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In the United States, by contrast, where the U.S. Geological Survey says there are still 440 billion barrels of producible and undiscovered oil (enough to meet America's needs well into the next century), most crude oil has cost $1 a barrel or more to take from the ground for the past 25 years. And much of it is under unleased Federal land.
U.S. oil companies gained a foothold in the Middle East in 1928. By the end of World War II, several American companies held large concessions-among them Standard of California (SOCAL). SOCAL found more oil in Saudi Arabia than it could market, and it brought in other companies. The California-Arab Standard Oil Company was formed—and it became the Arabian American Oil Company (ARAMCO), one of two huge oil consortia that dominate Middle East oil today.
ARAMCO holds concessionary rights to oil worth an estimated $1 trilliongiving it a face value of more than the combined assets of the top 500 corporations rated by Fortune magazine.
It is owned by Exxon, Texaco, Mobil, Standard of California and the Saudi government. Together with Gulf, British Petroleum and Royal Dutch Shell, these giant American multinational corporations are known as the "seven sisters." All are fully integrated, which means they control their petroleum from the gleam in the geologist's eye to the gasoline pump at the service station.
As the American oil industry shifted overseas, it took along its practice of setting its crude oil prices on the basis of U.S. rates in the Gulf of Mexico. But these prices were much higher than costs in the Middle East.
In the late '40s, the Federal Trade Commission says, the oil companies paid only 40 cents a barrel for oil in Saudi Arabia and 25 cents in Bahrain, including both production costs and royalties to Middle East governments.
Prof. Issawi, in his book, "Oil, the Middle East and the World," says the royalties come to only 20–25 cents a barrel. Christopher Rand, a Middle East specialist, once employed by SOCAL, says they were even lower: 12–18 cents a barrel.
The American oil companies turned around, the FTC says, and charged $1.05 a barrel and up.
"Profits were enormous," says oil writer Christopher Tugendhat.
Americans had begun developing oil in Venezuela, too. And remarkably, it was in South America, not in the Middle East, where American oil companies got their first warning that their shift to overseas production could bring grief.
Venezuelans saw the tremendous wealth of the U.S. oil companies-based, it seemed, on oil which belonged to them. When World War II gave the allies a desperate need for oil, the Venezuelan government increased its oil prices 80 percent. And in 1948, it enacted an income tax law that guaranteed Venezuela 50 percent of all profits U.S. oil companies made on Venezuelan oil.
Now the Middle East wanted more profits, too.
The U.S. Government, under President Harry S. Truman, quietly proposed to Middle East nations that they call the increase a "tax" instead of a royalty. And the companies obtained a ruling from the Internal Revenue Service-by private letter, says Thomas Field, a former adviser to the Treasury Department's legislative counsel—that the IRS would accept the "tax" designation.
That meant the companies could use the increase as a foreign tax credit. “The whole dollar," says Field, “would come out of the U.S. Treasury."
It therefore was agreed, Tugendhat says, “that although the companies should continue to make royalty payments on each ton of oil they produced, the main increase should come in the form of taxes."
Because the Middle East oil nations had no tax structure, the companies agreed to set an export price-now known as the posted price."
"It then became a comparatively simple matter to subtract the cost of production and the royalty payment,” Tugendhat says, "and to divide the remaining profit equally between the two sides."
In 1950, Saudi Arabia became the first Middle East nation to use the new system, and by 1952 all other important producing countries in the area except Iran had matched Venezuela's profit split.
"The American taxpayers," says Sen. Abraham Ribicoff (D-Conn.) "ended up subsidizing American oil companies to develop abroad."
"The tax situation,” counters Annon M. Card, senior vice-president of Texaco, “has nothing to do with where we make our investments."
But Prof. Issawi says output “shot up" in Saudi Arabia and Kuwait after the The Nixon administration has denounced the staff report.
"The FTC report is biased against the largest integrated companies," says William E. Simon, the President's energy policy administrator.
But the effects of the foreign tax credit on the U.S. Treasury were immediate and dramatic. In 1950, ARAMCO paid $50 million in U.S. taxes. In 1951, it paid only $6 million.
ARAMCO payments to Saudi Arabia, on the other hand, jumped by that precise difference: From $66 million in 1950 to $110 million in 1951. And by 1963, the five largest U.S. oil companies had amassed such huge foreign tax credits because of their payments to the Arabs that they no longer had to pay any U.S. taxes at all on the profits they earned overseas.
The second warning to the U.S. oil industry that overseas investment might be harmful came from Iran.
It had granted its oil concessions to Britain's Anglo-Iranian Company and now, in 1950, oppostion deputies in the National Assembly led by Dr. Mohammed Mossadegh invoked Iranian nationalism and forced the government to renounce its Anglo-Iranian agreement. Mossadegh said the company was plundering Iran, and he suggested nationalizing it.
Prime Minister Ali Razmara was assassinated. And when the assembly agreed to Mossadegh's proposal for nationalization, Reza Shah Pahlavi was forced to assent. He appointed Mossadegh prime minister, and a state-owned National Iranian Oil Company was formed. Mossadegh insisted that the Anglo-Iranian staff either work for it or leave. Britain chose to withdraw its people. And oil operations in Iran halted abruptly.
"To their horror," Tugendhat says "the Iranians discovered that they had been cut off from their markets.” Mossadegh refused to compromise and Iran's economy fell into chaos.
Preparatory to stepping in, the four "sisters" in ARAMCO obtained from the U.S. government under President Dwight D. Eisenhower what Senator Frank Church (D-Idaho) says were secret exemptions from antitrust laws permitting them to form the second consortium in the Middle East—this time along with the other three "sisters,” Gulf, BP and Royal Dutch Shell.
A coup swept Mossadegh from office. "It is frequently alleged that the American and British secret services financed the uprising,” says Tugendhat, "and it is perhaps significant that in his memoirs the shah leaves the question open.” The Wall Street Journal says flatly that the Central Intelligence Agency helped in the overthrow.
Senator HARTKE. This article reveals that over the last decade the international oil companies formulated a premeditated policy of limiting oil supplies to keep the price up.
This policy contributed to today's critical shortages.
This conclusion comes from secret U.S. Government documents on activities of the oil companies and from the files of Standard Oil Co. of California.
I would like to place this in the record. Senator TALMADGE. Without objection. [The article follows:]
[From the Wall Street Journal, Mar. 27, 1974) A DIFFERENT STORY—Nor Long AGO, IT WAS Too Much PETROLEUM THAT UPSET
(By Jerry Landauer) WASHINGTON.-Among oilmen nowadays, the task is all of shortages. And the industry's publicity broadsides tell again and again how shortages might have been prevented.
"The fuel industry has been warning ... for the past decade," a Gulf Oil Corp. newspaper ad says, “that if government regulations continued to keep oil and natural gas prices at levels too low and generate capital needed to find more oil and gas, our nation would eventually, run short."
During most of the past decade, however, some oilmen were actually worrying in private not about impending shortages but about oil surpluses that could depress prices and profits. And some international operators were considering or taking action to head off such surpluses-action that may have contributed to today's shortages. Evidence for this conclusion comes from secret U.S. government reports on activities of various oil companies and from the files of Standard Oil Co. of California, know as Socal.
“The overhang of surplus crude avails” (shorthand for "availabilities") "is very large,” according to a forecast prepared by Socal's economics department in December 1968. The document, projected a “large potential surplus” through 1973, and it predicted even more troublesome excesses through 1978, when the expected flow of Arctic oil, on top of imminent new production in Australia and strong growth in Indonesia, would be "extending and magnifying surplus supply problems.”
SLASHES IN OUTPUT With such a dire future in mind, the company's economists proposed strong measures to prevent an oversupply—though Socal contends this was only a paper exercise. At a time when oil-producing countries were demanding everbigger output to lift their national incomes, the Socal men urged cutbacks in most of the foreign lands where U.S. companies operate.
The company economists proposed slashing total 1969 output from the level of “indicated availability” in Egypt, Nigeria, Libya, Latin America and Indonesia ; such reduction, they figured, would permit “politically palatable” growth of production in Saudi Arabia and Iran, where Socal and some sister companies are most heavily invested. "Pressures will exist to continue to produce in many areas in excess of market requirements," they warned.
[The oil economists also assumed that all the major international monopoly companies would act concurrently to hold production down rather than see prices drop. And their prediction of industry production behavior in 1969 was remarkably prescient.) Though they missed wildly in a couple of countries, their error for the Eastern Hemisphere and for the entire non-Communist world was roughly 1%.
"NO COLLECTIVE DETERMINATIONS" James E. O'Brien, Socal's vice president for legal affairs, warns against drawing conclusions. He says the forecast of supply and demand was merely a “think piece" lacking much significance and unrelated to management decisions.
“This was only one assessment by one company," Mr. O'Brien says. “There were no collective determinations. ... There is no international oil cartel. So it would be a big mistake to salivate too much over this piece of paper. Dammit, we think we've done a darn good job of bringing oil to the American people."
Still, the company's persistent worry about oversupply ("The worry was no different than it had been for five or 10 years,” says C. J. Carlton, manager of Socal's economics department, who signed the 1968 forecast) could explain a basic development: The major international companies have permitted spare production capacity to shrink in recent years.
In the early 1960s, this idle capacity available to meet unexpected demand in the non-Communist world stood at roughly six million barrels a day. Oilmen then saw this standby reserve as permitting them to negotiate in a hard-nosed way with demanding governments of the producing states; as an Exxon vice president, George T. Piercy, says, “We had alternatives, and when you have alternatives you have strength."
But in 1968–69 the idle capacity fell below four million barrels a day, and it dropped to zero in 1973 as demand rose. So when Arab states began imposing production limits, the companies lacked capacity elsewhere to compensate in part for the cutbacks or to back their bargaining about prices. "Today, even if there were no political limitations on production, there would still be essentially zero spare capacity world-wide," Mr. Piercy recently told a Senate subcommittee headed by Democrat Frank Church of Idaho.
Indeed, as the Socal document suggests, the Arab states may now be doing to the industrialized West just about what Western oil companies did for decades: limiting production in order to prop prices up. "We can't expect to get unlimited production from the Middle East again,” laments Allen E. Murray, vice president of Mobil Oil Corp.
In fact, the big companies' long-time influence over foreign productions is generally being reversed now that there's a seller's market for oil. Not only Arab
regimes but governments from Indonesia to Venezuela are demanding and getting more control over production, more involvement in processing and marketing and a bigger share of the proceeds from each barrel sold.
In the recent past, especially in the Middle East, the situation was far different. For the most part, the story of oil in that region is the story of host governments constantly clamoring for more output in order to increase their revenues and of concession-holding oil companies just as often striving to keep production down, on occasion by trickery.
[In Iraq, according to a secret U.S. government report, a venture of five Western firms known as Iraq Petroleum Co. actually drilled wells to the wrong depths and employed bulldozers to cover up others, all in hopes of hoodwinking the Baghdad government.] "Iraq Petroleum Co. plugged these wells and didn't classify them because the availability of such information would have made the company's bargaining position with Iraq more troublesome," the report says. (The partners in the Iraq Petroleum Co. were Exxon, Mobil, Royal Dutch Shell, British Petroleum and Compagnie Francaise des Petroles.)
[In Iran, a consortium that includes the so-called seven sisters of international oil (Socal, Texaco, Gulf, Mobil, Exxon, Shell and British Petroleum) frequently resisted the shah's entreaties for more production, entreatise delivered to oilmen even on Swiss ski slopes during royal vacations.] To give the appearance of rising output, the consortium at one point shifted its reporting year from the Christian to the Iranian calendar (March to March). And instead of producing more for Western markets already deemed to be glutted, the consortium agreed to sell oil to the Iranian government-with the understanding that it couldn't be resold to compete with the consortium's oil; thus restricted, the shah bartered with Communist countries.
(The 1954 consortium agreement, disclosed for the first time by Sen. Church's subcommittee last month, permitted any combination of companies owning at least 30% of the consortium to set its total output at any chosen level-as long as that level was less than the production desired by the remaining consortium members.)
Anxiety about oversupply also accounts for the consortium's cooliness toward a proposed pipeline running from non-Arab Iran through Turkey-a pipeline that could have protected industrialized countries against Arab interruption of oil supplies. Companies belonging to the consortium didn't want the pipeline, apparently because they feared the shah might "force" them to deliver too much oil thereby.
"Major prospective user is contrary,” according to a coded 1967 cable sent to pipeline-building Bechtel Corp. in San Francisco from a company scout in Iran. "Believe real reason is ... that MPU do (sic) not relish being forced to more putthru at expense of member's global interests." ("Putthru" is jargon for oil to be delivered by way of the proposed pipeline.)
Similar forebodings following the big strike on Alaska's North Slope prompted California Standard's economic department to draw up an illustrative model of "what might occur" to “accommodate" Arctic oil by 1973. The possibilities, as outlined in a paper dated August 1968, included reducing total oil production in California by 70,000 barrels a day and cutting U.S. imports from Canada by 50,000 barrels a day.
A THREAT IN AFRICA The economists warned that "absorbing this production will require many difficult decisions," not only by companies having big stakes on the North Slope but by "all of the industry. However, there is the opportunity and time for the many adjustments to be made.
Production from Africa, especially Libya, posed a more immediate threat to stable oil prices. According to the Socal forecast of December 1968, production in Libya could rise from 2,591,000 barrels a day in 1968 to an "indicated" 3,555,000 barrels a day in 1969, mostly because smaller U.S. firms had gained a foothold and were pumping without restraint.
“The problem of accommodating a large potential surplus of crude in 1969 and over the five years to 1973 became very apparent when we tabled our estimates, allowing for production in many countries at indicated availability,” the economists advised Socal's management. "If production grew at indicated avail. ability in most countries outside of the Middle East, production in the latter area would likely decline in 1969 versus 1968.”
Such a decline was considered intolerable because the shah and the king of Saudi Arabia, both hooked on the expectation of rising revenues, weren't about to accept lower production. Irritating the monarchs might endanger the ArabianAmerican Oil Co. (Socal, Exxon, Texaco and Mobil) and the Iran consortium, which includes all four Aramco partners. But extracting enough oil from Saudi Arabia or Iran to please the sovereigns meant aggravating oversupply problems.
The company economists dealt with this dilemma after discussions with W. K. Morris, then chief of Socal's foreign advisory staff. Next to their table showing the availability of oil from various countries the planners prepared a second table projecting 1969 production cutbacks of 200,000 barrels a day for Libya, 200,000 barrels a day for Nigeria, 25,000 barrels for Egypt, 100,000 for Indonesia and 100,000 for Latin American countries other than Venezuela.
But then “further adjustments" outside the Persian Gulf region were found to be necessary. Accordingly, the economics department considered it “appropriate" to slice production elsewhere more deeply (Libya was the chief loser this time) and to allow the shah and king 140,000 and 70,000 barrels a day more, respectively.
“The downward revisions or adjustments of crude production in Libya and Nigeria for 1969 were made on the assumption that major companies with large interests in the Middle East would be required to moderate their liftings from Libya and Nigeria in order to maintain politically palatable growth in their liftings from the Middle East," the economic analysis explains.
“Some companies, however, such as Occidental, Continental, Marathon and others, without large interests in the Middle East, will be under heavy pressure to expand production rapidly and therefore aren't likely to limit their Libyan liftin Their Libyan oil will be competing vigorously with the majors' oil from the Middle East and Africa."
Washington, D.C., January 4, 1974.
DEAR WILBUR: As a direct result of recent increases in the price of imported crude oil, I would like to ask that the staff of the Joint Committee on Internal Revenue Taxation conduct a thorough review of the tax returns of oil companies.
Specifically, I am interested in foreign taxes in the nature of income taxes. These taxes, as you know, are taken as tax credits. It is my belief that at least a portion of those taxes are, in fact, royalties which are a cost of doing business and should be taken as a deduction, not as a credit.
This treatment of royalties means that oil companies are avoiding as much as $3 billion in taxes which would otherwise be due to the Federal government. It further affects the depletion allowance and thus results in an even greater loss of Federal funds.
Because of the lack of information about the definition of royalties and taxes as they apply to oil companies producing oil in foreign countries, I would hope that the staff of the Joint Committee could shed significant light on this subject. With my best wishes and thanks for your consideration of this request, I am Sincerely,
VANCE HARTKE. Senator HARTKE. How has the foreign tax credit aided profitmaking? Here is an example of how three major international oil firms in 1970 significantly reduced its tax burden via the increasingly important mechanism of the foreign tax credit.
I would like to insert this in the record.