Modern history

CHAPTER 31

OPEC’s Imperium

TIMES CHANGE, empires rise and fall, and the modern office building on Vienna’s Karl Lueger Ring, with the small bookstore on the ground floor, had customarily been called “the Texaco Building,” in honor of its lead tenant. But by the middle 1970s, owing to the presence of another tenant, it had abruptly become known as “the OPEC Building.” The change symbolized a profound process of global upheaval: the suddenness with which the oil-exporting countries had assumed the position formerly held by the international companies.

As it was, OPEC ended up in Vienna only by accident. In its early days, it had established itself in Geneva; but the Swiss doubted its serious intent and even its significance, and refused to grant the diplomatic status appropriate to an international organization. The Austrians, however, were eager to get what they could in terms of international prestige and were willing to be accommodating, and so in 1965, despite Austria’s inferior international air links, OPEC moved to Vienna. OPEC’s lodgement in Vienna, in the Texaco Building, clearly showed how little account had been taken, early on, of this rather mysterious and peculiar organization, which, despite the initial clamor at its founding, had fallen well short of its central political objective—the assertion of “sovereignty” by the oil exporters over their resources.

But now, in the middle 1970s, all that had changed. The international order had been turned upside down. OPEC’s members were courted, flattered, railed against, and denounced. There was good reason. Oil prices were at the heart of world commerce, and those who seemed to control oil prices were regarded as the new masters of the global economy. OPEC’s membership in the mid-1970s was virtually synonymous with all the world’s petroleum exporters, excepting the Soviet Union. And OPEC’s members would determine if there was to be inflation or recession. They would be the world’s new bankers. They would seek to ordain a new international economic order, which would go beyond the redistribution of rents from consumers to producers, to one that established a wholesale redistribution of both economic and political power. They would set an example for the rest of the developing world. The member countries of OPEC would have a significant say over the foreign policies and even the autonomy of some of the most powerful countries in the world. It was not surprising, therefore, that a former Secretary General of OPEC would one day look back on those years, 1974 through 1978, as “OPEC’s Golden Age.”

Yet nostalgia certainly clothed his recollection. To be sure, the OPEC countries did in the mid-1970s complete the acquisition of control over their own resources. There would no longer be any question about who owned their oil. But those years were dominated by a bitter battle not only with consumers but also within OPEC about the price of that valuable resource. And that one question alone would dominate the economic policies and international politics of the entire decade.

Oil and the World Economy

The quadrupling of prices triggered by the Arab oil embargo and the exporters’ assumption of complete control in setting those prices brought massive changes to every corner of the world economy. The combined petroleum earnings of the oil exporters rose from $23 billion in 1972 to $140 billion by 1977. The exporters built up very large financial surpluses, and the fear that they could not spend all the money created grave concern for the world’s bankers and economic policymakers: The unspent tens of billions, sitting idle in bank accounts, could spell serious contraction and dislocation in the world economy.

They need not have worried. The exporters, suddenly wealthy and certainly far richer than they might have dreamed, embarked on a dizzying program of spending: industrialization, infrastructure, subsidies, services, necessities, luxuries, weapons, waste, and corruption. With the avalanche of expenditures, ports were clogged far beyond their capacity, and ships waited weeks for their turn to unload. Vendors and salesmen for all sorts of goods and services rushed from the industrial countries to the oil-exporting nations, scrambled for rooms in over-booked hotels, and elbowed their way into the waiting rooms of government ministries. Everything was for sale to the oil producers, and now they had the money to buy.

Transactions in armaments became a huge business. To the Western industrial nations, the 1973 disruption of supplies and their high degree of dependence on the Middle East made the security of access to oil a strategic concern of the first order. Weapons sales, aggressively pursued, were a way to enhance that security and maintain or gain influence. The countries in the region were just as eager to buy. The events of 1973 had demonstrated the volatility of the area; not only were the regional and national rivalries deep and the ambitions large, but the two superpowers had squared off in a nuclear alert over the Middle East.

But weapons were only part of the contents of the vast, post-1973 cornucopia, which included everything from consumer goods to entire telephone systems. The proliferation of Datsun pickup trucks in Saudi Arabia was a sign of the times. “It is very expensive to maintain camels,” said one executive of Nissan, “it is cheaper to keep a Datsun.” To be sure, a Datsun cost $3,100 in Saudi Arabia in the mid-1970s, while the sticker price for a camel was only $760. But at twelve cents a gallon for gasoline compared to the going price for camel feed, it was much cheaper to fuel a Datsun than feed a camel. Almost overnight, Nissan became the number one purveyor of vehicles to Saudi Arabia, and the Datsun pickup was the favorite among the sheep-tending Bedouins whose fathers and grandfathers had been the camel-riding backbone of Ibn Saud’s armies. In total, the massive spending of the exporting countries, combined with the galloping inflation of their overheated economies, ensured that their financial surpluses would soon disappear. And disappear they did, completely—the bankers’ initial fears notwithstanding. In 1974, OPEC had a $67 billion surplus in its balance of payments on goods, services, and such “invisibles” as investment income. By 1978, the surplus had turned into a $2 billion deficit.

For the developed countries of the industrial West, the sudden hike in oil prices brought profound dislocations. The oil rents flooding into the treasuries of the exporters added up to a huge withdrawal of their purchasing power—what became known as the “OPEC tax.” The imposition of this “tax” sent the industrial countries into deep recession. The U.S. gross national product plunged 6 percent between 1973 and 1975, while unemployment doubled to 9 percent. Japan’s GNP declined in 1974 for the first time since the end of World War II. As the Japanese worried that their economic miracle might be over, sobered students in Tokyo stopped chanting “Goddamn GNP” at demonstrations and instead found new virtue in hard work and the promise of lifetime employment. At the same time, the price increases delivered a powerful inflationary shock to economies in which inflationary forces had already taken hold. While economic growth resumed in 1976 in the industrial world, inflation had become so embedded in the fabric of the West that it came to be seen as the intractable problem of the modern age.

The group that suffered the most from the price increases were those developing countries that were not fortunate in having been blessed with oil. The price shock was the most devastating blow to economic development in the 1970s. Not only were those developing nations hit by the same recessionary and inflationary shocks, but the price increases also crippled their balance of payments, constraining their ability to grow, or preventing growth altogether. They suffered further from the restrictions on world trade and investment. The way out for some was to borrow, and therefore, a goodly number of those OPEC surplus dollars were “recycled” through the banking system to these developing countries. Thus, they coped with the oil shock by the expedient of going into debt. But a new category also had to be invented—the “fourth world”—to cover the lower tier of developing countries, which were knocked flat on their backs and whose poverty was reinforced.

The new and very difficult problems of the developing countries put the oil exporters into an awkward, even embarrassing situation. After all, they, too, were developing countries, and they now proclaimed themselves as the vanguard of the “South,” the developing world, in its efforts to end the “exploitation” by the North, the industrial world. Their objective, they said, was to force a global redistribution of wealth from North to South. And, initially, other developing countries, thinking of their own commodity exports and overall prospects, loudly cheered OPEC’s victory and proclaimed their solidarity. And this was the time when “the new international order” was much discussed. But OPEC’s new prices constituted a huge setback for the rest of the developing world. Some oil exporters instituted their own lending and oil supply programs to aid other developing countries. But the main response of the exporters was to champion a broad “North-South dialogue” between developed and developing countries, and to insist on tying the oil prices to other development issues, with the stated aim of promoting that global redistribution of wealth.

The Conference on International Economic Cooperation, meant to embody the North-South dialogue, convened in Paris in 1977. Some of the industrial nations hoped to secure access to oil as a result of their participation. The French, still smarting with indignation at Kissinger’s leadership during the oil embargo and long envious of America’s position in Middle Eastern oil, promoted the dialogue as an alternative to American policies. More quietly, other countries saw it as a way to mute the confrontation between importers and exporters and to provide a counterweight to higher oil prices. Though the dialogue proceeded for two years, absorbing much effort, there was little to show for it in the end. The participants could not even agree on a communique. What came to matter most for the rest of the developing world, in practical terms, was not the high-minded rhetoric in Paris, but the reality of the depressed markets in the industrial world for their own commodities and manufactures.1

The Saudis Versus the Shah

OPEC itself became an international spectacle of the first order in the mid-1970s. The eyes of the world fastened on its meetings, with their drama, pomp, and commotion. Ears eager for any clues about what would happen to the world economy, strained to hear the quick response of a minister to a shouted question as he swept through a hotel lobby. Following in OPEC’s wake, oil talk—“differentials,” “seasonal swings,” “inventory build”—now became the parlance of government policymakers, journalists, and financial speculators. Though OPEC was usually described as a “cartel” during this period, in fact it was not. “You can call OPEC a club or an association but not, properly speaking, a cartel,” Howard Page, the former Middle East coordinator for Exxon, observed in 1975. To prove his point, he reached for a Funk & Wagnall’s dictionary, which defined a cartel as “a combination of producers to regulate the prices and the output of a commodity.” OPEC was certainly trying to set price, but not output—not yet. There were no quotas or assigned production levels. The market was really dominated, according to one formulation, not by a cartel but by a “somewhat unruly oligopoly.” During this period, most of the exporters were producing virtually at capacity. The exception was Saudi Arabia, which was setting its production in order to try to achieve its price objectives.

In response to the criticism of the oil price increases, the exporters generally replied by pointing out that, if one broke down the prices that consumers in industrial countries were paying for oil products on a per barrel basis, the Western governments were taking more in terms of tax than the OPEC countries were receiving in their sales price. This was the case in Western Europe, where there was a long history of a large gasoline tax. In 1975, for instance, about 45 percent of what the Western European consumer paid for oil products went to his government, while about 35 percent was accounted for by the OPEC price. The other 20 percent went for shipping, refining, dealer’s margins, and so forth. The argument had less validity for the United States, where the tax component was only 18 percent, while the share going to the OPEC exporter was more on the order of 50 percent. In Japan, the government took 28 percent, with 45 percent going to OPEC. Whatever the split, the consumer governments responded to the OPEC claim by saying that what they did within their borders and how they taxed their citizens was their own business, and that the macro-economic consequences of their sales taxes were strikingly different from that of the “OPEC tax.”

But the real issue was what would happen in the future. The central concern of the consuming countries in the years 1974 through 1978 came down to a simple question: Would the price of oil continue to go up, or would it be held more-or-less steady and thus eroded by inflation? On the answer to that question would depend, among other things, economic growth or collapse, employment, inflation, and the direction of the flow of tens of billions of dollars around the world. Though OPEC was commonly said to be split between “radicals” and “moderates,” this same question was also the focus of a running battle between the two largest producers in the Middle East, Saudi Arabia and Iran. It was not a new rivalry. In the 1960s, the two countries had competed over which would produce the most oil. Now the two nations struggled over price, and primacy.

For the Shah, the December 1973 price increase had been his great victory, and very much a personal one. From then on, he saw his moment and opportunity—the prospect of seemingly endless revenues, provided as if by divine intervention, to fulfill his ambitions to create what he called Iran’s Great Civilization, and, by the way, solve Iran’s mounting domestic economic problems. “One of the only things my husband likes in life,” said the Empress in the mid-1970s, “is flying, driving, driving boats—speed!” The Shah applied his passion for speed to his entire country in an attempt to hurtle Iran into the twenty-first century. In so doing, he would ignore the agitation and disorientation that such rapidity caused, as well as the resentment and unhappiness among the many who did not share his obsession with modernity. Iran, the Shah proclaimed, would become the world’s fifth largest industrial power; it would be a new West Germany, a second Japan. “Iran will be one of the serious countries in the world,” he boasted. “Everything you can dream of can be achieved here.”

Cut off from reality by the huge infusion of oil money, the Shah became consumed by his ambitions and dreams. He also began to believe all the imperial trappings. Who would dare disagree with the Shah, to counsel caution, to be the messenger of any bad news? As to criticisms of the price increases, the Shah was sarcastic and haughtily dismissive. Inflation in the West, he said, justified the drive for still higher prices, and he discounted the notion that higher oil prices themselves could possibly stoke inflation. “The day has passed when the big industrial countries can get away with political and economic pressure tactics,” he told the United States ambassador. “I want you to know that the Shah will not yield to foreign pressure on oil prices.” Moreover, Iran’s more limited oil reserves, limited at least when compared to its neighbors, argued for going for higher prices sooner rather than later. For, when “later” arrived, Iran’s oil reserves might be exhausted. And, finally, there was the Shah’s pride. All the humiliations of the past could now be laid to rest, all the gibes turned around. “There are some people who thought—and perhaps some who still think—that I am a toy in the Americans’ hands,” he said in 1975. “Why would I accept to be a toy? There are reasons for our power which will make us stronger, so why would we be content to be someone else’s catspaw?”

But as he pushed for further price increases, the Shah collided with his neighbors across the Gulf. The Saudis had never approved of the scale of the December 1973 price increase. They thought it was too large, and too dangerous to their own position. They feared the economic consequences. And they had been alarmed to find themselves losing control over OPEC and over the basic decisions about oil, which was so central to the kingdom’s existence and future. It was not in their interest to perpetuate the cycles of recession and inflation that would be stimulated by further increases in oil prices. Owing to the size of their oil reserves, the Saudis had a decisive stake in the long-term markets for oil, in contrast to Iran. The Saudis feared that higher prices, and the expectation thereof, could set off a move away from oil to conservation and to other fuel sources that would change and contract that long-term market for oil and thus diminish the value of their reserves.

From those considerations flowed other concerns. Saudi Arabia was a country large in territory but small in population, not much bigger in terms of numbers than, for instance, the geographically minute Hong Kong. The rapid buildup of oil revenues could create social and political tensions, as well as dangerous expectations, weakening the ties that held the kingdom together. Nor did the Saudis want higher prices to interfere with, complicate, or undermine their objectives in the Arab-Israeli conflict. And they worried about the effects of higher prices on the political stability of the industrial and developing world, because such instability could in due course come to threaten them. Economic difficulties in Europe in the middle 1970s seemed to be opening the door of government to communists, particularly in Italy, and the prospect of communists in power on Europe’s Mediterranean coast was deeply unsettling to a Saudi government already fearful of Soviet designs to encircle the Middle East.

There was still another concern in Riyadh—Iran. The Shah, they were sure, was too short-sighted in his drive for higher prices, too fired by his own ambitions. Further oil price hikes would only provide Iran with still more money and power, enabling it to buy even more weapons, thus shifting the strategic balance and encouraging the Shah to claim hegemony over the Gulf. Why, the Saudis asked, were the Americans so obsessed with the Shah? In August 1975, the U.S. ambassador to Riyadh reported to Washington that Zaki Yamani had said that “the talk of eternal friendship between Iran and the United States was nauseating to him and other Saudis. They knew the Shah was a megalomaniac, that he was highly unstable mentally, and that if we didn’t recognize this there must be something wrong with our powers of observation.” Yamani sounded a warning. “If the Shah departs from the stage, we could also have a violent, anti-American regime in Teheran.”

For their many and various reasons, political and economic, the Saudis purposefully and forcefully pursued their line against further price increases at meeting after meeting of OPEC. Their firmness at one point even forced OPEC to accept two different prices: a lower one for the Saudis and its ally, the United Arab Emirates, and a higher price for the eleven other members. When the other exporters were looking for justification to raise prices, the Saudis in opposition would push up their production to try to weaken the market. But in so doing, they made a disconcerting discovery. Their sustainable production capacity was not as high as had been assumed.2

Yamani

In all these Saudi maneuvers, the spotlight fell on one man—Ahmed Zaki Yamani. To the global oil industry, to politicians and senior civil servants, to journalists, and to the world at large, Yamani became the representative, and indeed the symbol, of the new age of oil. His visage, with his large, limpid, seemingly unblinking brown eyes and his clipped, slightly curved Van Dyke beard, became familiar the planet over. But in the quest for simplification and personalities, and also in response to the opaque political structure of Saudi Arabia, the world sometimes confused his role and ascribed greater power to him than he had. He was, in the final analysis, the representative of Saudi Arabia, albeit an enormously important one. He could not dictate or solely determine Saudi policy, but he could shape it. His style of diplomacy, his mastery of analysis and negotiation, and his skill with the press all gave him decisive influence. His power was augmented by simple longevity, the fact that he ended up being “there” longer than anyone else.

While Yamani was widely known as “Sheikh,” the title was in his case an honorific, assumed by prominent commoners, which he was. By background, Yamani was a Hijazi, an urban man from the more worldly and commercial Red Sea coast of Saudi Arabia, rather than a Nejdi, from the more isolated desert principalities that had provided the original base of Ibn Saud’s support and that looked to Riyadh as their center. Yamani was born in Mecca in 1930, the year that St. John Philby convinced King Ibn Saud that the only way out of the kingdom’s desperate financial situation was to allow prospecting for oil and minerals. During Yamani’s childhood, camels still thronged the streets of Mecca, and Yamani read at night either by oil lamp—“electreeks”—or went to the mosque, where electricity had been hooked up.

Both his grandfather and his father were religious teachers and Islamic lawyers; his father had been grand mufti in the Dutch East Indies and Malaya. This combination of learning and piety shaped Yamani’s outlook and intellectual development. After his father’s return to Saudi Arabia, the family house in Mecca became a meeting place for his students. “Many of them were famous jurists and they would discuss the law with my father and argue cases,” Yamani later said. “I started to join them and often after they left, my father and I would stay up for hours and he would teach me and he would criticize my arguments.”

Yamani’s own considerable intelligence was recognized early in Saudi schools. He went off to university in Cairo, and then to New York University Law School, followed by a year at the Harvard Law School, where he studied international law. He also developed an intuitive grasp of the West and of the United States in particular, and of how to communicate and be comfortable with Americans. When he returned to Saudi Arabia, he set up the first law office in the country. He worked as an adviser to various government ministries, and he wrote the contract for the 1957 concession with Arabian Oil, the Japanese consortium, that broke in on the majors in the Middle East.

Yamani also wrote commentaries on legal issues for various newspapers. That last is what attracted the attention of a most valuable patron, Prince Faisal, second son to Ibn Saud. Faisal invited Yamani to become his legal counselor, and in 1962, when Faisal emerged triumphant from the power struggle with his brother Saud, one of his first acts was to fire the nationalist oil minister Abdullah Tariki. He appointed as his successor the thirty-two-year-old Yamani, whose initial task, in turn, was to end Tariki’s confrontation with Aramco, and to begin with more subtlety and skill—and effectiveness—to drive toward the same eventual objectives. “Give me the rantings and ravings of Tariki any day,” an executive of one of the Aramco companies complained. “Yamani drives you to the wall with sweet reasonableness.”

By the time of the 1973 embargo, Yamani had already been oil minister for eleven years and had developed considerable experience and skill, and superb negotiating talents. His voice was soft, forcing adversaries to strain and to be silent to hear what he said. He almost never lost his temper; the angrier he got, the more quiet he became. Flamboyant rhetoric was not his style. He went logically from point to point, dwelling on each long enough to draw out the essence, the connections, the imperatives, and the consequences. It was all so simple and persuasive and so overwhelmingly obvious and irrefutable that only a maniac or a simpleton could disagree. It was a manner of presentation that was mesmerizingly irresistible to many, and absolutely infuriating to others.

Yamani carefully crafted his mystique; he was the master of patience and of the unblinking stare. When required, he would just look at his interlocutor, without saying a word, fingering his ever-present worry beads, until the subject was changed. He was always playing chess, carefully pondering his opponent’s position and how to get where he wanted. Though an adept tactician, expert at maneuvering as required by short-term needs inside Saudi Arabia and out, he also tried always to think long term, as befitted the representative of a country with a small population and one-third of the world’s oil resources. “In my public life, in my personal life, in everything I do I think long term,” he once said. “Once you start thinking short term, you are in trouble because short-term thinking is only a tactic for immediate benefit.” The Western world, he believed, was afflicted by the curse of short-term thinking, the inevitable result of democracy. By nature, Yamani was also cautious and calculating. “I can’t bear gambling,” he said in 1975, when he was at his apogee. “Yes, I hate it. It rots the soul. I’ve never been a gambler. Never.” In oil politics, he insisted, he never gambled. “It’s always a calculated risk. Oh, I calculate my risks well. And when I take them, it means I’ve taken all necessary precautions to reduce them to the minimum possible. Almost to zero.”

Yamani generated strong reactions. Many thought him brilliant, a diplomat of high order, with a broad, superb grasp of oil, economics, and politics. “He was a consummate strategist,” said one who dealt with him for twenty-five years. “He never went directly to his goal, but he never lost sight of where he wanted to go.” In the West, he became the embodiment of the OPEC Imperium and the ascendancy of oil power. To many Western leaders, he was the one reasonable and influential interlocutor, and the most knowledgeable. To many in the public, he was the most visible and, therefore, the most criticized and derided of the exporters’ representatives. Some in OPEC itself and in the Arab world hated him, either resenting his prominence, or regarding him as too close to the West, or simply thinking he was given too much credit. Jealous rivals and skeptics said that he was “overrated.” One Aramco official who frequently dealt with him was struck, more than anything else, by what he described as Yamani’s capacity for being “ostentatiously calm.”

Henry Kissinger, who also had many dealings with Yamani, was backhanded and almost deliberately lighthearted in commending him: “I found him extraordinarily intelligent and well read; he could speak penetratingly on many subjects, including sociology and psychology. His watchful eyes and little Van Dyke beard made him look like a priggish young don playing at oil policy but not really meaning the apocalyptic message he was bringing, especially as it was put forward with a gentle voice and a self-deprecatory smile at variance with the implications of his actions…. In his country at that time, barred by birth from the political leadership reserved for princes and by talent from an ordinary existence, he emerged in a position as essential as it was peripheral to the exercise of real political power within the Kingdom. He became the technician par excellence.”

Yamani was very much a Faisal man, devoted to the King who had chosen him. The King, in turn, regarded Yamani as a favored protégé and rewarded him with extensive grants of real estate, which skyrocketed in value during the oil boom and were a basis for Yamani’s personal fortune. Yamani’s close, intense relation with the King gave him carte blanche in making oil policy, though always under the final control of Faisal, and always within lines defined by the Royal Family, whose most prominent member when it came to oil policy after the King himself was his half brother, Prince Fahd.

In March 1975, Yamani accompanied the visiting Kuwaiti oil minister to an audience with King Faisal. A nephew of Faisal followed the party into the little reception room, and as the Kuwaiti knelt before the King, the nephew stepped forward and fired several bullets into Faisal’s head, killing him almost instantaneously. Afterward, some said that the murder was the revenge for the nephew’s brother, who had been slain a decade earlier in the course of leading a fundamentalist attack on a television station to protest the first broadcast of a woman’s voice in the kingdom. Others said the young man had been caught up in the miasma of the extreme left. Still others simply said he was deranged, mentally off-balance, and, noting that he had been prosecuted while a student in Colorado for selling LSD, suffering from the effects of drugs.

Then in December of that year, the international terrorist known as “Carlos,” a fanatic Marxist from Venezuela, led five other terrorists in an attack on a ministerial meeting in the OPEC Building on Karl Lueger Ring in Vienna. Three people were killed in the first few minutes. The terrorists took the oil ministers and their aides hostage, and eventually embarked on a harrowing air journey, flying first to Algiers, then to Tripoli, and then back to Algiers, threatening all the way to kill the ministers. Again and again, they said that two people had already and absolutely been sentenced to death: Jamshid Amouzegar, the Iranian oil minister, and Yamani, who was their number-one quarry. On the tense flights, Yamani spent the time playing with his worry beads and reciting to himself verses from the Koran, convinced that he would soon be a dead man. Forty-four hours after the initial assault in Vienna, the ordeal finally came to an end in Algiers, with the suspension of the “death sentences” and the release of everyone, including Yamani. Some thought that a faction in one of the Arab governments had provided assistance to the terrorists and may even have promised a large reward.

After 1975, Yamani became, understandably, obsessive on the subject of security. And after Faisal’s assassination, he never had the independence on oil that had previously been his. Faisal’s successor was his half-brother Khalid, who already suffered from a heart condition and did not project himself as a strong leader. Fahd became Crown Prince and Deputy Prime Minister. He was also the chief policymaker when it came to oil, and the person to whom Yamani now reported. To the outside world, Yamani still was the number-one figure, but within Saudi Arabia, it was the careful, cautious Prince Fahd who had the final say on policy. On those occasions when he spoke for the record, Fahd made clear that the opposition to higher oil prices was not Yamani’s position alone, but Saudi policy. Hiking the price further, Fahd declared, would spell “economic disaster.” Indeed, at a private meeting with President Jimmy Carter in Washington in 1977, Fahd went so far as to vigorously urge Carter to put pressure on two other OPEC countries, Iran and Venezuela, to prevent further price increases.

At times, the Saudi policies infuriated the other exporters enough to bring down a rain of vituperation, often carefully directed toward Yamani and not the Royal Family. “When you listen to Iranian radio or read Iranian newspapers, you will learn that I am a devil,” Yamani complained. One of the leading newspapers in Tehran castigated Yamani as a “stooge of capitalist circles, and a traitor not only to his own King and country but also to the Arab world and the Third World as a whole.” The Iraqi oil minister declared that Yamani was acting “in the service of imperialism and Zionism.” To such rhetoric, the unflappable Yamani reacted with his enigmatic smile and unblinking stare.3

America’s Strategy

Whatever the internal rivalries within OPEC, there certainly was a general meeting of minds between Riyadh and Washington when it came to oil prices. The United States government, through the Nixon, Ford, and Carter Administrations, consistently opposed higher prices because of the further damage that such increases might do to the world economy. But Washington did not want to aggressively force prices down. “The only chance to bring oil prices down immediately would be massive political warfare against countries like Saudi Arabia and Iran to make them risk their political stability and maybe their security if they did not cooperate,” Kissinger, Ford’s Secretary of State, explained in 1975. “That is too high a price to pay, even for an immediate reduction in oil prices. If you bring about an overthrow of the existing system in Saudi Arabia and a Qaddafi takes over, or if you break Iran’s image of being capable of resisting outside pressures, you’re going to open up political trends that could defeat your economic objectives.” Indeed, there was some concern that the oil exporters might themselves suddenly drop the price substantially and thus undermine expensive new developments, such as those in the North Sea. As a result, there were discussions among the members of the International Energy Agency about establishing a “minimum safeguard price” to provide a floor to protect higher-cost energy investment in the Western world against an abrupt, perhaps politically motivated, slash in world prices.

Washington’s central objective was stability, and it campaigned hard against further price rises for fear that they would stoke inflation, cripple the international payments and trade system, and retard growth. Before every OPEC meeting, the United States would dispatch a host of emissaries to the interested parties around the world. Backed up by a flood of cables that were filled with statistics about inflation and energy use, the American officials would strenuously argue against any further increases. To be sure, contradictory messages would sometimes emerge from the large, contentious bureaucracies that shaped foreign and economic policies in the United States. At times, the Saudis would even suspect that the United States was playing a trick on them, that it was in secret collusion with the Shah to raise prices. Nixon, Ford, and Kissinger were, in fact, reluctant to push too hard on the Shah, given other strategic considerations. Moreover, on the domestic American scene, there was no consensus, but on the contrary a series of battles that made energy the number-one political issue of the mid-1970s. Internationally, however, the consistent central objective of U.S. policy was to build stability back into the price and let inflation wear it down. All the rhetorical tools, from cajolery and flattery to prophecies of doom and implicit threats, were used by Washington in the pursuit of that stability.

Other, less visible approaches were tried as well. In an effort to help cap prices and ensure additional supplies for the United States, Washington flirted with the idea of going into the oil business itself in partnership with nothing less than the Soviet Union. Kissinger pursued a “barrels-for-bushels” deal under which the United States would import Soviet oil in exchange for American wheat. A preliminary letter of understanding was signed in Moscow in October 1975. Shortly after, senior Soviet officials came to Washington for what proved to be intense negotiations. Here was the chance for Kissinger to score a “victory” for his American-Soviet détente, which, under mounting domestic criticism, could use some victories. It could also mean a “defeat” for OPEC, with the savory irony of using Soviet oil to “break” OPEC’s grip.

After a few days of lengthy discussions, the Russians found themselves on a weekend in Washington with nothing to do. For a little light relief, they were whisked off by Gulf Oil, which traded oil with the Soviets, in a company jet to Disney World. On the trip down to Florida, the head of the Soviet delegation explained to his hosts why the negotiations were so difficult: Kissinger was insisting on maximum publicity to embarrass OPEC. The Russians would love to sell their oil, they would love not to have to spend hard currency on American wheat, but the transaction had to be kept, if not secret, at least very low profile. They could not allow themselves to be seen as undercutting OPEC and Third World nationalism. There was also a problem of terms; Kissinger was insisting that the American wheat be valued at world wheat prices, while the Russian oil should be valued at 12 percent or so below world oil prices. When the Russians asked why the disparity, the Americans explained that American wheat was being sold into an established market, whereas a new market was being opened up for Russian oil, and therefore the Soviets would have to discount to get into it. Ultimately, the deal fell through. But the Soviet officials did have a fabulous time at Disney World.4

The American commitment to stable oil prices put it on a collision course with Iran; after all, the Shah was the most vocal and influential of the price hawks, and the United States was frequently urging him otherwise. When President Ford criticized higher prices, the Shah quickly shot back, “No one can dictate to us. No one can wave a finger at us, because we will wave a finger back.” To be sure, Iran, no less than Saudi Arabia, was tied politically and economically to the United States. Yet as the government ministers and businessmen and weapons merchants trouped to Tehran, and as the Shah continued to lecture and hector Western society on its weaknesses and ills, some in Washington questioned exactly who was whose client.

At the beginning of the 1970s, Nixon and Kissinger had established a “blank check” policy, giving the Shah a free hand to buy as many American weapons systems as he wanted, even the most technologically advanced, so long as they were not nuclear. The policy was part of the “twin pillars strategy,” established for regional security in the wake of the British withdrawal from the Gulf. Iran and Saudi Arabia were together to be the pillars, but of the two, Iran was clearly, as one American official put it, the “Big Pillar,” and by the mid-1970s, Iran was responsible for fully half of total American arms sales abroad. The Defense Department was alarmed by this blank check; in its view, Iran needed a strong conventional army, but not ultramodern weapons systems that it would have trouble mastering and that might fall into the hands of the Russians. Defense Secretary James Schlesinger personally cautioned the Shah that Iran lacked the technical resources to assimilate so many new and complex weapons systems. “He fell in love with the F-15,” said Schlesinger. While the Shah normally brushed aside such warnings, in the case of the F-15, he heeded the advice and did not purchase that particular aircraft.

Pungent criticism came from Treasury Secretary William Simon. “The Shah,” he said, “is a nut.” Not surprisingly, the Shah took strong exception to that characterization and Simon quickly apologized: He had been quoted out of context. He had meant, he explained ingeniously, that the Shah was a “nut” on oil prices in the way one might say somebody was a “nut about tennis or golf.” The American ambassador was away from Tehran when this incident blew up, and the unhappy task of explaining the remark fell to the chargé. He repeated Simon’s excuse to the Minister of Court, who replied, “Simon may be a good bond salesman, but he does not know a whole lot about oil.” The Shah himself was reported to have commented that he knew English as well as Simon and that he understood “exactly what Mr. Simon meant.”

Yet despite the carpings and criticism, a consensus held sway through the Nixon and Ford administrations. Iran was an essential ally with a major security role in the Middle East, and nothing should be done to undercut the Shah’s prestige and influence. Nixon, Ford, and Kissinger had strategic and personal predilections for the Shah; he had not embargoed oil to the United States in 1973, and Iran could play a key role in geopolitical strategies. The Saudis, Kissinger would tell colleagues, were “pussy cats.” But with the Shah he could talk geopolitics; Iran, after all, shared a border with the Soviet Union.

The Shah had good reason to worry in 1977 about the new American President, Jimmy Carter. In the words of the British ambassador in Tehran, “The calculating opportunism of Nixon and Kissinger was far more to the Shah’s taste.” Two of the most important policies of the Carter Administration, human rights and restriction on arms sales, were directly threatening to the Shah. Despite those policies, the new Administration maintained the pro-Shah orientation of its predecessors. As Gary Sick, a Middle Eastern affairs officer on the National Security Council during the Carter Administration, later wrote, “The United States had no visible strategic alternative to a close relationship with Iran.”

Relations were facilitated by the Shah’s shift on the subject of oil prices. By the time Carter moved into the White House, the Shah was having second thoughts about the value of pushing for higher prices. The freneticism and euphoria, the onrush of petrodollars, and the oil boom itself were wrecking the fabric of Iranian economy and society. The results were already evident: chaos, waste, inflation, temptation, corruption, and deepening political and social tensions that were broadening opposition to the regime. Increasing numbers of his subjects wanted no part of the Shah’s Great Civilization.

At the end of 1976, the Shah himself ruefully summed up the problem: “We acquired money we could not spend.” Money, he was now forced to acknowledge, was not the remedy, but the cause of many of his nation’s ailments. Higher oil prices would not help him, so why go to the trouble of challenging the United States on this point when he needed, with Carter’s arrival, to bolster relations with America more than ever? Early on, the Carter Administration decided to launch and maintain a “price freeze offensive” as a central U.S. policy. And after Secretary of State Cyrus Vance, on a visit to Tehran in May of 1977, reassured the Shah about continued American support, the Iranian government began to surprise the other oil exporters, and even its own officials, by calling for moderation on oil prices. The Shah privately went so far as to tell Treasury Secretary Michael Blumenthal that Iran “does not want to be known as a price hawk.” Had the Shah undergone a marketplace conversion? Had the number-one price hawk become a dove?

In November 1977, the Shah came to Washington to meet President Carter. At the very moment the Shah arrived at the White House, a battle erupted on the nearby Ellipse among anti- and pro-Shah demonstrators, primarily Iranian students in the United States. The police broke it up with tear gas. The fumes wafted over the South Lawn of the White House, where President Carter was greeting the Shah. Carter began blinking and rubbing his eyes, while the Shah wiped away his own tears with a handkerchief. The news footage was broadcast not only on American television, but also in Iran, owing to the new liberalization—giving the Iranian population a less-than-grand view of their monarch, a perspective of the sort they had never before been permitted. That scene, along with the fact of the demonstrations themselves, convinced some Iranians that the United States was about to disengage from Mohammed Pahlavi. Why else, they thought, not understanding the American system, would Carter have “allowed” such demonstrations?

In their private meetings, Carter lobbied both for human rights and for stability in oil prices. As the Shah saw it, he was being asked by Carter to make a trade: to join Saudi Arabia in moderation on oil prices in exchange for the continued flow of arms from the United States and relief from the pressure on human rights. Carter stressed “the punishing impact of increased oil prices on the industrial economies.” Contradicting much of what he had said since the end of 1973, the Shah agreed with Carter, and he promised to urge the other OPEC countries to “give Western nations a break.”

Iran had now joined Saudi Arabia on the side of moderation. With those two countries representing 48 percent of OPEC production, they could dictate to the other members, and oil prices would be held in check. Thus the battle between the Shah and the Saudis was ended. The Shah had been won over. Through the half-decade from 1974 to 1978, there were only two rather small OPEC-wide price increases: from the $10.84 set at Tehran in December 1973 to $11.46 in 1975 and to $12.70 at the end of 1977. But inflation was increasing at a more rapid rate, and as had been anticipated, eroding the real price. By 1978, the oil price, when adjusted for inflation, was about 10 percent below what it had been in 1974, immediately after the embargo. In short, by restricting the increases to those two relatively small ones, the real oil price was in fact lowered somewhat. Oil was no longer cheap by any means, but neither had the price, as many feared it would, gone through the roof.5

Kuwait and “Our Friends”

If the oil exporters no longer had to negotiate over price with anybody except one another, there were still the oil concessions, reminders of the times when the companies held sway, relics of the days when the exporters were poor. The very existence of concessions, the oil nations now said, was degrading. The concession in Iran, of course, had been wiped out by Mossadegh’s nationalization in 1951, and Iraq had completed its nationalization of the IPC concession in 1972. While some concessions would remain in the aftermath of the 1973 price shock, the termination of the last great ones—in Kuwait, Venezuela, and Saudi Arabia—would mark the final demise of the twentieth century concessional arrangements that had begun with William Knox D’Arcy’s bold and risky commitment to Persia in 1901.

The Kuwaiti concession was the first on the block. The Kuwait Oil Company had been established in 1934 by BP and Gulf to bring an end to their acrimonious competition, which was stoked by the irrepressible Major Frank Holmes and sharpened by the determination of Ambassador Andrew Mellon. Forty years later, at the beginning of 1974, Kuwait acquired 60 percent participation in the Kuwait Oil Company, leaving BP and Gulf with 40 percent. Then in early March 1975, Kuwait announced that it was going to take over that last 40 percent and not maintain any special links to BP and Gulf. They would simply be treated like other buyers. And what would happen if BP and Gulf did not agree to Kuwait’s terms? “We will just say thank you very much and good bye,” said the Kuwaiti oil minister Abdel Mattaleb Kazemi. The objective, he added, was “to gain full control over the country’s oil resources.” He went to the essence: “Oil is everything in Kuwait.”

James Lee of Gulf and John Sutcliffe of BP were quickly summoned to Kuwait City. Sutcliffe told the oil minister, “There should be consideration for the old relationship.” The Kuwaiti reply was emphatic. “No compensation was due.” Meeting with the Prime Minister, Sutcliffe and Lee offered a brief history of how, as a result of the battle over rents, the profit split had shifted over the years, “from the 50/50 split concept in the early 1960s to the present split of about 98 percent for the Government and 2 percent for the companies.” They hoped now to work out a satisfactory arrangement. But they were told, quite firmly, that Kuwait intended to take over 100 percent, that it was a matter of sovereignty, and that the question was not open to debate.

For a number of months Kuwait struggled with the two companies, which continued to try to hold on to some kind of preferential access. At one point, a senior BP negotiator, P. I. Walters, half-jokingly suggested to the Kuwaitis that they would do far better to invest some of their new oil wealth in BP shares rather than to acquire the physical assets of the Kuwait Oil Company. The Kuwaitis were not interested, at least not at that time. Finally, in December 1975, the two sides came to an understanding—on Kuwait’s terms. Gulf and BP had asked $2 billion in compensation. At this, the Kuwaitis laughed. The companies got a tiny fraction of that amount, $50 million.

Once the deal was done, the two international companies still assumed that they would retain preferential access. That assumption was much in the mind of Herbert Goodman, the president of Gulf Oil Trading Company, when he was dispatched with a small team to Kuwait City to put the finishing touches on the new relationship, or so he thought. Goodman quickly found out how much had really changed. Not that he could ever have been accused of being naive. Goodman was one of the most experienced oil supply men and traders in the world; indeed, his career embodied the extraordinary development and expansion of the international oil companies in the decade of the 1960s. A former U.S. Foreign Service officer who had joined Gulf in 1959, Goodman had earned his place in any oil hall of fame; for during four years in Tokyo, he had the distinction of selling over a billion barrels of oil in a series of long-term contracts with Japanese and Korean buyers. The 1960s were the glory years, both for an oil man and for an American abroad. “There was tremendous cachet to being an American businessman then, enormous entree everywhere,” Goodman was to recall. “You learned to take it as your due. People paid attention. There was a respect for your credibility, clout, power. Why? It was trade following the flag—the enormous credibility and respect enjoyed by the United States. The American passport was truly a laissez-passer—a safeguard. Then that began to fade. I could feel it everywhere. It was the ebbing of American power—the Romans retreating from Hadrian’s Wall. I tell you, I could feel it everywhere.” Then came the oil embargo, the price increase, Nixon’s humiliation and resignation, and the abrupt American withdrawal from Vietnam. And now Goodman found himself, in 1975, sitting in Kuwait City where the Kuwaitis were also insisting that an era had ended.

Still, Goodman expected, as did the other executives in his party, that Gulf would get some kind of special price or preference, reflecting a relationship almost a half century long, the training of the many young Kuwaitis who had come to Pittsburgh and stayed with Gulf families, all the hospitality, personal relations, and connections. But no, Goodman was told to his surprise that Gulf would be treated just like any other customer. Furthermore, the Kuwaitis said, Gulf would only get enough oil for its own refineries, and not for its third-party customers in Japan and Korea. But those were the markets, Goodman replied, that Gulf had sweated blood to develop. He knew; it was his blood that had been sweated. No, said the Kuwaitis. Those were their own markets, based upon their oil, and they would sell their oil in those markets.

The Gulf men could not help but notice how differently they were being treated from past days. “We would go from our hotel to the ministry, day after day, and wait,” said Goodman. “Sometimes, a junior person would come. Sometimes not.” At one point in the discussions, Goodman tried to remind a Kuwaiti official of the history, at least as he understood it, as Gulf understood it, of all that Gulf had done for Kuwait. The Kuwaiti became very angry. “Whatever you did, you got paid for,” he said. “You never did us any favors.” Then he walked out of the meeting.

Ultimately, Gulf got a very small discount on oil going into its own system, but none at all on any oil that it might sell to anyone else. “For the Kuwaitis, it was the overthrow of the colonial power,” Goodman reflected afterward. “There was this misunderstanding. Here was the conceit of the Americans that we were loved because we had done so much for these people. This was the American naiveté. We thought we had good relations. They saw it from a different point of view. They had always felt patronized. They remembered it. In all these relationships, there’s this love-hate thing.

“Yet,” he added, “it was transitory. It was just that they were just about to get very rich.”6

Venezuela: The Kitty Cat Died

The great concessions in Venezuela were also being swept away. Already, at the beginning of the 1970s, there was no doubt of what was to come. After all, this was the country of Juan Pablo Pérez Alfonzo, oil nationalist and cofounder of OPEC. In 1971, Venezuela passed a “law of reversion,” which said that all the oil companies’ concessions and other assets in the country would revert to Venezuela when the concession terms ended, with restricted compensation. The first concessions would start expiring in 1983. The economic effect of the reversion law, plus Venezuela’s policy of “no new concessions,” was inevitable: The companies slowed their investment, which meant that Venezuela’s production capacity was declining. The decline, in turn, just as inevitably fueled the nationalistic antipathy to the companies. “It was chicken and egg,” recalled Robert Dolph, the president of Creole, the Exxon subsidiary in Venezuela. “The policy was that there were no new areas to explore. So we were not feeding the kitty cat, and then they were complaining that the kitty cat is dying.”

By 1972, the government had passed a number of laws and decrees that gave it effective administrative control over every phase of the industry, from exploration to marketing. It also raised the effective tax rate to 96 percent. So it had achieved many of the objectives of nationalization without yet nationalizing. But nationalization was still only a matter of time. The 1973 price increase and OPEC’s apparent victories quickly strengthened the spirit of nationalism and self-confidence and speeded up the last act. In the new era, 1983 was too long to wait. Foreign ownership was simply not acceptable anymore, and nationalization would have to come as soon as possible. On this, virtually all political factions seemed to agree.

Two sets of negotiations—not one—would ensue. The first was with the international companies, Exxon and Shell, followed by Gulf and a number of others. The second was only among Venezuelans themselves. The first set did not go smoothly. “As 1974 ended, the country was still in the midst of a feverish debate on the oil nationalization issue,” said one participant. “The field had clearly split between those who advocated a violent confrontation with the foreign oil companies and those who preferred a nonviolent, negotiated settlement.” Juan Pablo Pérez Alfonzo weighed in from the garden of his house on the side of the confrontationists; he declared that not only the oil industry but all foreign investment in Venezuela should be nationalized immediately.

Yet the process of settlement proceeded with less rancor than might have been expected, partly because of the realism of the companies. Some might have called it fatalism. Venezuela had been the source of a substantial part of their profits in earlier years, at one point half of Exxon’s entire global income. It had also been the place to be if you had any hope of getting to the top of Shell, if not necessarily Exxon. But, in the new era, there was no way they could resist. For them, the critical thing was to retain access to oil. “We couldn’t win,” said Dolph of Creole. “Prices were strong; circumstances in the market were emboldening all the countries, which assumed that what was happening would go on forever. The actual nationalization gave us very little room for maneuver.”

Venezuela would have two requirements after nationalization. One was to maintain the flow of technology and skills from the outside world to keep the industry as efficient and up-to-date as possible. The companies negotiated service contracts with Venezuela under which, in exchange for a continuing transfer of technical skills and personnel, the former concessionaires were paid fourteen or fifteen cents a barrel. The second need was access to markets; the nationalized industry would be producing a vast amount of oil. It did not have its own marketing system outside the country, and it would need to be able to sell the oil. Meanwhile, the former concessionaires still needed petroleum for their downstream systems, so they made long-term contracts with Venezuela that would get the oil to market. The first year after nationalization, Exxon signed with Venezuela what was considered to be the largest single oil supply contract ever made up to that date—900,000 barrels per day.

Far more difficult and emotional was the second negotiation—between the Venezuelan politicians and Venezuelan oil men. Two generations of Venezuelans had grown up within the oil industry; by this time, 95 percent of all the positions, right up to the most senior levels, were staffed by Venezuelans, many of whom had been partly trained abroad and had gained international experience within the multinational companies, and they generally thought they had been treated fairly. The question now came down to this: Was the Venezuelan oil industry, on which the government’s revenues depended, to be primarily a political entity, with its agenda set by politicians and the interplay of domestic politics, or would it be a government-owned entity that was run as a business, with a longer time horizon and with its agenda set by oil men? Behind that question, of course, was a struggle for power and primacy in post-nationalization Venezuela, as well as a battle over the future of the nation’s economy.

Certain inescapable considerations shaped the outcome. The oil industry and its health were central to the overall economic well-being of Venezuela. In Caracas, there was a widespread fear that “another Pemex” might be created, that is, an extraordinarily powerful national company like Petróleos Mexicanos, which was an impenetrable state-within-the-state. Or the result, it was feared, might be a weakened, politicized, corrupted oil industry, with a devastating effect on the Venezuelan economy. The outcome was also affected by the fact that there was a broad, accomplished, technically sophisticated cohort of oil people not only throughout the Venezuelan subsidiaries, but also at the very top. If the industry were politicized, they might just pack up and leave.

In those circumstances, President Carlos Andrés Pérez, who had recently won a landslide victory as the candidate of Acción Democrática, opted for a “moderate” and pragmatic solution, and one in which the oil industry itself was able to participate. A state holding company—Petróleos de Venezuela, known as PDVSA—was established to play a central financial, planning, and coordinating role, and to be a buffer between the politicians and the oil men. A number of operating companies were also created, based upon the pre-nationalization organizations, and eventually consolidated to four and then three. Each was a fully integrated oil company, down to its own gasoline stations. Such quasi-competition, it was hoped, would assure efficiency and prevent the growth of another bloated, bureaucratic state company. Also, this structure would help to maintain the various aspects of corporate culture, tradition, efficiency, and esprit de corps that would improve operations. On the first day of 1976, the nationalization took effect. President Pérez called it “an act of faith.” The country’s new nationalized oil company was destined quickly to become a major force in its own right in the new world oil industry.7

Saudi Arabia: The Concession Surrendered

What remained was the greatest concession of them all—Aramco’s in Saudi Arabia. From the bleak years of the early 1930s, when the impoverished King Ibn Saud had been more desirous of discovering water than oil, Aramco had grown into a vast economic enterprise. In June of 1974, Saudi Arabia, operating on Yamani’s principle of participation, took a 60 percent share in Aramco. But, by the end of the year, the Saudis told the American companies in Aramco—Exxon, Mobil, Texaco, and Chevron—that 60 percent was simply not enough. It wanted 100 percent. Anything less, in the new era of oil nationalism, was humiliating. The companies dug in their heels. After all, their number-one dictum was “never to give up the concession.” It was the most valuable in all the world. Even if that rule could not stand up to the political pressures of the mid-1970s, the companies would, at least, try to make the best deal they could. The Saudis, for their part, were no less insistent on getting what they wanted and exerted economic pressure when necessary. In due course, the companies were persuaded, and they agreed to the Saudi demand—in principle.

To transform principle into practice, however, took another year and a half, as the two sides argued over the crucial operational and financial questions. These negotiations to determine ownership of fully one-third of the free world’s oil reserves were arduous and difficult. They were also nomadic. For a month in 1975, the representatives of the Aramco companies encamped with Yamani in Beit Meri, a hill town above Beirut. Each morning, the oil men would walk down the little street from their hotel to an old monastery that Yamani had converted into one of his homes. There they would debate how to value an extraordinary resource and how to maintain access. Then word got to them that a terrorist group might be planning to attack them or kidnap them, and suddenly the little street looked not quaint but dangerous. They promptly cleared out, and thereafter, the negotiators trailed along with Yamani on his global peregrinations.

Finally, late one night in the spring of 1976, they came to agreement in Yamani’s suite at the Al-Yamama Hotel in Riyadh. Forty-three years earlier in Riyadh, after Standard of California had reluctantly agreed to make an up-front payment of $175,000 for the right to wildcat in the trackless desert, Ibn Saud had ordered the original concession document to be signed. By 1976, the proven reserves in that desert were estimated at 149 billion barrels—more than a quarter of total free world reserves. And now the concession was to be disbanded once and for all. “It was truly the end of the era,” said one of the Americans who was there at the Al-Yamama Hotel that night.

But the agreement did not by any means provide for a severing of links. The two sides needed each other too much. It was the same old issue that had tied the Aramco partners together in the first place: Saudi Arabia had enough oil to last several lifetimes, while the four companies had the huge marketing systems required to move large volumes of that oil. So, under the new arrangement, Saudi Arabia would take over ownership of all of Aramco’s assets and rights within the country. Aramco could continue to be the operator and provide services to Saudi Arabia, for which it would receive twenty-one cents a barrel. In turn, it would market 80 percent of Saudi production. In 1980, Saudi Arabia paid compensation, based on net book value, for Aramco’s holdings within the kingdom. With that, the sun finally set on the great concessions. The oil producers had achieved their grand objective; they controlled their own oil. These nation-states had become synonymous with petroleum.

There was just one odd thing about the agreement between Saudi Arabia and the four Aramco companies. The Saudis did not sign it, not until 1990, fourteen years after it had been agreed upon. “It was very practical,” said one of the company negotiators. “They got what they wanted—full control—but they didn’t want to disrupt Aramco.” As a result, about 33 billion barrels of oil were produced and marketed and over $700 billion of business was conducted for fourteen years and all of it in a condition, in the words of an Aramco director, “in limbo.”

While, initially, the oil companies were still linked by supply contracts to their former concessions in Saudi Arabia, Venezuela, and Kuwait, those connections would weaken over time due to diversification policies of both countries and governments, and because of the opportunities and alternative ties that existed in the market. Moreover, at the same time that the “great concessions” were being terminated, a new relationship was emerging between various petroleum exporting countries and international oil companies. Instead of being “concessionaires,” with ownership rights to the oil in the ground, the companies were now becoming mere “contractors,” with “production sharing” contracts that gave them rights to part of any stream of oil they discovered. This new type of relationship was pioneered by Indonesia and Caltex in the late 1960s. The “services” happened to be the familiar ones of exploring for, producing, and marketing oil. But the shift in terminology reflected an all-important political change: The sovereignty of the country was recognized by both parties in a way that was acceptable in the domestic politics of the countries. The lingering aura of a colonial past was banished; after all, the companies were there merely as hired hands. By the mid-1970s, such production sharing contracts were becoming common in many parts of the world.

Meanwhile, the amount of oil sold directly by the exporters themselves into the market, without benefit of the companies in their traditional role as middlemen, was increasing dramatically—quintupling from 8 percent of total OPEC output in 1973 to 42 percent by 1979. In other words, the state-owned companies of the oil-producing countries were moving downstream, beyond production, into the international oil business outside their own borders. Thus, in many ways, the global oil industry had in little more than half a decade taken on a completely new form under the OPEC Imperium. Even more dramatic changes were ahead.8

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