Crude Oil Pricing in pre-OPEC Era

The world oil prices were first administered by the large multinational oil companies in the 1950s and 1960s in the name of a 1927 Red Line agreement and one more such agreement.  At that time, the international oil industry outside the United States, Canada, the USSR and China was characterised by the dominant position of a group of large multinational oil companies called  Seven Sisters or the seven oil majors. These majors controlled 85% of the crude oil production in the world outside Canada, USA, Soviet Russia and China.

In those times, the host governments did not participate in production or pricing of crude oil and acted only as competing sellers of licences or oil concessions. In return, host governments received a stream of income through royalties and income taxes.

Each of the Seven Sisters was vertically as well horizontally integrated. They had control of both upstream and downstream operations. These companies were able to control the rate of supply of crude oil going into the market through joint ownership of companies that operated in various countries. The vertical and horizontal linkages enabled them to control the bulk of oil exports and prevent large amounts of crude oil accumulating in the hands of sellers, thus minimising the risk of sellers competing to dispose of unwanted crude oil to independent buyers and thus pushing prices down. Thus a kind of oil companies cartel was developed, this so called cartel was able to administer the prices till 1972.

Vertical Integration versus Horizontal Integration

Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to satisfy a common need. It is contrasted with horizontal integration which occurs when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm, e.g. a car manufacturer merging with another car manufacturer.