5 minute read

Oil: From Rockefeller To OPEC

A Brief History    5 minute read

Oil: From Rockefeller To OPEC

The great fortunes of the oil industry date back to the 1800s. At first, there was kerosene, used as fuel for lighting; then, with the proliferation of internal combustion engines and diesel engines, oil became a major source of energy. With industrial innovation, oil has become the main raw material for the chemical industry, producing major products ranging from fertilisers, synthetic rubber, plastics, textiles, medicines, detergents and insecticides.

A Not So Brief History

The first well was dug in the US in 1859. The race for oil wells caused the rapid amassing of large fortunes, whose largest recipient was an enterprising industrialist: John D Rockefeller. The company he established, Standard Oil, soon became a veritable empire. However, the US government forced him to dismantle it in 1911. The big oil-related interests organized themselves into huge multinational companies, dominated by a group of seven, known as ‘the Seven Sisters’.

In the Middle East, the oil story begins in the last decades of 1800, with contentions between the Germans, the Russians and the British to obtain concessions for oil exploration from the governments of the Ottoman Empire and Persia. This situation began to change after World War II, when new opportunities presented themselves to the states in the Middle East, with the birth of national oil companies smaller than the Seven Sisters.

For many years, oil companies agreed to avoid competition, working to establish an oil price that was high enough to provide them with high profits. As for the countries’ own raw materials, their governments could only receive a small percentage of the profits which were obtained by larger companies who sold the countries’ oil.

In 1950, the Iranian Government decided to nationalise its oil industry. However, Western countries agreed to boycott Iranian oil, thus contributing to an economic crisis in the country. Little by little, though, Arab governments began to get tired of receiving only a small proportion of a product which, after all, belonged to them.

In 1960, in Baghdad, five oil producing countries (Saudi Arabia, Venezuela, Kuwait, Iran, and Iraq) gave rise to OPEC. In 1973, during the Yom Kippur War between Israel and the Arab countries, OPEC agreed on a series of very radical measures: reduced exports and increased taxes on the income of companies, above all driving for a strong increase in the oil price. This led to the first oil shock.

The consequences of this strong and sudden increase were important, as oil-producing nations ended up with vast quantities of ‘petrodollars’. The petrodollars were spent on modernisation and for the economic and social development of these countries. Significantly, a greater extent of the Arab capital was invested abroad or otherwise placed in major financial markets.

Another preferred direction was represented by armaments: in Iran and Iraq, century-old poverty was accompanied by enormous expenses to obtain the atomic bomb. After 1973, the developed importing countries reacted in various ways, in an effort to reduce their dependence on an unstable region like the Middle East: boosting research and the use of alternative energy sources (coal, nuclear energy, hydropower, geothermal, solar, the wind, etc.) and developing energy-saving technologies.

A second oil shock came in 1979, with the victory of the Khomeini revolution in Iran and the establishment of a strongly anti-Western Government and, later, with the onset of the war between Iran and Iraq (1980-1988). This time, however, OPEC fell into a crisis because the differences between its members were increased, due to the problems connected with the management of oil wealth and international politics (like the Palestinian question). It was no longer possible to establish quotas and prices inside the OPEC organisation.

Since then the price of oil has undergone numerous fluctuations, up to the new crisis caused by the Iraqi invasion of Kuwait in 1990. However, it was a short-term phenomenon.

Oil Today

Today the price of oil is settled on the basis of keen competition between the different producers, OPEC and non-OPEC. One of the biggest news items regarding oil today is the imminent IPO of Saudi Aramco – the Coca-Cola of black gold, as Warren Buffet put it. In March, the Director General of the Saudi company Saudi Aramco, Amin Nasser, said the company will be listed locally and abroad in the second half of 2018.

Investment fund managers and institutional investors are already excited and expecting a market capitalisation from $1trn to $1.5trn from the IPO, which will nonetheless see the sale of just 5% of the assets of the Saudi company, according to findings from a survey published by the investment bank EFG Hermes, based in Egypt.

Aramco has recently formally nominated JPMorgan Chase & Co, Morgan Stanley and HSBC as international financial advisors for its IPO. The trio joins Moelis & Co and Evercore, who had already been appointed independent financial advisers. Selling 5% of Aramco represents a pivotal point of the ambitious economic reform agenda ‘Vision 2030’, presented last April 2016 by Deputy Crown Prince Mohammed Bin Salman. The reforms aim to radically transform the Saudi economic system, currently based on the energy sector and on income from real estate investments, by building an industrial fabric and a private sector (which is at the moment marginal at most).

 

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