The Control of Oil
Until about thirty years ago the primary object of economic criticism in the United States was the labor union; it resisted innovation, raised costs, subjected the community to the inconvenience of strikes, and was in highly unauthorized possession of an essentially public power. There are still echoes of these attitudes in the contemporary assertions that police, firemen, sanitation workers, and those who live on pensions are getting rich at the public expense. But, overwhelmingly, the modern focus of critical discussion is on the great corporation. There is a continuing cold war between the large corporation and its critics, and the terms of this conflict, which are very little examined by either the participants or others, are worth some thought.
Only people of exceptionally simple view, or with a highly developed capacity either for ignoring circumstance or adjusting belief to their personal pecuniary interest, suppose that the corporate and the general public purpose always coincide. There must be areas of common advantage; were it otherwise, we would hardly survive, for a handful of giant corporations—as a working figure, 2,000 is roughly right—supply around half of all privately produced goods and services. But to imagine that the men who run Exxon, GM, ITT, or Lockheed have only the aims of the average citizen in mind requires either extensive conditioning by standard text-book teaching in economics or a notable capacity for illusion. That so many rise to the requisite self-deception does not make the divergence in interest any less real. It is this divergence that sustains the conflict between the corporation and its critics.
All critics of the corporation—all who speak for the “public interest” or believe that they do—agree that the corporate advantage is enormous. It has great numbers of people on its payroll and at its call. It has access to vast sums of money. It has something yet more important, which is the ability to specify the respectable view. No editor or columnist ever gets accused of irresponsibility or radicalism by taking a position that accords with the needs or wishes of the high members of the corporate technostructure. Any professional economist who does so with some appearance of scholarly competence will, if noticed, enjoy a brief burst of business applause and be eligible for a modest though not trivial subsidy as a consultant, convention oracle, witness in an antitrust case, or, at the highest level, a member of a board of directors. (Oddly, in doing these things he invariably prepares himself for professional oblivion, for it quickly becomes known that his thoughts are in the service of his pay. But that is another story.)
Finally there is the dependence of press and commercial vision on corporate advertising and of politicians and public officials on business subsidy. The Nixon administration, with its paradoxical commitment to reform, made corporate purchase of politicians and political parties so flagrant that what had been an accepted abuse is now limited to what can be had for love or up to $1,000. But no one can believe that the political power of the great corporation has, by this reform, been dissipated or perhaps much reduced. It would be hard to imagine a public and political position seemingly more unassailable than that of the large corporate enterprise. Those who challenge that power have, in consequence, an unwavering belief in their own bravery and sometimes a rewarding sense of martyrdom. The opposition they face is, indeed, formidable and with a great capacity to survive even telling criticism. Yet the contest is not quite as unequal as the critics of the corporation so pleasurably assume.
Evidence on this point begins with the oral literature of the American corporate executive. It is replete with self-pity. There is possibly no group of people anywhere in the world who, having food, shelter, and medical care, complain more persistently, plaintively, and even pathologically of the unfairness with which they are treated or of the depths of the misunderstanding to which they are subject. And none at all, if business executives be taken at their word, has such a highly developed sense of economic peril.
Executives, older ones I judge more than younger, rarely meet except to warn each other of the malignancy by which they are surrounded. This sense of extreme vulnerability lies behind the persistent efforts to educate the American people in the nature and fundamentals of the economic system, an educated person being one who takes a benign view of the modern corporation. The hilarious current collaboration between the United States Department of Commerce and the Advertising Council to explain the approved concept of free enterprise is, by a wide margin, Governor Carter’s most bizarre inheritance from the Ford-Simon-Greenspan Gestalt.
The book by John Blair, to which in due course I will come, is concerned with the corporations that discover, recover, transport, refine, and market oil and its products. They are, it holds (and I agree), the most powerful of all business corporations, and the largest and most potent of these (and in assets the largest industrial corporation in the world) is Exxon, née Jersey Standard. Coming frequently into this account is M.A. Wright in his capacity as chairman of Exxon, USA. Two or three years ago, in a widely circulated pamphlet which he wrote or anyhow signed, Mr. Wright was apocalyptic, despairing: “Let there be no mistake: an attack is being mounted on the private enterprise system in the US. The life of that system is at stake.”
He went on to the reasons: People were being lured into “consumerism”; businessmen were too busy producing goods to see what was happening to them; the people, damn them, did not understand “the role of profit or the free market.” (Make note of that reference to the free market.) Turning to the political position of the oil industry, he observed that only two senators, James Buckley of New York and Paul Fannin of Arizona, out of the hundred (pessimism surely got out of hand here) could be relied upon to see economic truth as did the oil companies. Such was the state of mind—the sense of power and security—in the executive suite of the world’s most powerful corporation, and before, it should be added, age and the voters had combined in the best tradition of service to the Republic to delete both Fannin and Buckley.
Some of the complaint of the corporate executive arises not from a sense of vulnerability but from amazement and anger over what may be called unappreciated preeminence. The corporate president or chairman has reached the top of a huge organization—before all the world, he is a proven success. He enjoys the respect and on occasion the obeisance of a large army of subordinates. And he finds his view of the economic society in which he excels not only not accepted but challenged and on occasion scorned. And such criticism, always, comes from people of lesser achievement, experience, and income as well as of indifferent tailoring and maybe even deficient personal hygiene. Thus, and one must truly sympathize, some of the hurt tone in, as it is called, executive “communication.”
But more of this tone has a genuine basis of alarm, and it arises from the profound strategic weakness of the corporation’s defense of itself. That involves a compulsion—and I use the word advisedly—always to take a stand on the patently absurd. It is this corporate instinct for absurdity that makes the contest between the corporation and its critics far more nearly equal than the latter, at least, ever imagine.
The defense of the great corporation is rarely if ever that it uses its power to good purpose. It is always that it has no power. Economically it is subordinate to the market—as Mr. Wright automatically averred when speaking of the most improbable case. Being subordinate to the market, the corporation has no control over prices, or its production, or its product mix, or the prices it pays, or its profits. Product design is what the customer wants. No real discretion exists in the distribution of earnings or over investment decisions. In politics it has the citizens’ right of petition, and, on occasion, it must take its case to the public. But that is because legislators and the people at large do not understand the constraints imposed by the market—how the market system imposes a righteous discipline with which government must not as a matter of high principle ever interfere.
For an American corporation executive to concede the exercise of power for corporate purposes is virtually unthinkable. He never in public and not often in private agrees that his firm, in explicit or tacit association with others, has control over prices; or that it can, if it wills, bring substantial power to bear on suppliers; or that it sets a target level of profit which, more often than not, it is able to meet; or that it owns legislators less obtrusively compliant than Buckley and Fannin; or that it is even better served by a symbiotic association with people in the Pentagon or the regulatory agencies; or that it has a foreign policy and that this, in the manner of Lockheed or the oil companies, has no necessary alignment with that of the State Department.
And here is the fatal weakness. For it is known to everyone, including those who instruct the young to the contrary from the economic textbooks, that power is possessed by the large corporations, that its exercise is commonplace. And there is confirming evidence in the newspapers and on the networks every day; if influence on the press and television could suppress this information, there wouldn’t be too much left. The consequence is that the greatest corporation executive can be skewered even by an amateur, and since he is sometimes (though by no means always) pompous, dogmatic, or disposed to stand on his corporate dignity, this can be a pleasure. With no thought he always takes a position that allows of his impeachment by a myriad of his own past actions, or by those for which he has been responsible. And the public, having read or heard or experienced the actions—having seen prices increased by the steel companies over public objection, or having noticed an effort on television to persuade them to buy one product or another, or having heard of the contributions to CREEP, or having read of the inspired destabilization operations against friendly governments by Lockheed—is almost certain to believe that the critic is right. The corporation, he concludes, not surprisingly, must have had power to do what it did.
Were it the corporate defense that power over prices or the persuasion of consumers or even political influence is inescapably a counterpart of great size and that it is exercised with consummate wisdom for the public good, the critics of the corporation might have trouble. So long as the great men of the corporation argue that they have no power—that all authority lies with the market, the consumer, and the ballot box—they will be sitting ducks. Corporations will survive; their survival value, perhaps fortunately, is very high. But their critics will have the best of the play. And so lumbering, obtuse, or doctrinaire is the corporate perception of its economic role that this, one can be sure, will continue to be so.
I’ve said that in view of the implausibility of the corporate defense, even the amateur can do well in attack. The professional, for the same reason, can excel, and a single one, supported by intelligence and a little digging, can contend on more than equal terms with a goodly number of executives in the course of a year. The proof is in the career of John M. Blair, who, first with the Federal Trade Commission and then for thirteen years as chief economist of the Senate Subcommittee on Antitrust and Monopoly, made such contention his vocation. Dozens, perhaps hundreds, of executives came to testify before Blair or the senators he had coached. With the rarest exceptions all found themselves suffering for their deep oral commitment to aggressive price competition, their abhorrence of monopoly, and their motivated tolerance of smaller competitors, while being faced with a record of successful price stabilization, increased concentration in their industry, the emasculation and absorption of some unpleasant rival, or the record of some Washington ploy to counter threatened antitrust prosecution or foreign competition.
Blair was always gently spoken, and his face, in hearings, had an expression of surprised innocence which, in time, became permanent. It helped enormously that he believed rather devoutly in the solution—competition and the market as a solvent of power—that his witnesses avowed in principle and denied in practice. Antitrust lawyers with rare exceptions operate without principle or conviction. They learn their business with the Department of Justice and then after a few years go over to the defense of the corporations to make money. I would guess, although I do not know, that Blair was never even offered a job with a big corporation. On matters not involving the corporate mythology, executives are as sensible and sensitive as other people, and none would suppose that he was open to purchase.
Eventually, having acquired a reputation and prestige that rather challenged those of the senators on the subcommittee, Blair retired to Florida. This was welcome news but for the oil industry celebration was premature. As a professor at the University of South Florida, Blair set to work on the definitive book on how that business is controlled by its huge participants. A few weeks ago there was further news of mixed effect. John Blair was dead but his book, alas, had first been finished.
It is not a book that is easy to read; those wanting a lucid general view of the industry may still prefer Anthony Sampson’s The Seven Sisters.* But no one in the industry can take any comfort from Blair’s refusal to concede to popularity. The book is a long document, complete with tables and graphs, on the modern history of the oil industry and the instruments by which it controls production, prices, competition, and (though in lesser detail) public action. It will accordingly be read by everyone who presumes to speak with competence and authority on oil policy. On balance, it might have been easier for the oil business if Blair had remained with the subcommittee.
The oil industry, as members and professional sycophants delight in pointing out, is not especially concentrated; there is no single firm such as IBM that stands astride the whole business. Accordingly, control is complex—as an exercise of market power it is a work of art. Leading are the seven great international companies—Exxon, Shell, Gulf, BP, et al., called the seven sisters—and, in the United States, the eight large counterparts. The operations of all these firms extend throughout all of the stages in supplying petroleum products—ownership of reserves, recovery of crude, pipelines, refineries, and service stations. Following are a group of smaller companies (though they are huge by comparison with most corporations) that are also integrated but are less secure in either sources of supply or outlets for their products and are confined in their operations to a few countries or one. These, less than accurately, are called the independents. Then at the bottom are a large number of companies, some also large, which operate in only a limited area and on only one or a couple of stages; they produce crude oil or refine or market products.
Control begins with the seven sisters and a solid understanding among them that they will live and let live, and that, before all, they will not take business away from each other by cutting prices. This understanding is largely tacit, although joint operations in the Middle East and the absence of antitrust laws in other countries can be assumed to offer considerable opportunity for exchange of thoughts on common policy.
The live-and-let-live convention extends to the second tier and on to the nonintegrated companies for exactly as long, an important point, as they know and keep their place and do not seek by price competition to take business from their larger rivals. (Advertising, unlike price competition, cannot become cut-throat and so is a wholly approved form of competition.) The requisite discipline is enforced on the lesser companies by control either of their supply of crude oil or their market outlets. If independent refiners do not conform, there may be no crude for their refineries; if independent marketing companies get out of line, there may be no gasoline for their pumps; producers must stay in the system or there may be no one to whom they can sell their crude.
The latent threat of such action—the knowledge that one is vulnerable—is almost always sufficient to maintain discipline. But occasionally the threat must be made real. Thus John Blair holds that much of the oil shortage following the Yom Kippur war and the so-called oil embargo was, in fact, the result of a decision taken earlier that year to eviscerate the private-brand marketers who, with new, efficient self-service stations, were making great inroads into the retail market for gasoline. Refinery runs were cut back in the spring of 1973 to lessen the supplies that were going to these intruders. When autumn came, it was the Arabs that got all the blame. The service stations of the majors got most of the available gasoline, and the private-brand service stations got a lesson on how vigorous market competition is regarded in practice.
Pipelines, are part of the control—although they are common carriers, there are numerous ways by which they can be used to enforce discipline. And again, why run risks? Another and decisive part of the control is the United States government. The oil companies have always had power in Washington, and with the Nixon-Ford regime, it became a hammerlock. Until falling domestic reserves and a rapidly falling domestic share in total consumption made them redundant, import quotas were important in the control of supply. (They also greatly accelerated the exhaustion of domestic reserves.) And control of the government sustained the wonderful tax advantages the industry so long enjoyed. Blair notes that “in face of a corporate tax rate of 48 percent, the federal income taxes paid in 1974 by the nineteen largest oil companies amounted to only 7.6 percent of their income before taxes.” The exemption that made this possible has now been somewhat reduced but no one should suppose that it has been eliminated.
A further element in the control is OPEC. The oil companies do not resist OPEC prices; they would have everything to lose and nothing to gain by doing so, for they have the power to pass on the full increase in cost. And it is in OPEC’s interest that the oil remain in the hands of solid citizens who do not seek to enlarge their share of the market by breaking down the world price structure for oil. Such a breakdown was happening, as Blair tells, with Libyan oil in the late Sixties—a number of the second-tier companies which had got into the Libyan fields first were producing in large volume and finding a market by cutting prices. This embarrassment was ended on September 1, 1969, by the seizure of power by Colonel Muammar al-Qaddafi, who promptly forced the offenders to cut back, and conform, and made the point by taking possession of some of them. In the oil industry your allies are where you find them.
The oil business has a final source of power which Blair does not stress explicitly. That is intelligence. It will be evident that I do not think this extends to the industry’s defense of itself. But its competence is apparent in its planning and operations, and includes an engaging ability to adjust to all manner of politicians and political situations with skill and without indignation. In World War II, when heading up price control activities in Washington, I made for myself a mental table which ranked all major American industries by their perspicacity and the preparation and alertness that, accordingly, one had to bring to negotiations. Certifiably the most stupid were the heads of the anthracite coal companies, still important in those days, and of US Steel. Most intelligent by far were the heads of the oil companies.
Blair gives brief attention to other sources of energy and to conservation, on which there has been no significant progress because it is something in which neither the oil nor the automobile industry has any economic interest. Therefore under Nixon and Ford there was no action that would inconvenience those industries and not much action of any kind to reduce the use of oil.
In the closing pages Blair turns to his own proposal, which, as I have indicated, is to break the companies apart—require each to concentrate on one part of the business. He summarizes this solution by quoting Walter Adams, economist and former acting president of Michigan State University, and a long-time colleague of Blair’s in the battle against industrial monopoly:
First, we must terminate the symbiotic relationship between a monopolistic industry and a compliant government.
Second, we must break asunder the horizontal dominance of the petroleum majors, whether it rests on mergers, exchange agreements, joint ventures, or financial interlocks.
Third, we must halt the invasion of competitive areas of energy supplied by the petroleum giants.
Fourth, we must put an end to the majors’ vertical control over crude, refining, marketing and transportation by divorcement and divestiture action.
Finally, we must restructure the multinationals which currently perform the conflict-of-interest role as producers in, and marketing agents for, the OPEC nations.
This is the established liberal solution, or anyhow the most sophisticated variant of it. And it is not without support; with very little preparatory action, legislation along these lines very nearly passed the Senate a year ago. The companies had a substantial fright. As so often before, after years of proclaiming their commitment to competition and the market, they had to mobilize quickly to arrest a highly subversive move in that direction.
It is not the solution which appeals to me. I cannot think that competition and the classical market are the wave of the future; control would survive in a slightly attenuated form. Much effort and emotion would have gone for nothing. I would like to see the movement in the direction of regulation—as it has in fact been in the last year or two—with exquisite attention to ensure that the regulators are not regulated in turn by the oil companies. And beyond that, we should be thinking of an increased role, as in the supply of electric power, for public authorities.
But remedial action is not something with which John Blair is primarily concerned. Nor does he take up the effects, national and international, of OPEC-oil company pricing policies and the economic effects of the withdrawal of great chunks of revenue to the oil-producing countries. His primary, indeed his nearly total, purpose, is to show how the oil industry is controlled by its participants. And on this subject his book will be the basic source for years to come.
Anthony Sampson, The Seven Sisters: The Great Oil Companies and the World They Made (Viking, 1975). ↩