The Red Line Agreement


This map is only for illustrative purposes--the red line was drawn freehand using as a reference the map in: United States. Federal Trade Commission, The International Petroleum Cartel, staff report to the Federal Trade Commission submitted to the Subcommittee on Monopoly of the Select Committee on Small Business, United States Senate (Washington, U. S. Govt. Print. Off., 1952), p. 66


THE IRAQ PETROLEUM COMPANY

Formed in 1914, the Iraq Petroleum Company (originally Turkish Petroleum Co.) brought together interests who for over a decade had been contesting each other for a firm foothold in the Middle East. From the outset, the purposes of IPC were to consolidate existing rights under common ownership and to preclude competitive rivalry for future rights. Under an agreement adopted at the British Foreign Office on March 19, 1914, the British-Dutch groups accepted a "self-denying clause, stipulating that they "would not be interested, directly or indirectly, in the production or manufacture of crude oil in the Ottoman Empire... otherwise than through the Turkish Petroleum Co."

Conspicuous by their absence were the American companies, who had remained profoundly disinterested in the Middle East. But scattered shortages during World War I gave rise to a deep-seated fear that the United States might be running out of oil. According to an industry source, "Fear of an oil shortage in the United States was uppermost as a factor in international relations after World War I. It was a hold-over fear from a narrow escape from scarcity in 1917-1918 when in the midst of war." Moreover, even before the use of the foreign tax credit, the cost of leasing from private landowners (usually at a one-eighth royalty rate) was generally higher than securing rights from governments. There was also widespread concern over a foreign monopoly of all foreign oil resources. The Senate launched an investigation, which found that American interests were indeed being systematically excluded from foreign oil fields. In 1920, Senator Phelan of California introduced a bill to establish a government corporation to develop oil resources in foreign countries. Negotiations looking toward American entrance into the Middle East as a participant in the Iraq Petroleum Company began in 1922 and continued for six years, with the American firms represented by Exxon (Standard of New Jersey). The U.S. companies, however, were frustrated in their efforts to secure access to the new sources of supply, which were being discovered with increasing frequency in Rumania, India, the Dutch East Indies, Iran, and elsewhere:

Because of these factors, by the end of World War I nearly all of the important American oil companies were actively seeking foreign reserves. In this search, however, they were confronted in the Eastern Hemisphere with formidable obstacles, the most important ones being the national and colonial policies of Great Britain and the activities of British-Dutch oil companies which were, themselves, engaged in the search for foreign reserves. The British-Dutch companies were endeavoring to prevent the surrender of Empire reserves to the American "oil trust," while at the same time they were busily protecting a similar trust of their own. The national and colonial policies of other European countries were directed to similar objectives. (Quoting United States. Federal Trade Commission, The International Petroleum Cartel, staff report to the Federal Trade Commission submitted to the Subcommittee on Monopoly of the Select Committee on Small Business, United States Senate, Washington, U. S. Govt. Print. Off., 1952, p. 41)

These restrictionist policies were dramatized by the British refusal in 1919 to permit American oil companies to send exploration parties into Mesopotamia (now Iraq). Formerly part of the old Ottoman Empire under Turkish control, Mesopotamia after the war had become a "mandated" area under British control. Arguing that the war had been won by all of the allies fighting together, the U.S. companies and their government insisted upon an "open door" policy, specifically that favored treatment not be accorded nationals of any one country, that concessions not be so large as to be exclusive, and that no monopolistic concession be granted. Although it was the British-Dutch interests which had the concessions, the American firms supplied nearly three-fifths of total foreign demand, with Exxon alone controlling over 50 percent of the U.K. market, and hence were in a strong bargaining position. In July 1922, negotiations began looking toward American entrance into the Iraq Petroleum Co.; with the U.S. companies represented by W. C. Teagle, president of Exxon. After six years of seemingly interminable haggling, the U.S. firms, on July 31, 1928, were granted a combined 23.75 percent share (divided equally between Exxon and Mobil), with 23.75 percent shares, each, going to British Petroleum, Shell, Compagnie Française Pëtrole, and the remaining 5 percent to Gulbenkian. IPC was not operated as an independent profit-making company, but was essentially a partnership for producing and sharing crude oil among its owners. Profits were kept at a nominal level by charging the member groups an arbitrarily low price for crude-a practice which reduced IPC's tax liability to the British government and permitted the refining and marketing subsidiaries of the groups to capture most of the profits resulting from IPC's operations. This arrangement proved to be the source of considerable friction between the large integrated companies on the one hand and the French and Gulbenkian on the other. The French had only limited refining and marketing facilities, while Gulbenkian owned none.

Between 1922, when the "open door" policy was first advanced, and 1927, when it was in the process of being discarded, radical changes took place in the world oil situation. The fears of a shortage, so widespread in 1922, were drowned in a surplus of oil. Instead of competing for the development of oil resources, the international companies turned their attention to limiting output and allocating world oil markets. Reflecting this change in economic conditions, the American companies lost their enthusiasm for the "open door" policy, particularly after their entrance into IPC had been assured. One of the key provisions of the policy was the right of any responsible concern to obtain by competitive bidding concessions on plots to be selected each year by the Iraqi government. Originally backed by the American companies, this feature was subsequently nullified by a clause permitting IPC itself to be a bidder, thereby enabling the company to outbid any prospective lessee at no cost to itself, since the proceeds from the sale were to be returned to IPC. Three years after the American companies had been admitted, the concession was revised to eliminate all provisions for sharing the concession with third parties. The "open door," in the words of one industry observer, had been "bolted, barred, and hermetically sealed."

In the early twenties when the American oil companies first became interested in oil concessions in the Middle East, they placed great emphasis on what was termed the "open door" policy, and, in fact, made the acceptance of this policy a sine qua non of their participation in JPC. In this they were actively supported by the American Government. In its initial stages the "open door" policy was broadly interpreted to mean freedom for any company to obtain, without discrimination, oil concessions, in mandated areas, particularly in Mesopotamia. . . The "open door" policy which had been so strongly advanced was discarded in subsequent years without a single test of its adequacy as a practical operating principle.(Quoting United States. Federal Trade Commission, The International Petroleum Cartel, staff report to the Federal Trade Commission submitted to the Subcommittee on Monopoly of the Select Committee on Small Business, United States Senate, Washington, U. S. Govt. Print. Off., 1952, p. 109-110)

Competition among the owners themselves was precluded by retaining the "self-denying" clause of the 1914 Foreign Office agreement. Within an area circumscribed on a map by a "Red Line" encompassing most of the old Ottoman Empire (including Turkey, Iraq, Saudi Arabia, and adjoining sheikdoms, but excluding Iran, Kuwait. Israel, and Trans-Jordan), the owners agreed to be interested in oil only through the IPC. When Gulf Oil, a member of the American group, sought permission to exercise an option to purchase a concession in Bahrein, IPC denied the request.

As one writer commented, the Red Line Agreement ". . is an outstanding example of a restrictive combination for the control of a large portion of the world's supply by a group of companies which together dominate the world market for this commodity." In a confidential memorandum, the French described the objectives of the agreement: "The execution of the Red Line Agreement marked the beginning of a long-term plan for the world control and distribution of oil in the Near East." IPC was so operated as "to avoid any publicity which might jeopardize the long-term plan of the private interests of the group…"

Source: John M. Blair, The Control of Oil (New York: Pantheon Books, 1976), pp. 31-34


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