Calm before the Storm: The Global Oil Industry in the 1960s
The international oil industry of the 1960s was a period of incredible growth—in production, reserves, demand and countless new oil-based consumer products. However, beneath this apparent stability, the domination of a handful of Western-based oil companies who, for decades essentially controlled how much oil would be produced and how it would be sold, was ceding to a more diverse—and more unstable—international oil order.
Scott McKnight - October 2019
This piece examines the factors that contributed to this impressive growth, but that also in turn set the stage for the industry’s turbulence in the 1970s: first, many oil companies pushing for access to oil abroad (especially in the Middle East); second—and connected to the first—the rise of many new oil-producing areas coming online that threatened the delicate supply-and-demand balance maintained by the big oil companies (or ‘majors’); and third, the ubiquitous but unquantifiable nature of American power—in technology, finance and (when need be) military—that allowed for this industry’s expansion to take place, but which also made oil-producing governments of the post-colonial world sensitive to any threat to their sovereignty.
Builders of the international oil order: the Majors
The 1960s were a period of staggering growth for the oil industry. Demand was fierce, especially in the booming economies of Western Europe and Japan. Oil production and reserves continued to outpace skeptical estimates that the world was running out of oil—and even outpacing oil demand itself.
But by the decade of the 1960s, the industry’s rapid growth had become inherently disruptive: dozens of new companies, technologically capable and financially strong, were eager to get in on the action, a phenomenon that threatened the dominance of the ‘majors’ or so-called ‘Seven Sisters’—the handful of massive, vertically integrated oil companies that, through various interlocking arrangements, kept oil production in a dozen or so countries in line with world oil demand. The ‘majors’ were the regional offspring of the Standard Oil breakup (today’s ExxonMobil and Chevron), what would become BP (British Petroleum) and Royal Dutch Shell, as well as the French CFP (today’s Total). (After several waves of mergers, we now call these ‘supermajors’).
These companies dominated the global oil industry from the wellhead to the pump.
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Through the early decades of the 20th century—and in a few cases, even before that—they’d progressively gobbled up what would turn out to be the most productive and wealth-generating fields in countries like Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. Together they’d coordinate production so as not to flood the market with cheap and abundant foreign oil—and so destroy their profit margins. But they were just as careful not to let prices rise too high, which would alarm the governments of the major oil-consuming countries (and zealous antitrust authorities ready to pounce on them for suppressing competition and rigging prices). Several factors would come into full form in the 1960s to seriously disrupt this established order.
The up-and-comers: the Independents and National Oil Companies
The first challenge came from the so-called ‘independents’, companies that had little or no production overseas but were eager to access cheap crude abroad. Profits from overseas oil production was no doubt appealing. But the reality is that oil companies’ profit margins were starting to sink in the mid-1950s, the result of even rapid oil demand growth outpacing even faster production coming online and the sudden (re)emergence of Soviet oil exports to Europe. What really pushed these American-based ‘independents’ overseas was the 1959 decision by the Eisenhower administration, pressured by a politically powerful lobby of (especially Texan) higher-cost oil producers to limit (cheaper) oil imports.
So, cut off from this supply of cheap foreign crude, these independents went abroad—and had few qualms in outbidding the majors to gain acreage, taking smaller shares or paying higher royalties or even sharing in production decisions with the oil-producing countries—something unheard of in the 1950s.
At the same time, rising oil demand in many countries in western Europe and Japan set off fears that they could be cut off in a time of crisis (the blockades and oil rationing during WWII weren’t that long ago, after all). Likewise, importing growing quantities of oil was putting serious strain on these countries’ balance-of-payments—and this was during a period of relatively cheap oil. For these oil-hungry economies, focused first on reconstruction and later on industrial expansion, oil security was a very real concern.
And since this was a time when Keynesian-minded ideas of a heavy state presence were en vogue, this search for oil abroad would more often than not be state-led. Pushed by Charles de Gaulle during WWII, France eventually found oil in Gabon and on a much larger scale in the Sahara in the mid-1950s—about the same time it started fighting Algeria’s independence movement. Italy too sought oil for its growing economy, led by the ambitious Enrico Mattei, who wheeled-and-dealed—with the Shah of Iran, the Soviets—wherever and with whomever he could really. Mattei was a real thorn in the side of the industry’s established players—till his sudden death in 1958. Mattei’s tireless efforts helped turn Italy’s oil company, ENI, into a global powerhouse. Japan, which imported virtually every barrel of oil it consumed—and may have lost WWII due to its shortage of oil—also made a push abroad with its own state-owned company.
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The new oil frontier: More and more oil-producing regions
Another threat to the established order was the presence of more oil production. A new set of oil-producing areas came online throughout the 1960s. None would really compare to the big four—Saudi Arabia and Iran jockeyed for the world’s biggest oil producer throughout this decade; Venezuela was locked out by US oil import quotas; Iraqi production was frequently stifled by the majors’ fear of crushing world oil prices.
But each of the new oil-producing areas, to varying extents, added downward pressure on global oil prices. Algerian oil exports, starting in 1958, grew steadily despite the independence war; Libya began exporting oil in 1961, eventually accounting for 10% of all oil exports in 1965; greater quantities of oil from the Niger delta (from Nigeria especially, but from smaller neighbouring countries too), first found in 1956, was coming online, too.
In each of these—and the Libyan case especially—the terms for foreign companies to explore for and ultimately produce oil were generous. But unlike the blindly exploitative concession system of the early 20th century upon which the global oil industry was built, now the governments of oil-bearing countries sought to increase competition between bidding firms, in particular by dividing up acreage and privileging the independents. These governments knew foreign companies wanted in, and that the majors’ rather closed oligopoly—whether in terms of technology, information, finance or marketing—was giving way as the global oil industry expanded.
New oil was coming from the major oil-consuming countries as well. By the end of the decade, the North Sea—both the British and Norwegian sides—was producing commercial quantities of oil, showing that technology was pushing the petroleum frontier offshore—and into increasingly deep waters (we’ll still have to wait for the booming years in Mexico and Brazil). Oil had been found on Alaska’s North Slope, too, but it’d be several years before it would come online, hampered by legislation, logistics and resistance from environment-minded groups.
These two factors—the rise of companies (and countries) eager to produce more oil as well as the discovery of many new oil-bearing regions—would inevitably combine to put pressure on the delicate balance of supply and demand, which for decades had been one maintained by a handful of massive oil companies.
