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The Optimal Bundle: Volume 77

THE RED LINE AGREEMENT: SHAPING THE GLOBAL ECONOMY

In the records of economic history, only a few agreements have had an impact like that of the Red Line Agreement in the Global Economy. The Red Line Agreement was an oil agreement that was secretly signed by five major oil companies: Anglo-Persian Oil Company (now BP), Royal Dutch Shell, Compagnie Française des Petrolés (later Total), Northeast Development Corporation, and Standard Oil of New Jersey (Esso). The purpose of the oil companies coming together and forming a pact was to establish control over the Middle Eastern Oil Resources. With the foundation of this collaboration and their roots extending to the geopolitical and market world, the Red Line Agreement created a huge impact on the course of Economic history.

The terms of the agreement included factors that would enable the companies to cooperate on exploration, production, and marketing efforts within a defined zone known as the Red Line Zone. The zone included large parts of Iraq, Syria, and Turkey. By partitioning territories and delineating exclusive zones of operation, signatory companies established a virtual monopoly over oil exploration, production, and distribution. This gave the power to the companies to handle oil prices, manipulate market dynamics, and wield substantial control over global energy markets. With combined efforts the companies would either establish or disrupt oil supplies, exerting immense sway over economic fortunes of nations worldwide.

HISTORY

The real question surrounding the agreement is the reason for its establishment. Why or how did the five big companies suddenly decide to come out of the blue and decide to sign a paper for taking control over the Middle East oil resources. This dates back all the way to World War I where oil was one of the vital resources for modern warfare, fueling ships, land vehicles, and planes. The attacks by Germans disrupted the cycle of exportation of US oil resources to countries like Britain and France that were facing severe oil shortages during this time. When US made the move to join war allied against Germany in 1917, the Wilson Administration puts efforts to supply oil to Britain and France. The US production was unable to meet such large oil requirements from both the countries at the same time and thus decided to import oil from Mexico to meet the scarcity and gap. During the US war effort, Mexican imports average between 2.5 million barrels and 4 million barrels of oil per month, supplementing US production of about 30 million barrels per month.

However, it was later discovered and estimated in 1919 by the US Geological Survey that the oil supplies will soon run out in 10 years, and this triggered the first oil security fears. Though the United States produces roughly around one million barrels of oil per day, or 65 percent of global oil supplies, more than 90 percent is consumed domestically. By 1920 crude prices increased to $3 per barrel, which was more than double the price in 1914. Measuring the poor conditions, Congress took the step of passing the Mineral Leasing Act of 1920 which required leasing of federal lands for energy prospecting for the first time.

As a response to France and Britain’s decision to cut off US oil companies out of their Middle East protectorates, the law included a provision which denied any access to US mineral rights by any foreign entities whose government deny similar access to US companies. Thus, the US oil companies started pursuing concessions in Latin America. Following the British and French attempts to shut US oil companies, out of region they control in Middle East, the US government began active oil diplomacy, insisting on an “open door” policy that would allow all companies to compete for foreign concessions regardless of national origins. But the doctrine failed to take hold. Instead, a consortium of seven oil companies showed financial interest in the Iraq Petroleum Company, and the companies agreed to not independently develop oil in an area that expands from Turkey to Iraq and Saudi Arabia, but excluded Egypt, Iran, and Kuwait. This 1928, “Red Line Agreement” with its “self-denial” clause, allowed seven companies, five of which were US based companies to control the bulk of Middle East oil production by the early 1930s.

THE ONSET OF RED LINE AGREEMENTS

With all the chaos surrounding the banning of US oil companies from their regions of control in Middle East by the French and British, US Government started devising policies also known as the “open door” policy that allowed all companies to compete for foreign concessions regardless of national origins. But the doctrine had a fallout and a consortium of seven oil companies received a financial offer from Iraq Petroleum Oil Company, following which the companies came to a decision of not investing in the development of oil independently in area expanding from Turkey to Iraq and Saudi Arabia but excluding Egypt, Iran, and Kuwait. Thus the “Red Line Agreement” was signed in 1928 which allowed the seven companies, five of which were American to take control of bulk oil production in Mideast by the early 1930s.

READING THE LINES OF THE AGREEMENT

According to the Red Line Agreement, the companies were given the permit to collaborate on exploration, drilling, and distribution activities in certain territories within the Middle East region. Before the actual signing of the agreement in March 1914, the TPC partners met at foreign office and came to a common agreement that the collaboration would be extended not only to the oil-rich Ottoman provinces of Mosul and Baghdad, but also to the entire Ottoman empire of Asia. In 1914, several parts of the empire had declared independence or fallen under the control of neighboring powers which was total chaos till the owner of the remaining 5% of TPC, Calouste, Gulbenkian intervened.

In 1927, an article, “Political Science Quarterly” referring to Gulbenkian as the “Tarryland of Oil” was released and this led to the high diplomacy placement of Red Line Agreement. The 1928 Red Line Agreement embodied Gulbenkian’s personal claim to 5% of Middle East oil, a claim which he later invested in a firm. Thus, Red Line was an interpretation of the earlier 1914 Foreign Office Agreement wherein the TPC partners were not just shaping the future of Middle East but also conferring to its past.

THE FALLOUT OF THE AGREEMENT

The Red Line Deal created a petroleum regime which governed the development of Middle East Oil for the next two decades. By the terms of the contract, the four major international oil companies, Anglo-Persian, Shell, Jersey Standard and Socony, plus a small French company called Compagnie Française des Pétroles undertook to do all the business in the region exclusively through single instrument, Iraq Petroleum Company as their consortium was renamed in 1929. During the 1930s an issue occurred when there was an intrusion of non-member firms who challenged the Consortium’s “would-be” monopoly in Middle East. The most serious of the challenges was mounted by Standard Oil of California (Socal). In 1928, Socal acquired concession to Bahrain Island and struck oil there at the end of May 1932.

During the next three years, the Red Line Cartel reacted to Socal’s threatening Bridgehead in two ways. First the Cartel sought to box Socal in by obtaining new concessions throughout the Middle East and vesting them in Petroleum Concessions Ltd., which was an autonomous company created by Red Line Partners. Second from1934 to 1936 Jersey Standard, Socony, and Shell tries to find a workable way to buy Socal out of the Middle East. Jersey took the lead in the matter because of its concern about Stanvac, the joint marketing venture it had set up in Socony in 1933. Consequently this California company could only make a market for its Bahrain output by cutting prices in the existing markets that Stanvac had been created to service. The prospect of this price war affected shell because it too possessed a large Asian market. With no marketing network east of Suez, the small French company didn’t pay much heed to the potential threat posed by Socal in Bahrain.

On the other hand, CFP was legally a full partner in the Cartel and wanted to be part of the overall solution which may lead to an opportunity to acquire 23.75% share of Socal’s concessions. In late June of 1934, majors approached CFP in the hope of getting the French company’s assent to a redrawing of the Red Line. However, when one of the majors employed patronizing “horse-trading” tactics which disappointed the CFP officers as they were always offended due to their lower status than Cartel, they refused to touch Red Line and allowed majors only a limited negotiating brief. By the late fall of 1934, the first round of negotiation with Socal ended up in a deadlock. Jersey, Socony, and Shell resumed talks with CFP in the summer of 1935 to persuade the French Company to reconsider its refusal to revise the Red Line.  However, the outcomes of the negotiations were pretty disappointing, and this led to the permanent fallout of the Red Line Agreement which could have been revolutionary.

CONCLUSION

Thus it can be claimed that Red Line Agreement even though couldn’t bear the fruit it wanted was indeed a revolutionary initiative towards oil and the global economy based on it. It stood as a testament to the transformative powers of the strategic alliances and market monopolies. The agreement did in fact brought together the world economies leaving an indelible impact on the human history. As nation grapples with the imperatives of energy transition and economic sustainability, the lesson of Red Line Agreement serves as a stark reminder of the enduring interplay between power, profit, and progress in the pursuit of prosperity.

 

A DEEP DIVE INTO THE JOB MARKET CHALLENGES of 2024

The year 2024 has been marked by a significant increase in layoffs, earning the title "the year of layoffs." According to a report from executive coaching firm Challenger, Gray & Christmas, U.S. companies announced over 82,300 job cuts in January 2024 alone, representing a staggering 136% increase from December 2023. This trend has been widespread among major corporations, with thousands of employees being laid off, and it shows no signs of abating. This essay delves into the factors behind this wave of layoffs, identifying the key reasons that have made 2024 one of the most challenging years for job seekers.

During the Covid-19 pandemic, many companies were compelled to reduce their workforce due to decreased demand. However, as economies reopened, pent-up consumer demand led to a surge in spending, catching many companies off guard and leaving them understaffed. To meet this demand, companies intensified their hiring efforts and offered attractive benefits to attract workers. This surge in hiring was reflected in the JOLTS data, which reported a record 76.4 million hires in 2022, while layoffs hit a record low of 16.8 million. This period also witnessed a record number of people voluntarily quitting their jobs, reaching 50.5 million, signaling high employee confidence in finding new opportunities. Factors contributing to this trend included an increase in job postings, rising wages, and accommodative monetary policy with lowinterest rates. However, as interest rates began to rise, demand cooled, leading to a decrease in companies' revenue. This, coupled with the financial strain of fulfilling the benefits and wage promises made during the hiring boom, has prompted some companies to resort to layoffs as a cost-cutting measure.

As interest rates increase, companies are grappling with higher costs and lower revenue. Failure to meet revenue expectations could result in a drop in stock prices. To appease investors, companies must cut costs. This trend began with Meta's "year of efficiency" in 2023, during which they halted their annual headcount growth of 20%- 30% due to negative revenue growth in 2022. After numerous layoffs, Meta reduced its headcount by 22% and claimed improved execution. This efficiency drive continued, leading to a 21% increase in Meta's stock after reporting a 25% revenue jump in Q4 of 2024. Following Meta's lead, other tech giants like Google, Amazon, and Microsoft also laid off thousands of employees in response to positive Wall Street reactions.

Google, owned by Alphabet, announced layoffs of hundreds of workers from its ad sales team, coinciding with increased investments in AI. Although Google did not explicitly attribute the layoffs to AI, in a memo to employees, Philipp Schindler, Google's chief business officer, mentioned the "profound moment we're in with AI" when announcing the cuts. Microsoft is also focusing heavily on AI, investing billions in OpenAI, the creator of ChatGPT, while reducing its workforce. This approach of cutting jobs while investing in AI is seen as an easy cost-saving measure for companies. However, According to Peter Cappelli, professor of management and director of the Center for Human Resources at the University of Pennsylvania’s Wharton School, this wave of layoffs is driven more by investor pressure to reduce costs rather than economic necessity. Despite investor perceptions, Cappelli believes that these layoffs will not benefit the companies in the long run.

According to The Times (Semuels, A., 2023, June 14), finding a job is becoming increasingly difficult as companies take longer to hire candidates. Some companies have disbanded their recruiting teams and are using current employees, including upper-level managers with minimal experience, to conduct hiring processes. This has lengthened the time it takes to hire employees, which averaged 44 days in 2023.

Apart from being cautious of scammers, job seekers must also be wary of legitimate companies that post "ghost jobs." These are job postings made by companies to seek candidates they may hire in the future. It serves two purposes: to motivate their current employees and to indicate that the company is growing. These ghost jobs increase unrest among job seekers who fill out applications only to be rejected within minutes. Claims of diversity and inclusion are also being overlooked in this job market. Minorities and historically underrepresented groups have a 25% higher chance of being ghosted than their white peers.

In conclusion, the surge in layoffs in 2024 can be attributed to a complex interplay of factors, including the aftermath of the COVID-19 pandemic, shifts in consumer demand, and pressures from investors to improve efficiency. While these layoffs may offer short-term cost savings for companies, they also highlight broader challenges in the job market, including issues of job security, diversity, and hiring practices. Addressing these challenges will require a concerted effort from both companies and policymakers to ensure a more equitable and sustainable job market for all.

SOURCES

1. Semuels, A. (2023, June 14). Why looking for a job is getting more miserable. Time. https://time.com/6287012/why-finding-job-is-difficult/

2. Challenger, G. & C. (2024b, March 7). Job cuts announced by US-based companies surge 136% to 82,307 to begin 2024; Financial, tech lead. Challenger, Gray & Christmas, Inc. https://www.challengergray.com/blog/job-cuts-announcedby-us-based-companies-surge-136-to-82307-to-begin-2024-financial-tech-lead/

3. Job openings and Labor turnover - January 2022. (n.d.-a). https://www.bls.gov/news.release/archives/jolts_03092022.pdf

4. Picchi, A. (n.d.). The job market is strong. so why did layoffs double in January?. CBS News. https://www.cbsnews.com/news/layoffs-economy-2024-why-are-job-cutshappening/

5. Josephs, L., & Repko, M. (2024, February 18). Companies - profitable or not - make 2024 the year of cost cuts. CNBC. https://www.cnbc.com/2024/02/18/companies2024-cost-cuts.html

6. Iacurci, G. (2023, February 1). 2022 was the “real year of the great resignation,” says economist. CNBC. https://www.cnbc.com/2023/02/01/why-2022-was-the-realyear-of-the-greatresignation.html#:~:text=About%2050.5%20million%20people%20quit%20their%2 0jobs%20in%202022%2C%20beating,Turnover%20Survey%20data%20issued%20

7. Curry , R. (2023, December 16). Recent data shows AI job losses are rising, but the numbers don’t tell the full story. CNBC. https://www.cnbc.com/2023/12/16/ai-joblosses-are-rising-but-the-numbers-dont-tell-the-full-story.html

8. Cerullo, M. (n.d.). Tech companies are slashing thousands of jobs as they pivot toward ai. CBS News. https://www.cbsnews.com/news/tech-layoffs-artificialintelligence-ai-chatgpt/

9. Williams, K. (2024, January 20). As companies lay off even more workers, they could be making a big mistake in the way they’re doing it. CNBC. https://www.cnbc.com/2024/01/20/as-companies-lay-off-even-more-workersthey-could-be-making-a-mistake.html

10.Sorkin, A. R., Mattu, R., Warner, B., Kessler, S., Merced, M. J. D. L., Hirsch, L., & Livni, E. (2024, January 30). Technology companies are cutting jobs and wall street likes it. The New York Times. https://www.nytimes.com/2024/01/30/business/dealbook/tech-layoffs.html

11.Quiroz-Gutierrez, M. (2024, February 2). Meta stock surges 20% as Mark Zuckerberg’s “year of efficiency” becomes permanent: He plans to “keep things lean” and slow hiring. Yahoo! Finance. https://finance.yahoo.com/news/metastock-surges-20-mark172906281.html