The International Oil Industry

The international oil industry has long commanded public, political and academic attention.In recent years it has been seen as the pivotal force propelling the world into a series of interrelated ‘crises’. Oil scarcity was central to the idea of a ‘World energy crisis’, an idea so generally presented and widely accepted that the concept was seldom seriously appraised. The multinational oil companies, which dominated the international oil business until the late 1960s, were viewed as major contributors to the ‘development crisis’ in some Third World nations. It was a commonly accepted scenario that by exploiting the oil resources and transferring abroad much of the resultant economic rent, the companies were depleting the most valuable capital asset of producer states and thus depriving them of their development potential. Thus the 1973/4 ‘oil crisis’, created when the main producing countries — united in OPEC — unilaterally raised prices by a factor of four, was viewed by many as the dawn of a new international economic order. A dawn greeted with enthusiasm by some as being ‘the point when the Third World countries became aware, not of their rights, but of their power’ (Amin, 1979, p.65). However, no cause for celebration was felt by those who saw the same shift in resource power as a threat to the political security and material prosperity of advanced western nations (US National Commission on Materials Policy, 1973; Bergsten, 1974). Following the 1973/4 and 1979/80 oil price rises, the oil sector has since been held responsible for two further ‘crises’, world economic recession and the Third World Debt crisis, which according to some analysts could, in turn, lead to the breakdown of the international financial system, as defaults cause the collapse of major banks.

The purpose of this paper is to sketch briefly and with a broad brush an outline of the structure of the international oil industry and the changes in the roles of the several actors therein. This should provide a background against which those with little knowledge of the industry and its evolution can consider the more specialized discussions to follow in the subsequent chapters.

The Group of Thirty was established in late 1978 with the support of the Rockefeller Foundation in order to test the proposition that a group of distinguished public and private leaders in the fields of commerce and international finance, gathered from all over the world, meeting regularly, could bring fresh insight to public understanding of the powerful forces bedeviling the world economy. The Group has since established itself as an important force in world economic affairs and the Rockefeller Foundation has continued to support it.

The twentieth century has been so rich in disasters that the oil price explosions of the 1970s (see Figure 4.1) cannot rank near the top of the list. But they have more than a minor place.

Whatever may be said of lawyers in general, those who have been involved in oil industry matters have for the most part, been imaginative people. They frequently have had to deal with problems with which the law as originally formulated is not familiar, and, just as the industry itself functions on the fringes of the physical sciences, as it does, for example, in the North Sea, oil lawyers often work on the fringes of legal science. They have had to invent contractual structures where originally there has been little or no relevant law (for example, the early Middle East Concessions), or alternatively, to invent new concepts to meet new situations — production — and profit-sharing arrangements, joint venture arrangements, risk-sharing agreements, technical service contracts and so on. Petroleum law has to be as dynamic as the oil industry itself. It simply cannot lag behind.

Any attempt to analyse the status and strategies of the international oil corporations has to begin by recognising the enormity of the assignment. Indeed, it would be misleading to pretend that a single definitive statement could be made on the subject given the heterogenous nature of the enterprises involved. The International Oil Corporations can no longer be grouped under the convenient heading ‘The Seven Sisters’. They are now legion, operating in both the private and public sectors and they are remarkably diverse in character and objectives.

Esso Europe and its operating affiliates are responsible for Exxon Corporation’s oil and gas interests in Europe and Africa and we engage in all phases of the business from exploration and production to refining, transportation, and marketing. Esso’s European affiliates supply petroleum products in 15 countries of Western Europe and have an industry share of about 14 percent. We operate 12 refineries and sell our products through 16,000 retail service stations. Esso has participated in petroleum exploration and production in Europe since 1920 and has an important presence in France, Germany, The Netherlands, Norway and the UK In total Esso Europe has 25,000 employees almost all of whom are citizens of the countries in which they work.

Oil has been a significant factor in the satisfaction of the commercial energy needs of industrial and developing economies, and in sustaining their growth. Changes in the terms of its extraction and/or in its commercialisation are bound to affect various parties. International financial markets are among the economic sectors foremost concerned by such changes. In particular, the size, composition, nature and stability of financial flows are impacted by oil price changes. The impact is bound to be more significant, the more sizeable and rapid the changes are to price, volume, and patterns of oil flows.

The term ‘third-world’ has come to denote those 120-odd countries which represent the balance of the. world community after excluding the industrialized developed countries of both the market economy (the first world) and the centrally planned economy (the second world).As such, the third world is a very big and mixed bag indeed, which itself may well be divided into two or three distinct categories or smaller worlds. In spite of the fact that the term might not be precise or entirely satisfactory, it would seem to have at least the redeeming value of practical convenience.

In this chapter an attempt will be made to draw together the threads in the debate by considering the issues raised from the disciplinary perspectives represented at the seminar series. We begin with an economic viewpoint. The marked recent decline in oil prices and the evident disunity of OPEC has naturally led to much discussion of the ‘reassertion’ of the ‘logic of the market’. However, certain care must be taken when the rules for market logic are derived from models of the world economy which assume economic rationality, perfect competition and free markets. Neither individual consumers, industries or financial corporations nor, importantly, their governments, necessarily adhere to the objectives or behavioural norms implied by economic rationality. As Professor Desai himself points out in the messy political economy of the real world oil market ‘economics alone is not enough’