How an amoral agreement by oil bosses, signed at a Highland castle 100 years ago, still shapes our world
I Nthe 1920s, the oil had to flow and it had to flow profitably. If such mere things as governments, laws and even royalty were getting in the way of that, then they had to be subverted. Arrangements had to be made. And what better way of arranging things than over a quiet weekend of hunting, shooting and fishing on a remote Scottish country estate, where the wine and whisky would flow and where no one could possibly overhear how the diners were changing the balance of power in the world by creating a secret cartel that would become the forerunner of OPEC.
In 1927, oil companies were becoming more powerful than governments. Politicians in the major powers understood just how important this black gold was to their nations. During the First World War, Britain and France had literally drawn a line with a pencil on a map to carve up the oil-rich territories of the former Ottoman Empire.
In 1920, Britain gained control of further territory in the Middle East with its mandates over Palestine and Iraq. Governments were bribed by financial and military guarantees and territories with vast oil resources hidden underground were purchased from the unsuspecting landowners at knockdown prices. Soon, companies like Shell, Esso and Anglo Persian Oil Company (APOC) were so powerful they could set the rules for every aspect of oil production, including its export and price.
However, the arbitrary divisions of territory and shady business dealings were causing a backlash. In 1925, Reza Shah, the former Prime Minister of Iran, deposed Ahmad Shah Qajar and founded the Pahlavi monarchy. The new king was outraged at plummeting royalties from the companies exploiting his oilfields, particularly Anglo Persian (APOC). Tensions were also running high in Mexico where a clause in the
Mexican Constitution stated that the subsoil belonged to the Mexican State, not to the people who owned the property above it.
This posed a direct threat to the oil companies and created a deepening rift between the Mexican and American governments.
By 1928, political tension was seething in the oil-producing nations. There was a real fear that rising economic and political nationalism would threaten future ownership of oil resources. In such an unsettled market, competition between the big players was fierce. Cut-throat rivalries developed in the 1920s as executives used price cuts and buy-outs to gather crucial market share and bargaining power.
To oil executives at the very highest level there was a clear need to steady the oftensavage market and to insulate the oil companies from any sort of political or governmental intervention. The only problem with such an arrangement was that it would be illegal in almost every way.
In this febrile atmosphere, Sir John Cadman, Chairman of APOC, rented Achnacarry Castle, a remote Scottish country house near the south-western end of the Great Glen. He then invited his three biggest rivals to stay. His invitation to the Highlands was accepted by Dutchman Henri Deterding, head of Shell and by Walter Teagle, head of Standard Oil also known as
ESSO (S.O.) The other American at Achnacarry was William Larimer Mellon of Gulf Oil, called ‘W.L.’ by his friends. The quartet of oil executives were known as the ‘Four Horsemen’.
The four oil executives had arrived at Achnacarry Castle on the late afternoon of Friday 24 August 1928. Over the course of the weekend, the oil executives were entertained to some spectacular country sport. The stag season runs from July to October and the Achnacarry gamekeeper and stalker took the four men across the hills on the Saturday, stalking red deer.
On the Sunday, the four oilmen were invited to fly fish for brown trout and pike on nearby Loch Arkaig. Intensive discussions continued throughout the day on Monday 27 and Tuesday August 28, when the four men were taken on a ‘walked up’ grouse shoot, trekking across the open hills and moors to flush out the grouse. William Mellon urged his colleagues to exercise caution. He told them: “What we are trying to do is to control or fix prices, markets and production. We all
know that this is in direct breach of current anti-trust laws and is therefore illegal. I suggest that whatever we agree today, it should remain a closely guarded secret. I would also suggest that none of us append our signatures to the final document. This must remain a ‘gentleman’s agreement’ between the four of us here today.”
The oilmen drew up a list of conditions that effectively set out the terms and conditions of what became known as the ‘As-is Agreement’, becoming the operational rules of the cartel that would govern the oil industry. As well as quotas, the oil companies agreed to drive down costs, share facilities and coordinate the construction of new refineries and other necessary infrastructure.
Some months after the Achnacarry Agreement was adopted, the companies also agreed to control production, thus basically setting up a global cartel that could fix prices by manipulating output. Over the next five years the price of East Texas crude would be ruthlessly cut from 98 cents a barrel to only 10 cents a barrel, forcing many wildcatters
and smaller oil companies out of business. Those that clung on were forced to sign up to strict production quotas that have remained in place until today. This was possibly the most amoral agreement ever drawn up by a group of industrialists.
The Achnacarry Agreement was so secret that it was unknown even to the governments of the key participants. News of the agreement only leaked out in the 1950s, by which time the ‘Four Horsemen’ had been joined by three other major oil companies, with the new cartel nicknamed ‘The Seven Sisters’, involving Standard Oil of New Jersey (Esso), Royal Dutch Shell (Anglo-dutch), Anglo-persian (APOC), Standard Oil Co. of New York (Sacony), Chevron, Gulf and Texaco.
Together, the Seven Sisters ruled the oil world. Few could have imagined that a highly secretive meeting in a remote Highland castle, involving the world’s four leading oil executives, would lead to the creation of an illegal cartel, the profound ramifications of which affect the industry to this day.
The oilmen drew up a list of conditions that became the operational rules of the cartel that would govern the oil industry