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Middle Eastern Oil: An Historical Perspective and Outlook
Mercurial Times ^ | 5/25/02 | Sean Finnegan

Posted on 05/26/2003 8:15:58 PM PDT by nunya bidness

It's always been about oil when it comes to the Middle East. From the borders drawn by the British and French after the Great War to the current flare-up in Iraq, the simple fact is that not one drop of western blood would have ever been shed were it not for Persian Gulf crude. However, this does not mean that the United States is unjust in acting or alone in dealing with the petulant behavior of the oil producing countries in the region; it just means that we are the latest country to go back in force to bring stability where other countries have failed, most notably Britain and France. This time the United States will have the opportunity to achieve this stability from within the borders of the founding country of OPEC with the potential to secure oil sources for the entire world. If history is any indication the challenge is risky but the benefit will be worth the effort.

To put the current circumstances in the Middle East into perspective, it is imperative to observe the history of oil discovery and production both domestically and abroad. Many of the lessons learned can be applied to current events with the added benefit of projecting motives of key players in both producing and consuming countries. The alliance of France, Germany, and Russia, in particular, make perfect sense when observed under the constraint of energy trade. And the possible alliance of Iraq with western markets outside of the traditional OPEC structure could prove to be a landmark event that could change the face of Middle Eastern cooperation. Nothing is guaranteed except that the Iraqis will face events that have occurred before and in all likelihood they will behave in a predictable fashion. If the United States wants to capitalize on the first reintroduced major producer it will take skilled diplomacy, cooperation with current foes, and patience with the archaic political structure of the Arabian Peninsula. The fighting may prove to be the easy part but with history as a guide peace and prosperity is achievable.

 

HISTORY

American Made

It all started in Titusville, Pennsylvania on August 27, 1859. "Colonel" Edwin L. Drake, the first "wildcatter", struck oil and transformed the northwestern portion of the state into a boomtown. He was prompted by the efforts of George Bissell, the father of the oil industry, to extract "rock oil" from the ground to serve as an illuminant. The process of refining the oil to a usable flammable liquid was perfected by chemist Benjamin Silliman and the final product became known as

"kerosene". Together their efforts turned night into day and extended working hours beyond what was available with natural light. The second Industrial Revolution began with and was aided by oil discovered and produced in the United States.

John D. Rockefeller exploited the new discovery and founded Standard Oil based on a fledgling refinery business in Cleveland, Ohio in 1865. He was instrumental in developing the modern business model of the industry and in fostering advances in technology and trade. Pipelines were built to bypass the high cost of delivering the wooden barrels (formerly whiskey casks) due to the formidable power of the Teamsters Union. Eventually these pipelines linked the Pennsylvania fields to railroads which sent the oil and kerosene to thirsty markets in the industrial northeast.

Rockefeller meticulously bought and linked all the supply and distribution sectors under one roof. This consolidation made Standard a dominant force and allowed Rockefeller the opportunity to develop price cutting methods to destroy his competition and assimilate smaller companies in short order. It would take until 1911 before Standard was split up by the federal government before the company would face its first real competitor.

The US may have founded the modern oil industry but it was not alone. The Russians had quickly developed their own industry when Baku in the Caucasus region spouted in 1873. As luck would have it Ludwig Nobel, son of a Swedish inventor, was in the area looking for walnut for the stocks of Russian rifles when he decided to invest his money in the embryonic industry by buying a refinery. Together with his brother Ludwig, the Nobels built up Russian production as well as distribution with the first efficient tanker ship to the point that American oil was being challenged for the first time in 1884. The challenge occurred in Europe and the effect was massive growth in the industrialized sectors.

While the Americans and Russians were at the forefront of development, Marcus Samuel, the son of a shell merchant from London, had established an extensive trade business with Far Eastern connections to ship kerosene to the rest of the world. He joined forces with the French Rothschild family and in 1891 he was shipping the illuminant oil from the Caucasus through the Suez Canal to Hong Kong and the Dutch East Indies. At the same time Royal Dutch Oil was exploiting far eastern oil and eventually Samuel's Shell Oil and the Rothschilds joined the company to become the powerhouse known as Royal Dutch/Shell.

Henry Ford's automobile built in 1896 spurred demand unlike any other invention and to meet that demand oil was discovered in Texas when a gusher blew at Spindletop in Beaumont in 1900 followed by California and Oklahoma. American companies popped up with names like Sun, Texaco, and Gulf. Standard gobbled up all the companies it could but was kept out of Texas by the ex-governor James Hogg. As had happened in Pennsylvania, flush production quickly drove prices down and the boom turned to a bust.

19th century progressivism propelled by "muckraking" journalists lowered its aim on Standard Oil following the writing of Ida Tarbell, the daughter of an oil tank maker. She lambasted the cutthroat practices of Standard in a series of articles in McClure's and this lead to public outcry for President Roosevelt, elected with campaign contributions from Standard Oil, to do something. He had the Justice Department sue the company under the Sherman Antitrust Act of 1890 in 1906. Five years later the company would be broken up by the Supreme Court. The dissolution created the following companies that would soon themselves dominate the industry: Standard of New Jersey became Esso

(later Exxon), Standard of New York became Mobil, Standard of California became Chevron, Standard of Ohio became Sohio (later merging with the American arm of BP), Standard of Indiana became Amoco, Continental became Conoco, and Atlantic became ARCO. The dragon was slain and the Seven Sisters were born.

If things were looking bad for Standard they weren't looking much better for Royal Dutch/Shell in Russia. A young man by the name of Joseph Djugashvili was organizing a workers rebellion known as the Bolshevik movement in the Caucasus. He would later change his name to Joseph Stalin and the movement would lead to the Russian Revolution in 1905. That seminal event caused the first major oil disruption and forced the companies to look for oil elsewhere. Elsewhere was the Middle East.

 

The Middle East Emerges

Various exploratory ventures were launched in Persia (later Iran) at the turn of the 20th century. The first concession was formed between Baron Julius de Reuter, founder of the Reuters news agency, and the Persians in 1872 but it was later dissolved due to opposition within Persia and Russia. William Knox D'Arcy, a British capitalist, was the man who made a concession stick when he arrived there in 1901. He was there largely because the British Empire was feeling pressure from the Russians who had been slowly advancing south and in dangerous proximity to the

"Jewel of the Crown"- India.

The first site chosen was at Chiah Surkh amidst the mountains of what is now northeastern Iraq. It struck in 1903 after a year of drilling and constantly challenging supply and political problems. Even then the role of Islam played a part in the process and deference to tribal customs was as confusing as it is now. But the process was not cheap and the British government got into the act through the intermediary of Thomas Boverton Redwood, a member of the Admiralty's Fuel Oil Committee, who brokered the bail-out under the auspices of Burmah Oil, a coveted British source of oil in Rangoon of questionable potential.

The loan for the Persian development fit nicely with the planned future of the British navy. Since the advent of fuel oil the British had been building smaller ships powered by oil rather than coal. The ships were faster and more maneuverable and pointed to an obvious future away from England's most abundant resource. And as any empire would, the British sought a secure and dependable source. The Persian wells were proving reliable and with the new partnership the role of security would fall on the shoulders of the British navy. The formal nature of the partnership was defined by Lord Lansdowne in the House of Lords in 1903 which came to be known as the Lansdowne Declaration:

The British government would "regard the establishment of a naval base or a fortified port in the Persian Gulf by any other power as a very grave menace to British interests, and we should certainly resist it with all the means at our disposal." 1

Thus the fates of many nations were inextricably bound to the oil of the Middle East in what came to be known as the Monroe Doctrine of the British Empire. The name of the concession was the Concession Syndicate but it would grow to become British Petroleum.

In 1906 the Concession Syndicate capped the northern fields and moved the operation south where access was easier and prospects better. In Masjid-i-Suleiman they started to drill but it wasn't long before the Shah was deposed and a new Majlis or Parliament took over. While this was happening the British and the Russians struck a deal to section Persia with the Russians covering the north and the British in the south. But it wasn't until 1908 that oil was actually producing from Persia and not until 1912 that oil flowed through a 138 mile pipeline to a refinery in Abadan on the soon-to-be-contested Shatt-al-Arab

waterway between what would become the border of Iran and Iraq.

The refit of the navy from coal to oil pushed Britain headlong into the emerging conflict with Germany. The first member of the Admiralty to envision the conflict was John Arbuthnot Fisher who saw the growing threat to British naval dominance by the growing German fleet. In the words of one of its admirals Germany's aim was to break "England's world domination so as to lay free the necessary colonial possessions for the central European states who need to expand". The naval race had begun.

Winston Churchill had risen through Parliament to the position of President of the Board of Trade. It was there that he battled Fisher and the navy over its expansion and the threat of Germany which he declared as "all nonsense". He was proven wrong in 1911 when the German gunboat Panther sailed in to the Moroccan port of Agadir and shortly thereafter he threw his considerable weight behind the modernization of the fleet. This was formalized when he was named as the First Lord of the Admiralty, the top post for the Royal Navy.

The transition from coal to oil had already begun but between Churchill and Fisher the effort was intensified. In the years from 1911 to 1914 the entire British fleet was converted, including new construction. The advantage was not only speed and maneuverability but also freed up men from coal shoveling duty to man battle stations. Churchill appraised the commitment to oil when he stated, "To build any large additional number of oil-burning ships meant basing our naval supremacy upon oil. But oil was not found in appreciable quantities in our islands. If we required it we must carry it by sea in peace or war from distant countries. We had, on the other hand, the finest supply of the best steam coal in the world, safe in our mines under our land. To commit the Navy irrevocably to oil was indeed 'to take arms against a sea of troubles.'"

The question of where to buy the oil seemed simple but the complexity of the solution was soon apparent, and the pressure for a source grew when it was revealed in 1912 that the German navy was converting to oil as well. The two companies in contention were: Royal Dutch/Shell, run by Marcus Samuel who had dreamed of an oil-fueled British fleet, and Anglo-Persian, formerly the Concession Syndicate which had been kept afloat by the Admiralty. The debate whittled down to whether the ownership of Royal Dutch/Shell could be susceptible to German pressure and whether Anglo-Persian was able to deliver at the volume needed by the fleet.

The Anglo-Persian refinery in Abadan was visited and despite flagging production the operation was approved. On June 17, 1914, Churchill introduced a historic measure: The British government would buy 51% of the concern and it would place two directors on the company's board. In addition the fleet was granted a 20 year contract for fuel oil. It was stipulated that the government would have no say in the commercial activities of the company but that remained to be seen. The first quasi-nationalized company takeover had occurred and it was a portent of the future.

 

The Great War - Victory On A Wave Of Oil

The Great War broke out in 1914 and from the beginning it was a war fought with machines driven by oil. When Paris was facing the threat of the German advance in September of the same year French General Joseph Gallieni ordered a fleet of taxis to ferry troops to the front. The first motorized column was known as the "Taxi Armada" and it was facilitated with the meters running. Later, the British government developed a way to break the stalemate of trench warfare in 1915 when it rolled out the first tank. The tank would prove to be decisive in battles at Somme, Cambrai, and Amiens.

Aerial warfare was initiated by the Italians against the Turks in 1911 but it was the Brits who improved it when, in 1916, they began aerial bombardment against the Turks and later, in 1918, against the Germans. By the end of the war Britain had produced 55,000 planes; France, 68,000; Italy, 20,000; and Germany, 48,000. By contrast, the naval race which had fostered so much of the enmity of prewar period produced only one major engagement. The Battle of Jutland, in 1916, penned the German fleet to its home bases while the Brits controlled the North Sea.

The most significant events of the Great War took place in the Middle East. In 1914, the Turks led the offensive of the Ottoman Empire against the Brits by threatening the Abadan refinery. The campaign was repulsed and the British extended their defensive buffer to include Basra and eventually Baghdad in 1917. Meanwhile, Anglo-Persian purchased British Petroleum, a distribution network originally owned by Deutsche Bank to sell Romanian oil which was seized by the British government at the outbreak of the war. The purchase was further augmented by development of its own tanker fleet. Anglo-Persian, now BP, would emerge from the war as a major integrated oil company with a big customer in the British navy.

The Germans were not entirely shut out of the war and they countered with the use of diesel powered submarines against British ships moving oil. The plan proved to be a blunder. Standard Oil had lost six tankers shipping oil to Britain in 1917 and the loss added to the growing position of the US government to break its neutrality. Further pressure was added when French Prime Minister Georges Clemenceau informed President Wilson that if the French didn't get gasoline soon it would have to consider seeking peace with the Germans.

In 1918, the Inter-Allied Petroleum Conference of the United States, Britain, France, and Italy forged a solution to the supply situation aided by Standard Oil and Royal Dutch/Shell. The companies and countries would pool their military and petroleum resources under the use of convoys of tankers escorted by naval vessels. The combined effort would prove to be a useful method in future conflicts.

While the Allies were pooling, the Germans were facing a shortage of their own. The naval blockade had kept out virtually all shipments of oil to them. The Germans had been supplied by the Romanians but that ended when Romania declared war against them in 1916. In desperation, the Germans launched an offensive to secure Romanian oil. But they were thwarted by the efforts of British Colonel John Norton-Griffiths when he destroyed the Romanian oil industry. The Germans did capture the fields but they never got production back to the former levels and their military efforts suffered from it.

A similar situation happened in Baku when the Germans pressed to secure Caspian oil. They secured diplomatic access through the Brest-Litovsk Treaty with Russia but the Turks were threatening to seize the fields for themselves. Stalin told the local Bolsheviks to comply with the Germans but he was told, "Neither in victory nor in defeat will we give the German plunderers one drop of oil produced by our labor". The Brits arrived in 1918 and prevented the German capture of the city but the Turks took it shortly thereafter.

The loss of Baku was the final blow for the German offensive. Facing a bleak six-month supply of fuel the Germans surrendered on November 11, 1918. The role of oil in the Great War was expressed by Lord Curzon, a British member of the War Cabinet, when he said to the assembly of the members of the Inter-Allied Petroleum Conference, "One of the most astonishing things was the tremendous army of motor lorries. The Allied cause had floated to victory on a wave of oil."

Days later, French Premier Georges Clemenceau and British Prime Minister David Lloyd George took a drive around London to the cheers of gathered crowds. They discussed how to carve up the spoils of the war. In particular, they discussed parts of Mesopotamia, soon to be named Iraq. The French agreed to trade Mosul in the north for Syria. With that the lines were being drawn in the Middle East in the fading shadows of the Ottoman Empire. The lines were in some cases arbitrary and straight ignoring tribal fiefdoms but in other cases the lines were specific to the future interest in oil exporting. And in the case of TransJordan (later Jordan) and Palestine it was the transiting of oil to the European market via the Mediterranean Sea.

In 1912, the British had consolidated their interests in the region with the advent of British Petroleum but there was a new challenge. The Turkish Petroleum Company

comprised of the German Deutsche Bank (still smarting from having its interest in BP seized) and Royal Dutch/Shell, with a quarter of ownership each, was assembled to compete for Middle Eastern Oil. The other half interest was held by the Turkish National Bank, ironically a British-controlled bank from Turkey. There was another party involved but it wasn't a bank or a concession it was one man known as Mr. Five Percent. His name was Calouste Gulbenkian.

Gulbenkian was a second generation petroleum businessman. He was the son of an Armenian oil man and banker who had made his fortune selling Russian kerosene to the Ottoman Empire. After publishing an influential book on Russian oil in 1891 at the age of 21, Calouste was heralded as an oil expert. His expertise was tapped by officials of the Turkish Sultan to investigate the potential of the Mesopotamian region. Without setting foot there he put together a report that launched the development of Iraq. He was soon thereafter courted by Royal Dutch/Shell and the Turkish Petroleum Company was formed.

In 1914, under pressure from the British government, the Turkish Petroleum Company reshaped its membership. Under the "Foreign Office Agreement" Anglo-Persian was given a 50% share while Deutsche Bank and Royal Dutch/Shell kept their 25% each. In order to give Gulbenkian a vested interest Anglo-Persian and RD/Shell gave up 2.5% each and thus Mr. Five Percent was named. The partners agreed to a critical stipulation called the "self-denying clause" which established that no partner could develop anywhere within the Ottoman Empire individually. All prospects would be handled jointly under the umbrella of the Turkish Petroleum Company with the exception being Egypt, Kuwait, and the "transferred territories" on the Turco-Persian border.

While the Great War was boiling around them the prospecting continued. In a series of agreements the British sought to strengthen their control of the burgeoning Middle East. In the first agreement the Arabs revolted against the Ottomans because the British had promised them, in correspondence (1915-1916) with Husein ibn Ali of Mecca, the independence of their countries after the war. Then the Sykes-Picot Agreement, hammered out by representatives of the British and French government established the spheres of influence which eventually became the Gulf States. The remnants of the Ottoman Empire would be broken up with Palestine, TransJordan, and Iraq under the British Mandate, and Syria and Lebanon

under the French Mandate. This agreement was contentious for the Brits due to the French having been granted control of Mosul, later to be transferred in a car ride in London two years later.

The war proved to the British government the vitality of oil for its empire and to buttress this claim Sir Maurice Hankey, secretary of the War Cabinet, wrote to Foreign Secretary Arthur Balfour that in the case of Persian and Mesopotamian oil, "control of these supplies becomes a first-class British war aim". Balfour would later make the Balfour Declaration in 1917: the immediate purpose was to win for the Allied cause support of Jews and others in the warring nations and in neutral countries such as the United States with the long-range goal of securing Palestine as a strategic point on the land and sea routes to India and, above all, as the terminus at the Mediterranean Sea of pipelines from the rich oil-bearing regions of the Middle East.

French Prime Minister Georges Clemenceau had made a huge gamble in turning over Mosul to the Brits for Syria but he had hedged his bet by making the provision that France would be cut in for a percentage of any oil found there. The agreement quickly started to disintegrate and almost broke out into a fistfight between Clemenceau and Lloyd George during the Paris Peace Conference in 1919. The matter was later resolved at a meeting of the Allied Supreme Council in 1920. It became known as the San Remo Agreement: France would get 25% of Mesopotamian oil, which became a British mandate under the fledgling League of Nations. The vehicle for the exchange was the Turkish Petroleum Company and France was given Germany's share after Britain seized it during the war. The French concern became known as Compagnie Francaise des Petroles (CFP), a private company with two government appointed directors, that would eventually became known as Total. Later, in 1928, the French government acquired 25% of CFP and increased the number of directors, in the words of a French deputy, to become, "the industrial arm of government action".

The British continued to have problems with the duplicity with which it dealt with Anglo-Persian and RD/Shell. On the one hand the government wanted to wrestle control of RD/Shell and increase its stake over the Dutch 60%. And on the other hand Anglo-Persian was still struggling financially and diplomatically as it was treated as a de facto arm of the British government by South American and Iranian officials. Amalgamation was proving to be a touchy subject. Despite a brief tenure as broker for the deal between the three entities in 1923 Winston Churchill failed to secure the merger before he went back into politics.

 

Boom Period and Petro-Colonialism

In America the automobile boom was firmly underway. Between 1914 and 1920 the number of registered cars jumped from 1.8 to 9.2 million. And the effect on demand was appreciable; between 1914 and 1918 it increased 90%. Clearly the concern was depletion of domestic supply and this concern sent the United States to the Persian Gulf. In 1920 the US pressed the British for access by invoking the "Open Door" policy which was largely ignored. The American press responded to the San Remo Agreement by declaring it old-fashioned imperialism and a slap in the face for American intervention in the war. In response to the measure Congress passed the Mineral Leasing Act of 1920 to prevent access to resource rich public lands by foreign interests that denied similar access to Americans.

The newly elected Republican Harding administration made it known, in 1921, that it was supportive to big business in contrast to the previous Wilson administration. In particular, American oil companies would be given the support of the government in their development of foreign sources. The British government capitulated amidst growing noise of an American embargo and general anti-British sentiment from the American people. Upon consultation with the members of the Turkish Petroleum company it was decided that it would be in the company's best interest to include the Americans. The question of the legality of the concession's 1914 agreement for access to Mesopotamia further cemented the decision.

Negotiations began in 1922 under the direction of Walter Teagle of Standard Oil with the blessing of Commerce Secretary Herbert Hoover. The focus of discussion boiled down to cost. Teagle wanted the oil sold to the partners at cost with a royalty being paid to Iraq. The Iraqis wanted a direct share of the earnings and this position was supported by Gulbenkian who had no interest in having his dividend paid in oil - he wanted money. To make matters worse the new nation of Turkey was challenging the border with Iraq. The British government, seeing the fruits of their labor about to crumble, hastily pursued the new Iraqi government to grant a new and formal concession.

Leadership of the nascent Arab states was steered in the direction of the Hussein family in return for their raising an Arab revolt against the Turks. Faisal, the darling of Englishman T.E. Lawrence (Lawrence of Arabia), was installed in Syria but was subsequently deposed when the country changed hands from Britain to France. He was eventually placed in Iraq in 1921 by Winston Churchill as King with his brother Abdullah given dominion over the vacant lot known as TransJordan. That done the Brits had secured the necessary stopover for the imperial air route from the UK to India, Singapore, and Australia and implemented a more cost effective form of colonialism than the traditional hands-on approach.

While Allen Dulles, the chief of the Division of Near Eastern Affairs for the State Department, was pursuing the validity of the 1914 grant from Iraq to the Turkish Petroleum Company, the Iraqi government was struggling with the terms of a new concession appointment. Finally, the Iraqis tabled a deal on March 14, 1925 which was quickly signed by all. The American concern of having an "open door" seemed to have been addressed but it remained to be seen.

It wasn't until after the deal that a geological expedition was dispatched to Iraq to determine if in fact there was oil. Sites were chosen and in 1927 drilling began in Baba Gurgar near Kirkuk in the north. Almost six months later the well struck and the gusher shot 95,000 barrels per day (bpd) for eight days before it was brought under control. The question of "if" had been answered but there was still a lingering issue before the new concession. Gulbenkian had remained adamant that his profits would be in cash and not in oil and he was resisted by Teagle in the matter. This was finally solved on July 31, 1928 when the final version of the agreement was signed.

The new agreement gave Royal Dutch/Shell, Anglo-Persian, the French, and the Near East Development Company (the organization covering the American concern) 23.75% of the oil. Gulbenkian was given his 5% in oil that was to be sold immediately to the French for cash. The last point of the agreement was finalizing the "self-denying" clause which would define the territory that was do be developed by all the parties in cooperation under the Turkish Petroleum Company. Gulbenkian drew a boundary in red pencil around the former Ottoman Empire and thus the "Red Line Agreement" was created. The areas inside the red line included all the future oil producing countries with the exception of Persia and Kuwait.

 

Back To Russia

The 1920s and 30s economies were marked with post-war recovery and the Great Depression but the oil industry ventured further afield. Venezuela and Mexico reinforced their commitment to developing competitive and productive oil industries, but the prospect of nationalization

grew every year that the oil flowed out of the rich fields there. No oil producing countries better defined the absence of restraint than those two. Flush production and rampant spending in the hands of leaders soon drove those countries to the brink of solvency. The companies responded by looking elsewhere. This heralded the return to Russia.

During World War I Russian output was minimal but throughout the Russian Revolution and the Great War the Nobel family clung to their claim in the Caucasus. Despite nationalization of the industry by the Bolsheviks in 1920 the Nobels shopped their concern and the first company to rise was Standard of Jersey or Jersey. For the bargain price of $6.5 million down and $7.5 million later Standard bought one third of Russian output, 40% of refining, and 60% of the internal Russian market. The deal was accepted by the Bolsheviks under the 1921 Anglo-Soviet Trade Agreement signed in London.

The problem in Russia was that with nationalization Standard had just entered into the nebulous world of ownership that the Nobels and Royal Dutch/Shell had been dealing with for some time. Nevertheless investments in technology helped the ailing sector emerge quickly as a net exporter. That the exports were being made with effectively stolen property didn't escape the attention Jersey and RD/Shell. In 1924, they formed a buying company and began exploring a purchasing agreement with the Russians. The agreement fell apart in 1927. The eventual breakdown in the corporate control of oil was a harbinger of things to come, but in the meantime the companies left Russia to strike deals in the Middle East. They never thought the next big thing would be in East Texas.

 

Texas Flood

Columbus "Dad" Joiner, known as the father of the Texas oil flood of the 1930s, was the preeminent wildcatter. With his counterpart Doc Lloyd, a mysterious self-proclaimed geologist, they started drilling without any scientific findings on Daisy Bradford's farm in Rusk County. They struck it rich on October 3, 1930 and the carnival atmosphere descended on East Texas with implications that would affect the oil industry the world over. The field the discovered became known as the Black Giant and its weight of production by 1931 was 500,000 bpd driving prices to new lows.

It wasn't long before the concern for flush production was raised again. This time a new approach was made. The Texas Railroad Commission, the creation of Governor Jim Hogg to assert populist control over the railroads, had become the arbiter between the independent and major producers. Its counterpart in Oklahoma, the Commerce Commission, had the power to regulate production to market demand that the Railroad Commission did not. This obstacle was overcome when the Commission exploited the power it was granted to regulate "physical waste" in production. Despite its progressive view for the future of Texas oil production, the Commission was largely ignored and production soared on a wave of crude.

By August 1931 production in Texas and Oklahoma had driven prices to 15 cents a barrel from $1.85 five years before. The situation was bordering on anarchy as wildcatters drilled with abandon when the governor of Oklahoma declared martial law and had the state militia take over the fields. Texas followed suit and declared that East Texas was in a "state of insurrection" and several thousand National Guard troops and Texas Rangers were sent in deal with the problem. The fields sat idle for almost a year before the price slowly crept up to the magic $1/barrel (bbl) and finally in November of 1932 the Railroad Commission was given the authority to regulate based upon "economic waste" by Governor Sterling.

It didn't help. The quota for East Texas was still too high and the market for unregulated "hot oil" drove the price back down to 10 cents/bbl. The flood continued unabated and calls to the nation's capital were finally answered by the New Deal administration of Franklin Roosevelt. His point man was Harold L. Ickes, Secretary of the Interior, who was also appointed to the post of Oil Administrator and Public Works Administrator. His first act was to deal with the "hot oil" issue. Authority was granted under interpretation of the commerce clause of the Constitution to regulate interstate commerce. Legislation was whipped up and in 1933 Federal investigators lit out to the fields of Texas.

Ickes was given further power under the Oil Code established under the National Industrial Recovery Act to set monthly quotas each state. On September 2, 1933 telegrams were sent to the governors of oil-producing states designating their production quota for the month. The era of flush production had ended with the new era of federal regulation and the rule of capture was abolished. It lasted until January 1935 when the Supreme Court overturned the subsection of the Recovery Act dealing with "hot oil". In June of that year the Supreme Court went further and declared the entire Recovery Act unconstitutional.

A follow-up law called the Connally Hot Oil Act and momentum from the federal intervention carried the states into self-imposed regulation. The federal Bureau of Mines provided "suggested" quotas and, in the case of Texas, the Texas Railroad Commission implemented the quota throughout the various operations. The Interstate Oil Compact established a forum for domestic producers. It was steered away from becoming a de facto cartel by the Texas producers into a more benign clearing house for exchanging information relating to legislation and production conservation.

In 1932, Congress imposed a duty on crude and fuel oil of 21 cents and $1.05 on gasoline. It was supported by domestic producers due to the breathing room they were given when it pushed imports down to 5% of domestic demand from 12% during the 1930s. The tariff also funded the federal government to expand during the Depression which turned around and increased social spending thus creating favorable public opinion. Hardest hit of the importers was Venezuela. 55% of its total production was being imported to the United States. The country responded by taking its resources to the European market and the memory of the tariff would linger there and eventually would give birth to OPEC.

A different form of cooperation had been hatched a few years before with the major companies dividing up the globe and its markets. The "As-Is" agreement was made in 1928 at Achnacarry Castle in Scotland. The unsigned contract allocated a percentage of various markets based on the current share of each company. As demand grew the company could increase its volume but not its percentage share. Price was to be set by the American Gulf Coast crude plus freight. The companies would have to cut costs to improve profits and shorter shipping lines would put sources closer to markets. Finally, production was to be regulated to demand and any overages would be sold to other members rather than the market. It was called the "Pool Association" but it had all the markings of a cartel. It lasted two years before a flood of oil burst out of Texas and elsewhere driving prices down and companies back to each others' throats. "As-Is" limped along in various forms for the following years but the smaller number of cooperating companies and regional growth in demand fractured cohesion until the Second World War officially ended almost all cooperation across Allied and Axis lines.

 

Nationalization

Nationalization and the threat of it spread before the outbreak of war. Shah Reza Pahlavi of Persia seized Anglo-Persian's assets in November 1932. The Shah had consolidated his power by squelching the activities of religious fundamentalists while expanding social programs. Those programs and personal fortune drove the Shah to seek a greater percentage of wealth from the concern during the Great Depression. Eventually, a new agreement was established with Persia getting a fixed royalty regardless of market price: 20% of Anglo-Persian's worldwide profits, and annual cash payments.

Rampant debt, a depressed economy, and rising production costs all moved Mexico to nationalization in the years leading up to 1938. President/General Lazaro Cardenas plucked a section of the Mexican Constitution that gave ownership to the "subsoil" to the Mexican state and moved to seize production from Royal Dutch/Shell, Standard, and others. On March 18, 1938 Cardenas expropriated their assets. The British government embargoed Mexican oil to force the country's hand and secure the vital geographical source while the US was more cautious and a position of neutrality was declared. Both countries watched as Nazi Germany quickly became Mexico's biggest customer. The outbreak of war in 1939 incited the Allies' resolve; they had to keep Mexican oil no matter what from falling into the German's hands. A deal was struck to buy out the companies' assets and a new Mexican state oil company was created: Petroleos Mexicanos (Pemex) but it would not be resolved until after the Second World War. Mexico had established a model of nationalization for the eventual future the world over.

 

Saudi Arabia: An Elephant Rises

Frank Holmes, a New Zealand wanderer, found himself in the Arabian Peninsula in 1920 running a drugstore in Aden but his heart was in oil speculation. His flight of fancy would create the largest oil producing region and earn him the name "Abu Naft" or the "Father of Oil". Moving up to Bahrain in 1925 Holmes pitched the idea of drilling for oil to the Sheik, but the ruler was more interested in water. So Holmes drilled him a well and in exchange he was granted an oil concession. This was added to the other concessions he had secured in what would become Saudi Arabia and the neutral territory between there and Kuwait.

Holmes ran into financial trouble while drilling and shopped his concession around for a partner. He found one in Gulf Oil in 1927. Gulf, founded by the Mellon

family who had gone from bankers to oilmen in Texas during the turn of the century, agreed to help Holmes develop his interest but the prospect ran into a roadblock called the Red Line Agreement. This was sidestepped when Holmes interest in Bahrain was picked up by Standard of California (Socal), not a signatory to the Turkish Petroleum Company, while Gulf pursued Kuwait. But they ran into another wall when the British government pointed to an agreement between itself and the sheikhs of Kuwait and Bahrain that only British concerns would have access there. Two years of deliberations and a growing appreciation by the British government for American capital and military might resulted in the entry of American companies in the Gulf. In 1932, the Bahrain Petroleum Company, the Socal concern, struck oil on the Arabian Peninsula.

The modern state of Saudi Arabia was founded on the unification of various tribal territories by Muhammad bin Saud aided by followers of Muhammad bin Abdul Wahab whose belief was lifted from Sunni Islam and applied with fundamentalist puritanism starting in the 1700s. Numerous clashes with the Ottoman Empire and familial infighting pockmarked the ascension of the Saud dynasty but in 1925 after a series of decisive victories in Mecca and Medina Ibn Saud was declared King of the Hejaz, or holy land of Islam, and by extension the ruler of the Arabian Peninsula. Ever the astute politician, Saud balanced the concerns of the disparate Muslim factions of the Sunnis and Shias, while dealing with the threat of revolt from the Ikwan, or warriors of Wahabism. Despite their key role in securing his kingdom he crushed their rebellion in 1927 and wiped out the Ikhwan movement by 1930. Finally in 1932, the country formerly known as "Kingdom of the Hejaz and Nejd and Its Dependencies" was shortened to Saudi Arabia.

The 1930s depression had affected the Saud dynasty as it had most of the world and as such the king was in need of money. One of his close associates, an Englishman named Harry St. John Bridger Philby or just Jack to his friends, suggested that the king might want to explore the option of developing oil. As was the case in Bahrain, the king was more interested in drilling for water so Philby sent for Charles Crane, an American plumbing tycoon, who after arriving in 1931 spent a year with the aid of Karl Twitchell, an American mining engineer, searching for a viable water source but came up dry. However, several promising oil sites were noted. After Bahrain struck Ibn Saud decided it would be in his country's best interest to join the oil game.

Twitchell was hired by the Saudis to shop the idea around and he was quickly approached by Socal. Lloyd Hamilton, a lawyer for Socal, went to Saudi Arabia in 1933 and met with the king's minister of finance Abdullah Suleiman, but Socal wasn't the only game in town. The Iraq (formerly Turkish) Petroleum Company showed up as well. Jack Philby's favors were courted and eventually secured by Socal; unfortunately, the money he made there paid for his son Kim's schooling that eventually propelled the boy into a career as a Soviet spy.

The Iraq Petroleum Company (IPC)

soon dropped out when the members realized that they had enough oil and problems where they were. Shortly afterwards the king signed a deal with Socal. The agreement provided for $175,000 paid up front in gold with a portion being earmarked as a loan to be paid back from oil royalties. Once oil was discovered another loan of $500,000 in gold would be tendered. The concession would be one of the largest in acreage ever captured and the term would last sixty years. The greatest difficulty proved to be securing that much gold. The US had just gone off the gold standard so Socal had to secure it from Guaranty Trust's London office.

The Amir of Kuwait, Sheikh Ahmad, witnessed the events in Bahrain and Saudi Arabia and decided to get into the game. Kuwait had become a British protectorate during the First World War and it was under this assumption that Anglo-Persian (a member of the IPC), still smarting from the loss of Saudi Arabia, approached the Amir to challenge Gulf's effort. The British government attempted to block the American company by invoking the "British Nationality Clause" but, after pressure from the US state department, relented in the interest of increased stability once again. A deal was struck and a new cooperative was formed: the Kuwait Oil Company representing a 50/50 partnership between Gulf and Anglo-Persian. On December 23, 1934, the sheikh signed the agreement which gave him $179,000 up front and a flat payment of $94,000 a year. Frank Holmes was appointed as Kuwait's representative for the Kuwait Oil Company in London, where he stayed until his death in 1947.

Despite promising geological analysis, Socal was having trouble in Saudi Arabia. Further frustration was added when the Bahrain fields produced crude heavy in sulfur and as such the company couldn't find buyers in the European market where the refineries weren't capable of dealing with the oil. A joint venture was the solution and the other partner was Texaco. Texaco had an extensive downstream market in the Eastern Hemisphere but no fixed source. In 1936, the combination of the two companies became known as Caltex and they delineated their own consolidation as the "Blue Line"

agreement which encapsulated lifting and marketing of oil from Bahrain and Saudi Arabia.

In quick succession oil was struck in Kuwait on February 28, 1938 followed in March by Saudi Arabia. A flurry of offers flew at the Saudis but they stood firm with Caltex and even allowed the co-op to expand its territory to 440,000 square miles. Of course this loyalty came at a price and Socal soon found itself making loans amounting to millions of dollars. But the price was worth it when in April, 1939, King Ibn Saud turned the valve on a pipeline feeding the terminal at Ras Tanura and opened the flow of Saudi oil to a waiting Socal tanker. The celebration would have to wait. World War II shut down virtually all production in the Persian Gulf.

 

World War II: End of American Oil Dominance

World War II was fought against the expansion of Nazi Germany but, as in the First World War, it was fueled by oil. And in that respect key aspects of the war stand out. Rommel's run across Africa was intended to wrap around and meet the German Eastern Front in the Middle East. Once there, oilfields in the Caucasus and the Persian Gulf would secure the Third Reich's dominance. The Germans never made it because they ran out of gas. In the case of the Japanese, they were fighting to secure Far East oilfields but they were also deprived of the precious commodity due in large part to a lack of fuel as well. For the Allies, clockwork cooperation of member countries provided a formidable fuel supply system that drove back the Axis advances, despite logistical support depriving Patton's march across Europe and roving "wolf packs" of German subs in the Atlantic. United States oil companies provided the bulk of the fuel (6 out of 7 billion barrels consumed) for the Allies while facing subs at sea and antitrust charges at home. Indeed, American oil provided an Allied victory but just a few short years after the war in 1948 the US ceased to be a net exporter and faced the future as just another country in a long line of consumer nations as the center of gravity shifted to the Middle East.

In 1943, President Roosevelt authorized Lend-Lease assistance to Saudi Arabia, which was still in financial dire straits. The intention was to tie national security to Middle Eastern oil and further measures were taken by Secretary of the Interior Harold Ickes to acquire actual ownership of foreign reserves through the newly created government entity known as the Petroleum Reserves Corporation. Oil company leaders were summoned to Washington and offers were made to secure the United States government a majority position in the various Middle Eastern concerns. Ickes had good reason to think his deal would stick. He had been given unbridled freedom and authority by the President and was buoyed by his success in participating in the wartime fuel pooling program. But he didn't count on the oil companies to react as strongly as they did. Both independents and majors rose up to decry the nationalization of American corporations and Ickes quickly retreated from his plan. Much in the same way he had in Texas years before.

The United States government would not go into the oil business but that didn't mean that oil was not a matter of strategic concern. Indeed, it was a matter of survival. In 1944, sharp exchanges between Churchill and Roosevelt precipitated agreement between the US and Britain over the exploitation of their respective territories. A formal truce entitled the Anglo-American Petroleum Agreement was crafted which would effectively establish a cartel system of allocation and quotas. The oil companies were approached to facilitate the terms of the agreement but they balked at the potential for being charged under the Sherman Antitrust Act as had happened before in what was known as the "Madison" case. The companies wanted antitrust protection. But before it came the agreement was dropped when Roosevelt left for Yalta in 1945 to secure other pressing post-war agreements.

After Roosevelt died he was replaced by Harry Truman who made his position clear to Harold Ickes when he raised the issue of the Anglo-American Petroleum Agreement that it would not be supported by the President by accepting Ickes resignation. Navy Secretary James Forrestal took up the mantel of the agreement by stating in 1946, "If we ever got into another World War it is quite possible that we would not have access to reserves held in the Middle East but in the meantime the use of those reserves would prevent the depletion of our own¼" Despite the prescience of the statement the matter was dropped by the new administration without further comment.

During the same year Aramco (formerly Caltex - the Socal/Texaco concern) had developed a problem. The downstream marketing arm of Texaco was not making enough to pay for the huge cash investment in developing Saudi Arabia. They needed another outlet and the European market was the closest. To get the oil to market an ambitious pipeline project was put together to carry the oil across the desert to terminals on the Mediterranean Sea. As inhospitable as the desert was the political climate was worse. The Trans-Arabian Pipeline (or Tapline) would have to traverse several countries and end in the disputed territory of Palestine. Ibn Saud further complicated matters when he told all that would listen that he vehemently opposed the proposed Jewish state. Of course the cost was an issue in and of itself.

The solution to the cost problem was in extending the joint venture further but King Saud was adamant that any additions would have to be American. That meant only two companies: Standard of New Jersey or Socony-Vacuum (a former Standard subsidiary). Jersey was a clear favorite due to its substantial marketing system. But before the two companies were able get into the partnership they had to deal with the pesky Red Line Agreement, as both were members of the Iraq Petroleum Company. The legal loophole they passed through was called "supervening illegality". During the war the British government had taken over the shares of the French company CFP and Calouste Gulbenkian because the former was occupied at the time by Germany and the latter had taken up residence with the collaborationist government in Vichy. Therefore, London designated the entire IPC agreement null and void. After the war's end the shares were returned to CFP and Gulbenkian but the question of the agreement was undecided and as such challenged by Jersey and Socony. A meeting was called in London to deliberate over a new agreement.

Anglo-Persian and Shell indicated that the matter could be worked out based on "mutual interest" but the holdouts were the French and Gulbenkian. France's position was that the original contract was still binding. They had watched their prospects in the Middle East reduced time after time while British and newcomer American interests had grown. For Gulbenkian it was more personal, he had worked on the concession for forty years and he wasn't about to watch it dismembered. Jersey and Socony were confident that their case was strong so they entered into final negotiations. The last concern of possible antitrust violation was satisfied when their lawyers assured them that the deal was not in violation of US laws.

Despite threats of lawsuits from the French and Gulbenkian, the deal was struck on March 11, 1947. The four companies: Socal, Texaco, Jersey, and Socony signed with each other and Ibn Saud. The split was broken down to 30% for Socal and Texaco each with the remaining 40% being bought out by the newcomers. But Socony, fearing a cash imbalance for its other developments, settled for 10% while Jersey was made an equal 30% member. The next day President Truman, during a joint session of Congress, ushered in the Cold War by making a speech that would become known as the Truman Doctrine, a commitment to supporting countries against Soviet pressure. The post-war presence of the United States was firmly ensconced.

 

Post-War Expansion

The Marshall Plan relied on cheap and readily available oil to stoke the reconstruction and rejuvenation of the European continent with the obvious source being the Middle East. Cooperation among Saudi Arabia, Kuwait, Bahrain, and Iraq as well as the partners in the various concerns tightened control in the hands of American and British companies. Aramco was officially free of legal challenges by the French and Gulbenkian in 1948 and the concession was 100% American. Gulf made a deal with Royal Dutch/Shell and Kuwaiti oil found a European market.

In 1948, the United Nations formally announced the Jewish state in the territory known as Palestine. While this was no surprise to the surrounding Arab states the ramifications would resonate for decades and directly affect the marketing of Middle Eastern oil. The Saudi/Aramco Tapline was completed in 1950 bypassing Israel/Palestine and ending at a terminal in Sidon, Lebanon. The Iraq Petroleum Company had two outlets on the Mediterranean: one at Tripoli

in Lebanon and another at Haifa, Palestine which passed through the long alley of eastern Jordan. Both were fed from pipelines connected to the northern Kirkuk fields. The tightrope of geopolitical interests lasted a short time but the result was the swift return of the European economy and provides a potential possibility for future commerce given stability in the region. European supplies for oil in 1951 shifted from 77% from Western Hemisphere sources, to 80% Middle Eastern sources.

Iran, while not geographically advantageous to Europe, remained controlled by the British held Anglo-Iranian company. Despite the threat of Soviet expansion during the late 1940s, the company maintained its presence. The Soviets pulled back eventually but Communism would continue to be a threat, both real and imagined in the region. In 1947, Jersey and Socony signed a 20 year contract with Anglo-Iranian to firm up the Anglo-American alliance and hedge Soviet expansion in Iran. The post-war era was the greatest period of expansion of American oil companies under the soon-to-be challenged vanguard of corporate governance.

The first challenge to the existing structure came in Venezuela in 1943. Facing the possibility of nationalization Jersey and Shell capitulated and gave in to demands for a 50/50 split with the state. This would establish the concept of rents rather than ownership; companies would no longer have dominion of foreign soil. The idea was carried to the Saudis by a Venezuelan delegation in 1949 to get them to raise their prices and push the American market back to Venezuela. A year later Saudi Arabia renegotiated to a 50/50 split with Aramco. In quick succession Kuwait and then Iraq went to the new standard of 50/50. Despite Standard making this its line in the sand the handwriting was on the wall.

Neighboring Iran flirted with the 50/50 prospect in 1950 but internal strife precluded an amicable restructuring of the Anglo-Iranian concession. The son of Shah Reza Pahlavi, Mohammed Reza Pahlavi, had succeeded his father in 1944 but his power was not absolute. Mohammed Mossadegh, chairman of the Iranian oil committee to Parliament, took the news of the Saudis 50/50 and went further. He proposed full nationalization of all of the company's assets and on April 28, 1951 the Shah signed it into law. The British government considered military action but in the end the quietly withdrew their people at the refinery in Abadan on October 4, 1951. The British Empire in the Middle East was beginning to crumble.

The British government responded to their ouster by placing an embargo on Iranian oil. Initially it was symbolic, as output was virtually stopped due to the incapability of the Iranian workers. In late 1952, the British raised the possibility of a coup against Mossadegh, who had effectively replaced the Shah as the leader of the country, with the United States. It found support in the Eisenhower administration through Secretary of State John Foster Dulles and his brother Allen, the new head of the Central Intelligence Agency. That Mossadegh was making overtures to the Soviet Union didn't help. In a comedy of errors Mossadegh was arrested and the Shah returned to his leadership position that had never really gone away.

Once again the US government went to the major oil companies, this time to ask them to go into Iran and keep the country from falling into the hands of the Communists. At the same time, the government was bringing an antitrust case against the very same companies. Based in large part on a Federal Trade Commission report entitled The International Petroleum Cartel the Justice Department launched a criminal suit against the companies for the "As-Is"

conspiracy. With the support of Truman the case went forward in 1952. He was pounded with complaints from the companies as well as from members within his administration and most notably from the Defense Department. He dropped the criminal charges and had it modified to a civil suit. It was to go nowhere as the sentiment in the Eisenhower administration was that oil was a strategic concern and that the companies would be acting in the best interest of national security.

Negotiations with Iran began in earnest and a deal was struck on September 17, 1954. The new consortium of Jersey, Socony, Texaco, Socal, Gulf, Shell, and CFP was decidedly American but the emphasis was more on their ability to control the new concession as well as the other members. The terms of the new concession were that Iran would have ownership of its resources and facilities and the new National Iranian Oil Company would act as a partner with a 40% share. This partnership would prove to be a source of great wealth and misfortune for the young Shah.

 

Suez Crisis and the Rise of Nasserian Pan-Arabism

No better event illustrates the turning point in the Middle East than the 1956 Suez Crisis. Egypt did not possess oil wealth but it did have the canal and through it flowed two-thirds of Europe's oil supply. After King Farouk was deposed a young general rose to power in 1954, his name was Gamal Abdel Nasser. He assumed the role of dictator and set out to stir up Arab nationalism by using radio speeches to inflame the masses in feverish passion. His vision of

Pan-Arabism would become rote for many leaders in the years that followed: A unified Arab world and the destruction of the Israeli state.

Lofty rhetoric aside, Nasser was faced with economic hardship at home and he needed to raise some income. That income would have to come from transit fees through the canal but before he could get his hands on them he had to kick out the shareholders of the canal, known as the Suez Canal Company, which were the British and French. Despite the fact that the treaty to the company was scheduled to end in 1968, the British were considering letting it go sooner. And they did when they pulled out their troops in 1956. Nasser bolstered his military position by gathering arms deals with the Soviets which raised the suspicion of the US, ever wary of Soviet expansion.

After the US canceled its support for the Egyptian Aswan Dam loan Nasser formally nationalized the canal. While President Eisenhower was facing an election year the US made its position neutral and American oil companies began making plans on bypassing the canal altogether. The French and British, seeing a direct challenge to their sources, dug in. They were joined by the Israelis who were feeling the pressure from Nasser's threats of military action. Egypt struck an alliance with Syria and Jordan and oil was pinched off from the pipelines crossing their borders. On October 29, 1956 Israel launched an offensive across the Sinai and the British and French governments announced they intended to occupy the Canal Zone. Nasser responded by blocking the canal with scuttled ships and debris.

By November 5th the Israelis had gained control of the Sinai and Gaza Strip while French and British troops had been assaulting the Canal Zone and declared a cease-fire. The following day Eisenhower was reelected and immediately called for the withdrawal of all occupying troops or the three countries would face economic sanctions. This meant an embargo of Middle Eastern oil and to make the case Saudi Arabia officially embargoed England and France while Kuwait cranked down on its supply. Eisenhower assembled the oil companies and asked them for help in restoring supply lines and they agreed provided they would not be targeted by antitrust charges. The President promised them that he would personally pardon them if it came to that.

By the end of November the French and British troops began to withdraw and Eisenhower activated the "Oil Lift" and "Sugar Bowl" programs. The former was a coordinated deployment of tankers and oil sources to get around the crippled canal and to the starving European market. The latter was an allocation program administered by the Petroleum Emergency Group under the Organization for European Economic Cooperation to provide distribution of the "Oil Lift" to the European states based on pre-Suez oil use. The programs worked and by the spring of 1957 the crisis was coming to an end. The clear victor of the conflict was Nasser, who quickly cleaned out the canal and reopened it for business now firmly in the hands of Egypt.

The fallout from the crisis established several key elements in the oil industry and global politics. Pipelines were reconsidered as an effective delivery method due to the ever shifting alliances in favor of newer and larger tankers known as "supertankers" already in construction in Japan. The US went about resolving British and French bitterness by pointing out that all three countries had the same intention: to maintain access to Middle Eastern oil, but differed in the method. Force had to be applied judiciously or the entire region could revolt in a unified fashion. All agreed that support of independent states, such as Kuwait, and sympathetic leaders against Pan-Arabism would be in their collective best interests. The British Empire and French colonialism were effectively dead and the US had reaffirmed its control of not only the Middle East but also the flow of oil and energy for the westernized world.

 

Transition: Landlords and Tenants

The post-war petroleum order rested on two foundations. The first was the old-guard concessions whereby the companies had extracted great amounts and paid little in comparison to the new order, whereby countries were extracting great amounts from the companies while they did little work. The crux of the new order for the companies was based on the 50/50 agreement. In almost all of the oil producing countries they were taken from nothing more than clear land and transformed into oil producing giants. All the science, engineering, construction, production, shipping, and marketing were undertaken at great risk by the companies. And now the companies were watching their roles reduced to contractors to their own equipment. But it could get worse, and it did, but not quite they way they thought it would.

In 1957, an ambitious Italian oil man named Enrico Mattei took his Italian company ENI

(Ente Nazionale Idrocarburi) to the Middle East. He broke the 50/50 barrier by appealing to the Shah's greed and secured a partnership which gave the Iran 75% to his 25%. The leapfrog began. Japan's Arabian Oil Company struck a similar deal that same year for offshore access to the Neutral Zone between Saudi Arabia and Kuwait where they gave the Saudis 56% and the Kuwaitis 57%. And it wasn't just foreign companies that broke 50/50. Standard Indiana broke into the Iranian concession by giving the Shah 75% and a heavy down payment.

Nasser, encouraged by his win with the Suez Crisis, formed an alliance with Syria in 1958 called the United Arab Republic. This created a chokehold on oil transiting pipelines through Syria (the Haifa terminals had been closed after Israel was granted statehood) and through Egypt via the Suez Canal. Nasser went further by launching a bitter propaganda war against Iraq and the Hashemites who had been installed by the British in Iraq and Jordan. Shortly thereafter King Faisal II was beheaded in an uprising that was a bloodbath for most of the royal family and its officials. The new government's first order of business was to put the Iraq Petroleum Company on notice for new changes in their concession.

Nasserian pan-Arabism led to the fall of the Iraqi monarch of the Hashemites in 1958 and the set the stage for OPEC. Venezuela's Juan Alfonzo, who became energy czar after a coup in 1948 and again in 1958, restructured the local industry so that the country got a true 50/50. He took the Texas Railroad Commission's quota system and shopped it in the Middle East to get prices up to cover his country's cost. Abdullah Tariki, the head of Saudi Arabia's industry, listened.

Price cuts by the companies in the late 1950s caused by the Russians dumping to get a market spurred the eventual union. In 1960 Iraq stole the momentum from Nasser by holding the Organization of Petroleum Exporting Countries talks in Baghdad where Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran formed the union which languished for the rest of the decade. The union was inevitable but its form was hastened by the Russian glut and the subsequent price war in 1959. The irony of the formation of OPEC was that it took place in Iraq rather than Egypt as Nasser had intended. He would never get so close to leading a unified Arab state again.

The founding principles of OPEC were based on the same intentions of various alliances and organizations of both companies and governments before: stabilize production and regulate output to support a competitive price. The difference in OPEC was that it set out to not only regulate production to support price but also to break the oil states from archaic commitments to companies and inject the states themselves into all aspects of the companies' business. In other words OPEC states were about to launch a hostile takeover of the major oil companies and steal their downstream markets.

 

The 20 Year Surplus

The beginning of the 20 year surplus had begun in 1949 after the war but it gained speed in the late 50s. Russia would continue to dump to steal a market which pushed prices down and strained an already tenuous relationship between the companies and the Arab states. The formal rollout for OPEC was made in Baghdad on September 14, 1960. The founding membership was: Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran. Their combined output was over 80% of the world's crude exports. Despite the auspicious alliance OPEC initially proved to be a

paper tiger. The only consensus at its inception was that members would act in caution and they would not cut prices again.

In 1961, several events shaped the future of the Middle East. Kuwait was officially declared independent from the British on June 19th. Six days later Iraq challenged Kuwait by claiming it as a former territory, foreshadowing a disturbing trend. The charge was rebuffed when the Arab League and the British government dispatched troops to the country. OPEC's unity was still crystallizing amid suspicion between Saudi Arabia and Iran over quota cheating. Further confusion was incited when one of the founders of OPEC, Abdullah Tariki, was replaced during the transition from Saudi King Saud to Faisal by Ahmed Zaki Yamani. Yamani would go on to a stellar career guiding the organization through tumultuous times. He and the other founder, Perez Alfonzo, would later retire due to frustration and disillusionment.

Most significant was the discovery of huge reserves outside of the Arabian Peninsula, and it was the French who spearheaded the development of Africa as an alternative to the Middle East. While CFP was busy with the Iraq Petroleum Company, another state company Regie Autonome des Petroles (RAP) had quietly struck in Algeria. The French had finally carved out a niche in the Sahara away from the "Anglo-Saxon" powerhouses. State run energy organization, Bureau de Reserches Petroliers (BRP), developed Nigeria and the consortium of French companies eventually came together as one outfit known as Elf. France seemed poised to have carte blanche in Africa but then Libya exploded with American controlled oil.

During the 1950s Libya had lured the oil companies by passing a law that enticed them by tying the country's stake to actual market price rather than posted prices and by trying to attract the attention of independent companies as well as the majors. In April 1959, Standard Jersey struck in Zelten. By 1965, Libya was producing gasoline friendly low sulfur sweet crude with ready access to the European continent and had grabbed 10% of all petroleum imports. By 1969, the country would challenge the Saudis in production without the hassle of pipeline and Suez chokepoints. This increase, coupled with the Russian flood, forced a glut and the European market enjoyed price cuts forced by competition.

The rise of the United States as a preeminent player in the Persian Gulf was a key aspect of the 20 year surplus and the formation of the an economic order centered around the dollar and American technological development in the petroleum industry. While the major oil companies continued to have a majority share, now the independents were chipping away at the established order as a result of countries trying to diversify their market prospects. The increased competition reduced oil company rate of return on investment to 11% to 13% or roughly the same as manufacturing. The decline in profitability and the widening of the playing field was bad for the companies, both large and small, but was very good for consumers and producers.

The long-standing feud between Saudi Arabia and Iran continued to foster mistrust. The Saudis assumed the role of arbiter of the role of Gulf States in stabilizing the global supply but the Shah did not take to the Saudis conservative quotas. This strained the relationships of both the companies and the governments involved in trade there. Between 1959 and 1970 Saudi production grew by 258% compared to Iran's 387%. The significance is that the Saudis had a much greater base but the effect on the market was a glut that jeopardized prices. Luckily Iraq, in the early 1960s, revoked 99.5% of the Iraq Petroleum Company's concession which diminished Iraqi output and stabilized local production. This would also signal the end of aggressive Iraqi expansion until the country's liberation in 2003.

Foreign imports continued to challenge the domestic market and producers went to the government, again, for relief from rock bottom prices. In response President Eisenhower imposed the Mandatory Oil Import Program on March 10, 1959. A quota was set to 9% for foreign oil. This led to higher prices in the states and drove foreign oil to new markets. It also created the exemption for Canada and Mexico which were "technically" contiguous though pipelines didn't exist yet. Protecting American producers only forestalled the inevitable future of the loss of American oil as a competitor to cheap foreign production and made the American consumer pay for the difference.

Cheap oil drove all aspects of global growth with particular hallmarks for the US. Between 1949 and 1972 the car population in America grew from 45 million to 119 million, while the world's car population grew from 18 million to 161 million, nearly ten times in growth. Cheap oil was due to greedy producers chasing markets which directly affected the coal industry, already plagued by labor union strife. The US, Europe, and Japan all systematically converted from coal to oil during this period. England, in particular, converted due to from concerns from coal use in residences; ironically, the founder of the environmental movement, E.F. Schumacher, sat on the National Coal Board in London for the conversion years. The conversion could not have taken place as quickly if it weren't for a glut of cheap oil but the subsequent economic expansion proved to be a dubious period with growth bonded securely to politically volatile Middle Eastern oil.

US quotas pushed the major companies to seek European markets and a byproduct of this effort shaped the former boutique fashion of European retail to a more Americanized brand-centric model. Middle Eastern producers happily increased production to capture the European market and Libya, in particular, hastened Continental (Conoco) to develop a downstream market on the continent by providing an outlet for thirsty independents. The surplus exposed the weaknesses of the major oil companies at the two ends of the spectrum: at the wellhead and at the pump.

The surplus also produced several milestones. Credit cards were created as a way for companies to capture brand loyalty. Cheap oil begat more cars and more cars begat a host of effects. Suburbs were a byproduct of cars which signaled the decline of public transportation and the big railroads. Shopping centers and malls were derivatives of suburbs and cars. Fast food followed cars after roads followed cars. The 1956 Eisenhower Interstate Highway Bill built 41, 000 miles of highways with enough concrete to build 6 sidewalks to the moon, paid for with increasing taxes on the sale of gasoline.

 

Crisis Again

In 1967, Nasser once again pushed for Pan-Arabism and without oil as a weapon he forced the producers to respond by cutting Israel's access to the Gulf of Aqaba while mobilizing in the Sinai. Jordan quickly signed on. Israel didn't wait and pounded the Egyptians and Jordanians in the Six-Day War. Saudi Arabia, Kuwait, Iraq, Libya, and Algeria embargoed Israel's allies which were the US, Britain and West Germany. At the same time Nigerian production was halted due to civic unrest.

Once again the US government went to the majors for help and once again they had to promise no trust prosecution. And once again the Organization for (formerly European) Economic Cooperation and Development (OECD) was the vehicle just as in the Suez Crisis. The European members balked but capitulated after the US threatened to not share information (and presumably oil). It went through with France, Germany, and Turkey abstaining.

The war lasted six days but the embargo resonated for months and in some ways years. 1.5 million barrels per day (bpd) had to be made up during the disruption. American reserves and increased domestic production in addition to increases in Venezuela, Iran and Indonesia combated the cutoff. The embargo failed and the embargo producers suffered lost income due to the disruption. And again as it happened after Suez, the world faced a glut from the disruption whiplash which had created US quotas and fragmented markets before. A vicious cycle was emerging.

 

Leapfrog

When the British left the Persian Gulf in 1971, it left a power vacuum in the region for the first time since the discovery of the oil industry there as well as signaling the end of the 20 year surplus. With their departure from Yemen, the country dove into a Marxist-Leninist state that began to foster terrorism. The Nixon Doctrine, which was just a continuance of the Truman Doctrine, supported strong local powers in charge of policing the region and the Shah stepped up for the role. Meanwhile, Iraq was buying arms from Russia with the ostensible design on assuming a leadership role as well. With the depletion of US reserves the world was finally confronted with the reality that demand was approaching surplus capacity. US quotas were eliminated and imports jumped from 19 to 36 percent, and the Middle East saw 2/3rds of the increased demand from the 60s to the 70s. The Clean Air Act of 1967 and other environmentally driven legislation portended the future of the petroleum industry: Domestic production would hence forth be hamstrung and therefore a greater dependence on foreign oil would increase. In 1969 an offshore drilling rig in Santa Barbara forced notable seepage and the environmentalists quickly, through the Nixon administration, forced a moratorium on drilling. All of these factors pointed to volatility for the foreseeable future.

Alaska was explored after the '56 Suez Crisis with little results by Shell, Jersey subsidiary Humble, Sinclair, Gulf, and Richfield. Humble joined Richfield which went on to buy Atlantic Refining to become ARCO. In 1967 ARCO/Humble struck in Prudhoe Bay in the North Slope, while the North Sea was opened to exploration and both regions would provide stability not available in the Middle East.

In 1969 Muammar Qaddafi seized control of Libya from King Idris. Qaddafi, a rabid Nasserian, sought to unify Arabs under the banner of Islam but it was nothing more than greed masked as nationalism. He kicked out the US and UK from their bases there and in 1970 he cut Occidental's production (an independent owned by Armand Hammer) and at the same time, while the Suez was still closed due to the Six-Day War, the Tapline from Saudi Arabia was ruptured by a tractor in Syria. The result was a 1.3 million bpd cut from the market. This prompted vigorous negotiations throughout the region.

Quickly, Libya grabbed a 20% increase in royalties, and 55% share of profits. This led to leapfrogging by Iran (increasing to 55%), Venezuela (increasing to 60%), and OPEC endorsing an across the board 55% increase for all member countries. The companies tried to unite and this led to further negotiations in Tehran and Tripoli. The companies tried to get US government support but it wasn't there. In 1971, Iran gained 55% as well as a price increase, while in Tripoli, the countries affected by the Mediterranean market: Libya, Algeria, Saudi Arabia (pipeline access), Iraq (pipeline access) made a price increase.

The specter of nationalization loomed but prevailing pressure reduced the threat to "participation" which was partial ownership. In essence, the countries did not have the ability to market the oil so they concentrated on upstream and midstream production. Algeria broke from the mold and grabbed 51% ownership while Venezuela projected full nationalization by the 1980s.

Iran expanded by taking some islands in the Gulf and Libya reacted to the theft of Arab land by nationalizing BP's assets for Britain's "collusion" in the act. Iraq nationalized the IPC's last remnant: the Kirkuk concession. Eventually in 1972 OPEC's participation agreement was reached. It gave Saudi Arabia a 25% share immediately which would increase to 51% by 1983. Left out of the agreement were Algeria, Libya, and Iran. Kuwait rejected it. Libya reacted by snatching 50% of ENI's operations and all of Bunker Hunt's, quickly followed by a 51% nationalization of all concerns. Iran already owned its operations but it now it put the National Iranian Oil Company in charge of all operations thus reducing the companies to contractors.

The flurry of activity after the departure of the British and events in Libya exposed the momentum for not only an attempt to wrestle control of the industry but most importantly to set pricing. Gone were the days of cheap oil promoting global growth. Middle Eastern countries ratcheted down production to just above demand by 1972 while they slowly raised prices; OPEC had just grown fangs. This raised the phantom of the "oil weapon" Nasser had pledged to use in the Suez Crisis to a very real possibility. The issue of oil as a strategic concern for the US was about to be challenged.

 

1973: The Oil Weapon

The Nixon administration had faced the energy issue during its salad days when it dealt with complaints about the Eisenhower quota system by abolishing it. This allowed imports to shoot up to 6.2 million bpd in 1973 compared to 3.2 million bpd in 1970. The measure put the US on an even footing with the rest of the world as a net importer and the oil began to flow back to thirsty Americans. During the same period Libya remained focused and nationalized the remaining 51% of the operations it hadn't touched before. It only made sense as demand was supporting exponential price increases for not only the producers but also for the companies.

Egypt's Nasser died in 1970 and Anwar Sadat ascended to his position. Pan-Arabism had bankrupted the country and Sadat was faced with a daunting task. He soon determined that the only way to stabilize his country was to break out of the costly (20% GDP) military buildup against Israel. Negotiations would not work with Israel in the Sinai, so in early 1973 he formalized the war plan with Israel, in an attempt to end the costly conflict. Syria joined the effort in April when negotiations with President Hafez al-Hassad

were made in secret.

In 1972, when Sadat had implored fellow oil producing Arabs to use the oil weapon King Faisal of Saudi Arabia would not hear of it. His reason was that on the one hand Egypt had been routinely unstable by cavorting with radicalism and the Russians, and on the other hand the US was not (by his estimations) projected to need Arab oil until 1985. Therefore, the oil weapon would only hurt his country.

Several reasons changed his mind. The US had become dependent on Arab oil by 1973 not by 1985 and this put Saudi Arabia in a position of control with the US it hadn't seen before. Two devaluations of US dollars had cut the worth of their holdings; Libya and Kuwait had already cut production for this reason. The Tapline was severed in Syria which gave the Saudis a hard example of the looming peril of instability which together with threats from Sadat of a Soviet alliance sealed the deal.

Faisal, facing isolation from the Arab community, bolstered his position by telling the Aramco board to pressure the US government to disavow the Israelis; this would give him the support he needed to face the growing tide of anti-Americanism. The companies went to the government with this and were rebuffed. Sadat went to Riyadh with his war plan in August, 1973 and it was accepted by Faisal who committed both money and the use of the oil weapon.

By September the US had shifted from voluntary allocations to mandatory. Faisal pressed for disavowal which now came from the government but in standard diplomatic language. Meanwhile, the rest of the world felt the pressure with Japan formerly backing the oil producing countries.

An OPEC meeting, during the same month, in Vienna killed the Tehran and Tripoli agreements. The oil companies were summoned to a later meeting in October and the justice department again gave the companies anti-trust protection for the negotiations. On October 5th, Egypt and Syria attacked Israel. Then OPEC met with the companies and demanded a 100% price increase. The companies took time to poll the various countries they served and the answer was to hold for now. On October 12th, the companies told OPEC they couldn't meet the increase. The oil weapon was unleashed.

The war caught not only the Israelis but also the US flatfooted. The US seeing the potential for disaster from direct involvement pushed for a truce. However, the Israelis had not planned for a long engagement and their supplies quickly diminished. At the same time the Soviets were resupplying Syria and Egypt. This forced the US to confront the real possibility of a loss to the Soviets by proxy. A stealth resupply was implemented but due to weather American military planes were spotted in broad daylight aiding the Israelis. The Arabs were resolute.

OPEC raised prices by 70% to $5.11/bbl which roughly matched the spot market on October 16th. Faisal pushed for a US response. Nixon acceded to UN resolution 242 which would revert Israel back to its 1967 borders. Faisal responded that Israel had a right to exist. Kissinger was put in the warm up box.

In an October 17th meeting of Arab producers Iraq pushed for nationalizing of all US assets in the region. They were rebuffed and withdrew their support for the looming embargo that was set to cut production to 5% per month for "non-friendly" countries, and no cuts for "friendly countries". The intent was to punish the US and split the industrial countries based on their position on Israel.

On October 19th, Nixon declared a $2.2 billion military aid package to Israel. Libya immediately cut all shipments to the US. A day later Saudi Arabia cut all US shipments quickly followed by the other Arab states. On the same day, October 20, the Nixon administration was rocked by the October Massacre purge of staff due to the ongoing Watergate fiasco. This and Nixon's preoccupation with the scandal pushed Henry Kissinger to a de facto foreign policy leadership position in the absence of Nixon's.

Saudi Arabia quickly informed Aramco that it had plans to nationalize all of the concern's assets. The Soviets told the US it would not allow the destruction of Egypt's Third Army. However, that crisis was averted on October 26th when a cease fire was tabled. The clash of superpowers would have to wait but the embargo continued.

The embargo was two tiered: One part was the rolling 5% cutbacks for specific markets and the other was the targeted cutoff of oil to the US and the Netherlands, later to include Portugal, South Africa, and Rhodesia. The effective loss of Arab oil was from 20.8 million bpd to 15.8. Iraq in defiance increased production (by order of Saddam Hussein due to his disdain for Saudi Arabia and Kuwait's courting of the US) that cut the loss to 4.4 million bpd. This amounted to a 14% loss of the former available world market and was balanced by a consumption increase of 7.5%.

The difference between the 1967 crisis and this one was that in the former case the producers had suffered decreased profits but in this case the pricing was adjusted such that a decrease in production could be offset by the skyrocketing prices due to consumption. Panic buying had driven the per barrel price from $5.40 to $17. Gas lines formed in the US, Europe confronted its lopsided dependence, and Japan felt the shock despite its backing of the Arab states. American consumer confidence was devastated for the first time in the post-war era. Environmentalism had finally found a reason to push its agenda and Nixon suffered from fatal public perception.

There was no pooling of American and European countries this time for the simple reason that Europe was not being directly embargoed. This left the responsibility to the companies which had continued to enforce the embargo for the producers. The companies applied the strategy of "equal suffering" in the allocation of all oil in the downstream market. This was an enormous and complex process that moved specific grades to specific refineries to targeted markets from a wide variety of producers. And it had to be done in such a way as to give the appearance of maintaining the embargo.

The British were the most vocal in their dismay of the embargo affecting them such that they were designated as a "friendly country". Prime Minister Edward Heath, knowing that the government owned 51% of BP and facing a coal miners strike, sought to get the UK out of its position. BP and Shell were summoned. Shell could not break from "equal suffering" as it was 60% Dutch and the Netherlands were targeted. BP had already seen its Iran assets seized and faced with the possibility again it declined to increase delivery.

"Equal suffering" became the pool of the crisis. Non-Arab oil was delivered to embargoed countries while Arab oil went to favored countries. Overall the loss to individual countries was kept to around 17% due in large part to the actions of the companies.

The next OPEC meeting was during the feverish bidding period and thus the question of price was addressed. Saudi Arabia pressed for restraint ($8/bbl). The Shah saw a chance to make big profits and pushed for mammoth increases ($11.65). The Shah won. The increase when put into perspective was: from $1.80 in 1970 to $2.18 in 1971 to $2.90 in mid-1973 to $5.12 in October 1973 and finally in December to $11.65 and fixed to the new standard of Arabian Light. This was a fourfold increase in three years and the greatest turning point in the oil industry.

The US/Europe alliance that had existed since WWII was now split with added pressure from the 1956 Suez Crisis. European countries, led by France, courted the Arabs and tried to distance themselves from the US. Germany was less vocal and the Netherlands unyielding in its commitment to America. The French position was obvious; they had held the Americans in contempt since the abolishment of the Red Line agreement and the subsequent access to Saudi oil, the Suez Crisis, and the struggle over Algeria.

The Europeans proffered a resolution, in November 1973, formerly supporting the Arab position. This put the Netherlands in a tough spot. They could be faced with an embargo by their fellow EU countries violating the fledgling alliance's precepts. In response, the Dutch reminded the French that 40% of its gas came from them. A compromise was reached.

As 1974 dragged on the US convened an energy conference in DC. The bulk of the European countries, Japan and the US all decided that a new formal alliance based on energy was formed. It was called the International Energy Agency (IEA) and was tasked with management of the flow of energy to the concerned countries. France abstained entry.

The embargo petered out with the resilience of the new alliance and due to the pressure of Kissinger, on the part of the US, to negotiate a peace agreement. Syria and Egypt saw their alliance fractured due to Sadat's acceptance of the agreement with his original intent being met and his reputation intact.

The oil weapon had been used with great affect but not necessarily as designed. The attempt to split the old US/Europe alliance had only exposed the French as querulous and power hungry. The Israelis had survived and renewed the peace process with Egypt while Syria stewed, clearly used. American consumers were finally confronted with the real nature of their energy dependence which bolstered the emerging environmental movement. And finally, OPEC had seen its power and position manifest with commanding results and projecting a consolidation of influence for the future.

 

OPEC's Golden Years

OPEC producers' earnings went from $23 billion in 1972 to $143 billion in 1977. The loss of cash had the potential to disrupt the world's economy and as such the producers sought to solve the problem by spending. They did this by investing sizeable amounts in industrialization, infrastructure, subsidies, services, necessities, luxuries, weapons, waste, and corruption. In 1974 OPEC had a surplus of $67 billion; by 1978 the surplus had become a $2 billion deficit.

The affect of the embargo on the US was that inflation became embedded in the fabric of the economy based in large measure by the price increase of oil. Most westernized countries were able to weather the storm but the impact on developing nations was devastating. OPEC had strengthened but had not achieved the full cartel status yet, that being "a combination of producers to regulate the prices and the output of a commodity". Soon after the embargo all of the OPEC countries were at maximum capacity with the exception being Saudi Arabia.

OPEC responded to criticism by pointing out that it was the individual countries' taxes that hurt consumers more than their price increase. For example in 1975, 45% of what Western Europeans paid for oil products went to its government, while 35% went to OPEC, with remaining 20% going to shipping, refining, dealer's margins, etc. In the US consumers paid 18% in taxes with 50% going to OPEC. And in Japan 28% for taxes and 45% for OPEC. Taxes in the US would eventually rise to around 45% despite no new major roadwork and much needed repair.

The Shah continued to press for further increases. The Saudis had vetoed the previous increase and this time they were not going to take it lying down. Their fear was that further increases would destabilize the effort for Pan-Arabism, and invite the projection of communism in the region. Furthermore, they feared that the balance of power would shift from them to Iran if the Shah continued to challenge their leadership.

In March of 1975 King Faisal was killed by one of his nephews. His successor was Khalid

with Fahd becoming crowned prince and policy maker for oil. Kissinger foreshadowed the future at the time when he said, "The only chance to bring oil prices down immediately would be massive political warfare against countries like Saudi Arabia and Iran to make them risk their political stability and maybe their security if they did not cooperate."

America had become at odds with the Shah as he continued to challenge the price structure. Granted the Shah had not participated in the embargo but his ambitions were ill timed. After Carter was elected in 1977 the Shah shifted his stance based on the real possibility of loss of support from the US. Not to mention the effect fast growth had on his country. It had exposed the concentration of wealth in his hands at the expense of his people. The Shah soon became an advocate for moderation in pricing. Eventually, Iran and Saudi Arabia became united in their position and since they controlled 48% of OPEC production they had the clout. The subsequent price structure was muted and adjusted for inflation amounted to 10% below what it had been in 1974 after the embargo at $12.70.

Iran was fully nationalized and Kuwait sought to circumvent the price structure to increase its profits to match its contemporaries. In 1974 the country had acquired 60% of BP and Gulf's concession and now in 1975 they grabbed the remaining 40% with the added stipulation that the companies would not have proprietary access. The cost was $50 million compared to the companies' claim of $2 billion. Kuwait immediately sought to court the companies' markets and succeeded.

Venezuela had passed a law in 1971 that forced all concessions to revert to the state by 1983. It waited until 1976 and went ahead and nationalized with the companies becoming contractors and equal based on bids. The nature of the nationalization was such that PDVSA (Petroleos de Venezuela) became a state holding company to play between the politicians and the oilmen.

In 1974 the Saudis took 60% of Aramco (Exxon, Mobil, Texaco, and Chevron) and finally in 1976 Aramco was disbanded and the Saudis took control of the (at that time) estimated 149 billion barrels of reserves. The new arrangement allowed the companies to have access to 80% of production while being compensated 21 cents a barrel for operating the production services.

With the dissolution of Aramco the last of the great concessions was reduced to contractor status which signaled the new era of the producers assuming greater sovereignty over their resources. Also it signaled the entry of the producers into the downstream market for the first time. Direct sales from the producers went from 8% in 1973 to 42% in 1979. The days of cornered fields and cornered markets was dissolving. And there was more to come.

 

Post-Embargo Reaction

The response to the embargo set in motion a new format for dealing not only with the shortage but also with the transition from concessions to contractors. The IEA found itself in a position to assume the role of pooling resources of member countries so as to avert disruptions, despite the incongruent energy policies of the members.

Reaction from Japan was complex. The country diversified not only its sources but also the methods of energy, namely coal, oil, and nuclear. But the main thrust was a vigorous effort to promote conservation. And in that respect they led the world by developing fuel efficient vehicles and industry.

France stepped up its nuclear energy development and quickly became a leader in that field. But in true French fashion, it also targeted advertising that promoted or encouraged energy consumption, no matter how far removed. The most glaring example was a billboard sponsored by Total which depicted the French countryside and the phrase, "This is France." The ad was banned because the Energy Conservation Agency said it was paid for by an energy company and as such was a waste of money, which meant the company was rich, which meant that there must not be an energy problem.

In 1974, the US Senate Permanent Subcommittee on Investigations chaired by Senator Henry "Scoop" Jackson tasked with investigating the energy crisis and the role of oil companies. Senior executives of the Seven Sisters were lined up and grilled by the committee. Jackson laid the blame for the crisis squarely on the shoulders of the companies and accused them of making "obscene profits". This became a rallying cry for the American left despite the history of those same companies bailing out the government and the country time and time again.

In terms of those "obscene profits" they proved to be less so. Profits were virtually flat for the five years leading up to 1972. They rose from $6.9 billion in 1972 to $11.7 billion in 1973 and to $16.4 billion in 1974. The reasons were simple: As the foreign producers raised prices the companies rode the increase. Also they had stockpiled reserves prior to the increase and sold them afterwards. In 1975, profits dropped back to $11.5 billion due to diminished demand and recession, as well as from the exporters raising rents augmented by the US government withdrawing the hallowed foreign tax credit. Regulation on the industry was wielded without impunity and the companies paid for it with capacity.

Two pluses for that era were the completion of the TAPS (Trans-Alaskan Pipeline System) and the imposition of fuel efficiency standards for the automobile industry.

The post-embargo period was represented best by the scramble for oil everywhere by everyone at any price. And while that was happening exploration and development was targeted at western countries where nationalization wasn't a concern. The North Sea was heavily favored and exploited. RD/Shell put 80% of its worldwide, non-US production expenditures in the region.

In 1978, TAPS began pumping 1 million bpd and in few years it reached 2 million. Meanwhile, Mexico's Pemex came back after suffering miserably in the post-nationalization years where it had almost become a net importer. It made new finds in the state of Tabasco and with careful foreign investment it snapped back from ½ million bpd in 1972 to 1.9 million bpd in 1980. These two regions contributed to the US contiguous sources and dampened the dependency of foreign oil.

In 1969, Phillips Petroleum of Oklahoma struck oil in the North Sea. BP followed suit in 1970 and Shell and Exxon joined them in 1971 with their find in the Brent field. By 1975 oil flowed from offshore pipelines to British refineries. However, the British government considered nationalizing their portion of the field and formed the British National Oil Corporation (BNOC) which held title to the government's concession and the right to buy 51% of North Sea production.

Oil forecasting became a post-embargo activity. And one of the forecasts was that another crisis was imminent. Alaska, Mexico, and the North Sea were adding 6 to 7 million bpd but this supplement would not prevent the growing demand which would surpass the new additions in the late 1980s.

 

The Second Shock

Iran in the late 1970s had shown signs of growing pains. Impressive wealth was accumulated by the Shah while modernization programs were mired in corruption and waste. Agricultural stagnation had made the country a net food importer and overpopulation plagued its cities. And perhaps the most glaring policy of the government was human rights violations. In the middle of this period fundamentalism had taken root and its champion was the Ayatollah Khomeini.

In 1962 Khomeini had fled to Iraq. He was expelled in 1978 by Iraq's secular government which was facing its own problems with the Shiite population. He came back to Iran and quickly went to work. Strikes by Iranian oil workers started that same year. Production dropped off considerably. Soldiers joined the workers in camping out at the fields. The situation degraded precipitously and eventually production halted altogether at the years end. The companies pulled their people out and on January 16, 1979 the Shah fled the country.

The Second Oil Shock had begun. The Iranian oil loss was countered by Saudi production followed by the rest of OPEC which came to 2 million bpd less than the previous year. But the problem was not just the shortfall which amounted to a 4 to 5% loss, there were other factors. Demand had continued to grow, the former contractual nature of the companies was disrupted pushing the tenuous spot market to the fore, governments sent conflicting messages to both the companies and the producers, the producers seized the opportunity to raise rents, and the American public was still reeling from the embargo and that emotional aspect pushed the disruption to a crisis.

BP had 40% of its supply from Iran and it was the hardest hit. The Aramco companies fared better due to increased Saudi production to cover the shortage. Japan had sought Iran in a diversity scheme and was hard hit. And the spot market assumed the role of a driving market force challenging the former system for the first time.

Long term contracts were ripped up by the producers as they shifted supplies to catch the next rise in the market. By 1979 Iranian production started to trickle back. OPEC met and allowed the producers to make whatever add-on surcharges and premiums. This started the leapfrog (again) of the producers for higher prices while the purchasers cut each others' throats scrambling for deals.

Once again the Saudis vetoed the surcharges and did not participate. In addition they directed the Aramco companies to sell at the posted price. Soon after they cut production back to the pre-crisis level of 8.5 million bpd for no stated reason.

At the same time the Three Mile Island nuclear power plant accident occurred putting an obvious pale on alternative energy. The Iranian disruption caused gas lines again but not for the same reasons as 1973. Refineries fitted to process the lighter Iranian crude had to process heavier grades and this caused delivery delays. In addition price controls forced the long lines that would have been eliminated without the regulation.

Carter's presidency was poisoned by the crisis and in an attempt to resolve the issue he eliminated price controls on oil prices, while implementing a "windfall profits tax" on "excess" oil company profits. That single action alienated both sides of the aisle and cost him reelection

The Saudis cranked up production from 8.5 to 9.5 million bpd in the summer of 1979. OPEC reduced output, Iraq embargoed Egypt for the Camp David peace accords, and Nigeria nationalized BP's assets. The purchasers continued to buy in an attempt to build up reserves. Britain's new BNOC raised prices and looked to many as the next entrant in OPEC. The downstream system was a shambles as old standards were replaced with rampant opportunism. And all the while the consumers paid the price while everyone from the wellhead to the pump cashed in during the frenzy.

 

Hostages

American embassy staff members in Iran were taken hostage in 1979. This not only signaled a shift in Iran from a secular dictator to a fundamentalist theocracy, but also displayed a challenge to the Middle East status quo fueled by emerging Islamic fundamentalism. Later in the same month, Mecca was held hostage by other Islamists who opposed the Saudi government with the capture planned to inspire an uprising (it never happened). In December, the Soviet Union invaded Afghanistan. People were on the move and old lines were being challenged.

President Carter responded with what would later become known as the Carter Doctrine: "Let our position be absolutely clear. An attempt by any outside force to gain control of the Persian Gulf regions will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force." Thus the Truman Doctrine of 1950, which had come from the Lansdowne Declaration of 1903, had found another leader, forecasting an eventual conflict in the Middle East.

Carter embargoed Iranian oil and froze their assets. Iran countered by freezing all exports to the US The spot market reacted in standard nihilistic fashion by bidding up to a new high of $45/bbl. This furthered the impression to the world that US power was slipping in the region.

The price increase grabbed the attention of the Saudis who feared a power play by Libya and Iran. The Saudis had shifted from assessing the market solely on price, now they considered rates: interest, exchange rates, growth rates, etc. as stability indicators - their prominent concern. Also, the possibility of development of alternative supplies was factored. The result was they kept their prices down while increasing output.

OPEC met in December, 1979 amidst price fluctuations from $18 to $28 internally while the spot market was in the $40 to $50 range. The Saudis had kept their production up to keep OPEC in the 31 million bpd sweet spot, 3 million higher than 1978. The extra oil was being stockpiled by jittery companies. In addition, OPEC was fractured by producers grabbing higher bids and eschewing unity. Following the meeting, Libya, Algeria, and Nigeria rose prices. The exporters had finally lost touch with the market.

The Carter administration, in frustration, launched a rescue mission for the hostages. It failed miserably with loss of American life and exposed our intentions in Iran, which was that we had lost all other options and tried to quietly end the crisis without a frontal assault. The market tightened in answer to this and Iran reduced output.
OPEC responded to the mini-glut with a projection of 10 to 15% price increase in five years, or $60/bbl. During the 1980 OPEC meeting in Algiers the Saudis were joined by Kuwait in attempting to stabilize pricing which averaged out to $32/bbl. There was no consensus and OPEC head Yamani predicted greed would torpedo the exporters. The companies were stockpiling and as the market started to sag they demanded price decreases. As the 20th anniversary of OPEC approached the alliance was facing extinction by infighting or becoming a bazaar of conflicting voices.

In September, 1980 Iraq attacked Iran for several reasons: rivalry, leadership in the Gulf, nationalism, and in response to contested borders. In contention was the Shatt-al-Arab

waterway where Iraq had to ship its southern oil; the Iranians avoided the river as they had a pipeline to offshore terminals. Previously in 1975, the Shah had secured a deal with Saddam Hussein to have the border for the waterway moved from the eastern shore to the center of the river. For this Iran gave up its support for the Kurds. Jettisoning the Kurds gave Hussein and the Ba'thists a chance to purge the now unprotected ethnic group and consolidate control of Iraq. In return, Hussein kicked out the Ayatollah Khomeini. Obviously Khomeini had a bone to pick with Hussein.

The Ba'th movement started in a Paris university by two Syrian intellectuals in the 1930s; it was followed by the rise of the Ba'thist party in Damascus a decade later. The thrust of the party was rabid Arab nationalism and hatred of the West. It split to two factions, one in Syria and the other in Iraq. Much of the influence of the party through Hussein's power was based on the myth created from the 1941 coup attempt by pro-Nazi nationalist Rashid Ali. Nasserian rhetoric furthered Saddam's nationalist bent.

He was one of the organizers of the failed assassination attempt of Abdul Karim Kassem and afterward he fled to Egypt and stayed there until 1963. Upon his return he strengthened the Ba'th party and in 1968 he took the presidency after a major purge of the party. He installed mostly Tikritis to maintain loyalty with hometown friends and family.

The religious element was a big part of the conflict. Hussein could end the Shia threat to his country by striking at its heart in Iran. Oil was another; domination of the market was a tangible possibility with Iran's southern fields in Iraq's hands. As the war fulminated Hussein learned that his tank divisions could be threatened by a wave of human jihadists from across Iran that numbered in the hundreds of thousands.

The war severely disrupted both sides but Iraq suffered worse. Its output was virtually shut down by attacks and by Syria siding with Iran and shutting down its pipeline from Iraq to the Mediterranean Sea. The disruption removed 4 million bpd or 15% of OPEC's output. Prices jumped to $42/bbl. Was it the next shock? Demand was weakening augmented by conservation. The IEA plead with buyers not to panic and to rely on inventories.

OPEC raised prices to $36/bbl in December, 1980. The Saudis had been balancing prices by adjusting output and they had engineered the glut. Buyers pushed for lower prices and price wars broke out to grab new markets. In 1981, OPEC met and in a compromise to the higher prices and to the Saudis the price was adjusted to the average price of $34/bbl. Saudi Arabia adjusted output to 8.5 million bpd as its ceiling. The price would stay there for ten years.

 

Oil as a Commodity

Nothing defined the 1980s more than oil as a commodity. It had truly become a fungible asset, traded like gold and money. A price of $34/bbl drove the expansion. Domestic production soared and was invested in. Exxon responded by terminating its shale oil project and cutting back on exploration in 1982. The recessions of '80 and '82 were driven by interest rates to a sky-high 21.5%.

Higher prices fueled flagging production in Mexico, Alaska, North Sea, Egypt, Malaysia, Angola, and China. In addition, shipping became more efficient; the Alaska pipeline boosted output from 1.7 to 2.1 million bpd. Diversification in energy aided to reduce consumption. Oil declined its market share from 53% in 1978 to 43% in 1985. Conservation aided with efficiency jumping to 32% in the same period or 2 million bpd. In 1983 global (non-communist) consumption dipped from 51.6 to 45.7million bpd or 6 million bpd.

Thus, three factors contributed to the glut: collapse in demand, buildup of non-OPEC supply, and inventory dump by companies. For the first time non-OPEC production surpassed OPEC creeping over a gap of 1million bpd. The Soviets raced for access to increase their market share.

OPEC's problem was that it was losing its control of the market, while the spot market challenged its price structure increasingly. To keep the price up, OPEC cut production from 31 million bpd in 1979 to 18 million bpd in 1982. The Saudis assumed the role of taking up the slack from other quota holders. That same year King Khalid died and was replaced by Prince Fahd.

Competition was unbridled in the 1980s. The Saudis tried to maintain $34/bbl while the rest of OPEC chased the market with lower prices. Saudi production was cut to its lowest level since 1970. North Sea oil was offered at $30/bbl and that price cut out Nigeria, its direct competitor, which virtually ceased production in 1983. OPEC slashed prices by 15% from $34 to $29/bbl and cut production by 17.5%. This was predicated by the "honor system" being respected and the Saudis played the pivot role. OPEC had finally become a cartel - now they controlled price and production.

The market economy of oil had made it a true commodity. The effect was that traditional companies' and supplier's methods were now obsolete. Integration from the wellhead to the pump was inefficient and costly. Also, producers had forsaken companies in the quest for rents by nationalization. This cut their access to markets with stable companies. The spot market was now in charge.

BP, having lost propriety claims in Iran and Nigeria, led the way in diversifying its sources in 1982. This was the beginning of corporate disintegration. For the first time, Aramco (Exxon, Mobil, Texaco, and Chevron) faced with losses for paying the "official" prices went in search of sources.

The market shifted from OPEC to the New York Mercantile Exchange in 1983. The futures market now included oil next to eggs and other speculative commodities. Liquidity was provided by speculators betting on swings in supply and demand. Heating oil, gasoline, and now oil contracts set oil pricing. And with this shift oil companies moved from production to speculation on the open market. The pivotal moment was when the benchmark crude went from Arab Light to West Texas Intermediate (WTI) back from two decades before when Arab Light had replaced Texas Gulf Coast crude.

Takeovers descended on the seemingly benign oil companies based on the principle of the "value gap", where the value of a company was reflected in the difference between the value of shares and reserves. Exploration was now a liability and its increase of 2 to 3 times the cost of a barrel was a beyond acceptable.

One speculator of this trend was T. Boone Pickens of Mesa Petroleum, an independent. He capitalized on the value gap of Gulf Oil. First, he banked $30 million of the purchase and sale of bulk stock in Cities Service to Occidental which was seeking reserves and consolidation. Other companies were also at work in consolidating. Shell bought Belridge, Dupont bought Conoco, US Steel bought Marathon, and on the list went.

During this time Pemex was in big trouble. Suffering from a loss of exports to declining demand, high spending from high rates, and weakening market rates the company seemed poised to default. An aid package was put together that favored US buyers and prevented a potentially explosive chain of defaults worldwide. The days of huge loans based on oil as an asset were on the brink.

Meanwhile, the banks that had speculated on those loans suffered too. Penn Square and Continental Illinois both caused this paradigm shift by their collapse, and in the case of Continental one of the biggest bank runs in history. If it wasn't for a Federal Reserve bailout the bottom could have been very deep and very wide.

The final nail in the coffin of limitless exploration was the dry hole in Mukluk, Alaska. The wildcat venture was banked by BP affiliate Sohio and Diamond Shamrock. The cost of the lesson was the greatest in history: $2 billion. The message to the companies was crystal clear: find reserves in proven places and in the hands of other companies.

One such company was Gulf Oil. Mesa was looking for cash to pay for its $300 million exploration budget. Pickens descended on Gulf due to its vulnerable undervalued stock in comparison to its reserves. The value was depressed due to diminished reserves from nationalization and over regulation, despite Gulf's increasing its reserves during the attack.

Over the course of 1983 to 1984 Gulf was courted by Mesa (under the umbrella of a bulk stock purchase), ARCO (which sought Gulf's foreign production), and Chevron (smelling blood in the water). The bidding war matched cash (Chevron) against unproven securities (Gulf's internal attempt to retain control managed by Kohlberg, Kravis, and Roberts). ARCO's low bid was thrown out and the unproven securities proved to be too risky. The deal went to Chevron with a cash purchase of $13.2 billion.

The clear winner was Pickens and his stock bid to the tune of $300 million after tax. The clear loser was Gulf that had bet the farm on the next big elephant that never came. The greatest impact was dividends to the shareholders, not only in the Gulf deal, but else where. Fearing Gulf's fate Shell bought out its US arm and Exxon firmed up stockholder support by investing its huge cash flow in a share buy-back. This guaranteed rising stock prices and steady yield for the price of $16 billion. The era of consolidation had made shareholders the clear beneficiaries.

In May of 1985, the G-7 membership met in Bonn. It was the third year in an economic boom. Western European countries were pursuing Russian gas with the purpose of diversification. The Reagan administration was opposed to any propping up of the Soviet regime and tried to block American equipment from being shipped there. This created the biggest US/Europe conflict since the '73 embargo. Fate stepped in when a compromise was reached: Europe restricted gas imports to 30% of total need and invested in developing Norway's huge Troll

field.

The meeting and fallout pointed out a fundamental shift in energy and world events. Oil capacity exceeded demand by 10 million bpd or 20% of the world's consumption. Clearly energy was not the issue it had once been. At the same time Iran and Iraq were ramping up their fight to the point that tankers of other countries were under attack. Any other time in history it would have sent shock waves, now it wasn't even a ripple.
Secure oil sources seemed to be stabilizing while prices were still high. Cheap oil was not quite available for this boom as it had been during the 20 year surplus.

 

OPEC Bleeds

High prices favored Saudi Arabia, Libya, Mexico, and the USSR. In the case of the Soviet Union the prices would garner them hard currency for their purchases of Western technology. Low prices favored all oil importing countries but especially Germany and Japan, with their large industrial base. For the United States the answer was twofold: high prices would favor domestic producers and low prices would favor domestic industry, energy, and consumers.

In 1984, it was becoming obvious to OPEC that the quota system was not working. Most members were cheating. If it wasn't outright sales then it was through barter trade for weapons, planes, and industrial goods. The net effect was the same: the market was being oversupplied.

During the glut the British National Oil Company (BNOC) found itself in the position of buying up to 1.3 million bpd from North Sea producers and selling it to refiners at a loss. The price set by the BNOC (similar to OPEC) couldn't keep up with declining market prices. In 1985, Margaret Thatcher abolished the BNOC in support of her belief in the free market and disdain for state run companies. The market had won again.

OPEC continued to bleed into 1985. It could lower its prices or continue to prop them up and continue to lose its market share. Even during a war, both Iran and Iraq started to recover and Nigeria cranked up its production. Saudi Arabia was down to $26 billion in earnings in 1985, from $36 billion in 1984, and from the all time high of $119 billion in 1981. It was being to feel marginalized and would not suffer losing its market well. The Saudis warned OPEC: they would flood the market before they would bottom out.

The Saudis' production sunk to 2.2 million bpd - half of its quota level and roughly a fifth of its full volume. Exports to the US were a rock bottom 26,000 bpd from a high of 1.4 million in 1979. Even the Brent sector of the North Sea was pumping more. It was the last straw. The Saudis were ready to go on the offensive.

They started a process called "netback deals" to Aramco partners and selected companies in key markets. The refiners weren't charged a fixed price; rather, they would pay what the market would bear. An additional incentive was the refiner was guaranteed a predetermined profit off the top per barrel. Without concern for market price the refiner was free to sell as much as he could. For the first time in the industry the downstream was seeing profits on the level of producers. It was ingenious.

With no set price from the Saudis, there was in effect no OPEC price. Most of OPEC counted on the $18 to $20/barrel range to knock the North Sea production out of the market. They were wrong. Due to high taxes, North Sea producers would only lose around 85 cents a barrel but the big loser was the British government. Thus the freefall continued.

After a meeting in fall of 1985, OPEC decided to join the Saudis and collectively they declared a price war. This was the Third Shock after 1979-80 (fall of Shah), and 1973-74 (embargo). West Texas Intermediate plummeted from $31.75/barrel in November to $10/barrel in response to the OPEC flood. The flood was less in volume, only a 3% increase in world supply or a 9% increase from the 1985 quota, and more in application, the selective targeting of markets and downstream refineries.

Consumers were now in charge and they were being courted by producers in search for security of demand, just as the producers had been when Alfonzo shopped the US market for Venezuela and, after being turned down, went on to create OPEC. Producers were making deal after deal to secure markets, only to be undercut by better competition. For the first time since Spindletop, the market was truly unbridled and without regulation.

OPEC members Iran, Algeria, and Libya lobbied for a quota that would restore a $29/barrel price. Saudi Arabia and now Kuwait remained committed to regaining their market share. Non-OPEC producers started to get nervous and attended a spring 1986 meeting. No resolution was reached and prices continued to drop. Most of the marginal producing world began looking for a man in a white hat.

George H.W. Bush graduated from Yale in 1948 and passed on a Wall Street job to take a trainee position with a drilling company in Odessa, Texas. He made his way up the ranks and eventually formed Zapata, an independent oil company. The company eventually split and Bush took the offshore operation. By the 1960s he decided that he had made enough money and pursued a career in politics like his father had for ten years.

He made his way from county chairman to Congress where he represented the Houston oil lobby among his constituents. From there he went on the become ambassador to the UN, chairman of the Republican National Committee, US envoy to the People's Republic of China, head of the CIA, and then to four years of campaigning for the Republican nomination for the Presidency. Ronald Reagan, who beat him for the nomination, chose him as his Vice-Presidential running mate in 1980. Reagan's hands-off approach to the economy contrasted with Carter's micromanagement but the timing was good. The growing glut arrived just in time for Reagan's first term.

But as the glut grew, so did the complaints from domestic producers and the White House was faced with how to deal with the price collapse. Thus, George Bush was sent to meet with OPEC in 1986 and inquire as to what their plans were. During meetings with Yamani he indicated that if the price continued to drop the US would have to face the possibility of imposing a tariff. This was not the message the administration had sent him to give but OPEC didn't need to have it qualified. The Saudis weighed the cost.

Venezuela floated a new range of $17-$19 which when corrected for inflation took prices back to mid-1970s range. Kuwait's revenues were down 4%, Saudi Arabia's were down 11%, Iran and Libya's were down 42%, and Algeria was devastated. The consensus was that the market share strategy was a failure. OPEC, by the end of the year, backed the new pricing. In the process, OPEC was supported by Mexico, Norway, and the Soviet Union in an effort to maintain output to support the pricing. The effect of the price war was that $50 million was transferred back to consuming countries which stimulated the world economy and drove down inflation. Cheap oil had grown the world again.

The lingering war between Iran and Iraq dragged on for its seventh year in 1987. Iraq began to attack Iranian shipping in the Gulf which started the "tanker war". The Iranians retaliated in kind and expanded to Kuwaiti ships for Kuwait's support of Iraq. The US and the Russians were asked to protect Kuwaiti ships and the red menace was used again to project US military presence into the Gulf. Along with marking Kuwaiti vessels under the American flag, ships were sent from Britain, France, Italy, Belgium, and the Netherlands. In other words, any country that had an interest was present.

1988 rolled on as Ali Akbar Hashemi Rafsanjani was poised to replace the ailing Ayatollah in Iran, unfortunately, the US accidentally shot down an Iranian passenger jet further straining relations. Iraq's strength grew while Iran was wallowing in isolation. On July 17th the Iranians offered the UN a cease-fire. It went into effect by August 28th and Iraq began oil shipments that had been halted for eight years, and emerged from the war, at least in Hussein's eyes, the victor. For the first time since the Suez Crisis it looked like peace and stability might prevail in the Middle East.

 

Brief Stability

The end of the 1980s pointed out the state of affairs in the oil industry. The producers had taken over production and reduced the companies to contractors. But later the consumers showed the producers that they could take their business where the price was right. A balance had been struck. Some of the producers started to develop downstream operations while the British government divested the 51% share of BP it held. Integration followed for the Saudis when they acquired a half interest in Texaco's refineries and gas stations in 33 states. The state of the industry was refined, integrated, and best of all stable - or so it seemed.

In 1990, while the world witnessed the fall of Communism, and oil reserves in the Persian Gulf and Venezuela grew from 670 million to 1 trillion barrels, and US demand exceeded regional production again, Iraq invaded Kuwait on August 2, 1990. Stability was shattered. This time Saddam Hussein made it clear that he would use the oil weapon against the West and his resources had just expanded to 20% of the world's reserves.

It shouldn't have come as a surprise. Since 1985 Iraq was the world's largest arms buyer and Hussein's intention to dominate the Persian Gulf was no mystery. Steeped in Stalinist ideology and built for military might, Hussein had one problem: he needed money and his exports weren't enough. The movement of troops to the Kuwaiti border was explained as "enforcement" of OPEC quotas but the worst offender of the quotas was Iraq itself.

The response was not what Hussein expected. If he thought he could seize Kuwait quickly and explain his fait accompli as the solution to aged regional conflict he was wrong. The UN quickly slapped Iraq with an embargo and fearing Iraq intentions on Saudi Arabia the US started to build a coalition to oppose the Iraqi menace. And in the words of President Bush, "Our jobs, our way of life, our own freedom and the freedom of friendly countries around the world would all suffer if control of the world's great oil reserves fell into the hands of Saddam Hussein." Once again, the Middle East had become a strategic focus of American foreign policy with an emphasis on oil.

Just like in 1973 and 1979, the market was disrupted and this time to the tune of 4 million bpd. The sixth post-war shock acted like the others with prices jumping and financial markets plummeting. In a shock to Hussein's anticipation, OPEC rallied to cover the disruption of Iraqi and Kuwaiti oil. Hussein countered by threatening the Saudis supply system and the market jumped up to $40/bbl. For the first time the US considered using the Strategic Petroleum Reserve as a hedge to rising prices. Clearly Hussein had miscalculated the world's response.

Hussein used the Nasserian playbook by the letter. He played the "Israeli card", he appealed to the Russians to split the Western coalition, and most of all he calculated that he could wait and wear down sanctions and feed on American fears of lengthy engagements, like the Vietnam War, punctuated by the recent loss of US Marines in Lebanon. The US factored the wait and decided to beat the clock. And in November the UN gave Iraq a final warning to get out of Kuwait by January 15, 1991. Congress gave the President the authority to go to war on January 12th and on January 17th coalition aircraft launched the air assault on Iraqi forces.

A month later American ground forces moved in and the war ended 100 hours later. The "mother of all battles" had become a rout, but the damage was extensive. Hussein's forces had released the largest oil spill in history and ignited 600 oil wells. As much as 6 million bpd went up in flames. A formal cease-fire was declared on February 28, 1991. Despite uprisings in the north and south Hussein clung on to power. And Iraq remained in limbo for the next 12 years.

The Gulf War was about oil but more importantly it was about international stability based on oil trade. The bigger picture of the six major disruptions from the 1950s to the 1990s showed that despite the gloomy predictions cooperation could overcome the logistical challenges. Threats to the future of the oil industry were not only dictators or embargos but also the growing threat of environmentalism. Activist efforts to bind producing and consuming countries to scientifically dubious terms like "Global Warming" in treaties such as the Kyoto Protocol would only affect countries that allowed themselves to be hamstrung by the arbitrary regulations. The US and Europe seem poised to accept the terms while Russia will only give lip-service at home while vigorously supporting it abroad.

By way of example, deregulation in 1981 caused the number of refineries to drop from 324 to 204 by 2002, but greater impact has come from environmental regulations that have prevented new plant construction while increasing utilization of current plants from 69% to 92% with a loss of 3 million bpd, or a capacity of 16.8 million bpd under a consumption of 19.2 million bpd. The difference will have to be made up for by expanding current capacity which could prove disastrous, or by farming further refining out to Caribbean plants.

Despite projections of 77% of carbon emissions coming from increased energy consumption in developing countries it will be the industrialized nations that will have to bear the burden of rampant environmental regulation.

Recent History

Between 1991 and 2003 there were notable events that shaped the oil industry and international economies. The spike in prices after the Gulf War reached a high of above $30/bbl but it quickly shrunk to a nominal $20/bbl after the US released some of the Strategic Petroleum Reserves. The former Soviet Union broke up and the former republic's oil producing countries started to court the world market which further reduced prices to just above $15/bbl. OPEC raised prices while raising production to the highest level in decades at 25.3 million bpd; this kept prices in the $20/bbl range. Kuwait dumped in defiance to OPEC quotas to finance its reconstruction which sent prices down. The decrease was halted when Nigeria faced a workers strike and extremely cold weather hit the US and Europe.

Prices peaked in the mid-twenties during the 1995 to 2000 period when the US launched a missile strike against Iraq in retaliation for attacks on the Kurds and Shias. Supply began to swell when Iraq re-entered the market under the UN sanctioned Food-for-oil program which drove prices down. OPEC adjusted by trying to match cheating with a new ceiling of 27.5 million bpd. This raised worldwide supply to 2.25 million bpd in 1997 to the highest level since 1988. Prices plummeted to pre-embargo levels of $10/bbl due to anticipated Asian consumption which never materialized based on the economic crisis there. The market snapped back during the 1999-2000 recovery and demand pushed prices back up to the OPEC target of $25/bbl. This was due to OPEC cuts, cold weather, and resupply of low stocks.

Recession in the US contributed to price declines in 2000 and the September 11th attacks of 2001 pushed them even further down. The market responded to the potential US retaliation with increased prices and OPEC cutbacks but prices continued to slide. In 2002, with Venezuela in turmoil prices bottomed out at around $15/bbl. This caused companies to immediately stockpile for seasonal and financial reasons. By winter of 2003, prices had rebounded due to cold weather and renewed talk of hostilities with Iraq. Profits for companies were at an all time high as stocks were sold in preparation for the coming war with Iraq.

 

UN Oil-For-Palaces

One of the most notable events in the 12 years of sanctions against Iraq was the actions of the UN Security Council and its auspicious Oil-For-Food program. The intent of the program was to provide Iraq a way to sell its oil in order to feed its people. Recent revelations prove to the contrary and further violations of UN sanctions expose the actions of key Security Council players, namely: France, Germany, and Russia.

Since the program started in 1995 it employed 900 staffers in 10 agencies internationally with 3,000 Iraqi nationals inside the country to administer the program. The funds averaged $15 billion a year, more than five times the core UN budget, with 2.2% of it going to "administrative fees" which total $1.2 billion. It's no wonder the UN didn't want the war to begin. They were about to lose the biggest gravy train they had ever seen. Currently an estimated $12 to $21 billion sits in the French Banque Nationale de Paris gathering interest while the fate of the program is scheduled to end on June 3, 2003. No doubt recent revelations of what the money actually bought with UN oversight will drive a stake in this debacle of so-called relief.

 

Sanctions and Shady Deals

During the sanctions period Iraq racked up sizable debt. France, Iraq's largest European trading partner, did $3.1 billion in business under the Oil-for-food program, with more complaints lodged than any other competing country. It's estimated that France may be owed up to $6 billion for arms sales both legitimate and illegal adding up to 13% of arms imports to Iraq. In addition, French oil company Total has pending contracts for the Majnoon and Nahr Umar fields in the south with potential proceeds coming to $650 billion.

Germany made $350 million in direct trade with another $1 billion in third party contracts. Like France, Germany is owed billions for trade going back to the 1980s. Up to 80 German companies traded with Iraq supplying whole systems or components for weapons of mass destruction up to 2001.

Russia accounted for 5.8% of Iraq's imports with $530 million to $1 billion for the last six months of 2001 alone. Outstanding debt for arms sales (up to 50% of Iraqi arms) account for another $7 to $8 billion going back to the Iran-Iraq war. Oil contracts for Lukoil to rehabilitate the West Qurna field in the south amounts to $4 billion, Salvnet negotiated a $52 million contract to drill the Tuba field in the south, Zaruezhneft and Taftneft have an outstanding contract to drill in the Saddam, Kirkuk, and Bai Hassan fields with a combined value of $13.2 million, Gazprom has contracts totaling $18 million to refurbish gas stations, and an Iraqi-Russian agreement scheduled an additional $40 billion for exploration and development of southern and western fields. Further proof is developing that Russian companies supplied arms and military hardware up to and during the current conflict.

China accounted for another 5.8% of Iraqi imports with 18% of Iraq's weapons coming from there. The Chinese Aero-Technology Import-Export Company sold Iraq $6 to $15 billion in communications gear which has the potential to have been used in military command and control as well as for targeting of missile launch units. China National Oil Company had pending contracts for developing the Al Ahdab field in the south as well.

The United States was the largest importer of Iraqi oil under the Oil-for-food program through third party vendors. In 2002 alone the US imported $3.5 billion of Iraqi crude. For the same year the US exported $31 million in agricultural goods and machine parts. For the period of 1981 to 2001 the US imported $200 million worth of weapons and arms ranking 11th on weapons sales to Iraq. For the same period top weapons importers were Russia, China, and France respectively. 2

At the onset of Operation Iraqi Freedom most of the trade ceased but proof may bear out that further transactions were made which may have affected the outcome. Furthermore, all pending contracts will now have to meet the approval of the USAID for reconstruction of the country and its oil industry. Traditionally these contracts went to US companies due to security clearances but those standards will probably be relaxed to allow coalition partners access to the country. And in all probability France, Germany, and Russia will be given access to Iraq in the interest of global economic stability as well. As a note of contrition, the outstanding debt owed to Russia and France can be written off by them or come from the current balance of the UN Oil-For-Food program, although the money is earmarked for relief. Otherwise, litigation will only cloud the prospects of a likely international consortium of vendors for Iraqi petroleum production and development.

 

Projection of Iraqi Oil and Global Petroleum Trade

The reintroduction of Iraq as an oil producer has profound significance in global energy trade as well as international relations. Prior to Operation Iraqi Freedom, the country was producing and exporting around 2.5 million bpd under UN control. Once relieved of the sanctions the country will have to repair and rejuvenate its production and export infrastructure to get to that pre-war level. Beyond that the sky is the limit based on investment and the determination of the new Iraqi government.

The short-term outlook is favorable but it will take a considerable amount of hard work. It will cost approximately $5 billion to get production back to its 2.5 million bpd level and it will take between 3 to 6 months to accomplish, at least. The first hurdle will be meeting domestic demand of 460,000 bpd. This means that most of the gas separation and refinery repairs will have to be completed. Once done, exports can be made with the southern fields most capable of resuming as soon as possible. This will make 1.2 to 1.5 million bpd available with the likely consumers being Europe, Asia, and the United States. Once the northern fields and gas separation plants are functional exports can be made through the Kirkuk/Ceyhan pipeline to Turkey's port on the Mediterranean. Output there should approach 1.2 to 1.5 million bpd as well but it has the added wrinkle of transiting Turkey after an agreement between the two governments is reached.

Syria and Jordan are facing the loss of cheap and sometimes free Iraqi oil. Prior to the war Syria was selling its own oil while stockpiling Iraqi oil delivered by the Kirkuk-Banias pipeline (capacity: 300,000 bpd). Jordan was getting 90,000 bpd which was trucked across the border. It's doubtful the two countries will ever see deals like these again and the return of those barrels to Iraqi reserve figures will add to the available amount for export, earning the Iraqi people greater wealth. With a firm export agreement with Turkey, an end to UN sanctions, no litigation from Russia, France, China, etc. over old contracts and debts, solid pipelines and working terminals, Iraq could see a return to a level of up to 3 million bpd by the end of the year. It will take a miracle but it is possible.

The prospects for the mid-term are more complicated. Iraq could produce and sell between 2.5 to 3.5 million bpd at a sustained rate approaching 1 to 2 years from liberation with an additional cost of around $7 billion towards the upper level of production. The oil will flow with a split between American and Asian markets in the south and European markets in the north. OPEC has continued to adjust for Iraqi output and it would be during this time that the cartel would begin to pressure Iraq to return to its place as the founding country of the organization.

It's probable that Iraq will sit out any quotas from OPEC in order to earn as much as possible in as little time as possible. One possible way for the Iraqis to steal a captive market would be to offer netback deals, similar to what the Saudis did during the 1980s, to selected refiners (and their markets) who are facing record low margins. Concerns of Iraq's output driving prices down are unsupported as OPEC has continued to allow in its allocation for Iraq since the war started but the benefit to the Iraqi people will be that even if the price plunges they will still make out as the cost to lift is less than $5 a barrel. Whether Iraq rejoins OPEC is less of a concern while it is still rebuilding and more of a concern for its projected developed output. Iraq's current reserves hover around 112 billion barrels but that number could double when the western region is explored. The nature of the exploration will be one of the most telling aspects of the direction the country will take in terms of foreign investment. Very few companies will be willing to sink billions in greenfield development only to see it nationalized in a few years. If the Iraqis offer service agreements the companies will probably hedge their bets by frontloading the payoff to cover costs in lieu of higher royalties over time. Speculation by daring independents like ENI did during the break of the 50/50 reign in 1957 may pop up but their efforts will only diversify the Iraqi outlets.

The development of the west has vast consequence in establishing the direction Iraq will take in a return of foreign companies but even more significant for the export potential to the Mediterranean. Iraq has several pipelines heading that way: There's the Kirkuk-Haifa pipeline, mothballed since 1948 with an output of 100,000 bpd. The line is 67 years old and likely in desperate condition but if it can be brought online it could be a large source for the 280,000 bpd of Israel's consumption, or the 99,000 bpd of Jordanian consumption (both Israel and Jordan are 100% net importers), or for export through Haifa's terminal. There's the 50 year old Kirkuk-Banias line which has an output of 300,000 bpd. It could serve Syria's 260,000 bpd consumption but it is more likely that the oil would be exported as Syria's production is 520,000 bpd. Finally, there are the Kirkuk-Ceyhan pipelines which have a combined output of 1.6 million bpd. These lines will continue to carry the bulk of Iraq's northern export crude to the European market.

If the Iraqis decide to normalize relations with Israel to secure a direct route to the Mediterranean it will signal a historic return to the original intent of the British when they carved up the former Ottoman Empire. For the brief time between 1936 and 1948 Iraq shipped via this very route while Palestine was being developed to be the hub of export for Iraqi oil that was available before Saudi Arabia even knew it had the stuff. An additional benefit for normalizing relationships will be the added incentive for the Saudis to reopen the mothballed Tapline which runs from Ras Tanura to Sidon, Lebanon with an output of 500,000 bpd. Originally, the pipeline terminated at Haifa as well but it was diverted to Sidon when Israel was granted statehood and eventually the line was reduced to supplying Jordan until deliveries were cut off due to Jordan's support of the Gulf War in 1991. The Sidon terminal was state of the art during its heyday but it's unclear how well its tank farm (3.5 million barrel capacity) and five offshore berths have weathered neglect.

Realistically, the pipelines are all in deplorable shape and the repairs would cost in the millions, and even billions, but if peace is achievable the work done will be a test case for an export route that could prove to be as strategically advantageous as it was projected in 1916. Furthermore, the cost to benefit is substantial; bypassing the 3,600 mile trip from the Persian Gulf through the Suez Canal would save 9 days in transit time with a 40% savings in transit costs and eliminate any potential disruption from the volatile northeastern African countries. If the producing countries, up to and including Iraq, Iran, Saudi Arabia, and Bahrain, decide to shift some of their capacity it would be a substantial transition based on stability and projected friendly relations. Higher capacity pipelines would likely be constructed at a cost in the billions and would take years to complete. This could only be possible because of the direct military involvement of the United States and its coalition partners. And it would likely need to be secured by continued military occupation in the region for the foreseeable future. In the final analysis, should this path become a reality it would directly benefit European countries, like France and Germany, despite their best efforts to derail the war in Iraq.

This scenario is in all likelihood a pipe dream. Developed western fields could move output in that direction but the bulk of the proven reserves will continue to move to the north and south. The northern route can't increase output without constructing additional pipelines so expansion will probably come in the south. Southern fields could increase output by additional drilling but that work would have to be done in conjunction with work on the two available terminals at Mina al-Bakr and Khor al-Amaya. Mina al-Bakr is the largest terminal with four berths capable of handling 400,000 bpd each and large enough to fit very large crude carriers (VLCC). This will be the country's workhorse terminal and will probably see little attention to increase output due to its continuous use with output in the 1.2 to 1.5 million bpd range. Khor al-Amaya was virtually destroyed in the Gulf War but Iraq claimed (before Operation Iraqi Freedom) that it had seen repairs to the point that it could soon see use of two berths with an output of 700,000 combined. Additional work could bump the output up to 1.2 million bpd.

Long-term outlook is where it gets interesting. Iraq should be able to maintain a comfortable output in the 3 to 4 million bpd range but to truly appreciate its weighty potential it would have to increase output to 6 million bpd. To reach that figure large-scale investment would have to be made in every segment of the industry. Estimates put the amount at around $20 to $30 billion with completion in 2010. To do this Iraq will have to make several key decisions. First, the government will have to prove that it is stable enough for companies to invest there. Second, the government will have to decide if it is going to allow production sharing and commit to it. The climate is right as several instances of a return to the old days of royalty concessions are being explored in key producing countries like Nigeria, Colombia, Angola, Qatar, Libya, Russia, and Saudi Arabia. Third, Iraq will have to decide if it's going to join OPEC. If it does it would have to assume output based on the quota system which is always abused but does influence prices effectively. If it doesn't than it will have to be in a position to challenge OPEC and specifically Saudi Arabia for a market share, otherwise the Saudis will adjust output to meet the contest.

This is a daunting scenario due to Saudi Arabia's dominant reserves and output capacity. Currently the kingdom has 264 billion barrels of proven reserves with as much as 1 trillion barrels in resources. Its production costs are the lowest in the industry at $1 to $2 a barrel and finding costs at around 10 cents a barrel. Export terminals at Ras Tanura (6 million bpd capacity), Ras al-Ju'aymah (3 million bpd), and Yanbu (5 million bpd) combine to export a whopping 14 million bpd. Current production stands at around 8 million bpd with reserve capacity up to 10.5 million bpd. No other country produces more oil; the United States and Russia come second with output at around 8 million bpd each.

For Iraq to challenge OPEC and Saudi Arabia it would have to produce and export beyond the 6 million bpd it could achieve, but at significant cost. Before Iraq can make this kind of move it would have to satisfy its $140 billion in debts, rebuild from over 30 years of war damage, and lure investment for excess capacity. There is very little chance of this happening and as such there is little chance of Iraq ever challenging OPEC while Saudi Arabia participates.

 

Market Impact

The United States consumes roughly 20 million bpd with about 11.2 million bpd in imports. OPEC producers account for two-fifths of this input and Persian Gulf states is 1/5 of that amount with Saudi Arabia having the largest block at 1.5 million bpd. Other large contributors are: Canada (1.9 bpd), Mexico (1.5 million bpd), and Venezuela (1.4 million bpd). Iraqi oil could replace any of these importers but it would only become likely if there was a major disruption like the kind that happened in Venezuela prior to Operation Iraqi Freedom and recently in Nigeria (.5 million bpd US imports). In both of those cases OPEC took up the slack and continued providing the 2.5 million bpd of Iraqi production. Most of the shortfall was covered by Saudi Arabia. Realistically, Iraqi crude will find Asian and European markets with the US augmenting supply by courting it in negligible amounts.

While most of the world's attention is on Iraq and the Middle East, key events have occurred elsewhere that could affect markets in ways that reduce the impact of the return of Iraq to the market. Canada, which vies for top US supplier with Saudi Arabia at around 2 million bpd, increased its reserves from 4.9 billion barrels by 175 billion barrels of oil sand deposits (bitumen). The heavy oil has proven to be cost prohibitive in the past but technological development has brought the cost down to a range of $9 to $11 a barrel. This would put it close to US domestic production rates. Overall increases in efficiency and industry advances could add as much to global reserves as 125 billion barrels, or as much as is currently Iraq's proven reserves. Western Africa, despite civil unrest, could prove to replace the North Sea in output as soon as 2006, and short transit times would favor the US market. But no case better illustrates the resilience of the energy industry than Russia.

The co-originator of the modern petroleum age is on the brink of challenging OPEC giant Saudi Arabia. What's been called "the miracle in the Russian oil fields" has boosted the country's production by 25% in the last three years. With proven reserves of 48 billion barrels production peaked at 12.5 million bpd in 1988. This amount dropped after the fall of the Soviet Union but has crawled back up to 7.29 million bpd currently with 5.4 million bpd in exports. With an annual investment of $1 billion production could increase to Saudi levels in a few years. However, the critical aspect of Russia's potential lies in development for export. Russia's workhorse Druzhba pipeline feeds Europe at a rate of 1.2 million bpd. It will need additional work to increase output. The terminal at Novorossisk on the Black Sea dates back to the early days of Russian oil but is still a consistent outlet. It needs additional work to increase output and civil unrest has plagued the area since the fall of the Soviet Union. Also, the Bosphorus Straits has proven to be difficult for large carriers and may become restricted should the Turkish government deem it.

A pipeline bypass of the Bosphorus is in the works and would solve the problem. Construction is underway to carry Caspian oil from Baku to Ceyhan in Turkey and this will make most of the Caucasus producers export streamlined. Russia may seek to exploit that outlet but will probably concentrate on bolstering it access to the US market by piping crude from its west Siberia fields to a refitted terminal in the ice-free port of Murmansk on the Artic Ocean. Negotiations are also underway for Siberian crude to find its way to the Asian market. Various state and private organizations have wrestled with the route and destination of a pipeline to China and Japan. The likely Angarask and Sakhalin ventures will need hefty investment beyond what the state can muster.

Russian deals with Iraq would have and may still provide the necessary hard currency to complete export infrastructure improvements but for the projects to truly soar they will have to be opened up to foreign capital. This means that Russia will have to open up to true production sharing agreements (PSA), which it has begun to explore with BP lately. If that happens it will send a clear signal of a continued trend back to privatizing oil and away from the failure of nationalized oil that changed the landscape of the energy industry. 3

 

Conclusion

The return of Iraq as an unbridled oil producer sets the stage for a transition in the Middle East that offers wide speculation but perhaps the most important aspect is the return of stability due to American and coalition military action there. The rise of Arab nationalism and associated terrorism has afflicted the region ever since the withdrawal of British troops in 1971 and the return of western force will raise suspicions of colonialism but the blame can be placed on the lack of control of producing countries that sat by and watched the disturbing trend develop. The United States, as history shows, has always maintained a doctrine of oil as a strategic resource and current events are nothing new. The difference is that since 9/11 the US has been given the mandate to defend itself and in so doing projecting an energy policy that dates back to the discovery of oil in the Middle East.

Iraq will not bring about a flood of cheap oil but it may shake things up for the near future before it reverts back to its OPEC roots. The brief period of time that it causes prices to drop will be more beneficial for consumers than any tax break. Per barrel prices in the 20s could inject $150 billion into the economy, whereas, a $10 increase in the price of a barrel of crude taxes consumers $100 billion annually. Somewhere in between, a per gallon price of $1.35 could save consumers as much as $228 a year. That's about as good as it gets. There's no reason to believe that prices will drop below $20 a barrel and that means that the real war dividend will be a long term process of stability and free trade which favors both consumers and producers alike.

Taken as a measure of history current events don't stand out as any great milestone for the Middle East and its position in the world. There are no elephant fields being discovered. There aren't any colossal companies getting split up by forgetful bureaucrats. There isn't a major disruption from a dictator's egotistical delusions brought about by rampant oil wealth or lack of it. Indeed, Operation Iraqi Freedom was almost met with a snore by the oil sector because it had learned so well from history. All the previous ups and downs had forced the industry to streamline the distribution process so that equal suffering softened the blow of the recent outage in Iraq. Producers need consumers and vice versa, and everyone in between, to make the world run smoothly. Expansion of global oil demand is expected to increase from 80 million bpd to 117 million bpd by 2020 which means cooperation is vital to avoid disruption and shared economic hardship. In geopolitical terms, this means that today's enemy could be tomorrow's friend and despite vastly different energy portfolios the world will not be replacing oil any time soon so it's better to learn how to deal with it and the problems it causes. Or, in the paraphrased words of a cartoon sage, "Oil, the cause of and solution to all of life's problems." 4

 

1. Yergin, Daniel, The Prize: The Epic Quest for Oil, Money, and Power, New York, Touchstone, 1991
2. Satterlee, Carrie, Facts on Who Benefits From Keeping Saddam Hussein In Power, Heritage Foundation, 2003
3. All historic data is from the Energy Information Administration:
http://www.doe.gov; all projection information is based on reports from the Cambridge Energy Research Associates: http://www.cera.com

4. Homer Simpson; the original quote was, "To alcohol! The cause of and solution to all of life's problems." - Homer vs. the Eighteenth Amendment, 1997

 

May 25, 2003

Mercurial Times exclusive commentary. Reprints must credit the author and Mercurial Times.

Copyright 2001-2003 - Mercurial Press


TOPICS: Editorial; Foreign Affairs; War on Terror
KEYWORDS: history; middleeast; oil

1 posted on 05/26/2003 8:15:59 PM PDT by nunya bidness
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To: Mercuria; AnnaZ; Jeff Head; Travis McGee; redrock; AuntB; MadameAxe; Carry_Okie; Alberta's Child; ..
It's very long but it's comprehensive.
2 posted on 05/26/2003 8:29:02 PM PDT by nunya bidness (It's not an assault weapon, it's a Homeland Defense Rifle.)
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To: nunya bidness
It's very long but it's comprehensive.

Ya think!
I'll get back to ya on Friday.

3 posted on 05/26/2003 9:12:26 PM PDT by Gore_ War_ Vet (Invading Iraq and taking over the world is NOT conservative.)
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To: Gore_ War_ Vet
Perfect. I should be getting close to town by then. We stayed a little late down here but we're heading your way tomorrow.

We can hash it out over some rock fishing.

4 posted on 05/26/2003 9:28:23 PM PDT by nunya bidness (It's not an assault weapon, it's a Homeland Defense Rifle.)
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To: nunya bidness
Dang!
5 posted on 05/26/2003 10:01:37 PM PDT by MadameAxe
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To: nunya bidness
This thing reads like a novel. It's interesting. It would take a year of study to understand it.

As to why the middle east is important to us: two reasons, oil and Israel. Without those we would never here of the area.

6 posted on 05/26/2003 10:07:05 PM PDT by RLK
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To: nunya bidness
Further frustration was added when the Bahrain fields produced crude heavy in sulfur and as such the company couldn't find buyers in the European market where the refineries weren't capable of dealing with the oil. A joint venture was the solution and the other partner was Texaco.

----------------------

In addition to having oil, Texas has some of the largest sulfur deposits ub the world, which gave Texaco experience in sulfur influenced oil.

7 posted on 05/26/2003 10:09:34 PM PDT by RLK
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To: nunya bidness
It is asked why Hitler made the error of opening up a second front with the Soviets. The answer, hinted at here, was the presence of oil fields in Russia to the Northeast of Germany.
8 posted on 05/26/2003 10:11:57 PM PDT by RLK
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To: nunya bidness
Whew! Let me get back to you!
9 posted on 05/26/2003 10:12:11 PM PDT by Travis McGee (----- www.EnemiesForeignAndDomestic.com -----)
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To: RLK; MadameAxe
As to why the middle east is important to us: two reasons, oil and Israel. Without those we would never here of the area.

Both valid and staggering in implementation. You'll find the two are inextricably entwined.

10 posted on 05/26/2003 10:17:09 PM PDT by nunya bidness (It's not an assault weapon, it's a Homeland Defense Rifle.)
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To: Travis McGee
Take your time, I'm moving my boat north tomorrow. It should take a week to get there.
11 posted on 05/26/2003 10:21:08 PM PDT by nunya bidness (It's not an assault weapon, it's a Homeland Defense Rifle.)
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To: nunya bidness
Where to where? Inside or outside?
12 posted on 05/26/2003 10:26:46 PM PDT by Travis McGee (----- www.EnemiesForeignAndDomestic.com -----)
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To: Travis McGee
West coast Florida to the Chesapeake. It should take five days if we stick to the outside. Granted, we'll be facing bucking the stream if the wind comes out of the north but that's the breaks.

Ideally we'll make good ground if we can keep outside for the bulk of the trip before we go inside at Morehead, it's only practical there.

I'm not sweating any part of the trip until we pass Little Creek. When we make the left turn up the Bay is when it gets interesting. The last time the Bay let us know it was boss with 4 foot waves and a nasty wind out of the north. We had it on the nose the whole way.

Hatteras is a snore compared to a low pressure system on the Chesapeake. Did I mention we'll have to dodge the navy the whole way up?

Gotta' love those Yamaha stern drives though. They are rock solid.

By the time you send your epilogue I should be able to receive it. And I might be reading it while dining on bull dolphin or yellowfin tuna. Not too shabby.

13 posted on 05/26/2003 10:45:50 PM PDT by nunya bidness (It's not an assault weapon, it's a Homeland Defense Rifle.)
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To: okie01
Bump for later
14 posted on 05/26/2003 10:52:53 PM PDT by okie01 (The Mainstream Media: IGNORANCE ON PARADE.)
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To: nunya bidness
bump for later
15 posted on 05/26/2003 11:47:45 PM PDT by Don W (Lead, follow, or get outta the way!)
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To: nunya bidness
whew! but a keeper ntl...
16 posted on 05/27/2003 3:40:03 AM PDT by CGVet58 (I still miss my ex-wife... but my aim is improving!)
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To: Amelia
Bump to read later.
17 posted on 05/27/2003 3:47:07 AM PDT by Amelia
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To: nunya bidness
OPEC producers' earnings went from $23 billion in 1972 to $143 billion in 1977.

Is this set of numbers in constant dollars (I doubt it)? This was a period of high inflation.

18 posted on 05/27/2003 4:51:07 PM PDT by Carry_Okie (There are people in power who are truly evil.)
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To: nunya bidness
Carter's presidency was poisoned by the crisis and in an attempt to resolve the issue he eliminated price controls on oil prices, while implementing a "windfall profits tax" on "excess" oil company profits. That single action alienated both sides of the aisle and cost him reelection.

Oh come on, Sean! As if 15% inflation, 20% mortgage interest rates, Soviet proxies in Central America, high unemployment, and the Soviet military buildup had nothing to do with it?

19 posted on 05/27/2003 5:05:43 PM PDT by Carry_Okie (There are people in power who are truly evil.)
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To: nunya bidness
The war severely disrupted both sides but Iraq suffered worse. Its output was virtually shut down by attacks and by Syria siding with Iran and shutting down its pipeline from Iraq to the Mediterranean Sea.

This is most curious. Why would a Ba'athist regime like Syria take sides against another secular Ba'athist regime, namely Iraq, in favor of a theocracy like Iran?

20 posted on 05/27/2003 5:17:04 PM PDT by Carry_Okie (There are people in power who are truly evil.)
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To: nunya bidness
Competition was unbridled in the 1980s (Because REAGAN decontrolled oil prices, that led to an immediate increase in production). The Saudis tried to maintain $34/bbl while the rest of OPEC chased the market with lower prices. Saudi production was cut to its lowest level since 1970. North Sea oil was offered at $30/bbl and that price cut out Nigeria, its direct competitor, which virtually ceased production in 1983. OPEC slashed prices by 15% from $34 to $29/bbl and cut production by 17.5%. This was predicated by the "honor system" being respected and the Saudis played the pivot role. OPEC had finally become a cartel - now they controlled price and production.

I take issue with this. The 1980s was the return of oil to commodity status, as the next several paragraphs state. It accomplished several things, not least of which was to reduce the value of Soviet oil sales with which it had financed its military buildup in the late 70s. Decontrol of oil pricing had more to do with the eventual collapse of the Soviet Union than anything else Reagan did.

21 posted on 05/27/2003 5:34:43 PM PDT by Carry_Okie (There are people in power who are truly evil.)
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To: Heuristic Hiker
Ping
22 posted on 05/27/2003 11:09:25 PM PDT by Utah Girl
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To: Carry_Okie
Is this set of numbers in constant dollars (I doubt it)? This was a period of high inflation.

Yes, it's in constant dollars.

Oh come on, Sean! As if 15% inflation, 20% mortgage interest rates, Soviet proxies in Central America, high unemployment, and the Soviet military buildup had nothing to do with it?

Of course they did. But in the context of oil the lobbyists and their congresscritters had their way with Carter. Remember that without regulation cheap oil had proven to be an economic boost.

This is most curious. Why would a Ba'athist regime like Syria take sides against another secular Ba'athist regime, namely Iraq, in favor of a theocracy like Iran?

The problem between Syria and Iraq was less a matter of ideology and more a matter of traditional power struggle. Syria was shackled to Egypt in the realm of transitting oil but not producing it. In addition, the history of the old mandates had left Syria lacking from its inattendent French handlers.

I take issue with this. The 1980s was the return of oil to commodity status, as the next several paragraphs state. It accomplished several things, not least of which was to reduce the value of Soviet oil sales with which it had financed its military buildup in the late 70s. Decontrol of oil pricing had more to do with the eventual collapse of the Soviet Union than anything else Reagan did.

You're combining decontrol of the US market and regulation on the production side of Russian oil. Russia was hamstrung with the former Soviet system and that's what cost them in production costs. They couldn't bank as much to build up their military until they escaped the old system; they're still struggling now. The problem for us is that our market prices are reflective of OPEC but still subsidized to domestic production. Not quite a true free market but certainly better than the old days.

23 posted on 06/04/2003 9:09:02 PM PDT by nunya bidness (It's not an assault weapon, it's a Homeland Defense Rifle.)
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To: sphinx; Toirdhealbheach Beucail; curmudgeonII; roderick; Notforprophet; river rat; csvset; ...
The second piece from nunya bidness

If you want on or off the Western Civilization Military History ping list, let me know.
24 posted on 07/26/2003 8:32:14 AM PDT by Sparta (Check out my new blog, http://bayousage.blogspot.com)
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To: nunya bidness
Bump for later reading. Thanks for the ping Sparta
25 posted on 07/26/2003 9:19:56 AM PDT by SAMWolf (Kiss me twice. I'm schizophrenic.)
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To: Sparta
Sean's quite a writer and thinker!
26 posted on 07/26/2003 10:38:07 AM PDT by Travis McGee (----- www.EnemiesForeignAndDomestic.com -----)
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To: Travis McGee; nunya bidness

Sean's quite a writer and thinker!

Yes he is.

27 posted on 07/26/2003 12:49:43 PM PDT by Sparta (Check out my new blog, http://bayousage.blogspot.com)
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To: Sparta
Long read but I'll hang on to it.

Thanks Sparta
28 posted on 07/26/2003 4:26:38 PM PDT by snippy_about_it (Pray for our Troops)
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To: Sparta
Thanks.
29 posted on 07/27/2003 5:44:47 PM PDT by sistergoldenhair (Don't be a sheep. People hate sheep. They eat sheep.)
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To: Berosus; blam; Ernest_at_the_Beach; FairOpinion; ValerieUSA
Ping!

30 posted on 02/26/2005 5:53:12 PM PST by SunkenCiv (last updated my FreeRepublic profile on Sunday, February 20, 2005.)
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To: nunya bidness

I can't believe I read the 'ho' thing. Very informative


31 posted on 02/26/2005 9:12:05 PM PST by corbe (mystified)
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To: corbe

Thanks for taking the time.


32 posted on 03/16/2005 9:26:11 PM PST by nunya bidness
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