$100 start to Gulf oil's second century

11 May 2008

Producers, not buyers, control the oil industry 100 years on, and the NOCs are the masters now.

Gulf oil starts its second century in May with oil well above $100 a barrel for the first time.

And 70 years after the first oil industry nationalisation, questions are again being asked about the role of international oil companies (IOC) in a world that may be running out of crude.

At 4am on 26 May 1908, a well sunk in Masjid-i-Suleiman in south-west Iran struck oil and began the Middle East oil era. It was seven years since William Knox D’Arcy, a British businessman backed by the UK government, had signed an exploration deal with the Persian Empire.

Less than 12 months after the strike, the Anglo-Persian Oil Company (APOC) was established in Glasgow. It’s now called BP.

Dominant power

Iran plans to celebrate Gulf oil’s centenary, but has mixed feelings about the changes the discovery at Masjid-i-Suleiman has wrought. It has suffered, ever since, the intrusive attentions of countries coveting oil.

British and Russian armies occupied Iran during two world wars. The UK orchestrated the 1921 coup that brought Reza Pahlavi to power and allowed him to seize the Persian throne four years later. He, in turn, was pushed aside for failing to back the Allies against Germany in September 1941 and replaced by his 21-year-old son, Mohammed.

Iran nationalised oil in 1951, but the US was to become the dominant power after the coup that broke the opposition to the Iranian monarchy two years later.

America and Britain supported the Shah against the 1979 Islamic revolution, which ended foreign ownership of Iranian oil. America’s leaders today call for a new revolution to secure Iranian freedom. Iranians believe the past 100 years prove that what the US really wants is Iranian oil.

NOC/ IOC battle

Britain and France, with US companies in a supporting role, gained control of the entire Gulf oil industry within 20 years of the first Iranian strike. But a new trend began in March 1938 when the Mexican government nationalised its oil industry and created Pemex, the first national oil company (NOC). Nationalisation spread and was largely completed in the Gulf in 1980.

The subsequent 20 years were a battle between oil-producing governments, their NOCs and IOCs backed by the West. The Gulf controlled the wells, but low oil prices from 1986 until 2003 strengthened buyers. Under financial pressure, countries that had closed their oil industries to foreign companies seemed ready to let them back on IOC terms. IOCs merged, and were poised at the start of this century to recover their grip on the region’s oil.

At the time, the Iraq invasion seemed another milestone in the unstoppable forward march of the IOCs. It promised a Baghdad government thankful for the end of sanctions and Saddam Hussein’s dictatorship, which would be ready for foreign help to develop Iraq’s oil reserves - almost 10 per cent of the world total. Securing Iraqi oil was never explicitly stated as one of the war’s prime objectives, but the possible results of Saddam’s fall conveniently conformed to the West’s long-term energy needs.

The invasion appears to have had the opposite effect. Iraqi attitudes to their self-appointed liberators have been contaminated by the atrocities the occupation seemed to provoke. Iraq’s government is dominated by radical Shiites. Neighbouring states, and not just Iran, have obstructed coalition actions. Middle East opinion has hardened against oil companies, or at least those most closely associated with the invasion’s authors.

Who are the masters?

The causes of the quadrupling of oil prices since March 2003 are, as yet, unclear. But the consequences aren’t. Oil companies are enjoying unprecedented windfall earnings. Gulf governments and NOCs have benefited even more. It is possible both will continue to flourish.

But the struggle for Gulf oil that began in 1908 will continue as reserves outside the region dwindle. As they do, the balance of power will irreversibly shift in favour of the eight countries with more than 60 per cent of the world’s oil and 20 per cent of its gas.

IOCs say that only they have the skills needed to keep Gulf oil flowing in the volumes the world requires. They may be right. But the Gulf has learned many lessons in a century of foreign manipulation and brute force.

IOCs will have a future in the region but it must be secured by persuasion. Producers, not buyers, control the oil industry and the NOCs are the masters now.

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