Chapter 14 summary

This chapter had a lot going on. Enjoy!!

Henri Deterding rented the property of Achnacarry Castle for a month. Joining him were Walter Teagle, head of Standard Oil of New Jersey; Heinrich Riedemann, Jersey’s chief man in Germany; Sir John Cadman of Anglo-Persian; William Mellon of Gulf, and Colonel Robert Stewart of Standard of Indiana. This meeting was to be kept a secret but it was leaked out. They met to search for a solution to the dilemmas of over production and overcapacity in their industry. They wanted a formal treaty for Europe and Asia to bring order, divide markets, stabilize the industry, and defend profitability. The flow of Russian oil brought the men to Achnacarry. The price war had gotten out of hand and turned into bitter global warfare, prices were collapsing, and none of the oil companies could feel secure in any market. A concordat was the objective of the oil men of Achnacarry.
The Hand of the British Government
The British government was prodding and pushing the companies toward collaboration in the pursuit of its own economic and political goals. Sir John Cadman was the successor to Charles Greenway as the chairman of Anglo-Persian. He chose to set up joint ventures with established companies and divide the markets with them, making an arrangement to pool markets and facilities in India with Shell as well as Burmah, which was Anglo-Persian’s second-largest shareholder after the British government. The Admiralty feared the Anglo-Persian might be absorbed by Shell, which would go against the most basic tenets of government policy. They thought the tensions might lead to pressure on the government to sell its holdings in Anglo-Persian. This would be bad for the Royal Navy and not good at all for the Exchequer.
Winston Churchill, Chancellor of the Exchequer, played a pivotal role. He came to the conclusion that combination was the best policy, not to mention the cheapest. He told the Committee on Imperial Defense, “The alternative to the proposed working arrangement was for the Anglo-Persian Oil Company to fight for the market in Africa.” The government gave its firm support to Cadman’s efforts to form his African “alliance” with Shell.
“The Problem of the Oil Industry”
The two weeks at Achnacarry resulted in a seventeen-page document, not signed, called the “Pool Association.” It was better known as the Achnacarry or “As-Is” Agreement. It summarized the “problem of the oil industry”, which was overproduction, the effect of which “has been destructive rather than constructive competition, resulting in much higher operating costs…Recognizing this, economies must be effected, waste must be eliminated, the expensive duplication of facilities curtailed.”
The heart of the document was: each company was allocated a quota in various markets—a percentage share of the total sales, based upon its share in 1928. A company could only increase its actual volumes as the total demand grew, but it would always keep to the same percentage share.
Absent from the Agreement was the Soviet Union. Even though Deterding and Teagle disliked doing business with the Soviet Union, the major companies reached an understanding with the Russians in February 1929, which gave the Soviet Union a guaranteed share of the British market. The agreement explicitly excluded the domestic U.S. market, in order to avoid violating American antitrust laws.
Many “fringe” players in the oil firms did not hesitate to nibble away at the market share of the major companies. Seventeen American companies combined to form the Export Petroleum Association, which would jointly manage their oil exports and allocate quotas among them. They were acting under the Webb-Pomerene Act of 1918, which allowed U.S. companies to do abroad what the antitrust laws did not permit them to do—come together in combination—so long as the combination’s activities took place exclusively outside the United States. But the association never attained the critical mass and they could not come to satisfactory agreement on prices and quotas. There were too many producers and too much production outside the “As-Is” framework, and in the surge of uncontrollable production, the Achnacarry Agreement was washed away. The oil companies began attacking one another’s markets once again.

Discord Within “Private Walls”
Standard of New Jersey, Shell, and Anglo-Persian tried to reformulate on alliance in 1930. The revised the “As-Is” understanding in the form of a new Memorandum for European Markets. The system proved ineffective again.
By 1931 Jersey grew disenchanted with unworkable global alliances. John Cadman stood up before the entire membership of the American Petroleum Institute to declare that “the principle of ‘As-Is’” has “become the keystone of cooperation in international petroleum trading outside the United States.”
A new version of the “As-Is” was created. It stated the Heads of Agreement for Distribution, which “should be used as a guide to representatives in the field for drawing up rules for local cartels or local Agreements.” The initial adherents to the Heads included Royal Dutch/Shell, Jersey, Anglo-Persian, Socony, Gulf, Atlantic, Texas, and Sinclair.
Being as unstable as the “As-Is” agreements became much more effective with the Draft Memorandom from 1934 on. In early 1938, Jersey gave verbal notice of termination of the “As-Is” agreements. Any surviving “As-Is” activities came to an end in September 1939 with the outbreak for World War II.
The Mexican Battle
The point of dispute in Mexico was described in paragraph 4 of Article 27 of the Mexican Constitution of 1917, which was the clause that stated that underground resources belonged not to those who owned the property but to the Mexican state.
President Plutarco Elias Calles ordered General Lazaro Cardenas to prepare to set the oil fields on fire in the event of a U.S. invasion.
The largest foreign oil company was Mexican Eagle. It was responsible for 65 percent of Mexico’s total production. The American companies produced another 30 percent. The companies did not was to risk new investments in the face of the unsettled conditions in the country, they just wanted to maintain what they had. Production fell drastically.
Cardenas was to extend government control over the oil industry.
On March 16, 1938 the oil companies were officially in a rebellion. On March 18, Cardenas told his cabinet that he intended to take over the oil industry. It was better to destroy to oil fields than let them be an obstacle to national development, he said.
Mexican Eagle had the most to lose. It was controlled by Royal Dutch/Shell Group and its stockholders were largely British. The British government took a stand against Mexico. It insisted that the properties be returned. Mexico severed diplomatic relations.
Nazi Germany became Mexico’s number one petroleum customer with Fascist Italy next. Japan was also a major customer.
In a military crisis, production in the Latin American countries would be essential to Britain. When it came to oil Mexico was far more important to Britain than the United States.
“As Dead As Julius Caesar”
After outbreak of the war in Europe, interests of the expropriated American oil companies and of the United States government diverged more sharply. In the event of American entry to the war, the U.S. government wanted access to Mexican oil supplies. The expropriation was the major obstacle to cooperation with Mexico. U.S. Ambassador Josephus Daniels to Roosevelt that there was no sense trying to restore and defend a status “as dead as Julius Caesar.”
Mexican Eagle and Shell did not settle with Mexico until two years after the war’s end in 1947.
The Mexican expropriation was the biggest trauma that the industry had experienced in many years. The 1938 nationalization was seen as one of the greatest triumphs of the revolution. Mexico was the complete master of its oil industry, and Pemex would emerge as one of the first and most important of the state owned oil companies in the world.