreement, taken together with those of the Mene;-SOV agreement, required that all "pooled concessions" be re- tained in the joint enterprise, or that they be sold or transferred wholly to the two Standard (New Jersey) subsidiaries except where their consent as granted for other disposition. In the case of Meneg's wholly owned concessions, International- i. e., Standard (New Jersey)-had an unlimited option to buy or acquire any or 11 concessions which Meneg desired to sell or surrender, and an unlimited option to buy a 50-percent undivided interest in any or all concessions which Meneg purchased, provided it paid half the costs of acquisition. Thus, Meneg had traded away, in effect, nearly all of its rights o deal in concessions. The quid pr quo.-The consideration paid by International to Meneg for one half of Meneg's physical properties, future crude-oil 65 The intention of t o parties was to maintain the titles to Meneg's concessions and interests in con- cessions clear and uno cumbered, except insofar as the agreement with SOV applied (art. 1). Monee was to do everything necessary to maintain the life of the concessions and to cure defects in their titles, Inter- national to pav one-half of those costs arising thereto allocable to future production of oil (arts. 1 and 2). 67 Art. I, If the sale or transfer was intended by Meneg to leave undisturbed International's rights and obligations, International could itself buy the concession or the interest in the concession at the total price stated in the notice, or it could consent to the sale at that price. If the sale or transfer was intended by Meneg to have include and carried with it International's rights, International could itself purchase the concession or the inter st in a concession at one-half or the purchase price stated in the notice, or it could consent to the transact on, receiving one-half of the purchase price or consideration. ee Art. 2. If Internal onal so elected, the concession or interest would be transferred to International, Meneg to receive no c nsideration for the transfer. If such a transfer could not be made. for any reason, Meneg was required to operate the concession for International at International's cost and risk. If Inter- nat:ionaldid not elect t take the concession, Meneg was free to surrender it, except insofar as agreements with third parties (e. g., SOV) applied. 09 Art. 6. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 177 production, and other rights and benefits in Meneg's concessions and interests consisted of (a) the assumption of one-half of Meneg's burdens and obligations allobable to crude-oil production and (b) large nonrecurring cash payments. As part consideration for the sale and transfer of Meneg's physical assets and the rights to share in all future rights from these properties as well as those jointly acquired under the agreement, International agreed "to reimburse Meneg for one-half of Meneg's net expenditures for current obligations accruing after December 15, 1937." "Current obligations" were defined as including all those "incurred in exploring } and exploiting the said concessions, including administration expenses, and any joint handling and joint transportation within Venezuela of the oil produced therefrom." 70 Reimbursement in United States currency was to be made monthly in the case of current obligations, and "promptly" as other special expenses were incurred.71 International also agreed to pay Meneg $100,000,000 in cash as part consideration under the agreement. Of this, $25,000,000 was designated as "part consideration for (the) sale of oil," to be paid at the rate of 7 cents per barrel of total crude oil produced or acquired by Moneg for the joint account of itself and International. The total sum was to be paid as some 357,143,000 barrels of oil were produced or acquired within 8 years from December 15, 1937, whether or not such production were actually achieved within that period.72 In a separate agreement, International agreed to pay to Meneg a further sum of $25,000,000 on the date the principal agreement was signed, December 15, 1937, and additional sums of $25,000,000 each on December 15 of 1938 and 1939.73 This total sum of $75,000,000, together with the agreements to pay one-half of all current obligations and $25,000,000 currently with oil production during a maximum period of 8 years, all in United States currency constitute the "good and valuable consideration" paid to Meneg by international.74 The transaction, therefore, may be summarized as follows: 75 1. Meneg sold and International purchased an undivided one-half interest in all of Menog's physical properties. The net book value of this sale was fixed by Gulf at $9,781,426. 2. Meneg sold and International purchased rights to acquire at cost an undivided one-half interest in all future production of oil from Meneg's properties, and, also, rights to acquire at cost an un- divided one-half interest in all properties acquired in the future by Meneg and in the production therefrom. Gulf fixed the money value of this transfer at $90,218,574. 3. International paid Meneg $100,000,000 and agreed to pay one- half of's future "current obligations," i. e., it agreed to pay the actual costs of its acquisitions as listed under item 2. TO Art. 4. 71 International also agreed to pay one-half of those costs incurred in curing defects in the titles of Meneg's concessions and interests in concessions and which were allocable to future oil production (art. 2), and one- half of the costs of acquiring those now concessions and interests in which International elects to participate (art. 6). All costs and burdens allocable to Monog's sole interests or to crude-oil production before Decem- ber 15, 1937, were carefully excluded from the burden assumed by International (art. 7). 72 Art. 0. This assumes that Moneg's production quotas under the ratio agreement would be fulfilled. (See table 12, p. 184.) 78 Letter agreement between Mane Grande Oil Co., C. A., and International Petroleum Co., Ltd., dated December 15. 1937. 74 Insofar as the Commission has knowledge. 76 This treatment is suggested by the explanatory notes in Gulf's consolidated balnce sheet as published in Moody's Industrials, 1950. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 178 HE INTERNATIONAL PETROLEUM CARTEL The principal effect of the transaction was a broadening and elaboration of Jersey Standard's controls over another sector of the world's petrol um. resources. After the three agreements of December 15, 1937, of which two have been discussed thus far, only Jersey Standard and hell. remained as dominant members of the Venezuelan petroleum. industry, Gulf having virtually disappeared as an inde- A number off intangible values also changed hands, values that can be only imperfectly represented on a balance sheet. One such value has already b ten mentioned, i. e., the sale of future benefits-in the concessions- he rights to future crude oil production. Obviously, it was impossible to determine, in 1937, the value of these rights and claims to future production. This sale included rights not only to one-half of th production from Gulf's proven and rich resources in the Lake Mar caibo region, but also a claim to one-half the dil to be produced from. Meneg's holdings and interests in eastern Venezuela. That these ho dings were regarded as extremely valuable is indicated by the fact that within a few months a 100-mile 16-inch pipeline from the Oficina of fields to a new ocean shipping terminal was under construction." The intangi le values arising out of this transaction, furthermore, extend t- the broad international interests of Jersey Standard and Gulf. This i partly indicated by the close relationships that de- veloped betwe n them in the production of oil in Venezuela as a result of the three agreements of December 15, 1937. Under the principal agreement, G if transferred valuable properties, rights, and intangible values to Jersey Standard for a consideration of $100,000,000. Under of Gulf were Standard, the agreement, d was to be regu conditions. Venezuela-a inevitably hav heavy fuel of already been a these arrange in which it hall held interests. These cartel relationships could not of Jersey Stan two parties in furthered by Venezuela. conclusion of 76 The Oil Weekly, C 10,000 barrels daily we 75,000 to 100,000 barrel V and principal agreements, the Venezuelan holdings brought into a partnership arrangement with Jersey ated in accordance with their estimates of world market merging of the interests of Jersey Standard and Gulf in important source of supply for both of them-must had a restricting or limiting effect on the rivalry of the in the markets supplied from this source, such as the market in the United States and the markets for ducts in western Europe. The two companies had ngements described in chapters VIII and IX.__ Under ents, Gulf held an assured position in various markets ongly fortified by the close interweaving of the interests and and Gulf in Venezuela. The larger interests of the heir agreement to control and to share production in ional-NOM main agreement.-About a year after the he Meneg-International agreement, International sold est in that agreement to a Royal Dutch-Shell subsid- esta lisped at the time construction began. The capacity of the pipeline was to be daily. Other large installations were likewise already under construction. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 179 iary, N. V. Nederlandsche Olie Maatschappij (NOM). This agree- ment, known among the parties as the main agreement, was signed in Hudson County, N. J., on November 30, 1938, but was made retro- active to December 15, 1937. Substantially the main agreement brought Shell, through NOM, into the principal agreement as a full and equal partner with Standard, through International. Upon being formally notified of the conclusions of the main agree- ment, Meneg apparently reserved its rights,77 but later recognized the right of International to assign to NOM a one-half interest in the rights and burdens of International under, the principal agreement'71 thereby agreeing to the participation by Shell in the exercise of Jersey Stand- ard's veto power. Each of the three parties thereupon agreed that 79 "it would not make any assignment, in whole or in part, of its respective interest" under either the principal or the main agreement, "except with the consent of the other parties hereto." 80 Participation in the joint enterprise-Sale of oil and properties: The main agreement made NOM a full and equal partner with Inter- national, as of December 15, 1937, in each and every part of the principal agreement. Thus, it was provided that NOM would take delivery of one-half of all the oil delivered to International by Meneg under the principal agreement, a special allotment being given NOM to equalize the receipts of Meneg crude oil by the two parties. from December 16, 1937.81 International agreed to hold, for the joint account of, itself and NOM, all property accruing to Inter- national under the principal agreement, until such time as Meneg would agree to vest in NOM an undivided one-half interest in said property, i. e., an undivided one-fourth interest in the whole enter- prise.82 International and NOM agreed to confer on each option received by International with regard to the acquisition of Meneg's interest in the sale, transfer, or surrendering of concessions, or interests in concessions. They also agreed to confer with regard to the pur- chase of an undivided one-half interest in new concessions or interests in concessions acquired by Meneg. The two parties would exercise the option jointly, or if only one party wished to participate, Inter- national would act either on its own or on NOM's behalf. Both would share in the proceeds received by International from the sale of any concession or interests by Meneg.83 In general, NOM was also to share in International's right to supervise Meneg's operations, but NOM was to act through Inter- national rather than directly. Thus, it was agreed that International would have the management of the personnel and the organization necessary in connection with Meneg's administration and manage- ment of the joint enterprise. International would also have charge 77 Lotter to NOM and International, dated December 10, 1938, contents not available to the Commission. " Agreement between Meneg, International, and NOM, dated January 28, 1939, art. I. It was further agreed that NO M would receive its bills and make payments directly to Meneg for all its obligations under the agreements. 76 Ibid., art. 4. (Italics added.) Such consent was not required where certain concessions acquired after December 15, 1937 (under B/L agreement of November 3, 1933, contents not in Commission's hands) are dis- posed of by any party to these agreements to any other such party or to SOV (agreement between Meneg, Iutornational and SOV, dated February 10,1930). Interpretation of this and other clauses of the agroem ont depend on an agreement between Meneg and S O V of even date, which is not in possession of the Commission.' e0 This restriction did not apply to the sale or disposition of crude oil accruing to the parties under the agreement. 91 Main agreement, art. 3, sees. (a) through (f). NOM was to take all of such deliveries by Menog to Inter- national until it had assumed ownership of a total amount of oil equal to one-half the oil which had accrued to International from December 16, 1937, to November 30, 1938. e2 Art. 3 (h). A"Art.3 W. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 and control of 4..11 dealings with Meneg under the principal agreement.84 International as obliged, upon request by NOM, to inspect prop- erties and records covered by or. subject to inspection under the principal agree ent, and to report fully thereon '85 or to institute and maintain arbitration proceedings."' Both parties mutually, agreed to make avails )le, to each other all geological, title, and other infor- ination relating to matters under the agreements and in their posses- sion."' International granted full access to its books of account relating to all operations under the principal agreement.88 With regard to budgets, it was agreed that International and NOM would confer with regard to the budgets of capital and operating ex- penditures and the statements of general operating policy to be sub- mitted to Into national by Meneg. International, however, was to have the authority in the event that these discussions were protracted or that agreement could not be attained."' Thus, disagree- ments were to be referred to the president of the Standard Oil Co. (New Jersey) and a managing director of either parent company of Royal Dutch-S ell; 90 but, if these referees could not resolve the ques- tions at issue, "the decision of International shall control." Similarly, International reserved its sole freedoin of action in all cases where con- sultations or decisions were not concluded or rendered prior to Decem- ber 15 of the year in which the budgets were submitted.,,' Thus, the veto power of International over the exploration and development by Meneg of new oil fields or of permanent expansions in capacity was opened to NOl , but the final voice was reserved to International.92 The quid pro q o The main a reement made NOM an' equal partner with Inter- national not o ly in the rights and benefits accruing to International under the principal agreement but also in the burdens and obligations thereby incur ed and assumed by International. In substance, International transferred to NOM at cost a one-half interest in the principal agree ent, constituting, in effect, an undivided one-fourth interest in Me leg. For this, NOM agreed to pay to International $50,000,000 pl s one-half of all "current expenditures" charged to International y Meneg (i. e., one-fourth of Meneg's total costs of crude-oil prod ction), beginning as of December 15, 1937, and con- ' Art. 6. ea Arts. 10 and 11. se Art. 6. U Art. 9. 89 Art. 12. as Art. 7. 90 I. e., The Shell Tra sport & Trading Co.,, (Groai,t Britain) or the N. V. IConinklijlce Nederlandscho Maatschappij tot Exp oitatie van Petroleumbronnen in Nede landsehe-Indie (Netherlands). 91 Art. 7. 'T'hese bud ets and operating statements were to be submitted by Meneg on or before Novem. her 1 of each year. (It lies added.) 92 The main agreome it also included the following miscellaneous provisions: The life of the agreement was to be that of the prncipal agreement and of any extensions thereof (art. 25). International agreed that it would not give its co sent to any modification of or addition to the principal agreement or to any dealings by Moneg with any co cessions, rights, or properties covered. by that agreement, except those dealings ox- pressly permitted, wit out the written consent of NOM, thus giving NOM a veto power over such changes or dealings qualified o ly by NOM's agreement not to withhold its consent unreasonably" (art. 17). Elaborate provisions defining the rights of the parties in the event either party defaults in its obligations were also included, it being provided that, unless such defaults were made good within a year, all rights and obligations under the principal agfeement would pass to the nonfaulting party (art. 16). The performance by OM of all its obligations under the main agreement was guaranteed unconditionally by its parent corporatio , the Bavarian Petroleum Co., a principal subsidiary of Royal Dutch-Shell. Agree- ment between interne national Petroleum Co. and N. V. do Bataafsche Petroleum Maatsehappij, dated No- Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 tinuing for the life of the agreements.93 For these payments, NOM received (a) an undivided one-fourth interest in all of Meneg's then- owned physical properties, concessions, interests in concessions, and other assets, plus a one-fourth share in Meneg's crude-oil .production from December 15, 1937, to the date of the agreement. NOM also acquired (b) the right to participate to the extent of an undivided one-fourth interest in all of Meneg's future growth, including all future acquisitions by Meneg of properties, concessions, and other assets, and all of Meneg's future oil production 94 NOM's status as a partner with International under the principal agreement was further spelled out in the acquisition by NOM of the right to participate in the supervision and general management of Meneg's operations. The main agreement was of great value to Shell for much the same reasons that the principal agreement was of great value to Standard (New Jersey).9b Shell, thereby gained an important voice and share in the exploration, development, and production of crude oil in the new fields of eastern Venezuela, where it had previously held no im- portant interests. Shell acquired a share of the jointly controlled oil fields of Standard and Gulf in eastern Venezuela. Moreover, the joint control of the three companies in the Lake Maracaibo properties was more closely integrated. This partnership in oil properties, some of which were of enormous potential value, was made available to Shell by Standard at cost. The broad international interests of Shell and Standard, as well as Gulf, were reflected in the agreements. Shell was a participant with Standard and Gulf in the international cartels and cartel arrangements described in chapters VIII and IX. In view of Shell's strong interests in these international cartels and its large share of the international oil business, it was to the advantage of all three parties to bring Shell into these agreements for sharing and controlling Venezuelan crude-oil production. The interweaving of interests in Venezuela tended to result in the strengthening of the world-wide cartel relationships of the three companies. Gulf, inter- nationally a less important company than Standard and Shell, be- came, by virtue of these agreements, a junior partner in the Vene- zuelan petroleum industry. Production quota agreements On the same dates that these agreements were signed, the various parties concluded other agreements which have. never been made 93 NOM's payments to International included the following: Payment of one-half of all of International's obligations under the principal agreement as follows: (1) prompt reimbursement of one-half of all pay- ments, expenditures, and advances made to Moneg up to and including November 30 1938; (2) prompt payment of one-half of the monthly bills for "current expenditures" as these became due; (3 5 prompt payment of one-half of all other obligations of International as these became due. The word "all" is italicized to emphasize that NOM obligated itself in specific terms to pay one-half of (1) all "current obligations" incurred after December 15, 1937,of (2) the $25,000,000 sums due on December 15, 1937, 1038, and 1939, of (3) the specified $25,000,000 consideration for the sale of oil, and of (4) all other "current and special obligations" arising from the operations of Meneg. These obligations appear to be a specific quid pro quo, an agreement by NOM to pay one-half of all International's obligations under the principal agreement in purchase of a one-half interest in all the benefits flowing to International under that agreement. All of the additional costs of management and administration flowing from the main agreement were to be paid in equal shares by International and NOM (art. 14). All of these payments were to be made in United States currency unless otherwise specified by International (art. 4). 94 With respect to concessions acquired by Meneg after November 30,1938, NOM'S rights to an undivided one-fourth interest were stated in terms of an option which NOM could exercise or not as it chose. (See P.0179.) 6 Another important factor from Shell's point of view was the importance of this now eastern Venezuelan oil supply as a compensating resource to replace that lost in Mexico in March 1938 when the foreign oil com- panies were expropriated. Shell's production in Mexico in 1937 was about 15.0 percent of its total world output (outside of the United States, 1. c., its production available for refining and sale in world markets). This was about 62 percent of total Mexican production (The Petroleum Times, June 4, 1038, pp. 729, 731). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 public. These latter agreements established annually the total allow- able production of Meneg and Jersey Standard's Venezuelan subsidi- aries, and. fixed or each a ratio or constant proportion of the total production. When considered in relation with the other agreements. described above, the language of these quota agreements suggests that the various moves by Standard and Shell in Venezuela were designed to restrict prod ction in that country in accordance with their esti- mates of world arket conditions. The four-part ratio agreement.-By far the most important quota agreement is that signed on December 15, 1937, at Toronto, Canada, known among the parties as the ratio agreement. The principal parties to this agreement were Meneg and two Venezuelan subsidiaries. of Jersey Standard which were collectively referred to in the agree- ment as "Lagos v." These two subsidiaries were the Standard Oil Co. of Venezuela (SOV), which operated chiefly in eastern Venezuela and which signe Co. (Lago), whi represented sub roducing intere eneg, and acco by virtue_ of t The ratio ag cement fixed production quotas for Meneg and Lagosov for a period of 12 years and provided machinery for setting new quotas annually in 1950 and thereafter." These production quotas were prescribed in accordance with certain "principles" and goals which are stated so broadly, however, that the agreement could only have been Principles an considerations u guiding principle light on the and the Meneg-SOV agreement, and the Lago Petroleum h operated on the Lake Maracaibo region in close tantially all of Standard's Venezuelan crude-oil- ts, except those acquired through International in nted for about 50 percent of Venezuelan production.97 1 Petroleum Co. also participated in the agreement e Meneg-International principal agreement which onsideration exchanged between the parties for the. partial instrument in their achievement. goals. A formal statement was given of the basic denying the ratio agreement. This statement of rlying motivations of Standard in Venezuela. producing, durii}g the life of their concessions in Venezuela, the "total recoverable oil" therein. However, they are agreed that their desire- of advancing the exploration and development of their concessions * * * and of increasing the p oduction therefrom * * * should be done in an orderly, manner and in accordance with good business and true conservation practices. Accordingly, the accompanying production schedules (discussed below) were prepared and are said to reflect the "estimates" of the two parties of th increases in production that can be made over the next 12 years.' In short, Standard, through Lagosov, and in partner- ship with Gulf i Meneg, fixed the total maximum production allow- able in Venezu la under their mutual estimates of future world markets and agreed upon the respective proportions to be produced :s See p. 167. of See p. 167. ?s Preamble. This prow sion underscores the contention that all the agreements discussed in this chapter are to be read and interpr ted together as one unified over-all agreement. 99 The agreement was caa~reeled in 1943, and, therefore, the provisions relating to the period beginning in 1950 apparently never conic into effect. See below, p. 189 if. I Preamble. (Italics added.] Meneg and La Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL bf.Meneg and by Lagosov. No explanation was provided as to what logical'or necessary relation these estimates (an economic determina- tion) have to "true conservation practices" (an engineering or geolog- ical determination). Lagosov was given the power of unilaterally increasing, but not decreasing, the respective quotas of the two parties during the initial 12-year period, under certain specified conditions. This power was granted to Lagosov, but not to Meneg, in recognition of the former's ` more advanced development and its large and diversified available markets and connections," making it able to "better judge" the conditions permitting such increases.' This language suggests that Lagosov (i. e. Standard (New Jersey)) was recognized as the domi- nant party in fixing and adjusting the quotas for at least 12 years. This superior position flowed from Lagosov's dominant position in the Venezuelan petroleum industry and its much greater size than Mene~.3 While the above principles were set forth to guide the fixing of the production schedules up to and including 1949, a broader statement of principles and goals, including all the above principles as a starting point, was elaborated to guide the fixing of quotas for 1950 and after. It was contemplated that beginning in 1950 the parties would determine annually the total crude to be produced by them in Venezuela and the respective proportions to be produced by each. In fixing these amounts, the parties would "take into account, to the extent that it is in the control of Meneg and Lagosov," the following ends that the quotas "should" be designed to promote: (1) the maintenance of total Venezeulan oil production at "a fair ratio basis" to that of world production outside of the United States; (2) the maintenance of "a proper relationship" of the production of Meneg and Lagosov to the total production of Venezuela; (3) the maintenance of "a proper relationship" of the production of Meneg and Lagosov to the total production of. other petroleum companies in Venezuelan4 The phrase "to the extent that it is in the control of Meneg and Lagosov" connotes something of an understatement, for these two, together with the Shell group, accounted for more than 99 percent of Venezuelan production in 1937 and 1938.11 Production quotas, 1938-49: The ratio agreement includes in its provisions "production schedules" or quotas for the 12-year period beginning in 1938. These schedules, prepared in accordance with the above-stated principles, reflect the estimates of the parties in Decem- ber 1937 of the maximum production they could jointly produce and dispose of in world petroleum markets during this period "in an orderly manner," and it also fixed the proportions of the total to be produced 9 Idem. a See p. 167. 4 Art 2. [Italics added.] The ratio between the two parties was to be fixed in 1910 and the subsequent years after considering (1) the rest ective crude-oil reserves; (2) the total recoverable oil during the life of the concessions; (3) other pertinent data. S (See p, 167.) Gulf, Standard (New Jersey), and Shell, together with their world-wide a.nliatiens and connections, were sensitive to and an important influence urea world mart ets outside of the United States. The three goals listed above, therefore, were reasonably attainable by the Gulf and Standard (New Jersey) subsidiaries in Venezuela, provided that an agreement or oven a tacit understanding were arrived at with Shell. Shell's operations in Venezuela were readily adaptable to such an understanding for it bad been Shell's practice for some time to assign fluctuating production quotas to some of its Ven czr of an oil folds (bu t hot to anyaof its Lake Maracaibo properties), which, as "reserve fields" took the impact of changes in Shell's world- wide demand. For example, the production at one of Shell's reserve fields was 1,200,000 barrels lower in 1037 than In 1936 because of a lower production quota assigned to it (The Oil Weekly, February 21, 1938, P.64). Production on the Lake Maracaibo properties was, in large rart, of an offset character, i.e., the three companies maintained their relative productions under cooperative working arrangements. (Fee p. 167.) Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 184 TEE INTERNATIONAL PETROLEUM CARTEL by each of the arties. The production schedules and the ratios or proportions are shown in table 12.? Meneg's quota included- all oil accruing to International under the principal agreement.' TALE 12.-Produ terage on schedules set forth in the ratio agreement and the ratios thereof daily gross production tin barrels of 42 gallons] Units Units 1038-------------------- 80,000 285,600 365, 500 100 356.'9 1939..------------------- 100,000 345,000 445,000 100 345.0 1940-------------------- 110,000 379,500 489, 500 100 346.0 1941..------------------- 121, 000 417, 450 538, 450 100 345.0 1942-------------------- 133,100 459,195 592,295 100 345.0 1943- --- - - ----- ------- -- 146, 400 505, 114 651,614 100 345.0 1944.------------------- 150,000 518,100 668,100 100 345.4 1945------------------- 150, 000 518,100 668,100 100 345.4 1946-------------------- 150,000 518,100 668,100 100 345.4 1947-------------------- 150,000 518, 100 668,100 100 345.4 1948-------------------- 150, 000 518,100 668,100 100 345.4 1949..------------------- 150,000 518,100 668,100 100 345.4 I Defined in footnote 6 below. 2 Mono Grande Oil Co. 8 Logo Petroleum Corp. and Standard Oil Co. of Venezuela, jointly, including Venezuelan production of affiliated companies. Source: Agreement be wcon Mone Grande Oil Co., Logo Petroleum Corp., Standard Oil Co. of Vene- zuela, and International Petroleum Co., dated Dec. 15, 1937, art. I. The total quo rate of 365,500 average daily pr productions sch, 70.9 percent of produced a som and Shell subsir of production le It may be nc through 1944 ai after. The rat throughout at a as described be] the ratio relati( period. Under the pr somewhat differ to fixed for the two parties for 1938 was at the average barrels daily, while actual reported total Venezuelan eduction was 515,500 barrels.' Thus, the agreed-upon dules, if adhered to, would have amounted to about actual production. Meneg and Lagosov together ewhat lesser proportion of 1938 production, however, iaries produced somewhat more than the 29 percent ft over for them in the ratio agreement. ied that the quotas gradually increased from 1938 d were fixed at the 1944 level for the 6 years there- io of Meneg's production to Lagosov's was fixed proximately 100 to 345 units.' Provision was made, .ow, for possible increases, though not decreases, but )nship was to remain unchanged during the 12-year ncipal agreement, however, control of the oil was in ent proportions than the production ratios. Meneg's 6 The quotas are stated in terms of "grossproduction" which differed, in fact, only slightly from the "net- production" consent used in the Meneg-S 0 V and principal agreements. "Gross production," as defined in art. 7, means total prod tion "from all sources," including all production from totally owned properties and the royalty oil payable in respect thereof, and including that portion of production to which a party is entitled from properties In which it has a part interest and all royalty oil applicable to such part interest. Royalty oil paid by one party to the other (e, g., that paid by Meneg to Creole, an affiliate of Lagoeov and hence included with it, on its Lake Maracaibo properties) was included in the production of the party receiving the oil. "Net production" under the Meneg-SOV (p. 171, above) and principal (p. 173 above) agreements similarly in luded all oil produced, received, or acquired by the parties, but royalties paid I. kind were deducted rem the total. (Cash royalties were treated as a carrying charge.) Royalties in Venezuela have generally been paid in cash; in the postwar period, however, the Venezuelan Government has sometimes elected t take its royalties in kind. } Art. 7. NOM's shay of oil under the main agreement is taken from that deliverable to International under the principal ogre ment. The language of art. 7, cited in footnote 6, is sufficiently broad and inclusive so that the quota for La osov may be construed as including the production of properties operated by SOV subsidiaries and owned y North Venezuelan Petroleum Co. and the Pantepea Oil Co., etc. 8 World Oil July 15, 950, p. 44. 8 This stabilizes the r lative production of the two parties at the actual 1937 ratio of production. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL .185 production quota was deliverable half to itself (i. C., to Gulf) and half to International. Of the total gross production allowed, therefore, Standard (New Jersey) would receive all of Lagosov's production (i. e., 345 units) and 50 percent of Meneg's (i. e., 50 units) while Gulf would receive only half of Meneg's production. - Hence, on the basis of the production schedules, it was contemplated that through the 12-year period Gulf would receive 50 units as compared to 395 for Standard; i. e. a ratio of 100 to 790. The entry of Shell, through NOM, into the share arrangements with International would reduce Standard's- share to 370 units, or a ratio of Gulf to Standard of 100 to 740. Insufficient details of foreign operations of Gulf and Jersey Standard are available to determine whether the production and control ratios were adhered to after the agreement was concluded in December 1937 and up to the time it was canceled in 1943. For comparison with the ratio schedules, however, the division of production in 1947 among the major Venezuelan oil companies is shown here.10 The respective proportions of Venezuelan production accounted for by Meneg, Lago- sov (through its corporate successor, Creole), and Shell were as follows: Standard Oil Co. (New Jersey) (Creole Petroleum Corp.) --------------- Percent 52. 5 Shell group (3 subsidiaries) ------------------------------------- 27.7 Gulf Oil Corp. (Mene Grande Oil Co.) ------------------------------- 14. 6 Total------------------------------------------------------ 194.8 1 Survey of Current Petroleum Situation in Venezuela, OIR Rept. No. 4796 (PV) Nov. 4, 1948, Department of State, Division of Research for American Republics, Office of Intelligence Research, unclassified. The remaining 5.2 percent of production was split up among a number of other companies the most important of which were the Texas Co. and Socony-Vacuum Oil Co. Note that Shell's proportion of production in 1947, unlike Gulf's and Standard's, had fallen off significantly since 1937 (see p. 167). Whether this was due to temporary factors or represented a permanent decline is not known. The actual ratios between Gulf and Standard (New Jersey) in 1947 appear to have been, for production, 100:360, and, for deliveries of oil, 100:770. Only a negligible proportion of Meneg's and Lagosov's 1937 pro- duction came from oil fields in eastern Venezuela other than the long- established field at Quirequire; the newly discovered fields did not begin to yield commercially significant volumes of oil until 1940.11 The production quotas, therefore, must be read with the following factors in mind: (a) Nearly all of Meneg's and Lagosov's production in 1937 came from well-defined oil fields with established productive capacities. (b) The limitations imposed by the quotas would be felt more severely in the new oil fields coming into production in eastern Vene- zuela-the source of Venezuela's lighter and higher-valued crudes.I2 A large proportion of Gulf's and Standard's potential capacity in eastern Venezuela was tied together in the "pooled concessions" so 10 It should not be inferred that these data indicate the application of the restrictions of the ratio agreement in 1947. 11 International Petroleum Trade, September 30, 1941, p. 258. 12 The crude oils of eastern Venezuela were lighter than those of western Venezuela, and were more suit- able for refining into higher-value products. These products were more competitive in nature with those refined from United States oils and sold in the domestic market or exported into world markets. Gulf and Standard (Now Jersey) were keenly interested in both markets and may have wanted to create the ma- chinery for control over eastern Venezuelan crude oil so as to be able to protect their interests. Shell's interest in such controls is obvious and is indicated in its adherence to the International-NOM ratio agree- ment discussed below. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 186 THE INTERNATIONAL PETROLEUM CARTEL that the quota restrictions, insofar as they had an unequal impact on one or the other, would operate uniformly in these new petroleum fields. (c) The prod ction quota system, together with the pooling of concessions and the management controls and restrictions on Meneg, were a potent instrument for controlling the development of eastern Venezuela or for the imposition, if need be, of restrictions or retarda- tions on that development. The production schedules discussed above were fixed at the same level from 1944 t trough 1949, suggesting that Meneg and Lagosov were unwilling to commit themselves to increases for more than a 6-year period. It was rovided, however, that Lagosov, dtie to its superior position and kn wledge,13 could better judge what increases, if any, would be justified from time to time, as "marketing and other con- templated condi ions permit." No provision was made for decreases in the quotas. Increases were to be instituted by unilateral action of Lagosov alone, t at is, Lagosov could simply produce in excess of the quotas as it th tight feasible.14 Meneg, upon notification of this excess productio could produce in the same year, or in the ensuing year, in excess o its quota an amount of oil equivalent to 100/345th of Lagosov's ex ess oil, thus preserving the ratio position of the parties." Theeffect of these provisions was to give Jersey Standard, through Lagoso , a free hand in determining the production of itself and of Gulf in Venezuela, provided only that it could not fix that production at le s than the quotas provided for in the agreement. Quota machinery for 1950 and thereafter.-The ratio agreement provided a comp ete mechanism for determining production schedules after 1949. It as provided that on or before September 1, 1949, Meneg and Lag sov would each appoint one or more representatives to determine "th total crude oil to be produced by them from Vene- zuela for the yea 1950 and the proportion to be produced by each".18 The deliberation were to be guided by the principles and goals dis- cussed above, his procedure was to be repeated annually. The agreement also set forth in some detail a voting procedure and provi- sions for resolving disagreements about the ratio to be established between the part es.11 Moreover, it fixed the penalties to be imposed in cases of produ tion in excess of the quotas.18 Thus, the machinery was created for he fixing of production schedules over a period of many years in a cordance with stated goals.1? '3 See p. 183. 14 Art. 1. During this Initial 12-year period, however, Meneg was burdened with penalty clauses in the event that it produced oil in excess of its quotas except as permitted above. If excess oil were produced by Moneg, it was provided at one-half of such excess oil would be deliverable to International under the principal agreement and hat Lagosov had the option of purchasing the other half of such oil at cost of production and transportation. Thus, Gulf stood to lose possession of all oil produced in excess of the quotas, that Lagosov had not authorized, while Lagosov retained complete freedom of action. I6 Idem. 16 Art. 2. 17 The combined repress tation of Meneg and Lagosov were each entitled to only one vote. International was authorized to have no voting representatives present. Should the parties fall to agree upon the ratio, it was agreed that the par lee were to appoint a "third representative," i. e., an arbitrator, or, failing agree- ment on this third repress tative, application could be made by any of the parties to a judge of the Supreme Court of Ontario to appol t such third representative; the decision of the arbitrator was to be binding and conclusive upon the part es (art. 2). In no case, however, was the production scheduloof Moneg to be fixed at less than an averse gross production of 150,000 barrels daily (art. 3). 18 Penalty clauses for pr duction in excess of quotas, beginning in 1950, were to be applied against both parties, but the incidence f the penalties was uneven. The provision for penalizing Meneg was repeated (see footnote 14, above); th t is, half of the excess would be delivered to International, and Lagosov was given the option of purchasing t e other half at cost of production, i. e., Standard (New Jersey) would get all the excess oil, Gulf nothing. eneg similarly had an option to purchase, all excess oil produced by Lagosov at cost of production, but ha] of the excess oil purchased must be delivered to International under the principal agreement, 1. e., Standard (New Jersey) and Gulf would share excess oil on a 50-50 basis. ' This agreement was ca celed in 1?43. Its stated life (art. 5) was the same as that of the principal agree- ment, 1. o., the life of Mergeg's concessions. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 187 The saving clause.-A saving clause was included in the ratio agree- ment, designed, it may be assumed, to bring the agreement within the range of action permitted under the United States antitrust laws. However, the effect of the saving clause was qualified by an attached proviso which largely negated it. Article 4 of the ratio agreement states: Nothing in this agreement shall in any way restrict the right of any party 'hereto to increase production for import into the United States or reexport there- from by itself or any third party; Provided, however, That such party will first apply its proportion of the amount of production to be produced by it pursuant to articles 1 and 2 hereof to its said requirements for import into the United States -or reexport therefrom before the right to increase production specified in this article 4 is claimed or used.20 The first part of this article suggests that the ratio agreement was not intended to restrict the free flow of petroleum to the United States. But even without the attached proviso this provision had little mean- ing since imports into the United States were already subject to vol- untary restrictions on the part of the oil importers'21 limiting imports to 4.5 percent of American production, amounting to roughly 30 per- cent of Venezuela's production.22 Under these conditions, any large increases in Venezuelan production, such as that expected in 1937 to result from the important new discoveries in eastern Venezuela, would be excluded from United States markets, except as increases in United States domestic production permitted increases in the import tonnage within the limits of the 4.5 percent voluntary restriction. It may again be noted that this limitation of the United States market was itself an important consideration in the writing of the ratio agreement and the construction of regulating machinery. The agreement was designed to soften the impact of this new production, particularly from eastern Venezuela, not in the United States where it was effectively excluded but rather in the other natural markets for Venezuelan oil which were long-established and world-wide in scope.23 Whatever meaning was left to the saving clause was removed by the attached proviso. This proviso stated that a party wishing to exceed its quotas by shipment to the United States would first have to apply its full quota allowed for that year (i. e., "its proportion of the amount of production to be produced by it pursuant to articles 20 Art. 1 is that in which production quotas were fixed for the 12-year period, 1938-49, Art. 2 provided machinery for fixing quotas for 1950 and after. 21 Voluntary agreement with the Secretary of the Interior. Soo p. 169. 22 In 1937, imports into the United States averaged about 143,600 barrels daily and totaled about 4.5 per- cent of domestic production. About 88 percent of those imports came directly from Venezuela as crude oil (39 percent) or indirectly from the Netherlands West Indies as heavy refined products (49 percent). About 45 percent of all petroleum imports were band-d for reexport. Foreign Commerce and Navigation of the United States in the Calendar Year 1937, p. 178. Venezuelan production in 1937 averaged about 510,000 barrels daily, and exports averaged a slightly lower figure. Thus in 1937 about 30 percent of Venezuelan United States, much of this being bonded for peeuc ti,, nba 70 imported was recttly. i or other indirectly world intokte. 23 All three large Venezuelan producers had established markets outside of the United States. Shell and Standard (New Jersey) shipped most of their production to refineries in Netherlands West Indies and lesser amounts to refineries in Europe and the United States. The refined products manufactured at these places were sold in all world markets. International shipped its share of Moneg oil to the refineries of its parent corporation, Imperial Oil Co., the Canadian subsidiary of Standard (New Jersey). Assuming that all of Standard's Imports Into the United States originated directly and indirectly from Venezuela, those imports amounted to about 35 percent of Standard's Venezuelan production. Gulf imported about half its production into the United States, where it was refined in Gulf's refineries, the products being sold domestically or bonded for export, and it presumably sold the other half of its production to others prior to the coming Into effect of the principal agreement. Shell's imports into the United States at this time were a negligible proportion of its Venezuelan production. All these statements are based on data from Ivloody's Industrials, the 011 Weekly, November 13, 1939. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 188 T 1 and 2 hereof' from the United its quotas for tl be exceeded unc to go to the L could be used. This proviso exceeded in the to use the savil would have to e Lagosov to use markets for a la The Internati, International ar a second docun assented to the only because NI but also because were to be "rea meat." 26 NON acquired in the) the principal ani It was agreed, endeavors to cal sources at the le' ratio agreement, or where the dirt It was further of any change in tl from the quotas the quotas.27 These provisi( a stable and pr year to year.26 system for Men thirds or more participate dire( acquired throug] ments an impor therein. Shell t arrangements. . production went principal supplic While Shell's ov quota schedules; been guided by t Another agree: national-NOM k ) to its requirements for import into or for reexport States, before it could claim or use the right to exceed LCSO purposes. In other words, if the quotas were to or the saving clause, the total production would have nited States and no other channels of distribution effectively eliminated the possibility of quotas being case of shipments to the United States. For Meneg rig clause, its part owners, International and NOM, liminate their normal channels of trade; similarly for the clause, it would have to abandon the normal rge proportion of its production. oral-NOM ratio agreement.-At the same time that id NOM concluded the main agreement, they signed lent in which Shell, through NOM, recognized and ratio agreement. This recognition was required not )M had acquired an interest in Meneg's production, the budget provisions 24 of the principal agreement I in conjunction with and subject to the ratio agree- s, therefore, agreed that it would not use its voice, Hain agreement, to disturb the arrangements made in I ratio agreements regarding production. however, that International would use "all reasonable a .se Meneg" to maintain its total production from all eels authorized by the production schedules under the except where "contrary to good operating practice" ict costs of the oil produced exceed its market value.26 reed that the consent of NOM would be required for ie ratio agreement which would either release Meneg or which would require Meneg to produce less than ins generally reflect the interests of Shell in receiving edictable supply of eastern Venezuelan crude from They also reflect Shell's desire to maintain the quota eg and Lagosov, which together accounted for two- of Venezuelan production. While Shell did not tly in the ratio and principal agreements, it had i the main and the International-NOM ratio agree- tant voice and share in the arrangements included herefore had a direct knowledge and share in these Moreover, since the greater part of Venezuelan to foreign markets, in most of which Shell was a r, it had a particular interest in their fulfillment. vii producing subsidiaries were not included in the it seems likely that their operations would have hose considerations.29 ment, which was extraneously included in the Inter- Latio Agreement, further cemented relations between Y+ See p. 176. ss Art. 5. ss Art. 1. 27 Art. 6. 2B This was important t Shell singe this Venezuelan oil was to replace the petroleum resources owned by Shell and expropriated b3 , the Mexican Government in March 1938. 2e The International-N M ratio agreement completed the process whereby Standard (Now Jersey) and Shell had gained the do inant voice in the operations and management of Meneg, and Gulf had become, in effect, a junior partner. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE: INTERNATIONAL PETROLEUM CARTEL 189 Standard and Shell. International and NOM agreed that if either acquired, directly or indirectly, Gulf's holdings in Meneg, it would "immediately offer one-half thereof to the other party at the cost to it of such one-half".30 Thus, the joint and essentially equal voice of Inter- national and NOM was to be maintained under all contingencies. Cancellation of the four-party ratio agreement.-On January 13, 1943, representatives of the four corporations signing the ratio agreement executed a further agreement whereby the parties: (1) canceled the ratio agreement as of December 31, 1942, and (2) mutually waived y and abandoned any claim of any nature arising out of that agreement. No reasons were given for this action and no provision was made for a superseding agreement. However, current circumstances and events, together with the fact that the provisions of the other agreements were still operative, help to explain this abrupt and laconic annulment. In the first place, to achieve "economics in administration and operations," all of the Venezuelan interests of Standard (New Jersey), except those held by International in Meneg, were merged into the Creole Petroleum Co. during August and September 1943.31 This change in Standard's corporate structure in no way directly affected the ratio agreement, but in the course of arranging the reorganization -which was bound to result in a certain amount of publicity- Standard may have felt that it would be better to have the ratio agreement out of the way. More important was the impact of World War II upon current operations and prospective markets. Beginning in 1942, German submarine attacks on tankers substantially reduced the amount of Venezuelan, oil shipments from the Caribbean area to consuming centers. The Venezuelan petroleum industry was thereby forced to curtail production from its peak production in 1941 of 625,800 barrels daily (average) to 404,600 barrels daily in 1942. As the submarine danger was brought under control, recovery was rapid. New tankers were built and production in 1944 averaged 704,200 barrels daily, with average daily production mounting rapidly thereafter.32 The agreed-upon production schedules and ratios, therefore, were inapplicable both to the lean years of 1942 and 1943 and to the fat years that immediately followed when the petroleum companies had every inducement to produce all the oil that could be transported. Further, the future became highly uncertain and unpredictable; what would world markets be like in the immediate postwar period? If the war should end before 1949, there would be no way of ascertaining whether the agreed-upon quotas and ratios would be applicable and "fair." Moreover, the machinery for fixing quotas beginning in 1950 might better suit the situation than that agreed upon for the period ending in 1949. All in all, it seemed that the safest course of action was to disregard a quota system that would be inoperative for an unpredictable number of years. 34 These assets included "Any assets of Meneg [acquired] (otherwise than pursuant to the main agree- ment)", t. o., (1) any assets of Mcnog owned and vested in Gulf as distinct from those owned and vested in International and NOM under the principal and main aereements, and (2) "any shares of stock, bonds, notes, debentures, or other securities of Meneg" (Art. 7 [italics added]). 81 This reorganization was announced to the stockholders in March 1943. In It, SOV and Logo disappeared as separate entities in separate corporate hierarchies, and the control and administration of their properties and business was thereby considerably tightened. The status of the "pooled concessions" did not change; Creole merely supplanted its subsidiary, SOV, in the ownership and management relations with Moneg. In connection with this merger, Standard (New Jersov) later filed an application, dated May 5,1944, with the New York Stock Exchange for an additional stock listing of 50,208 shares. as All statistics from World Oil, July 15, 1950, p. 44. Production increased annually until 1948, when the daily average was 1,291,800 barrels, but it fell off slightly in 1949. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 190 It mayalsob The provisions budgets of capit operating polic control over 95 Meneg through; stability and soli Moreover, th known, is still in It may be assn tory, was freely upon the partie Meneg is presu noted that the cancellation of the ratio agreement by all controls over the Venezuelan petroleum industry. l .and operating expense and to annual statements of ersey) and Shell still held, in 1947, direct and indirect percent of all production in Venezuela.33 The two rred continuously and necessarily with respect to their subsidiaries, International and NOM. The ity of even an implied or tacit understanding between. International-NOM ratio agreement, so far as it is xistence,34 though it is necessarily largely inoperative. ed that the written consent of NOM, which is manda- hell participated in that decision. The restriction with respect to the acquisition of certain assets of ably still binding. SUMMA Y: THE SIGNIFICANCE OF THE AGREEMENTS As of December 15, 1937, the Mene Grande Oil Co., a 100-percent subsidiary of the Gulf Oil Co., owned various oil concessions in Venezuela, in its own right and owned interests in various other con- cessions jointly with others. It owned and held interests in the ownership of ph sical properties in connection with these concessions and concession interests. It held the right to develop and to partici- pate in the development of them. It owned rights to future oil production from these concessions proportionate to its ownership. The net book value of these concessions, physical properties, and rights was $19,562,852. On December 15, 1937, Meneg participated in a number of agree- ments with various Standard (New Jersey) subsidiaries. The net effect of these agreements and of subsequent agreements between the International Petroleum Co. and the NOM, a Shell subsidiary, may- be summarized as follows: (a) Meneg an SOV, a Standard (New Jersey) subsidiary, agreed,. as of December 1, 1937, to "pool" all the concessions in which they had joint interests. These "pooled concessions" represented about 74 percent of all exploitation concession interests and about 90 percent of all exploration concession interests held by Meneg. Practically all of these were ocated in eastern Venezuela. While the concessions, were to be "ope ated" by their legal owners the actual management. and control ove all exploration, development, and production was transferred to a committee representing equally the two partners. Additional conce sions could be pooled at the discretion of and upon. agreement of the committee. All costs of operation of each pooled concession were to be shared equally, and one-half of the oil produced on each pooled concession was deliverable to each of the parties. Thus, a large pat of the properties of the two companies was, in fact, transferred from ! the separate management to that of a joint enter- prise. "see p. 185. It Its life is the same as t Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 (b) Meneg sold an undivided one-half interest in all of its conces- sions, physical properties, and rights, as. defined in the opening para- graph of this summary section to the International Petroleum Co., an indirect subsidiary of Standard (New Jersey), the sale taking effect on December 15, 1937. Included in this sale was an unlimited and con- tinuous option to International to purchase all concessions and con- cession interests that Meneg might want to sell, transfer, or surrender, and a similar option to buy an undivided one-half interest in all new concessions and concession interests that Meneg might acquire. In eluded in the sale, also, was an undivided one-half interest in all physi- cal properties of every description acquired by Meneg after the date of this sale. International later sold to a subsidiary of Royal Dutch- Shell, NOM, retroactively to December 15, 1937, an undivided one- half interest in all the concessions, properties, rights and options it had acquired from Menog. As of and after December 15, 1937, therefore, all of the assets, tan- gible and intangible, of Menog were vested as follows: Gulf, 50 per- cent; Standard (New Jersey), 25 percent; Shell, 25 percent. Insofar as the "pooled concessions" were concerned, as distinct from all of Meneg's other assets, their ownership and all oil produced therefrom was divided as follows: Gulf, 25 percent; Standard (New Jersey), 62.5 percent; and Shell, 12.5 percent. (c) Meneg surrendered valuable management prerogatives to its partners: (1) Meneg granted to International the right of access to and inspection of all of its properties, records, books of account, and all information, including geological, in its possession relating to its concessions and properties; (2) Menog also agreed to submit annually budgets of capital and operating expense and statements of operating policy for all its properties and interests for the approval and con- currence of International, such approval being necessary for all exploration and development work other than that in connection with current and "normal" operation; (3) Menog and Standard (New Jersey) operating subsidiaries agreed to fix total production schedules beginning in 1938, quotas being fixed under these schedules in the ratio, respectively, of 100:345. Machinery was provided for a revision of these production schedules and ratios beginning in 1950. The superior and dominating position of the Standard (New Jersey) subsidiaries was recognized by Meneg. These provisions were to be read and interpreted together with those relating to budgets and operating policy, i. e., Meneg's limited voice in the quota arrangement was subject to approval by International. While the quota arrange- ments were canceled in 1943, the budgeting arrangements are still in effect. International admitted Shell, through NOM, to participation on a substantially equal basis in all the supervision rights it had acquired under the provisions summarized above. NOM thus acquired an equal right of access and of management through International. Similarly, it acquired knowledge of and approved and consented to the production quota arrangements. Meneg, in two separate docu- ments,36 recognized International's right to admit NOM to these arrangements and to the sale. (d) In consideration of the sale and transfer of prerogatives as described above, International agreed to assume one-half of all of Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Meneg's "current obligations" arising after December 15, 1937, or allocable to oil produced after that date, and to pay to Meiieg $100,000,000. he consideration paid by NOM to International for one-half of Int rnational's acquisitions included the assumption by NOM of one-ha f of all of International's burdens, i. e., International transferred to OM an undivided one-fourth interest in Meneg at the cost thereof to International. The net effect of the various considerations p id may be summarized as follows: (1) The agreement by the parties to assume varying portions of "current obliga ions" represented, in effect, an agreement to pay all the costs of oil elivered and to be delivered to them after December 15, 1937. The ayments were to be proportionate to the interest in the oil produced, I. e., Gulf, 50 percent; Standard (New Jersey), 25 percent; and Sh 11, 25 percent. The total amounts paid by the three parties from December 15, 1937, to October 31, 1947, a period of just under 10 years, were as follows: Gulf (50 percent) - ----------------------------------------- $172,033,708 Standard (New Je sey) (25 percent) -------------------------- 86, 016, 854 Shell (25 percent) ------------------------------------------- 86,016,854 Total------1----------------------------------------- 344,067,416 Meneg's net I roduction of oil during the same period was similarly divided: Barrels Gulf (50 percent) - ------------------------------------------ 191,073,259 Standard (New Je sey) (25 percent)--------------------------- 95, 536, 630 Shell (25 percent) - 95, ---------------------------- 95,536,630 - Total----- ---------------------------- 382,146,519 (2) As of De 7, the three parties had the followininvestments in and rights: (a) Gulf owned an undivideone-half interest ise (net book value $9,781,426) and had a net "profit" o the sale of the other half of $90,218,574, i. e., it held its one-half interest free of cost, plus cash in hand or owed to it of $80,437,148. O. Standard (New Jersey) owned an undivided one- fourth interest net book value, $4,890,713) at a cost of $50,000,000. (c) Shell owned an undivided one-fourth interest (net book value, $4,890,713) at cost of $50,000,000. These invest. ents were in addition to and separate from the burdens assumed and ca ried by the three parties for "current obligations," i. e., for the cos s of producing oil after December 15, 1937. In ac- counting practice they represent charges paid for the rights to future production of of from the concessions and properties owned by Meneg and the right to participate in such growth and expansion as Meneg might enjoy in t e years to come.36 3' Up to October 31, 1 47, a total of 382,146,519 barrels of oil had been delivered to the parties under the agreement. Since the pi oven reserves of Meneg were estimated, as of January 1, 1948, in Gulf's Prospectus, dated January 27, 1948, ago 3, at 575,000,000 barrels, this would suggest that the total resource made avail? able to the partners was about 960,000,000 barrels. Standard and Shell had each purchased a one-fourth interest in this oil at a cot of $50,000,000, respectively. Gulf retained a one-half interest in the oil, and had a cash balance of $80,437, 48. The cost of the oil deli ered to the parties during the life of these agreements can be calculated from this information. The cost o 'each barrel of oil acquired by Standard (New Jersey) and Shell is the actual cost of production, paid to M neg as a "current obligation," plus 20,4 cents. The cost to Gulf is the actual cost of production minus 16$ cents per barrel. With respect to Meneg's production, Gulf's advantage over Standard (Now Jersey) a d Shell is thus 37.6 cents per barrel. Even if proven resorve double after January 1, 1948, this cost factor will continue to give to Gulf, over the entire life of the agree ents, an advantage over Standard (Now Jersey) and Shell of about 23.4 cents per barrel. Moreover, if Me eg's costs of production approximate those of Standard's and Shell's independent production in Venezuela, Gulf has had and will continue to have an over-all cost advantage for its share of Venezuelan crude. The discussion in this footnote is suggested by the manner in which Gulf actually handled the transaction n its accounts, making its calculations, however, as of December 15, 1937. Moody's Industrials, 1950. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 193 At the time the various agreements were signed, Standard and Shell were both much larger producers in Venezuela than Gulf. It was a time when the world petroleum industry was greatly concerned with the problem of "overcapacity"-a problem which could have been greatly aggravated by uncontrolled Venezuelan production. The interests of Standard and Shell lay in "stabilizing" and controlling Venezuelan production in relation to markets for petroleum and petroleum products elsewhere in the world. The various agreements described in these pages facilitated the achievement of this goal, and the exchange of money and rights .to oil was the instrument for fixing the interests of the parties. For cash Gulf surrendered its management, prerogatives and accepted a position as a junior partner in the Vene- zuelan industry. Standard (New Jersey) and Shell consolidated their control over the Venezuelan petroleum industry. Production quotas were fixed for about 70 percent of Venezuelan capacity. Shell alone remained outside of the quota arrangement but had knowledge of and consented to it. These contracts for the sale of oil, therefore, had unusual features that distinguish them from ordinary business transactions. The three parties to the contracts became in reality partners in a joint enterprise, each holding undivided interests in the assets of the joint enterprise. The "price" paid by Jersey Standard and Shell for the oil they received was the cost of production of that oil. The "profit" accruing to Gulf for the "sale" of oil was the fixed sum initially paid, i. e., $100,000,000 less one-half of the book value of Meneg's assets in 1937, irrespective of the quantities of oil that would actually be delivered over the life of Meneg's concessions and interests in Venezuela. The "sale of oil" features of these contracts thus appear actually as a sharing of oil among the three companies, while the contracts themselves a pear to have been designed to further the regulation and control of the de- velopment of crude-oil production in Venezuela. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 PART III PRODUCTION AND MARKETING AGREEMENTS Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CHAPTER VIII PRODUCTION AND MARKETING AGREEMENTS AMONG INTERNATIONAL OIL COMPANIES BACKGROUND FOR INTERNATIONAL AGREEMENTS In addition to (1) their outright ownership of reserves and produc- tion and distribution facilities, (2) their joint ownership arrangements, as in the Middle East, and (3) their agreements for the purchase and ,sale of crude, the leading oil companies have also exercised control over the industry through restrictive agreements regarding interna- tional production and marketing. These agreements, some of which are the subject of this chapter, constitute a series of steps by which the major international companies sought to establish more effective control over distribution and prices throughout the world. A feeling that greater control in distribution markets was needed arose in the middle 1920's. At that time it became evident that the existing degree of control over production constituted an inadequate basis for controlling price competition, even among the largest com- panies; for a price war broke out in Asia between two of the large international interests, and thereafter, in 1928, an international cartel agreement was formed among the principal international companies. Its purpose was to forestall market competition, both among them- selves and with others, through control of production and exports. But this agreement left largely uncontrolled the activities of important independent interests that were not parties to the agreement. It was followed by other agreements designed, first, to forestall compe- tition more fully among the parties to the main agreement and, second, to extend the international groups' control over the activities of inde- pendents through separate local. marketing agreements formulated, so far as possible, in accord with the principles and procedures agreed upon by the parties to the main agreement. These agreements cov- ered the period from 1928 to the outbreak of World War H. They were an integral part of the pattern of concentrated big-company control over world oil resources and trade described in other chapters of this report. Division of the Indian market The price war which immediately preceded the first international agreement broke out in India in 1926. It was a striking illustratiox_ of how price competition between two of the big companies in one consuming area could spread to other markets and have a disastrous effect on the profits of all. The concerns directly involved were Royal Dutch-Shell and Standard Oil Co. of New York. Royal Dutch-Shell owned some of the properties seized by the Russian Government in 1918. Neverthe- less, both Shell and Standard of New York continued throughout the early 1920's to buy quantities of Russian crude oil which they refined 197 23541-52-14 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 198 TF E INTERNATIONAL PETROLEUM CARTEL years of unsuc during which n where, Shell d buying no mor likewise. Shell substitute for R Standard cease strengthened S would have w thereby practic decided that, i to continue to dia and other far-eastern markets. After several essful negotiation for compensation for its properties, ;w reserves and production were being developed else- cided to retaliate against the Russian Government by ad substantial production in Rumania which it could ssian oil, but Standard of New York had no substitute buying from Russia, it would not only have thereby ell's position in pressuring the Russians, but also akened its own competitive position in India, and 4lly imposed upon itself the necessity of acknowledging rsbip of the British-Shell combine in India. Standard d t T di ain i ~----- th or e- o rem n a n e uy Russian oil. _Sir Henri Deterding, of Shell, said that he propose that Shell was On Septemb price of kerose more Russian deterred; and between Stand United States, of ethyl fuel in panes spread, tional marketi andard countered Deterding's opposition by alleging eeking a monopoly of Russian oil.' r 19, 1927, Royal Dutch-Shell announced that the e in India would be reduced immediately, should any n September 23, 1927, price reductions were made. ons followed,' developing into a price war in India rd of New York, and Shell. Steps were taken by hile Standard of New York intensified its advertising ther world markets were involved and other interna- hol.d their respe tive positions. This intensive price competition, however, was short-lived. Late in 1928, an agreement was reached between Standard of New York, Shell, and Ang o-Persian which ended the struggle over the Indian market. Few etails are available, but apparently an understanding was reached wh reby the Indian market was divided between Standard, Shell and. Anglo Persian.4 Shell's action in carrying the price competition to the American market affected the operations of all American oil companies. On the other hand, the action of Standard of New York in. staying in India notwithstanding low prices, and in intensifying the promotion of its ethyl gasoline i England, brought sharply to the attention of Anglo- Persian and Ro al Dutch-Shell the possibility that Standard might increase its sale in Great Britain and continental Europe and that ogler America interests might take similar action. The relative po,` itions of all international companies in the principal consuming markets of the orld were jeopardized. Thus, the stage was set for an'internationa live-and-let-live policy. This was the background against which t e first steps toward cartel control of world markets were taken in 1 28. I The Petroleum Tim s, London, January 28, 1928, p. 168 and February 4, 1928, p. 210. The Petroleum Tim s, London, January 28, 1928, p. 168. e Ibid., March 3 1928, p. 400. 4 International cartel United Nations Secretariat Department of Economic Affairs, 1947, table 1; see also Leith, Furness and Ws, world Minerals and World Peace, The Brookings Institution, 1943, p. 113. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The rapidity with which the Indian price war had spread from India to American markets and then back to Europe made it apparent that control. of reserves in newly discovered fields was not, in and of itself, an effective guaranty against the outbreak of competition. With this experience fresh in mind, Royal Dutch-Shell, Anglo- Persian Oil Co., Ltd., and Standard Oil Co. (New Jersey) sponsored many conferences and meetings during the early months of 1928. It appears that American interests took the lead in attempting to for- mulate an international working agreement.' Before any machinery for actual controls could be set up, a set of ,general principles and procedures had to be formulated which would be acceptable to practically all of the oil industry itself,' would avoid opposition by the various national governments involved,' and could be effectively applied to the. differing conditions prevailing in particular producing areas and consuming markets.' The burden of drafting such a document was undertaken by" Walter . C. Teagle, of Standard Oil Co. (New Jersey) ; Sir Henri W. A. Deterd- ing, of Royal Dutch-Shell; and Sir John Cadman, of Anglo-Persian Oil Co., Ltd. The actual work appears to have been done in England. How this document came to be known as the Achnacarry agree- ment was described in the trade press of the day, which quoted Mr. Teagle as having said: Sir John Cadman, head of the Anglo Persian Oil Co. and myself were guests of Sir Henri Doterding and Lady Deterding at Achnacarry for the grouse shootin~, and while the game was a primary object of the visit, the problem of the world s petroleum industry naturally came in for a great deal of discussion. * * * Any attempt at regulation of overproduction of crude would obviously require cooperation of a vastly greater number and diversity of interests than were represented at Achnacarry Castle. 'The document finally adopted bears the simple title Pool As o ciation and the date, September 17, 1928. It is more often referred to, however, as the "as is agreement of 1928" or the Achnacarry agree- ment. The document consists of three parts: a preliminary state- ment, a set of principles, and a combined declaration of "policy" and outline of procedure to be followed by participants in applying the principles. The preliminary statement consists of a series of paragraphs justi- fying the proposed control measures. The nature and scope of this part of the document, which may be regarded as the industry's } brief for controls, is indicated by the following key passages: Certain politicians, with the support of a portion of the press, have endeavored to create in the public mind the opinion that the petroleum industry operates "The The 011 and Gas Journal, June 19, 1027, p. 38, stated: "Now that the differences of Royal Dutch-Shell and Standard of New York have boon adjusted, the American companies have taken the lead in bringing about-an international accord on the subject of oil conserv-tion and supply." , ? It is a cardinal fact of cartel economics that oven a small "fringe" of uncontrolled production or market supply may dis-upt the smooth operation of cartel controls by making them more beneficial to the fringe than to the participants. 7 A plan to restrict production or divide markets which was fully sanctioned by law in some countries might be condemned by law in others. e A plan suitable to control of production in Persia or the Dutch East Indies, where reserves and produc- tion were controlled by a few interests, might be unworkable in the United States where control of reserves and production was sc diverse as to make concerted private control of reserves and production difficult, especially in view of the prohibition of the antitrusts acts. In redned.products marketing, controls which were applicable in a market where there was no uncontrolled fringe of noncooperating suppliers might be unworkable in a market where even a small percentage of the total market supply was furnished by out- siders. I The Oil and Gas Journal, September 20, 1928, p. 40. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 200 TIE INTERNATIONAL PETROLEUM CARTEL solely under a p licy of greed and has itself initiated methods of wanton ex- travagance. Thi contention is absolutely unjustified, ignoring as it does, the problem of the oil industry. Since its incept on, the oil industry has looked forward with apprehension to the gradual depletion and final exhaustion of its supplies of crude oil. The tem- porary shortage of supplies that existed in certain countries during the Great War further accentuated this fear and caused vast sums of good money to be expended to locat- and develop reserves in all parts of the world where petroleum potentialities app ared, as ;well as in accumulating large reserve stocks above ground. Now th situation has changed. An adequate supply for a long time to come is assure * * *. Excessive competition has resulted in the tremendous overproduction of today, when over the wo ld the shut-in production amounts to approximately 60 percent of the production actually going into consumption. Up to the prese t, each large unit has tried to take care of its own overproduc- tion and tried to increase its sales at the expense of someone else. The effect has been destructive rather than constructive competition, resulting in much higher operating costs. * * The petroleum industry has not of late years earned a return on its investment sufficient to enable it to continue to carry in the future the burden and responsi- bilities placed upon it in the public's interest, and it would seem impossible that it can do so unles present conditions. are changed. Recognizing this, economies must be effected, ante must be eliminated, the expensive duplication of facilities curtailed Governing print pies As a basis for accomplishing the desired objectives, the following seven principles to govern proposed group action were set out: 1. The acceptance by the units of their present volume of business and their proportion of any future increases in consumption. 2. As existing facilities are amply sufficient to meet the present consumption these should be made available to producers on terms which shall be based on the principle of paying for the use of these facilities an amount which shall be less than that which i would hive cost such producer had he created these facilities for his exclusive se, but not less than demonstrated cost to the owner of the facilities. 3. Only such facilities to be added as are necessary to supply the public with its increased requires ents of petroleum products in the most efficient manner. The procedure now pr vailing of producers duplicating facilities to enable them to offer their own products regardless of the fact that such duplication is neither necessary to supp y consumption nor creates an increase in consumption should be abandoned. 4. Production shlall retain the advantage of its geographical situation, it being recognized that t Ie value of the basic products of uniform specifications are the same at all points f origin or shipment and that this gives to each producing area an advantage in s pplying consumption in the territory geographically tributary thereto, which sh uld be retained by the production in that area. 5. With the object of securing maximum efficiency and economy in transporta- tion, supplies shal be drawn from the nearest producing area. 6. To the exte t that production is in excess of the consumption in its geo- graphical area then such excess becomes surplus production which can only be dealt with in one f two ways.; either the producer to shut in such surplus produc- tion or offer it at a price which will make it competitive with production from another geographi al area. 7. The best int rests of the public as well as the petroleum industry will be served through th discouragement of the adoption of any measures the effect of which would bet materially increase costs with consequent reduction in con- sumption."-" Principles 1 o 6, inclusive, cover points essential to a scheme of control throug the pooling of industry resources. This was to be accomplished b (1) accepting and maintaining as their share of the 10 Pool Association (A hnacarry) agreement of September 17, 1928. 11 Ibid. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL industry the status quo of each member; (2) making existing facilities available to competitors on a favorable basis, but at not less than actual cost to the owner of the facilities; (3) adding new facilities only as actually needed to supply increased requirements of consumers; (4) maintaining for each producing area the financial advantage of its geographical location; (5) drawing supplies from the nearest producing area; and (6) preventing any surplus production in a given geographical area from upsetting the price structure in any other area. Point 7 gives a consumer-interest turn to the purpose of accomplishing savings and stabilizing the industry. Policy and procedural provisions This part of the document covers nearly two-thirds of the 17 type- written pages constituting the agreement. It consists of 2 intro- ductory paragraphs and 15 numbered policy and procedural para- graphs. The two introductory paragraphs clearly state its general purpose: If these principles are followed, the result will be a stabilization of the world's market outside of the United States domestic market which will be in the interest of all. To give effect to the above it will be necessary for the groups to adopt a uniform policy, which in each country of production will have to be considered separately, based on the particular conditions existing in each such country. * * * 12 The field of cartel action.-The first of the policy and procedural paragraphs said that the first step would be the adoption of An arrangement to cover all exports of petroleum and its products, with the exception of lubricating oils, paraffin wax, and specialty products, which shall be the subject of further consideration, and excepting all exports made to the United States. Specific statements limiting the stabilization envisaged to the world "market" outside the United States, and limiting the agreement's operation to "all exports * * * excepting exports to the United States," obviously were intended to exempt the cartel from the United States antitrust laws by declaring both the domestic market and export trade of the United States to be economic and political areas not affected by the agreement. Nevertheless, the agreement necessarily affected both imports into and exports from the United States. In regard to the former, the agreement contemplated that all "groups" operating in countries out- side the United States would adhere to the agreement and be subject to principle I, covering "acceptance by the units of their present volume of business and their proportion of any future increase in consumption." Application of this "as is" principle to the production of American companies in foreign countries automatically limited the quantity of foreign oil which they might produce and thereby limited the amount they might ship to the United States. In regard to the exports, machinery apparently designed to subject them to the principles of the Achnacarry agreement was established immediately. Two American export trade associations were set up within a few months after the Achnacarry agreement was formulated. The first was the Standard Oil Export Corp., formed in December 1928, with a membership consisting of Standard Oil Co. (New Jersey) 13 Ibid. [Italics added.] 13 Ibid. [Italics added.] Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 202 T~E, INTERNATIONAL PETROLEUM CARTEL Association, In can oil compa latter body bro "as is" quotas cartel through in both organi export trade i appears in the formed early in 1929 with a membership consisting- Export Corp., mentioned above, and 16 other Ameri es interested in exporting petroleum products. This under a single Webb-Pomerene export association. imilar to those'of the Achnacarry agreement. Liaison between the Export Association and the Achnacarry ations. As will appear below, some members of the spite of the formal exclusion of that trade which Quotas.-Pol'cy and procedural paragraphs 2 to 6, inclusive dealt- , with the formu ation of two types of quotas for the base period and' subsequent yeas, and set forth general rules for operation thereunder.. The two types f quotas covered, respectively, the performance of each group, first, in ach country, and, second, in all countries combined.. Since some gro ps might undersell in some countries and oversell in others, a meth d of adjusting and equalizing performance was neces- sary if the pert rmance in later years was to be so adjusted as to main- tain the propo tions fixed by the base period quotas. The general' rules for determining quotas and adjusting the performance of the- groups in subsequent years were set out in procedural paragraph 2,. as follows: L 2. The proporti n of the exports of each group to be ascertained on the following (a) The quantities of each product the groups have delivered in each country during the period from ---------------- to ---------------- shall be added, and the proportion of each group's deliveries of the total shall be ascertained for- each product and each country. The proportion of the total deliveries of each product so ascertained for each group shall be the quota each group shall be entitled' to supply of the t tal imports of all groups in the country in question. (b) The percentage shall furthermore be ascertained which the total of each group's deliveries n all countries bears for each product to the total of all of the (c) If during an 1 year the total of all the quantities supplied by a group as under (a) is less t an the quantity based on the group's percentage of the total supplies of all groups as under (b), then the group shall have the right to offer' to the oversupplyi g groups the difference, and the oversupplying groups shall be obliged to purchase from the undersupplying group the quantity of a product so, offered in proporti n to their oversupply, at the Gulf price basis." Briefly, the aragraphs quoted above embody the basis for de terminmg and aintaining the "as is" position of the participating- groups, both i individual countries and in the world market as a whole. Compliance with the "as is" principle was to be attained by all participants agreeing that if they were oversuppliers they would purchase from those who were undersuppliers. An example was. H For further discussi n of the organization and operation of the two American export associations, see p. 218 if., below. to Achnaearry agreement of September 17, 1928, The copy of the agreement from which the above par. 2 is quoted contains no definitely specified base period upon which quotas were to be determined; however" the first of the seven principles quoted on p. 200 above, required "the acceptance by the units of their present volume of business." I accordance therewitfi the base period used from the outset appears to have been the 1928 calendar year. This was the base period definitely specified in a subsequent agreement entitled Memorandum for European Markets," dated January 20, 1930, which was intended to implement some of the principles of the Ac nacarry agreement. (See p. 230, below.) Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 worked out in detail to show how, under conditions of changing market demand and volume of business done by different groups, the over-all "as is" status of all suppliers during the base period would be projected into the future. Thus, the maintenance of the "as is" status was to be tied to and maintained by purchases and sales within the group. These 'cartel transactions would be made on the basis of prices at United States Gulf ports under a special cartel pricing system described below. Procedural paragraphs 3, 4, and 5 dealt with three possible con- tingencies under which an undersupplying group 18 might not wish or might not be able to supply its full quota, and the procedure to be followed in filling these undersupplied quotas. Paragraph 3 pro- vided that if any undersupplying group did not offer to sell to over- suppliers, its right thereafter to do so would be forfeited. Paragraph 4 dealt with the contingency of inability to supply for reasons beyond the control of the undersupplier. It provided that any group unable to supply its full quota by reason of force majeure, would forfeit its right to supply a' quota proportion equal to the proportion of its undersupplies during the period of force majeure. It also provided that this forfeiture would continue after the force majeure ceased to exist for a period equal to the time during which the party was unable to supply. Finally, paragraph 5 dealt with the reallocation of the quota of an undersupplier who failed to supply its quotas under (a) of paragraph 2 for a period of 6 months for any reason other than force majeure. Such an undersupplier would forfeit its right to the extent that it undersupplied, and this part of its quota would be allotted to the other groups in proportion to their quotas. Principle No. 4 was a declaration that production should retain the advantage of its geographical situation "it being recognized that the value of the basic products of uniform specifications are the same at all points of origin or shipment." This principle implies standardiza- tion of the basic products. Standardization of product of the type necessary to obtain this objective does not appear to have existed in the industry. To correct this, paragraph 6 provided that the groups were "to agree on a standardization of quality for the various prod- ucts" with the added parenthetical note, "It will be necessary to V work out detailed specifications therefor." Pooling transportation faciliti'es.-Policy and procedural paragraph 11 dealt with the transportation of products shipped under the export quotas set up under the agreement. Each individual group was to have the right to transport its assigned quota to each destination in its own vessels if it so desired. If, however, it was unable to transport in its own vessels, or elected not to do so, then the association was to assign tonnage. To provide a working pool of tonnage subject to the cartel's control, the participating groups agreed to: * * * offer to the association [the cartel's administrative agency] any surplus tonnage they may have before chartering the same to outsiders, and the associa- tion shall have the first call on such tonnage provided it is willing to pay rates for same not below those which the group or groups can, obtain from others at the time.17 16 "Group" was used in the agreement to designate a company or group of affiliated companies, such as, Standard Oil Co. (Now Jersey) and its subsidiaries and affiliates, all of which participated in the agreement. as a group. 17 Achnacarry agreement, procedural par. 11. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The cartel's * * * charter offer to the associ outside tonnage.18 Reciprocal exi a quota system creation of a tri vided for a ratl the various pa were to direct dministrative agency, on its part, was bound to: 'rom the other groups tonnage owned by them which they may tion at freight rates at which the association is able to charter hange of supplies.-In addition to the establishment of nsportation pool, the Achnacarry agreement also pro- er elaborate method of exchanging oil supplies among upplies to each market from "the nearest producing area,"_ 10 thereby reducing transportation costs through the elimina- the participant erection of now its increased re manner." 21 Method of of the reciprocal e controlling the ment. The m each participan sources of suppi exclusively all o scope of the a chases of suppl agency the sol agreed that the be set up, woul ably situated a This scheme supplies econo visions. The fi prices more fav the contingency was covered by then the willing g tilies so purchased agreement at the po Thus, surplus p regularly made ling, and to minimize the tedency to erect duplicate dance of duplication was expected to result because her's existing facilities, 20 and would tend to limit the uirements of petroleum products in the most efficient eting exchange of supplies.-The method of effecting change was designed as part of an over-all scheme for etroleum production of the participants to the agree- mbers agreed to make arrangements providing that lies and obligate itself to purchase from the groups f its imports of petroleum products that fall under the Trangoment." 22 This provision eliminated all cur- s from outsiders and made the cartel administrative source of supply for its members. It was further groups, acting through the administrative agency to to eliminate outside sources of supply and to route ically within the cartel was fortified by two other pro- ?st was that participants would not sell to outsiders at rable than to cartel members.2? The second envisaged that some participant might have a surplus over what under its quota, which it might wish to sell at prices the provision that such a group: r same to the other groups at a price below that posted by the ted price against their quota.25 ?oduetion was to be disposed of at low prices among ers and under the cartel quota system, while sales to outside marketers by cartel members under their ie Achnacarry agreom 11 Ibid., principle No. F 20 Ibid., principle No. 21 Ibid., principle No. . 22 Ibid., procedural p . 8. 23 Ibid., procedural pa . 10. 24 Ibid., procedural pa . 8. 28 Ibid., procedural pa . 14. [Italics added.] Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 quotas were never to be made at prices lower than those charged in intracartel sales and reciprocal exchanges. Intracartel pricing methods.-The pricing method adopted for intra- cartel sales and exchanges was designed both to reserve to the cartel members all cost savings resulting from the exchange of oil supplies and to give effect to principle No. 4 of the Achnacarry agreement, which declared "that the value of basic products of uniform specifi- cations are the same at all points of origin or shipment." The participants agreed that the cartel administrative agency would prepare- * * * for 6 months in advance, on the basis of current freight rates, statements of relative freight rates from each port of shipment to each port of import.2a These freight rate schedules were incorporated into the cartel pricing system as follows: Each group shall be paid f. o. b. port of shipment for each product on the basis of the Gulf price; or, if the goods are supplied c. i. f. port of import, the marketing organizations shall pay to each group this price plus the freight rates scheduled for the port of import under the statement prepared by the association. (NOTE.- The United States Gulf prices shall be the basis until further notice by the asso- ciation.) 27 The agreement on freight rates was designed to stabilize this im- portant element of petroleum prices. In each case in which a sale or exchange of supplies was made and a transportation charge was involved, the transportation charge was to be fixed by a rate schedule, made after due consideration of "current freight rates." Once the cartel's relative freight rates were fixed, they could not change for 6 months, even though they ceased to reflect open market private charter rates. The observance of such arbitrary rates undoubtedly was facilitated by the fact that the participants owned outright, or controlled under long-term charters, the vessels in which their oil would normally be shipped. As stated above, the participants had. also agreed to pool and place at the disposal of the cartel management any surplus tonnage which might arise. Thus in each transaction among the cartel members in which a. transportation charge was involved, a stabilized charge was to apply. Since oil supplies were to be directed to the "geographically most favorably situated area," the applicable charge in each case was to be the freight charge determined in advance from the nearest port of shipment. It was further agreed that, until further notice from the cartel administrative body, the United States Gulf prices would be the "base price" at every port of shipment. The pricing method adopted for internal cartel use, therefore, provided for a uniform base price at every port of shipment plus an agreed freight rate in all applicable cases. This pricing method was to apply both to oil supplies exchanged so as to achieve economies for the benefit of the cartel members and to petroleum products sold among the cartel members in adjustment of over- and under-trading. Sales of surplus products among the cartel members, however, were to be made "at a price below that posted by the association for the product or products in question." 2S Operation of the exchange and pricing system.-An example, bearing the same date as the Achnacarry agreement, was worked out by the negotiators of that agreement to show how the combination of the 26 Ibid., procedural par. 11. 27 Ibid., procedural paragraph 13. 2a Ibid., procedural par. 14. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 cartel pricing method with the reciprocal exchange of supplies would work to the a vantage of each of the participants. The example is as follows: Let us assume AP [Anglo-Persian] is entitled to supply 100,000 tons, and this quantity is shipped from Persia to Italy instead of from Persia to the AP's own marketing organization in Great Britain, this marketing organization receiving instead 1.00,000 one from the Shell from the U. S. Then, assuming other figures, we would have the following picture: 1. AP's selling organization in Great Britain is supplied by the Shell with 1.00,000 tons from the U. S., paying therefor to Shell 10 cents per gallon and 20/-freight. 2. AP's selling organization realizes from the sale and delivery of these 100,000 tons a return of 150,000. 3. AP supplies to Italy 100,000 tons and receives therefor 10? per gallon and a freight rate of 18/- per ton. Then, AP has realized for its 100,000 tons of products a net return of ?150,000, less local marketing expenses in Great Britain, less cost of Transportation from U. S. to Great Britain instead of realizing for this quantity ?150,000 less the same marketing expenses and less cost of transportation from Persia to Great Britain. Conse uently AP saves the difference in cost between transportation from U. S. to Great Britain as against Transportation from Persia to Great Britain 2' The fact that P's marketing organization may have paid to the Shell a higher freight rate for he transportation of the 100,000 tons from the U. S. to Great Britain than sel cost does not in the least change this, since AP will receive for the transportati n from Persia to Italy a proportionately equally higher freight rate. Whateve excess it may have paid over self cost through its British market- ing organization for Atlantic maritime transportation to Great Britain will be returned to AP y the proportionately equally high excess over self cost AP will receive for the ransportation from Persia to Italy. On the other hand, if the Shell sells through its Italian marketing organization the 100,000 tons of products supplied by AP to Italy then the Shell will realize for the 100,000 tons supplied to AP in Great Bri ain the Italian price less the freight from Persia to Italy instead of the Italian pri e less the freight from the United States to Italy, thereby making an additional p ofit by saving the difference in freight from Persia to Italy as -against U. S. to Italy. The balanci g of freight savings as between the two points of origin and the two destinations would obviously be upset by any change in transporta ion rates. The stabilized schedules of freight rates, therefore, assured to each party that the freight savings resulting from the reciprocal xchange of supplies would be equitably divided between them. Furth rmore, the use of a common base price (United States Gulf price), i respective of the source of supply, assured to each participant uniform. base prices for its petroleum products at each port of shipm nt irrespective of its costs of production. Cartel verso world pricing methods.-The way in which the freight savings to be achieved by the reciprocal exchange of supplies would be reserved entirely for the benefit of the cartel members becomes -clear in a comparison of cartel pricing with world pricing methods. The pricing method for intracartel transactions was a modified multi- ple basing poi it system having the following elements: (1) each port ,of shipment as designated a basing point; (2) United States Gulf port published prices were designated as base prices to prevail at each basing point until further notice; (3) freight rate schedules were prepared showing "relative freight rates from each port of shipment to each port o import" and (4) "standardization of quality for various products" wa declared to be a cartel objective. In contrast to this pricing method for internal cartel transactions, the world pricing method up to World War II, as shown in chapter Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 207 10 of this report, was a single basing point system including the fol- lowing elements: (1) the common recognition of the United States Gulf as the single, governing basing point; (2) the common observance of the United States Gulf price, as the starting point in the determi- nation of the delivered price; (3) the common use of standard adjust- ments for differences in quality; and (4) the common use of standard tanker charges from the United States Gulf to ports of destination to be added to the basing point price.30 The common acceptance of this pricing method by all parties in. world trade resulted in a uniform delivered price in each market.31 The Gulf-plus pricing system was a structure within which the framers of the Achnacarry agreement could achieve and reserve to themselves substantial economics. Under Gulf-plus, prices in world markets were fixed at the level of prices at the United States Gulf plus standard freight charges from the United States Gulf to consum- mg markets. So long as the United States, or even the United States and Caribbean areas, were the world's principal sources of crude, it was to nobody's advantage to undercut the Gulf-plus price in any foreign market unless the undercutter was willing to risk a price war- a war which the dominant American companies, because of their -size and location, would probably win. During the 10 years from 1919 to 1928, however, increased produc- tion of crude oil, especially in the United States, Venezuela, Russia, Rumania, Iran, and Netherlands East Indies changed the condition of the petroleum market from one of anticipated shortage to what the preamble to the Achnacarry agreement described as "tremendous overproduction * * *." 2 3o goo p. 352. 31 The use of the Gulf-plus method of pricing actually was not now In the Industry. In fact, most of the o11 comnanics had long priced their products in this manner, whenever It had been to their advantage to do so. In defense of their system of pricing, industry representatives have frequently attached much im- portanco to the distant origin of Gulf-plus pricing as a "natural" competitive development, dating from the early days when the United States was the world's principal source of both crude and refined petroleum products. The fact that a given system of pricing has long been in use, however, does not necessarily mean that it originated from the free play of competitive forces. It must be romem bored that from about 1882 to the sec- ond Standard Oil dissolution in 1911, the original Standard Oil Trust (1882-92), and its successor, Standard Oil Co. (Now Jersey) had occupied a virtual monopoly position in both domestic and world trade. (See Report of the Commissioner of Corporations on the Petroleum Industry, pt. 1, Position of the Standard Oil Co. in the Petroleum Industry (1907) ch. II, pp. 48-94.) As a result of the 1911 dissolution order, Stand- ard Oil Co. (Now Jersey) distributed its entire stockholdings in 33 subsidiary and affiliated companies. The stock, however, was distributed pro rata to Its own stockholders. Hence, although, as a result of the dissolution Standard Oil Co. (New Jersey) coasod to be a holding company, the successor firms wore owned by the some interests which had owned the trust-a circumstance which was not likely to give rise to im- mediate vigorous competition among them. The development of the Gulf-plus basing point system was facilitated by the continued cohesiveness of the Standard companies, coupled with the fact that the American oil companies, as a group, still continued to account for the bulk of the world supply, particularly after the discovery of the midcontinent and south- r western fields. 77 According to DeGolycr and McNaughton, op. cit., pp. 23 to 29, the increases for the six countries named, nand for the world, during the years from 1919 to 1928, were as follows: Producing area 1019 1928 Percent increase Million Million barrels barrels United States________________________ 378,367 901,474 138.0 Venezuela______________________________________________ 425 105,749 24,782.1 Union of Soviet Socialist Republics_____________________ 31,752 84, 745 166.2 Rumania----------------------------------------------- 6,618 30,773 364.9 Iran---------------------------------------------------- 10,139 43,461 328.7 Netherlands East Indies___________ 15,508 32,118 107.1 Total 6 countries____________ ___________________ 442,809 1,198, 320 170.6 .All other countries______________________________________ 113,066 126,424 11.8 Total world production--------------------------- 555, 875 1,324,744 138.3 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The continued use of the Gulf-plus pricing system under these changed condi ions afforded an unusual opportunity to the framers of the Achna arry agreement. According to leaders of the oil in- dustry, the "United States was producing at increasing costs by tapping dcope reserves and by use of stripping operations in its older and shallower fields.33 United States domestic production in these areas tended to be high-cost as compared with the flush pro- duction of Venezuela and the areas in the Middle East then being opened. Sine the Gulf port prices reflected these higher costs of United States output, their use as the base price "values" for the newer produci g regions had the effect of basing the export trade structure on high-cost production. To recapitulate, while market prices throughout the world were to continue on a "Gulf-plus" basis, a modified multiple-basing-point system was so up for intracartel transactions. Through the recip- rocal exchang of supplies, the cartel. members would each receive their supplies from production centers freightwise most advanta- geously locate with respect to consuming markets. As shown in the official "example" cited above, the savings in transportation costs resulting from the reciprocal exchange of supplies were to be reserved to the cartel embers as an "additional profit." The cartel program was further st engthened by the provisions requiring the participants to purchase supplies only from cartel members, to sell supplies to outsiders undo their quotas at prices not lower than those charged the marketing rganizations of the cartel members, and to sell surplus production ab ve the quotas only to cartel members for resale under their quotas. Administrati n of the agreement.-Reference has been made to the cartel's management or administrative agency, which was referred to in the agreement as "an association" or "the association." Its general purpose and membership were. described in the following words: For the practical carrying out of the arrangement the groups will form an association whit shall be managed by a working representative of each group, and each group hall have the right to recall at any time its representative, re- placing same by nother.34 More spocifially, the "association" was to make the arrangements necessary to carry out the objectives of the agreement: The association shall make arrangements with the marketing organizations owned,by each group or by each member of each group and/or with the parent companies that hive agreements with marketng organizations, such arrangements to provide that e ch marketing organization shall maintain its quota of deliveries irrespective of the source of supply and obligate itself to purchase from the groups exclusively all it imports of petroleum products that fall under the arrange- ments. * * * 35 To this end, each marketing organization was to report its expected demand for ea h product. The association was to- * * * obligate itself to supply the demand of the marketing organizations and not to sell and deliver to others in the countries in which the marketing organizations Operate at prices below those quoted at the time to the marketing organizations. 35 33 See p. 220, 34 Aehnacarry agreo ent, procedural par. 7. 35 Ibid., procedural par. 8. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 209 The association was to perform the central statistical and sales- management functions necessary to carry out the cartel's objectives. To this end the agreement provided that the association: 1. Would inform the groups as far in advance as possible and keep them currently informed of the total demand for the various products it would need to supply the marketing organizations.38 2. Would allocate to each group its quota of each product, and direct shipments to the geographically most favorably located areas.37 3. Would administer the pool of member-controlled surplus trans- 4 portation facilities provided for in the agreement, and furnish from this pool, or from outside tonnage which the association might find it necessary to charter, transportation facilities for any products that the members might elect not to transport in their own ships.38 4. Would prepare for 6-month periods in advance, schedules of relative freight rates from each port of shipment, or basing point, to each port of import involved in the agreement.39 5. Would post the base prices applicable at each port of shipment."' 6. Would request and receive from all members, as soon as possible after January 31 of each association year, scaled bids covering- * * * 3 percent of the association's total demand of two grades of gasoline during the preceding year. * * * The. bids shall be opened on the first business day after the term for the submission expired and the award shall be given to the group offering the total quantities demanded of stipulated qualities at the lowest price. In ascertaining the price the quantities of each quality shall be multiplied by the price submitted and the group offering the lowest' total of such additions shall receive the award. The other groups shall then purchase from such group the quantities offered in proportion to their quota" The two grades for which bids were requested were to be those "of which the association's demand was the largest during the preceding year." The quantities awarded were to be delivered in cargo lots, in about equal quantities monthly during the ensuing year beginning in May, and no award was to be made "unless at least one group offered during the prescribed time all the quantities of each quality demanded." 41 Although the purpose of these sealed bids was not specifically stated, it would appear that they were designed to provide a means of disposing of surpluses within the cartel. In other words, this instru- ment of sealed bids appeared to give effect to a preceding paragraph in the agreement which provided that if any group had a surplus of any product and desired to sell such surplus over and above the quan- tities which it was entitled to, supply under its quotas, it would offer such surplus "to the other groups at a price below that quoted by the association for the product or products in question."'42 Briefly, then, the association, managed by one representative of each participating group, was to act as the administrative head of the proposed cartel. As such, it would make all necessary subsidiary arrangements and agreements, and act as the cartel's quota-making, 30 Ibid., procedural par. 9. 37 Ibid., procedural par. 10. 83 Ibid., procedural par. 11. 3' Ibid., procedural par. 12. 91 Ibid., procedural par. 13. 11 Ibid.., procedural par. No. 15. 42 Ibid., procedural par. No. 14. Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 iE, INTERNATIONAL PETROLEUM CARTEL roduction-allocating, and transportation-assigning; tations of the Achnacarry agreement price-fixing, I agency. Nature and lim Although the conferences in v pated, and alt cedurcs, it prov practicable guic This limitatic leum industry. part of the mar order to accom] willing to part( adequate contrc of potential cor operate in main quite different There always w petitive exporte. in particular ma tated the contr( by other means. Because of th best characterize sets out genera stabilization. I worked out by others to whom titular consumil Achnacarry agreement was worked. out after longthy- hich not only the Big Three but other interests partici-- ed to be more of a statement of things hoped for than a n stemmed from its failure to cover the entire petro-. Thus, the regulation of quotas for export covered only eting operations which would have to be regulated in lish the "as is" objectives. The number of interests ~,ipate might not include all those necessary to assure aining "as is" quotas in one consuming area might be. from those- willing to cooperate in other markets. s and marketers that might disrupt the price structure rkets. The maintenance of the "as is" quotas necessi- 1 of such outside competition either by agreement or se limitations, the Achnacarry agreement is probably d as a constitution, or charter, which, in broad terms , 1 principles, objectives, and procedures for market s such, it left many detailed arrangements to be Whatever attmpts were made to put the Achnacarry agreement Oil Co. (New J Federal Trade company's files terminated, and to carry out th allocation plan, The same sour of a "few" of th European mark( words, it appea group objectives objectives under encountered difficulties. Legal counsel for Standard' rsey), in submitting a copy of the agreement to the ommission, stated that there were no papers in the further, that the association which was to be formed s described in the document, was never carried out."' e, however, acknowledged that the implementation e of a series of agreements dealing with individual is negotiated during the ensuing 8 years. In other s that the principles set forth in the Achnacarry in the formulation of subsequent agreements relating WORLD PRO OSALS OF THE AMERICAN PETROLEUM INSTITUTE At about the time the major oil companies were engaged in drawing up the Achnaca ry agreement, the petroleum industry began a cam- paign to control production in the name of "conservation." Paradoxically, this campaign began when extensive drilling for new reserves in the United States had resulted in now production sufficient. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 211 to allay fears of an impending shortage. Thereafter, domestic produc- tion continued to increase to a peak in 1929.43 As production in- creased, the oil companies and the United States Government turned their attention from the discovery of now domestic reserves to the conservation of those already proved and in production. To this end the President created the Federal Oil Conservation Board by Execu- tive order late in 1924.14 Congressional legislation respecting the Board's operations was limited to appropriations to cover the expense of the studies, the object of which was to recommend methods of conservation. From 1924 to 1928, American petroleum interests cooperated with the Oil Conservation Board in a series of research projects to develop more efficient methods of production and conservation of oil. Among the proposals put forth jointly by the industry and the Board were recommendations for control of production from flush producing fields. This was done as part of an oil-conservation movement which the industry characterized in 1945 as "effective and * * * still in operation in the United States." 45 The conservation controls so described are those embodied in the system of proration of production through interstate compacts. Coordination of United States conservation with cartel objectives At one time an effort was made to expand the American conserva- tion pattern into a world-wide movement. The effort was spear- headed by the American Petroleum Institute, which called- a conference of representatives of the larger producing companies * * * at New York for informal discussion of the entire problem 4s This conference took place on July 30, 1928, antedating the formula- tion of the Achnacarry agreement by about 6 weeks and: Discussion concerned the too rapid development of the fertile oil fields of South America, and a committee was appointed to make a general survey of the situation. Matters assumed a world-wide aspect when in August representatives of American, British, and Dutch oil companies discussed various phases of the subject abroad.47 In December 1928, Sir John Cadman of Anglo-Persian Oil Co., addressing a meeting of the American Petroleum Institute, emphasized that "economic cooperation" would solve the industry's problems. Three months later the American Petroleum Institute appointed a Committee on World Production and Consumption of Petroleum and Its Products, with a membership of about 80 representatives of oil companies producing in the United States and South America. On February 25, 1929, the Federal Oil Conservation Board issued a report in which it pointed out that the United States was "exhausting its petroleum reserves at a dangerous rate," and recommended not only cooperation in the development of foreign oil fields, such as those of Mexico and South America, but also larger imports to reduce the depletion rate of the United States." 43 United States production increased quite steadily from 355,928,000 barrels in 1918 to 732,407,000 barrels in 1923, and thereafter continued to grow at a somewhat similar rate to 1,007,323,000 barrels in 1929 (Do Golyer & McNaughton, op. cit., p. 28). Interior, and Commerce. 44 The Federal Oil Conservation Board consisted of the Secretaries of War, Navy, 44 American Petroleum Interests in Foreign Countries, op. cit., p. 308. 44 Ibid., p. 308. 47 Ibid., pp. 308-309. 48 Ibid., p. 309. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Three weeks later on March 15, 1929, the first control plan of the American Petroleum Institute's Committee on World Production and Consumption o Petroleum and Its Products was presented at a meeting in Houston, Tex., attended by both Federal and State Government representatives, as well as industry representatives. The committee recommended at 1928 production of crude oil in the United States should be cons'dered as peak requirements for 1929 and subsequent years, proposi g in effect that average production in future years be held to the 108 level. The committee also recommended that a permanent organization be set up in the Petroleum Institute for continuing study of conservation and proper production and use of pe- troleum produ ts, both in the United States and in foreign countries.43 There is a striking similarity between this recommendation and the "as is" quota provisions of the Achnacarry agreement, for under the latter 1928 was also to be the base year for subsequent international quotas set up to implement its principles. One dissimilarity, how- ever, is to be noted; namely, that the conservation recommendations for the United States would permit no increased production over that of 1928, where s the Achnacarry agreement contemplated increases in production to cover increased world consumption. If United States production could be held rigidly to the 1928 level there would, of course, ben "surplus" production available for export to trouble the cartel. Thus the proposed American conservation control plan would have had the effect of plugging the loophole which, for legal reasons, had b en left in the cartel agreement by the deliberate ex- clusion of the domestic market of the United States and imports into the Unite States.49 The conservation plan was promptly approved by the American Petroleum Institute on March 27, 1929. The proposal apparently had the fulls pport of the leading foreign producers. When the committee's re ommendations were before the institute for approval, representatives of both Royal Dutch-Shell and Anglo-Persian Oil Co. were present, and Sir Henri Deterding of Royal Dutch-Shell took a prominent part in the discussions centering around the world oil situation.150 Sir Henri, in particular, is reported to have offered 100-percent cooperation in foreign fields." The Federal Oil Conservation Board, which had been kept fully informed of th nature of the plan, was aware that its presentation would raise questions as to the Board's authority to approve such a proposal. Ace rdingly, on March 20, 1929, 5 days after the commit- tee recommen ations had been formulated in Houston and 7 days before they were approved by the American Petroleum Institute, Chairman Wilbur of the Federal Oil Conservation Board sent a letter to Attorney General Mitchell requesting legal advice on the proposed plan. According to the Attorney General's reply dated March 29, 1929, the ques ions submitted covered: * * * whet er the Federal Oil Conservation Board has power to approve the proposed agr ement and what, if any, effect such approval might have in relieving the part es to the proposed agreement from.the operation of the acts of Congress forbidd ng agreements in restraint of interstate commerce. You also " Ibid., p. 309. se Introduction to pr n.ciples in the Achnacarry agreement. eo The Oil and Gas ournal, July 11, 1929, P. 39; the Petroleum Times, London, March 20, 1929, p. 543. 6! nited States April 14, 1929; New York Journal of Commerce, March 28, 1929; and American PetrUoleum Interests iu Foreign Countries, op. cit., p. 309. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 inquire whether the proposed agreement would violate the antitrust laws of the United States.' After reviewing the conditions under which the Oil Conservation Board had been created by Executive order and taking note of the fact that congressional action had been limited to the appropriation of funds for its expenses, the Attorney General stated in unqualified terms that Congress had not given the Board "any power to grant to any persons immunity from the antitrust laws," and that the Board had "no authority to approve any action which is contrary to an act of Congress or to the antitrust laws of any State." The Attorney General stated further that, on the record- The proceedings of the American Petroleum Institute indicate that the purpose of submitting the proposed agreement to the Federal Oil Conservation Board for approval is to obtain a sanction from the Federal. Government which may operate to make the parties to the agreement immune from the operation of the antitrust laws.53 The institute's plan was submitted to the Oil Conservation Board on April 3, 1929. Chairman Wilbur followed the advice of the At- torney General by notifying the institute on April 8, 1929, that the Board had no legal authority to regulate drilling and production and that the sole authority for such action rested with the States. He suggested renewed discussion "with the State authorities of the three or four principal oil-producing States, particularly to learn if it is not possible for them to enter upon an interstate compact under the pro- visions of the Constitution authorizing such compacts to which the Federal Government, through congressional action, would be a party." 54 This actually became the procedure by which the domestic petroleum industry, in cooperation with the Federal Oil Conservation Board and State authorities, subsequently worked out the domestic proration controls that are still in effect. Operation under interstate compact The stated objective of proration in the United States has always been conservation,55 i. e., obtaining the maximum total yield of oil from each producing field. Valid technological considerations indicate that this objective is best achieved by operating each field as a unit in such a manner as to maintain the natural hydrostatic and gas pressures necessary to assure maximum total recovery. Proration for conservation alone involves only the limitation of production in each field to those allowables which will maintain those pressures, regardless of the price at which the oil can be sold. In actual practice, however, the definition of "conservation" used by the oil industry has always combined this technological objective of a maximum total recovery with the market objective of regulating production in order to stabilize prices. Even before there were any State compacts, the quotas suggested by the representatives of the industry or by the advisory committee acting for the Oil Conservation Board were designed to attain the market as well as the technological 12 American Petroleum Interests in Foreign Countries, op. cit., p. 310. 43 Ibid., p. 310. 64 Ibid., p. 310. a' Testimony of E. 0. Thompson, member of the Texas Railroad Commission, TNEC hearings, pt. 15 (1939), p. 8221. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 214 THl INTERNATIONAL PETROLEUM CARTEL objectives.58 La- legislation for th the large oil con meant market si committee (1934 mittee of Standa ,er when Congress was being asked to enact enabling e interstate oil compacts, various representatives of ipanies indicated that to them conservation mainly labilization. Thus in hearings before the Cole sub- ) Mr. W. S. Farish, chairman of the executive com- rd Oil Co. (New Jersey) testified as follows: Mr. WOLVERTON And what is the underlying thought you have that makes such legislation [to uthorize interstate compacts] advisable? Mr. FARISI. The underlying thought covered is the whole idea of conservation and stabilization of the industry which to my mind are synonymous terms; they mean practically the same thing (p. 698). Similarly, Mr. Edward T. Wilson of Denver, Colo., ex-president of Continental Oil o., stated: Mr. MAPES. Now, then, that means in effect that you believe that legislation is desirable for the urpose of stabilizing the industry rather than for conserving the oil? Mr. WILSON. That is my, personal opinion (p. 341). Mr. H. F. Sin lair, chairman of the executive committee of Con- solidated Oil Corp. of New York, replied to questions as follows: Mr. WOLVERTON.~ Is it not your opinion that when you curtail production that for curtailment by Mr. SINCLAIR. I Mr. WOLVERTON. Mr. SINCLAIR. I' Representativq proposed legislat' The purpose of a the price of petrole profit (p. 1451). The basic met under the inters the Temporary . 1. Preparation of a monthly fa which, added to oil and petroleu use and export d 2. State autho allowable produc 3. Each State to the various p diction.57 In 1939, the intensive investi States had been 59 Testimony of W. S. F and Foreign Commerce, 7 procedure was being follow States Statutes at Large, imposed In 1932 were: Crude petroleum and Ins paraffin and petroleum wa 57 TNEC hearings, pt. L' pt. 15, pp. 8230-8240, tcstin ould say that is one of the reasons. In fact that is the chief reason, is it not? ould agree with you about that (p. 2545). Marland of Oklahoma testifying in on stated: support of the hod of proration of domestic production developed ate oil compacts, as described in testimony before ational Economic Committee in 1939, includes: by the Bureau of Mines of the Interior Department recast of the total quantity of domestic crude oil expected imports, will supply the quantity of crude i fuel products estimated to be needed for domestic Iring the ensuing month. ities follow these estimates in determining the total ion for their respective States. uthonity then allocates its total allowable production roducing fields and wells within its political juris- emporary National Economic Committee made an ation to determine whether or not proration by'the sod for the purpose of influencing prices. Evidence arish in hearings before a subcommittee of the House Committee on Interstate 3d Cong., on H. Res. 441 (Cole subcommittee, 1934), p. 683. Also, while this ,ed, a tariff was imposed in 1932 on both crude oil and refined products (United 7o1. 47 pt. 1 (1931-33), p. 250, title IV, sec. 601, par. C. (1)). The tariff rates as 1 oils, one-half cent per gallon; gasoline and other motor fuel, 2388 cents per gallon; K products, I cent per pound. (1939), pp. 9583-9603, testimony of Alfred G. White of the Bureau of Mines, and Tony of E. O. Thompson of the Texas Railroad Commission. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 developed before the TNEC clearly indicates that the industry understood the principal purpose of curtailment of production imposed by the Texas Railroad Commission to be the maintenance of crude oil prices.b8 Thus, Mr. W. S. Parish, testifying in general terms on October 24, 1939, stated: Now I am going on to the price thing. I say unhesitatingly that price has influenced the proration authorities, there isn't any argument about that. The record is so clear that it would be stupid to say it hadn't,' and they have been influenced by price. It is quite natural.50 When questioned about an order of the Texas Railroad Commission which shut down certain Texas wells for 2 weeks in August 1939, following a reduction of 20 cents per barrel in the price of East Texas crude posted by the Humble and Sinclair companies, E. O. Thompson of the Texas Railroad Commission stated: We have been shutting down, as I told you, 2 days a week, sometimes 3, and sometimes 2 weeks at a time. A cutting of price came, and we promptly shut down 2 or 3 days of terward.5o Mr. Thompson defended these shut-downs as a necessary conser- vation measure to prevent the plugging and loss of production of thousands of stripper wells. in Texas which, he said, could not afford' to operate at a well price below $1 per barrel. He maintained that the effect on price was "purely incidental; like all price reactions are incidental to this proration business." fit Later, however, he con- nected past effort under proration with the working off of stocks of crude, oil in storage above ground and summarized the reasons for fur- ther restrictive action as follows: It [the cut] affected our people, and here is what made us indignant about it. Through the years we have been working off these surplus stocks. The industry has been saying through the years that there was too much oil above ground. We all produced heavily in 1936 and 1937, with the result that there was 310,000,- 000 barrels.of oil above ground in storage; it was increasing. Throughout the whole economy of the trade overhanging stocks were condemned as being wasteful because it costs about 20 cents a barrel to store oil per year, and it has been demonstrated in many hearings, testified to many times before our commission, that the lighter ends evaporate, so we have been trying to reduce stocks above ground and have reduced them materially through the last 2 years. They are down now to about 232,000,000 barrels in stocks. When stocks were at the lowest ebb, the lowest in 18 years, consumption was at an all-time high. It didn't seem fair that there should be a out in price. It gave pause to everyone who was working for the conservation effort. The CHAIRMAN. Did you think that cut in price was an improper cut? Mr. TisospsoN. I have said that stocks were low and consumption was high and if there was anything to the theory of balancing supply and demand when stocks are low and demand is high you should not have declining values.62 Immediately after Texas ordered its shut-down, a special meeting of the Interstate Compact Commission was called at the suggestion of the Governors of Kansas and Oklahoma.83 The Interstate Com- pact Commission consisted of the Governors, or their designated representatives, of the States that were cooperating under the inter- state oil compact. At this meeting the effects of the proposed price reduction on stripper wells were discussed and a resolution was adopted to the effect that each State would handle its own production ae Testimony of E. O. Thompson, TNEC hearings, pt. 15, pp. 8225 et seq., and staten'ent prepared by Carl A. Crowloy, TNEC hearings, pt. 14, pp. 7604-7610. 59 TNEC hearings, pt. 15, p. 9793. 09 Ibid., n. 8230. 61 Ibid., pp. 8226 and 8230-8231. 62 Ibid., p. 8237. [Italics added.1 es These States wore Texas, Now Mexico, Kansas, Oklahoma, Arkansas, and Louisiana. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 216 TIE INTERNATIONAL PETROLEUM CARTEL problems in it Oil and Gas representative We hoped by from the begi petroleum stoc own way.64 O. C. Bailey, chairman of the Arkansas ommission, testified that following this meeting the of the various States stopped production," and A. geologist and member of the New Mexico Conserva- n, stated that in New Mexico- the TNEC hearings, the history of East Texas prices ping of the efforts by the "compact" States to reduce, Jan. 1, 1936-th-- -------------- $1. 00 Jan. 9,1936 r ugh Jan. 5, ______________ 1.15 Jan. 28, 1937, though May 18,1937 ---------------------------------- 1. 27 May 22, 1937, though Aug. 29, 1938________________________________ 1.35 As may thu eriod by a de aced in execs at prices less t that the cut pr the posted pric shut-down ord other compani The Policy o trated by the Ten years aft Committee, in pointed out th its hold on indus Specifically, in E4 E. O. Thompson, pact Commission, dos sion, and asked me to Phillips in Oklahoma be seen, prices under proration were advanced during d 1937; followed, however, during the latter part of the line. At that time "hot oil" was apparently being pro- of prorated allowables and sold to independent refiners an the posted prices quoted above. In fact, it appears posed by Humble and Sinclair was designed to reduce for East Texas to what "hot oil" was selling for. The red by the "compact" States in 1939, plus the failure of lied prices remaining unchanged." enhancing prices in the name of conservation, as illus- 1939 shut-down, has generally remained unchanged. the TNEC investigation the Senate Small Business is final report on oil supply and distribution problems, t- ment regulates the supply, the tendency of monopoly to increase ry is intensified.99 . regard to the effects of proration, the committee stated: anism controlling the production of crude oil to market demand crates as smoothly and effectively as the finest watch. During f the Texas Railroad Commission, who was then chairman of the Interstate Oil Com- ?ibod this meeting as follows in a statement filed with the Cole subcommittee in 1940: State spoke of the tragic effect it would have upon their stripper-well production if >o cut. R a situation upon which the compact could not, in my opinion, take any action, but called a hearing for A gust 28, at which time a further check on the storage situation would be taken. "It was decided the at my suggestion, that a resolution be passed to the effect that each State would handle its own prod ction problems in its own. way under its own statutes. Whereupon the meeting This is as complet a description of the meeting as could be had. I called the meeting. I told them Texas had already sh t down. I did not urge any other State to shut down. We simply talked the situa- tion over and each St to made its own announcement as to what it intended to do." (See Petroleum In- vestigation: Hearings Before a Subcommittee of the Committee on Interstate and Foreign Commerce, House of Represent-t ves, 76th Cong., 3d sess. on H. Ices. 290 and It. R. 7372, pt. 4, pp. 2102-2103.) 60 Petroleum Invest gation: Hearings, op. cit., pt. 3, p. 1043. 05 ibid., p. 1179. BT TNEC hearings, 68 See also testimon t. 14, pp. 7578 and 7589-7591. of E. O. Thompson. TNEC hearings, pt. 15, pp. 8238-8239. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 217 the year and a half the committee has been investigating the oil industry, there never has been a real over-all shortage of petroleum. Price increases on crude oil have been frequent and substantial, going from $1.25 per barrel at the end of 1945 to $2.65 per barrel in the spring of 1947, with several companies posting $3 per barrel as this report is written. At the time the consumers were feeling the greatest pinch in January and February 1947, there were 220,000,000 barrels of crude oil in storage, mainly controlled by the larger units, which could have been distributed among independent refiners who were running under capacity. But the controlled economy existing in the oil industry needs an absolute balance of supply and demand because it does not contemplate drawing on stocks. When the Bureau of Mines through their monthly forecast of demand underestimated the demand by close to 2 percent for each of the years 1946 and 1947, the spot shortages followed as night the day. The mechanism was wound too tight. Independent refiners could not take more oil out of their own wells because of State proration laws, and the integrated companies would not allow them to take their crude oil' except by a processing or tied-in sales agreement. Those cut off of supply by independent refiners or by integrated units desiring to favor one customer over another were suffering, and in turn their customer accounts wer@ without oil. A truly competitive system based only on real conservation, practices, could not possibly have held the flow of oil so close to market demand. The oil-control policies in effect in the United States consist of a series of State and Federal statutes, recommendations of committees made up of integrated-oil- company economists and recommendations as to market demand made by the Bureau of Mines of the Department of the Interior. No single item is in itself controlling; taken together they form a perfect pattern of monopolistic control over oil production and the distribution thereof among refiners and distributors, and ultimately the price paid by the public.70 This conclusion of the Senate Small Business Committee in 1949 reveals how well one of the principal objectives of the Achnacarry agreement of 1928 had been attained. Under the Achnacarry agree- ment the Big Three international oil companies had agreed- To the extent that production is in excess of the consumption in its geographical area, then such excess becomes surplus production which can only be dealt with in one of two ways: either the producer to shut in such surplus production or offer it at a price which will make it competitive with production from another geo- graphical area.71 In 1946, P. II. Frankel, writing with a background of more than 20 years of study and experience in the oil industry in countries on both sides of the Atlantic, summarized the connection between the conservation program in the United States and the industry's efforts to stabilize world production and prices as follows: There can be little doubt that the American counterparts of this international set-up were "conservation" and "proration" as we knew them in the "thirties." * * * what mattered most, apart from the aspect of technology, where sound argument seemed to support it, was the fact that only with a certain degree of production control could the United States be fitted into the world-wide structure of the oil industry. Conservation was the missing link which had to be forged.72 Also an American observer, commenting in 1949 on the industry's hope of maintaining world prices while finding a market for increasing Middle East production, stated: Involved in the apparent strategy to hold prices, however, is the ability to prevent an excess of crude-oil production in Texas and Venezuela, while at the same time expanding the output of the Middle East. Although the cost of pro- ducing crude oil abroad is much less than in the United States, there is the chance that imports at the present rate may not have a decided influence on prices of any products except heavy fuel oil. This is contingent upon the ability of the regu- latory bodies of the oil-producing States to hold production in check so that a large proportion of the excess foreign production may be absorbed here untillit can be marketed advantageously outside the United States 73 73 Ibid., p. 13. 71 Achnacarry agreement, principle No. 6. 77 Frankel, The Essontias of Petroleum, op. cit., pp. 116117. 73 J. H. Carmical, Oil Industry Soon in Price Quandary, Now York Times, January 21, 1949. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 218 T E INTERNATIQNAL PETROLEUM CARTEL Thus, while he prevention of waste in the use of oil as an exhaust- ible natural resource is a desirable economic objective, the facts sur- rounding the itiation of the conservation movement in the United State and the history of its subsequent operation are such as to strongly indicate that the prevention of waste is not the only motive behind the support of the movement by international oil interests. Conservation as urged by the industry, not at the time when it feared the imminent exhaustion of domestic reserves, but during a subsequent pe iod when the discovery of new fields had created an embarrassing s rplus in the United States. Moreover, the detailed features of the proposed conservation plan and the subsequent re- strictive effect of proration as operated under State compact fitted admirably into the world-wide "as is" agreement of the 1930's by limiting Unite States flush production and thereby tending to enhance and maintain published Gulf prices which were the base prices or values used in determining world prices. Today these effects appear to be no less important to the industry as a means of maintaining pr ces in the United States and other markets of the world while a arket is found in the United States and elsewhere for greatly increas d Middle East production. It is true th t the geographical location of flush production has shifted with th United States becoming an importing nation. Yet in the thinking of the industry proration still is the means of balanc- ing supply with demand in the United States in such a way as to maintain prices. Frankel's conclusion "that the United States price level-that of high-cost producer--was maintained with the assist- ance, the collus on if you like, of low-cost producers who, at the same time, acted in ceordance with their own interest" 74 appears to fit the 1950's as w 11 as it does the 1930's. In addition t launching the conservation movement, the American oil companies lso sought to implement the Achnacarry agreement through the formation under the Webb-Pomerene Export Trade Act of two export tr de organizations, known respectively as the Standard Oil Export Corp. and the Export Petroleum Association, Inc. It should be noted that the Achnacarry agreement was finally formulated and dopted on September 17, 1928. Standard Oil Export Corp. was into porated only 2 months later, on November 26, 1928, and Export Pe roleum Association, Inc., was incorporated 1 month thereafter, on J nuary 4, 1929, with Standard Oil Co. (New Jersey) personnel takin an active part in its formation and Standard Oil Export Corp. becoming a charter member. Standard Oil E, ort Corp. The first oft e two export associations, Standard Oil Export Corp., was designed to centralize control over the export activities of Stand- ard Oil Co. (New Jersey). The corporation, which according to its certificate of incorporation, was formed to engage solely in export trade, was organized with a total of 100, shares of no-par voting com- 1"The Essentials of Pc roleum, op. cit., p. 117. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 mon stock. These shares were issued to four companies in the Stand- ard Oil (Now Jersey) group, as follows: Shares Standard Oil Co. of New Jersey------------------------------------- 40 Standard Oil Co. of Louisiana--------------------------------------- 25 Humble Oil & Refining Co------------------------------------------ 30 Carter Oil Co ----------------------------------------------------- 5 Total------------------------------------------------------ 100 On December 13, 1928, the corporation's board of directors author- ized the execution of marketing agreements with each of the above companies designated as "member companies." These agreements were executed promptly, and on December 18, 1928, the corporation filed its first report as a Webb Act association. . These agreements provided that Standard Oil Export Corp. would engage solely in export trade and the member companies would- * * * make no offer, sales, or deliveries in export trade except through, to, or by the corporation, or in such manner as the corporation shall from time to time determine as regards prices, terms, and conditions of sale. These member contracts were for an indefinite period, but were terminable after 1 year's notice. Any disagreement between a member and the corporation was to be resolved by vote of the cor- poration's board of directors. The corporation's organization and operating expenses were to be assessed against the member companies in proportion to the quantities exported or sold for export by the member companies. All other expenses were to be assessed against member companies in accordance with the number of shares owned by each. Limitations of Standard Oil Export Corp.'s authority.-Standard Oil Export Corp. had no corporate connections with American com- panies outside the Standard (Now Jersey) group and made no con- tracts to represent other American interests. It served two purposes in the export trade of Standard Oil Co. (New Jersey)." First, it established a single centralized corporate control over the export trading activities of the parent company's principal producing and exporting subsidiaries. Second, as the corporate agency exercising this control, it coordinated its activities with the requirements of the international agreements entered into by the parent company. That it actually assumed the parent company's responsibilities under those agreements is indicated by its reply to an inquiry of the Federal Trade Commission on June 19, 1929: * * * the "Corporation" has conducted negotiations with certain foreign companies, as permitted by the Webb Act, in an effort to assure the maintenance of the export trade of the "Corporation." As a result of these negotiations, the "Corporation" has a verbal understanding with these foreign companies whereby it is recognized by such foreign companies that the member companies have heretofore built up over a period of years a large export trade in petroleum products which the "Corporation" and its members companies are entitled to maintain, Standard Oil Export Corp.'s position in international trade was strengthened about a year later by its acquisition of Anglo-American Oil Co., Ltd. Since 1911, this company had functioned in England as a formally independent refiner and marketer of petroleum products, 25 For clarity herein, the parent Standard Oil Co., a New Jersey corporation, is referred to as Standard Oil Co. (New Jersey) to distinguish it from its subsidiary, Standard Oil Co. of Now Jersey, which isa Delaware corporation. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 220 TEE INTERNATIONAL PETROLEUM CARTEL a large part of v interests.78 Th Anglo-American to the operatio allocating Unit the marketing o Anglo-American Export Petroleu On October 3, counsel of Stan counsel in the Export Corp. introduction to tribution. tificate of incor hich it purchased from Standard Oil Co. (New Jersey) action of Standard Oil Export Corp. in purchasing Oil Co., Ltd., was directly related, on the one hand, s of the Export Petroleum Association in pricing and d States exports of petroleum, and. on the other to petroleum in Great Britain and other areas in which Oil Co., Ltd., operated.77 Association, Inc. 1928, 3 months before the Export Petroleum Associa- ncorporated, a tentative plan for its formation was Federal Trade Commission by C. O. Swain, general .ard Oil Co. (New Jersey) and Gilbert H. Montague, rganizati'on and operation of both the Standard Oil trod the Export Petroleum Association, Inc. The the plan stated that: all the possible economies in the conduct of its foreign business petroleum industry hope to overcome the handicaps which y and. progressively to inhere in its position in the world trade. h costs of production in the United States is superimposed a e competition among the various American units for position 1 unnecessary duplication of marketing facilities, unnatural supplies and other uneconomic burdens upon the cost of dis- ld purpose of the association, as stated by its cer- ,oration, were set forth as follows: in export trade, as the term "export trade" is defined in s entitled "An Act to promote export trade, and for other :d April 10, 1.918, commonly known as the Webb Act, s amendatory thereof or supplementary thereto, and in con- txport t trade to do any and all things necessary or incidental purposes," approv and any and all ac thereto * * * The associatic organization witi par value. Th nominees of me n was established as a_nonprofit cooperative service se shares were to be issued _ to members, or to the ly one share was to be issued ito each member, and 76 Anglo-American Oil o. was organized in England in 1888. It was one of the thirty-odd subsidiaries of which Standard Oil Co. (New Jersey) was required to divest itself under the United States Supreme Court's decision of May 1011. Divestiture was accomplished by Standard Oil Co. distributing its hold- ings in these subsidiaries to its own stockholders. Thus, Anglo-American Oil Co., Ltd., became a legally separate corporate entity, but continued to be allied closely in interest with the Standard group, from which it purchased large quant ties of crude oil and refined products which it marketed mainly in the United Kingdom and North Air ca. To acquire this former subsidiary, Standard Oil Export Corp. amended its charter to permit the issuance of 5 percent nonvoting preferred stock which was guaranteed jointly and severally as to both par value and cumulative dividends by the member companies of Standard Oil Export Corp. Final acquisition f Anglo-American's total outstanding stock.was completed in 1930 by the issuance of 764,935 shares ($76,493,500 par value) of Standard Oil Export Corp.'s preferred stock, on the basis of one $100 par value preferred Marc for each 55.6 shares of .?1 par-value Anglo-American ordinary stock. Later, on June 28, 1935, Standar Oil Co. (New Jersey) acquired the voting shares of Standard Oil Export Corp. formerly owned by Hum lc Oil & Refining Co., and assumed numble's incidental guarantee with respect to the Export Corp.'s ou standing nonvoting preferred. On June 30, 1930, Standard Oil Export Corp.'s entire issue of preferred as called at $110 per share. Moody's Industrials, 1033, p. 292; and 1936, p. 2570' 77 Standard Oil Export Corp. was bound by its membership in Export Petroleum Association to observe the prices and terms fixed by that association. On this basis, Standard Oil Co. (New Jersey) interests continued to sell to Anglo-American Oil Co., Ltd., as their principal British outlet exactly as in the past. The separate corporate e tity, however, drew a boundary line between the export corporation's operations in the United States and the operation of its American-controlled British subsidiary in foreign markets. The latter took title top oducts exported from the United States on delivery to the ship. Beyond this, the Anglo-American company operated on its own account in the United Kingdom as a separate legal entity. After Standard i] Export Corp. acquired control of Anglo-American Standard (New .Jersey) Interests were in a position to exercise closer control over the operations of the 1tnglo-American company d it, foreign subsidiaries than had existed at any time since the dissolution of Standard Oil Co. (New Jersey) in 1911. Moreover, the acquisition gave Standard Oil Co. (New Jersey) a controlled marketing company in the United Kingdom that it ould direct and depend upon to carry out the commitments made by the chief executives of Standard Oil Co. (New Jersey) respecting the observance of the "as is" principles and pro. cedures of Achnacarry ag cement, particularly with respect to pricing problems and other matters arising in the distribution of "as is" quotain the United Kingdom. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 the shares so issued were not assignable or transferable except with previous consent of the association's board of directors. In case of default or breach of contract by any member company, the board of directors might, by resolution adopted with the assent of two-thirds of the directors, declare the member's agreement terminated. The cancellation of any member's agreement also required that the cer- tificate of stock standing in the member's name be also canceled and the stock returned to the association.. Membership and terms of membership agreements.-In accordance with these charter provisions, membership agreements were promptly executed by the association and 15 American oil companies, including the Standard Oil Export Corp. One additional member joined in 1929 and one in 1930, to make a total membership of 17 companies, as follows: Atlantic Refining Co. Standard Oil Co. of California Cities Service Co. Standard Oil Co. (Indiana) Continental Oil Co. Standard Oil Co. of New York Gulf Refining Co. Standard Oil Export Corp. Maryland Oil Co. Texas Corp., The Pure Oil Co. Tidewater-Associated Oil Co. Richfield Oil Co. Union Oil Co. of California Shell-Union Oil Corp. Vacuum Oil Co. Sinclair Consolidated Oil Co. In defining the rights and duties of the parties, the membership agreement said. only that "* * * the member company shall be governed by and shall carry into effect" with respect to "all offerings, sales, or deliveries in or for export trade hereafter made by, for, or in behalf of the member company" all determinations that were made by (a) the association's export price committee with respect to prices; (b) the association's quota committee with respect to export quotas, and; (c) the association's general committee with respect to "all other conditions and details of all offerings, sales, or deliveries in or for export trade." These provisions were supported by the association's bylaws, which required the board of directors to delegate absolute authority to these three committees to determine the association's pricing and operating policies and procedures. The members, in turn, agreed to abide by the decisions of these three committees in all export operations, whether actually by the members themselves, or by their agents, or through the association. The decisions of each of the committees were to be by unanimous consent of all members of the committee. Each of these committees consisted of one representative of each contracting member company. Thus, all actions of the association, except those dealing with assess- ments, dissolution, and election of officers, could, be blocked by the dissent of a single member. This unanimous-consent rule slowed down the association's operations and contributed powerfully to its ultimate collapse.7s As a result of the affiliation of Standard Oil Export Corp. as one of the charter members of the Export Petroleum Association, the wide- 7e In reporting to the Federal Trade Commission on May 27, 1929, the vice president and general counsel for Export Petroleum Association, Inc., stated that- "This association rule was the only basis on which the member companies were willing to enter the asso- ciation. 'Among the association constituent member companies there are examples of each and every known variety of exporter in the entire American export trade in petroleum and petroleum products. m a< n m w + "This association rule, however, inevitably involves great delay in action by the association on any sub- ject whatsoever, and that Is why the association has not made faster progress." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 222 T E? INTERNATIONAL PETROLEUM CARTEL spread operations of Standard interests were intermingled with the operations of d le export association. Similarly, Royal Dutch-Shell was represente through the membership of Shell Union Oil Corp., -an American su sidiary. The associati n took its first responsibility for the export activities of its members n January 18, 1929, on which date it appears to have assumed jurisdi tion over export sales of gasoline and kerosene. The record also indicates that it proposed to assume jurisdiction over its member companies' export sales of crude oil on April 9, 1929.79 Price actions y the association.-Before the export association could begin to function it was necessary for its price, quota, and general committees to rive at determinations in their respective fields. Just when the first. actions on these subjects were actually taken is not clear, but on pril 2, 1929, the export price committee issued a "Resolution a d Determination Effective January 18, 1929, as Amended by Amendments Effective March 30, 1929, and amendment Effective April 2, 1929." This document fixed the export prices for four grades Of gasoline and two grades of kerosene- In bulk f. o. b. S. Gulf, shipments within 60 days, and payments to be made in cash on date, o shipment, otherwise cost of financing to be added in full. If beyond 60 days, price prevailing date of shipment.8? Prices at North Atlantic ports were to bear a differential of j4 cent per gallon over Gulf prices except on shipments to France, which were to be at Gulf p ices plus actual freight differential from Gulf ports as compared with North Atlantic ports. An amendment, effective March 30, 1929, added 1 cent per gallon to port prices when sales were made to nonmember buyers, thus establishing a price handicap against nonmel ber exporters buying from members. Prices for gasoline and kerosene f. o. b. California ports for shipment to points east o the Panama Canal were to be Gulf prices less Cali- fornia's actual freight disadvantage. Shipments from California to the Dominion of C nada and west coast of South America were not to- be below the equivalent of the * * * Gulf prices for similar products after making proper allowance for transportation costs, etc. These pro visi ns indicate the use of a system of basing-point pricing, with Gulf ports as the basing point and Gulf port prices fixed by the association as the base prices. California producers were required to meet the Gulf prices in all destination areas, absorbing freight on shipment to these areas where Gulf shippers had a freight advantage and enjoying phantom freight in those areas where they had the advantage.S1 79 The statistical repot of the association for 1929 indicated that the association exercised some control over crude oil exeorts in 929; but its 1930 report covered only kerosene and gasoline. 80 The prices fixed were as fellows: Cents per American measured Gasoline: p0 at C0? F. 40 to 45 percen off at 212?,375? final ----------------------------------------------------- -10 25 to 30 percen off at 212?, 390? final----------------------------------------------------- 934 25 to 30 person off at 212?, 400? final----------------------------------------------------- 934 U. S. Navy--- -------------------------------------------------------------------------- 83*y Kerosine (export p 1929, so as to rea Water white, 4{ ices effective Jan. 18, 1929, were raised, by amendments effective Mar. 30, d as follows): 4 API plus 21 color------------------------------------- ----- % Prime white-- --------------------------------------------------------------------- 734 81 Shipments of California oil to Pacific Ocean destinations west of California, however, were to be handled somewhat differently. For such shipments it was provided that Gulf-plus basing-point pricing would apply if and when the prices in those markets-some of which had apparently been characterized by price competition-were so "corrected" as to yield the Gulf prices plus the "established" transportation differential, plus a "fair profit." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 223 Efforts to obtain adherence of western independent producers.-Control of American exports by the export association was difficult without the cooperation of independent producers, refiners, and exporters. In order to bring the western independent firms into the fold, negotia- tions were carried on with the Western Petroleum Refiners Associa- tion." The result of these negotiations was a draft, dated May 9, 1929, of a "Plan and agreement dated as of May 1, 1929, for a proposed Western Petroleum Refiners Export Bureau," consisting of members of Western Petroleum Refiners Association. Members would con- tract with the bureau for a period of 8 months from May 1 to Decem- ber 31, 1929, during which time they would agree to make offerings, sales, or deliveries of gasoline and kerosene for export only to or through the bureau- * * * in such manner and in such proportions as shall be satisfactory to Export Petroleum Association. As the quid pro quo the Export Petroleum Association would endeavor to purchase kerosene and gasoline from the Bureau. The quantities to be purchased were to be determined in part: * * * by quantities which Western Petroleum Refiners Export Bureau desires to sell during the period of proposed contract, it being understood that Export Petroleum Association, Inc., will endeavor to purchase quantities equal to quantities purchased by all of Export Petroleum Association, Inc.'s mdmbercom- panies from all of Western Petroleum Refiners Association members during the last 8 months of 1928. Orders covering such purchases were to be placed by the Export Petroleum Association with the Bureau, which, in turn, would allocate them among its members in proportion to the quantities made avail- able to the Bureau by its members, "* * * having due regard for particular conditions affecting particular Bureau members and partic- ular member companies of Export Petroleum Association, Inc." Bureau members were to fill orders so allocated and payments were to "be made direct by Export Petroleum Association, Inc.'s, member company handling shipment." This arrangement went beyond the commercial relationship previ- ously prevailing between individual members of Petroleum Export Association and individual independent producers. Under the pro- posed arrangement, Bureau members were to export exclusively through the Bureau, which, in turn, was to find a market for its exports exclusively through the Export Petroleum Association. Leakage of products to outsiders would have been effectively blocked. Together with the 1 cent per gallon price handicap, this exclusive dealing arrangement would have practically closed the market to nonmember exporters. So far as the record shows, this arrangement was never put into effect. Final collapse of. Export Petroleum Association efforts.-The proposal to form the Western Petroleum Export Bureau was only one of a number of efforts made to set up a working organization. These efforts continued throughout 1929 and 1930 under the direction of Gilbert Montague, vice president and general counsel. During these years no president or treasurer was elected, and officially the work of the association was carried on entirely by Mr. Montague and the board of directors, consisting of one representative from each of the con" 82 Western Petroleum Refiners Association, with headquarters in Tulsa, Okla., appears to have had a membership of approximately 00, consisting mainly of independent refiners in the midcontinent field. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 224 THE INTERNATIONAL PETROLEUM CARTEL tracting members. No further products were brought under the association's co trol, and its operations respecting kerosene, gasoline, and crude oil appear to have been carried on under mounting handi- caps. Export rites were fixed by the association, but with increasing difficulty owing to the "unanimous consent" rule. The quota com- mittee attempt d to establish export quotas for its members, based on their export performance in 1928, but it, likewise, experienced the same problem. In the meantime it appears that some of the members tried to base th it 1929 export performance on their percentage ratios of 1928.83 This apparently means that they were attempting to operate individually in accordance with the Achnacarry agreement. A year later, Mr. Montague reported on June 30, 1930, that the association was still in its formative and experimental stage and that- The chief obsta les encountercid by the association are those inherent in working out a program fo cooperation in export trade which will be satisfactory to the diverse inberests o the 16 member companies of the association. The association continued to operate in a limited way until Novem- ber 7, 1930, when its export price schedules were canceled. There- after it became inactive and remained dormant until it was formally dissolved, in Ju e 1936. Proportions of United States total exports controlled by Webb Act asso- ciations The influent of the two associations on United States petroleum exports is refle ted in the following table, which is based on incom- plete statistics reports made by the Standard Oil Export Corp. and the Export Petroleum Association for the years 1929-36. TABLE 13.-Comb ned exports of Standard Oil Export Corp. and Export Petroleum Association, Incl., compared with total exports of petroleum and its products from the United State 192.9-36 Standard 0 i? Export Corp. total exports Export Petro- leum Associa- tion (for mem- bers other than Standard Oil Export Corp.) Total Stand- ard Oil Export Corp. and Ex- port Petroleum Association Total United States exports (petroleum and its products) 3 Percent by Export Petro- leum Associa- tion and Standard Oil Export Corp. 1929------------------- $140,240,000 $111, 000, 000 $251, 240, 000 $561,191, 000 44.8 1930------------------- 113,185, 000 2 99, 605, 000 212, 790, 000 494, 339, 000 43.1 1931------------------- 57, 043, 000 (3) 57, 943, 000 270, 500, 000 21.4 1932------------------- 44,195, 000 (3) 44,195, 000 208,381,000 21.2 1933------------------- 33, 400, 000 (3) 33,400,000 200, 016, 000 16.7 1934------------------- 41, 500, 000 (3) 41, 500, 000 227, 537, 000 18.2 1935------------------ 37,500,000 , ( 37, 500, 000 250, 326, 000 15.0 1936------------------- 00 000 3) 19, 000, 000 263, 149, 000 614.2 1 Source: Commerce Estimated as same 1 Export Petroleum A 4 6 months, January 1 Assuming exports of Source: Reports of St Commission. nd Navigation. roportion of Export Petroleum Association's total as in. 1929. ssociation inactive. to June 31. last half equal those of first half of the year. andard Oil Export Corp. and Export Petroleum Association to the Federal Trade the association's constituent member companies in the association's total export Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The maximum degree of control exercised by the Webb Act associa- tions was reached in 1929, when nearly 45 percent of the total value of all United States petroleum exports. were made by these two organizations. With the collapse of the Export Petroleum Associa- tion, the degree of control fell sharply. The proportion controlled by Standard Oil Export Corp. also decreased steadily from 21.3 percent in 1931 to less than 15 percent in 1936. Thus it appears that the movement to establish effective single control over American export trade was a failure. Foreign influence in Export Petroleum Association operations The reason most frequently assigned for the collapse of the Export Petroleum Association was the inability of the American interests to. agree on prices through unanimous action by the price committee. There is evidence, however, that at least as early as August 1929, the question of the propriety of a price increase proposed by the association was the subject of discussion among international interests meeting in London. Trade press reports of the time indicate that any difference of views among American interests constituting the association was also shared by foreign interests. The July 13, 1929, issue of The Petroleum Times (London) stated that opinions for and against the association's proposed price increase: * * * have been so much at variance that the matter has been referred back to the export-price committee for further consideration. It is reported that whilst the Standard interests favor an immediate increase in price, an equally important section with Royal Dutch and Shell interests is against such a move on the grounds that it would be contrary to good business practice to raise prices in the face of interests opposed the proposed price. increase on the grounds that curtailment of crude production had broken down in America, and that a price increase would create distrust of the American oil industry in European consuming markets.85 A little later, the same trade magazine reported that the question whether Export Petroleum Association, Inc., should increase its prices was discussed further at a secret oil conference in London in August 1929.88 Thereafter, the association found it increasingly difficult to obtain agreement on export prices because of disagreement both within and outside its .membership. This situation continued for more than a year,. until its price schedules were finally canceled. Thus it appears that the breakdown of the Export Petroleum Asso- ciation stemmed from the inability of foreign and American interests to agree on American export prices. Dissent by a foreign company, expressed through its American subsidiary, could effectively block the unanimous price action necessary under the association's unanimous- consent rule. Royal Dutch-Shell was in a position to make its opposi- tion effective through the membership of its subsidiary, Shell Union Oil Corp. Who cast the dissenting vote or votes is not known, but it is apparent that the dissent was based on the objections of British and. Royal Dutch-Shell interests expressed in London. The two principal reasons assigned in the foreign press for the objec- tions by foreign interests were (1) that curtailment of crude production had broken down in America, and (2) that it would not be good busi- The Petroleum Times reported, further, that Royal Duteh-Shell 84 Petrolculh Times, London, July 13, 1929, p. 47. 66 Ibid., July 20, 1929, p. 132. 68 Ibid., August 10, 1929, p. 239. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 226 THE INTERNATIONAL PETROLEUM CARTEL ness practice to raise prices in the face of continued increases in pro- duction. The price increase, if permitted to the Americans, would have raised the entire world price structure through the use of Amer- ican Gulf-port pt-ices as the base prices for world trade, as outlined by the Achnacarry agreement. Such a general enhancement of world prices would have still further stimulated world production. The foreign interests were, therefore, taking the long-range view that until world productio , and especially American production, had been brought under control, a price increase to cover the allegedly high marginal cost of producing in America would be undesirable. Relation to Actin carry agreement On the basis o. a close connectio 'to cartelize the both the Expor Corp. for inform In reply each st ber companies h Specifically, i the objective of in the language Corp. likewise s understanding sideration of wh increase." 88 ? After receivin Trade Colnmissi exporters to co detriment of pro that the verbal undi by your corporation 1928 level, in this c of production, and commerce, in vio]at and the Wilson Tar information appearing in the foreign press suggesting n between the export associations and the movement rorld oil trade, the Federal Trade Commission asked t Petroleum Association and Standard Oil Export ation regarding their relations with foreign interests. ted that it had " verbal understandings" under which companies" agreed to respect the volume which mein - td in 1928, plus the normal increase. May 1929, Export Petroleum Association described is negotiations as being to insure the "as is" position i world trade, and described that position practically f the Achnacarry agreement."' Standard Oil Export fated by letter in June 1929 that it had such an ~ith certain unnamed "foreign companies" in con- ch it agreed not to expand its export trade beyond me of its member companies, plus the normal these communications, the Chairman of the Federal in, on July 2, 1929, pointed out to both Webb Act it was not the purpose of the Webb Act to allow ibine with foreign producers or distributors to the luction and trade in the United States, and expressed opinion- ion of the Sherman Act, the Federal Trade Commission At, Act. by which is meant the rat'os established by the 1928 performance, shall as nearly as possible be maintained as regards all petroleum nd petroleum products exported from all countries of production (excepting all imports into the United S ates) and as regards all petroleum and petroleum products distributed in foreign countries." S Standard Oil Export orp. stated: "With further reference to the operations of the corporation, you are advised that the primary purpose of the corporation is to protect and assure the export trade previously handled by the corporation's constituent member companies. With this purpose in mind, the corporation has conducted negotiations with certain foreign companies, a per fitted by the Webb Act, in an effort to assure the maintenance of the export trade of the corporation. Asa esult of these negotiations, the corporation has a verbal understanding with these foreign companies where y it is recognized by such foreign companies that the member companies have heretofore built up over a period of years a large export trade in petroleum products which the corporation and its member companfe are entitled to maintain. The volume of export trade of the corporation, which these foreign companies have agreed to respect, is the volume which the member companieshad in 1928, plus the normal increa':e. In order to be assured of maintaining its position in the export trade, the. cor- poration has agreed that it will not expand its export trade beyond the 1928 volurne of its member companies plus the normal increase, vhe-?e such expansion would result in depriving these foreign competitors of the volume of business in fore gn markets which they enjoyed in 1928, plus the normal increase thereof." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE; INTERNATIONAL PETROLEUM CARTEL 227 In reply, C. T. White, secretary of Standard Oil Export Corp., took the position that his company had not entered into any combination with foreign producers to the detriment of trade and production in the United States, or which would restrict the trade of competitors exporting from the United States." On the contrary, he defended the understandings as an attempt carried out under the provisions of the Webb Act to assure maintenance of the volume of American export trade in the face of competition from lower-cost foreign oi1.90 Later, on October 14, 1929, the Commission again asked each of the Webb Act associations whether it had taken any further action in the matter of agreements with foreign producers or distributors. The Export Petroleum Association replied that it had no agreements with any foreign producers or distributors, and Standard Oil Export Corp.'s secretary stated that this company has taken no further action in the matter of agreements with foreign producers or distributors since the report contained in my letter of June 19, 1929. Thus, in America, the observance of the "as is" principle was pre- sented as an effort under the Webb Act to maintain and increase Amer- ican export trade. In foreign circles, however, where less official secrecy surrounded the cartel's methods and objectives, the "as is" principle was regarded as the basis for dividing world markets, re Etricting world production, and thereby enhancing prices; and Export Petroleum Association was regarded as one of the instruments of im- plementing the "as is" principle. This point of view was described in The Economist (London) as follows: As far as marketing is concerned, international cooperation is not only possible, but it is being increasingly extended. This is due to the fact that the interna- tional oil export trade is largely in the hands of three groups-Standard Oil, Royal Dutch-Shell, and Anglo-Persian. At the end of last year the Standard ,Oil Co. of New Jersey took the lead in forming the American Oil Exporters Asso-. ~ciation, of which every American oil company of importance is now a member. This association fixes the prices at which oil products can be exported from American ports. Representatives of the association conferred this year with representatives of the Royal Dutch-Shell and Anglo-Persian groups, and agreed upon a division of territories in the European markets. An example of the effectiveness of international cooperation in oil marketing is Great Britain, where -the three groups-Shell, Anglo-Persian, and Standard Oil of New Jersey, which is, now taking over complete control of its subsidiary, Anglo-American Oil-have not only agreed upon selling prices and the number of pump installations, but have secured an agreement with the Russian Oil Trust fixing its proportion of the British trade. The stability of petrol and other refined oil prices in the British, European, and Eastern markets is the measure of the cooperation between Royal Dutch-Shell, Burmah Oil, and Anglo-Persian on the one hand and the Standard Oil companies on the other.91 89 The provisions of the Webb Act in this respect are as follows: "Src. 2. That nothing contained in the Act entitled An Act to protect trade and commerce against un- lawful restraint and monopolies,' approved July second, eighteen hundred and ninety, shall be construed as declaring to be illegal an association entered into for the sole purpose of engaging in export trade and ac- tually engaged solely in such export trade, or an agreement made or act done in the course of export trade by su ll association, provided such association, agreement, or act is not in restraint of trade within the United States, and is not in restraint of the export trade of any domestic competitor of such association: And pro- vided further, That such association does not, either in the United States or elsewhere, enter into any agree- ment, understanding, or conspiracy, or do any not which artiflcally or intentionally enhances or depresses prices within the United States of commodities of the class exported by such association, or which substan- tially lessens competition within the United States or otherwise restrains trade therein." 90 Standard Oil Export Corp.'s understanding with foreign oil companies was described as: "? * * an effort to assure the maintenance of the volume of export trade of the corporation in the face of conditions existing in the world oil situation which threaten to diminish seriously the volume of export trade of this corporation unless some method is found to carryout the understanding. Since crude petroleum and products derived therefrom are produced abroad at much less than the cost thereof in this country, some agreement with foreign oil companies is necessary in order that American companies may maintain their position in export trade. Without some such understanding as Standard Oil Export Corporation is trying to work out under the provision of the Webb Act, American export trade in petroleum and its products cannot hope to withstand the foreign competition." 91 The Economist (Lonulon), December 21, 1929. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 As rioted in Jersey) was on agreement. Its Export Petrole implement the Association wa Jersey) officials continuing their the Export Ass function in the form less than On March 2, 19 (New Jersey) ad in which he stat The Economist's article, Standard Oil Co. (New. of the Big Three that formulated the Achnacarry officials also took a leading part in organizing on movements, and in carrying out other steps to ichnacarry agreement. The collapse of the Export so discouraging to some Standard Oil Co. (New that they seriously questioned the desirability of "as is" understandings after its demise. This reac- a negative way that, as The Economist indicated, ciation was expected to carry out an important months after the association suspended operations. 1, E. J. Sadler, vice president of Standard Oil Co. ressed a letter to three other high Standard officials dinpart: Mr. Teagle that I thought in view of the collapse of the Export Associatioi, our as-is arrangement with the Royal Dutch should be abrogated, and lik wise with an as-is arrangement in territories where it was mutually advantageous. In many places I think our as-is agreement with the Royal Dutch allows third parties to cox e in and take a percentage of the trade, while handicapping either the Royal utch or ourselves in maintaining or increasing the 1929 percentage of the t o interests added together.9? Had these su to increase the However, other and the suggesti was formulated pean markets. "as is" principle stood between t is of a durable n Following the iti November 19 vigorous compet leum industry. American produ export prices fix Dutch-Shell by importing into tl Shell Union Oil gestions been followed, the effect would have been pportunity for competition in the, world industry. ew control measures were then under consideration, y the Big Three for control of competition in Euro Chis understanding likewise was founded upon the in harmony with the statement that "it is under- ie three parties concerned that the main principle RANDUM FOR EUROPEAN MARKETS, 1930 collapse of the Export Petroleum Association, Inc., tion might assert itself in the international petro- These rumors were based on the assumption that ers, freed from their obligation to sell only at the d by the association, might retaliate against Royal e United States large quantities of low-cost oil from refined and marketed by its American subsidiary, n among the large producers."5 ne conapse e1 retroleum lcxport Association's activities. ndum for European Markets, January 20, 1930, p. 1. London, November 15, 1929, pp. 789-790. 380, stated: that industry alone canndlt obtain effective control of oil production without the cooperation of the large producers outside the United States, and there is no doubt that this exists to a considerable degree." 1' Ibid., March 1, 1930, 'But notwithstanding Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The latter rumors proved to be the more correct. The foreign oil trade press reported that in 1929 and 1930, the cooperative relation- ships between Anglo-Persian and Royal Dutch-Shell in Africa and the East were strengthened,96 and that Jersey Standard and Shell were adjusting their differences in the East Indies and Asia.97 In the Western Hemisphere the United States Tariff Commission reported inJanuary 1931 that- Under a gentleman's agreement, restriction of crude oil production in Venezuela has been in effect for some time-- and that--- In response to a resolution of Oklahoma oil producers in December 1929, the Royal Dutch-Shell proposed in February 1930 curtailment of Venezuelan pro- duction for the year, proportionate with the year's curtailment compared with 1929 in the United States.98 Trade press comments respecting control of production in other producing areas were to the effect that late in 1930, Royal Dutch-Shell was prepared to shut in substantial quantities of production in Rumania, the Dutch East Indies, Mexico, and Venezuela, provided American companies would do likewise;` and that early in 1931 Standard also agreed to limit its production in Venezuela and to reduce imports into the United States.' It thus appears that control of production in foreign countries hinged upon control of production in' the United States. Thus, it can be seen that although the efforts to establish world- wide controls through the media of the American Export Association 2 and the American conservation movement were not completely suc- cessful, they laid the ground work for attacking the problem in a more realistic manner-i. e., through (1) direct control of production in particular flush-producing fields and (2) marketing agreements and understandings in particular marketing areas. The large companies apparently realized that although it was practically impossible to devise a single world-wide cartel agreement to which all of the diverse oil interests of the world would adhere, it was not impossible to estab- lish controls of both production and marketing on a "piecemeal" basis. As E. J. Sadler, vice president of Standard Oil Co. (New Jersey) phrased the matter in 1931: The making of a world-wide agreement is more difficult to obtain than accom- plishing the result piecemeal. Economically, there are local situations which can be consolidated with a much sounder economic basis than to immediately attempt to jump to a position of world-wide distributions.' ' Ibid., June 14, 1930, p. 1064. 97 Ibid., December 6, 1930, pp. 913. 9B U. S. Tariff Commission, Cost of Petroleum, 71st Cong., 3d sess., Doc. 267, January 26,1931, p. 20. 9' The Petroleum Times, December 6, 1930, p. 913. 1 Ibid., April 4, 1931, pp. 477-478. 2 That the indirectness of control of prodpction through the Achnacarry agreement and Export Petroleum Association's activities was recognized by the Big Three is evidenced by the following from a Memorandum of Meeting at Sir IIonri's Mouse on Saturday, May 4, 1929: "The curtailing or prorating production will be an indirect result insofar as members will have for their production as a regular outlet only what their respective quotas give them. However, the Achnacarry principle does not in any way restrict, in itself, the production of members, as is shown by the provision that each party can produce any surplus it likes, provided, and to the extent that it can find an extra outlet for such surplus by offering it to the other pool members at a price which makes it attractive to them to shut down production." 3 while this statement was made in a memorandum dealing with matters of internal policy of Standard Oil Co. (New Jersey), it is, nevertheless, an incisive commentary on the world international oil situation. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 230 TILE INTERNATIONAL PETROLEUM CARTEL In establishing controls on a "piecemeal" basis, the first step was the drafting of a new international agreement entitled "Memorandum for European Markets," which bears the date of January 20, 1930. The direct con ection between this new document and the .Achna- carry agreement is indicated by the following statement made by Standard Oil Co. (New Jersey) in submitting a copy of the memoran- dum to the Commission: A few of the principles with respect to marketing arrangements abroad, which were expressed in the document entitled "Pool Association" [Achnacarry agree- ment], were imple nented by the document entitled "Memorandum for European Markets," dated anuary 20, 1930, which is produced herewith in response to subpena item No. 1. Terms of the M morandum for European Markets The prime movers behind the memorandum were the same three international p troleum interests that formulated the Achnacarry agreement. Thus the memorandum neither abolished nor super- seded the Achn carry agreement, but rather reenacted its principles, with procedural amendments to cover their application in local market- ing areas.' The keynote of the memorandum is contained in its first paragraph, which states that- Local arrangements will be made between the parties for each country and shall be of such duration as may be thought advisable .5 While the "local arrangements" were, to concern primarily the Big Three, provisio was made for the admission of others by the de- claration that- It is the intenti n that all outside concerns seriously engaged in the distribution of petroleum prod cts shall be admitted, provided that the conditions on which they are admitted are not more favorable than those enjoyed by the original parties at the time when they were admitted.' Such admissi n of outsiders, however, could occur only "by the unanimous consent of the parties," i. e., the three initiating interests. The products covered by the memorandum consisted of- This produe only in that (1) Achnacarry agr Quotas and internal trade agreement, the >ducts of petroleum with the exception of-- ;ies, including candles. s, i. e., supplies to ships otherwise than supplies of oil made for i of trawlers, fishing boats, and similar small coasting vessels bunker in their home ports, supplies which are regarded as of the country.' coverage differed from the Achnacarry agreement lubricating oil was definitely included, whereas in the cement lubricants were to be the subject of further ,nd (2) the Achnacarry agreement did not specifically s. taintenance of "as is" positions.-Quotas were to be party for each of the products classed as part of the )f each country. As in the case of the Achnacarry base period for the determination of quotas was to be morandum declared that- ' Under the new appr, ducersIn each flush-pro 5 Memorandum for E, B Ibid., clause IIIa. 7 Ibid., clause IV. 8 This applied to all pi base. ach, production control became a matter for local action among the principal pro- lucing area by the shutting in of production as described above. ropean Markets, clause I. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 It is an essential part of these arrangements that each and every party thereto, having been allotted a quota, shall do his utmost to obtain the share of total trade represented by that quota, and to extend it where possible but not at the .expense of the parties to these arrangements.B The intent of this provision obviously was to place the responsi- bility on each. party to put forth effort to maintain and increase its 'quota rather than to rely on the quota as a. guaranty of a specified volume of business. However, the general rule to be followed was that members could expand their quotas only at the expense of outsiders. The rules were quite explicit on this point: It is the duty of each party, to himself and to the other parties, to maintain at least the position in the market represented by his quota. If, notwithstanding this, there should be any change in the relative position of the parties, it can arise only: (i) if one or more of the parties has failed to do his quota by losing trade to an outsider; (ii) if one or more of the parties has improved upon his quota by gaining trade from an outsider; (iii) if any of the parties has gained trade from .another party. As the principle to be maintained is that what is gained from an outsider or lost to an outsider is entirely for the account of the party gaining or losing, it follows that no question of overtrading or undertrading arises in the case of (i) and (ii) but in the case of (iii) only, the party gaining is an overtrader and must adjust with the undertrader.10 Rules for the adjustment of "overtrading" and "undortrading" were spelled out in detail. The preferred method was to make such adjustments by transfer of customers among the parties, which might take place at any time during the trading year. If adjustments could not be made in this manner, the under- trader was to receive from the overtrader at the end of each trading year the "net proceeds" realized by the overtrader for the quantity of each product overtraded.ll To further guard against any' party becoming a habitual under- trader by default of effort to sell, it was provided that, as a penalty, the imdertrader's allotted quota for the ensuing year- * * * shall be reduced by a percentage equal to one-quarter of the differ- ence between his allotted quota for the year and the actual percentage of the total trade which he has done during the year,, and the reduction so made in the quota of the undertrader shall be divided between the other parties, being overtraders, pro rata to the amount of their overtrading.11 If the "as is" position of all parties, based on their 1928 quotas; was to be maintained, it was important that no party should obtain and hold a heavy overtrader position at the expense of the other parties. Therefore, provision was made for a sliding-scale system of penalties for overtrading, to be collected and distributed to under- traders in the following manner: There shall be no penalty on an overtrader provided his overtrading does not exceed his allotted quota for the year by more than 5 percent of such allotted quota. If, however, a party is an overtrader to the extent of more than 5 percent in excess of his allotted quota, then in respect of the quantity represented by the initial 1 percent in excess of 5 percent he shall pay a fine and for the quantity 9 Memorandum for European Markets, clause III. [Italics added]. 10 Ibid., clause VIII. 11 Net proceeds" for this purpose were defined as follows: "* * the net proceeds realized [by the overtrader] after deducting expenses, which shall include an allowance to be agreed upon for overheads and amortization. The proceeds for this purpose shall be the average proceeds realized for the grade in question by the overtrader during the period for which the adjustment is being made. 22 Memorandum for European Markets, clause X. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 232 THIS INTERNATIONAL PETROLEUM CARTEL represented by the respect of the exec the basic fine, and completed 1 perces the basic fine: prop 100 percent in excr_ shall be apportion( gallons as the case The amount next completed 1 percent of the basic amount, the fine in es quantity shall be increased by a surcharge of 20 percent of in respect to the quantity represented by each subsequent it the surcharge shall be increased by a further 20 percent of ,ided, always, that in no case can the surcharge be more than ss of the basic fine. The amount paid in fines and surcharges d among the undertraders pro rata to the amount in tons or may be of their undertrading.13 f the basic fine was to be fixed for each product by ntatives of the parties in each country, subject to the local repres As a guide to the local representatives, however, it was stated- that the fine shoul be such as will reasonably dissuade any party from setting any extravagant pac in organization or advertisement.'5 Provisions were also incorporated which would make the heavy overtrader who gained at the expense of the other parties, as dis- tinguished from outsiders, pay out in adjustments and penalties the whole of the proceeds from his overtraded sales in excess of 10 percent of his Prices and co ditions of sale.-The memorandum provided that each local cartel would fix the prices and selling conditions for all of its parties for each product sold in the market. The pricing activities were related to he maintenance of the "as is" position of the parties by the provision that- It is agreed bet een the parties that they shall maintain at least the share of the total trade which they held during the basic period, and to this end prices ? and selling conditions shall be fully and frankly discussed and agreed between the local representatives. In the event of. disag cement between the parties the matter shall be settled bya simple majority vote, each party having one vote for each complete 1 percent of quota.17 The parties were bound to observe prices so determined as long as they jointly maintained at least 90 percent of the share, of the market which they jointly held during the basic period, plus a similar pro- portion of the market's increased trade. If, however, the joint shares of the parties fell below 90 percent, "then all the parties are free to take whatever action they may deem necessary to restore their joint share of the total trade of the market to the percentage at which it stood during the basic period." Since the loss of large contracts to outsiders would practically nullify efforts t maintain the joint "as is" position of the parties, the pricing and handling of such contracts were made the subject of special provisions. It was agreed that, in principle, the party: holding the business in the basic period shall retain it, but in any case prices and conditions for all s ch business shall be discussed between the parties, and in the event of the party who, it has been agreed, shall take the business, losing it to an outsider after quoti ig prices and conditions on which all are agreed, all the parties 13 Ibid., clause XI. '4 Approval by whom as not stated. It would appear from the Swedish Oil Report, however, that at a later date the Swedish cartel operated subject to approval by a committee in London representing the three principal parties. S c Swedish Oil Report, ch. 12, Cartels and Other Competition Limiting Measures, pp. 14 and 25. (English translation mimeographed.) lE Memorandum for European Markets, clause XI. [Italics added.] 18 It was suggested that the amount of the basic fine should be one-half of the allowance to, overhead and amortization which the vertrader would, by agreement, withhold in making quota adjustments with undertraders. On this basis, the maximum basic fine plus surcharges would increase with the amount of ovortrades and finally become equal to the whole of the allowance for overheads and amortization withheld Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 shall, without alteration of their quota rights, take their share of the quantity lost pro rata to their respective quotas. But if, on the other hand, the party whose business it was to make the contract fails to quote the price and conditions which have been agreed with the other parties, and thereby loses the contract, he will have no claim to share the loss with the other parties * * *.18 If, however, there was disagreement among the parties and the party whose business it was to make the contract declined: to quote the price proposed by a majority vote * * * then the parties who have composed the majority 'vote in favor of a lower price shall arrange between themselves to quote for the business at the price which they have proposed. In the event of their obtaining the business the quantity involved shall not be in- cluded in their trade for purposes of arriving at their overtrading or undertrading positions. * * * If, on the other hand, the contract should be lost, then all the parties shall share in the loss in exactly the same way as if the contract had been lost after an agreed price had been It will be noted that action was to be taken by majority vote, and not by unanimous consent such as frustrated price actions by the Export Petroleum Association. However, the voting power of each participant was to be propor- tional to its basic "as is" quota in the market. ` This, of course, gave the participants with large quotas the dominant voting power to determine the prices which all participants agreed to observe. It was recognized that dissatisfaction might arise on this score, even among the three largest companies, and that the opportunity for disagree- ment would increase with the admission of other parties. Such dis- agreements, however, were not to be permitted to upset the local cartel as long as the group maintained at least 90 percent of its joint share of the market during the base period.21 Only if an all-out price war with independents was deemed necessary to maintain the joint quota position was the- majority-vote pricing rule permitted to lapse. In that case, all parties were to-be free to take whatever price action they individually might regard as necessary to restore their position. Such a temporary suspension of the pricing rule meant a practical suspension of at least part of the cartel's operations for as long as the resulting price war might last. During such a suspension, however, it would appear that the meetings of local representatives of cartel members to exchange statistics of their own trading and estimates of trading by others, and to "cooperate to the fullest extent to get the best results and make the best possible use of the information obtained," were to continue. Full cooperation could be reestablished when the joint quota position of the group was reestablished. 1e [bid., clause XII. [Italics added.] I6 Ibid. In the case of low prices made to hold large contracts provision was made for the cartel member entitled to take the business to decline to bid the cartel price fixed by majority vote, in which case the re- maining cartel members would arrange among themselves to quote the low price. If they obtained the contract, the group's joint quota in the market would be retained, subject to adjustment for over-and-under- trading as provided in the memorandum. To prevent this rule from giving undue protection to the member refusing to quote, it was provided that business so taken would not be counted in arriving at the over- and under-trading positions of the parties who took the business, but would he counted in computing the average net price per unit on which adjustments for over-trading and under-trading positions were to be made within the group at the end of the year. The financial loss, both to those who took the business, and to the mem- ber who declined to bid, thus would be minimized in setting bona fide over-trades and under-trades. 20 Several contingencies might make joint maintenance of 90 percent of the quota impossible in competi- tion with outsiders. If the cartel's monopoly price was fixed high enough to be satisfactory to all partici- pants, it might be undercut by an outsider favorably situated with respect to costs or willing to dump in the market regardless of cost. If, on the other hand it was fixed low enough to inept or drive out lower independent price competition, the cartel's majority-price action might mean a price war in which some cartel members might wish to withdraw from the market. -The problem, therefore, was how to cover this last contingency in such a way as to suspend cartel operations in whole or in part for a time without entirely disrupting the organization.. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 234 TIE INTERNATIONAL PETROLEUM CARTEL maintain quota of products am apportion fines their biweekly to get the best r obtained, not o _ Other provisi 1 of members by exchanging customers or by exchanges >ng members; 25 (5) to fix fines for overtrading and to. so collected among undertraders; 28 and, (6) through neetings to " * * * cooperate to the fullest extent ,suits and make the best possible use of the information my in the matter of their position in relation to one of their position in the market as it whole." 24 ns.-In a second part of the memorandum, bearing is the main memorandum, the parties agreed, for all European countries, not. to give makers of petroleum-consuming apparatus any oommission or bonus for recommending the use of their products. tus.28 A third part to Memorandu above, requirin sion of outside subject of acqu agreed to offer 21 These were local ma 22 Addendum to mom It was also agreed not to take any secret financial erns making or using 27 petroleum consuming appara- f the memorandum, bearing the subtitle "Addendum d two points. The first was the provision described s to local agreements. The second dealt with the sition of independent local distributing concerns by principal parties. In such an event, the purchaser pro rata participation to the other parties. If any 28 Ibid., clause VII. 28 Ibid., clause IX. 28 This provision, how ver, was not intended to prohibit 100-percent ownership of petroleum-apparatus concerns, provided the ownership was disclosed to the other parties; nor was it to prevent any party from taking an interest in sue firms "if such a stop is necessary to prevent a trade outlet from going to an out- sider," and provided, also, that the acquisition was disclosed to all other parties, if possible, before It ac- tually was made. Me orandum No. II for European Markets, January 20, 1930. Management f local cartels.-The local cartel arrangements for each country were to be made "between the parties for each country."' At the outset these parties were three in number,21 as evidenced by a statement contained in an addendum to the memorandum that " * * ' * . it i understood between the three parties concerned that the main print ple is of durable nature." It was further stated in the addendum that "outside the scope-of anything which may be incorporated in.local arrangements, the parties undertake as between one another" to carry out certain commitments, one of which was that: * * * It is agreed that approval of any proposal to admit outsiders to a local arrangement shall be given by the unanimous consent of the parties 22 Thus, although price actions could be taken on the basis of majority vote, the question of including new members required unanimous consent. The active m nagement and operation of each local cartel was dele- gated largely to the local representatives. The principal duties of the local represent tives were: (1). To establish quotas for the base year and for subseq ent years; (2) to fix prices and terms of sale; 23 (3) to meet at least every 2 weeks to exchange statistics respecting their own trade and estim tes of the trade done by outsiders; 24 (4) to adjust and Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 of the other parties refused to join in the purchase, the remaining parties were to have the right to make the purchase jointly and add the trade thereby gained to their quotas. These joint-ownership provisions, however, were not to apply if the initial purchasing party- * * * has in the market in question no direct or indirect shares in the dis- tributing trade in which the purchasing concern is engaged; provided always that the other parties are informed and the purchaser does not displace the source of supply of any party who is a party to the main agreement in respect of the country in question.29 The general purpose of the entire memorandum was succinctly described in the addendum in the following words: As there are many European countries which are now endeavoring to work out certain agreements, it is desirable to give a sketch of the charter which will fix the main principles for all European countries 30 These "main principles" were based on the "as is" concept of the Achnacarry agreement. It was this fundamental concept which governed the detailed. procedural rules laid down to cover allocations of quotas, admission of outsiders, transfer of customers, and adjust- ment of overtrading and undertrading, penalties for overtrading, limitation of the acquisition of financial interests in petroleum con- suming and using concerns, and provision for pro rata shares in the purchase of independent distribution outlets. Operations under the memorandum.-The Memorandum for Euro- pean Markets, dated January 20, 1930, continued to be the "charter which will fix the main principles for all European countries" until a new convention, known as the Heads of Agreement for Distribution, was adopted on December, 15, 1932. Trade press reports indicate that prior to the formulation of the memorandum, Royal Dutch-Shell and Standard Oil of New York were engaged in price competition in the East Indies and Asia that was reported to have "occasioned heavy loss to the Shell interests." Foreign comment indicates that this competition in distribution markets was terminated by agreement in May 1930, whereupon both companies increased their prices. More specifically as to what happened in this settlement, The Petroleum Times reported that- By means of personal negotiations with the Standard Oil interests, Sir H. Deterding has succeeded in reaching agreement with them, not only in the sphere of production, but also for cooperation in refining and distribution.31 The United States Tariff Commission reported early in 1931 that in addition to the proposal by Royal Dutch-Shell that Venezuelan production be reduced in proportion to reduction made in United States production in 1929, Standard Oil Co. of Indiana proposed in September 1930 that Venezuelan production be curtailed 9 percent, beginning October 1, 1930.32 The Petroleum Times described this proposal as having been made to Creole Petroleum Corp., Gulf Oil Corp., and Royal Dutch-Shell interests in Venezuela." These reduc- tions appear to have been darried forward into the ensuing year, as it was reported that Venezuelan production for the first half of 1931 was 14 percent below that of the corresponding period of 1930.34 26 Addendum to Memorandum for European Markets, par. (i). 3o Ibid., introductory paragraph. [ Italics added.] st The Petroleum Times, September 6, 1030, p. 374. 32 U. S. Tariff Commission, Cost of Crude Petroleum, 71st Oong., 3d ses., Doc. 267, Jan. 26, 1931 20. 33 The Petroleum Times, October 25, 1030, p. 062. '4 Ibid., August 1, 1031, p. 137. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 . New distribu~ their internal actively apply the countries w where similar Austria and S) dissolved for a reconstituted; in 1930.38 Ne Spanish petrole The Standard C obtain an increas exchange value of Spain was o competition wa it was usually as on an econ( adopted an att same time, hov they considerec structure. In they competed The Rumanian During the t country operati ing agreement= European mar] production and tance. Early in De markets was b, of discussion, p new productio operators "into prices were pro In July 193( Romana, a sub; a subsidiary of from all Rum. purchased durii quotations.40 operating as tb export prices. which were to ] in exports and ion agreements under the memorandurn.-After resolving lifferences, the parties to the memorandum began to its principles in various European countries. Among here local agreements were formulated were Germany, agreements had been attempted in previous years,35 vitzerland, where motor-fuel cartels, which had been short time, were reported in September 1930 as being tnd Poland, where a naphtha cartel was reformed, also gotiations were also undertaken for a revival of a um monopoly, concerning which it was reported- )il and Shell interests are in opposition to the Russians, and may cd share of the supply business on the basis of supporting the the peseta.37 my one of a number of countries in which Russian s troublesome. Where Russian interests were involved, lecessary to carry on negotiations on a political as well )mic level. In general, the Russian trading interests itude of aloofness toward binding agreements. At the never, they cooperated in certain local markets where l it to their advantage not to undercut the cartel price markets where they wished to expand foreign outlets, actively. agreements ,hirties Rumania was Europe's principal oil-producing ng under private ownership. Hence, the local market- which were developed under the memorandum for cots and the measures concurrently taken to control distribution of Rumanian oil are of particular impor- cember 1929, while the memorandum for European Bing negotiated, it was announced that, after months ractically all of the Rumanian operators had signed a n agreement,38 which would bring the Rumanian line with the rest of the world." In parts of Rumania, raptly increased some 10 percent.39 ), further details of the plan were announced; Astra sidiary of Royal Dutch-Shell, and Romano Americana, Standard Oil Co. (New Jersey), proposed to purchase inian producers the same quantities that they had ig the preceding year at prices based on American Gulf &t this time Export Petroleum Association was still e American export agency which determined the Gulf The Rumanian producers were to be allotted quotas )crearranged periodically in accordance with variation internal consumption.41 ' Ibid., September 1 , 1930, pp. 429-430. 38 Ibid., September 6, 1930, p. 374. 37 Ibid. For further information regarding some of the above-mentioned cartels and other cartels estab- lished under the memorandum, sec ch. IX. 88 The formation oft is agreement followed by several months the modification of the Rumanian mining law legalizing a cartel hich had existed unlawfully in Rumania during the previous year. This earlier cartel had included on y the big international producers who were operating in Rumania and, therefore, had not been fully olle tive in its coverage of Rumanian production. - 89 The Petroleum Ti es, December 7, 1939, p. 1112. 40 Ibid., July 19, 1930 p. 85. 41 Ibid., Aug. 12, 1930 p. 178. - Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 In the fall of 1930, this plan suffered a set-back due partly to the discontinuance of Gulf price quotations by the Petroleum Export Association and partly to the failure of Rumanian proration efforts. On October 24, 1930, it was announced that Steaua Romana, an important Rumanian producer, had given notice of withdrawal from the commission for restricting oil production in Rumania and would resign from the proration scheme effective November 30, 1930.42 Negotiations for the reestablishment of the Rumanian cartel got under way almost immediately. It was reported in May 1931 that, through negotiations which Sir Henri W. A. Deterding was able to conduct during a visit to Bucharest- Refiners were pleased and signed the agreement and higher prices were assured. The price of motor spirit has already risen in Bucharest 2 lei per kilo, and the prospects for a further increase almost immediately are predicted.43 The success of this new Rumanian agreement hinged upon the gen- eral control of world crude-oil production.44 To achieve such control, the Rumanian producers suggested that an international conference be held. J. B. Aug. Kessler, of Royal Dutch-Shell, advanced a plan for a conference on conservation. In November 1931, it was reported that the Rumanian Association of Petroleum Industrialists was pre- pared to send representatives to such a conference to "assist in working out the most adequate means for the establishment of a world agree- ment between oil-producing countries on the principles laid down by Mr. Kessler." 45 This information was communicated to the American Petroleum Institute, with the suggestion that take the lead. The institute promptly indicated its willingness to call a meeting in New York, but stated that, because of United States antitrust laws, it could not "accept the Kessler plan as a basis for discussion, nor any other plan involving a definite agreement among producers to restrict production." 46 The Rumanian Association of Petroleum Industrialists thereupon asked the American Petroleum Institute to suggest an alternative to the Kessler plan, and the institute is reported to have 'replied: Proposals are being made to our Congress which, if enacted, might clear the way for definite and binding action on the part of our Government and indus- trialists. We therefore suggest that the call of conference be deferred pending action on our proposals. We repeat our assurance of sympathetic attitude and await your advices.47 42 Ibid., Nov. 1,1930, p. 688. Stcaua Romany was owned by British-French-Rumanian Interests (Inter- national Petroleum Trade, Feb. 28, 1941, p. 69). According to Moody's Industrials, 1938, the British in- terest was hold by Anglo-Iranian. 43 Ibid., vol. 25, 1931, p. 733. 44 Some hope of such control was aroused in the European trade by the announcement early in August 1931 that Venezuelan crude production during tho first 6 months of the year was 14 Percent less than during the corresponding period of 1930 (The Petroleum Times, August 1, 1931, p. 137). 4E Ibid., November 7, 1931, p. 594. 46 Ibid., November 21, 1931, p. 662. 47 Ibid., February 6,1932, p. 140. Following this, companion bills authorizing an interstate oil compact in the United States, as proposed by the oil States Advisory Committee, were introduced in both houses of the Congress in March 1932. These bills were, respectively, S. 4232 March 23, 1932, and H. R. 10863, March 26, 1032. Both were entitled "For the conservation of oil and gas and the protection of American sources thereof from injury, correlation of domestic and foreign production, and consenting to an interstate compact for such purposes." These bills were referred, respectively, to the Senate and House Committees on the Judiciary, No further action was taken at that time on either bill (Congressional Record Index, vol. 75, pt. 15, pp. 747 and 965.) Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 238 In July 193, an international conference was finally held in Paris, at the conclusion of which it was announced that an agreement con- cerning the Rumanian oil problem had been reached: * * * between the representatives of the Rumanian groups and those of the international group on the essential points destined to improve .the situation in the import markets. Stabilization will be attained by a reciprocal undertaking to respect the relativ positions of the exportations of the two groups 48 Again, it is nteresting to note that the controlling principle was to be l at of the Achnacarry agreement, maintaining relative positions. Final ratification by the Rumanian producers was delayed until Sep tember 1932, At which time it was stated that the chief object of the agreement was that- * * * -Ruma ion oil should be directed with the greatest promptness toward the controlled di tributing organizations who were agreed to adhere to the con- vention for quot s and prices in consuming countries.49 In these neg tiations the international group first proposed that the Rumanian quota should be based on sales for the 1928 calendar year (the Achnacar agreement base year). In order to obtain Rumanian adherence, however, it was agreed "after long discussions" that the basis for quot s should be Rumanian exports between July 1, 1931, and June 30, 1932. This change in the base period gave the Ruman- ians an increase of 65 percent. The international group also agreed to continue buying as much Rumanian oil as they had purchased during the base period." On their part, the, Rumanians agreed to adhere to the uotas and price agreements set up under the Memoran- dum for European Markets, and to base their prices for sales to the international group "on those ruling at the Gulf." The consum g markets to which the Rumanian agreement was to apply were- Europe (excluding Rumania), Turkey in Asia, Syria, Palestine, Egypt, Sudan, Tripoli, Algeria, Tunis, French Morocco, and Spain."l The fall of 1932 was consumed in conferences in Rumania and Paris working jout operating details of the agreement. In October it was reported t arbitration by unable, becaus rights and obl cally provided ,Sias is" positio'. exporter from group," it wou ' The Petroleum Ti 4' Ibid., August 27, 1 rat the Paris agreement had been altered to provide for a "mixed commission" 6e in case the Rumanians were e of circumstances beyond their control, to fulfill their igations "in any country whatever." It was specifi- that if the Rumanian group was unable to maintain its l in any country due to the export activities of "any America who is not a member of the international d be the duty of the mixed commission to attempt to es, July 30, 1932, p. 106. [Italics added.] 32, pp. 195-196. n as is" position based on the later year, the Rumanians increased their base year national group to 4,66,860 tons for the year 1931 finally agreed upon. The purchases of the international group were stated to r present about 45 percent of Rumania's total exports during the base period. 51 We Petroleum T mes, August 2", 1932, pp. 195-l o .) In accordance with the Memorandum for Euro- pean Markets, each of the parties to the Rumanian agreement had the right to expand its position in any 52 This was a central mmittee consisting of representatives of the international group and the Rumanian group, setup under th Paris agreement. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 find an adequate solution." From the Rumanian viewpoint, an ade- quate solution apparently required that the mixed commission either bring the independent American exporters under control or make some other satisfactory provision by which the Rumanian position would be maintained regardless of the activities of the American independ- ents. In other words, the price of Rumanian adherence was that others restrict their shipments in order to bolster prices for Rumania's increased production. In the latter part of 1932, the whole agreement was threatened by the sharp decline in Gulf prices, which dropped materially below the price of oil in Constanza. Since the cartel's price structure was based on the Gulf price, a solution had to be found. A Petroleum Times editorial on the Outlook for 1933, took the position that United States producers would have to play the game; that there was too much price cutting in the United States, and that American producers would have to see that export prices conformed to those outside the United States.54 On February 4, 1933, another Petroleum Times editorial stated that if the Roumanian agreement was to be continued, the international group "must raise the price in the United States." b6 A week later an editorial again commented that the Roumanians were taking a serious view of the situation; that the president of the Roumanian Association of Petroleum Industrialists had been in both London and Paris interviewing representatives of the international oil group; and that J. B. Aug. Kessler had gone to New York,56 The problems met in trying to establish a local agreement in Roumania illustrate the difficulties which plagued local marketing agreements which were established under the memorandum for European markets. As in the case of the Roumanian agreement, it was difficult, if not impossible, to maintain these other local agree- ments as long as world production was not effectively controlled. In other words, the existence of a fringe of uncontrolled producers proved to be just as troublesome in the early thirties to the new strategy of setting up local agreements as it had been to the previous effort to establish a comprehensive cartel. Control of Russian oil-New York conference, May 1982 Although the American Petroleum Institute did not follow the Rumanian suggestion to call a world "conservation" meeting to con- sider the Kessler plan, it did call a conference held in New York which was attended by representatives of both American and European interests.67 'This meeting was described in the European trade press as preliminary to the proposed world oil conservation Conference.68 6e, (The Petroleum Times, October 22,1932,p. 415.) An editorial note pointed out that these modification, were, "particularly interesting in the case where, by reason of the intervention of a noncontrolled competitors the groups can no longer effect the position to which the "as is" gives them the right." 64 Ibid., January 7, 1933, pp. 15-16. 5' Ibid., February 4, 1933, p. 118. e,6 Ibid., February 11, 1933, p. 129. '7 The Petroleum News, May 7, 1932 p. 526, stated that those present from Europe would include: J. B. Aug. Kessler of Royal Dutch-Shell, William Fraser of Anglo-Persian; R. I. Watson of Burmah Oil Co., 11. Von Ricdemaim, representing European interests of Standard Oil Co. (New Jersey), and Wilson Cross of Vacuum Oil Co., of London. It was also stated that three Russian representatives also were in New York, but not primarily for the conference. 68 Although this meeting appears to have grown out of the Rumanian suggestion regarding a world con- ference, it does not appear that the Rumanian situation was given any attention except that the Russians "stressed the fact that Rumanian competition in European markets during the past few years has proved even more demoralizing than that by the Soviet." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 the New York of. 5ocony-Vacuu to secrecy.69 During the con Moffett, Jr., vi as joint spokesm news of the, pr being concentra plished throug companies woul through their o inability of the an amicable ac and terms of sa trade press stated that American representation at .eeting was- I to the major American exporting companies; that the Euro- s were present at the invitation of Charles E. Arnott, president Oil Co., and that all present at the conference were pledged erence, which lasted about 3 weeks beginning in the e president of Standard Oil Co. _(New Jersey), acted gress of the conference and the actual aims of the ed on an effort to arrange for the "orderly" marketing products in world markets. This was to be accom- agreements under which the major international buy stated quantities of Russian oil for distribution n marketing organizations. The only hitch was the oviet representatives and the other interests to reach ord on the quantities to be so 'taken and the prices stated, but without official confirmation, that the American and 37,500,000 barr uropean companies proposed to buy approximately is of Russian oil annually for a period of 10 years, or approximately t 1931. Regardi The early tr Russians, but E deadlocked over in their quota a foreign marketi terests refused t altogether. Th Jersey), and P Foreign Trade, time to reach at. the problems cry corisumption.12 further efforts ti local agreemen after the adoptii embodied in the Distribution." g the prices to be paid, it was stated that- viously, would be unwilling to accept the f. o. b. Constanza decided upon as the representative "free market" on which a n be based 6' ide press reports forecast an agreement with the ,nnounced a week later that the negotiations were the insistence of the Russians on (1) periodic increases id (2) the right to market their oil through their own ig organizations. When the other international in- accept these conditions, the negotiations broke down 3reupon, Charles E. Arnott, of Standard Oil (New hilip Rabinovich, of the Soviet Commissariat for rnnounced jointly that it had been impossible at that .y mutually satisfactory agreement for the solution of ated by the lack of balance between production and At the same time, however, it was indicated that stabilize world markets would be continued through s in particular countries. These efforts continued )n, on December 15, 1932, of further understandings memorandum known as the "Heads of Agreement for as The Oil and Gas Jo real, May 26, 1932, p. 17, stated that: "Representatives of the major American companies participating in the world conference find themselves in an anomalous position * * *. Being unable to divulge the trend of the proceedings, because of the obvious danger of 'upsetting the apple cart' in the midst of negotiations through the misconstruction of the proceedings or an ill-timed criticism of the negotiations, they are s bject to criticism by many elements in the industry for this very policy of secrecy which they deem so essential." 60 Ibid. It was also st ted that "* * * the arrival of the American and European oil companies at an accord with respect tote proposals to be submitted to the Soviet was in itself no small feat of diplomacy. Some of these interests i recent years have been at odds with their competitors regarding certain aspects of foreign marketing ope ations, and even should the Russian negotiations fall through * * * it is felt that the conference will ave accomplished considerable constructive work through the bringing together of major European and A orican oil companies for an informal round table discussion of mutual problems and an ironing out of difllcu ties and misunderstandings hitherto existent." ec Ibid., p. 17. ea The Oil & Gas Jon al, June 0, 1932, p. 100. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL 241 HEADS OF AGREEMENT FOR DISTRIBUTION, 1932 Origin and nature of the heads of Agreement Following the Rumanian agreement of 1932, there still remained the problem of fitting Rumanian export production into the local cartel quota and price agreements to which the Rumanian agreement applied. Some of these local agreements were carry-overs from the period before the adoption of the Memorandum for European Markets in 1930; some included parties other than those adhering to the "as is" principle; and some deviated in other respects from the principles and procedures laid down in the Achnacarry agreement and the Memorandum.63 The "as is" leaders decided to continue such agree- ments until their termination, at which time new agreements would ?. be made in accordance with the main international charter. To this end it was felt that a new set of rules restoring the principles and procedure of the Achnacarry agreement and the Memorandum for European Markets was needed as a guide to the local representatives in formulating the new local cartel arrangements. This intent was clearly set out in the first paragraph of the Heads of Agreement for Distribution, adopted December 15, 1932, which stated: The "IIeads of Agreement" which follow have been drawn up with a view that they should be used as a guide to representatives on the field for drawing up rules for local cartels or for local Agreements. It is the intention that all such local Cartels or Agreements should be based on these "IIeads" but in those countries where the parties have already or make in the future a satisfactory working arrangement or agreement, which includes "non-as-is" parties and which differs from the guiding principles laid down herein, it is not proposed that those agreements should be altered, if such alterations would cause undue dis- turbance; but if such local agreements should terminate for any reason, then those "as is" partners who continue to cooperate shall base their relationship each with the other on the lines of the provisions which follow ea At the time the new agreement was formulated there were two "as is" committees known respectively as the New York and London "as is" committees. The new agreement was formulated by the London committee, which hold a series of preliminary meetings in London on October 24 and 25 and November 17 and 18, 1932. All of these preliminary meetings were covered by a single con- solidated minute. The minutes of the final meetings of the London "as is" committee, at which the agreement was adopted on December 15 and 16, 1932, indicate that representatives of Socony-Vacuum, Standard Oil Co. (New Jers'ey), Anglo-Persian, Gulf, Atlantic, Texas, and Royal Dutch-Shell were present. A representative of Sinclair Oil Co. wired regretting his inability to be present. This appears to have been the roster of the London."as is" committee at that time. At the first preliminary meeting, it was agreed that the Memo- randum for European Markets should be considered clause by clause with a view to so revising it that "there would be one common basis governing the relations between all `as is' parties." It was decided that two memoranda should be drawn up: one to cover distribution arrangements and the other to cover supply arrangements. These memoranda would then be presented for discussion and adoption at e3 Deviating agreements were the result of making the best bargains possible in particular consuming countries with concerns that did not accept all of the principles laid down in the Achnacarry agreement and the Memorandum for European Markets. An instance was the agreement already mentioned between Russian Oil Products Co., Ltd., the Soviet marketing agency in Groat Britain, and Anglo-American, Shell, and other important British marketing agencies. Numerous other agreements existed in other con- tinental consuming markets. 64 Preamble to the Heads of Agreement. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 a meeting inclu mg representatives. of all the "as is" companies. The draft of the Heads of Agreement for Distribution Memorandum was considered and amended at a meeting of the full London "as is" committee, and adopted on the following day. Whether any action was taken by the London committee to formulate the proposed second memorandum is of clear from the record. It is clear, however, that on December 15 1932, the full London committee recommended that the supply probl ,ni be handled by the New York "as is" committee, which, along wi ,h the American Petroleum Institute, was actively promoting the conservation movement in the United States as a cartel objectives General terms of The following of meetings of furnished by the Since the new a ments, of the clauses of the pr change. Notabl clause dealing and (3) the pr specialties as wa covered. In add such as benzol, or compete with, the scope of the The Texas Co. on the ground th should stand as should be made Vacuum Oil Co. inclusion of lubri lubricating oils o the practical difri even though no s ness to cooperate members concer stability.e7 ments was the pr determining the t eads of Agreement . nalysis of the terms of the Heads of Agreement for sod on a copy of the document and certain minutes he committee that drafted it, both of which were tandard Oil Co. (New Jersey) in response to subpena. reement is essentially a recodification, with amend- decessor agreement were carried over almost without among these were (1) the "as is" principle, (2) the ith the making of local arrangements to fit local h country (except the United States of America), vision that all petroleum products (except such Lion it was provided that, unless other local arrange- lcohol, and other products, which are mixed with, agreements.86 reserved its agreement to these inclusive provisions 11 countries. It was agreed, however, that the clause outside the Heads of Agreement. Also, Socony- wished it recorded that, although it favored the sating oils, it wished to consider itself "free so far as ily are concerned, should no satisfactory solution of ultics concerning that product be found." However, ch solution was found, "Socony" statedits willing- to the fullest extent at all times with other "as is" ng prices and any other factors affecting market the clauses carried over from the previous agree- vision for the parties to meet and report their own mates of total deliveries of outsiders as a basis for 65 The minutes of the London "as is" committee meeting on December 15 state that in order to avoid duplication of effort betwee the two committees" * * * it was suggested that roughly the division should be that New York should andle supply'as is' " and that London, being in close contact with the markets, should deal with distributi n "as is." 00 In the case of bitumen emulsions, however, only the actual bitumen content was to be included. Lubri- eating oils and greases, while subject to the basic principles of the Heads of Agreement, were also to be subject to a special memo andum which would provide "for the detailed working arrangements and for the adjustment of over- an under-trading," and also deal with "nonmincral ingredients in lubricating oils and greases" for "as is" pu poses. 67 Minutes of the London "as is" committee, December 15, 1932. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 243 were added provisions which in principle would exclude a party's own consumption figures and which would require independent auditor's certificates for the companies' own trade figures." Also carried forward was the provision for monthly meetings of the local representatives to exchange statistics and to cooperate to the fullest extent not only in regard to their individual position in relation to each other but also in regard to their combined position in relation to the market as a whole.?? Trade and quota adjustments and penalties.-Also carried over from the Memorandum for European Markets were the general conditions governing the responsibility of each party to maintain its percentage- quota position and the general rule for determining overtrading at the expense of other parties. Rules for carrying out these conditions, however, were made more explicit. For example, it was declared that the only basis for determining over- and under-trades would be the percentage of the trade done by the parties during each trading period, as shown by their records at the end of the period. Definite rules were also provided for determining when over-trading had oc- curred which, in accordance with the "as is" principle, was to be cor- rected by exchanging customers, giving cash compensation, and paying fines. Likewise, a definite rule was added for determining how much of an under-trader's volume was lost to parties to the agreement, as distinguished from that lost to outsiders.70 Undertraders were to have the option of supplying products to over- traders or of accepting cash compensation from the overtraders at the end of each annual trading period. Rules for determining the com- pensation to be paid by overtraders also were spelled out in somewhat greater detail than in the Memorandum for European Markets.71 Under the 1930 memorandum, adjustments in quotas and payment of fines for overtrading were to be made annually on the basis of the preceding year's trading. Under the 1932 Heads of Agreement, how- ever, quota adjustments were to be made only after a party had undertraded (after including losses to and gains from outsiders) for ee Heads of Agreement for Distribution, clauses V and VI. Here, again, a reservation was made by the Texas Co. to the effect that it was not willing to have its figures audited by an independent auditor. All other parties agreed that such outside audit might not be required of"as is" parties, but in view of the fact that the scope of"as is" was widening and that compulsory audits had been found "absolutely essential for the working of the French cartels in which a large nuMiber of small concerns was included," it was considered necessary to retain the clause as drafted. Minutes, London "as is" committee, December 15, 1932. 09 Heads of Agreement for Distribution, clause VII. In addition, it was specifically provided that only the principal local representatives, defined as "only the senior representatives of each party for the market in question, or the next senior person as delegated by him to act in his absence" would be eligible to sit in such meetings. 70 Heads of Agreement, clauses VIII and IX. The rules for determining under- and over-trades were as follows: "If the figures at the end of the period are such that the overtraders' actual trade exceeds their allotted quotas to a greater extent than the undor- trader's (or undcrtraders') trade is below his (or their) allotted quota, then the undertrade shall be assumed to have been gained by each ovortrader pro rata to the volume of their respective overtrading, and the adjust- ment of trade, compensation, or fines which each overtrader must effect * * * shall be calculated on this basis. "Again if the figures at the end of the period are sneh that the undcrtraders' actual trade is below their allotted quotas to a greater extent than the ovortrador's (or overtradcrs') actual trade exceeds their allotted quota, then the overtraders' overtrado shall be assumed to have been gained at the expense of each under- trader pro rata to the volume of their respective undortrading, and the trade adjustment or compensation which each undertrader shall receive from the overtraders, and the quota adjustment (if any) which the undortrader shall suffer, shall be calculated- on this basis." Ti The average "gross proceeds of all parties for all invoiced deliveries for the product in question" during the trading period were to be substituted for "the average proceeds realized * * * by the overtrader," as provided in the memorandum. Deduction from this average gross realization of a figure covering marketing. expense, agreed upon by allparties before the beginning of each trading year, yielded the average cash compensation per unit of product which overtraders would pay to undcrtraders. To provide against the contingency that ovortradcrs might benefit financially through reduction of their fixed expenses as a result of increased volume gained by overtrading, it was provided that the deductible marketing expenses should not include any allowance for depreciation, interest or overheads; in other words, should include only actual out-of-pocket expenses and commissions paid. - Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 two consecuti e years." Detailed examples were given of how to compute the q antities to be deducted from the undertraders' quota and added to the quotas of overtraders at the end of any such 2-year period. A similar su stitution of a 2-year period for overtrading was made for the purpos of computing the fines which were to be paid by an overtrador an apportioned to undertraders. Again, detailed exam- ples were worked out to illustrate the determination of the quantity a member had overtraded in each year, and the quantity on which he would pay fine. As in the 1930 agreement, the fine was to increase progressively with each 1 percent overtraded in excess of an allowable margin of 5 pe cent.73 The number of steps by which the fine would increase with ach 1 percent overtraded in excess of 5 percent was reduced from to 4, so that the percentage of overtrades at which the fine would ecome equal to the total deductible marketing expense retained by the overtrader was reduced from 10 percent to 9 percent. As in the cose of the 1930 memorandum, the Heads of Agreement treated large contracts as something in which the member holding them had a property right which it was the duty of other members to respect. It was therefore agreed that the local representatives of "the parties should discuss, inter se, selling conditions with a view to enabling the p rty holding the contract to retain it if possible. It was further suggested that large contracts offered a useful vehicle for making current trade adjustments in accordance with the rules for adjusting under- and over-trading.?4 Admitting o tsiders.-Both the Memorandum for European Markets and the Heads of Agreement declared that "it is the intention that all outside concer s seriously engaged in the distribution of petroleum products shall be admitted." In 1930, outsiders were to be admitted on conditions "not more favorable than those enjoyed by the original parties at the ime when they were admitted." 75 This last provision had been rend red impracticable, however, by the recently formulated Rumanian Pr duction Agreement, in which Rumanian producers were conceded a 65 percent increase in crude oil production over what they would h ve been entitled to under quotas based on their per- 72 The provisions res acting adjustment of quotas were as follows: "When, for each oft o consecutive years a party has undertraded (after excluding losses to and gains from outsiders) by more th n a margin of 5 percent of his effective percentage quota in each year his percentage quota for the ensuing ear shall be reduced by one quarter of the amount by which his undertrading in the second year exceeds hi 5 percent margin. `The figure by whie the undertrader's quota is thus reduced shall be added to the quotas of those parties who are not undertra rs in excess of their 5 percent margin, pro rata to their respective quotas." Heads of A.grcoment for Distri ution, clause XII. 72 The provisions res ecting fines were as follows: "The overtrader at II suffer a fine if his overtradc for any product for each year of any two consecutive years is in excess of 5 ereent of his allotted percentage quota for that year and for that product. "In the above event the overtrader shall pay a fine for each unit of the quantity by which his overtrade in the second year oft e 2 years is in excess of 5 percent of his allotted quota. The fine for each unit of this quantity represented. y the initial 1 percent of his allotted quota, or fraction of that 1 percent, in excess of 5 percent overtradc shall be 25 percent of the average marketing expense of the product for the second year, as agreed in adv nee under the provision of clause X. The fine for each unit of the quantity repre- senting the second an third completed 1 percent or fraction thereof, in excess of 5 percent overtrade shall be 50 and 75 percent, respectively of the agreed average marketing expense, and for each unit of the quantity represented y the fourth and each succeeding 1 percent, or fraction thereof, the fine shall be equal to 100 percent of the agreed average marketing expense. "The amount paid i fines by the overtrader shall be apportioned among the parties who are not over- traders, in excess of th it 5 percent margin, in proportion to their respective quotas." Heads of Agreement for Distribution, claus XIII. 74 Heads of Agreeme t for Distribution, clause XIV. This brief general s atement was substituted for the more detailed provisions of the Memorandum for European Markets res ecting the fixing of prices and terms of sale for such contracts, and for cooperationto retain them within. th member group. 75 Memorandum for European Markets, clause III-a. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 formance during 1928. In order to provide the elasticity needed to make room for Rumanian exports, the phraseology of the 1930 agree- ment was modified to permit the admittance of outsiders "provided that the conditions on which they are admitted are mutually acceptable to all existing partners. It was also agreed in principle that, to be admitted, outside concerns would be required to "accept the provision of these Heads of Agreement for all products and for all countries (except the United States of America)." 76 In effect, this change in phraseology permitted new members to be admitted with percentage quotas computed on bases other tharl their trading during the base period. Such admission would require contri- butions from the quotas of existing members to make up the larger quota of the new member. How to handle this troublesome subject was considered by the London "as is" committee both in drafting the Heads of Agreement and again at the time it was adopted. The minutes of the committee indicate that no general agreement, however, could be obtained regarding a specific formula, although it was agreed within the committee that adjustments should be made in accordance with the following principles: 1. That all "as is" parties should contribute to the quota of any new member admitted with a quota larger than a share of trade held by him prior to admission. 2. That any new member so admitted would not be allowed to further increase his quota after admission by taking trade from outsiders until the old members regained their shares of trade represented by their quotas prior to the admission of the new member.77 In adopting the Heads of Agreement without a specific formula for sharing quotas with new members, the London committee stated in its minutes that- So far as the future admission of new members was concerned, it was agreed that each case would be considered on its merits and it was hoped that a basis for adjustment would be found which would be mutually acceptable to "as is" members 78 Purchase of outsiders.-The acquisition of outside distribution out- lets received careful consideration during the 'drafting and adoption of the Heads of Agreement. On December 15, 1932, the London committee directed that the following paragraph be included as a footnote to the clause dealing with the admission of new members: Purchase of outsiders.-It is recognized that it is desirable to convert uncon- trolled outlets into the controlled class; in view of this the purchase by the "as is" members of going distributing concerns outside "as is" is to be recommended as tending to improve the stability of the markets. The purchase of such outsiders is in principle the equivalent of admitting new members to "as is" and should be treated accordingly. It is therefore recom- mended that where possible, such purchases shall be frankly discussed between parties interested before the purchase is completed.75 Virginal markets.-This was a new subject considered in adopting the Heads of Agreement. During the drafting period, the London 70 Heads of Agreement for Distribution, clause III. 77 Minutes of meetings held on October 23, 25, and 26 and November 17 and 18, 1932. 78 Minutes of London as is" committee meeting, December 15, 1932. 7e Heads of Agreement for Distribution, footnote in connection with clause III. [Italics added.] This language was inserted in lion of the more specific phraseology of the Memorandum for European Markets which had provided that any party purchasing a local outside distributing concern would offer a pro rata participation in the purchase to the other parties who if they joined in the purchase would divide the ton- nage of the acquired outlet pro rata to the quotas of the participating parties in the markets concerned. Joint purchases, or any other solution satisfactory to the parties, could still be worked out through discus. sion among the interested parties. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 committee de `as is' arrange periods discus ever, was inc cisions arrive be supplement of the parties markets withi entitled to a suggestions w which a party med virginal markets as "markets in which no party to inents had had trade for a certain product during the basic ed." 80 No specific clause respecting such markets, how- uded in the Heads of Agreement. Therefore, the do- at by the committee regarding these markets appear to ;al understandings arrived at among the top executives as to how they would bring their operations in virginal a the scope of "as is." ttee agreed in principle that all "as is" parties were share of the trade for the product in question. Two ,re considered for determining the percentage share to would be entitled if he entered a market where he had not hitherto t aded. The first was that the parties should be entitled to percentage hares in the new market in the ratio of their respective shares of tot 1 world consumption (excluding the United States). The second was that the world market should be divided into areas or zones, and that the rights of the parties in a virginal market should then be in the ratio of their respective zonal percentages in the zone in which the particular market was situated.81 When this matter came before the London "as is" committee on December 16, 1932, the zonal basis was adopted. The minutes of the committee indicate that the following zones were suggested: Zone 1. Europe, north African Mediterranean countries (Morocco, Algiers, Tunis, Tripolita ia, Egypt), Near East (Palestine, Syria, Asiatic Turkey, Arabia, Persia, Iraq, and Red Sea area). 2. Relnaindel f Africa not included in 1, and neighboring islands (i. e., Mada- gascar, Seychelles, etc.). 3. Remainder f Asia not included in 1, Japan, Philippines, and East Indies. 4. Australasia, including Pacific islands. 5. South Arne ica, Central America, and West Indies. There still remained, however, those cases in which a market might be "virginal" to some "as is" parties, but already occupied by others. Discussion of his subject immediately brought out the comment that, under "as is" any party who was already in the market should be entitled to ret in at least the quantity he was already selling therein. This meant that the second party entering the market was entitled only to such share as he might be able to take from outsiders, plus any increase in to al volume sold in the market. In other words, the second "as is" arty was entitled to his full. "as is" quota in the market only if and w en the total quantity sold in the market had increased sufficiently to over his quota without encroaching upon the quantity which the firs party had held before the second party entered the market. Prior to 19 2, two international committees, the London "as is" committee and the New York "as is" committee, had operated to carry out the "as is" principles. These committees appear to have operated practically on a coordinate basis. With the adoption of the Heads BO Minutes of meetings held on October 24, 25, and 26 and November 17 and 18, 1032. (Italics added.] a, Ibid. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 of Agreement for Distribution, new operating problems arose, par- ticularly in connection with the admission of new parties. In order to. deal with these operating problems, the minutes of the London "as is" committee of December 15,1932, record that- all were agreed that to further the smooth working of "as is", it was full time that a central "as is" secretariat was formed, which was -to be domiciled in London and which would be available equally to all members of "as is". It was further agreed that the powers of the secretariat should be administrative and not executive, that its primary duties would be to serve as an aid to the "as is" committee," and that its cost would be shared by all "as is" parties. The likelihood that the Rumanian agreement would soon become effective was cited as further reason for the formation of the secretariat. In regard to the division of executive, functions it was suggested- that New York should handle supply "as is", and that London, being in closer contact with the markets, should deal with distribution "as is". That the two committees were to continue to function coordinately was indicated by a statement to the effect that all decisions by the London committee affecting major issues and matters of principle would have to be referred to the New York committee before becoming effective, and vice versa. The duties of the central "as is" secretariat were to serve as a central service agency collecting and maintaining the necessary statistical data for the administration of "as is", and to record and circulate all decisions made by the two main executive committees. This was to provide working machinery in the fields of both production and distribution, with a central coordinating agency between the two executive committees. Thus the New York committee was to continue to promote the restriction of production, particularly in the United States, under the conservation program, while the Lon- don committee was to continue to supervise and coordinate the struc- ture of world cartel controls, including local market agreements, and each committee was to clear its decisions with the other. Additions to previous agreements.-The principal additions made by the Heads of Agreement to previous international understandings were to make it clear: (a) That the principle of "as is" was .to apply in each and every country or area of the world except the United States; (b) that it was to apply to both "supply" (i. e., production and exports of crude oil and refined products) and distribution; (c) that supply "as is" would be handled by the New York "as is" com- mittee; (d) that distribution "as is" would be handled by the London "as is" committee; (e) that the activities of these main working com- mittees would be' coordinated through a central "as is" secretariat; and, (f) that all disputes arising under the Heads of Agreement would be decided by a central "as is" committee, which also would $' The language used in referring to the "as is" executive machinery is somewhat con- fusing, sometimes indicating the existence of a single "as is" committee, while at other times specifically referring to separate performance of particular functions by the London "as is" committee, or the New York as is" committee. The confusion may arise out of the fact that I. the fonnnlation of policy the two committees acted practically as a single body, while in the administration of policy they acted separately. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 provide "rules I changing condit Secrecy regar, utes of the Lon veinber meetins It was felt that i freer circulation T of the inelnorandu certain countries the voting rights o Accordingly, cedures set fors clauses in the H "be phrased on Heads.of Agre provision that t] est extent to get information obt lation to one ai whole." Of a sii tracts that "the a view to enablii The minutes c member 16, 193e state that- All parties were mittee meetings sl parties and should [Italics added.] or meeting problems arising through new factors, or ions in the oil industry." 83 ing the Heads of Agreement.-The consolidated min- on "as is" committee covering the October and No- n view of the inclusion of the new members and the consequent vhich the new memorandum would have compared with that im for European markets, it would be inadvisable, as far as vere concerned, to refer too openly to the fixing of prices and f members in this connection 84 it was decided that in contrast to the detailed pro- 'h in the memorandum for European markets, the ends of Agreements dealing with these matters should very general and noncommital lines." Hence, the ement contained only such indefinite clauses as the pie senior representatives would "cooperate to the full- the best results and make the best possible use of the ained, not only in the matter of their position in re- iother, but also of their position in the market as a nilar character was the provision regarding large con- parties should discuss inter se selling conditions with 1 the arty holding contract to retain it if possible." I'll If the -meeting of the London "as is" committee on Do- ~, at which the Heads of Agreement were approved, agreed that these minutes and the minutes of previous com- ould only be circulated to the head offices of the interested not be sent by any party to local marketing representatives. Thus, although the Heads of Agreement was to be a guide to field representatives in drawing up rules for local cartels or agreements, not even the "senior representatives of each part for the market in question or the next senior person as delegated by him to act in his absence" was to have access to the minutes. Operations and r the Heads of Agreement The life span of the Heads of Agreement, 1933-34, fell within the worst period of he world depression. During these years, competition was held in check in most foreign oil producing countries. In the Middle East, t predominant position of the Anglo-Persian Oil Co., ea It is not entirel clear from documents available whether the central "as is" commit- tee and the London "as is" committee were to be one and the same. The Heads of Agree- ment provided that "a central 'as is' committee shall be formed, the members of which shall be representat ves of each of the groups subscribing to as is.' All matters of dis- putes concerning the local interpretation of these arrangements, which cannot be settled on the field, or dis utes concerning the principles on which 'as is' is based, shall be re- ferred to this committee for settlement. The committee shall also provide, as the occasion arises, rules for me ting problems arising through new factors or the changing conditions in the oil industry.' The December 15, 1932, minutes of the London "as is' committee 'suggested" that th London "as Is" committee, likewise, should make decisions "affecting major issues and matters of principle dealing with distribution as is'." but do not make It clear whether th se matters would be separate and distinct from those for which a central "as is" comm ittee was to be formed. Minutes of preli inary meetings of the London committee, October 24-25 and Novem- her 17-1 S' 1932. With respect to the matter of voting rights, however, the committee felt "that some method of deciding the voting rights in the fixing of prices In the various distribution markets should be developed and laid down in a. separate memorandum of understanding,"' and that "this could then he included in the local agreements if thought advisable, taking Into consideration the conditions in the country concerned." Minutes of the London com- mittee, October 24-2 and November 17-18, 1932. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 249 Ltd.,"" was challenged in December 1932 by the annulment of its con- cession in Persia. This action was taken by the Persian Government on the ground that the company had not exploited the Persian fields while it had developed fields in other areas."' In 1933, however, Persia granted Anglo-Persian a new concession. Russia, which- had refused the offer of the international companies to buy its oil, continued to be a potential threat to "as is" supply and distribution. However, Rus- sian exports were restricted, and no flood of Russian oil appeared in the world markets.88 Venezuelan production was largely controlled by Royal Dutch-Shell and Standard Oil interests,89 and hence was subject to "stabilization." Rumanian and United States production By far the most difficult problems under the Heads of Agreement were those of Rumanian and United States production. About 2 months after the Rumanians signed the Paris agreement, the presi- dent of the Rumanian Association of Petroleum Industrialists was in Paris and London expressing the dissatisfaction of his group with the world price situation created by "the disastrous cut in American oil prices." On returning to Rumania, he took the position that if con- ditions in the United States were permitted to continue unchanged the whole of the Paris Conference decisions would be greatly endan- gered.90 This complaint was referred to the Mixed Commission setup by the Paris Agreement. This body, consisting of the leaders of the large American and British companies, met in London with a delega- tion from Rumania during the last 2 weeks of February 1933. The Rumanians contended that the price situation in the United States "had gone from bad to worse," and threatened to abrogate the agree- ment at the end of the 3 months' trial period if the American situation was not improved.- 86 Up to 1935, practically all of Middle East production was taken from Anglo-Persian's concessions in Persia. Production in Iraq, in which Anglo-Persian held a share, was less than 1 million barrels annually up to 1934, 7.7 million barrels in 1934, and 27.4 million barrels in 1935. World 011, February 15, 1951, p. 246. sr According to the Petroleum Times, January 28, 1933, p. 94, the position of the Persian Government was that: "It is inadmissible that the extraction of oil should be confined for more than 30 years (out of the 60 for which the concession was made) to an area of a little more than 1 square mile. Yet such is the fact. The Anglo-Persian Oil Co. * * * is constantly extending its activities outside Persia, but in Persia it confines itself to a restricted exploitation. * * *." ?e The Petroleum Times, February 8 1934, p. 100, noted that Russian crude oil produc- tion had showed no increase during 1633 and that its exports were 22 percent less for the f irst 11 months of 1933 than they were in 1932. so The Petroleum Times, February 3, 1934, p. 111, divides Venezuelan production for 1932 and 1933, as follows: Company group Royal Dutch-Shell ---------------------- 51,224,383 44.1 83,072,264 44.6 Standard Oil Co. of New rsoy------------------ 47, 376, 690 41.1 51,222,288 43.0 Others------------------------------------------- 14, 708, 780 14.8 14, 709,162 12.4 Gulf Oil Corp. accounted for most of the crude oil produced by "others." 90 A Petroleum Times editorial, discussing the world outlook for 1933, stated that there was too much price cutting in the United States, which would have to "play the game" and see that its export prices conformed with those outside the United States. The Petroleum Times, January 7, 1933, pp. 15-16. A month later another editorial declared that "The international group must raise prices. in the United States." The Petroleum Times, February 4, 1933, 118. 91 Ibid., February 25, 143 , p. 208. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 250 THE ? INTERNATIONAL PETROLEUM CARTEL At the end of the conference it was officially announced that the meeting had "dealt with the details of the machinery of the efficient operation of the agreement." It was stated that, as its contribution, in an attempt to bring "fuller cooperation between the [United States] legislative authorities and oil companies in the matter of pro- ration measures " Standard Oil Co. of New Jersey would not draw oil from storage and would "refuse all orders which would bring pro- duction above the set limit." Arrangements were made for further meetings in Par s.92 It was reported that an advance in United States domestic prices long the whole Atlantic coast might take place.93 Following the meeting, an International Petroleum Bureau (appar- ently the central "as is" secretariat) was set up in London as a "pri- vate body formed on behalf of the groups which have taken part, its objects being t collect statistics and information on the oil trade and such matter of value in connection with any agreements that may be :made." 94 During the last week of March 1933, oil conferences were held simultaneously in the United States and Paris. They were said to indicate that "the oil industry is determined by some means or other to lift itself fro its present ignominious position.9' A conference took place during the first week of April between Secretary Ickes of the United S ates Department of the Interior and the governors of oil-producing States who were considering ways and means of con- serving the oil resources of the United States.99 Individual State action was then nder consideration, but neither effective State laws nor approval by the Congress of joint action by the States through interstate comp cts then existed. Therefore, neither the governors nor the Federal officials could do more than recommend restriction of production b individual producers. The Paris con erence closed a week later. The British and Ameri- can interests apparently were unable to give satisfactory assurances that American roduction would be restricted and Gulf prices ad- vanced. The Rumanians, therefore, insisted upon greater freedom to produce andsell. It was reported that the Paris conference closed with a number of understandings, of which the following were the most important: (1) The Rumanians retained the right to continue to produce 18,500 tons of crude oil daily; (2) the Rumanians ob- tained the right to sell in any countries where they could find pur- chasers, but the nternational group requested the Rumanians to ex- port outside Eu ope only if they first offered their products to the international gr up and only if the price offered by the international group was less han that offered by other buyers; (3) the inter- national group a reed to buy 20,000 tons of kerosene and a like quan- tity of motor s irit (gasoline) ; and (4) if United States prices showed no advan e and United States production was not kept within 02 Ibid., March 4, 19 3, p. 222. 93 This advance fail e d to develop, due to continued unrestricted production and com- petitive selling of crud oil, especially from the newly discovered Past Texas field. Accord- ing to the Oil Paint a d Drug Reporter, the field price in East Texas fell from 98 cents per barrel in Octobet , nd November 1932 to 10 cents per barrel in May 1933. The posted price for export from Gulf ports fell from 90 cents per barrel in November 1932 to 32 cents by the end of :ranuixy 932. and to 30 cents in May and June 1932. 04 The Petroleum Times, March 25, 1933, p. 304. 95 Ibid? April 1, 1933, p. 332. ? Ibid., p. 335. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL the limit of 2 million barrels daily, Rumanian producers would be free to terminate their agreement altogether without notice.97 In May 1933, American production had not been reduced. Inde- pendent producers, especially in the newly discovered east Texas field, flooded the market with oil. The big companies thereupon posted prices as low as 10 cents per barrel in the east Texas field and 30 cents per barrel for export from Gulf ports, allegedly in an attempt to drive the independents out of the market 93 The disgusted Ru- manian Association of Petroleum Industrialists thereupon unani- mously agreed not to follow the restrictions on output imposed by the Paris agreement.99 But this decision did not mean that the Paris agreement was wholly abrogated. It was reported that the Rumani- ans were willing to revert to the limitation imposed by the Paris agree- ment when American production was brought under control and out- put limited to about 2 million barrels per day,' but that further Paris conferences would be postponed until "America gets into line".2 The suspension of the Rumanian agreement continued well into 1934,3 with the Rumanian producers exporting 20 percent more oil in 1933 than in 1932 and shipping a few cargoes as far as Canada and Australia.4 Operational problems in other areas Operations under the Heads of Agreement were also impeded by disturbances in a number of local distributing cartels. According to foreign trade press reports, in Germany, for instance, the cartel- minded German oil industry sought to gain greater influence and con- trol in the domestic oil trade. The result was that although Standard (New Jersey), Shell, and Anglo-Persian had for years dominated both wholesale and retail distribution and had fixed prices and estab- lished quotas dividing the market among themselves since 1928, there were inroads upon their position due to increases in both domestic production and imports from outside sources. By 1930, oil from these outside sources, including Russia, provided a basis for operation of independent retail stations with the result that whereas independ- ents had owned practically no retail pumps in Germany in 1928, they owned about 5,000 pumps out of an estimated total of 55,000 in 1933. With the introduction of this outside competition, the established price structure broke down. In 1932, the dominant international companies sought to meet this growing problem by entering into an agreement to buy German domes- tic petroleum products and to market them in Germany before sell- ing imported products. This arrangement was in strict conformity with the two principles of the Achnacarry agreement which dealt, respectively, with dividing the local market among the cartel parties 97 ibid., April 29, 1933, p. 435. 9' The Petroleum Times, May 13, 1933, pp. 497-498, commented on: "Disturbing news from East Texas where the increase in production alone in the past few days is many times greater than the total output In Rumania, and this formidable Increase In produc- tion has been met by the international group posting crude prices down to 10 cents per barrel in order to ]till the efforts of the independents * * *." See also Oil Paint and Drug Reporter price quotations covering that period. 9D Ibid., June 30, 1933, p. 570. 1 Ibid., June 10, 1933, p. 597. 2 Ibid., July 1, 1933, p. 2. 8Ibid., May 19, 1934, p. 529. Following Informal International oil "chats" in London between several leaders of the American oil industry and representatives of Royal Dutch- Shell and Anglo-Persian Oil Co., It was reported that statements by w. S. Farish, president of Standard Oil Co. of New Jersey, indicated that no world stabilization agreement would be possible until the American situation was secure. 4 Ibid., December 23, 1933, p. 741. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 on the basis o production in of limiting th[ tailers. The these sources. realistic due t( the big compa man productio man producer, tion, has no sa' quota. system i F past performance and of giving preference to local supplying local markets.,' It had the effect, however, supply available to independent wholesalers and re- artel's actions, therefore, came under criticism from It was charged that the quotas based on 1928 were un- ) changed conditions. The arrangement under which Hies purchased and controlled the marketing of Ger- a also came in for criticism on the basis that "the Ger- thus relieved of worry regarding disposal of his produc- in the matter of price fixing." c The working of the n Germany was also criticized as follows : pletely changed tImes. One of the basic ideas of the quota system is that the laggard shall be given a helping hand, either by diverting business to him or by granting him a p .cuniary compensation ; the market is also subjected to danger- ous pressure by the frenzied efforts to maintain quotas which developments as a whole have rendered out of date. * * * The parties to the agreement have undertaken to ab orb all additional German production before selling imported products, which leans-that the distributors place greater value on the mainte- nance of the stat s quo in the market, and thereby the utilization of their dis- tributing organiza tions, than they do on finding an outlet for the wares of their own foreign pare it companies.' It was further charged that the three big importers-Royal Dutch- Shell, Standard Oil (New Jersey), and Anglo-Persian-had formed a defensive fro t against German producers and had reduced prices. The three big mporters defended themselves against this charge in a memoranda presented to the German Ministryof Economy by the Erdol Reichsv rband. This memorandum stated that although the three companie commanded a majority in the cartel : * * * all chan es in prices during conventions since 1928 have been under- taken in the closest collaboration with the German producers, and have never been directed against he latter. When prices have been leveled up this has been done within the strict limits imposed by considerations concerning outsiders and the otherwise overburdened consumption ; reduction in prices represented not the desire of the mporters but defensive measures against dumping from other sources and again t the incursions of the outsiders.' Whereas in ermany the competition of independents was elimi- nated by purchasing their products, in England an important inde- pendent was eli inated by acquisition when Anglo-American Oil Co. bought out the ealand Petroleum Co. The latter company had been 90-percent own d by Continental Oil Co. and had marketed Conti- nental product competitively in the United Kingdom under the trade name "Dominion." In commenting on this acquisition, The Pe- troleum Times tated : Thus the Domi ion petrol will cease to be one of the independents and will be price-controlled b the national distributing companies.' Preparation for a new international agreement In December 1932, the beginning of the 18-month period during which the Head of Agreement were the accepted guide in the forma- tion of local cartels, the outlook for effective control over the world petroleum industry was not too bright. The principal problem was, of course, the lack of restrictions on United States output and the Achnacarry agreement principles 1 and 4. 'The Petroleum T mes, December 9, 1933, p. 710, quoting from Die Wirtschaft in Neuen Deutschland. ibid. ' The Petroleum, Tines, December 16, 1933, p. 732. ? Ibid., p. 718. , Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 253 refusal of the Rumanian producers to cooperate until American prices were stabilized. In fact, it was generally accepted in the trade that little could be accomplished until American Gulf prices had been brought under effective control. But with the NRA code of fair competition for the petroleum in- dustry,1? a solution appeared to be in sight. Under the code the east Texas.field price for grade A crude oil, which had dropped as low as 10 cents per barrel, was moved up from 50 cents in July to $1 per barrel in October 1933, with Gulf export prices advancing corre- spondingly. These prices remained unchanged throughout 193411 Efforts to take advantage of this change in the situation were not long forthcoming. In February 1934, it was reported that Rumania was as willing as ever to control her industry.Y2 Shortly thereafter, it was stated that Rumanian and Iraq Petroleum Co. representatives would meet in March 1934, "to confer on the situation and attempt to reach some definite plan as to marketing." 13 In April 1934, a Lon- don meeting was attended by leaders of the American industry and representatives of Royal Dutch-Shell and, Anglo-Persian interests. This meeting was described as "prompted no doubt by the necessity of some concerted action in the future when new sources of supply in the Near East will become available." 14 Tanker rate cuts had also contributed to price differences in inter- national oil markets. This problem was met by the formation of an international tanker pool under what was known as the Schierwater plan. The pool was stated to include all of the major ship owners in Denmark, France, Germany, Holland, Norway, Sweden, and the United Kingdom, and to have the support of all major oil companies engaged in the European trade. The plan provided compensation to owners for laid-up tankers. It was stated that American tanker own- ers were not members of the pool, but were trying to evolve a plan of their own.15 Thus, although operation under the Heads of Agreement fell short of its "as is" objectives in limiting Rumanian, Russian, and German production and distribution, and although difficulties were met in applying "as is" distribution in Europe and elsewhere, the interna- tional oil interests, after the adoption of the NRA code, were preparing for another attempt to implement their "as is" plan. Nature of the draft memorandum A renewed effort to stabilize the industry was made in April and May of 1934, when representatives of the major groups met in London to amend and reformulate the "as is" principles. By this time the major international oil companies had already acquired control of 11 The National Industrial Recovery Act was approved June 16, 1933, and the code of fair competition for the petroleum industry was approved thereunder on August 19, 1933. See Codes of Fair Competition, vol. 1, p. 143. Y' Prices,quoted by the Oil Paint and Drug Reporter for the east Texas field advanced from 10 cents per barrel in May 1933 to 25 cents in June, 50 cents in July, 75 cents in August, 90 cents in September, and $1 on October 9, 1933. Thereafter, prices in this field remained unchanged throughout 1934. Gulf export prices trailed after these field prices, reaching levels ranging from 82 cents to $1.12 per barrel on October 9, 1933, and thereafter likewise remained stable throughout 1934. is The Petroleum Times. Februarv 3, 1934, p. 110. 13 Ibid., February 17, 1934, p. 193. 14 Ibid., April 1.4, 1934, p. 385. la Ibid., March 10, 1934, p. 250. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 254 T~IE? INTERNATIONAL PETROLEUM CARTEL most of the w rld's important producing areas. Venezuelan oil was largely under t le control of Standard Oil (New Jersey), Royal Dutch- Shell, and Gull interests; the pattern of Middle East control by Anglo- Persian, Royal Dutch-Shell, Standard of New Jersey, and several other large A erican interests was emerging; Rumanian production was dominated by the British, Dutch, and Standard Oil (New Jersey) interests, and dian and Indonesian oil fields were controlled largely by the interrel ted British and Royal Dutch-Shell interests.- This steadily increa ing control of production by international interests, bound together by an intricate maze of joint ownership and contractual and cartel relationships, gave promise of less difficulty in the future in following a ommon policy. At their London mbeting the representatives of the major groups decided to give even greater emphasis to the twofold character of dis- tribution controls which they had gradually developed, and which may be described briefly as (a) the establishment of over-all principles or goals (the "as i " principles), and (b) the application of those princi- ples through t e medium of local marketing agreements, which might vary in certain details from country to country, according to differing circumstances. Past experience had taught the groups that the "as is" principles could be considered as controlling only with respect to relations among themselves. They had come to recognize that in dealing with thers these principles had to be regarded as only a desired goal. Difficulties in attaining the goal when dealing with outsiders through local marketing agreements were to be expected. The draft m ,morandum was undated. However, a memorandum, entitled "Expla natory Notes With Regard to Draft Memorandum of Principles," was issued on June 27, 1934, by the London office. These explanatory no es describe the origin and purpose of the draft memo- randum as foil ws : During these s me meetings [London, May-June 1934] the memorandum for European market dated the 20th or 21st January 1930 was revised and brought up to date, and at ached you will find a copy of the new memorandum which is to replace the memorandum for European markets for all purposes. Although them .morandum is not dated, it has been agreed that it applies from the 1st of Januar 1934, and that therefore from that date this new memorandum should replace al existing local agreements which may have been developed on the lines of the memorandum for European markets. * * * Thus the dr< ft memorandum of principles was an amendment to the memoranda in for European markets, carrying forward the same proposed inclu regarded as hi not be copied les and means for their attainment. In view of the lily confidential. To guard against possible leakage, um is to be treated with utmost confidence, and should r circulated, except possibly to responsible heads of Ic In addition, th large international companies were planning to acquire control of new potential sours s of production. In August 1934, Sir John Cadman of Anglo-Persian Oil Co., Ltd., made trip to Australia "to investigate the possibilities of the Anglo-Persian assisting in the de elopment of Australia's oil shales," and in November 1934, it was announced that a new company, owned jointly by Royal Dutch-Shell (40 percent), Standard Oil Co. of California (20 percent), and Standard Oil Co. (New Jersey) (40 percent), would thoroughly explore New Guinea for oil. See The Petroleum Times, August 18, 1934, p. 169, and November 3, 1934, p. 482. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 departments affected by the arrangments." 17 Only the top officers of the major groups, who were charged with administration of the plan were to have full knowledge of its terms. In dealing with outsiders, the local agreements were to be treated as wholly separate. Partici- pating outsiders were to have direct knowledge of the main agreement only to the extent that the London executives of the major parties might direct. Terms of the draft memorandum As in the case of the two predecessor agreements, the Draft Memo- randum of Principles declared the main principle of maintaining "as is" to be "of an enduring nature." It quoted some parts of the 1930 Memorandum for European Markets word for word and revised, amended, and added to other parts. The result was that the 13 main clauses and 2 addenda of the Memorandum for European Markets were expanded into 24 numbered clauses and 6 addenda. Inasmuch as the draft memorandum closely followed the broad "as is" principles, and procedures of the 1930 memorandum, the ensuing discussion will give attention primarily to new clauses and interpretative provisions. The preamble stated that the draft memorandum was "to cover all countries to the extent that it is not contrary to law." This pro- vision extended the application of the "as is" principle to distribution markets throughout the world, whereas only European markets were covered in the earlier Memorandum for European Markets. Excepted, because of the antitrust laws, was the United States, as well as any other country in which the provisions would be contrary to law. A new feature was a provision that in any market where all partici- pants were already, or might in the future become, members of a local cartel, the major parties might agree, by unanimous consent, that the local cartel would "override this memorandum for that market and product for the duration of such cartel." This provision gave the members greater freedom to make the best possible bargain with outsiders. However, it was subject to a requirement that any new local agreements made with outsiders "should be developed on the same lines as * * * the memorandum as nearly as possible." 18 As under previous agreements,- it was stipulated that the term of local agreements would be "of indefinite duration, unless terminated by 1 month's notice, which may be given at any time." It was further provided, however, that since the "as is" principle was of a durable 17 Full text of the explanatory notes dealing with the confidential nature of the draft memorandum and its application in local markets is as follows : `Before proceeding to discuss certain special clauses of the memorandum, it is important that you realize that this memorandum is to be treated with the utmost confidence, and should not be copied or circulated, except possibly to responsible heads of departments affected by the arrangements. Should it be necessary for certain departments to have frequent access, for working purposes, to this memorandum, it Is suggested that only excerpts as required by the department concerned should be made for their purposes. "The now memorandum applies only to the major parties in your area and is neither to be discussed nor disclosed to any other party who is In, or in the future may be brought into, a.ny of the local arrangements in your market without prior reference to London. Although it Is foreseen that other parties may enter Into "as is" arrangements in the local markets with the major parties, and although the working arrangements with them should of course be developed if possible on the lines of this memorandum, It is advisable that such local working arrangements should be developed apart from the memorandum and by separate agreement. In other words, If in your market it should be decided to enter into an arrangement with other parties, the major parties operating there should make jointly a separate agreement with the new party, and that agreement should be developed on the same lines as the attached memorandum, as nearly as possible." 18 See footnote 17, above. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 nature "such to mination shall not prevent the participants from en- deavoring to ge together to find a basis for its renewal." 18 The product to be covered in local agreements were specified in more detail than in the predecessor memoranda. They were as fol- lows : 20 Gasoline (including turpentine substitutes and other white spirits) Kerosene and trac or kerosene Fuel oils (excluding bunkers) Gas and Diesel oils (excluding bunkers) Bituminous products Determination of quotas and adjustments for undertrading and over- trading As under previous agreements, the parties were to meet locally and determine as accurately as possible the total consumption of each market, includi g quantities supplied by outsiders, for the necessary base and other operating periods. All basic data for quota purposes were to be supp rted by an independent auditor's certificate. On the basis of the assembled data, the local participants were to determine "the percentage of the total done by each participant in each product during such pe 'ods." 22 The explanatory notes accompanying the memorandum state that "It has been agreed upon that the basic year for the parties Iemains in principle the year 1928 for all products"- the year originally adopted under the Achnacarry agreement.23 The question of how to deal with sales and exchanges of products among participants was disposed of by the statement that : Sales by one pa ticipant to another arranged for their mutual advantage are at all times permissible. Such sales shall not be taken into account in cal- culating the performance of the supplying participant with regard to distribu- tion quotas.a' It was also agreed that sales of crude oil were to be made to certain independent refiners- * * * in various countries that have a position in the market and while it is not the intention to improve that position neither is it the intention to deny to 19 The effects of experience under the Rumanian agreement previously described appear to be reflected here. 2? For the applicat on of these classifications, it was provided that : "It is to be deter- mined locally whethe the grouping of such products for quota purposes as hitherto applied requires alteration." As under previous agreements, benzol, alcohol, and other products not derived from petroleum were to be included to the extent that they were marketed either in competition with or mixed with petroleum products. It was also provided that each local cartel would define the type of ship to which sales of petroleum products would be considered at bun ers and, therefore, excluded from local market sales for quota pur- poses. Bituminous products were defined by addendum 4 as "Bitumen, Asphalt, Fluxes, cut-backs, road oils, fuel oil, or other Petroleum Products used as road materials * * * or mixed with bitumen for industrial purposes," All petroleum products so used were to be counted at their full tonnage. Lubricating oils were specifically excluded but were to become subject to the provision that "any working agreements (if later developed) for these products will be covered in a separate memorandum." Further provision indicating refinements in computing quantities for quota-making purposes were that where nonpetroleum products were mixed with bitumen, only the bitumen content was to be included, and that the bitumen content of emulsion delivered Into consumption by emulsion companies, whether or not these companies were controlled by a participant, wa not to be counted. However, any bitumen sold to such companies was to be counted as sold to a buyer. Also, it was agreed that the net weight of bitumen counted would be computed by deducting from the gross weight a percentage to be agreed upon locally as repre enting the weight of packages. ea Italics added. "'he provision that, in principle, products consumed by the participants as well as quan sties consumed y outsiders were to be excluded in determining consumption figures, and the provision fo local monthly meetings for exchange of participants' data and esti- mates ofoutsiders' made, were carried forward from earlier memoranda of agreement. Also it was definitely stipulated that the monthly local meetings should be attended by only the senior repr sentative of each participant for the market; in question, or such senior person as dole ated by him to act in his absence. 24 Draft memorand in of principles, clause XX. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 257 the participants the right to sell crude to such refiners and thereby forcing a crude supply outlet to outside suppliers.26 Such sales both to participants and to outsiders were to be included in the supply quotas of the various participants, but were to be ex- cluded from their distribution quotas for the reason that quantities of the products so supplied would be included in the distribution quotas of those receiving them. This, in effect, required the setting up of two types of quotas, one, a supply quota, covering the total quantity of each product to be supplied by each participant, which would in- elude sales to other cartel members and outsiders, and the other, a, distribution quota which would cover the quantities to be distributed by each participant directly to consumers, wholesalers, and retailers in the market. In general, the provisions governing the determination of over- trading and undertrading in earlier agreements were simply carried forward. It was emphasized that with real cooperation "over and undertrading among the participants should not arise." If, however, overtrades and undertrades occurred, they were to be adjusted by transfer of customers or by compensation to undertraders and fines against overtraders. The rules for cash compensation to undertraders and for restoration of the undertrader's quota were spelled out in greater detail, by definitely providing that the overtrader should busy from the undertrader the quantity required to restore the undertrades s "as is" quota percentage. This was to be done in all cases except where the undertrader withdrew entirely or partially from the market 2s If the undertrader refused to supply the overtraders during any period of 3 months, it was provided that : * * * The undertrader shall be deemed to have voluntarily retired from the market by a percentage equal to the drop in his percentage position over the 3 months caused by his undertrading or by his final undertrading position at the end of the year, whichever percentage of undertrading is the smaller. In that event his quota for the ensuing year shall be reduced by 75 percent of that per- centage so undertraded and fines for such overtrading shall be waived. The percentage lost by withdrawal of an undertrader was to be added to the quotas of overtraders in proportion to their respective quotas. The overtraders, of course, were to dispose of their increased tonnage at the prevailing market price. As under earlier agreements, it was provided that the parties would meet and agree upon a price to cover allowable expenses, which the overtrader would retain in making compensation to undertraders. The intention was declared to be that the price paid as compensation would be such as to place the overtrader : * * * As closely as possible in the position in which he would have been had he not traded in excess of his quota and that he should not get the benefit of the contribution to his overhead arising out of his increased volume.,, It was. agreed that compensation for overtrading should be made in the market and in the local currency of the market when it fell due. It was recognized that under certain circumstances "it may be difficult to require the overtrader in a given market and a given product to purchase that product at a price which is out of line with the market price prevailing at the time the compensation is actually effected." As a matter of expeditious handling, however, it was proposed that the w Ibid., addendum I, par. 2. w Except in cases where withdrawal was due to force majeure. 27 Italics added. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 overtrader wou d compensate the undertrader by outright purchase "on the basis -o the prevailing market price at the time such com- pensation is made," and that any difference between the market price actually paid a d the price calculated under the general procedure ,outlined above as that which the overtrader should pay would be subsequently adusted.28 A new basis f r determining fines for overtrading was adopted, using sliding scale per entages based on the Gulf f. o. b. price 28 The method of apportioning fines to undertraders was also altered to provide a more equitable apportionment. Specifically, it was changed from a division in "proportion to their respective quotas" to apportionment `in proportion to their respective volume of under- trade." 30 In s ort, the undertraders were to be reimbursed from the fines in proportion to their loss of trade rather than in proportion to their quota. As before, la ge contracts were- in principle the right of the participant holding such contract during the basic period, unless subsequently lost to an outsider. It was also agreed, as before- that such contracts are a useful type of business for the purpose of making current trade adjustments * * * to avoid over- and under-trading. Large contracts, however, were not to be transferred without the con- sent of the previous seller. Revision of quo as Past experie ce had indicated that there were various circum- stances which required the revision of "as is" quotas. The previous agreements had not embodied specific procedures for making such revisions. Rule were therefore established which would govern the revision of quotas for the following reasons : (1) As a pen lty against any participant who, in any accounting period, undertraded by more than 5 percent of his quota; (2) Upon the admission of new members; (3) Upon the acquisition of outsiders by purchase; 28 All prices paid aihd subsequent adjustments would be in terms of the local currency of the market, and one currency could not be substituted for another except by mutual consent of the parties. 20 The earlier agree eat had provided for fines assessed on a sliding scale such that if a participant overtrad d to the extent of about 9 percent of his quota, he would be paying as a fine the total arketing expense per unit which it was agreed he should retain in making cash compen ation to undertraders. Under the new plan the fine for overtrading for the first 1 percent or fraction thereof in excess of a 5-percent tolerance permitted for overtrading was to b 5 percent of the Gulf price. For each 1 percent of overtrades up to 1.0 percent, an additional 5 percent of the Gulf price was to be assessed. For any quantity overtraded i excess of 10 percent the penalty was to be a flat 35 percent of the Gulf price. so Italics added. The full text of the provisions of the draft memorandum respecting the computation of fines and their disposition was as follows : "The fines which the overtrader shall pay for the quantity represented by his overtrade in excess of 5 percent of his allotted quotas shall be: "(a) For each unit of the overtraded quantity represented by the initial 1 percent of his allotted quota or fra tion of that 1 percent, in excess of his 5-percent overtrade, the fine shall be 5 percent of he Gulf f. o. b. price for the equivalent product according to Platt's oilgram averaged for the accounting period under consideration. "(b) For each uni of the overtraded quantity represented by the second, third, fourth, ,and fifth completed 1 percent or fraction thereof, in excess of 5-percent overtrade, the fine shall be 10 percent, 15 percent, 20 percent, and 25 percent, respectively, of the Gulf price for the product as calculated under (a) above. "(c) For each unit of the quantity of overtrade in excess of 10 percent of the overtrader's y'Iota the fine shall be 35 percent of the Gulf price for the product as calculated under (a) above. The amount paid fines by the overtrader shall be apportioned among the undertraders in proportion to thei respective volume of undertrade." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 259 (4) When a participant voluntarily retired from the market in whole or in part; (5) When the use of one product developed in such a manner that it eventually replaced another product, either wholly or in part. In the case of (1) above, the undertrader's quota was to be reduced for the ensuing accounting period by distributing to the other par- ticipants "one-quarter of the amount by which his undertrading ex- ceeds his 5-percent margin." Distribution of his loss of quota to other participants was limited to "overtraders' pro rata to their re- spective overtrading." 31 Thus only those who overtraded were to be the beneficiaries of any quota losses by undertraders. Activity rather than indolence was to be rewarded in such adjustments of quotas." Revision of quotas resulting from the admission of outsiders "on such conditions as might be mutually agreed upon by the parties" merely carried forward an elastic provision of the Heads of Agree- ment of 1932.33 However, the explanatory notes which accompanied the draft memorandum make it clear that the Achnacarry agreement's basic year for "as is" quotas, 1928, was to be abandoned only when necessary to obtain the adherence of important outsiders. The acquisition of outsiders ,was the third reason agreed upon as necessitating adjustment of quotas. Acquisitions had always been recognized as a desirable means of bringing competitors within the cartel's orbit. But problems arose in handling the quota revisions resulting therefrom. The 1934 Draft Memorandum of Principles repeated the strict pro- vision of 1930 for sharing in purchases of local outside distributing concerns." In addition, rules for applying this provision under three special circumstances were spelled out as follows : (a) If the acquiring participant had previously supplied the ac- quired local distributor for at least 2 years, it was agreed that the acquirer would have the right to retain for his. own account a percent- age of stock control of the acquired outlet equal to the percentage of the outlet's total supply which the acquirer had furnished during the preceding 2 years. The other participants were to be entitled to share the balance of the stock control pro rata to their respective quotas35 (b) If the acquiring participant's quota in any product in the local market was less than 15 percent, it was agreed that, by mutual consent 81 Under the previous Ileads of Agreement, the distribution was to be to all participants who are not undertraders In axcess. of their 5-percent margin, pro rata to their respective quotas." [Italics added.] 82 In addition, the complicated earlier scheme of adjusting for undertrading at the end of each consecutive 2-year period was abandoned in favor of adjustment at the end of each accounting period. as Strict application of the 1928 "as is" agreement respecting quotas broke down when it became necessary to give Rumanian outsiders larger quotas in order to obtain their signatures to the 1932 Rumanian agreement. 34 Under the 1930 Memorandum for European Markets It was agreed that any of the three major parties desiring or having an opportunity to purchase a local distribution concern would offer a pro rata participation to the other parties. The 1932 Heads of Agreement laid down no procedure for handling this matter more specifically than to recommend that since the purchase of outsiders "is in principle the equivalent of admitting new members to 'as is' * * * such purchases shall be frankly discussed between the parties interested before the Purchase is completed." 85 The full provision of the agreement was : "Should any participant, for a period of at least 2 years, immediately preceding the time at which he acquires a local outside dis- tributor, have supplied such local distributor, such participant has the right to retain for his own account the proportion of stock Interest and supply represented by his share in the supplies of the total requirements of such local outside distributor during the above- mentioned 2 years, the obligation to offer a participation of stock interest and supplies to the other participants being limited to the balance, in which all participants shall be en- titled to participate pro rata to their quotas" (Draft Memorandum of Principles, clause SIX). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 of the other pt rticipants, the acquirer might be permitted to retain such portion o the outsider's business as would bring the acquirer's quota up to 15 jiercent of the total market consumption. The remain- ing participa.n s would then be entitled to share pro rata to their quotas only th balance of the acquired company s business in the product or proj.ucts concernecd.36 (o) It was further agreed that the conditions described in (a) and (b) would not prevent any participant who previously had no direct or indirect share. in distribution in the market from acquiring a local. outside distribi It tor, provided notice was given to the other partici- pants and pro ided that the purchase did not directly displace the. supply outlet o v. any other participant in the main agreement.37 Voluntary retirement from the market was the fourth condition agreed upon as necessitating a revision of quotas. This matter was especially troublesome for several reasons. In the first place, it was necessary topermit withdrawals for various good business reasons, such as lack of supply, low profit on sales in the particular market as compared with sales in other markets, force majeure, etc."' In the second place, retirement for whatever reason, whether permanent or only temporary and whether in whole or in part, caused the retiring party to become an undertrader.39 Therefore any withdrawal by any party raised questions as to how long and to what extent the with- drawing party' quota in the market would be ].~lrotected and what arrangements would be made for offsetting the reduction in supply. An attempt was made in the Draft Memorandum of Principles to answer these qi estions by making a distinction between. competitive under- and over -trading and deliberate withdrawal from the market. The former was to be handled as outlined on page 257. In the case of the latter, new rules were adopted providing that if a par- ticipant withdrew from a market either entirely or partially for rea- sons other than force majeure, an overtrader would have the right at the end of any -month period to call upon the undertrader to state whether he wou d "supply to the overtrader the amount thus under- traded during that 3-month period in return for the overtrader's pro- '' Pull text of the revision was : "If any participant with a quota of less than 15 percent in any product in any market shall acquire an outsider, such con- sent of the other pa ticipants may be participant by mutual con- prnss bran pol. quota u of the outsider'% business in the product or products concerned ed a as shall all bring his total qIn that t product or products to 15 pe cent of the total market consumption, his t and lie and the other partici pants shall then be entitled to share pro rata to their quotas only such portion of the business acquired as would bring his quota in the relative product or products above 15 percent of the total arket consumption" (ibid.). ~T The provisions in the agreement was that- "The foregoing sh 11, however, not prevent the purchase of such a local outside dis- tributing concern by any of the participants if he has in the market In question no direct or Indirect share in the distributing trade in which the purchased concern is engaged: provided always that the other participants are informed and the purchaser does not ill,;- place directly the s pply outlet of any participant who is a participant to the main arrangement in respe t of the country in question." Ibid. ae Retirement or any of these reasons might be entire or only partial, and might be permanent or only to porary. It might take the form of failing to supply another pgant under an excha go arrangement among the parties or of failure to supply outsiders Formerly supplied in he market. Furthermore, it might be done in good faith for sound business reasons open y declared, or it might be done surreptitiously in an attempt to retain a quota position In t e market pending improvement in prices therein or improvement in the retiring party's si nation with respect to supply or cost of products. nliven temporary vithdrawal raised questions as to who among the remainin pants should or would supply the quantity of g g "as Is" osition of the products necessary to maintain the "as is p grow and on what price basis these products should be supplied in the interim. Permanent withdrawal posed similar questions as to who would permanently take over the supply. If the other parties stepped in and supplied the retiring party's share and permitted him to retain his quota position, they became overtraders obligated to make cash compensation to he undertrader. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 261. ceeds less expenses." 40 If the undertrader declared his unwillingness, to supply the overtrader on this basis, it was provided- the undertrader shall be deemed to have voluntarily retired from the market by a percentage equal to the drop in his percentage figure over the 3 months, * * * or by his final undertrading position at the end of the year, whichever percentage is the smaller. In that event, it was agreed that the undertrader's quota for the ensuing year would be "reduced by 75 percent of that percentage so undertraded and fines for such overtrading [by others] would be waived." 41 These provisions were obviously designed to stimulate effort on the part of any participant to furnish the supply necessary to maintain his quota. Only.if he was willing to sacrifice his own future position could he afford to withdraw, even temporarily or partially, from the market. Finally, the new agreement gave special consideration to the adjust- ment of quotas resulting from the displacement of one petroleum product by another, as, for, instance, Diesel fuel oil displacing gaso- line previously sold. In such cases it was declared to be the intent that the party who previously had the outlet for the displaced product "should be entitled to an equivalent outlet for the replaced product." In practice, this amounted to treating the two products as interchange- able for quota purposes. To make the necessary adjustments, cus- tomers for the new product might be traded or large contracts might be so divided by agreement among the parties as to maintain each participant's over-all "as is" quota for the two products combined 42 Prices and terms of sale The general principle set forth iii the draft memorandum respect- ing prices was that : Prices should be maintained in all markets on a basis which should yield a fair return on a reasonable investment, having due regard to encouraging the use of petroleum products. It is important, that prices should not be permitted to rise to a point where the buying public is exploited." To implement this principle, the "majority rule" for voting on the fixing of prices was carried forward from the 1930 Memorandum for European Markets. There the "majority rule" had been described as specifically applicable to large contracts which the participants were to hold against outsiders on an agreed-price basis. In the 1934 draft 0 Draft Memorandum of Principles, clause XVIII. 41 It was further agreed that the percent so lost by the undertrader would be added to the quotas of the other participants "who have not undertraded in proportion to such participants' relative percentage performances during the year in question provided that such participants are prepared to deliver their proportionate share of the supplies" at the compensation less expense price which the undertrader would have been entitled to receive had he supplied the overtrader. Ibid. 42 An addendum to the draftmemorandum dealt in detail with the method of adjustment to be followed, using the case in which gas oil had replaced gasoline for automotive pur- poses as a concrete example. In such case, it was provided that all "participants shall have the right to market Automotive Gasoil in accordance with their gasoline quotas." In markets where the fuel used by Diesel engines for automotive purposes could be accu- rately estimated it was declared that : "* * * the Automotive Gasoil shall be consid- ered as a separate product and the rights of the participants to market Automotive Gasoil shall for all 'as is' purposes be in accordance with their rights under their gasoline quotas in the market in question," In markets where such segregation of gas oil use was impossible, existing gas oil quotas were to be so revised, "that each participant's revised quota for gas oil shall protect not only their right to market Automotive Gasoil in accordance with their quota rights for gasoline, but also their right to market gas oil for purposes other than automotive in accordance with their previous gas oil quota." Ibid., addendum VI. 19 Ibid., clause XVI. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 262 TIE INTERNATIONAL PETROLEUM CARTEL memorandum tie scope of price fixing was broadened to include "price movements up or down." Such movements were to be "governed by the majority, each participant having one vote for each complete 1 percent of quotas * * " 44 Concerted price fixing was to be suspended only if the group's aggregate percentage performance, or that of an individual member, fell below 95 percent of its, or his, "current share" of the market.45 If this occurred, it was agreed that the. participants or individual participant whose share fell below 95 percent "sha 11 have liberty of action regarding changes in selling price, except th t the selling price may not be reduced below the price quoted by outs ders less 20 percent." This liberty, however, was to continue only until "the group's percentage is restored to the aggre- gate of the current quotas and no participant is below his individual quota." It was further agreed that thereupon : "a majority vote shall be sufficient to increase selling prices and to establish the actual in- crease." Thus, there was to be no individual freedom of price action except to restore "as is" quota positions. A member could act independently, taking such action as regards prices as he ma y deem desirable, if he felt that his investments as a producer in an market would be detrimentally affected by the opera- tion of a majority vote in connection with prices.410 But this escape clause was more apparent than real, since in no case was a participant * * * entitled giving the othcr pi an opportunity hF without all partic amount and scop business to which Thus, the pri discussion of pi markets. Tliest consumption as latter, arranged The former incl to other market outsiders the di It is agreed tha none of the parti such sales." The exceptioi refineries could ket involved : except for supply determined, sales to effect a change in prices, discounts, or allowances without irticvpants notice of their intention to change selling prices and ,ing ' afforded for discussion of the, contemplated change, nor ipants being informed prior to any change in price as to the of such change and the points at which and the class of such change shall apply." cing system combined open price reporting and open -oposed prices with binding price agreements in local general pricing provisions were to apply to sales for distinguished from sales between participants. The for mutual convenience, were at all times permissible. sided not only sales directly to consumers but also sales ers, some. of whom might be outsiders. In regard to :aft memorandum stated : t, except as provided for in addendum I on sales to outsiders, cipants to this agreement shall, directly or indirectly, effect l in addendum I was to the effect that sales to outside be made with the consent of the members in the mar- rig a position actually established, as per a schedule to be if crude or finished products shall only be made to outsiders of each participant's vote was determined by the size of his quota. the trimester immediately preceding the month in question, the percentage performance in dist:rihution of the hole group (or the individual participant as the case may be), is trimester." Draft }fl This exception, was couched in sue or the whole group (or the individual participant) during the said emorandum of Principles, clause Xvi. general ternis that it could cover a case in which a participant was her a price increase or a price reduction determined by majority action Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 THE+ INTERNATIONAL PETROLEUM CARTEL 263 by consent of the participants who are operating in the market to which such crude or finished products are destined, or, if the destination is unknown, by the consent of all participants." The reason for permitting sales to outside refineries at all was to prevent them from being supplied by outside crude producers : It is recognized that there are certain refineries in various countries that have a position in the market and while it was not the intention to improve that position neither is it the intention to deny to the participants the right to sell crude to such refiners and thereby forcing the crude supply outlet to outside suppliers.'0 Under the procedure laid down, the participants were to establish annually a list of outside refineries to which they would sell crude oil to prevent "forcing the crude supply outlet to outside suppliers." They were also to determine but not "improve," the position of the to the tit thi l y s quan ocate outside refiners. The next step was to al various members. This was to be done in proportion to each partici- pant's "over-all percentage in the total consumption of all products in the market in question." 51 A similar procedure was laid down to cover the sale of refined products to outside marketers.12 Finally, it was agreed that "except as hereinbefore provided for, no participant shall be free to sell to outsiders either crude oil or finished products." 53 Sales to outsiders were likely to fall in the category of large con- tracts. In regard to such sales, the members were to discuss and agree upon prices and selling conditions among themselves. Wher- ever possible,, the previous supplier was to retain the contract. This provision applied to contracts with Government agencies, municipali- ties, public institutions, cooperatives, and all other large consumers. If through cooperatives or similar groups customers combined their purchases in such a way that a participant was prevented from sup- plying a previous customer, it was provided that- the participant or participants having obtained the business so, lost [shall] com- pensate the losing participant or participants by ceding an equivalent customer."' The purpose of these provisions regarding large contracts and sales to outsiders is clear-to set up a way of excluding outsiders and allo- cating to the members the total supply in accordance with their "as is" position. The "as is" position of independent refiners and marketers was to be recognized only to the extent necessary to prevent them from becoming market outlets for outside suppliers. If outside suppliers could be excluded, the control of the cartel over outside refiners and marketers would be complete, and no independent refiner or marketer could exist except by unanimous consent of the cartel members. a9 "Consent" was defined as follows : " 'Consent' means that the participants shall agree to an estimate in advance of each year of the outside buyers to whom the participants can rightfully sell and the volume of crude in each market involved (always excepting the volume included in the established position of the participants as covered in the schedule referred to above)." Draft Memorandum of Principles, addendum I. 50 Ibid., addendum I. [Italics added.] ' If any participant elected not to "quote on his allotted quota, or any part thereof, then the quantities so surrendered shall be divided pro rata between the other participants, based on their position in the market in question." Ibid. m Such sales, other than those included by the schedule covering positions actually established, required consent of the parties, and the right to supply any excess quantity so consented to was to be offered "pro rata to the distribution of quotas of the participants for the product and the market in question." Such offers were to be accepted or rejected promptly by each participant, and the remaining participants were to "be entitled to share the quantities so rejected pro rata to their quotas." Ibid. sa Italics added. "' Draft Memorandum of Principles, clause XV. Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Competitive m~r1eeting expenditwres The draft m morandum placed great emphasis on the necessity of eliminating un ecessary sales costs, particularly advertising expenses:. With a view to reducing unnecessary expenditure and thus enable the parties- pants hereto to supply the public at lower costs, it is agreed that budgets covering certain items of capital expense and advertising budgets, should be, insofar as,. possible, agreed upon for each market by the participants in that market before being submitted or consideration to London with a view to eliminating unnee- essarp duplicatio or expense which only serves to increase the cost of distri- bution and thus p aces an unnecessary burden on the consumer " Addendum , entitled "Economy in Competitive Expenditure,"' provided a spe ific procedure to be followed in formulating budgets.. With respect t new equipment for distribution, each participant in, each market was charged with the duty of compiling an annual budget which was to be screened by the other members for unnecessary expenditures and then forwarded to London for review : Before submitti g the budgets to London the participants must discuss these. items between the selves, and ascertain to what extent, by cooperating in install- ing such equipment items can be eliminated from this preliminary budget, so as to avoid expenditure by one participant being offset and canceled out by similar, expenditure by one or more of the other participants. It may be found either that the participants can agree and reduce the budget which they will submit to, London for review, or that a difference of opinion may exist as to the necessity for expenditure under certain headings by one or more participants." X similar pr cedure was to be followed with respect to advertising expenses, with a view to mutually elimina ing such items of advertising expenditure as can be dis- pensed with without detriment to the normal sale of each participant's prod- uct's * * * e?r The following advertising items were specifically cited as subject to. reduction: 1. Road signs and billboards-to be reduced or eliminated. 2. Newspaper advertising-to be kept within reasonable limits. 3. Premiums to acing drivers-to be reduced or eliminated. 4. Novelties, such as cigarette lighters, pens and pencils, calendars, paper weights, etc.-to b reduced or eliminated. i. Number and t pe of signs placed at dealers' garages-to be standardized to reduce unnecessary expenditure. Other adverts ing items were also to be discussed and the whole ad- vertising program, as agreed upon locally, was then to be forwarded. to London for r view.38 A year later a i. "addition to addendum V" was adopted and declared to constitute a art of the Draft Memorandum of Principles. This "addition," dat d October 28, 1935, stated that occasions had arisen in which it was found necessary for a participant to amend a budget 61 Draft Mcmorandlnu of Principles, clause XXI. [Italics added.] 60 Ibid., addendum N "r This procedure was as to be followed in all countries, and with respect to all products, subject to the declaration that : "While it is realized that conditions vary greatly in different countries and that upon the introduction of new products or new brands It may be Impossible to make a comparison, of advertising budge sfor such new products or brands, nevertheless all other items of advertising and publicity can by agreement be materially reduced. Draft Memorandum of Prin iples, addendum V. "8 An explanatory note accompanying the draft memorandum contained the following specific instruction : "The procedure for implementing the exchange of details of intended competitive ex- penditure of the nature specified should at the first opportunity be agreed locally with other represenatives in order that before the end of October 1934 the agreed budgets for the veer 1931 (beyond which no expenditure of this kind is to take place without previous, local discussion) may be forwarded to London on the agreed lines." Explanatory notes with regard to Draft emorandunv of Principles. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL 265 figure previously agreed upon. It was, therefore, understood between the participants that- * * * the provisions of addendum V would apply to the amendments just as to the original budget and that consequently no material change should be made to an agreed budget without full discussion of the other participants." The draft memorandum stated that the purpose of these provi- ?sions"was to enable the participants hereto to supply the public at !lower costs." Addendum V stated that it is "as much the interest ,of the consumer as of the participants that distribution of petroleum s products is maintained whilst combining the greatest efficiency with ,the greatest economy." Since under the cartel all members quoted the same price to any given buyer, competition in terms of. price had been virtually elimi- ? hated. Hence, whatever rivalry existed among the members could be manifested only in terms of nonprice competition, and in the petro- leum industry principal media of nonprice competition were distribu- tion facilities and advertising. Thus, a cartel agreement which began as an attempt to limit production and fix prices was widened to include detailed restrictions on the number and kind of distribution outlets and on the volume of advertising expenditures. ;Operations under the draft memorandum The Draft Memorandum of Principles, adopted in June 1934, con- tinued in subsequent years to be the charter of the three major coin- panies in making local market agreements. In accordance with the declared policy and procedure, previously negotiated local agreements were not disturbed until their termination; but then an effort was made to renew them as nearly as possible along lines of the memoran- ?dum. The activities of the major participants to implement the main .agreement were carried out under the supervision of a London com- mittee consisting of one representative of each participant. The mem- orandum provided for the setting up of this committee with broad powers "for the purpose of carrying out the provisions of this mem- orandum." It was agreed that to it "shall be. referred all matters of disputes covering the interpretation of this memorandum, or any other 4questions which may arise as regards the operation of this memoran- dum." A duty specifically assigned to the committee was the arbitra- tion of all disputes arising among participants in local markets.60 In ,general, it was agreed that : It shall be the duty of the committee to cement and coordinate the relations between the participants with a view to obtaining the maximum cooperation, and the committee is authorized to set up such machinery as it deems advisable for the interchange of such information and statistics as may be required, and in general do all things.necessary toward the proper functioning of this arrange- ment.' 6? (Italics added.) The addition also stated that it had been found in practice that dis- cussion of budgets in advance was insufficient alone to achieve the intended purpose. It was therefore agreed "that at intervals during the period covered by the budget, the par- ticipants should exchange full information as to the progress of the spending of the amounts which have been agreed and further that as soon as possible after the close of the period an exchange should be made showing the figures which have actually been spent against the agreed-upon amounts." so If the members of the committee representing the interested participants were able to agree on an equitable solution of the dispute, or if all members were in agreement on a question of interpretation, it was agreed that their decision was to be binding on all participants. ei Draft Memorandum of Principles, clause XXII. Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 In transmitt ng a copy of the draft memorandum, Standard of New Jersey stated hat : In or before th early part of 1938, verbal notice was given, in accordance with clause I of the Draft Memorandum of Principles, of termination of that agree- ment. Any activ ties that may have survived came to an end in September 1939, as a result of the outbreak of the war. They were never resumed.?a Theoretically, this notice should have ended cooperation of Stand- ard of New Jersey interests under the draft memorandum. However, a special inve timating committee of the Swedish Riksdag in 1947 found evidence or continued cooperation among. the three major inter- national companies in later years. This committee cited documentary evidence that in December 1938, Standard, BP (Anglo-Iranian), Shell, and Te aco agreed that a new agreement should be made to cover the Swedish market, and that such a new draft agreement was drawn up in I' bruary 1939, but was not formally signed. In evaluat- ing the relationship of this new local agreement to the Draft Memo- randum of Principles, the Swedish committee stated : It appears fro] correspondence placed at our disposal that one of the concern companies notified its daughter enterprise in April 1939, that the Draft Memo- randum of Princi les which has been applied for the three major companies in Sweden as well a in other countries had, for reasons which they did not consider necessary to state, formally been canceled. However, the intention had not been that the basis of he cooperation should in reality be changed. The only actual alteration was th it, while the draft memorandum had been a document which had been general) applicable in all countries, matters must now be so arranged that the colnpani s had to reach their own agreement on about the same lines as the draft memorandum, but with the modifications which had proved to be necessary for the adaptation of the local conditions.60 The Swedish investigating committee further found evidence that it was not until- 1942 that the Swedish subsidiaries of the American companies had been informed b., question [Swedis] ments might be i It appears tha same investiga representatives under-trading ducted- regarding unifor have led to an ag the parent companies that agreements of the kind now in local agreements] must no longer be made because such agree- t variance with American antitrust legislation * * *.G4 even then cooperation did not entirely cease for the ing body found that as late as 19,13 some company in Sweden had discussed an adjustment of over- and Lnd that, at the end of 1946, negotiations were con- - - ement called selling conditions.G" Even though there may have been no formal comprehensive inter- national agreement after 1938 or 1939, the "as is" principles were apparently of such a durable nature as to be regarded as trade cus- toms, to be observed as the basis for subsequent arrangements in particular markets. During the war years enemy-controlled markets were closed, short- ages and rationing were general, exports were controlled by license, 62 Standard Oil C . (New Jersey) letter July 7, 1950, signed A. C. Minton, secretary. Clause 1 of the Dra t Memorandum of Principles Crovided for termination of the agree- ment "by 1 month's previous notice, which may be given at any time." 63 Swedish Oil Report (1947), ch. XII, p. 24, mimeographed translation. G4 Ibid., p. 42. 06 Ibid., pp. 42 and 44. At another point in the Swedish report this document was referred to as headed "Selling conditions as from January 1, 1947." After reviewing its terms at some lengt , the Swedish committee concluded that "the selling conditions must in our opinion b~ characterized as a price agreement" (ibid., pp. 26--28). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 267 and formal cartel agreements were necessarily largely suspended. These conditions prevailed in some countries for varying periods after the termination of hostilities. During the war period the leading American, British, and Dutch companies all cooperated closely in programs laid out by their respec- tive governments to supply the oil needs of the Allied and neutral countries. These programs and the way in which the oil companies functioned in them varied in different Allied countries. In Great Britain, which became the seat of the Dutch Government in exile, the principal British, Dutch, and American oil companies operating in the United Kingdom formed by agreement what was known as the Petroleum Board 66 This Board was described in the British trade press of the time as a voluntary private commercial body which had no direct connection with His Majesty's Government, but which, at the request of the British Government early in 1939, formulated plans to assure adequate supplies of motor fuel and lubricants with the utmost economy of transportation, storage, and distribution facilities, and manpower in case of emergency. Under this directive, two pool- ing plans were developed, one for motor fuels and one for lubricants. These pools were characterized as "by the industry for the industry." 67 Later, after the plan was approved and ordered into effect by the Gov- ernment at midnight September 3, 1939, the Board's membership, according to the British Secretary of Mines, consisting of nine mem- bers representing- substantially the whole of the petroleum industry so far as it relates to the importation, storage, and distribution of oil. products- and its staff was drawn from all companies, both large and small. The Board, and the separate companies whose products it handled, had the responsibility for obtaining supplies from abroad, refining them, and getting them into the United Kingdom. There the Board, acting to all intents and purposes as a single marketing company, pooled all supplies and sold them through its likewise pooled whole- sale distribution facilities. The pooled products were sold to garages and to commercial consumers, much as the individual companies had previously done.- The guiding principles underlying the operations of both the motor fuel and lubricating oil pools were described as the avoidance of waste and observance of the "as is" principle that "all concerns in the scheme 6 The Petroleum Times, November 18, 1939, p. 531, states that the Board was formed originally by agreement among Anglo-American Oil Co., Ltd. (Jersey Standard) ; National Benzole Co., Ltd., Shell-Mex., and B. P., Ltd. (Royal Dutch-Shell and Anglo-Iranian). 87 The Petroleum Times, October 28, 1939, p. 456, stated regarding these pools : "No new ministry controls the pools; no new Government department is set up; and no host of officials is recruited ignorant of the oil industry's special aspects. It is inevitable from the peculiar structure of the British oil industry that the few outstanding companies must predominate in any such schemes and their controlling personnel, but we know it to be correct that in the evolution of these plans the independents have rightly had their say, and now have their place in the wartime carrying out of the pools. "Conceived in secrecy, these schemes have remained shrouded, even to this journal. Naturally, we have taken steps to remedy this deficiency in our knowledge, and the docu- ments in our possession make it clear that much of this secrecy is unnecessary, and that the schemes are based on principles of ethics and fairness for all throughout; there is little that need not be revealed in full to the trade." 68 Ibid., pp. 529 and 531. c9 The motor fuel products covered by rationing, with which the Board had nothing to do except to collect and cancel coupons issued by the Government, included aviation spirit, motor spirit, benzole, kerosene, white spirit, gas oil, Diesel oil, fuel oil, and asphalt. The Board also supervised a lubricating oil pool which was operated separately from the motor fuel pool. The latter was described as purely an importers' pool which operated through a. less extensive distribution organization to sell its pooled products In a similar manner. See Petroleum Times, November 18, 1939, pp. 530 and 531. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 shall share ali] a prearranged the Board had :e in proportion to their stake in the industry during qualifying period." i0 Beyond this, the functions of to do largely with import requirements, price fixing, and licensing.71 Thus during the war and for more than 2 years after added force of Much the sa 1947, on which tioning as part were again sold performed by overnment sanction. e conditions continued to prevail after December 31, date-the motor fuel and lubricating pools ceased func- under brand names. Some of the functions previously he Board were taken over by two new committees set respect to both war arrangem One committee development of The supply tral countries American, and cooperation wi imposed by the neutral country :Swedish Gover gether with sue ith Government sanction, continued to function with supply and distribution. In reviewing the new post- nts, the London Economist stated in August 1947: ill deal with * * * the supply of oil from overseas, the prices, imports and petrol rationing will continue as before.' f petroleum products available to oil-importing neii- uring the war was largely controlled by the British, h their Allied Governments, while the local distri- supplies was subject to such regulation as might be eutral governments. The only detailed study of car- representatives of international oil companies in a during the war and the early post war period is the ment's oil report cited above. These activities, to- tries, are discussed in more detail-in the next chapter. Four internat oil industry's ac cartels and in of The primary m4 efforts to impler of the oil industi the Royal Dutc. (formerly Angl completely inter company and it. portation, and it is associated in i TO Ibid., November : 71 Ibid., p. 530. 'i effective on October I deal wholesale in pet of Mines, the license the Secretary of Mini " The Economist, 2 the cessation o hostilities, the Board's activities in the fields both of international sylpply and local distribution were carried on with the ional oil agreements, dated from 1928 to 1934, and the tivities to implement these agreements through local her ways, have been the subject matter of this chapter. veers in all of these international agreements, and in sent them, were the three major international groups ?y, namely, the Standard Oil Co. (New Jersey) group, h-Shell group, and the Anglo-Iranian Oil Co., Ltd. o-Persian Oil Co., Ltd.) group. Each of these is a ,rated oil group consisting of a central controlling subsidiary and affiliated producing, refining, trans- iarketing interests. In addition, each of these groups nterest with each of the others and, in some instances, .8, 1939, p. 529. his account states that under the licensing system which became 0. 1939, "any person other than the Petroleum Board who wishes to ,oleum products or benzole must obtain a license from the Secretary to be subject to such conditions as to grade, quality, and price as s shall deem necessary." .ugust 23, 1947, p. 339. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 with outside interests,73 through joint ownership of reserves, through joint-control of producing, refining, and marketing facilities, and through agreements for the purchaso and sale of crude oil and re- fined products. The immediate background for the first international agreement in 1928 was a price war between Royal Dutch-Shell and Standard Oil Co. of New York in India in 1927, which promptly spread to the United States and European markets, where it severely affected, or threatened to affect, the financial interests of all major and minor companies. After this controversy was settled, the heads of the three major groups met and negotiated the Achnacarry agreement of 1928. This agreement was essentially a declaration of principles and procedures by which the three majors hoped to forestall in the future + similar outbreaks of competition, both among themselves and with others. The heart of this agreement was a group of seven principles to govern group action. These principles, collectively called "as is," were : (1) Acceptance by the participants of their "present [1928] volume of business and their proportion of any future increase in consumption." (2) Joint use of existing facilities. (3) Construction of only such additional facilities as were necessary to supply increased demand. (4) Production to retain the advantage of geographical loca- tion on the basis that "values of products of uniform specifica- tions are the same at all points of origin." (5) Supplies to be drawn from the nearest producing area. 6) Excess of production over consumption to be shut in by producers in each producing area. (7) Elimination of any competitive measures or expenditures. which would materially increase costs and prices. These principles were never formally abandoned. On the contrary, in subsequent agreements intended to implement them in whole or in part, "as is" was said to be of such a durable nature that failure of the subsidiary agreements to accomplish their objectives, or even their total abrogation by some parties, should not prevent further joint effort to find a basis on which to make "as is" effective. In 1928, the world's principal developed reserves and production, outside of Russia and the United States, were largely controlled by the three participants in the Achnacarry agreement. The basic assumption underlying this agreement was that world production might be fitted to consumption and world prices thereby controlled if these companies (a) by agreement limited production and exports from the areas which they controlled; (b) found a way lawfully to control exports from the United States, where diverse ownership and the antitrust laws made direct control of production by agreement impracticable, and (c) found a way to control the competition of Russian oil in world markets. Efforts from 1928 to 1930 were directed primarily toward controlling world production and supplies from all three of these sources. Private 'S "Outside interests" Is used here to designate integrated and nonintegrated companies outside the direct corporate control of any one or more of the three major international Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 270 T*E INTERNATIONAL PETROLEUM CARTEL some foreign c limit production were negotiated with outsiders 74 in untries. Russian competition, however, still continued me, especially in European markets. In the United rays of controlling production and exports were sought. Petroleum Institute sponsored proration of production 's and sought both State and Federal sanction for its nservation measure. This movement later developed of interstate oil compacts sanctioned by the Congress in measure in the national interest. A few years later, it companies similarly urged world-wide conservation i for private agreements to limit production in foreign zs conservation became the cartel's slogan at a time ood of international production threatened to depress States, lawful The American in the late 192 scheme as a co into the system as a conservati the internation as a justificatio when a rising world prices. States, the conservation movement was supplemented ormation of Export Petroleum Association, Inc., as a lawfully constituted Webb Act association. This organization was the principal i etermining the value of oil products of uniform speci- members were foreign interfe activities was vember 1930. of which depen can export pric The experien ing the first 2 years of operation under the-Achnacarry agreement of production sufficient to ser They could not creasingly imp anable to agree upon prices among themselves, due to uestioned, the association's activities collapsed in No- hereupon, the 1930 Rumanian agreement, the success ed upon the enhancement and maintenance of Ameri- s, also came to naught. es of the three principal international companies dur- make it clear that their control over the major sources utside the United States and Russia was, by itself, in- always agree among themselves, and there was an in- rtant uncontrolled fringe of producers and marketers The activities f outside producers seldom were world-wide; but, by cutting even sli they were inte cartel's progra side competiti htly under the cartel's prices in those markets in which ested, the outsiders became the beneficiaries of the . If the cartel sought to drive such unwelcomed out- i out of one market by price competition, the inde- pendents had t markets in whi fore, demonstr single agreeme: three companie basis for effecti The Big Thr principles of t for European international c e tactical advantage of being able to retaliate in other h they previously had not been factors. The effort to ustry through a single world-wide agreement, there- ted the difficulty of alining diverse interests under a t, and the insufficiency of the dominant position of in world production and distribution to serve as the e cartel controls in local markets. e conferred late in 1929 in an effort to implement the eir 1928 agreement. The result was the Memorandum farkets of January 20, 1930, in which the three major mpanies set out the terms upon which they agreed to in 1928 by the to control American exports and fix the "f. o. b. Gulf"_prices, which attacking the problem of world control (a) through Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 :agreements among themselves and with others to control production in particular producing areas and (b) through marketing agreements involving themselves and others in particular consuming countries. . The first attempt under the expanded plan was the formation of a new Rumanian agreement in 1930, under which all Rumanian pro- ducers agreed to limit production and fix prices for oil from the Rumanian field. The success of this agreement hinged upon finding markets for Rumania's controlled production largely in European countries at, prices satisfactory to Rumanian producers. As already indicated, the Rumanian agreement fell when Export Petroleum As- sociation, Inc., was unable to agree on "f.o.b. Gulf" prices and became inactive. Thereupon, Steaua Romana, an affiliate of Anglo-Iranian, withdrew from the Rumanian proration scheme. 4 Concerted effort to bring Russian and Rumanian independent pro- duction under control and find a market for it at prices fixed by local marketing cartels formed in accordance with the 1930 Memorandum for European Markets, however, did not cease. Partial cooperation by the Russian trading company was obtained in some markets, and a new Rumanian production agreement was made in 1932, which the Rumanian independents signed only on condition that they be given a larger production quota than they would have been entitled to with the year 1.928 as the base. This constituted a departure from the "as is" procedure previously laid out in the Achnacarry agreement. Furthermore, during 1930 to 1932 local marketing agreements to which outsiders were admitted proved difficult to conform to "as is" as set out in the Achnacarry agreement and the Memorandum for European Markets. This was so because of numerous concrete problems of procedure in sharing markets, fixing prices, making financial adjust- ments for under- and over-trading and adjusting quotas in markets where a participant entered a local market in which he had not pre- viously sold, or where a participant acquired a previously existing independent outlet in a local market in which he already was selling. The development of rules to solve these problems was attempted in a new international agreement known as Heads of Agreement for Dis- tribution, which was adopted on. December 15, 1932, at a meeting attended by representatives of Socony-Vacuum, Standard Oil Co. (New Jersey), Anglo-Persian, Shell, Gulf, Atlantic, and Texas 75 The new agreement provided greater elasticity in the application of the Achnacarry agreement's quota provisions 7e by setting out in detail the manner in which the participants to the main agreement would contribute from their quotas in local markets to make room for larger production quotas granted to outsiders, as had been done in the case of Rumanian producers. Other revisions and additions made it clear that the revised international understanding covered the following points : (1) That the principle of "as is" was to apply to every coun- try or area of the world, except the United States. (2) That it was to apply to supply (i. e., production and ex- ports) and distribution of crude oil and refined products. 1e A representative of Sinclair Oil Co. was also recorded as having telegraphed his inability to attend. 96 Both production and distribution quotas previously were based on the performance of the parties in 1928. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 272 Tt3E INTERNATIONAL PETROLEUM CARTEL (3) Th t supply "as is" would be handled by a committee sitting in ew York. (4) Th t distribution "as is" would be handled by a com- panion committee sitting in London. (5) Th t the activities of these two working committees would be coordinated through a central "as is" committee sitting in London. (6) That all disputes arising under the Heads of Agreement would be decided by a central "as is" committee which would also, provide rules for meeting problems arising as a result of new factors or changing conditions in the industry. Thus machi ery such as had not previously existed was provided for coordinate g world-supply agreements among the major inter- national companies with local marketing agreements to which out- siders were also to be admitted. During the text year and a half, comparatively little was accom- plished in fur her cartelization under the Heads of Agreement be cause, with A erican production uncontrolled, f. o. b. Gulf prices,. which, by. inte national agreement, were the base prices for comput- ing European market prices, fell as low as 30 cents per barrel in May 1933. T e disgusted independent Rumanian producers there- upon refused to observe their agreement to limit production, and shipped a few cargoes to markets as distant as Canada and Australia. Resistance to local marketing agreements based on "as is" also arose in European consuming markets. Shortly thereafter, however, United States Gulf prices were ad- vanced under he NRA Code of Fair Competition from 50 cents in July to $1 per barrel in October 1933, and became stabilized at that level. Thereupon, in February 1934, it was reported that the Rumanian pr ducers were as willing as ever to control their pro- duction provided foreign production and prices were brought under control. In the mea time, the three major international groups had tight- ened their joint control over reserves and production in Venezuela and the Middle East and continued their dominant position in, Rumania and he Far East. The development of local market agree- ments became easible again. Past experience had demonstrated that although the "as is" prin- ciples might be strictly controlling with respect to relations among the Big Three the diversity of interest of independents with whom these compani s necessarily had to deal in local markets was such as to necessitate egarding those principles as ideals to be attained as far- as practicable, but not to be insisted upon too strongly in dealing with outsiders For this reason, as well as to clarify the positions of the principles ith respect to each other, a new agreement known as the Draft Me orandum of Principles was negotiated in June 1934. This agreement, the fourth, longest, and last of the prewar inter- national Linde standings, was essentially a restatement of the "as is"' principles of previous agreements. New material dealt largely with procedural amendments and detailed rules for the application of the principles in l1 markets of the world except the United States and any other co tries where their application by agreement would be unlawful. T e new rules dealt largely with special conditions under Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 273 which the application of "as is" had proved troublesome in the past. Specifically, it was agreed that- (1) Local agreements to which outsiders were admitted were to be regarded as wholly separate from the draft memorandum, and outsiders were to have direct knowledge of the main agree- ment only to such extent as the London executives of the major parties might direct. (2y In any market where all parties to the main agreement already were? or might subsequently become, members of a local cartel including outsiders, the major parties might unanimously agree that the local cartel would override the memorandum for that market for the duration of the local agreement. (3) Two types of quotas for the participants were to be set ~- up in each local. market, one covering the total quantity supplied by each participant, including sales to other participants and approved outsiders, and the other covering only quantities actu- ally distributed by each participant. (4) Fines assessed against excessive overtraders were to be .apportioned back to undertraders on a more equitable basis than had been provided under previous agreements. (5) Quotas were to be adjusted for each of the following reasons: (a) As a penalty against undertraders who, for any ac- counting period refused to furnish to overtraders the quanti- ties required to keep the quotas of all participants in balance; (b) When new members were admitted to the local agree- ments; (c) When a participant acquired an outside outlet by purchase; (d) When a participant voluntarily retired from the market; (e) When one product replaced another in use in the market (for instance, if Diesel fuel oil replaced gasoline). (6) Under certain conditions specifically described, the general rule that price movements, either up or down, were to be governed by a majority vote of all participants in each local market was to be suspended, but even at such times, the practice of open price reporting and discussion of proposed prices in advance was to be followed. . (7) After a specified date no competitive expenditures for ad- vertising and sales promotion and for capital investment for facil- ities were to be made except in accordance with budgets previously approved by the cartel's London committee. This partial review of the various international agreements indi- cates that from the comparatively simple proposal of the Achnacarry agreement in 1928 to stabilize the world market by controlling pro- duction and exports there was evolved in 1934 an international agree- ment which contemplated detailed restriction of production, division of markets, price fixing, restriction on the number and kind of distri- bution outlets, and the elimination of competitive expenditures for market facilities and sales promotion in local markets. So far as the record shows, the three prime movers in the formation of the international agreements, from Aclinacarry in 1928 through the Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 274 Draft Memorandum of Principles in 1934, were the three major inter- national comp other importa leader among that any acti outbreak of t war. However, B ued to coopera plan for inter closely along randum must violation of th not entirely ce, adjustment of considered in year 1947 were More than 1 lished accepta their observa of the coopera small number nies. This appears to have been true even though some t American companies sat in the conferences which later international understandings having to do with Jersey Standard, which appears to have acted as the he American companies, states that it gave verbal notice ities which may have survived came to an end at 'the e war in September 1939. From this, it might be in- ?itish and Dutch cooperative relations were by no means tandard's withdrawal, and American companies contin- ;e to some extent both during and after the war. In the lm an industry committee, acting with the approval. of Government, set up and operated a wartime pooling rational supplies and local distribution modeled quite as is" principles, and in Sweden, a neutral country, it 1942 that American companies informed their subsid- 1 agreements of the type made under the draft memo- lo longer be made for the reason that they might be in American antitrust laws. Even then, cooperation did tse, for a Swedish investigating committee found that under- and over-trading in accordance with "as is" was 943, and that in 1946 prices and terms of sale for the agreed upon. years of cumulative effort to operate and extend con- various international agreements apparently estab- ~ce of the durable nature of "as is" principles, so that ce among the corporately interrelated international practically a custom of the trade." The development ;ive atmosphere was favored by the intricate maze of 1 other relations developed over the years among the f large international oil interests. 77 As early as 193 when California-Texas 011 Co., Ltd., was formed after Standard Oil Co. of California had f fled to reach an agreement with the Shell, Jersey Standard, and Anglo- Iranian groups for the marketing of Bahrein crude, the Petroleum Times, July 4, 1936, p. 8, summarized the situation as follows : "From the stand oint of the two companies, the amalgamation is highly sensible, each complementing the other in its basic requirements [Standard had production, Texas had marketing facilities], while from that of world oil circles the advantage of the merger is that both companies being sound, stable, and conservatively managed, it assures that Bahrein production as well as any output that may eventually come from countries now being developed by Standard of California, will have assured and regulated outlets and will so lessen any, possib a danger of upsetting the equilibrium of international markets." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CASE STUDIES IN THE APPLICATION OF MARKETING AGREEMENTS IN SELECTED AREAS The structure of control and agreement in the international petro- leum market was made complete during the interwar period by the organization of local marketing cartels, based upon "as is" principles, in most countries of the world. The elements of this structure have been shown in the previous chapters of this book as including- (a) The predominant and strategic position of seven international oil companies in the ownership of world petroleum reserves, produc- tion, refining capacity, and transportation facilities. (b) Joint ownership by these companies in affiliated and subsid- iary companies in all parts of the world, particularly in the Middle East, and in all phases of the industry. (c) Crude-oil sharing arrangements in important producing regions. (d) The development of agreement upon a philosophy and strategy of cooperation in marketing the end products of the industry. The local marketing cartels described in this chapter flowed naturally from these developments and provided an additional and important ele- ment in the structure of control and agreement. This chapter, therefore, deals with (1) an examination of the procedure followed by the subsidiaries of the international oil com- panies in creating and maintaining local marketing cartels in ac- cordance with the principles set forth in the international market- ing agreements described in chapter VIII, and (2) an examination of the scope and effectiveness of the local cartels. The marketing arrangements described in chapter VIII were, for the most part, general statements of policies and goals. They were designed to set up a broad and flexible framework of principles to be applied in each of the particular markets in which these oil companies were interested. The Achnacarry ("as is") Agreement, the Memo- randum for European Markets, the Heads of Agreement for Distri- bution and the Draft Memorandum of Principles, therefore, did not directly allot quotas or fix the conditions of sale, but, rather, constitut- ed guiding statements to be used in preparing and administering local arrangements to be put into effect for each petroleum product in each marketing area. The international marketing agreements further provided. that where the participants in the agreements were or intended to become members of local cartels, the local cartel arrangements would "over- ride" the "as is" principles by unanimous consent. Thus the inter- national agreements were highly flexible documents and the inten- tion was to apply the agreed marketing principles, subject to special modifications or substitutions in the appropriate cases, to all. countries Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 276 TjIE INTERNATIONAL PETROLEUM CARTEL in which the except the Unij The applicat' was effectuated tiation and con: It was necessary try, guided byl national. agrees administered, local officers of in.eet frequentl, subject to revie' The lengthy arrangements information is investigation ai information ex- case history re the terms of thf international oil companies had marketing interests, ;ed States. ion of the broad agreements discussed in chapter VIII . only after a lengthy and continuous process of nego- iultation by local managements in each marketing area. y to agree upon marketing arrangements for each coun- the broad and flexible directives given in the inter- nents. 't'hese local arrangements were to be governed, Ind modified in the light of current conditions by the the international oil companies, who were directed to y for that purpose. Local administration was always w by the London "as is" committee. process of preparing and administering the local s Illustrated by the case of Sweden. Fairly complete available with relation to that country as a result of an id report by a legislative committee in 1947. Sufficient ists about other countries to indicate that the Swedish ;embles that of other local cartels that operated under international agreements in other foreign countries. PROBL U MS IN THE APPLICATION OF THE AGREEMENTS Certain broad economic and administrative conditions were gen- erally influenti 1 in the creation and operation of the local cartels.' From 1928 tot e beginning of World War II, they included conditions arising from (1) changes in the volume of consumption of petroleum products, (2) changes in the structure of competition, (3) the course and development of national economic policies, and (4) other matters. Consumption o petroleum products The period o gestation of the local marketing cartels coincided in time with the Great Depression, which began in some parts of the world as early as, 1928. The incidence and impact of that depression, its intensity an duration, and the character and degree of recovery in the various national economies, all varied considerably from nation to nation. However, nearly all nations suffered sharp declines in the level of industrial production. The impact of the depression on the market for petroleum products, i. e., the demand in terms of physical volume, largely depended upon the operation of the following factors ,of recovery in velopment of powerfully to a Lion of national related. In spi general observa in the case hist market: (a) the extent of the decline and the speed he level of industrial production, (h) the rate of de- ew uses for petroleum products, which contributed or petroleum products, and (d) the nature and\opera- onomic policies. These factors, of course, were inter- of variation from country to country the following ions may be made about the relation of the cartels to mand, the data on which they are based being given ries discussed later in this chapter. (a) The market for petroleum p~ in the period 19 oducts in most European countries expanded annually x A detailed of these factors is beyond the scope of this study, and, in any event, 'much of the relovan information on activities in foreign countries is unavailable. Such specific information s Is readily available is incorporated in the case studies given in this chapter. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 277 tors was felt in some countries only as a slackening in the rate of increase, in others by slight declines in consumption lasting only a year or two at most.2 (b) The market for petroleum products in most Latin-American countries declined considerably after 1929 and re- covered rather slowly, reaching the earlier levels in most cases only in 1935 or 1936. (c) The international oil companies were able to form and maintain marketing cartels under all market conditions, whether of increasing or decreasing demand, and in agricultural economies as well as industrial. Their success, or, in some cases, lack of success, in holding or dominating markets was generally independent of the trend of demand. Control over the sources of supply was probably the most important factor in the outcome of these cartel ventures. (d) A slowing down or reversal of the long-term rising demand for products, which occurred in some markets, may well have been a resultant rather than a causative force in cartel operations. Successful cartelization with the attendant division of markets and fixing of prices and of selling conditions may have had an important effect in determining the course of consumption. While it is impos- sible to measure the effect of the marketing cartels upon consumption, there can be no doubt that the effect was restrictive. The information given in the Swedish case history, discussed in this chapter, is instruc- tive on this point. The structure of competition The participants in the various national markets may be classified in the following general categories : (a) the "as is" group, (b) other major American oil companies, (c) the Russian oil monopoly, and (d) small competitors. The "as is" group: The subsidiaries of Royal Dutch-Shell, Stand- ard Oil Co. (New Jersey) and Anglo-Iranian Oil Co. in each market- ing area may be termed, for the purposes of this chapter, the "as is" group. This usage derives only In part from the fact that the parent corporations were leaders in the development of the international marketing agreements and held dominant strategic positions in the production of petroleum entering world markets. It also derives from the fact that in each country in which one or more of these three international oil companies held marketing interests, their local sub- sidiaries likewise held dominant or outstanding positions in the market and took the lead in the establishment of local marketing cartels. In each case study presented in this chapter, therefore, the relative posi- tion of the "as is" group will be discussed. Other major American oil companies.-Marketing interests of vary- ing importance in many countries, especially during the period from 1928 to the beginning of World War II, were also held by Texas, Gulf, Sinclair, Socony-Vacuum, and Atlantic. Representativbs of all of these companies, except Sinclair, participated in the making of the Heads of Agreements for Distribution (1932) described in chapter VIII.' The cases studied in this chapter indicate that the marketing subsidiaries of these companies followed no consistent policy with respect to the many local marketing cartels that the "as is" group Germany suffered substantial declines in consumption of most petroleum products dur- ing 1931-33 In percentage terms, the products showing the greatest tendency to decline in consumption in all markets were kerosene, lubricating oils, and asphalt. 2 See p. 241. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 278 THE INTERNATIONAL PETROLEUM CARTEL oil supply and thus were independent of the major i Rumanian and German concerns which had domestic other European countries. Some of the most activ operated refineries and marketed their products dom example, these small concerns included many domesti subsidized or otherwise granted favors by their gove Small competitors.-There were a great many smal the process of withdrawing from the markets in near: cartels.' By 1936 the Russians had sold out their into by 1931, the Russians tended thereafter to be coope the "as is" group of companies in Great Britain, a cries were par- countries they F ; in other cases d in still other fact that these nter the cartels ide cooperation lpetitive condi- zn markets dur- l ttempts of the those markets. ante, since the cartel arrange- By 1929, for -in gements with nd by 1932, in i.tional markets rative with the rests or were in y all cases. l concerns com- n Europe, for firms, usually rnments, which ~stically and in of these were, ources of crude iternational oil example, the Russians had entered into cooperative arr ments on both the international and national. levels. Russians were soon accommodating themselves to the However, these disturbances were of limited impor Russian Government monopoly to capture portions o The Russians.-The greatest disturbances in Europe tions 4 with the cartel in the matter of prices and other co and accept quotas and other restrictions did not precl cases they did not take membership._ However, the entered the cartels several years after they were create created and operated._ In some countries these subsid supplies of refined products or crude oil 11 upon world markets domi- nated by the major international oil companies. (b) None nated of these concerns accounted for more than a very sm 1l part of any product market, although collectively they often accounted i f or sig- nificant proportions, especially in such products as asphalt and road Furthermore, it seems unlikely that these subsidiaries could enter " iolent competition in one country without causing serious injury to the cartel structure In neighboring coun- tries. There is no record of such events. s See pn. 239-241 for discussion of Russian cooperation in the International sphere. The Russians also entered the German cartel in 1935. . For details, see the respective, ease histories. 4 According to the Petroleum Times, January 6, 1934, p. 12, the Rus cans, in accordance with their agreements with the international oil companies, reduced their exports of re- fined products in 1933 by 22 percent from the levels of 1932. "All goe to show that there was no flood of Russian oils in world markets last year." 8 These comments are directed chiefly at European market conditio . There is less in- formation available with respect to Latin America, and in most case s s there is insufficient- information to show how important small concerns are in these mark ts. e Except for the Rumanian and German refiners having domestic su plies of crude oil. The competitive position of these small concern marized as follows: (a) These concerns were depe of which appeared only in one or two petroleum pi Some of these were small domestic marketing firms their supplies of refined petroleum products or purchi the local subsidiaries of the major oil companies. 7 numerous other purchasers or importers in each count sumer cooperatives, large industrial consumers, jo agencies, municipal or other government consumers, al companies. In addition, there were many other small) concerns, most that imported sed them from y, such as con- nt purchasing may be sum- Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 279 oils. (c) The major international oil companies maintained a close watch and control over the activities of these small importers and sellers. As the Swedish case history indicates, no firm was too small or insignificant to escape their attention, control over supplies being an especially potent weapon. National economic policies During the interwar period, nearly all countries, and particularly all European countries, developed extensive and complicated pro- grams of economic controls. These included high tariffs, import quotas and other trade barriers, currency and exchange restrictions, subsidies, protective legislation favoring home industries, and a host of other devices intended to combat the depression, develop and pro- mote domestic industries and markets, and, in some cases, make the Nation more self-sufficient in case of war. Difficult problems often arose as a result of such legislation, which hampered the application ,of the principles set forth in the international marketing agreements. One official of the Standard Oil Co. (New Jersey) stated the problem as follows : Besides the day-to-day problems of handling the marketing of the three companies [t. e., the "as is" group] more or less as a joint venture, we are now confronted with nationalistic policies in almost all countries, as well as decidedly socialistic tendencies in many. He then proposed that the parent corporations' marketing organiza- tions be "domiciled in the same lace' to insure the "best results," if these problems "are to be harmoniously acted upon." 10 In other words, the "joint venture" of Shell, Standard (New Jersey), and Anglo- Iranian in Europe and South America extended not only to "the field of pure marketing" but also to cooperative dealings with govern- ments. By means of "daily contact of the managements of the three interests," therefore, the "as is" group would have unique power in these dealings with foreign governments." Other problems Generally, the other problems met in the shaping and direction of the local marketing cartels were those usual in such cooperative under- takings, including such matters as the problems of cooperation among the separate enterprises, of bringing into the cartels and holding the most important competitors, of controlling the activities of outsiders, of successful operations by a number of cooperating concerns under the necessary conditions of secrecy, and so on. All of these problems are well illustrated in the Swedish case history. To these may be added the fact that the managing directors of the marketing subsidi- aries of the "as is" companies were adjured to maintain secrecy with regard to the international marketing agreements. Thus, their staffs operated without knowledge of the subject matter and provisions of their basic directives, and the other participants in the cartel arrange- ments frequently entered into cooperation without knowledge of the "guiding principles" upon which these agreements were founded.12 10 Italics added. Memorandum, dated January 19, 1935, and initialed Obi (probably a misprint of OH, 1. e., Orville Harden), printed in Patents, hearings by Senate Committee on Patents, 77th Cong.. 2d sess., 1942, pt. 7, p. 3653. n Ibid. Italics in original. is See pp. 248 and 255. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL Sweden In 1947 a special investigating committee reported to the Swedish Riksdag that petroleum-product cartels, organized and operated in accordance with the principles set forth in the international market- ing agreements described above in chapter VIII, had been in existence in Sweden during the decade of the 1930's. It report d that the par- ticipants in those earlier cartel agreements were then 1947) attempt- ing to organize new cooperative arrangements. Th, Swedish case history presented in the following pages is largely bit ed on this com- mittee's report. This history forms a significant ep .sode in that it illustrates the manner in which the international oil companies shaped the "as is" principles to fit the requirements of particular local markets. Moreover, this detailed study imparts meaning to the less-well-docu- mented case studies that follow. The Oil Investigating Committee of 19!5.--One o the functions of the Oil Investigating' Committee, of 194514 was to investigate oil enterprises in Sweden in accordance with the law of investigations regarding monopolistic enterprises and associations.15 In accordance with its directives, the committee made an extensive i quiry and sub- mitted its report to the Riksdag in 1947. The principal findings of the committee with respect to the oil enterprises in S veden was that these firms had made a number of agreements respect ng prices, sales conditions, sales quotas, and so on, during the 1930's, all in accord- ance with the principles of the "as is" marketing agree ents, and that there was some evidence that this cooperation was being revived.- The committee also reported that the oil companies had attempted to obstruct and mislead the committee in its inquiry and had objected vigorously to publication of the report. A. summary of cartel arrangements, 1930-47.-It i, not clear that the 1928 "as is" agreement was immediately followed by consultations and cooperation in Sweden, but such activity did imn ediately follow the negotiation and conclusion of the Memorandum for European Markets in 1930. Renewed and accelerated activity < mong Swedish oil concerns followed the agreement by the parent co porations upon a Draft Memorandum of Principles. The cancellation of this memo- randum did not mean the end of cooperation in Sweden The Swedish Oil Committee found evidences of continued collaboration up into World War II and of an attempt to revive the "as is" principles in the postwar period. In the pages that follow, Swedish cartel arrangemen :s are described in accordance with this chronological outline. A di cussion of the application of the arrangements in markets will be presented in a Cooperation in the 1930-33 period: During the e rly period, the leading oil companies on the Swedish market, that is the local sub- "Appointed pursuant to authorization of the Riksdag of Sweden in 945. Its principal duty was to undertake a survey and submit proposals regarding scat control of the im- - re This statute authorizes investigations of monopolistic enterprises and associations to determine the influence of such organizations on price or sales Condit ons in Sweden and grants to the investigating authority powers substantially the same as he right of subpena by congressional committees in the United States. See the preface o the report of the Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 281 sidiaries i ' of Standard (New Jersey), Shell, Anglo-Irani_all (BP), and Texas, arrived at two principal agreements and several supple- mentary agreements."8 Separate agreements or understandings were made with Nafta (owned by the Russian oil monopoly) and with Nynas, a Swedish refiner, importer, and marketer of petroleum products. In 1,931 these six firms actually accounted for 97 percent of the market in those petroleum products covered by the principles of the "as is" agreement.10 The four international oil companies began negotiations in the fall of 1930 .and were successful in arriving at a working agreement, i. e:, "rules of life," in April 1931. These rules consisted of a "principal" agreement and two supplementary acts known as the "sales act" and the "community act." The "principal" agreement set forth the terns under which the companies were to cooperate. Among other matters the parties agreed : "to observe strictly the prices and other selling conditions that were fixed by the parties from time to time for the sale of bmn- zene, kerosene, and gas oil in Sweden"; 20 "to create mutually a fair distribution of the trade in these products"; and "to cooperate with a view to cutting sales expenses as well as the costs of distribution and organization." They also agreed to cooperate in "acquiring for them- selves and keeping" their customers in Sweden. The "sales act" included specific stipulations regarding conditions of sale and delivery, while the "community act" contained detailed agreements concerning the division of trade, rationalization of oper- ations, and similar matters.21 In May 1932, the representatives of Standard, Shell, BP, and Texas concluded a further agreement pledging "full cooperation" among the parties in the future "for the purpose of bringing about better and sounder conditions on the Swedish oil market." This agreement, which was more formal than the earlier one in that it was actually signed by the representatives of the companies, established joint terms of rebate and provided for collaboration with respect to the erection of. new service stations. Subsequent agreements regulating selling conditions were arrived at during a number of later meetings. During the negotiations leading to the agreement of April 1931, representatives of the Swedish subsidiaries of Standard and Shell arrived at an agreement with the most important Swedish firm in 11 The following terms will be used in referring to the principal Swedish oil firms, in- cluding their predecessor and affiliated companies : a) Standard (New Jersey)-Standard Swedish Petroleum Co. b) Sheller Swedish Shell Co. c) BP-BP Swedish Gasoline & Petroleum Co. (owned by Anglo-Iranian Oil Co.). (d) Texas-The Texas Co. (e) Nafta-Aktiebolaget Naftasyndikat (owned by the Russian state oil monopoly and sold to Gulf in 1937). (see & Co. footnot e affiliate of Gulf). For further information about Alfred Olson ~r Co. Olsen (p1 Nynas-Nynas Petroleum Co. (a Swedish concern (see p. 696, footnote 3). 1e The committee presented a summary of. the information on these agreements that was given In 1933 in a report by a predecessor committee, the Committee of Motor Fuel Experts. 101. e., substantially all petroleum products that are domestically consumed, with excep- tion of lubricating oils and specialty products (seep. 289). The percentage figure is de- rived from data given in tables 15 and 10, pp. 302-303. 20 These terms generally cover all petroleum products included under the "as is" agree- ment except asphalt and road-making materials. [Italic added.] 21 while the three agreements were not signed by the representatives of the oil com- panies, "the stipulations are said to have been adhered to in the main, though alterations have been made here and there by special decisions, and in some respects there have been differences of opinion." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 282 THE INTERNATIONAL PETROLEUM CARTEL the petroleum market, Nynas Petroleum Co.,- concerning the sale of bitumen, benzine, kerosene, and gas oil-in short, all o the products covered by the "as is" principles. No details of this agreement are given, except that it was provided that the agreement was effective up to and including December 31, 1933, and was to be automatically extended annually unless either party gave notice of it termination. The largest and most vigorous competitor of the principal oil com- panies in Sweden during this early period was the subsidiary of the Russian Oil Monopoly, the Naftasyndikat.23 In the autumn of 1932, negotiations were opened with Nafta to eliminate the ken competition between the oil companies and Nafta, which had resulted, it was said, in unprofitable prices and financial losses to all concern d. It was re- ported that these negotiations resulted in "collaboration" between Nafta and the oil companies, and that Nafta, upon bein informed of the agreements thatthe others had mutually made, had applied the conditions of sale the oil companies had agreed upon but had not entered into a formal agreement to that effect. This collaboration resulted in higher benzine prices, and the stabilization of retail prices was made possible, although Nafta continued to ,grant higher rebates in some cases than the others. The committee did not r port, nor did the oil companies assert, that the Russians caused an further dis- turbances in the market ; and it may be assumed that this "collabora- tion" continued until Nafta's business was taken over by Gulf in 1937.24 Agreements under the Draft Memorandum of Prince les, 1934-38: The preparation of a new and far more elaborate international agreement, the Draft Memorandum of Principles,25 tog Cher with its addenda and explanatory notes, necessitated the concl sion of new local agreements in Sweden. Six agreements, memor< nda, and the like were found by the committee to have been entered i to by the oil companies in Sweden during the life of the international Draft Mem- orandum of Principles, that is,.during the period from 1934 to 1938. These documents, as will become evident, follow a logic 1 sequence of development, and culminate in the most important Swedish agree- ment, that of October 15, 1937. The representatives of the "as is" group of companies-Standard, Shell, and BP-signed a joint memorandum, written in English, and dated October 6, 1934. In this memorandum, the representatives noted that they had each gone through the Draft Me orandum of 22 The agreement was actually made with A. Johnson & Co., the parent corporation. Johnson imported crude oil and operated a refinery at Nynasham, whil Nynas marketed the refined products, chiefly asphalt and road oils, in Denmark and Norway as well as in Sweden. Johnson's refining capacity in 1929, the year in which the 'finery was con- e structed, was 40,000 metric tons annually ; this capacity was doubled In 931 and a crack- ing plant was added ; and in 1939-40, with the aid of a Government 1 an, the capacity was expanded to 600.000 metric tons annually. Nynas' share of the Swedish market in :1931 was 3.83 percent and. in 1936, 3.90 percent. See the Swedish report, ch. V, pp. 14-15, and table 15, p. 302, below. 23 "Violent fluctuations" In prices, competitive rebates, and considerab e financial losses by the Swedish subsidiaries of the oil companies were attributed to their struggle with Nafta. During 1930-32, these concerns created an interest-bearing deb with the parent corporations of 35,201,200 kroner. (The total debt of the companies increased slowly during the 1930's to a peak of 48,212,276 kroner, which was 85 perce t paid by 1945.) On the other hand, Swedish fuel oil experts have contended that declining prices in Sweden during the 1928-32 period were largely caused by declining pr ces In the world market, due to declining costs; that, while the subsidiaries lost money, theparent corpo- rations had substantial profits; and that petroleum products could be purchased in world markets, during this period, at lower prices than those charged the s bsldiaries by the, parent corporations. See ch. V, p. 1, and ch. X, pp. 8-10 of the Swedish report. 24 In addition, Nafta was a party to the "price system" agreement of F bruary 10, 1938 See p. 284. 21 See pp. 253-265. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THEE INTERNATIONAL PETROLEUM CARTEL Z(50 Principles and its explanatory notes; that they herewith noted down the decisions they had agreed upon in those matters left open for local agreement, and that the application of the quotas for 1934 raised certain questions-due to a previous agreement to increase BP's quo- tas-that would be referred to the head office for instructions. The memorandum apparently indicated, therefore, that the three subsid- iaries had accepted the Draft Memorandum of Principles as a basis for local agreements. A memorandum was prepared at a meeting on November 19, 1935, of Standard, Shell, BP, and Texas, and deals principally with "ir- regular customer's terms," i. e., the fact that the terms of sale to cus- tomers were not uniform. The parties agreed to try to correct "the chaotic conditions that characterized the market," 26 and thus to reach "the peace which must absolutely form the basis of a measure aiming at a stabilization of prices," 27 As soon as the program decided upon in this memorandum had "noticeable results," a "definite program for a continuing stabilization of prices" would be drawn up. Specific measures agreed upon,included : (1) the existing distribution of cus- tomers would be honored and participants would not try to acquire one another's customers; (2) uniform rates of rebate set forth in the memorandum would be applied, and fixed rebates for certain large consumers, such as railways, municipal institutions, highway boards, etc., were agreed upon; (3) an investigation of the "group resellers- consumers" would be made to ascertain to what extent they could be distinguished as "resellers" (retailers) and consumers, and maximum permissive rebates were fixed for the latter when buying in bulk; (4) regulations for compensating a participant which had lost a customer to other participants were agreed upon; 28 and (5) the parties agreed to set up a "special control committee." It was also decided at this meeting that Nynas would be invited "to attend the meetings of the committee." A memorandum, dated January 31, 1936, set forth in summary form a "price system". which was put into effect on February 10, 1936. The adherents to this "price system" included Standard, Shell, BP, Texas, and Nafta. The latter appears in a formal agreement for the first time.20 Uniform "rebates, bonuses, and terms of payment were fixed for various categories of consumers, such as private motorists, munici- pal institutions, road contractors, private railways, and automobile firms." Special rebates and other stipulations were agreed upon for highway boards, state unemployment commission, purchases by the state, and deliveries to the IC,30 the Stockholm Tramways, and other large or special purchasers. This "price system" seems to be, at least in part, the "definite program for a continued stabilization in prices"mentioned in the memorandum of November 19, 1935. 20 It is difficult to comprehend exactly what is meant by this phrase since the earlier agreements had apparently eliminated most forms of price competition by the end of 1932. It may refer to practices of "chiseling" or shading of prices and terms of sale. 2 Italic added. 28 The losing participant was entitled to make up his loss by selling an equivalent volume of product at agreed upon prices to the participants who had gained the customer, and was entitled to receive an equivalent customer as compensation. This provision suggests that this agreement, which is given in the Swedish report only in summary form, closely approached the "as is" principles in many respects. Nynas, in accordance with the invitation extended to it in November 1935, probably sat in on the negotiations leading to this agreement, and, in any event, as is shown in the paragraph following in the text, was a full collaborator in its elaboration. 80 The IC organizations were purchasing cooperatives of automobile owners, including especially among its members owners of taxis and motor lorries. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 G64 THE, INTERNATIONAL PETROLEUM CARTEL The "price system" set forth in the memorandum of January 31, 1936, was elaborated in considerable " detail as a result of decisions made at meetings of the companies during June and July 1936, and recorded in an undated memorandum. Participants i these meetings included Standard, Shell, BP, Texas, Nynas, and Gulf. With the in- clusion of the latter company at these meetings, all S edish oil inter- The purpose of the meetings was to shore up the "price system" which was threatened by the pricing and selling practi es of "some re- sellers and distributors" who had not "adhered to the ti.pulations re- beyond the control of the participants [in the agreements], and, in consequence, the rebates having lately shown a tendency to spread, the parties decided" * * * that the resellers should be deprived of the right t grant and pay rebates and that the term "rebate" should be eliminated from he market.' While the details of this agreement are too lengthy, even in sum- mary form, to be reproduced here, the trend and tone o the document are well illustrated by a few citations. Thus, for examp e, the "official" price of benzine and bentyl 34 was reduced, but this was made up by an agreement upon "new price zones" and by removing all cash discounts paid to consumers and the rebate paid to "commercia traffic." The parties also agreed to reduce the "reseller's" margin y a stipulated amount and to protect "loyal resellers" by cutting off deliveries to those who failed to observe all the stipulations set forth in the agree- ment. The wealth of detail in this agreement is illu trated by the decision that "free service or washing and lubricate n at reduced prices must not be applied at the companies' stations but the fixed service prices should invariably be charged." 35 Numerous other pro- visions dealt with such matters as the classification of ustomers, spe- cial~terms of sale and price for the special categories of ustomers, and On January 25, 1937, representatives of Standard an Shell signed an agreement regarding deliveries of "black oils" (bunkers and other heavy oils) to the Royal Navy and the Royal Board Of Waterfalls. It was decided that the two companies would divide 11 such State deliveries of 100 metric tons or more between them, while deliveries of less than 100 tons would be placed among Standa d, Shell, BP, and Texas in accordance with a previous local agree ent. Certain 81 Gulf had been a marketer of gas and fuel oils in Sweden since the early 1930's through its gteeliate, Alfred Olson & Co. (see below p. 820), and had attended regular weekly meet- ings of the group as early as January 1936 (see pp. 292-293). Gulf was a participant in the meetings of June and July 1936, not only through this connection, ])at also because it was probably then negotiating with Nafta for the purchase of Nafta's marketing organi- zation, the sale being concluded on May 1, 1937. This would explain Nafta's absence from the meetings. With this sale, the Russians apparently withdrew from the Swedish market . 52 The decision was made only after "the political situation" and "all questions of topical [current] Interest" had been thoroughly gone into. This reference pro ably refers to the fact that the third investigation of the oil trade in Sweden. In the 133-36 period was. then in progress. (From the point of view of their impact on the onduct of the oil business, all three reports. were negative; see ch. V of the report, pas im.) During the summer of 1936, the Swedish Government had a change in administrate n which was also. probably considered in the maki .,..___..-_- f th ng o e 4 Probably a motor alcohol blended with benzene and produced as. a byproduct of the sulfite pulp industry of Swed n e . as, [Italics added.] Distributors-l. e., company agents-who filled to observe this stipulation or any of the others in the agreements were to be given " clear warning," and if the infractions persisted, the errant distributor was to be 'immediately des charged from his post." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 285 The agreement that bore closest resemblance to the international Draft Memorandum of Principles was signed on October 15, 1937, by representatives of Standard, Shell, BP, Texas, and Gulf. This is the first document uncovered by the Oil Investigating Committee that allocated domestic sales quotas and provided for adjustments for over- and under-trading. The purpose of the agreement was stated in much the same terms as in the Draft Memorandum of Principles itself, and adds nothing new. The agreement was to cover the period from October 1, 1937, to December 1, 1938, and was to run automati- cally from year to year thereafter unless notice in writing was given by any participant not later than September 30 of any year. While this is the first document found by the committee that specifi- cally set forth distribution quotas for the five companies-Nynas did not participate in this agreement-the committee had evidence from other documents that the "as is" group, at least, had had such arrange- ments between them in earlier years.- Details on the actual quotas that were agreed on are given below in the discussion of the appli- cation of the agreements. The Swedish "as is" agreement likewise included provisions for the adjustment of over- and under-trading which, for the most part, accord with the procedure set forth in the Draft Memorandum of Principles'37 although there were some changes. These provisions, together with those relating to distribution quotas, are examined below in the discussion of the administration of the cartel arrangements.311 Other provisions of this Swedish "as is" agreement of 1937 included nothing novel. It was agreed that "uniform selling prices and terms" were to be maintained ; although special prices and sales conditions were agreed upon for the special categories of customers mentioned in earlier agreements, these were to be eliminated at the time that new contracts were being negotiated.39 The parties agreed to respect each other's customers. Whey also agreed not to supply "other competitive marketers," except by agreement, whereupon all the parties were to share in this business pro rata to their quotas; nor to sublet any part of their storage facilities to such outsiders or to associations of consumers. In addendum 5 to the Draft Memorandum of Principles certain stipulations are made with respect to economy in competitive expendi- tures. These stipulations were the subject of a meeting on January 17, 1938, attended by Standard, Shell, BP, and Texas. The decisions that were made were recorded in a memorandum, and a committee, of representatives of each company was formed to meet monthly for discussions of "relevant problems." It was decided that the total number of "selling points" would not be increased in 1938, and that extension and reconstruction of existing service stations would be 86 The independent information presented on pp. 741 IT., confirms this conclusion of the committee. No evidence was given by the committee to show that Texas participated in any of the earlier quota or other special "as is" arrangements, while Gulf was sub- stantially a newcomer to Swedish markets. While Nynas did not participate In this agreement, it was already as "as is" adherent for asphalt, by far its most important product (see p. 300 below). 37 See above pp. 253-205. 39 See below p. 297 if. so In the case of certain benzene customers, Gulf was allowed to offer "terms deviating from the official ones" in order to "protect their old customers" which they had inherited from Nafta. However, these "special terms," in each Individual case, were to be sub- mitted to the companies for discussion. Gulf was also allowed generally to grant extra rebates and discounts, which were fixed in the agreement, but was not to use these "tem- porary concessions" for "securing new business." Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTE limited to lists especially prepared as enclosures with the memoran- dum. No company would install a meter at a Selling point from which another company had removed one, and no company would encourage resellers or consumers to erect service stations at their own expense or would contribute to such building by making money con- tributions, paying rent, etc. The companies also agree not to extend their current capacity in stationary plants or bulk vessels. Draft and agreements, 1939-47: Insofar as formal documents are concerned, cooperation in Sweden reached its fullest development in the agreements of 1936 and 1937. When the time came for renewal of the agreements early in 1939, this proved to be difficult because the subsidiaries of Gulf and Texas were not able to sign. his was prob- ably due to develapment.s in antitrust activity in the United States. In chapter VIII, the possibility has been shown'that th international Draft Memorandum of Principles was canceled for is reason early in 1938.40 The dissembling nature of this cancellation is revealed in a letter sent to one of the Swedish concerns by its forei n parent com- any, which was made available to the Oil Investigatin Committee 41 'he subsidiary enterprise was notified in April 1939 that the inter- national draft memorandum had been "formally" canceled for reasons which it was not necessary to state. The committee's paraphrase of this letter continues : in reality, be changed.. The only actual alteration was that, memorandum had been a document which had been generally countries, matters must now be so arranged that the companies had to reach their own agreement on about the same lines as random but with the modifications which had proved to be superseded the draft memorandum in respect of the relation b large companies in Sweden.92 pplicable in all in each country he draft memo- The situation at the beginning of 1939, therefore, as that while Texas and Gulf were not able to sign formal documen s, the "as is" group, including Standard (New Jersey), Shell, and 13P, were pre- pared to go ahead with new agreements that were to take the place of those based on the draft memorandum. While the outbreak of World War. II put an end to most private cooperation in Swedish industry, the Oil Investigating Committee discovered evidences of a revival of cooperation in the postwar period. The following paragraphs summarize the comments of he committee on oil industry cooperation from 1939 to 1947. Negotiations for a renewal of the Swedish "as is" agreement of 1937 or for the conclusion of a new agreement were carried on at the end of 1938 and at various times in 1939. In a memorandum dated December 290938, and signed by representatives of Standard, Shell, and BP, it is mentioned that these three companies and Texas had agreed that a new local agreement should be concluded. This memo- randum states that unless Texas' and Gulf's replies egarding the new agreement were given by January 1, 1939, the life, of the 1937 09 See P4206. 41 The Government would not permit the committee to give the na es of the sender or receiver of "personal" letters or to copy them, either in full or in art, but a para- phrase or summary of the contents was permissible. Presumably this l otter was sent by one of the three signatory companies of the draft memorandum, 1. e., S andard, Shell, or Anglo-Iranian. 42.Italics added. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE,, INTERNATIONAL PETROLEUM CARTEL 287 agreement would be, extended to January 31, 1939, presumably to permit negotiations to continue. However, Texas refused to sign a "price list" prepared for 1939 on the grounds that it was not allowed to sign joint statements.43 Similarly, Gulf refused to sign a draft, dated January 9, 1939, which provided similar terms for economy in competitive expenditures to those in the memorandum of a year earlier. The other four parties nevertheless agreed to mutually apply this agreement, and to exchange lists regarding their plans for ex- penditures in 1939. Despite these difficulties, negotiations continued, and a draft of an agreement was prepared, dated February 6, 1939, which substantially repeats the provisions of the 1937 agreement. This draft apparently was never signed, although the names of the five companies were typed under the text; and the Oil Investigating Committee concluded that it had never been e p l Nevertheless, the "as is" group-Standard, ell> and BP-were agreed that efforts should be made to arrive at new agreements. Rep- resentatives of the three companies signed a memorandum,44 dated June 1, 1939, which stated that the provisions of the existing agree- ment between the five companies could not presently be "improved," but that the three signatories would prepare a new agreement cover- ing all products and submit it to the parent corporations in London for approval. They agreed to operate on the basis of the new three- party agreement. should the existing five-party agreement cease.',, As a result of this memorandum, an undated first draft 46 of a three- party agreement was prepared which generally followed the pattern of the agreement of October 15, 1937, and of the Draft Memorandum of Principles, except that a revision in otas was to be made due to special arrangements among the head offiuces in London. Presumably this matter was not pursued further because of the outbreak of World War II. During World War II the petroleum market was, of course, subject to special controls and abnormal conditions of supply, so that a study of this period would be beyond the scope of this report. The Oil Investigating Committee was satisfied, however, that even during this period some degree of the earlier cooperation had been carried on. They report that they had established by a study of Shell's corre- spondence "that, as late as 1943, some companies in Sweden had dis- cussed an adjustment of over and under deliveries." Maximum prices for petroleum products in the Swedish markets were fixed by a price control board in the postwar period. During negotiations with this board concerning proposed reductions in the price of benzine, the oil companies also had negotiations among them- selves about some proposed "rules of life" with regard to rebates and selling conditions. These proposed stipulations were recorded in a draft document which was headed "Selling conditions as from Jan- uary 1, 1947." It was proposed that all contracts and other delivery 48 However, Texas was a signatory to the 1937 agreement, which was, as noted in the text, still in force. 44 In a letter dated June 2, 1939, the contents of this memorandum were made known "to the international committee of cooperation." No description of this committee is given, but it may be surmised that this refers to some committee of the London marketin offices of Standard, Shell and Anglo-Iranian, perhaps the supposedly defunct "as is' committee. 46 This style of expression suggests that the 1937 agreement did not in fact terminate en January 31, 1939. 44 This draft was attached to a letter dated August 24, 1939.. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 288 THE INTERNATIONAL PETROLEUM CART~L agreements for certain petroleum products be based i. e., that all the companies charge the maximum pr retailers, etc.) and consumers were to be fixed at sti and all current contracts and delivery agreements with lattbentyl,47 water white illuminating kerosene powe , oil, fuel oil, and white spirit. It was also proposed th There was some dispute with the companies as to whether these "rules of life" were being applied and whether they constituted a litre, that bonuses for quantity purchases be fixed th the rules did constitute a price agreement since these all in addition to, and arrived at separately from, the that this was merely a "draft agreement," it was prow mittee that Shell itself had ordered the application for the operation of service stations be borne by the' station managers, that no extra terms be granted to State and municipal institutions, and price agreement. In the opinion of the Oil Investigating Committee Administration of the cartel arrangements.-In the preceding pages, an account has been given of the cooperative arrangem nts developed by the oil companies in Sweden during the period from. 1930 to 1947. The pattern of these arrangements shows a continuous process of broadening and elaborating cooperation in Sweden a to the eve of World War II, and it shows an attempt to reconstruct tl is cooperative pattern in the postwar period. In the pages that foll w a summary analysis is presented of the method and the scope of pplication of The committee's characterization of this document as a "price agree- ment" has interesting implications with respect tote position of Standard, Texas, and Gulf. Although these companies had each pro- tested at some point in the investigation that their iris ructions from their parent corporations would not permit them to e iter into joint agreements affecting prices and otherwise, conflicting with the Ameri- can antitrust laws, all three had participated in the ne otiations lead- on the "official ce of delivery, ces allowed by uppliers (i. e., higher rebates mber 31, 1946. e motor' spirit, kerosene, gas t all cash dis- nd consumers fixed sum per t all expenses rovisions were "official" price hell protested terms. The committee does not state whether other concerns had 47 For a definition of "lattbentyl" see p. 284, footnote 34. "The State price control board stated that they had no part in drawing up these "rulers of life" and that their sole function was to flx maximum prices. Ad endum to ch. XII of Swedish Report, p. 16. 1, Two primary sources of information are drawn upon in this summa ry analysis. One consists of documents taken from the files of the Standard Oil Co. ( ew Jersey) which present in summary statistical form the results of "as is" operations in Europe from 1928 through 1936. These documents are known as the Deliveries Into Con umption-Europe. It may be noted at this point that these do not purport in all cases t record all cartel- like activities in each country but were intended primarily as a record of the operations and relative positions of the "as is" companies---Standard (New Jersey), Royal Dutch- Shell, and Anglo-Iranian. The other primary source of information i that afforded by the report of the Swedish Oil Investigating Committee of 1945. This report describes the application of the various agreements in Sweden in some detail, especially for the years 1937 to 1940. It affords an intimate view of these operations that is available for no other country. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 289 The marketing arrangementments and agreements in Sweden gen- erally were applicable to nearly all petroleum products sold for do- mestic consumption. These "controlled products," which were essen- tially the same as those governed by the international t'as is" agree- ment,50 were classified as follows : (a) Benzine (i. e., gasoline and closely related solvents). (b) White spirit (i. e., turpentine substitutes and the like). c) Water white or illuminating kerosene. ~d) Motor or tractor kerosene. (e) Diesel:oil (excluding bunkers). (f) Gas oil (i. e., a -wide variety of fuel aiid : other heavy oils, excluding bunkers). (g) Automotive gas oil 51 (i. e., gas oil grades used as motor fuel). (h) Asphalt (i. e., asphaltum oil, black oils, fluxes, residual oils, and all other petroleum products used as road-building materials). The Swedish cartel arrangements did not include bunkers 12 or specialty items such as petrolatum, paraffin waxes, candles, and so on. Insofar as these local arrangements are concerned, there were no provisions reported by the Oil Investigating Committee relating to lubricating oils.53 The total volume of petroleum products consumed in the internal or domestic market in Sweden, therefore, included all the "controlled products," lubricating oils, and specialty items. In 1936, the last year for which market statistics were compiled in the Deliveries Into Con- sumption, the total deliveries of "controlled products" and of lubri- cating oils'tiwere 832,231 metric tons. As to specialty items, while con- sumption statistics are not available, net imports in 1936 were about 6,500 metric tons,' Assuming that these imports were equivalent to consumption, total consumption of petroleum products in Sweden for domestic purposes was about 838,750 metric tons in 1936.5) Thus, the proportions of total domestic consumption were : for "controlled products," about 93 percent; for lubricating oils, about 6.5 percent; and for specialty items, less than 1 percent. ao See p. 256. bz Automotive gas oil was segregated in a separate category, effective January 1, 1936, in accordance with a directive in the Draft Memorandum of Principles. (See p. 260 and foot- note 42, p. 261.) 53 Blinkers include all oils put aboard ships for fuel and oer purposes, except for those consumed In internal commerce by tugs, fishing boats, andpotwher coastal vessels, which are included above. (See p. 580.) 59 In a survey of the Swedish petroleum market. for the calendar year 1939, II. Carlson, American vice consul in Stockholm, stated the following : As regards lubricating oils, there is another organization called * * * (The Association of Swedish Importers of Lubricating Oils). This association controls the prices of lubricating oils sold in Sweden and consists of the above large oil importers and several wholesalers, who import them- selves and also buy from the large importers" (International Petroleum Trade September 30, 1940, p. 358). The "large importers" referred to include the six principai companies operating In Sweden at that time. (See P. 694, footnote 1.) The document Deliveries Into Consumption-Europe includes detailed marketing statistics for lubricating oils for Sweden, and for nearly all European countries, compiled for the "base year" for lubricating oils described in the Memorandum for European Markets ; 1. e., the 12 months ending June 30, 1929, and for each calendar year from 1929 through 1936. For efforts- to develop marketing arrangements for lubricating oils on the international level, see above, pp. 2:30 and 242. - "Intern ational Petroleum Trade, op. cit. March 28, 1988, pp. 58-60. u8 Estimated total consumption of petroleum products in Sweden, including bunkers but excluding military consumption, was 7,480.000 barrels in 1936, according to the Oil Weekly, January 31, 1938, p. 22. If the above figure is converted from nretrie tons to barrels (using the standard average converting factors given in International Petroleum Trade, February 25, 1938, p. 28), the following results appear : Of this total consumption about 83 percent was in "controlled products," about 5 percent in lubricating oils, about 0.6 percent in specialty items, and less than 12 percent in bunkers... - Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 200 THE INTERNATIONAL PETROLEUM CARTEL . All important products, except lubricating oils, were subject to the cartel arrangements described earlier in this chapter. Lubricating oils, accounting for a small part of the total market, were not subject to these cartel arrangements but may have been subject to other con- trols. No information is available for specialty items, which formed a negligible fraction of the total market. Bunker oils w,re not subject to these arrangements governing the internal market, ut these oils, because of the nature of their market, were peculiarly the province of the major international oil companies. During the decade of the 1930's, Sweden ranked about eighteenth in size among the principal petroleum-consuming nation of the world. Sweden's total annual consumption 56 of petroleum pr ducts during this period was less than 0.5 percent of total world con umption, and from 0.7 to 0.8 percent of United States consumption. Swedish con- sumption was roughly equivalent in volume to that of Holland, about one-tenth that of the United Kingdom, about one-sixth t iat of France, and about one-fifth that of Canada or Germany. While Swedish con- sumption in 1947 and 1948 was 2 to 21/2 times as great as that of a decade earlier, its relative importance had only increased slightly.,'", During the 1930's, Sweden was wholly dependent upon foreign sources for its petroleum. During this period, nearly 95 percent of Sweden's petroleum imports were refined products, part cularly motor fuel and gas and fuel oils,58 the other 5 percent of impor s being crude oil to be refined by the Nynas Petroleum Co. While a all domestic shale-oil industry was developed during World War II its maximum contribution in 1945 was but a fraction of 1 percent of Swedish sup- ply 5e The expansion in 1938-40 of Nynas' Nynasha refinery in- creased domestic refining with the result that about 12.5 percent of the Swedish market was supplied by local refineries- in 1947.G0 Prac- tically all of the crude oil imported in 1947 was from c entries whose petroleum economies were controlled by the large international oil companies.61 Cartel operations: An analysis of the cartel arrangements in Sweden reveals that the matters that were mutually agreed upon fall within two categories. In one, are the stipulations, joined in by all six important participants in the Swedish oil market, which fixed prices, regulated selling conditions, and classified custo ers. Stand- ard (New Jersey), Shell, BP, and Texas cooperated in these matters from the spring of 1931, and were soon joined, more or less formally, by Nynas and Nafta. These arrangements were rest ted in broad and elaborate documents in 1936. The international "as is" principles contemplated a much more tightly knit structure, however, including the fixing of quotas, the ae Including bunker deliveries, but excluding military consumption. sv Consumption In 1947 was 23,491,000 barrels ; i. e., about 64,370 ba rels daily (Inter national Petroleum Trade, January 31, 1950, p. 22). Compared with the data given in table VI, p. 19, this is about 0.7 percent of world demand, excluding the U S. S. R., however, and about 1.1 percent of United States demand in that year. es International Petroleum Trade, op cit., March 28, 1938, pp. 58-59. 59 (Ibid., February 28, 1949.) Peak production of refined products f om shale oil was 583,000 barrels in 1945, but production in subsequent years fell off sharply. ? In 1947 Swedish consumption of petroleum products was about 23. million barrels total imports (excluding crude oil) was 19.7 million barrels ;production f refined products from shale oil was 0.4 million barrels; and from crude oil, about 3 mil on barrels (ibid., October 31. 1949, pp. 204, 209). In 1947 imports of crude oil, totaling about 3,334,000 barrels, were ivided by country of origin as follows : Venezuela, 66 percent ; Colombia, 9 percent ; Saud Arabia, 22.5 per- cent ; and Mexico, 2.5 percent. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 291 division of the market, so that the relative position of the parties would be undisturbed, and adjustment of over= and under-trading. It is not clear from the report of the Oil Investigating Committee how closely the terms of some of the various Swedish agreements approxi- mated these "as is" principles; e. g., the often-repeated stipulation that the parties would "respect" one another's customers. Neverthe- less, the "as is" group-Standard (New Jersey), Shell, and BP- applied these principles from the start for all controlled products,62 and were joined by some of the other concerns with respect to asphalt in 1932 and 1935, and with respect to benzine, water-white kerosene, motor kerosene, and possibly other products in 1937. The principal administrative device for administering the cartel arrangements was the weekly meeting of the principal ofTlcers of the cartel members. In these meetings, negotiations were regularly con- ducted upon questions of interpretation of the various agreements and understandings and for the settlement of issues in current problems arising in the course of business operations. In short, these meetings were the principal means of continuous and full cooperation among the cartel members, and, in fact, were compared by the oil investi- gating committee to a "permanently functioning board of coopera- tion." The meetings were usually held in Shell's offices, and Shell acted as the executive organ for the group. Minutes were kept of all meetings recording the discussions and decisions that were made. The committee reports that, in 1937, 55 meetings were held at which 897 subjects were discussed; in 1938, 49 meetings were held at which 656 subjects were discussed; and, in 1939, 51 meetings were held at which 776 subjects were discussed 6' The memorandum for European markets and the Draft Memo- randum of Principles both provided that the local representatives of the "as is" companies would each submit at their regular group meetings duly audited and certified lists of deliveries made by the marketing subsidiaries, together with estmates of the sales of out- siders.64 That this was done during the period 1928-36, is demon- strated by the data from which charts 21 and 22 were prepared.", Similar provisions to these were incorporated in the Swedish "as is" agreement of October 15, 1937, and the companies informed the oil investigating committee that they did, in fact, exchange such statistics through a common agency set up for that purpose. This practice was resumed after the end of World War II. The Swedish cartel arrangements provided that the cartel members Although Texas participated in all agreements up to 1939, it is not made clear at any place that it participated in the quotas and other distinctive "as is" arrangements prior to 1937. ' These figures refer to "principal" meetings only, 1. e., meetings of the managing directors of the companies. The memorandum for European markets prescribed such meetings fortnightly, and the Draft Memorandum of Principles, monthly. In addition to the "principal" meetings, there were an undetermined number of meetings of district representatives of the companies, and of meetings regarding special products, e. g., black oils. The committee contended that the regularity and frequency of these meetings and the great number of subjects discussed, all dealing with cartel and related matters, established the fact of close "cooperation" or "association" among the companies. The committee concluded that it was "not possible to attach any importance" to the contrary position of the companies. ? The exact language in the Draft Memorandum of Principles (art. VI) was that there should be presented "a complete list of the participants' invoiced deliveries for each product." It is not clear from this language exactly what information was to be submitted, but the use of the word "invoiced" would suggest that something more than mere totals of quantities sold were meant, that is, that the information desired may have included names of customers, prices, and selling conditions. 66 Charts 21 and 22 are at pp. 300 and 302. (See also tables 15 and 16, pp. 301-303.) Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R1I000700 1 3000 1-2 292 THE, INTERNATIONAL. PETROLEUM CARTEIJ were. to agree upon and apply uniform prices and sa es conditions in all cases except where uniform rebates or other deviations from the "official prices and terms" were allowed for special cate ories of cus- tomers. The oil investigating committee reports that th re were com- paratively few negotiations over the basic price system in the period after the agreements of 1936 and 1937 were concluded, since price levels for petroleum products were generally stable during this period.66 However, negotiations on prices and terms for special cus- tomers occurred repeatedly during the "principal" meetings of the companies. Nevertheless the minutes of "principal" meetings an other docu- ments available to the committee made it apparent that the general changes in. prices that did occur in the later 1930's were the result of decisions made by the oil companies. One example of such a decision is that made at a meeting on July 7, 1937, which increa ed prices of illuminating kerosene, power kerosene, and automative as oil. The minutes of this meeting record not only this decision t raise prices by fixed amounts in the different localities, but also a ecision that each company should send its sales organizations a pr scribed tele- gram at 4 p. in. of the day of the meeting announcing t e new prices which were to go into effect the following day 67 A second case of a decision to raise prices is that made in meetings on Octob r 15 and 19, 1937, when it was decided to increase benzine prices. Assurances were received from the IC 68 that it would try to induce its member associations to adhere to the new prices, and from Sve ska Foil, an independent marketer, that it would apply a corresponding increase in price. A third example of decisions by the compani s fixing the general level of prices and selling conditions, in the opinion of the committee, was the draft agreement for January 1, 1947. There were two often repeated provisions in the international and the Swedish documents relating to the protection and urrender of customers. One was the recurring stipulation that- without wanting; to encroach in any way on the customer's choi e of supplier, they (the companies) would respect each other's customers.69 Similarly, the closely related -provision appears freou ntlv in the aocuments that, notwithstanding the general rule protecting the established division of customers, adjustments of over- and under- trading were to be made whenever possible by transferri g customers from one participant to the other. As in the general agreement, "large contracts" were viewed as a. specially suitable kind of busi- ness for these adjustments. The oil investigating committee found that discussions of the pro- tection or surrender of customers appeared usually in the minutes in connection with the negotiations over special customers prices and terms and in negotiations over purchases by state and m nicipal in- stitutions. 60 The committee ventured no opinion as to the causes of this price st bility during a period when the companies insisted that there was "violent war" in the market. 67 Part of this prescribed telegram read as follows : "All distribution fr m stock today of products mentioned must cease at 5 p. in. No deliveries may be made a old price after time mentioned. Shortages of empties not accepted as reason for after-deliveries. Branch and depot offices and agents shall confirm direct to head office that no products have left the stocks at old price after time fixed. The company orders that the above instructions be strictly followed. Deviations involve serious consequences to those concerned." 08 An association of automobile owners' purchasing associations. 89 Italics added. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 293 The committee reports a number of typical cases showing the tone and direction of the negotiations over special customers' terms. In the minutes of a meeting on January 31, 1936, for example, it was decided that prices charged the Stockholm tramways for benzine and bentyl were far too low and should be raised by the tramway supplier, Gulf. In order to protect. Gulf against the loss of this large customer and thus make possible the increase in price, it was agreed that the other oil companies, if invited to make offers, would quote the tramways a higher price than that which Gulf was to charge under this decision. Similarly, it was agreed on January 7, 1937, that Shell, which supplied the tramways with gas oil, should, upon the expiration of the current contract, quote a price 20 percent higher than before. The other con- ditions of sale were also fixed by agreement of the parties. Standard, Texaco, and BP declared their willingness to protect this price quoted by Shell in such a way that, in the event of. the tramways applying to them with an inquiry, they would quote a higher price, varying for the, parties concerned.89' Gulf 7? "promised not to disturb the customer in question" and agreed to quote a. higher price, also, but pointed out that it had previously promised the tramways that it would meet the prices for gas oil that were offered by "any of the other oil enterprises operating in this country." If pressed by the tramways, Gulf promised to "get into contact with Mr. Gustafson, Shell, and settle the question of price in consultation with him."' A number of provisions in the various documents regulate business. with state and municipal institutions. The Draft Memorandum of' Principles, for example, declared that quotations for government busi- ness should only be made after the companies had fully consulted in advance, but that no party should be restricted from quoting for such business if necessary for political or other important considerations. In a supplement to the Swedish "price system" agreement of January 31, 1936, it was agreed that no other rebates than those usually applied. to the general public would be granted for purchases by state institu- tions which bought privately, such as regiments, hospitals, and the pilotage service. In the Swedish "as is" agreement of October 15,. 1937, it was decided that new offers for all transactions with state and. municipal institutions should contain uniform prices and selling con- ditions. It was decided, further, at a meeting on January 12,1937, that offers to such institutions should not be submitted by retailers but by the "companies' own organizations," i. e., the companies should handle' such business directly from their head sales offices to insure that the terms of the agreements were fully applied. Negotiations were regularly had with regard to tenders for business to state institutions, municipalities, and semi-state-managed institu- tions, and with regard to the possible transfer of these major con- sumers in adjustment of over-and-under trading.72 The interest of TU Actually Gulf's affiliate Alfred Olsen & Co. T1 All quoted statements are from the minutes of the meeting. The minutes of the meet- ings indicate that these questions were settled only after long negotiations during which the reluctance of some parties to give up an opportunity to acquire these customers was overcome Similar decisions were made with regard to pooling and dividing up the business in other- markets, the manipulation of prices, fictitious quotations of prices, etc., being agreed upon as devices to steer the customers to their assigned sunplicrs. Thus, Texas was to have the deliveries to the Gothenburg Association of Taxi-Owners, while . other business in the Gothenburg area was to he steered to the other oil companies. 92 Statement of the managing director of the Swedish Shell Co. In the translated copy of the Report of the Oil Investigating Committee, the numerous examples of the allocation of municipal customers were omitted. 23541-52--20 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 294 THE INTERNATIONAL PETROLEUM CARTEL the parent companies in this matter is reflected in a letter written by one of the subsidiary companies to its parent company office in London reciting difficulties that had arisen in the allocation of some state business. The letter, as summarized by the Oil Investigating Com- mittee," reported that the subsidiary company, which was an under- trader, was anxious to adjust its trade figures, in accordance with the usual practice, by the reallocation in its favor of the benzine business of the state railways. Another company, an overtrader, was reluctant to do this-this company was always "anxious" to get its full "share of each business that cropped up"-chiefly because it feared that another large consumer would not renew its contract at the expiration date. Since the recalcitrant party would not yield to persuasion, the parent company was asked to see if it could do anything in this matter, presumably in the principal offices of the oil companies in London. The Oil Investigating Committee reported that the Swedish con- sumers' associations had generally attempted to safeguard the.interests of their members but "had not been able to influence conditions on the market to any extent worth mentioning." 74 Nevertheless, they had an irritating effect upon the cooperative efforts of the oil companies, particularly with regard to prices. The companies seem to have been able to keep matters under control, however, chiefly through their control over supplies.75 The relations of the oil companies with the IC organization," the most important cooperative in the petroleum market, are instructive. In a draft memorandum written on May 5, 1937, Standard (New Jer- sey), Shell, Texas, and BP reached a tentative agreement with the IC and its member associations.?? IC's practice had been to import petroleum products,78 but, since its supplies from importation were in- sufficient to meet its needs, it had been required to purchase supplies from the oil companies on what IC generally regarded as unsatis- factory terms. It was contemplated in the memorandum that IC would buy its total requirements from the four companies,70 except for supplies already contracted for from Nynas and other small importers; that IC would sell only to its member organizations and would not increase the number of its member organizations; and that it would furnish trade statistics to the companies and apply the same prices and selling conditions as the companies. On the companies' part, they would not try to sell to IC's member organizations except to those which were already customers. Subsequent events showed that IC did, in fact, generally comply with the .stipulations regarding prices and selling conditions. The minutes of a group meeting on June 9, 1937, show that IC and the oil company representatives "unreservedly" agreed to join in the above Ill Thecommittee was not allowed to quote directly from this letter dated May 8, 1938. See above, p. 386, footnote 41. ,, Ch. II of the report of the committee. 75 The remarks made below, p. 297, concerning the difference between the "supply" position and the marketing or distribution" position of the companies are particularly relevant here. 76 The IC was an association of automobile owners' purchasing organizations including owners of commercial vehicles. 77 This agreement was neither signed nor dated, and as much as a month later the com- panics thought that everything was definitely settled. The IC told the investigating com- mittee that they had not found it possible to accept the terms of this agreement. 78The IC purchased from Naftauntil that company began its cooperation with oil com- panies in 1932. Thereafter, the IC attempted to import its requirements but was not successful in finding adequate supplies. re Prices were to be fixed on United States Gulf quotations plus freight and other charges. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 295 aggreement, which was to become operative at a time to be agreed upon. IC's representatives agreed to attempt to eliminate price cutting on the part of its member organizations, and questions regarding the protection or transfer of certain customers of IC and the companies were settled. IC also promised to purchase equivalent quantities of benzene from the companies should some customers refuse to be trans- ferred. On July 1, 1937, IC agreed to prevent a member organization from expanding into a territory where Shell had eliminated rebates to a's cooperative8" Finally, IC agreed to cause its member organizations to apply the general increase in prices voted by the oil .companies effective on November 1, 1937 81 . The oil companies similarly brought pressures to bear upon other consumers organizations, such as associations of property holders, the National Association of Swedish. Farmers, and the several fishery as- sociations. The tactics used 'included lessening the amount of or eliminating discounts, rebates, bonuses, commissions, and the like, refusal to make additional deliveries to associations which increased their membership or to enter into contracts with new associations, and so on. In short, it was agreed that every measure should be taken to avoid "the risk of such organizations growing too strong, whereby difficulties may be caused to the companies." To this end it was; agreed, on June 10, 1938, that- no negotiation, either directly or indirectly, must take place with buying organi- zations, associations of property holders, or similar associations without the matter having been discussed in advance with the other participants. Aside from the six principal oil companies and the various con- sumer cooperatives, the only independent competitors in Sweden were a few small importer-marketers82 The Investigating Committee re- marked that the oil companies brought concerted pressure to bear on these enterprises to insure their adherence to the established price pol- icies. Minutes dated June 11, 1937, for example, record a case where a retail outlet of one of these independent competitors cut prices. The managing director of BP acted for the group in undertaking- to impress effectively on the supplier (i. e., the independent enterprise) * * * that the benzene prices fixed for the place in question shall be observed. The principal goals of the Swedish agreements, according to the oil companies, were to eliminate market developments which, from their point of view, were highly unfavorable. The agreements were lib- erally peppered with statements of the desirability of clearing up the existing "price chaos" or "unsound rebate conditions," or of achieving "a better order in respect of selling price." The purpose of the Swedish "as is" agreement of October 15, 1937, was stated as follows : to arrive at and maintain a stable and normal price level in the Swedish market, and, through better cooperation make it possible for the companies to run their business as economically as possible.' * * * The oil companies also insisted that the ,various agreements and 80 Bjasta, the place where this cooperative was located, was referred to in the minutes of the meeting of April 7, 1937, as an "infected place," and it was proposed that the com- panies eliminate their selling points there. 11 IC also agreed to cause its member associations to eliminate "exceptional prices where such had been granted" as well as apply the price increase. 11 The number of these concerns apparently varied from time to time. In 1939, it is reported, there were only two of these Independents in Sweden. International Petroleum 'Trade, September 30, 1940, p. 358. 81 italics added. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 296 other documents represented a cooperative spirit among the oil com- panies that was more apparent than real, since it was contended that. the company representatives had not adhered to the decisions they had themselves made. The Oil Investigating Committee concluded that "it is indisputable that the development of price on this market has not been the result of free competition between the various enterprises." 83 This remark of the committee w:, s, in effect, a summary of their reply to the two arguments advanced by the companies. On the one hand, the coin- mittee stated that, since they were able to determine costs, pricer, and profits of the oil trade only for the domestic trade in Sweden, as, they did not have access to the accounts of the parent corporations covering the operations of exploration, production, refining, and transportation, they were unable to determine as a matter of fact, .whether or not the prices in Sweden had been reasonable and the oil trade in Sweden remunerative s1 In the opinion of one expert, a former official of Texas Co. in Sweden, "the agreements were most dangerous to the State, since when making purchases, the State ac- cepted the lowest price offered, even when this happened to be higher than that paid by certain other consumers." The committee also found a letter from a subsidiary concern to its parent, written in April 1939, stating that benzene prices were unduly high in the cur- rent market, but that they would not be reduced because two of the- companies wanted to recover during the year their investments in new plant facilities. The committee, in short, was skeptical of the argu- ment that cooperation was begun and maintained because of ruinous; inarketing conditions, and replied simply that _there was no "free com- petition" in the market. The committee's view seems to have been,, rather, that cooperation in Sweden was largely due to the international "as is" agreements. As to the second argument, the committee agreed that there was undoubtedly a gap between the letter of the agreements and their, application, since a complete application would not have been pos sible in any event. The committee's view was that it was not neces- sary to explore the question of the extent to which the agreements. were applied, since those who made the agreements presumably in- tended to abide by them.85 The managing director of Shell told the committee that "tide documents have been prototypes of how the com- panies wanted things to be," i. e., the companies wanted a strict regu- lation of the market in accordance with the terms of the agreements. On another occasion he remarked that, assuming that the oil trade, programs were prepared on a basis of 100-percent cooperation, the companies had had to be content if 50- or 60-percent cooperation were, actually attained. 83 italics added. sa Chapters IX, X, and XI of the Swedish Report. See also footnote 21, on p. 281,. 85 See below, p. 308, footnote 28. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL. 297 Quota arrangements.-The quota arrangements outlined by the in- ternational "as is" agreements were adopted and applied in the Swedish market by the "as is" group of companies and were included in modi- fied form in the five-party Swedish "as is" agreement on October 15, 1937. The Memorandum for European Markets established, and the Draft Memorandum of Principles continued, a system of "distribution" or "total consumption" quotas8e These were designed to protect the -division of markets among the participants that had actually existed during the base year. Each participant was recognized as being "en- titled" to his established quota or proportion of the total market for each petroleum product, and the parties mutually agreed to "respect" these quotas. Over- and under-trading among the parties was to be "adjusted" by a system of fines and compensation. Gains and losses in the market attributable to "outsiders" were to insure to the sole benefit or injury of the participant making the gain or suffering the loss. The "distribution quotas" should be carefully distinguished from the total "supply position" of the "as is" participants in each country. The international agreements set forth detailed principles designed to safeguard the relative "supply position" of each participant in ,each national market,"' that is, the position of the international oil companies as suppliers not only of their own marketing subsidiaries and outlets in each country but also as suppliers of "outside" marketers. The "distribution quotas," on the other hand, were managed at the level of the local markets and controlled the activities of the domestic marketing subsidiaries of the "as is" group and their marketing out- lets. The distribution quotas that were fixed from time to time in Sweden are reproduced, for the more important products, in table 14.88 The basic quotas, as shown in the first column of table 14, represent the percentages of each product market actually held by each "as is" participant during the "base year" or "qualifying period," 1928. Under the agreement, they were the share of the product markets to which each of the parties was entitled. Except for asphalt, these -quotas remained in effect until January 1, 1936, but in fact part of the "basic quotas" failed to represent actual marketing conditions. after 1930, as will be explained below. 86 Sec discussion above, p. 230 If. 8T See discussion above, p. 250. 98 Distribution quotas for white spirit, gas oil, and automotive gas- oil are omitted. The ,quota for automotive gas oil, effective January 1, 1936, was identical to that for benzine in accordance with addendum VI of the Draft Memorandum of Principles. See p. 261, footnote 42. Data in table 14 and discussion in the text relating to quotas prior to 1937 are based on Standard (N. S.) documents, Deliveries Into Consumption-Europe. Data and discussion relating to the quotas for October 1, 1937, are based on chapter XII of the Swedish Report. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE 14.-Distribution quotas under Swedish "as is" arrangements [Expressed in percentages] BENEZINE QUOTAS Basi c quota, 1028 Standard (New Jersey) ------------------------------------- -- 37.03 28.06 28.06 Shell----- -------------------------------------------- -------- 1 42.94 32.63 32.53. AIO C (BP)----------------------`------------ --------- 3.94 8.43 8.43 Texas--------------------------------------------------------- ----- --------- --- ----------- 12.92 Gulf---------------------------------------------------------- ----- --------- 12.09 Total quotas-------------------------------------------- 81.91 69.02 94.03 Outsiders----------------------------------------------------- 18.09 30.98 5.97 Standard (New Jersey)---------------------------------------- 61.14 51.03 51.03 Shell--------------------?-----------------------------------? 30.62 25. 57 25.57 AIO C (BP) -------------------------------------------------- .70 4.80 4.80' Texas --------------------------------------------------------- ----- --------- --- ----------- 9.36 Gulf ---------------------------------------------------------- 7.29 Total quotas --------------------------- ----------------- 92.46 81.40 98.05 Outsiders------------------------------------------------,---- 7.54 18.60 1.96 Total market------------------------------------------- 100.00 MOTOR KEROSENE QUOTAS Standard (New Jersey) --------------------------------------- 36.41 28.21 28.21 Shell --- ---?-------------------------------------------------- 39.63 30. 61 30.61 AIOC (BP)--------------------------------------------------- .44 7.60 7.50 Texas--------------------------------------------- ----------- ----- --------- --- ----------- 11.32 Gulf---------------------------------- ----------------------- ----- --------- 15.28 Total quotas-------------------------------------------- 76.38 66.32 92. 92 Outsiders----------------------------------------------------- 23.62 33.68 7.08 Standard (New Jersey) --------------------------------------- 47.42 38.14 -------------- Shell --------------------------`------------------------------ 62.58 42. 20 ------------- AIOC (BP) -------------------------------------------------- ------ -------- 6.52 -------------- Total quotas-------------------------------------------- 86.95 Outsiders----------------------------------------------------- 13.05 Total market------------------------------------------- Basic Effective- quota, 1928 Jan. 1, Aug. 1, Jan. 1, 1932 1932 1935 Standard----------------------------------------------- 56.62 67. 51 56.32 32.74 Shell--------------------------------------------------- 33.65 32.76 32.08 18.66 Texas-------------------------------------------------- ------------ ------------ 2.96 2.90 Nynas----------------------------------------------- ------------ 37.00 Total quotas-------------- ---------------------- 90.27 90.27 91.36 91.36 Outsiders---------------------------------------------- 9.73 9.73 8.64 8.64 Total market------------------------------------ 100.00 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 299 The great changes in the Swedish market between 1928 and 1936 were given recognition in revised distribution quotas, effective Janu- ary 1, 1936. Among the most important of these changes was the position acquired in each product market by outsiders"-Texas, Nynas, Nafta,. and others-and guaranteed already in large measure by the agreements of the oil companies to "respect" one another's customers. These de facto positions were recorded, in effect, along with "special quotas" for BP, when Shell and Standard substantially reduced their quotas for each product, except asphalt, for which quota adjustments had already been made. In other words, to accommodate the "outsiders," Standard and Shell .agreed that they were "entitled" to substantially smaller portions of the market. As an examination of table 14 will show, the quotas of Standard and Shell were simply reduced in ratio to the size of their "basic quotas" rather than accord- ing to any formula in the various international or local agreements. Insight into the process of revision of quotas is afforded in the case of the greatly increased quotas granted to Anglo-Iranian (AIOC), or BP. The increase in AIOC's benzine quota was explained by a Standard (New Jersey) official in these words : Compensation is given by AIOC to SOC (New Jersey) and Shell for the difference between this special "local quota" and AIOC's "as is" quota of 1.64 percent; such compensation takes the form of a reduction of SOC of New Jersey's and Shell's obligation to lift gasoline from AIOC under the ben-zinc agreement." In short, the local quotas in the case of benzene, and probably in the case of the increases granted AIOC in all other product markets except asphalt, were fixed on the basis of other internal arrangements of the as is" group made on the international level. Further insight into the quota mechanism is provided by the quota schedules for asphalt, which show the earliest known cases in Sweden of the admission.of "outsiders" to the distinctive "as is" arrangements. The first revision of the basic quotas, effective January 1, 1932, records the acquisition of an outsider by Standard (New Jersey) s? This re vision reflects the readjusted relative positions of Standard and Shell, however, rather than the facts of greatly changed positions in the market.0' Effective August 1, 1932, the distribution quotas were again revised to show the entry of Texas into "as is" and, effective January 1, 1935, a further revision was made upon Nynas' adherence to "as is" principles. The quotas assigned to Texas and Nynas both reflect the share of the asphalt market each held in the calendar year prior to their admission to the quota-arrangements; 2 and the four parties now 8' Italic added. Memorandum on European and North African Benzene Distribution Quotas, dated January 10, 1936, and initialed J. II. It. No explanation is given of the term "Benzine Agreement." 01 Standard (New Jersey) purchased all foreign interests of Standard Oil Co. of Indiana in 1932. The purchase included a German firm, Ebano, which marketed asphalt and other petroleum products in a number of European countries. 01 See table 15 for the actual position of the parties in 1931. Ebano's share of the asphalt market in 1931 was 2.39 percent. 02 The revisions in the quota arrangements to account for Texas' quota of 2.96 percent, the actual share it had of the 1931 market, were made as follows : Texas' share of the market in 1928, the "qualifying period," was 1.09 percent ; the share of the total market belonging to "outsiders" was accordingly reduced by this quantity. The balance of 1.87 percent was taken from the quotas of Standard and Shell in proportion to the relative size cof their quotas, I. e., Standard's quota was reduced by 1.19 percent and Shell's quota by 0.68 percent. Nynas, on the other-hand, was not in the asphalt or, for that matter, any other market in 1928. Its actual share of the market in 1934 was 37.05 percent. Its quota of 37 percent was made by reducing Standard's and Shell's quotas in proportion to their rela- tive size; 1. e., Standard's quota was reduced by 23.58 percent and Shell's by 13.42 percent. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 300 THE INTERNATIONAL PETROLEUM CARTEL "recognized" their respective "right" to the shares of the market signi- fied by their quotas. The Oil Investigating Committee reports that distribution quota arrangements were entered into by the five parties to the agreement of October 15, 1937. These quotas were effective as of October 1, 1937, and are shown in table 14 for benzene, water white kerosene, and-motor kerosene,93 The quotas to which the members of the "as is" group- Standard (New Jersey), Shell, and BP-tivere "entitled" remained unchanged from the revision effective on January 1, 1936. The quotas to which Texas became "entitled" were generally somewhat higher than actual performance in earlier years, while those for Gulf were somewhat lower than the actual performance of Nafta, the predecessor organization which Gulf had purchased in the spring of 1937.- As these pages indicate, therefore, the effect of the revisions of 1936 and 1937 was substantially to substitute 1935 for 1928 as a "base year" or "qualifying period." The 1937 agreement also provided that the companies were "entitled" to change their distribution quotas for the different products provided that their "fixed total distribution quotas" were not exceeded ; 1. e., the total quantity of products sold did not exceed the total quantity al- lowable under the distribution quotas for the different products.95 The Oil Investigating Committee was not able to supply full in- formation on the administration of provisions regulating adjust- ments for over and undertrading under the quota arrangements. It states that there were such adjustments in 1935, and 1936, and "prob- ably also for 1934." It does not state how these adjustments, were arrived at nor the amounts of the fines paid and compensation re- ceived by the parties. The agreement of 1937 included provisions for the adjustment of over and undertrading among the five parties, which generally ac- corded with those principles set forth in the Draft Memorandum of Principles." The oil companies stated that they could not trace any adjustment made in the period after January 1, 1937, nor could the committee establish whether such adjustments had been made through the parent companies. The committee had fragmentary evidence that such adjustments had been made,97 and that fines were paid in connection with the adjustments. oa The Oil Committee reports quotas only for these products, but does not indicate whether or not five-party quotas were agreed upon for Diesel oil, gas oil, automotive gas oil, or white spirit. The asphalt quotas of 1935 already covered all important Swedish oil companies. 94 This probably reflects the fact that Texas held substantial shares of these markets in ]928, while Nafta was not in business during this qualifying period. See table 15. Texas' benzine quota is identical to its performance in 1935. 9u This nroba.bly represented concessions to Texas and Gulf arrived at during the negotia- tions on the agreement. 0, See above, pp. 257-258. According to the committee, the Swedish "as is" agreement provided that these adjustments were to bq made at 6-month intervals in accordance with the following procedure : (a) Trade losses attributable to outsiders were to be excluded from the distribution quotas. as such losses were "entirely for the account of the losing participant." Trade gains, however, were to be regarded as a joint gain to be shared among the parties in proportion to the distribution quotas. (b) The roriolting modified quotas were to be the basis upon which adjustments of over and undertrading among the parties were to be calculated. The adjustments were to he made by an assignment of busi- ness from the overtrader to the undertrader. If this could not be done or proved to be only a partial adjustment, the undertrader could supply the overtrader "a quantity of the same product amounting to his overtrading therein or the undertrading of the under- trader, whichever was the less." The method of fixing the price in such a sale was not stated in the report. (c) The report does not state whether the agreement provided for a system of additional fines and compensation or for revision of the distribution quotas as provided in the Draft Memorandum of Principles. 91 The report originally contained "a schedule of adjustments known to us," but un- fortunately this was omitted in the translated document. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CHAT DELIVERIES INTO CONSUMPTION OF PETROLEUM F . "As is" group BENZINE . 3.54% 1.29% 26.70% ? 16.90% 32.24% 12.75% 69.76% 1 66.47% 70.35% 81,91% GAS OIL ?'19.0% ; - 42119%? 1 53% ?14.98%~ 7.36% 9.23% 72.30% 68.18% 76.79% 92.64% DIES WATER WHO ? 3.66' 6.43% 7,64% 89.91% 92.46% Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 DUCTS IN SWEDEN IN 1928,1931,1934 and 1936 MOTOR KEROSINE 1.35% 29.9 0.05% 33.11% I ? ~.,,. .'18.04%.? 23.62% 89,86% 13.23% . , , 86.84% 68.73% 76.98% IL ASPHALT ? ?14.18%. 1936 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 301 Trading results, 1928-36, The actual "trading results" achieved by the adherents to the cartel arrangements were recorded for the 9-year period, 1928-36, in the documents known as the "Deliveries into Consumption-Europe. "' 98 Charts 21 and 22 and tables 15 and 16 present data for all products 99 for 1928, the "base year"; 1931, the year in which the Swedish cartel began to operate; 19334; and the last year shown in the documents, 1936. .These tables, therefore, cover the most troublesome years in the Swedish petroleum trade, the years of the depression and of the invasion of the market by Nynas, a Swedish refiner-importer-r-marketer; by Nafta, a Russian &overn- ment monopoly; and by Gulf. In charts 21 and 22, two cartel divisions are shown, one marked e" `as is' group," and the other "total cartel." The "as is" group- Standard (New Jersey), Shell, and BP-is set off because of the dis- tinctive arrangements that existed between them as described earlier. Except in the asphalt market,1- no other companies adhered to these special "as. is" stipulations prior to 1937. Somewhat weaker cartel arrangements were adhered to during this prei.od by the "as is" group, together with Texas and Nynas. Nafta entered upon a period of "col- laboration" in the. matter of prices and selling conditions in late 1932 and was. a signatory to the "price system" of 1936.2 The term "total cartel," therefore, signifies the percentages of the product markets held by the five participants in 1931 and 1932, and the six participants after 1939- TABLE 15.-Deliveries into. consumption of petroleum products in Sweden in selected pears [In metric tons] Benzene: -------------------------------- Standard (New Jersey) - 77, 786 95, 976 98, 679 120,646 -- -- Shell 90, 193 111,087 120,145 146, 729 - AIOC (BP_) 4,087 20,138 24. 545 37,253 Total "as is" group ------------------------------- 172,066 227,201 243, 369 304, 628 ------ Texas ------------------------------- - 28,000 37, 240 46, 201 55,179 - --------------------- N nas -------------------------------- - 3, 936 5, 848 7,668 y - ----------------- Nafta------------------------------------------------------ 65,991 53, 722 Total cartel -------------------------------------------- 268, 377 361, 409 421,197 Nafta------------------------------------------------------ Sundry------------------------ --------- ----------- --------- 53, 500 1, 100 41-m- 15, 473 water white kerosene: ---------------------- ------- Standard (New Jersey) 28, 379 26, 704 23,005 23,075 - ------ Shell ----------------------------- ---- 14, 214 16, 477 15, 41.2 17,188 - ------------------------ ---- AIOC ------------------ 323 964 2,036 2, 942 Total "as is" group ------------------------------ 42, 916 44,145 40,543 44, 105 -------- Texas ------------------------------- 3,000 2, 911 3, 921 4, 683 ----------------------- N nas --------------------------------- 244 165 385 y -------------------- Nafta------------------------------------------------------ 5, 040 2,930 Total cartel -------------------------------------------- 47, 300 49, 669 52,103 - Nafta------------------------------------------------------ 1, 500 IN- -------477 Sundry---------------------------------------------------- 300 08 Standard (New Jersey) does not report any later statistics in their files in this country. i5 Separate data on white spirit are omitted here, as this product is of minor importance in the Swedish market, accounting for less than 1 percent of total tonnage traded in each year. i See above, p. 299. 2 See above, pp. 282 and 283. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE 15.-Deliveries into consumption of petroleum products in Sweden in Selected years-Continued [In metric tons] Motor kerosene: Standard (New Jersey) ------------------------------------- 7, 321 6,657 8,256 10,064 Shell-- ------------------------------------------------ 7,949 7, 698 11,315 13, 290 AIOC (kF) ------------------------------------------------ 89 1, 266 2,299 3,344 Total "as is" group------------------------ -- 15,359 15, 621 21,870 26,698 Texas----------------------------------------------------- 3,250 2, 273 3,437 4,287 Nynas------------------------------------------ 734 597 758 Nafta----------------------------------------------------- 6,804 6, 504 Total cartel ---------------------------------------------- 18, 628 32, 708 38,247 Nafta----------------------------------------------------- Sundry---------------------------------------------------- 3,500 600 15 -------524 22, 728 1 32, 723 Gas oil: Standard (New Jersey) ------------------------------------- 15,120 14,090 18,042 24,395 She]] ------------------------------------------------------- 23,122 22,250 29,249 33,710 AIOC (BP) ------------------------------------------------ 40 590 1,311 3,695 Total "as is" group ------------------------------------ 38,282 36,930 48, 602 61,800 Texas------------------------------------------------------ 785 2,220 6,078 6, 465 Nynas----------------------------------------- 2,278 1,424 1,817 Total cartel --------------------------------- 41,428 56,104 70,082 Nafta ------------------------------------------------------ 4,300 A. Olsen & Co. (Gulf)-------------------------------------- 3,000 14,577 14, 825 Sundry---------------------------------------------------- 2, 258 601 564 41, 325 48, 728 ! 71,282 I 85,471 Diesel oil: Standard (New Jersey) ------------------------------------- 8,473 9, 919 17,852 38,677 Shell ------------------------------------------------------ 9,395 17,475 31, 658 50,098 AIO C (BP)------------------------------------------------ 1,007 2,171 5,285 Total "as is" group ------------------------------------- 28,401 51,681 94,060 Nynas------------------------------ ------- 3,324 1, 279 1,279 Total cartel ------------------------------------- 31, 725 52, 960 95,339 Nafta---------------------------------------------------- 4, 700 A. Olsen & Co. (Gulf) -------------------------------------- 6,000 9, 525 11, 434 Asphalt: Standard (New Jersey) ------------------------------------ 8, 196 6, 766 4,148 6,546 Shell---------------------------------------- -- 4, 872 6, 379 3, 961 6, 482 Total "as is" group -------------------------------------- 13, 068 13,145 8, 109 13,028 Texas---------------------------------------------------- 158 799 521 1,816 Nynas----------------------- ---- 9, 233 11,128 18, 464 Nafta---------------------------------------------------- ---------- 1,913 3,332 Total cartel ---------------------------------------------- ---------- I 23,177 21, 671 36,640 Sinclair ---------------------------------------------------- ---------- ---------- 2,583 12, 030 Sundry and other marketers -____-------_----------------- 1, 251 3,829 5, 777 2,439 Total market_____________________________________________ 14,477 i 27,006 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 DELIVERIES INTO CONSUMPTION OF "CONTROLLED PRODUCTS 11J I N SWEDEN, 1928-1936 7.48% ^ "As Is" group Other cartel ???? 5.83% ? ? Outsiders + ? 21,90% ? 6.25% '????~? '24.63% ??? 4.45% ,26.15% ??? 21.15% ? ~ 18.1% ?~? ?? ?????? 30.32%, .;? ?~? 21.39% ? 25.19%, ? ?:? 69.54% ??~? 67.60% ?14.53%. 65.23% 88.00% 71.25% 78.81% 64.8t% 85.47% Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 -TABLE 16.-Deliveries into consumption of "controlled products," summary statistics' for Sweden in selected years )In metric tons) Company 1928 1931 1934 1936 Standard (New Jersey)______________________________________ 145,545 160,490 170,857 226,090 Shell----------------------_-_-----_-_-------_-_----__-----__ 150,399 182,645 213,400 270,505 AIOC 4,539 23,905 32,362 52,519 Total "as Is" group______________________________________ 300,485 367,100 410,619 549,114 'Texas ---------------------------------------------------------- 35,193 45,443 60,158 72,478 Nynas------------------------------------------------------ ---------- 19,749 20,441 30,371 Nafta_..------------ ?--------------------------------------- --- --------- ---------- 80,548 67,467 Total cartel ---------------------------------------- _------- __________ 432,292 577,766 719,430 Nafta------------------------------------------- ------------- ---------- 67,500 -- Olsen & Co. (Gulf)_________________________________________ __________ 9,000 24,102 26,259 Sinclair_____________ 2,583 12,030 Sundry________________________________________________________ 15,891 6,462 11,82i 19,864 Total market_____________________________________________ 351,767 516,254 616,275 777,583 Includes all products shown In table 15 and white spirit.. "Controlled Products" comprised the bulk ,of the Swedish domestic oil business. Gulf, through its affiliate, Alfred Olsen & Co.,3 held a share of the gas oil and Diesel oil markets during most of this period, but the Oil Investigating Committee does not report that it participated in any agreements prior to 1936.4 In 1937, Gulf purchased the business of Nafta which, together with its gas and Diesel-oil business, it con- solidated into the Swedish Gulf Oil Co 5 In this capacity, it entered into the agreement of October 15, 1937. Aside from the "other cartel" members who are included in charts :21 and 22 as "outsiders" prior to their entry into the cartel, the only -outsiders in the Swedish oil market were the Swedish cooperative so- cieties and a few small importer-marketer firms. These were referred to collectively in the "deliveries into consumption" as "sundry mar- keters" and typically held negligible fractions of most markets, except .asphalt." The Swedish cooperative societies occasionally imported petroleum products but usually bought their supplies from the oil companies, performing various wholesale and retail functions for their members. Although the cooperatives, as has been shown,7 posed a constant threat to the cartel arrangements, the oil companies were generally successful in controlling the situation. It appears from a cursory inspection of charts 21 and 22 that the "as is" group suffered considerable losses from its position in 1928. Actually nearly all of these percentage losses occurred during the period 1929-32, when Nynas, Nafta, and Gulf entered the markets. After the first cartel arrangements were made in 1931-32, the "as is" group slowly improved its position. The fact is that in 1936 the "as 8 The relations of Gulf and Alfred Olsen & Co. are described below, p. 334. 4 Gulf had begun collaboration with the cartel group as early as January 1936, and was a participant in the meetings of June and July 1936, see p. 283. Gulf is shown as an "outsider" in charts 21 and 22, but might well be ineluded as a cartel member for 1936. Its share of the various markets for 1936 includes gas oil, 17.34 percent; Diesel oil, 10.71 percent; and, for all "controlled" products, 3.38 percent. "Alfred Olsen & Co. has continued in business as Gulf's marketing subsidiary for lubri. eating oils and greases In the Scandinavian countries. U Sinclair was the only important outsider in this market. Besides the 'sundry" marketers, there were in the different years from 8 to 12 other small foreign and domestic concerns In this market. ' See above, p. 294. The independent marketers were of only local significance and were described by the Oil Investigating Committee as holding "negligible" proportions of the trade. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 is" group and the Texas Co 8 had little cause for dissatisfaction with developments after the troublesome years 1930-32. They were get- ting a smaller slice, percentagewise, out of a much bigger pie. Thus, the actual tonnage traded in the, benzene market by the group in 1936 was 77 percent larger than in 1928 although their percentage of the total benzene market had declined 12.2 percentage points." Similar results appear in all markets; in over-all terms, the group's share of the market for all "controlled products" declined nearly 15 percent while their tonnage increased about 82 percent." Moreover, their market in 1936 was assured and stable due to the cartel arrangements. Finally, with the substitution of Gulf for Nafta in 1937, the last doubtful and extraneous element in the markets was removed. The other cartel participants-Nynas, Nafta, and Nafta's successor,, Gulf-also had grounds for satisfaction with the course of events."' The positions won by these firms in the 1930-32 period were confirmed and protected by the cartel arrangements that developed after 1931. The degree of control of the Swedish petroleum markets acquired by the cartel participants is made apparent by an examination of charts 21 and 22. It should be noted that the cartel members and Gulf, which entered the cartel in 1937, accounted for from 95 to 100 percent of all petroleum product tonnage delivered in 1936 for con- sumption in each product market. As will be seen in chart 22, the cartel members made 92.52 percent of such deliveries, while Gulf made 3.38 percent.11 All other marketers accounted for only 4.1 These data represent only one measure of accomplishment in regu- lating the market. However, taken together with the control achieved over prices and selling terms, as well as over the activities of the small "outsiders," they suggest the attainment of a considerable degree of success. Attempts to obstruct and mislead the committee.-The international. oil companies were hostile to the investigation and report by the Oil Investigating Committee. Their answers to questions were often evasive and nonresponsive, and they made strong objections to the re The being made public. the first step by the committee was to summon the managing directors of the principal oil companies to a meetino on September 25, 1946, at which stenographic records were made. 'kepresentatives of the Swedish subsidiaries of Standard (New Jersey), Shell, Anglo Iranian (BP), Texas, Gulf, and Nynas (a Swedish concern) were present. The chairman of the committee first reviewed the attempts a These same considerations apply in the case of Texas as for the "as is" group, ? Texaa held about 10 percent of the trade in all controlled products in 1928 and about 8.82 percent in 1931 when it entered the cartel; thereafter its percentage position Improved slowly. Its total volume in 1936 was slightly more than double that of 1928. ? See tables 15 and 16. 10 Nynas began operations in 1929 and held between 3 and 4 percent of the trade in controlled products from 1931 to 1936. Nafta, which was founded in 1928, rapidly in- creased its share of the business, accounting for 13.10 percent in 1931 and 17.97 percent in 1932. Thereafter its share of the Swedish trade declined to 13.07 percent in 1934 and 8.68 percent in 1936. While Nafta's share of the market fell off, its total volume of business In 1936 was about the same as in 1931 and somewhat smaller than in 1934. See table 16. Gull', through its affiliate, Alfred Olsen & Co., held 1:75 percent of the trade in 1.931 and 3.3 to 4 percent in the subsequent years, but its trade was entirely in Diesel and gas oils, in which product markets Gulf was practically the sole outside element, 11 See above, p. 334. 12 Chiefly the cooperative associations in the benzine market and various outsiders in the asphalt market. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 305 at cooperation during 1930-33, which had been described in a previous report to the Riksdag. He then asked the following questions : 1. Are any of the agreements made in the early thirties still in existence? If not, when did these agreements cease to be effective? 2. Did any agreements or any other form of collaboration regarding joint pricing or joint quotations when making offers exist during the later thirties? 3. Have such agreements been made or has cooperation regarding pricing or allocation of trade quotas existed after the end of the war. The representative from each company was separately interrogated. For the most part the answers to these three questions were in the negative, qualified only by assertions that such agreements as had existed had been "oral"' or "international" in origin, and that these agreements had never been applied and had never lessened competi- tion.13 The committee's reaction to these statements was that "the first meeting left the impression that there had been no organized coopera- tion of any importance worth mentioning between the companies dur- ing the period in question." 14 As a result of further information obtained from Shell and other sources, the representatives of the six oil. companies were summoned to a second meeting on November 22, 1946. At this meeting there was considerable disagreement among the company representatives as to whether certain agreements had or had not existed, whether or not they had been signed, and as to their subject matter and provisions. As a result of this second meeting the company representatives prom- ised to search their files, and the committee undertook a full-scale investigation. In the committee's opinion the representatives of the companies gave "erroneous and misleading information" at the two meetings. The committee stated, however, that "the documents requested [from the companies] now seemed to have been placed at our disposal." 15 Not only did the oil companies attempt to mislead the committee at the very beginning of the investigation, but they also insisted vigor- ously that the findings of the committee should not be published. Their statements to this effect were published as part of the report, 13 The representative of Standard (New Jersey) Insisted that there had always been a "violent war" on the market. 11 It should be noted that the-company representatives had been notified at the opening of the meeting that they were liable to criminal penalties if they willfully made false or misleading staterCnts. 15 Swedish Oil Report pp. 1 and 41. [Italics added.]( At the two meetings the repre- sentatives of Shell and `B1' were, on the whole, more responsible to questioning than those of American concerns. At the second meeting, however, the managing director of BP, who admitted that lie had seen a copy of the "as is" agreement, stated that this agreement had nothing to do with local agreements in Sweden. The responses of the representatives of Standard, Texas, and Gulf may be summarized as follows : The representative of Standard said at the first, meeting that the agreements of 1930-33 no longer existed and that they had been instructed by the parent corporation sometime in 1.942 not to mike any agreements whatsoever. At the second meeting, lie is only reported as saying that it was "self-evident" that the parent corporation was kept informed of, but that it had "never interfered" in, local commercial agreements. The representative of Gulf stated at the first meeting that his company had "never" joined in any quota arrangement and that the parent corporation was "most anxious" that the Swedish subsidiary not join in any agreements that might violate the American antitrust laws. At the second meeting, he insisted that lie had not signed an agreement on October .1.5, 1937, though it was subsequently proven that he had (lone so ; that all meetings of the. oil companies had been informal and inconclusive ; that any decisions reached had been nonrestrictive- and, in any event, not applied at any time ; and that he had heard the term "as is" for the first time at this meeting. Texas at both meetings stated that it has participated- in informal discussions and understandings to bring about "sounder conditions" in the trade and it normal "profit," but denied that the "as is" agreement had been applied. The representatives of all companies agreed that the oil trade in Sweden had always been "free," that competition had always been keen with respect to qualities and service, and that such agreements as had been made were designed to maintain "order" and to prevent "ruous prices." They agreed further that these agreements were never observed. [Italics added.] Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL together with rebutting comments by the committee."' The numerous, objections advanced by the companies were generally based upon a complaint that the committee had in one way or another exceeded its authority and upon the argument that the facts adduced and docu- mented by the committee had been given all undue and unnatural interpretation. Statements of Standard (New Jersey) and Gulf. The Standard (New Jersey) subsidiary claimed that the committee exceeded its authority in that (1) the report gave "the impression of a court pro- ceeding" in which the committee members "appear before the reader as both prosecutor and judge in one person., Such a method cannot be in accord with the meaning of the law"; (2) it was contrary to the spirit of the law to make public letters, records, and other documentss, of private business, including those containing "statements of terms, with given companies or persons;" these parts of the report could only cause economic harm to the companies and were not necessary in the execution of the committee's task ; (3) the report was "unnecessarily verbose" and it would be difficult for the public to understand its actual contents; (4) the committee "should continue itself to, what is necessary for accomplishing the aims of the investigation-i. e., an objective and factual statement-without unnecessary accounts of the cooperation that has actually taken place on the Swedish oil market during a given period, omitting all irrelevant material * * *",~~ i. e., the committee should discuss only the economic results of this cooperation 1' without disclosing the form or the extent of the coopera- tion that had taken place. The position of the Swedish Gulf Oil Co. was that no "agreements for intimate cooperation" had been "entered into", that no "monop- olistic tendencies" had been "approved," that competition had been keen for a long time, and thatno complaints were justified since "such meetings as had occurred * * * did not result in disadvantageous or unfair conditions for the consumers of petroleum products." Gulf's arguments may be summarized as follows : (1) Much of the report-i. e., that part dealing with events up to the spring of 1937-is of merely historical interest since it deals with the special circumstances surrounding the participation of the Naftasyndikat (owned by the Russians) in the market. This period ended when the Gulf Oil Co. acquired Nafta's business.1' The Nafta period was char- acterized by Gulf as being one of price wars and of financial losses. (2) Gulf denied that it had engaged in any improper activities after the close of the "Nafta period," defending many specific events and practices; e. g., it contended that the exchange of sales information among the oil companies had produced "helpful sales figures from a statistical viewpoint" but that "there has never been any question of the companies dividing the business between them." (3) Gulf defended its conduct and that of the oil companies as customary and ethically justifiable. Thus, it asserted that the almost weekly, meetings of rep- resentatives of the oil companies during 1938-40 were neither "illegit- 18 As an addendum to ch. XII of Swedish Report. l' Italics added. 18 I. e., prices and sales conditions. See n. 280, footnote 15. '? Gustaf Dahlborn, who had been an official of Nafta from the time it was founded by the Russians in 1928, continued as managing director of Swedish Gulf and held that office at the time of the investigation. II or comments on this "Nafta period," see above, p. 28'1, footnote 23. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL 307 imate" nor "harmful." They have only been honorable, concerted, usually unsuccessful attempts to bring a bit of system and order in the petroleum market." (4) Finally, it contended that the report must not be published, not only because it would give the public a false impression of the oil business in Sweden-"it ppresents an entirely biased and extraordinarily misleading picture" but also because it dealt with a question which should not be settled by public opinion nor "exploited for articles on the front pages of newspapers." Gulf's opinion was that decisions with regard to the future of the oil business in Sweden should be made upon "factual conditions as they exist today," and with regard only to "practical matters." "Theoretical .speculations and political viewpoints" should be left aside, and de- cisions should not be made by "the public" or by "a so-called built-up opinion." Gulf put its case in these words : Hitherto, to the best of our knowledge, it has never been considered repre- hensible for businessmen within a particular business to meet for discussions of mutual interests for the purpose of bringing order in the market. Insofar as the oil companies have tried to realize a somewhat uniform price level, the elimination of extra rebates, a. reduction of the number of distributing points, etc., all this must be considered permissible and reasonable * * * If in one point or another there has been achieved a regulation, it has never been unfair or uneconomical for the consumers. Considered objectively, it can never be wrong to maintain uniform prices and conditions for gasoline which for the most part is a standard product. Had the prices been set too high, or if any other criticism were to be made about the other conditions, then there would be an excuse for fault finding.20 Statements of the other companies. The arguments advanced-in the statements of the managing directors of the other companies included an attack on the, committee's power to make its investigation and a blanket denial of the committee's conclusions. Shell argued that the basic law under which the investigation was conducted authorized investigations only where "an enterprise or an association * * * can. be assumed to be of a monopolistic nature." In this view the committee was obliged to prove, first, that the oil companies formed an actual "association" rather than a mere group of companies, and, second, that such an "association" was of a monop- olistic nature. Shell argured that the committee had not successfully proven either of these two points," and hence no further investigation was permissible. Anglo-Iranian (BP) contended that the most important fact about the agreements was that they had not been observed. Anybody reading this selection (of documents) must primarily come to the conclusion that some kind of trust had been created, whereas the real situation was that, though the companies only sought through cooperation to bring some measure of stability to the price structure of the oil market, they nevertheless came to grief time after time 22 The Texas Co. stated that the most important duty of the committee 20 Addendum to ch. XII, p. 14. [Italic added.] 21 Shell charged the committee with being tendentious in that it gave a different meaning to cooperation in the oil industry than it really had-"those concerned have tried to prove the existence of agreements between the companies, though, as a matter of fact, there have been no such agreements"-and in that it reported only the material "calculated to place .the oil companies in an unfavorable light." Shell also argued that such cooperation as had taken place was legal and no different from that occurring in most of the other branches of Swedish industry. 22 [Italics- added.] In omitting this point, BP argued, the committee's selection of documents for quotation and its statements of findings were "one-sided," and were de- signed to create "distrust, of business undertakings in this branch of commerce. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 was to determine whether or not a monopoly existed in Sweden "to- day" (1.947). Since the committee had really discovered at an early stage in its proceedings that such was not the case, Texas said, it should have confined itself to establishing this conclusion. Thus the committee had exceeded its powers and issued a report that was "pure propaganda," since it presented an "exaggerated" account of irrele- vant matters.23 Texas then asserted that "the actual fact was that during the whole period mentioned, there has been an intense and continuous competition between the companies." 24 Nynas confined its statement to an assertion that the statements made by its officials to the committee were "confidential" and hence "not suited for publication." Comments of the committee. For the most part, the committee denied the validity of the arguments advanced by the oil companies, simply stating that they were refuted by the contents of the report. Among the more important points made in its comments are the following: (1) There was no justification whatever for the argument that the committee had exceeded its authority.25 (2) The selection of . material for the report was not tendentious, as had been claimed, but rather reflected the fact that "both the extent and the forms of the companies' cooperation have essentially differed from what the com- panies' representatives- have stated to us." 26 (3) Assertion by the companies that it was not proven in the report that agreements had ever existed, or that an "association" of the companies had even been established, and so on, were rejected. "It is impossible to attach any importance to it." (4) The committee rejected the argument that it should have investigated "in each individual case to see whether the decisions had been put into effect." 27 To this the committee remarked that such an investigation was unnecessary since it assumed that those who made the decisions would not act contrary to them .211 (5) The committee rejected the view that the contents of the report included "confidential" statements or other materials, i. e., matters of private business, unsuited not for publication public should be given the possibility of forming "the an opinion." The committee's view was that the public was entitled to get all the information that was available, and that the companies had had adequate notice that the results of the investigation would be published. 2' Texas argued that the committee's intent in investigating cooperation in the in- dustry during the previous 15 years had no connection with its legal duties, i. e., this investigation, according to Texas, did not throw light on the question of the present (1347) existence of monopoly in the trade, but rather was to produce material to support a receommendation of a state monopoly. 24 [Italics in the original.] Cooperation in the oil trade, according to Texas, was designed merely to bring about "sounder conditions in the market," but there was no proof that it had "existed in the form suggested in draft agreements prepared." These "draft agree- ments," as Texas described them, were not actual agreements to be observed,- it said ; thus, for example, the initialing of the Swedish "as is" agreement of October 15, 1937, was intended to signify only that the representatives of the oil companies "had read the draft" and not that they had reached an agreement "binding" on the parties. 25 The committee's powers were based on appointment by the Government pursuant to authority granted by the Rikisdag, i. e., it was a legislative committee. The committee pointed out that Brian French, a representative of the London office of Shell, agreed that, as far as lie was able to ascertain, it had not exceeded its powers. 2e Italics added. 27 See statements of BP and Gulf. ze "We have presumed'that responsible managers of enterprises * * * cannot proceed in such a way that they act contrary to decisions they have themselves made. In any case, such a point of view is alien to anyone who is of the opinion that decisions made ought to be observed. That the companies' managing directors were to hold these meetings only as an apparent maneuver with a view to misleading each other in respect of their real price policy is an explanation that seems too unreasonable to be acceptable." [Italics added, ] Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Sum nary and review of the Swedish case history.-The Swedish case history has demonstrated in some detail the processes by which the local marketing subsidiaries of the international oil companies have negotiated and put into effect cartel arrangements. The major conclusions to be drawn from this case histor are as follows : (1) The oil companies participating in tie cartel arrangements effectively dominated all petroleum product markets in Sweden from 1933 to 1936.29 In each market, except asphalt, the cartel participants, including Gulf,3? delivered in 1936 from 96 to 100 percent of the ton- nage sold for domestic consumption in Sweden. (2) The Swedish subsidiaries of Standard (New Jersey), Shell, and Anglo-Iranian, the "as is" group, participated in all of the reported negotiations, agreements, meetings, and cooperative efforts of the oil companies in Sweden during the period under review in this case history, 1930-47. Texas was an equal participantthroughout this period, while Gulf was a full participant from the time it became a mayor factor in the Swedish market in 1937. Nynas, a Swedish con- cern, And Nafta, the Russian-owned predecessor of Gulf, collaborated in the main with these firms. (3) The Swedish cartel arrangements were inspired and guided for most part by the international "as is" agreements, particularly the Draft Memorandum of Principles.31 (4) The cancellation of the Draft Memorandum of Principles at the end of 1937 was not intended to-and, in fact, did not-result in the termination of the local agreements, since. the parent companies instructed Standard (New Jersey), Shell, and BP to continue the local agreements if possible. The five-party Swedish "as is" agree- ment continued until at least the end of 1938. Repeated efforts to draw up a new five-party or, failing this, three-party agreement were interrupted_by the outbreak of World War II. The oil companies pre- pared a new price agreement after the war, which was intended to be effective on January 1, 1947. (5) The parent corporations supervised and directed the coopera- tive efforts of their subsidiaries in Sweden. While the Oil Investigat- ing Committee was able to investigate this matter in only one case, they report that "the company concerned has, with regard to coopera- tion with other companies, in some cases received detailed instructions from their principals, and has in turn rendered detailed reports to them and asked for their approval of what has occurred." 32 20 while no trade statistics are available after 1936, the following excerpts from a review of the Swedish Oil Trade in 1939 is suggestive. "The petroleum trade in Sweden is dominated. by six large oil importers, all of which, except one, are subsidiaries of foreign concerns. The five foreign companies operate under price agreements. Aktiebolaget Nynas-Petrolcuin practices the same price policy, although outside the cartel. It is said that these compare es have 98 percent of the trade. Two other companies exist principally by utilizing the cartel's price policy to keep somewhat lower prices. They seem to be too unimportant to the other groups to. start it price campaign against them, as they have only local interests. "No division of the country into sales districts has been made ; but, according to trade Information, parent companies of the above-mentioned five concerns have a certain quota agreement. International Petroleum Trade, Sweden : Petroleum Survey, 1939 ; from a report from. Stockholm of American Vice Consul Harold Carlson, July 25, 1940. September 30. 1940. p. 3155. 80 Gulf's collaboration with the cartel began at the latest in January 1936. (See above, p. 293.) at The Oil Investigating Committee reported that it had evidence in its possession, which it did not disclose, that cooperation between subsidiaries of the "as is, companies of a similar nature also existed in other countries. 22M the meeting with the Oil Investigating Committee on November 22, 1946 (see p. 805 above) representatives of Standard (New Jersey), BP, Shell, and Gulf stated that there was a regular exchange of informtion and views between the subsidiary and parent concerns. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 (6) The administration of the Swedish cartel arrangements was carried on through the medium of regular weekly meetings of the managing directors of the companies, at which all matters of common and current interest were discussed and differences of interest or interpretation were resolved through negotiations. The Oil Investi- gating Committee likened these meetings to "a permanently func- tioning board of cooperation with Shell as the executive organ." At the meetings, the companies regularly rendered audited accounts of their trade. statistics; i. e., "lists of deliveries involiced" by them. (7) The cartel arrangements included agreements that the com- panies would charge identical prices-and would fix uniform rebates, commissions, bonuses, discounts, and other selling terms. It was agreed that customers would be classified and that rebates, and the like, would be eliminated for some classes of special customers and made uniform for others. It was agreed that the companies would consult in advance before any firm made tenders to State institutions and other large customers. It was' also agreed that the companies would "respect" each other's customers. (8) The distinctive "as is." arrangements applied at first only to the `'as is"- group, but in 1937 were extended to include Texas and Gulf. Nynas did not adhere to these arrangements but cooperated in other respects. The adherents to the "as is" arrangements were assigned distribution quotas in each product market. A system of adjustment and. compensation for over- and under-trading was instituted. The principal method of adjustment agreed upon was the transfer of.. major customers, particularly State institutions and. the like. (9) The Oil Investigating Committee found that the arrangements set forth in paragraphs (7) and (8), above, were generally adhered i o by the oil companies. Price changes in the market were the result of decisions of the companies. Uniformity of prices, rebates, and sales conditions was largely achieved. Special customers were classified and their terms of sale fixed as a result of negotiations among the oil companies. Markets were divided and customers steered to the desig- nated suppliers by a. number of devices, including that of tenders at fictitious prices. Adjustments of over- and under-trading were made, often by the device of transferring customers.',' While the companies contended that the agreements- were, in effect, mere paper promises, the committee was satisfied that they had been substantially put into effect. (10) Outside marketers, such as the consumer cooperatives and the small importers, were generally whipped into line in order to protect the interests of the oil companies, including the cartel arrangements, and the interests of the affiliated outlets. The committee reports that "decided pressure" was exerted on these outsiders to adhere to the prices and other matters in the agreements. The companies refused to do business with the cooperatives, except the IC, or proposed terms which were onerous, or required the cooperatives to limit their activ- ities. Special efforts were made to bring the IC into cooperative agree- ment with the oil companies. In nearly all cases control over supplies was the chief weapon used. 88 The committee reports that these ad,.ustmenta often were submitted to the parent companies for approval. In some cases adjustments were made by special transactions directly by the home offices of the parent corporations. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL e3~.1.. (11) Since the Oil Investigating Committee was. unable to obtain essential data relating to costs, it was unable to state whether prices had been unreasonable or the. oil enterprises unduly profitable. Ac- cording to a statement by one of the companies, benzine prices in 1939 were unduly high, but no reduction in price was made. State and municipal institutions were especially vulnerable to the cartel opera tions, but the effects on consumers in general could not be determined. The. above summary recapitulates conclusions unanimously arrived at by the Oil Investigating Committee of 1945.3- The Swedish oil market was not a free market but one regulated and controlled by private arrangements. The primary task of the committee was to sur- vey the oil trade and to submit proposals with regard to the. future of that business. Among the alternatives considered was that of a state monopoly of the trade. These facts were among the important con- siderations that led the majority of the committee to recommend the establishment of it state monopoly.36 The United Kingdom of Great Britain and Northern Ireland Standard (New Jersey), Shell, and Anglo-Iranian, through their marketing subsidiaries and affiliates, have been the predominant factors in the petroleum markets of the United Kingdom since before the First World War. These markets are of the greatest importance to the international oil companies, since they are the largest world markets outside of the United States.3a The "as is" powers have successfully cooperated among themselves in the control of this highly concentrated market, and have been the principal means through. which the oil trade has been organized in all its aspects. Three companies, Anglo-American Oil Co., Ltd. '17 and marketing subsidiaries of Shell and Anglo-Iranian (at that time Anglo-Persian), emerged from World War I as dominant marketers in the United Kingdom. An expert on the British oil trade described conditions at that time as follows : 3H Immediately after thewar there was little competition from the small outside companies known in the trade as "pirates," Which had scarcely had time to reestablish themselves, and the prewar companies, having become accustomed to a certain amount of cooperation with each other during the war, continued to act together in such matters as wholesale and retail selling prices, the general conditions of the trade, and its relations with dealers and the public. 94 Both the majority and minority of the committee agreed, for the most part, on the conclusions and facts recited in this case study. See the special statement of the minority. pp. 5-6, for their, views. The minority felt that the important matter was. not whether there had been cooperation among the oil companies, though they deplored the facts that had been developed and the attempts of the companies to mislead the committee, but whether or not the companies had misused or abused their power. The minority felt that the companies had been reasonable in their activities and had never "literally" applied the quotas or .the "official prices." 11 The opinion of the minority was that no economic benefits to the public would result from the proposed monopoly and that the remedy for the situation lay in increased com- petition by domestic concerns and the consumers' cooperatives. 90 In the prewar period, about 30 percent or more of European oil consumption (exclud- ing the TT. S. S. R.), and about 1.5 percent of foreign consumption (1. e., world consumption excluding the United States and the U. S. S. R.) was concentrated in the relatively small geographical area of the British Isles (The Petroleum Tinges, March 5, 1938, p. 306, and 1+'ebruary 25, 1939, p. 259). Consumption in fiscal 1949 was about 70 percent greater than in the prewar (ECA European Recovery Program : Petroleum and Petroleum Equipment, March 1949. p. 32). Although the U. S. S. R. was a greater consumer of petroleum than the United Kingdom, it is not a "market" in the ordinary sense of the word. 11 From 1911 to 1930, Anglo-American was a legally separate corporation, but was regarded as the "representative" in Great Britain of "Standard Oil Group" interests C C. T. Brunner, The Problem of Oil, 1930, pp. 30-32. For the relations of Standard '(New Jersey). with Anglo-American, see above, p. 219. P Brunner, op. cit. p. 22. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 The major companies fortified themselves. during this period through the acquisition of some of the established firms in the British market.39 The major companies were commonly referred to as the "combine" because of their close cooperation.4? Because of their wide market coverage, they were also frequently called "national" compa- nies in contradistinction to other marketers who operated on a local or a limited scale. During these years several other firms, which were subsequently to become of national iitlportance, entered the oil trade. The first of these was the National Benzole Co., Ltd., incorporated in 1919. Na- tional Benzole produced benzole (a motor alcohol) and marketed a blend of this product and benzine. Since it purchased its supply of ben zinc from Anglo-Persian, it was regarded Is an associate of that company 41 National Benzole was not a disturbing factor, and co- operated with the major companies in their control of the market. Two other firms which were formed in the 1920's soon expanded their operation throughout Great Britain and became major disturb- ing factors in the market. The lesser of these firms was the Power Petroleum Co., which marketed motor spirit manufactured by crack- ing kerosene purchased from the Russian Export Trust 42 The more important was Russian Oil Products, Ltd., popularly known as ROP, established in 1925 as a marketing subsidiary in the United Kingdom by the Russia Export Trust. ROP soon became the leading outsider in the British market. While R.OP and Power Petroleum were both price cutters, their operations until the late 1920's were on too small a scale to cause any serious disturbance to the market.43 The other companies in the oil trade, known collectively as the " irates," limited their operations to specialized or local markets. None of these companies held more than a very small portion of the total trade. Some were small but well-established British concerns and others were marketing subsidiaries of such American concerns as Cities Service Oil Co. and the Texas Co. The term "pirate" was attached particularly to a number of British firms which operated on the fringes of the industry in the large municipal markets. These marginal firms were brought into the market through three factors, the profitability of the business, the richness of the concentrated municipal markets, and the availability of supplies of gasoline, par- 'o Shell acquired a controlling interest in 1919 in the Mexican Eagle Oil Co., Ltd. In 1920 the British marketing subsidiaries of Shell and Mexican Eagle were merged on a 50-,50 basis into Shell-Mex, Ltd. Anglo-American in 1925 acquired control of the marketing facilities of the British Mexican Petroleum Co., Ltd., another established outsider in the British market. British Mexican, which owned, in addition to its own business, the entire capital stock of the Redline Motor Spirit Co., another long established marketer, had been an affiliate of the Pan American Petroleum & Transport Co., a subsidiary at that time of Standard Oil Co. (Indiana). During the 1920's, Anglo-American also purchased Glico Petroleum Co., Ltd., which had been in the oil business since 1888, and the Agwi Petroleum Co., Ltd., a refinery company in Great Britain. In 1932 Standard (New Jersey), which had acquired control of Anglo-American in 1930, purchased the remaining British market- ing interests of Standard (Indiana) together with other holdings of Pan American. These interests included the Petroleum Storage & Finance Co., Ltd.,- and its marketing subsidiaries, Cleveland Petroleum Products Co., National Filling Stations, Ltd., and British Oil Storage, Ltd. Anglo-Persian in 1933 purchased Continental Oil Co.'s 90 percent interest in the Sealand Products Co., Inc. `A Brunner, op cit., p. 39. 41 Ibid., p. 31. Benzole mixtures in the British Isles at the end of the 1930's generally were about 1 part benzole and 3 parts gasoline. Ibid., p. 104. 92 The parent company of Power Petroleum, which was established In 1923, was the 31ledway Oil & Storage Co., which imported Russian kerosene for manufacture into benzene ,at Its cracking plant. 43 Ibid., p. 24. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE, INTERNATIONAL PETROLEUM CARTEL 313 ticularly at the public wharves near these markets. The "pirates" purchased their supplies from private brokers who had picked up spot cargoes of American, Rumanian, Mexican, or Russian oil at bargain prices, and resold them at cut prices to those dealers willing to retail unbranded products'4 The basis for this type of marginal operation, therefore, was the availability of cheap surplus supplies in producing areas 45 and the low prices of those supplies which made the business profitable despite the irregularity of shipments, the lack of established trade names, and the uncertainty of quality. Cartel arrangements in the United Kingdom.-In 1929, the three major companies reached a series of agreements with most of the out- side firms designed to eliminate price cutting and other harassing tactics'e In the first of these agreements,'' concluded on January 1, 1929, the independents, i. e., most of the substantial and established outside companies except ROP agreed to adopt the price schedules and, marketing practices of the combine. The independents agreed to sell only to "legitimate" retailers "approved" by the Motor Agents' Association '411 and to recognized "commercial customers." They agreed to adhere to the wholesale prices and to the schedules of prices to commercial customers 4a fixed by the national companies, i. e., the combine, and to observe the geographic zoning scheme they had de- termined. They agreed to require their retail customers to maintain prices at the levels fixed by the national companies; the provision actually was that the independents would cause their retail outlets to maintain the same rate of profit as that allowed by the national com- panies. Since wholesale prices were to be uniform, this would make retail prices also uniform.50 They agreed to cause their retail outlets, to gradually eliminate all unbranded pumps and the like, so that all pumps would be marked clearly with the brand name and grade of the product dispensed therefrom. With the brand and grade posted on the pump, it was easier to identify price cutters and those selling the odd lots and off-brand gasolines distributed by the "pirates." The national companies, on their part, agreed, insofar as the parties to the agreement were concerned, to stop their policy of discriminat- 44Ibid., p. 23. Aa Brunner attributes the availability of this cheap oil to overproduction by many small producers in the United States and Rumania and the high rate of bankruptcy among these concerns; ibid., p. 35. For further discussion of overproduction In the late 1920's see chapter VIII. 4s These agreements were precipitated by the imposition of additional petrol taxes in April 1928, which made the public price conscious. As a result the sales of the price- cutters, ROP, Power Petroleum, and the "pirates" boomed, and British prices failed to rise in 1928 along with world prices. Prior to this time the combine had limited its attacks on outsiders to a "fierce" newspaper campaign in 1927 on "Russian" oil, i. e., ROP and Power Petroleum. This tactic was unsuccessful. Brunner, op. cit., p. 24. 47 Information about this agreement and the related agreement between Power Petroleum Co. and the combine is taken from Brunner, op. cit., pp. 39-41. In the late 1930's Brunner, an Englishman, wrote two books about various economic aspects of motor transportation, and also the book cited here on the. oil trade in the United Kingdom. This book was Intended to explain the economics and history of the oil trade and was written from the Industry or trade association point'of view. He approved of cooperation among the oil companies, and saw the activities of the "combine" as "the only safeguard of the retailer against unorganized cut-throat competition." Ibid., p. 39. It is not known, however, what sources of information were available to him and hence his account may not be com- plete olsr accurate In all details, and the Federal Trade Commission does not vouch for such detai . 98 The Motor Agents' Association "approved" only of garages and filling stations as retailers. It was formed by distributors to protect the retail trade in new and used cars, garage supplies and services, and the like., In all its interests except prices. 40 Including special rebates to large customers. " It is not clear what sanctions the independents were to apply to enforce this uniformity among their retail customers. The national companies had an agreement with the Motor Trade Association-a similar organization to the Motor Agents' Association but solely concerned with retail price maintenance-to cooperate in their activities by cutting off' supplies to retailers whom the MTA identified as price cutters.. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 ,.,314 THE INTERNATIONAL PETROLEUM CARTEL ing against retailers who sold independent brands. In the United Kingdom it was customary for retailers to sell the brands of all lead ing companies. It had been the practice of the national companies to pay loyalty rebates to retailers who sold only national brands, a kind of exclusive dealing arrangement. These discriminatory -pay- ments were now extended in favor of those independents who entered into the agreement. The Power Petroleum Co. not only was a party to the above agree- ment but also made a separate agreement with the combine on the same clay. Power Petroleum, which drew its entire supply from the Russians, agreed to set aside 5 percent of the f. o. b. prices paid to the Russians, to be paid as compensation to the owners of expropriated Russian oil interests 51 In March 1929, the combine, acting through A.nglo-American, con- cluded a related agreement with R. O. P., the most important outsider in the British market. R. O. P. agreed to sell to the three major oil companies-Anglo-American, Shell, and Anglo-Persian-an undis- closed volume. of refined products annually;12 the prices to be charged for these products to be fixed at 5 percent below current market prices.53 Other provisions of the agreement are unknown but were reported to be restrictions on Russian trade in the British market 54 It seems evident that the purpose .of this agreement was to adjust R. O. P.'s participation in the British market.i5 The London Econ- omist described the principal purpose of the agreement as one. "fixing its [the Russian] proportion of the British trade." 56 Sir Henri De- terding, of the Royal Dutch-Shell group, issued the following state- ment at the time the agreement was. concluded : .The new agreement put an end to the dumping policy of Russia, and the acknowl- edgment of the compensation principle has created a base for new relations." One immediate result was a rise in the prices of petroleum products.58- With the conclusion of these agreements in 1929, the national com- panies had completed a structure that formed the basis for the control ,of the English oil trade until the outbreak of World War II. The only firms outside this structure of control were the remaining "pirates" who were dependent on spot cargoes for their supplies, were discriminated against by the "loyalty" rebates and other control de- vices, and, in any event, were too small to disturb the market seriously. In 1929, the national companies also broadened the scope of their long-established close cooperation in the English market by negotiat- ing an agreement which applied the "as is" principles that their parent 51 It is self-evident that the Russians must have consented to this agreement. a2 This sales agreement, or successors to it, apparently continued in force at least until the beginning of World War II; Moody's Industries, 1940. Jersey Standard acquired this contract in Its purchase of Anglo-American in 1930. 82 This was in lieu of the payment of 5 percent of the value of the f. o. b. purchases of the major companies to expropriated owners of Russian oil properties. A report in the Petroleum Times, April 27, 1929, p. 744, to the effect that no provisions in the agreement provided such compensation therefore, does not exactly state the case. - 6, Brunner, op. cit., p. 41. These restrictions may well have been similar to those set forth in the agreement made 2 months before, according to Brunner, with most of the independents. According to the Oil and Gas Journal, June 2, 1932, p. 20. R. o. P. agreed to a price-maintenance scheme and was allowed a fixed gallonage in the United Kingdom market. - 66 However, Russian exports to the British market continued to expand until 1931, .there- after falling to a fixed proportion of British imports. This, however, reflects R. O. P.'s position as a supplier rather than as a distributor in the British market ; see below, p. 319. footnote 74. se December 31. 1929, p. 1196. - ?' The Petroleum Times; March 16, 1929, p. 466. ae Ibid., p. 473. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 315 concerns had negotiated in 1928. While the details of this British agreement are not known, it was reported that its provisions included agreements on prices and on the limitation of pump installations in the United Kingdom. i? It may be supposed that this agreement generally followed the provisions of the international agreements with regard to distribution quotas and the like 60 Although the structure of control put together in 1929 was subject to severe stresses during the early 1.930's, it was strengthened con- siderably beginning in 1936. In that year, the independent distribu- tors formalized their relations by organizing the Independent Petroleum Federation. Its membership rapidly increased from 22 to 44,? comprising almost all -of the independent distributors. The principal purpose of the Federation was to enforce "uniform market- ing arrangements" for gasoline and kerosene, i. e., to carry out, for the most part, the 1929 agreement with the national companies. The provisions of the agreement included stipulations with regard to uniform prices, uniform. commercial rebates, zoning arrangements, and the like, the purpose of which was to ensure that the price fluctua- tions of the national companies would be followed "exactly." O' It was, of course, difficult to deal with price-cutting and other com- petitive practices on the retail level .62 The desirability of a strong program of retail price maintenance as a support to the whole struc- ture of prices in the petroleum industry was regarded as evident. The national companies were strong enough to protect retail prices of their products by their own efforts; upon a complaint of price cutting they immediately cut off the supplies of the offending retailer. Instances of price cutting were reported to the national companies by the Motor Trade Association-an association of interested parties in the various branches of the retail motor trade whose function was to "administer the price protection arrangements made between the various branches of the industry." After lengthy negotiations, the national companies 83 in 1936 became members of the Motor Trade Association; it was agreed that the association would maintain a "segregated stop list" of all price-cutters, and that the distributor members of the association would not supply any firm on this list. It was anticipated that the association would be able to induce the independent distributors, many of whom were members of the association, to support the "stop list" also. Thus, co The London Economist, December 21, 1929, p. 1197. 00 This is probably the National Companies' Percentage Agreement, which was in force until December 31, 1934 ; see below, p. 317, footnote 70. a1 The Petroleum Times, weekly issues of January to July 1939, especially January 14, 1939, pp. 41-42, and July 29, 1939, pp. 136, 141, 155; see also ibid., January 9, 1937, p. 38. O. P., the Texas Co., which had lately association entered 1937 market. The only Trinidad Leaeholds, Ltd outside and TSanctions to enforce the rules of the federation were instituted by agreement with the importers of petroleum products. The latter firms organized a body known as the "Author- ized Importers." It was agreed between the two organizations that the "Authorized Importers" would sell only to members of the Independent Petroleum Association while the latter bound themselves to buy only from the Authorized Importers. It was reported that a number of cases of price-cutting had been reported to the Independent Petroleum Association, which had referred the cases to the importers' group. The latter had imme diately cut off deliveries to the offenders. It was planned to put into supply contracts provisions for their termination when a distributor left the federation. , The following discussion is based upon the Petroleum Times, July 17, 1927, p. 81, July 9, 1938, p. 41, July 10, 1938, p. 73, February 18, 1939, p. 206, and March. 11, 1939, p. 325. "The national companies, represented by the Petroleum Distribution Committee, at Co., Kingdom P Power this time Included all marketing Anglo-Iranian, and the National nBenze o eUnited. Standard (Now Jersey), Shell, Petroleum Co. Approved For Release 2010/04/14: CIA-RDP57-00384ROO0700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 316 THE INTERNATIONAL PETROLEUM CARTEL the price-maintenance program of the national companies was to be extended to the independents. The association, on its part, readily undertook to maintain the "stop list," and announced, early in 1937, that it would "conduct an intensive campaign to trace and put a stop to the cutting of petrol prices." In this campaign the association was fortified by a, decision of the highest court in the United Kingdom, which affirmed the power of the association to discipline its members.e5 It was expected, therefore, that the association would be able to fine or suspend distributor members who failed to observe the "stop list." This campaign failed despite the fact that "hundreds" of cases of price cutting were dealt with. The national companies charged that, while they had loyally supported the "stop list" and had lost con- siderable business and incurred public disfavor as a result, the as- sociation had been unwilling or unable to penalize those independents which had not done so. The national companies therefore withdrew from the association in 1938, affirming their loyalty to the "principles of price maintenance." Thereafter, the national companies continued to protect the retail prices of their brands on their own account and invited the cooperation of others. While negotiations to heal this breach between the association and the national companies continued for more than a year, nothing apparently came of them .65 The system of control over the British petroleum trade, therefore, was nearly complete on the eve of World War II. At the center of this system were the nationalcompan.ies-particularly Standard (New Jersey), Shell, and Anglo-Iranian-which together were the predomi- nant element in the industry. These companies had cooperated closely since the First World War and, in fact, were described as a "joint ven- ture" by one Standard (New Jersey) official. Among themselves they determined a common price and industry policy and applied the "as is" principles set forth in the international agreements.. The cartel structure of 1929, as broadened and strengthened in the late 1.930's, was built by the national companies on the solid base they provided. The independent distributors were drawn to conform to the pricing and trade policies of the national companies. While com- plete control over prices and trade conditions in the retail trade was not attained, the partial success in this direction was due almost wholly to the power of the national companies. Such was the history of cooperation and control in the English petroleum trade immediately prior to World War II.(' ah The Motor Trade Association laid the basis of its control by successful price-mainte- nance enforcement in other branches of the motor trade, particularly in the retail sale of new and used cars. In the well-known case, Thorne V. Motor Trade Association., the House of Lords, on appeal, sustained the power of the association to enforce two of its rules. One of these rules forbade any member of the association to supply, either directly or indirectly, any trade goods to a firm, on the stop list except under preexisting contracts. The other rule provided that the price protection committee could put a member violating MTA rules on the stop list, in effect barring the member from the trade, or require the member to pay a fine in lieu of this penalty. Thorne, after being warned, continued to supply a retail customer who had been a price cutter and whose name was on the stop list. The association ordered Thorne to pay a tine on penalty of being put on the stop list him- self. (The amount of the fine was not stated, but in previous cases fines had been as high as ?5,000.) The law lords upheld the association in this action, declaring it to be in furtherance of "lawful business interests" (Thorne v. Motor Trade Association, The All- England Law Reports, 1937, vol. 3, London, pp. 157-172. Also reported in the London Times, June 4, 1937, p. 4). This decision gave the association effective sanctions in support of its price-maintenance program. The members of the Independent Petroleum Federation agreed unanimously in 1939 to support moves by retailers to establish a program of retail price maintenance (ibid., July 29, 1939, p. 1.55). ?" For a discussion of wartime controls see pp. 206-268. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE 17. Distribution quotas in the United Kingdom,' as determined in the base year, 1928, and as revised, effective Jan. 1, 1936 [In percentages] Standard Oil Co. (New Jers(,.y)2 Total "as is" group Base year (1928) distribution quotas: Benzene-- - - ---------------------------------- 28.67 57. 75 86.42 13. 58 Kerosene----------------------------------------- 43.43 42.37 85.80 14.20 White spirit---------------------------------------- 44.19 51.28 95.47 4.53 Gas oil -------------------------------------------- 68.47 27.29 85.76 14.24 Fuel oil--------- 15.05 70.60 95.25 4.75 Asphalt------------------------------------------ 7.25 85.94 93.19 6.81 Distribution quotas effective Jan. 1, 1936: Benzene --------------------------------------------- 28.78 52. 32 81.10 18.90 Kerosene ------------------------------------------ 40.75 40.75 81.50 18.50 White spirit. -------------------------------------- 37.42 42. 58 80.00 20.00 Automotive gas oil --------------------------------- 32. (14 59.36 92.00 8.00 Gas oil.------------------------------------------- 54.65 25.15 79.80 20.20 Fuel oil----------------------------------------- 15.43 78.47 93.90 6.10 Asphalt------------------ ------------------------- 13.30 68.70 82.00 18.00 I Including Irish Free State. 2 Anglo-American Oil Co., Ltd., and its subsidiaries and affiliates. 3 Royal Dutch-Shell and Anglo-Iranian Oil Co., Ltd., hold combined quotas for all their marketing sub- sidiaries and affiliates. Operations under "as is" and other cartel arrangements s? The base year, 1928, was described by an English oil trade expert" as one of acute competition in the industry, during which such price cutters as R. O. P. and the "pirates" made "considerable headway." Neverthe- less, despite these losses, the national companies had an excellent per- formance in the market, accounting for 85-95 percent of the sales of each of the main classes of petroleum products. This accomplishment was reflected in the distribution quotas that were fixed for each of the product markets upon the percentage shares of the companies during this "qualifying" period as shown in table 17. These base year quotas remained in effect thereafter with few The quotas were subjected to a general revision,70 effective January 1, 1936, bringing them into a closer relation to the companies' actual performance in the market. The revised quotas, shown in table 17, reflect the relative stability of the share of the national companies in the British market, since they Were fixed at levels that were only moderately lower than the "base year" quotas. Except where otherwise specified, the data in this section and in tables 17, 18, and 19 are taken from standard Oil Co. (New Jersey) documents, `Deliveries Into Consumption- Iturope." us Brunner, op. cit., p. 24. a" The quotas were changed, effective January 1, 1932, when standard (New Jersey) ac- quired the British marketing subsidiaries of Standard (Indiana), and effective January 1, 1933, when Anglo-Iranian bought the British marketing interests of the Continental Oil Co. ; see above, p. 312, footnote 39. In each case the distribution quotas of the parties were increased by it few percentage points. The only other change in the quotas occurred when Texas entered into "as is" arrangements In the asphalt market, being given a quota of 3.20 percent, effective August 1, 1932. Texas withdrew from this arrangement on Decem- ber 31, 1933. 70 The distribution quotas for benzene were subject to the national companies' percentage agreement up to December 31, 1934. This agreement is probably that concluded by the companies in 1929 and provided the local British arrangements under the as is" prin- ciples. The base-year quotas, modified as described in the preceding footnote, were reaf- firmed, effective January 1, 1935. It may be surmised that this technical abrogation and reinstatement of the quotas reflected the conclusion of a new British agreement under the Draft Memorandum of Principles. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE 18. Deliveries into consumption of "controlled" products Kingdom, 11728 and 1935' Standard Oil Co. (Now Jersey) _________________..-----_ 1,489,994 29.30 2,104,831 28.23 Shell/BP 2........................... ....... 2,981,594 58.80 4,054,529 64.38 Total "as is?------------------------------------ 4,471,588 88.19 6,159, 360 82.61 Russian Oil Products, Ltd---------------------------- 229, 528 4.53 216, 885 2.91 The Texas Co-----------------------------------?------ 35,366 70 144, 446 1.04 Cities Service Cc--------------------------- ----------- 39. 538 78 89,384 .53 National Benzole Co., Ltd----------------------------- 38, 378 .76 110,613 1.48 Trinidad Leaseholds, Ltd------------------------------ ------------- ---------- 260, 787 3.50 All others--------------------------------------------- 256,163 5.04 524,053 7.03 I Includes Irish Free State. "Controlled" products include all petroleum products sold for domestic con- sumption except lubricating oils and specialty products. "Own use" of the companies is included except that consumed at refineries. 2 Combined sales of all marketing subsidiaries and affiliates of the Royal Dutch-Shell group and Anglo- Iranian Oil Co., Ltd. A summary statement of the position of the principal marketers of the United Kingdom in 1928 is shown in table 18. In that year, the national companies held 88.19 percent of the total domestic petroleum market, while the only outsider of consequence was Russian Oil Prod- ucts, Ltd., which held 4.53 percent.71 In the years following 1928, the national companies were successful in maintaining their positions in most British petroleum markets.72 The position of the principal British companies in 1935.73 is also shown in table 18, indicating that the national companies had slight decreases in their percentage share in the market, but with the increase in petroleum consumption, also showed substantial increases in their volume of trade. Moreoever, no 71 Included in "all others" for 1928 in table IS are the two firms purchased In 1932 and 1933 by Standard (New Jersey) and An Io-Iranian. These two firms together accounted for 1.46 percent of the total market in 1928 and had nearly tripled their combined positions by 1931. 72 In 1929, the national companies held 85.66 percent of the total petroleum trade, in 1931, 80.88 percent, the lowest position of the major companies, in 1934, 82.18 percent, and In 1936; 81.65 percent. 781935. was taken in preference to 1936 in table 18 because the data for the independent companies were not broken down in the latter year. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 independent company held more than a very small fraction of the trade.14 in wholesale prices for motor gasoline in Kingdom, 1.930-1939 [Net price per Imperial gallon] Date Wholesale price Time interval Date Wholesale price Time interval d. Months s. d. Months Oct. 21,1930______________ 1 3 --------- Mar. 22,1934 ---- -------- 1 4 5 Mar. 3, 1931______________ 13*a 41,1 May 1, 1936 -------------- 1 5 1 Ala. 28, 1931______________ 334 2 Jan. 14, t937 -------------- 1 538 1 6 203a May 22,1031_____________ 1 21,1 1 Feb. 12, 1937 -------------- A 27 1937 I 63?ea 23 11 July 18, 1931______________ 131 2 pr. -------------- , . Sept. 11, 1931_____________ 1 33% 2 July 29,1937-------------- 1 6 3 1032_____________ Sept. 14 1 63.88 12 Feb. 18, 1938_____________ 1 53% 63h , May 17,1933 ------------- 1 4 8 Mar. 4,1038 -------------- 1 5 Nov. 3, 1933______________ 1 5 538 Nov. 1, 1939______________ 1 . 5 20 One more important fact about the British market in these years remains to be noted-the remarkable stability of prices during the decade of the 1930's. As will be noted in table 19, which shows all 7'1 It was stated by Mr. Orville Harden of the Standard Oil Co. (New Jersey) that there had been two successful invasions of the British markets where outsiders had taken "a sub- stantial portion of the market." The first of the invaders was the Russians, in 1927 and after, and the second was Trinidad Leaseholds, Ltd., in "approximately" 1936. Joint hearings on the Foreign Contracts Act, op. cit., p. 149. As is shown in table 18, the Rus- sians had gained a position of only 4.53 percent of the total market in 1.928. They reached a peak marketing position in 1931 of 5.25 percent, and thereafter their share of the market declined. Mr. Harden may have had in mind, however, the position of the Russians as suppliers rather than as distributors in the British market, for they supplied not only their marketing subsidiary, R. 0. P., but also other British distributors, and also sold products to the national companies under the agreement of March 1.929. The Russians also sup- plied such commercial customers as municipal gas works and the like. The table attached to this footnote shows Russian imports into the United Kingdom, 1920-39. Imports in 1929 were paid to be greatly increased over those of earlier years. It may be observed that, beginning in 1933, these imports were fixed in a low and fairly constant proportion to total British imports; these imports probably reflect fairly well the Russian marketing position after 1933 as well. As to Trinidad Leaseholds, the following facts are known: (1) TLL (Trinidad Lease- holds, Ltd.) participated in the years prior to 1936 In "as is" and "pool" cartel arrange- ments in the Caribbean area ; see pp. 340 341 ; (2) TLL drew a substantial portion of its supply from 15 percent royalties paid to it by Standard Oil (New Jersey), which managed the North Venezuelan Oil.Co., Ltd., properties owned by TLL: (3) In 1936 TLL and Shell, later joined by Anglo-Iranian, formed a joint exploration and exploitation company, Trinidad Northern Areas, Ltd. In view of these close tics with the major international oil companies, it seems unlikely that TLL would pursue a vigorous program of price cut. ting in the United Kingdom, a principal market of the major companies. Imports of petroleum products into the United Kingdom from Russia, 3969-59 1929----------------------------------------------- 1930-------------------- ------------------------- 1931---------------------------------------------- 1032 ----------------------------------------------- 1933 ----------------------------------------------- 1934-- --------------------------------------- 1935-- ----------------------------------------- 1936-- ------------------------------------------- 1937----------------------------------------------- 1938---------------------------------------------- 1039 (6 months)---------------------------------- 200, 000 264, 431 270, 929 167, 715 74.249 65,743 79, 642 80, 71.7 85, 607 79.982 32,696 0 9. 2 11.0 12.3 7.6 3.0 2.4 2.8 2.8 2.8 2. 5 1.9 Source: The, Petroleum Times; Feb. 27,1937, p. 278, Jan. 29, 1938, p. 134, Jan. 28, 1930, p. 126, July 22, 1939, p. 113. Percent of total im- ports of crude oil and refined products into the United Kingdom Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 changes in the wholesale price of motor gasoline during this period '75 wholesale prices in the United Kingdom changed only 17 times dur- ing the period of just over 9 years. Five of these changes occurred in 1931, probably reflecting competitive disturbances in the .market. The six changes in 1937-38 reflect substantial increases in the United States Gulf export price of gasoline and in tanker rates from the Gulf to the United Kingdom-the two principal components in the cost of British gasoline-and their subsequent substantial decline.- Other than this price changes occurred about once a year, while there were two periods of 20 :months with no price changes. Summary.-The stability of gasoline prices in the United Kingdom reflects the solidity of the structure of control that had been erected there between 1928 and 1939. The long-term cooperation of the national companies-Standard (New Jersey), Shell, and Anglo- Iranian-and their predominance in the market provided the core of this control. Built around this core, and supported by it was a scheme of control that may be likened to private licensing of distributors and retailers, although the scheme was less successful in the control of retail trade. The national companies applied the "as is" principles among themselves, and these principles were, in effect, transmitted to the independent distributors through modified cartel-like arrange- ments. Except for sporadic rivalry among retailers, resulting largely from the activity of the "pirates," price competition had been almost completely eliminated from the petroleum industry by the latter thirties. France The French marketing subsidiaries of the international oil com- panies encountered unique problems in the application of "as is" F rinciples. These problems arose out of the interplay of French po- tico-military, currency, and foreign-trade policies.77 The effect of these policies, together with the growth of an indigenous cartel system, provided a substantial control over the oil trade, although from the point of view of the major companies, there were serious leakages in the system. Although France consumed only 55 to 60 percent as much petroleum products as the United Kingdom, it stood next to that country as a major oil market. A substantial interest in the French market was ROP shaded these and retail prices as a matter of policy but had only a small portion of the market. Trinidad Leaseholds, Ltd., shaded the wholesale prices, but. controlled retailprices for its products at the levels fixed by the national companies. See weekly section on prices in the Petroleum Times, 1936-39. 4' While British prices are said to be based on these components of cost, actually their reaction to fluctuations in them are slow and of much smaller amplitude. In the 4!/2-year period, :1935-July 1939, for example, British net retail gasoline prices, 1. e., wholesale prices as given in table 19, plus 1 penny and less taxes, changed seven times. The ratio of the lowest price in this period to the highest was 1 : 1.28. The United States Gulf export price in this period changed 51 times and the ratio of the lowest to the highest price was 1:1.53. The average monthly United States Gulf-United Kingdom clean tanker rates changed each month but three during the 41/2 years, and the ratio of the lowest to the highest 'price was 1 : 3.18. Computed from data in the Pettroleum Times, July 15, 1939, p. 69. ?7 French petroleum policies during the interwar period were determined by the follow- Ing considerations: (1) The fact that France was almost wholly dependent on foreign sources for its supplies of crude oil and refined products Various politico-ecommnlc-mili- tary problems were involved here, including (a) fear of blockade during wartime, (b) fear of being pinched in times of world shortages, and (c) fear of being subject to the control of petroleum monopolies or of foreign governments. (2) The fact that foreign currencies were required to purchase the needed supplies. Involved here were French monetary problems of the interwar period, and the problems of the determination of prices and of rates of exchange. See "French Petroleum Policy of 1937," by R. Rama.dler, The Petro- leum Times, June 12, 1937, pp. 766--767. A further consideration, related to the above, was probably the desire to protect and expand domestic industry and trade. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE- INTERNATIONAL PETROLEUM CARTEL 321 held by four international oil companies-Standard (New Jersey)," Royal Dutch-Shell, Anglo-Iranian, and Socony-Vacuum Oil CO., Inc.-which, as in other countries, cooperated in the application of "as is" principles. French petroleum, policies.'?-French petroleum policies during the interwar period were based on two laws of March 1928. One of these laws provided that only licensed firms would be permitted to import petroleum products.- Small importers, i. e., those importing less than 300 metric tons per year, were required to obtain licenses, but were exempted from Most other provisions of the law. Large firms, I. C., those importing, 300 metric tons per month or more, were subject to quota restrictions; they received 3-year renewable licenses permitting each to import only specified ratios of the total import trade in certain products."' These quotas were determined by the Government on the basis of the actual performance of the licensee in the market, and were reviewed at 6-month intervals so as to keep the companies "in balance,," i. e., so as to preserve the relative positions of the companies in the im- port market. Import licenses were granted to 46 distributors in March 1929. The purpose of the law was said to be to achieve the twin goals of protecting established interests in the trade and of protecting the public against the development of excessive controls by foreign "combines." 82 The second of these laws provided for stiff increases in import duties on refined products, its purpose being to "revive" and develop the French refining industry.83 Further measures to support this policy were taken in 1931, when it was provided that import authori- zations, good for 20 years, would be issued to those concerns agreeing to erect refineries in PA ralice.84 It was anticipated that these refineries would handle, as it became available, allotted quantities of the crude oil obtained under the French interests in Iraq.85 In all, 10 such 78 The principal French Interests of Standard (New Jersey) are in the United Petroleum Securities Co., which is owned by Standard (67.5 percent), Gulf Refining Corp. (22.5 per- cent), and Atlantic Refining Co. (10 percent). United holds an 81.54 percent Interest in Standard Prancaise des Petroles, a marketing company. American firms in the French market, other than those previously mentioned, included the Texas Co. and Sinclair Oil Corp. 79 This section is taken mainly from the following sources : The Petroleum Times, April 10, 1937, p. 48:1. and June 12, 1937, pi?. 716-717 ; report of the Oil Investigating Com- mittee of 1945 (Sweden), ch. IV ; and joint hearings on the Foreign Contracts Act, op. cit., pD. 142-144. eo An earlier law of 1925 required licensees to maintaiif reserves equal to 3 months' supply and to publicly post their prices as a condition for obtaining the licenses. (The latter provision was intended as a protection to the public, but it may also he a useful device for enforcement by a cartel of price uniformity.) In the law of March 1928 the reserve requirement was increased to 4 months' supply. 81 These Import restrictions applied only to the trade in benzene, kerosene, gas oil, and lubricating oils. These were the most. Important petroleum products in terms of volume of business and of value. All petroleum products other than those mentioned were free of quota restrictions. ea The rapporteur of the bill stated in the Chamber of Deputies that among the pur- poses of the bill were "to keep the balance equal between all ; to fix each one's share in our supplies; to insure later on the placing on the French market both of our share in Mesopotamian oil * * * and of the synthetic petrol.which we may tomorrow extract from our coal and lignite." IIe later stated that the purposes of the bill were to prevent the further development of the hold of the "combines" on the French market, and yet to ptect the "vested interests" of the combines, and to establish diversified sources. of oil byroissuing import licenses to companies of all nations. 83 These import duties were again substantially increased on November 12, 1938. I" The licensees were also required to promise to work jointly with the state in the promotion of policies declared to be in the public interest. sa In 1936 and 1937. 52.6 percent of crude oil imports into France were from Iraq. One of the licensees was the Compagnie Francais des Petroles (CFP), which- not only held the French interests in Iraq but also was granted the privilege of refining about 25 percent of total French marketing requirements, all French distributors being required to offtake from CFP up to 25 percent of their total combined requirements. CFP was owned by the French Government, the international oil companies, and others, and was founded in 1931 see p. 54. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 322 THE INTERNATIONAL PETROLEUM CARTEL special licenses were issued to companies and to groups of companies. These special licenses established refining quotas which were subject to revision every 6 months. It seems probable that the refining quotas corresponded fairly well to the import quotas, not only because both were held by substantially the same groups of companies, but also because the import quotas tended to state the quantities of the permitted imports which were, in fact, to be refined domestically from imported crude. This French policy substantially fulfilled its pur- pose. While in 1929 only 5.8 percent of the total imports of petroleum consisted of crude oils, the proportion had risen to 83.7 percent by 1936. These figures reflect the rapid growth of domestic refining facilities and of their output of refined products. Cartel operations in France.-The French petroleum policies fur- thered the growth of associations which tended to bring the more important oil companies into intimate cooperation. Nearly all of the French distributin, companies of any size were joined together in the Board of Liquid Fuel Distributors.4, This has been described as a "voluntary " group set up under auspices of the Government. Every company doing business in France in 1928 and subject to the quota system was invited to join this "syndicate," and thereafter member- ship was closed by a French law.8? The function of the syndicate was to represent these companies before the appropriate agencies of Gov- ernment from time to time as current problems arose. Frequently these problems had to do with prices."" The procedure in the syndi- cate was as follows: The representatives of the companies met to- gether. They talked over their problems. That was the.niethod of contacting the Gov- ernment. They chose from the syndicate a president, or a small group, to confer with the Government on their problems.8" This intimate cooperation of the principal oil companies in France extended to the formation of cartels governing the distribution of petroleum products. Four distributors, representing about 51 percent of the trade in 1936, were bound together in the application of the "as is" principles." Three of these companies (Standard (New Jer- sey), Royal Dutch-Shell, and Anglo-Iranian) based their quotas, as the Achnacarry agreement provided, on their market performance during 1928. Socony-vacuum, which adhered in France to the "as is" rinciples, effective January 1,, 1935, was allowed to take 1931 as its `qualifying period." There were no substantial changes in the-base se Chambre Syndicate de In Distribution des Carburants of des Combustibles Liquifies. This syndicate and seven others representing the Interests of the larger companies in other branches of the French oil industry were joined together in the Union of French Oil Boards, a central organ. The smaller companies were similarly organized under a central organ, the French Fuel Federation. In addition there were five other such central organi- zations, representing member associations of retailers and specialized divisions of the industry ; the Petroleum Register. 1950. 87 Foreign Contract Act, op. cit., p. 144. While not explicitly stated, this would imply that no quotas would be granted to new companies large enough to qualify under the quota system. While the size of the quotas that were granted were determined by the Government, the function of the syndicate was to negotiate with the Government on beha'f of the French petroleum Industry on quota and other matters concerning the industry. Ss The French Government did not fix petroleum prices, but under the laws of 1928 it 'controlled the prices by a review of price changes. It could order the revision of any prices it found ` unreasonable." so Ibid., p. 1.44. 10 Standard Oil Co. (Now Jersey) documents : Deliveries Into Consumption-Europe. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE. INTERNATIONAL PETROLEUM CARTEL 323 year quotas during the period ending in 1936.31 The distribution quotas for benzine and kerosene are shown in table 20. TABLE 20. Distribution and import quotas in France for benzene and kerosene (Expressed in percentages] Base year "as is" quotas: Tradinv re- Trading resu its, 1936 Annual port quo 3 yea beginn im- tas:2 rs ing sults, 1928 Apr. 1, 1934 Benzine: 22 18 16.04 21.94 Standard (New J(Irsey) - --------------------------------- Royal Dutch-Shell ----------------- ----------------------- . 17.23 10 84 12.55 7.26 15.34 10.07 Anglo-Iranian------------------ ------------------------- Socony-Vacuum - ----- ------ - ---- -------------- . 18.23 6.54 7.92 Total "a sis " ------------------------------- 58.48 42.39 55.27 . ------ ----------_-------_----- ais des Petroles n Ci Fr -------------- -------------- 25.85 ------ g e. a All others---------------------- ------------------------- 41.52 57.61 18.88 100.00 Kerosene: Standard (New .Jersey)----------------------------------- 21.50 16.77 23 02 19.84 79 24 Royal Dutch-Shell---------------------------------------- 20.87 . 9 . 52 12 Anglo-Iranian ----------------------- 8.39 5 7. 4 . 98 7 SoeonY V:Lelltrm------------------------------------------ 1 8.10 7.3 . Total "as is" - --------------------------------------- 58.86 55.08 65.13 29.93 Cie. Frangais des Petroles ---------------------------------- ------ 41 14 --- "4 92 4.94 All others- ------------------------------------------ ---- --------------------------- ------------------ . . Total market - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- I 100.00 100.00 I 100.00 I Socgny-Vacuum quotas were based on 1931 . market performance and were effective Jan. 1, 1935. 2 Computed from table in International Petroleum Trade, Mar. 28, 1938,1): 76. In 1932, it is reported,92 a cartel. was formed by all of the major French companies. The members agreed upon a division of distri- bution facilities and upon distribution quotas. It is not known whether the "as is" quotas were supplanted by the cartel agreement or included in it. This cartel broke down by 1935, owing in part to the loophole in the basic petroleum laws exempting from quota restrictions all "small" importers whose imports averaged less than 300 metric tons per month. These small importers had increased greatly in numbers, and the volume of their imports had increased sufficiently to undermine the cartel.9' Negotiations for a reconstruc- tion of the cartel were going on in late 1936, according to a memoran- dum writtenby an official of Standard (New Jersey).- The erosion of cartel. control of the market was due not only to the exemption of small firms from quota restrictions but also to an official policy encouraging the growth of such small local firms in order to .91 The purchase of small outsiders slightly increased Shell's asphalt quota In 1930 and Standard s asphalt quota in 1932. Further changes occurred when the "combined black oils" quotas were broken down In 1934 and 1935. In 1934 separate quotas equal to those for benzine were established for automotive black oil and it was agreed that there would be no tonnage adjustments, fines, penalties, etc., on this product. In 1935 the "combined black oils" euota was separated into two elements (fuel oil and gas oil) quotas for "a-h being awarded on the basis of the "qualifying period" performances in the market with adjustments for the separate treatment of automotive gas oil. p2 Report of the Oil Investigating Committee of 1945 (Sweden), ch. IV, p. 13. OII Keen price competition is reported to have followed the dissolving of the cartel in the Paris and other municipal markets (lbir1,l. Under the international agreements, the "as is" parties were free to follow Independent price policies In cases where losses in market position such as those in France were being suffered. N Dated October 1, 1936, and initialed ".1. 11. R.," the memorandum includes the benzine quotas for 1930-these differed only slightly from those for the base year-which were to be. applied by the four companies, pending the determination of new cartel quotas. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 324 THE INTERNATIONAL PETROLEUM CARTEL "diversify" the sources of petroleum products.?'5 The entry into the market not only of these numerous small firms but also of the market- ing subsidiaries of the Compagnie Francais des Petroles (CFP) which occupied a favored position in France, considerably reduced the per- centage positions of the "as is" companies in French markets from those attained in 1928, as is shown in the second column of table 20. The "as is" companies, for example, held 58.48 percent of the benzine market in 1928 as compared with 42.39 percent in 1936, although in the much smaller kerosene market their percentage position during these years decreased only from 58.86 percent to 55.08.96 TABLE 21.-Deliveries into consumption of "controlled" products' ia? France, 1928, 1931, 1934, and 1936 [In metric tons] 1928----------------------------------------------------------- 1931---------------------------------------------------------- 1934 ----------------------------?------??----?-------- 1936----------------------- ?--?----?---?---? Deliveries by the "as is" group 2 Total deliv- eries 2, 054,108 3,226,027 3,951,566 4,699,62 1,292,881 1,811,991 2,101, 216 2, 392,128 62.94 56. 17 53.25 50.90 I Includes all petroleumproducts sold for domestic consumption except lubricating oils and specialty products. Includes French marketing subsidiaries of Royal Dutch-Shell, Standard Oil Co. (Now Jersey), Anglo- Iranian Oil Co., Ltd., and Socony-Vacuum Oil Co. Nevertheless, despite the policies favoring the small French firms and the CFP, the international oil companies managed to hold a major proportion of the total French market. As shown in table 21, the four companies in. 1928 accounted for nearly 63 percent of the total volume of all of the products covered by the international. marketing agreements which were sold for domestic consumption in France. Al- though in the following 8 years these proportions declined substan- tially, the four companies still held about 51 percent in 1936. In terms of actual volume the "as is" companies increased their deliveries in France by 85 percent from 1928 to 1936, chiefly in gas and fuel oils. The percentage losses of the major companies were due chiefly to their failure to capture a representative share of the great increase in sales in the benzene market, which was particularly susceptible to invasion by the small concerns. At the same time, however, French petroleum policies operated to protect the interests of the major oil companies through the import quota system. In the third column of table 20 the annual import quotas for the 3 years beginning April 1, 1938, are shown. These quotas apparently represent the shares of total petroleum supply allotted to the companies by the Government, including both the quan- tities to be refined under the refining licenses and the quantities to be imported under the import licenses. While these quotas do not repre- 95The International Petroleum Register, 1950, lists 142 distributors in the French market. Of these, 22 were members of the Board of Liquid Fuels Distribution, the syndi- cate of the larger distributors, while 120 were independent firms. 00 The percentage share of the four "as is" companies in the "combined black oils" market-i. e., the markets for fuel oil, gas oil, and automotive gas oil-was 83.41 percent in 1928, and 59.83 percent in 1936. In asphalt, the market position in 1928 was 78.41 percent ; and in 1936, 82.95 percent. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 325 sent exactly the same thing as the "as is" distribution quotas-they rep- resent "supply" rather than distribution positions-the close corre- spondence of the 1938 import quotas to the base-year market positions is striking. This close relationship illustrates the Government's de- clared intention to preserve but not to extend the basic positions of the companies. While the strong positions of the international oil com- panies in the market had been eaten away to a degree, particularly in the benzene market, they received the support of the Government in preserving their historic supply positions. Thus, although there had been considerable changes in the actual market situation, the import quotas do not reflect these changes, but allot to the companies the his- toric positions to which, in "as is" terminology, they are entitled. To this extent, therefore, the "as is" principles and French petroleum policies had similar purpose. Germany.-It is interesting to note that in Germany, the country where the cartel principle was brought into its earliest full develop- ment, there were no national petroleum cartels prior to the introduc- tion of the "as is" arrangements by the international oil companies."' In 1928, the three major international oil companies-Standard (New Jersey), Shell, and Angl.o-Iranian-which had captured control of more than 60 percent of the domestic market,?? came to an agreement which apparently provided for the application of the "as is" prin- ciples, as will be suggested by the following paragraphs. In addi- tion, it was reported "8 that some important German firms cooperated with the three major companies in this 1928 agreement, including the Benzoleverband, an association of distributors, and the marketing subsidiaries of Leuna and I. G. Farber," which produced motor alco- hol and gasoline blends. The 1928 agreement was defended in a public statement' issued on behalf of the major oil companies by "Olex" Deutsche B. P., a sub- sidiary of Anglo-Iranian, in response to public and oil trade criticism. "Olex" denied that the German consumer was being exploited by a "close combine" of the major oil companies through inordinately high prices and onerous trade terms. It stated that, while there had been no understandings whatever among the companies prior to 1928, they had entered upon "limited arrangements" in that year in order to "safeguard" the interests of those in the oil trade and "to counteract the senseless competition" then prevalent. These ar- rangements, which were still in force in 1930, it said, were not a price- fixing scheme, since the parties were all free to fix their own prices. Each party was obliged, however, to give notice to the other parties to the agreement 24 hours prior to any contemplated price changes. The parties also had agreed upon a graduated system of rebates de- at According to a special report in the Petroleum Times, March 15, 1930, this was the result of an agreement reached between the German Government and IIerr von Riedemann, an agent of Standard (New Jersey), following world war I. It was said that Riedemann obtained an "assurance" from the Government that no "monopoly" would be formed in that country for a 10-year period. In return, he procured supplies of petroleum for Germany at' a time when supplies were short and Germany was reduced to entertaining proposals from the Rumanians that a monopoly be granted to them. 9 It was said that, in 1933, the three international oil compitnies owned 50,000 of the 55,000 filling stations in Germany. This was stated in an article appearing in the Ger- man oil trade journal Erdol and Teer, and translated in the Petroleum Times, December 9, 1933, p. 710. as The important German distributor, Deusehe Gasolin A. G., was at that time owned 50 percent by Standard (New Jersey), and 50 percent by I. G. Farbenindustrie. Y Translated in the Petroleum Times, September 13, 1930, pp. 429--430. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 326 THE INTERNATIONAL PETROLEUM CARTEL signed to "insure appropriate margins to the various classes of mer- chants." "Olex" stated that the big companies had "consistently" opposed any increases in these rebates. By 1930-31, however, this 1928 agreement had. been dissolved, ac- cording to Erdol and Teer,2 owing to the development of new and disturbing problems in the German market. Among these problems were (a) increases in German production of crude oil,' (b) increases in the share of the market taken by the Russians, (c) decreases in consumption of petroleum in Germany, (d) the growth of "outsiders," especially in distribution, and (e) the consequent breakdown of whole- sale prices. Thus it became necessary for the major companies to determine new quotas, more applicable to the changed situation, and to bring more of the outsiders into the cartel. Accordingly new cartels were formed for benzene and gas oil in 1932 and for kerosene in 1935.4 The German cartel for benzene and white spirit went into effect on September 1, 1932.1 The quotas that were adopted were relative dis- tribution quotas ; that is, their purpose was to preserve the relative position of the members to each other rather than the relative position to the total market. Thus, the quotas fixed a ratio to which each mem- ber was "entitled" out of the combined sales of the cartel members, unlike the distribution quotas under which the cartel members were each entitled to a fixed ratio of the total market. Under the relative quotas, the amount of business to which a member was "entitled," therefore, was determined not by the size of the market, but rather by the amount of business done by the cartel as a whole.", Thus each member was tied to his fellows, and all were to rise or fall together. TABLE 22.-Relative distribution quotas for benzene and white spirit in Germany [Expressed in percentages] Sept. 1, 1932 I Jan.. 1, 1937 Standard (New Jersey) -------------------------- -------------------- l I)' R h Sh 21.48 21. 61 tc - oya ell . , ------------------------------------------------ 21. 48 21.61 Anglo-Iranian -------------------------- 10 68 10 74 Other carte] members--------------------------------------------------- . 46.36 . 46.03 The relative quotas that were adopted at the beginning of the cartel are shown in table 22. The quotas allotted to the "as is" companies totaled 53.64 percent, while the quotas of the 18 other members totaled 46.36 percent, including a quota of approximately 16 percent held by the Benzoelverband, then by far the most important outsider in Ger- many. These quotas were adjusted slightly from what they would have been in the base year, 1928. During the first full year of opera- 2 See footnote 98, p. 325. s This problem was settled by an agreement of the major companies to "absorb" all additional German production before selling imported products, see p. 251. 4 No cartel was formed for the asphalt market, so the "as is" cartel arrangements pre- vailed for the International oil companies- The "as is" group held 52.88 percent of this market in 1928. and 78.71 percent in 1936. Standard Oil Co. (New Jersey), documents, Deliveries Into Consumption-Europe. e LPxcept where otherwise specified all information and the data for table 22 In this section on Germany is taken from Deliveries Into Consumption-Europe. I Memorandum Initialed J. II. R. and dated October 1, 1936. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TILE INTERNATIONAL PETROLEUM CARTEL 327 tion, the cartel accounted for 86.85 percent of the total benzene trade in Germany, and this business was distributed among the cartel mem- bers in accordance with their relative quotas. Of those outside the cartel, Derop (the Russian marketing organization in Germany) ac- counted for 7.16 percent of the total trade in 1933, a second outsider, T'ostgeschaft, for 2.25 percent, and various others for 3.74 percent. The outlines of the cartel changed little until the end of 1936, despite complaints that the quotas, being based on 1928, were unrealistic under current conditions.' Although the quotas were adjusted nine times in 4 years, the changes were minor in character. The quotas effective on January 1, 1937, after the ninth change, are shown in table.22. The more important changes occurred as a result of shifts in membership, the Russi ans entering the cartel in 1935, while nine cartel members had dropped out, by the end of 1936. These changes did not greatly affect the proportion of the total benzene trade done by the cartel, which was approximately S4 to 85 percent during 1934-36. It appears, there- fore, that the cartel had succeeded in stabilizing the proportion of the business to be done by it, and that this business was distributed among the members in accordance with relative quotas based on 1928 which remained fairly constant throughout. These results thoroughly accorded with the "as Is" principle and must have been highly satis- factory to the international oil companies. .One month after the benzene cartel began its operations a gas oil cartel was forined, which apparently covered the markets for all "black oils"-gas oil, fuel. oil, and automotive gas oil. Tinder this cartel, relative quotas similar to those awarded under the benzene cartel were determined, the three international oil companies being entitled to 93.57 percent of the total business of the cartel and the other members to 6.43 percent. Apparently these quotas were unrealistic, and the car- tel was reconstituted, effective January 1, 1935, with distribution quotas based on the total market rather than relative quotas. These quotas, which were effective as of January 1, 1935, appear to be base year (1928) quotas adjusted to accord with current market' conditions. These quotas were readjusted from time to time; and, effective on January 1, 1937, they were as follows : Percent Standard (New Jersey) ------------------------------ 40.22 She11-+--------------------------------------------- 21.97 Anglo-Iranian----------------------------------------- 1.0.72 members --------------------------------------- Other 20. 13 , Norimelnbers----------------------------------------- 6.96 1 There were two "other members," Derop (the Russians) with a quota of 18.02 percent, and a firm called "Olhag," with a quota of 2.11 percent. Although undesstatinc, somewhat the actual position in the market held by the nonmembers in 1935-36, these quotas reflected fairly closely the actual division of the market. In the kerosene market, two international. oil companies, Standard (New Jersey) and Anglo-Iranian, held about 95 percent of the market in 1928 and more than 85 percent thereafter. These two firms operated under "as is" arrangements, dividing their joint business in the ratio + It was complained In 1933 that the "frenzied efforts" to erfoa,ce the quotas led to market disturbances, since the principle of the quotas wis that "the laggard shall he given a helping hand either by diverttng business to him or by granting hlni pecuniary compensi tion." Article in ErdDl iind Teor, op. cit. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 328 THE INTERNATIONAL PETROLEUM CARTEL existing between them in 1928, namely, Standard, 73 percent, and Anglo-Iranian, 27 percent. A cartel was formed in this market, with quotas made effective January 1, 1935. The two international oil companies received a joint quota of 86.44 percent, to be divided between them on a 73-27 basis; other members received total quotas of 5.48 percent ; and nonmembers were regarded as entitled to 8.08 percent of the total market. These quotas actually fell somewhat short of the actual performance of the two international oil companies, which held nearly the same share of the total market in 1935--36 as in 1928. Thus the international oil companies achieved a fair degree of suc- cess in maintaining their proportion of the various petroleum markets in Germany, as determined by the base year, 1928. In other words, the cartel arrangements in this respect were in full accord with the "as is" principles. These quotas, based on 1928 and adjusted to meet current conditions in Germany, remained in effect at least until 1937. While the German Government came to play an increasing role in. petroleum industry affairs, as it did in other industries, this fact should not be permitted to obscure the origin of the German petroleum cartel system in the "as is" principles sponsored by the international oil companies. That the German cartels were a substantial success from the point of view of the international oil companies is shown by the statistics of distribution. The "as is" group accounted in 1928 for 61.50 percent of the total trade in the products covered by the various "as is" and other cartel arrangements. In 1936 not only did they account for 60.14 percent of the total delivery into domestic markets, but other cartel membersekl.osely allied with them accounted for a further 24.50 percent. Belgium and the Netherlands In Belgium, as in other European countries, the three international oil companies-Standard (New Jersey), Shell, and Anglo-Iranian- not only applied the "as is" principles but also drew their most im- portant competitors into cartel arrangements embodying these princi- ples. However, the cartels that were formed, especially in the benzene market, ran into difficulties because of the fact that Belgium was a grans-shipping point for western Germany and other countries. Thus, there was always present in transit a substantial volume of petroleum products 8 and, while only a small part of this supply found its way into domestic consumption, it was sufficient to cause "disturbances" in the market. A benzene cartel was formed in Belgium, with quotas effective August 1., 1930.9 Members of the cartel included the marketing sub- sidiaries not only of the three international oil companies, but also of Texas Co., Sinclair Oil Corr.,to Atlantic Refining Co., and two other firms known as Deco, a British concern,-1-1 and Purfina, a domestic company. The quotas, which were fixed on a slightly different base 8In 1937 about 4.4 million barrels of refined products were reported in transit in Belgium, 73 percent of this being benzene. These supplies were of "varied ownership," In 1937 Belgium's total consumption was about 3.7 million barrels. Int"rnatio ial Petroleum Trade, May :31, 1940, p. 198 ; The Petroleum Times, January 15, 1938, p. 88. All information, including the data for the tables 23 and 24 In this section on Belgium and the Netherlands is taken the Deliveries Into Consumption-Europe, unless other- wise specified. 10 Sinclair-then Consolidated Oil Corp-sold its Belgian and German subsidiaries In 1937. according to its annual report for; that year. ii Deco was the Belgian subsidiary of Phoenix Oil Products, Ltd. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 329 period than the usual one of the calendar year, 1928,12 allotted 66.97 percent of the trade to the "as is" group, and 31.48 percent to the other 6 participants. In 1931, the first full year of operation of the cartel, the "as is" companies actually accounted for 64,37 percent of the trade and the 6 others for 31.28 percent. The cartel soon ran into difficulties, however, most of which were probably traceable to the entry of small amounts of "uncontrolled" benzene into the market. As in the case of the "pirates" in the United Kingdom and the "small importers" in France, the total share of the market held by the small "outsiders" in Belgium was small, amount- ing to 6.16 percent in 1933, and from 4.5 to 5 percent in other years. Nevertheless Deco withdrew from the 1930 cartel in 1933 and Sinclair and Texas in 1934. Negotiations immediately began for a new cartel, the chief points of discussion being restrictions on the domestic re- fining industry and on prices, which, it was said, had not been"eco- nomic." " These negotiations culminated in a new cartel agreement which, substantially restored the 1931 quotas, effective July 1, 1935. In 1936, however, only the "as is" group and Purfina adhered to the cartel arrangements, while Texas, Atlantic, and Sinclair, although nominally cartel members, did riot 14 Cartels in the other product markets were more stable. Firms representing 100 percent of the trade in kerosene, for example, entered into a cartel with the familiar 1928 base period. The "as is" group members held combined quotas of 78.59 percent, while Texas, Purfina, Sinclair, and Deco held quotas totaling 21.41 percent. Among other adjustments in the quotas, there was one for over- and under-trading, effective January 1, 1933, which resulted in minor changes in the quotas of most of the cartel participants'5 During 1933, however, outsiders acquired nearly 3 percent of the market, and by May 1934, both. Deco and Sinclair withdrew from the cartel. Nevertheless, the cartel. continued to operate, with its members retaining control of 93 to 95 percent of the market. A similar cartel was formed in the black oils market. The mem- bers, representing 98.27 percent of the trade during the base year, 1928,16 included the "as is" group, Purfina, Sinclair; and the Gulf Oil Corp. During the years that followed, however, a number of small domestic firms entered the trade and Sinclair withdrew from the cartel. In 1936 these outsiders accounted for 23.34 percent of the black oils business. Two international oil companies-Standard (New Jersey) and 12 The 6-month period, August 1, 1927, to January Si, 1928, was the "qualifying period The "as is" parties, however. adjusted the quotas awarded to them so that the exact relationships that had prevailed among them during the calendar year 1928 were pre- served. These adjustments, which were minute in size, again illustrate the meticulous care with which the quota relationships were maintained. In 1933 the quotas of Atlantic. and Purfina were increased slightly to record gains they had made against outsiders in 19,32. Is It was proposed that imports be restricted only to existing refineries and that the erection of new reflneries be prohibited the Petroleum Times, September 8, 1934, p. 241. 14 The "as is" group's share in the market was 65.46 percent, a figure not greatly different Atl Atlantic, held percent 6.05 the those in 1936, while lt 3e out iders, including dTex s, to , and held percent of, the trade. 15 It should he noted again that such changes in the quotas are prescribed in the interna- tional agreements as a separate action, to follow after the normal and regular adjustments of over- and under-trading by compensatory sales and the exchange of customers. lU The sole outsider at the time the cartel was formed was 'i'exa.s: The base year quotas assigned to the "as is" group totaled 60.93 percent, and those for the other three partici- pants, 37.34 percent. These quotas were not changed by Sinclair's withdrawal in 1934 except for the striking out of its quota. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Shell-applied the "as is" principles in the asphalt and white spirit markets as well. The two companies predominated in both markets, holding about 88 percent of the asphalt market in the base year, 1928,17 and about 80 percent of the white spirit market in 1930, when a cartel was formed. The other participant in the white spirit cartel was Deco, which held the remaining 20 percent of the trade. In 1932, however, some outside competition developed and Deco withdrew from the cartel a year later." In 1936, the two "as is" companies held about the same proportions of the trade in each product as in the earlier years. In Belgium, therefore, cartel arrangements conforming for the most part to quotas based on the "qualifying period" of the international agreements were established in all important domestic product mar- kets. In 1931, a year when all. the cartels were in full operation, the. "as is" group accounted for 65.71 percent of the trade in all petroleum products covered by these cartels and by the international agree- ments, while other cartel adherents held 29.65 percent of the trade and outsiders only 4.64 percent. In 1936, the "as is" group accounted. for 62.86 percent of the total domestic Belgian trade in. these prod- ucts, a decline of 3 percentage points. The share of the other cartel adherents, however, had dropped to 13.03 percent, mainly due to. defections from the benzene cartel. The record of cartel arrangements in the Netherlands is so similar to that in Belgium as to require little additional comment. Cartels were formed in 1930 in the benzene and kerosene markets, the members of both. cartels being the three members of the "as is" group, and Texas, Sinclair, and Purfina. In 1931 the cartels as a whole controlled 88 percent of the trade in benzene and 95 percent in kerosene. This strong control persisted until Texas left both cartels on July 1, 1936. Cartels were also formed in the black oils and white-spirit markets,1e at about the same times and with about the same membership as in Belgium. Standard (New Jersey) and Shell also cooperated in the asphalt; market, of which they controlled 84-89 percent. The basis of the quotas in all these cartels was the "qualifying period" of 1928 prescribed in the international agreements, and all subsequent adjust- ments in the quotas altered the basic relationships only slightly. The. "as is" companies, which had controlled nearly 75 percent of the Dutch petroleum trade in 1931, the first year of full cartel operations in all divisions of the trade, still controlled 71.65 percent in 1936. The share of the market held by other cartel members fell from 17.19 per- cent in 1931 to 11.49 percent in 1936, mainly due to the withdrawal of Texas from the cartels. u In 1928 Shell held 87.46 percent of the asphalt market and Standard (New Jersey), 0.12 percent. A firm known as Calol also participated in the arrangements. Standard Improved its quota by the acquisition of Calol and another outsider, so that in 1935, after the quotas had been revised as a result of adjustments for over- and under-trading, its quota was 8.17 percent, and Shell's was 86.62 percent. Texas participated in the cartel arrangements in the asphalt market from August 1, 1932, to February 2, 1934. 19 The base year (1929) quotas were: Standard (New Jersey), 26.32 percent; Shell, 53.68 percent; Deco, 20 percent. These quotas remained in effect throughout, except that Deco's was marked as an outsider's quota after 1933. 10The base-year quotas for the black-oils cartel members were: Standard (New Jersey), 20.863; Shell, 62.66: Anglo-Iranian, 3.68: other members (Gulf and Pnrfina), 11,94. Three nonmembers held 0.86 percent of the trade. These quotas were adjusted, chiefly for Gulf's benefit, in 1932 and 1936, the cartel claiming 100 percent of the trade, although 8 or more outsiders actually held 4.2 percent in 1936. The three members of the white- spirit cartel, Standard (New Jersey), Shell, and Deco, held 95.6 percent of the trade in 1929, the, base year : quotas were allotted' on the basis of 100 percent, however, although outsiders subsequently gained 15 percent of the trade. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLVtM,t CARTEL Other case studies The preceding case studies have illustrated in some detail the appli- cation of the international marketing agreements in local markets and the resultant development of local cartels. In this section less detailed studies are presented of other local cartels. The information on which these are based is taken for the most part from the Standard Oil Co. (New Jersey) documents, Deliveries into Consumption-Europe and Deliveries into Consumption-Latin America. Supplementary in- formation has been given when available20 TABLE 23.-Deliveries into consumption of "controlled" products 1 in Belgium, 1931 and 1936 [In metric tons] Tons -------------------- d (New Jersey) d St 126, 071 27.03 140, 527 23.08 0 ------------- ar an --------------- ------ l Dutch-ShelL R 127,265 27.29 176,860 29. 5 10 73 - -------------- oya Anglo-Iranian ----------------------------------------- 53,132 11.39 65,350 . ---------- ------- tal "as is" group T 306,458 65.71 382, 746 62.86 13 ------------ - o Other. cartel members---------------------------------- 138, 278 29.65 79,366 .03 tal cartel T ----------------- 444, 731 95.36 462,112 75. 89 o -------------------- Nonmembers------------------------------------------ 21, 616 4.64 146,782 24.11 I Includes all petroleum products sold for domestic consumption except lubricating oils and specialty products. TABLE 24. Deliveries int oconsumption of "controlled" products 1 in the Nether- lands, 1931 and 19361 [In metric tons] -------------- d (New Jersey) d S 242, 057 34.27 282, 223 29.47 ------------------ ar tan --------- -------------- l Dutch-Shell R 272,848 38.62 385,702 40.28 90 ------------ -- oya Anglo-Iranian------------------------------------------ 14,039 1.99 18, 154 1. ---------------- roup s is" l " T t 528,944 74.88 686,089 71.65 -------------- g a a o Other cartel members---------------------------------- 121, 451 17. 19 110,061 11.49 artel l T t -------------- - 650, 395 92.07 796,140 83.14 c a o - --------------------- Nonmembers------------------------------------------ 66,028 7.93 161, 457 16.86 I Includes all petroleum products sold for domestic consumption except lubricating oils and specialty products. The Scandinavian countries.-For the most part, the available in- formation concerning petroleum cartel activities in Denmark, Nor- way, and Finland is limited to reports on "as is" group affairs dur- 01 See p. 288, footnote 40. In the ease studies of Latin-American countries, summary tables are not presented because of difficulties in converting the statistics given in the Standard Oil Co. (New Jersey) documents, Deliveries Into Consumption--Latin America, into a common unit. In terms of volume of sales, the most important products in most Latin-American markets are fuel oil, and gasoline in order of Importance, and details are given for these two products. The names of the classes of.petroleum products In Latin America, while different from those in Europe, generally denote the same range of products. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 332 THE INTERNATIONAL PETROLEUM CARTEL ing the period 1928-36, i. e., reports on the distribution quotas fixed and the trading results achieved by Standard (New Jersey), Shell, and A.nglo-Iranian. This study, therefore, will present little more than a summary of this market information since nothing is known aboutthe local arrangements that may have been arrived at among the as is" members or with their competitors in pursuance of the inter- national agreements. To round out the picture for the Scandinavian countries as a whole, certain of the data presented in the Swedish case history are repeated here. The base year trading results achieved by the "as is" companies in the Scandinavian countries are shown in table 25, which lumps together the trading results achieved in each domestic product market, except for lubricating oils and specialty products. It will be seen that the "as is" group together held the following percentage positions : Denmark, 91.6 percent; Finland, 96.1 percent; Norway, 97.8 percent; and Sweden, 81.9 percent. While the distribution quotas were fixed separately in each product market, the "as is" companies practically preempted the entire market during this "qualifying period"-a posi- tion which was to be reflected in the distribution quotas. TABS 25.-Deliveries into consumption of controlled products in the Scandi- navian countries in the base year, 1i128 [In metric tons] Standard Oil Co. (New Jersey)_________________________ R 199, 467 53 789 77 899 145 545 oyal Dutch-Shell group________ n l I 60,306 , 49, 175 , 47 966 , 150 399 g o- ranian Oil Co----------------------------------- 56,000 ------------- , 37, 003 , 4, 539 Total "as is" group_____________________ 324,773 101, 964 162,868 300 483 30,592 4,113 3, 645 , 51, 084 Total market------------------------------------- 106, 077 i Includes all petroleum products sold for domestic consumption except lubricating oils and specialty products. 2 Companies' own use excluded, except for "black oils." Large contracts for "black oil" also excluded. The distribution quotas that were fixed from time to time in the Scandinavian benzine markets are reproduced in table 26.21 These are representative of the quotas fixed in the other product markets. The "1928 basic" quotas reflect the relative positions of the "as is" 'companies during the "qualifying period." The meticulous care with which the rights of the parties were safeguarded is shown in the re- visions of the base year data for Norway, each revision adjusting the quotas by only a few hundredths of a percentage point.22 Similarly, the benzine quotas for Denmark were revised by a few hundredths of a percentage point, effective January 1, 1931, to reflect adjustments in the quotas due to "over- and under-trading." 23 This kind of quota revision was prescribed in the Memorandum for European Markets,24 n These are taken from Deliveries Into Consumption-,Europe, except for the Swedish quotas effective Octobr 10, 1937, which are taken from the report of the Oil Investigating Committee of 19,15; see p. 300. It is not clear why the basic ouotas were revised for each product market, except "black oils," effective January 1, 1935, so as to exclude "own use." Trading results were similarly adjusted. Since this was not done in any other country, it probably reflects -some special settlement of the quotas by the local managements. 23 The distribution quotas for kerosene in Denmark were similarly revised, effective January 1, 1932. 21 Similar provisions were included in the Draft Memorandum of Principles. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 333 which was then in effect, as a sequel to the regular market adjustments of over- and under-tr.ding through the transfer of customers .or the making of compensatory sales. TABLE. 26.-Benzene quotas in Denmark, Finland, and Norway, 1928-36 Standard (New Shell AIOC Others Jersey) Denmark: 1928 basic ------- ---------------------------- ------- 31.99 18.44 4.68 Effective Jan. 1, trading-------- 1031, adjusted for over- and --------------------------- under- ----- 44.82 32.06 18.44 4.68 Effective Jan. 1, 1936, adjusted for unobtaina ble---- 39.97 28. 59 16.44 15.00 Effective Jan. 4, gqpptayPablo------- d' 1936, adjusted for revised --------- ----------------- unob- ------- 27. 75 15.96 17.50 9 1 28 basin. Effective Jan. 1, 1936------------------------ -_---- 49.126 40.000 46.872 40.000 4' 002 20.000 Norway: 1928 original; own use Included --------------------- 43.33 33.14 22.92 .61 1928 revised; after audit-- -------------_-_-----_--- 43.37 33.11 22.91 .61 Efective Jan. 1, 1935; 1928, own use excluded-_----- 43.39 33.13 22.87 .61 Effective Jan. 1, 1936------------------------------- 39.20 30.00 20. 71 10.00 Sweden: 1928 basic ------------------------------------------ 37.03 42.04 1.94 18.09 Effective Jan. 1, 1936------------------------------- 28.06 32. 53 8.43 30.98 Effective Jan. 10, 1937------------------ 28.06 32. 53 8.43 5.97 I Distribution quotas effective on this (late also included: Texas, 12.92 percent, and Gulf, 12.09 percent;. see table 14, p. 298. In each of the four countries, substantial downward revisions of the distribution quotas, effective January 1, 1936, were made to account for what was "unobtainable," as is noted in the Danish quotas.25 These quota adjustments, which were made for nearly all product markets,. recognized the permanently reduced percentage positions of the "as is" parties from those of 1928. The trading results in the Scandinavian markets in 1:936 are. summa marized in table 27. The "as is" companies in that year held the fol- TABLE 27. Deliveries into con$ of controlled products' in Scandinavian countries in 1936 Company Denmark Finland Norway 4 Sweden Standard OilCo.(New Jersey) ------------------------- 267,433 60,550 115,298 226, 090 Royal Dutch-Shell group_______________________________ 120.467 72,586 87,019 270,505 1 Anglo-Iranian OilCo.,Ltd ----------------------------- 78,645 ------------ 70,726 52,5 9 Total "as is" group_______________________________ 466,545 133, 136 273,043 549, 114 The Texas Co 72,478 Russian Export Trust---------------------------------- 7,206 18,7861 15,540 67,467 Gulf Oil Corp.2 ---------------------------------------- 61, 200 - 259? A. Johnson & Co.8------------------------------------- 3,014 95 - All others____________________________________________ 77.276 17,499 23,020 31,891 Total market------------------------------------- 615,241 169,516 311,603 777,583 I Includes all petroleum products sold for domestic consumption except lubricating oils and specialty products. 2 Alfred Olson & Co., an affiliate. (See p. 334, footnote 31.) 8 Parent corporation of Nynas Petroleum Co., Sweden. 4"Own use" of the companies excluded; large contracts in the "black oils"-(fuel, Diesel, and gas oils- excluded. zo The revised quotas were generally somewhat higher than the percentage positions that were actually held in 1935. The quotas in Finland provided for an equal division of the obtainable markets between Shell and Jersey Standard, although the latter had held a better position in Finnish markets than Shell during the base year. This probably com- pensated Standard for the fact that after the early 1930's its percentage share in each. product market was lower than Shell's. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 334 lowing combined share in these markets : Denmark, 76.13 percent ; Finland, 78.54 percent; Norway, 87.63 percent; and Sweden, 70.62 percent. These proportions were 12 to 18 percent lower than those held in 1928, and reflect the circumstances that had led to the revision of the distribution quotas. Nevertheless, since Scandinavian markets had expanded strongly since 1928, the "as is" companies enjoyed large increases in the volume of sales over those of the base year.", The most important outsider in the Scandinavian markets was the Russian Export Trust, which had established marketing organizations in the four countries in the late 1920's and had rapidly expanded its operations. The peak years of Russian penetration in the market were 1933 and 1934,17 with subsequent decline, particularly in Den- mark.28 Thus, the shares of the markets attributed to the Russians in table 27 represent the achievement of a declining competitor. Early in 1937, Gulf Oil Corp. purchased the Russian marketing or- ganizations in Denmark, Finland, and Sweden, operating through its affiliate, Alfred Olson & Co.29 During the period 1928-36, the latter firm had acquired a substantial business in fuel, gas, and Diesel oils in Sweden,- and had held 30 to 35 percent of the trade in these products in Denmark. These interests and the newly acquired Russian organi- zation were brought together in a single structure headed by Alfred Olson, who became manager of all of Gulf's Scandinavian operations.31 The other firms in the Scandinavian petroleum markets were generally of minor significance, holding in. most cases small fractions of the market.32 22 The sales volume (in metric tons) of the "as is" companies was 44 percent greater In Denmark in. 1936 than it had been in 1928; 31 percent greater in Finland; 08 percent greater in Norway ; and 83 percent in Sweden. The over-all Scandinavian increase was 60 percent. "The Russians held 20.34 percent of the Danish and 21.89 percent of the Finnish benzene markets in 1933, and 7.08 percent of the Norwegian market In 1934. Their share of kerosene markets was 10.97 percent in Denmark and 5.20 percent in Norway in 1934, and 15.19 percent in Finland in 1932. In "black oils," the Russians held 27.34 percent of the Finnish market and 12.98 percent of the Norwegian market in 1934. After attaining these peak positions in the markets in which they were interested, the Russian percentage shares rapidly declined to the levels of 1936. 28 In Denmark, the Russians almost literally dropped out of the market in 1936, Navin total sales of 7,206 metric tons In 1936, as compared with sales of 48,927 tons in 1934 an 41,697 tons in 1935. 2e While not mentioned in the press reports, the Russian marketing organization in Nor- way probably was included in the sale. Among the terms of the transaction, the following was reported : "The supply agreements which the corporation's [Gulf's] British, Belgian, and Scandinavian subsidiary companies have with Soyougnefteexport were also renewed," The Petroleum Times, May 29, 1937, p. 716, and November 13, 1937, p. 645. am See table 15, p. 302. 31 It is not clear precisely what relation the Olson firm had to Gulf prior to 1937 ; hence it Is referred to above as an "affiliate." The Report of the Swedish Oil Investigating Com- mittee of 1945, ehs. II and XIV, states that the Olson firm and the Swedish Gulf Oil Co. were wholly owned by Gulf in 1947. It may be recalled that after the reorganization of its Scandinavian interests, Gulf's Swedish interests entered in full participation in the Swedish "as is" agreement of 1937, and that prior to that agreement there had been coop- eration between.Gulf interests and the Swedish cartel. 82 The shares of the market held by firms other than the "as is" group, the Russians, and Gulf were as follows : In Denmark six firms together held 3.66 percent (22,552 metric tons) of the total petroleum market in '1936, practically all of this in the asphalt and road-oil market. One of these, firms, A. Johnson & Co. (parent of the Swedish concern, Nynas), partici- pated in the as is" arrangements in the asphalt market, being given a ouota. of 13 percent. In addition to these. "sundry" other competitors held 9.42 percent (57,738 metric tons) of the market. This "sundry" group, which had never before held more than 0.5 to 1.5 percent of the market, was probably this large because of the spot market for benzene and kerosene created when the Russians practically quit the market in that year. In Finland the principal other competitor was a Hamburg firm, known as Purotank, which held 7.56 percent of the total market in 1936. Six other firms and the "sundry" competitors together held 2.82 percent. In Norway a subsidiary of the Sinclair Oil Corp. held 4.32 percent of the total trade and three other firms and the "sundry" competitors together held 3.07 percent. The other competitors in Sweden were discussed in the case study of that country. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 335 In summary, therefore, three international oil companies-Standard (New Jersey), Shell, and Anglo-Iranian-were the principal mar- keters of petroleum products in the four Scandinavian countries. In each of these countries they cooperated among themselves in the local application of the marketing principles set forth in the inter- national agreements they had arrived at. In Sweden other firms, representing nearly all of the outside trade, were participants or cooperators in the local cartel arrangements. In 1937 the principal outside firms, the subsidiaries of the Russian Export Trust and affiliates of Gulf, were merged into a unified or- ganization controlled by Gulf. The Swedish subsidiary of this organization, wholly owned by Gulf, soon thereafter became a full participant in the Swedish cartel. The Gulf organization, the "as is" group, and the other participants in the Swedish. cartel, the Texas Co. and A. Johnson & Co. (Nynas) constituted nearly all of the Scandinavian oil trade. Argentina.-The application of the "as is" principles in Argentina by Standard (New Jersey) and Shell was complicated by the existence ,of the State Oil Fields Department (YPF)33 which conducted fully integrated petroleum operations from the oil. fields to the market. Until 1936 YPF and the smaller distributors in the market increased their control of the profitable gasoline market, while the "as is" group increased their share in the larger market for the less valuable product, fuel oi1.34 Distribution quotas in Argentina were fixed up to 1937 by the major international companies in accordance with the "as is" princi- ples, on the basis of the. shares of the market actually held during the "qualifying period," 1928. The shares of the various product markets to which Standard (New Jersey) and Shell were "entitled" are shown in the top section of table 28, which also shows the estab- lished positions of YPF and the independent companies in 1928. The distribution quotas were subject to a general revision, effective .January 1, 1936, which recorded the great changes that had taken place in the market.35 These revised quotas are shown in the middle portion of table 28. Finally, the shares of the various product mar- kets actually held by the different companies in 1936 are shown in the bottom of table 28. The most important changes were in the gasoline market, where the "as is" group lost ground, and in the fuel- -oil market, where the group made, substantial gains.-6 83 Yacimlentos Petroliferos Fl,scales. 34 Fuel oil was quantitatively the most important market in most Latin-American 'countries, and gasoline was second. 96 Jersey Standard's quotas were revised upward, effective January 1, 1932, when it acquired, through the purchase of Pan American, Standard of Indiana's Argentine Interests. The gasoline quotas were also revised, effective January 1, 1933, to record YPF's gains to that date. 36 In 193.6, sales in the total gasoline market were 6.3 million barrels, an increase of 47.4 percent over 1928. In the fuel-oil market, 1936 sales of 1.4 million metric tons were 15.9 percent higher than in 1928. The percentages given in table 28 indicate the shares of the various marketers in these markets. Fuel oil accounted for more than 50 percent of Argentina's total consumption of petroleum, while gasoline accounted for about 25 per- cent. See Petroleum Times, March 5, 1938, p. 307. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 336 TABL>;; 28. Deliveries into consumption of petroleum products anddis quotas in Argentina, 1928 and 19361 [Expressed in percentages] Standard (New Jersey) Shell YPF 2 Others Total 1928-Baso year quotas (trading results): Gasoline_ ___________________________--______-___ 45.79 27.65 14.63 11.93 100' Refined oi13------------------------------------- 43.92 16.91 22.08 . 17.09 100 Fuel oil__________________________________________ 3.61 28.76 31.43 36.20 100 Gas and Diesel oil______________________________ 44.34 20.47 2.68 32.51 100 Asphalt and road oil ----------------------------- 11.74 76.05 ---------- 12.21 100 1936-Distribution quotas: Gasoline---------------------------------------- 33.91 20.67 (28.00) 17.42 100 Refined oil 3------------------------------------ -- 37.24 14.10 48.66 -------- - 100? Fuel oil-------- --------------------------------- 6.26 40.77 53.03 - _ ___ - 100' Gas and Diesel oi1------------------------------- 44.13: 19.47 36.40 _ gas and Diesel oil_ _ -_ _ __._ 33.91. 20.67 (28.00) 17.42 100 Asphalt and road oil_____________________________ 23.92 53.35 22.73 __________ 100 1930-Trading results: Gasoline----------------------------------------- 30.51 22.01 28.98 18:60 100 Refined oil 3_____________________________________ 32.23 18.62 29.16 10.99 100, Fuel oil______ --------------------------------- 8.06 39.45 29.51 22.98 100? Gas and Diesel oil_________ --------------------- 36,04 25.83 20.32 17.81 100- Automotive gas and Diesel oil _______________-._ 58.41 16.11 8.25 17.23 100' Asphalt and road oil____________________________ 24.37 52.30 16.76 6.57 . 100? includipig Paraguay, whose consumption is a negligible proportion of the whole. S Yacimiento Petroliferos Fiscales. 3 Kerosene, tractor fuel, and similar products. In 1936 the Argentine Government initiated new petroleum poli- cies which put YPF in a favored position. The State Oilfields De- partment (YPF) was given regulatory powers over imports, in- cluding the power to apportion imports among all the companies, including itself. Importing companies were required to arrive at agreements with YPF before. they could be entered on the register of importers. Exports of petroleum were forbidden.17 In its negotiations with Standard (New Jersey) and Shell under this law, YPF attempted to reserve the bulk of the concentrated and highly profitable Buenos Aires gasoline market for itself.37 The re- sult of these discussions was an agreement for the gasoline market which was to run for 3.1/2 years, beginning July 1, 1937.35 This agree- ment covered 100 percent of the market, since YPF represented also. the smaller concerns, with which it had previously come to terms. The quota arrangements were based on an assumed market of 6,065,025 barrels. The apportionment of this market is shown in table 29. It was agreed that YPF would have "preferential treatment," i. e., a prior right, in all consumption in excess of 6,065,025-barrels. Since consumption in 1936 was more than 6.3 million barrels," this meant that YPF was to have all the normal increase in consumption occur- ring after 1936. Other provisions of the agreement which, since YPF represented all small marketers, governed the entire trade, in- eluded the fixing of prices at uniform levels and the creation of a tribunal to administer the agreement. aT Ibid., January 15, 1938, p. SS. 31 Ibid., October 16, 1937, p: 494. ao In 1935 .consumption was 5.97 million barrels, so that most of the 1936 increase was also reserved to YPF. These figures are converted to 42-gallon barrels from data given in 50-gallon barrels In Deliveries Into Consumption, Latin America. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE. 2O.-Gasoline quotas under the A -gentine--greemesii of 1937 337 [In 42-gallon barrels] Estimated marke total t Estimated Aires ma Buenos rket Estimated Argentine other market Standard (Now Jersey) ------------------- 1,807,281 29.80 451,577 23.95 1,355,704 32.44 Royal Dutch-Shell ------------------------ 1,284,466 21.18 241,156 12.79 1,043,310 24, 96 Y. P. F.1--------------- -------------- 2,973,277 49.02 1,192, 767 63.26 1, 780, 510 42.60 I Yacimientos Potroliferos Fiscales. Y. P. F.'s quotas include those of the other firms operating in Ar- gentina. Source; The Petroleum Times, Oct. 16, 1937, p. 494. Chile.4?--In Chile the principal distributors in 1928 were Standard (New Jersey) and Shell. The two international companies held sub- stantial control of all markets, except that their shares of the "black oils" markets were low because the principal consumers, the mining companies of northern Chile, were direct importers. The share of the 1928 markets held by the "as is" group, and hence the base-year quotas, were : Standard (New Jersey) Gasoline ------------------------------------------------------------- 61.45 37.30 -------- Refined oil ---------------------------------------------------------------- 58.50 38.63 -- Fuel oil ------------------------------------------------------------- - 31. 59 8. 23 --- -- Gas and Diesel oil -------------------------------------------------------- 44.86 2.82 - Asphalt and road oil--------------------------------------------------------- 3.04 55.07 These quotas were for the most part unchanged until January 1, 1936, when general revisions were made to record the "as is" group's control of 100 percent of the small asphalt market and their losses in the gasoline and refined-oil markets' These losses were occasioned by the entry in the Chilean market of a new firm known as Copec.41 In 1936 this firm held 20.98 percent of the gasoline market and 1.87 percent of the kerosene market. .A cartel was formed with Copec, with relative distribution quotas effective January 2,1937. The two international oil companies secured a gasoline quota of 66.67 percent, which they divided as follows- Standard (New Jersey), 41.77 percent, and Shell, 24.90 percent. Co- pec's gasoline quota was 33.33 percent. In the kerosene market, Copec obtained a quota of 10 percent and the "as is" group 90 percent, divided as follows-Standard (New Jersey), 54.21 percent and Shell, 35.79 percent.` 40 Information in., this section on Chile Is taken from Deliveries Into Consumption-- Latin America. 4r The quotas were reduced proportionately so that the two companies had the same ratio relationship as in 1928. There were no quota changes in the fuel and gag/Diesel oil markets. 42 Compania de Petroleos do Chile, a privately owned company. This company is reported to have had strong support from the Chilean Government after it was founded I. 1934. Hearings on the Foreign Contract Act, op. cit., p. 157. 49 Both the gasolene and the kerosene quotas were divided in this way so as to preserve the 1928 ratio between Standard and Shell. . Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 338 THE INTERNATIONAL PETROLEUM CARTEL In postwar editions of the International Petroleum Register, the following note appears : 44 The import and distribution of the principal petroleum products, with the exception of the fuel oil for the mining companies in the North, is operated today by three companies, the Copec (Compania de Petroleos de Chile), the Esso Standard Oil Co., Chile, and Shell Mex Co., Chile. Each company has a quota of about one-third, with increases in some cases until 50 percentfor the Copec. Brazil. -The principal marketers in Brazil- during the 1930's were. subsidiaries of Standard (New Jersey); Shell, Atlantic Refining Co., and Texas Co. Other sales were almost entirely by- Pan American, a subsidiary of Standard of Indiana, whose interests were acquired by. Jersey Standard in 1932. The shares of these companies in the various markets in 1928 were as follows : Standard (New Shell Atlantic Texas Other Jersey) Gasoline ----------------------------------- Refined oil 47.40 - 20.40 17.56 13.20 1.4 -------------------------------- Fuel oil 49.11 18.01 12.04 16.72 4. 1 ----------------------------------- OasandDiesel oil------------------------- 4.54 5.87- 50.88 36.71 ------------ 2.32 ------------ 44. b 55 1 sp alt and road ail---------------------- 30.23 17,. 49 ------------ ------------ __---- . 57.2 The quotas of Standard (New Jersey) and Shell were based on 1928 shares in the market, except for increases in Standard's quotas due to the acquisition of Pan American in 1932. These quotas were re- placed in 1934 and 1935 by other arrangements46 In 1934; Standard (New Jersey) and Shell formed a "black oils pool." 47 It was agreed that they would divide the fuel-oil market, of which they then controlled 100 percent, on a 50-50 basis,4S and the gas and Diesel oil market, of which they then controlled 94 percent, on a basis of 52.5 percent for Standard and 47.5 percent for Shell.49 In the following year, Standard (New Jersey), Shell, Texas, and Atlantic formed a "white oil cartel" for the gasoline and refined oils markets. The quotas that were established, effective January 1, 1934, were as :follows : Standard (Now Jersey)--------------------------------------------------- Shell Atlantic Tcxa 17.26 15.56 18.21 5.00 43, 32: 18.61 20. 73 16.32 1. 02 These quotas closely reflect the actual marketing positions of the companies in 1934-35 and are 'lot greatly different from their trading positions in 1928. ~4 P. 481 in the 1949 edition. "Information in this section on brazil is taken from Deliveries Into Consumption- Latin America. 4U Except in the asphalt market, which continued substantially under the base-year quotas until 1936, when quotas of 62.05 percent for Standard and 13.63 percent for Shell were fixed. In 1936 most of the remaining competition left the market. '' Bunker oils were included in this pool. n.actually the relation of Standard to Shell in the market in 1934 and after was closer to 60-40. Presumably adjustments were- made as a result of this over- and under-trade- situation. as The outsiders, chiefly Atlantic and Texas, increased their -share of the market to about 12 percent in 1936, 4 2 8 0 8 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 339 Mexico.50-Tile four principal marketers in Mexico-Standard (New Jersey), Shell, Sinclair, and Standard Oil Co. of California- formed cartels in Mexico in 1933 covering all petroleum products ex- cept the minor specialty products. It was agreed that relative dis- tribution quotas were to be fixed, based on the combined sales of the four companies. Since, for the most part, outsiders were of negli- gible importance in the market," these quotas were substantially divi- sions of the whole market. The relative quotas, effective January 1, 1933, were as follows : 62 Standard (New Jersey) Shell Sinclair Standard (California) ------------------------------------- Gasoline -- 24.854 35.380 20.880 18.886 -------- - ---------------------------------------- Kerosine - 27.238 38.168 30.181 4.413 _--- - -----------------_--------------------- Tractorfuel - 21.126 47.980 24,207 6.687 -- - --------------------------------- - Diesel fuel oil 13.750 31.198 15.746 39.306 .----_- ------ Commercial fuel oil ------------------------------ 25.419 47, 649 12. 632 14.300 Railroad fuel oil- - -------------------------------- - - - - - - - - - - - - - - - - i'rbricating o i l 53.710 31. 080 46.290 36. 097 . 25.853 6.970 - - - - - - - - - - - - - Railroad lubricating oil -------------------------------- 50.000 25.000 25.000 --------- -- Greases----------------------------------------------- 14.948 43.700 36.270 5.012 These quotas generally accorded with market positions held by the four participants in 1930, the first year for which market statistics are given in the documents, Deliveries Into Consumption-Latin America. For the most part these quotas were adhered to in the market, although there was substantial. over- and under-trading in some cases.53 There was a general revision of the quotas, effective January 1, 1936, but there were few changes of more than 1 or 2 percentage points, most of the adjustments occurring in the quotas of Sinclair and Standard of California. Cuba.''-In accordance with the "as is" principles, Standard (New Jersey) and Shell fixed distribution quotas for the Cuban market on the basis of their positions in 1928. The shares of the market held by the two "as is" companies, and hence their distribution quotas, were as follows : Standard (New Jersey) Gasoline ----------------------------------------------- 50.31 22.54 27.15 ------- Refined oil-------------------------------------------------- Fuel oil 96.33 18.43 --------17.20 3.67 09.37 pas and Diesel oi]_____________---------------------------- Asphalt and road oil------------------------- ----------------- 97. 01 90.43 --------- . _61 901 2.39 5.56 50 Information in this section is taken from Deliveries Into Consumption-Latin America. Jersey Standard became an important factor in Mexico in 1932 through the acquisition of the Mexican properties of Standard of Indiana in the purchase of the foreign proper- ties of its subsidiary, Pan American Petroleum & Transport Co. 51 Outsiders, in the 7-year period, 1930-36, held at most 3 to 4 percent of each market, except in the case of the minor products, commercial lubricating oils and greases, of which, in some years, they supplied 13 to 15 percent. 62 These quotas applied to combined sales up to fixed maximums=e. g., 1,810,000 barrels In the case of gasoline and 8,500,000 barrels in the case of commercial and railroad fuel oils combined. Combined sales above these maxinuuns were to be divided four ways, each participant to have 25 percent. These set maximums were eliminated in the gen- eral revision of quotas in 1936. 511 It is not known what devices were used to enforce compliance with the quotas. In 'some cases, the overtrading was, by agreement, as in the railroadlubrica,tin,g oil market where Standard (New Jerr:ey) held 100 percent of the trade. In the case of commercial lubricating oils, i here outsiders held 7-14 percent of the trade, it was expressly stated that the quotas could be exceeded at the expense of outsiders--a basic "as is" principle. 11 Information in this section is taken from Deliveries Into Consumption-Latin America. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 These quotas were retained without substantial change until re- vised quotas went into force, effective January 1, 1936, which recorded the small changes that had taken place in the market. The principal "outsider" in the Cuban market was the Sinclair Oil Corp., which accounted for most of the business of the "other" lna,rketers. Beginning in 1932, Standard (New Jersey) and Sinclair entered into a supply relationship. By 1935 Standard supplied all of Sinclair's requirements of fuel oil, kerosene, and gas and Diesel oil for the Cuban market. The "as is" companies and Sinclair formed a cartel for the most important petroleum products, the distribution quotas effective Jan- uary 1, 1937, being : Standard (New Jersey) Gasoline 42.13 19.85 27. 1.0 10.92 Refined oil ----------------------------------------- 92.35 ------------ 4.90 2.75 Gas and Diesel oi]_____----------------------------- 81.98 4.64 13.38 Asphalt and road oil- ----------------------------- 70.09 2.88 24.31 2. 72 No quotas were fixed for fuel oil. It was stated. that the cartel arrangement in this market was: based on a "gentleman's agreement" with Sinclair. The quotas reflect rather closely the market situation current in the. mid-1930's except in the refined oil. market, where Standard had lost a substantial part of its business to outsiders. There Standard was recognized as "entitled" to 92.35 percent of the trade, although its actual share of the market in 1935 was only slightly over 50 percent. This quota, therefore, was in line with the usual "as is" practice of retaining in principle the 1928 historic position except when adjustments are dictated by cartel operations. The Lesser Antilles.55-The international oil companies extended their cartel. arrangements to some of the smallest markets of Latin America. The markets of the islands of the Lesser Antilles in the Caribbean Sea are individually small and collectively of minor im- portance; nevertheless, cartels were formed under "as is" principles in the islands of Barbados, Jamaica, Trinidad, and the, Windward and Leeward Islands, and in the Guiana territories of the northern shore of South America. The principal participants in these cartels were the marketing subsidiaries of -Standard (New Jersey), Shell, and Trinidad Leaseholds, Ltd. (TLL), the latter two companies oper- ating.most frequently as a pool.6e Cartel arrangements were made in the gasoline, refined oil. (includ- ing tractor fuel), fuel oil, gas and Diesel oil, asphalt and road oil, lubricating oils, and grease markets. In each market, quotas based on the "qualifying period," 1.928, were fixed for each of the parties, the cartel participants generally controlling all or nearly all. of the market. The quotas were subject to the pattern of minor adjustments m Information in this section is taken from Deliveries Into Consumption-Latin America. 6? Other cartel participants of lesser importance inclpded the Texas Co. (until 1935, when it withdrew from all cartel arrangements in this area), Trinidad Central Oilfields, Ltd. (TCO), and British Union (sic). These firms were not in all markets. TCO was supplied by organizations that appear to have been subsidiaries or affiliates of the principal cartel members. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TiIE INTERNATIONAL PETROLEUM CARTEL and general revisions in 1936 that was typical of all "as is" quota operations. 57 Table 30 shows the base-year quotas in these markets for gasoline, which were fairly typical of the quotas for other products, except that the market for gasoline tended to be divided among more participants than was usually the case. The smallness of these markets is indicated by the fact that the total combined sales for 1936 in the five marketing areas amounted to only 450,000 barrels. This was about 40 percent of the sales in the Cuban market of that year acid about 15 percent of that in Brazil, both of which were in turn minor markets. TABLE 30.-Gasoline distribution quotas in the Lesser Antilles and Guiana' Standard (Now Shell TLL 2 Pool 8 Other cartel + Others Jersey) Barbados------------------------------- 11.88 ---------- ---------- 84.06 3.79 0.27 Guianas group ?------------------------- 30.18 ---------- ---------- 62.70 17.12 ______---- Jamaica_________________________________ 7.86 46.47 30.46 _ _ Trinidad________________________________ 7.19 39.83 39.83 ---- 113.15 Windward and Leeward Islands 8_______ 20.84 __________ __________ 67.73 ________ 16.43 7 As determined by marketing results during the "base year," 1928. 2 Trinidad Leaseholds, Ltd. 8 The "Pool" included the combined quotas of Shell and TLL. 4 In Barbados, the Guianas group, and Trinidad, the other cartel member was Trinidad Central 0ilflelds, Ltd., and in Jamaica, the Texas Co. c Including Surinam, French and British Guiana. Excluding Barbados; the Virgin Islands of the United States, and the Dutch West Indies. 7 These quotas represent the combined quotas of other cartel members and of "others"; i. e., outsiders. Other countries.-The case studies giocven in this chapter by no means exhaust the list of countries in which lal cartels have been organized under the international marketing agreements. The Standard Oil Co. documents (Deliveries Into Consumption-Europe, and Deliveries Into Consumption-Latin America) present statistical data on the operations of the "as is" group of companies in a number of other coun- tries of Western Europe and Latin America. Tables summarizing this information are presented at the close of this section. -The fact that the documents available to the Federal Trade Com- mission did not present statistics on marketing and distribution quotas in other parts of the world does not indicate that the inter- national marketing agreements were not applied there. In the Middle and Far East, for example-the area known to the inter- national oil companies as "east of Suez"-there are a great many in- dications that the international oil companies agreed upon cartel arrangements governing the market positions each had established. As was shown in the first part of chapter VIII, the beginning of cooperation of the major international oil companies in the Indian market in the mid-1920's, and the resulting division of that market among them, led directly to the conclusion of the Achnacarry or "as is" agreement of 1928. In these earlier years in the Far East, more- over, there are numerous indications of close cooperation among the 67 An interesting quota adjustment was made in 1934 when TLL accepted a lower gasoline quota in Trinidad and was granted a higher refined oil quota in Jamaica. Such transactions may have been useful devices for settling various problems that might arise between the parties. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 342 international oil companies. For example, it was reported in the Petroleum Times 58 that the Chinese market had been controlled since 1914 by Dutch and American oil companies (chiefly Shell and Stand- ard Oil Co. of New York). These companies had reached agree- ments which "regularized the market" and maintained uniform prices since that time. P. W. Parker, in a. Standard-Vacuum memo- randum of January 7, 1935, dealing with tax difficulties of 1934-35 with the Chinese Government, stated that the cartel arrangements in China were on an "as is" basis.59 It was reported officially in 1931 that prices in local markets in the Dutch East Indies were much too high in comparison with those in other producing countries due to a price agreement bAtween Shell and Standard (New York) 60 In Japan, Shell and Standard (New York) had been the dominant forces in the market since 1906. In 1931, as a result of price cutting by domestic firms, the two international oil companies made a "new agreement" with the four leading domestic firms-Nippon Oil, Ogura, Mitsubishi, and Mitsui. This agreement was "designed to regulate not only prices but also the quantity to be marketed." Prices immediately rose as a result of this cartel arrangement 61 This cooperation, moreover, appears to have continued until recent years. In chapter V light is thrown on this in the discussion. of the problems of marketing Bahrein and Aralnco oil. Thus it appears that Standard of California could. not dispose of its oil until it was able, through the merger of its Middle East producing interests with Far East marketing subsidiaries of the Texas Co., to funnel its oil into a distributing organization which held established positions in Far East markets.6z The cartel restrictions on these joint marketing or- ganizations, moreover, limited the amount of Bahrein and Aramco oil that could be disposed of in these areas63 Similarly, the Gulf- Anglo-Iranian joint ownership agreement of 1933 (Kuwait) 114 and the contracts for the sale of crude oil dealing with Middle East oil in the postwar period,65 all laid important restrictions on the movement of oil into the markets "east of Suez." While it seems evident that cooperation existed among the oil companies in the markets east of Suez, no information is available that would indicate the nature of the agreements governing this coopera- tion. The fact that the Standard Oil Co. documents are limited in their coverage to Europe and Latin America, therefore, does not signify that "as is" or other cartel arrangements were not applied in those areas. In central. and southeastern Europe and the eastern Mediterranean, cooperation among the international oil companies with regard to dis- tribution was complicated by difficulties in regulating oil production m December 27, 1930, p. 1039. ED Patents, hearings, pt. 7, p. 3691. 80 The Petroleum Times, January 23, 1932, p. 98. Ibid., May 16. 1936, p. 629. 62 See pp. 114-116. See pp. 118-119. See p. 132. P See pp. 140--141 and 157. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 in Rumania. This country supplied crude oil and refined products to its own domestic markets and was a principal supplier to markets in this area68 As has been previously shown, the international oil com- panies, which were themselves important petroleum producers and refiners in Rumania, attempted to solve the problems occasioned by over-production in that country by creating a domestic cartel, by allocating production quotas; by determining export quotas by coun- tries, and by purchasing excess production, thus channeling it into the hands of companies interested in maintaining the international "as is" principles.- The solutions proposed for the marketing area served by Rumanian oil were specially designed to meet the special problems in that area occasioned by the breakdown of controls over Rumanian production. As such they were supplementary to, rather than in conflict with, the international "as is" principles. In many of the countries in this area, moreover, governmental economic policies were such as to make the terms of the "as is" principles inapplicable to local markets."' These governmental measures-tariffs, quotas, and other import controls, clearing arrangements and other financial and currency controls, spe- cial trade agreements and the like-were adopted earlier and in greater variety in these countries than elsewhere in an effort to pro tect and stabilize the truncated economies of these countries .61 The following tables present statistical information drawn from the Jersey Standard documents previously mentioned together with explanatory notes taken from the same source. These tables indicate the quotas and marketing results of the "as is" group of companies for the principal petroleum products of each country, but do not necessarily show all cartel participants due to the fact that the docu- ments from which the information is taken are directed at setting forth the "as is" group market relationships. 00 Rumania alone consumed nearly as much crude oil and refined products as all other countries of central and southeastern Europe combined. In 1937-39, Rumania supplied the bulk of the crude and refined petroleum imports of Czechoslovakia, Hungary, Yugoslavia, Bulgaria, and Greece and supplied significant proportions of imports of Turkey and. other eastern Mediterranean countries ; see import data by countries in International Petroleum; Trade, 1939 an([ 1940 issues. 07 See above, pp. 236-239 and 249-251. Os These two factors-the adoption of special private arrangements and the economic policies of the eovernments-probably account for the fact that the Standard (New Jersey documents, Deliveries into Consumption-Europe, do not include data about quotas an trading results for the countries in the area under discussion, except for data about the asphalt market in some countries. 69 Cf. Information by countries in (a) the annual issues of Economic Review of Foreign Countries, U. S. Department of Commerce, 1933-39, and (b) Regulation of Imports by Executive Action in Countries With Independent Tariff Jurisdiction, U. S. Tariff Commis- sion, 1941. Gottfried Haberlcr has made an excellent survey and analysis of such gov- ernmental controls in Quantitative Trade Controls, League of Nations, 1943. The effect of all these controls was generally to freeze and stabilize the proportions of import, trade at the historic position of the participating firms attained during a "base year"-most often 1931 or 1932. Under these circumstances the application of "as is" principles in the petroleum trade might well have been neitiler necessary nor relevant. For example, in Czechoslovakia and Hungary, where existing refining capacity was in excess of domestic needs, cartels were sponsored by the government in which the position of the established importers and refiners was "recognized" and preserved in quota arrange- ments. A similar cartel was formed in Turkey (Joint Hearings on the Foreign Contracts Act, Committee on the Judiciary and Special Committee Investigating Petroleum Resources U. S. Senate, 1945, pp. 154-155). A discussion of controls over Rumanian production anct distribution is given on pp. 236-239. All such cartels and- any other such arrangement could be substituted for the "as is" arrangements by unanimous consent of the partici- pants under the provisions of the Draft Memorandum of Principles. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 344 THE INTERNATIONAL PETROLEUM CARTEL TABLE 31. Distribution quotas and trading results for specified products in selected countries [Expressed in percentages] Base year quotas (trad- ing results in 1928) Quotas effec- tive Jan. 1, 1930 Trading re. suits, 1936 Algeria: I - Benzene: Standard (New Jersey) --------------------------------- 42.18 40.32 30.35 Shell - ---------------------------------------------- 21.92 23.69 25.31 --- Cipan (Socony-Vacuum)______________________________ 10.37 10.46 9.39 Total "as is" group--------------------------------- 74.47 74.47 65.05 Other marketers --------------------------------------- 25.53 25.53 34.95 Total market--------------------------- 100.00 Kerosene: Standard (New Jersey) ------------------------------- 38.28 35.13 28.05 Shell-..----------------------------------------------- 21.07 24. 69 29.05 Cipan (SoconY-Vacuum) ----------------------------- 13.31 12.84 10.80 Total "as is" group--------------------------------- 72.66 72.66 67.90 Other marketers______________________________________ 27.34 27.34 32.10 Tunisia: I Benzene: Standard (New Jersey) ------------------------------- 5t. 72 44.38 45.47 Shell------------------------------ -'------------------- 35.84 31.08 32.02 Cipan (Socony-Vacuurn)__..____---------------------- 12.44 10.69 9.11 - Total "as is" group--------------------------------- 88.15 88.60 Steaua, Francalse------------------------------------- 13.85 13.40 Other marketers-------------------------------------- --------------- -------------- Total market--------------------------------------- Kerosene: Standard (New Jersey) ------------------------------- 46.16 41.75 40.84 Shell -------------------- -- ---------- 31,96 31.73 32.13 Cipan (Socony-Vacuum)_____________________________ 18.88 17.10 16.56 Total "as is" group-------------- ------ ----------- 90.58 89.53 teaua rraneaio------------------------------------- 9.42 10.33 Other marketeers------------------------------------- -------------- .14 Total market--------------------------------------- Switzerland: 2 Benzene: Standard (New Jersey) ------------------------------- 35.82 35.82 29.14 Shell-------------------------------------------------- 33.58 33.58 27.41 AIQC------------------------------------------------ 13.16 13.16 15.29 Total "as is" group--------------------------------- 82.56 82.56 71.84 Other marketers ________________-__________-______-____ 17.44 17.44 28.16 Black oils: Standard (New Jersey) ------------------------------- 43.05 36.17 34.12 Shell-------------------------------------------------- 31.01 31.01 28.88 AIOC---------------------------------- -------------- 3.12 10.00 10.22 Total "as is" group--------------------------------- 77.18 77.18 73.22 Other marketers-------------------------------------- 22.82 22.82 26.78 Total market--------------------------------------- Italy and Libya: 6 Benzene and white spirit: Standard (Now Jersey) ------------------------------- 44.42 45.47 28.07 Shell ------------------------------------------- ---- -- 27.37 28.01 26.10 AIOC------------------------------------------------ 1.79 .10 .08 -'Total "as is" group--------------------------------- 73.58 73.58 54.25 Other marketers______________________________________ 26.42 26.42 45.75 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE; INTERNATIONAL PETROLEUM CARTEL 345 TABLE 31.-Distribution quotas and trading results for specified products in selected countries-Continued Base year quotas (trad- ing results in 1928) Quotas effec- tive Jan. 1, 1936 Trading re- sults, 1936 Staly and Libya-Continued Black oils: Standard (New Jersey) ----------------------------- 28.77 33.41 20.80 Shell-------------------- ----------------------------- 23.31 27.07 23.66 AlOC------------------------------------------------ 8.40 -------------- Total "as Is" group--------------------------------- 60.48 60,48 44.46 Other marketers -------------------------------------- 39.52 39.52 55.54 Total market --------------------------------------- 'Colombia: 4 Gasoline: Standard (Now Jersey)------------------------------- 94.21 93.92 94.45 Shell-------------------------------------------------- 5.79 5.49 4.14 Total "as Is" group--------------------------------- 99.41 98.59 Other marketers .................................... .59 1.41 Total market--------------------- ----------------- Fuel oil: Standard (New Jersey)---._-_..----------------------- 93.69 Shell-------------------------------------------------- 6.30 Total "as Is" group--------------------------------- 97.04 07.04 99.99 Other marketers-------------------------------------- 2.96 2.96 .01 Total market --------------------------------------- 6Curacao:4 Gasoline: Standard (New Jersey) ------------------------------ 6.02 15.28 20.76 Shell-------------------------------------------------- 93.08 84.72 78.78 Total "eels" group------------------------------- 99.54 Other marketers -------------------------------------- .46 Total market ---------- ----------------------------- 4Roflned oil: Standard (New Jersey)------------------------------- 23.54 23.81 16.28 Shell---------------------- --------------------- 76.11 75.84 79.72 Total "as is" group--------------------------------- 99.65 99.65 96.00 'Other Viarkoters -------------------------------------- .35 .35 4.00 'Total market ------------------------------------ Peru:'4 Gasoline: Standard (Now Jersey)------------------------------- Shell-------------------------------------------------- Total "as Is" group --------------------------------- 95.18 95.25 97.79 ,Other marketers -------------------------------------- 4.82 4.75 2.21 Total market--------------------------------------- 190.00 'Gas and Diesel oil: Standard (Now Jersey) ------------------------------- Shell -------------------------------------------------- Total "as is" group--------------------------------- 98.29 98.29 100.OD Other marketers --------------------------------------- 1.71 1.71 -------------- Total market --------------------------------------- .See footnotes at end of table. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 TABLE 31.-Distribution quotas and trading results for specified' products selected countrifs-Continued [Expressed in percentagesll Base year quotas (trad- ing results Quotas effec- tive Jan. 1, 1936 Trading re- sults, 1936 in 1928) Venezuela: 4 Gasoline: Standard (Now Jersey) ------------------------------ 5.15 33.14 34.35- Shell - ----------------------------------------------- 77.10 66.49 66.62' T. L. i ----------------------------------------------- .16 -------------- -------------- Total "as is" group--------------------------------- 82.41 99.63 99.97' Others------------------------------------------------ 17. 59 .37 .03' Total market--------------------------------------- Fuel oil: Standard (New Jersey) ------------------------------- -------------- 6.63 5.66- Shell------------------------------------------------- 99.69 93.36 94.34 T. L. L ----------------------------------------------- .02 -------------- -------------- Total "as is" group--------------------------------- 99.71 99.99 Other marketers-------------------------------------- .29 .01 4 Both of these French North African colonies appear to have closely held petroleum product markets. The base year quotas in Algeria were twice adjusted for over- and under-trading, the first change being effec- tive on Jan. 1, 1935, and the second on Jan. 1, 1936, the year shown in the table. These adjustments were slight in both cases. The base year quotas in Tunisia were adjjusted, effective Jan. 1, 1933, to account for the granting of a quota to an outsider, Steaua Francais, which had entered the market in 1930. This com- pany, however, although adhering to its quota, did not adhere to any of the "as is" rules and hence was regarded as an outsider. The quotas of the "as Is" group were readjusted several times for over- and under- trading, the changes being slight in each case, however, so that the 1936 quotas reflect fairly well the 1933 changes. An adjustment in the quotas, effective Jan. 1, 1937, is recorded. The trading results appear to have followed the quotas rather closely, especially in Tunisia. The 2' products shown accounted for ~fi or more of the total quantity of petroleum products sold annually in domestic markets of these 2 French colonies. In comparison with other countries, the markets in these countries were small. a The Swiss quotas were fixed throughout the 9-year period 1928-36 at the base-year levels, the only change being that shown in the quotas for black oils, Jersey ktandard giving "up 6.88 percent to Anglo- Iranian. This was done under a proposal-made by H. E. Bedford to J. C. Clark on M1ar. 18, 1935, and confirmed by the latter on Mar. 22, 1935-whereby the difference between Anglo-Iranian's basic quota of 3.12 percent and their quota of 10 percent is to be compensated to SOC (New Jersey) outside of Switzerland. The two products shown here accounted for 380,931 metric tons out of the total quantity of 432,993 metric tons of all petroleum products delivered for domestic consumption in Switzerland In 1936. a The base year quotas were subject to only 1 change in the 9-year period, 1928-36, this occurring when Anglo-Iranian's quotas were divided between Jersey Standard and Shell, effective Jan. 1, 1932, when Anglo- Iranian withdrew from the market. The 2 products shown accounted for more. than 85 percent of the total of 1,705,000 metric tons of petroleum products delivered into domestic consumption in 1936. 4 The more important petroleum consuming countries in Latin America, aside from those Included In the case studies, are the petroleum producing countries whose petroleum economics are dominated by the large producers. The only event affecting quotas and marketing results in the 1928-36 period was the purchase by Jersey Standard from Standard of Indiana of the foreign interests of the latter company's subsidiary.. Pan American Petroleum & Transport Co. These tables and the case histories do not exhaust the cartel statistics appearing in the Jersey Standard documents Deliveries Into Consumption-Latin America, since all Latin American countries are represented there. Trio markets in many cases are so small that the statistics are not significant and in other cases are repetitive on a smaller scale of what has already been given. - The case studies given in this chapter illustrate the widespread de- velopment of local cartel arrangements following the conclusion of the Achnacarry or - "as is" agreement of -1928. As has been noted,. this international agreement on marketing principles was inspired. by the price war which had broken out in the Far East, particularly in India.70 Its principles, which were elaborated upon and modified in subsequent international agreements in 1930, 1932, and 1934, proved applicable in all kinds of markets, in large countries and small, in 00 See pp. 197-198. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 347 industrialized economies and in agricultural and even "undeveloped" economics. There can be no doubt that most of the local cartel arrangements were guided by the international agreements. In nearly all petroleum markets of the world, outside of the United States, subsidiaries and affiliates-of the principal parties to the international agreements- Standard (New Jersey), Royal Dutch-Shell, and Anglo-Iranian- were predominant forces. Cartel agreements would have been un- workable without their leadership and cooperation. These companies were closely associated in their direction of marketing activities from London-the three companies being described by a Jersey Standard official as a "joint venture"-and were bound to apply the "as is" principles in all local markets. The cartel arrangements universally included quota arrangements designed to freeze the market pattern- the historical position of the marketers-in accordance with that of a "base year" or "qualifying period," which in most cases was the year prescribed in the international agreements, 1928. Most of these distribution quotas were subject to a general revision, effective Janu- ary 1, 1936, although nearly all changes were minor in character.n Other features of the cartel arrangements included provisions to pro- tect the division of the market, such as the agreements to "respect" .each other's customers, the fixing of prices, schedules or rebates, dis- counts, etc., and other selling conditions, the adjustment of quotas for over-and-under trading, the application of a system of fines and ,compensation in adjustment of over-and-under trading, and the limita- tion of competitive expenditures for marketing facilities. "In most cases where there were substantial "outsiders" in the markets, they were brought into the cartel. These important outsiders were occasionally successful in causing modifications or substitutions in various "as is" provisions, but the central principle, that of pre- serving the historical positions of the participants, always remained. `These modifications and substitutions were expressly permitted by the international marketing principle that the interested "as is" parties could enter into such local cartel arrangements by unanimous consent. This analysis of the origin of the local marketing cartels of the 1930's does not accord with the interpretation advanced by the in- ternational oil companies themselves. Lawrence B. Levi, a. director ,of Socony-Vacuum and its executive in charge of foreign operations, speaking for a committee of American oil companies, stated in 1945'2 that the cartels developed out of the following factors : the develop- inent of excess productive capacity after the First World War, the Telative narrowness and leanness of most foreign markets in compari- son with'the United States, severe price cutting and "dumping" by the Russians, causing "price wars and wasteful practices," and the devel- opment of national economic policies, including such matters as cur- rency and monetary controls, and regulation of markets. He did not mention international marketing agreements, but rather laid great ,emphasis on the role of governments desirous of attempting "market stabilization within their countries." Ti These revisions were all adjustments of the 1928 quotas to accord more closely with the current market situation. The universality of the revisions would suggest that they were ordered by the London offices of the companies. One feature of most of the revisions was that the relative positions of the "as is" companies were generally preserved in the '1928 ratios. 727oreign'Contracts Act, op. cit., pp. 139-140. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Mr. Levi then went on to state : Trade agreements which affected the oil industry in foreign countries may be classified under two general headings : 1. By law, i. e., government monopoly or compulsory cartel. 2. (a) Trade agreements by government direction of pressure, and (b) trade agreements organized by private initiative in accordance with the-law of a country ,e and permitted or encouraged by its government. Thus he interpreted the local cartels as merely the result of com- pulsive governmental or social forces within each local marketing area. American companies, he said, were forced to go along with these restrictive forces if they wished to stay in business in these countries. This interpretation omits the role of the international oil com- panies themselves in the development of the local cartels, as described in chapters VIII and LX of this report. The international agree- ments were developed partly as instruments to deal with the problems listed by the industry spokesman. These forces were conditioning and limiting factors that determined the form of application and the effectiveness in each case of the cartel arrangements under "as is." It would be difficult indeed to list many of the cartels described in this chapter under the categories listed by the industry spokesman. The assertion that local customs and usages determined the growth and form of the marketing cartels must also be questioned. In this regard the significance, effect, and form of the local marketing ar- rangements of the 1930's is much the same as that of the international "as is" agreements.74 The international "as is" agreements largely determined the character of local cartelization. Local cartel arrange- ments pursuant to the "as is" agreements were themselves largely determinative of the customs of the trade. n By this he meant, as he subsequently testified, ibid., p. 148, agreements not prohibited by law. 14 See p. 274. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 CHAPTER X PRICE DETERMINATION IN THE INTERNATIONAL PETROLEUM INDUSTRY INTRODUCTION The preceding chapters have described the degree of control over the world petroleum industry held by the seven major international oil companies, their participation in joint-ownership ventures, as in the Middle East, their control over sources of supply through contracts among themselves for the purchase and sale of crude oil, as in the Middle East and Venezuela, their development of world-wide produc- tion and marketing agreements, and the application of these agree- ments in specific countries. Moreover, it has been shown that these major oil companies, through the high degree of concentration of control, through direct ownership, through joint ownership, through purchase and sales contracts, and through production and marketing agreements, have been able to limit production, divide up markets, share territories, and carry on other activities designed to. stabilize markets and control production. In addition, the international petroleum companies have followed a system of pricing which has had the effect of eliminating price differ- ences among themselves to any buyer at any given destination point. Under this system the delivered price to any given buyer is exactly the same regardless of whether he purchases from a nearby, low-cost .source or from a distant high-cost source. While the delivered price from all sellers will be different at one destination point, as compared with another, reflecting largely differences in freight costs, their de- livered price at any given destination point will be exactly the same. This systematic elimination of price differences has been achieved through the establishment and observance of an international basing- point system, generally refered to as "Gulf-plus." In recent years the system has undergone a number of minor modifications. Nonetheless, since each of the major companies has usually observed these modi- fications, the system's ultimate effect upon any given buyer has re- mained the same-the elimination of price differences as among the various sellers. Under basing-point systems the quotation by sellers, no matter where located, of identical delivered prices at any given point of destination is arrived at in the following manner: A particular producing center- (or centers) is designated as "the base point," at which a "base price" is established. The various sellers then arrive at a delivered price by adding to the "base price" the freight charges therefrom to the point of destination. Those sellers who are located nearer to the buyer than the "basing point," reap the advantage of "phantom freight"-i. e., the difference between their actual freiht charges to the buyer and the freight charges from the "basing point ' to the buyer. Similarly, those sellers who are located farther from the buyer than the "basing point" have to "absorb" freight-i. e., tbav have to absorb the difference 349 23541--552---24 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 350 THE INTERNATIONAL PETROLEUM CARTEL between their actual freight charges to the buyer and the freight charges from the "basing point" to the buyer. As can thus be seen, the starting point. in the operation of a basing- point system is the establishment of the "base price" at the "basing point." Hence, the first step in discussing a basing-point system should be an examination of the adequacy and representativeness of this price. In the international petroleum industry the "base point" has generally been United States Gulf, and the "base price" established at United States Gulf has been derived from an American trade journal, Platt's Oilgram. . . The trade journal from which the "base prices" are derived in the petroleum industry is Platt's Oilgram Price Service published at Cleveland, Ohio. It has been appropriately described by an industry source, as "the framework on which this complex international price structure is carried." The sane source further described Platt's price reporting service as follows : * 4 * this is a daily publication of oil prices in the United States, both for the home market, where quotations are given at a number of important sources of supply and centers of consumption, and for the export, market where prices are quoted f. o. b. the major oil ports. * * * Most long-term sales contracts of petroleum products are linked throughout the world, to Platt's f. o. b. prices, and the price fluctuates directly in proportion to the changes in Platt's. Even where, for any special considerations, the price of a product is not the same price that it would have been if it had been shipped front the United f;tates, allowing for freight charges, it is frequently the practice, iii a contract which is to spread over a period, to link the price to the Platt's prices of a grade selected for reference purposes. This means that even if the sale is not originally directly related to the United States price * * * it is usual in international trade to allow subsequent fluctuations of that price directly in proportion to the movements in Platt's.' It is these widely circulated Platt's price quotations, specifically the "seaboard" prices f. o. b. ship at United States Gulf ports for cargo lots (20,000 barrel minimum) of refined products, which serve as the recognized "base price" for the determination of uniform delivered prices on international sales of refined products. Similarly, Platt's quotations of posted well-head prices at Texas crude fields adjacent to the United States Gulf coast, to which are added the charges for bringing the crude to the Gulf ports, constitute the "base prices" for crude oil-i. e., the f. o. b. United States Gulf coast price for crude.. Crude oil prices, compiled by Platt's from prices posted at the well by leading purchasing companies in each field, appear in Platt publications monthly or whenever price changes occur. Refined product prices, however, fluctuate much more frequently than do crude oil prices. Refined product prices are gathered by Platt.'s market reporting organization at key seaboard, refinery, tanker and V ipeline terminal points, and at major consumption centers of the 7nited States,2 and are published daily in Platt's Oilgram Price ' The Price Structure of the Oil Industry, by R. C. Porten, published in Oil, house organ ,of the Dlanchester Oil Refinery. Ltd., England. vol. I. No. R-reprinted in a special sup- plement to Platt's Ollgram Price Service of October 24, 1949. [Italics added.] 2 Platt's covered only domestic prices until February 1, 1950, when for the first time it initiated daily publication of bunker grade fuel oil prices at 44 foreign seaports "from London to Capetown, from Calcutta to Rio de Janeiro." All are prices of Esso Export Corp., (Standard Oil of New Jersey subsidiary], its affiliates and companies with whom arrangements for deliveries can be made through Esso Export, as published in the letter's Marine Fuel Oil Price Bulletin. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 351 Service and weekly in the National Petroleum News. Daily re- fined product prices carry in the parlance of the industry "high," "low," "mean," or "average" of Platt's quotations to cover the range of different prices quoted by sellers at any one time in a given market for each refined product.3 Since world prices for refined products are based on Platt's, the following characteristics of Platt's price quotations for refined prod- ucts should be noted : 1. The prices published are "sales prices or quotations or general offers or posted prices" reported to Oilgram by refiners, and byprod- uct pipeline and tanker-terminal operators. These are confined to "open spot" transactions and do not include : (a) Prices arrived at by discounts off a specified price or "mar- ket date of shipment." (b) Prices named in contracts or prices arrived at in accord- ance with any arrangements made prior to date of sale. (c) Prices made to brokers. (d) Prices in "inter-refinery" transactions. 2. During periods of shortage, as in 1947-48, some or all sellers withhold public quotations to new customers or the posting of firm prices, giving Platt's Oil-gram only those prices which they otherwise would quote to the trade in general and which they confine to regular customers. 3. Parenthetical figures before and after the prices indicate the number of companies iii the Platt sample that quote the lows and highs of the price range. For the most part, only one company appears to have quoted the low and the high at the Texas Gulf coast points-with no indication whether or not the prices of a particular company are con- sistently used as the low or the high over a long period of time 4 These characteristics of Platt's price quotations raise serious ques- tions as to their representative quality and reliability as a barometer of price fluctuations and market conditions. In general, the bulk of international trade in petroleum products, including United States exports, moves under long-term contracts (and mostly between majors and their own or each other's foreign subsidiaries). Yet these trans- actions are not covered by Platt's quotations. Likewise Platt's does not cover long-term contracts in the domestic markets, or discount or premium prices, or long-term transactions and exchanges between major refiners, or intrac.orporate transfers between subsidiaries. What Platt's quotations actually do cover is a relatively thin mar- ket, limited to transactions between major or independent suppliers on the one hand and independent United States marketers, foreign re- finers, and importers (not affiliated with any of the majors) on the other. Moreover, during periods of shortage the quotations become even less representative by recording only what some sellers would charge if trade conditions were different. Though they probably ac- count for but a minute portion of all refined products moving out of United States Gulf coast ports, these quotations are used to establish the "base price" on which price levels all over the world are based. S Except for tank-wagon prices (usually on smaller than bulk lots sold to dealers and gasoline station operators for resale to final consumer), prices are for bulk lots including tank car, cargo lots (tanker), barge and truck transport from refinery or terminal in large quantities. * Cf. Foreword to Platt's Oil Price Handbook (annual). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Indeed, because of Platt's practice of sampling in most instances only one company for price quotations, a single company (probably one of the internationally dominant majors) may, by setting the "base price," determine the domestic and the world price for refined products. For several decades the international petroleum industry employed a basing point system for pricing crude oil and refined products in the world's oil markets. The industry is particularly suited to the use of the basing point system because crude oil and refined products of different intrinsic qualities can readily be reduced to standardized commodities. Also the international companies all produce and sell in several areas of the world, and the small number of such companies makes it easy to maintain a basing point system once it is established. Sometimes the industry used a single, and at other times a dual, basing point system, but both have been expedient devices to restrain price competition among the international oil companies. The history of Gulf-plus Sometime after 1921 when American output started to expand (more particularly since the rapid growth following 1926), "the price of oil world-wide came to be traditionally determined by the American exporter, that is to say, it was always hitched to the level of American domestic quotations." 6 This system, "which enabled Texas-Gulf vir- tually to dictate world prices," 6 required the calculation of world prices, irrespective of the point of origin, as if the oil had come from the United States Gulf. The end-product of this system has been that sellers, located at dif- ferent points on the globe, quoted f. o. b. prices which, through the use of fictitious transportation rates, tended to result in identical delivered prices at any given point of delivery, regardless of the differing pro- duction or transportation costs actually incurred. A simultaneous consequence is that sales made from sources of supply outside the United States Gulf area result in net receipts (f. o. b. port of shipment prices) varying in amount. For destinations to which transportation costs from an eastern supply point (e. g., Abadan or T-Iaifa) were lower than from the United States Gulf, the eastern supplier had a freight advantage, or "phantom freight." For destinations to which the sup- plier paid more freight than the United States Gulf supplier he in- curred a freight disadvantage, reflected as a lower realization at his shipping point-freight absorption. The practical elimination of differences in delivered prices derives from several basic common practices followed by all sellers. These include : (1) The common recognition of the United States Gulf as the single, governing basing point; (2) the common observance of the United States Gulf price, as the starting point in the determination of the delivered price; (3) the common recognition and use of the price ,quotations appearing in Platt's Oilgram as the "official" prices at the United States Gulf; (4) the common use of standard adjustments for differences in quality; and (5) the common use of standard tanker UP. H. Frankel, What Price Oil? The International Structure, Oil Forum, November 1948, p. 438. u Texas-Gulf Remains World Price Barometer, Oil Forum, August 1947, p. 201. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 charges (often differing from actual tanker charges or costs) to be added to the basing point price.7 In general, these factors so synchronize the operations of the Gulf-plus system that equalized delivered (c. i. f.) prices were estab- lished for any given major consuming area, Irrespective of the source of supply. This basing-point system not only linked all Western Hemisphere crude and refined products prices, but also those in Eu- rope and the Middle East, directly to the Texas-Gulf price structure. As explained by the Director General of the British Ministry of War Transport before the Committee of Public Accounts, the system operated as follows : Before the war the prices at which oil bunkers were sold at ports overseas were influenced by (I do not say that they were absolutely based on, but in ordinary commercial practice they were influenced by) the published f. o. b. prices quoted at production centers in the Gulf of Mexico, to which, of course, there would be added freight and insurance from the Gulf port to the actual bunkering port, in order to give a c. I. f. price. This. selling. price was applied to all the oil sold at a given port, regardless of its actual source of origin. So the result was that the effective f. o. b. prices of oil derived from some port other than the Gulf of Mexico port differed from the price of the Gulf of Mexico by an amount depending on the geographical position of the source of origin in relation to the port at which the oil was sold. * * * to take an example : If oil were supplied in Bombay from Abadan in the Persian Gulf, it would normally show a higher f. o. b. return than the Gulf price, because of the low cost of freight from Abadan to Bombay on a very short haul, that freight obviously being much less than a freight from the Gulf of Mexico to Bombay. On the other hand, if Abadan oil were sold at some point farther away from Abadan than the Gulf of Mexico, then it would normally produce a lower return than the Gulf price, and it is this difference in f. o. b. values which was known in the jargon of the trade as the origin differential" This pattern of world oil pricing persisted until 1939 with but few minor changes. Though the bulk of Western Hemisphere export trade gradually broadened from the United States Gulf to include other Caribbean sources (principally Venezuela), this did not affect 7 Precise information as to tanker charges added to the basing-point price from the United States Gulf to yield identical delivered prices during the period between world wars I and II is not available. It is known, however, that more than 50 percent of sea- going tankers were owned by the major international oil companies and that "a consider- able part" of the 40 percent owned by nonoil firms was on long-term charter to the "majors," with the balance consisting of, tankers controlled by various governments, and ships carrying molasses, oils, etc. In all, it is estimated that not much more than 10 percent of all loadings were covered by single-voyage charters-a very narrow free tanker market, which accounts for the wide and erratic fluctuations in voyage tanker freight charges. Time charter rates on the other hand (which may be arranged for from 6 months to 10 years and were tied.up largely by the "majors") were far less variable, ranging during the period 1923-38 between 5s. and 7s. 6d per month per dead-weight- ton. As for the tanker fleets owned by the oil companies, their operating costs, interest and depreciation are all relatively stable. Further stability in the tanker rates at which most international oil shipments moved was introduced by the tanker pool (International Tanker Owners Association) which began to function in May 1936, and continued until the outbreak of world war II. This association of virtually all free owners made it possible to keep up the standard of rates by relieving the pressure of competing tonnage (through payments from a ' pool to which a part of the earnings per voyage were contributed to reimburse owners who laid up their ships). Thus, an additional measure of stability was introduced into the tanker market already largely controlled by the "majors," who agreed not to charter vessels outside the pool. (See P. II. Frankel, Essen- tials of Petroleum, pp. 158-163.) Thus, fluctuations in 'tanker charges entering into the delivered price quoted customers under the "Gulf plus" system before world war II were minimized, thereby minimizing disturbances to the identical delivered pricing struc- ture of the world oil market. After world war II the difficulties introduced by fluctuat- ing tanker freights were virtually eliminated through the use of standard United States Maritime Commission (USMC) rates, set up (luring the war. As will be shown below, even after the Maritime Commission's authority over tanker rates ceased, USMC rates were used as purely paper rates because of their convenience as a standard reference for the setting of identical delivered world oil prices under the basing-point formula. s The Petroleum Times, London, p. 838, December 9, 1944. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 the use of the Texas-Gulf prices as a world yardstick. As described by an authoritative source : "The United States Gulf coast price is the world market price because it is the main market where oil is exported. The bulk of this oil goes to the Atlantic seaboard, as does the bulk of the oil exported from the Caribbean area. So these two oils compete on the Atlantic seaboard ; and as the freight between Gulf coast and Atlantic seaboard and the Venezuelan coast and Atlantic seaboard are prac- tically the same, the world market price on the Venezuelan coast and on the Gulf coast are the same, with the adjustment of import duties.' The f. o. b. price for Venezuelan crude at Venezuelan ports to all world destinations, whether the United States, Canada, Europe, or elsewhere, was the United States Gulf price for crude of similar qual- ity, less the United States import duty of 101/2 cents per barrel.1? In other words, Venezuelan crude was priecd on the "Gulf-plus" base less 10-%2 cents per barrel, leaving the world crude oil price structure firmly linked to Texas-Gulf price quotations 11 The prices of refined prod- ucts were determined in the same manner. Prices at the United States Gulf coast, known as the "low", "mean", or "'high" of Platt's, were quoted for refined products at Caribbean shipping points. The most significant development during the pr(-1939 period was the advent of a great new center of production in the Middle East, which potentially posed a threat to the "Gulf-plus" world pricing structure, The major international oil companies, most of whom were interested in production both in the Middle East and in the Western Hemisphere, were obviously not anxious to jeopardize the "Gulf-plus" price structure by competing among themselves in the Middle East, or against their own Caribbean supplies. They did not vigorously push the development of production from their Middle East conces- sions which would have driven their own Western Hemisphere crude from Eastern Hemisphere markets. The result was that the impact 9 Memorandum on Behalf of Petitioner, Compagnie Francaise des Petroles, before the Supreme Court of the State of New York in the matter of the application of Compagnie Francaise des Petroles, for an order pursuant to sees. 1450 and 1452. of the Civil Practice Act, directing that Pantepec Oil Co. of Venezuela, C. A., and Pantepec Oil Co., C. A., proceed with arbitration and designating and appointing an arbitrator, June 30, 1949, p. 23. to Ibid., p. 81. Though a small amount of Venezuelan crude may be sold to non-United States destinations without deducting the 101/2-cent duty from the price (i. e., at United States Gulf price), most of It moves at the "ex duty" 1, o. b. price, irrespective of destination. This practice has been followed by the industry for over a quarter of a century. It has been explained as follows : In addition to the practical problems that would result from any attempt to establish and maintain different f. o. b. prices based on destination, and to the reluctance of producers who value good will to discriminate among their customers, there is an- other immediately obvious reason why sales for delivery outside the United States are not made at a figure 101/ cents above the price on sales to United States buyers. Unless all major Venezuelan producers were to establish and maintain such a price differential, competition would prevent any one of them from attempting to do so." Based on testi- mony of Max. W. Ball, ibid., pp. 80-81. 11A notable exception to the "United States Gulf plus" formula before World War II was the establishment of a base price, f. o. b. Constantsa, Rumania. during the early 1930's. Rumania was the only country (outside of the U. S. S. R.) with an exportable surplus of crude produced by a relatively large number of local producers and only partly controlled by the majors. However, Rumanian exports, even at their peak, were of suffi- cient magnitude to affect only nearby markets. Their prices, "if they were not mani- pulated by the big firms, were adulterated by continuously changing export duties." Frankel, Essentials of Petroleum, p. 140, f. n. 16. Moreover, the Constantsa f. o. b. price was not entirely independent of the United States Gulf price, particularly when considered in the light of the Rumanian petroleum cartel and Rumania's participation in the international proration schemes of the early 1930's under which her output was restricted and price stabilization attempted. Like the Rumanian exports, Russian ship- ments abroad, which expanded materially during the depression period of the early thirties to a peak of about 40 million barrels annually, receded to insignificant proportions by 1939, as internal consumption climbed with expanding industrial operations. See Petroleum Requirements-Postwar, hearings before Special Committee Investigating Petroleum Resources, United States Senate, .79th Cong., 1st secs., pursuant to S. Res. 36, October 3 and 4, 1945, p. 104. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 355 ,,Of Middle East production on the prevailing "Gulf-plus" price struc- ture was postponed for years by the limitations on the rate of Middle East output imposed by the major oil companies. As a British writer has summarized the matter : * * * It is difficult to say what would have happened had production in the Middle East not been in the hands of companies which had strong interests in the Western Hemisphere, companies like Jersey Standard, Socony-Vacuum, and Shell and later on California Standard and the Texas Co., or who, like Anglo- Iranian, knew better than to go all out on their own" Consequently, crude (as well as refined products) continued to be priced until the outbreak of World War II as if it came from the Caribbean area, with all price competition at every given world mar- ket eliminated. Thus the buyer in the Middle East paid the same delivered price for oil shipped from Middle East sources as from Texas, Venezuela, or any other source of production, with the de- livered price of Middle East crude rising and falling with Texas- Gulf posted prices. On shipments from the Middle East the netback (net realization) was higher the shorter the distance from the Persian Gulf and the longer the distance from the United States Gulf to any given market. Even though the oil they purchased came from the Middle East, Mediterranean buyers continued to pay more for their crude f. o. b. loading port than purchasers in Western Europe. Dr. Frankel appraised this price discrimination as follows : It is obvious that in a free market with supplies readily available and pro- ducers keen to sell, there would eventually be a tendency for only one f. o. b. price level to be effective to all destinations. In. the absence of agreements to the con- ta.ry this would be inevitable as prices in the more remunerative areas would, by competitive trading, be forced down to almost the marginal levelYB It is obvious that such price discrimination was possible only if it was prac- ticed uniformly by all operators, since otherwise each of the competitors would have endeavored to increase his sale in the more remunerative markets, a tendency which, according to the classical pattern, would have led to such "pre- mium" being wiped out and a single price being established " A New. Basing Point-Th.e Persian Gulf. While the basic feature of the "Gulf-plus" basing point system- the quotation of identical delivered prices at any given point of desti- nation-remained unchanged, a number of minor modifications were made in its operation, beginning in the middle of World War II. The first of these modifications was the establishment of a new basing point at the Persian Gulf for bunker fuel oil. During the period following the outbreak of hostilities in 1939, military operations in the Mediterranean practically eliminated large- scale shipments of Middle East oil to the western Mediterranean and western Europe-a type of movement which, under Gulf-plus, in- volved freight absorption. At the same time, shipments from the Middle East to nearby Eastern Hemisphere markets, involving large elements of phantom freight, were substantially increased. This shift in the geographic distribution of most Middle East oil, and the fact that the prices paid for that oil now included payments for phantom freight, led British authorities to question the propriety 12 P. ff. Frankel, American Oil in it Chancing World. Oil Forum, November 1950, p. 446. Oil Forum, November 1948, p. 457. [Italics added.] '" OR Forum, November 1950, p. 448. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 356 THE INTERNATIONAL PETROLEUM CARTEL of the Gulf-plus price structure as applied to Middle East Oil. In, the language of the British Auditor General during the war : Before the war the price of oil f. o. b. in the Gulf of Mexico was the generally accepted basis regulating the prices of commercial supplies of oil in the Atlantic area. It also influenced, under competitive conditions, prices in other areas. In the course of their inquiries the Committee found that in many cases the price of bunker oils charged or proposed to be charged to the Ministry at ports in the Indian Ocean and Middle East included an element described as an origin differential. This differential (which dill not represent actual costs incurred by suppliers, and which applied to all oil products, and not solely to bunker fuels) was a means of equating c. I. f. prices, whatever the point of production. The general result was that when the source of supply was more distant than the Gulf, the application of the differential would operate to the disadvantage of the supplier and, when it was nearer, to his advantage 1" The main concern of the British appeared to be with the problem of phantom freight and of cross-hauling engendered by a straight Gulf-plus system. This concern is reflected in a further statement by the Director General : * * * We could no longer accept this origin differential automatically as a proper element in bunker prices in overseas ports, mainly because owing: to, the vital necessity for getting the utmost possible service out of tanker tonnage it was a matter of policy and principle to draw supplies from the nearest avail- able source. It was no longer a matter of commercial. competition. It was a matter of imposed policy that every ton of oil that could be dra wn ffromla near source had to be taken from that source, and from bone other. The outcome of this British action was the establishment of a sec- ond basing point at the Persian Gulf. As to the level of the base pprice at their new basing point, the British Government which, after long discussions with the oil interests had failed to bring to light the actual cost of production at the Abadan refinery agreed "to accept" as the Persian Gulf base price the United States tulf base price. As stated in the report of the Auditor General : In view of the difficulty of arriving at production costs and in the knowledge that f. o. b. prices in the Gulf of Mexico were controlled by the United States Government at levels giving a fair return, the committee accepted f. o. b. prices for Persian Gulf production centres approximating the f. o. b. prices in the Gulf stem for bunker fuel, while eliminating a oint s i l b d y ng p as ua The highly discriminatory element of phantom freight, did not, as the British apparently presumed, eliminate the origin differential. Freight absorption and differences in net realization at the Persian Gulf continued to exist on shipments to destinations which were freightwise closer to the United States Gulf. The basic result of the Gulf-plus system continued to be realized, i.. e., the quotation of identical delivered prices for each destination regardless of supply source. .The propriety of the Persian Gulf price The dual basing point established at the insistanee of the British in the Persian Gulf for bunker fuel was extended. to apply to other refined products and crude oil in 1945. The acceptance of the Gulf figure as the base price at this new basing point for crude and refined products came in for sharp criticism, particularly with regard to sales 1a Adiustanent in Prices of Bunker Oil Supplies, in the (London) Petroleum Times, May 13, 1944, p. 298. 10 Ibid. 13, 1944, p. 298. 17 Ibid., The Petroleum Times, London, May, Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 357 to the United States Navy. Behind this criticism, which found ex- pression during the course of a 1947-48 congressional investigation (popularly known as the Brewster hearings and reports),18. was the belief that costs were lower in the Middle East than in the United States and that the United States Government, in purchasing Middle East oil, should gain the benefit of these lower costs. The question of crude oil prices centered in the negotiations leading to United States Navy purchases from Arabian American Oil Co, in 1945 for delivery to the French Government under the Lend-Lease Act 1s These hear- ings were directed specifically into charges that the Navy had paid excessive prices for crude oil and petroleum products to companies holding concessions in Saudi Arabia and the island of Bahrein, In- formation developed at the hearings revealed that the cost of pro- duction of Saudi Arabian crude was about 40 cents per barrel, includ- ing a royalty of 21 cents. The cost of producing a barrel of Bahrein crude, including a royalty of 15 cents, was estimated to be approxi- mately 25 cents per barrel .20 These costs become significant when compared with the selling prices of $1.05 per barrel and upward which the Navy was required to pay for crude, and products from Saudi Arabia and Bahrein. Arabian. American Oil Co., at that time a jointly owned subsidiary of the Texas Co. and Standard Oil Co. of Calif ornia,21 held a con- cession in Saudi Arabia which was just beginning to develop into an important producing area, for which no price policy had been estab- lished. But with the end of the war approaching and with the rapidly expanding crude production of Saudi Arabia requiring world market outlets, it was important for the controlling oil companies to establish a price policy for Saudi-Arbian crude and set a precedent that would apply not only to future Government sales but to private sales as well. As the Navy had made no previous purchases of crude from Aramco, it was aware that the first contract would serve as a precedent for future dealings in Middle East oil. Evidence abounds in the Senate committee hearings 22 that through- out the period of protracted negotiations, the aim of the oil company was to maintain the principles of the dual basing-point system- that is, to establish a base price in the Persian Gulf for crude at the same level as the United States Gulf price, thus paralleling the price structure for bunker fuel established in World War II at the insistence of the British. Thus Aramco offered to supply the crude for $1.05 per barrel f. a. s. Persian Gulf, or the same as the United States Gulf price for West Texas crude, after allowing for differences in quality and cost of moving the oil from wellhead to loading port. The Navy pro- 19 Petroleum Arrangements With Saudi Arabia, pt. 41 of hearings before a special com- mittee investigating the national defense program, United States Senate, 80th Cong., 1st sess., pursuant to S. Res. 46, March-November 1947, and January 1948 ; and Navy Purchases of Middle East Oil, S. Rept. No. 440, pt. 5, 80th Cong., 2d sess., of the same committee, April 1948. to The Navy was assigned procurement responsibility for petroleum products under the Lend-Lease Act. 20 Petroleum Arrangements With Saudi Arabia, op. cit., pp. 24978-25032. 21 Standard Oil (New Jersey) and Socony-Vacuum have since bought a 30- and 10-percent interest, respectively, in Aramco. The March 1947 conditional contract for their purchase of Aramco stock became final in December 1948. 22 See Petroleum Arrangements with Saudi Arabia, op cit., pp. 25172 and 25412. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 cerement officers 23 made an attempt through sources inside and out- side Government to determine the reasonableness of the Aramco quota- tion. Officials of the Shell Oil Co. and its subsidiary, Asiatic Petro- leum, when asked for price information on British-controlled Middle East crude, advised the Navy that the British would accept the dual basing-point system, with the Persian Gulf base price equivalent to the United States Gulf: * * * the British would base the value of such crude f. o. b. vessel Iran/Iraq on United States Gulf seaboard price for a comparable quality crude." During its negotiations with Aramco, the Navy received informa- tion from the Petroleum Administrator for War (PAW) as to the cost of production of Arabian crude, accompanied by PAW experts' findings that a price of $1.02 per barrel was excessive 25 This informa- tion was based on an exhaustive analysis conducted by PAW in 1943 into the costs and proper evaluation of Arabian crude (supplied by Aramco to Bahrein Petroleum Co.) 26 The analysis had been made in order to determine the price to be paid by Defense Supplies Cor- poration for 100-octane gasoline produced at Bahrein's new refinery, constructed mainly with United States Government financing. PAW cost experts rejected a 1943 evaluation of Arabian crude at $1.02 per. barrel based solely on equivalent Texas crude price quotations 27 (as incorporated by Bahrein in its aviation gasoline-costing calculations), because- * * * it appears to us that its comparative value with reference to domestic crude is not a proper criterion and because the prewar sales of Arabian crude * * * were at prices considerably lower than $1.20 per barrel. Specifically we understand that the company owing the Arabian crude had a contract with a Japanese firm calling for the sale of a large volume of this crude at 86 cents per barrel f. a. s. the Arabian coast. We further understand that this contract was canceled by the Japanese as a result of pressure exerted on Dutch East Indian sources of crude oil, and as a result of these factors two cargoes were shipped to the Japanese at a price of 70 cents per barrel f. a. s. the Arabian coast. We do not believe that these latter sales (or certain other small sales which we understand were made for shipment to Mediterranean ports) represent a fair index to the market value of the Arabian crude but we have taken the position that this crude oil should not be evaluated at a price higher than the 8e-cents- per-barrel figure contained in the large-scale contract referred to above' The Navy negotiator's attempts to obtain substantiating cost infor- mation from Aramco's sales manager were rebuffed on the grounds that such data were unavailable. Later the company's vice president testified before the "Brewster committee" that cost figures were com- piled monthly for the directors, and the costs were only 40.6 cents per 2a Conductive negotiations for the Navy was Commander A. A. MacKriile, officer in charge of the Purchasing Section, Fuel and Lubricants Division, of the Bureau of Supplies and Accounts. Petroleum Arrangements With Saudia Arabia, op. cit., pp. 25161 and 251.62. 24 Petroleum Arrangements With Saudia Arabia, op cit., p. 25412. 25 However, the Brewster committee found that the PAW had no intimation that the Navy was negotiating the purchase of oil from Aramco, nor was it advised that the Navy was being charged $1.05 for Arabian crude. 2 Both Aramco and Bahrein were owned jointly by the seine companies, Standard Oil of California and the Texas Co. 27 Equivalent to $1.25 East Texas crude prices, allowing for quality differences. sa Navy Purchases of Middle East Oil, op. cit., pt. 5, p. 20 [italics added] : "With the contingency allowance of 1.25 cents per gallon and other costs evaluated on a basis consistent with domestic production and favorable to Government, the 13.75-per- gall.on price for the 100-octane aviation gasoline contains an allowance for raw materials equivalent to a price of slightly less than 84 cents per barrel for the Arabian crude f. a. s. the Arabian coast. While it is impossible to say that this is or is not exactly the proper price, we believe it is completely justifiable, since it is less than the price involved in the only large volume commitment entered into prior to the war, namely, 86 cents per barrel" (Petroleum Arrangements With Saudi Arabia, op. cit., exhibit No. 2582, pp. 25414-25415). Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 359 barrel at the time the Navy was required to pay $1.05. Had the com- pany disclosed these costs to him, testified the Navy representative, he would have refused to pay the quoted price.29 But, confronted by Aramco's uncompromising "take it or leave it" attitude, and informed by his superiors the oil was unobtainable elsewhere, the Navy nego- tiator felt compelled, because of the urgent need, to agree to the company's original quotation.,, In passing, it should be noted that the $1.05 price was not only far above Middle East costs and substantial) above contract prices on previous sales; it was also well above actual offers to sell to the United States Government previously made by Caltex and the Texas Co. Thus, in 1941, James A. Moffett, chairman of the board of Caltex (jointly owned by Standard of California and Texas Co.), offered to sell products to the United States Navy at special prices : Gasoline at 31/2 cents a gallon, Diesel oil at 75 cents per barrel, and fuel oil at 40 cents per barrel. Again in 1943, W. S. S. Rodgers, chairman of the board of the Texas Co., offered to sell Aramco crude and products to the United States Government "at an agreed-upon percentage of the going price in the world markets. * * *." 31 The United States Government was an interested party in the world pricing of refined products as well as crude. Since 1942 the United States Navy had made substantial purchases of refined petro- leum products from the subsidiaries of American companies operating in the Middle East, and the products were lifted by the Navy's own tankers. From early 1942 until the middle of 1945, Caltex was the chief Navy supplier of Middle East products at special contract prices, somewhat below United States Gulf f. o. b. quotations. But the acceptance of the $1.05 crude price established a dual basing point for crude oil and had a precedent-setting effect upon the prices of re- fined products in the Middle East. This is indicated, for example, by the prices called for in the initial contract for refined products from 25 However, the overriding consideration, as stressed in the Navy's official "justification" for recommending acceptance of the $1.05 price asked, was an alleged 21 cents per barrel increased royalty to the Saudi Arabian Government, which was actually not being paid. The official Navy report said : "This group [various executives of Aramco and its parent companies] stated that they considered the original pricing of crude oil for 100-octane aviation gasoline for the Defense Supplies Corporation-that is, January 1943-a reason- able and adequate justification for contractor's quotations to Navy, particularly since current royalties to the King of Arabia are now totaling approximately 42 cents per barrel, as compared to the former 21 cents per barrel applicable during the period of negotiations of the DSC contract. In addition, it was reported considerable pressure is being placed on Arnhlnn Amerlenn to fn"flier increase such royalty" (Petroleum Arrangements With Saudi Arabia, op. cit., p. 25412). Though officials of Aramco or its parents denied making the statement that the royalty had increased, the Navy report written by Lieutenant Bodenschatz (associated both before and after his Navy service with the General Petroleum Corp., a wholly owned subsidiary of Socony-vacuum) speaks of current royalties having increased 21 cents since the PAW analysis of the Bahrein-DSC contract in 1943. Commander MacKrille (with the Shell Oil Co. since 1930 except for the period of his Navy service), who conducted the negotia- tions for the Navy with the oil company officials, apparently never read the typed report, claimed some "mistalte" In "Lieutenant P.odenschatz's understanding of what I said, or in transcribing" re the royalty increase; but he recalled that Mr. Denham, sales manager of Aramco, told him the royalty might be doubled and the company was under pressure to increase it. As the testimony revealed that no increase in royalty had actually taken place. the committee found that the justification for an increase in Arehinn crude nrices to $1.05 per barrel "was based on incorrect facts and was entirely without foundation," (See Navy Purchases of Middle East Oil, op. cit., pp. 20-21 ; and testimony in Petroleum Arrangements With Saudi Arabia, op, cit., pp. 25148-25153 ^nd 25181-25182.) is (Navy Purchase of Middi" East Oil, op. cit., pp. 19-22.) The Brewster committee found that "The testimony indicated clearly that the Navy officers were far from diligent In seeking cost records from Aramco. Millions of dollars might have been saved the tax- payers had the Navy insisted on or demanded the cost figures prior to the execution of the contract for. $1 05 per barrel of crude oil. This failure established a 'bottom price' for that commodity, and it has remained as a basing price since in all other procurements from the Arnhian all fields" (p. 23). n Ibid., pp. 4 and 12. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Aramco's new, modern refinery at Ras Tanura, Saudi Arabia. En- tered into on September 13, 1945", at the time when petroleum prod- ucts were in critical short supply, the refined products contract called for f. o. b. Ras Tanura prices on 80-octane motor gasoline (61/2 cents per gallon), fuel oil special ($1.05 per barrel), and Diesel oil ($1.68 per barrel) "at the minimum United States Gulf-coast prices for prod- ucts of similar grades in tanker lots." 32 As the Brewster committee concluded : It was agreed by the Navy representatives that the first contract for $1.05 for crude was largely determinative in the fixing of these prices. In its first sale of refined products, as in the sale of crude oil, 'Aramco did not furnish these products at the prices quoted in the Moffett offer of 1941 nor at "prices well below world prices" as set forth in the 1.943 Rodgers proposal. In fact, the prices were much higher than those the sister corporation, Caltex, had charged in prior years. The latter corporation furnished from Bahrein's refinery fuel oil special for 85 cents per barrel and Diesel oil at $1.25 per barrel from May 1.942 to July 1944, and had supplied the Diesel fuel between March and July of 1945 at $1.571/2 per barrel. Caltex was solely a marketing agent and had been in that part of the world for sometime. Aramco, a virtual newcomer in the marketing field, on its first major transaction with the Navy, established the United. States Gulf coast price for the Persian Gulf area. This action by Arameo had a marked effect. Ca[ Tccc in its next Navy contract commencing October 1, 1945, closed at prices identical with the price established by the first Aramco contract." For the entire period between January 1942 and June 30, 1947, Caltex and Aramco, both owned jointly by Standard Oil Co. of Cali- fornia and the Texas Co., sold approximately $70 million worth of petroleum products to the United States Navy. This valuation was about $38.5 million higher than would have resulted from the special prices proposed under the wartime Moffett proposal.," In all, it is evident that had prices in the Middle East been deter- milled by competitive influences bearing some relation to the low cost of production of Middle East oil, substantial savings could have been effected by the United States Government on Navy purchases. In- stead, with Middle East suppliers using as their base price the United States Gulf figure, the difference between the low cost of Middle East production and the far higher costs in the United States Gulf output, was intercepted by the major oil companies. operating in the Middle East. CRUDE OIL PRICING AFTER WORLD WAR II Until the end of World War II, developments affecting the world crude oil price structure were similar to those affecting the pricing of refined products and the discussion of these developments was pre- sented simultaneously in preceding sections. However, since the end of World War'II the story of crude oil pricing departs consid- erably from that relating to refined products. Accordingly, the dis- cussion of crude oil pricing and refined products pricing in the post- war period will be divided into separate sections. One will deal with crude oil and the other with refined products. Increases in Production and Prices in the Middle East Immediately following the war two significant developments pro- foundly affected the world crude price structure. The first was the expansion in Middle East output; the second was the rapid series of as Navy Purchases of Middle East Oil, op. cit., p 23. [Italics added.l "Navy Purchases of Middle East Oil, op. cit., p. 23. [Italics added.] 84Ibid. p. 24. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 THE INTERNATIONAL PETROLEUM CARTEL 361 .crude price increases in the United States which were soon reflected in higher prices for Middle East oil. With regard to the former, Middle East crude output increased from 4.8 percent of total world crude production in 1940 to 12.2 percent by 1948. Once the critical supply shortages of 1945-47 began to ease, this increased flow of Middle East crude could only be absorbed in the major consuming areas of western Europe, and later the United States. The need for finding western European and United States markets, for Middle East crude led to a change in the world pricing structure- As has been noted, a new basing point, with It base price equal to United States Gulf, had been established during the war at the Persian Gulf. Although this dual basing point system eliminated phantom freight on shipments of Middle East crude to the eastern Mediter- ranean, it tended to prevent shipments from the Middle East to the western Mediterranean, to western Europe, and to the United States. Under the dual system as it then existed, deliveries of Middle East oil westward beyond the mid-Mediterranean (i. e., southern France, western Europe) required the absorption of freight, since the United States Gulf was nearer (freightwise) to those markets than the Per- sian Gulf. Thus, as long as their system remained, the companies operating in the Middle East were faced with the prospect of having to absorb freight and take a lower net price in disposing of their rapidly expanding output in the markets of western Europe and the United States. Modifications of the basing point system which would permit a freer movement of Middle East oil into western markets seemed to be in order. The second postwar development affecting the world crude price structure was the rapid series of increases in the United States Gulf crude price-to which world crude prices were linked-following the lifting of OPA controls. The upward spiral in Middle East prices, reflecting these increases in United States Gulf prices, began with an action by Arainco raising its Persian Gulf price for the contract period December 1946-March 1947, from $1.05 to $1.17-$1.23 (depending on gravity) for crude oil sold to the Navy for UNNRA. For a time nonuniform Persian Gulf crude quatotions prevailed, as Caltex,", Socony-Vacuum and Esso Export " raised their Middle East crude oil prices at different times, in a lagging pursuit of the rapidly rising American crude oil price level. 3T On December 6, 1947, just 5 days after the last 50 cent increase in United States crude prices, Esso Export, a newcomer in the Persian Gulf, raised its Persian Gulf crude prices to a record $2.22 per barrel on shipments to Italy-93 cents above the previous high of $1.2936 85 A subsidiary of Bahrein Petroleum, marketing Middle East oil produced for the account of Standard Oil of California and the Texas Co. by Bahrein and Aramco. ae Subsidiary of the Standard Oil Co. (New Jersey). a' Absolute increases in f. o. b. Persian Gulf prices may not have kept precise pace with the rapid increase in American crude prices because of the contractual manner by which industry related the two. The usual contract for Middle East crude carries an "escalation" clause specifying that the f. o. b. Ras Tanura price shall be adjusted upward or downward by the mean average price change of east Texas crude and west Texas sour crude (adjusted for differences in API gravity). At times the contract calls for escalation to start only after a certain price level is reached in the United States. 86 The emergence of Standard Oil Co. (New Jersey) through its subsidiary, Esso Ex- port, as a leader in pricing of Persian Gulf crude took place shortly after Standard Oil (New Jersey) and Socony, on March 12, 1947, agreed to buy into Aramco (upon settlement of claims of certain 1PO partners), end Trans-Arabian Pipe Line Co. (Tapline), and to purchase from Aramco and Cal-Tex (under the interim off-take agreement) specified quan- tities of crude, starting in August 1947. See pp. 119-128. With crude thus made avail- able to "Jersey," in the Persian Gulf for the first time, Jersey took the lead in setting the crude pricing pattern in that area. Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Approved For Release 2010/04/14: CIA-RDP57-00384R000700130001-2 Socony followed Esso's lead in February 1948 while Caltex, after initially raising its price to $1.59, did not reach the $2.22 level until March 1948. Before t