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Fourth International, August 1948

John Fredericks

Oil and Labor

II. Economic Structure of the Oil Industry

From Fourth International, Vol.9 No.6, August 1948, pp.183-186.
Transcription & mark-up by Einde O’Callaghan for ETOL.

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The economic structure of the oil industry is comparable to other basic American industries: steel, auto or electrical manufacturing. Only the giant or dominating company in the field controls the manufacturing process, the source of raw materials, transportation and distribution to the consumer. Such companies are known as wholly integrated companies.

The oil industry contains more wholly integrated companies than any other industry. Yet many of these seemingly independent companies are linked together by secret agreements, patent control, market agreements, etc., in such a manner that 20 major companies, acting as a unit, control nearly two-thirds of the assets of the entire industry and collectively determine its basic policies.

Although there are 13,000 oil companies in the United States, the 20 major companies own 89% of the pipeline mileage; produce 60% of the crude oil; own 87% of the tanker tonnage; hold title to 96% of the stocks of refined petroleum; own 80% of the daily crude capacity, 85% of the cracking capacity, 93% of the finished stocks of gasoline and lubricant; own 96% of gasoline pipeline mileage, and control 80% of domestic gasoline sales. Ten of these companies own over half the proven oil reserves of the nation.

The growing concentration in this industry can best be seen in the decade prior to 1938, when the control of the 20 companies over crude production increased from 46 to 53%), finished products from 76 to 94%, refining capacity from 66 to 76%, gasoline production from 71 to 84%. The war and postwar years have accelerated this process at a tremendous rate. The Standard Oil empire is the fullest embodiment of this growing centralization of capital.
 

1. Standard Oil and Monopolization

Standard Oil Company of New Jersey is the largest single unit in the oil industry. The history of this company is the story of John D. Rockefeller, too lengthy to repeat here. But even, in bare outline his story is that of big capital, unscrupulously wielding power over labor and small capital. Rockefeller entered the infant industry about three years after its birth. At that time he was a

modest commission merchant with no more than $20,000 capital. Within eight years he and his partners formed Standard Oil with $1,000,000 capital. No additional capital has ever been added to the company since! The record of capital accumulation follows:

Even these figures are underestimates of the true capital accumulation of Standard Oil in that period. The president of the company testified before the N.Y. State legislature in 1888 that “the company is worth not less than $148,000,000.”

The process through which the expansion and consolidation of this capital took place was through the destruction of competing capital, rather than through consolidations and absorption of competing companies. Through price wars, terrorism, discriminatory rail rates, and snipping rebates this company was able to smash thousands of weaker companies, amassing billions in the process.

Technological improvements in every branch of the industry – exploration, drilling, transportation and refining – made it possible to undersell competitors and ruin them. The elimination of serious competition in the early days made later high prices and the resulting huge mass of profit possible. The consolidation of capital that followed has ensured the present position of leadership enjoyed by Standard Oil.

Early rates of profit were phenomenal. The company earned 15% on invested capital in the decade 1882-92; then jumped to 21% in the year 1892-1900; then rose again to 25% for 1900-6. The earnings from 1876 to 1881 were $55 million. In the next six years $50 million was paid in dividends alone. 1903 profits were $81 million; 1904 profits, $61 million; 1905 profits, $57 million.

Rockefeller was the first, individual to establish a complete monopoly over a segment of American industry. His monopoly by 1885 was complete and remained unchallenged until 1911, when the parent company was dissolved by Supreme Court decree. At that time Standard Oil owned 33 corporations and the court order split it into 33 parts. It is clear today that the court order had little meaning, since Standard Oil of N.J. owns 255 corporations, and has a controlling interest in 300 others today! Before dissolution its shares were worth $663,793,000, while a month after the dissolution they were worth $885,044,000. Rockefeller’s personal share had increased in value by $56 million through the court decision.

Considering that the entire capital structure started with an investment of only $1 million, that “philanthropies’’ have consumed over $700 million, the Rockefeller interests

are worth today no less than $6.6 billion! The rate of accumulation becomes more clear. It was in the early years that the great rate of profit made the monopoly flourish; monopoly in turn assured consolidation and continuation of great profits.
 

2. Monopolization, Profits and the Government

The Texas Co., which was organized as late as 1926, has grown into fourth place among the major companies, but only at the expense of obtaining constant new capital from outside the company. Its growth is linked with the Standard Empire. Standard Oil of California and the Texas Co. jointly own Aramco, the company which operates the rich Saudi Arabian oil fields.

The position of the major oil companies, in relation to the smaller producers and refiners, has improved enormously during the war. A study of the process of monopolization in the oil industry in 1938 reported that “through the practical denial of the use of pipe lines, through the operation of the proration system, through practical denial of the use of patented processes, through the refinery price squeeze and through practical denial of the use of compounds and products necessary to bring his run of refinery gasoline up to standards fixed by the major oil companies, the smaller producer has been squeezed out” (TNEC report).

The government, having greatly accelerated this process of monopolization and profiteering during the war, turned about after the war and “exposed” the concentration and centralization of capital prevailing. (See, Report of the Smaller War Plants Corporation: Economic Concentration and World War II, p.169.) On October 21, 1947 twenty leading oil companies were charged before the Senate War Investigating Committee with rolling up $59,856,000 excess war profits. Roland Larrabbee, chief administrator for the Reconstruction Finance Corporation, told the committee that these companies had made $259,943,000 total profits on their war contracts with the government. He demanded the return of a mere $59 million as “excess profit.” But even this modest demand has been ignored.

Profits for the first postwar year, 1946, show that every oil company has increased its mass of profit over even the lush war years:

1947 saw the still greater accumulation of profits. A study by the National City Bank of New York, covering the 21 largest oil companies, shows a rise in total profits of 69.1%, after payment of all taxes, for 1947, over total profits for 1946. At the same time the authoritative Petroleum Refiner (May 1948) reports that production for 1947 increased only 6.9% over 1946.

Despite the charges before the Senate War Investigating Committee of super-profits in the industry, the industry has little to fear from the government. On the contrary, the green light provided by Public Law 395 assures them immunity from prosecution under the Sherman Anti-Trust Laws.

Not only that, but foreign operations have netted them super-profits. With the help of the American government, the industry is assured that this will continue. For example, Aramco offered to sell to the Navy oil at 40 cents a barrel, on condition that the financial demands being made on them by King Ibn-Saud be satisfied by the United States government. First the government refused, whereupon Aramco raised its oil price to $1.05 per barrel. (It should not be forgotten that they were selling to the Japanese government for only 70 cents a barrel!) Then it turned out that the wartime demands of King Ibn-Saud were such that the government paid him $81 million, while it continued to pay the premium price for its Navy oil!

Aramco, which owns and operates the Saudi Arabian fields, was organized in 1933 with a capital investment of $80 million. It was owned, 50% by Texaco and 50% by Standard Oil of Calif. In 1946 a deal was made that permitted two other American companies to buy a 40% interest in Aramco. Standard Oil of N. J. bought 30% and Standard Vacuum the remaining 10%. The purchase price was $200 million. Of this, $85 million was in cash, $50 million in 10-year notes, and the remainder in oil produced from the field at 12 cents a barrel. And here lies another tale: Today’s market price for crude oil is as exorbitant as $2.50 a barrel, but the 12 cents per barrel stipulated in that agreement reflects the true production cost! Since 1933 Aramco paid no dividends, using all income for capital expansion. Its first dividend in 1947, however, amounted to $22 million. Its underground oil reserves are conservatively estimated to be worth no less than $20 billion!

In 1948-49 these fields will absorb $375 million of American capital; in 1947 more than $138 million was invested in Saudi Arabia and in 1946 it was over $73 million. While American production of crude oil increased only 6.9% in 1947, the Saudi Arabian field increased its production by 30%.

Finally, the American companies who control these fields have elaborated still one other device by which to coin profits. They set up “foreign” oil companies to sell the product. They thus avoid payment of any taxes whatever to the United States government. Thus, the Bahrein Petroleum Co., organized as a Canadian corporation, is owned by the same firms as Aramco. On an investment of $100,000 it has reaped profits of $92,186,107. On these fabulous profits they paid not a cent in taxes. Another “foreign” firm, Caltex (California Texas Co.), owned entirely by Texaco, is organized as a Bahama Islands corporation. The total investment of $1 million has paid off profits of $25,386,573. Again, these patriotic Americans paid not a cent in taxes to the United States government. Although these facts were brought to the attention of senatorial committees, the lucrative fraud is still in operation and no attempt is being made by the powers that be to end the lush untaxed profits of the oil monopolists. On the contrary, the collaboration between the oil monopoly and the government grows closer with each passing day.
 

3. The State and the Oil Industry

a. INTERNATIONAL RELATIONS

Ever since World War I the struggle for control of the world’s supply of oil has become the province of governments rather than the exclusive business of rival oil monopolies. The individual capitalist was supplanted by his government in the process of striking bargains for a share of the world’s oil pools and markets. The oil fields of Iran and Iraq, for instance, were taken over by the British Admiralty.

As a bourgeois paper expresses it:

“There is no country which is so thoroughly geared to the power supplied by petroleum. Yet, thanks to the mixture of unsupported argument, official reticence and sheer hypocrisy which befog the subject, there can be few peoples so poorly informed of the global implications of oil production and distribution as the American.”(The New York Herald Tribune, March 23, 1948.)

In World War II Iran was occupied by England, Russia and the United States as a supply line for lend-lease. At the end of the war Soviet Russia sought oil concessions in Northern Iran that reached from Afghanistan to Turkey, close to the Baku fields. This act was necessary to the Soviet Union since oil production had fallen from 31 million tons in 1940 to 23 million tons when the devastation of war was over. Although Premier Ghavam made the concession asked for, it was rejected by the Iranian Majlis (parliament). Raymond Daniels writes: “There is no known source from which Russia can obtain additional oil except from the Middle East.”(New York Times, Dec. 14, 1947.) The Iranian dispute only draws into sharp focus the pressing need for Russia to obtain oil for normal industrial production.

The estimated needs of the USSR are 60 million tons annually. Since Stakhanovite methods are quickly depleting not only the Baku fields, but also the Zisterdorf fields of Austria, and the war-ruined Polesti fields of Roumania. and since the projected target for the Fourth Five-Year Plan is only 35 million tons annually, oil will remain of pivotal importance. The most notable field to be discovered in the last decade is the Saudi Arabian field, which is the world’s richest and contains, 40.9% of the world’s known oil reserves. These fields are the exclusive property of American capital, however. The nation which controls their future production holds the key to future industrial and war production.

Nothing so clearly brings out the key importance of oil as the present stepping-up of the preparations for World War III. It caused the quick reversal of the United States government on the question of Palestine partition. Before this, the United States had met the earlier objection of the Arabs to the American pipe line terminating in Haifa, Palestine, by changing its plans so that the pipe line is now to be located in all-Arab territory, and terminate in Sidon, Lebanon. Now its own imperialist state interests demand a more rapid completion of its plan, since the above pipe line to carry oil from Saudi Arabia to Sidon would take about two years to complete. Therefore it has now been decided to rush to completion a branch of this line at Ras Tanura on the Persian Gulf, which can be done in only four months. This means that there is no time to bargain with the Arabs. It is more advantageous to “surrender” since this is in accord with American imperialist interests.
 

b. GOVERNMENTAL “RESPONSIBILITY”

A great many “oil experts” went into the government during the war. The 20 monopolistic companies, which were “regulated” by a self-appointed board before the war, succeeded in having their own board appointed as a government regulating board for the duration of the war. In this way they were able to secure the abrogation of the anti-trust laws for the duration. Numerous handpicked individuals, whose first loyalty is to the oil industry, were placed in key war posts. Charles Rayner, long an oil company man, was appointed Petroleum Adviser to the State Department. Max Thornburg, an official of the Standard Oil Co. of Calif., received $29,000 per year from 1941 to 1943 from his company, while holding down the post of Petroleum Adviser to the State Department.

The most notorious oil “expert” on the government payroll is Edwin Pauley, friend of General Marshall. His posts during the war included those of Assistant Secretary of the Navy, and Assistant Secretary of War. When he was nominated for Assistant Secretary of State, Congress had had to balk, and rejected the nomination after his oil deals had been exposed. He is now treasurer of the Democratic Party and chief lobbyist for the oil interests in the Tidelands Oil Bill. His presence with General Marshall in Bogota, Colombia is not accidental. “Oil experts” are an essential part of every diplomatic mission ahrqad. Needless to say, these men were selected from, and owe their prime loyalty to the oil companies from which they were “borrowed.”

A man who has not received such notoriety, Bruce K. Brown, is of greater importance. A vice-president of Standard Oil of Indiana, he holds the post of Chairman of the Military Advisory Board on Petroleum.

Oil deposits in Saudi Arabia are of such importance that the government dare not leave their direction in private hands. On Jan. 29, 1948 Secretary of Defense James Forrestal stated before the Senate War Investigating Committee that “Some arrangement should be made to be certain that in times of emergency our armed forces could depend on the Middle East depot, even though this would doubtless bring upon the United States a hostile propaganda clamor charging imperialism.” When Senator Brewster asked how this ideal condition could be brought about, Forrestal declared, “The Government could simply buy into the private companies, although this would be a question of high national policy which would have to be determined in Congress and would immediately raise strong objections against government in business.”

Previous precedents exist. All the oil deposits in the Middle East, Iraq, Iran, etc,, with the exception of the American fields in Saudi Arabia are owned by the British government. American oil companies participate with the British government in the Anglo-Iranian Oil Co. (Standard Oil 40%, British Admiralty 60%) and in the Iraq Petroleum Co. where Standard Oil owns 23%. The American share in these fields was obtained for Standard Oil through a treaty negotiated in 1927 between the British government and the American government!

At the beginning of the war the American government sent a special economic mission to the Middle Fast. The report of the commission recommended that

“In the Middle East governments are competing for the control of the production and distribution of oil. It is therefore amateurish, as well as ineffective, for the American Government to allow private American companies to compete with each other for the same concession or to expect a private company to get on with only the traditional good offices support from our local diplomatic representatives.”

The government was equally realistic in its policy on the home front.

Responsibility for determining the combined military and civilian needs, supplies and methods of producing oil rested primarily with the government, not with private companies, as we can see from the following: “For it was always the rote of government to determine the plans and policies, to direct and supervise operations requisite to their fulfillment, and to assume over-all governmental responsibility for all aspects of the oil program.”(A History of the Petroleum Administration for War, p.2. US Government Printing Office.) Since 65% of the total overseas tonnage during the war was oil, it is easy to see that oil was the indispensable material.

Ties between the government, as represented by the Slate Department, the Army and Navy, and the monopolistic 20 companies who own the oil industry are so close it is difficult to find where the one ends and the other begins. While industry spokesmen are constantly concerned with their “independence” from governmental controls, they would at the same time like an even closer understanding with the government that would permit the abrogation of the anti-trust laws. Public Law 395 has been passed to accommodate them in this respect and Attorney General Clark has assured the industry of immunity from prosecution.

At the same time the industry fears outright nationalization. M.J. Rathbone, president of Standard Oil of N.J., stated on Oct. 14, 1947 before an industry group that “Those who urge legislation upon the oil industry Would see that the result would be the ending of private industry in the petroleum industry ... Modest and apparently harmless in its infancy, it develops into partial statism or government control in its adolescence, and into full nationalization in its adulthood. We see its grown-up stage evidenced on all sides of us in the Western Hemisphere – in Mexico and Bolivia and in some Canadian provinces. Familiar to you also is the situation in Europe, where the industry is wholly or in part nationalized in Spain and in Portugal, in France, Italy, and elsewhere.” He continued that “the same situation could develop in this country,” and warned against the “approaching dangers of nationalization.”

The House Interstate Commerce Committee began hearings on March 4, 1948 on legislation that states

“It is the government’s responsibility to see that a synthetic oil industry is created in this country ... First step as spelled out in the bill – Authorize RFC to lend up to $400 million for private industry construction of commercial size plants to produce synthetic oil from coal and shale by three specified processes. If industry does not take up the option within four months, RFC is to build the plants itself and hire operators to run them. Krug and Forrestal are sponsoring the program. Their argument; Government cannot sit idle and permit industry to pass up development of vital natural resources just because there isn’t a profit in sight.” (Business Week, Feb. 28, 1948)

This bill, H.R. 5475, introduced by Rep. Wolverton (R. – N.J.) would build three plants of a capacity of 10,000 barrels each on the following lines:

1. Hydrogenation of coal.

2. Synthesis of liquid hydrocarbons from coal gas.

3. Oil from shale deposits.

The more profitable Fischer-Tropsch process, captured from the Germans, has been turned over to Texaco and improved so that the yield is increased by one-third and the cost of production reduced to one-quarter. Synthetic oil produced by this process is able to compete favorably today with natural oil, at today’s crude prices.

The interlocking relationship between the state and industry was, of course, most conspicuously demonstrated in the atom bomb project and the atomic energy plants. What is not so well known is the fact that the government built a billion-dollar synthetic rubber industry during the war and turned it over to the oil industry, which now owns it. .

The $9 billion synthetic oil proposal therefore is not without precedent, but is the most ambitious project in government-financed industry ever undertaken. The effect on labor can be gauged only by studying the role of the union in this industry and the social conceptions of the workers in the industry.

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