Page 329 - Arabia the Gulf and the West

326 Arabia, the Gulf and the West

the notion that the Western world was prepared to subsidize their oil income, it
established a most unfortunate and dangerous precedent.
Parity of profit-sharing having been achieved - without parity of investment
and hence of risk-taking - the governments of the oil-producing countries now
demanded that the companies publicly fix the price for crude oil and not
conceal it (as had hitherto been the practice) in the complexities of their
accounting procedures. Prices were to be fixed, furthermore, without over­
much consideration being given to production costs. T he companies conceded
the demand, thenceforth posting the price at which they would offer their oil

for sale and upon which the revenues paid to the concessionary governments in
the form of tax would be calculated.
The effects of the fifty-fifty profit-sharing agreements and the introduction
of the posted price system upon the income of the oil-producing countries
quickly became apparent. Between 1950 and 1955 their revenues rose more
than fourfold, from $193.5 million to $898 million per annum. It was in part an
artificial growth, for their 50 per cent of profits was based not upon actual
profits but upon the difference between production costs and the posted price.
The producing countries also insisted that output be continually increased, so
as to push their revenues even higher, with the result that towards the end of
the 1950s a world surplus of crude oil began to develop. Although the surplus
had the inevitable effect of forcing down oil prices in the international market.
the posted price remained the same; so that the fifty-fifty balance of profits
between the companies and the producing countries actually began to tilt in
favour of the latter. Something had to give, and in February 1959 the com­

panies made a cut of 18 cents a barrel in the posted price. The producing
countries promptly protested at the reduction in their revenues, ignoring the
fact that it was their insistence upon increased output which had created the
glut and the consequent fall in market prices. Eighteen months later, in August
i960, Esso, acting alone, made a further cut of 10 cents a barrel. The other
major companies, although they had not been consulted, had no option but to
reduce their posted prices also.
The reaction of the producing countries was angry and vengeful. Iraq, which
since the accession to power of the military regime under Abdul Karim Qassim
in 1958 had been locked in an acrimonious dispute with the Iraq Petroleum
Company over the operation of its concession, called a meeting of the four
leading Middle-Eastern oil-producing states - Saudi Arabia, Kuwait, Persia

and Iraq - at Baghdad in September i960 to determine how best to retaliate
against the seven major international oil companies - the ‘Seven Sisters’,les^tte
sorelie, as Enrico Mattei, the head of the Italian state oil company, ENI, a
dubbed them. Venezuela, the pace-setter in most of the innovations which a
been introduced into oil company and concessionary government re auons
over the previous decade, was also invited to attend. The upshot was
creation, by the ‘Five Furies of Baghdad’, of the Orgamzauon of Petroleum