The demise of Big Oil (part 1): carve up the Middle East

In today’s Exponential Investor…

  • Make sure you’re down for “Big Green”
  • Sykes-Picot – what a duo!
  • Powering the war machine

Before I get started, I want to make sure you’ve registered for the “Beyond Oil: The Birth of Big Green” six-day special event that kicked off yesterday.

It’s not too late to get access – while there will be new content released today, tomorrow, in fact all week, you can still catch Monday’s on “catch-up”.

To get free access to every interview and all information about “Beyond Oil: The Birth of Big Green” make sure you’ve registered here.

It’s one of the most interesting and exciting events we’ve ever put together and will give you a whole new perspective on the direction our world is taking right now.

Of course, you might not necessarily believe that “Big Oil” is dead just yet either. After all, when you look to the stockmarkets and some of the biggest companies in the world, Big Oil makes up a fair chunk of those.

For instance, Saudi Aramco (SAR:2222) has a market capitalisation of about £1.5 trillion.

Yep, that’s right. That’s no typo. One-point-five TRILLION pounds is its market capitalisation.

And you thought Apple Inc. (NASDAQ:AAPL) was the most valuable public company in the world at US$1.5 trillion…

Then there’s,

  • Exxon Mobile (NYSE:XOM) with a market cap of US$183 billion
  • BP Plc (LSE:BP) with a market cap of about £60 billion
  • Royal Dutch Shell Plc (LSE:RDSB) with a market cap around £95.5 billion
  • Chevron Corp (NYSE:CVX) at about a US$168 billion market cap.

Those are just a few that are listed on public markets. But that is Big Oil as you know it today. Of course, these companies didn’t just appear in the last decade or two. The seeds for these oil giants was seeded back in the early parts of the 1900s.

Big Oil as you know it today has been over 100 years in the making.

I wanted to understand big oil better, so a few years ago I decided to look deeper into where it came from and why. I wrote some editorial on the subject matter. And now there’s never been a better time to revisit my work.

You see, the key to understanding the potential collapse of big oil is to understand how it came about in the first place.

Nothing lasts forever

On 16 May 1916, the British and the French, with assent from Russia, signed a secret agreement.

This agreement was to determine how to divide the Ottoman Empire. It would establish “spheres of influence” for the British and French. It was a play for a region rich in oil. Something the British had come in high demand for.

This secret agreement was of conditional on the “Triple Entente” (Britain, France and Russia) defeating the Central Powers (Germany, Austria, Italy and the Ottoman Empire) in World War I. We know how that ended…

Sir Mark Sykes and Francois Georges Picot put together this secret agreement. Parts of the original text of the agreement state,

That in the blue area France, and in the red area Great Britain, shall be allowed to establish such direct or indirect administration or control as they desire and as they may think fit to arrange with the Arab state or confederation of Arab states.

The British and French government, as the protectors of the Arab state, shall agree that they will not themselves acquire and will not consent to a third power acquiring territorial possessions in the Arabian peninsula, nor consent to a third power installing a naval base either on the east coast, or on the islands, of the red sea. This, however, shall not prevent such adjustment of the Aden frontier as may be necessary in consequence of recent Turkish aggression.

It is agreed that measures to control the importation of arms into the Arab territories will be considered by the two governments.

It concludes with note that Russia should give it the thumbs up. And the Japanese, “should be informed of the arrangements now concluded.”

Source: Wikipedia Commons

This document became the foundation of French and British claims in the Arab world. Much of the disputes in this region today stem from the actions of those times.

The agreement was never going to stand the test of time though. France and Britain agreeing to share the Arab world? The French however weren’t keen on voiding the agreement. They were determined to claims on Syria.

Britain decided strategically Palestine, Mosul and Iraq were more important. So they “gave” the French their claim to Syria and Lebanon.

Of particular interest to the British though was the oil-rich region of Mesopotamia (Iraq). But why would the British be so keen on a region of oil, so far away from domestic shores?

Make them bigger, stronger and faster

Winston Churchill was an astute naval strategist. As First Lord of the Admiralty he helped beef up the British Navy.

Bigger guns and better armour were first. But then it needed faster ships. To achieve this, it needed a new energy. The navy was reliant on coal. But this simply didn’t burn hard enough to power the upgraded fleet. It needed a more powerful energy to power the fleet than domestic coal.

Speaking about the difficulty of switching the nation’s most valuable war assets to oil he said,

The oil supplies of the world were in the hands of vast oil trusts under foreign control. To commit the navy irrevocably to oil was indeed to take arms against a sea of troubles… If we overcame the difficulties and surmounted the risks, we should be able to raise the whole power and efficiency of the navy to a definitely higher level; better ships, better crews, higher economies, more intense forms of war power—in a word, mastery itself was the prize of the venture.”

By 1914 the British already held a 51% controlling stake in the Anglo-Persian Oil Company. This company was the first company to extract petroleum from Iran – you might now know this company at British Petroleum, or just good old BP.

When the chance came after WWI to get access to more oil, the British jumped at the chance. Enter the Sykes-Picot Agreement in 1916.

By 1919 Churchill was now War Secretary. The goal was always strategic naval strength. And as an island nation protection of the seas were critical. To secure the strength of the navy, the British needed to secure the energy to power them.

The Sykes-Picot agreement led to the San Remo conference in 1920. Here the British and French agreed to establish Mandatory Palestine (under British administration) and the French Mandate for Syria and the Lebanon.

But in secret they set up the “San Remo Oil Agreement”. This gave the British permanent control over any entity exploiting oil in Mesopotamia. In particular was the full control of the Turkish Petroleum Company. The TPC had close to a monopoly on oil exploration in Iraq.

As Germany originally had interest in TPC, France demanded their share. The French would get 25% and favourable oil transport terms. Meanwhile, the US was not particularly happy about being excluded.

In effect this gave the British control of some of the most oil-rich regions in the world. And a pathway from Iraq to the Mediterranean. It also gave them a pathway to the Persian Gulf and on to British-controlled India.

It comes as no surprise that the most formidable naval fleet in the world was now the British Royal Navy. And it had managed to secure the most valuable resource for war, oil. It also had free rein through the Mediterranean and the Persian Gulf.

This was all set up for oil dominance, but as history would reveal, sometimes these agreements fall apart. Also, no one likes being occupied by an invading force… ever.

In tomorrow’s Exponential Investor I’ll continue this deep dive into the origins of Big Oil as well as explain just why it’s about to all end in a proverbial flaming oil well.

Until then.

Regards,

Sam Volkering
Editor, Exponential Investor

Category: Energy

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697. https://register.fca.org.uk/.

© 2020 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑