The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

While world oil demand was growing during the 1950s, production capacity was growing still more rapidly. Always in search of higher revenues, the exporting countries, for the most part, sought to gain them by increasing the volume sold, rather than by raising prices. More oil was in search of markets than there were markets for oil. As a result, the companies were forced to offer bigger and bigger discounts on the prices at which they in turn sold their Middle Eastern oil. Discounting was leading to a crucial divergence in the world oil industry between the “posted” or official price, which was held constant, and the actual market price at which crude was sold, which was dropping. It was the former, the posted price, against which the producing country’s “take”—taxes and royalties—was computed. The posted price was supposed to more or less match the market price, and originally, it had. But, as discounting spread, a gap between the two had appeared and expanded. The posted price could not easily be lowered because of its importance to the revenues of the producing countries. That meant that they continued to take 50 percent of the profits based upon the posted price. But by the late 1950s, that was a fictional price, existing only as a basis for calculating revenues. In fact, the producing countries were taking a higher percentage—perhaps 60 or 70 percent—of the profit realized from the actual price. In other words, the Middle Eastern governments were being kept whole, whi...