PETROLEUM SWAPPING BETWEEN OIL GIANTS - Part 2
Historical Antecedents
The precise origins of
reciprocal oil barter, (like the origins of primitive
human barter) are probably lost in antiquity. There is
no way of knowing exactly when or under what
circumstances petroleum barter was first utilized. Nor
is that of any significance here. What is more important
for present understanding is how, and for what purposes,
large-scale, systematic reciprocal supply Exchanges
first came into use among the largest oil companies with
dominant positions in the industry. Here, history still
has much to teach.
To answer this
question, fortunately, there is an excellent published
resource in the FTC�s own landmark 1952 Report to a
Senate Monopoly Committee entitled �The International
Petroleum Cartel.�
That Report (foundation
for the previously noted Justice Department�s
International Oil Cartel Case [Cartel Case]), highlights
a 1928 document drafted by three top executives of the
world�s then- largest oil companies, (now known as
Exxon, Shell and BP). What is significant about that
document, (called �The Achnacarry Agreement�) is that
there for the first time the dominant Companies�
expressed a clear written basic charter of principles,
policies, and procedures for solidifying their joint
control of international oil supplies and markets. And
prominent among these grand plans were special
provisions relating to Exchanges.
While world market
conditions addressed by the Achnacarry Agreement may
have substantially changed since 1928, and while
all-encompassing cartel agreements like it may have been
inhibited by Cartel Case consent decrees, nevertheless
the fact remains that some of those original industry
practices, like Exchanges still survive, though in a
legal limbo (i.e., neither adjudicated nor specifically
enjoined by Cartel Case consent decree). Furthermore,
since the FTC�s aborted 1973 case likewise failed to
adjudicate its Exchange issues, the net result of both
Government defaults has been a continuing green light
for the practice of Exchanges.
Nevertheless, the 1952
FTC Report still stands as a classic historical
illustration of powerful companies� candid strategic
thinking about the role of supply Exchanges. Page 204 of
the FTC Report highlights objectives of those Exchanges
as contemplated by The Achnacarry Agreement:
Reciprocal exchange of supplies. In addition to the
establishment of a quota system for the division of
markets�the Achnacarry Agreement also provided for a
rather elaborate method of exchanging oil supplies among
the various participants.
The principle purposes
of this exchange were to direct supplies to each market
from �the nearest producing area, thereby reducing
transportation costs through the elimination of cross
hauling, and to minimize the tendency to erect duplicate
facilities. Avoidance of duplication was expected to
result because the participants, in thus exchanging oil
supplies, would tend thereby to share each other�s
existing facilities. And that would tend to limit the
erection of new facilities to those �necessary to supply
the increased requirements of petroleum products in the
most efficient manner.�
A Model of Exchanges
In this writer�s 1965
Justice memo,7 I offered an expanded explanation for
Exchanges as viewed from a broad historical and economic
perspective. Most of my original thesis appears to have
been confirmed by the CounselDoc analysis � however
fragmented � of documentary evidence discovered in the
aborted FTC Case. Based on that tacit endorsement, I
respectfully proffer the full text of my 1965 memorandum
for consideration as a comprehensive model of the world
of Exchanges. I do so however with three qualifications:
I. When I wrote in
1965, the US national crude oil situation was one of
comparative surplus: (i.e., we still had considerable
excess crude oil capacity that was still subject to
State pro-rationing and Federal interstate controls as
described in my memo). Since then, however, as most
continental US reserves of relatively cheap crude were
exhausted, the US has become crude short and more
dependent on imported foreign crude. And OPEC has now
supplanted the Texas Railroad Commission, as the
ultimate controller of surplus crude production. Despite
these transformations, I nevertheless believe that my
1965 model still holds as an explanation of the
strategic private coordinating role of crude and product
Exchanges among dominant vertically integrated
companies.
II. Also, at the time I
wrote, for reasons suggested by my memorandum, there was
no significant intermediate market system of brokers,
etc. How much relatively recent development of commodity
exchanges, futures trading, etc., may have altered the
effectiveness of Exchanges I frankly do not know; (and
with zero knowledge in that area, I will not presume to
say). My hunch is that while those intermediate markets
may have achieved some competitive loosening, the
likelihood is that the formidable power of Exchanges
moves inexorably onward. Only sophisticated testing will
tell.
III. Finally, and
importantly, when I wrote in 1965, the largest
vertically integrated companies, were still corporately
separate from each other (indeed, many like Mobil,
Chevron, and Amoco having been split off from the
original �Standard Oil Trust� by the 1911 Standard Oil
decision). As separate corporate entities those major
companies still had daylight between them. To avoid
antitrust challenge (such as the FTC Oil case), they
still had to tread cautiously using intricate,
subtly-disguised contracts � like Exchanges � to achieve
horizontal supply coordination between themselves.
But with the recent
spate of mega-mergers (such as Exxon-Mobil, et al), the
need for such subtlety may have significantly
evaporated. Now these new mega-giants are free to manage
vast, once-separate company resources as a single
intra-corporate enterprise. With the horse escaped from
the barn, there is some reason to wonder about the value
of now closing the door against Exchanges. This, too,
will require sophisticated analysis.
In sum, it is an open
question what impact all these changes in the industry�s
institutional landscape may have on the significance of
Exchanges. The model in my following memorandum offers a
baseline for comparative assessment.
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