World Oil Cooperation or International Chaos

Walter J. Levy

From Foreign Affairs, July 1974

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Summary:  Rarely, if ever, in postwar history has the world been confronted with problems as serious as those caused by recent changes in the supply and price conditions of the world oil trade. To put these changes into proper perspective, they must be evaluated not only in economic and financial terms but also in the framework of their political and strategic implications.

Rarely, if ever, in postwar history has the world been confronted with problems as serious as those caused by recent changes in the supply and price conditions of the world oil trade. To put these changes into proper perspective, they must be evaluated not only in economic and financial terms but also in the framework of their political and strategic implications.

I need not dwell here on the overwhelming importance of oil for the energy requirements of every country in the world; nor do I plan to elaborate on the fact that-except for the United States, the Soviet Union and a small number of countries that are, or will become, self-sufficient-most of the nations of the world will, at least for the foreseeable future, depend almost entirely on imports from a handful of oil-exporting countries, with an overwhelming concentration of oil production and reserves in the Persian Gulf area of the Middle East. Among those countries in the Gulf, Saudi Arabia is predominant in terms of reserves, production, and most important, in the potential to provide significant expansion of supplies. Inevitably, producing decisions by Middle East governments, especially Saudi Arabia, will play a pivotal role in future world oil availability and pricing.

Over the last three years or so, oil-producing countries have in fact taken over complete control of the oil industry in their countries. They have coördinated their efforts through the Organization of Petroleum Exporting Countries (OPEC) which was established in 1960. Since 1970, producing governments have imposed in rapid succession changes in previous agreements that had been negotiated and renegotiated with their concession-holding companies, predominantly affiliates of the Anglo-American international oil companies. These changes were arrived at under the threat that if the oil companies would not acquiesce, the producing countries would legislate such changes unilaterally or expropriate the concessions. In October 1973 the last vestige of negotiations was abandoned and producing governments unilaterally set posted prices on their oil.

In the exercise of this power, Middle East producing countries have raised their government oil revenues from taxes and royalties from about 90 cents per barrel in 1970 to about $3.00 per barrel by October 1973 and then to $7.00 per barrel by January 1974. In addition, as a result of the participation agreements between the producing countries and the oil companies, the governments earn additional income from the sale of their newly acquired oil. Its amount, of course, depends on the percent of government ownership and the price they charge for their oil. Agreements had been concluded, as recently as late 1972, under which producing countries acquired a 25 percent participation in the oil-producing operations and were also committed to sell most of their participation oil to the oil companies at agreed-upon prices; now producing countries are demanding that these arrangements be changed in their favor. Only a few arrangements have yet been concluded, but most of the producing countries will probably insist on at least the equivalent of 60 percent participation and a price for ...

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