When we speak about oil in Latin America, there are several new developments we must take into account: first, a wave of mergers and acquisitions among the biggest international oil companies; second, the rise to power of a charismatic nationalist-populist Latin American leader, Venezuela's Hugo Chávez; and finally, the revival of the Organization of Petroleum Exporting Countries (OPEC) and its power to control production and maintain high oil prices. The consolidating giant oil companies may be cynically planning to support OPEC in its efforts to raise those prices, while simultaneously seeking to eliminate, via privatization, competition from smaller national oil companies. But rather than entering into an unreliable partnership with big oil, I believe Venezuela and other oil-producing countries should pursue an alternative strategy, one which builds on the potential harmony of interests among all Third World nations. By developing a multilateral barter exchange system for Third World commodities, such a strategy could secure reliable revenues for the oil-exporting countries, while providing the oil-importing countries with a steady flow of oil, and with export outlets at fair prices for their own commodities. The following discussion elaborates on these points, and outlines how such a barter system could work.
While oil has played an important role in the hemisphere throughout the twentieth century, currently Latin America represents a relatively small part of the international oil industry. Of total proven world crude oil reserves of slightly over a trillion barrels, Latin America accounts for little more than 10%, and almost nine-tenths of that amount comes from Venezuela and Mexico. With regard to gas reserves, which worldwide amount to more than 5,000 trillion cubic feet, Latin America accounts for about 5%, again led by Venezuela and Mexico. Finally, when it comes to oil refining capacity, Latin America accounts for only about 8% of worldwide capacity.
This is not to say that the giant oil companies are writing off their prospects in Latin America, but rather that pursuing them is contingent upon the "good behavior" of countries in that region. In the words of the head of ExxonMobil's exploration operations as he addressed a recent oil and gas conference in Rio de Janeiro, "Latin America offers some of the most appealing prospects for petroleum company investment...providing, however, that the region can continue and even step up efforts to sustain economic and regulatory reforms."[1]
Nevertheless, most countries in Latin America, aside from Venezuela and Mexico, are net importers of oil, and are likely to remain so for many years. Thus, they find themselves in a situation similar to that of almost all oil-importing Third World countries. Their immediate, direct interests are opposed to OPEC's, in that a high price for crude oil negatively impacts their economies.
The last few years have seen an acceleration of mergers and acquisitions in the oil industry. The largest was the merger of Exxon and Mobil, followed by that of British Petroleum with Amoco and Arco, Total with Fina and Elf, and a recently announced planned merger of Chevron and Texaco. Through incestuous marriages, the fabled "Seven Sisters" have been consolidated into four mega-majors. The pace of these mergers has taken a quantum leap in the last three years, catapulting from an average market valuation of $10 billion per year from 1990 to 1996, to $40 billion in 1997, and well over $100 billion in 1998 and 1999.
What are the motives for these mergers and acquisitions? Most commonly cited in the oil literature is the "need" for greater efficiency in order to meet increased competition, or the "need" to increase shareholder value. Both of these "needs" are simply variants on the age-old theme of the "need" for profit maximization.
What is somewhat new in the present situation is that, perhaps more than ever in history, the stock market, with its pool of hundreds of billions of restless dollars sloshing around the world, is putting pressure on managers of oil companies to obtain short-term profits as well as to show prospects for accelerating long-term profits. Short-term profits can be increased by mergers which reduce costs by eliminating overlapping functions and by wholesale lay-offs of workers. In the long run—particularly regarding exploration and production in "new frontier" areas such as the former Soviet Union, where risks are higher than normal due to both political and economic factors—such mergers increase the pool of capital available to the enlarged firm to finance such risks.
But an additional long-range, profit maximizing goal lies behind these mega-mergers. Historically, the largest profits in the oil industry have come from maintaining a monopolistic price for crude oil, one considerably higher than the average cost of production. Ever since the Achnacarry agreement of 1928 to divide up world markets—an agreement reached between the companies now known as Exxon, BP and Royal Dutch/Shell, and later joined by the four other so-called "Seven Sisters": today called Mobil, Chevron, Texaco and Gulf Oil—the big companies maintained a relatively stable price for crude oil, primarily by controlling its worldwide production.
This oil-company regime lasted until the 1960s, when the cumulative weight of various newcomers to crude oil production drove down the price of crude to a point where the oil producing countries were forced to take action. Thus, particularly after the 1973 Middle East war, OPEC wrested control of crude oil pricing from the big oil companies.
Since then, the price of crude oil has fluctuated wildly, basically responding to OPEC's ability or inability to control supply. Its ability to do so has been hampered by two factors. First, its member governments often cannot agree on or stick to production quotas. Second, OPEC is completely unable to control production outside of its member countries. All in all, particularly compared to what was done earlier by the big companies, OPEC has done a poor job of maintaining a high and stable price for crude oil.
The wide fluctuations in crude oil price in the last 25 years—oscillating between $10 and $40 per barrel—have been a problem not only for OPEC, but also for the major international oil companies, who have seen their profits whipsawed by the ups and downs. Even though their profit swings have been cushioned by their vertical integration, the volatility has nevertheless hurt both long-term planning and valuation of their stock, since the stock market abhors volatility and uncertainty.
In this writer's view, the big oil companies have never given up on their dream of somehow regaining control over crude oil prices. It seems to me that a long-range goal of the contemporary giants is to develop sufficient concentration among the private oil companies so that, as a group, they can become a kind of junior partner with OPEC in maintaining monopolistic and stable crude oil prices. Thus, the four largest private companies, ExxonMobil, Royal Dutch/Shell, BP Amoco and soon-to-be Chevron-Texaco, now control 13% of world crude oil production. The next 13 largest publicly traded Western oil companies control 6% percent of production.
OPEC currently controls about 40% of the production, and the four "NOPEC" countries which usually cooperate with OPEC—Mexico, Norway, Oman and Russia—account for another 18%. Thus, when output is totalled from the largest private companies, the aggregate second-largest firms, OPEC and NOPEC, these four groupings account for over 75% of world crude oil production. Moreover, since the OPEC countries alone control almost four-fifths of the world's crude oil reserves, if the four groups could coalesce, they could virtually dictate crude oil prices.
What are the chances that a new oligopoly can be established in the oil industry? To assess the possibilities, we need to look to history. OPEC was formed in 1960 in response to unilateral cuts in the posted price of crude oil. While it was successful in stopping these cuts, for the rest of the decade it was otherwise a toothless tiger. In 1969, oil prices in real terms reached an all-time low, and crude was selling in the Middle East for $1.25 per barrel.
In retrospect, the most important oil event that year was the rise to power in Libya of nationalist-populist army colonel Muammar el-Qaddafi. He completely reversed the previous policy of allowing the foreign oil companies to pump out of Libya as much oil as they wanted—a policy which allowed the companies to pursue their age-old strategies in the Third World, namely, rape and run. Since Libya was conveniently located near European markets and had a high-quality, low-sulfur crude oil, the companies were producing as if there were no tomorrow. Qaddafi's reversal of this practice, along with his tough overall stance toward the oil companies, was key to stiffening OPEC's backbone. His actions led to the series of increases in the price of crude oil, from $1.25 per barrel in 1969 to about $3 in 1972; the Arab-Israeli war of October 1973, which triggered the Arab oil embargo, then led to a jump to $12.
Now, some 30 years later, another nationalist-populist army colonel has come to power, this time in Venezuela. Like Qadaffi before him, Colonel Hugo Chávez denounced oil company plans—this time of the State Oil Company of Venezuela (PDVSA)—to pump out Venezuelan crude as if there were no tomorrow. At the beginning of 1999, when he was president-elect, Chávez called PDVSA's production target of six million barrels per day by 2005 "completely crazy and senseless."[2] Instead of maintaining that target, he said, his government would "rationalize oil production and development in Venezuela...to stabilize oil prices."[3]
Chávez followed up his words with actions, and Venezuela played a key role in the historic March 2000 OPEC meeting which agreed to limit production, thereby causing crude oil prices to almost quadruple from their early 1999 lows. Further, the new Constitution of Venezuela, adopted at Chávez's instigation, prohibits the privatization of Venezuela's state oil company.
Most recently, in October, Venezuela launched the Caracas Energy Accord, which adds barter arrangements to Venezuela's previous sales—along with Mexico's under the San José pact of 1980—of subsidized crude oil to Caribbean countries. Much to the dismay of Washington and Mexico, Cuba was incuded under the Caracas Accord for the first time in the subsidy arrangements. And to top it off, Venezuela has signed a barter arrangement with Cuba, which will allow it to swap medicines and other services for a large part of its oil import needs.
In Chávez's words, the initiative stems from "the Bolivarian vision of integration of the Latin American and Caribbean peoples."[4] These strategies also add up to a goal of strengthening the position of both Venezuela and OPEC vis-a-vis foreign oil companies and Western powers. Chavez's strategy rejects the concept of "globalization," which favors "free markets" setting oil supplies and prices, and which—given the centuries-old fact that crude oil normally sells for much more than its production cost—implies a continual tendency for "overproduction," which drives down prices. Moreover, this same concept is now favored by the world's major industrial countries, who virtually all import crude oil.
This is not to say that resurrecting the cartel and maintaining high prices for crude oil will be easy. Rivalries between OPEC countries are deep-seated, as illustrated by the conflict between conservative countries like Saudi Arabia and Kuwait, and more "radical" nations such as Iran, Iraq, Libya and Venezuela. Moreover, the Western oil powers, particularly the United States, have a strong influence on these conservative countries' oil policies, through their military and economic ties with these regimes.
However, whereas the big U.S. oil companies once called the tune for U.S. foreign oil policy, the situation now is much more complicated. The oil industry's share of total U.S. production has declined dramatically in recent years, in tandem with the growth of the financial, electronic and telecommunications industries. One indicator of this change is that since 1973, consumption of oil per dollar of GDP has dropped by almost half.
As a result, new power bases have developed in the United States that have a new influence on U.S. foreign economic policy. To a great extent these new entities have a stake in low rather than high oil prices. This is particularly true because U.S. oil production is steadily declining while crude oil imports are rising; and the cost of these imports is a very large component of the U.S. trade deficit. This deficit threatens to undermine the value of the dollar and hurts U.S. financial institutions since a strong dollar, which serves as the world's currency reserve, generates huge profits for these institutions, as well as for the U.S. Treasury. Hence there is a conflict of interest between the big oil companies and other powerful forces in the U.S. economy.
The common interest of OPEC countries and the major oil-producing companies in a high price for crude oil, however, means that powerful forces are arrayed behind these monopoly prices. The arrival of a nationalist-populist leader like Chávez, together with the mega-mergers taking place in the international oil industry, might be just the combination of forces necessary to guarantee this outcome.
Ultimately, the phenomenon which has always defeated oil cartels is the encroachment of new supplies. Most of the new supply outside of OPEC would need to be discovered and exploited by the major international oil companies. Therefore, consolidation of these companies through mega-mergers and other alliances would go a long way toward controlling any new supplies.
Parallel to building up their monopolistic positions, one of the goals of the oil companies and the Western powers is to weaken and/or privatize the world's state oil companies, particularly in Latin America, which has a long tradition of popular support for state ownership of the oil industry, as exemplified in the Brazilian war cry "O petroleo e nosso"—the oil is ours. The assault on state ownership has been going on for many years, and has resulted in complete privatization of the state oil company of Argentina, Yacimientos Petrolíferos Fiscales (YPF), as well as Bolivia's Yacimientos Petrolíferos Fiscales Bolivianos (YPFB).
Despite strong popular opposition to the oil privatization movement, it has gained increased momentum in an era of "globalization" and "free markets." In a recent survey of oil privatization prospects, an industry journal noted approvingly that "Privatization is moving slowly across the Latin American landscape" and that "Mexico will likely continue privatization under new president, Vincente Fox, working from downstream—refining and marketing—to the upstream sector—crude oil production." The journal further noted that although Brazilian crude oil exploration was being opened up to the private oil companies, "Petrobras, Brazil's national oil company [was] still far ahead of the game."[5] And significantly, in Colombia, where there may be huge reserves of oil, "state oil firm Empresa Colombiana de Petroleos SA (ECOPETROL) has taken it upon itself to sweeten the incentives for foreign investment."[6]
A high crude oil price will, initially at least, harm the oil-importing underdeveloped countries in Latin America (and elsewhere). As Offshore points out, "With high oil prices prevailing, Latin American countries are either reaping substantial income, if they are exporters, or weathering a deep economic hit, if they are importers."[7] OPEC needs to adjust for this in order to obtain these countries' long-run political support.
One indirect way to approach this problem is being pioneered by Venezuela, which is now taking the lead in OPEC in raising the issue of the high internal taxes that Western governments charge for oil products. When OPEC was first formed in 1960 under the leadership of Juan Pablo Pérez Alfonzo of Venezuela and Abdullah Tariki of Saudi Arabia, this was one of the main points raised by OPEC, but over the years it has been dropped. It is an extremely important point, because if such taxes on oil products were reduced, the price of crude oil could rise, while the cost of the final product for the consumer would remain the same.
Historically, Western governments have resisted dealing with the issue, because a significant part of their fiscal revenues comes from these oil-product taxes. Moreover, cutting such taxes while simultaneously allowing the price of crude oil to rise would be equivalent to sending real financial resources to the OPEC countries, something which would be fiercely resisted by virtually all industrial sectors of the economy. The relevant point here is that such a transfer would make it easier for the OPEC countries to assist the oil-importing Third World countries.
One possible direct method is for OPEC to subsidize oil shipments to such Third World countries, as Venezuela and Mexico are already doing with many Caribbean countries. However, in the long run it would be more useful for OPEC to take the lead in adopting some kind of a multilateral barter exchange system. Such a system could enable the oil-importing Third World countries both to obtain the oil they so desperately need and to receive fair prices for at least some of their commodity exports.
The current period is remarkably similar to the 1970s, when OPEC enjoyed considerable power because of the sharp increase in crude oil prices. A crucial similarity is the key role of the Arab-Israeli conflict in generating mass pressure on conservative Arab governments to move away from outright subservience to Western economic and political interests. In the 1970s, this writer noted that OPEC's longstanding power was at real risk of being jeopardized if it did not consider the difficulties high oil prices were causing for oil importing underdeveloped countries. I suggested two basic mechanisms for OPEC to mitigate the damage:
The first was direct financial assistance, and the second was multilateral commodity exchange agreements (see below). Unfortunately for OPEC and for the Third World in general, this historic opportunity was not seized. Instead, the Western powers were able to play their historic role of divide and conquer, creating instability and economic disaster for all Third World nations. Now, OPEC once again has a chance to build the long-term Third World unity which is so necessary in today's world, where inequalities of income and wealth are increasing at ever more rapid rates. Below, I update proposals that I made some 25 years ago to help deal with these issues.[8]
While most oil-importing underdeveloped countries lack sufficient foreign exchange to pay for high-priced oil imports without greatly weakening their economies, collectively they produce vast quantities of valuable natural resources, ranging from coffee to copper, sugar and tin, as well as finished products like steel and aluminum, and services such as computer and medical skills. Thus, the specific proposal is that oil-importing underdeveloped countries could pay for these oil imports with a commodity oil reserve unit (CORU). This CORU would be a unit of currency based on a fixed link between a barrel of crude oil and a basket of Third World commodities.
To illustrate how the scheme could work, and merely to simplify calculations, let us take a hypothetical and not necessarily real-market group of commodity prices. If crude oil were initially valued at $32 per barrel, and coffee, copper, sugar and tin each at $4 per pound, then one barrel of crude oil (one CORU) could be set equal to two pounds of each of those commodities, or any other combination totalling up to eight pounds. Once the initial relationships were fixed, they would remain constant over the life of the agreement.
Note that this goes beyond the bilateral programs, such as the one in which Venezuela is working with Cuba to exchange oil for sugar, medical services and so on. The exact contents of the basket of Third World commodities would depend partly on which Third World countries wanted to participate in the scheme. And calculating fair exchange ratios between each of the commodities in the CORU would undoubtedly require considerable negotiation among the participating countries.
In general, once the exchange rates were agreed on, the oil-producing countries would deliver oil to the oil-importing countries and receive payment in CORUs. The CORU units could be redeemed on demand for the underlying commodities during a reasonable time. Meanwhile, any oil-producing country would be free to resell its CORUs, and hence would not have to be the ultimate consumer of these commodities. For their part, the oil-importing underdeveloped countries would collectively promise to provide the required amounts of commodities to the oil-exporting countries participating in the agreement.
This barter scheme has several major advantages for the Third World. First, for the oil importing countries, it would alleviate the impact of high crude oil prices on their limited foreign exchange reserves, while simultaneously providing a guaranteed outlet, at fair prices, for some of their commodity exports. Second, it would give the oil exporting countries a means to alleviate foreign exchange burdens on the poor Third World countries without themselves having to surrender anything. Instead, for wealthy OPEC countries like Saudi Arabia and Kuwait, which in the past have feared the erosion of the value of their foreign exchange holdings through future inflation, the CORU would provide a useful alternative store of value.
Third, since the oil-commodities barter would require state-to-state arrangements, the interposition of the international companies could be eliminated, and that would leave a very large pool of profits to be shared among the Third World countries. Finally, such a multilateral barter arrangement for oil could provide a first step beyond sporadic bilateral deals to enhance Third World economic unity and capacity for self-development.
We stand at a crucial juncture in the history of the international oil industry and Latin America, and in relations between and among Third World and developed countries alike. The juncture is fraught with danger, not only in the Middle East, but in the northern part of South America. In Colombia, U.S. troops are entering in force, ostensibly to fight "narcoterrorism," but surely to promote and protect U.S. oil investments in that potentially oil rich nation. Further, the United States, as one observer noted, is likely to "position gobs of U.S. military advisers right next door to Venezuela...as a security deposit on a far greater future investment."[9]
At the same time, the headlong rush to globalization and the corresponding overriding of national sovereignty and human rights in favor of the mindless forces of international capitalism has generated a backlash all over the world, from Seattle to Europe to the Middle East. In this context, strenuous mass actions in Europe to reduce the costs of oil to consumers by cutting internal excise taxes have laid the basis for potential cooperation among oil-producing countries and progressive mass movements in the industrial world. Such cooperation can flower amid recognition that the enormous disparity of income and wealth within and between countries is a grave danger to the very survival of our species. In the face of the global challenges, the only viable response is international solidarity in many forms—including around oil issues.
ABOUT THE AUTHOR
Michael Tanzer has been an oil consultant to Third World governments for over 30 years. He is the author of The Political Economy of International Oil and the Underdeveloped Countries (Beacon, 1969) and most recently, co-author, with Stephen Zorn, of Energy Update: Oil in the Late Twentieth Century (Monthly Review Press, 1985). He is currently a senior editor at The Black World Today (www.tbwt.com).
NOTES
1. Jon L. Thompson, quoted in Oil and Gas Journal Online, October 30, 2000.
2. Quoted in Petrostrategies, January 18, 1999.
3. Petrostrategies, January 18, 1999.
4. Internews Press Service, October 20, 2000.
5. Offshore, September 1, 2000.
6. Oil and Gas Journal Online, November 29, 1999.
7. Offshore, September 1, 2000.
8. See Michael Tanzer, "Oil for the Third World," The Nation, April 6, 1974.
9. Juan Gonzalez, "Hugo Chavez's Dangerous Mix," In These Times, October 16, 2000.
