Policies and Tactics of Oligopolistic Co-Ordination

  • Alberto Clô


In the historical development of the oil industry, we can usefully distinguish a take-off phase—roughlybetween 1859, the year oil was first discovered at Titusville (Pennsylvania), and the end of the nineteenth century — which was a phenomenon almost unique to the United States, and marginal even in the context of the energy resources of that country. Until 1900, kerosene was the main product, followed by lubricating oils, naphtha and oils for medical purposes. Demand for gasoline was to become significant only later. Even so, this first phase is extremely important for many reasons.


Middle East Vertical Integration Cartel Agreement Depletion Allowance Base Point System 
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  1. 1.
    Through the Petroleum Concessions Ltd. it controlled, IPC in 1944 had areas of around 300,000 km2 outside Iraq.Google Scholar
  2. 2.
    obtained an exclusive license until the area was absorbed into the Red Line Agreement in 1936. In actual fact, BP and Shell were not interested in developing greater production in the Persian Gulf, because of the consequences that this would have had on production in Iran; this explains why the first productive well was only completed in 1939 (Longrigg, 1968).Google Scholar
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    Such as the Memorandum for European Markets (1930), the Heads of Agreement for Distribution (1932), and the Draft Memorandum of Principles (1934).Google Scholar
  4. 4.
    Frankel wrote: “In the United States, the production of crude oil has never been able to be placed fully under control, and even on the world market, latent competition represented a constant threat for the majors. (…) Aware that their policies of price stabilisation were subject to destabilising interference from their less powerful competitors, the majors preferred to come to an agreement with them. It is obvious in fact that the market leaders will first try to crush a competitor, and then, when for some reason the other loses, they will accept him rapidly. with all the honours, as a sort of junior partner”.Google Scholar
  5. 5.
    Kahn and De Chazeau have shown that a company with a “degree of integration” of 77% or more in crude oil production was able to increase its own profits by increasing the price of crude oil, even if this increase was not in any way transferred on to prices further downstream. The losses that the refining/sales branches would bear were more than compensated for, thanks to the rules of taxation, by the earnings of the branches of production/sales of crude oil.Google Scholar
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    Since in the voluntary program there was no limit on semi-manufactured oil and on refined products, the importers restricted themselves to substituting crude oil with the latter, and the overall imports continued to rise.Google Scholar
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    The mandatory program foresaw an overall ceiling to the importation of crude oil and oil products of 9% of the expected demand. The way round this by importing semi-manufactured products was eliminated with the rule that no company could import more than 10% of its quota in the form of semi-manufactured products. The “9% of demand” formula, devised in this way, allowed imports to increase more rapidly than domestic production; so from 1963 the program was altered, and the import ceiling was from that time calculated on the basis of domestic production and not on demand.Google Scholar
  8. 8.
    Estimated by Adelman, at the beginning of the Seventies, to be around four billion dollars a year.Google Scholar
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    The company could deduct 27.5% of the value of production up to the maximum limit of 50% of the net profit.Google Scholar
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    Intangible costs are those that do not have a recoverable value; labour, energy, transport, etc.Google Scholar
  11. 11.
    It was only with the Tax Reduction Act of 1975 that US Congress set out to reduce a little the long series of tax privileges the oil companies had enjoyed. 57 years after its introduction, the depletion allowance was abolished for the larger companies, and limits were introduced also for the smaller companies, while the depletion rate was gradually reduced to 15%. At the same time other measures were adopted to stop the intangible drilling expenses incurred abroad from compensating, for taxation purposes, for the revenue produced at home. Finally, the foreign tax credit was reduced slightly.Google Scholar
  12. 12.
    In working out the profit sharing agreements with the governments of the producer countries at the start of the Fifties, the companies did not actually have much choice. In order to give the governments a share of the profits, the hypothetical alternatives were some form of royalty payment per barrel, some form of profit sharing, or a combination of the two. The simple payment of a royalty, however, would no longer satisfy the governments, who would have always compared their revenues with the overall profits of the companies. A profit sharing system was therefore chosen, in the form of a tax on revenues paid to the producer countries by the companies, because this system allowed the American companies to benefit from substantial tax relief.Google Scholar

Copyright information

© Springer Science+Business Media New York 2000

Authors and Affiliations

  • Alberto Clô
    • 1
  1. 1.Bologna UniversityItaly

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