The Tyranny Of Oil

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With this deal, which cost them nothing, the companies announced in 1950 that they would guarantee the king a fifty-fifty profit split on all the crude oil pumped from his soil, a guarantee soon extended to Kuwait and other Persian Gulf sheikdoms. On the strength of these concessions to the Arabs, the United States entered into a 1950 tripartite pact with Britain and France, drastically limiting arms shipments into the Middle East—a move enhancing Israel’s chances of survival. The United States also took a hand in Iran. There the ultranationalist regime of Mohammed Mossadegh had seized British Petroleum’s assets, only to find that the international companies, closing ranks, made it impossible for Iran to find buyers for its nationalized oil. In 1953, when Mossadegh was reported making overtures to the Russians, the CIA, led by Secretary of State Dulles’ brother Alien, intervened to overthrow Mossadegh and restore the shah, who had fled to Europe.

The cooperative State Department-oil-company policy took it from there. State Department officials brought the five big American internationals (Jersey Standard, Socony, Socal, Texaco, and Gulf) into a new consortium shaped to reintroduce Iran’s oil into the world markets without upsetting the international price and allocation system. In the process, of course, the Americans cracked the last bastion of the former British oil monopoly. But the new deal, giving the shah the same tax benefits (and the same fifty-fifty profit split) as the other Persian Gulf oil chieftains, bound Iran to the anti-Communist camp as never before.

That raised America’s petroleum power to its peak in the Middle East and probably enabled the system to survive the disastrous 1956 Anglo-French invasion of Egypt and even Russia’s pro-Arab interventions, which began with the first Soviet-bloc arms sale to Egypt in 1955. The Eisenhower administration helped Israel open its new Red Sea port of Elath, and the oilmen even managed to get along without their Suez pipeline. Before the Egyptians blocked the Suez Canal in the 1956 war, 70 per cent of Europe’s oil had flowed through it. By the time of the 1967 Arab-Israeli war, when the canal was blocked again, the system had so far freed itself from dependence on Suez that most of the Persian Gulf oil was traveling around Africa’s Cape of Good Hope to market. The industry had built 250,000-ton supertankers of such surpassing efficiency that it became cheaper to transport the oil the long way around.

Such dexterous adjustments were all part of the split-level diplomacy that permitted the United States to keep Israel going and the oil flowing at the same time. So well did the system work and so copiously did it provide energy for the ever-growing demands of Europe and Japan that few noticed the flaw that appeared just when the setup was producing the stability and profits its State Department and oil-company managers had hoped for. This was the assumption, accepted with hardly a murmur in the early Cold War years, that the interests of the big oil companies were always identical with those of the nation.

The flaw was exposed in the summer of 1960. At that time world demand for oil fell off, and Exxon cut the posted price of its Persian Gulf crude by fourteen cents a barrel. It was presumably the prudently profit-motivated action of a very big commercial enterprise. But it had painful consequences immediately for Saudi Arabia and eventually for the United States. Under the fifty-fifty deal the posted price of oil determined the revenue the host country could expect, and Saudi Arabia budgeted its expenditures accordingly. The Exxon action caught the Saudi government just as it was embarking on some costly but necessary development projects. At a single stroke the country’s income was slashed by $30 million for the year 1960-61. Outraged, the Saudi king sent his petroleum resources minister to meet oil ministers of other Middle Eastern states and Venezuela in Baghdad. They formed the Organization of Petroleum-Exporting Countries— OPEC .

The formation of OPEC was not taken seriously by the majors. “We were living in sort of a fool’s paradise,” their lawyer, John J. McCloy, said later. They thought their system had met every test. And for the next decade it kept the oil flowing, with new fields in Libya helping to meet the ever-rising demand. As profits rolled in complacency rose and the cooperative State Department-oil-company relationship fell slack. Then came the change. In 1969 the pro-Western king of Libya was overthrown in an army coup. A twenty-seven-year-old colonel and fanatic Arab nationalist, Muammar al-Qaddafi, seized power. He unceremoniously expelled the United States from its big Wheelus air base. Then he demanded an increase in payments for Libya’s oil. The majors, treating him like Mossadegh, offered only trifling changes. Furious, Qaddafi ordered cutbacks in production.