- Historic Sites
The Tyranny Of Oil
HOW AND WHY THE UNITED STATES GOT INVOLVED IN THE MIDDLE EAST
December 1976 | Volume 28, Issue 1
In October, 1973, Arab states clapped an embargo on oil shipments to the United States. All at once the nation had to go on daylight-saving time, throttle back on the highways, and turn down thermostats. Millions of baffled Americans found themselves lining up, sometimes for hours, at filling-station pumps. Up to that moment Americans had paid little heed to the quarrels of the Middle East. Until the Second World War that part of the globe had been strictly a British problem. Now suddenly the impact of events in the blazing deserts east of the Mediterranean fell hard upon the United States.
It was oil that got us so deeply involved in the Middle East. America’s commitment to Israel, important as the immediate cause of the embargo, was a later development; in the beginning was the oil.
The United States involvement came about through a unique and, in its day, aggressively successful cooperation between the federal government and four or five international oil companies. Born in the First World War, thirty years before Israel came into existence, this cooperative policy sought to get American oil companies into foreign countries that might have oil and, by American control of reserves thus amassed abroad, to promote the national security.
War forged this collaboration. The realization that petroleum was absolutely vital to waging modern war compelled the Wilson administration to set aside its antipathy to the monopolistic character of the United States oil industry. Fearful that the supply of petroleum might run out, the government entered into close cooperation with the industry—at home granting the 1918 depletion allowance and other tax benefits to induce prospectors to seek out new fields; abroad pushing open doors for Standard Oil of New Jersey (now Exxon), SoconyVacuum (Mobil), and other big companies to locate and tap oil to supplement American sources. With State and Commerce Department help, the companies made big discoveries in such Western Hemisphere countries as Venezuela, Peru, Argentina, and Colombia.
In the Middle East, where the British controlled oil and everything else, American interventions had less success. Though President Harding’s Secretary of State, Charles Evans Hughes, whom some called the Secretary for Oil, trumpeted: “This government has stood for the Open Door principle,” the British Foreign Office kept American oil prospectors out of Turkey, Iran, and Iraq. With peace, fears of an oil shortage began to subside. Harding’s Interior Secretary, Albert Fall, went so far as to lease the Navy’s Teapot Dome oil reserve in Wyoming to the oil magnate Harry F. Sinclair (and was later imprisoned for taking Sinclair’s bribe). By the midigao’s the situation was reversed, and there was too much oil for the world’s markets. So great was the glut that in 1928 the biggest petroleum companies, Standard Oil of New Jersey and Socony-Vacuum among them, got together at Achnacarry, Scotland, and secretly set up schedules for “stabilizing” production and prices around the globe. At that time American companies made their first entrance into the Middle East: Jersey Standard and Socony obtained shares in the British-controlled Iraq Petroleum Company, which was just beginning to exploit oil deposits, known since biblical times, along the Tigris and Euphrates rivers.
The price of entrance was joining in the so-called Red Line Agreement. During the negotiations Calouste Gulbenkian, a wily old Armenian who held a 5 per cent share in Iraq Petroleum for his part in landing the original concession from the Turks, took a map of the Middle East and with a red pencil marked a line that approximated the boundary of the old Turkish Empire. Within its limits all the participants, including the two American firms, bound themselves to joint development of all oil discovered. The line encompassed not only Iraq but the whole Arabian Peninsula, with the one small exception of Kuwait, a tiny principality on the Persian Gulf that could be classified as a British protectorate. Iran was also omitted—but Iran’s oil was totally controlled by Anglo-Iranian (British Petroleum), a company in which Winston Churchill had bought a majority interest for the British government in 1914 to assure a supply for the Royal Navy. Altogether the Red Line Agreement assured that Middle East oil would be opened up at the leisurely pace the British desired.
One major United States company that had no part in these arrangements was the Standard Oil Company of California. Even in Rockefeller’s day the California company was the one part of the Standard Oil trust that had its own fields, pipelines, refineries, and marketing facilities; after the trust was split by government action in 1911, it was the successor company least amenable to control by the owners in New York. Its tough, conservative bosses began to look for opportunities abroad on their own. In 1928 “Socal” picked up a concession at Bahrein, a British island in the Persian Gulf, and in 1931 it struck oil there. It was not a big find, and the British finally allowed Socal to incorporate a wholly owned subsidiary in Canada and begin tapping the oil. But the Socal men on Bahrein thought there must be more oil on the western shore of the Persian Gulf, visible across the water twenty miles away.
This was on the Arabian Peninsula, well inside the Red Line oil preserve where members only were supposed to go hunting, and then according to strict club rules. But Socal ignored all that. Besides, the territory in question lay within the new realm of Saudi Arabia, a kingdom established in 1927 by the martial prowess of Ibn Saud. This towering desert warrior had managed to subdue all the warring Bedouin tribes and send Britain’s puppet ruler fleeing from the holy cities of Mecca and Medina. New as it was, Ibn Saud’s remote and thinly peopled kingdom stood out as the one state in the entire Middle East not subject to British control.
Nonetheless, when the British got wind that Ibn Saud was entertaining an American overture for an oil concession, British Petroleum dispatched a mission to Riyadh, the Saudi Arabian capital, to enter a counterproposal. But the directors of the British company did not think there was oil in Saudi Arabia, and their man confided to Harry St. John Philby, a British Arabist and adviser to Ibn Saud, whom Socal had promised to put on its payroll, that their only real concern was to see that the Americans did not get the concession. As it happened, Philby was the person who had convinced the king that he could raise revenues for his new state by selling rights to foreigners to exploit its undeveloped mineral resources. Egged on by Philby, the Americans offered the better deal—some $250,000 in gold for a starter and $25,000 yearly for a sixty-year concession. The bargain was closed in August, 1933.
In the United States the Depression was hitting bottom; and in far-off San Francisco, Socal managers were watching their dollars closely. Short of capital and totally lacking in marketing outlets in the Eastern Hemisphere, they turned to the only other major American oil company not bound by the Red Line Agreement. This was Texaco, which already had its own worldwide sales setup. In 1936 Texaco bought a 50 per cent share in both the Bahrein and the Saudi concessions and thereby became a partner with Socal in the California Arabian Standard Oil Company (soon renamed the Arabian American Oil Company, or Aramco). But development in such out-of-the-way places went slowly. Not until the last day of 1937 did engineers on the Arabian shore make a strike, and not until 1939 was the field—at Dammam, Saudi Arabia—ready for production. King Ibn Saud journeyed across the desert to the tiny new oil town of Dhahran, seven miles from the wells, and his party camped nearby in tents. Fifty sheep were slaughtered for the festive banquet. Ibn Saud went aboard the tanker D. G. Schofield , named for the founder of Socal, and was presented with a Cadillac. Then the king turned a valve on the pipeline, and oil began to flow. He was so pleased that he increased the size of the concession to 444,000 square miles—an area nearly twice as big as Texas. To the American negotiator he said: “Perhaps you would be interested to know why the Arabian American Oil Company received this concession?” “Very much,” said the Aramco man. “Well, I don’t recall seeing many American warships around these waters.”
In the world of 1939 the American breakthrough in the Persian Gulf went all but unnoticed. To newspaper readers in the United States, Bahrein and Dhahran were vague places, and the government in Washington was at the moment paying more attention to the war clouds building up over Europe and the Far East. All negotiations up to that point had been handled by a private company, and there was not a single diplomat at the ceremony marking the historic opening of the Saudi field. Several months passed before Washington accredited the United States minister to Egypt, Bert Fisher, to Saudi Arabia as well. A month after that the Second World War exploded.
The hostilities ended all chances of early development of the Saudi oil discovery. But war also placed the owners of the concession in need of all the diplomatic protection they could get. In October, 1940, Italian planes from Eritrea bombed Bahrein oil installations. Hitler dispatched Rommel across the Mediterranean to drive toward Cairo and Egypt’s oil fields and to threaten the Allied sources of petroleum in Iraq and Iran. In May, 1941, a group of young proGerman officers took over Iraq briefly in a coup, and German parachutists began landing at the Baghdad airfield before the British regained control. In Iran the Allies grew so fearful of a pro-German coup that they staged their own coup, replacing Shah Riza Khan with his young son, the present shah, Mohammed Riza Pahlavi.
Meanwhile the two American partners in Saudi Arabian oil were disturbed about the viability of their Middle East venture. They knew that the perpetually quarrelsome Arabian tribes had been unified only by the sword of Ibn Saud; now his economy was faltering as a result of the loss of oil royalties as well as of revenues from the annual pilgrimages to Mecca, which the war had halted.
When the king turned to Aramco for money in 1940, the concessionaires advanced him $2.9 million on future royalties. The following year he asked for $6 million more. Already many millions in the hole on their investment, the companies sought a subsidy for Ibn Saud from the United States government. James Moffett, a vice president of Socal and a friend of Franklin D. Roosevelt, asked him for a $6-million loan to the king. A direct payment was impossible under the law, Roosevelt said, and his suggestion that the company instead try to sell $6 million worth of oil to the Navy was turned down by Secretary Frank Knox on the ground that the Navy did not need that much oil in that part of the world. When Ibn Saud then directly approached Washington for a $ io-miilion loan, Roosevelt said that in view of their extensive Middle East commitments the British should handle the request. He then had the British divert part of their i94i $4oo-million loan from the U.S. to help Ibn Saud stabilize his finances. The British came through with $5.2 million in 1941, $12 million in 1942, and $16.6 million in 1943.
Socal and Texaco, watching the British control the cash flow to Ibn Saud and picture themselves to the king as his real benefactors, became convinced that the future of their concession was being jeopardized. The oilmen mounted a fresh lobbying campaign in Washington to head off the British threat. After a session with them in June, 1943, Undersecretary of the Navy William C. Bullitt informed Roosevelt that the British, “regarding the concession with covetous eyes,” were trying to “diddle” the Saudis to get it away from the Americans. H. D. Collier and W. S. S. Rodgers, the heads of Socal and Texaco, respectively, insisted that the only answer was for Washington to institute direct lend-lease aid to Saudi Arabia. Rodgers offered to set up a separate oil reserve in Arabia for the United States from which oil would be drawn for military use at discount prices—in return for direct lend-lease for Ibn Saud.
This pressure from Aramco came at a time when the theatres of war were widening and there was fear that oil supplies might run out. The Pentagon had told Petroleum Administrator Harold Ickes in April, 1943, for example, that “the Army Air forces are facing an extremely critical shortage in 100-octane gasoline. …” The State Department favored accepting Rodgers’ proffered reserve of cutrate oil in exchange for making Ibn Saud eligible for lend-lease. Roosevelt, however, after strong urging from Bullitt and Ickes, went much further. In a letter to Secretary of State Edward R. Stettinius he said: “I hereby find that the defense of Saudi Arabia is vital to the defense of the United States”—and authorized Stettinius to extend lend-lease aid to the king. But there was more. The President also ordered formation of the Petroleum Reserves Corporation, recommended by the Joint Chiefs as “a matter of greatest national security urgency,” to acquire 100 per cent of the Arabian concession.
Collier, Rodgers, and the other top executives of Aramco were dismayed. Instead of merely arranging a special petroleum reserve for the government, they were being asked—they were almost being told —to sell their rich Arabian concession to the government at cost. In the words of Herbert Feis of the State Department, “they had gone fishing for a cod and had caught a whale.”
The new corporation was formed June 30, 1943. Ickes became president, the Secretaries of State, War, and Navy its directors. Ickes pressed for 100 per cent control by the United States government. But as talks proceeded, uncertainties about the Middle East fighting that had helped quicken the oil companies’ desire for government participation abated, and they grew stubborn. By late 1943 Rommel had been ejected from Africa, the Allies were storming ashore in Italy, and almost as swiftly as the new corporation had sprung into being, the whole climate of negotiation had changed. Within weeks Ickes’ terms were whittled down by his representatives to asking for a one-third interest; and even that was rejected by Socal and Texaco. Word of these exchanges leaked out, and other oil-industry leaders denounced the whole business. They turned against Ickes as a replica of Josephus Daniels, Wilson’s Secretary of the Navy, who had urged the nationalization of oil production during the First World War for the same reason of national security.
But Ickes could be stubborn too. Top geologists sent by the government to the Persian Gulf reported to him that the “center of gravity” of world oil production was shifting to the Middle East, and Ickes seized upon a navy recommendation that the government build a pipeline to transport the oil across the deserts from the producing fields to the Mediterranean. When he proposed that the Petroleum Reserves Corporation should build a $160-million pipeline for the companies in return for a billion barrels of oil for the armed forces at a 25 per cent discount, it raised a storm. Ickes’ Petroleum Industry War Council, which comprised a hundred top men in the industry, called the pipeline “unnecessary” for victory and demanded an end to PRC. The Independent Petroleum Association, voice of the smaller American producers, said the plan was “fascist”; Oklahoma Senator Edward Moore termed it an “imperialist adventure.” The Truman War Investigations Committee urged a policy stressing private enterprise. In 1944 Roosevelt simply allowed the PRC to go out of existence.
But United States interest and influence in Saudi Arabia intensified. Not only did the first resident United States minister, Colonel William A. Eddy, open a consulate alongside Aramco’s headquarters at Dhahran, but U.S. government-subsidized trucks, bulldozers, and all sorts of oil-field equipment showered on the country. The Department of Commerce granted an export license for Aramco to ship twenty thousand tons of scarce steel. And in 1945, on his way home from the Yalta conference, President Roosevelt stopped off for a personal meeting with King Ibn Saud.
“A boyish … note was in the President’s talk and nod … when it had to do with the Middle East,” said the State Department’s Feis. Roosevelt obviously thought he was stealing a march on Churchill. Not until the last day at Yalta had he told his British friend that he was going to make the visit. The prime minister, “thoroughly nettled” at this casual intrusion into Britain’s Middle East preserve, according to Colonel Eddy, “burned up the wires,” setting up a meeting of his own with the king three days later. Roosevelt welcomed Ibn Saud aboard the cruiser Quincy in the Suez Canal area. The king made the journey from Jidda to the rendezvous as a guest on the destroyer Murphy . A party of forty-eight retainers pitched the royal tent on the warship’s deck and slaughtered about a dozen sheep for the royal table during the voyage. To the President on the Quincy the king brought swords and daggers as gifts, and Roosevelt promised Ibn Saud an airplane. Having himself grown lame, the monarch looked with wonder at Roosevelt’s wheelchair—and was promptly given the Presidential “spare.” The two heads of state talked of United States-Arabian cooperation in the extraction and marketing of Arabian oil. On Palestine, which came up as a likely postwar problem, they ran into difficulties. The Jewish homeland promised by the British in the 1917 Balfour Declaration was still being delayed, though the United States favored it in principle. Roosevelt told the king that as President of the United States he would oppose any hostility to the Arabs, and that the United States government would never take a position on Palestine without full consultation with Arabs as well as Jews. Ibn Saud understood this as a promise binding on the American government and all F.D.R.’s successors. But only a few weeks later Roosevelt was dead.
As Truman moved into the White House significant changes took place in United States policy affecting both oil and the Middle East. First of all, his administration, while continuing to place the greatest importance on developing secure reserves in the Persian Gulf area under American control, decided to do so in what the oil-industry lobby called “the American way.” The management of American-controlled Middle East oil deposits was to be left in private-company hands. This decision ensured that the oil treaty negotiated between the United States and Britain in 1944 for regularizing the changed relationships —the vastly increased American involvement—in Middle East oil control never went into effect. Innocuously general though the pact was, its provisions for setting up an International Petroleum Commission sounded dangerously like government supervision to the industry and to the Senate, which twice refused to vote on it. Such a commission might have come in very handy in the crises of the 1970’s. But because the private sector had its way, the international companies that had formed the world oil cartel at Achnacarry in 1928 were left to resume their prerogative of allocating the world’s oil, for which the Middle East was now the major source of supply.
The second United States policy change affecting oil and the Middle East was much more sweeping. Just when the United States was establishing its dominance in Saudi Arabia, all the country’s difficulties with its war-time Russian ally seemed to be coming to a head, and a grave confrontation with the Soviet Union loomed. Once again the two parent companies that had reckoned to develop the Aramco concession on their own grew fearful about the political future. They were unsure whether the United States under the Truman administration would maintain a strong presence in Europe, much less in the distant Middle East areas beyond the Mediterranean. Great Britain and France still controlled Palestine, Syria, and Lebanon, the states through which their pipelines would run; those powers also controlled the Suez Canal, which their tankers must transit. In Saudi Arabia itself there was always the chance that some morning a less friendly ruler would succeed Ibn Saud. Most of all, now that the Red army occupied much of Europe, the American companies feared a Communist move into the Middle East. Having spurned out-and-out government partnership, they nonetheless felt the need for firm diplomatic support.
They got it. Their Saudi concession bordered the shores of the Persian Gulf—and no official in the U.S. State Department could forget a document that came to light when the German Foreign Office papers were captured in 1945. Soviet Foreign Minister Vyacheslav M. Molotov had written the Germans in November, 1940: The territorial ambitions of the Soviet Union lie south of Soviet territory in the direction of the Persian Gulf and the Indian Ocean.
In fact, Russian forces had moved south to occupy northern Iran during World War n, in a kind of curtain raiser for the Cold War. But early in 1946 the western Allies, led by Secretary of State James Byrnes, provoked the first big postwar showdown debate in the United Nations. On the strength of their still-mobilized war might, and other considerations, they persuaded Stalin to pull his forces out of Iran. Although Byrnes proceeded to sign peace treaties with Bulgaria, Hungary, and Rumania that paved the way for Communist takeovers in those countries—and Standard Oil of New Jersey and other big American oil companies had to give up hope of repossessing Rumanian oil fields and eastern European marketing properties that they had owned since the nineteenth century—American oil interests in the Persian Gulf were comforted.
The United States’ strong diplomatic stand gave Socal and Texaco a chance at last to exploit their rich Saudi concession. For this they needed capital—because now they were going to build the big pipeline to the Mediterranean themselves, as well as a refinery and port installations at Ras Tanura. And they also needed more marketing outlets for the huge pools of oil to be tapped. The new American preponderance in the Middle East, enforced by the cooperative policy of the State Department and the big oil companies, practically dictated where they would turn for help. Jersey Standard and Socony, the old-line American internationals, had plenty of cash. And with their extensive marketing facilities around the globe, they knew all about how to fit the enormous potential of the Persian Gulf into the world production and marketing system. With the State Department’s blessing (and apparent acquiescence from Attorney General Tom Clark, who asked to see all the papers but took no action), Socal and Texaco on March 12, 1947, entered into a half-billion-dollar deal that cut in Standard Oil of New Jersey and Socony as partners in Aramco. Jersey got a 30 per cent slice, and Mobil 10 per cent of what Socal’s chairman accurately described as “the most important and valuable foreign economic interest ever developed by U.S. citizens.”
For Jersey Standard and Socony the deal required breaking the Red Line Agreement, which they had signed in 1928, but the cooperative policy of the State Department and the oil companies took care of that. The British needed a $3.5-billion postwar U.S. loan too badly just then to be stiff about oil arrangements, and Jersey and Socony promised long-term contracts to buy enough British-produced oil from Iraq and Kuwait to ensure that the British partners, British Petroleum and Royal Dutch-Shell, would not be undercut by the Arabian oil. When Gulbenkian and the French partners in the old original Iraq Petroleum combine sued the Americans for breaking the Red Line, they were bought off with bigger allotments of Iraqi oil. Gulf Oil came in, too, as the fifth American giant in the Persian Gulf parlay by reason of its half share in the Kuwait pool.
What emerged by early 1947 was a new balance of Middle East oil power in which the Americans held the upper hand, a new system updating Achnacarry by prorating the output of oil gushing up along the Persian Gulf. The American newcomers—Socal, Texaco, and Gulf, with their vast supplies in Saudi Arabia and Kuwait—were admitted to the system, and the position of the longer established internationals, Jersey Standard and Socony, was consolidated. Altogether the spectacle was very much like that of Victorian colonialists dividing up Africa at a European high table, except that the powers at this table were private oil companies. Hitherto oil from the Western Hemisphere had supplied the needs of western Europe. Now, as soon as the seven big sisters controlling Middle East oil—Jersey Standard, Socony, Socal, Texaco, Gulf, Shell, and British Petroleum—got their fields, pipelines, and tanker traffic organized, they would begin to redirect shipments from Venezuela to North American markets, and Middle East oil would supply Europe and Asia.
The scheme was bold, promising huge profits on the cheap Middle East oil. But to succeed it required a climate of reasonably assured peace and order. Here the friendly State Department-oil-company policy came into play yet more decisively. At the moment that Jersey and Socony moved into Aramco, the United States stepped forth as a superpower to create the desired environment. In the shattered world left by history’s most destructive war, American arms would guarantee the peace; emergency American aid would help reconstruct the order.
On February 24, 1947, Secretary of the Navy (later Secretary of Defense) James Forrestal recorded in his diary that Secretary of State George Marshall had shown him a memo
… informing the United States government that Britain could no longer be the reservoir of financial-military support of Greece and Turkey. … Marshall said … that it was tantamount to British abdication from the Middle East with obvious implications as to their successor . …
Within weeks President Truman called for $400 million emergency aid for Greece and Turkey to keep the Russians from moving into the eastern Mediterranean. Proclaiming the Truman Doctrine, he pledged the United States to resist international Communism everywhere. Thus the first big American move of the Cold War took place in the Middle East—and in short order the Sixth Fleet took station in the eastern Mediterranean and the U.S. Air Force flew into bases in Libya, Turkey, and Saudi Arabia where they could help guard Persian Gulf oil.
But the Truman Doctrine was not enough. Important as the Middle East might be to America’s future, it was of secondary interest compared with the preservation of western Europe, which now appeared weaker and more susceptible to Communist infiltration than Truman and his advisers had supposed. On June 5, 1947, only three months after the Greek-Turkish intervention, the American Secretary of State proposed the Marshall Plan.
The Marshall Plan reinforced the meaning of the Truman Doctrine for the American position in the Middle East. One important purpose of the Truman Doctrine was to enhance opportunities for American exploitation of the Middle East by denying the area to Communism; now the Marshall Plan promised to help the war-weakened economies of western Europe by shipping those countries American commodities and other exports they needed for their reconstruction. Prominent among those commodities was oil. Oil was the link between the Truman Doctrine for the Middle East and the Marshall Plan for Europe.
From the time of the Industrial Revolution coal had been the staple of Europe’s economy. But the Second World War left the Continent prostrate; coal was in calamitously short supply. In the emergency America shipped in quantities from across the Atlantic. Still, plants stood idle for lack of coal, and hunger spread across Europe in late 1947 and early 1948.
The trouble with coal, in the Cold War for which America now girded, was that it was a labor-dominated industry. The Marshall planners, looking for a way to put Europe back on its feet and to hold off the Communists, ran up against the hard fact that most of the miners who had to produce the coal for recovery in Britain and France belonged to Communistled unions. The same situation was feared in the western zones of occupied Germany. From the moment in July of 1947 when the Russians walked out of the Marshall Plan conference, battle was joined. In the coalfields the Communists held an almost unassailable position.
While officials in Europe faced this intractable problem others in Washington talked about ways for opening up the Middle East. Forrestal, who as a Wall Street investment banker had floated many an oil-company stock issue in his day, lunched with the chairman of the Senate Commerce Committee, Republican Owen Brewster of Maine: I said that Middle East oil was going to be necessary. … Brewster said that he had had a long talk with John D. Rockefeller Jr. … Europe in the next ten years may shift from a coal to an oil economy, and therefore whoever sits on the valve of Middle East oil may control the destiny of Europe.
To Forrestal and others concerned that the United States was depleting its home reserves, the Aramco merger had opened the way for Persian Gulf oil to flow under American direction into European markets. The partners in Aramco needed help to buy scarce pipe to complete their line to the Mediterranean. On September a, 1947, W. S. S. Rodgers, the Texaco chairman, told Forrestal: I personally think that [pipe] is worth about five or ten times as much in that line as it is in one of those [domestic American] lines, particularly if we are to go ahead with this Marshall Plan and try to do something in Europe. Because a barrel delivered in the Mediterranean is in a way the same as a barrel delivered here in this sea-board.
Thus the project for the American companies to develop Middle East oil in place of their American oil for marketing in western Europe began to emerge. Some days later Forrestal, having fought off domestic bidders to clinch the pipe for the Middle East line, noted in his diary at a cabinet meeting: I took the position that we should not be shipping a barrel of oil out of the United States to Europe [while] the greatest field of untapped oil in the world is in the Middle East.
The trans-Arabian pipeline, called Tapline, connecting Dhahran with the port of Sidon on the Mediterranean, was triumphantly completed in 1949. Equally important as a link in the emerging system were tankers to haul the oil the rest of the way to Europe. The United States government’s contribution, decided at an emergency cabinet session in mid-1947, was to declare one hundred T2 tankers war surplus and clear them for sale to foreigners as well as U.S. citizens. Most of them found their way into the hands of the major oil companies, but the fast-rising Greek shipowner Aristotle Onassis—under the Truman Doctrine, Greece was a favored ally—bought twenty for the Middle East life line to Europe.
As the parts of the system were being fitted into place Forrestal consulted frequently with industry men about the oil’s destination. One businessman Forrestal saw at that time was Robert McConnell, an industrialist and engineer who had served in various government positions in the war and had just been in Germany. Forrestal’s diary notes: [McConnell] came in to see me with a vigorous expression of the thesis that it would be a basic mistake to reactivate the coal industry of the Ruhr. He said that an oil economy would produce greater efficiency at lower cost (and would have various political advantages).
Never did these profitable efficiencies and political advantages loom larger than in the winter of 1948. Every day the plight of a Europe dependent upon Communist-controlled coal grew worse. In a memorandum to Truman, Forrestal said: Without Middle East oil the European Recovery Program has a very slim chance of success. The U.S. simply cannot supply that continent and meet the increasing demands here.
By contrast with the coal of western Europe, the oil of the Middle East was in abundant supply and flowed to the surface with little labor in the almost uninhabited desert areas bordering the Persian Gulf. It could be piped to tankers in the Gulf or in Mediterranean ports. It could then be shipped over sea-lanes safeguarded by the U.S. Navy and delivered at bargain prices to power plants and factories in Europe. Accordingly, a changeover to oil took on new significance as a way to promote European recovery.
Of course, there were obstacles to be overcome in completing the system. Domestic American oil interests, like all commodity producers, wanted a piece of Marshall Plan business, and for a time some Texas oil produced by independents found its way to Europe. The British wanted to pay for Middle East oil, as they always had, in sterling. But there was not much question in 1948 as to who was calling the tune. Putting up the entire $13 billion for the Marshall Plan, the Americans could and did say where funds would be spent. In the fall of 1949 Jersey Standard completed a huge refinery at Fawley on the Thames and was soon selling Middle East petroleum, for dollars, to the European Cooperation Administration for the British market. In its first two and a half years ECA authorized countries receiving Marshall Plan funds to purchase $384 million worth of oil from the Middle East. When the European Marshall Plan Council programmed a fivefold increase in refinery capacity, the lion’s share of this expansion went to the U.S. companies. Thus all five U.S. majors gained a strong place in every western European market as they helped these countries shift the basis of their economies from coal to oil.
So fundamental a change required far longer to accomplish than the Marshall Plan’s four years. But by the time the Korean War boom turned the plan into a success, Europe’s new energy pattern was established. By 1956 western Europe was dependent on the Middle East for 30 per cent of its energy; by 1970, notwithstanding subsidies everywhere to encourage coal mining, for 60 per cent. Oil, as the political scientist Benjamin Schwadran wrote later, had become “the decisive factor in the recovery of Europe and the backbone of the NATO structure.”
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.
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.
But now Europe and Japan were buying four times more oil than they had when OPEC started, and the world petroleum supply was considerably tighter. Lured by the foreign tax credits devised to help Ibn Saud, not only the majors but numerous other U.S. oil companies had all but abandoned domestic for overseas exploration. In Libya, in contrast with Saudi Arabia and Iran, many concessions had gone to independent companies. Ignoring the majors, Qaddafi zeroed in on the smaller companies, one at a time, and soon brought them, and then the majors, to terms that altered in his favor the fifty-fifty profit split that had prevailed in the Middle East for two decades.
After that the majors saw the hand-writing on the wall, accepted one price rise after another, and began surrendering their exclusive control over oil production in the Middle East. Protecting themselves, they passed on the price boosts to their European and Asian customers. And at the same time another big new factor came into the picture.
Not since the grand international system had been built had the United States ever taken more than 6 per cent of the Middle East’s oil output. Never had the United States drawn upon what Harold Ickes had been pleased to call its “reserves” in Saudi Arabia. Now, however, what Ickes and Forrestal had foreseen thirty years before had happened: with its prodigious appetite America had consumed its petroleum resources faster than it had located new ones, and neither domestic supplies nor imports from nearby Canada or Venezuela could meet its burgeoning demand. The only place where there was oil enough was in the Middle East. And the only place in the Middle East with the spare capacity equal to the large amounts America would need at expected levels of demand was Saudi Arabia.
Now when America for the first time needed Saudi Arabian oil and Aramco proposed to boost output from five to eight million barrels a day to provide it, the subject of American support for Israel came up again. But by this time Saudi Arabia owned 25 per cent of Aramco, and the state-owned Saudi Arabian Oil Company was preparing to buy out the rest. Obviously the time had long passed when Aramco’s payments to the king could be counted as U.S. “aid.” When, to counter huge Soviet arms shipments to Egypt and Syria, the United States sent $1.5 billion worth of arms to Israel in 1971-73, State Department men got nowhere reminding the Saudis that oil-company payments were bigger than that—three times bigger. Without a more “even-handed” American policy, said Ibn Saud’s son King Faisal, there could be no increase in Saudi output. Aramco nevertheless pushed ahead with its expansion. By late 1973 the United States was getting 18 per cent of its oil imports from the Middle East. United States dependence upon Middle East oil had become a reality.
Then the Arab-Israeli war of 1973 exploded, and when Washington air-lifted emergency arms aid to Israel, the Saudis ordered the American companies to enforce an embargo on oil shipments to the United States. The companies, faced with commercial extinction, complied—and thereby defined themselves as multinationals, with interests anything but identical with those of the United States. The United States and the U.S.S.R. rushed to arrange a cease-fire between the Arabs and Israelis, and when that arrangement faltered, the U.S. went to a nuclear alert, the first one since the Cuban missile crisis of 1962. Thereafter OPEC put up the price of Persian Gulf oil to $11.65 a barrel, and while Americans queued at the gas pump the companies obediently enforced the price.
The companies said they had lost their “leverage”; others said they had become mere tax collectors for the new cartel of oil-producing states. Certainly the international system built to save Europe had ceased to exist, though the oil continued, after the political interruptions of 1973-74, to flow through more or less the same channels to more or less the same markets. The United States, now virtually alone in its support of Israel at the United Nations, was receiving some 16 per cent of its imports from Saudi Arabian wells. Whether, for how long, and at what price it would continue to do so, however, was up tc OPEC . Controlling the production OPEC now controlled the system, and Saudi Arabia controlled OPEC .