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11. the Roller Coaster University of Calgary PRISM: University of Calgary's Digital Repository University of Calgary Press University of Calgary Press Open Access Books 2019-04 Imperial Standard: Imperial Oil, Exxon, and the Canadian Oil Industry from 1880 Taylor, Graham D. University of Calgary Press Taylor, G. D. (2019). Imperial Standard: Imperial Oil, Exxon, and the Canadian Oil Industry from 1880. "University of Calgary Press". http://hdl.handle.net/1880/110195 book https://creativecommons.org/licenses/by-nc-nd/4.0 Downloaded from PRISM: https://prism.ucalgary.ca IMPERIAL STANDARD: Imperial Oil, Exxon, and the Canadian Oil Industry from 1880 Graham D. Taylor ISBN 978-1-77385-036-8 THIS BOOK IS AN OPEN ACCESS E-BOOK. It is an electronic version of a book that can be purchased in physical form through any bookseller or on-line retailer, or from our distributors. Please support this open access publication by requesting that your university purchase a print copy of this book, or by purchasing a copy yourself. If you have any questions, please contact us at [email protected] Cover Art: The artwork on the cover of this book is not open access and falls under traditional copyright provisions; it cannot be reproduced in any way without written permission of the artists and their agents. The cover can be displayed as a complete cover image for the purposes of publicizing this work, but the artwork cannot be extracted from the context of the cover of this specific work without breaching the artist’s copyright. COPYRIGHT NOTICE: This open-access work is published under a Creative Commons licence. This means that you are free to copy, distribute, display or perform the work as long as you clearly attribute the work to its authors and publisher, that you do not use this work for any commercial gain in any form, and that you in no way alter, transform, or build on the work outside of its use in normal academic scholarship without our express permission. If you want to reuse or distribute the work, you must inform its new audience of the licence terms of this work. For more information, see details of the Creative Commons licence at: http://creativecommons.org/licenses/by-nc-nd/4.0/ UNDER THE CREATIVE UNDER THE CREATIVE COMMONS LICENCE YOU COMMONS LICENCE YOU MAY NOT: MAY: • gain financially from the work in any way; • read and store this • sell the work or seek monies in relation to the distribution document free of charge; of the work; • distribute it for personal • use the work in any commercial activity of any kind; use free of charge; • profit a third party indirectly via use or distribution of • print sections of the work the work; for personal use; • distribute in or through a commercial body (with • read or perform parts of the exception of academic usage within educational the work in a context where institutions such as schools and universities); no financial transactions • reproduce, distribute, or store the cover image outside take place. of its function as a cover of this work; • alter or build on the work outside of normal academic scholarship. Acknowledgement: We acknowledge the wording around open access used by Australian publisher, re.press, and thank them for giving us permission to adapt their wording to our policy http://www.re-press.org 11 THE ROLLER COASTER From Stability to Chaos From its earliest days the oil industry in both the United States and Canada had been plagued by boom and bust cycles, with crude prices escalating from $1 to $10 per barrel and back again within a matter of months. Rockefeller made price stability a major objective for his strategy of integration and amalgamation, which was attained by the 1880s, but the challenges persisted through more than half a century. The discovery of large oil fields in the early twentieth century in Texas, Mexico, Russia, Persia, and the Dutch East Indies brought new competitors onto the scene, and the forced breakup of the Standard Oil Trust exacerbated the situation. Each new discovery attracted hordes of enterprising wildcat- ters, reproducing the cycles that had roiled the oil fields of Pennsylvania and Petrolia. The 1920s–30s witnessed the biggest finds yet in Oklahoma and Texas. The effort of the large international companies to impose price stability through the “As Is” cartel arrangement in 1928 was undermined by these developments. The Texas Railroad Commission, backed up by the US fed- eral government in the depths of the Great Depression, established some degree of price stability. Because the oil output of the Texas fields was so large, accounting for almost half the world’s crude production, the system imposed by the state regulatory commission in effect achieved a degree of predictability in oil prices that Rockefeller would have appreciated. After the Second World War, the measures of the “As Is” cartel (dubbed the “Seven Sisters”) and the Texas Railroad Commission resulted in an 249 Figure 11.1. WTI Crude Oil Prices from 1946 (in USD). Courtesy of Macro Trends LLC, 2018. unprecedented period of price stability that lasted until the early 1970s, absorbing and coordinating the growth of large new producers in the Middle East, Venezuela, and Canada.1 This period also saw the dramatic growth of petroleum consumption, with the vast expansion of the auto industry, accompanied by increased use of oil for residential heating, electrical power generation, and as a feedstock for petrochemicals. Escalating market demand also lured more entrepreneurs into the industry, not just into the search for new sources but also into refining and marketing. The appearance of new would-be players on the scene provided bargaining leverage to political leaders in the countries graced with the resource base, particularly those in the “con- cession states” of the Middle East who controlled access to these oil riches and increasingly felt that the big companies were retaining the lion’s share of the revenues.2 250 Graham D. Taylor Tensions between the producing countries and the international oil companies grew in the 1960s. The “official” crude oil prices, which deter- mined tax sharing and royalty payments to the producing states, hovered around $1.00/bbl. (USD). But the entry of oil from the Soviet Union af- fected actual market costs for refiners. The oil majors, particularly Jersey Standard, believed that the gap between the official and market costs of crude placed them at a disadvantage with independent refiners, particu- larly the Italian company ENI. To offset that problem, the big oil com- panies unilaterally reduced the official crude oil price in 1959. This move led to the creation of an alliance of the producer states, led by Venezuela and Saudi Arabia and called the Organization of Petroleum Exporting Countries (OPEC), a year later. For much of the following decade the oil majors regarded OPEC as a “paper tiger.” A test of this view came during the Arab-Israeli war of 1967 when the Arab member states of OPEC sought to embargo the shipment of oil to countries such as the US that were perceived as supporting Israel. The failure of that effort appeared to demonstrate that OPEC was an -in herently unstable cartel of countries with wildly different objectives. But by 1970–71 the situation was changing dramatically. Despite the Prudhoe Bay discoveries the United States had become a net importer of petroleum, while demand in Western Europe and Japan provided increasing leverage to the OPEC states. In 1971 Jersey Standard found itself in an awkward position in Libya, where it had made substantial investments, forced to accept concessions to the new ruler of that country—Muammar Qadaffi— that resulted in a wider price rise from $1 to $2/bbl. (USD). Two years later emboldened members of OPEC met in Vienna and proposed to more than double the posted price of their oil exports, based on the value of Saudi Arabian light crude, to $5/bbl. (USD). In the midst of their deliberations another Arab-Israeli war erupted, and the Arab oil states once again agreed to cut production and mount an embargo against countries supporting Israel. In this situation, the US did not have the ex- cess capacity to offset the Middle East supplies, and other OPEC members including Iran chose to stand on the sidelines. By the end of the year the OPEC posted price had spiked to $11.65/bbl. (USD) while “spot prices” rose even higher, as traders from non-OPEC countries exploited panic buying. The embargo was lifted in March 1974 but posted prices remained 11 | The Roller Coaster 251 above $10/bbl. (USD) and the producing states extracted further conces- sions from the large refining companies, including nationalizing the fields and refineries in their own countries. The era of price stability in world oil markets had unravelled.3 Another round of price spikes came in 1979–80 when the Iranian revolution and Iran-Iraq war disrupted exports from the Middle East. Even before the fall of the Shah of Iran, spot oil prices surged from $12.80 to $21.80/bbl. (USD) and then on to $40/bbl. (USD) by the end of 1979. OPEC, which had not created this chaotic situation, nevertheless exploited the crisis. By 1981 the OPEC posted price was $34/ bbl. (USD). Just as significantly, the major consuming countries, including the United States and Canada, began to frame energy policies based on the assumption that high oil prices were here to stay.4 But OPEC, much like the early producer cartels, was inherently un- stable. Many member countries habitually exceeded their quotas, selling advantageously on the spot market. Fundamentally the organization was divided between countries like Iran and Venezuela with diminishing re- serves and large politically volatile populations, and the oil-rich, thinly populated Arab nations of the Persian Gulf, particularly Saudi Arabia.
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