Modern history


OPEC and the Surge Pot

STILL, THE SURPLUS of oil continued to mount. Further discounts off the posted price followed, in large measure as a result of the aggressive marketing by the Soviet Union, which stepped up its drive to sell oil in the West, slashing prices and making barter deals. In these Cold War years, many in the West believed that the intensifying Soviet petroleum campaign represented not only a commercial venture, but also a political assault, the purpose of which was to create dependence in Western Europe, weaken the unity of NATO, and subvert the Western oil position in the Middle East. “Economic warfare is especially well adapted to their aims of worldwide conquest,” Senator Kenneth Keating would say of the Russians. And of the blustering leader of the Soviet Union, he said, “Khrushchev has threatened to bury us on more than one occasion. It is now becoming increasingly evident that he would also like to drown us in a sea of oil if we let him get away with it.”

Certainly, the Soviet Union was proving to be a very tough competitor. The Soviets needed dollars and other Western hard currencies to buy industrial equipment and agricultural products. Oil exports then, as now, were one of the few things that they had to sell to the West. On sheer economic terms, Soviet prices could not easily be resisted. At one point, Russian oil could be picked up in Black Sea ports at about half the posted price of Middle Eastern oil. The companies feared significant losses of sales to the Russians in Western Europe, which was also the primary market for Middle Eastern oil. The agitation among the Western companies was further increased when they observed that the most prominent buyer of Russian oil was none other than their number-one bête noire, the Italian Enrico Mattei.1

Once again, as in 1959, the only way open to the companies to cope with the general oversupply and, in particular, to counter the Soviet threat (barring governmental restrictions on the importation of Soviet oil), was the competitive response, price cuts. But which price? If only the market price were reduced, then the oil companies alone would be absorbing the entire loss. Yet could they risk making another cut in the posted price? The first one, in February of 1959, had inflamed the Arab Oil Congress and led to the Gentlemen’s Agreement. What would happen if they did it again?

T Square Versus Slide Rule

In July of 1960, fifteen months after the Arab Oil Congress in Cairo, the board of Standard Oil of New Jersey met in New York to consider the vexing question of the posted price. The meeting was contentious. The company had a new chairman, the no-nonsense Monroe Rathbone, known as “Jack.” Rathbone’s life was practically a textbook of the American oil industry. Both his father and his uncle had been Jersey refiners in West Virginia. Rathbone himself had studied chemical engineering, and then had gone to work right after World War I in Jersey’s huge refinery at Baton Rouge. He was the first member of the new wave that, as a Jersey man once said, took refining from being “a combination of guesswork and art” and turned it into a science.

By the age of thirty-one, Rathbone was the general manager of the Baton Rouge refinery. There he developed considerable political skills fending off the predatory attacks of Huey Long, the demagogic political boss of Louisiana, who “customarily ran for office against Standard Oil.” (As part of his personal war against Standard, Long had once offered the by-then-elderly Ida Tarbell one hundred dollars for an out-of-print copy of her Standard Oil history.) Rathbone soared through the Jersey organization to the top position. As the boss, he was self-confident, decisive, unemotional, and uninterested in small talk. A colleague described him as “an engineer with a T Square.” The great drawback was that his entire career had been spent in positions in the United States, so that he did not intuitively grasp the changing mentality of foreign oil producers. Fending off the populist Huey Long was not as good a preparation as Rathbone might have thought for dealing with the nationalistic leaders of the oil-exporting countries. He simply did not realize how another reduction in the posted price would be received. It did not seem to him necessary even to consult with the producers, for whom he had a certain impatience. “Money is heady wine for some of these poor countries, and some of these poor people,” he once said.

Jersey was then managed by what seemed such an endless number of committees that it was known in-house as the “Standard Committee Company of New Jersey.” This system was intended to forestall precipitous decisions, to make sure a problem was carefully analyzed and looked at from all sides. But Rathbone had, as an associate once said, “the kind of determination that takes an awful lot of evidence to break down.” And, at this moment, Rathbone, preoccupied by the strategic problem of gaining markets midst the glut, was determined to overwhelm the committee system and force a cut in the posted price.2

Howard Page, Jersey’s expert Middle East negotiator, and the man who had put together the Iranian consortium, vigorously disagreed with Rathbone. He and others on the Jersey board thought that Rathbone did not fully comprehend the problem or the likely reactions. He had been at odds with Rathbone for some time on this issue. Page had broad international experience; he had helped organize oil supplies between the United States and Britain during the war under Harold Ickes; afterward, he became Jersey’s Middle East coordinator. “He was a very tough man,” said one who negotiated against him. “He always had a slide rule on his lap, so that he could calculate down to the last half cent on a barrel. But he was also a man of some vision, and was very well able to understand other people’s vision.” Page grasped the explosive force of nationalism in the Middle East, and he feared that his colleagues at Jersey, and Rathbone in particular, did not.

In an effort to educate his fellow directors, Page arranged for the intrepid journalist Wanda Jablonski, just back from the Middle East, to meet with the board of Jersey. She told them, according to a report by a British diplomat who talked to Jablonski afterward, that there was “almost universal adulation for Nasser among all classes, and a hostility towards the west that had deepened markedly. In the field of oil this took the form of a growing outcry against absentee landlordism. She had listened to many a bitter diatribe against those international oil companies who, from foreign capitals, were draining off the wealth of the Arab countries! It was intolerable that, from their remote vastness in London, New York, Pittsburgh etc., top executives of oil companies should control the economic destinies of Middle East oil producing states.” Jablonski even told the Jersey board that the existing structure of the Iraq Petroleum Company and Aramco might prove to be “short-lived,” which was about the last thing in the world they wanted to hear.

At a separate meeting with Jablonski, Rathbone vehemently disagreed with her disquisition on the force of nationalism. He dismissed her concerns. He had just come back from the Middle East, and he told her that she was being excessively pessimistic.

“You never got beneath the surface,” Jablonski replied tartly. “Jack, do yourself a favor. You got the red carpet treatment, you were there only a few days. You’d be wiser if you didn’t make those statements.”

Now, as the Jersey board debated cutting the posted price, Page argued against it. Jersey would be cutting the countries’ national revenues. Consult with the governments, he said, compromise with them, but don’t do anything unilateral. Page made a motion that a cut be made, but that it be effected only after some discussion and agreement with the governments. The other directors backed the motion. Jack Rathbone did not, and he was the chairman. He privately dismissed Page as “a know-it-all.” He decided that Jersey would go ahead and cut the price, and that the company would do it the way he wanted it done, which was without first consulting any governments or anyone else. That was that.

On August 9, 1960, with no direct warning to the exporters, Jersey announced cuts of up to fourteen cents a barrel in the posted prices of Middle Eastern crudes—about a 7 percent reduction. The other companies followed suit, though without any enthusiasm and, in some cases, with a good deal of alarm. To John Loudon of Shell, it was “the fatal move. You can’t just be guided by market forces in an industry so essential to various governments. You had to take these other things into consideration. You had to be so terribly careful.” BP, which had learned its lesson when it cut the posted price in 1959, complained that it “heard the news with regret.”

The reactions on the part of oil-producing countries went far beyond “regret.” Standard Oil of New Jersey had suddenly made a significant slice in their national revenues. Moreover, that decision, so critical to their fiscal position and their national identity, had been carried out unilaterally, without any consultation. They were outraged. “All hell broke loose,” recalled Howard Page. Another Jersey executive, who had also opposed the cut, was in Baghdad when it was announced. He was, he later said, “glad to get out alive.”3

“We’ve Done It!”

The exporters were furious and they wasted no time. Within hours of Standard Oil’s announcement of the cut in the posted price in August 1960, Abdullah Tariki telegraphed Juan Pablo Pérez Alfonzo, and then hurriedly departed to Beirut for a twenty-four-hour visit. What would happen, he was asked by journalists? “Just wait,” he replied. Tariki and Pérez Alfonzo wanted to bring the other signatories of the Cairo Gentlemen’s Agreement together again as quickly as possible. In the maelstrom of anger and outrage, the Iraqis recognized a political opportunity. The revolutionary government of Abdul Karim Kassem had no wish to subordinate itself to a Nasserite order in the Middle East, and it was deeply opposed to the influence that Nasser could wield on oil policy through his domination of the Arab League and the various Arab oil conferences. The Iraqis now saw that, by using the price cut as the catalyst to establish a new organization composed exclusively of oil exporters (including two non-Arab countries, Iran and Venezuela), they could isolate oil policy from Nasser. The Iraqis also hoped that such a grouping would bolster them in their confrontation with the Iraq Petroleum Company—and provide the additional revenues they desperately needed. And so, jumping at the chance to bring the other exporters together under Iraqi auspices, they quickly dispatched invitations to meet in Baghdad.

When the telegram from the Iraqi government was brought into Pérez Alfonzo’s office in Caracas, he was exultant. Here were the makings of the international “Texas association” that he so ardently advocated. “We’ve done it!” he declared excitedly to his aides as he held the telegram aloft. “We’ve achieved it!”

The oil companies quickly realized that the unilateral price cut was a dreadful error. On September 8, 1960, Shell offered an olive branch; it raised its posted prices by two to four cents. The gesture came too late. By September 10, representatives of the major exporting countries—Saudi Arabia, Venezuela, Kuwait, Iraq, Iran—had arrived in Baghdad. Qatar attended as an observer. The omens for the meeting were not particularly good. Pérez Alfonzo had to delay his departure from Caracas owing to an attempted coup against the new democratic government. Baghdad itself was filled with tanks and armed soldiers; the new revolutionary regime was on alert against an anticipated coup. Armed guards were posted behind each delegate during the discussions.

Yet, by September 14, the group had completed its work. A new entity had been established with which to confront the international oil companies. It was called the Organization of Petroleum Exporting Countries, and it made its intention clear: to defend the price of oil—more precisely, to restore it to its precut level. From here on, the member countries would insist that the companies consult them on the pricing matters that so centrally affected their national revenues. They also called for a system of “regulation of production,” Tariki’s and Pérez Alfonzo’s dream of a worldwide Texas Railroad Commission. And they committed themselves to solidarity in case the companies sought to impose “sanctions” on one of them.

The creation of OPEC gave the companies good reason for second thoughts, creative backstepping, and outright apologies. “If you disapprove of what we have done, we regret it,” a representative of Standard Oil abjectly told an Arab oil conference a few weeks later. “Whenever in any manner, large or small, you disagree with something that we have done, we are sorry that this is so. Whether what we have done is in fact right or wrong, the fact that you feel it is wrong or that you do not understand why we have done it, is a failure on our part.”

To apologize was prudent, for OPEC’s five founding members were the source of over 80 percent of the world’s crude oil exports. Moreover, OPEC’s creation represented “the first collective act of sovereignty on the part of the oil exporters,” in the words of Fadhil al-Chalabi, later an OPEC Deputy Secretary General, as well as “the first turning point,” as he put it, “in the international economic relations towards the states’ control over natural resources.”

Yet, despite all the motion and rhetoric, the newly created OPEC did not seem very threatening or imposing. And, whatever their initial apologies, the companies certainly did not take the organization all that seriously. “We attached little importance to it,” said Howard Page of Standard Oil, “because we believed it would not work.” Fuad Rouhani, the Iranian delegate to the founding conference in Baghdad and OPEC’s first Secretary General, observed that the companies initially pretended that “OPEC did not exist.” Western governments did not pay much attention either. In a secret forty-three-page report on “Middle East Oil,” in November 1960, two months after OPEC’s founding, the CIA devoted a mere four lines to the new organization.4

OPEC in the 1960s

Indeed, OPEC could claim only two achievements in its early years. It ensured that the oil companies would be cautious about taking any major step unilaterally, without consultation. And they would not dare cut the posted price again. Beyond that, there were many reasons why OPEC had so little to show for its first decade. In all the member countries, with the exception of Iran, the oil reserves in the ground actually belonged by contract to the concessionaires, the companies, thus limiting the countries’ control. Furthermore, the world oil market was overwhelmed with surplus, and the exporting countries were competitors; they had to worry about holding on to markets in order to maintain revenues. Thus they could not afford to alienate the companies on which they depended for access to those markets.

The 1960s saw a continuing process of decolonization and the rise of “Third World” questions and controversies. Yet the issues of sovereignty in the oil world, which was so stark and central in OPEC’s formation in 1960, subsided over the next few years, as the companies sought to meet the exporters’ demands for higher revenues by pushing up production. There were broader political factors as well. In Saudi Arabia, King Faisal was now firmly in charge, and he, in contrast to his brother Saud, was oriented toward the West. Indeed, a political competition soon developed between Saudi Arabia and Egypt, which culminated in their proxy war in Yemen. Outside the Middle East, Venezuela was interested in pursuing a stable relationship with the United States and became a key country in the Alliance for Progress of the Kennedy and Johnson Administrations. Overall, the circumstances of international politics, including the dominance of the United States and its importance to the security of several of the producing nations, prevented them from challenging too directly the United States and other Western industrial countries.

And if the OPEC member countries had a common economic goal—to increase their revenues—the political rivalries among them were considerable. In 1961, when Kuwait became completely independent of Britain, Iraq not only claimed ownership of the small country, but also threatened invasion. Iraq backed off only after Britain dispatched a small military squadron to help defend Kuwait. But Iraq did temporarily suspend its membership in OPEC in protest. The two major producers, Iran and Saudi Arabia, looked upon each other with apprehension and envy, even as the ascent of Nasser and nationalism in Egypt and throughout the Middle East posed a threat to their dynasties as well as their political leadership in the region. The Shah wanted to increase his revenues as speedily as possible, and he believed that could only be achieved by selling more oil, not by holding back production and raising the price. And he wanted to be sure that Iran regained and held on to a position of preeminence that befitted his own ambitions. “Iran must be restored to number one producer,” he said. “International oil prorationing is nice in theory but unrealistic in practice.”5

Abdullah Tariki, the Saudi proponent of prorationing, had aligned himself with King Saud. It was an unwise choice, as Faisal won the power struggle. In 1962, Tariki was fired and replaced as oil minister by the young legal adviser to the Cabinet, Ahmed Zaki Yamani, who had no particular attachment to the notion of creating an international Texas Railroad Commission. Thus was Tariki severed from OPEC. He spent the next decade and a half in itinerant exile, as a consultant, advising other petroleum countries, and as a journalist and polemicist, denouncing the oil companies and urging the Arabs to seize full control of their resources.

OPEC’s other father, Pérez Alfonzo, grew disillusioned not only with politics, but also with OPEC. The physical strain of being minister and of all his travels also took its toll, and he finally resigned in 1963. He said that his mission had been to get the oil producers together; he had done that, and there was nothing more for him to do. A few weeks after his resignation, he let loose a blast at OPEC for its ineffectiveness and for failing to produce any benefits for Venezuela. He then retreated to his villa to read and write and study philosophy, managing to preserve the house and its gardens as an enclave for contemplation and criticism in a city bursting with growth, din, and automobiles. But Pérez Alfonzo no longer talked about “sowing the oil”; instead, he took to calling petroleum “the excrement of the devil.” He kept the rusted Singer automobile in the garden as a monument to what he saw as the waste of oil wealth. His concerns, in his last years, continued to focus on the need to husband, not dissipate, resources, and on the pollution created by industrial society. “I am an ecologist first of all,” he said shortly before his death in 1979. “I have always been an ecologist first of all. Now I am not interested in oil any more. I live for my flowers. OPEC, as an ecological group, has really disappeared.”

The oil companies strenuously sought to avoid direct negotiations with OPEC during much of the 1960s. “Our position was that we owned the concessions, and we would deal with the countries in which the concessions were located,” recalled an executive of one of the majors. OPEC itself continued through the 1960s to be, as another executive called it, a sideshow: “The reality of the oil world was U.S. import quotas, Russian oil exports, and competition. This was what filled the columns of the trade press, the minds of oil executives and the memos of government policy makers. These were the important underlying preoccupations of the oil industry.” What loomed over everything else was the dizzying growth in demand and the even more dizzying growth in available supply. It seemed that OPEC’s moment to mount an effective challenge to the power of the major oil companies had passed—or would never come.6

“The New Frontier”—and More Elephants

Almost as soon as OPEC was established, its member countries lost what had been their almost total grip on world oil exports. Wholly new oil provinces were found and opened up in the 1960s, adding to the supplies that were swamping the market. And while most of the producing countries would eventually become members of OPEC, they entered the world market first as competitors, capturing the market share of the more established exporters.

Africa was considered the “new frontier” for world oil in those years. France took a lead in exploring it, drawing on the policies that had been enunciated after World War I, when Clemenceau had said that oil was the “blood of the earth”—and had decided that he could no longer depend upon his “grocer,” supplied by foreign companies, for so critical a commodity. If France were to remain a great power, it had to have its own petroleum resources. Within a few months of the end of World War II, Charles de Gaulle ordered a maximum drive to develop oil supplies within the French empire. The objective was to have French oil production around the world at least equivalent in volume to France’s own consumption, thus helping the balance of payments and promoting security. Yet France’s national champion, CFP, was preoccupied with sorting out the Iraq Petroleum Company and its position in the Middle East, and so the government charged a new group of state companies, under the Bureau de Recherches Pétroliers (BRP), to explore for oil elsewhere in the empire. After several years, oil was discovered in Gabon in West Africa.

In North Africa, France’s High Commissioner for Morocco had been promoting the potential of the Sahara, though in the face of much skepticism. The most prominent professor of geology at the Sorbonne announced that he was so sure that there was no oil in the Sahara that he would happily drink any drops of oil that happened to be found there. Nevertheless, the territory was large, there was very little competition for permits, and another state company, Régie Autonome des Pétroles (RAP), began exploration. And, in 1956, RAP discovered oil in Algeria.

The Algerian find, in the Sahara, fired excitement in France. Here, for the first time, France would have control of oil resources that were outside the Middle East and beyond the reach of the “Anglo-Saxons” (though Shell was a partner in the Algerian venture). The Suez Crisis, later in that same year, only reinforced the significance of the “Sahara” to France, again demonstrating the danger of dependence upon the unreliable “Anglo-Saxons”—in this case the Americans—for oil and indeed for political support. The French felt that they had been betrayed by their American ally. Moreover, the crisis had been a severe blow both to French pride and to economic stability. The government’s Economic Council called for a stepped-up international exploration campaign, especially in Africa. “The diversification of sources of supply,” declared the council, “is for our country an essential condition of security.”

All this made the new Algerian oil discoveries and their rapid development even more crucial. The “Sahara” became a magical word in France. The “Sahara” would free France from dependence upon foreigners and from the acute pain of foreign exchange crises; the “Sahara” would make possible the revitalization of French industry; the “Sahara” would be France’s answer to Germany’s Ruhr, where the German postwar economic miracle was taking place. De Gaulle himself made a private visit to the Saharan oil fields in 1957, a year before his return to power. “Here is the great opportunity for our country that you have brought into the world,” he told the oil men at the desert camp. “In our destiny, this can change everything.”

Getting the oil out was very difficult. The fields were deep in the desert; even the simplest things, like water, had to be trucked hundreds of miles across roadless wastelands. Yet by 1958, within two years of discovery, the first oil began to flow out of the desert, for export to France. There was, however, one great inconvenience with Saharan oil. Algeria was caught up in a bloody war for independence, which had begun in 1954, and the Algerian rebels regarded the Sahara as integrally part of Algeria, French protestations to the contrary. The future of Saharan oil production could not exactly be regarded as secure. Indeed, in some French circles, it was believed that the “Anglo-Saxons,” as well as Signor Mattei of Italy, were colluding with the rebels to gain preferential access to the Saharan petroleum in a postindependence Algeria.

Yet the thrust of French policy worked. Whatever the risks, by 1961 companies primarily belonging to and controlled by the French state were producing oil around the world equivalent in volume to 94 percent of French demand. The next year, Algeria formally won its independence. But the Evian Agreement that de Gaulle negotiated with the Algerians guaranteed retention of France’s position in Saharan oil.

Nevertheless, there was no telling how long the deal with Algeria would hold. To strengthen the overall French oil position and to compete more effectively against the established majors, RAP was merged in 1965 with the BRP group of state companies, which among other things had discovered and developed a significant gas field in France. “We have chosen to adapt in a realistic manner to the international situation,” explained André Giraud, the Director of Fuels. The combined company was named Enterprise de Recherches et d’Activités Pétrolières, or more commonly Elf-ERAP. It eventually became better known simply as Elf, which was one of its gasoline brand names. Building upon its Algerian base, Elf launched a global exploration campaign and became not only a new major, one of the largest oil companies, but also one of the biggest industrial groups in the world.

Production was beginning to build up in other countries as well, promoted by eager independents hoping to strike a bonanza. The majors also moved in expeditiously. Despite their vast holdings in the Middle East, they wanted to diversify their sources in order not to find themselves hostage to what might happen in the countries around the Persian Gulf. As a Shell managing director put it in 1957, they wanted to be in a position “which is more commercially defensible than having all our eggs in one basket.” A joint venture between Shell and BP, which had begun exploration in Nigeria in 1937, finally in 1956 hit the first signs of oil in the swampy delta of the Niger River. But nothing anywhere else in the world would compare to the extraordinary phenomenon that unfolded in the desolate desert kingdom of Libya. It transformed the world oil industry, and would ultimately transform world politics.7

The Libyan Jack-Pot

Thousands of tanks had rolled back and forth over the gravelly rock of Libya during World War II, in the titanic desert struggle between the Germans and the British. And it was there that Rommel’s forces, chronically short of fuel, had ultimately been overwhelmed. Neither side knew that, even as their fuel gauges were falling, they were fighting at times only a hundred miles or so from one of the world’s great reserves of oil.

In the decade after World War II, Libya was seen as having some moderate significance from a military point of view. It was the site of Wheelus Air Force Base, one of the main American bomber bases in the Eastern Hemisphere. Beyond that, it did not count for much in international terms. Three distinct “provinces” had been rather arbitrarily joined to create the thinly populated country. At the top of its rickety political system sat old King Idris, who did not really like being king. He actually wrote out a resignation letter once, but desert tribesmen heard about it and prevented him from abdicating. Libya was a very poor country, plagued by droughts and locusts. Its economic prospects could hardly be called promising; in the years after World War II, its leading exports were two: esparto, a type of grass used to make paper for currency bills, and scrap metal scavenged from the rusting tanks and trucks and weaponry that had been left behind by the Axis and Allied Armies.

But by the middle 1950s, there was growing suspicion among geologists that the country might produce oil. To encourage exploration and development, the Libyan Petroleum Law of 1955 provided for a host of much smaller concessions, instead of the very large concession areas characteristic of the Persian Gulf countries. “I did not want Libya to begin as Iraq or as Saudi Arabia or as Kuwait,” explained the Libyan petroleum minister who oversaw the law. “I didn’t want my country to be in the hands of one oil company.” Libya would give many of the concessions to independent companies, which did not have oil production and concessions to protect in other countries in the Eastern Hemisphere, and thus would have no reason to hold back from exploring and producing as much, and as rapidly, as they could in Libya. The law offered another incentive. The government’s take would be pegged to the actual market price for its oil, which was lower than the increasingly fictional posted price. This meant that Libyan oil would be more profitable than oil from other countries, which was an excellent reason for any company to maximize its Libyan output. The central objective of the arrangement was summed up by the Libyan petroleum minister: “We wanted to discover oil quickly.”8

The strategy of diffusion worked: In the first round of negotiations, in 1957, seventeen companies successfully bid for a total of eighty-four concessions. The Libyan juggernaut was starting to roll. Working conditions, however, were hardly convenient. The country was very backward. There were no telephones to the outside world. Those wanting to make an overseas call to the United States had to fly to Rome to do it. Progress by the geologists in the field was impeded by obstacles they had never encountered before: an estimated three million land mines left over from World War II. Geologists and oil field workers were not infrequently injured or killed by undetected mines. The companies formed mine detection and clearance squads, and in due course, some of the Germans who had laid the mines for General Rommel were recruited to remove them.

The early exploration results were disappointing, and discouragement soon settled in. BP was already beginning to dispose of its warehouse supplies, its leases, and its villas in preparation to exit. Then, in April 1959, at a spot called Zelten, about a hundred miles south of the Mediterranean coast, Standard Oil of New Jersey made a big strike. The State Department summed it up for the British Foreign Office: “Libya has hit the jack-pot.” Ironically, Jersey had come close to deciding to give Libya a pass. After all, it owned 30 percent of the Aramco concession, which seemed capable of providing endless oil; it was also a member both of the Iraq Petroleum Company and of the Iranian consortium, and the largest producer in Venezuela. Yet, though the risks looked very large, there would also be a very important advantage to having oil in Libya. “One of our purposes in going into Libya was to try to find oil that would compete with the Middle East,” said M. A. Wright, who had been Jersey’s worldwide production coordinator. “We would have an improved position with the Saudis by having another source of crude.” Moreover, Jersey, like other companies, tended to believe that political risk in Libya was much lower than the risk in the Persian Gulf countries or in Venezuela.

With the discovery at Zelten, the rush was on. By 1961, ten good fields had been discovered, and Libya was exporting oil. It was a very high-quality, “sweet” (i.e., low-sulfur) crude. In contrast to the heavier Persian Gulf crudes, which provided a large proportion of fuel oil, Libyan crudes could be refined into a much higher proportion of gasoline and other light, “clean” products, perfect for the growing automobile fleets of Europe and excellently suited to the dawning age of environmentalism. Moreover, Libyan production could hardly have been better located; it was not in the Middle East nor did it require transit either through the Suez Canal or around the Horn of Africa. From Libya, it was a quick, secure jaunt across the Mediterranean to the refineries in Italy and on the southern coast of France. By 1965, Libya was the world’s sixth-largest exporter of oil, responsible for 10 percent of all petroleum exports. By the end of the 1960s, it was producing over three million barrels per day, and in 1969 its output actually exceeded that of Saudi Arabia. It was an incredible accomplishment in a country in which, a decade earlier, no petroleum reserves had yet been discovered.9

But with such quick and unexpected prosperity, the Libyan business environment became redolent with corruption. Everyone seemed to have his hand out. One oil executive complained that his company was being “nickeled and dimed” to death. Most of the takers, however, were looking for much more than mere nickels and dimes. “If you were using any local contractors, there would be a shakedown,” remembered Bud Reid, a geologist with Occidental Petroleum, a small American independent that had obtained significant Libyan concessions. “The pressures came from all kinds of places. If the brother-in-law was an official in the customs department, then suddenly some piece of equipment you needed to get through customs wasn’t coming through fast enough. If you wanted to ensure your equipment got in, then you did business with a certain trucking or a certain contracting firm.” The family running the royal household was particularly well known for its interest in extremely large gratuities. The death of the senior member of that family in an auto accident set off a crisis of sorts in the country; for his demise, explained an American oil man, “created real uncertainty about who to bribe.”

The vast surge of Libyan oil dramatically affected world oil prices, giving further force to the descent that had begun after Suez. The flood of Libyan oil picked up where Soviet oil left off. In Libya, more than half the production was in the hands of independent oil companies, many of which, unlike the majors, did not have their own outlets. Nor did they have any reason for restraint, since they had no other supply sources to protect. Moreover, they were shut out of the American market by quotas that protected and encouraged high-cost domestic oil. So politics, as well as economics and geography, forced the independents operating in Libya to crowd into a single market in Europe and to seek aggressively to sell their oil at whatever cost. And not only in Europe, but throughout the world, there was more petroleum looking for markets than there was demand. The result was cutthroat competition. Between 1960 and 1969, the market price for oil fell by 36 cents a barrel, a drop of 22 percent. Correcting for inflation, the fall was even steeper—a 40 percent decline. “Oil was available for anybody, anytime, any place and always at a price as low as you were charging for it,” recalled Howard Page of Jersey. “I mean, I have never seen such a competitive market. The market was just falling on its face.”10

Mattei’s Last Flight

And what of the man who had set in motion this challenge to the power of the majors and the very structure of the industry, Enrico Mattei? As he turned ENI and its oil subsidiary AGIP into a world force, Mattei went from battle to battle, finally taking on not only the established oil companies, but also the United States government and the North Atlantic Treaty Organization, both of which were alarmed by his bid to become a massive buyer of cheap Soviet oil. He intended to link his Mediterranean-based pipeline system to the westward-marching Soviet system and, in the process, to barter Italian pipe for Russian oil. But he was also working toward a compromise in his bitter fights with Standard Oil of New Jersey and the other majors and was preparing for a trip to the United States to meet its new President, John Kennedy. The American government supported oil company efforts to work out a détente with Mattei and, in the words of the U.S. ambassador to Italy in April 1962, “assuage his damaged ego sufficiently to minimize future polemics.”

On October 27, 1962, Mattei took off from Sicily in his private jet. The only other passenger aboard was Time magazine’s Rome bureau chief, who was researching a cover story on the Italian tycoon in anticipation of his upcoming trip to America. Their destination was Milan. They never made it. The plane crashed in a terrible thunderstorm, about seven miles short of the runway at Linate Airport in Milan.

Because it was Italy, because it was Mattei, and because he was so controversial, there was much speculation about the cause of the crash. Some said that the Western intelligence services had sabotaged his jet because of his oil deals with the Soviet Union. Some said that the French Secret Army Organization, the diehards who were fighting against Algerian independence, had sabotaged the plane because of Mattei’s criticism of colonialism and the French role in Algeria and in revenge for his flirting with the Algerian rebels, which was aimed at positioning AGIP for Algerian independence. But it is more likely that his death was an accident, with the weather and character as fate. Mattei was always in a rush, and his impatient, driving personality would not permit a storm to deter him from landing when he had important things to do on the ground. He had often pushed his reluctant pilot to battle through the Milanese weather, and always with impunity. This time he had simply pushed too hard.

At the time of his death, Mattei was fifty-six, and at the height of his empire building. He had seemed invincible and invulnerable. The foreign affairs columnist of the New York Times called him “the most important individual in Italy,” more important than either the premier in Rome or the Pope in the Vatican. It was said that he was more responsible than any other man for the sustained postwar boom known as “the Italian Miracle.” Afterward, the location of ENI’s headquarters in Rome was named “Piazza Enrico Mattei,” and ENI and AGIP continued their growth and quest for expansion. But without Mattei, ENI’s buccaneer days as the world’s number-one maverick oil company were over.11

The New Competitors

Though Mattei was gone, he had instigated a revolution that would eventually overthrow the majors’global dominance. To be sure, and contrary to the customary image, the industry’s structure was constantly changing. The history of international oil in the twentieth century was one in which “newcomers” continually broke in on the established order. But, for the most part, up until the 1950s, there always seemed to be a way that they could be accommodated; they, too, could, more or less, become part of the establishment. That possibility ended in 1957 when Mattei did his deal with Iran, and the Japanese followed suit offshore of the Neutral Zone. The frenetic activity in Libya in the 1960s carried on the revolution Mattei had begun and dramatized how much had changed. Now, there were many participants in the international oil game—with strikingly divergent interests and far too many for the clubby collaboration of the era of the Seven Sisters.

The reasons for the explosion in the number of players were several. The advance and diffusion of technology reduced the geological risk and made exploration and production expertise readily available. Governments in producing and would-be producing countries adopted concessionary policies that favored the entry of independents and new players. Improvements in travel, communications, and information made Latin America, the Middle East, and Africa all less remote and more accessible. The high rate of return on international oil investment, at least up until the middle 1950s, provided a great appeal. The United States tax code made foreign investment less risky and more attractive. Prorationing in the United States also encouraged companies to go abroad to seek capacity that they could produce at full rate. And petroleum demand among the industrialized nations was climbing to new highs, while the governments of both the consuming and the producing countries increasingly looked to oil as the motor for economic growth and as a tangible symbol of security, pride, and power.

There was one other factor at work: the preeminence of the United States in the Western alliance system and the world economy. Despite crises generated by nationalism and communism, American influence was pervasive, supplanting that of the old colonial empires. America’s military might was widely respected, and its economic success was an object of admiration and envy. The dollar ruled supreme, and the United States was at the center of an economic order that encouraged, among other things, the outflow of American capital, technology, and managerial expertise in oil, as in other industries. And the United States was in a position to shape a political order in which risks and threats were manageable. Private enterprise responded.

The proliferation of players in the oil game was remarkable, especially in the Middle East. In 1946, 9 oil companies operated in the region; by 1956, 19; and by 1970, the number reached 81. Yet even this was only part of a larger expansion. Between 1953 and 1972, by one estimate, more than 350 companies either entered the foreign (that is, non-U.S.) oil industry or significantly expanded their participation. Among these “new internationals” were 15 large American oil companies; 20 medium-sized American oil companies; 10 large American natural gas, chemical, and steel companies; and 25 non-American firms. How different this was from the situation at the beginning of the postwar period, when only six American firms, in addition to the five acknowledged American majors, had any active exploration interests anywhere overseas at all. In 1953, no private oil company anywhere in the world, other than the seven largest, had as much as 200 million barrels of proven foreign reserves; by 1972, at least thirteen of the “new internationals” each owned more than 2 billion barrels of foreign reserves. Altogether, the new entrants owned 112 billion barrels of proven reserves—a quarter of the free world total. By 1972, the “new internationals” had a total daily output among them of 5.2 million barrels per day.

One of the most obvious results of such a crowded arena was a decline in profitability. The industry had earned high rates of return on its foreign investment until the mid-1950s—the rewards, some would say, for the risks taken in distant, inaccessible regions in the turbulent postwar days, or, others would say, the result of an oligopoly, an industry dominated by a handful of major players. The series of crises—Mossadegh and Iran, the Korean War, and Suez—continued to buoy the profit rate above 20 percent. But with the reopening of the Suez Canal in 1957, the intense competition to sell supplies started to force both prices and profits down. Thereafter, and continuing through the sixties, investment in foreign oil yielded 11 to 13 percent returns, which were pretty much the same as for manufacturing industries. While the exporting countries were counting more money than they had ever seen before, the oil industry itself was no longer being as well rewarded as in the past.12

Walking the Tightrope—Iran Versus Saudi Arabia

The global battle of production intensified the long-standing rivalry between the two key oil countries of the Middle East—Iran and Saudi Arabia. The swell of output around the world put the major companies in a political quandary. They had to try to balance supply against demand, even while production was coming on from the newcomers, and that meant restraining output in the world’s greatest reserve, the Persian Gulf region. And while Persian Gulf production would grow quickly, it would not increase as rapidly as its reserves would have allowed, or as the governments in the region wanted. In the United States, production was managed and restricted by the Texas Railroad Commission and similar agencies in other states. In the far-more-bountiful oil provinces around the Persian Gulf, output was reined in to what the major companies estimated was necessary to fill the gap between projected demand and available production from the rest of the world. Thus, the Persian Gulf became the stabilizer, the control mechanism for balancing supply and demand. It was the “swing area” or, as some oil men liked to call it, the “surge pot.” But allocating growth, particularly between Iran and Saudi Arabia, was hardly easy. It took considerable ingenuity and application to try, even half successfully, to satisfy an Iran whose Shah was already swelling with grand ambition, and a Saudi Arabia that had no intention of acknowledging Iranian leadership in petroleum production, or indeed in anything else.

There were many points of conflict between the two nations: one was Arab and one was not; one was Sunni Moslem and the other Shia Moslem. Each wanted to be the leader, both in the region and among oil producers, and each had unfulfilled territorial ambitions. Their competition over levels of oil production underscored the fundamental jealousy and suspicion between the two countries. For output translated into wealth; and wealth in turn meant power, influence, and respect.

The rivalry between Iran and Saudi Arabia created enormous problems for the major companies. It was like “walking a tightrope,” said J. Kenneth Jamieson, later an Exxon chairman. The stakes were very large. The companies did not want to lose their position in either country. A single point stood out to the four Aramco companies—Jersey, Mobil (as Socony-Vacuum had become), Standard of California, and Texaco. Nothing should be done to jeopardize the Saudi concession. The challenge, said Howard Page, Jersey’s director responsible for the Middle East, was to keep the Saudis sufficiently happy to maintain Aramco’s position “because this was the most important concession in the entire world and we didn’t want to take any chances of losing it.” Appearing in Saudi eyes to be tilting toward Iran when it came to output could threaten the concession.

But Iran was potentially the dominant power in the region, and the Shah did have to be placated, if not always satisfied. “Nobody could have lifted enough crude to satisfy all the governments in the Persian Gulf during this period,” said George Parkhurst, who was Standard of California’s Middle East coordinator. The potential to supply, assuming that the appropriate investment was made, simply would outrun demand at any given point. Somehow the available growth in requirements had to be allocated in such a way that neither government would feel that the other was getting a better deal. Saudi Arabia’s gain would be Iran’s loss, and vice versa. “This is like a balloon,” said Page of Jersey. “Push it in one place, it comes out in another, and so if we acceded to all those demands, we would get it in the neck.”

To make matters more complicated, the major companies were dealing as partners in the various countries, and they had divergent, competing interests. Some had more crude than they needed, and some were short of crude. “What you have to do is in effect negotiate with your partners all the time, day and night,” Page said. “They’re always fighting.” Then, to make the fighting worse, there were the American independents who had been shoehorned into the Iranian consortium. They did not have other sources of crude or other major concessions to protect, and they were less concerned about the overall world situation than about getting as much oil out of Iran as possible and marketing it as aggressively as they could. They were continually pushing for higher Iranian production, and the majors suspected that they were egging the Shah on. But if Iranian production went up, that would mean the independents would have more oil, in Page’s phrase, to “peddle” against the majors, while the majors would have to hold back Saudi production and explain it all to an irate Ahmed Zaki Yamani and perhaps to King Faisal himself.

The question of how to allocate production between Saudi Arabia and Iran was not, strictly speaking, a matter of economics. The cost differential between the two countries was usually only a penny or two—“peanuts,” said Page. Rather, it was a strategic and political decision, and on many occasions, the responsibility fell to Howard Page, on behalf of the four Aramco partners, to explain and justify the companies’ actions. Zaki Yamani, the Saudi oil minister, was a formidable foe. He knew that Page liked Iranians personally, and he did not hesitate to express bluntly his suspicion that Page was showing favoritism toward Iran, at the expense of Saudi oil production.13

Dealing with the Iranians was no less difficult. The 1954 consortium agreement had pledged that Iran’s output would grow at least as fast as the average annual growth rate for the entire region, but the Shah was convinced that he was being hoodwinked by the oil companies. At a luncheon at the White House in 1964, he told Lyndon Johnson of his fear that oil companies would give preferential treatment to Arab oil producers. OPEC, the Shah added, had become an “instrument of Arab imperialism.” Fired by his own imperial vision and intent on regaining the number-one Middle Eastern export role for his country, the Shah tried any number of tactics and approaches to bring the companies around, even attempting to get the American State Department and the British Foreign Office to pressure the companies on geopolitical grounds.

The Shah made clear exactly where he stood in a meeting with his old friend, Kim Roosevelt, who had helped orchestrate the countercoup that put the Shah back in power a decade earlier. He “was tired of being treated like a schoolboy” by the United States, the Shah now told Roosevelt. He listed all the ways he was helping Western interests, including “Iran’s stand-up fight against the incursions of Nasser.” But “indifference” and “maltreatment” were all he got in return. “America does better by its enemies than it does by its friends,” he added. The special relationship between Iran and America, he warned, “is coming to an end.” To drive home his point, he patched up relations with the Russians, made a gas deal with Moscow, and threatened to reorient Iranian imports away from the West and toward the Soviet Union.

The Shah’s tactics worked. Both the American and British governments urged the oil companies to “do their best” to meet Iranian demands. The Iranians also kept constant pressure directly on the companies to increase output. All sorts of remedies were tried to keep the Shah happy. The companies even switched from a Western to an Iranian calendar in order to push more production into that particular year. In negotiations, no one would dare tell the Shah when he had made an error, even in simple arithmetic, and he did make such errors. The additional pressure that he brought to bear in the mid-1960s achieved the desired effect. For most years between 1957 and 1970, Iranian production grew at a faster rate than Saudi output: Altogether Iran’s production over those years grew by 387 percent, compared to Saudi Arabia’s 258 percent. But because Saudi Arabia had started with a larger base, the two countries’ respective outputs, in absolute terms, were within 5 percent of each other in 1970. The high-wire balancing act had, despite the running controversies, succeeded.

For this achievement, however, the companies, as well as the Saudis and Iranians, owed a considerable debt to still another party, radical Iraq, though the service provided by that country was quite inadvertent. At the beginning of the 1960s, Iraq revoked 99.5 percent of the concession held by the Iraq Petroleum Company, the company originally created by Calouste Gulbenkian, leaving it only the region where it was actually producing oil. The IPC in turn ceased investing in new exploration and production in that area. The result was that Iraqi output, which could have surged along with Iran’s and Saudi Arabia’s, creating an impossible problem of allocation, only edged up gradually through the 1960s.

At one point during those years, Oman, at the southeast corner of the Arabian peninsula, emerged as a very interesting oil play. Standard Oil of New Jersey, as might be expected, had the chance to get in. But when the issue came up in the company’s executive committee, Howard Page recommended against it. He had spent so much time negotiating with the Saudis and the Iranians that it required little effort on his part to conceive of how furious they would be. He could well imagine, in particular, what Yamani would say to him if Jersey and Aramco sought to restrain Saudi output to make room for production from a new concession in a neighboring country. That would surely contradict Jersey’s principle number one, which was not to do anything that “would endanger our Aramco concession.”

But the members of Jersey’s production department disagreed with Page. After all, they were geologists, and as far as they were concerned, discovering and developing new reserves were what the game was all about. Their ambition was to find new elephants, and they were very excited about Oman. “I am sure there is a 10 billion barrel oil field there,” a geologist who had just returned from Oman told the executive committee.

“Well, then,” replied Page, “I am absolutely sure we don’t want to go into it, and that settles it. I might put some money in if I was sure we weren’t going to get some oil, but not if we are going to get oil because we are liable to lose the Aramco concession.” With that logic, Jersey stayed out of Oman. The geologists, however, were right. Oman did become a significant oil producer, with Shell in the lead.14

“Us Independent Oil Suckers”

Consumers around the world welcomed cheap oil from Venezuela and the Middle East. So, after some hesitation, did the governments of the industrial countries. There was one exception—in the United States. No longer was the growing abundance of cheap foreign oil something to be encouraged and applauded as a way to relieve the pressure on U.S. reserves. Rather, the rising flood of imported oil was seen, at least among the independent American producers, as a dangerous threat that was undercutting domestic prices and undermining the domestic industry itself. As early as 1949, an irate geologist from Dallas named “Tex” Willis had written to his Senator, Lyndon B. Johnson, to ask if he was “going to be able to do anything for us independent oil suckers on that foreign oil that has destroyed the market for two billion dollars worth of Texas independent oil this year?” Tex Willis wanted to be sure that Johnson understood how he and his fellow oil men felt. There was, he said, “no sense in bankrupting every independent oil man in Texas for a few Arabian princes and because… Standard Oil of New Jersey claims they need the money.”

Johnson and the other members of the Congressional delegations from the oil states clearly heard Tex Willis and his compatriots and pressed hard to give the domestic oil industry some protection against Venezuelan and Middle Eastern oil. At one point, Johnson sent his aide, John Connally, to the State Department along with a number of Texas congressmen, all of whom wanted to impress on rather unsympathetic officialdom that their “re-election might turn upon whether or not they could provide a satisfactory answer to their constituents.” The oil state representatives sought to raise the tariff on imported oil tenfold, from 10.5 cents to $1.05 per barrel, and to limit imports to 5 percent of domestic consumption. Such efforts found no favor with President Harry Truman, who told one Congressman, “Something must be radically wrong with the reasoning of the people who would like to cut off our foreign trade for the benefit of the oil crowd.”

After the end of the Korean War and the return of Iranian oil to the market with the fall of Mossadegh, petroleum imports made even further inroads on domestic petroleum and coal. As a result, coal-producing and oil-producing states formed an unlikely coalition to seek to limit such imports. But one of the last things the new Eisenhower Administration wanted to do was put tariffs or quotas on imported oil. It wanted to encourage freer trade, to broaden economic relations with developing countries, and to keep them in the Western orbit. Yet Congress insisted on giving the President the power to restrict oil imports through a “National Security Amendment” to the 1955 trade act, which would enable him to control their level when he concluded that the nation’s security or its economic well-being was threatened.

Eisenhower was loath to use this new power. Instead of mandatory restrictions on foreign oil, his administration called for “voluntary” restrictions on the part of importers. It launched a vigorous campaign of letter writing and moral suasion directed at the importing companies, but the campaign proved rather ineffective in the face of the continuing buildup of Middle Eastern supply capacity and the price advantage of imported oil.

The Suez crisis of 1956 highlighted concerns about national security. The price fall that followed the crisis further increased the clamor among independents for protection in the form of tariffs or quotas. The majors, with their foreign production, did not join in the clamor. Eisenhower, himself still opposed to protectionism, came up with an alternative. If access to oil in an emergency was required for national security, he asked, then why not have the government stockpile oil in abundance? At one Cabinet meeting, he reminded his colleagues of what he called “an old suggestion”—that the government purchase low-cost foreign oil and store it in exhausted wells. Perhaps he remembered what had happened in 1944, when General Patton had run out of gas, and he had faced the thankless job in the “unforgiving minute” of allocating supplies between the furious Patton and the inflexible Montgomery. Storage might not improve the health of the domestic oil industry, but it would reconcile national security concerns with the administration’s free trade economic policies. But Eisenhower could not get any support for his idea. Indeed, the special committee he appointed to report on the entire oil import and security question rejected this particular alternative as simply too impractical.15

National Security and “a Nice Balance”

The independent oil men wanted mandatory controls—and soon. They intensified their campaign for a tariff as imports continued to rise, from the equivalent of 15 percent of domestic production in 1954 to over 19 percent in 1957. Meeting with three pro-restriction Senators in June of that year, a reluctant Eisenhower outlined the large number of considerations that he was trying to juggle: “the health of the domestic industry, national defense, the tax income of the various states, overall depletion of U.S. reserves, and the encouragement of exploration without causing the marketing of too much domestic oil and thereby unduly reducing our domestic reserves.” In short, said the President, “a nice balance should be obtained.” In an attempt to achieve that balance, the Administration adopted, in 1957, a system of more-explicit voluntary controls. The government was now in the business of informally allocating import rights.

No one particularly liked the “voluntary” allocation machinery. Still, it would work if everybody cooperated. But several companies were decidedly uncooperative. One reason was obvious: they were disproportionately disadvantaged because they had made large commitments to foreign oil. This applied not only to majors. J. Paul Getty had embarked on a $600 million expansion program to build tankers, gas stations, and a big new refinery, all of it to be based upon his new production from Kuwait’s Neutral Zone. Getty adopted the simple expedient of ignoring the voluntary quota system. After all, it was only voluntary. Sun Oil was much worried about the antitrust implications of cooperating with a “voluntary” program, the effect of which was to maintain prices. At that very moment, the Justice Department was suing the majors under the Sherman Antitrust Act for actions they had taken during the Suez Crisis in response to encouragement from other branches of the Federal government, which had been worried about shortages. Robert Dunlop, the president of Sun, also remembered the “Madison Case” in the 1930s, when the Justice Department had successfully prosecuted the oil industry on antitrust for going along with a market stabilization scheme promoted by Harold Ickes and the Interior Department. What assurance could the government now give that Sun, along with other companies, would not later be hauled up once again on antitrust charges for cooperating with the so-called voluntary system—which did look rather like a government-sponsored scheme to bolster prices!

The recession of 1958 did in the voluntary program. While oil demand dropped substantially, imports increased further, and the political pressure for mandatory controls was becoming irresistible. Clarence Randall, the chairman of the Council on Foreign Economic Policy, exasperatedly told Secretary of State Dulles that those who were invoking “national security” to restrict imports were all mixed up. If national security was the concern, then the best thing to do was to encourage imports in order to preserve domestic reserves. “Our policy should be to conserve that which we have,” he said, “rather than to take measures which would cause our supplies to be exhausted more rapidly.”

Still, the Eisenhower Administration resisted mandatory quotas. “This business about the national security is a good deal of window dressing,” Dulles complained in a phone conversation with Attorney General Herbert Brownell. “What they are doing,” Dulles continued, referring to the Texans who were calling for mandatory controls, “is to try to put the price of oil up and put more of the Texas wells into production and accelerate new drilling which will only happen if the price goes up.” Between seniority and adroit politicking, the oil states and the interests of the independents were powerfully represented in the Congress. The Speaker of the House, Sam Rayburn, was from Texas, and for him, as his biographer wrote, “oil and Texas were inseparable.” The Senate Majority Leader, Lyndon Johnson, was from Texas, and was no less sensitive to his constituents. He had already by 1940 made himself the key link in fundraising for Democratic politicians among wealthy Texas oil men. One of the most powerful Senators was Robert Kerr, a millionaire oil man from Oklahoma. Eisenhower could see what was coming. “Unless the Executive takes some action, Congress will,” he finally told Dulles, and he doubted that a Presidential veto would be upheld.

The President, unhappy about the position in which he found himself, unloaded his anger at a Cabinet meeting, criticizing the “tendencies of special interests in the United States to press almost irresistibly for special programs like this” that were “in conflict with the basic requirement on the United States to promote increased trade in the world.” Nevertheless, four days later, on March 10, 1959, Eisenhower announced the imposition of mandatory quotas on oil imports into the United States. A full decade after the battle had begun, the United States finally adopted formal controls. They may well have constituted the single most important and influential American energy policy in the postwar years. The independent oil “suckers” were jubilant; the majors, disappointed.16

“A Very Healthy Domestic Industry”

The quotas lasted for fourteen years. Under Eisenhower, imported oil could not exceed 9 percent of total consumption. The Kennedy Administration tightened the quotas a bit in 1962. Later, in the second half of the 1960s, the Johnson Administration did make some effort to relax the quotas as a way to bring down oil prices and thus help to counteract the inflation that was beginning to build with the Vietnam War. But, essentially, the quota system remained intact.

Oil import quotas sounded simple, straightforward. These were not. As time went on, their management became more and more Byzantine. Indeed, under the Mandatory Oil Import Program, as it was known, there were continuing fights over allocations, struggles over interpretations, searches for loopholes, and the ever-more-intense hunt for exceptions and exemptions. Over the years, the program became increasingly barnacled and distorted. A brisk market developed, not in oil itself, but in oil import “tickets” or rights to bring in oil. Some parts of the refining industry ended up, in effect, subsidizing others.

But there was nothing to compare with what became known variously as the “Mexican Merry-Go-Round” or the “Brownsville U-Turn.” Since memories were fresh of World War II and the U-boat attacks on tankers, and since “national security” was what the quotas were supposed to be all about, oil that came “overland” to the United States from Mexico or Canada was deemed more secure than oil shipped in tankers, and was given certain preference and exemption, which also happened to help political relations with Mexico and Canada. But here was the catch: There were no oil pipelines from Mexico, and oil was certainly not going to be trucked several hundred miles from Mexico’s production centers. Therefore, Mexican oil was shipped by tanker to the bordertown of Brownsville, Texas, put into trucks, driven across the bridge into Mexico, around a traffic circle, and then back across the bridge into Brownsville, where it was reloaded into tankers for shipment to the northeast. Thus shipped “overland,” it perfectly legally qualified for an exemption.

By the time of the Johnson Administration, one official was calling the entire quotas program “an administrative nightmare.” It also had far-reaching effects. It led, as was intended, to higher levels of investment in domestic oil exploration, relative to exploration outside the United States, than would have otherwise been the case. It tilted foreign investment by U.S. companies toward Canada, on account of that country’s preferential access to the American market. It resulted in the building of substantial refining capacity in the American Virgin Islands and Puerto Rico because of special exemptions to the quotas that were granted to refineries there on economic development grounds. And, finally, the program gave an important impetus to the global oil trade. If companies could not bring foreign oil into their own systems in the United States, which was the objective of integration, then they would have to find and develop markets elsewhere in the world.

As a further result of the program, prices were higher in the United States than they would have been without the protection. Moreover, the quotas put the prorationing systems in Texas and the other states back into a position where they could stabilize domestic prices. Indeed, domestically, the ten-year period following the introduction of the mandatory quotas was reminiscent of the price stability that followed the full implementation of prorationing in the 1930s. The average price of oil at the wellhead in the United States in 1959 was $2.90 a barrel; a decade later, in 1968, it was $2.94—stable, certainly, and also 60 to 70 percent above Middle Eastern crude in East Coast markets. In contrast, by closing off the American market, the mandatory controls resulted in lower prices outside the United States.

Despite all the exemptions, complications, and administrative nightmares, the import quotas did achieve their fundamental goal: They provided ample protection for domestic oil production against lower-cost foreign oil. By 1968, United States crude oil output was 29 percent higher than it had been in 1959, the year the mandatory quotas were introduced. Without that protection, American production would surely have plateaued or declined. Companies, large and small, adapted to the mandatory quotas. The majors, despite their initial vociferous criticism of the quotas, eventually came to see merit in a program that protected the profitability of their own domestic operations, albeit at the expense of their foreign ones. Their adjustment was facilitated by the fact that demand elsewhere was growing with sufficient rapidity to absorb their foreign production.

The mandatory program also taught the international companies a lesson. They may have had the financial resources, they may have had the scale and the know-how, but the independents had the political clout, and it was to them that the senators and congressmen from the oil patch responded. Sometimes the point had to be made explicit. In the mid-1960s, Senator Russell Long of Louisiana felt constrained to deliver a little homily to a group of executives from the larger oil companies. Congressmen from the oil states, he explained, “are especially interested in the domestic phases of the industry, because that is the part that gives employment to our people and means revenue to our state governments, and it is essential to our economy.” Long wanted the oil executives to ponder the implications. “We would like you fellows that produce oil overseas to realize this, that when problems come up with regard to your tax credit overseas or even your depletion allowance overseas, or the special tax treatment to your employees that you have overseas, the fellows you are going to rely upon to protect your activities in that respect are the same people who are interested in the domestic production of oil.” To summarize his message, Long added, “It is very much to your advantage to have a very healthy domestic industry and do everything within your power to cooperate to that end.”17

The international companies grudgingly absorbed the lesson.

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