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As-Is Agreement

AS-IS AGREEMENT

Agreement establishing a cartel of Western oil companies, 1928.

Price wars among major oil companies in the 1920s, most significantly one in India between Standard Oil of New York and a subsidiary of Royal Dutch Shell, threatened major oil company profits, especially those from relatively high-cost production in the United States. At an August 1928 secret meeting at Achnacarry Castle in the Scottish Highlands, the As-Is Agreement was devised by the leaders of the Anglo-Persian Oil Company (later BP), Royal Dutch Shell, and Standard Oil of New Jersey (later Exxon). Together with the Red Line Agreement, the As-Is Agreement formed the basis of what a U.S. Senate subcommittee in 1952 called "the international petroleum cartel."

The As-Is Agreement consisted of seven "principles" to limit "excessive competition" that had led to enormous overproduction by dividing markets, fixing prices, and limiting the expansion of production capacity. The agreement affected the development of oil production capacity in the Middle East by limiting price competition in product markets and, as a result, supporting the prices of products made from high-cost, primarily American, crude oil. This strategy was implemented as a "basing-point" system under which all sellers calculated delivered prices as the sum of FOB prices at one or more specific locationsbasing pointsplus a standardized freight charge from that point to the point of delivery. Such a system is very effective because it ensures that all sellers quote the same prices and that producers with low costs cannot use that advantage to expand their market shares by passing on the low costs.

The impact of the As-Is Agreement on the position of Middle Eastern oil producers was profound. It was substantially responsible for the reluctance of concession holders to expand production in this low-cost region. In 1928, when it was adopted, more than a third of worldwide production capacity was shut down due to oversupply. Owners feared that expanding low-cost capacity in the Persian Gulf would only add to their losses. The As-Is and Red Line agreements retarded the development of Middle Eastern oil resources until after World War II; at the same time they led to the depletion of reserves in what were later seen as politically "safe" areas, such as the United States and Canada. The resulting division of production shares between Middle Eastern countries and others aggravated anticolonial and anti-Western feelings among the populations of many Middle Eastern states, most notably Iraq and Iran. It also established a pattern for ensuring oil profits by exercising market control that the members of the Organization of Petroleum Exporting Countries later tried to emulate.

see also arabian american oil company (aramco); iran; iraq; organization of petroleum exporting countries (opec); persian (arabian) gulf; red line agreement; royal dutch shell.


Bibliography

Penrose, Edith T. The Large International Firm in Developing Countries: The International Petroleum Industry. Westport, CT: Greenwood Press, 1976.

Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Shaped. New York: Bantam, 1991.

United States Congress. Senate. Select Committee on Small Business. Subcommittee on Monopoly. The International Petroleum Cartel: Staff Report to the Federal Trade Commission. 82nd Congress, 2nd session. Washington, DC: U.S. Government Printing Office, 1952.

Mary Ann TÉtreault

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