EnergyPolic3'. Vol. 23, No. 10, pp. 871477.

1995
~]E UTTE RwO RTH Copyright © 1995 Elsevier Science Ltd
IN E M A N N
Printed in Great Britain. All rights reserved
0301-4215/95 $10.00 + 0.00
0301-4215(95)000126-3

The changing structure of the

international oil industry

Implications for OPEC

Kathleen L Abdalla
United Nations Economic and Social Commission/br Western Asia, PO Box 927124, Amman, Jordan

This paper examines the changes in international oil market structure observed in the 1980s
and early 1990s and assesses possible effects on oil market conditions in the future and implica-
tions for OPEC. it focuses on the trend toward a more vertical organization mainly resulting
from substantial purchases of downstream assets by state owned oil companies in major oil pro-
ducing countries. While the Gulf war prevented greater horizontal concentration ofoil reserves,
it merely interrupted the trend toward vertical concentration in the international oil industry.
The vertical integration of only some of the OPEC members will cause a further divergence of
goals within the organization resulting in a lower likelihood of OPEC regaining its former posi-
tion as an effective cartel. If the trend toward greater vertical concentration increases, future oil
prices will, in part, be affected by decisions made by vertically integrated firms.
Kevwords: Oil; OPEC; Organization

The Organization of Petroleum Exporting Countries
(OPEC) I has undergone many changes since its incep-
tion in 1960. it has evolved from a loosely organized
group in the 1960s to a powerful cartel in the 1970s and
early 1980s to a group with varied objectives in the
1980s and 1990s. For the past ten years or so OPEC has
grappled with the problem of satisfying the different
goals of its members with varying degrees of success.
For some time OPEC has faced a situation of relatively
low oil prices and conflicting goals among the members
have led to production over agreed upon levels by some
members with excess capacity. The past success of
OPEC as a working cartel was in part due to the advent
of independent oil companies which added a degree of
competition to the industry and, most importantly, pro-
vided an alternative outlet for emerging national oil com-
panies (Schneider, 1983). The Tripoli agreement in 1971,
IOPEC comprises Algeria, Gabon, Indonesia, lran, lraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and
Venezuela. Ecuador withdrew its membership in 1992 and indications
are that Gabon may withdraw soon.
which came about by Libya's ability to exploit the weak
position of the independent producer, was the first step
in the break down of the vertical organization of the oil
industry. During OPEC's most successful years its con-
trol over the industry represented a significant degree of
horizontal concentration. Oil market conditions during
the 1980s and 1990s, however, led some OPEC mem-
bers to consider vertical organization as a means of en-
hancing their market positions. This paper argues that
those members with a vertically organized industry
structure will have different goals from other members
of OPEC and these differences will contribute to the
weakness of the cartel.
Historically the oil industry provides classic textbook
examples of monopolistic, oligopolistic and competitive
market structures as well that of an effectively operating
cartel. The production level and ultimate price charged
for oil has depended, along with other factors, on the
market structure prevailing at any given time. While
many analysts focus on reserves, production capacity
and expected demand when forecasting future oil market

Energy PolicT 1995 Volume 23 Number 10 871

The oil mdust O, and OPEC: K L Abdalla
trends, recent changes in the market structure of the in-
dustry may also have an impact on production and prices
well into the 21 st century.
Throughout the history of the oil industry, political
developments have influenced its structure. The Sherman
Anti-trust Law passed in 1890 was partially a result of
public indignation of John D Rockefeller's control over
the US oil industry at the time. It was used to break up
the integrated Standard Oil Company early in the 20th
century. More recently, Iraq's invasion of Kuwait was,
among other things, an attempt by Iraq to gain greater
control over world reserves and thus supply. A greater
horizontal concentration of the oil industry would have
resulted if lraq had been successful. The political and
military intervention on the part of the international
community prevented further concentration of the in-
dustry as effectively as the US Justice Department did
almost a century earlier.
By 1990, there were other less visible trends which
would ultimately affect market concentration. A change
in the ownership patterns in the refining and distribution
processes had been under way, as the entire downstream
side of the industry had been restructured. Companies
were consolidated and unprofitable concerns, especially
refineries, were closed throughout the 1980s. A more
cooperative atmosphere between oil producers and com-
panies in major consuming countries was emerging as
companies began securing reserves all over the world.
At the same time major oil producing countries were
purchasing downstream facilities in oil importing coun-
tries. A 'verticalization' of the industry was quietly
occurring as upstream and downstream sectors of the
industry became more integrated.
While political events in the Gulf may have inter-
rupted this trend temporarily, indications are that the
restructuring of the oil industry is continuing. This
paper examines the trend toward a greater degree of con-
centration in the industry during the 1980s and 1990s
and suggests that the emerging market structure, not-
ably the trend toward vertical concentration, may have
a long-term impact on OPEC's production decisions and
prices.
Background of the structure of the oil
market
While the history of the international oil industry is well
known, it is relevant here to very briefly review trends
post-World War 2 related to market structure develop-
ment. Immediately after the war, a number of Western
companies actively sought to develop reserves outside
their own boundaries continuing a process which had
begun before the war (Yergin, 1991 ; Sampson, 1975). Seven
major firms, which had come to dominate the industry,
872 Energy Polio, 1995 Volume 23 Number 10
secured large concessions in countries with proven or
potential oil reserves. The control over world supply and
distribution by the Seven Sisters, as they came to be
known, became a classic case of a highly concentrated,
oligopolistic market structure in a vertically organized
industry. 2
The 1960s and early 1970s saw the dissolution of the
control of the Seven Sisters over the production of oil.
OPEC was founded in 1960 but, during the 1960s, con-
tinued to compete for market share. In the meantime
many countries nationalized their oil assets or found
other means to take control over their reserves. The
long-term concessions previously granted to the oil
companies were significantly altered or rendered null
and void. This trend gave rise to the establishment of na-
tional or state-owned oil companies in the 1960s and
1970s which were basically owned and controlled by the
countries themselves. The vertical organization of the oil
industry was broken and the major international oil com-
panies became purchasers of oil produced by the na-
tional oil companies in the producing countries. The
private oil companies, though, still owned downstream
operations, refineries and marketing facilities, in major
oil consuming countries.
This significant change in oil industry structure, how-
ever, did not result in a greater degree of competitive-
ness. OPEC began operating as an effective cartel in
the early 1970s when its members successfully imple-
mented production quotas which resulted in higher
prices. OPEC virtually controlled prices throughout the
1970s and became a classic example of a working cartel.
Although vertical integration had been effectively weak-
ened, the oil industry remained highly concentrated. The
short-run demand and supply were both inelastic with
respect to price, allowing OPEC to maintain control over
prices using production quotas in the short run. OPEC
met other conditions of a successful short-term cartel
including concentration of production, few available
substitutes and substantial cost differences among
producers (Eckbo, 1975).
Necessary conditions for a longer lasting agreement
were not satisfied and eventually the cartel functioned
less efficiently. The high prices affected consumption
and production patterns. Though it took some time for
a number of reasons, consumers eventually undertook
measures both to conserve oil and to substitute other en-
ergy products for oil where possible. In addition, the
high prices encouraged the development of high cost oil
reserves in non-OPEC countries which had not been
2The Seven Sisters were Standard Oil Company of New Jersey (now
Exxon), Royal Dutch Shell, Mobil, Texaco, Anglo-Iranian Oil Com-
pany (now British Petroleum), Standard Oil Company of California
(now Chevron) and Gulf Oil Corporation (acquired by Chevron in
1984).

economically fcasible as well as provided an inccntivc
to engage in costly exploration activities. As a result,
demand was somewhat curbed and supply grcatly in-
creased in the long run. Significant oil reserves were
discovered and developed in many areas of thc world in-
cluding Alaska, the North Sea, Egypt and Yemen. Con-
ditions for a longer lasting cartel, including a lack of or
a minimum level of government involvement, a formal
production or profit sharing agreement and a tight con-
trol of distribution channcls, were not met (Eckbo, 1975).
The sharp decline in oil prices in 1986 was a result
of the slowdown in demand and the increase in world
supplies. Oil production by non-OPEC countries in-
creased from 27 million barrels/day (b/d) in 1973 to
41.5 million b/d in 1986. Prices, which had been rising
continuously from 1974 began falling in 1982. In 1986
average prices fell sharply to US$13/barrel from the
previous year's average of almost US$28/barrel. Dur-
ing the summer months of 1986 the price ofoil fell to
below $10/barrel.
Effects o f lower prices on market structure
d u r i n g the 1980s
Between 1986 and 1990, after the sharp fall in oil prices,
cooperation among OPEC members declined. Saudi
Arabia, which had acted as a swing producer to en-
sure restricted supply and continued higher prices, aban-
doned that role. It was difficult to satisfy all members
and occasionally quotas were arranged without consen-
sus. OPEC members also began cheating on their quotas
by producing at higher than agreed upon levels. A pris-
oner's dilemma situation developed. As prices fell, there
was more incentive for an individual country to produce
more which, as every country realized this and acted
alone, caused prices to fall again. Lower, rather than
higher, revenues were thus accrued)
During this time calls for dialogues between pro-
ducers and consumers were often made. Not only were
prices lower, they varied considerably from month to
month which caused uncertainties both in oil producing
countries and oil consuming countries. 4 Investment deci-
sions in the oil industry itself were difficult since the
long-run rate of return was difficult to determine. Since
the price ofoil affects the cost of every good transported,
fluctuating prices also caused uncertainty in major in-
dustrial countries. Though such a dialogue never oc-
3This was the situation in 1990 immediately prior to Iraq's invasion of
Kuwait. lraq was producing according to its quota which was approx-
imately equal to its production capacity. Iraq's complaint that oil prices
were too low stemmed from its need for higher prices to maximize rev-
enues after the costly Iran Iraq war.
41n 1989, for example, oil prices (Arabian light, netback prices) ranged
from US$14.50/barrel to over US$20/barrel. Price variations were also
considerable weekly and even on a daily basis.
The oil indusoy and OPEC. K L Abdalla
Table I Access to refinery facilities in other countries of selected
oil producing countries (thousand barrels/day)
Country 1983 1987
Kuwait 0 133
Libya 105 105
Saudi Arabia 0 8~6
United Arab Emirates 0 346
Venezuela 294 1355
Source: Williams ( 1988, p 15)
curred in any formal sense, other measures were under-
taken to promote price stability. Both longer term supply
contracts and netback pricing had the potential of tying
oil prices to product markets more directly, yet neither
strategy was successful in promoting stable oil prices
in the short run. The introduction of the futures market
for oil, however, did lend some stability to oil prices by
allowing buyers and sellers to 'lock into' a price at any
given time and by providing information about expecta-
tions of future prices.
Lower oil prices caused some OPEC countries to
reassess their investment strategies and purchase down-
stream facilities in major consuming countries (Martin,
1989). This trend had the same potential as a successful
consumer-producer dialogue by matching their interests
in a structural way. While investments in refineries had
been made earlier in their home countries, during the
1980s some OPEC countries began purchasing refin-
eries abroad. This trend was part of a general worldwide
restructuring of the oil refining industry and was noticed
and regularly reported on in trade journals and news-
letters. The long-term effects of this aspect of industry re-
structuring were also noted and some viewed the trend
as stabilizing (Constantino, 1990; Akacem, 1987; Fhadar,
1987). Perhaps the most publicized acquisition was
Kuwait's purchase of over 20% of the stock of British
Petroleum. 5 Tables 1 and 2 show the access to refining
and marketing facilities by OPEC members in major oil
consuming countries during the 1980s.
While it is difficult to quantify the extent of 'vertical-
ization' of the industry resulting from these purchases,
a more direct access to consumers was being forged by
certain producers. The purchase arrangements varied
from country to country were often complicated finan-
cially and usually for partial ownership. Kuwait, for in-
stance, preferred 100% ownership of facilities while
other countries became partial owners with agreements
to supply crude oil. Certainly a return to the 1950s, where
a few firms controlled all aspects of oil production,
refining and marketing was not imminent. Yet direct
access to consumers was seen as an advantage by some
oil officials from oil producing countries (Sheikh
Ahmed Zaki Yamai cited in Constantino, 1990; H E
Hisham Nazer cited in Middle East Economic Survey,
Energy Policy 1995 Volume 23 Number lO 873
The oil indus#.'v and OPEC: K L Abdalla

Table 2 Acquisitions of major oil producing countries of downstream facilities in consuming countries
Country/year Acquisition
Kuwait/1983 Two refineries in Rotterdam and Denmark with capacities of 135 000 b/d and 750000 b/d respectively. Acquired
1575 service stations in Benelux countries and Scandinavia
Kuwait/1984 1500 service stations in Italy
Kuwait/1986 82 service stations in the UK
Kuwait/1987 35 service stations and the right to supply 430 dealer-owned outlets in the UK
Kuwait/1987 53 service stations in the UK
Kuwait/1987 389 service stations and other marketing and distribution facilities in Denmark
Kuwait/1987 47% share (controlling interest) in a refining and fertilizer company in Spain
Kuwait/1988 21.6% share in BP reduced to 9.9% in 1989
Libya/1986 Majority holding in an Tamoil ltlaiana SpA with a refinery of 100000 b/d and gasoline and fuel-oil marketing op-
erations
Libya/ 1990 Purchased Gatoil Suisse with over 300 petrol stations, a terminal and a refinery in Switzerland
Libya/1993 80% of a German company (HEM) with 400 petrol stations
Saudi Arabia/1988 50% share in three Texaco refineries with a total capacity of 615 000 b/d and I 1 450 petrol stations in the USA
Saudi Arabia/1991 35% share of a Ssangyong, a South Korean company company with over 250 000 b/d refinery capacity
Saudi Arabia/1993 Purchase of refinery and 860 petrol stations in the Philippines from Petron
UAE/1987 10% share in Total of France
UAE/1988 10% share of CEPSA of Spain
UAE/1994 20% share of an Austrian lima with petrol stations in Europe and two refineries
Venezuela/1983-88 Various purchases of refining and marketing facilities in the USA, Germany, Sweden, Belgium, England and the
Caribbean
Venezuela/1989 50% share in 153 000 b/d refinery in the USA
Venezuela/1990 Purchase of Citgo in the USA

Sources: Gulf International Bank ( 1989); Ghadar ( 1987 ); Petroleum Economist ( 1989); Petroleum Intelligence Weekly (various issues).

14 November 1988). This trend was coupled with an ef-
fort by international oil companies to secure a more di-
rect access to oil supplies.
The purchase of downstream facilities during the
1980s was limited to those producing countries with
large financial reserves. Kuwait, Saudi Arabia, the
United Arab Emirates and Venezuela were able to make
significant purchases in consuming countries as indi-
cated in the tables. Since refining adds to the value of
crude oil it is seen as advantageous for state-owned com-
panies to invest in downstream facilities. One study
notes that in 1990 average refining and marketing mar-
gins were US$13.61/barrel (excluding taxes) and that,
by investing in downstream facilities, oil producers had
the potential to increase the return on each barrel of oil
by as much as two thirds (Verleger, 1994, pp 170-173).
Investing in downstream facilities also would allow
state-owned companies a greater degree of flexibility in
marketing their oil and leave them in an especially
strong position during periods of ample supply or weak-
ened demand. During these times they would have
secure outlets for their oil and be in a position to make
less of a profit in the upstream sector since profits could
be garnered in the downstream sector. This was some-
what similar to the strategy of the fully integrated Seven
Sisters during the 1950s, though they had much more
control over total supply. Such downstream investments
were most probably undertaken as strategic moves with
benefits beyond simple short-term profitability, such
as the capture of market share and improvements to full
margins (Treat, 1991). At the same time, estimates indic-
ated that their rates of return were lower than could have
been attained in other non-oil investments, indicating
that goals other than short-term profits were factors in
such purchases (Wood-Collins and Ait-Laousine, 1988).
Countries lacking the financial capability to pur-
chase downstream facilities would have been in a much
weaker position in the event of an abundant world sup-
ply or declining demand. At the very least, they would
have been forced to accept lower prices. This group in-
cluded lran and Iraq, whose financial resources had been
depleted during their eight-year war, as well as Algeria,
Indonesia and Nigeria. Perhaps the most interesting
example in this group is lraq. The late 1980s found lraq
expanding production capacity by improving oil trans-
port facilities and consequently increasing output. Its
output increased more or less continuously from the
end of the Iran-lraq war in 1988 until the United Na-
tions sanctions were imposed in 1990. Output increased
from an average of slightly over 2 million b/d during
1987 to 3.4 million b/d in July 1990. During this time
lraq worked, within OPEC as well as on a bilateral
basis with its neighbours, to encourage other oil pro-
ducers to limit production in an effort to increase Iraqi
oil revenues. However, other major oil producers also
increased their output causing prices to fall. Iraq found
its oil revenues much lower than expected due to falling
prices.
Iraq's problematic financial position was partly due
to the debt incurred during its prolonged conflict with
Iran which was estimated at US$80 billion (Abdalla,
1991). While Iraq faced difficulties in raising needed

874 Energ), Poficy 1995 Volume 23 Number I0


revenues in the short run, it also found itself unable to
participate in long-run investments aimed at integrat-
ing its state-owned oil company with the purchase of
downstream assets. Virtually no purchases were made
at a time when many other OPEC producers were un-
dertaking such investments. If the trend towards a more
integrated oil industry were to continue, Iraq would find
itself as part of the fringe producer group. Without direct
access to marketing facilities it would be part of the
group with less influence in the market. In other words,
Iraq and other oil producers without downstream assets
would be under greatcr pressure to accept lower prices
in times of ample supply or weakened demand.
Substantial purchases of downstream facilities by
some members of OPEC could eventually result in di-
verging goals of member countries, OPEC had operated
successfully as a cartel when each member country had
similar incentives and goals. Its problems during the
1980s not only resulted from outside competition and
lower prices but a change in the objectives of some of
its members. Saudi Arabia, in particular, changed from
maximizing price to maximizing output or market share
as its main objective. Once some of the OPEC members
become vertically integrated their interests and goals
will no longer be the same and a further, perhaps more
damaging, split to the cartel could occur.
Oil market structure in the 1990s
The 1990s began with the invasion of Kuwait and the
subsequent political and military intervention of the in-
ternational community. In terms of the market structure
o f the oil industry, the overall long-term effect was
minimal. However, as noted earlier, if Iraq had been
successful there would have been greater horizontal
concentration since Iraq would have had control over
Kuwait's reserves as well as its own. Its ownership of
the downstream facilities, though, was more in doubt
from the beginning. Kuwait was able to supply its con-
sumers with purchases on the spot market and kept con-
trol over its downstream assets throughout the period
1990-9 I. The ultimate effect, after military intervention,
was no change in horizontal organization and a mere
slowdown of the process of vertical integration of the in-
ternational oil industry.
The Gulf war interrupted the trend toward vertical in-
tegration by draining the financial reserves of the two
countries most able to afford expensive downstream
purchases and active in this endeavour, namely Saudi
Arabia and Kuwait. Substantial financial reserves
garnered during the late 1970s and early 1980s were
essentially used to pay for the military intervention.
Both countries have incurred budget deficits and have
borrowed on the international financial markets to cover
The oil indusoy and OPEC." K L Abdalla
public spending. Kuwait's expenses for the military in-
tervention, extinguishing oil fires and immediate recon-
struction amounted to US$23 billion. Kuwait borrowed
US$5.5 billion from external sources to help pay these
expenses. Saudi Arabia's external debt reached US$18.5
billion in 1991 due to war-related expenses.
Despite these financial setbacks, both countries have
remained interested in downstream investments. Saudi
Arabia, however, is in a better position to make pur-
chases and acquired 35% of a Korean refining company
with 300 000 b/d capacity in 1992. Saudi Arabia also ex-
pressed interest in other downstream operations and in
1993 purchased a refinery and 860 petrol stations in the
Philippines. Officials have identified vertical integration
as a major aim and are considering a major purchase in
Japan. Kuwait, while under greater financial strain, still
expresses interest in the downstream sector and officials
consider selling oil on the futures market as a financing
option (statement by Kuwait Oil Minister Homoud A.
al-Rqobah quoted in Petroleum Intelligence Weekly, 22
June 1992, p 4). Kuwait has also indicated a readiness
to purchase partial shares rather than acquiring 100%
ownership as in the past and officials have indicated an
interest in the Asian downstream market (according to
Nader Sultan, Deputy Chairman and Managing Director
of Kuwait Petroleum Company as quoted in Middle East
Economic Survey, 26 September 1994, pp A5-A7). In
fact, Kuwait hopes to add 400 000 b/d to its total refin-
ing capacity though joint ventures in Asia.
Other notable downstream purchases by OPEC mem-
bers in the 1990s, so far, have been made by Libya,
Venezuela and the United Arab Emirates, indicating that
the trend toward a greater degree of vertical integration
in the oil industry is continuing. Libya has made sub-
stantial purchases in Germany, the Netherlands and
Switzerland and is reportedly considering possibilities
in Eastern Europe. It was able to distribute 213 000 b/d
through its own organizations in Europe in 1992. Libya's
ownership of downstream assets has been, in part, cred-
ited with its recent success in avoiding a politically mo-
tivated oil boycott by consuming countries. Venezuela
has also made substantial downstream purchases
recently including the 1990 purchase of the American
firm, Citgo. By 1991 Venezuela's overseas refining
capacity had reached 1.5 million b/d. In 1994 the United
Arab Emirates announced the purchase of 20% of an
Austrian firm with petrol stations in Austria and neigh-
bouring countries and two refineries for approximately
US$450 million. The United Arab Emirates will be able
to market 60 000 b/d of crude oil directly under the
arrangement.
Other oil producing countries with state owned firms
such as Norway and Mexico, have also invested in down-
stream facilities outside their home countries. Norway
Energy Policy 1995 Volume 23 Number tO 875
 The oil indusoy and OPEC." K L Ahdalla
purchased 260 service stations in Ireland in 1992 and is
considering downstream investments in Eastern Europe.
Mexico's state owned firm recently purchased a 50%
share in a US refining company with over 200 000 b/d
capacity.
Along with state-owned oil companies purchas-
ing downstream facilities, the early 1990s witnessed a
continuation of the trend of oil companies purchasing
upstream assets. This is another aspect of the process
of vertical integration in the oil industry and includes
equity production arrangements in oil producing coun-
tries, Oil producing countries which had spurned oil
company participation during the 1970s and 1980s are
now more amenable to such arrangements. For instance
Ente Nazionale Idrocarburi (ENI) of Italy has equity pro-
duction arrangements in 11 countries including OPEC
members Libya and Nigeria as well as Egypt and
Norway. Such arrangements provided it with almost
500 000 b/d of crude oil in 1990. Even Kuwait, which
had insisted on full control over production, is discus-
sing the possibility of equity production arrangements in
border areas.
One of the most interesting developments, though
subject to political approval, has been in the state owned
oil company of Venezuela, Petroleos de Venezuela. Along
with purchasing downstream facilities in consuming
areas, it has offered equity production arrangements to
foreign firms and now has downstream capacity approx-
imately equal to its upstream capacity, and thus is now
essentially an integrated international finn. Libya is an-
other country which allows equity production arrange-
ments and, as mentioned above, has considerable down-
stream assets.
Though not as binding as legal ownership of assets,
long-term contracts also forge ties between producers
and consumers. The 1980s witnessed an attempt to rely
on long-term contracts and other innovative contractual
arrangements to a varying degree. The beginning of the
1990s, however, saw the implementation of'frame' con-
tracts which commit the seller but not the buyer. The
seller, however, has the right to set the price. This type
of flexible, non-binding arrangement cannot be con-
sidered a contributing factor to the trend of increasing
vertical integration in the international oil industry.
Impact of vertical organization on prices
and market conditions
The market structure of the oil industry has had an im-
pact on prices and market conditions throughout the his-
tory of the industry. Economic models used to analyse
and forecast oil prices and market conditions are con-
tinually updated and modified to account for changing
OPEC behaviour and oil market conditions (Hammoudeh
876 Energy Policy 1995 Volume 23 Number IO
and Madan, 1992; MacFadyen, 1993; Young, 1994). Most
models, though, have not explicitly considered the effects
of recent changes in structure of the industry.
Although an exact, quantitative measure of the grow-
ing concentration of the international oil industry is dif-
ficult to establish, a definite trend toward the vertical
integration of the international oil industry has been
noted in the 1980s and early 1990s. This has resulted
mainly from purchases of downstream refining and mar-
keting assets in consuming areas by state owned oil
companies, although a higher incidence of equity pro-
duction agreements has provided oil companies with
upstream assets as well. This change in the structure of
the international oil industry may have an impact on
supply decisions, and thus prices, well into the 21st
century.
It is difficult to predict the effects of such purchases
on competiveness in any given market; they are likely to
vary depending on the downstream market itself. Ver-
leger notes that downstream purchases by state owned
oil companies may benefit consumers by increasing
competition, though this will be more likely if the pur-
chase is in the nature of assets in a small or medium
sized concern rather than in the largest facility in an area
(Verleger, 1994). Purchase of the largest company in a
downstream market may decrease the degree of competi-
tion. Verleger's assessment of recent acquisitions, such
as Aramco's (Saudi Arabia) purchase of Texaco's re-
fineries in the USA and Kuwait's purchase of refineries
in northern Europe, resulted in either the prevention of a
decrease in the degree of competition or an increase in
competition in the market area.
At the level of the upstream producer, specifically
OPEC members, a greater degree of vertical integration
has the potential to further divide oil producers into
splinter groups. During the early 1980s OPEC and non-
OPEC producers undertook different measures in their
efforts to maximize oil revenues. As prices fell in the lat-
ter part of the decade, some countries within OPEC
changed their strategies and the effectiveness of the
cartel decreased substantially. The vertical integration,
even on a partial basis, of some oil producing state
owned firms has the potential to cause a further diver-
gence of goals and strategies of oil producers as a
whole. The group fortunate enough to own downstream
assets in consuming countries will be better able to
withstand temporary periods of lower prices and thus
be less likely to cooperate to limit supply. If this trend
continues, the oil industry could be characterized by a
group of vertically integrated companies, including oil
companies in consuming countries and state owned oil
companies in producing countries, and a group of other
oil producers. The integrated companies may have a
substantial influence on oil market conditions while the

other producers will, in times of decreasing demand or
ample supply, be in a weaker position and be more likely
to accept lower prices sooner in order to facilitate the
sale ofoil. A two-tiered pricing system could develop.
Conclusion
Supply decisions and prices in the latter half of the
1990s and into the 21 st century will be affected, not only
by the degree of cooperation among all oil producers, but
also by the degree of cooperation within each group. If
the vertically integrated oil companies eventually co-
ordinate their output decisions, even in an informal
manner, the market structure will tend to be closer to that
of an oligopoly with a few major firms dominating the
industry and a secondary group of producers acting as
price takers. In this case, those producers in the sec-
ondary group will find their positions weaker at any
given time. This trend will be tempered by the depletion
of mature reserves throughout the world leading to a
more concentrated supply of reserves. However, given
the divergence in interests and goals between these two
groups, and along with other geopolitical and economic
factors, OPEC will be unlikely to regain its status as an
effective cartel. Even if OPEC's overall market share in-
creases in the future, the different goals of the integrated
group and the non-integrated group suggests that pro-
ducers will be unlikely to cooperate as before.
Although beyond the scope of this paper, an analysis
of demand is also needed for forecasting future oil prices
and market conditions. World energy demand is ex-
pected to continue to grow well into the 21 st century but
the oil industry will be faced with greater competition
from non-oil energy sources. Thus, while the trend
within the oil industry may be moving toward greater
concentration, the overall energy market will be more
competitive. However, the integrated oil companies will
be in a better position to cope with such competition
underscoring the potential for a divergence of interests
between integrated companies and other state-owned
The oil indusoy and OPEC." K L Abdalla
companies and further divisions split within OPEC in
the coming decade.
Acknowledgements
The views expressed here are those of the author and do
not necessarily reflect those of the United Nations. The
author benefited from discussions with Mahmoud Saleh
and Mundhir Abdul Salam and from the comments of an
anonymous referee.
References
Abdalla, N ( 1991 ) Impact q["the Gull' Crisis on Developing Countries
United Nations Development Programme, New York
Akacem, M (I 987) 'The future of the organization of the petroleum ex-
porting countries' Journal o[Energy and Development 13 ( 1) 123-139
Constantino, C (1990) 'International oil market new directions' Nat-
ural Resources Forum 12 (4) 280~285
Eckbo, P L (1976) The Future o[ World Oil Ballinger, Cambridge, MA
Ghadar, F (1987) "The impact of the new OPEC downstream operations
on oil industry structure' Natural Resources Forum I 1 (2) 179-188
Gulf International Bank (1989) Gull'Economie and Financial Report 4 (8)
Hammoudeh, S and Madan, V (1992) 'The dynamic stability of OPEC's
oil price mechanism' Energy Economics 14 ( 1) 65 7 I
MacFadyen, A J (1993) "OPEC and cheating: revisiting the kinked
demand curve' Energy Policy 21 (8) 858 867
Martin, J (1989) 'From the erosion of crude oil prices to reorganiza-
tion of the oil industry' Natural Resoutz'es Forum 13 (2) 149-159
Middle East Economic Survey (various issues)
Oil and Gas Journal (various issues)
Petroleum Economist (1989) December, 384
Petroleum Economist (various issues)
Petroleum Intelligence Weekly (various issuesl
Sampson, A (1975) The Seven Sisters: The Great Oil Companies and
the World They Shaped Viking Press, New York
Schneider, S A (1983) The Oil Price Revolution Johns Hopkins Uni-
versity Press, Baltimore, MD
Treat, J ( 1991 ) 'Vertical integration: a flashing yellow light' Petroleum
Intelligence Weekly 2 December, 6
Verleger, P K (1994) Ad/usting to Volatile Energy Prices Institute for
International Economics, Washington, DC
Williams, R (I 988) 'OPEC ventures downstream: industry threat or
stability aid'?' Oil and Gas Journal 16 May, 15
Wood-Collins, J and Ait-Laousine, N (1988) 'Downstream integra-
tion: myths and realities' Petroleum Intelligence Weekly 3 October,
Special Supplement
Yergin, D (1991) The Prize." The Epic Quest.lbr Oil. Money and
Power Simon and Schuster, New York
Energy Policy 1995 Volume 23 Number 10 8"]7