-Caveat Lector-
An interesting account of where the managers of the world's oil corporations
went to work out an agreement about how to divide up the world oil markets.
Daniel Yergin, THE PRIZE: The Epic Quest for Oil, Money, and Power
Simon & Schuster, 1991
from Chapter 14, pp. 260-65
MALCOLM AND HILLCART was a real estate agency in the town of Fort William,
on the west coast of Scotland, seventy-five miles north of Glasgow. It dealt
in the rental of estates for hunting and fishing; and in anticipation of the
summer season of 1928, it had prepared the "particulars" for a property
called Achnacarry Castle, which was located a dozen or so miles away, in
Inverness-shire. Like real estate agents mound the world, Malcolm and
Hillcart spared no adjectives. "The Castle is beautifully situated on the
banks of the River Arkaig and is one of the most interesting historical
spots in the Scottish Highlands," it said. "The surrounding scenery is
probably unsurpassed in Scotland." The shooting--over fifty thousand
acres--and fishing were excellent; one might anticipate as many as 90 stags,
160 brace of grouse, and 2,000 fish. The main house itself--built at the
beginning of the nineteenth century "in the Scottish baronial style," though
modernized with electricity, hot water, and central heating--had nine
bedrooms, plus additional rooms with beds, and another four bedrooms were
attached to the garage. For all of August 1928, the estate was available for
three thousand pounds; though, to be sure, the renter had to bring his own
servants, except for the head housemaid, who would be provided.
What better place could there be to spend some time in a relaxed setting
with old friends? Henri Deterding took the property for the month. One old
friend who joined him was Walter Teagle, the head of Standard Oil of New
Jersey. There was nothing surprising in that; after all, the two men had
made it a point to go hunting together on occasion over the years. But this
time, the list of old friends was longer; there was Heinrich Riedemann,
Jersey's chief man in Germany; Sir John Cadman of Anglo-Persian; William
Mellon of Gulf; and Colonel Robert Stewart of Standard of Indiana. Their
holiday entourage included secretaries, typists, and advisers, who were
housed in a specially secured cottage seven miles away.
Though great effort had gone into keeping the get-together secret, word
leaked out and the London press galloped northward, only to be told that the
oil men had gathered merely for some grouse shooting and fishing. But then
why the great effort at secrecy? "The grouse were to have no warning," the
Daily Express hypothesized. No further word could be extracted, not even
from the butler, about what the oil men might be saying as they traipsed
across the moors or sat together in the evening, talking over drinks.
Uninterested in the sports and bored with the conversation, Deterding's two
teenage nieces--"hellions," in Teagle's phrase--poured molasses into
Riedemann's bed and tied his pajamas in knots. The stiff German was furious.
As for the shooting, it was lousy, Teagle later said. But that did not
matter, for it was not grouse the oil men were after. They were searching
for a solution to the dilemmas of overproduction and overcapacity in their
troubled industry. More than trying to bring another truce to the oil wars,
they were after a formal treaty for Europe and Asia--one that would bring
order, divide markets, stabilize the industry, and defend profitability.
Achnacarry was a peace conference.'
This was a year before the 1929 stock market crash and the beginnings of the
Great Depression--and two years before Dad Joiner's discovery in East Texas.
But already, oil was surging from the United States, Venezuela, Rumania, and
the Soviet Union, flooding the world market, weakening prices and
threatening "ruinous competition." The how of Russian oil, in particular,
had carried the
oil men directly to Achnacarry. The vicious price war that Deterding had
launched against Standard Oil of New York in retaliation for its purchases
of Russian oil had spread to many markets around the world. The battle had
gotten out of hand and turned into bitter global warfare, prices were
collapsing, and none of the oil companies could feel secure in any market.
Achnacarry reflected the temper of the times. Industrial
rationalization, efficiency, and the elimination of duplication were the
values and objectives of the day in Europe and the United States, celebrated
by both businessmen and government officials, as well as by economists and
publicists. Mergers, collaboration, cartels, marketing agreements, and
associations were the various instruments for achieving those goals, and
they constituted the pattern of
international business in the 1920s and, even more so, in the 1930s, with
the coming of the Depression. Profits would be preserved and costs
controlled through the "efficiencies" of collaboration. As in the days of
John D. Rockefeller and Henry Flagler, "unbridled competition" was the
danger that had to be fought off. But it was no longer possible to seek to
eliminate commercial rivalry through total control, a universal monopoly. No
one firm was powerful enough to "sweat" the others into submission. Nor
would political realities allow it. And so a
concordat, rather than conquest, was now the objective of the oil men of
Achnacarry.2
The Hand of the British Government
The meeting at Achnacarry was not only the work of the oil companies. Behind
the scenes, hidden from most observers, the British government was prodding
and pushing the companies toward collaboration in the pursuit of its own
economic and political goals.
At the juncture of these various interests stood Sir John Cadman, the
successor to Charles Greenway as chairman of Angle-Persian. By I928, Cadman
was arriving at the peak of his influence, operating on the same plane as
Deterding and Teagle, but also with unparalleled credibility in the eyes of
the British government. Growing up in a family of mining engineers, Cadman
had begun his own career as a coal mine manager. (He won awards for saving
miners during underground disasters.) In time, he became professor of mining
at Birmingham University, where he had shocked the academic establishment by
introducing a new course in "petroleum engineering,'' so novel that an
academic opponent denounced it as "flagrantly advertised" and "a blind
alley" with "a freak title." By the outbreak of World War I, Cadman was one
of the outstanding experts on oil technology. During the war, as head of the
Petroleum Executive, he demonstrated considerable skills both at politics
and in managing people. In 1921, he became technical adviser to
Anglo-Persian; six years later, the government's candidate, he became its
chairman.
By that time, petroleum production was growing throughout the world, and
the total output of Cadman's own company, from Persia as well as Iraq, was
poised to increase fourfold. "It was essential that new markets should be
found," Cadman said flatly. Anglo-Persian had two choices: Fight its way
into those new markets, with the consequent large investment and unavoidable
competition, or set up joint ventures with established companies and so
divide the markets with them.
Cadman chose the second path, making an arrangement to pool markets and
facilities in India with Shell as well as with Burmah, which happened to be
Anglo-Persian's second-largest shareholder after the British government. The
next target was Africa, where Anglo-Persian and Royal Dutch/Shell proposed
to form an "alliance," under which they would split markets fifty-fifty.
But, in order to proceed with this new venture, Anglo-Persian sought in
early I928 the permission of its majority stockholder, the British
government. And the government was not at all sure that it should approve.
The Admiralty expressed its customary fear that Anglo-Persian might be
absorbed by Shell, which would go against the most basic tenets of
government policy. The Foreign Office and the Treasury were anxious about
alienating the United States. They worried that such a combination might
lead the United States--"in the present state of irritability of American
public opinion"--to charge that the two companies were making " 'war' on
American interests represented by the Standard Oil Company." That indictment
could easily be extended to the British government, owing to its majority
ownership in Angle-Persian, and that would have most unfortunate political
consequences. Moreover, the resulting tensions might lead--so the reasoning
went--to pressure on the government to sell its holdings in Anglo-Persian,
which would be a catastrophe for the Royal Navy and not very good at all for
the Exchequer, which was most attached to its attractive dividends.
Once again Winston Churchill, now Chancellor of the Exchequer, was to
play a pivotal role. At first, he had many doubts about the proposed African
combination. "The moment when Sir Henri Deterding is at 'war' with the
Standard," he said, "seems a singularly inopportune one for the British
government to be drawn into the quarrel." But as Churchill reflected further
on the matter, he came to the conclusion that combination was the best
policy. It was also the cheapest. "The alternative to the proposed working
arrangement was for the Anglo-Persian Oil Company to fight for the market in
Africa," he told the Committee on Imperial Defense. That would require a
great deal more money, and would mean that he--on behalf of His Majesty's
government, the largest shareholder--would have to approach Parliament for
it. He had done so once before, in 1914, when he had convinced the
government to buy shares in Anglo-Persian; and he did not want to go through
a similar episode again, especially when it was likely to prove much more
controversial. The direct interests of the British government in oil matters
were best kept out of sight.
The government, thus, gave its firm support to Cadman's efforts to form
his African "alliance" with Shell. Its overall position was laid out in a
joint memorandum from the Treasury and the Admiralty in February 1928. "Such
a policy will in the long run be more in the interest of the consumer than
cutthroat competition." The arrangement could have additional benefits, the
memorandum went on to say; it might promote "similar alliances
elsewhere" -specially with Standard Oil of New Jersey.
That last provision, aside from approval of the African arrangement
itself, was the most important thing to come out of the government
deliberations. The government had given Anglo-Persian a mandate to talk with
Standard Oil and to seek out similar market arrangements with the Americans
in order "to allay their jealousies and show that we are not out to
quarrel." For, unhindered by the American tradition of antitrust, the
British government was partial to combination. As one British official wrote
at the time, "Our experience has broadly been that the amalgamation of oil
interests has not resulted in the consumer suffering."
Cadman, now representing government policy as well as Anglo-Persian,
pursued a concordat with the American companies. Once the African deal with
Shell was done, he wrote to Teag]e of Jersey to propose "a small
'clearinghouse' for matters of the very highest policy" for their respective
companies, plus Royal Dutch/Shell. These various developments were among the
major influences leading to Deterding's invitation to Teagle, Cadman, and
the others to join him, in August of I928, for a little shooting and fishing
at Achnacarry Castle in the Scottish Highlands.'
"The Problem of the Oil Industry"
The two weeks of discussion that ensued on the banks of the River Arkaig
resulted in a seventeen-page document, agreed to but not signed, that was
called the "Pool Association." It became better known as the Achnacarry or
"As-Is" Agreement. The document summarized the "problem of the oil
industry"-overproduction, the effect of which "has been destructive rather
than construetive competition, resulting in much higher operating costs. ...
Recognizing this, economies must be effected, waste must be eliminated, the
expensive duplication of facilities curtailed."
But the heart of the document was the "As-Is" understanding: each
company was allocated a quota in various markets--a percentage share of the
total sales, based upon its share in 1928. A company could only increase its
actual volumes insofar as the total demand grew, but it would always keep to
the same percentage share. Beyond this, the companies would seek to drive
down costs, agreeing to share facilities and to be cautious in building new
refineries and other facilities. In order to increase efficiency, markets
would be supplied from the nearest geographical source. That would mean
extra profits, since the sales price would still be based upon the
traditional formula--American Gulf Coast price plus the going freight rate
from that coast to the market--even if the oh was coming from a closer
location. That provision was central, for it established a uniform selling
price, and adherents to the "As-Is" Agreement did not have to worry about
price competition--and price wars--from other adherents.
A few months later, the industry leaders agreed to control production as
well. Participants in the Achnacarry system could increase their output
above the volumes indicated by their market quotas, but only so long as they
sold this extra production to other pool members. In order to implement the
agreement, an "Association," managed by one representative from each
company, was set up to cany out the necessary statistical analysis of demand
and transportation and to allocate the actual quotas.
An important participant in the European oil trade was, however,
noticeable by its absence from the agreement--the Soviet Union. Clearly, the
Soviets had to be brought into the "As-Is" system if it was to have any
chance of success. For, by 1928, a Soviet company, Russian Oil Products, was
the fourth-largest importer into the United Kingdom. The Soviets had
regained prewar production levels, and oil had become the Soviet Union's
largest single source of hard currency earnings. Remarkably enough,
considering Deterding's and Teagle's distaste for doing business with the
Soviet Union, the major companies reached an understanding with the Russians
in February I929, which gave the Soviet Union a guaranteed share of the
British market. With Russia apparently roped in, at least in part, there was
only one major exception to this amicable division of the world's oil
markets. But it was a very large one: The agreement explicitly excluded the
domestic U.S. market, in order to avoid violating American antitrust laws.4
The Achnacarry Agreement, crafted in the isolated beauty of the Scottish
Highlands, harked back to the turn of the century, when Rockefeller and
Archbold, Deterding and Samuel, the Nobels and the Rothschilds all
strenuously sought a grand concord in the world oil market, but failed in
the attempt. This time around, the oil companies were no more successful in
implementing their new agreement than they had been in keeping their meeting
at Achnacarry secret in the first place. While the companies involved in the
"As-Is" Agreement were by far the dominant firms, there were enough "fringe"
players who did not belong and who did not hesitate to nibble away at the
market share of the major companies. In fact, nonmembers of the "As-is"
Agreement found it to their liking. They could price just a bit beneath the
large companies and win market share. Even if the members did respond with
tough price competition, forcing the nibblers out of one market, these
smaller companies could move on to another.
In particular, it was critical to win control over American oil exports,
which amounted to about a third of all oil consumed outside the United
States. And immediately upon Teagle's return from Achnacarry, a number of
American companies, seventeen in all, combined to form the Export Petroleum
Association, which would jointly manage their oil exports and allocate
quotas among them. They were acting under an American law called the
Webb-Pomerene Act of 1918, which allowed U.S. companies to do abroad what
the antitrust laws did not permit them to do at home--come together in a
combination--so long as the combination's activities took place exclusively
outside the United States. But the association's negotiations with the
"European Group" fell apart over the question of how to allocate output
between the American and European companies. Moreover, the association never
attained the critical mass--at the most, it controlled only 45 percent of
American exports--while seventeen companies were simply too many to come to
satisfactory agreement on prices and quotas. ' The failure of this attempt
to cartelize U.S. oil exports further undermined the determined efforts at
Achnacarry.
All over the world, there were too many producers and too much
production outside the "As-Is" framework. "The figures we had before us," J.
B. Kessler, a Royal Dutch/Shell director, wrote to Teagle, "showed that, of
the potential world production, a large part is controlled by companies
which are not controlled either by you or us or any of the few other large
oil companies. From this followed that the present balance in the world's
oil production cannot possibly be maintained by you and we only." It did not
take long for the accuracy of Kessler's prediction to be confirmed.
Discoveries and output in the United States were building up to the great
crescendo of East Texas. Oil was also coming onto the world market from
other sources, such as Rumania. In the surge of uncontrollable production,
the Achnacarry Agreement was washed away. And the oil companies once again
began attacking one another's markets.5
Notes:
1. "Particulars Regarding Achnacarry Castle, Season 1928," SC7/A24, Shell
archives (Malcolm and Hillcart); Daily Express, August 13, 1928 ("no
warning"); Wall and Gibb, Teagle, pp. 259-61 ("hellions").
2. Loxley and Collier minutes, April 4, 1930, N2149/FO 371/14816, PRO;
Deterding to Riedemann, Oct. 20, 1927, 5-5-35 file, case 6, Oil Companies
papers; Jones, State and British Oil, p. 236; Larson, Standard Oil, vol. 3,
p. 306; Leslie Hannah, The Rise of the Corporate Economy, 2d. ed. (London:
Methuen, 1976), chaps. 2, 4, 7; Wilkins, Multinational Enterprise.
3. Rowland, Cadman, p. 55 (Cadman's academic opponent). Cadman discussion
with Fisher Barstow et al., February 1928, T8/T10, T161/284/33045/2;
Treasury and Admiralty, "Anglo-Persian Oil Company: Scheme of Distribution
in the Middle East," T161/284/5330481/1 ("irritability," "long run" and
"similar alliances"); Churchill to Hopkins, February 12, 1928,
T161/284/533048 ("singularly inopportune"); Oliphant minute, Feb. 15, 1928,
A1270/6, FO 371/12835; Barstow and Packe to the Treasury, March 15, 1928,
T161/284/33045/2; Wilson to Waterfield, Feb. 13, 1928, T161/284/533048/1
("amalgamation"), PRO. Ferrier, British Petroleum, pp. 514, 510.
4. Weill to the Baron, March 5, 1920, 132 AQ 1052, Rothschild papers;
United States Congress, Senate, Foreign Relations Committee, Subcommittee on
Multinational Corporations; Multinational Corporations and U.S. Foreign
Policy, part 8 (Washington, D.C.: GPO, 1975), pp. 30-31 ("As-Is"), 35-39
("problem," "destructive" and "Association")...; Larson, Standard Oil, vol.
3, pp. 308-9; U.S. Congress, Senate. Committee on Small Business,
Subcommittee on Monopoly-The International Petroleum Cartel: Staff Report
to the Federal Trade Commission (Washington, D.C.: 1952)..., pp. 199-229;
Ferrier, British Petroleum, p. 513; Jones, State and British Oil, p. 236;
Tolf, Russian Rockefellers, p. 224.
5. Campbell to Cushendun, October 29, 1928; Jackson to Broderick, September
26, November 17, 1930; Kessler to Teagle, Sept. 13, 1928.
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