Competitive Environments of the International Oil Industry

Abstract

This paper discusses the process of progressive adaption which has resulted in the gradual emergence of large, integrated companies as the predominant form of business organization in the overseas oil industry. It examines: (1) the changes in the world distribution of reserves, production and potential crude oil markets; (2) the structure of the industry as it existed immediately after World War II in comparison with present operations; (3) the technological, economical, political and business circumstances which forced the vertical integration; (4) the past and the present role of the host governments toward their 'guest' companies; (5) the emergence of OPEC and the ensuing 'co-operative' economical political efforts in regulating the fiscal matters of exploration-exploitation and recently also the transportation and manufacturing-distributing operations of the international oil business; (6) the gradual disappearance of the 'old' traditional concession-type business arrangements and their replacement by service contracts; (7) crude oil pricing in the competitive international oil markets; and (8) the resulting general economics of overseas operations.

The background setting of this paper suggests that the real strength of the international oil companies vis-a-vis the host governments is no longer their ability to find and to produce oil but the fact that they are as yet indispensable as offtakers of that oil. They are the only ones who can transport, refine and sell the oil, and indeed only they can finance it and pay the taxes promptly. Briefly, as long as the main consuming countries do not, by taking imports into- their own hands, impede the functioning of these oil companies, their real standing in the international oil game is and will remain virtually unassailable. Thus, as long as these conditions prevail, and surely we all subscribe to the free-enterprise system, the economics of the development of remote and inaccessible crude oil reserves will remain to be governed only by the free demand-supply choice of the highly competitive international oil industry.

HISTORICAL BACKGROUND

THE INTERNATIONAL OIL COMPANIES are business enterprises which are frequently in the public eye because of the various political interplays that affect them. Many times, these political problems find their basis in the growing independence of the host governments. The operations of the foreign companies in Africa, the Middle East, Asia and to a lesser degree in South America, the majority of them either British or American, are still based on the remnants of the European, and mostly British, sphere of influence established in these regions before, or immediately after, World War I. With the help of diplomacy and by various means of commercial entrepreneurship, these companies managed to obtain a foothold in these areas. Thereafter, aided and supported by their financial strength and their unchallengeable position in technological and managerial knowhow, control of worldwide transport, refining- and marketing, such companies have managed to hang on to their status in spite of the gradual disappearance of the political conditions which helped them into the saddle.