clearly a matter of grave concern in view of the developing importance of oil to economic development throughout the world . It is a problem to which the Marxist economist could profitably devote attention . A brief attempt will be made here to present a preliminary outline of the oil price structure .
There are two main elements to consider . Crude petroleum on the one hand and refined products on the other . Before World War II , the governing movement in international oil was that of refined product . This arose out of the vast concentration of oil production and refining in the United States of America . It was from the western hemisphere that refined products flowed to the main consuming area outside the Americas-northwestern Europe .
Another feature of international oil economics strengthened this trend and this was the fact that refining capacity was nearly always located near centres of crude output , the producing areas to use the jargon of the trade . A consequence of this feature was that crude oil moved only short distances , from the oilfield to a refinery generally located either on the field itself or at the nearest port to the oil field . This was the situation in the Middle East , which was then emerging into importance as an additional if not rival source of oil supply .
The effect-of these features on pricing led to the evolution of what is known as Gulf Parity . Under this system the price of refined product is based on the price ruling in the export market in the Gulf of Mexico . No matter what the source of supply the price of a refined product at any given point originally comprised its Gulf price plus freight from the Gulf to that point .
Under this system comparative profitability was regulated very largely by transportation cost , the nearer source earning the higher 18 return but the critical point is that the consumer derived no advantage from his geographic location . A notional element clothed and masked the whole issue of the price of oil in international movement . To arrive at profitability was an experiment in the devious ; it involved a comparison between production and refining costs incurred by a supplier with those prevailing in the USA , both largely unknown elements . Since the major oil companies themselves operate either directly , or on longterm charter , the vast bulk of world tanker tonnage , the other component , transportation , also becomes an impenetrable mystery . Post-war Situation
So much for the situation prior to World War II . The post-war situation was distinguished by two features — firstly , the enormous increase in Middle East production led to the emergence of this area as a major factor in world petroleum , and secondly , the creation of more or less self-sufficient refining capacity in north-western Europe . The dollar shortage and the growing importance of oil in the national economy , had dictated , a change of outlook on the question of refinery location — the post-war trend was directed at constructing refining capacity at centres of consumption rather than of production .
These post-war developments caused a change in the character and source of international oil movements . To the critical consuming area , north-western Europe , the flow was not of refined product but of crude and the main source not the USA but the Middle East . Crude oil from the Middle East travelled to the refineries of Europe , there to be processed and distributed to agriculture , transport and industry . The Middle East becomes the fountain-head of Europe ’ s main energy supply and the Suez Canal , through which some seventy per cent of Middle East crude has to travel , a vital artery .
A new price pattern evolved . Crude became the major factor in international movement and a pricing system developed with two main basing points — the Gulf of Mexico and the Middle East . The two prices were interrelated , the Middle East price was fixed to ensure that supplies from this source could sell at parity with US crude at a certain point . Originally the critical point was the central Mediterranean , moved westward reaching the UK and even the eastern seaboard of the USA .
Though the pressure of events and in particular the needs of the US armed forces during the war and the immediate post-war period had led to a departure from total dependence on US price , the departure was more apparent than real . The prices of Middle East crude was determined not by its cost of production but by the need to maintain a certain differential visa-vis the US price which , consequently , remained the chief determinant . The differential itself was governed by transportation costs and as already stated , this too is artificially regulated by the dominant oil interests .
The Economic Commission for Europe ( ECE ) has made a rough attempt at assessing the element of profit in Middle East crude prices and its estimate is that net profit comprises some $ 1.40 out of a crude price of $ 1.75 per barrel . This fantastic figure reflects the difference between US and Arab labour costs and much more significantly the difference in productivity between oil wells in the USA and in the Middle East . The ECE provides the following interesting comparison : Average Productivity per Well in
Barrels per Day US 11.6 Middle East 5,000 Kuwait 9,000
Class Struggle