The Prize, Chapter 14 Overview

The Prize, Chapter 14 Overview

During that period, industrial rationalization, efficiency and elimination of duplication were the values and objectives promoted by the companies as they explored mergers, collaboration cartels, marketing arrangements, and associations to address the excess supply problem. These and other developments were what contributed to the "As-Is" Agreement, also called Pool Association that was agreed to, but not signed. Under the agreement, each company was allocated a quota in various markets, but the agreement excluded the domestic US market to avoid violating US antitrust laws. In addition to the quotas, the companies agreed to drive down costs, share facilities, and be cautious in building new refineries and other facilities. A few months later, the industry leaders agreed to control production as well. Thus, by the agreement, an international oil cartel was in essence being formed!

Cartels typically control or fix prices, markets, and production. However, the agreement fell apart as the companies resumed attacking each other's markets. Eventually, 17 American companies formed the Export Petroleum Association, under the Webb-Pomerene Act of 1918 that allowed US companies to do abroad what the antitrust law would not allow them to do in the US. Disagreements on the allocation of output between the American and European companies led to the failure of the attempt to "cartelize" US oil exports, further undermining the "As-Is" agreement. Besides, there was too much production outside the "As Is" framework for it to be effective, and the agreement and the attempt to "cartelize" international oil production failed.

The Big Three (SO of New Jersey, Shell, & Anglo-Persian) tried to reformulate an alliance in 1930 dealing with the European Markets. They attempted to make local arrangements, dividing market shares with "outsiders." Again, the system proved ineffective due to the rising volumes of American, Russian, and Romanian oil. In December 1932, the companies came up with an updated "As-Is" understanding: "The Heads of Agreement for Distribution." The initial adherents were Royal Dutch/Shell, Jersey, Anglo-Persian, Socony, Gulf, Atlantic, Texas, and Sinclair. There were, however, many contentious points in the new agreement including chronic cheating and new markets. The companies, being fierce competitors, always plotted new attacks against each other even while they sought cooperation. In addition, there were constant conflicts with implementing agreements or even "agreeing to what had been agreed to."

In a way, the "As-Is" agreement in addition to being a tool to defend against overproduction and the Depression, was also intended to defend against the emergence of political forces in Europe and the producing countries. During the 1930s, political pressure on the oil companies took many forms. Governments imposed import quotas, set prices, and placed restrictions on foreign exchange and also, as a result of the Depression, autocracy and bilateralism were the order of the day. The oil companies sought to insulate and protect themselves from government intervention in the second half of the 1930s after the worst of the Depression was over. Political and economic nationalism had also intensified throughout the world, and, as one oil observer then noted, "Operations in the oil business are 90% political and 10% Oil."