Modern history

PART IV

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THE HYDROCARBON AGE

CHAPTER 20

The New Center of Gravity

IT WAS KNOWN AFTERWARD, in corporate lore, as the “Time of the Hundred Men.” These were the war years, when the number of American oil men working in Saudi Arabia was reduced to a hundred or so, cut off for most of the time from the rest of the world, and the development of Saudi oil was forgotten amid the global clash of arms. In late 1943, the “hundred men” were joined by another—Everette Lee DeGolyer, whose arrival was a sure signal that Saudi Arabia had not been forgotten by those who were thinking about the future, when the war would be over.

No man more singularly embodied the American oil industry and its far-flung development in the first half of the twentieth century than DeGolyer. Geologist—the most eminent of his day—entrepreneur, innovator, scholar, he had touched almost every aspect of significance in the industry. Born in a sod hut in Kansas and raised in Oklahoma, DeGolyer had enrolled in a geology course at the University of Oklahoma, to avoid Latin, and thus by accident set the course of his life. While still an undergraduate, he took time off to go to Mexico, where, in 1910, he discovered the fabulous Portrero del Llano 4 well. It blew in at 110,000 barrels per day, inaugurating the Golden Lane and the golden age of Mexican oil. It was the biggest oil well ever discovered, and it laid the basis both for the oil fortune of the Cowdray/Pearson interests and for DeGolyer’s unique and everlasting reputation.

That was only the beginning. DeGolyer was more responsible than any other single person for the introduction of geophysics into oil exploration. He pioneered the development of the seismograph, one of the most important innovations in the history of the oil industry, and he championed its use, to such a degree that he was said to be “crazy with dynamite.” The chief geologist of Standard Oil of New Jersey said admiringly of DeGolyer that “his interest in oil finding is actively with him day and night.” DeGolyer put together a successful independent oil company, Amerada, on behalf of the Cowdray interests, and then, though courted by Standard of New Jersey, he instead went off on his own and in the late 1930s established DeGolyer and McNaughton, which became the world’s leading petroleum engineering consulting firm. This, too, was an innovation, for it met the new need for independent appraisal of the value of petroleum reserves to serve as a basis for financing by banks and other investors.

DeGolyer was already a millionaire several times over by his mid-forties, and thereafter his earnings averaged $2 million a year. Eventually, he grew bored with making money and gave a lot of it away. Indeed, DeGolyer’s interests were much broader than just oil and money. He was a founder of what became Texas Instruments. He was a considerable historian of chili. He built an extraordinary collection of books. He bailed out the Saturday Review of Literature, when it was about to go bust, and became its chairman, though he never did care much for its politics.1

For many years, the short, plump, and dynamic DeGolyer, with his leonine head, was a familiar, highly respected figure in the councils of the oil industry, where his words carried much weight. And, of course, as a self-made man, DeGolyer had little use for the New Deal. But when the war broke out, he was called to Washington to be one of the chief deputies to Harold Ickes in the Petroleum Administration for War, and he came, though reluctantly. His charge was to help organize and rationalize production throughout the United States. In 1943, however, he was given a special foreign mission: to appraise the oil potential of Saudi Arabia and the other countries of the Persian Gulf, which by that time had emerged at the center of a critical and very contentious debate.

Three years earlier, in 1940, DeGolyer had made a speech on Middle East oil to a group in Texas. “No such galaxy of fields of the first magnitude over such a wide area has been developed previously in the history of the oil industry,” he said. “I will be rash enough to prophesy that the area we have been considering will be the most important oil producing region in the world within the next score of years.” Now, in 1943, he would have the chance to see for himself. Even so, he did not look forward to the trip. “A long time ago it seemed pretty important to me for some American to make this trip and size up the situation,” he wrote to his wife. But, he added, “it is uncertain—likely to be uncomfortable and a little bit hazardous. I am no Lindbergh.”

Getting to the Middle East was no easy thing in wartime. The first stop was Miami, where the plane blew a tire on landing. After waiting around for transport, DeGolyer and the members of the mission finally hitched a ride on military planes, over the Caribbean, to Brazil, to Africa, and finally to the Persian Gulf. Their itinerary would take them to the oil fields of Iraq and Iran, to Kuwait and then to Bahrain, and lastly to Saudi Arabia, to see the existing fields and to visit other structures that had been identified. After one stop, DeGolyer wrote his wife, “We haven’t seen anything but a pretty barren land on this whole trip…. In fact Texas is a garden in comparison with some places we have been.”

DeGolyer mastered the art of eating sheep’s eyes when they were ceremoniously offered to him. And he noted many curious sights along his route. But it was the geology—the clues that his experienced eye detected as he toured the desert, the further hints that he extracted from the maps, the well reports, and the seismic work—that captured his imagination. Three structures had already been tapped in Saudi Arabia, with reserves estimated at 750 million barrels. But the identification of similar structures suggested that the reserves might be far larger. The same applied in the other countries along the Gulf. The physical hardships were worth the trouble, many times over. For DeGolyer was an oil man, and to him the barren desert of the Arabian Peninsula was an El Dorado, the stuff of legend. He was overcome by excitement, for he recognized that he was investigating something for which no precedent existed in the history of the oil industry. Even he, who had discovered a well that flowed at 110,000 barrels per day, had never seen anything on so vast a scale in the course of half a century in the business.2

When he came back to Washington in early 1944, DeGolyer reported that the proven and probable reserves of the region—Iran, Iraq, Saudi Arabia, Kuwait, Bahrain, and Qatar—amounted to about 25 billion barrels. Of that, Saudi Arabia accounted for about 20 percent—perhaps 5 billion barrels. He was a conservative man, and he applied the same standards for “proven” and “probable” reserves on behalf of the United States government as he would have in appraising the reserves for a bank. In fact, he suspected that the reserves would be much, much larger. And, indeed, estimates that sounded like lunacy—up to 300 billion barrels for the region and 100 billion barrels for Saudi Arabia alone—resulted from his trip. One of the members of his mission told officials in the State Department, “The oil in this region is the greatest single prize in all history.”

More important than any specific numbers was DeGolyer’s overall judgment of the significance of these huge reserves of oil: “The center of gravity of world oil production is shifting from the Gulf-Caribbean area to the Middle East—to the Persian Gulf area,” he said, “and is likely to continue to shift until it is firmly established in that area.” That judgment, delivered by a man with roots so deep in the American industry, constituted a eulogy for America’s receding place in world oil—the end of its dominion. The United States was to produce almost 90 percent of the oil used by the Allies in World War II, but that was the high-water mark for its role as supplier to the world. Its remaining days as an exporter would soon disappear. Yet DeGolyer’s words were more than just a eulogy. They were a prediction about a dramatic reorientation in the oil industry that would have a profound impact on the direction of world politics.3

“The Allies Have the Money”

The British government had long been actively involved in politics and oil production in the Middle East. The United States had largely ignored the area. The gingerly approach reflected the fact that, when all was said and done, oil production in the Middle East did not as yet amount to much. In 1940, the area including Iran, Iraq, and the entire Arabian Peninsula produced less than 5 percent of world oil, compared to 63 percent for the United States.

Even then, however, there were those who could see that the “center of gravity” was moving. In the spring of 1941, James Terry Duce, a vice-president of Casoc (as the California-Arabian Standard Oil Company was known), had written to DeGolyer that he was “getting a closer and closer look at the Persian Gulf” and that “fields such as we have in that area are a totally different experience to anything in the United States—even East Texas. The amounts of oil are incredible, and I have to rub my eyes frequently and say like the farmer—‘There ain’t no such beast.’”

But at that time the Axis powers were still on the offensive in Russia and North Africa, and the Middle East was in jeopardy. As a consequence, the dwindling number of Americans, “the hundred men” in Saudi Arabia, largely devoted themselves not to development, but to the opposite: planning how to protect the wells (by filling them in with cement) in case they were bombed, and how to destroy them in the event that “denial” to advancing German armies became necessary. For the same reason, wells were also plugged in Kuwait and Iran, all of which was carried out in coordination with British and American military and political authorities.

Even so, the American orientation toward Saudi Arabia and the Middle East was about to change. The trigger was much as it had been a decade earlier, at the beginning of the 1930s: another collapse in the pilgrimages to Mecca and a new financial crisis in Saudi Arabia. This time it was not an economic depression but the war that interrupted the flow of pilgrims. Things were made worse by a drought and the resulting crop failure. The traditional industries—sword and knife making, leather working—were hardly going to generate enough to make up for the losses. By 1941, Ibn Saud was once more confronting a stark financial crisis. The King had to face the harsh reality. As he explained to an American in 1942, “The Arabs have the religion, but the Allies have the money.”4

So Ibn Saud once again had to appeal for help—to the British, in whose political sphere he operated, and to Casoc and its two American parents, Standard of California and Texaco. The oil companies did not want to make any further loans against future production, especially at a time when development itself was constrained, but neither did they want to risk losing the concession. Perhaps Washington would come to the rescue. Perhaps, it was further suggested, some help could be provided under Lend Lease, the wartime aid program. But Congress had authorized Lend Lease to be provided to “democratic allies.” Unfortunately, Saudi Arabia was a kingdom and not a democracy, and unlike, say, the King of England, Ibn Saud was not exactly a constitutional monarch. Finally, after laborious discussion, Roosevelt decided against any American assistance at all. “Will you tell the British,” he instructed one of his aides in July 1941, “I hope they can take care of the King of Saudi Arabia. This is a little far afield for us.”

The British did come forward, providing, among other things, about $2 million worth of newly minted coins, and British subsidies would continue to grow substantially. But the American oil men worked hard to convince King Ibn Saud that this British aid was really American—since Britain, in its turn, was a recipient of American assistance. That meant, explained the oil men, that the aid actually came from the United States. It just came indirectly.5

“We’re Running Out of Oil!”

America’s entry into the war would be followed, in 1942 and 1943, by a wholesale redefinition of the importance of the Middle East, based upon a new outlook that completely gripped Washington, if not always the oil companies. Oil was recognized as the critical strategic commodity for the war and was essential for national power and international predominance. If there was a single resource that was shaping the military strategy of the Axis powers, it was oil. If there was a single resource that could defeat them, that, too, was oil. And as the United States almost single-handedly fueled the entire Allied war effort, putting an unprecedented drain on its resource, a fear of shortage began to grow. It was another of those periods of pessimism about the American oil position, similar to that at the end of the First World War, but etched, because of this war, in much greater urgency. What would a pervasive and lasting shortage mean for America’s security and for its future?

The late 1920s and early 1930s had seen an explosive growth in the United States in discoveries and in additions to known reserves. But from the middle 1930s onward, while significant “revisions and additions” were made to existing oil fields, the discovery rate of new fields had fallen off very sharply, leading to the view that additions in the future would be more difficult, more expensive, and more limited. The precipitous decline in new discoveries transfixed and frightened those responsible for fueling a global war. “The law of diminishing returns is becoming operative,” said the director of reserves for the Petroleum Administration for War in 1943. “As new oil fields are not being formed and as the number is ultimately finite, the time will come sooner or later when the supply is exhausted.” For the United States, he added, “the bonanza days of oil discovery, for the most part, belong to history.”6

Secretary of the Interior Harold Ickes shared that view, and the title of an article he published in December 1943 left no one in doubt where he stood—“We’re Running Out of Oil!” In the article, the Old Curmudgeon warned ominously that “if there should be a World War III it would have to be fought with someone else’s petroleum, because the United States wouldn’t have it… America’s crown, symbolizing supremacy as the oil empire of the world, is sliding down over one eye.”

Such gloomy analyses could lead to only one conclusion. Although oil was then flowing out from American ports to all the war fronts, the United States was destined to become a net importer of oil—a transformation of historic dimensions, and one with potentially grave security implications. The wartime gloom about America’s recoverable oil resources gave rise to what became known as the “conservation theory”—that the United States, and particularly the United States government, had to control and develop “extraterritorial” (foreign) oil reserves in order to reduce the drain on domestic supplies, conserve them for the future, and thus guarantee America’s security. Even private-enterprise Republicans were calling for direct government involvement in foreign oil concessions. For, declared a prominent Republican Senator, Henry Cabot Lodge, “history does not give us confidence that private interest alone would adequately safeguard the national interest.” And where were these foreign reserves to be found? There was only one answer. “In all surveys of the situation,” Herbert Feis, the State Department’s Economic Adviser, was to say, “the pencil came to an awed pause at one point and place—the Middle East.”7

Thus, American policymakers arrived, belatedly, at the same conclusion that had directed British oil policy ever since the end of World War I—the centrality of the Middle East. And there, however trusting their overall wartime collaboration, the two Allies certainly viewed each other with considerable suspicion. The British were fearful that the Americans would try to eject them from the Middle East and deny them even the oil reserves currently under their control. The region was considered central to imperial strategy and to the governance of India. Ibn Saud, as keeper of the holy places of Islam, was a person of very great importance to Britain, which, in India, ruled over the largest number of Moslems of any country in the world. He might also prove to be a most important factor in Britain’s efforts to find a way out of its dilemma in Palestine, then a British mandate torn by mounting strife between Jews and Arabs.

Both American oil companies and government officials were deeply worried throughout the war that the British had a nefarious design to somehow preempt the United States when it came to Middle Eastern oil and exclude the American companies, particularly from Saudi Arabia. When the British sent a locust-control mission to Saudi Arabia, Casoc was absolutely sure that it was really a cover for secret oil geology exploration. The overall concern was summed up by Navy Undersecretary William Bullitt, who warned that London would “diddle” the American companies “out of the concession and the British into it.”

In truth, the Americans woefully exaggerated British designs on Saudi Arabia—and the capability to carry them out. The British were hardly in a position to dislodge the Americans, on whom they depended so heavily; indeed, on balance, they wanted greater American involvement in the Middle East, for both security and financial reasons, and were actually trying to find ways to reduce their subsidies to Ibn Saud. Still, afflicted as they were by such anxieties and concerns, what could the Americans do? Three alternatives were to emerge. The first was to acquire direct ownership in Middle Eastern oil, on the model of the Anglo-Persian Oil Company. The second was to negotiate some kind of settlement and system with the British. And the third was to leave the whole matter in private hands. But, in the middle of the war with its pervasive uncertainty, even the “private hands” were very nervous about being left to their own devices. They wanted government support, and that again took them to Washington.8

The Policy of “Solidification”

Socal and Texaco, the two partners in Casoc, were the only two private companies involved in Arabian oil. They feared the British might obtain a dominant position over King Ibn Saud’s finances in order to shoehorn their own way into Saudi oil and to show Socal and Texaco the door. The companies were also worried about something else. Socal and Texaco had made very large investments in and financial commitments to Saudi oil, and much more would be required; they knew that they were sitting on an immensely valuable resource. But, as a unified country, Saudi Arabia was only two decades old. Would Ibn Saud’s kingdom—and the oil concession—survive the King himself?

How better to keep Britain in check, bolster their concession and protect this extraordinarily valuable asset against the political risks than with American aid to the Saudi government, and perhaps even with direct U.S. government involvement? It was one thing to throw out private companies—after all, only a few years earlier Mexico had nationalized company concessions with virtual impunity—and another thing to take on the leading power in the world. Direct involvement by the American government in Saudi Arabia was what became known to some as the policy of “solidification.”

In mid-February 1943 the presidents of Socal, Texaco, and Casoc came to Washington to see the State Department with hats in hands. They appealed for financial aid from the government to keep the British at bay and assure “the continuation of purely American enterprise there after the war.” If Washington were willing to come forward with foreign aid, they would be willing, in exchange, to offer the U.S. government some kind of special access or option on Saudi oil.

Over lunch, on February 16, Harold Ickes, a strong advocate of government involvement, bent President Roosevelt’s ear on the subject of Saudi Arabia. It was “probably the greatest and richest oil field in the world,” said the Interior Secretary. The British were trying to “edge their way into it” at the expense of Casoc, and the British “never overlooked the opportunity to get in where there was oil.” It was the arguments of Ickes and other government officials, and not the petition of the oil company executives, that finally swayed Roosevelt. On February 18, 1943, two days after his lunch with Ickes and a year and a half after he had declared that Saudi Arabia was “a little far afield for us,” the President authorized Lend Lease assistance to King Ibn Saud. It was only the beginning. Shortly after, the Army Navy Petroleum Board presented its projections for 1944: A serious shortage of oil was impending, which would threaten military operations. The anxieties of the military men gave a powerful additional push to the United States government in the direction of Saudi Arabia.9

Financial assistance to a friendly albeit nondemocratic government, even disguised as Lend Lease, was one thing; seeking to acquire direct ownership of the resources of a foreign country was quite another. But that was exactly what followed, in part carried out in the name of the Petroleum Reserves Corporation, a newly created government entity that the ever-ingenious Ickes appropriated with the aim of acquiring actual ownership of foreign oil reserves. In this, he was strongly backed by the Army and Navy. Only the State Department held back. It was fearful, as Secretary of State Hull told Roosevelt, of creating “intense new disputes.” For, the Secretary reminded the President, “In many conferences after the last war the atmosphere and smell of oil was almost stifling.”

The target of the Petroleum Reserves Corporation was Saudi Arabia. In June 1943 Ickes met at the White House with War Secretary Henry Stimson, Navy Secretary Frank Knox, and James Byrnes, who was Director of the Office of War Mobilization. They “viewed rapidly dwindling domestic supply with alarm,” and agreed on the need for the government to acquire “an interest in the highly important Saudi Arabia fields.” In July, Roosevelt confirmed this stunning decision at a meeting in the White House. “The discussion was jovial, brief, and far from thorough,” said one participant. “A boyish note of enjoyment was in the President’s talk and nod, as usual when it had to do with the lands of the Near East.” There was still one crucial point outstanding. How much of Casoc or the concession was to be acquired? In a move that would have done credit to John D. Rockefeller himself, it was decided that the government’s “interest” should be nothing less than 100 percent!

In August 1943 the unsuspecting presidents of Texaco and Socal, W. S. S. Rodgers and Harry C. Collier, filed into Ickes’s office at the Department of the Interior. They thought they would be discussing aid in exchange for an option on Saudi oil. Ickes came out with his proposition: that the government buy the whole of Casoc from Texaco and Socal. Ickes observed, with some satisfaction, that his astonishing proposal “literally took their breath away.” A government-owned oil company operating abroad would be an extraordinary departure for the United States. It would also transform the position of the two private companies concerned. All that Rodgers of Texaco and Collier of Socal could manage to say was that the offer was a “tremendous shock” to them. The companies had wanted assistance, not their assimilation. As one participant in the discussions noted, “They had gone fishing for a cod and had caught a whale.”10

After more discussions, Ickes whittled down his proposal from 100 percent to a 51 percent share, on the model of the British government’s ownership of Anglo-Iranian. He even suggested modeling the name of the venture on Anglo-Iranian—that is, the American-Arabian Oil Company. But some thought that such a name, at least in terms of its order, might be received poorly by Ibn Saud, whose objective was to hold foreign involvement in his kingdom to a minimum.*

While Ickes continued to negotiate with the two companies, he also explored the possibility of making a similar deal with Gulf in Kuwait. But, finally, he struck a bargain with Socal and Texaco. The U.S. government would acquire one-third of Casoc for $40 million; the funds would be used to finance a new refinery at Ras Tanura. Further, the government would have the right to buy 51 percent of Casoc’s production in peacetime and 100 percent in wartime.

Thus, the United States was about to go into the oil business. Or so it seemed. But then the rest of the American oil industry rose up in what could only be described as righteous and fiery indignation. None of the other companies wanted the government in the oil business. It would be a formidable competitor; it might well champion foreign oil production over domestic oil; it might be only the first step toward Federal control of the oil industry, or even its nationalization. Strong opposition came not only from the independent companies, but also from Standard of New Jersey and Socony-Vacuum (Mobil), which themselves were interested in Saudi oil and did not want to be preempted.

Ickes had worked hard to mobilize the oil industry on behalf of America’s war effort, and he could not afford to disrupt that effort with a battle over Casoc. So, in late 1943, he abruptly retreated and repudiated the plan, in the process blaming Texaco and Socal for being too greedy and recalcitrant. That was the end of the move by the United States to get into direct ownership of foreign oil.11

Still, Ickes would not be stayed; in early 1944, he became champion of another plan: to get the United States government into the foreign pipeline business. Ickes agreed in principle with Socal, Texaco, and Gulf that the U.S. government would, through the Petroleum Reserves Corporation, spend up to $120 million to build a pipeline that would carry Saudi and Kuwaiti oil across the desert to the Mediterranean for transshipment into Europe. As part of the deal, the companies would establish a one-billion-barrel oil reserve for the American military, which could be purchased at a 25 percent discount from market prices.

But many forces mobilized against this new plan in the late winter and spring of 1944. Congressmen were already calling for the abolition of the Petroleum Reserves Corporation. Other oil companies were furious at the notion that they would be, as Herbert Feis put it, “exposed to what they feel is favored competition.” Independent oil men denounced it as “a threat to our national security” and as “a move towards fascism.” It would promote cutthroat competition in world oil markets, said the Independent Petroleum Association of America, undermining domestic prices and shattering the domestic industry. Liberals opposed the plan because it would help big business and “monopolies”; isolationists opposed it because they did not want the government to, literally, dig itself into the far-off sand of the Middle East. Earlier, the Joint Chiefs of Staff had said that such a pipeline was “a matter of immediate military necessity.” But, after D-Day, with the end of the war in Europe coming into sight, the Joint Chiefs would not renew their endorsement. It was a potent coalition of opponents and critics, and eventually, despite the Old Curmudgeon’s ire and another of his resignation threats, the government pipeline project was eventually allowed to wither away and then disappeared altogether.12

“A Wrangle About Oil”

So the United States government was not going into the oil business in Saudi Arabia after all. But there was still another avenue to be explored: a partnership with Great Britain in managing the world oil market. The two governments had already begun probing each other’s views about such an arrangement. While a number of the wells in the Persian Gulf area had been cemented in to keep them out of German hands, those who knew the potential of the region were beginning to worry what postwar production from that area would do to the market. A rising tide of cheap oil from the Persian Gulf after the war could be as destabilizing as the flood of oil from East Texas in the early 1930s. At the same time, many in the United States continued to fear the exhaustion of U.S. reserves and wanted to reduce the call on American oil. As they saw it, the major objective of the United States should be to break the prewar restraints and instead see maximum production from the Middle East and, in particular, from Saudi Arabia. That way, a fundamental transformation in supply arrangements would result: Europe could be principally supplied from the Middle East, and not from Western Hemisphere and especially American reserves, which could instead be conserved for America’s own use and security.

The British, for their part, were deeply apprehensive about the disorder that would arise from pell-mell production in the Middle East. They feared a competitive production race by concessionaires seeking to satisfy the rising revenue appetites of the Middle Eastern oil countries. If petroleum matters were not settled before the end of the war, the result would be a devastating glut that could, because of low prices, deprive the oil-producing governments of royalty income and ultimately threaten the stability of concessions. Moreover, despite what many Americans thought, the British still favored further American participation in Middle Eastern oil development. Such involvement would, among other things, said the British Chiefs of Staff, improve “the chances of our obtaining American assistance” in defending the area, especially against “Russian pressure.” The British Chiefs added that “American continental resources constitute our most secure supply in war and therefore it is in our interest to take any steps that may assist in their conservation.” But how to convince the Americans that joint control, not laissez faire exploitation, would be in the best interests of both nations?13

The British campaigned hard to open negotiations with the United States about Middle Eastern oil. In April 1943 Basil Jackson, Anglo-Persian’s representative in New York, met with James Terry Duce, on temporary leave from his job as a Casoc executive to be head of the Foreign Division of the Petroleum Administration for War. “It is the first time in history that there have been such enormous quantities of oil overhanging the markets of the world,” warned Jackson. But it was not possible, he said, “for the companies themselves to arrive at any agreement regarding the future of Near Eastern oil.” The American companies were constrained by the Sherman Antitrust Act. After the war it would be too late to act. Yet without such agreement, Jackson concluded, there would be “a fierce competitive battle.”

Duce concurred. Both men recognized the fundamental issue ahead, one that would shape the postwar petroleum order. Royalties on oil were or would soon be the major source of revenues for the countries of the Gulf. As a result, those countries would put continuing pressure—augmented by threats, veiled or otherwise—on the companies to increase production, in order to increase royalty revenues. Some overall system of allocation could help balance that pressure.

The account of Jackson’s remarks was widely circulated to American policymakers. Ickes sent it to Roosevelt himself. “We should have available oil in different parts of the world,” Ickes noted. “The time to get going is now. I see no reason why we could not come to an understanding with the British with respect to oil.” Yet so great were the mutual suspicions that it was no easy matter for the two Allies even to come to an understanding within their respective governments on how to structure the discussions. Any notion of a conference to discuss Middle Eastern oil “should be put in a pigeon hole,” Lord Beaverbrook, the newspaper tycoon who was serving as Lord Privy Seal, told Churchill. “Oil is the single greatest post-war asset remaining to us. We should refuse to divide our last asset with the Americans.”

But others in the British government persisted in trying to formulate a plan with the Americans. On February 18, 1944, the British ambassador in Washington, Lord Halifax, argued for almost two hours with Undersecretary of State Sumner Welles on oil and how to proceed. Afterward, Halifax telegraphed to London that “the Americans were treating us shockingly.” So upset was Halifax with the discussions at the State Department that he immediately requested a personal interview with the President. Roosevelt received him that very evening at the White House. Their discussion focused on the Middle East. Trying to allay Halifax’s apprehension and irritation, Roosevelt showed the ambassador a rough sketch he had made of the Middle East. Persian oil, he told the ambassador, is yours. We share the oil of Iraq and Kuwait. As for Saudi Arabian oil, it’s ours.14

Roosevelt’s hand-drawn map was not sufficient to relieve the tension. Indeed, the developments over the previous few weeks led to a brittle exchange between President and Prime Minister. On February 20, 1944, just hours after seeing Halifax’s report on his meetings, Churchill sent a message to Roosevelt in which he said that he had been watching “with increasing misgivings” the telegrams about oil. “A wrangle about oil would be a poor prelude for the tremendous joint enterprise and sacrifice to which we have bound ourselves,” he declared. “There is apprehension in some quarters here that the United States has a desire to deprive us of our oil assets in the Middle East on which, among other things, the whole supply of our Navy depends.” To put it bluntly, he said, some felt “that we are being hustled.”

Roosevelt replied tartly that he, in turn, had received reports that Great Britain was “eyeing” and trying to “horn in” on the American companies’ concession in Saudi Arabia. In response to another sharp telegram from Churchill, Roosevelt added, “Please do accept my assurances that we are not making sheep’s eyes at your oil fields in Iraq or Iran.” Churchill cabled back, “Let me reciprocate by giving you fullest assurance that we have no thought of trying to horn in upon your interests or property in Saudi Arabia.” But, while Britain did not seek territorial advantage, “she will not be deprived of anything which rightly belongs to her after having given her best services to the good cause—at least not so long as your humble servant is entrusted with the conduct of her affairs.”

The acid exchange was a testament to the importance oil had assumed in world politics. But the two men managed to put the wrangle aside, and negotiations ensued in the spring of 1944 in Washington. The issue at hand was stated in the opening remarks of the State Department’s Petroleum Adviser at the first meeting: The central objective of the negotiations, he said, “is not a rationing of scarcity, but the orderly development and orderly distribution of abundance.” In other words, whatever the prospects for American oil, the problem from a global point of view would be too much oil—and how to control production. The British assessment of the Middle Eastern oil situation had prevailed.15

Quotas and Cartels

Lord Beaverbrook, whose suspicion of American economic ambitions was obvious, came to Washington to negotiate the final agreement in July of 1944. “I guess the war is on again,” James Terry Duce, now back at Aramco, wrote to Everette DeGolyer in commenting on Beaverbrook’s arrival. “The lion wouldn’t lay down with lamb—except possibly in the guise of lamb chops.”

In Washington, the outspoken Beaverbrook brought up the awkward point on which no one really wanted to focus. In London, he had privately described the agreement that was being shaped as a “monster cartel,” and one managed by the Americans to protect their domestic producers at England’s expense. In his negotiations with the Americans in Washington, he was more polite, observing that the two sides were really trying to come up with “an agreement of an ‘As-Is’ character”—not so very different from Achnacarry and the subsequent restrictive agreements among the companies in the late 1920s and 1930s.

The American negotiators were quick to disagree. “The Petroleum Agreement under discussion had been formulated on a basis altogether different from anything associated with the expression ‘cartel,’” one of the Americans huffily replied. “This was an intergovernmental commodity agreement predicated upon certain broad principles of orderly development and sound engineering practices. It was directed toward assuring the availability of ample supplies of petroleum to meet market demands.”

It was not obvious that Beaverbrook was persuaded to change his mind. Still, a few days later the Anglo-American Petroleum Agreement was completed, and it was signed on August 8, 1944. The objective was to assure “equity” to all parties, including the producing countries. The heart of the agreement was embodied in the establishment of the eight-member International Petroleum Commission. It would prepare estimates for global oil demand. It would then allocate suggested production quotas to various countries on the basis of such factors as “available reserves, sound engineering practices, relevant economic factors, and the interests of producing and consuming countries, and with a view to the full satisfaction of expanding demand.” The commission would also report to the two governments on how to promote the development of the world petroleum industry. The governments, in turn, would seek “to give effect to such approved recommendations and, wherever necessary and advisable, to ensure that the activities of their nationals will conform thereto.”16

Whether seen as a “commodity agreement” aimed at stabilizing an important industry or as a government-run cartel, the Anglo-American Petroleum Agreement was, in fact, a direct link to the market management of the late 1920s and the early 1930s, both to the “As-Is” of Achnacarry and to the Texas Railroad Commission. Its fundamental purpose was the same: to balance discordant supply and demand, to manage surplus, and to bring order and stability to a market laden with oversupply. While the agreement may well have satisfied the Roosevelt Administration and the British, it was immediately and bitterly assailed by the independent American oil men and their Congressional allies. The independents had more political clout than the majors, and if the independents did not like Ickes’s Arabian pipeline project, they hated the Petroleum Agreement, fearing that it would open the door to international regulation of domestic oil production. It was one thing to have oil production rates set by the Texas Railroad Commission, whose members were elected in Texas, but quite another to have it done by a commission that was half “limeys” and half appointees of Franklin Roosevelt. More than anything else, the domestic oil companies were motivated in their opposition to the agreement by the specter of vast amounts of cheap Middle Eastern oil taking away their markets in Europe, perhaps even flooding into the United States, weakening prices. The independent oil men feared that the international companies would manipulate the agreement to gain decisive control over the world’s reserves and markets and then use such control to put the independents out of business.17

The majors were also wary, but for a different reason. They were afraid of legal attack at some point in the future for antitrust violations—price fixing and production rigging—if they cooperated with the International Petroleum Commission. After all, when they had taken action to stabilize markets in the late 1930s in response to what they thought was the government’s wishes, and in particular the behest of Harold Ickes, they found themselves hauled into court by the Justice Department on antitrust charges in what had become known as the Madison Case. And the “Mother Hubbard” antitrust suit against them had only been suspended because of Washington’s need for cooperation after America’s entry into the war. This time the majors did not want to take any chances; they wanted an antitrust exemption before going ahead.

The entire petroleum business, whatever the division between the majors and the independents, now seemed to be arrayed against the agreement. “The oil industry is ganging up on this without any rhyme or reason at all,” Ickes complained to Roosevelt. “Some of the industry are seeing ghosts where there are no ghosts.” The agreement was submitted to the Senate as a treaty, but it quickly became clear that, as such, it was going to go down to an inglorious defeat. In January 1945 the Roosevelt Administration withdrew it so that the antitrust problem and other issues could be addressed. Shortly after, efforts to revise the agreement were put into abeyance, as Roosevelt and his senior advisers set off for Yalta in the Soviet Crimea for a meeting with Joseph Stalin and Winston Churchill. Their aim was to lay the basis for the postwar international order—and to carve out the shape and size of their spheres of influence in that postwar world.18

The “Twins”

Yet the issues of Middle Eastern oil touched even this journey. In mid-February, after the conference at Yalta, the Sacred Cow, the President’s plane, carried Roosevelt and his advisers back from Russia to the Suez Canal Zone in Egypt, where they boarded the USSQuincy, which was anchored in the Great Bitter Lake in the Canal. Another American ship, the USS Murphy, pulled up with an honored guest—Ibn Saud.

For the Saudi King, this was perhaps only his second trip outside his kingdom since that day, forty-five years ago, when he had left exile in Kuwait to take his first step—the assault on Riyadh—toward regaining Arabia. He had boarded the Murphy a couple of days earlier, in Jidda, with a party of forty-eight. His group was also to include one hundred live sheep, but after some negotiation, the number was reduced to just seven in light of the sixty days’ worth of provisions, including frozen meat, on board the American ship. Ibn Saud spurned the offer of the commodore’s cabin and slept instead on deck, in an improvised tent made of canvas, stretched over the forecastle, and furnished with Oriental carpets and one of the King’s own chairs.

Once Ibn Saud had transferred to the President’s ship, the chain-smoking Roosevelt, out of deference to the King’s religious precepts, did not light up in his presence. On the way to lunch, however, Roosevelt was taken in his wheelchair into a separate elevator. The President himself pushed the red emergency button, stopping long enough to smoke two cigarettes before meeting again with the King. Altogether, the two men spent more than five very intense hours together. Roosevelt’s interests were a Jewish homeland in Palestine, oil, and the postwar configuration of the Middle East. For his part, Ibn Saud wanted to assure continuing American interest in Saudi Arabia after the war, in order to counterbalance what had been for him a chronic threat throughout his reign—British influence in the region. In reply to Roosevelt’s call for a Jewish homeland, the bitterly anti-Zionist Ibn Saud suggested that those displaced Jews who had somehow managed to survive the war be given a national homeland in Germany.

Roosevelt and Ibn Saud got along very well. At one point, the King declared that he was the “twin” brother of the President because of their close ages, their responsibilities for their nations’ well-being, their interests in farming, and their grave physical infirmities—the President confined by polio to a wheelchair, and the King walking with difficulty and unable to climb stairs because of war wounds in his legs.

“You are luckier than I because you can still walk on your legs and I have to be wheeled wherever I go,” said Roosevelt.

“No, my friend, you are more fortunate,” the King replied. “Your chair will take you wherever you want to go and you know you will get there. My legs are less reliable and are getting weaker every day.”

“If you think so highly of this chair,” said Roosevelt “I will give you the twin of this chair, as I have two on board.”

The wheelchair went back with Ibn Saud to Riyadh, where thereafter it would remain in the King’s private apartment to be shown off by Ibn Saud as a most valued memento, though it was too small to be used by a man of the King’s large stature.19

The official record was surprisingly silent about what the two men said about oil. One member of the party later reported that the President and the King did have a long talk on that subject. Whatever was or was not said, both men knew that it was central to the emerging relationship between their two countries. The New York Times foreign affairs correspondent, C. L. Sulzberger, got right to the point. Immediately after the meeting at the Great Bitter Lake, he wrote, “The immense oil deposits in Saudi Arabia alone make that country more important to American diplomacy than almost any other smaller nation.” But Winston Churchill was not exactly thrilled to see the American President conferring with monarchs in an area of traditional British influence—Roosevelt also met King Farouk of Egypt and Haile Selassie of Ethiopia. According to one account, Churchill “burned up the wires to all his diplomats in the area, breathing out threatenings and slaughter unless appointments with him were made with the same potentates after they had seen F.D.R.” Churchill rushed to the Middle East, and three days after Roosevelt, the British Prime Minister drove into the Egyptian desert to meet Ibn Saud in a hotel at an oasis.

Once again, the issue of smoking came up, though this time complicated by that of imbibing. Churchill’s meeting with the Saudi King was to conclude with a grand banquet. Beforehand, Churchill had been told that, as he later noted, the King “could not allow smoking or drinking alcohol in his presence.” Churchill would not be so accommodating as Roosevelt toward Ibn Saud. “I was the host and I said if it was his religion that made him say such things, my religion prescribed as an absolute sacred rite smoking cigars and drinking alcohol before, after, and if need be during, all meals and the intervals between them.”

Churchill’s high-handed insistence on his own rights and prerogatives may have done little to reassure an already suspicious Ibn Saud about British intentions regarding his kingdom and the region. Churchill faced another problem. He gave Ibn Saud a small case of very choice perfumes—value about one hundred pounds. But Ibn Saud, in turn, presented him and Anthony Eden with diamond-hilted jeweled swords, as well as robes and other presents—including about three thousand pounds’ worth of diamonds and pearls for, as Ibn Saud had put it, “your womanfolk.” Embarrassed by the disparity in the gifts, Churchill, on the spur of the moment, declared that the perfumes were “but tokens,” and promised Ibn Saud “the finest motor car in the world.” Churchill realized that he had no personal authorization to make such a gift, but so be it. A Rolls-Royce was delivered to the King, which cost the British Treasury upwards of six thousand pounds. Eventually, all the jewels were sold off, though with the proviso that the sale be kept secret, so as not to offend Ibn Saud.20

“What Do We Do Now?”

On Roosevelt’s return from his long journey, he found his advisers still battling among themselves over the Petroleum Agreement and the related antitrust issue. Harold Ickes had proposed a meeting with the President and the new Secretary of State, Edward Stettinius. But the President was exhausted after his lengthy trip and was going to rest. “I shall be delighted to have the meeting that Harold proposes just as soon as I get back from Warm Springs,” he told Stettinius on March 27, 1945. “Will you remind me of it?”

Stettinius did not have the opportunity. Roosevelt died in Warm Springs on April 12, 1945.

Efforts were made under the new President, Harry Truman, to revise the Petroleum Agreement in order to make it domestically palatable. Ickes, by then its leading sponsor, renegotiated it in London with the British in September of 1945. Whatever teeth had existed in the previous agreement were extracted in London. This time around, the International Petroleum Commission, which had been charged in 1944 with suggesting how to allocate production around the world, was effectively precluded from touching domestic American production—a rather large omission for a global petroleum agreement, as the United States then accounted for two-thirds of total world production. But that was the best that could be done. “There is no prospect of getting any more comprehensive Agreement through the U.S.A. Senate,” the British Minister of Fuel and Power told the Chancellor of the Exchequer. “On balance, it is better that we should accept the Agreement rather than reject it.”

Meanwhile in America, the gloom about the adequacy of oil reserves was receding. At a Senate hearing in 1945, J. Edgar Pew, vice-president of Sun Oil and chairman on the committee on petroleum reserves of the American Petroleum Institute, lambasted the prospect of an oil shortage as a psychological rather than a geological condition. Expressing the Pew family’s traditional disdain for the warnings of depletion, he assured the Senators that domestic production would meet all American needs for two decades or more. “Of that I am as sure as I am that the sun shall rise and set tomorrow,” he said. “I am an optimist.”

With victory in 1945 over Germany and Japan, there was no longer a crushing demand on American oil reserves, and thus another impetus to securing the agreement with Britain was dissipating. Then, in February 1946, the Anglo-American Petroleum Agreement ran into a new problem. Its chief sponsor, Harold Ickes, got into a bitter scrap with Harry Truman over the President’s proposed appointment of Edwin Pauley, a California oil man, as Undersecretary of the Navy. Ickes, as had been his wont under Roosevelt, submitted his resignation. And a long good-bye it was—more than six pages typed, single-spaced. “It was the kind of letter sent by a man who is sure that he can have his way if he threatens to quit,” Truman later said.

But Ickes had made a mistake; Truman was not Roosevelt. He accepted Ickes’s resignation tersely and with alacrity and delight. Ickes requested six weeks to wind up the many things that only he personally could attend to; Truman gave him two days to clean out his desk. The Old Curmudgeon shot back with one last salvo. Truman, he announced to the nation, “showed a lack of adherence to the strict truth” and was “neither an absolute monarch nor a descendant of a putative Sun Goddess.” And with that, the Oil Czar of the New Deal and World War II left office and took up a new career as a newspaper columnist.21

Had the Anglo-American Petroleum Agreement any future without its champion, Harold Ickes? Support for the agreement now came from an unlikely source: Navy Secretary James Forrestal. A driving, ambitious and politically conservative former investment banker from Dillon, Read, Forrestal was one of the first senior policymakers to conclude that the United States had to organize itself for a protracted confrontation with the Soviet Union. Oil held a central place in Forrestal’s strategy for security in the postwar world. “The Navy,” he said, “cannot err on the side of optimism” in its estimates for what supplies might be available. The largest known oil reserves outside the United States were in the area of the Persian Gulf. “The prestige and hence the influence of the United States is in part related to the wealth of the Government and its nationals in terms of oil resources, foreign as well as domestic,” he said. “The active expansion of such holdings is very much to be desired.” The State Department should work out a program to substitute Middle Eastern oil for American oil, he added, and use its “good offices” to “promote the expansion of United States oil holdings abroad, and to protect such holdings as already exist, i.e., those in the Persian Gulf area.”

At Potsdam, the final conference between the Allied powers before the end of the war, Forrestal had lectured the new Secretary of State, James Byrnes, on Saudi Arabia as “a matter of first importance.” And now, in early 1946, in the immediate aftermath of Harold Ickes’s firing, he saw considerable merit in continuing to fight for the Anglo-American Petroleum Agreement. “As you know, I am not in the forefront of the cheering section of ‘Honest Harold,’ but I think it might be worth taking a new look at these oil treaty negotiations,” he said to Byrnes. “I am of the opinion that he is right about the limitations of American oil reserves—in this I am influenced a good deal by the engineer that I used in private business, E. L. DeGolyer.” Forrestal added, “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 own, a depletion which may be serious within the next fifteen years.”22

But Forrestal was a minority. Elsewhere throughout the government, support for the agreement was eroding. Indeed, within days of the Old Curmudgeon’s exit, one State Department official, Claire Wilcox, wrote a memo entitled “Oil: What Do We Do Now?” Providing a lengthy list of reasons for killing the agreement, Wilcox declared, “the Agreement is either dangerous or useless. If employed as a cover to set up a cartel to allot quotas and fix minimum prices, it is dangerous. If not so employed, it is useless.” Wilcox summed up the issue for the Truman Administration. “Mr. Ickes told the President that he had raised this baby on a bottle. Now the orphan is on our doorstep. Shall we smother it or adopt it?”

The answer was pretty clear. The agreement had no political support. Even local schoolteachers in Texas were mobilized to oppose it. Imported oil, they said, would destroy the economy of Texas. The baby was to be smothered. Events and interests had outrun the political process, and the Anglo-American Petroleum Agreement had become increasingly irrelevant and obsolete. In 1947, the Truman Administration gave up any further effort on behalf of the agreement. It was dead.

But even as the agreement, the last of the major wartime oil initiatives, disappeared from sight, other factors were coming to the fore. Whatever the debate about reserves and discovery rates, the United States was finding that it could not sustain itself on domestic production alone. It was about to become a net importer of oil, and its dependence on foreign sources of petroleum would swell in the years ahead. In short, even without the requirements of a global war, the process of “solidification” had to proceed; American and European interests, public and private alike, were best served by the rapid development of the oil lands of the Middle East.

As for the oil companies, the requirements of markets and competition and the demands from producing countries for revenues—none of these pressures could be stayed. Everything that wartime negotiators had sought to prevent was coming to pass, and the petroleum industry in the postwar years looked to be as competitive, chaotic, and unstable as it had ever been in the past. So, while the unprecedented and controversial possibilities offered by the Anglo-American Petroleum Agreement were fading, the oil companies themselves were moving quickly to work out, in the word used by an executive of Anglo-Iranian, their own “salvation” in the Middle East and for the postwar world.23

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