Modern history

CHAPTER 32

The Adjustment

DID THE END of cheap oil mean the end of the road for Hydrocarbon Man? Would he be able to afford the petroleum that powered his machines and provided the material things he had come to cherish in his daily life? In the 1950s and 1960s, cheap and easy oil had fueled economic growth and thus, indirectly, promoted social peace. Now, it seemed, expensive and insecure oil was going to constrain, stunt, or even eradicate economic growth. Who knew what the social and political consequences would be? Yet the risks loomed large, for one of the great lessons of the miserable decades between the two world wars was how central was economic growth to the vitality of democratic institutions. The oil exporters had, heretofore, complained that their sovereignty was being impaired because of oil. After 1973, it was the industrial nations that found their sovereignty diminished and under assault, their security threatened, and their foreign policies constrained. The very substance of power in international politics seemed to have been transmuted by its oleaginous reaction with petroleum. No wonder that the decade of the 1970s was, for Hydrocarbon Man and for the industrial world as a whole, a time of rancor, tension, unease, and gritty pessimism.

Yet Hydrocarbon Man would not so easily surrender his postwar legacy, and a process of massive adjustment to the new realities now began. The International Energy Agency turned out to be not the agent of confrontation that had been predicted by the French, but rather an instrument for coordination among the Western countries, and a way to bring their energy policies into parallel. The procedures for an energy emergency sharing program were worked out, as were targets for government-controlled strategic reserves of oil, which could be called upon to make up a shortfall in the event of a disruption. The IEA also provided a forum for evaluation of national policies and for research on both conventional and new energy sources.

The central goal for the Western world in the middle of the 1970s came down to what Kissinger described as changing those “objective conditions” in the marketplace from which oil power derived—those conditions being the supply-demand balance and the overall reliance of the industrial economies on oil. Virtually all of the industrial countries, responding to both price and security concerns, embarked on energy policies aimed at reducing dependence on imported oil. In trying to alter those “objective conditions,” each of the major consuming countries proceeded in its own characteristic way, reflecting its political culture and idiosyncrasies—the Japanese with a public-private consensus; the French with their tradition of dirigisme, state direction; and the United States with its usual fractious political debate. The mix may have been different, but the elements required to roll back the new oil power were the same: the use of alternative fuels, the search for diversified sources of oil, and conservation.

Nations Respond

After the initial panic and shock of the Arab oil embargo, Japan began to marshal its responses. The Ministry of International Trade and Industry made a personal “statement” of sorts; it curtailed elevator service in its own headquarters building. In order to reduce the need for electric air conditioning in the summer months in Japan, a major effort was also made to promote an ingenious innovation in men’s fashions: the shoene rukku or “energy conservation look”—business suits with short-sleeve jackets. While the elevator service remained curtailed, the new suits, though advocated by Prime Minister Masayoshi Ohira himself, never caught on.

Quite a vigorous struggle for leadership in energy decision making broke out in Japan. Nevertheless, in every dimension, the country was committed to altering drastically its energy position, which since the early 1960s had been based on access to cheap and secure Middle Eastern oil. It was no longer cheap or secure, and Japan’s naked vulnerability was, once again, all too evident. The lines of response and change were widely accepted and acted upon. They included the conversion of electric generation and industrial production from oil to other fuel sources, the acceleration of nuclear power development, the expansion of imports of coal and liquefied natural gas, and the diversification of oil imports away from the Middle East and toward the Pacific Rim. “Resource diplomacy” came to the fore in Japan’s international relations, as the country arduously sought to woo oil producers and energy suppliers, both in the Middle East and in the Pacific Rim.

Yet no other effort was more concentrated nor more immediately significant than the concerted government-business drive to promote energy conservation in industry and, in particular, to reduce oil use. The campaign’s success far exceeded what was anticipated, and was of key importance to the renewed international competitiveness of Japanese business. The response, in fact, set the standard for the rest of the industrial world. “Both workers and business leaders were very apprehensive after 1973,” recalled Naohiro Amaya, then a Vice-Minister of MITI. “They feared for the survival of their companies, and so everybody worked together.” In 1971, MITI had conducted a study on the need to move from “energy-intensive” to “knowledge-intensive” industry, based upon the premise that Japanese oil demand was growing so fast that it would put undue pressure on the world oil market. The heavy industries had not particularly liked the study, which implied that they were lame ducks; and the report, developed at a time when prices were still low, was much criticized. But the 1973 crisis provided the force to implement the new strategy at breakneck speed. “Instead of using the resources in the ground, we would use the resources in our head,” said Amaya. “The Japanese people are accustomed to crises like earthquakes and typhoons. The energy shock was a kind of earthquake, and so even though it was a great shock, we were prepared to adjust.

“In a way,” he added, “it was a kind of blessing, because it forced the rapid change of Japanese industry.”

In France, the most senior energy official was Jean Blancard, an engineer and member of the elite Corps des Mines with long experience in the oil industry. As General Delegate for Energy in the Ministry of Industry, he coordinated government policies and those of the state-owned energy companies. In early 1974, even as Paris was trying to pursue its conciliatory bilateral policies toward the oil producers, Blancard was arguing to President Georges Pompidou, “The period from here on will be quite different—a transformation, not a crisis…. It is not reasonable for such a country as ours to be hanging on the Arabs’ decisions. We must pursue a policy of diversification of energy and try to decrease the need for oil—or at least not allow it to increase.”

Blancard found a very receptive audience for his ideas in Pompidou, who, in early 1974, convened a meeting of his senior advisers. Seriously ill, Pompidou had become swollen from the effects of treatment, and was obviously in great pain during the long meeting. Nevertheless, that discussion confirmed the three basic planks of French energy policy: rapid development of nuclear power, a return to coal, and a heavy emphasis on energy conservation—all designed to restore France’s autonomy. Pompidou died less than a month after the meeting, but his successor, Valery Giscard d’Estaing, pushed ahead on all three programs. With a governmental system much more impervious than other Western countries to such outside interveners as environmentalists, France within a few years would outstrip all the others in its commitment to nuclear power. But nuclear power was proceeding elsewhere as well; and electricity generation would, by the early 1980s, become one of the major markets in the West lost to oil, as indeed was the intention, though nowhere else to so great a degree as in France.

France also developed the most aggressive government policy on energy conservation. Inspectors would swoop down on banks, department stores, and offices and do “le check up”—take the inside temperature with special thermometers. If the temperature exceeded the officially approved twenty-degree-centigrade level, fines would be levied on the building management. But perhaps the most striking aspect of France’s overall energy conservation program, and an altogether French initiative, was the ban on any advertising that “encouraged” energy consumption. A manufacturer could advertise that his portable electric heater was more efficient than comparable heaters, but he could not say that electric heating was the best form of heating, because that encouraged energy use. Officials of the French Energy Conservation Agency were known to hear a radio advertisement on the way to work and, judging it as encouraging consumption, have it pulled from the radio by lunchtime.

The advertising ban created particular perplexity for the oil companies. They were accustomed to waging aggressive campaigns to win even a 1 percent gasoline market share away from their competitors. No more. Now about the best they could do was trumpet the gasoline-saving properties of various additives. Exxon’s tiger was tamed in France; no longer in the tank, he was judiciously advising motorists to check their tires and tune their engines to save gasoline. The companies could not give away the kind of trinkets and premiums that gasoline stations habitually offered around the world—mugs, glasses, spoons, and decals. After all, such gifts would encourage consumption. Instead, about the only thing they were permitted to hand out were cheap tool kits, but only so long as they contained a brush for cleaning spark plugs to promote higher efficiency.

One of the two French national oil companies, Total, searched desperately for some way to keep its name in front of the public. At last, it had a brilliant idea. It started putting up billboards, picturing a beautiful piece of green French countryside, with a simple legend announcing “This is France” and signed “Total.” The ad was banned. A stunned Total asked why. “It is easy,” said Jean Syrota, the director of the Energy Conservation Agency. “Consumers look at this ad and say, ‘Oil companies are wasting a great deal of money on such ads, therefore the companies must be rich, therefore there must not be any energy problem, therefore it is all right to waste energy.’”1

“Obscene Profits”

The laugh was something that the playwright Eugene O’Neill would never have anticipated, and he might well have been perplexed. In a popular Broadway revival of his play A Moon for the Misbegotten, one of the characters bellowed at the beginning of the second act, “Down with all tyrants! Goddamn Standard Oil!” Night after night, the audience broke into laughter, and sometimes into applause. It was early 1974, three decades after the play had been written, but the line resonated with another drama that was being simultaneously acted out in the halls of Congress, as Senators and Congressmen held hearings on the energy crisis and the role of the oil companies. Of all the hearings, the most dramatic were those held by the Senate Permanent Subcommittee on Investigations, chaired by Senator Henry Jackson, who, as a boy, had been nicknamed “Scoop” by his sister owing to his resemblance to a cartoon character, and who was still known as Scoop even as the powerful chairman of the Senate Interior Committee. He saw himself as a hard-headed Truman kind of Democrat, a realist, who, as he liked to say, had his head “screwed on straight.” Nixon would fume in private at what he called “Scoop Jackson’s demagoguery.” But a White House aide tried to explain to the irate Nixon that “our troops in the Interior Committee have a major inferiority complex when it comes to Jackson, because, frankly, he Scoops the hell out of them.”

Now, at the hearings, the playing to populism was irresistible, and Jackson would score one of the greatest political scoops of his long career. Senior executives of the seven largest oil companies were lined up at one table and were made to testify under oath. Then, facing Jackson and his colleagues in a crowded hearing room that was flooded by television lights, they were subjected to withering questioning about the operations and profits of their companies. Those executives, whatever their skills at geology or chemical engineering or general management, were no match for Jackson and the other Senators when it came to political theater. They came across as inept, insulated, self-satisfied, and out of touch.

The timing of the hearings was exquisite: The oil companies were reporting huge increases in profits while the Arab oil embargo was still in effect. In an atmosphere that reeked with distrust and hostility, Jackson announced that his subcommittee was going to find out if there really was an oil shortage. “The American people,” he declared, “want to know if this so-called energy crisis is only a pretext; a cover to eliminate the major source of price competition—the independents, to raise prices, to repeal environmental laws, and to force adoption of new tax subsidies…. Gentlemen, I am hopeful that we will receive the answers to these and other questions before we leave here today.” He added menacingly, “If not, I can assure you we will get the answers one way or another in the days ahead.”

Jackson and the other Senators then laid into the company executives, who tried to defend themselves. “The contrivance theory is absolute nonsense,” the president of Gulf U.S. lamely protested, though adding, “I know people are a bit mystified by the rapid turn of events in the United States.” A senior vice-president of Texaco haplessly declared, “We have not cheated or misled anyone and if any member of the subcommittee has proof of any such acts by Texaco, we would like to be presented with such proof.” When a senior vice-president of Exxon was unable to recall the amount of his company’s 1973 dividend, Jackson scathingly told him that he was being “childish.”

The oil men were humiliated, sobered, and infuriated, particularly by Jackson, who found a line that, though perhaps not quite up to Eugene O’Neill, nevertheless won thunderous applause across the country, especially from those who were still spending their time in gas lines in the winter of 1974. The companies, said Jackson, were guilty of making “obscene profits.” The oil men, accustomed to some deference, were hardly prepared for the onslaught. “We didn’t have a chance,” complained Gulf’s bloodied president after the hearings. But Jackson knew that he was speaking for many Americans because he felt the way they felt. The two gasoline stations near his house were now always closed by the time he headed home. “We have to send one of the boys in the office out in the middle of the day to try to find an open station,” he said with some frustration after the hearings. He was outraged by what he saw as the arrogance and greed of the oil companies, and he proposed that they be chartered by the Federal government. Jackson succeeded in turning “obscene profits” into a national catch phrase, the yardstick for the times. When Exxon had the misfortune coincidentally to release its 1973 earnings, up 59 percent over 1972, on the third day of the hearings, Kenneth Jamieson, the company’s chairman, felt constrained to declare, “I am not embarrassed.” Many thought otherwise.

The Standard Oil cursed in O’Neill’s play had been broken up in 1911, but the reference still seemed appropriate. For John D. Rockefeller was once again casting his dark shadow over the land, with all the sinister intimations about collusion, manipulation, and secret deals. The oil companies were now among the most unpopular institutions in all of America. The same was true in other industrial countries. Some Japanese publications, for instance, ran articles about how the American oil companies had planned the crisis in order to raise their profits. Indeed, such was the public outcry and the demands for accountability and control that the confidential main planning document that went to the board of one of the largest oil companies warned in 1976, “The future for private oil companies is much less certain. The trend for upstream operations to pass into government hands will continue, with companies filling a contractor role, either formally or de facto. Greater government involvement, direct or indirect, is also to be expected downstream” in the consuming countries. The next year, 1977, a senior executive of Shell in London went so far as to opine, “Paradoxically, the threat to the viability of an oil company may today come more from the importing than the exporting governments.”

He had a good point. After all, the worst had already happened in the oil-producing nations: The companies had been nationalized, they no longer owned the oil, they no longer set prices or production rates. As far as the oil exporters were concerned, the companies were contractors, hired hands. Was it now, oil executives asked themselves, the turn of the consuming governments to hammer their companies? Some of the industrial countries launched antitrust investigations of oil company practices. Political risk, at least if it were to be measured in terms of senior management time, shifted to the industrial countries, particularly in the United States. The hallowed depletion allowance, which reduced the tax on oil production, was sharply curtailed; to a lesser degree, so was the foreign tax credit, the “golden gimmick” that had been put to such good use after World War II to facilitate oil development in Venezuela and the Middle East and protect the American position in both places. There were continuing efforts in Congress to roll back oil prices and even stronger political pressure to keep down natural gas prices. No less a threat was the movement for “divestiture,” by which was meant the breaking up of the integrated companies into totally separate firms for each segment of the business: crude oil and natural gas production, transportation, refining and marketing. At one point, forty-five out of one hundred Senators voted in favor of divestiture. The opinion of the oil industry on this particular movement was summed up by the term it preferred to use—“dismemberment.”

And then there were the constant attacks on those “obscene profits.” What were the facts underlying this matter of great contention and anger? The profits of the largest oil companies had been almost perfectly flat for the five years through 1972, despite the explosive growth in demand. Profits then rose from $6.9 billion in 1972 to $11.7 in 1973, and shot up to $16.4 billion in the banner year of 1974. The reasons were several. Much of the immediate increase was derived from foreign operations. As the exporting countries pushed prices up, the companies got a free ride in terms of the increases on the non-U.S. equity oil they still owned. The value and market prices of their American oil reserves also went up. Moreover, they had bought oil at lower prices, say $2.90, before the increases, and had it in inventory, and then made money when they finally sold that same oil at $11.65. Their chemical operations had also done well, helped by a weak dollar. But then profits dropped back to $11.5 billion in 1975, lower than 1973. Again, the reasons were several. Overall oil demand was down because of a recession. The exporting countries noticed the profits that the companies were making on equity oil, and hurriedly proceeded to raise taxes and royalties to ensure that rents went into their treasuries and not to the companies. That was the year, as well, that some tax advantages were curtailed. Over the next few years, profits rose again, reaching $15 billion in 1978, which in real terms meant that they were just about keeping up with inflation. The companies’ profits were huge in absolute terms, but their rates of return were, except for 1974, somewhat below the average rate for all American industry.

One other feature of the profitability picture was significant. Profits were concentrated in the upstream part of the business—crude oil and natural gas production. The value of the reserves the companies had in places like the United States and the North Sea had increased with the price of oil. The downstream—refineries, tankers, gasoline stations, and so forth—had been built before 1973 on expectations of 7 to 8 percent annual growth in oil demand. Actual demand was much lower, and thus capacity in the downstream was bloated far beyond requirements. A third of the total tanker fleet was in surplus. This overcapacity, combined with the loss of equity crude in the Middle East, made the international oil companies start to question the rationale and value of the large downstream systems they had built up in Europe in the 1950s and 1960s for the disposal of Middle Eastern oil—the oil that had now been taken away from them.2

The United States Energy Policy: “Chinese Water Torture”

Despite the surprisingly strong consensus and continuity of the Nixon, Ford, and Carter Administrations on the lines of international energy policy, no similar agreement existed in domestic politics. On the contrary, the domestic side of the energy equation continued to be marked by a divisive, angry, bitter, confused debate about price controls, and about company practices and policies. Nixon had resigned from office in August 1974, but the Watergate debacle had left a crippling crisis of confidence in government and a pervasive suspicion about the energy crisis itself.

Oil and energy were already well on the way to becoming the hottest cauldron in national politics, made all the more difficult by the “threat” to the American way of life and the high stakes in terms of power and money. Back in August 1971, in an effort to stamp out inflation (then running at almost 5 percent, considered unacceptably high), Nixon had imposed price controls on the entire economy. Most controls were allowed to expire by 1974, but not those on oil. Instead, the politics and intense pressures of the time gave rise to an awesome Rube Goldberg system of price controls, entitlements, and allocations that made the mandatory oil import program of the 1960s appear, by comparison, to have the simplicity of a haiku.

The public wanted Washington to do “something”—and the something was to return prices to the good old days but at the same time, assure adequate supplies. Markets were confused and distorted, with unforeseen consequences continually arising from each decision. “For every problem you solve, it seems you create two more,” moaned one government regulator. Those who figured out how to work the system could do very well. For instance, acquiring entitlements to crude oil supplies became a big business, and the result was the bringing out of mothballs any piece of “refining junk” that could be found—leading to the return of hopelessly inefficient “tea kettle” refineries of the kind that had not been seen since the flood of oil in the East Texas field in the early 1930s. The various programs gave rise to much wasted motion, endless Congressional hearings, and so much work for attorneys as to comprise one of the great “lawyer’s relief” programs of the century. As one scholar has written, “For the oil industry, the Federal Register became more important than the geologist’s report.” Whatever the short-term gains in terms of equity, the costs were enormous in terms of the inefficiencies, the confusion in the market, diversion of efforts, and misallocation of resources and time. Just the standard reporting requirements for what became the Federal Energy Administration involved some two hundred thousand respondents from industry, committing an estimated five million man-hours annually. The direct costs of the regulatory system—measured simply in terms of expenditures by government agencies and by industry on regulatory matters—added up to several billion dollars in the mid-1970s. The entire regulatory campaign did less to boost the national weal than to cause a chronic migraine of immense proportions in the nation’s politics. But such was the temper of the times.

Meanwhile, something big did have to be done. In January 1975 President Gerald Ford, picking up on Nixon’s Project Independence theme, proposed a grand ten-year plan to build 200 nuclear power plants, 250 major coal mines, 150 major coal-fired power plants, 30 major oil refineries, and 20 major synthetic fuel plants. Not long after, Vice-President Nelson Rockefeller, grandson of the man who personified the monolith of oil, championed an even grander $100 billion program to subsidize synthetic fuels and other high-cost energy projects that commercial markets would not support. But opponents challenged the cost of these projects, and the Rockefeller initiatives came to naught. There were, however, two highly significant achievements during the Nixon-Ford years. In the immediate aftermath of the embargo, Congress gave a green light to the Alaskan oil pipeline. The project ended up costing ten billion dollars. Environmentalists said that the delays and the reconsiderations had led to a safer and more environmentally sound pipeline. As it was, TAPS—the Trans-Alaskan Pipeline—made possible what proved to be the single most important new contribution to American energy supply since Dad Joiner’s discovery of the East Texas field in the 1930s.

The other landmark was the setting in 1975 of fuel efficiency standards for the automobile industry. According to the new standards, the average fuel efficiency of a new car would have to double over a ten-year period, from its then-current 13 miles per gallon to 27.5 miles per gallon. Since one out of every seven barrels of oil used in the world every day at that time was burned as motor fuel on America’s roads and highways, such a change would have a major impact not only on America’s but also on the world’s oil balance. The legislation that included the fuel efficiency standards also established a strategic petroleum reserve: the same idea that Eisenhower had proposed after the 1956 Suez crisis, and that the Shah had tried to sell to the United States in 1969. The plan was excellent; such a reserve would provide the surge capacity to compensate for any interruption of supply. In practice, however, the rate at which the reserve was built up turned out to be fatally slow.3

In 1977, Jimmy Carter became President, having campaigned as an outsider who would bring moral renewal to the fallen, Watergate-besmirched politics of America. Energy was a subject that had engaged his attention many years earlier. He had been a submariner in the United States Navy, and he always remembered a warning that Admiral Hyman Rickover, the father of the nuclear submarine, had once delivered about how humanity was exhausting nature’s stock of oil supplies. During the campaign, Carter had promised a national energy policy within ninety days of inauguration day, and he was dedicated to making good on his word.

He gave the job to James Schlesinger, a Ph.D. economist, who had originally made his name as a specialist on the economics of national security. Schlesinger combined a powerful analytic intelligence and a strong sense of duty with what has been described as “intellectual zeal and moral fervor.” He held clear views about what was right when it came to policy and to governance, and he did not hesitate or beat around the bush when it came to expressing them. He had little patience himself for easygoing give-and-take, and he could certainly try his opponents’ patience. He would lay out his thinking in a slow, spare, emphatic manner that sometimes seemed to suggest that his auditors, be they generals or senators or even presidents, were first-year graduate students who had failed to understand the most self-evident theorem.

Richard Nixon had plucked Schlesinger from the Rand Corporation for the Bureau of the Budget, then to be chairman of the Atomic Energy Commission, then made him director of the Central Intelligence Agency, but soon after switched him to Secretary of Defense. On a fine Saturday or Sunday morning, however, he could be found in the countryside around Washington, binoculars in hand. He was not out in his professional capacity, looking for Russians, but pursuing his hobby of bird watching, about which he was passionate. His tenure at the Defense Department came to an end under Gerald Ford, when Schlesinger took exception to Kissinger’s détente policy and to the American posture regarding South Vietnam’s last agony leading up to the fall of Saigon—and made his feelings abundantly clear in Cabinet meetings. After the Democratic National Convention in 1976, Jimmy Carter phoned Schlesinger and invited him to the Carter home in Plains, Georgia, to talk politics and policy. Schlesinger was a close friend of Senator Henry Jackson, who was after all the single most important Senator when it came to energy, and had been Carter’s rival for the nomination. After the election, Jackson pressed Carter to make Schlesinger the energy champion for the new Administration. Carter was more than willing. Not only was he impressed by Schlesinger, but as Schlesinger himself later commented, “It was kind of convenient if the chairman of the Senate Energy Committee was a pal of your proto-energy secretary.”

During the first weeks of the Carter Administration, “energy” was cast as its number-one issue. Carter read a CIA report, prepared in late 1976, predicting future oil shortages; he found it compelling and persuasive, and it was important in motivating him to proceed in the way he did. Schlesinger, like Carter, was convinced that hydrocarbons would be under growing pressure, which posed major economic and political dangers for the United States. To be sure, Schlesinger, an economist, did not believe in absolute depletion, but rather that prices would inevitably rise, balancing the market. Both men shared a deep concern about the foreign policy implications of a tight oil market. As Carter wrote in his memoirs, many Americans, obviously including Jimmy Carter and James Schlesinger, “deeply resented that the greatest nation on earth was being jerked around by a few desert states.”

In 1972, well before the crisis and while he was still chairman of the Atomic Energy Commission, Schlesinger had expressed a then-heretical idea: that the United States should promote energy conservation on grounds of national security, foreign economic policy, and environmental improvement. “We can do somewhat better than automobiles that move at 10 miles to the gallon and badly insulated buildings that are simultaneously heated and cooled,” he had said then. Indeed, he had advised environmentalists that the “heart” of their case should be “challenging the presupposition” that “demand for energy grows more or less automatically.” Now, in 1977, he was more convinced than ever that conservation should be central to any energy policy. Unfortunately, that premise was considerably more obvious to him than to many others.

The new Administration remained committed to unveiling its all-encompassing energy program within the first ninety days. Such haste did not leave enough time to build the requisite consensus and working relationships not just with committee chairmen in the Congress, but also with a broader base of interested Congressmen—or, indeed, even within the Administration. The development of the programs themselves was kept as secret as possible. Moreover, Schlesinger had to devote a third of those first ninety days to moving emergency natural gas legislation, in order to help relieve the shortages of 1976–77, and additional time on the legislation setting up the Department of Energy. With so much else happening, Schlesinger asked Carter to consider relenting on the ninety-day commitment. “I said 90 days,” Carter firmly replied. “I made the pledge and I intend to keep it.”

Yet Carter himself was not altogether happy with the emerging energy plan. “Our basic & most difficult question is how to raise the price of scarce energy with minimum disruption of our economic system and greater equity in bearing the financial burden,” he wrote in a note to Schlesinger. “I am not satisfied with your approach. It is extremely complicated.” To drive home his complaint, Carter plaintively added, “I can’t understand it.”

The plan was due to be unveiled in early April in a major Presidential address. The Sunday before, Schlesinger appeared on a television interview show, in which, trying to find a metaphor to capture the magnitude of the energy challenge, he recalled a quotation from William James—“the moral equivalent of war.” It turned out that the viewers that Sunday included Jimmy Carter, who was impressed by the phrase and put it into his speech. Thus, Carter, appearing in a cardigan for a fireside chat to the nation in April 1977, introduced his energy program as the “moral equivalent of war”; and by that sobriquet it would often thereafter be known. Its detractors preferred to use the acronym—“Meow.”

The Carter program included a host of initiatives aimed at reshaping America’s energy position, introducing economic rationality into pricing, and reducing the need for imported oil. In Schlesinger’s mind, the number-one priority was to find a way to let domestic oil, which was under price controls, rise to world market prices so that consumers could react to correct price signals. The current system blended the price-controlled domestic oil and the higher-priced imported oil into the final price that consumers paid, which really meant that the United States was subsidizing imported oil. Thus, the Carter program promulgated a procedure to end price controls on domestically produced oil through a “crude oil equalization tax.” There was some irony here, as it had been the Republican Administration of Richard Nixon that had originally imposed price controls in August 1971, and it was now a Democratic Administration that was trying to lift them. Carter and Schlesinger also sought an ingenious, if very complex, method for extracting the country from the straitjacket of natural gas price controls. The Administration put much greater emphasis than its predecessors on conservation and on the use of coal. It sought to introduce some competition into the electricity sector and to encourage the development of alternative and renewable energy sources, including solar power.

The Administration was proceeding as though there was a crisis that would rally the nation; the public, however, did not think there was a crisis. And, in the course of pushing his program, Carter received a firsthand education in how special interests operate in the American system, including liberals, conservatives, oil producers, consumer groups, automobile companies, pro- and antinuclear activists, coal producers, utility companies and environmentalists—all with conflicting agendas. To Schlesinger, however, the issue was absolutely clear. The United States faced “a substantial long-run national problem.” He did not think that the world was about to run out of oil, but rather that the high growth rates in consumption that had supported economic development in the 1950s and 1960s could no longer be sustained. “We had to stop depending on crude oil for economic growth,” he would later explain. “We had to wean ourselves away.” Confident in his rigorous analysis of the issue, he was unprepared for the storm of debate and the bitterness of the ensuing battles. Sitting through one Congressional hearing after another, he came to recall a word of advice that an old veteran at the Atomic Energy Commission had given him when he was its chairman: “There are three kinds of lies—lies, damn lies, and energy lies.” Later, Schlesinger would say, “I have a sort of World War II mentality. If the President says something is in the national interest, I had assumed he would get a more supportive response than we found. But there had been a change in the nation. As Secretary of Defense, everyone not against you is with you. Here, on energy, you had interest groups against interest groups. You couldn’t put a consensus together. It was distressing.”

Of all the energy issues, natural gas proved to be the most contentious and intractable. For the Carter Administration had walked right into the middle of a decades-old political and almost theological struggle over natural gas pricing, and whether that price should be controlled by government or set by the market. So bitter was the argument that Schlesinger was moved to observe during the Senate-House conference meetings on natural gas, “I understand now what Hell is. Hell is endless and eternal sessions of the natural gas conference.” Yet, somehow, a compromise, a very intricate one, was arranged. Natural gas prices would be allowed to increase in limited increments. Some gas, currently controlled, would be decontrolled, while some gas that was decontrolled would be recontrolled for a time and then decontrolled again. A number of different categories for pricing purposes were created for a commodity that, for the most part, was composed of the same standard molecules of one carbon atom and four hydrogen atoms.

Despite all the bloody political battles, and the consequent exhaustion of much of its political capital, the Carter Administration could claim a series of important accomplishments on the energy front. “Passage of the National Energy Act represents a watershed in that it starts the adjustment of our demands to the means available,” Schlesinger told a London audience. “The turn in the road is forced upon us—all of us—by the limits, physical and political, on prospective oil supplies.” But, as he looked back on the almost two years of struggle that had followed Carter’s initial call to action, Schlesinger could not help but ruefully observe, “The response was less close to William James’ moral equivalent of war than to the political equivalent of the Chinese water torture.”4

Boom Times

By the end of 1978, the post-embargo policies elsewhere, as in the United States, were just beginning to make their influence felt. There was, however, one reaction to the embargo that was virtually instantaneous. The price hikes, the expectation of future increases, much-expanded cash flows, and the eagerness of investors—all combined to ignite a frenetic and inflationary global hunt for oil. When asked to characterize the worldwide craze, Exxon’s deputy exploration manager summed it up simply: “It’s just wild.” What had been a depressed exploration business up through 1972 was now running at capacity, and the cost of everything, be it a semisubmersible drilling rig or a dynamically positioned drilling ship or just an old-fashioned land crew in Oklahoma, was bid up to double what it had been in 1973.

Moreover, the flow of investment was redirected in a very substantial way. The number-one commandment was to avoid, at all costs, nationalism in the Third World. In any event, exploration in most of the OPEC countries was fore-closed because of nationalization, and there was a rather strong presupposition that, if a company had success in other developing countries, the fruits would be seized before they could be ingested, leaving only small pieces and bits for the company. So the companies redirected their exploration spending, to the degree possible, to the industrial countries of the Western world: to the United States, despite a growing pessimism about its oil potential, to Canada, and to the British and Norwegian sectors of the North Sea. In 1975, Gulf undertook a complete review of its global budget. Every investment dollar that was not nailed down and committed was quietly yanked out of the Third World and brought back to North America and the North Sea. By 1976, Royal Dutch/Shell was concentrating 80 percent of its worldwide, non-U.S. production expenditures in the North Sea. “After 1973 and nationalization, you had to go hunt your rabbits in a different field,” recalled an Exxon executive, “and we went to places where we could still obtain equity interests, ownership, in oil.”

The oil companies also began to diversify into totally different businesses. This was somewhat difficult to justify at the same moment that the companies were calling for the lifting of price controls on the basis that they needed all the money they could get to invest in energy and, indeed, undermined their case. But the diversification reflected the view that the business and political environment for oil companies might grow more and more narrow, more and more harsh, more and more constrained by government intervention and regulation. There was something else, as well, a more-than-nagging fear that the days of oil companies, and oil itself, might be numbered by geological depletion. Between 1970 and 1976, proven American oil reserves dropped by 27 percent, and gas reserves by 24 percent. It seemed that the United States was about to fall off the oil mountain. Though the actual investments outside the energy business were small when compared to the overall financial wherewithal of the companies, they were still large dollar commitments. Mobil bought the Montgomery Ward department store chain, Exxon went into office automation, and ARCO into copper. But nothing aroused so much mirth and derision as Gulf’s bid for the Ringling Bros, and Barnum & Bailey Circus. That, more than anything else, did seem to prove that the clamorous new era—of OPEC’s imperium and high oil prices, of confusion, bitter debates, and energy wars in Washington—really was a circus.5

New Supplies: Alaska and Mexico

OPEC continued to dominate the world oil market throughout the 1970s. It accounted for 65 percent of total “free world” oil production in 1973 and 62 percent in 1978. But, though not yet too obviously, its grip was beginning to loosen. The incentive of price and the motive of security were stimulating oil development outside OPEC, and in a matter of years, these new sources would transform the world’s oil supply system. While the activity was spread out all over the world, three new oil provinces would have overwhelming influence: Alaska, Mexico, and the North Sea. Ironically, each had been identified before the 1973 price hike but had not yet been developed because of various mixtures of politics, economics, environmental opposition, technical obstacles, and the simple factor of time, the long leads required by major energy projects.

With the emergency go-ahead on the Alaskan pipeline in the weeks after the embargo, the work there could at last begin. The steel pipe and tractors, so optimistically purchased in 1968, conveniently still sat waiting on the frozen banks of the Yukon River, and the engines in the tractors had been dutifully turned over on schedule for the last five years. Now they could be used, and work proceeded rapidly. By 1977, the eight-hundred-mile pipeline had been completed, some parts of it suspended on stilts above the tundra, and the first oil had made the journey from the North Slope to the shipping port at Valdez on Alaska’s southern coast. By 1978 over a million barrels per day were flowing through the line. Within a few years, the flow would be two million barrels per day, a quarter of America’s total crude oil production.

In Mexico, after the fiery nationalization battle of the late 1930s, the oil industry had turned inward. No longer did Mexico strive to be one of the world’s great exporters. Instead, Pemex, the national oil company and the embodiment of Mexican nationalism, devoted itself to supplying the domestic market. Pemex was also subject to a struggle for control between the government and the powerful oil workers’ union, which happened, and not by coincidence, to be in the unusual position of being one of the leading contractors to Pemex. For decades, Pemex was a company under pressure. Its income was limited by the low domestic prices. Its development program was directed by cautious engineers, who were guided by a conservationist ethic based on the conviction that resources should be husbanded for future generations. Pemex did relatively little to expand its reserve base. While production rose, it could not keep up with the demands of the rapid growth of the “Mexican economic miracle.” As a result, Mexico not only ceased being an exporter but actually became a minor oil importer, though, to save face, a good deal of effort went into disguising that fact when, for instance, it hurriedly had to buy a cargo of Venezuelan crude from Shell.

In search of more oil, Pemex launched a deep-drilling exploration program in the rolling savannahs in the southern state of Tabasco. In 1972, oil was struck in what proved to be an extraordinary structure called Reforma. The highly productive wells in the Reforma fields led to the region’s being dubbed “Little Kuwait,” and discoveries there were soon followed by further very large discoveries in the adjacent offshore area, the Bay of Campeche.

It was becoming clear that Mexico possessed world-class oil reserves. In 1974, the country started, in a very small way, to sell petroleum abroad again, though the export of oil was criticized by some as running against the tenets of Mexican nationalism. While production was rising, the engineers in Pemex continued to be very cautious in their estimates of reserves through the last years of the Presidency of the radical, nationalistic Luis Echeverría Álvarez. But matters changed with the election of a new President, José López Portillo, in 1976. López Portillo, who had been Echeverría’s Minister of Finance, inherited an economic crisis that was Mexico’s worst since the Great Depression. The Mexican economic miracle had run out of gas, the economy had stalled, the value of the peso had collapsed, and the country was regarded as a poor risk by international lenders. To make matters worse, the population was growing faster than the economy—one out of every two Mexicans was under the age of fifteen—and 40 percent of the workforce was either unemployed or underemployed. In the months before López Portillo actually took over, conditions were so bad that there were even rumors of a possible military coup.

The new oil was a godsend. So was the 1973 price shock, which made that oil much more valuable. López Portillo decided to put the new discoveries to work as the central element in a new economic strategy. He appointed an old friend, Jorge Díaz Serrano, as the head of Pemex. Unlike his predecessor, an engineer whose specialty had been bridge construction, Díaz Serrano knew the oil industry. He had become a millionaire supplying it with services, and he grasped the potential that was now at hand. Oil would provide Mexico with its desperately needed foreign earnings, if would remove the constraint of the balance of payments on economic growth, it would provide the collateral for new international borrowing, and it would put Mexico at the center of the new oil-based international economy. In short, it would be the engine of renewed growth.

President López Portillo, however, offered a word of caution: “The capacity for monetary digestion is like that of a human body. You can’t eat more than you can digest or you become ill. It’s the same way with the economy.” But López Portillo’s actions spoke considerably louder than his words, and with quite a different accent. Investment, much of it borrowed from abroad, was poured into the industry. The proving and expanding of reserves was pushed at a rapid rate; officially sanctioned rumors were floated of greater and greater and still greater oil potential. Production proceeded at a breakneck pace, even ahead of plan. Daily output rose from 500,000 barrels in 1972 to 830,000 barrels in 1976 to 1.9 million barrels in 1980—almost a fourfold increase in less than a decade.

Whereas Mexico had been a country to be avoided by international lenders through 1976, it now became one of the most active borrowers in the world. “Why the Bankers Suddenly Love Mexico” was the title of an article in Fortune. The reason, of course, was oil. “Every Tom, Dick, and Harry in banking is knocking on their door,” said the vice-chairman of Manufacturers Hanover Trust. One Mexican official was even chosen “borrower of the year” in 1978 by a New York financial newsletter. The title might well have been won by the whole country. There seemed to be no restraint: The Mexican government was borrowing from abroad, Pemex was borrowing, other state companies were borrowing, private firms were borrowing, everyone was borrowing from abroad. How much was being borrowed altogether? No one knew. But it didn’t seem to matter. Mexico’s credit, lodged in oil, was good. Or so the bankers and their Mexican counterparts thought. But one thing was certain: Mexico had become a major new force in the world oil market, as it had not been since the 1920s, and it would provide yet another significant alternative source of supply, undermining the OPEC Imperium.6

The North Sea: The Biggest Play of All

For many centuries, fishermen had the North Sea to themselves, to catch the herring that was Northern Europe’s biggest business in the Middle Ages, and then more recently the haddock and cod. But by the middle 1970s, a new breed of seafarer could be seen from a helicopter on the waters below: floating drilling rigs, supply boats, platforms, pipe-laying barges—singly at first, and then in such profusion, at times, as almost to crowd the sea. Here on the waters of the North Sea, between Norway and Britain, was the biggest new play for the world oil industry, and its single greatest concentration of capital investment and effort. No major company dared to be left out, and many new players were drawn in, ranging from industrial companies to staid Edinburgh investment trusts to Lord Thomson, the newspaper tycoon, who owned the Times of London. He was a partner of Armand Hammer.

Ever since 1920, thousands of onshore wells had been drilled by the hopeful in Western Europe. The results had been distinctly disappointing; total production in the area never exceeded 250,000 barrels per day. The Suez crisis of 1956 gave a new boost to the search for secure oil and gas resources in Europe; and in 1959, at Groningen in Holland, Shell and Esso had discovered a vast gas field, the largest then known outside the USSR. Realizing that the geology of the North Sea matched that of Holland, the oil companies began to explore in adjacent waters. In 1965, the same year that Britain and Norway formally agreed on how to divide the North Sea right down the middle between them, insofar as mineral rights were concerned, major natural gas deposits were found in the relatively shallow southern reaches of that sea; and platforms comparatively primitive by future standards were built to exploit the gas. Some companies continued exploring for oil, with, at best, what might be described as mild interest, but hardly with eagerness.

Phillips Petroleum from Bartlesville, Oklahoma, was among them. Its interest had been piqued in 1962, when the company’s vice-chairman, while on a vacation in the Netherlands, had noticed a drilling derrick near Groningen. Two years later, after the company’s senior executives spent an afternoon crawling around and examining three hundred feet of seismic data unrolled on the company’s basketball court in Bartlesville, Phillips decided to pursue an exploration program. But half a decade later, in 1969, after a string of dry holes, the company was ready to call it quits. Including Phillips’s own efforts, some thirty-two wells had been drilled on the Norwegian continental shelf, and not one of them was commercial. And hole for hole, the North Sea was much more expensive and much more difficult than anything else the company had ever tried. The message from Bartlesville to Phillips’s managers in Norway was clear: “Don’t drill any more wells.”

But in the grand tradition that stretched back to Colonel Drake’s well in Pennsylvania in 1859 and the first discovery in Persia in 1908, Phillips reluctantly decided to give it one more go—but only because it had already paid for the use of a rig, the Ocean Viking, and could not find anyone else who wanted to sublease it. Phillips would have to pay the daily charges whether the rig was drilling or not. The weather was getting bad, and the seas were rough. At one point, the rig broke off from its anchors and began to drift away from the bore hole. On another night, it became so stormy that a capsize was likely and an emergency evacuation of the rig was initiated at the first daylight. But the Ocean Viking did the job; in November 1969, it made a major find on Block 2/4 in the Ekofisk field, on the Norwegian side of the median line. That happened to be a great moment for technology; American astronauts had just landed on the moon. As the drilling superintendent on the Ocean Viking examined an oil sample brought up from a depth of 10,000 feet beneath the seabed, he was quite amazed by its appearance, which bespoke a very high quality. “What the astronauts have done is great,” he said to the rig’s geologist, “but how about this?” He held up the oil; it had a golden sheen, almost transparent, but definitely almost like gold.

Phillips’s discovery set all the companies to re-evaluating their seismic data and stepping up their activity. No longer would any orphan drilling rigs go begging for employment in the North Sea. Some months later, a senior Phillips executive was excitedly asked at a technical meeting in London what methods Phillips had used to diagnose the geology of the field.

“Luck,” he replied.

Toward the end of 1970, British Petroleum announced the discovery of oil in the Forties field, on the British side, one hundred miles northwest of Ekofisk. It was a huge reservoir. A series of major strikes followed in 1971, including Shell and Exxon’s discovery of the huge Brent field. The North Sea oil rush was on. The 1973 oil crisis turned the rush into a roar.

Fortunately, a new generation of technology was either available or under development that would allow production to proceed in the North Sea, a province of the sort that the industry had never before attempted. The whole venture was risky and dangerous—physically and economically. Drilling rigs had to be able to work through water depths much greater than anything tried heretofore, and then still drill another four miles under the seabed. And all the equipment and workers had to cope with a nasty and vicious sea and some of the worst weather in the world. “There’s nothing quite as vile as the North Sea when she’s in a temper,” was the lament of one skipper. Not only was the weather bad, but it could change three or four times a day; a sudden storm could brew up in hours; waves of fifty feet and winds of seventy miles an hour were not uncommon. The permanent platforms through which the oil was pumped—really small industrial cities set on man-made islands—not only had to stand on mud, quicksand, clay, and sand wave bottoms, but also had to be built to withstand the fury of a “100-year wave,” ninety feet high, as well as winds of 130 miles per hour.

Altogether, the development of the North Sea was one of the greatest investment projects in the world, made all the more expensive by rapidly inflating costs. It was also a technological marvel of the first order. And it was carried out in an amazingly expeditious manner. On June 18, 1975, the British Secretary of State for Energy, Anthony Wedgwood Benn, turned a valve at a ceremony on an oil tanker in the estuary of the River Thames. The first North Sea oil, from the Argyll field, flowed ashore to a refinery. Publicly, Benn enthusiastically declared that June 18 should from then on be a day of national celebration. Personally, however, he did not enjoy the inaugural event at all. Benn was a leader of the left wing of the Labour party with a passion for nationalization and an inbred detestation of capitalism, especially as it was represented by the oil industry, and was extremely distrusting by nature. He sourly noted in his diary that he had been forced to participate in the ceremony in the company of “a complete cross-section of the international capitalist and British Tory establishment.” And when he turned the valve, the oil “allegedly went on shore,” he added with great suspicion.

Benn found a much greater outlet for his animosity toward oil companies, for he was playing a leading role in Britain in replicating the traditional battle between governments and oil companies. The North Sea reserves had been proved and the risks greatly reduced; whereupon the British government had decided that it, too, like many other governments, wanted a larger share of the rents, along with more control over its “destiny,” and perhaps outright nationalization. “Oil companies can jump over national boundaries to save on taxes more easily than a kangaroo pursued by a dingo can jump over a fence,” complained Lord Balogh, Benn’s Minister of State. The result of the struggle was a special tax on oil revenues and the establishment of a new state oil company, British National Oil Corporation. It now held title to the government’s participation oil, reflecting the right to buy 51 percent of North Sea production, and was meant to be the national champion. The British government’s push for more revenues and more control of North Sea oil led the head of one company finally to explode, “I don’t see any difference any more between those OPEC countries and Britain.”

In some ways, that same thought was on the mind of Harold Wilson, Britain’s Prime Minister. He was sitting in a second-floor study at 10 Downing Street, puffing on his pipe, in the summer of 1975, a few weeks after the celebration over the first barrels of North Sea oil. Wilson had already had one of the longest-running tenures as Prime Minister. He had also made a major contribution to political theory with a line that deserved to be engraved on the wall of every parliament and congress around the world: “In politics, a week is a long time.” Wilson had first come to power in 1964 with a promise to lead stagnant Britain into the “white heat of the technological revolution,” but now, a decade later, it was the technology of oil development, not computers and aerospace, that seemed Britain’s best economic bet. That particular summer day, Wilson was ruminating on how Britain’s oil production could grow from a trickle to perhaps two and a half million barrels per day, transforming Britain’s economic prospects and certainly affecting the balance of oil power in the world. He was already thinking like the prime minister of an oil country. At the time the Ford Administration was campaigning against higher oil prices. “We do have an interest in seeing that the price of oil doesn’t fall too much,” Wilson said. “If America wanted to really bring down the price, not many people here would necessarily agree.”

There was a great irony in all this. Wilson was sitting in a room that had been used by Anthony Eden two decades earlier, at the time when Eden struggled over what to do about Suez, Nasser, nationalism, and the threats to Britain’s oil supply. So grave was the perceived threat in 1956 that Eden had decided to use military force in the form of the aborted attack on the Canal Zone, which did so much to end the historic European role in the Middle East—and, certainly, Eden’s career. Wilson faced no such fate. In fact, he confessed an ambition that might have shocked Eden. As leader of a newly emerging major oil power, Wilson genially said, he hoped he might be chairman of OPEC by 1980.7

“The Crunch”

One peculiar result of the price shock of 1973 was the rise of a new line of work—oil price forecasting. Before 1973, it had not really been necessary. Price changes had been measured in cents, not dollars, and for many years prices were more-or-less flat. After 1973, however, forecasting blossomed. After all, oil price movements were now decisive not only for the energy industries, but also for consumers, for a multitude of businesses from airlines to banks to agricultural cooperatives, for national governments, and for the international economy. Everybody now seemed to be in the forecasting business. Oil companies did it, governments did it, central banks did it, international organizations did it, brokerage houses and banks did it. Indeed, one might have been reminded of the Cole Porter refrain: “Birds do it, bees do it, even educated fleas do it.”

This particular kind of forecasting, like all economic forecasting, was as much art as science. Judgments and assumptions governed the predictions. Moreover, such forecasting was much affected by the “community” in which it was done; thus, it was also a psychological and sociological phenomenon, reflecting the influences of peers and the way individuals and groups groped for certainty and mutual comfort in an uncertain world. The end result was often a strong tendency toward consensus, even if the consensus completely changed its tune every couple of years.

Certainly, by 1978, such a consensus could be observed throughout the community of oil forecasters and among those who made decisions based on those forecasts: While Alaska, Mexico, and the North Sea would together add six to seven million barrels per day to world markets by the early or mid-1980s, those new sources were expected to serve only as a supplement and a sort of modern-day Fabius, holding off and postponing, but not decisively banishing the inevitable day of shortage and reckoning. For, most forecasters agreed, another oil crisis was highly probable a decade or so hence, in the second half of the 1980s, when demand would once again be at the very edge of available supply. The result, in popular parlance, was likely to be an “energy gap,” a shortage. In economic terms, any such imbalance would be resolved by another major price increase, a second oil shock, as had happened in the early 1970s. Though variations were to be found among the forecasts, there was considerable unanimity on the central themes, whether the source was the major oil companies, the CIA, Western governments, international agencies, distinguished independent experts, or OPEC itself. Not only were the forecasters convinced, so were the decision makers who relied on the forecasts to make their policies and investments and choose their course of action.

The single most important assumption underlying this common view was the belief in the “Iron Law”—that is, that there was an inevitably and inescapably close relationship between economic growth rates and the growth rates for energy and oil use. If the economy grew at 3 or 4 percent a year, as was generally presumed, oil demand would also grow by 3 or 4 percent a year. Another way of putting it was that income was the main determinant of energy and oil consumption. And the facts, as measured in 1976, 1977, and 1978, seemed to bear out this assessment. Economic growth in the industrial world had rebounded from the deep recession and averaged 4.2 percent in those three years; oil demand had grown at an average rate of about 4 percent. The picture of the future world that thus emerged was a projection of the then-current circumstances: Growing economies would continue to call upon growing volumes of oil. Economic progress in developing countries would add to the demand. The future effects of conservation were discounted. The stage would be set for a repetition of 1973.

Ahmed Zaki Yamani, the leading proponent of a Long-Term Strategy for OPEC, began to depart from his customary advocacy of price stability and instead argued for regular, small increases in the price that would encourage conservation and development of alternative sources. This, he said, was much preferable to and less destabilizing than the wrenching increase in price that had become the common expectation. “From our own studies and from all the reliable studies I have read,” he said in June of 1978, “there are very strong indications that there will be a shortage of supply of oil sometime around the mid-1980s if not before…. No matter what we do, that date is coming.”

Yamani was expressing what had become the general informed outlook in both the oil-importing and the oil-exporting countries. Even in Washington, some, looking at the falling real price of oil and the rising demand, had begun to think that modest price increases sooner might spare much agony later. The crunch would surely come in a decade, give or take a year or two. But it was also generally agreed that conditions did not point to any major price increases in the near term. That was a view based upon looking at the economics. Politics, of course, was something else; politics was never easy to fit into models that dealt with economic growth rates and elasticities of demand. Yet it could not be disregarded. And politics was not about to allow anyone the luxury of a long-term strategy.

On the last day of 1977, President Jimmy Carter, en route from Warsaw to New Delhi in the course of a hectic three-continent trip, arrived in Tehran. He said he had asked Mrs. Carter where she wanted to spend New Year’s Eve, and she had said with the Shah and his wife, so delightful a time had the Carters had when the royal couple visited Washington six weeks earlier. Yet there were reasons of realpolitik as much as sentiment behind their choice. Carter had been impressed by the Shah. The Shah, for his part, was taking significant steps toward liberalization and was talking about human rights. With a new understanding between the two men, Carter was now in a position to better appreciate the strategic role of Iran and its leader than when he had first come into office. Iran was a fulcrum country, essential to stability in the region. It was a critical element in counterbalancing Soviet power and ambitions in the area, as well as those of radical and anti-Western forces. It was central to the security of the world’s oil supplies, both as one of the world’s two major exporters and as a regional power.

Carter also wanted to show his gratitude to the Shah for his progress on human rights and his switch of position on oil prices, which was seen as a major concession on the part of the monarch. Moreover, the President was regretful and embarrassed over the rioting and tear gas that had greeted the Shah’s arrival on the South Lawn of the White House, and he wanted to clear up any misunderstandings, within Iran and outside the country, and firmly underline American support. So, at a New Year’s Eve banquet, he rose to offer a memorable toast. “Iran, because of the great leadership of the Shah, is an island of stability in one of the more troubled areas of the world,” he said. “This is a great tribute to you, Your Majesty, and to your leadership, and to the respect and the admiration and the love which your people give you.” On that strong and hopeful note, the President and the Shah welcomed the momentous New Year of 1978.

Not everyone saw the same island of stability that the President had described. Shortly after Carter’s visit, the president of one of the independent American oil companies active in Iran came back from a trip to Tehran. He had a confidential message he urgently wanted to share with one of his directors. “The Shah,” he said, “is in big trouble.”8

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