Nationalization of Oil Supplies - History

History

The nationalization of oil supplies has been a gradual process. Before the discovery of oil, Middle Eastern countries such as Iraq, Iran, Saudi Arabia, and Kuwait were all poor and underdeveloped. They were desert kingdoms that had few natural resources and were without adequate financial resources to maintain the State. Poor peasants made up a majority of the population.

When oil was discovered in these developing nations during the early twentieth century, the countries did not have enough knowledge of the oil industry to make use of the newly discovered natural resources. The countries were therefore not able to mine or market their petroleum.

Major oil companies saw this as an opportunity for profit and they negotiated concession agreements with the developing countries; the companies were given exclusive rights to explore and develop the production of oil within the country. The concession agreements made between the oil producing country and the oil company specified a limited area the company could utilize, lasted a limited amount of time, and required the company to take all the financial and commercial risks as well as pay the host governments surface taxes, royalties, and production taxes. Despite all of this, however, the countries were able to claim any of the oil they mined. As a result, the world’s oil was largely in the hands of seven corporations based in the United States and Europe. Five of the companies were American (Chevron, Exxon, Gulf, Mobil, and Texaco), one was British (British Petroleum), and one was Anglo-Dutch (Royal Dutch/Shell). These companies have since merged into four common oil companies: Shell, ExxonMobil, Chevron, and BP.

The established contracts between oil companies and nations with oil reserves gave the oil companies an advantageous position, leading to the inclusion of choice-of-law clauses. In other words, disputes over contract details would be settled by a third party instead of the host country. The only way for host countries to alter their contracts was through nationalization. Most of the countries, with the exception of Venezuela, even signed away their right to tax the companies in exchange for one time royalty payments.

Although undeveloped nations originally welcomed concession agreements, the movement for nationalism began once the developing countries realized that the oil companies were exploiting them. Led by Venezuela, oil producing countries realized that they could control the price of oil by limiting the supply. The countries joined together as OPEC and gradually they gained control of their own oil supplies rather than allowing the oil companies to control them.

Before the 1970s there were only two major incidents of successful oil nationalization—the first following the Bolshevik Revolution of 1917 in Russia and the second in 1938 in Mexico. Due to the swift growth of the energy economy, resources shifted to becoming nationalized to protect themselves from adjustments in demand worldwide.