PERSEPOLIS, THE CAPITAL of the ancient Persian empire, was sacked by Alexander the Great in 330 B.C. and left for over two millennia in deserted ruins. In October 1971 it was brought back to dazzling life. Three huge tents and fifty-nine smaller ones were erected on the desolate site. The occasion was what Time magazine called “one of the biggest bashes in all history,” put on by the Shah of Iran to celebrate the founding of the Persian empire twenty-five hundred years before. The assembled dignitaries included the President of the Soviet Union, the Vice-President of the United States, Marshal Tito of Yugoslavia, twenty kings and sheikhs, five queens, twenty-one princes and princesses, fourteen other presidents, three other vice-presidents, three premiers, and two foreign ministers. In the course of the ceremonies, the Shah publicly communed with the ghost of the king Cyrus the Great, the empire’s founder, and promised to continue the tradition and works of that monarch, now dead for some twenty-five centuries. And the jeweled and medal-bedecked guests were taken in buses up to the hill above Persepolis for a stunning son et lumière under the stars that dramatized, strangely enough, Alexander’s destruction of Persepolis.
In anticipation of the Persepolis celebration, the Iranian government had urgently sought top-secret advice from Britain on a most critical matter of high diplomacy: how to handle the seating plan with so many VIPs in attendance. Likelihood of offense to various potentates was great. The protocol section in the Foreign Office in London came up with an innovative plan based on a specially constructed table with undulating curves so that no one would be too far from a prominent member of the Pahlavi family.
As signal proof of his grandeur, the Shah had invited Queen Elizabeth II to attend his party. But Her Majesty’s ambassador in Tehran had the unhappy task of explaining that the Queen was already committed to a state visit elsewhere. The “elsewhere,” however, happened to be neighboring Turkey, which could not but aggravate the Shah. He then asked for Prince Charles. Sorry, Charles was not available; he was on naval duty on a frigate in the North Sea. Never mind that Persepolis was not just another party, but a once-in-a-twenty-five-hundred-year celebration—and that the Shah was, among other things, in the process of ordering several hundred British-built Chieftain tanks, which happened to be critically important to Britain’s balance of payments. London offered him Prince Philip and Princess Anne. The Shah accepted, but he was not exactly placated.
The event was catered by Maxim’s of Paris. The menus, created and carried by 165 chefs, bakers, and waiters, all flown in from Paris, were wondrous. To accompany the meals, twenty-five thousand bottles of wine were also flown in from France. (Since the whole affair had so strong a French accent, France’s President, Georges Pompidou, was notable by his absence. “If I did go,” he explained privately just beforehand, “they would probably make me the head-waiter.”) The cost of the pageantry and celebrations was estimated at somewhere between $100 and $200 million. When some questioned such extravagance, the Shah could not contain his irritation. “So what are people complaining about?” he asked. “That we are giving a couple of banquets for some 50 Heads of State? We can hardly offer them bread and radishes, can we? Thank heavens, the Imperial Court of Iran can still afford to pay for Maxim’s services.”
After Persepolis, the British, in an effort to mollify the Shah and reduce various tensions between the two countries, invited him to spend Royal Ascot Weekend with the Royal Family at Windsor Castle. The visit proved to be a great success. The only hitch emerged when the Shah was going to go riding à deux with the Queen. Some hours before they were to mount up, it was realized with horror that the Shah, as an Iranian male, would not ride a mare or gelding, only a stallion. But no stallion was available. Then, just as despair was settling over the British side, the Queen remembered that Princess Anne had a stallion. But it was noted, with new horror, that the horse was named Cossack. The Shah, of course, was the son of an officer of the Cossack Brigade, who had taken power in the 1920s. Given the Shah’s sensitivity about his father, and Britain’s role in deposing him, as well as his general suspicion of the British, he might well take the proffering of such a steed as a new and blatant insult and, indeed, a gross put-down. The Shah did ride Cossack, though the horse’s name was successfully kept from him, and the ride and the rest of the weekend went swimmingly. Queen Elizabeth and Prince Philip and the Shah and the Empress rode around the racecourse at Ascot in an open coach, and thereafter the Shah was to write to the Queen as “My Dear Sovereign Cousin.” Britain was back in favor.
The overall aim of the Shah’s grand celebration at Persepolis was to establish himself firmly in the line of Cyrus the Great, the Appointed One of God. His visit to the Queen enhanced his stature as every bit her royal equal. He was no longer a puppet, a pawn, a mere appointee to his throne. He was now a man of enormous wealth, power—and pride—who was stepping into pivotal new roles in the Middle East and on the international stage.1
The Anglo-American Retreat
The postwar petroleum order in the Middle East had been developed and sustained under American-British ascendancy. By the latter half of the 1960s, the power of both nations was in political recession, and that meant the political basis for the petroleum order was also weakening. The United States had been mired in Vietnam for several years in a costly, unpopular, and ultimately unsuccessful war. At the same time, anti-Americanism had become a great fashion and a great industry throughout much of the world, organized around denunciations of imperialism, neocolonialism, and economic exploitation. Americans themselves were deeply divided not only by the Vietnam War but also by arguments over the “lessons of Vietnam,” which had to do with the extent and character of America’s global role. For some in the developing world, however, the lessons of Vietnam were quite different: that the dangers and costs of challenging the United States were less than they had been in the past, certainly nowhere near as high as they had been for Mossadegh, while the gains could be considerable.
The United States was a newcomer to the Middle East compared to Britain, which had been involved in the Persian Gulf since the early 1800s, when it first began to put down the pirates plying those waters and established truces in the chronic maritime wars among the sheikhs along the Arabian side of the Gulf. In exchange, the British took on the responsibility of keeping the peace with agreements that evolved into guarantees to protect the independence and integrity of these various “trucial” states. In the late nineteenth and early twentieth centuries, similar treaties and understandings were extended to Bahrain, Kuwait, and Qatar. But Britain in the 1960s was a country preoccupied with its economic decline, which had combined with politics, both domestic and international, to make the liquidation of empire the central drama for Britain in the postwar world. Great Britain bowed out of the port city of Aden, at the southern tip of the Arabian peninsula. Entirely a British creation, Aden was strategically located on the oil routes from the Persian Gulf and was one of the busiest ports in the world. Now it was in anarchy. As the British governor departed, a military band played “Fings ain’t wot they used to be.” And, indeed, they were not. With the British withdrawal, Aden disappeared into the harsh Marxist-Leninist state of South Yemen. Then, at the beginning of January 1968, in response to a balance of payments crisis, Prime Minister Harold Wilson announced that Britain would end its defense commitments east of Suez. It would completely withdraw its military presence from the Persian Gulf by 1971, thus eliminating the last major remnant of the great Pax Britannica of the nineteenth century and of the British Raj.
The sheikhs and other rulers in the Persian Gulf were dumbfounded by the decision of the Wilson government; only three months earlier they had all been reassured by the Foreign Office that Britain had no intention of leaving the Gulf. The sheikhs begged the British to maintain their presence. “Who asked them to leave?” asked the ruler of Dubai. The Amir of Bahrain was blunter. “Britain could do with another Winston Churchill,” he said. “Britain is weak now where she was once so strong. You know we and everybody in the Gulf would have welcomed her staying.”
The British position in the Gulf actually involved only about six thousand ground troops, plus air support units, at a non-sterling cost of 12 million pounds a year. That might have been seen as a rather small amount, an insurance premium, given the vast investment by British oil companies in the region, generating both corporate earnings that had a very positive impact on the British balance of payments and very large revenues for the government’s exchequer. Some of the sheikhs said they would be glad to put up the 12 million pounds themselves in order to keep British forces in the area. The offer was angrily rejected. Defense Secretary Denis Healey derided the notion of the British becoming “mercenaries for people who like to have British troops around.” But, as some pointed out, such offset payments were accepted for garrisoning British troops in West Germany or Hong Kong. But it was not only economic necessity that motivated Healey; the growth of nationalism had persuaded him that it would be “politically unwise” to maintain a military presence in the Middle East.
The British did help set up a federation, the United Arab Emirates, to bind together a number of the small states, which, it was hoped, would afford them some measure of protection. With that accomplished, the British packed up and left the Gulf in November 1971. Their departure marked the most fundamental change in the Gulf since World War II and meant the end of the security system that had operated in the area for over a century. It left behind a dangerous power vacuum in a region that supplied 32 percent of the free world’s petroleum and that, at the time, held 58 percent of the proven oil reserves.
The Shah of Iran, as he had demonstrated the previous month with the great celebration at Persepolis, was eager to fill the vacuum. “The safety of the Persian Gulf had,” he said, “to be guaranteed, and who but Iran could fulfill this function?” The Americans were not happy to see the British go. But if not the British, there was the Shah. This was, after all, the era of the Nixon Doctrine, which attempted to deal with the new political and economic constraints on American power by depending upon strong, friendly local powers as regional policemen. No one seemed better fitted to play that role than the Shah. Nixon himself had developed a high regard for the Shah, whom he first met in 1953, a few months after the Shah had regained his throne. “The Shah is beginning to have more guts,” he had told President Eisenhower then. “If the Shah would lead, things would be better.” When Nixon lost the California gubernatorial election in 1962, he set out on a round-the-world trip. The Shah had been one of the few heads of state to receive him cordially. Nixon never forgot that show of respect when he was down. Now, in the early 1970s, the Shah was intent on leading, not only in Iran but throughout the region, and the Nixon Administration supported him. Though the fact often went unrecognized, there was no other obvious choice. Soviet arms were flowing in large volumes into neighboring Iraq, which had its own long-held ambitions for hegemony over the Gulf and its oil. From here on, a very different security system would reign over the Gulf.2
The End of the Twenty-Year Surplus: To a Seller’s Market
The 1970s also saw a dramatic shift in world oil. Demand was catching up with available supply, and the twenty-year surplus was over. As a result, the world was rapidly becoming more dependent on the Middle East and North Africa for its petroleum. The late 1960s and early 1970s were, for the most part, years of high economic growth for the industrial world and, in some years, outright boom. This growth was fueled by oil. Free world petroleum demand rose from almost 19 million barrels per day in 1960 to more than 44 million barrels per day in 1972. Oil consumption surged beyond expectation around the world, as ever-greater amounts of petroleum products were burned in factories, power plants, homes, and cars. In America, gasoline use increased not only because people were driving more miles but also because cars were getting heavier and were carrying more “extras,” such as air-conditioning. The cheap price of oil in the 1960s and early 1970s meant that there was no incentive for fuel-efficient automobiles.
The late 1960s and early 1970s were the watershed years for the domestic U.S. oil industry. The United States ran out of surplus capacity. For decades, going back to Dad Joiner, the East Texas field, and Harold Ickes, production had been regulated by the Texas Railroad Commission, the Oklahoma Corporations Commission, the Louisiana Conservation Commission, and similar bodies in other states. They had prorationed output, keeping actual production well below capacity in order to promote conservation, and maintained prices in a situation of chronic potential oversupply. The inadvertent result of their work had been to provide the United States and the entire Western world with a security reserve, a surge capacity, that could be called upon in time of crisis—whether of the extended magnitude of World War II or the much more limited crises of 1951, 1956, and 1967.
But the need to restrain production was erased by rising demand, low investment because of low prices, and relatively low discovery rates, along with the import quotas. Now there was an eager buyer for every barrel of oil that could be produced in the United States. In the period 1957 to 1963, surplus capacity in the United States had totaled about 4 million barrels per day. By 1970, only a million barrels per day remained, and even that number may have been overstated. That was the year, too, that American oil production reached 11.3 million barrels per day. That was the peak, the highest level it would ever reach. From then on, it began its decline. In March 1971, for the first time in a quarter century, the Texas Railroad Commission allowed all-out production at 100 percent of capacity. “We feel this to be an historic occasion,” declared the chairman of the commission. “Damned historic, and a sad one. Texas oil fields have been like a reliable old warrior that could rise to the task when needed. That old warrior can’t rise anymore.” With consumption continuing to rise, the United States had to turn to the world oil market to satisfy the demand. The quotas, originally established by Eisenhower, were eased, and net imports rose rapidly from 2.2 million barrels per day in 1967 to six million barrels per day by 1973. Imports as a share of total oil consumption over the same years rose from 19 percent to 36 percent.
The disappearance of surplus capacity in the United States would have major implications, for it meant that the “security margin” upon which the Western world had depended was gone. In November 1968, the State Department had told the European governments at an OECD meeting in Paris that American production would soon reach the limits of capacity. In the event of an emergency, there would then be no security cushion; the United States would not be able to provide stand-by supply. The other participants at the meeting were taken by surprise. This was only one year after the 1967 embargo effort by OPEC, and the Middle East was manifestly no more secure.
Indeed, the razor’s edge was the ever-increasing reliance upon the oil of the Mideast. New production had come on from Indonesia and Nigeria (in the latter case, after the end of its civil war in early 1970), but that output was dwarfed by the growth in Middle Eastern production. Between 1960 and 1970, free world oil demand had grown by 21 million barrels per day. During that same period, production in the Middle East (including North Africa) had grown by 13 million barrels per day. In other words, two-thirds of the huge increase in oil consumption was being satisfied by the wells in the Middle East.3
Another significant shift was taking place in the industrial countries. Man’s view of the environment and his relationship to it was also changing, with the paradoxical effect of both increasing the demand for oil and regulating its use. Beginning in the mid-1960s, environmental issues began to compete successfully for their place in the political process, in the United States and elsewhere. Air pollution prompted utilities around the world to shift from coal to less-polluting oil, adding another major stimulus to demand. In 1965, New York’s mayor pledged to banish coal from the city. An air pollution crisis hit New York City on Thanksgiving Day, 1966; smog gripped the city, and coal burning was restricted. Within two years, Consolidated Edison, the utility serving New York City, switched to oil. In 1967, a clean air bill passed the United States Senate by a vote of eighty-eight to three. In 1970, Federal legislation was enacted that established what became known as environmental impact statements: The possible consequences for the environment of major new projects had to be projected and taken into account before a go-ahead would be given. That same year, one hundred thousand people paraded down Fifth Avenue in New York City to mark Earth Day.
Nothing else so much reflected the new environmental consciousness as the extraordinarily wide and intense public response to The Limits to Growth: A Report for the Club of Rome’s Project on “The Predicament of Mankind.” Published in 1972, the book argued that if several basic world trends—in population, industrialization, pollution, food production, energy consumption, and resource depletion (including oil and natural gas)—continued unabated, they would make contemporary industrial civilization unsustainable and “the limits to growth on this planet will be reached sometime within the next hundred years.” The study warned not only of resource depletion, but also of the environmental consequences of hydrocarbon burning, the buildup of carbon dioxide in the atmosphere and a new concern about global warming. It was a general caution: The timing of future crises was highly uncertain.
The study itself was released at a critical juncture. A worldwide economic boom, with high inflation and an even higher growth in resource use, was taking place at the same time that American oil reserves were declining and both American imports and worldwide energy use were rising dramatically. Moreover, the new environmental consciousness was beginning to reconfigure public policy in the industrial world and to force changes in corporate strategies. It meant, in the words of a Sun Oil executive, a “new game” for energy companies. Limits to Growth became a lodestar in the debates over energy and the environment. Its arguments were a potent element in the fear and pessimism about impending shortages and resource constraints that became so pervasive in the 1970s, shaping the policies and responses of both oil-importing and oil-exporting countries.
The impact of environmentalism on the energy balance was manifold. The retreat from coal was accelerated, and reliance on cleaner-burning oil grew. Nuclear power was bruited as an environmental improvement over the combustion of hydrocarbons. Efforts were accelerated to search for new sources of oil, and toward the end of the 1960s, hopes grew for major production offshore of California. There, after all, before the end of the nineteenth century, the very first drilling in water had taken place from piers near Santa Barbara. Now, more than seventy years later, rigs were being positioned along the scenic Southern California coastline. But then, in January 1969, the drilling of an offshore well in the Santa Barbara channel encountered an unexpected geological anomaly, and as a result, an estimated six thousand barrels of oil seeped out of an uncharted fissure and bubbled to the surface. A gooey slick of heavy crude oil flowed unchecked into the coastal waters and washed up on thirty miles of beaches. The public outcry was nationwide and reached right across the political spectrum. The Nixon Administration imposed a moratorium on California offshore development, in effect shutting it down. However great the need for oil, the leak increased opposition to energy development in other environmentally sensitive areas, including the most promising area in all of North America, the one most likely to stem the decline in American production and counterbalance rising dependence on the Middle East—Alaska.4
The Alaskan Elephant
As early as 1923, President Warren Harding had created a naval petroleum reserve on the Arctic coast of Alaska, and wildcatters poked around the region in the years thereafter. Following the 1956 Suez Crisis, Shell and Standard Oil of New Jersey began exploring in Alaska, but in 1959, after drilling what proved to be the most expensive dry hole up to that time, they suspended operations.
Another interested company was British Petroleum. In the aftermath of Mossadegh in Iran, and then the Suez Crisis, BP was dead keen on reducing its virtually total dependence on the Middle East. In 1957, the year after Suez, it made the strategic decision to seek diversified sources of production, particularly in the Western Hemisphere. In this it was strongly supported by the British government. “The British oil companies are well aware of the insecurity of their hold on oil supplies from the Middle East, on which they mainly rely to sustain their business in Western Europe and indeed throughout the Eastern Hemisphere,” Prime Minister Harold Macmillan wrote privately to the Australian Prime Minister, Robert Menzies, in 1958. “They also know that the United Kingdom Government for political and economic reasons, would welcome any action they can take to reduce their dependence on the Middle East. The British Petroleum Company in particular has its own commercial reasons to broaden the base of its supply: it was worse hit by the Suez crisis than any of the other major international oil supplying companies and within the resources it commands it is trying to cut down its vulnerability to a stoppage of supplies from the Middle East.”
Sinclair Oil offered BP a nostrum to relieve its dependence on the Middle East—joint exploration in Alaska. But, after drilling six expensive dry holes in succession on the North Slope in the frigid far north of Alaska, the two companies suspended the effort. Gulf Oil also showed some interest in Alaska. Some of its explorationists argued valiantly that, despite the dry holes, the geology was promising and the company ought to try its hand at exploration on the North Slope. The top management absolutely refused even to consider the request. “It would cost $5 a barrel,” one senior executive flatly declared, “and oil will never get to $5 a barrel in our lifetime.”
Yet another company was still investigating Alaska—Richfield, a California-based independent. It was particularly attracted by the thick marine sediments in the virtually inaccessible North Slope. In 1964, Jersey decided to reenter Alaska, and for payments and commitments totaling a little over $5 million, its Humble subsidiary became Richfield’s partner. In 1965, this new joint venture won about two-thirds of the exploration leases on the North Slope’s Prudhoe Bay structure. The BP-Sinclair combination was the other main winner.
That same year, Richfield merged with Atlantic Refining, forming Atlantic Richfield, which later became ARCO. The combined company was headed by Robert O. Anderson. Though Anderson would often strike other people as surprisingly relaxed, almost casual, perhaps even a little absent-minded, he had the determination and concentration that befit a man who was one of the last of the great wildcatters and oil tycoons of the twentieth century. Anderson was the son of a Chicago banker who had made a speciality during the 1930s of lending prudently to Texas and Oklahoma independent oil men at a time when others wouldn’t lend at all. The young Anderson grew up around the University of Chicago, attended it during the heyday of the Great Books curriculum, and gave some thought to becoming a philosophy professor. But the oil men who were his father’s clients captured his imagination much more than the academics he saw on campus, and in 1942 he went down to New Mexico to take over a fifteen-hundred-barrel-per-day refinery. He soon moved over to exploration, and became one of the better-known independents in the business. He had the same gift for quick mental arithmetic as Rockefeller and Deterding. In the early days, he could beat a slide rule and, later on, a pocket calculator, and he had a habit in meetings of correcting people on their decimal points. “I was never particularly conscious of the ability,” he explained. “The biggest thing it does is to help you discard a lot of things and move on. In negotiations, you can casually allow something that the other guy doesn’t understand the importance of. You stay ahead of the curve.”
Over the years, Anderson would prove to be a man of wide and diverse interests, consistently an intellectual maverick in the oil industry. Drawn to ideas, comfortable with social science professors, curious about such things as values and governance and social change, he liked seminars where businessmen discussed such varied subjects as technology and humanism, the environment, and Aristotle. In short, despite many successes, he never exactly fit the mode of the typical oil tycoon. He believed in many things that were quite anomalous among his peers. Yet, at heart, he was the quintessential wildcatter, and in nothing else did he believe so fervently as crude oil and reserves in the ground—“the absolute heart of the industry,” he would say. “Over and over, the lesson in this business is that if you can’t take disappointment, you ought not to be in this business, since 90 percent of what you drill are failures. You really have to take defeat regularly.” Still, the other 10 percent would prove very good to Anderson, not only making him very wealthy but also, among other things, enabling him to end up the largest individual landowner in the United States.
But in the winter of 1966 it looked as if Alaska might well end up in the 90 percent failure column. ARCO, with Humble’s participation, drilled a costly well sixty miles south of Alaska’s north coast. It was dry. One more wildcat was on the schedule, at Prudhoe Bay on the North Slope. There was considerable doubt about whether to continue. It was up to Anderson. It would be his decision. He believed in exploration, he believed in crude oil. But ARCO’s own dry hole had come on top of the six dry holes of BP and Sinclair, and he wasn’t in the oil business to lose money. He gave the okay, though without a great deal of conviction. It was just that the drilling rig was already in Alaska, and it only had to be moved sixty miles. “It was more a decision not to cancel a well already scheduled than to go ahead,” he later said.
In the spring of 1967, the ARCO-Humble venture began drilling what would certainly be the last wildcat if it failed. The well was dubbed Prudhoe Bay State Number 1. On December 26, 1967, a loud, vibrating sound drew a crowd of about forty men to the well. They were wrapped in heavy clothes—it was thirty degrees below zero—and they had to struggle to hold their places in the thirty-knot wind. The noise grew louder and louder—the roar of natural gas. To one geologist it sounded like four jumbo jets flying directly overhead. A natural gas flare from a pipe shot defiantly thirty feet straight up in the strong wind. They had struck oil. In mid-1968, a “step-out well,” drilled seven miles from the discovery well, confirmed that this was a great structure, a world-class oil field. A true elephant. The petroleum engineering firm DeGolyer and McNaughton estimated that Prudhoe Bay might hold as much as 10 billion barrels of recoverable reserves. However grudgingly Anderson had given the go-ahead, it was the most important decision he would ever make as an oil man. Prudhoe Bay was the largest oil field ever discovered in North America, one-and-a-half times larger than Dad Joiner’s East Texas field, which had destroyed the price of oil in the early 1930s.
In the tightening world oil market, Prudhoe Bay was not going to destroy any price structures, but it did have the potential to slow the growth of American oil imports greatly and to reduce dramatically the tautness in the global oil balance. Estimates suggested that total output would quickly be upwards of two million barrels per day, making it the third-largest producing field in the world, after Saudi Arabia’s Ghawar and Kuwait’s Burgan. Initially, ARCO and Jersey, along with Jersey’s Humble subsidiary, thought that the field would be in operation within three years. Its development seemed likely to be expedited when the management structure on the North Slope was simplified; ARCO acquired Sinclair, snatching it just in time from the jaws of the conglomerate Gulf & Western, in what was the largest merger to that date in the United States. Now the Big Three on the North Slope were ARCO, Jersey, and BP. The merger also made ARCO the seventh-largest oil company in the United States.
A great obstacle to development was the physical environment in the isolated north: inaccessible, extreme in weather, harsh, and fiercely hostile—“a mean, nasty, unforgiving place to work,” said one geologist. It was a place unlike any other from which oil had yet been recovered. The technology did not exist for production in such an environment. The tundra, a few feet in thickness, froze concrete-hard in winter as temperatures fell to as much as sixty-five degrees below zero. It then thawed into a spongy prairie land in summer. There were no roads across the tundra, and beneath was the permafrost, that part of the soil that was permanently frozen, extending sometimes a thousand feet in depth. Normal steel piling would crumble like soda straws when driven into the permafrost.
If that obstacle could be overcome, there would still be the daunting challenge of getting the oil to market under very difficult conditions. Icebreaker tankers that would travel through the frozen Arctic seas to the Atlantic were seriously considered. Other suggestions included a monorail or a fleet of trucks in permanent circulation on an eight-lane highway across Alaska (until it was calculated that it would require most of the trucks in America). A prominent nuclear physicist recommended a fleet of nuclear-powered submarine tankers that would travel under the polar ice cap to a deep-water port in Greenland—the port to be created, in turn, by a nuclear explosion. Boeing and Lockheed explored the idea of jumbo jet oil tankers.
Finally, it was decided to build a pipeline. But in which direction? One proposal was for an eight-hundred-mile pipeline south from the oil fields to the port of Valdez, where the oil would be picked up by tankers for shipment through environmentally sensitive Prince William Sound and on to market. The other was for an entirely overland pipeline, east through Alaska to Canada, then south into the United States, eventually terminating perhaps in Chicago. Opponents of a trans-Alaskan pipeline argued that it could result in “probable major discharges from tanker accidents,” while the Canadian route was environmentally sounder overall and would reduce the cost of an otherwise expensive pipeline for Alaskan natural gas. The Alaskan route, however, had the advantage of being an “all-American route,” thus supposedly more secure, and it had the added plus of flexibility: Alaskan oil could go either to the United States or to Japan. And the oil men would only have to deal with two governments—one state and one Federal, and both American, and not, in addition, Canada’s Federal government in Ottawa and three or four provincial and territorial jurisdictions, all with their own fiscal systems, as well as Canadian environmentalists and a couple more American states. Moreover, the Canadian government seemed to be turning against a trans-Canada pipeline. Given all these considerations, one argument stood out: The trans-Alaskan pipeline was likely to be built much more quickly than one taking the Canadian route. The trans-Alaskan route was chosen.
Construction of the pipeline posed a host of engineering challenges that would require a great deal of innovation and ingenuity. For instance, the oil came out of the ground at 160 degrees; yet it would then have to enter a pipeline running through permafrost many degrees below zero. If it ran beneath the surface through areas where the permafrost had a high water content, it could turn the area into a mushland; and the pipeline, deprived of support, might snap. But no matter what construction problems it might encounter, the group organized to build the Trans-Alaskan Pipeline—composed of ARCO, Jersey, and BP, plus companies with much smaller positions on the North Slope—rushed out and hurriedly bought 500,000 tons of forty-eight-inch pipe from a Japanese company; they did not think there was time to wait for American manufacturers to gear up. They were wrong. The pipeline was to come to a dead halt before it even started.
It was slowed by claims by Eskimos and other Alaskan natives, and by wrangling among the partners. But it was completely stopped by something entirely different: a Federal court injunction won by environmentalists in 1970. Energized by the 1969 Santa Barbara oil spill, the newly formed but diverse environmental movement converged on blocking the Alaska pipeline. Some of the environmentalists said that the companies were trying to move too fast, without sufficient study, understanding, skills, or care and that the proposed pipeline was poorly planned. The consequences of an accident would be environmentally catastrophic. The Canadian route was better, posing less environmental risk. Before going ahead, they said, the United States should institute a program of energy conservation. Other environmentalists argued that irreplaceable natural assets and a unique environment would be damaged or destroyed, and the project should never go ahead. Alaskan oil was not needed.
The eager oil companies, confident that they could overcome the opposition, brought in $75 million worth of Caterpillar trucks and trailers to a staging point on the banks of the Yukon River, ready to start building roads and laying pipe. The trucks and tractors and stored pipe were not to move for five years. The prohibitions on the pipeline remained in effect. The oil that had been expected in 1972 from Alaska did not flow, and American imports of foreign oil went up instead. As for those trucks and tractors on the banks of the Yukon River, the oil companies spent millions of dollars keeping their engines tuned up and just plain warm, waiting for the day.
Just when it became clear that Alaska and offshore California were very problematic as new sources, another promising alternative appeared with an oil discovery in the North Sea. But development in the North Sea was highly uncertain. The effort would be both enormous in scale and very, very expensive. The environment was harsh and treacherous. Like Alaska’s North Slope, North Sea production would require an entirely new generation of technology. And it would take time, a great deal of time. Yet Alaska and the North Sea had another common bond: Though their reserves were in very difficult places, physically, they were not in unstable places, politically. Even so, neither could provide any imminent relief for the global supply-demand balance, which was drawing ever more taut. That meant there was still only one place to turn for the additional supplies required to satisfy the world’s almost-insatiable appetite for oil—the Middle East.5
It was just before dawn, one day toward the end of August 1970, when a chartered French Falcon jet entered Libyan air space. Soon it was on the ground at the airport at Tripoli. The door of the jet opened, and a short, stocky man, just turned seventy-two, stepped out into the early light. He was a very worried man, so worried that he had flown virtually nonstop from Los Angeles, landing in Turin only long enough to change jets. He feared that he was about to lose what he called his “shining star,” his company’s richly prolific oil concession in Libya. But, as always, he tried to be confident. His life had been devoted to making deals, and he believed firmly, as an article of faith, that, as he once said, “There’s nothing worse than a deal that wasn’t closed.”
The man was Dr. Armand Hammer, chairman of Occidental Petroleum.
When it came to deal-making, there have been few in the entire twentieth century to rival Armand Hammer. He was born in 1898 in New York City to an immigrant Jewish family with roots in Odessa, on the Black Sea. Among other things, a rich uncle had held the local Ford distributorship there. In the nineteenth century, Odessa was a great trading emporium where Western industrialists met Middle Eastern merchants, and in some ways, Odessa always remained in the blood of Armand Hammer. His father, Dr. Julius Hammer, was not only a practicing physician and drug manufacturer, but also a partisan of the left; he had met Lenin in Europe in 1907 and was one of the founders of the American Communist party. Armand did not share his father’s socialist tendencies; he was interested in making money and doing deals—in short, a capitalist.
In 1921, having just graduated from medical school, Hammer set off for Russia. He carried relief medical supplies for the strife-torn country, and aimed, in the process, to collect $150,000 that the Soviets owed the family drug business. Through his father’s connections, he became known to Lenin, who was allowing some competition in the ruined Russian economy and encouraging trade with the bourgeois West. Lenin applied a special benediction to Hammer, commending him to Stalin as “a little path leading to the American ‘business’ world and we should use it in every possible way.” So Hammer, assisted by his brother Victor, stayed in Russia to do business under Lenin’s New Economic Policy—an asbestos concession, an agency for Ford tractors and other products, the national concession for pencils. He even ran his own fur stations in Siberia, with his own personal trappers. But when Stalin came to power at the end of the decade, Hammer correctly read the portents and packed his bags. He and Victor carried out with them a load of Russian art, which they sold through department stores in the United States. Hammer then went on to make millions in a variety of other businesses, from beer barrels and bourbon whiskey to bull semen.
He came to Los Angeles in 1956, at fifty-eight, a wealthy man—like so many others, intent on retiring. He was now a prominent art gallery owner and collector. Seeking a tax shelter, he made some investments in oil, and then, almost as a sport, bought a small, nearly bankrupt company called Occidental. He knew nothing about the petroleum business. Yet by 1961, Occidental had made its first significant discovery in California. Hammer, the inveterate dealmaker, acquired a number of other companies, and by 1966, Occidental’s annual sales were almost $700 million.
Through clever deal making and good timing, Hammer was eventually to build Occidental into one of the world’s great energy companies. Not for him the normal chains of command. Phoning anywhere in the world at almost any time, he ran things himself, out of his hat, like a modern Marcus Samuel. His political connections were unparalleled; his ability to get into places unstoppable; and his personal fortune vast. In his never-ending negotiations, Hammer could be, as one opponent once said, “fatherly and very loving,” always breaking the tension with an anecdote. But he was also deadly serious in seeking what he wanted. In advancing his interests, he had a great talent for letting people hear what they wanted to hear. “The Doctor is one of the greatest actors in the world,” was the acid comment of one of the many men who had mistakenly thought himself Hammer’s heir apparent.
Hammer renewed his contacts with the Soviet Union under Nikita Khrushchev and ended up as a go-between for five Soviet General Secretaries and seven U.S. Presidents. His access to the Kremlin was unique. He was virtually the only person who could tell Mikhail Gorbachev firsthand about Lenin, who had died a decade before Gorbachev’s birth. As late as 1990, at age ninety-two, Hammer was still the active chairman of Occidental, and loyal stockholders continued to sing his praises. He was indeed in the line of the great buccaneer-creators of oil: Rockefeller, Samuel and Deterding, Gulbenkian, Getty and Mattei. He was also an anachronism, a privateer from the past, in spirit a “merchant from Odessa” circling the globe in his corporate jet in search of the next great deal. But it was a deal in Libya that had made possible his global tycoonery.6
The mad Libyan oil rush was already well along when, in 1965, Occidental won concessions there in the second round of bidding. Oxy’s thick bid stood out midst the 119 others because it had been done up, under Hammer’s personal supervision, on sheepskin manuscripts and was wrapped in red, black, and green ribbons—the colors of the Libyan flag. As one sweetener, Oxy promised to establish an agricultural experimental farm at a desert oasis that had been the childhood home of King Idris and the burial spot of his father. Hammer gave the King a gold chess set. The company also paid the expected overrides and special commissions to those who could help it obtain the concessions.
The blocks that Occidental won, Numbers 102 and 103, covered almost two thousand square miles of bleak, gravelly, scorched desert in the Sirte Basin, more than a hundred miles from the Mediterranean coast. “The hardest thing to live with is dry holes,” Hammer once said, and the first few holes drilled on the site were very dry. They were also costly. Occidental’s board of directors began to grumble loudly about “Hammer’s Folly.” Libya was the place for the big boys. But Hammer was persistent.
His persistence paid off. In the autumn of 1966, Occidental struck oil on Number 102. But this paled when compared to what happened on Number 103, forty miles to the west, subsequently called the Idris field. Occidental drilled right under the site of the former base camp of Mobil Oil, which had previously held but then relinquished the concession. The first well came in at forty-three thousand barrels per day; then another at a phenomenal seventy-five thousand barrels per day. Occidental had struck one of the most prolific deposits of oil in the world. It was the use of newly developed seismic technology that had enabled this puny California producer to find what giant Mobil had missed. With the discovery, said Hammer, “All hell broke loose. We became one of the Big Boys.”
By another stroke of luck in 1967, the Six-Day War left the Suez Canal shut, and so Libyan oil took on an even greater value. The Libyan oil boom turned into a frenzy. DeGolyer and McNaughton, the petroleum engineering firm, estimated that, on the basis of the discoveries to date, Occidental alone was in possession of three billion barrels of recoverable reserves, almost a third of the reserves discovered at the same time on Alaska’s North Slope! But what could not be done in Alaska—build a pipeline—certainly could be done in Libya. Normally, it would have taken three years to construct a 130-mile pipeline across the desert; but, force-paced, the line was built in less than a year, and Occidental was actually shipping oil to Europe less than two years after receiving its concessions. It was soon producing upwards of eight hundred thousand barrels per day in Libya. From nothing Occidental Petroleum had become the sixth-largest oil-producing company in the world, and it had fought its way into the competitive European market both by contract and by buying its own downstream system.
Yet this sudden giant was very vulnerable, owing its very success to its lopsided dependence on Libya. Elderly King Idris could not last all that long. To diversify, Hammer sought to acquire Island Creek Coal, a major United States coal producer. But before agreeing, William Bellano, the president of Island Creek, decided that he had better investigate the outlook for political stability in Libya. Bellano talked to people at such places as the State Department, the Chase Manhattan Bank, and Citibank. The general answer was the same: One could well expect political stability in Libya for five or six years, and “it was easy to anticipate the orderly transfer of power when the King died.” The merger went ahead. That was 1968. The experts were all dead wrong.7
The Libyan Squeeze
On the night of August 31–September 1, 1969, a senior Libyan military officer, finding himself unexpectedly awakened in his own bedroom by a junior officer, told the insistent young man that he was too early; the coup was scheduled for a few days later. Alas, for the senior officer, this was a different coup. For months, the whole Libyan military had been seething with conspiracies, as various groups of officers and politicians prepared to topple the ailing regime of King Idris. A group of radical young officers, led by the charismatic Muammar al-Qaddafi, beat all the others to the punch, including their military superiors, who had scheduled their own coup for just three or four days later. Indeed, many military men participated in the September 1 coup without knowing who was in charge or even which coup it was.
Qaddafi and his associates had begun their conspiring a full decade earlier, while teenagers in secondary school, inspired by Gamal Abdel Nasser, his book, Philosophy of Revolution, and his radio station, the Voice of the Arabs. They decided to model their lives and their cause on Nasser. They also decided that the road to power was not directly through party politics, but the same route Nasser had taken, through the military academy. In Qaddafi’s mind, as one acute observer put it, the revolutionary doctrines of Nasser were amalgamated “to the ideas of Islam at the time of Mohammed.” The group was, indeed, in thrall to Nasser and the Nasserite vision of Arab unity. In due course, Qaddafi would seek to pick up the mantle of Nasser. A born conspirator like Nasser, but also eccentric and erratic, with the wide mood swings of a manic-depressive, he would attempt to make himself not only the leader of, but indeed the very embodiment of the Arab world. In doing so, he would plot and campaign endlessly against Israel, Zionism, other Arab states, and the West, and—equipped with huge oil revenues—he would become banker, sponsor, and paymaster for many terrorist groups around the world.
Among the first acts of Qaddafi’s new Revolutionary Command Council after the successful September coup were the shutting down of the British and American military bases in Libya and the expelling of the large Italian population. Qaddafi also closed all the Catholic churches in the country and ordered their crosses removed and their contents auctioned off. Then, in December 1969, a countercoup was aborted and Qaddafi’s consolidation of power was complete. He was now ready to deal with the oil industry. In January 1970, officers of the Revolutionary Command Council launched their offensive with a call for an increase in the posted price. Qaddafi warned the heads of the twenty-one oil companies operating in Libya that he would shut down production, if necessary, to get what he wanted. “People who have lived without oil for 5,000 years,” he said, “can live without it again for a few years in order to attain their legitimate rights.”
Initially, much pressure was put on Esso-Libya. The military government asked for a 43-cent-a-barrel increase in the posted price: “43 cents in those days,” recalled the head of Esso-Libya. “Good God! That was out of the world.” Esso offered five cents. The companies were not about to budge. Stymied by Jersey and the other major companies, most of which had alternative sources, the Libyans turned to the one company that did not have any alternatives, Occidental. They understood its vulnerability. As one Libyan explained, “It had all its eggs in one basket.” In late spring of 1970, Occidental was ordered to cut its production, the lifeblood of the company, from eight hundred thousand barrels per day to around five hundred thousand. Just in case Occidental was missing the point, Libyan policemen began to stop, search, and harass the company’s executives. Though cutbacks and harassments were also applied to other companies, Occidental was especially favored with such attention.
The Qaddafi regime had chosen a very propitious time to initiate its campaign. Libya was supplying 30 percent of Europe’s oil. The Suez Canal was still closed, maintaining pressure on transportation. Then, in May 1970, a tractor ruptured the Tapline at a point inside Syria, which prevented the export of five hundred thousand barrels per day of Saudi oil through that pipeline to the Mediterranean. Tanker rates immediately tripled. There was no shortage of oil, but there was a shortage of transportation, and this put Libya and Qaddafi, sitting directly across the Mediterranean from European markets, in a central position. The Libyans were not loath to exploit their advantage. Their own cutbacks added dramatically to the tightness and tensions in the market; between the Tap-line closure and the Libyan cutbacks, a total of 1.3 million barrels per day had been abruptly taken out of the market. The young Libyan military officers, moreover, were not exactly operating in the dark when it came to oil economics and strategy; Abdullah Tariki, the radical and anti-Western oil nationalist who had been fired eight years earlier as Saudi oil minister, was now in Tripoli, advising the revolutionary government.
As the pressure mounted, Hammer became agitated. He went to Egypt to ask Qaddafi’s hero, President Nasser, to intercede with his “disciple.” Concerned that a shutdown of oil production in Libya would threaten Libya’s subsidies to the Egyptian Army, Nasser advised Qaddafi to go easy. He also told the Libyan leader not to repeat his own mistakes—Egypt had paid dearly for his policy of nationalization and the expulsion of key foreign technicians. The advice was not heeded.
Hammer tried to find other companies that would provide replacement oil at cost to Occidental if it did not cave in to Libyan demands but stood firm against Qaddafi and was then nationalized. He was not successful. Even a visit to Kenneth Jamieson, chairman of Exxon, did not produce the oil that Hammer wanted, at least not on the terms that he wanted. Hammer was very bitter. But perhaps Jamieson simply could not take Hammer seriously. It was “perfectly understandable that Jamieson turned Hammer down,” one of Hammer’s chief advisers was to say privately. “Here the President of Exxon, the world’s largest corporation, was confronted with an art dealer, a non-fraternity type, coming out of the cold with a worldwide scheme.”
Desperate to find an alternative source of oil, Hammer came up with yet another global scheme. Over dinner at Lyndon Johnson’s ranch in Texas, he tried to put together a barter deal whereby he would be the middleman in trading McDonnell Douglas warplanes for Iranian oil. That effort failed as well. He had just about run out of alternatives when, at the end of August 1970, he received an urgent phone call from George Williamson, his manager in Libya, warning him that the Libyans might nationalize Occidental’s operations. And it was that warning that sent him streaking through the night skies to Tripoli.
On the Libyan side, the negotiations were led by Deputy Prime Minister Abdel Salaam Ahmed Jalloud, considered more fun-loving than the puritanical Qaddafi, but still a relentless negotiator. Once, to show his displeasure during a discussion with representatives of Texaco and Standard of California, he rolled their proposal up into a paper ball and threw it back into their faces. On another occasion, he charged into a room full of oil executives with a submachine gun slung over his shoulder. At his first session with Hammer, Jalloud, after offering the Doctor hot rolls and coffee, unbuckled his belt and set down his .45 revolver on the table directly in front of Hammer. Hammer smiled. But he was disconcerted. He had never before negotiated across a gun barrel.
Each day Hammer worked through the arduous, draining negotiations. Each night, he flew back to Paris, so that, from his suite at the Ritz Hotel, he could telephone with some security back to his board of directors in Los Angeles. There was another reason for this daily commute. Despite Jalloud’s offer of the hospitality of a palace that had belonged to the deposed King Idris, Hammer worried that he might be “detained” for an extended stay. Yet he did relax his guard a little. On that first day, he had used a chartered French jet to reach Tripoli out of caution that the Libyans might seize his private plane. Thereafter, a bit reassured, he switched back, on each morning’s commute from Paris, to his own more familiar Gulfstream II, with its cork-lined bedroom. He would arrive back in Paris at 2:00 A.M., and would be off again by 6:00 A.M. Throughout his life, he had had a remarkable capacity to nap under all kinds of conditions, and he put that ability to very good use on the flights.
As the intense discussions dragged on, crowds outside, preparing to celebrate the first anniversary of the coup, were chanting for death to opponents of the regime. Yet, finally, there came a point in the negotiations when Hammer and Jalloud went into a corner and shook hands. They had an agreement in principle, and the deal seemed set for signing when a new hitch, regarding the form of the contract, suddenly appeared. Suspicious, Hammer decided to depart the country immediately, leaving it to George Williamson to complete the deal. The next day, ensconced at the Ritz in Paris, Hammer learned that the final bargain had been signed. The Libyans got a 20 percent increase in royalties and taxes. Occidental would be able to stay. As for the other companies, they wavered, but bythe end of September, virtually all of them had given in, though with immense reluctance. The Libyans solemnly promised that they would stick to these new agreements for five years.
But what had happened was of far greater significance than a thirty-cent increase in the posted price and a hike in Libya’s share of profit from 50 to 55 percent. The Libyan agreements decisively changed the balance of power between the governments of the producing countries and the oil companies. For the oil-exporting countries, the Libyan victory was emboldening; it not only abruptly reversed the decline in the real price of oil, but also reopened the exporters’ campaign for sovereignty and control over their oil resources, which had begun a decade earlier with the foundation of OPEC, but then had stalled. For the companies, it was the beginning of a retreat. The Jersey director who had responsibility for Libya succinctly summarized the significance of the new agreements when he said, “The oil industry as we had known it would not exist much longer.” George Williamson of Occidental had a premonition of how great the changes would be. As he prepared to affix his signature to the final documents, he observed to another Occidental manager, “Everybody who drives a tractor, truck, or car in the Western world will be affected by this.” They signed the documents, and then Williamson and his associates sat with the Libyans, sipping orange soda, the best that could be found in the alcohol-less land, silently contemplating the uncertain future.8
The Shah of Iran was certainly not going to let himself be outdone by some up-start young military officers in Libya. In November 1970, he broke through the old fifty-fifty profit-sharing barrier and won 55 percent of the profits from the consortium companies. The companies then decided that they had no choice but to offer 55 percent to the other Gulf countries. And with that, a game of leapfrog began. Venezuela introduced legislation that would raise its share of profits to 60 percent and would also provide for oil prices to be raised unilaterally, without reference to or negotiation with the companies. An OPEC conference endorsed 55 percent as the minimum country share and threatened a cutoff of supplies to the companies if demands were not met. It also insisted that the oil companies negotiate with regional groupings of exporters, rather than with OPEC as an entity. Then, at the beginning of 1971, Libya jumped over Iran and made new demands. Obviously the game could be endless unless the companies established a common front and succeeded in sticking with it.
David Barran, chairman of Shell Transport and Trading, became the foremost advocate of the common front. “Our Shell view was that the avalanche had begun,” said Barran. Without a united front, the companies would “be picked off one by one.” Out of Barran’s urging came the makings of a joint approach, by which the companies would as a single unit negotiate with OPEC as a group, rather than with individual countries. That way, they hoped, the avalanche of competing demands could be stayed. Winning an antitrust waiver from the U.S. Justice Department, the oil companies set about to create a “Front Uni,” harking back to the one they had formed to confront the Soviet Union in the 1920s. But now it was a much more complicated world, with many more players. This modern Front Uni eventually comprised two dozen companies—American and non-American—representing about four-fifths of free world oil production. The companies also created the Libyan Safety Net, a secret understanding that if any company had its production cut back because it had stood up to the Qaddafi government, the other companies would provide replacement oil. The agreement institutionalized the kind of deal that Hammer had tried, and failed, to get out of Exxon six months earlier. It also represented, in the words of James Placke, the American petroleum attaché in Libya, a “truce” between the majors and the independents.
On January 15, 1971, the companies hurriedly despatched a “Letter to OPEC,” which called for a global, “all-embracing” settlement with the oil exporters. The aim was to maintain a united front and to negotiate with OPEC as a whole, rather than with individual exporters or subgroups, as OPEC wanted. Otherwise, the companies would be endlessly vulnerable to leapfrogging.
But the Shah resolutely opposed the companies’ plan for an “all-embracing” settlement because, he said, the “moderates” would not be able to restrain the “radicals”—Libya and Venezuela. Yet if the companies would only be reasonable and deal with the Gulf countries separately, the Shah promised a stable agreement that would be kept for five years. “If the companies tried any tricks,” he added, “the entire Gulf would be shut down and no oil would flow.”
The negotiating process opened in Tehran, with the Front Uni represented by George Piercy, the Exxon director responsible for the Middle East, and Lord Strathalmond, a director of BP and a lawyer by profession. The latter was a friendly, genial man, who liked to kid the Kuwaiti oil minister by calling him, owing to his appearance, “Groucho.” He was also the son of William Fraser, who had been chairman of BP at the time of the Mossadegh affair, and who had remained a most unpopular man in Iran—so much so that Lord Strathalmond felt constrained to tell some confused Iranians, “I am not my father.”
The companies thought that they had the support of the U.S. government in their struggle with the Shah; but Piercy and Strathalmond discovered, on arriving in Tehran, that Washington had acquiesced to the Shah’s position. The two oil men were flabbergasted and furious. “It made the whole exercise look silly as hell,” Piercy said.
On January 19, Piercy and Lord Strathalmond met with the OPEC Gulf committee: Iranian Finance Minister Jamshid Amouzegar (educated at Cornell and the University of Washington), Saudi Arabian Oil Minister Zaki Yamani (educated in part at New York University and Harvard Law School), and the Iraqi Oil Minister, Saadoun Hammadi (Ph.D. in agricultural economics from the University of Wisconsin). The three ministers were unbending. They would discuss oil pricing for the Gulf countries, and only for the Gulf countries, and not the rest of OPEC, and that was that. The Shah himself denounced the companies and brandished the possibility of an embargo if the companies did not agree to his point of view. He even summoned up the ghost of Mossadegh. “The conditions of the year 1951 do not exist anymore,” he sternly warned. “No one in Iran is cuddled up under a blanket or has shut himself off in a barricaded room.” The effort to get a single, “all-embracing” negotiation, he said, was either “a joke or was an intent to waste time.”
No conclusion emerged from this first phase of the Tehran negotiation. In a private meeting, Yamani warned Piercy that yes, it was true what Piercy had heard, that there was talk among the exporting countries about an embargo to strengthen their hand against the companies. Moreover, Yamani admitted, the Saudis and the other Gulf producers supported the idea. Piercy was shocked. The Saudis had never embargoed oil except in wartime. Did this, he asked, have the support of King Faisal? Yes, said Yamani, and also that of the Shah. Piercy urged Yamani not to take such a step.
“I don’t think you realize the problem in OPEC,” said Yamani. “I must go along.”9
The companies concluded, however reluctantly, that they would have to give up their insistence on the all-embracing approach—there was no longer a choice. They agreed to have the negotiations split. Otherwise, there would be no negotiated settlement at all; the exporters would simply decide prices on their own. At all costs, the companies needed to maintain the pretense, even if it was only a pretense, that the exporters negotiated matters with them, rather than simply deciding things themselves.
So now there were to be two sets of negotiations: one in Tehran and one in Tripoli. On February 14, 1971, the companies capitulated in Tehran. The new agreement interred the fifty-fifty principle. The hallowed fifty-fifty had done its job, it had lasted for two decades, but now its time was past. The new accord established 55 percent as the minimum government take and raised the price of a barrel of oil by thirty-five cents, with a commitment to further annual hikes. The exporters gave their solemn promise: no increases for the next five years beyond what had already been agreed.
The Tehran Agreement marked a watershed; initiative had passed from the companies to the exporting countries. “It was the real turning point for OPEC,” said one OPEC official. “After the Tehran Agreement, OPEC got muscles.” In the immediate aftermath, the Shah, from the ski slopes at St. Moritz in Switzerland, offered his blessings to the undertaking. “Whatever happens,” he pledged, “there will be no leapfrogging.” David Barran, the chairman of Shell, was a better prophet. “There is no doubt,” he said, “that the buyer’s market for oil is over.”
Now it was time for the other half of the negotiation, over the price of OPEC oil in the Mediterranean. The Mediterranean committee included Libya and Algeria, as well as Saudi Arabia and Iraq, since part of their production came to the Mediterranean via pipelines. A few days after the Tehran Agreement, discussions began in Tripoli, with Libya—and Major Jalloud—very definitely in charge of the negotiations on the Arab side. Jalloud resorted to all his now-familiar tactics—bluster, intimidation, revolutionary sermons, and threats of embargo and nationalization. On April 2, 1971, agreement was announced. The posted price was raised by ninety cents—well beyond what would have been implied by the Tehran Agreement. The Libyan government had increased its oil revenues by almost 50 percent.
The Shah was beside himself with rage. Once again, he had been leapfrogged.10
Participation: “Indissoluble, like a Catholic Marriage”
The pledge of five years’ stability in the Tehran and Tripoli agreements proved to be illusionary. A fresh battle soon ensued when OPEC sought increases in the posted price to compensate for the devaluation of the dollar in the early 1970s. But that fight was overshadowed by a more momentous conflict, which would dramatically alter the relationship of the companies and countries. The battle was over the issue of “participation”: the acquisition by the exporting countries of partial ownership of the oil resources within their borders. If the exporters won that battle, it would mean a radical restructuring of the industry and a fundamental change in the roles of all players.
For the most part, oil operations outside the United States had been based on the concession system, the history of which reached back to William Knox D’Arcy and his bold and blind venture into Persia in 1901. Under the concession system, the oil company contractually obtained rights from a sovereign to explore for, own, and produce oil in a given territory, be it as large as D’Arcy’s original 480,000 square miles in Persia or Occidental’s 2,000 square miles in Libya. But now, as far as the oil exporters were concerned, concessions were already a thing of the past, holdovers from the defunct age of colonialism and imperialism, wholly inappropriate to the new age of decolonization, self-determination, and nationalism. Those countries did not want to be mere tax collectors. It was not only a question of garnering more of the rents. For the exporters, the greater question was sovereignty over their own natural resources. Everything else would be measured against that objective.
Outright nationalization had been an obvious resort for some exporting regimes—in Russia after the Bolshevik Revolution, in Mexico, in Iran. The concept of “participation,” partial ownership achieved by negotiation, was consciously devised as an alternative to nationalization and full ownership because it satisfied the interests of some of the main oil exporters. Oil was not only a symbol of national pride and power; it was also a business. Outright nationalization would disrupt relations with the international companies and put the oil-producing country directly into the business of selling oil. The country would thus face the same obstacle that bedeviled the independents who had built up large reserves of oil in the Middle East—the problem of disposal. That would lead to a battle royal with other exporters for markets. The oil companies not only would be free to shop around for the cheapest barrel, but also would have strong incentive to do so, since they would now be making their profits on sales in the consuming markets, rather than in production.
“We in the producing countries—having become the operators and sellers of our oil—would find ourselves in a competitive production race,” said Sheikh Yamani in 1969, warning against outright nationalization. The result would be “a dramatic collapse of the price structure, with each of the producing countries trying to maintain its budgeted income requirements in the face of the declining prices by moving larger volumes of oil to the market.” The costs, and risks, would not only be economic. “Financial instability would inevitably lead to political instability.” Yamani insisted that participation—joint ownership with the major companies rather than their ejection—was the way to meet the exporters’ objectives and yet maintain the system that held up the price. It would, he said, create a bond that “would be indissoluble, like a Catholic marriage.”
Participation fit Saudi Arabia’s situation; it meant gradual change, rather than a radical overturning of the oil order. But for other exporters, gradual participation was insufficient. Algeria, with no pretense of negotiation, took 51 percent ownership in the French oil operations there, which had been preserved a decade earlier when Algeria won its independence. Venezuela passed legislation under which all concessions would revert to the government automatically upon their expiration in the early 1980s.
OPEC itself called for immediate implementation of participation with the threat of “concerted action”—cutbacks—if it received no satisfaction. Yamani was put in charge on the OPEC side. The pressure on the companies to go along was rising. With the British withdrawal from the Gulf at the end of 1971, Iran had seized some tiny islands near the Strait of Hormuz. For the militants among the Arabs, it was a great affront, the seizure of Arab territory by non-Arabs. To punish the British for “collusion” in this dastardly act, Libya, twenty-four hundred miles away, nationalized BP’s holdings in that country. Iraq nationalized the Iraq Petroleum Company’s last remnant in the country, the Kirkuk concession, the great producing field that had been discovered in the 1920s and had been both the focus of all Gulbenkian’s wrangling with the major companies and the basis of much of Iraq’s production. “There is a worldwide trend toward nationalization and Saudis cannot stand against it alone,” Yamani warned the companies. “The industry should realize this and come to terms so that they can save as much as possible under the circumstances.”
Yet before any agreements could be made, several fundamental issues had to be thrashed out, including the basic question of valuation. For instance, depending on the accounting formula that was chosen, 25 percent of the Kuwait Oil Company could be worth anywhere from sixty million to one billion dollars. Finally, in that case, the two sides came together by inventing a new accounting concept, “updated book value,” which included inflation and large fudge factors. And in October 1972 a “participation agreement” was finally reached between the Gulf states and the companies. It provided for an immediate 25 percent participation share, rising to 51 percent by 1983. But, despite all the OPEC endorsements, the application of the agreement was less popular in the rest of OPEC than Yamani hoped. Algeria, Libya, and Iran all stood outside it. Kuwait’s oil minister approved it, but the Kuwaiti parliament rejected it, and so Kuwait was also out.
The Aramco companies had finally agreed to participation with Saudi Arabia because the alternative was worse—outright nationalization. The chairman of Exxon said hopefully that he expected “more stable future relationships” to result from the agreement, which “maintained the essential intermediary role of the private international oil companies.” Others were not so sure. At a meeting in New York of oil company executives, chaired by John McCloy, Aramco announced its initial decision to agree to participation. At the end of the fractious discussion, McCloy asked the opinion of Ed Guinn, an executive of the independent Bunker Hunt oil company, which operated in Libya. Guinn was upset. Any concession made in the Persian Gulf, he believed, would only goad Libya into even greater demands. The Aramco plan he had just heard, he added, reminded him of the story about two skeletons hanging in a closet, which he proceeded to tell. One skeleton said to the other, “How did we get here?” The other replied, “I don’t know, but if we had any guts we’d get out.”
“Meeting adjourned!” McCloy immediately shouted, and everyone left.
After Yamani’s deal with Aramco, Libya took over 50 percent of the operations of ENI, the Italian state oil company, then proceeded to expropriate Bunker Hunt’s holdings altogether. Standing with Uganda’s brutal dictator, Idi Amin Dada, by his side, Qaddafi proudly announced that, by taking over Bunker Hunt, he had given the United States “a big hard blow” on “its cold insolent face.” He then went on to nationalize 51 percent of the other companies that were operating in Libya, including Hammer’s Occidental Petroleum.
The Shah was intent on assuring that he ended up with a better deal than Saudi Arabia. But for Iran, participation was irrelevant. Owing to the 1951 nationalization, Iran already owned the oil and facilities; but the consortium set up in 1954, and not the National Iranian Oil Company, actually operated the industry. So the Shah insisted on gaining not only higher production and financial equivalency with the agreement that Yamani had hammered out, but also much greater control. And he got what he wanted. NIOC was to become not only owner but also operator; the 1954 consortium companies would set up a new company to act as a service contractor to NIOC, replacing the old consortium. Having the National Iranian Oil Company officially recognized as operator was a first for a state oil company, a victory of considerable symbolism in the Shah’s quest to turn NIOC into the world’s premier oil company. And it was a victory for himself. He was now moving into his grandest phase. “Finally I won out,” the Shah declared. “Seventy-two years of foreign control of the operations of our industry was ended.”11
The Hinge Years
In gaining greater control over the oil companies, whether by participation or outright nationalization, the exporting countries also gained greater control over prices. Where they had only recently sought to increase their income by emphasizing volume, competing to put more and more barrels into the marketplace, which just seemed to push the price down, they would now seek higher prices. Their new approach was supported by the tight supply-demand balance. The result was the new system that was forged in Tehran and Tripoli, under which prices were the subject of negotiation between companies and countries, with the countries taking the lead in pushing up the posted price. The companies had been unable to put up a successful new Front Uni. Nor had their governments. In fact, the governments of the consuming countries did not particularly want to support or bolster the companies in their confrontations with the exporters. They were distracted by other matters. Oil prices did not seem a terribly high priority, and some thought that the price increases were, in any event, justified and would be helpful in stimulating conservation and new energy development.
But there was that further element to the response of the two key Western governments. Both Great Britain and the United States had powerful incentives to seek to cooperate with, rather than confront, both Iran and Saudi Arabia, and in passing not to gainsay them larger incomes. By the early 1970s, Iran and Saudi Arabia had heeded the Sultan of Oman’s appeal for help to put down a radical rebellion and were taking up their roles as regional policemen. Their arms purchases were increasing rapidly, one calibration of the interaction of rising oil prices with the new security calculus for the Gulf.
Yet putting aside politics and personalities, the supply-demand balance that emerged at the beginning of the 1970s was sending a most important message: Cheap oil had been a tremendous boon to economic growth, but it could not be sustained. Demand could not continue growing at the rate it was; new supplies needed to be developed. That was what the disappearance of spare capacity meant. Something had to give, and that something was price. But how, and when? Those were the all-critical questions. Some thought the decisive year would be 1976, when the Tehran and Tripoli agreements were due to expire. But the supply-demand balance was already very taut.
While, of course, the recoverable reserves in the Middle East were huge, available production capacity was much more closely attuned to actual demand. As late as 1970, there were still about 3 million barrels per day of excess capacity in the world outside the United States, most of it concentrated in the Middle East. By 1973, the additional capacity, in pure physical terms, had been cut in half; it was down to about 1.5 million barrels of daily capacity—roughly 3 percent of total demand. In the meantime, some of the Middle Eastern countries, led by Kuwait and Libya, had been instituting cutbacks in their output. By 1973, the surplus production capacity that could be considered actually “available” added up to only 500,000 barrels per day. That was just one percent of free world consumption.
Not only in oil, but in almost any industry, even in the absence of politics, a 99 percent utilization rate and a one percent security margin would be considered an extraordinarily precarious supply-demand balance. Politics was adding to the dangers.
What might all this mean for the future? One who watched with a growing sense of foreboding was James Placke, an American diplomat who had been an economic officer at the U.S. embassy in Baghdad a decade earlier, when OPEC was formed, and was now the petroleum officer in the U.S. embassy in Tripoli. In late November 1970, he sat down to collect his thoughts on paper for a dispatch to the State Department. Fifteen months had passed since an unknown group of officers had staged their military coup in Tripoli, and almost three months had elapsed since those same young officers had carried out a coup in oil pricing. Placke had been reporting on a daily basis all through the period as the Libyans had battled with Occidental, Esso, Shell, and the other companies, but now there was time to stand back. The weather had cooled and become somewhat stormy, with squalls coming in off the Mediterranean and the tangy smell of salt and sea in the air. A permanent sense of unease and even fear had settled over the western community in Libya. There were constant rumors about who had been harassed, detained, or deported, and both company officials and Western diplomats found themselves followed by security men, usually recognizable in the rearview mirror because of their white Volkswagen beetles.
It took Placke several weeks to work out what he wanted to say to Washington. He did not want to so overstate matters that his cable would be disregarded. As he wrote, he could look out through the one window in his broom closet of an office across a narrow alley to an Occidental office, where engineers bent over draughting tables as though it were business as usual and as if nothing had changed. But as Placke saw it, everything had changed. The old game in oil was over, even if no one in Washington or London quite grasped it. The international petroleum order had been irrevocably changed. In the report he finally sent to Washington in December, he argued that what had happened in Libya made it much more likely that the producing countries “will be able to overcome their divisions to cooperate in controlling production and raising prices.”
But it was not only a question of price, but of power. “The extent of dependence by western industrial countries upon oil as a source of energy has been exposed, and the practicality of controlling supply as means of exerting pressure for raising the price of oil has been dramatically demonstrated.” As he saw it, the United States and its allies, along with the oil industry, were simply unprepared intellectually and politically to “deal with the changed balance of power in the petroleum supply situation.” The stakes were high. Among other things, though the “oil weapon” had not worked in 1967, the “rationale of those who call for the use of Arab oil as a weapon in Middle East conflict has also been strengthened in current circumstances.”
He added one over-arching point: “Control of the flow of resources has been of strategic concern throughout history. Asserting control over a vital source of energy would permit Middle Eastern states to regain the power position vis-avis the West, which this area lost long ago.” Placke emphasized that he was not pleading for maintaining the status quo. That was impossible. But what was important was to understand how the world was changing and to prepare for it. The greatest sin was inattention.
The U.S. ambassador was so impressed by Placke’s paper that, in order to give it added weight, he had it sent out over his own name. But to Placke’s knowledge, no one in Washington paid any serious attention to the message. He certainly never heard a word back on it.12