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Nationalization of Oil: Its Challenges and Dangers

            It has been said that if people in the present will not take time to study the past, then they will be doomed to repeat it. In reality though, no one pays attention about history until a similar problem in the past is being felt in the present, a bad case of déjà vu. For almost the entirety of the 20th century the whole world became well acquainted with a new phenomenon the planet’s overdependence on petroleum products. The same thing is happening today and just like in the past, the common belief is that the energy crisis was brought upon by the capriciousness of oil exporting countries. But an in-depth study of six articles will reveal that the energy crisis is the direct result of oil exporting countries working with a U.S. led oil cartel. The contentious partnership is characterized by self-serving politics, greed and incompetence.

Background

            It was only after World War I when Europe and America fully realized the great importance of petroleum deposits and the need to control and access oil fields. The United States was the major reason why allied forces won the war but Britain moved first to secure Iran’s petroleum deposits on the strength of a concession granted to them in 1901 (Stork, 1973, 4). As a result Britain controlled the fourth largest oil producing country after the United States, Russia, and Venezuela. The British government exploited the incompetence of a weak and corrupt Persian government in order to secure a one-sided concession.

            Moreover, after World War I and the defeat of Germany, France and Britain proceeded to carve up the Middle East and created a modified colonial system when they subdivided German and Ottoman territories. Syria and Lebanon will be ruled by France while Palestine and Iraq will be ruled by Britain. Needless to say the only way that this kind of arrangement would work is through the suppression of the local political forces (Stork, 1973, 6). It is now clear why the Arab world will strike back after decades of receiving the short end of the stick.

            France and Britain could easily justify what they had done to Middle East because to the victors goes the spoils of war. It took the United States more than a decade to take part in this mad scramble for foreign oil. This is due to the fact that Texas, Louisiana and California are producing large quantities of oil in the 1920s so much so “…that the U.S. is supplying 68% of the world’s crude oil” (Stork, 1973, 8). Before the end of the 1920s a powerful American oil cartel composed of Jersey Standard and Socony (Mobil) went into partnership with British and French companies to form a much bigger cartel called Turkish Petroleum Company and was later renamed to Iraq Petroleum Company. This is the beginning of how three superpowers – Britain, France, and the United States – began controlling oil in the Middle East.

Middle East

            Before the Second World War, European and American companies such as Jersey Standard, Mobil, Gulf, Socal, Texaco, Anglo-Persian and Royal Dutch-Shell are practically in control of the oil world composed of three regions, the Middle East, Iran and North Africa. But after World War II local leaders began to make their move to retrieve what was lost through incompetent negotiations that led to unfair concessions.

            The most practical solution to their problems concerning foreign control of oil reserves and imperialism is the nationalization of oil companies operating within their respective countries. Members of the oil cartel did not take all of these sitting down. They used all the tricks in the book including economic warfare, destabilization and the setting up of puppet governments that will do their bidding in exchange for a piece of the action. The U.S. led oil cartel found a way to exact payment after doing all the above-mentioned dirty work. This was achieved using an elaborate and clever pricing scheme wherein oil is being sold based on U.S. production costs while strictly controlling supply. To illustrate, the cost of production in the Middle East is 16 cents a barrel while it will cost $1.73 to produce the same thing in the United States. It will not take a rocket scientist to figure out how much money the cartel is making and how this kind of greed can plunge the world into an energy crisis – characterized by high prices and limited supply.

Venezuela

            The Venezuelan government followed the lead of Iran in nationalizing a foreign-owned economic activity in the country. This growing pattern, the “…ambition on the part of periphery states to have a more substantial say in their own economic affairs” is now formally known as the New International Economic Order (Bye, 1979, 57).  Thus, in January 1, 1976 Venezuela nationalized its oil industry. This is a very important step for this Third World country considering that since 1917 oil has totally dominated the country’s economy while this resource has been totally monopolized by the aforementioned oil giants. Moreover, Venezuela’s active participation in the international debate concerning nationalization resulted in the formation of the Organization of Petroleum Exporting Countries (OPEC).

            At first glance Venezuela wanted to wrest control of oil production and marketing from the hands of the giant oil companies. In addition the goal of nationalization is to help the poor and eventually help every Venezuelan to reach a level of economic progress never seen prior to nationalization. But in the aftermath of nationalization nothing significant happened except perhaps in the idea that Venezuela’s political and economic system has regained its national pride (Bye, 1979, 74). But the multinational corporations such as the oil giants in Venezuela continued to enjoy their partnership with the government knowing fully well that they have all the bases covered such as: a) economic penetration; b) technological penetration; c) trade partner concentration; d) foreign trade dependence; e) Mono-production; and f) external exploitation (Bye, 1979, 72). This means that Venezuela may have nationalized their oil industry but they could not stand on their own two feet without the help of multinational corporations such as the world’s oil giants.

Mexico

            While the oil producing nations in the Middle East suffered at the hands of European and American oil conglomerates through unfair concessions they were able to recover and later on – beginning in the 1970s up to the present – were able to make a lot of money, thanks in the presence of large oil reserves. The same could not be said of Mexico. American and British oil companies started extracting oil as early as 1901 but they had short-term goals. They would sacrifice the future of Mexico by pushing production to 193 million barrels annually up until, “…production costs rose and the quantity and quality of the resource declined in the 1930s…” (Koppes, 1982, 64). Then the oil companies shifted gear to focus to the more profitable environment of Venezuela.

The oil companies practically abandoned Mexico but while they were still there continued to exploit the Mexicans. On top of that Mexican workers were treated badly by the multinational companies and this can be seen by their low wages and poor housing. In 1934 a new president came to power and he demanded reforms. His zeal and enthusiasm forced the Mexican government to collide with the United States with regards to Mexico’s petroleum products. When negotiations broke down the president nationalized the country’s oil industry on March 18, 1938.

Considering the timing, it was before the Second World War the United States was very much in opposition to the nationalization of Mexico’s oil industry. The U.S. based oil companies feared two things, the first one is the implication of not being able to access oil fields in Mexico and the second one is the effect of nationalization with regards to other Latin American countries where U.S. oil companies are heavily invested on. Thus, the United States used dirty tactics to pressure Mexico to reverse the nationalization law. At the end Mexico stood its ground, this defiance restored pride to the nation but looking at the depleted fields, it may have been too late.

Domino Effect

            The United States had all the right words to say in the political arena. In the 1930s the U.S. government advocated the “Good Neighbor Policy.” But when the U.S. was challenged by the nationalization of Mexico’s oil industry, the subsequent actions by the Americans could not be considered as good or neighborly. The U.S. government used heavy-handed tactics to force Mexico to reconsider but to no avail.

            According to Kobrin there is good reason why America behaved the way it did. He added that nationalization can create a domino effect, “…potentially threatening all investment abroad unless forcefully opposed by home country governments” (Kobrin, 1985, 4). This is brought about by diffusion a type of social interaction where one nation is influenced by the other or specifically, “…events in one country stimulating similar events in another…” (Kobrin, 1985, 8).  In this case the nationalization of a foreign economic activity existing within that country.

            Upon closer inspection countries such as the United States need not fear the diffusion effect of nationalization because it will not scatter like wildfire. There are other reasons why nations decided to nationalize key industries and this is not simply due to proximity to other nations who experimented on nationalization. More importantly, Kobrin argues that a country will not nationalize simply because they want to, the author argues that nations nationalize foreign economic activity simply because they have now the money and the technical know how to operate and manage a business enterprise after decades of learning and sharing information from multinational corporations (Kobrin, 1985, 26). There is therefore nothing that they can do if the host nation decides to nationalize a key industry.

Brazil

            Middle East countries such as Iran and Iraq are situated thousands of miles from Brazil but there is one thing that these nations share in common, they have petroleum products underneath their subsoil. But this is where similarities end while Iran and Iraq are virtually swimming in crude oil; Brazil’s oil reserves are very much limited. Brazil could never challenge some of the heavyweight members of OPEC in terms of production but Brazil could turn this weakness into strength and avoid the fate that befell some of the Third World countries such as Venezuela and Mexico.

            The discovery of large quantities of petroleum products in Venezuela and Mexico became a blessing and curse for both countries. They became dependent on oil and the national economy could not be sustained without the profits from exporting oil. Since both countries do not have the capital and the technology for oil exploration, extraction, and refinery they entered into disadvantageous contracts with oil giants. They later regretted this but could not free themselves from the strong grip of oil cartel. Brazil’s limited oil reserves forced the government to look for alternative sources of energy (Goldemberg, 1978, 163). This can prove a blessing in disguise for Brazil as its political leaders will be forced to create a strategy that will allow Brazil to avoid becoming another Third World country that can be exploited and left to dry by the oil cartel.

Conclusion

            There is no need to elaborate the negative impact of imperialism especially the modified version wherein a company having close ties with economic superpowers such as Britain, France and the United States will come in and exploit the natural resources of Third World countries. In most cases oppressive practices can be corrected by revolution but in the case of oil producing countries and their uneasy relationships with oil giants the answer is simple and direct – to nationalize the oil industry. This is a knockout punch cutting-off access to the nations resources and preserving patrimony while at the same time redirecting profits so that instead of repatriating the money back to foreign governments the profit remains with the local government.

            The United States and Britain for sure did not like the idea of nationalization. It is bad for business. But most importantly economic advisers to both countries are well convinced that there is a diffusion effect or a domino effect if the economic superpowers simply agree to nationalization without putting up a fight. As a result Britain and America were known to use dirty tactics to reverse the ruling. The U.S. was successful only in Iran but most of the time could not reverse the trend. This is because there is more to nationalization that simply the effect of diffusion. After a long time of receiving money, observing and learning from multinational corporations the host country now has the capital and the knowledge to take over. Still, countries like the United States and Britain found ways to continue their dominance even after nationalization. Case in point is Venezuela who after nationalizing their oil industry could not extricate itself from the tentacle-like grip of oil companies.

Bibliography

Bibliography

Bye, V. 1979. Nationalization of oil in Venezuela: re-defined dependence and legitimization

of imperialism. Journal of Peace and Research 16(1): 57-78.

Goldemberg, J. 1978. Brazil: energy options and current outlook. American Association for

the Advancement of Science. 200(4338): 158-164.

Kobrin, Stephen. 1985. Diffusion as an explanation of oil nationalization: or the domino

effect rides again. Journal of Conflict Resolution 29(1): 3-32.

Koppes, Clayton. 1982. The good neighbor policy and the nationalization of Mexican oil: a

reinterpretation. The Journal of American History 69(1): 62-81.

Stork, Joe. 1973. Middle East oil and the energy crisis: part 1. Middle East Research and

Information Project 20: 3-20.

Stork, Joe. 1973. Middle East oil and the energy crisis: part two. Middle East Research and

Information Project 21: 3-22.

 

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