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ANALYSIS Oil Price In December 1998, the oil price went below $10 a barrel, for the first time since before the oil crisis of 1973. Just 18 months previously it had been at $25 a barrel. All the oil majors were hit, and their attempts to offset the price drop with increased production failed to prevent severe loss of profits in their 1998 results. Three factors combined to create a glut of oil on the world market: the Asian economic crisis, the warm winter in the US and Europe (both of which decreased demand) and an OPEC agreement in November 1997 to increase production by 10%. Since February 1998, oil producing nations have been struggling to reduce output, but political disagreements and a lack of discipline among OPEC members mean that any cuts are unlikely to be sufficient, and the price is likely to remain low for some time. Some analysts however celebrated the Asian financial crisis, as it forced the Asian governments to deregulate and reduce taxation in order to keep the companies interested - changes which will be much harder to reverse in the future. It is hard to over-estimate the importance of the oil price to global politics and economics. But the game is a tight balancing act, to keep the price within an acceptable range. Let the price get too low, and the profits of oil multinationals are hit, sending markets teetering due to the sheer size of oil stocks. If it gets too high, on the other hand, Western economies will be struck with hyper-inflation, reflecting just how dependent industry is on oil as a fuel. Furthermore, a high oil price shifts the balance of power in the oil business in favour of oil producing states. It is those states which actually own the great majority of oil in the world, whereas western companies contribute technology and capital investment (see George Frynas' paper, 'What is Shell?'). A low oil price keeps oil-producing countries dependent on the West. So the oil companies might be having a tough time now, but the situation has forced them to consolidate and improve efficiency. The chronology shows how the last 18 months have been marked by `merger-mania` as oil companies merge sections of their operations: cf Shell/Texaco downstream merger; or merge their total operations: cf BP/Amoco, Exxon/Mobil and Total/Petrofina. The overall effect is to create a smaller number of companies each of which is markedly stronger. Or to put it another way, increasingly large amounts of capital are concentrated in the hands of an increasingly smaller number of company directors. And with more power handed over from producer governments, the western oil industry can only get tougher. |
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| Merger Mania BP/Amoco On 31st December 1998, BP and Amoco signed their merger deal. The new company, BP Amoco, joins Shell and Exxon in the oil super-league. Workaholic Sir John Browne is the CEO, furthering his plans to make his mark on the oil business, having now grown out of the shadow of David Simon, the former BP Chief Executive who moved to Whitehall. But BP has more in common with New Labour than just Lord Simon. It combines - in spin - healthy business performance with a publicly acceptable face of environmental protection. John Browne was the first of the oil heavyweights to call for action on Climate Change (without of course downsizing the oil business), and has been working in "partnership" with several major NGOs. BP Amoco will be the biggest producer in the North Sea, where the UK has been very keen to push the EC's plan for publicly available environmental impact assessments. And the deal will help boost BP’s position in natural gas - the fossil fuel industry’s answer to Climate Change. Amocoís gas reserves are 4 times the size of BP’s. The combined company will be based in London, just a few streets away from the International Petroleum Exchange, which is leading the development of a trading market in CO2 emissions permits. The merger will not only make the UK even weightier as a centre of corporate power, it will help spread the Third Way vision to the oil business as a whole. The trend catches on. Just three months later, two more mega-mergers were on the table. Exxon and Mobil are to combine, in the world’s biggest ever industrial merger - reuniting the two largest remnants of John D Rockefeller’s Standard Oil, which was broken up by anti-trust regulators in 1911. Back in Europe, French Total is to take over Belgium’s PetroFina. The spate of mergers is partly brought on by the low oil price - reinforcing the need to cut costs. For example, the Exxon-Mobil deal will shed up to 14,000 jobs. (Meanwhile, Exxon’s Lee Raymond, who will head the new company, earned a cool $2.4m last year, and is unlikely to vote himself a pay cut). The main reason, though, is the sheer financial muscle the merged companies will have. They will be able to call the shots over regulators and governments worldwide. Exxon-Mobil will be bigger than Denmark, and 50% bigger than Saudi Arabia, and BP-Amoco will be bigger than Colombia. The oil business is all about risk. Exploring for oil, and setting up the infrastructure, are extremely expensive, but the rewards are even higher. The increased size of the companies will allow them to absorb more of these risks, to explore for yet more reserves, and to push further into frontier areas - pristine rainforests and other delicate ecosystems, homelands of uncontacted indigenous groups, and politically unstable regions where human rights are routinely abused. |
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| North Sea Taxation The UK oil industry breathed a sigh of relief in March 1998 when Chancellor Gordon Brown decided not to change North Sea taxation for at least another year. And in September, the government decided to scrap its planned review altogether. The UK is known for having the world's most generous offshore taxation system. While most countries "charge" companies for their oil through royalties and taxation, the UK gives it away for free. Companies are licensed to work in blocks of the UK Continental Shelf, and get to keep, gratis, any oil they find and remove. The only tax they pay (on fields discovered since 1993) is corporation tax, which they have to pay anyway just for doing business, and which at just 30% (dropped by New Labour from 33%) is hardly punishing. So when the government announced in 1997 that it was considering changing the system, the offshore industry launched what is perhaps its biggest lobbying campaign ever - and with success. The reason for all this generosity is that the UK isn't really economically viable as an oil province - North Sea fields are small and complex, and the weather is harsh, so without "welfare" from the state, the companies just wouldn't bother. The UK's real significance is as a corporate and intellectual centre for the industry - home to BP, Shell and the International Petroleum Exchange (one of the world's three oil futures markets), and the provider of much of the industry's vital technology. The UK government has no wish to jeopardise this relationship with some of its favourite transnationals, especially when the oil price is low. |
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Iraq Crises
1997 and 1998 have been punctuated by repeated crises in Iraq. The Gulf War Coalition has withered away, leaving the US and UK increasingly alone internationally, as the two most virulent opponents to Iraq. From this protracted conflict has come the largest build-up of military might in The Gulf since 1991, and several missile attacks, the most recent being in December 1998. The justification given by London and Washington has been the evil character of Saddam Hussein and the possible threat that his remaining weapons systems pose to the West. Behind this simplification (and indeed hypocrisy - the USA refuses external inspections of many of its weapons sites), lay a myriad of strategic issues, not least the fact that Iraq the second largest portion of the world's oil reserves (11%). Iraq effectively rid itself of Western oil companies in 1956, following the nationalisation of its petroleum industries. For 35 years Iraq had sole control of the production, refining and retailing of its oil. However after the Gulf War of 1991, and the punitive sanctions that followed, Iraq’s oil industry has been crippled, by war damage, lack of investment capital and the removal of its export markets. The UN Oil-For Food Programme has ensured that the amount of oil that Iraq can export is set by the UN, at a level that suits the West, in terms of its effect on the global oil price. Leaving aside issues of the brutality of Saddam’s regime and its acts of aggression towards neighbouring states, the 1990s has seen Iraq progressively losing control of its natural resources, to be taken instead by the West, through the UN. The withering away of Iraq’s national control of its oil industry is best seen in the wider context of the slow rolling back of oil industry nationalisation (which reached its high point in the Middle East in 1973). With the oil price disastrously low (and hence the main income source for oil-producing nations), lack of capital investment has led to crumbling of national oil industries. Iran has been slowly opening its doors to Western companies, and it may not even be too long before the oil majors can start to gain access to Saudi Arabia’s vast reserves (25% of the world total). When sanctions are eventually lifted, Iraq’s oil industry - technologically decrepit and starved of capital - will offer a significant opportunity for the oil majors in their long march back into the Middle East. In the light of this, it is significant that France and Russia have been increasingly friendly towards Saddam since 1996; Total (already leading the field in investment in Iran) and Gazprom (part owned by Shell) may well be the first corporations to re-enter Iraq after over 40 years of absence. |
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| Algeria Massacres January 1999, the month of Ramadan has, just as in 1998, seen a renewed spate of killings in Algeria. The bloodbath that has been slowly worsening since the military takeover in 1992, has already claimed 80-100,000 lives. While the Algerian state has blamed the killings on Islamic militants (a line accepted by the West), the state is at the very least responsible for for doing little to protect its citizens. There is however mounting evidence of state personnel carrying out murders. Meanwhile, the West has stood idly by. The European Union has sent timid delegations of , but no real initiatives have come from this. A key reasons for this are that Europe depends heavily on Algerian gas (it supplied 12% of Europe’s needs in 1997) and that Western companies are involved in the extraction of this gas, gas which provides 97% of Algeria's export earnings. BP announced in December 1995 a £3.5 bn investment in a gas project stretching up to 2020, proving that it is there to stay, whatever the regime does. |
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| Climate Summits (or false peaks?) the one we’d been waiting for... In December 1997, while one of the worst El Nino weather systems of this century raged across the Pacific, politicians in Kyoto, Japan, argued about whether to adopt a policy of no change or insignificant change. After a week and a half of intense negotiation, a final proposal for legally binding CO2 emissions targets was agreed which was condemned by all the major environmental groups present (Climate Action Network, WWF, Greenpeace, FoE). It offers a 5.2% cut in emissions by 2012 (compared to 1990 levels) - ranging from an 8% and 7% cut for the EU and US respectively, to an 8% INCREASE for Australia and 10% increase for Iceland. To put this in perspective, the Intergovernmental Panel on Climate Change recommends a 60-80% cut, and the Alliance of Small Island States called for a 20% cut by 2005, followed by larger cuts thereafter. No compliance mechanism was established, and the agreement contains several loopholes - such as allowing ‘emissions trading’, whereby big polluters such as the US can buy increased CO2 emissions rights from other countries. Furthermore, afforestation can be offset against emissions reduction - so even the small targets agreed need not be met.
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