Motioning for Mike to stay seated, Morgan slowly rose, focusing his full attention on his challenger.
“You said they ‘have already met and informed us,’ Jim. Think about what that means. Your choice of words implies that these companies have already met in private—perhaps secretly—to discuss how they plan to control the development of the world’s oil supply. I can’t even begin to count the number of antitrust laws the executives of these companies have already broken by meeting secretly. Are you suggesting we join them in their illegal quest?”
“Morgan, my choice of phrase doesn’t mean a thing, and you know it!” Jim replied.
Smiling at his adversary, Morgan continued. “Knowing that this subject might come up, I asked Jacques Roth to stand by. He’s in the next room. If you don’t mind, I think we should invite him to join us; you may be interested to hear what he has to say.”
The bankers were silent. Morgan left and soon reappeared with Jacques at his side. “To those of you who haven’t had the pleasure of meeting him,” said Morgan, “I would like to introduce Jacques Roth. He is Pierre’s oldest son and the heir to his family’s banking empire.”
Turning toward the revered banker sitting next to him, Morgan asked, “Pierre, is there anything you would like to add?” The older man smiled and shook his head, so Morgan continued. “In case you didn’t know, for the last seven years Jacques has been responsible for Stone City Bank’s international banking operations. Jacques, if you please.”
Jacques confidently looked out over the gathered bankers before he spoke. “Several weeks ago, gentlemen, I was alerted to the possibility that the seven chief executive officers of the Oil Club were scheduled to hold a private meeting. In response, I made arrangements to record the landing of each of their aircraft at the Rocky Mountain Club near Casper, Wyoming.
“Subsequently, I turned my notes over to the FAA. They have obtained access to logs of the seven privately chartered airplanes and have confirmed that the passengers on board those particular aircraft were the Oil Club executives. What I am passing out to you now are copies of the affidavits executed by the local fixed-base operators and the responsible FAA officials that support my contention. Experienced antitrust legal counsel has opined that this information will satisfy the Attorney General’s requirements to authorize a follow-up investigation.”
Jacques took a seat, and Morgan waited for the murmuring of the bankers to quiet down before he spoke again. “I can appreciate why the Oil Club believes such a union would be consistent with their orderly development of new reserves, but have we really stopped to think about what the political and economic consequences could be if ninety percent of the world’s oil supply is controlled by these seven oil companies?”
The room was silent.
“No one is questioning the world’s need for their help and cooperation,” Morgan continued. “That is not in dispute. The question being raised here is what kind of an oil industry do we envision for the future?
“If we don’t stop the Oil Club’s efforts to extend its control of the new supplies today, the day will come when both the oil-producing countries and the oil-consuming nations will wake up to a world that is politically and economically controlled by a handful of corporations. When that time comes, I can assure you that more drastic remedies will be required to undo what they are considering doing today.
“Have we forgotten that the federal government of the United States was forced to break up the monopolistic control of Standard Oil in the early nineteen hundreds? Have we forgotten that our government was forced to stand by and tolerate the shipping of domestic oil to Germany after war had been declared? Have we forgotten the lessons of what can happen when excessive concentrations of wealth and influence are allowed to proceed without the constraints required to protect the public interest? Haven’t we just finished fighting a very costly war to stop the expansion of unbridled greed and ambition?”
McLain interrupted him. “Morgan, I strongly object to your highly inflammatory statements. There are those of us who believe the world is fortunate to have the services of such capable and financially worthy companies, whose resources can be directed to solving the world’s burgeoning demand for oil. These companies are not the villains; they should be regarded as saviors! Our efforts should be directed toward helping them, not opposing them. If you insist on pursuing this course of diversification and new competition, you and your friends could be responsible for creating a permanent split within the ABA. Is that something you really want to do?”
Morgan was quick to respond. “Call it what you want, Jim, but I would like to remind you and the others gathered here today that it’s neither the function nor the responsibility of the ABA to dictate operating policy to any of its member banks. For thirty years, this has always been a forum where reasonable men could gather, identify problems, and, hopefully, seek solutions that allow us—individually and collectively—to better serve the free world’s banking needs.”
Morgan delivered his next line with enough conviction to make many of the bankers seated at the table squirm in their chairs: “It is my hope that someday the ABA will once again become such a responsible forum!”
Chapter 4
A DIFFERENT APPROACH
Incensed by the outcome of the meeting, Morgan retired to the small conference room adjacent to the boardroom. Joining him were four of the original Sentinels: Jacques, Claudine, Mike, and Cecelia Chang. Morgan’s closest ABA friends were sitting around the table—Claudine’s father Henri Demaureux, the respected Swiss banker, Pierre Roth, and Pete Ferrari, Chairman and President of San Francisco’s American West National Bank.
“Make no mistake,” said Morgan, “the big money-center bankers are planning to restrict their lending activities in the petroleum industry to only the seven major oil companies. Unless we can come up with some alternative financing plan, their threat of creating an international financial blockade will be more than capable of restricting any serious competition for a very long time!”
Pierre Roth was the first to respond. “The incremental economics of developing new oil fields clearly favor the existing oil companies. I have it on good authority that the big investment banking houses needed to lead syndicated financings have also come under the influence of the Oil Club. Together, the commercial banks and the investment banks stand a very good chance of accomplishing exactly what they are expected to do.”
“I think there are other things the Oil Club members can do which could be equally difficult to overcome,” added Henri. “The Oil Club will not permit competitors access to or the use of its members’ refineries, pipelines, shipping, or retail distribution outlets. The independent oil company will be required to build one hundred percent of the infrastructure required to process and bring its oil to market. The full costs of vertically integrated capital improvements will have to be absorbed by the newly developed oil production. Conversely, the established oil companies will be able to use their new production to spread their fixed costs over a much larger base.”
“Vertically integrated?” Claudine interrupted.
“Yes, referring to consolidated ownership of the pipelines, refining plants, ships, pumping and storage equipment, and retail distribution facilities necessary to convert crude into the end product that the customer uses at a gas station in his local neighborhood.”
Pete Ferrari was the next to speak. “Regardless of the short-term incremental economics, in the absence of any viable financial alternative, what is there to stop the Oil Club from perpetuating their ninety-percent control over both existing and to-be-developed oil fields? Such extensive control will provide the Oil Club with the unrestricted ability to manage production quotas and prices on a global basis.”
“I’m not so certain that’s necessarily true,” Jacques said. “What you’ve just described might appear to be the case, but only if we look at the capital formation process through conventional eyes. Claudine has been doing her homework, and she t
hinks she’s discovered a way to create an alternate source for funding new oil development.”
Mike couldn’t resist the opportunity to tease his friend. “Whose money are we going to steal this time, Claudine?”
Ignoring the comment, Claudine turned to Morgan. “If I owned an oil field with proven and certifiable production of a million barrels per day, and I needed to install all the remaining facilities required to process and bring my production to market, would your bank lend me the money I would need to do it?”
“Providing that you were prepared to put up your ownership in the oil field as collateral, we would be happy to make you the loan,” said Morgan.
Claudine pursued the subject. “Conceptually, what’s the difference between using deposited gold bullion and using proven oil-generating revenues as collateral?”
“That works well once the productivity of a new oil field has been established,” said Ferrari, “but where does the capital come from to arrive at that point?”
“From private investors willing to accept the development risk once they have the take-out commitment needed to fund all the remaining vertical development costs,” said Claudine.
Morgan asked the obvious question. “And where does the capital to fund those commitments come from? You are talking about billions of dollars!”
Smiling at the formidable banker, Claudine said, “From an international bond fund we’re going to organize.”
“And who is going to raise the fifteen billion dollars required to capitalize such a fund?” Morgan asked.
“We are. Once the domestic and foreign members of the financial community understand the importance of diversifying the oil industry, why can’t we draw upon our relationships with them to secure the needed funds? Morgan, I don’t mean to be disrespectful, but once we start thinking internationally, how do you know there isn’t a sizable market seeking a secure and liquid bond that carries an attractive rate of interest? We know there is a plethora of prewar, pent-up capital needing to be warehoused on an accretive basis until it is needed for some other purpose.”
The diminutive Cecelia Chang rose from her chair to speak. The simple gesture of her standing up was more than adequate to attract everyone’s attention. “Perhaps it might be wise for us to assume there are influential people, outside the United States, who are also threatened by seven oil companies’ control of the world’s oil supply,” said Cecelia. “Given the opportunity to consider an alternative, they might see the value in Claudine’s idea.”
Jacques, who had been listening carefully, said, “Fifteen billion could represent a very high percentage of the total size of the market. Before we try to access that amount of money, we need to make sure we know how to ask and answer the right questions.”
“I agree with Jacques,” said Mike. “For example, when you consider the fact that no single independent oil company is capable of satisfying all the necessary criteria, creating a suitable consortium of motivated and qualified independent oil companies could be one of our biggest challenges.”
“I’m back at square one,” said Cecelia. “Knowing the limitations we are going to face in postwar European economies, and from the Oil Club’s domestic resistance, to have any chance of fulfilling our requirements, we are going to need investors’ maximum commitments. It’s critical we understand what terms and conditions the final agreement needs to reflect. We have to know what we’re doing before we do anything!”
Chapter 5
WALTER MATTHEWS
After the group’s discussion following the ABA meeting had drawn to a close, Morgan Stone suggested that Jacques meet with Walter Matthews, the celebrated New York Times journalist whose column was syndicated in thirty-two newspapers nationwide. Eager to learn more about the oil industry before he and Mike headed to Washington, Jacques had welcomed the suggestion. After driving Claudine to New York Municipal Airport for her flight to London, he made his way back toward Manhattan for his meeting with the reporter.
Jacques and Walter had just seated themselves at one of the smaller tables in the back of P.J. Clarke’s, an after-work gathering place long favored by members of the working press.
“Thank you for agreeing to meet with me, Mr. Matthews,” Jacques said to open the conversation. “I’ve been reading your column ever since I moved to New York eight years ago. Your ideas and your superb way of expressing them make me proud to be living in a country of free speech.”
After the waiter came and took their order for two beers, Walter said, “Ever since I heard you present your doctoral thesis at Berkeley in 1938, supported by the rest of the Sentinels, I’ve been a great fan. You may recall that I was the reporter who wrote the article describing your presentation. I have often thought about how different things might have been had the American, British, and French governments heeded your prediction that the German industrialists were leading the world to war.”
“That’s very kind of you,” said Jacques. “And it is upsetting that so few would listen to us.”
“So, Morgan says you folks are studying the oil industry now,” said Walter. “Perhaps I should warn you, I’m no friend of the Oil Club. For as long as I can remember, I’ve been a longtime student and loyal disciple of Ida Tarbell, the reporter whose work eventually led to the breakup of the Standard Oil monopoly a few decades back. All of which means I don’t trust the motives of the major oil companies. I’m completely convinced that when they argue about the importance of supplying the world with oil, they are using their rhetoric to mask their private agendas of strengthening their own economic and political power.”
“Walter—may I call you Walter?” said Jacques.
“Of course,” he replied. “But most of my friends call me Walt.”
“Well, Walt, maybe I should explain the purpose of my call. You may be interested to know we have recently learned of events that suggest a new power cycle may be forming in the oil industry.”
For the next few minutes, Jacques explained the Sentinels’ concerns and their mission while Walt took notes, interrupting him only to ask for clarification on certain points.
When Jacques was done, Walt spoke. “Coincidently, Jacques, I’ve been hearing some very interesting rumors about recent events in Venezuela. It’s been said that Juan Pablo Perez, Venezuela’s minister of oil, has been quietly building a file to show that the two major oil companies operating in Venezuela—both members of the Oil Club, of course—have been fraudulently manipulating their charges for transporting and refining oil. Should those rumors prove to be accurate, the associated damages over the last five years alone could be enormous. Can you imagine what would happen if fraud can be proven and treble damages were to be imposed?”
“It would obviously be devastating to the oil companies,” said Jacques.
“And that’s not all,” Walt continued. “Venezuela is in the final stages of renegotiating its operating agreement with these two major oil partners. I checked the prevailing agreements. They contain clauses enabling either party to vacate the contract if fraudulent behavior by the other party can be proven. Just imagine the added leverage the Venezuelan government will enjoy over its operating oil partners.”
“The Venezuelan government would have most of the power,” Jacques agreed. “Not to mention how the revelation would affect the other oil companies’ relationships with their operating oil partners.”
“Exactly,” said Walt. “Similar to the situation in Venezuela, the value of sovereign oil reserves in the Middle East and Southeast Asia has dramatically changed since the original contracts were negotiated in the thirties. All these other governments are waiting for Señor Perez to complete his negotiations before initiating a new dialogue of their own. There are no secrets in the oil industry. Everyone is closely watching the events in Venezuela. If Perez’s files contain concrete proof of fraud, they could create the risk of exposure the oil companies will do almost anything to avoid.”
“Well, we don’t really need more evidence to demon
strate precisely why an oligopolistic oil industry dominated by seven companies can’t be allowed to continue, but that certainly would be a compelling reason for sovereign nations to think twice before trusting the major oil companies,” said Jacques.
“Well, there’s still more. Do you know anything about the foreign profits tax provision in the Internal Revenue Service’s tax code?”
“Nope, that’s new to me.”
“During the thirties, our country was awash in domestic oil. When nobody was looking, the oil lobby in Washington introduced a bill that allowed the American oil companies to use the royalties paid on the production of foreign oil to offset taxes due on profits made from transporting, refining, distributing, and selling the same oil in the United States.”
Jacques looked shocked. “Are you suggesting that once the United States becomes dependent on foreign oil, in 1950 or so, the American taxpayer will begin subsidizing the oil companies’ cost of importing petroleum?”
“Exactly. If you don’t believe me, have your accountants research the tax code and obtain a current copy of any of the major oil companies’ annual financial reports. Tell them to pay particular interest to the footnotes. If that’s not enough, have your friends at the Treasury Department check their tax returns.”
Jacques thought hard about what Walt had just told him before asking his next question. “If your research proves to be accurate, what are you planning to do with the information?”
“Not if, Jacques. I’ve already completed most of my research. And though I don’t have enough data to help me calculate the extent of the damages in Venezuela, I do have some indication of what the annual American taxpayers’ subsidy of imported oil could be. My rough calculations still need to be refined, but they indicate that over the next ten years, the annual cost to the American taxpayer could reach approximately five billion dollars. That’s a lot of lost tax revenue.”
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