There Will Be More Blood
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The global oil industry is best understood by three aphorisms. First, all's well provided there is oil in the well. Second, power exists with a nation with lots of oil or a lot of military-monetary clout to get it. Finally, the four Ps of oil industry are pricing, profiting, polluting (the business aspect) and politicking (the diplomatic aspect).
As for the first three Ps, the star cast and locations are as fascinating as a movie. The cast includes three globally dominant oil families (the Rockefellers in the US, Rothschild of Russia and D'Arcy of Britain), the "Seven Sisters", or globally dominant oil firms belonging to the pre-Opec (Organization of Petroleum Exporting Countries) era, of which five are from the US, and one each are from the UK and the Netherlands. Then, there are the 12-member Opec. At least four wars have had an oil impact; the Arab-Israeli Conflict, the Iran-Iraq war and the US's two in Iraq. Add the automobile industry, which plays a central role in the oil game, and the dramatis personae is complete.
The plot is murky and asymmetrical. Manipulations by a few companies and politicians have deeply hurt (and still do so) every other nation. The Seven Sisters became big by doing seven things: 100 per cent backward integration (oil extraction, refining, transportation and marketing, all under one roof); holding management control closely; fudging financial statements; violating foreign exchange rules; maintaining secrecy; resorting to heavy lobbying, and finally, mergers and amalgamations until each company became a behemoth. Before Opec was formed, these firms inked one-sided business deals with their host countries, earning a lion's share of profits. They did not spare even their own countries. For instance, they overpriced petrol even to the US and UK during wars. Profits mattered more than patriotism.
Since all oil sales and assets were denominated in US dollars, America was cushioned against forex fluctuations. It had an iron grip on oil pricing, got unlimited supply and enjoyed lower rates of inflation compared to most other nations. But this inequity could not continue indefinitely. The result: Opec was formed, tables were turned, companies were nationalised by the host nations and an oil embargo was enforced upon the US.
The book holds the US and its auto industry responsible for the oil mess, as they fostered obscenely high per capita oil consumption in the country. For instance, the US with just 5 per cent of the world population and around 20 per cent of global manufacturing consumes two-and-a-half times more oil than China, which has 24 per cent of the global population and around 22 per cent of manufacturing. The American automobile industry has always argued that cars with high fuel efficiency would be unaffordable and unsafe, even though science has shown otherwise. The fact is the US auto industry enjoys large government oil-based subsidies and continues to please "Oil Barbarians". A shift to alternative fuels is unthinkable for them as of now.
The formation of Opec changed the geopolitical games forever, thanks to its clout. Getting onto Saudi Arabia's right side became a crucial foreign policy mantra for all. The US softened its pro-Israel stance and offered military protection to Saudi Arabia. Russia ended up antagonising Opec by not joining it despite its huge oil reserves. It has ensured oil self-sufficiency for itself, exports to select trade partners and decides its own prices. Franks and Nunnally have covered all the angles of the oil story. The book is topical and well-timed and its eye for details makes it an enchanting read for policymakers, foreign policy students and laymen alike.
Sandy Franks is executive publisher of Baltimore-based Insiders Strategy Group (ISG), publisher of e-newsletters Taipan Daily and Smart Investing Daily. She specialises on a variety of markets such as financial, health and business startup publishing. Sara Nunnally is senior research director and global correspondent at ISG. She also co-edits ISG's Macro Trader and contributes to Smart Investing Daily. She specialises on art history, computer science and financial research.
Kumar is a retail consultant based in Chennai
(This story was published in Businessworld Issue Dated 05-03-2012)