Modern history

CHAPTER 12

“The Fight for New Production”

THE EQUATION—oil equals power—had already been proven on the battlefields of World War I, and from that conflict emerged a new era in relations between oil companies and nation-states. These relations were, of course, fueled by the volatile dynamics of supply and demand: who had the oil, who wanted it, and how much was it worth. Yet now more than the economics of the marketplace had to be factored into the equation. If oil was power, it was also a symbol of sovereignty. That inevitably meant a collision between the objectives of oil companies and the interests of nation-states, a clash that was to become a lasting characteristic of international politics.

Mexico’s Golden Lane

In the early years of the twentieth century, exploration in the Western Hemisphere outside the United States, was centered, above all, in Mexico. The two dominating companies were Pan American Petroleum, led by Edward L. Doheny, who later became embroiled in Teapot Dome, and Mexican Eagle, led by the Englishman Sir Weetman Pearson, later to be Lord Cowdray. Doheny, already a successful oil man in California, had first gone to Mexico in 1900 to scout oil territories at the invitation of the head of the Mexican State Railways, who, owing to the scarcity of fuel wood, was anxious to see oil developed somewhere along his line.

Pearson’s interests were much more far-reaching; he was one of the greatest of the great nineteenth-century engineer contractors. Talented and highly innovative technologically, he was also a daring entrepreneur. He seemed born to engineering, for he was gifted in mathematics and was slow, steady, meticulous, and persevering in character. The round and unprepossessing Pearson also had the gifts of the natural commander. He turned down places at both Cambridge and Oxford in favor of the family engineering business, based in Yorkshire. His early years of hard, dirty work left him with a lifelong preoccupation with scrubbed hands and clean fingernails. It was all part of his never-ending attention to the details of work.

The “Pearson touch”—his knack for success on a grand scale—was much admired. But he had few illusions about how it worked. To his daughter, he wrote: “Dame Fortune is very elusive; the only way is to sketch a fortune which you think you can realize and then go for it baldheaded.” To his son, he added, “Do not hesitate for one second to be in opposition to your colleagues or in overriding their decisions. No business can be a permanent success unless its head is an autocrat—of course the more disguised by the silken glove the better.” He proved his own adages again and again. He was responsible for several of the engineering marvels of the late nineteenth century, including Blackwall Tunnel under the River Thames; the four tunnels under the East River in New York, built for the Pennsylvania Railroad; and Dover Harbor. Eventually, the empire he established would include everything from the Financial Times, the Economist, and Penguin Books to the investment bank of Lazard’s in London, as well as an oil-service company. But Mexico would provide the basis for the greater part of his fortune.

The lure of the “Pearson touch” was such that President Porfirio Díaz, Mexico’s dictator, had invited him to Mexico to undertake the first of several major projects—the Grand Canal that drained Mexico City, to be followed by the Vera Cruz Harbor and the Tehuantepec Railway that connected the Atlantic and the Pacific. From the moment he arrived in Mexico to begin doing business, Pearson worked hard to ingratiate himself with the Mexicans, and in particular with Díaz and those around him, with everything from favors and presents, including fancy European objects d’art, to one hundred thousand pounds to found a hospital bearing his name. He seemed always willing to make concessions to Mexican sensitivities in ways that Americans would not. His English connections also impressed the Mexicans; in Parliament, where Pearson sat for several years, he was known as the “Member for Mexico.” But Pearson also owed his position in Mexico to Díaz’s cold political calculation. “Poor Mexico,” the dictator was supposed to have once remarked, “so far from God and so close to the United States.” Díaz and the politicians around him could not permit Americans to dominate their economy completely; thus, Díaz had good reason to invite a world-famous engineer from a distant country to undertake major engineering projects and then to give him every opportunity to expand his activities in Mexico.

In 1901, on a trip to Mexico, Pearson missed a rail connection in the Texas border town of Laredo. Forced to spend the night, he discovered that the town was, as he put it, “wild with the oil craze” that had spread across the state from the Spindletop discovery three months earlier. Recalling the report of an employee about seepages in Mexico, he examined every oil prospectus he could find on short notice in Laredo, and then cabled his manager to “move sharply” to acquire prospective oil lands. “And be sure that we are dealing with principals,” he ordered. Oil, he reasoned, would be a good fuel for his new Tehuantepec Railway. All of this was accomplished in the course of a nine-hour stopover. Pearson’s Mexican oil venture was launched. He expanded his area of exploration to include Tabasco, and hired none other than Captain Anthony Lucas, who had brought in the well at Spindletop, to assist in Mexico.

Large expenditures and intense commitment followed. Yet, after almost a full decade, Pearson’s Mexican Eagle had little to show in terms of production. “I entered lightly on this enterprise,” a chastened and depressed Pearson wrote to his son in 1908, “not realizing its many problems, but only feeling that oil meant a fortune and that hard work and application would bring satisfactory results.” To his wife, he was even more plaintive. “I cannot help but think what a craven adventurer I am compared to men of old,” he wrote her. “I am slothful and horribly afraid of two things—first that my pride in my judgment and administration should be scattered to the winds and secondly that I should have to begin life again. These fears make me a coward at times. I know that if my oil venture had to fizzle out entirely that there is enough left for me to live quietly. … Yet until it is a proved success I continue nervous & sometimes despondent.”

Finally, in 1909, acknowledging that his own knowledge of the oil business was “superficial,” he fired the English consulting geologists whom he had been using, the famous Sir Thomas Boverton Redwood and his firm, and instead hired Americans formerly associated with the U.S. Geological Survey. They proved their mettle, for in 1910 Pearson, now known as Lord Cowdray, made major strikes, beginning with the fabulous Potrero del Llano 4, which flowed at 110,000 barrels per day and was considered the biggest oil well in the world. These discoveries ignited a boom in Mexico; they also, virtually overnight, made Mexican Eagle one of the world’s leading oil companies. Production was centered along the “Golden Lane,” not far from Tampico, along which seventy-to one-hundred-thousand-barrel wells were soon not uncommon.

Mexico quickly became a major force in the world oil market. The quality of its crudes was such that they were mainly refined into fuel oil, which competed directly with coal for industrial, railway, and shipping markets. By 1913, Mexican oil was even being used on Russian railroads. During World War I, Mexico became a critical source for the United States, and by 1920, it was meeting 20 percent of domestic American demand. By 1921, Mexico had, with rapidity, achieved an astonishing position: It was the second-largest oil producer in the world, with an annual output of 193 million barrels.1

Yet, by then, the political environment of Mexico had changed dramatically. In 1911, the eighty-one-year-old President Díaz—distracted, some were to say, by a toothache that had gone septic—was overthrown, inaugurating the Mexican Revolution. The subsequent and continuing violence drastically reduced foreigners’ taste for investing in the country. E. J. Sadler, the head of Jersey’s Mexican operations, was captured by bandits as he carried the company’s payroll, beaten savagely, and left for dead. Somehow, he survived and made his way back to the camp. But, thereafter, he never carried more than twenty-five dollars in cash, always wore a cheap gold watch that could be surrendered to assailants, and had a visceral aversion to becoming more involved in Mexico. Oil camps belonging to Mexican Eagle were overrun and held for a time by rebels, and some of its employees were killed. In October 1918, the last month of World War I, Cowdray was approached by Calouste Gulbenkian, on behalf of Henri Deterding. Royal Dutch/Shell, said Gulbenkian, would like to purchase a substantial part of the stock in Mexican Eagle and take over its management, and thus “leave Lord Cowdray with a perfect peace of mind.”

Two decades of oil development in Mexico had made Cowdray not only weary but also wary of further risk. The Englishman had had enough. He had no desire, he explained to a British government official, to “carry indefinitely, and single-handed, the financial burden of this huge business.” Cowdray quickly accepted the proposal that Gulbenkian had put before him; and—if not with perfect peace of mind, at least with some relief and with a great addition to his wealth—he stepped aside. He had gotten his timing just right, for Mexican Eagle hardly proved to be one of Shell’s best acquisitions. Almost immediately after the sale, salt water started to intrude into the big producing wells that Shell had purchased from him. That salt water was very bad news—it meant the beginning of a decline in oil output. The same process was soon observed by other petroleum companies. The problem could have been conquered with more capital, better technology, and new exploration. But, in the midst of the revolutionary turmoil, the foreign companies were loath to step up their investment. Indeed, their days in Mexico were on the wane. For, as it turned out, more far-reaching in its impact on oil company activities than the lawlessness and physical danger of the revolution itself was the fierce struggle that developed between Mexican nationalists and revolutionaries, on one side, and foreign investors, on the other.2

The emerging conflict in Mexico would establish an essential and lasting line of battle between governments and oil companies that would soon become familiar around the world. In Mexico, the issue came down to two things: the stability of agreements and the question of sovereignty and ownership. To whom did the benefits of oil belong? The Mexicans wanted to reassert a dormant principle. Until 1884, resources in the country beneath the ground, in the “subsoil,” had belonged first to the crown and then to the nation. The regime of Porfirio Díaz had altered that legal tradition, giving over ownership of subsoil resources to the farmers and ranchers and the other surface landowners, who, in turn, welcomed foreign capital, which eventually controlled 90 percent of all oil properties. One of the major objectives of the revolution had been the restoration of the principle of national ownership of those resources. That was achieved and enshrined in Article 27 of the Constitution of 1917. It became the center of the battle. Mexico had recaptured the oil but could not develop or market it without foreign capital, while investors had little desire to bear the risk and expense of development without secure contracts and the prospect of profits.

In addition to the nationalization of the subsoil, various other actions by successive Mexican regimes—regulations and tax hikes—fueled continuing conflicts with oil companies. Some of the oil companies, led by Edward Doheny, succeeded in whipping up strong sentiment in Washington for military intervention to protect “vital” American-owned oil reserves in Mexico. The battle was made even more complicated by the efforts of Mexico to raise revenues to pay off foreign loans on which it had defaulted. Leading American bankers were keen to see Mexico make good on its debts, for which it needed oil revenues. And thus they took Mexico’s side against the American oil companies and strongly opposed the companies’ call for intervention and punitive sanctions.

The oil confrontation made relations between Mexico and the United States continually turbulent. Washington habitually withheld diplomatic recognition from the changing Mexican regimes, and more than once, the two countries seemed close to war. To the Americans, important interests and rights, including those of private property, were being attacked, and contracts and bargains were being broken. When Washington looked south toward Mexico, it saw instability, insecurity, banditry, anarchy, a dangerous threat to the flow of a strategic resource, and welshing on contracts. But when Mexico looked toward Washington and American oil companies, it saw foreign exploitation, humiliation, the violation of sovereignty, and the enormous weight, pressure, and power of “Yankee imperialism.” The oil companies, for their part, felt increasingly vulnerable and endangered, which led to reduced investment and a rapid retreat in terms of activity and personnel. The effects quickly registered on output, which plummeted, and Mexico soon ceased being a world oil power.3

General Gómez’s Venezuelan “Hacienda”

The expectations for world oil demand, the fear of shortage, the new role of oil in national power that had been proved by the war, and of course, the profits to be made—all these fueled what Royal Dutch/Shell called “the fight for new production” in its 1920 annual report. It declared, “We must not be outstripped in this struggle to obtain new territory … our geologists are everywhere where any chance of success exists.” Venezuela was at the top of the list, and not only for Royal Dutch/Shell. The change in the political environment in Mexico was stimulating a wholesale migration by oil men to Venezuela. There, centuries before, early Spanish explorers had observed how the Indians used the oil seepages to caulk and repair their canoes. Now Venezuela offered, in contrast to Mexico, a friendly political climate. It was the handiwork of General Juan Vicente Gómez, the cruel, cunning, and avaricious dictator who, for twenty-seven years, ruled Venezuela for his personal enrichment.

Venezuela itself was an underpopulated, impoverished, agricultural nation. Ever since the country’s liberation from Spain in 1829, local caudillos had governed the various regions. Of the 184 members of the legislature in the mid-1890s, at least 112 managed to claim the rank of general. Seizing power in 1908, Gómez set about centralizing power and turning the country into a personal fiefdom, his own private hacienda. Barely literate, he ruled through his cronies and family—by one count, he fathered ninety-seven illegitimate children. He installed his brother as his vice-president, a post the brother held until he was murdered by Gómez’s son. Before World War I, Gómez affected a Teddy Roosevelt big game hunter garb. During the war, he was pro-German and dressed up in imitation of the Kaiser. Woodrow Wilson called him a “scoundrel,” a mild epithet for a man who kept his tight grip on the country through terror and brutality. The British minister to Caracas was more blunt; he described Gómez as “an ‘Absolute Monarch’ in the most medieval sense of the word.” Whatever the state of his literacy, Gómez knew what he wanted, which, in addition to absolute political power, was vast wealth. His poor country needed revenues if it was to develop economically, and if he was to become rich. The two objectives blended as one. Revenues meant foreign capital. Oil was Gómez’s opportunity; but he shrewdly recognized that, in order to lure foreign investors, he would have to guarantee a stable political and fiscal environment.4

By 1913, Royal Dutch/Shell was already at work in Venezuela, in the environs of Lake Maracaibo, and minor commercial production began in 1914. In 1919, with the postwar surge of interest in Venezuela, Jersey Standard sent its scouts to look over the country, among them a geologist who decided to skip the Maracaibo Basin altogether. “Anyone who stays there a few weeks,” he explained, “is almost certain to become infected with malaria or liver and intestinal disorders which are likely to become chronic.” He recommended against investing in Venezuela. But a Jersey manager who had come along on the trip disagreed. To him, what counted in Venezuela, much more than malaria and the liver and intestinal disorders, was the commitment of Royal Dutch/Shell. “The fact that they have spent millions there leads us to suspect that there is considerable oil in this country,” he reported. Failure to develop production in Latin America could endanger Standard Oil’s ability to remain predominant in supplying Latin America.

Getting a concession on General Gómez’s “hacienda” was not, however, as easy as it looked. Standard Oil’s representative managed to arrange to see the general himself, rather than going through the normal host of intermediaries. The general seemed encouraging, and Standard, with some confidence, put in a bid. But, on that exact day, the same concession was also bid on by one Julio Méndez, who happened to be Gómez’s son-in-law and who coincidentally won the concession—and immediately sold it to another company. Eventually, Jersey did acquire a good deal of acreage, some from other American companies and some from Julio Méndez, including 4,200 acres under Lake Maracaibo. That last was considered a big joke. A Jersey official suggested that the company also buy a boat so that, if the 4,200 underwater acres proved valueless as an oil concession, the company could go into the fishing business.

Even on dry land, the search for oil was difficult and hazardous in Venezuela. There were virtually no roads passable by auto, and very few even by ox cart. The geologists traveled by canoe or mule. The country had never even been accurately mapped; it was discovered that rivers indicated on maps did not exist or, if they did, were tributaries of entirely different systems from those depicted. Disease seemed to hit inescapably almost everyone who came into the country. “Mosquitoes were the worst and largest of any place I ever saw,” recalled one of the American geologists. The geologists also had to cope with another insect that specialized in laying its eggs under human skin. Medical care was inaccessible, primitive, or nonexistent. In addition to everything else, the geologists and the drillers who followed had to contend with hostile Indian tribes. One Jersey driller was killed by an arrow as he sat on the porch of a mess hall; thereafter, all jungle growth within arrow’s range was ordered cut back. As late as 1929, Shell protected the cabins of its tractors with several layers of a special cloth, dense enough to stop Indian arrows.

Gómez’s desire to draw in foreign capital led his government to seek the help of both the American minister in Caracas and American companies in drafting what became the Petroleum Law. It set the terms for concessions, taxes, and royalties, and, at least once a concession was granted, Venezuela under Gómez provided political predictability and administrative and fiscal stability—in sharp contrast to Mexico. Yet, even as late as 1922, the year of the new Petroleum Law, there was some question whether there would be any significant oil development at all. The exploration results had been interesting but no more, while the capital and effort required were proving quite large. In 1922, some American geologists, who had already spent four years mapping the country for Shell, offered a gloomy assessment of oil prospects for Venezuela and the entire South American continent. What they saw there was “a mirage.” Ten cents spent increasing production in the United States, they said, would “be more productive of profits than a dollar spent in the tropics.” They even went so far as to argue that shale oil in the United States could be produced more cheaply than oil from Venezuela and elsewhere in Latin America.

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Their judgment was premature. In December of that same year, Shell’s Barroso well, in the La Rosa field in the Maracaibo Basin, blew out with an uncontrolled flow that was estimated at one hundred thousand barrels per day. The La Rosa field, which had not appeared particularly promising at first, had been selected and staked out by the local Shell manager, George Reynolds. He was the very same George Reynolds—the “solid British oak”—who had resolutely guided Anglo-Persian’s project in Persia to its first discoveries a decade and a half earlier in the face of enormous obstacles, and then had been let go with nothing except a minuscule bonus. A decade and a half earlier, his persistence had opened up the Middle East to oil production. Now he had done the same for Venezuela.5

The La Rosa strike confirmed that Venezuela could be a world-class producer. The discovery inaugurated a great oil frenzy. Over a hundred groups, mostly American, but some British, were soon active in the country. They extended from the largest companies down to independent oil men like William F. Buckley, who obtained a concession to build an oil port. The oil rush provided enormous opportunity for General Gómez to enrich himself. His family and cronies, the Gomecistas, would, infallibly, obtain choice concessions from the government and then resell them, at considerable profit, to the various foreign companies, passing on kickbacks to the general himself. Later, to formalize such matters, the general and his friends set up a paper outfit called Compañía-Venezolana de Petróleo, but more familiarly known as “General Gómez’s company.” Gómez and his Gomecistas developed the playing-off of the various foreign suitors into a fine art. The companies had no choice—no choice, that is, if they wanted to participate in what would become the great Venezuelan oil boom of the 1920s.

Development proceeded at breakneck speed. In 1921, Venezuela produced just 1.4 million barrels. By 1929, it was producing 137 million barrels, thus making it second only to the United States in total output. That year, oil provided 76 percent of Venezuela’s export earnings and half the government’s revenues. The country had already become Royal Dutch/Shell’s largest single source of production, and, by 1932, Venezuela was also Britain’s largest single supplier, followed by Persia and then the United States. Venezuela had, within less than a decade, emphatically become an oil country. And it had won the competition for foreign capital. Investment on a large scale was required for exploration and development in Venezuela, and thus, despite the many players, the scene was really dominated by a few companies. In the 1920s, most of the production was directly or indirectly accounted for by just three—Royal Dutch/Shell, Gulf, and Pan American. The last was Edward Doheny’s company, which still remained one of the dominant producers in Mexico. In 1925, Pan American was purchased by Standard of Indiana.

This scale of foreign investment in Venezuelan oil would probably not have occurred had not Gómez provided a relatively hospitable political environment. But how long would the stability last? A representative of Lago, Standard of Indiana’s subsidiary, told a U.S. State Department official in 1928: “President Gómez could not live forever, and there was always the danger that a new Government, perhaps with more radical tendencies, might seek to confiscate the oil properties and follow some of the policies which have been adopted in Mexico.” Thus, for safety’s sake, Lago built its huge export refinery for Venezuelan oil not in Venezuela, but on Aruba, a Dutch island just off the coast. Shell did likewise on another Dutch island, Curaçao.

Unlike Shell and the other companies, Jersey had had no exploration success to speak of in Venezuela, despite large expenditures. In New York, the executive responsible for Venezuela was known as the “nonproducing production director.” Finally, in 1928, applying new technology to a concession discarded by another company, Jersey made its first significant strike. The development of underwater drilling technology opened up the rich deposits under Lake Maracaibo, ultimately raising a vast amount of oil from beneath the lakebed. No one joked anymore about Jersey’s going into the fishing business.

In 1932, at the bottom of the Great Depression, Standard of Indiana became worried that a proposed new American tariff on imported oil—$1.05 per barrel of gasoline, 21 cents on crude and fuel oil—would effectively shut Venezuelan oil out of the United States. Indiana did not have a foreign marketing system to which the oil could be diverted. It was also apprehensive about additional capital requirements in the midst of the Depression, as well as the possibility that its Mexican assets would be nationalized. Adding it all up, the risks looked large—too large from Indiana’s point of view—and it sold off to Jersey its foreign operations, including its large Venezuelan position. Jersey paid, in part, with stock, and thus, for a time, Indiana became the largest single stockholder in Standard of New Jersey.6

Duel with the Bolsheviks

But it was in the Eastern Hemisphere, not the Western, that the collision between petroleum and politics was most dramatic. Before the war, Russian oil had been one of the most important elements in the global market. But now that oil was in the hands of the new communist government of the Soviet Union. How would it choose to play the game, and by whose rules?

Royal Dutch/Shell had the most at stake, owing to its purchase, just before World War I, of the Rothschilds’ large oil interests in Russia. After the Bolshevik Revolution, many parties were busy trying to acquire Russian oil fields on the cheap. Gulbenkian was said to be picking up properties from emigré Russians at “bargain basement” prices. Never one to pass up a deal, he was also buying the art treasures that the cash-hungry emigrés brought out with them in their luggage.

Unlike the Rothschilds, the Nobel family had held tightly to its interests in Russian oil. But during the Revolution, the Nobels fled the country, one group disguised as peasants, another escaping by sled and foot across the border into Finland. After three-quarters of a century, their dynasty in Russia was over. They eventually made their way to Paris, where they holed up in the Hotel Meurice and tried to figure what could be salvaged of their oil empire—and how.

The answer was a fire sale. The Nobels offered Deterding their entire Russian oil operation. The country was still in chaos and civil war, and the outcome was not at all certain. Deterding grasped at once what was being offered: the opportunity to become master of Russian oil. There was just one catch—the assumption that the Bolsheviks would be defeated. He took the lead in forming a syndicate, along with Anglo-Persian and Lord Cowdray’s interests, to negotiate with the Nobels. He was convinced that the Bolshevik regime could not last. “The Bolsheviks will be cleared, not only out of the Caucasus,” he wrote to Gulbenkian in 1920, “but out of the whole of Russia in about six months.” Still, as an insurance policy, Deterding sought a guarantee of political support from the British Foreign Office. When the Foreign Office refused, he insisted that the Nobels retain a minority share, or that, at best, the Group buy an option until “the establishment of some settled form of Government.” The Nobels wanted out, completely, and in the face of Deterding’s implacability, the negotiations broke down.

But another potential suitor was waiting in the wings, and one that was, frankly, much more attractive to the Nobels, not only because of its resources but also because of its nationality, which promised to bring with it the political support of the American government. It was Standard Oil of New Jersey. Here, in these far different and more threatening times, was the opportunity to realize, at last, that long-sought alliance of American and Russian oil that the Nobels had originally tried to forge in the 1890s.7

Jersey, in turn, was interested. Walter Teagle and his colleagues remembered all too well the impact Russian oil had once had on the old Standard Oil Trust, frustrating its efforts to create a universal petroleum order. They knew that the Mediterranean markets could be supplied more cheaply by Russian oil than with oil exported from the United States. Russian exports had ceased during World War I, but if production were sufficiently restored and new technology applied, it could once again drive American petroleum from European markets. Better that Standard Oil have a say over Russian oil than have it in the hands of a competitor. “It seems to me that there is no other alternative but for us to accept the risk and make the investment at this time,” commented Teagle. “If we do not do it now, I think we will be debarred from ever exercising any considerable influence in the Russian producing situation.”

Jersey and the Nobels started intense negotiations—despite the strong possibility that the Nobels were trying to sell properties they might no longer own. That risk became more real in April 1920, when the Bolsheviks recaptured Baku and promptly nationalized the oil fields. The British engineers who worked in Baku were thrown into prison, while some of the “Nobelites” were to be put on trial as spies. Yet, so attractive was the deal if the Bolsheviks failed, and so strong the conviction that they would, that Jersey and the Nobels continued their discussions. In July 1920, less than three months after the nationalization, the deal was consummated. Standard Oil bought controlling rights to half of the Nobel oil interests in Russia at what was definitely a bargain basement price—$6.5 million down, with a commitment of up to another $7.5 million. In exchange, Standard gained control over at least one-third of Russian oil output, 40 percent of refining, and 60 percent of the internal Russian market. But, notwithstanding what the Western oil men wanted to believe, the risk was very high indeed—and all too evident. What if the new Bolshevik regime did, after all, survive? Having already nationalized the oil fields, it might operate them itself or put them on the international auction block.

In the duel between capitalists and communists that followed, the Bolsheviks were represented by the skilled and resourceful Commissar for Foreign Trade, Leonid Krasin. Tall, with chiseled features and a sharply pointed beard, he was urbane and persuasive, and seemingly reasonable, not at all the blood-thirsty fanatic that Westerners expected. He also had an eye for the ladies. He “looks, every inch of him” swooned an Englishwoman, “the highly bred and highly trained human being, a veritable aristocrat of intellect and bearing.” Like no other of his comrades, Krasin understood the capitalists, for he had been one himself. Before the war, he had served as the altogether respectable manager of the Baku Electric Company and then as the Russian representative of the big German combine Siemens. At the same time, however, Krasin was also, secretly, the chief technocrat and, in Lenin’s own words, “finance minister” of the Bolshevik Revolution. “I am a man who has no shadow,” he liked to say. During the war, in his official role in the Czarist state, he had been one of the main architects of the Russian war economy, putting strains on his relations with his fellow revolutionaries. One dispute with his Bolshevik comrades so distressed him that he gave up meat and subsisted on a diet of mare’s milk. But the Bolsheviks needed him and his managerial skills—he was the only big businessman in the Bolshevik hierarchy—and he emerged from the Revolution with a double brief, commissar not only for foreign trade but also for transport. From these posts he would cast a considerable shadow.

As Standard was wrapping up its negotiations with the Nobels, Krasin arrived in London to discuss trade relations on behalf of the Bolshevik government. On May 31, 1920, he went to 10 Downing Street at the invitation of Prime Minister David Lloyd George—a historic moment, in that it was the first time an emissary of the Soviet Union had been received by the head of government of a great Western power. His appearance stirred intense curiosity among the British, combined with repugnance. Lord Curzon, the Foreign Secretary, staring into the fireplace, hands firmly clasped behind his back, refused to shake hands with Krasin until Lloyd George sternly rebuked him: “Curzon! Be a gentleman!”

For many months thereafter, the Anglo-Soviet discussions proceeded, though with great difficulty. Lenin himself passed a secret message to Krasin in London: “That swine Lloyd George has no scruples or shame in the way he deceives; don’t believe a word he says and gull him three times as much.” While the negotiations dragged on, Krasin proved himself singularly adept at stimulating the appetites of British businessmen eager for trade. But his was the weaker hand. For the Soviet Union was a country headed toward economic disaster, beset as it was by woeful industrial underproduction, inflation, severe lack of capital, and a widespread food shortage that was turning into famine. It desperately needed foreign capital to develop, produce, and sell its natural resources. Toward that end, in November 1920, Moscow announced a new policy of offering concessions to foreign investors.

Then, in March 1921, Lenin went further. He announced what became known as the New Economic Policy, which provided for a much-expanded domestic market system, a return of private enterprise, and a broadening of the Soviet commitment to foreign trade and selling concessions. It was not that Lenin had experienced a change of heart; he was only responding to immediate and dire necessity. “We cannot by our own strength restore our shattered economy without equipment and technical assistance from abroad,” he declared. To gain that assistance, he was ready to give extensive concessions “to the most powerful imperialist syndicates.” Characteristically, his first two examples referred to oil—“a quarter of Baku, a quarter of Grozny.” Petroleum could once again, as in Czarist times, become the most lucrative export commodity. A Bolshevik newspaper called it “liquid gold.”

Lenin’s rapprochement with the West met strong opposition from other comrades, including the ever-suspicious Stalin. The businessmen coming to the Soviet Union, Stalin warned, would include “the best spies of the world bourgeoisie,” and wider contacts would lead to dangerous revelations of Russia’s weaknesses. Nevertheless, a week after Lenin’s announcement of the New Economic Policy, and in affirmation of it, Krasin signed the Anglo-Soviet Trade Agreement in London. He then proceeded with great dexterity to approach the various companies, dangling offers of new concessions for oil—at the same time using rumors and hints to play one company off against another.

Deterding decided that he was not disappointed to have lost the Nobel deal. Not at all. He, like the Nobels, was convinced that the entrance of Standard Oil into Russia brought a strong measure of insurance to all foreign investors, including Royal Dutch/Shell, with its ownership of the former Rothschild properties. “We have already several good seats and a very great part of the food on the Russian table,” he lectured Gulbenkian. “Dining is very much better in company with other people who have also got a very big interest in the dinner.” But Deterding had no intention of accepting passively the Bolsheviks’ efforts to sell off what he regarded as his properties and so exclude him from the table. Nor, for that matter, did Walter Teagle.8

In Search of a United Front

In 1922, Jersey, Royal Dutch/Shell, and the Nobels began to fashion what became known as the Front Uni. Their aim was to create a common bloc against the Soviet threat to their Russian oil properties and their trade. Ultimately a dozen other companies joined it. All the members pledged to fight the Soviet Union together and not allow themselves to be picked off individually. They agreed to seek compensation for nationalized property and to refrain from dealing with the Russians independently of one another. To be sure, there as elsewhere, “the brethren of oil merchants” hardly trusted one another, let alone the Soviets. Thus, despite the mutual pledges and promises, the Front Uni stood on very unsteady legs from its birth. And the crafty Leonid Krasin, who well understood capitalists and their competitive instincts, continued to play the companies off against one another with a master’s skill.

Meanwhile, in many markets around the world, the companies were feeling the rising pressure of competition from cheap Russian oil. The Soviet oil industry, virtually dormant from 1920 to 1923, thereafter revived quickly, helped by imports of large amounts of Western technology, and the USSR soon reentered the world market as an exporter. Within Jersey, the senior executives faced a dilemma. Should they, whatever their property claims, start buying cheaper Russian oil, or should they continue to stand back on both moral and business grounds? Teagle now regretted the investment in the Nobel enterprise. “I am,” he said, “convinced that instead of sitting up with a sick child of this character and nursing it along for years, we could have taken the same amount of money and invested it elsewhere in the oil business in such a way that the investment would have immediately become productive.”

Heinrich Riedemann, the head of Standard’s German operations, saw things somewhat differently. Private companies, he concluded, would not easily be able to defend their rights against confiscation and nationalization. “The participation of a government in industrial and business enterprise as in Russia is new and unheard of in the history of business,” he said. “None of us like the thought of helping Soviet ideas,” he added. “But if others should be willing to come in, what would then have been the use if we had kept aloof?” Indeed, other Western groups were already knocking at the door, some quietly and some with great fanfare, seeking concessions across the whole of the Soviet Union—all the way from Baku, in the Caucasus, to the island of Sakhalin, off the coast of Siberia. The properties in the Caucasus were those already claimed by Jersey, Shell, and others. To make matters worse, the Soviets were selling oil from those properties as if it were their own.

There was one possible way to outmaneuver the Soviets: Jersey and Shell could form a joint organization to buy Russian oil. Teagle did not like the idea at all. “I know I am old fashioned in feeling this way,” he said, “but somehow or other the idea of trying to be on friendly terms with the man who burglarizes your house or steals your property has never appealed to me as the soundest course that could be pursued toward him.” Yet, once other American companies began to purchase more Russian oil and used it to compete directly with Jersey, opposition within the company to doing business with the Russians gave way. A joint Jersey-Shell buying organization was finally established in November 1924, and the two companies began exploring the options for doing business with the Soviets. Privately, Teagle was bitter about how the whole matter had been handled. It was the classic business problem of not enough time, of the day never being long enough for long-term thinking. “As I look back over what we have done during the past six or eight months, I am rather impressed with the fact that a matter so important as this Russian purchase situation should have been handled by us without really giving the subject the consideration which its importance justified,” he wrote to Riedemann. “It is certainly to be regretted that we have so many things to do and our business day is so fully occupied that somehow or other we seem to make mistakes which could have been avoided if we had really spent the time necessary to think the matter through to a logical conclusion.”

Cooperation with Royal Dutch/Shell was one thing, but cooperation with the Soviets remained repugnant to Teagle. In a letter to Riedemann he wrote, “Affording the Soviet a market for petroleum not only is actually becoming a receiver of stolen goods, but operates to encourage the thief to persist in his evil courses by making theft readily profitable.” Riedemann tried to calm the agitated chief executive. “Man is a strange being,” he replied, on Christmas Eve 1925, “and in spite of all disappointments he still starts every year with new hopes. So let us do the same.”

A Jersey-Shell agreement for a joint purchase arrangement with the Soviets soon appeared imminent. It even provided that 5 percent of the purchase price would be set aside to compensate former owners. Both Teagle and Deterding remained personally skeptical of the whole undertaking. And, when the proposed agreement fell apart in early 1927, Deterding was almost gleeful. “I am so glad that nothing came of these Soviet deals,” he wrote to Teagle. “I feel that everybody will regret at some time that he had anything to do with these robbers, whose only aim is the destruction of all civilization and the re-establishment of brute force.”

Sentiment of a sort had apparently entered into Deterding’s business calculations. After his marriage to the White Russian émigré Lydia Pavlova, he seemed to become more staunchly and outspokenly anti-communist. Deterding even telegraphed John D. Rockefeller, Jr., beseeching him to block the various Standard successor companies from buying Russian oil. The Dutchman reported that he had “begged” Rockefeller, “for humanity’s sake,” that “all decent people” should abstain “from helping the Soviets to get hard cash.” The regime, he told Rockefeller, was “anti-Christ.” Surely, he added, Rockefeller did not want his companies “to have bloodstained profits. … The Soviet murderous system will be soon at an end if your Companies will not support it.”9

Price War

In spite of Deterding’s entreaties, two of the other Standard Oil successor companies, Standard Oil of New York and Vacuum, were going their own way in dealing with the Soviets. Standard of New York built a kerosene plant for the Russians at Batum, which it leased back. Both companies now contracted to buy large amounts of Russian kerosene, particularly for India and other Asian markets. Socony needed Russian oil to supply its markets in India. Shell had other sources from which to substitute in India; Socony did not.

Deterding went into an awful rage. He denounced Socony’s president, C. F. Meyer, as “a man who has neither honor nor intelligence”; and in 1927, in retaliation for what he saw as Socony’s treachery, he launched a brutal price war in India, which he soon carried to other markets around the world. Socony counterattacked, cutting prices in still other markets. Deterding also orchestrated a press campaign against Standard of New York for buying “communist” oil. Since the distinctions among the successor companies to the Standard Oil Trust were not very clear—not only to the public, but also in the mind of Deterding, who was too suspicious to believe in them anyway—Standard Oil of New Jersey was dragged into the fray. To the intense discomfort of Walter Teagle, Jersey was also accused of buying “communist” oil. That had been Deterding’s intention all along. “We are facing now such enormous events that the Jersey Cy. should settle these things herself,” Deterding wrote menacingly to a Jersey executive. He left no doubt that he expected Jersey to bring Socony sharply to heel. Jersey “after all is the biggest American oil Cy. and anyhow is the one with the biggest future,” he said, “and the minor New York Cy. should-be made to understand that she is the servant of the Jersey Cy., and not her boss.” As Deterding had intended, Jersey was driven to criticize publicly the other two companies on their Russian purchases. Teagle was able to find some solace in the affair. “The thinking people in Europe, for the first time,” he said, “now realize that there is a real and genuine difference between one Standard Oil Company and another.”

Jersey’s executives suspected Deterding had withdrawn from the joint purchase agreement with the Soviets because of pressure from the British government. But, with the price war in full swing, a senior British official assured the Americans that such was not the case. “Sir Henri Deterding always got himself into hot water because of his tactlessness,” wrote the official. When the Russians had questioned the compensation arrangement in the proposed joint purchase venture of Shell and Jersey, “Sir Henri completely lost his head and told them that he would prevent any one from buying Soviet oil. … This was an utterly stupid and at the same time thoroughly characteristic thing for him to do. … It was obvious that other purchasers could not be kept away and that it is partly rage at his own futility which made Sir Henri come out with his blast on the Standard Oil of New York and the statement of his determination to undersell.”

But at a dinner party in The Hague, at the home of one of his Dutch directors, Deterding offered his own version of events. “After years of comparative peace,” he declared, “we found ourselves suddenly attacked in Burma, where the Standard Oil Company of New York began to import Soviet kerosene. Considering our best defence in this instance to be a good offence, I immediately accepted the challenge and ever since we have been thrusting and parrying in our efforts to find weak spots in the other’s armour. I believe that, for the moment at least, the position of the Royal Dutch with regards to Soviet oil is once again clearly understood.”

The two errant American companies, Vacuum and Standard of New York, would not concur. Deterding’s aim, the president of Vacuum was convinced, was really to cut his company off from inexpensive oil for its export systems, which happened to compete directly with Royal Dutch/Shell, and then to win “a monopoly supply of Russian petroleum available for export.” And when Jersey accused the two companies of betraying American principles, Vacuum’s president observed that American businessmen and farmers were busily selling cotton and other products to Russia. “Is it more unrighteous,” he asked, “to buy from Russia than to sell to it?” That would be a long-persisting question.

By the late 1920s, the major companies were weary of the whole matter of Russian oil. The effort either to regain their properties or to recoup their investment had become a lost cause. Moreover, the gusher at Baba Gurgur in Iraq turned their attention to the new sources of supply in the Middle East. The Jersey board decided to adopt a neutral stance—neither to seek a contract with the Soviets nor to participate in a boycott. Riedemann summed up the matter in the autumn of 1927. “Personally,” he said, “I have buried Russia.”

If so, it would prove to be a lively corpse, as growing volumes of Soviet oil entered a sated world market. The vicious and zealous price war that Deterding had instigated, in India and elsewhere, was aimed at this Russian petroleum, but it was to have far larger consequences for all who played in the game of international oil.10

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