Modern history

CHAPTER 22

Fifty-Fifty: The New Deal in Oil

REPRESENTATIVES FROM the United States Treasury were conferring in London with British officials in 1950. In the course of their discussions, the Americans mentioned certain developments regarding Saudi Arabian oil policies, the effects of which would surely be felt throughout the Middle East. “The Saudi Arabian government had recently made some startling demands on Aramco,” one of the American officials confided. “They covered all possible points ever thought up by a concessionary government.” Yet, in one form or another, the demands all came down to one thing: The Saudis wanted more money out of the concession. A good deal more.

Such demands were by no means restricted to Saudi Arabia. In the late 1940s and early 1950s, oil companies and governments grappled continually over the financial terms upon which the postwar petroleum order would rest. The central issue was the division of what has been called “that uneasy and important term in the economics of natural resources”—rents. The character of the struggle varied among countries, but the central objective of those initiating the struggle in each country was the same: to shift revenues from the oil companies and the treasuries of the consuming countries that taxed them to the treasuries of the oil-exporting countries. But money was not the only thing at stake. So was power.

Landlord and Tenant

“Practical men, who believe themselves to be quite exempt from any intellectual influences,” John Maynard Keynes once said, “are usually the slaves of some defunct economist.” When it came to oil, the “practical men” included not only the businessmen that Keynes had in mind, but also kings, presidents, prime ministers, and dictators—as well as their ministers of oil and finance. Ibn Saud and the other leaders of the time, as well as the various potentates since, were under the thrall of David Ricardo, a fantastically successful stockbroker in late-eighteenth-century and early-nineteenth-century England. (Among other things, he made a killing on Wellington’s defeat of Napoleon at Waterloo.) By origin a Jew, Ricardo became a Quaker, then a learned member of the House of Commons, and was one of the founding fathers of modern economics. He and Thomas Malthus, his friend and intellectual rival, constituted between themselves the successor generation to Adam Smith.

Ricardo developed the concept that was to provide the framework for the battle between nation-states and oil companies. It was the notion of “rents” as something different from normal profits. His case study involved grain, but it could also apply to oil. Let there be two landlords, said Ricardo, one with fields much more fertile than the other. They both sell their grain at the same price. But the costs of the one with the more fertile fields are much less than those of the one with the less fertile fields. The latter makes, perhaps, a profit, but the former, the one with the more fertile fields, receives not only a profit, but also something much larger—rents. His rewards—rents—are derived from the particular qualities of his land, which result not from his ingenuity or hard work, but, uniquely, from nature’s bountiful legacy.

Oil was another of nature’s legacies. Its geological presence had nothing to do with the character or doings of the peoples who happened to reside above it, or of the nature of the particular political regime that held sway over the region in which it was found. This legacy, too, generated rents, which could be defined as the difference between the market price, on one hand, and, on the other, the costs of production plus an allowance for additional costs—transportation, processing, and distribution—and for some return on capital. For example, in the late 1940s, oil was selling for around $2.50 a barrel. Some grizzled stripper-well operator in Texas might only make a 10 cent profit on his oil. But in the Middle East it only cost 25 cents a barrel to produce oil. Deducting 50 cents for other costs, such as transportation, and allowing a “profit” of 10 cents on the $2.50 barrel, that would still leave a very large sum—$1.65 on every barrel of Middle Eastern oil. That sum would constitute rents. Multiply it by whatever the rising production numbers, and the money added up very rapidly. And who—the host country, the producing company, or the consuming country that taxed it—would get how much of those rents? There was no agreement on this elemental issue.

All would have legitimate claims. The host country had sovereignty over the oil beneath its soil. Yet the oil was without value until the foreign company risked its capital and employed its expertise to discover, produce, and market it. The host country was, in essence, the landlord, the company a mere tenant, who would, of course, pay an agreed-upon rent. But, if through the tenant’s risk-taking and efforts, a discovery was made and the value of the landlord’s property vastly increased, should the tenant continue to pay the same rent as under the original terms, or should it be raised by the landlord? “This is the great divide of the petroleum industry: a rich discovery means a dissatisfied landlord,” said the oil economist M. A. Adelman. “He knows that the tenant’s profit is far greater than is necessary to keep him producing, and he wants some of the rent. If he gets some, he wants more.”1

The postwar battle over rents was not exclusively limited to economics. It was also a political struggle. For the landlords, the oil-producing countries, the struggle was interwoven with the themes of sovereignty, nation-building, and the powerful nationalistic assertion against the “foreigners,” who were said to be “exploiting” the country, stifling development, denying social prosperity, perhaps corrupting the body politic, and certainly acting as “masters”—in a haughty, arrogant, and “superior” manner. They were seen as the all-too-visible embodiment of colonialism. Nor did their sins end there; they were, in addition, draining off the “irreplaceable heritage” and bounty of the landlord and his future generations. Of course, the oil companies saw it all quite differently. They had taken the risks and held their breath, they chose to put their capital and efforts here and not there, and they signed laboriously negotiated contracts, which gave them certain rights. They had created value where there was none. They needed to be compensated for the risks they had taken—and the dry holes they had drilled. They believed that they were being put upon by greedy, rapacious, and unreliable local powers-that-be. They did not think that they were “exploiting”; their plaintive cry was, “We wuz robbed.”

There was yet another political dimension to the struggle. To the consuming countries in the industrial world, access to oil was a strategic prize, not only vital to their economy and their ability to grow, but also a central and essential element in national strategy—and, by the by, also a significant source of tax revenues, both directly in excise taxes and by fueling overall economic activity. To the producing country, oil also meant power, influence, significance, and status—all of which were previously lacking. Thus, it was a struggle in which money signified both power and pride. That was what made the battle often so bitter. The first front in this epic contest was opened in Venezuela.

Venezuela’s Ritual Cleansing

The tyrannical dictatorship of Venezuela’s General Gómez had come to an end in 1935, through the one sure method when all else fails—the dictator’s death. Gómez left a shambles; he had treated Venezuela as a sole proprietorship, a personal hacienda, managed for his own enrichment. Much of the population remained impoverished, while the nation’s oil industry had been developed to the point where the country’s overall economic destiny depended upon it. Gómez also left behind a wide tableau of opposition. Military men had been humiliated by their treatment at Gómez’s hands; they were poorly paid, lacked status, and had to spend part of their time tending the dictator’s own multitudinous herds of cattle. No less important was the creation of an opposition on the democratic left, centered in what became known as the “Generation of ’28”—students at the Universidad Central in Caracas who had rebelled against Gómez in 1928. They had failed then, of course, and the leaders either went to prison, where sixty-pound leg irons were fastened to their ankles, or went into exile, or were sent by Gómez to work on road crews in disease-ridden jungles in the interior. Many members of the Generation of ’28 perished, victims in one way or another of Gómez’s terror. Those who did survive became the nucleus of the reformers, liberals and socialists, who worked their way back into Venezuelan political life after Gómez’s death. When it finally came to power, Venezuela’s Generation of ’28 would provide the basis for redefining the relationship between oil companies and producing countries, between tenant and landlord around the world—as well as the methodology for reallocating rents.

With oil already dominating Venezuela’s cash economy—accounting for well over 90 percent of total export value in the late 1930s—Gómez’s successors set out to reform the chaotic regulation of the industry and effect a wholesale revision in the contractual arrangements between the nation and the companies that produced its oil, including a reallocation of rents. The United States government was catalyst to the process. During World War II, Washington was all too conscious of the continuing strife with Mexico about the nationalization of its oil industry and was intent on protecting access to Venezuela, which was the most important source of oil outside the United States, and one that was relatively secure. Thus, the American government would intervene directly to avoid another Mexico and to safeguard what was, in the midst of wartime, a great strategic prize. For their part, the companies did not want to risk nationalization. Standard Oil of New Jersey and Shell were the dominant producers in Venezuela. They knew they were sitting on some of the most important oil reserves in the world, which they could not afford to lose. Venezuela was the major source of low-cost oil, and Jersey’s Creole subsidiary generated half of the company’s total worldwide production and half of its total income.2

Jersey, however, was sharply divided about what to do in the face of the drive by the Venezuelan government to reallocate the rents. Traditionalists in the company, some of whom had been cronies of the old Gómez regime, wanted to stand firm against any change, whether pushed by Caracas or pushed by Washington. Opposed to them was Wallace Pratt, who had been the company’s chief geologist before moving into senior executive positions. Pratt, with long experience in Latin America, thought that the world had changed, and that change and adaptation on the part of the company were not only inevitable but essential to protect its long-term interests. He was also convinced that implacable resistance would probably be not only expensive, but also futile. Better to help create the new order, in Pratt’s view, than be a victim of it. The debate came at a time when Jersey itself was the target of traumatic and painful political attacks in Washington because of the controversy over its prewar relationship with I. G. Farben and a new antitrust campaign from the Justice Department. As a result, Jersey altered its attitude and orientation toward public policy and the political environment, and not only in the United States. Moreover, the Roosevelt Administration made it quite clear that, in any dispute with Venezuela that arose from the company’s failure to adapt, Jersey could not count on support from Washington.

Jersey simply could not risk losing its position in Venezuela, and Wallace Pratt won. Jersey installed a new top man in Venezuela, Arthur Proudfit, who sympathized with the country’s social objectives, and who would show considerable sensitivity to the changing Venezuelan political scene. Proudfit had been part of the migration in the 1920s of American oil men from Mexico to Venezuela; he brought with him a lasting memory of the disaster of government-company relations and of the bitter labor strife in the oil fields, along with a determination to apply the painful lessons he had learned in Mexico.

All the main players—the Venezuelan and American governments, Jersey and Shell—wanted to work things out. To help facilitate matters, the U.S. Undersecretary of State, Sumner Welles, took the unprecedented step of recommending to the Venezuelan government the names of independent consultants, including Herbert Hoover, Jr., son of the former President and a well-known geologist in his own right, who could help Venezuela to improve its bargaining position vis-à-vis the companies. Welles also pressed the British government to make sure that Royal Dutch/Shell went along. With the assistance of the consultants, a settlement was hammered out based on the new principal of “fifty-fifty.” It was a landmark event in the history of the oil industry. According to this concept, the various royalties and taxes would be raised to the point at which the government’s take would about equal the companies’ net profits in Venezuela. The two sides would, in effect, become equal partners, dividing the rents down the middle. In exchange, the questions about the validity of various concessions would be overlooked—and there were certainly pointed questions about how some had been obtained by Jersey and the companies it had acquired. The title to existing concessions would also be solidified and their life extended, and new exploration opportunities would be made available. These, for the companies, were very desirable gains.

The proposed law was criticized by members of Acción Democrática, the liberal/socialist party that had been formed by the survivors of the Generation of ’28. They charged that the law as written would result in a division well below fifty-fifty for Venezuela, and they argued that Venezuela should be compensated for past profits the companies had made. “The total purification of the Venezuelan oil industry, its ritual cleansing, will remain impossible until the companies have paid adequate financial compensation to our country,” declared Juan Pablo Pérez Alfonzo, Acción Democrática’s spokesman on oil. Despite the abstention of the Acción Democrática deputies, the Venezuelan Congress passed the new petroleum law in March 1943, enshrining the agreement.

The major companies were quite prepared to live under the new system. “What they are after is money,” Shell director Frederick Godber said of the Venezuelan government shortly after the law was passed. “Unless they are prompted to do so by our friends across the water, they are not likely yet to reject good money from wherever it comes.” But unlike the majors, some of the smaller companies operating in Venezuela were outraged. William F. Buckley, president of the Pantepec Oil Company, telegraphed the Secretary of State to denounce the new law as “burdensome” and to declare that it had been accepted only “under compulsion by the Venezuelan government and our State Department.” It was a clear invitation, he added, to further “agitation and attempts to invade the property rights of American oil interests.” Buckley’s telegram was filed away.

Two years later, in 1945, the interim regime in Venezuela was toppled by a coup by dissatisfied young military officers, acting in collaboration with Acción Democrática. Romulo Betancourt was the first president of the new junta. He had played forward on the university’s championship soccer team before emerging as the leader of the Generation of ’28, was subsequently twice exiled, became secretary general of the Acción Democrática, and was serving as a first-term member of the Caracas City Council at the time of the coup. The minister of development was Juan Pablo Pérez Alfonzo, who had been the leading Congressional critic of the Petroleum Law of 1943, and who now complained that the promised fifty-fifty split actually worked out to about sixty-forty, in the companies’ favor. Pérez Alfonzo instituted significant revisions in the tax laws that were calculated to ensure that the division really was fifty-fifty. Jersey accepted the changes; its resident manager, Arthur Proudfit, told the State Department that “no reasonable objection could be raised to an upward revision of the income tax structure.” Altogether, rents were dramatically reallocated between Venezuela and the oil companies by the Petroleum Law of 1943 and Pérez Alfonzo’s subsequent adjustments. As the result of those changes, plus the rapid expansion of production, the government’s total income in 1948 was six times greater than it had been in 1942.

In another precedent-breaking move, Pérez Alfonzo decided to try to capture income from the downstream segments of the industry; he wanted Venezuela, he said, to “reap the profits of transportation, refining, and marketing.” In pursuit of this objective, he insisted on taking some of the royalties due Venezuela not in money, but in kind—that is, in oil. He then turned around and sold the royalty oil directly on the world market. This broke a worldwide “taboo,” said President Betancourt. “The name of Venezuela was now known on the world oil market as a country where oil could be bought by direct negotiation. The veil of mystery over the marketing of oil—behind which the Anglo-Saxons had maintained a monopoly of rights and secrets—was removed forever.”

In sharp contrast to what had happened in Mexico, the larger oil companies not only adapted to the redivision of rents but also established a successful working relationship with the Acción Democrática during its time in power. Creole moved swiftly to fill its ranks with nationals; in a few short years, its work force became 90 percent Venezuelan. Arthur Proudfit of Creole even lobbied on behalf of the Venezuelan government with the U.S. State Department, at the time when Creole itself was described by Fortune as “perhaps the most important outpost of U.S. capital and know-how abroad.”

Betancourt may have once called the international companies “imperialist octopi.” But he and his colleagues were, essentially, pragmatists; they recognized that they needed the companies and that they could work with them. Oil provided 60 percent of the government’s income; the economy was virtually based upon oil. “It would have been a suicidal leap into space to nationalize the industry by decree,” Betancourt said afterward. National objectives could be met without nationalization. With some pride, Betancourt noted that, as a result of the tax reforms of the mid-1940s, the Venezuelan government received 7 percent more per barrel than what was paid to the Mexican government by its nationalized industry. And Venezuelan production was six times that of Mexico.

Under Betancourt, the fifty-fifty principle was securely established in Venezuela. But time was running out. A new Acción Democrática government had been elected with over 70 percent of the vote in December 1947. Less than a year later, in November 1948, it was overthrown by members of the same military clique that had been its allies in the 1945 coup.

Some of the oil operators applauded the November 1948 coup. William F. Buckley was delighted for, he said, Betancourt and his allies in Acción Democrática “have used the vast dollar resources of the country to further Russian Communistic interests in the Western Hemisphere, and they have forced American capital to provide the money for this anti-American campaign.” That was not, however, the way the major oil companies saw things. Arthur Proudfit found the coup “disheartening and disappointing.” It threatened three years of intense efforts to establish a stable relationship with the democratic government.

And Betancourt had demonstrated his pragmatism in many ways. He had even invited a prominent American citizen to establish a new enterprise—the International Basic Economy Corporation, which would fund development projects and new businesses in Venezuela. This particular American owed his considerable fortune to oil. He was the recently resigned Coordinator for Inter-American Affairs in the State Department—Nelson A. Rockefeller, grandson of John D.3

The Neutral Zone

Another precedent-shattering redefinition of the relationship between landlord and tenant took place in a remote area of the world that had not one landlord, but two. The Neutral Zone was the two thousand or so square miles of barren desert that had been carved out by the British in 1922 in the course of drawing a border between Kuwait and Saudi Arabia. In order to accommodate the Bedouins, who wandered back and forth between Kuwait and Saudi Arabia and for whom nationality was a hazy concept, it was agreed that the two countries would share sovereignty over the area. If every system has within it the seeds of its own destruction, then it was in the Neutral Zone—and in the way its oil rights were parceled out—that the erosion began that would eventually lead to the end of the postwar petroleum order.

At war’s end, the United States government, and specifically the State Department, endorsed and actively supported many of the new oil arrangements in the Middle East, but it had continually worried about one thing: the interlocking relationships among the major oil companies that were emerging from the “great oil deals.” It was concerned about the effect on competition and the marketplace. It worried even more about the perception both of the dominating role of such a small group of companies and of U.S. government support for them. The whole thing might look too much like a cartel, perfect grist for nationalist and communist mills in and around the region. At the same time, the new system in the Middle East might easily fire up criticism and opposition from diverse groups in the United States, not only trust-busters and liberal critics of big business, but also the independent sector of the domestic oil industry, with its builtin enmity toward “big oil” and now, increasingly, toward “foreign oil.”

To forestall these criticisms and perceptions, Washington adopted a surprisingly explicit policy of encouraging “new companies” to participate in Middle Eastern oil development in order to counterbalance the majors and their consortia. Such a policy would meet two additional political concerns of the State Department. The introduction of more players would stimulate the pace of development of Middle Eastern oil reserves and thus bring higher revenues to the countries in the region, which was an increasingly important objective. At the same time, it was thought that the more sources of oil in the Middle East, the lower the prices to consumers. But there are only so many ways to slice rents, and lower prices to consumers and higher revenues to producing countries were ultimately inconsistent objectives.

In 1947, the State Department, to promote its new policy, circularized American companies, telling them that Kuwait might be putting its rights to the Neutral Zone up for bid and that the United States government would be happy to see them take advantage of this opportunity. Several of the major companies thought it was too risky. They feared that if they got into a bidding match, they might well have to offer considerably better terms than they were paying on their current concessions, which would greatly irritate the countries concerned.

One who was very familiar with the new thrust of American policy, as well as with the opportunities in the Middle East, was Ralph Davies, the former Standard of California marketing executive who had been Harold Ickes’s deputy at the Petroleum Administration for War, and then head of the Oil and Gas Division in the Department of Interior, and was now back in private life. In 1947, in order to bid for the Kuwaiti Neutral Zone concession, Davies organized a consortium including such prominent independent companies as Phillips, Ashland, and Sinclair. It was called “Aminoil.” What better name could there have been? For Aminoil was short for American Independent Oil Company. Davies warned his partners to expect a rough ride—they were now “bucking the big, big, big time,” he said, and the competition with the majors would be very intense.

But Aminoil had a unique entree, derived from Jim Brooks, a Texas oil field welder, who, on his return journey from a working stint in Saudi Arabia, had stopped over at Shepheard’s Hotel in Cairo. By coincidence, also staying there was the secretary to the Amir of Kuwait, who had just been instructed to find a Texas oil man unconnected to the majors, in order to bring in new bidders. The welder’s cowboy hat had provided reason enough to strike up a conversation, and the welder soon found himself a guest in Dasman Palace in Kuwait City, where he garnered lasting gratitude in the water-starved principality by adjusting the palace’s plumbing so that water use was cut 90 percent. When the welder finally got back to the United States, word about his new friendship drifted around the oil patch, though the story was not regarded as particularly credible. But because of his valuable connections, he was recruited for the Aminoil negotiating team—with very positive effects. Aminoil won the Neutral Zone concession from Kuwait with a bid that stunned the industry: $7.5 million in cash, a minimum annual royalty of $625,000, 15 percent of the profits—and a million dollar yacht for the Amir of Kuwait. That settled, there still remained the Saudi Arabian rights in the Neutral Zone, which were also now up for grabs.4

“The Best Hotel in Town”

If one aim of United States policy was to spread the wealth by diffusing holdings, the fact that the Saudi concession in the Neutral Zone went to an American independent was to have quite the opposite effect. For, within eight years of winning the concession, an oil man named Jean Paul Getty, or J. Paul Getty as he called himself, would become the richest man in America. From his earliest days in business, the inward, vain, and insecure Getty had been driven by a powerful need to make money, matched by an extraordinary talent for doing so. “There’s always the best hotel in town and the best room in the best hotel in town, and there’s always somebody in it,” he once said. “And there’s the worst hotel, the worst room in the worst hotel, and there’s always somebody in that room, too.” Clearly, he intended to occupy the best room.

Getty was constantly seeking to win victories, to exert power over people, and then, or so it seemed to some, to betray those who depended upon him or who had put their trust in him. He was certainly no more trusting than Gulbenkian. “One is very nearly always let down by underlings,” he explained. “They may be all right for 80 percent of the time, but for 20 percent, they do something quite incredible.” There were two things that Getty could not stand: to lose in a contest and to share authority. He had to be in control. “I had a perfect record with J. Paul Getty,” said a business partner. “I had a thousand fights with him, and never won a single one. Getty did not believe in changing his mind. He didn’t care what evidence you had. Even if you could show him that a decision was ten to one in his favor, he wouldn’t budge—as a matter of principle.” Getty was a gambler, but even in his biggest gambles, he was cautious, conservative, and would do everything he could to bolster his position. As he explained, “If I wanted to gamble on typical gambling games, I’d buy a casino and have the percentages for me, rather than play.”

Getty’s father was a lawyer for a Minnesota insurance company who had gone to Oklahoma to collect a bad debt and ended up a millionaire oil man. The son began building up his own oil business, alongside his father’s, during World War I. The father was a man for whom his word was his bond. The son, in contrast, engaged in what were called in the oil business “sharp practices,” and he did so with such skill and enjoyment that he turned those practices almost into an art. He reveled in his triumphs, business or otherwise. Getty was “well built, pugnacious by nature, and quick,” said the boxer Jack Dempsey, who had once sparred with him. “I’ve never met anybody with such intense concentration and willpower—perhaps more than is good for him. That’s the secret.”

As a young man, Getty was already launched on a life of wild romance and sexual adventure, with a special predilection for teenage girls. He married five times. But marriage vows were, for him, not even an inconvenience; to engage in some of his more clandestine affairs, he simply operated under a favored and not all that discreet alias, “Mr. Paul.” He liked to travel in Europe because it was less noticed that he was in “transit flagrante” with two or three women at a time. Yet the only true love of his life may have been a French woman, the wife of a Russian consul general in Asia Minor, with whom he had a passionate affair in Constantinople in 1913. He bade what he hoped was a temporary farewell to her on the dock at Istanbul, but then lost contact with her forever in the turmoil of war and revolution that followed. Even sixty years later, whereas he would discuss his five marriages almost technically, as if they were lawsuits, a mere mention of this lady, Madame Marguerite Tallasou, was enough to bring tears to his eyes.

Getty had other serious pursuits, to be sure. He dabbled at being a man of letters, and wrote at least seven books—including one on how to be rich (for Playboy), a history of the oil business, a book on art collecting and a tome entitled Europe in the Eighteenth Century. He also launched a significant career as an art collector, creating one of the world’s great collections. But while those outside interests, particularly in women, would embroil him in headlines and lawsuits, he never let any of them get in the way of his primary vocation: his single-minded quest for money through oil. “A man is a business failure if he lets his family life interfere with his business record,” he once declared. Or, as he more frankly confided to one of his wives, “When I’m thinking about oil, I’m not thinking about girls.”

Getty was always looking for a bargain. “He had one idea,” said a business associate. “He was obsessed with value. If he thought something had value, he bought it and never sold it.” In pursuit of value, he did not hesitate to go against the tide. In the 1920s, he decided that it was cheaper to drill for oil than to buy the overvalued shares of other oil companies. After the 1929 stock market crash, he completely changed tack; he saw that oil shares were selling at a great discount to assets, and he turned to prospecting for oil on the floor of the stock exchange—in the course of which he got into an extended and bitter takeover battle for the Tidewater Oil Company, with Standard of New Jersey as his prime opponent. His pell-mell buying of shares was a great gamble. It was also the right decision. Those purchases were the basis of the rise of his fortune in the 1930s.

Getty always wanted the cheapest price, the best bargain, and he was ruthless in the pursuit. During the Depression, he fired all his employees and then hired them back at lower salaries. In 1938, he picked up the Pierre Hotel on Fifth Avenue in New York for $2.4 million—less than a quarter of its original cost of construction. In that same year, several months after the Nazi seizure of Austria, Getty was in Vienna, where he managed to get himself admitted to the home of Baron Louis de Rothschild. He was there to see not the Baron, who at that moment was being held prisoner by the Nazis, but rather the Baron’s valuable furniture, which he understood might soon be available. He liked what he saw and immediately went to Berlin (where he had well-connected girlfriends) and sought to find out what the SS intended to do with the Rothschild furniture. He ended up buying some pieces at a great discount—to his considerable satisfaction. He also, however, lived with his own fears during those years. He told one of his wives that he kept a large yacht in California so that he could make a quick escape in case the communists took power in the United States.

By the end of the 1930s, Getty had become a very rich man. Having made substantial contributions to the Democratic party and to various politicians, he angled for a diplomatic post and then, once America entered the war, for a commission in the United States Navy. His efforts came to nothing, for both the FBI and military intelligence developed suspicions that he had had rather extensive social connections with Nazi leaders—perhaps even sympathy for the Nazis, at least until very late in the day. Some reports went even further; there were bizarre allegations, for instance, that he was staffing the Pierre Hotel with German and Italian spies. His application for a naval commission, according to naval intelligence, “was rejected because of suspected espionage activities.” Whatever the truth of the matter, he remained fascinated by dictators for the rest of his life.

During the war, Getty was in Tulsa, managing an airplane factory, a subsidiary of one of his oil companies. By this time, his eccentricities were manifold. He not only ran the operation in Tulsa from a concrete bunker, but also lived in it, in part out of fear of being bombed by the German Luftwaffe. He made a point to chew each mouthful of food thirty-three times, and he had taken to washing his own underwear each night because of his antipathy to commercial detergents. By age fifty-five, he had had his second facelift and was dyeing his hair a funny kind of reddish-brown, all of which gave him a rather wizened, embalmed look.

The end of the war only rekindled his consuming ambition to make much, much more money. He first devoted his efforts to what he was convinced would be the sure route to fabulous wealth as Americans took to the roads and highways in the postwar years: the manufacture of mobile homes. But he gave that up for something he knew much more about—oil. Getty was certain he wanted the Saudi concession for the Neutral Zone even before he had it surveyed. “If one is to be anybody in the world oil business,” he declared, “one must have a footing in the Middle East.” This was his chance.

The head of exploration in the Rocky Mountain division of Getty’s Pacific Western oil company was a young geologist named Paul Walton, a Ph.D. from the Massachusetts Institute of Technology. Walton had worked in Saudi Arabia for Standard of California in the late 1930s and he knew his way around there. Walton would be Getty’s point man in making a deal with the Saudis. Getty summoned him to the Pierre Hotel for a few days of discussion and briefings. Getty, Walton remembered ever afterward, had a “half-mad” expression on his face—a sort of angry, disagreeable scowl that he had developed, Walton figured, to keep people at a distance from him and from his money. Walton found Getty overbearing, though a man of considerable intelligence. But their discussions about the Saudi concession went smoothly, and Getty set the boundaries for the deal—at what price to start bidding for the concession and how high Walton could go. He also gave Walton a firm order: When Walton got to Saudi Arabia, he was not to discuss anything with anybody.

Walton left for Jidda and soon found himself face to face with Abdullah Suleiman, the same finance minister who had conducted the negotiations for the original Socal concession almost two decades earlier. Suleiman arranged for Walton to go up in a DC–3 and fly low over the Neutral Zone desert. Walton could barely believe what he saw from the plane: a small mound rising up from the flat expanse. He was elated. It looked almost exactly like the mound in Kuwait’s Burgan field, then the largest known oil field in the world.

Though very excited when he came back to Jidda, Walton, remembering Getty’s injunction about security, was also very cautious. There were no locks on the rooms in his hotel in Jidda, so he left no pieces of paper around. He did not dare send a message to Getty by wireless, since he was sure it would be intercepted. Instead, he dispatched a handwritten letter by airmail. Judging by that little mound, he told Getty, the odds of a major oil play were fifty-fifty. He would have set the odds higher, but he had been in Saudi Arabia after the original discovery in 1938 and had remembered two seemingly perfect structures that had been drilled, each of which was “as dry as hell.” Still, fifty-fifty was a lot more promising than the exploration odds in the Rocky Mountains, which were one in ten or even one in twenty.

Walton opened negotiations with Suleiman, which were mostly conducted on the porch of Suleiman’s house in Jidda. Clearly, the deal was going to be expensive. Once again, Saudi Arabia needed money, badly, and as in 1933, Suleiman wanted a large bonus payment up front. As instructed by Getty, Walton opened at $8.5 million. The deal they finally struck was $9.5 million up front, a guaranteed million dollars a year even if no oil was found, and a royalty of fifty-five cents a barrel—far higher than what was being paid anywhere else. Walton also agreed that Getty would establish training programs, build housing, schools, and even a small mosque, and provide free gasoline for the Saudi Army. In addition, Suleiman insisted that Getty pay for a Saudi Army unit to defend the area of the concession against any potential Iranian or Soviet threats. It finally took a telegram signed by Secretary of State Dean Acheson to the Saudi government, explaining that private American companies were legally prohibited from funding another nation’s Army, to take that issue off the table.

By the last day of 1948, Suleiman had given assurance to Walton that Getty had won the concession. However, Suleiman also took the precaution of telling Aminoil and a Wall Street firm that, if either would top the Getty offer, the concession would be theirs. But the price tag was too high and the risk too great; neither took it. Of course, Walton, for his part, had played a pretty good game of poker. Suleiman had stopped at $9.5 million. He never found out that, at the Pierre Hotel, Getty had authorized Walton to go up to $10.5 million. Still, Getty’s company, Pacific Western, was paying an unprecedentedly high price to wildcat in an unknown desert.5

Kuwait and Saudi Arabia each held what was called an “undivided half interest” in the Neutral Zone. That meant that they would split the entire pie. Therefore, their respective concessionaires had to amalgamate operations to a considerable degree. The result was a totally unhappy marriage. Relations between Aminoil and Getty’s Pacific Western were terrible; Getty and Ralph Davies, the head of Aminoil, could not stand each other. Pacific Western was a one-man band; Aminoil, an awkward consortium that required approvals from its many members.

Aminoil played the more dominant role in exploring the area. Nothing was easy. It battled hard to keep costs down and to do everything as cheaply as possible. But, no matter what Aminoil did, it was never cheap enough for J. Paul Getty. Exploration took longer, and proved to be more difficult and, thus, much more costly than anticipated. As time passed, anxiety among the American oil men was rising rapidly, and with good reason. By the beginning of 1953, half a decade had elapsed since the concessions had been granted, both groups were looking at expenditures in excess of $30 million, and there was nothing to show for their efforts except five dry holes. Getty sought to allay his anxiety in a variety of ways. He focused on his business interests. He wandered across Europe. He spent several weeks researching Rembrandt’s portrait of Marten Looten, which he owned. Like the young John D. Rockefeller a century earlier, the sixtyish Getty relaxed by totting up his income and expenses each evening. One entry from Paris listed sums under “income” that were measured in the thousands and millions, while under “expenses” were such things as “newspaper—10 centimes” and “bus fare—5 centimes.” Coming back to the United States, he finally won his twenty-year battle for control of Tidewater Oil, bought a rare Louis XV lacquer table, and enrolled in a $178 course at Arthur Murray’s School of Dancing, with a special concentration on the samba and the jitterbug and on improving his ability to lead.

Still, Getty’s patience and confidence were wearing thin. Not only was the string of dry holes exasperating, but so was the outflow of expenses, including his million-dollar-a-year payment to Saudi Arabia. Getty made it clear that he was disgusted with the whole approach. The Aminoil team resolutely ignored the little mound that Walton had seen from the airplane. Getty insisted that the sixth hole be drilled at that site. Furthermore, sunk costs were sunk costs; if the sixth hole was dry, he was going to pull out. Such extreme action proved unnecessary. In March 1953 the Aminoil team struck oil where Walton had thought, all along, that oil would be found. To call it a major discovery would prove an understatement. Fortune was to describe it as “somewhere between colossal and history-making.”

Billionaire

It was only afterward that Getty made his first visits to the region. In anticipation of one trip, he listened to a “Teach Yourself Arabic” course on records, and learned enough to use Arabic in describing the geology of the Neutral Zone at a joint “banquet seminar” he cohosted with Aminoil for the Amir of Kuwait and King Saud, who had succeeded his recently deceased father, Ibn Saud. Getty’s rival, Ralph Davies of Aminoil, never made it to the Neutral Zone at all; in the words of one of the other executives of Aminoil, he had “a pathological fear of dust, dirt and germs,” which was a good reason to stay close to home.

Getty used his Neutral Zone production, especially the cheap, heavier “garbage oil,” to build up vast integrated oil operations in the United States, Western Europe, and Japan. He reorganized all his holdings, putting Getty Oil at the top and making himself the sole commander of a great oil empire. By the end of the 1950s, Getty was the seventh-largest marketeer of gasoline in the United States. Fortune magazine announced in 1957 that he was America’s richest man and its sole billionaire. He was stoic in the face of that news. “My bankers kept telling me,” he said, “that it was so, but I was hoping I wouldn’t be found out.” He added a sensible admonition. “If you can count your money, you don’t have a billion dollars.” He achieved further fame as the Billionaire Miser. He spent his final years as squire of Sutton Place, an exquisite, 72-room Tudor manor house in Surrey, and there, amid the splendors of his priceless collection of art and antiques, he installed a pay phone for guests to use.

Paul Walton, the geologist, had come down with amebic dysentery while negotiating in Saudi Arabia in 1948. It took him three years to recover. Getty gave him a $1200 bonus, and Walton returned to Salt Lake City to work as an independent geologist. In the early 1960s, more than a decade after he had first spotted that small mound in the Neutral Zone from the air, Walton was visiting England. He telephoned Getty from London, and the billionaire invited him to Sutton Place. Getty demonstrated the positive effects of his devotion to physical fitness; well into his seventies, he regularly lifted weights, which he kept in his bedroom. The two men reminisced about how furious Getty had become at the refusal of the Aminoil people to drill in the little mound that Walton had spotted from the air. Finally, they had given way, vindicating Walton—and Getty. The Neutral Zone was by far, Getty said, his largest single asset. “He was very favorably impressed with the whole operation,” Walton recalled. And well he should have been. It was estimated that his company still had more than a billion barrels of recoverable reserves in place there. The Neutral Zone had made him not only the richest American, but also the richest private citizen in the world. As for Walton, the man who had spotted the site, he continued to put together quite ordinary drilling deals back in Salt Lake City.

When Getty died in 1976, age eighty-three, the eulogy at his funeral was delivered by the Duke of Bedford. “When I think of Paul,” said the Duke, “I think of money.” For J. Paul Getty, there surely could have been no higher compliment.

The extraordinary deal that Getty made with the Saudis in 1948–49 was exactly what the established companies had feared would result from the arrival of the independents. Still, shock was the general reaction to Getty’s Pacific Western bid, whose terms went far beyond what might have been expected. Getty’s 55-cent-a-barrel royalty to the Saudis loomed over Aminoil’s 35-cent royalty to Kuwait, the roughly 33-cent royalty that Aramco had just been compelled to pay the Saudis—and far overshadowed the 16½ cents that Anglo-Iranian and the Iraq Petroleum Company were paying in Iran and Iraq respectively, as well as the 15-cent royalty that the Kuwait Oil Company was paying. The general manager of Iraq Petroleum pronounced the 55-cent royalty “completely insane, uncalled for, and responsible for the difficulties being encountered in Iran and Iraq.” A British diplomat angrily denounced “the notorious Pacific Western” concession.

No one had a greater sense of foreboding about what would follow from the arrival of the independents than that most skillful hand at negotiating Middle Eastern oil concessions, Calouste Gulbenkian. “These new groups lack the experience of developing oil concessions in the Middle East,” he wrote to an executive of Standard Oil of New Jersey. “They offer fantastic terms to the local governments who expect similar fantasies from us. The result is trouble all around.” Perhaps Gulbenkian harbored personal resentment toward Getty; after all, the American was an arriviste in the unsettled vineyards of Middle Eastern oil, which Gulbenkian had so carefully cultivated for a half century. Moreover, Getty was challenging him in another sphere—with fierce competition for the position of world-class art collector. Yet Gulbenkian did speak out of his long experience and with the perspicacity of the shrewd survivor. “I feel confident that the local governments, although by no means cordially disposed with each other, will come together on this question of petroleum concessions, and do their best to squeeze us,” he prophesied. “I fear that the wind of nationalization and other complications…may spread to us also.” He added a further caution. “I would not be tranquil.”6

“Retreat Is Inevitable”

The world’s demand for Saudi oil, which had been rising rapidly, flattened out in 1949, because of an American recession and economic problems in Britain. With Aramco production down, Saudi revenues were also cut, but the financial commitments of the King and his kingdom were continuing to grow at a rapid rate. It was all too reminiscent of the two previous financial crises of the early 1930s and early 1940s. Soldiers and officials were going unpaid, subsidies to tribes were being withheld, and the government was piling up debt.

Where else to turn, in their current time of need, but to that very profitable concern called Aramco? Finance Minister Abdullah Suleiman had skillfully, with the assistance of “Jack” Philby, negotiated the original Socal concession in 1933. But now, he regularly threatened to close down the entire oil operation unless Saudi Arabia were able to share in what he called “large company profits.” Suleiman’s demands seemed endless: Aramco should pay for construction projects; Aramco should contribute to a Saudi “welfare fund”; Aramco should advance new loans. “Each time the company agreed to one thing,” said Aramco’s general counsel, “there was always just one more.” But what the Saudis really wanted was a renegotiation of the original concession so that the government’s “take,” its share of the rents, would be much increased. Aramco was clearly a very profitable company, and they insisted that they get their rightful share. They wanted what the Venezuelans had already gotten.

It was not just word of the deal the Venezuelans had recently struck that had traveled from Caracas. A Venezuelan delegation was promulgating the fifty-fifty concept throughout the Middle East, even going to the trouble of translating its documents into Arabic. The Venezuelans had not taken on these additional expenses sheerly out of altruism. In Caracas, it had become, as Romulo Betancourt observed, “increasingly evident that the competition from low-cost, high-volume production from the Middle East was a grave threat to Venezuela.” Best get those costs up, which would be accomplished if the Middle Easterners were to raise their taxes. And so, in the ironic words of a State Department petroleum expert, the Venezuelans “decided to spread the benefits” of the fifty-fifty principle “to the area which was taking business away from them—the Middle East.”

The closest the Venezuelan delegation got to Saudi Arabia was Basra in Iraq; the Saudis did not like the way that Venezuela had voted on Israel in the United Nations and would not let the delegation in. Nevertheless, the fifty-fifty concept expeditiously crossed the border, and when the Saudis looked at the numbers for 1949, they could see what a difference it would make. Aramco’s profits that year were almost three times Saudi Arabia’s own earnings from the concession. What really struck the Saudis, however, was the way in which the United States government’s tax take had risen—to the point that, in 1949, taxes paid to the American government by Aramco were $43 million, $4 million higher than Aramco’s royalty payments to Riyadh. The Saudis made clear to the Americans that they knew exactly what the company had earned, what it had paid in taxes to the United States, and how that compared to the royalty payments to Saudi Arabia. And they also made clear, as the head of Aramco delicately put it, that they “weren’t a darn bit happy about that.”

The terms of J. Paul Getty’s new Neutral Zone concession certainly demonstrated to them that oil companies could pay much more. Yet the Saudis did not want to squeeze too hard. There was still a very large investment program to be carried out within the concession. Moreover, having just seen Aramco lose market share, the Saudis did not want to hobble the company with additional costs that might make its oil uncompetitive with that produced by other Persian Gulf countries.

Perhaps they could get more money out of Aramco without directly affecting the company’s competitive position. The Saudis did their research; they had even, unbeknownst to Aramco, retained their own adviser on American tax law, and to their delight, they learned about a most interesting and intriguing provision in American tax laws that would leave Aramco whole. It was called the “foreign tax credit.”

Under legislation dating back to 1918, an American company operating overseas could deduct from its United States income tax what it paid in foreign taxes. The objective was to avoid penalizing American companies doing business abroad. Royalties and other fixed payments—costs of doing business—could not be deducted, only taxes paid on income. That distinction was all important. For it meant that if Saudi Arabia had collected not only $39 million in royalties in 1949, as it had done, but also another $39 million in taxes, then that $39 million tax bill could have been deducted from the $43 million tax bill that Aramco owed to the United States government. As a result, Aramco would have had to pay only $4 million to the United States Treasury—the difference between $43 million and $39 million—not $43 million. For its part, Saudi Arabia would have received not $39 million, but twice that—$78 million. In other words, the overall tax bite on Aramco would have remained the same, but most of it would have been collected in Riyadh, not Washington. And to the Saudis, that was how things should have been, for as far as they were concerned, it was their oil.

Armed with a new weapon, Saudi Arabia kept up the pressure on Aramco, until finally, in August 1950, the company faced reality and authorized negotiations for a fundamental revision in the concession. The company was in continuing contact with the State Department, which was a very strong proponent of meeting Saudi demands. The Korean War had begun in June 1950, and the American government was now even more worried about communist influence and Soviet expansion in the Middle East and about regional stability and secure access to the oil. Anti-Western nationalists had to be kept at bay. Despite the loss to the United States Treasury, the State Department wanted to see more revenues going to Saudi Arabia and other oil-producing countries in the region, in order to maintain pro-Western governments in power and to keep discontent within manageable bounds. In the case of Saudi Arabia, it was particularly urgent to do whatever was necessary to preserve the position of the American companies.

Just twelve years had passed since Mexico had expropriated the American and British oil companies. That stood as the great warning of how badly things could go wrong. “Since company retreat is inevitable,” concluded a State Department policy paper, “it would seem useful to make the retreat as beneficial and orderly as possible to all concerned.” As George McGhee, Assistant Secretary of State for Near Eastern Affairs, saw it, fifty-fifty had become inescapable. “The Saudis knew the Venezuelans were getting 50/50,” he later said. “Why wouldn’t they want it too?” At a State Department meeting on September 18, 1950, McGhee told representatives of American oil companies operating in the Middle East that the time was certainly at hand for “rolling with the punch.”

There was one last stumbling block—the four Aramco parent companies. Some of them were resolutely opposed to the idea; after all, the original concession terms specifically prohibited an income tax. But at a following meeting, McGhee bluntly told the parent companies that there was no alternative and that long-term contracts created “the practical necessity of horsetrading.” Speaking in support of fifty-fifty, an executive vice-president of Aramco said, “From a psychological point of view such a formula sounded fair and would be considered fair in Saudi Arabia.” The parent companies were persuaded. On December 30, 1950, after a month of complex negotiations, Aramco and Saudi Arabia signed a new agreement, the heart of which was the Venezuelan fifty-fifty principle.

But if the Saudis were satisfied with their new revenues, there was still the open and very critical question of whether these tax payments would be eligible for an American tax credit. In fact, their eligibility was not confirmed until 1955, when the Internal Revenue Service, in the course of auditing Aramco’s 1950 tax return, approved the credit. In 1957, the staff of the Joint Congressional Committee on Internal Revenue Taxation added its approval, based upon the various tax laws, their legislative history, judicial decisions, and IRS rulings with respect to “other similarly situated taxpayers.” In later years, some would argue that the United States government, particularly the National Security Council, had bent the tax laws to give Aramco a special dispensation on the matter of the tax credit. But based upon the records available, that was not the case. The Aramco ruling was consistent.

In the meantime, and thereafter, a substantial flow of revenues was diverted from the U.S. Treasury to that of Saudi Arabia. Whereas the Treasury had collected $43 million in taxes from Aramco in 1949, compared to $39 million in royalties paid to Saudi Arabia, by 1951 the division of rents was completely different. In that year, Saudi Arabia collected $110 million from the company, while, after the application of the tax credit, Aramco paid only $6 million to the United States Treasury.7

The impact of the Saudi-Aramco deal on neighboring countries was swift. The Kuwaitis insisted on a similar arrangement, and Gulf Oil was fearful about failure to respond. “We might wake up any morning and find that we had lost Kuwait,” a worried Colonel Drake, chairman of Gulf, told American officials. Gulf succeeded in overcoming the obdurate objections of Anglo-Iranian’s chairman, Sir William Fraser, and got that company, its partner in the Kuwait Oil Company, to agree to fifty-fifty in Kuwait. Britain’s Inland Revenue opposed the principle of the tax credit on Anglo-Iranian’s share, but pressure came from other parts of the British government until the taxmen too finally saw the light and agreed to an appropriate tax credit mechanism. In neighboring Iraq, a fifty-fifty deal was also in place by early 1952.

Thus, a new foundation had been established for relations between David Ricardo’s landlord and tenant. And the tenant oil companies had to grapple with their significance. Inside Jersey, several departments collaborated on a working paper on the fifty-fifty arrangements, to provide internal guidance for the company. The paper noted that Jersey had gone through a considerable process of education since the Mexican expropriation. “We now know that the safety of our position in any country depends not alone on compliance with laws and contracts, or on the rate or amount of our payments to the government, but on whether our whole relationship is accepted at any given moment by the government and public opinion of the country—and by our own government and public opinion—as ‘fair.’ If it is not so accepted, it will be changed.” Unfortunately, “‘fairness’ and ‘unfairness’ are essentially concepts of the emotions rather than fixed and measurable standards.” However disconcerting and unpalatable it might be to the engineers, businessmen, and buccaneers who ran international oil companies, that was a fact of life. “Experience already shows that there is something inherently satisfying in the ‘50/50’ concept.”

Satisfying or not, it was a necessity. But had the battle over rents ended with a lasting peace treaty or was it only a truce? Did the companies now have a position that they could successfully defend against nationalism, the assertion of sovereignty, and the inevitable thirst of nation-states for more revenues? The paper prepared for Jersey management offered a sharp warning: “If we ever admit in any country that an equal division is less than ‘fair,’ the ground will be cut out from under our feet in every country.” On fifty-fifty, the paper warned, was where Jersey should make its stand: “‘50/50’ is a good position which needs no defense and is hard to attack; ‘55/45’ or ‘60/40’ would have no such appeal, and could be only rear-guard defense positions in an unlimited retreat.”

The Watershed

The Saudi-Aramco fifty-fifty agreement of December 1950 was, with justification, described as a “revolution” by one historian of the decline and fall of the British empire—“an economic and political watershed no less significant for the Middle East than the transfer of power for India and Pakistan.” As for the American government, it satisfied the urgent and critical need to increase the income to Saudi Arabia and other governments in order to maintain the postwar petroleum order and to help keep those “friendly” regimes in power. The stakes and risks were enormous. At a time when every dollar of Truman Doctrine and Marshall Plan aid was a battle in Congress, an arrangement that enabled Middle Eastern governments to tax the profits of the oil companies was more efficient than trying to get additional foreign aid out of the Congress. Moreover, the fiftyfifty principle had the right psychological feel. Both politically and symbolically, it did the job that needed to be done.

Many years later, in 1974, when the international politics of oil had become burningly controversial, George McGhee, who as Assistant Secretary of State had brokered the Saudi-Aramco deal, was quizzed at a Senate hearing about the arrangement that he had helped hammer out in 1950. A Senator asked him if the tax credit wasn’t really “a very ingenious way of transferring many millions by executive decision out of the public treasury and into the hands of a foreign government treasury without ever needing any appropriation or authorization from the Congress of the United States?”

McGhee disagreed. It was not a sleight of hand. There was consultation with the Treasury Department at the time, and with Congress. The decision was not secret. The fifty-fifty principle had already been at work in Venezuela for seven years before its adoption in Saudi Arabia. No, McGhee explained, the question missed the point. “The ownership of this oil concession was a valuable asset for our country.” The risk of not doing something along these lines was much too great. “In essence,” McGhee said, “the threat was the loss of the concession.”8

And, indeed, Aramco’s concession in Saudi Arabia had been preserved. But, within six months of the signing of the Saudi fifty-fifty deal in December 1950, events in neighboring Iran were to prove that the relationship between landlord and tenant had by no means been satisfactorily resolved.

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