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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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