NATURAL RESOURCE CONTROL - THE CASE OF CARIBBEAN OIL
A paper presented as part of the requirements of a course on Development Problems in the Caribbean given given at Carleton University, Ottawa in July and August 1979 by Dr. Clive V. Thomas of the University of Guyana.
The objective of this paper is to review the case of petroleum as a natural resource in the context of the Caribbean, primarily from the perspective of the English-speaking Caribbean, and more particularly, with a view to outlining the problems and potential of petroleum as a natural resource which could stimulate both development and further underdevelopment in the region.
In this review, we look at:
1. A brief history of oil developments in the Caribbean;
2. Some aspects of the production structure of the transnational corporations
TNC's) which dominate the industry;
3. Some of the problems created by this domination;
4. Two specific national examples of oil developments in Trinidad and St. Lucia;
5. Some sketchy hypotheses about future developments.
A BRIEF HISTORY OF CARIBBEAN OIL
The first oil well in the Caribbean was drilled in Trinidad in 1857, a year or so ahead of the first well in the United States of America. Commercial production did not become significant however until the 1890's, after the British navy was converted from coal to oil power, and the colonial authority turned to sources of supply within its empire, with Trinidad becoming the largest single source of supply. (1)
Oil developments in the Caribbean were dependent on developments elsewhere right from the beginning. Colonial economic policies had ensured that the Caribbean economy revolved around external demand, with little possibility that Caribbean resources, whether agricultural or mineral, could be linked to the needs and demands of Caribbean people.
The growth in demand for oil as a source of energy grew rapidly in the late 1800's and early 1900's, as the automobile industry grew, electrical power switched from coal to oil, and industry became more mechanized and capital intensive. Demand outgrew supply in the U.S. and Europe, requiring the development of petroleum deposits outside the industrial nations or metropolis. First, deposits were developed in Mexico in the early 1900's and then switched to Venezuela after growing nationalism increased economic costs and reduced metropolitan control in Mexico in the 1930's. Similarly, growing nationalism in Venezuela caused the now vertically integrated TNC's to increase Middle Eastern oil production in preference to Venezuelan from the 1950's to 1960's.
Arab and OPEC pressures have led to the increase of African and Alaskan oil production in the 1970's. (2)
Throughout these adjustments in sources of supply of crude oil by the TNC's, the Caribbean came to play a crucial role in the world oil industry. After the development of Venezuelan production in the 1930's and 1940's, the TNC's located trans-shipment and refining facilities in the Dutch Antilles and Trinidad, just out of the reach of potentially nationalistic tendencies in Venezuela. The smallness of these territories, their colonial governments, their location between raw material supplies and markets, and their natural deep water harbours made them ideal locations for the development of intermediate stages of the industry between the producing countries and the TNC's consumer markets in North America and Europe. These advantages remained significant even after the focus of international crude oil production shifted from Venezuela to the Middle East and Africa. Indeed, their small size and dependent nature were so attractive to the TNC oil corporations, that trans-shipment and refining facilities were expanded in the 1950's and 1960's to the point where Caribbean refineries provided crucial facilities for the balancing of supplies between global crude production and markets for Exxon, Shell, Texaco and a number of smaller corporations. Excess Caribbean refining capacity of 10 to 20 percent and the most complete and modern equipment allowed the TNC's to adjust for strikes, technical problems, demand variations and political unrest throughout their international networks.
The lack of significant crude oil production in relation to world markets, or any other industry of significance, reduced the threat of nationalization. The growth of environmental concerns in North America and Europe also stimulated the development of petrochemical industries in the Caribbean as demand for industrial chemicals grew and the advantages of expanding existing facilities over building new plants were apparent.
Today, 23% of America's imported oil comes through the Caribbean on its way from Venezuela and the Middle East. The world's largest refinery is located at St. Croix in the U.S. Virgin Islands. Even North Sea crude is trans-shipped through the Burmah terminal in the Bahamas on its way to the shallow east-coast U.S. ports. (3)
SOME ASPECTS OF THE PRODUCTION STRUCTURE OF TNC's
The phenomenon of transnational corporations, which now control 50 to 66 percent of western industrial production, has grown out of the remarkably increased concentration of capital in the world economy in the past 100 years. The dynamics of this growth in concentration should be the subject of an entirely different paper so we will simply outline some of its aspects here. Growth in consumer demand and greatly reduced transport costs resulting from the industrialization of the metropolitan economies created the conditions for large scale(production to dominate small, single stage, local operations and to integrate them into large, centrally controlled networks of raw material supply, processing facilities and marketing outlets. Integration ensured continuity of supply and minimized disruption of production and investment risks due to dependency on individual suppliers and markets.
Multinationalization followed the outstripping of western resources by demand and was a natural result of the competition of these large, vertically integrated enterprises for raw material supplies and new markets. The nature of industrial production and wage labour created more surplus than could be consumed by the small number of owners, thus leading to its investment in more capital, which stimulated further production and productivity, demanding ever expanding markets and sources of raw materials in an upward spiral of capital concentration and centralized economic power.
In conventional microeconomics, or the theory of the firm, output is determined by certain cost, demand and supply formula which maximize profits. In the case of the transnational corporations however, profit is maximized at the level of the entire corporate network and not for each individual subsidiary or production unit.
Thus, as Girvan demonstrates (4), in the case of mineral export economies, or by extension for enclave industries such as export oil refining in small territories, the output of the raw material or processing industry is determined by factors which will not necessarily maximize income or profit at the local level. For example, a high cost crude oil operation may be made to produce more oil than an equivalent sized low cost operation, if the corporation concerned has a more efficient and less costly refinery and can undercut its competitors on the basis of overall costs. The reverse could also be true for different refining and production costs.
In the case of TNC's, markets, processing and raw material supplies are spread out over a range of operations which are balanced to ensure the greatest stability and flexibility of production for the entire firm. While increased output may tend to go to those subsidiaries with relatively lower costs, factors such as political stability, potential technical breakdowns or transport disruptions, labour action and others are often as or more important than relative profitability of an individual subsidiary. These factors operate to restrict growth of output and therefore income for each subsidiary.
Since many Third World nations depend on export income from the output of one TNC subsidiary or one oligarchic extractive industry, their prospects for long term growth within the decision making framework of transnational corporations is very limited. Changes in end product demand, technology, marketing costs and many other factors beyond the control of the Third World "host" nation can have dramatic effects on output in its territory, with no reference at all to the relative economic conditions of raw material supply or processing. This decision making framework of the TNC's precludes excessive dependence on growth in any one element of its network as a condition for the stability, growth and therefore profits of a huge, complex system of international production.
SOME PROBLEMS OF TNC DOMINATED PRODUCTION
One of the major problems facing Third World countries whose economies are dominated by export oriented TNC production, is that of dependence on external factors for internal development or growth. The nature of most export production by TNC's precludes the establishment of backward linkages to capital goods supply or forward linkages to local consumption within the national economy. These linkages exist in the metropole, where large scale industrialization is a fact and most TNC's have their bases. They are blocked however in the hinterland by unbalanced production structures which relegate those subsidiaries to the role of raw material supply or enclave export processing industry. The polarization of growth and capital accumulation at the centre ensures that these linkages, and therefore autonomous, non-dependent growth will not occur at the periphery without major changes in the ownership of the means of production which permit different resource allocations than those based on TNC profits.
The surplus of the extraction or export processing subsidiary is invested in those parts of the TNC which maximize overall current profit or growth, not for the benefit of the particular subsidiary. In the case of oil, the great difference between price and cost of production generates huge surpluses well beyond the requirements of increased production or the expansion of an already existing refinery. Thus the huge quantities of capital generated are expropriated mainly for other parts of the TNC's operations, not for the benefit of the workers or the owners of the natural resource.
The vertical integration of the TNC's centralizes the purchasing of material and equipment for all subsidiaries of the corporation.
The standardization of products leads to the standardization of technology and equipment. The availability of virtually free transport on returning empty raw material carriers and the abundance of foreign exchange generated by oil export surpluses, further reduce any tendency to link purchases to the local economy of the subsidiary. De Castro states that petroleum industry contractors tie large portions of their costs to suppliers in their home country: 8O% in the case of the U.S. corporations, 65% for the U.K. and 54% for Japan. Backward linkages to the local Third World economies are thus blocked by central decisions. (5)
Two further factors have important consequences for internal development in oil exporting or enclave refining economies. Firstly, the substantial supplies of foreign exchange available from exports tend to increase imports without causing balance of payments problems and thus reduce pressures to develop local consumer goods industries against competition from imports. (6)
Secondly, the highly capital intensive nature of the industry makes labour costs a small part of overall costs. High wages therefore do not increase costs proportionally and are the norm in an industry where high skills and unionization are prevalent. High wages lead to greater expectations in other sectors of the economy, make local manufacturing uncompetitive with imports, and turn underemployment into open unemployment through the discouragement of agriculture and the stimulation of rural/urban migration.
Any increases in output are therefore likely to lead to increased income only for the corporation's head office, high income workers, the commercial importing class and government. The latter three of these tend to spend this income in consumption and non-productive investments. This lack of investment in local production further aggravates unequal distribution of income and unemployment, and blocks autonomous growth independent of the TNC's extractive or enclave processing operations.
The efforts of some governments to invest in industrialization based on export earnings have not proven overly successful due to the all pervasive nature of INC production. Industrial linkages to the export sector have proven almost impossible to develop due to the vertical integration of the TNC, especially with respect to the purchasing function described above. Nor are forward linkages easy to stimulate due to the centralized market control of the TNC. Efforts for greater national control or even nationalization cause the TNC centre to shift output to relatively less "troublesome" subsidiaries and cause panic in Third World leaders dependent on growing export earnings for state structures (and power) and consumer imports. Nor are producers' cartels entirely effective due to their lack of control of marketing in the industrialized countries, where demand is far greater than in their own Third World markets at this stage of their development.
The transfer of technology and training of local personnel is another problem of INC production which faces Third World countries trying to exert national control. The functions of the extractive or enclave processing subsidiary of the INC are to produce the output ordered by the centre at the lowest possible cost. Technology and personnel policies are therefore geared to this rather static objective, rather than to the dynamic research and development requirements of the overall industry. (7) In addition, the depth (experience) and breadth (range of skills) of key technical personnel are carefully controlled by the TNC in each subsidiary to maintain as much leverage as possible with expatriate staff in the event of a dispute with local authorities. (8)
THE TRINIDAD AND TOBAGO OIL INDUSTRY
As a source of employment and finance for Trinidadian development, the oil industry has not lived up to expectations.
Employment has steadily dropped from 20,000 in 1956 to 17,800 in 1963, 13,500 in 1968 and has a current level of about 12,000. This has occurred in spite of a significant increase in oil production and exports (almost triple) over the same period. The tendency towards automation and capitalization, of the industry is demonstrated by the fact that 4O% of all investment between 1951 and 1961 went to the oil industry and only 7% to manufacturing. (9)
Nor have oil revenues contributed significantly to employment generation, either through government stimulated industrialization, or in government services. The Pioneer Industries programme, Trinidad's version of Puerto Rico's Operation Bootstrap, created only 7,000 jobs between 1950 and 1963 at a cost of $257.8 million, whereas the labour force grew by 100,000 over the same period. (10) Government plans for the larger revenues generated since the increase in oil prices in 1973 are now geared towards heavy industry such as iron and steel, liquified natural gas, aluminum smelting, petro-chemicals, fertilizer and cement at a cost of approximately'US$400,OOO per job in investment. (11)
Before 1974, TNC's operating in Trinidad were allowed to write off "losses" in their refineries or crude oil production against other segments of their operations. As an example, Texaco, the largest firm operating in the country, calculated net income from its export refinery as the difference between its sales to head office, and a refining "fee" charged for processing services but bearing no relation to the value added by the refinery. This allowed Texaco to set a "fee" which reduced income on its refinery operations to whatever was convenient for tax purposes. At times, "losses" on refinery operations were allowed to be written off against income from Texaco's crude oil production. (12) This was changed in 1974, when the Petroleum Taxes Act separated production and refining into two separate tax regimes. (13) Oil revenues formed 20% of government revenues in 1970 and jumped to 70% in 1974! Texaco is now being accused by the Oilfield Workers' Trade Union of running down its Trinidad operations in an effort to force government tax concessions. A government commission of enquiry into the oil industry has begun as a result of these accusations. (14)
This dramatic rise in oil revenues however has not found its way down to the majority of Trinidadians. The industry itself employs only 12,000 in a labour force of over 300,OOO; tax revenues are being held, primarily overseas, for investment in the heavy industries projects mentioned above as they come on stream over the next several years; the dismal state of water, telephone, electrical. and roads services in Trinidad has become a national bad joke, and clearly demonstrates that government plans do not include major improvements in public services as a priority over heavy industry or even on a par with it.
The heavy industries being planned are primarily export oriented and will provide few linkages, either backward or forward, to the local economy. Some developments in metal working and certain capital goods and works may result from the steel, aluminum and cement industries, and there could be agricultural benefits from fertilizer production. The pressures for increased imports resulting from easy access to foreign exchange and high wages (which also make local industry uncompetitive) will make it difficult to stimulate local industrial or agricultural employment unless-major changes are made in the allocation of investment funds to labour intensive activities.
THE ST. LUCIA/AMARADA HESS OIL AGREEMENT
An agreement was signed on July 11, 1977 between the Government of St. Lucia and Amerada Hess, one of the larger American "independent" petroleum corporations, to provide for the construction of an oil trans-shipment terminal and export refinery at Cul-de-Sac just south of Castries. (15) One only has to look at this agreement, with its provision for the settlement of disputes in the International Chamber of Commerce in Paris, and not in St. Lucia, under St. Lucian law, to realize how even a small transnational corporation can take advantage of a small country.
Amerada Hess Corporation was formed in 1967 through the merger. of the Hess Oil and Chemical Company and the Amerada Petroleum Company. The former began as a small coal and oil distributing business in the 1920'.s and the latter was a successful producing company with 101,000 barrels per day of oil in North America and 197,000 bpd in Libya. Leon Hess was able to take advantage of the boom years in the post war period to build a vertically integrated company in the face of "benign neglect" from the seven major INC oil producers, through the use of residual fuel oil, a low profit product, the demand for which grew rapidly with the switch from coal to oil by electrical utilities and many other industrial consumers.
Using political contacts and a lot of wheeling and dealing, Hess cornered substantial distribution contracts, in particular for the large New Jersey utility, Public Service Electric and Gas Company. In 1965, Hess gained favour with the Democratic Governor of the U.S. Virgin Islands and saw the Island Congress pass a special bill entitling Hess to considerable incentives over a 16 year period for the construction of a refinery. These incentives, plus privileged access to "entitlements" under the 1973 U.S. Emergency Petroleum Allocations Act, have allowed Hess to substantially undercut the sales of other independent oil companies and to withstand the onslaught unleashed on the independents by the "Seven Sisters" after the 1973 oil "crisis". (16)
The trans-shipment terminal and export refinery are estimated to cost about EC$135 million, or about the same as the Gross Domestic Product of St. Lucia per annum. The 50 year agreement allows Hess almost complete tax immunity for a twenty year period from a date which Hess can set through its complete control under the agreement of the rate of construction of the refinery. The agreement only stipulates when refinery construction must begin (i.e. before completion of the terminal) and not when it must be completed. Hess has complete control over design and construction with respect to safety and pollution standards, neither of which are defined in the agreement. The agreement prohibits St. Lucia from attracting competitors to Hess by automatically providing whatever greater tax benefits St. Lucia might offer to any other firm, a sort of "most favoured corporation" clause!
Hess is only required to pay US$0.02 per barrel for trans-shipped oil and Us$0.04 per barrel of refined oil exported from St. Lucia, compared with the US$0.16 charged for refined oil by Trinidad against Texaco.
It is interesting to note that the agreement has only four very general clauses concerning Hess' responsibilities under the Act, whereas there are seventeen detailed clauses concerning those of the Government of St. Lucia.
Also interesting is the simultaneous pressure applied by Hess to the Assemblies of St. Lucia and St. Croix with respect to oil export facilities. Hess demanded the approval of all members of the St. Lucian House of Assembly before agreeing to the contract. Hess also withheld back taxes due of some US$30 million from the Government of the U.S. Virgin Islands, pending Its approval of a 10 year extension of tax exemptions concessions beyond 1981. (17)
POSSIBLE FUTURE DEVELOPMENTS
It is difficult of course to project just what lies in the future for Caribbean oil resources. On the one hand, projections have been made of huge reserves rivaling those of the Middle East, which could be developed once the technology to drill and extract petroleum from greater than 2,000 feet of water is available. On the other hand, the political instability of the region due to massive unemployment must give rise to questioning on the part of the TNC's as to whether or not the time has arrived to shift processing operations to areas where political obstacles to their heretofore untrammeled freedom are less likely to arise.
In the latter case, it is difficult to see any easy short term solution for the TNC's, thus increasing the leverage of those nations there facilities exist and which wish to obtain more benefits from their natural resources or their geographically advantageous locations. There are few regions left in the world where small territories, ideally situated between raw material sources and markets, can be manipulated and played off against one another as easily as has happened in the Caribbean in the past. The arrival of more nationalistic governments in Grenada, St. Lucia and Dominica earlier this year is a trend which is likely to continue and spread in the Caribbean. The strength of environmental groups in the industrialized nations is growing also and will act to reduce the options of the TNC's.
It is possible that the TNC's have already looked at their options and have concluded that the increased costs of Caribbean nationalism are among the least costly of the various alternatives available to them at this time. There are some signs that such a consensus may have been reached. The U.S. Government, which is closely linked to transnational capital interests through Jimmy Carter's membership in the Trilateral Commission, has moved quickly over the past two years to greatly increase its activities in the Caribbean. Huge sums of money have been allocated for balance of payments support in the region, much of it going to protect the Bauxite exporting economies of Jamaica and Guyana. (18) At the diplomatic and political level, the U.S. State Department has appointed a special troubleshooter to take responsibility for containing Cuba's expanding influence in the region after the FSLN victory in Nicaragua. This envoy recently visited London to coordinate plans with British officials who still have some colonial responsibilities for a number of regional governments. (19)
One can already recognize the growing outlines of a coordinated programme of increased aid and credit, public service and works. investments to soak up unemployment, massive propaganda about the trickle down benefits of resource and enclave industrial development, destabilization of the more militant nationalist and socialist groups and other tactics designed to ensure that the costs of nationalism do not get too high too quickly.
The prospect of large scale oil production in the region is one option which must also be studied seriously in any analysis of Caribbean natural resources, as I have pointed out in an earlier paper. (20) It may still be premature to try to pinpoint specific areas where this development might first begin, however, a thorough study of the various arrangements under which other nations control their offshore petroleum resources is an urgent necessity, as is an appreciation of the ramifications of the soon to be concluded U.N. Law of the Sea, as it affects Caribbean states. The move to political independence by the remaining Associated States is also important before meaningful steps can be taken to increase the benefits from the region's natural resources.
In this context, it will be important to observe political developments in Martinique and Guadeloupe, since, as the least advanced in terms of nationalist forces, they stand to play an important role in undermining any regional efforts at coordination of resource policies. This assumes of course that French and American capital interests can agree on coordinated policies with respect to the Caribbean, an eventuality probably as difficult to predict at the moment as a coordinated regional nationalism.
One further and more localized projection of future developments which needs to be studied, is the effect of the Amerada Hess terminal and export refinery in St. Lucia. While it is likely that the agreement will be subjected to renegotiation of some of its terms, particularly the throughput charges, which are especially low, the overall effects of an enclave exporting industry on the development and structure of St. Lucia's economy are more important and merit special attention.
As noted above, the effect of easier access to foreign exchange on the composition of imports and therefore on local industrial development needs to be studied. The use to which government revenues are put, whether in non-productive services, capital intensive industry or rural/village industry and agriculture, will have an important influence on the distribution of benefits from the enclave industry. The relative interests of the commercial class, a growing local bourgeois class of "industrialists", peasant farmers, organized workers and unemployed youth will be difficult to sort out, as both economic and political pressures interact with the newly elected and much more heterogeneous government.
A logical extension of this paper, and one which time did not permit, would be a study of the various strategies available to small dependent Caribbean territories to confront the TNC oil corporations and maximize the benefits from their petroleum reserves and their location with respect to sources and markets in the international oil trade.
Three authors who are useful in beginning such a study would be: Tanzer (21), Girvan (22) and Thomas (23).
An example of oil development in a small economy worth studying would be the case of North Sea oil in the Shetland Islands of Scotland, where a population of only 19,000 has been beseiged by the TNC's and has managed to cope relatively well with the tremendous dislocations involved. (24)
I have drawn rather heavily on Girvan and to a lesser extent on Seers for my understanding of the operations of TNC's in resource industries. I hope I have been able to provide a relatively useful, if sketchy, outline of some of the complex factors involved and their relation to some specific cases in the Caribbean.
(A 2018 footnote: In re-reading this almost 40 years later, I Googled "Amarada Hess" and came across this link Buckeye Global Marine Terminals
1) NACLA, Oil in the Caribbean: Focus on Trinidad, October 1976
2) Peter Odell, Oil and World Power: Background to the Oil Crisis, 4th Edition, Penguin Books, 1975.
3) Latin America Economic Report, June 22, 1979, Vol. VII No.24.
4) Norman Girvan, "Multinational Corporations and Dependent Underdevelopment in Mineral Export Economies", Social and Economic Studies, December 1970, Vol. 19, No.4.
5) Steve De Castro, "Caribbean Petro—chemicals: Industrial and Technological Issues", Caribbean Technology Policy Studies Project, UWI/UG/IDRC.
6) Dudley Seers, "The Mechanism of an Open Petroleum Economy", Social and Economic Studies, 1964, Vol 13, No.2.
7) Trevor Farrell, "The MNC's, The Transfer of Technology and the Human Resources Problem in the Trinidad and Tobago Petroleum Industry", Caribbean Technology Policy Studies Project, UWI/UG/IDRC.
8) Odell, op. cit.
9) Edwin Carrington, "Industrialization in Trinidad and Tobago since 1950", New World Quarterly, 1968, Vol. 4, No.2.
10) Carrington, op. cit.
11) CARIBISSUES, February 1979, Vol. 3 No.4.
12) NACLA, op. cit.
13) CARIBISSUES, April 1979, Vol. 3, No.6.
14) CARIBISSUES, January 1979, Vol. 3, No.3.
15) St. Lucia Official Gazette, Oil Refinery Act (1977).
16) NACLA, op. cit.
17) Caribbean Contact, August 1977, Vol.5 No.5.
18) CARIBISSUES, various issues throughout 1978 and 1979.
19) Foreign Report, July 11, 1979.
20) R.A. Thomson, Caribbean Contact, May 1979, Vol.7 No.1.
21) Michael Tanzer, The Political Economy of International Oil and the Underdeveloped Countries, 1969, Beacon Press; also, "The State and the Oil Industry in Today's World", Monthly Review, March 1978.
22) Norman Girvan, "Towards a Minerals Policy for the Third World", Chapter Five in Corporate Imperialism: Conflict and Ex ropriation, 1976, M.E. Sharpe Inc., N.Y.
23) C.Y. Thomas, Dependence and Transformation, Monthly Review Press, 1974.
24) John Button (Ed.), The Shetland Way of Oil: Reactions of a Small Community to Big Business, 1978, Thuleprint Ltd.