- Historic Sites
The Tyranny Of Oil
HOW AND WHY THE UNITED STATES GOT INVOLVED IN THE MIDDLE EAST
December 1976 | Volume 28, Issue 1
Within this system set up under the indispensable nuclear umbrella of Washington’s Cold War power, the big oil companies held down profits on the refining and marketing ends of their business so that the reconstructed consumer countries of western Europe, and later Japan, found prices attractive and bought more oil year after year. The companies’ secret was the phenomenally low cost of producing the Middle East oil. Not until decades later did it come out that Aramco’s cost of production in the huge Ghawar field in Saudi Arabia was no more than five cents a barrel; in Iran costs ran perhaps twice as high—ten cents a barrel. Fully automated from derrick to dock, this system enabled the American partners who managed it to do extremely well. In the fifteen years after the opening of the Tapline, U.S. oil interests took more wealth out of the Middle East than the British took out of their entire empire in the nineteenth century. So huge was the cash flow, for that matter, that the British, through their Shell and BP partnership in the system, probably did so too.
Aggressively behind this system was the cooperative State Department-oil-company policy, which safeguarded it through all the rebellions, assassinations, and wars in the Middle East. This cooperative policy was always premised, as a 1975 report by the Senate Subcommittee on Multinational Corporations pointed out, upon two basic assumptions: that the companies were instruments of United States foreign policy and that the interests of the companies were essentially identical with the national interest of the United States. The second of these assumptions was flawed, as the nation was later to learn. But the cooperative policy gave the United States two strings to its bow in the Middle East—or leeway to operate on two levels of diplomacy, one public and one private.
This was especially true in dealing with the problem of Israel and the Arabs. Thus if Congress at the President’s urging voted public aid to Israel, the President at the State Department’s behest topped it with unpublic support for Ibn Saud. So it was when Israel came into existence in May, 1948. At that time Harry Truman, the President who did more than any other to build America’s huge stake in Middle East oil, rushed to make the United States the first country to recognize Israel—just eleven minutes after it was born. This move was in response to domestic political pressures that the President felt were valid. But in plumping so ostentatiously for Israel, Truman did not go back on the Arabs—far from it. From that time forth the United States simply backed Israel publicly at the United Nations while supporting the Arabs unpublicly through oil-company diplomacy. This schizophrenic conduct contributed to the state of mind that drove Defense Secretary Forrestal to suicide in 1949, and twenty-five years later brought us all to oil starvation in the 1973 Middle East blowup.
Such two-level diplomacy enabled Ralph Bunche to negotiate the United Nations truce that confirmed Israel’s first territorial foothold while the United States agreed to pay Ibn Saud a hefty rental for its air-force base at Dhahran in Saudi Arabia. And when in 1949 the king asked for still more money, the sequel was the most explicit application yet of the cooperative policy of the State Department and the oil companies.
The plan, devised by Secretary Acheson’s aides in the National Security Council staff, upped aid to Ibn Saud’s income enormously but so unpublicly that it was all but invisible in the U.S.A. The State Department arranged to have Saudi Arabia adopt a corporation tax law. Lawyers from Wall Street were sent in to draft it—and to make sure that the law conformed with the tax-credit provisions of the U.S. Internal Revenue code. Next Aramco renegotiated the royalties payable to the king, greatly increasing them; but in the new contracts most of the royalties were reclassified as taxes. Then, on the unassailable proposition that double taxation of earnings was inherently unfair, the U.S. Treasury ruled that the oil companies would not be required to pay U.S corporate income taxes on their Saudi revenues, having already paid such taxes to the Saudi Arabian government.
By this neat trick Aramco, which in 1949 had paid U.S. taxes of $50 million, turned over only f 6 million to the U.S. Treasury in 1950. Instead, in 1950, Aramco paid exactly $44 million more than it had in 1949 to Ibn Saud’s coffers. It was a clear transfer of $44 million in American aid to the king, and the Saudi monarchy was confirmed in its anti-Communism. Not until a quarter of a century later, when the Senate Subcommittee on Multinational Corporations published the details, did it come out that the National Security Council had ordered the arrangement, for “national security” reasons.