Modern history


The Second Shock: The Great Panic

A WEEK AFTER Jimmy Carter’s departure from Iran, a Tehran newspaper published a savage attack on an implacable opponent of the Shah’s, an elderly Shiite cleric named Ayatollah Ruhollah Khomeini, who was then living in exile in Iraq. The article, though anonymous, appeared to be the work of an official of the Shah’s regime. Perhaps the Carter visit had bolstered flagging confidence. Certainly the article was already in the works, for exasperation was increasing with Khomeini’s own harsh attacks on the Shah’s government, which were being circulated clandestinely in cassettes throughout Iran.

Animosity between the royal house of Iran and the fundamentalists of the dominant Shia Islamic sect dated back to Reza Shah’s fierce battle for power with the Shiite clergy in the 1920s and 1930s and was part of a much larger struggle between secular and religious forces. But that newspaper article of January 7, 1978, triggered a wholly new stage in the struggle.

Disillusion and Opposition

It had become evident in the mid-1970s that Iran simply could not absorb the vast increase in oil revenues that was flooding into the country. The petrodollars, megalomaniacally misspent on extravagant modernization programs or lost to waste and corruption, were generating economic chaos and social and political tension throughout the nation. The rural populace was pouring from the villages into the already-overcrowded towns and cities; agricultural output was declining, while food imports were going up. Inflation had seized control of the country, breeding all the inevitable discontents. A middle manager or a civil servant in Tehran spent up to 70 percent of his salary on rent. Iran’s infrastructure could not cope with the pressure suddenly thrust upon it; the backward railway system was overwhelmed; Tehran’s streets were jammed with traffic. The national electricity grid could not meet demand, and it broke down. Parts of Tehran and other cities were regularly blacked out, sometimes for four or five hours a day, a disaster for industrial production and domestic life and a further source of anger and discontent.

Iranians from every sector of national life were losing patience with the Shah’s regime and the pell-mell rush to modernization. Grasping for some certitude in the melee, they increasingly heeded the call of traditional Islam and of an ever more fervent fundamentalism. The beneficiary was the Ayatollah Khomeini, whose religious rectitude and unyielding resistance made him the embodiment of opposition to the Shah and his regime and indeed to the very character and times of Iran in the mid-1970s. Born around 1900 in a small town 180 miles from Tehran, Khomeini came from a family of religious teachers. His father had died a few months after his birth, killed on the way to a pilgrimage by a government official, it was said by some. His mother died when he was in his teens. Khomeini turned to religious studies and, by the 1930s and 1940s, was a popular lecturer on Islamic philosophy and law, promulgating the concept of an Islamic Republic under the stern control of the clergy.

For many years, Khomeini had regarded the Pahlavi regime as both corrupt and illegitimate. But he did not become politically active until about the age of sixty, when he emerged as a leading figure in the opposition to the “White Revolution,” as the Shah’s reform program was called. In 1962, Khomeini expressed outrage at the proposal that places in local assemblies no longer be restricted exclusively to male Moslems. When, under the rubric of the White Revolution, the government redistributed large estates, including the vast holdings of the Shiite clergy, Khomeini came forward as one of the most unyielding opponents, landing in jail more than once and eventually ending up in exile in Iraq. His hatred of the Shah was matched only by his detestation of the United States, which he regarded as the main prop of the Pahlavi regime. His denunciations from exile in Iraq were cast in the rhetoric of blood and vengeance; he seemed to be driven by an unadulterated anger of extraordinary intensity, and he himself became the rallying point for the growing discontent. The words of other, more moderate ayatollahs were overwhelmed by the exile’s harsh and uncompromising voice.

Another dimension of opposition had emerged. With Jimmy Carter’s capture of the Democratic nomination and then the Presidency in 1976, human rights became a major issue in United States foreign policy, and the human rights record of the Shah was not good. It was also typical of much of the Third World, and better than that of some other countries in the region. A member of the International Commission of Jurists, who was a leading critic of the Shah and who investigated human rights conditions in Iran in 1976, concluded that the Shah was “way down the list of tyrants. He would not even make the A-list.” Still, Savak, the Iranian secret police, was brutal, quick, and particularly nasty in its torture; it was also callous, stupid, intrusive, pervasive, and arbitrary. None of this fit the image of the Great Civilization, the Iran that was pursuing its ambition to be a world power—and whose Shah was lecturing the industrial world on its own character flaws. Thus, Iran’s human rights record became more visible and much more reported upon than the abuses in other developing countries, contributing further to the growing hostility, both inside Iran and out, to the Shah and his regime. The Shah himself felt intense pressure on the human rights question from the United States, and ironically, even as the criticism mounted, he had determined to move on a course of political liberalization.1

“Doing the 40–40”

Khomeini’s words took on a new fury in late 1977, when his eldest son was murdered under mysterious circumstances. The murder was attributed to Savak. Then came that newspaper article of January 7, 1978. It ridiculed Khomeini, questioned his religious credentials and concerns, challenged his Iranian nationality, and luridly accused him of various acts of immorality, including the authorship of risqué love sonnets as a young man. This journalistic assault on Khomeini set off riots in the holy city of Qom, which remained his spiritual home. Troops were called in and demonstrators were killed. The disturbance in Qom ignited a new confrontation between the Moslem religious leadership and the government, which took a very specific form. The Shiite branch of Islam provided for a forty-day mourning period. By plan, the end of the forty-day period for the slain at Qom became the occasion for new demonstrations, more deaths, more mourning, and then, after forty days, more demonstrations—and still more deaths. One leader of this relentless cycle of protests was later to call it “doing the 40–40.” The riots and demonstrations spread across the country, with further dramatic clashes, more people killed, and more martyrs.

Attacks by the police and army on critics of the regime only served to swell and broaden the ranks of those antagonistic to the Shah. The withdrawal of subsidies to the Shia religious establishment alienated and further angered the clergy. Indeed, overt opposition was becoming part of the fabric of national life. Yet all through the first half of 1978, its significance was discounted. Yes, the Shah told the British ambassador, the situation was serious, but he was determined to press ahead with liberalization. His most implacable enemies, and the most powerful, were the mullahs, with their hold on the minds of the masses. “There could be no compromise with them,” he said. “It was a straightforward confrontation and one side had to lose.” The Shah made it clear that he could not imagine being on the losing side.

In the U.S. government, too, hardly anyone could imagine that the Shah might fail. For Washington, any alternative was virtually unthinkable. After all, Iran’s powerful monarch had sat on his throne for thirty-seven years. He was courted throughout the world. He was modernizing his country. Iran was one of the world’s two great oil powers, with wealth far beyond anything it had known only a few years earlier. The Shah was a critical ally, a regional policeman in a crucial area, the “Big Pillar.” How could he possibly be toppled?

American intelligence on Iran was constrained. As the United States became more dependent on the Shah, there was less willingness to risk his ire by trying to find out what was happening among the opposition that he despised. In Washington, there were surprisingly few people with the requisite analytic skills on Iran. And until late in the day, there did not seem to be great demand among the “consumers” of intelligence, as senior American national security officials are sometimes called, for analyses of the stability of the Shah’s regime, either because they thought it unnecessary or because they feared, at some level, that the conclusions might be too unpalatable. “You couldn’t give away intelligence on Iran,” was the comment of one frustrated intelligence analyst.

The American intelligence community struggled throughout 1978 to assemble a National Intelligence Estimate on Iran, but could never get it together. There was plenty of daily reporting, but great difficulty in assessing how all the disparate forces of discontent and opposition would interact and play out. The State Department’s Morning Summary did, in mid-August, suggest that the Shah was losing his grip and that Iran’s social fabric was unraveling. But as late as September 28, 1978, the Defense Intelligence Agency’s prognosis was that the Shah “is expected to remain actively in power over the next ten years.” After all, it was reasoned, he had weathered other crises in the past.

And yet there were at that very moment various signs, some particularly grisly, of the fury of the forces that were rising against the Shah. Over a period of two weeks in August 1978, half a dozen movie theaters around the country were set afire by fundamentalists opposed to “sinful” movies. In mid-August, in Abadan, the home of the great refinery, about five hundred people were crowded into a theater when some group locked the doors and incinerated the trapped moviegoers. Though uncertainty remained, it was thought that the perpetrators were fundamentalists. In early September, bloody demonstrations took place in Tehran itself. That was the turning point. From then on, the Shah’s government began to collapse as an effective ruling force. Still, the Shah pushed on with his liberalization, including talk of free elections in June 1979.

To those with access to the monarch, something seemed to be wrong with the Shah himself. He appeared distant and more isolated. Rumors had circulated for years about his health. Did he have cancer? Or an incurable venereal disease? On September 16, the British ambassador went to see the Shah again. “I was worried by the change in his appearance and manner. He looked shrunken; his face was yellow and he moved slowly. He seemed exhausted and drained of spirit.” The fact of the matter was that the Shah did have cancer, specifically a form of leukemia, which French doctors had first diagnosed in 1974. But the seriousness of the illness was kept for several years from both the Shah and his wife. As it was, he insisted upon the greatest secrecy for his treatment. Later, some in Washington suspected that elements in the French government would nonetheless have had to know. The British government and most certainly the American did not know. Had they been informed of the fact and nature of his ailment, the calculations on many accounts might have been different. As time went on, the Shah began to feel the effects of the illness more and more, and to fear its consequences, which might help explain the indecisiveness, strange detachment, even malaise and fatalism that seemed to take hold of him.2

“Like Snow in Water”

As the political situation in his country deteriorated, the Shah vacillated. He would not wage total war against the growing rebellion; “world public opinion” was watching too closely. And these were his people. But neither would he concede. He was befuddled by the contradictory advice emanating from the U.S. government. He felt betrayed by one and all. Again and again, he expressed his suspicion that the American CIA, British intelligence—and the BBC, the hotline for his opponents’ communications—were conspiring against him, though for reasons that were never very clear.

As the weeks passed, more and more of the country went on strike, including oil industry technicians. In early October 1978, at Iran’s urging, Ayatollah Khomeini was expelled from Iraq; after all, the Ba’thist regime in Baghdad had to worry about its own Shiite population. Denied refuge in Kuwait, Khomeini went to France and established himself and his entourage in a suburb of Paris. The Iranian government may have thought, out of sight, out of mind, but it was mistaken. France provided Khomeini and his followers with access to the direct-dial international phone service that the Shah had installed in Tehran, greatly facilitating communication. The elderly, irate cleric, who knew so little of the Western world and held it in such scorn, nevertheless proved himself a master of propaganda in front of the media that camped at his door.

Still, the Shah proceeded with his liberalization program. Academic freedom, freedom of the press, freedom of assembly—these were being proffered, but such Western-style rights were of little interest to a population that was rising up against the monarch and his dynasty and the whole process of modernization. At the end of October, the Shah could only say, “We are melting away daily like snow in water.” Strikes immobilized the economy and the government, students were out of control, and demonstrations and riots went on unchecked.

The Iranian oil industry was in a state of escalating chaos. The main production area was known as “The Fields.” Located in the southeast, it included Masjid-i-Suleiman, where Anglo-Persian had made its original discovery in 1908. Now, seventy years later, operations in The Fields were in the hands of the Oil Service Company of Iran, Osco, which was the descendant of the consortium that had been established in 1954, after the fall of Mossadegh and the Shah’s return. Staffed by expatriate oil men, mostly from the member companies, Osco’s headquarters was in Ahwaz, about eighty miles north of Abadan. In October, some of the striking Iranian laborers from The Fields moved into Osco’s main headquarters building in Ahwaz. No one tried to evict them. By November, a couple of hundred of them were living in the corridors, eating and sleeping there, in a tactic aimed at increasing the pressure on Osco and the National Iranian Oil Company. The Western oil men went about their jobs, carefully trying to avoid stepping on the workers. Meanwhile, in the courtyard outside, impromptu prayer meetings had begun. At first, no more than half a dozen participated. But soon, the oil men could see from their windows that the numbers of the chanting faithful at each meeting had swollen to several hundred.

The impact of the strikes was felt immediately. Iran was the second-largest exporter of oil after Saudi Arabia. Of the upwards of 5.5 million barrels produced daily in Iran, about 4.5 million were exported; the rest were consumed internally. By early November, exports had been reduced to less than a million barrels per day, and thirty tankers were waiting in line at the loading facilities at Kharg Island for oil that was not there at a time when, in the international market, the winter demand surge was beginning. Petroleum companies, responding to the general softness in the market, had been letting their inventories fall. Would there be a shortage on the world market? Moreover, the stability of Iran itself depended upon oil revenues; they were the basis of the country’s entire economy. The head of the National Iranian Oil Company went south to The Fields to seek a dialogue with the striking oil workers—or so he thought. When he got there, he was mobbed by angry strikers. He immediately decided to forgo negotiations and instead fled the country. There seemed to be no way to end the strike.

Trying to contain the growing chaos, the Shah took a critical step that he had always wanted to avoid; he installed a military government. This was his last chance, but he put a weak general in charge. The general immediately suffered a heart attack and never asserted authority. The new government was able, at least temporarily, to restore some order in the oil industry and get production going again. Soldiers now also moved into Osco’s headquarters at Ahwaz, where they coexisted uneasily with the striking workers, who continued to camp in the corridors.

As events tumbled toward their conclusion, the policy of the United States, Iran’s most important ally, was in confusion, disarray, and shock. During most of 1978 senior officials of the Carter Administration had been distracted and preoccupied by other momentous and demanding developments: the Camp David peace accords with Egypt and Israel, strategic arms negotiations with the Soviets, normalization of relations with China. American policy had been based on the premise that Iran was a reliable ally and would be the Big Pillar in the region. Out of deference to the Shah and because of the desire not to anger him, American officials had kept their distance from the various opponents of his regime, which meant that they lacked channels of communication to the emerging opposition. There was not even any reporting to Washington on what the Ayatollah was actually saying on those by-now-famous tapes. Some in Washington insisted that the unrest in Iran was a secret, Soviet-orchestrated plot. And, as always, there was the same question: What could the United States government do, whatever the case? Only a few American officials thought that the Iranian military could withstand the persistence of nationwide strikes and the defection of religiously minded soldiers. Indeed, the last few months of 1978 saw a fierce bureaucratic battle over policy waged in Washington. How to bolster the Shah or assure continuity to a friendly successor regime? How to support the Shah without being so committed as to assure an antagonistic relationship with his successors, should he fall? How to disengage, if disengagement were required, without undermining the Shah, in case he could survive politically? Indecision and vacillation in Washington resulted in contradictory signals to Iran: The Shah should hang tough, the Shah should abdicate, military force should be used, human rights must be observed, the military should stage a coup, the military should stand aside, a regency should be established. “The United States never sent a clear, consistent signal,” one senior official recalled. “Instead of oscillating back and forth between one course of action and the other and never deciding, we would have done better to have flipped a coin and then stuck to a policy.” The cacophony from the United States certainly confused the Shah and his senior officials, undermined their calculations, and drastically weakened their resolve. And no one in Washington knew how sick the Shah was.

The efforts to construct hastily some new American position were complicated by the fact that the Shah was an object of dislike and criticism in the media in the United States and elsewhere, which resulted in a familiar pattern—moralistic criticism of U.S. policy combined with the projection by some of a romantic and unrealistic view of the Ayatollah Khomeini and his objectives. A prominent professor wrote in the New York Times of Khomeini’s tolerance, of how “his entourage of close advisers is uniformly composed of moderate, progressive individuals,” and of how Khomeini would provide “a desperately-needed model of humane governance for a third-world country.” The American ambassador to the United Nations, Andrew Young, went even further; Khomeini, he said, would eventually be hailed as “a saint.” An embarrassed President Carter immediately felt the need to make clear “that the United States is not in the canonization business.”

So great was the lack of coherence that one senior official, who had been involved in every Middle Eastern crisis since the early 1960s, noted the “extraordinary” fact that the “first systematic meeting” at a high level on Iran was not convened until early November—very late in the day. On November 9, William Sullivan, the American ambassador in Tehran, finally confronted the unpleasant realities in a dramatic message to Washington entitled “Thinking the Unthinkable.” Perhaps the Shah would not be able to survive after all, he said; the United States should begin to consider contingencies and alternatives. But in Washington, where the bureaucratic battles continued to rage, there was no meaningful reaction, save that President Carter sent hand-written notes to his Secretary of State, National Security Adviser, Secretary of Defense, and Director of Central Intelligence to ask why he had not been previously informed of the situation inside Iran. Ambassador Sullivan, meanwhile, came to the conclusion that the United States faced the situation in Iran “with no policy whatsoever.”3

“Torrents of Blood”

December 1978 was a month for mourning, processions, and self-flagellation in the Shiite creed. The high point was the holiday of Ashura, marking the martyrdom of the iman Hussein and symbolizing unremitting resistance to a tyrant without legitimacy. Khomeini promised that it would be a month of vengeance and “torrents of blood.” He called for new martyrs. “Let them kill five thousand, ten thousand, twenty thousand,” he declared. “We will prove that blood is more powerful than the sword.” Huge demonstrations were held across the country, some truly awe-inspiring in size. All of the opposition seemed to have united, and the Army was crumbling away. The Shah was running out of options. “A dictator may survive by slaughtering his people, a king cannot act in such a way,” he said privately. But what should he do? And to add to all his other indignities and humiliations, there had been that telephone prank. The Shah had been told that Senator Edward Kennedy was phoning from Washington. Preparing himself, no doubt, for conversation with one of America’s leading liberals and human rights champions, the Shah picked up the phone—only to hear a quiet voice repeating a simple incantation over and over: “Mohammed, abdicate. Mohammed, abdicate.”

A task force from the Oil Service Company had already begun preparing, in a low-key way, an evacuation plan for the twelve hundred expatriate oil men and their families in The Fields. The group collected maps, looking for desert airstrips that could be used to land planes if airports were closed. But the effort was not taken very seriously. Then, one afternoon, George Link, an Exxon man who was the general manager for Osco, was being driven back to work after lunch. When his driver stopped the car and got out to open a gate, an assailant leaped from the side of the road and tossed something into the car. Link reflexively threw open his door and jumped out. Moments later, the car exploded. Thereafter, the evacuation planning took on a new seriousness.

Strikes once more gripped The Fields, and Iranian production again fell away rapidly. Tension was very high. Osco’s assistant general manager for operations was Paul Grimm, on loan from Texaco. His position put him in direct confrontation with the workers. The big and outspoken Grimm bluntly warned some blue-collar expatriates, who were joining the strikes out of fear and confusion, that they would be dismissed if they did not come back to work, and he, in turn, was singled out as the man who was trying to break the walkout. In the middle of December, as Grimm was driving to work, a shot was fired at him from a car that was following his own, and he died instantly from a bullet in the back of his head. Evacuation of dependents now hurriedly began.

By December 25, Christmas Day, Iranian petroleum exports had ceased altogether. That would prove to be a pivotal event in the world oil market. Spot prices in Europe surged 10 to 20 percent above official prices. The cutbacks in oil production also deprived Iran of domestic oil supplies. Long lines formed in Tehran to get whatever small rations were available of gasoline as well as kerosene, which was the standard fuel for cooking. Soldiers maintained order by firing shots into the air. The oil workers refused to provide any petroleum products to the military, helping to immobilize it. Finally, in an ironic reversal of roles, an American tanker was diverted to Iran to supply badly needed fuel. Over the next critical weeks, the tanker remained in the vicinity, sometimes anchored offshore, sometimes sailing upriver toward Abadan, but it was never able to deliver the cargo, as sufficiently secure arrangements to unload could not be made.

“I Am Feeling Tired”

At the end of December, there was reluctant agreement in the ruling circles that a coalition government would be formed, and that the Shah would leave Iran, ostensibly for medical treatment abroad. But there could be little doubt of what was really happening. The Pahlavi dynasty appeared to be finished. So, virtually, at least for the time being, was petroleum production in The Fields. In the week after Christmas, Osco decided to evacuate all its Western employees. Hardly privy to what was going on either in Tehran in the immediate vicinity of the Peacock Throne or in Washington, the expatriates assumed that their exit was only temporary, a matter of weeks or months at the most, until order was restored. Thus, they were strictly limited to only two suitcases. They left their houses intact, with pretty much everything in place, for their return. They faced a quandary similar to that of the oil men who had been forced by Mossadegh to leave Abadan in 1951—what to do with their dogs, which they could not bring with them. Since they did not know how long they would be gone, they did what their predecessors had done: took their dogs out back of their houses and either shot them or clubbed them to death.

They gathered at the airport at Ahwaz. Their eventual destination was Athens, where they were supposed to pass the time in sight-seeing, waiting for the all-clear so they could go back. Once again, the heirs of William D’Arcy Knox and George Reynolds were ignominiously leaving Iran. But unlike the “farewell to Abadan” in 1951, there were no honor guards, no salutes, no bands, no singing of verses to “Colonel Bogey’s March.” Ahwaz had once been a very busy airport, with innumerable domestic flights, plus a constant flow of small planes and whirring helicopters, shuttling back and forth to the various production sites. But now there was no domestic air service, the oil industry was shut down, and the sky over the deserted airport at Ahwaz was empty and silent and foreboding.

On January 8, the British ambassador went to say farewell to the Shah. The monarchy that had survived all sorts of vicissitudes for almost half a century was at its end. The pomp of the celebration at Persepolis of the twenty-five hundredth anniversary of the Persian monarchy was gone. So was the power. Alexander the Great had captured Persepolis in 330 B.C. and burned the royal palace; now the Ayatollah Khomeini was making a mockery of the self-proclaimed heir to Persepolis. Like the Wizard of Oz, Mohammed Pahlavi was revealed to be, after all, but a mere mortal. The show was over.

Talking to the ambassador, the Shah was calm and detached. He spoke about events as though they had no relevance to him personally. That made it all the more emotional for the ambassador, who, despite all his years of steeling himself to be a self-disciplined professional, found himself crying. Awkwardly trying to comfort him, the Shah said, “Never mind, I know how you feel.” Considering their relative circumstances, it was a very strange remark. The Shah talked about the conflicting advice he was continuing to receive. Then, in an odd gesture, he looked at his watch. “If it was up to me, I would leave—in ten minutes.” The show was indeed over.

At midday on January 16, the Shah appeared at Tehran airport. “I am feeling tired and need a rest,” he said to a small group that had gathered, maintaining the pathetic fiction that he was only going on a vacation. Then he boarded his plane and left Tehran for the last time, carrying with his luggage a casket of Iranian soil. His first stop would be Egypt.

With the Shah’s departure, all of Tehran erupted into the kind of jubilation that had not been seen since the Shah’s own return in triumph in 1953. Car horns blared, headlights were flashed, windshield wipers decorated with pictures of Khomeini swished back and forth, crowds shouted and cheered and danced in the streets, and newspapers were handed out rapid-fire with the unforgettable banner headline “The Shah Is Gone.” In Tehran and throughout the country, the great equestrian statues of his father, and of himself, were pulled from their pedestals by wild crowds, and the Pahlavi dynasty and its era crumbled into dust.

And who would rule? A coalition government had been left behind in Tehran, headed by a long-time opponent of the Shah. But on February 1, Khomeini arrived back in Tehran in a chartered Air France 747. Seats on the plane had been sold to Western reporters to finance the flight, while Khomeini himself spent the trip resting on a carpet on the floor of the first-class cabin. He brought with him a second government, a revolutionary council headed by Mehdi Bazargan, whose own credentials as an opponent of the Shah were impeccable. Indeed, in 1951, twenty-eight years earlier, Bazargan had been chosen by Mohammed Mossadegh to be head of the nationalized oil industry, and it was he who had then immediately gone to the oil fields in person with the stamps and wooden sign that said “National Iranian Oil Company.” Subsequently, he had served his time in jail under the Shah. And now, despite Khomeini’s lasting hatred of Mossadegh as a secularist nationalist, Bazargan was, given the conjunction of political forces, the Ayatollah’s candidate to lead the new Iran. So, for a brief time, there were two rival governments in Tehran. But, of course, there could only be one government. In the second week of February, fighting broke out at an air force base in the suburbs of Tehran between non-commissioned officers called “homafars,” who were sympathetic to the revolution, and troops of the Imperial Guard. The military support for the coalition government collapsed, and Mehdi Bazargan was in. The American defense attaché provided a succinct summary of the situation in a message to Washington: “Army surrenders; Khomeini wins. Destroying all classified.”4

The Last Man Out

Not quite all the oil men had departed from The Fields. Twenty or so were asked to stay on in order to maintain the fiction of Osco’s legal presence, should there be any argument with the government later on. Among the group was Jeremy Gilbert, an Irish mathematician turned petroleum engineer who had been assigned by BP to Osco and was now Osco’s manager for capital planning. They remained only a few days before they, too, decided to leave in the face of the further deteriorating situation. But because he was in the hospital, suddenly stricken with a severe case of hepatitis, Gilbert was not allowed on the evacuation plane. He stayed in the hospital in a feverish haze throughout the tumultuous days of January. At night, from his hospital bed, he could hear the chanting and gunfire and, on the day the Shah left, the clangorous sounds of a giant celebration. His only contact with the world outside Abadan, apart from the BBC, was a huge arrangement of flowers, courtesy of Osco.

Very weak and hardly able to move around the ward, Gilbert was mistaken by the Iranians in the hospital for an American. A group of nurses took to gathering outside his window to chant “Death to Americans.” Another patient without warning began beating Gilbert on the head with his crutches, ranting all the while against Americans. Gilbert’s actual nationality posed another problem. The only way out of Iran was through Iraq, but because Irish troops on a peacekeeping mission in Lebanon had recently gotten into a shooting match with Iraqi soldiers, Gilbert was denied a visa for Iraq. To obtain it, he literally had to go down on his knees before an agent at the local Iraqi consulate and apologize for all the sins of the Irish.

At the end of January, he finally felt strong enough to make the trip out of the country. At the dusty border crossing, the Iranian officials waved him across with hardly a glance. But the Iraqi guards, suspecting he was a spy, detained, searched, and interrogated him for several hours. Meanwhile, the only available transportation to Basra, a single taxi, had left. When he was finally released, Gilbert asked, “How do I get to Basra?”

“You walk,” one of the guards replied.

There was no other choice. Tired, weak, and carrying two bags, he dragged himself off along the dirt road toward Basra. After a couple of hours, a van overtook him and stopped. The driver agreed to take him to Basra for a fee, but laughed uproariously when Gilbert produced Iranian money. It was worthless, the driver chortled. Gilbert used his last dollars to pay the driver to take him to the Basra airport. But now he was broke. How could he get anywhere else? Then he remembered he had just received an American Express card, which he had tucked in his wallet but had not yet used. Thanking heaven that he had not left home without it, he got himself on a flight to Baghdad. He arrived late at night in the Iraqi capital, and after several tries, found a hotel. He called his family. They were appalled; they thought that he was comfortably still in the hospital in Abadan.

Gilbert did not move from the hotel room for three days. When he thought he had enough strength to risk the next leg of the journey, he took another flight from Baghdad to London. Arriving late Friday at Heathrow, he phoned the personnel department at British Petroleum from the airport to announce that he had finally made it. The last Western oil man from The Fields, the great Iranian petroleum complex, was finally out. But the personnel officer who took the call, distracted by a conversation about his own weekend plans, misheard Gilbert and thought the caller was phoning with some news of the missing engineer. “Jerry Gilbert,” he said, “we’ve been wondering where he was. Have you been in contact?”

That was the final indignity. From the open pay phone at Heathrow, summoning up whatever fragments of strength he had left, Gilbert loudly and abusively cursed not only the hapless personnel man, but everyone connected with the world oil industry.5

Panic Begins

The old regime was gone in Iran, and the new one was in power, though most uneasily; there were already bitter struggles for control. And from Iran, as if it had been shaken by a violent earthquake, a giant tidal wave surged around the world. All were swept up in it; nothing and no one escaped. When the wave finally spent its fury two years later, the survivors would look around and find themselves beached on a totally new terrain. Everything was different; relations among all of them were altered. The wave would generate the Second Oil Shock, carrying prices from thirteen to thirty-four dollars a barrel, and bringing massive changes not only in the international petroleum industry but also, for the second time in less than a decade, in the world economy and global politics.

The new oil shock passed through several stages. The first stretched from the end of December 1978, when Iranian oil exports ceased, to the autumn of 1979. The loss of Iranian production was partly offset by increases elsewhere. Saudi Arabia pushed up production from its self-imposed ceiling of 8.5 million barrels per day to 10.5 by the end of 1978. It lowered its output to 10.1 million barrels per day in the first quarter of 1979, but that was still well above its 8.5 million “ceiling.” Other OPEC countries also boosted output. When all of that was figured in, free world oil production in the critical first quarter of 1979 was about 2 million barrels per day below the last quarter of 1978.

There was, then, an actual shortage, which was not surprising. After all, Iran was the second-largest exporter in the world. Yet when measured against world demand of 50 million barrels per day, the shortage was no more than 4 to 5 percent. Why should a 4 or 5 percent loss of supplies have resulted in a 150 percent increase in price? The answer was the panic, which was triggered by five circumstances. The first was the apparent growth of oil consumption and the signal that it gave to the market. Demand had risen smartly from 1976 onward; the impact of conservation and non-OPEC oil was not yet clear, and it was assumed by virtually all that demand was going to continue to rise.

The second factor was the disruption of contractual arrangements within the oil industry, resulting from the revolution in Iran. Despite major upheavals, world oil had remained an integrated industry. However, the ties were no longer the formal ones of ownership, but rather the looser ties of long-term contracts. The Iranian interruption hit companies unevenly, depending upon their dependence on Iran, and led to disruptions of the contractual flow of supplies. That rupture sent hosts of new buyers hurtling into the marketplace, scrambling to secure the same number of barrels that they had lost. All would do anything they could to avoid being caught short. Here was the real end of the classic integrated oil industry. The links between upstream and downstream were, at last, severed. What had been the fringe, the spot market, became the center. And what had been a somewhat disreputable activity, trading, would now become a central preoccupation.

A third factor was the contradictory and conflicting policies of consumer governments. The international energy-security system, which had been promoted by Kissinger at the 1974 Washington Energy Conference, was still in development, with many aspects yet untested. Actions taken by governments for domestic reasons would be read as major international policies, adding to the stress and tension in the marketplace. While governments were pledging to cooperate to dampen prices, companies from those nations would feverishly be bidding up the price.

Fourth, the upheaval presented the oil exporters with the opportunity to capture additional rents, enormously large rents. Once again, they could assert their power and influence on the world stage. Most, though not all of them, kept pushing the price up at every opportunity, and some manipulated supplies to further agitate the market and gain additional revenues.

Finally, there was the sheer power of emotion. Uncertainty, anxiety, confusion, fear, pessimism—those were the sentiments that fueled and governed actions during the panic. After the fact, when all the numbers were sorted out, when the supply and demand balance was retrospectively dissected, such emotions seemed irrational; they didn’t make sense. Yet at the time they were indubitably real. The whole international oil system seemed to have broken down; it was not out of control. And what gave the emotions additional force was the conviction that a prophecy had been fulfilled. The oil crisis expected for the mid-1980s had arrived in 1979, the second phase of the turmoil unleashed in 1973–74. This was not a temporary disruption, but the early arrival of a deeper oil crisis, which would mean permanently high prices. And there was the unanswered question of how far the Iranian Revolution would advance. The French Revolution had reached across all of Europe to the very gates of Moscow before it spent its force. Would the Iranian Revolution reach into nearby Kuwait, to Riyadh, and on to Cairo and beyond? Religious fundamentalism wed to feverish nationalism had caught the Western world by surprise. Though it was still incomprehensible and unfathomable, one of its driving forces was obvious: a rejection of the West and of the modern world. That recognition led to an icy, pervasive fear.

It was the buyers, stunned by the unfolding spectacle, fearing a repetition of 1973, gripped by panic, who inadvertently made the shortage worse by building up inventories—as they had done in 1973. The world oil industry maintains billions of barrels of oil in inventories—supplies in storage—on any given day. Under normal circumstances, they were the stocks necessary for the smooth operations of the highly capital-intensive “machine” that extended from the oil field through the refinery to the gasoline station. A particular barrel of oil could take ninety days to travel from a wellhead in the Gulf through the refining and marketing system into underground storage at a gasoline station. To run short at any point in that system was costly in itself and could also disrupt other parts of the system. Thus, inventories were central to the constant effort to match supply and demand and to keep everything running smoothly. On top of that base requirement, the industry held a sort of insurance cushion: additional stocks to protect against any unexpected shifts in supply or demand—say a sudden surge of oil use in winter because of a January cold snap or a two-week delay in the arrival of a tanker because storms had disrupted loading facilities in the Gulf. Necessary supplies could then be drawn from inventories.

Of course, it was expensive to hold inventories. The oil had to be bought, facilities maintained, money tied up. So companies did not want to hold more inventories than their normal experience suggested they needed. If they thought that prices were going to go down because consumption was sluggish, they reduced inventories, and as quickly as they could, with the idea of buying later when the price would be lower. That was exactly what the industry was doing during the soft market conditions through most of 1978. By contrast, if companies thought that prices were going to go up, they bought more of today’s cheaper barrels so that they would have to buy less of tomorrow’s more expensive oil. And that was what happened, with extraordinary vengeance and fury, in the panic of 1979 and 1980. In fact, the companies bought well in excess of anticipated consumption, not only because of price, but also because they were not sure they would be able to get any oil later on. And that extra buying beyond the real requirements of consumption, combined with hoarding, dizzily drove up the price, which was exactly what companies and customers were struggling to avoid in the first place. In short, the panic of 1979–80 saw self-fulfilling, and ultimately self-defeating, prophecy on a truly colossal scale. The oil companies were not alone in panic buying. Down the consumption chain, industrial users and utilities also furiously built inventories as insurance against rising prices and possible shortages. So did the motorist. Before 1979, the typical motorist in the Western world drove around with his tank only one-quarter full. Suddenly worried about gasoline shortages, he too started building inventories, which is another way of saying that he now kept his gas tank three-quarters full. And suddenly, almost overnight, upwards of a billion gallons of motor fuel were sucked out of gasoline station tanks by America’s frightened motorists.

The rush to build inventories by oil companies, reinforced by consumers, resulted in an additional three million barrels per day of “demand” above actual consumption. When added to the two million barrels per day of net lost supplies, the outcome was a total shortfall of five million barrels per day, which was equivalent to about 10 percent of consumption. In sum, the panic buying to build inventories more than doubled the actual shortage and further fueled the panic. That was the mechanism that drove the price from thirteen to thirty-four dollars a barrel.

Force Majeure

The panic might have been contained if the shortfall had been distributed evenly. But it was not. British Petroleum, as a result of its historical position, was far more dependent on Iran than any of the other companies. Fully 40 percent of its supplies came from Iran, and thus it was hardest hit by the interruption. In the argot of the industry, BP was “crude long”; that is, its crude supplies far outstripped the requirements of its own refining and marketing system. And so it was a “wholesaler,” selling much of its oil through long-term contracts to “third parties”—either to the other majors, like Exxon, or to independent refiners, in particular in Japan. But now, having lost Iranian supply, BP invoked force majeure (act of God) provisions in its contracts and cut back on its buyers. It canceled altogether its supply contract with Exxon, while at the same time scrambling to buy oil elsewhere. Neither BP nor Shell were members of Aramco, so they had no direct access to the increased Saudi production, which went to the four American Aramco companies.

Thus, the dominoes began to fall. Other worried companies, deprived of oil either directly by the Iranian disruption or indirectly by BP’s cutbacks, also invoked force majeure to reduce shipments to customers or to cancel contracts altogether. In March, Exxon, faced with an April 1 renewal date for its contracts with Japanese buyers, let it be known that it was going to phase out many of its third-party contracts as they came up for renewal. Exxon had been warning its buyers since 1974 to diversify supply and “not to count on Exxon.” In the words of Clifton Garvin, Exxon’s chairman, “The handwriting had been on the wall. Venezuela had been taken away from us. We no longer had the concession in Saudi Arabia. We couldn’t see a role in being the middleman between the Saudis and the Japanese consumer. Exxon’s decision was not arrived at lightly. The world was just changing.” So Exxon had already begun to wind down its third-party contracts. But, in the context of the crisis mood, its March 1979 message took on unexpected significance.

The chain reaction hit Japan hard. After the first oil crisis, it had consistently tried to carve out a niche in Iran, and had succeeded. As a result, it had become relatively more dependent than other industrial countries on Iran, which by 1978 supplied almost 20 percent of Japan’s total oil needs. Moreover, the majors now clearly could no longer be counted upon. Japanese refiners were not going to let their refineries go idle through lack of supply. The government was once again face-to-face with Japan’s blatant lack of natural resources; Japan’s economic miracle was threatened at the jugular, by the fact that its industrial base was largely fueled by oil. Panic was more pervasive in Japan than anywhere else because twenty years of hard-earned economic growth appeared about to come apart. The government ordered the bright electric lights in the Ginza to be dimmed as an energy-saving measure. More important, it urged Japanese buyers to go directly into the world marketplace, something they had not much done before. The formidable Japanese trading companies took the lead, scouring the world for supplies. It often required considerable ingenuity to develop the access they had never before needed. One trading house discovered that an excellent way to get in to see the right officials in ministries and state oil companies was by giving gloves as presents to the secretaries. In order to cultivate the Iraqi oil minister, this same trading house provided him with the services of a world-class acupuncturist.

Other independent refiners from many nations joined established companies and the Japanese in the frantic quest for oil. So did state oil companies, like that of India, which also had been dependent upon Iran. Suddenly, where there had been relatively few buyers, now there were many—a highly desirable situation from the point of view of the sellers, of whom there were still only few. And, suddenly, all the action was in the spot markets, which had, until then, been a kind of sideshow, comprising, in terms of both crude and products, no more than 8 percent of total supplies. It had been a balancing mechanism, a place where buyers would go to get discounted oil, such as refinery overruns, instead of more expensive supplies guaranteed by contracts. But it was the marginal market, and as buyers rushed into it, prices were bid up—and up and up. By late February 1979, spot prices were double official prices. People would call it the “Rotterdam Market,” after Europe’s huge oil port, but, in fact, it was a global market, connected by a fevered network of telephones and telexes.6

Leapfrog and Scramble

Here was the perfect opportunity for the exporters, and they responded in two ways. They began adding premiums to their official prices, with new monthly terms clattering out from telexes around the world. Then the exporters began shifting as many supplies as possible, and as rapidly as possible, from long-term contracts to the much-more-lucrative spot markets. “I would be a fool to give up $10 extra a barrel in a spot sale,” said one OPEC oil minister in private, “when I know that if we don’t sell at this price someone else will.” The exporters insisted that their long-term buyers take higher-priced spot oil along with the contractual officially priced oil. Also invoking force majeure, they canceled contracts altogether. One morning, Shell received a telex from an exporting country announcing that, on grounds of force majeure, a contracted supply was no longer available. That same afternoon, Shell received another telex from the same country, informing it that crude oil was available on a spot basis. Miraculously, the volume available was exactly the same amount as that which had been cut off, by act of God, just hours earlier. The only difference? The price was 50 percent higher. Circumstances being what they were, Shell took the offer.

Yet, at the beginning of March 1979, far more rapidly than expected, Iranian exports began to return to the world market, albeit at much lower levels than before the fall of the Shah. Reflecting the apparent easing of supply, spot prices began to fall back toward official selling prices. This was the moment at which some kind of order, well short of disaster, might have been reestablished. At the beginning of March, the member countries of the International Energy Agency pledged to cut demand by 5 percent to help stabilize the market. But the panic and the feverish competition in the marketplace now had a momentum of their own. Who could be confident that Iranian oil would maintain its new availability? Though Khomeini had asserted control over the petroleum industry, The Fields in Iran, as far as the outside world could determine at the time, were controlled by a radical leftist group—a “Committee of 60,” composed primarily of militant white-collar workers—that was functioning as a virtual government of its own, jailing oil administrators and other officials at will. Moreover, ominously, other OPEC countries had begun to announce cutbacks in their own output. With prices rising, it would be more valuable to keep the oil in the ground and sell it in the future.7

At the end of March, OPEC met. Spot crude prices had risen by 30 percent; products, by as much as 60 percent. OPEC decided that its members could add to their official prices whatever surcharges and premiums “they deem justifiable in light of their own circumstances.” What that really meant, Yamani bluntly allowed, was a “free-for-all.” The exporters were abandoning any notion of an official price structure. They would charge whatever the market would bear. And now there would be two games in the world oil market. One was “leapfrog”: the producers vying with each other to raise prices. The other was “scramble”: a bruising competition for supply among purchasers. Anxious buyers—companies that had been cut off, refiners, governments, a new breed of traders, and of course the majors—trampled one another in their rush to court the various exporters. None of this fevered, bruising activity brought forth any new supplies; all it did was intensify the competition for the existing supply, driving up the price. “Nobody controlled anything,” said Shell’s supply coordinator. “You just fought for it. At every level, you felt you had to buy now; whatever the price, it was good compared to what it would cost you tomorrow. You had to say ‘yes’ or you would lose out. That was the psychology of the buyer. Horrible as the terms might be from your point of view, they would be worse tomorrow.”

Only one exporter stood out clearly in opposition to the surcharges, premiums, and other manifestations of rapid price increases—Saudi Arabia. Having fought further price increases ever since the 1973 quadrupling, it now objected to the leapfrog because it feared that short-term winnings, however great, would be followed by large and perhaps ruinous losses for the exporters. Oil would price itself out of its competitiveness in energy markets; Middle Eastern producers would become, once again, the residual, to be shunned on grounds of energy security. Their importance to the industrial world, and their clout, would decline.

The Saudis issued what became known as the “Yamani Edict,” which stated that Saudi Arabia would keep to official prices, no surcharges. In addition, Saudi Arabia insisted that the four Aramco companies sell at those official prices both to their own affiliates and to third-party buyers. If Saudi Arabia found that they were adding premiums to their prices, there would be hell to pay; they would run the risk of having their access to Saudi oil cut off at a time when every company ached over its short supplies. Saudi Arabia was virtually alone among the exporters in taking such a position, both at the OPEC meeting in March and all through the following months. Though its only OPEC ally was the United Arab Emirates, there was much behind-the-scenes pressure and outright imploring from Western nations. One senior official after another traveled from Washington—and Bonn, Paris, and Tokyo—to Riyadh to ask the Saudis for price moderation and to applaud every action they took in that direction.

Yet in the second quarter of 1979, the Saudis cut production, bringing it back to the precrisis “ceiling” of 8.5 million barrels per day. Despite the Saudi insistence on keeping to official prices, that cutback helped to send spot prices soaring. A variety of reasons were proffered. Were the Saudis trying to send a conciliatory and neighborly signal to the new Islamic regime of Ayatollah Khomeini by making room in the market for the returning Iranian production and thus avoiding a regional confrontation? Or were they seeking to express their dissatisfaction with the Camp David peace accords between Israel and Egypt, which had been signed on March 26? Or were they focused on their own financial position? The Saudis were debating among themselves about conservation of oil reserves and “the whole question of production in excess of actual revenue needs,” especially at a time when they saw that American oil imports were actually rising. Or did the Saudis, observing the return of Iranian supplies to the market, simply assume that the crisis was easing and would soon be over? Whatever the reason, the blunt fact was that only Saudi Arabia had the kind of spare capacity that the United States had once had, the sort that could, if brought into production, quell the panic. So, even as the Western emissaries extolled the Saudi price moderation, they also urgently and repeatedly asked the Saudis to increase production again and put more supplies into the market to dampen the panic.

“Living Dangerously”

In one of those coincidental tricks of history, several hours after that latest OPEC meeting had adjourned, in the early morning hours of March 28, a pump failed and then so did a valve at the Three Mile Island nuclear plant, near Harrisburg, Pennsylvania. As a result, hundreds of thousands of gallons of radioactive water poured into the building housing the reactor. Days of near-panic passed before the extent of the accident could be evaluated. Some insisted that it was not an “accident,” only an “incident.” Whatever it was called, the unthinkable and supposedly impossible had happened to a nuclear plant; something had gone seriously wrong.

In itself, the event at Three Mile Island raised large doubts about the future development of nuclear power. It also threatened the assumption throughout the Western world that nuclear power would be one of the major lines of response to the 1973 oil crisis. Did Three Mile Island, by limiting the nuclear option, mean that the industrial world would find itself more dependent on oil than it had expected? Altogether, the accident contributed to the gloom, pessimism, and even fatalism that was now gripping the Western world. “A situation which we had imagined around the middle 1980s where there would be a real scramble for oil is already here,” said the commissioner in charge of energy for the European Community. “All the choices are difficult, and most are very costly,” declared David Howell, the British Secretary of State for Energy. “Friends, we are living dangerously.”

The efforts of Western governments to mobilize cutbacks in demand, to blunt the upward price spiral, were proving insufficient. Yet they were loath to invoke the newly devised emergency oil sharing system of the International Energy Agency for fear that it would introduce more rigidity into the market. And, in any case, it was unclear whether the official trigger point for the system, a 7 percent shortfall, had actually been reached. Governments were torn between two fundamental objectives: obtaining relatively low-priced oil and guaranteeing secure supplies at any price. Once they had been able to do both. But now they found that these two objectives were contradictory. Governments talked the first but, when domestic pressures began to be felt, pursued the second.

The top priority was to keep domestic consumers, who happened to be voters, supplied. Energy questions had become, explained a European energy minister, “short, short, short-run politics.” The various Western governments became promoters and champions of aggressive worldwide acquisition hunts, either indirectly through companies or directly through state-to-state deals. The result was suspicion, accusation, finger pointing, and anger among those supposedly allied nations. For the consuming countries as well as for the oil companies, it appeared to be every man for himself. Prices continued to climb.

To the American public the reemergence of gas lines, which snaked for blocks around gasoline stations, became the embodiment of the panic. The nightmare of 1973 had returned. Owing to the disruption of Iranian supplies, there was, in fact, a shortage of gasoline. Refineries that had been geared to Iranian light and similar crudes could not produce as much gasoline and other lighter products from the heavier crude oils to which they were forced to turn as substitutes. Inventories of gasoline were low in California, and after news reports and rumors of spot shortages, all 12 million vehicles in the state seemed to show up at once at gasoline stations to fill up. Emergency regulations around the country made matters worse. Some states, in an effort to avoid running out of supplies, prohibited motorists from buying more than five dollars worth of gasoline at any one time. The results were exactly the opposite of what was intended, for it meant that motorists had to come back to gas stations that much more frequently. Meanwhile, price controls limited the conservation response; and indeed, if gasoline prices had been decontrolled, the gas lines might have disappeared rather quickly. At the same time, the federal government’s own allocation system froze distribution patterns on a historical basis and denied the market the flexibility to move supplies around in response to demand. As a result, gasoline was in short supply in major urban areas, but there were more than abundant supplies in rural and vacation areas, where the only shortage was of tourists. In sum, the nation, through its own political immobilism, was rationing gasoline through the mechanism of gas lines. And, to make matters worse, gas lines themselves helped beget gas lines. A typical car used seven-tenths of a gallon an hour idling in a gas line. One estimate suggested that America’s motorists in the spring and summer of 1979 may have wasted 150,000 barrels of oil a day waiting in line to fill their tanks!

As gas lines spread across the country, the oil companies were once again public enemy number one. The charges flew thick and fast: The companies were withholding oil, tankers were being held offshore to drive up prices, the industry was deliberately hoarding oil and creating shortages to increase prices. Clifton Garvin, the chairman of Exxon, decided to “go public” personally to try to refute the accusations. Garvin was a cool, measured man, who liked to weigh things very carefully. A chemical engineer by training, he had worked in every facet of the oil business. He was also a passionate bird watcher, as had been his father, an activity he took some ribbing about from his peers. (Later, he was on the board of the National Audubon Society.) Now he made himself available to the media, was interviewed on television, and appeared on the Phil Donahue Show, surely a first for the chief executive of the world’s largest oil company. But it seemed that whenever Garvin started explaining about the basic matter of inventories and the complex logistics of the business, the interviewers, eyes glazing over, would cut him off and change the subject.

Garvin had no trouble when it came to reading the public mood. “The American is a funny person,” he recalled. “He worships the result of things that are big, economies of scale, mass production, but he hates anything that is big and powerful, and the oil industry is seen as the biggest and most powerful industry.” It was an impersonal hatred, but Garvin was not about to take any chances. One day, he found himself sitting way at the back of a gas line at his local Exxon station, on Post Road in the heart of Greenwich, Connecticut. The dealer, recognizing the chairman of Exxon, came over to him and offered to have him drive around the back of the station to get to the front of the line.

“How are you going to explain that to everyone else in the line?” asked Garvin.

“Why, I’ll tell them who you are,” replied the dealer, helpfully.

“I’m sitting right here,” Garvin said firmly.8

Petroleum and the President

The gas lines marked the beginning of the end of the Presidency of Jimmy Carter. He was one more victim of the revolution in Iran and the upheaval in the oil market. Carter had come to Washington two years earlier, in 1977, with a paradoxical persona that reflected the two sides of his experience: a naval officer turned peanut farmer, and a born-again Christian. He was the Preacher, seeking a moral rehabilitation of post-Watergate America with his unembroidered, down-to-earth Presidency. He was also the Engineer, trying to micromanage the intricacies of the American political machine and to show his command over both big issues and little details.

Carter would have seemed particularly well-suited to leadership in the midst of the 1979 panic; after all, his agenda and interests as both Preacher and Engineer had converged on energy and oil, making them the number-one domestic focus of his Administration. And now he confronted the crisis he had been warning against. But there would be no reward nor credit given to the prophet, only blame. By mid-March of 1979, two months into the crisis, Eliot Cutler, his chief White House energy adviser, was already warning of the “darts and arrows coming at us from all directions—from people who want to get rid of the regulatory structure, from people concerned about inflation, from people who want a sexy and affirmative program, from people who don’t want the oil companies to profiteer, and generally from people who want to make life politically miserable for us.” Shortly after, there came the accident at Three Mile Island, and the anxious nation saw photographs of the nuclear engineer, Jimmy Carter, wearing little yellow safety booties, tramping through and personally inspecting the control room of the damaged plant.

In April, Carter delivered a major speech on energy policy that merely intensified the barrage. He announced a decontrol of oil prices, which was certain to infuriate liberals, who tended to blame almost everything bad on the oil companies. And he coupled decontrol with a “windfall profits tax” on “excess” oil company earnings, which was no less sure to anger conservatives, who blamed the panic on government meddling, controls, and overweening regulation.

A special Presidential task force on energy met repeatedly in secrecy to try to figure out some solution to the gasoline shortage. The only quick way to fight the global oil disruption, and end the gas lines before they ended the Carter Presidency, was to get the Saudis to increase their output again. In June, the American ambassador to Riyadh delivered an official letter from President Carter as well as a more personal handwritten note. Both implored the Saudis to increase output. The ambassador also met for several hours with Prince Fahd, the head of the Supreme Petroleum Council, seeking a commitment to boost production and try to hold down the price. That same month, Carter went to Vienna to complete negotiation of the SALT II arms control agreement with Soviet President Leonid Brezhnev. The signing of SALT II, in negotiation for seven years through three administrations, might have been celebrated as a landmark achievement. But not then. It simply did not count. The only thing that mattered was the gas lines—and they were Carter’s fault.

“The Worst of Times”

Much of the nation now seemed to be in the grip of the gasoline shortage. A survey by the American Automobile Association of 6,286 service stations nation-wide showed that 58 percent were closed Saturday, June 23, and 70 percent were closed on Sunday, June 24, leaving Americans with very little gasoline on the first weekend of the summer. Independent truckers were conducting a rowdy, violent nationwide strike, now three weeks old, to protest fuel shortages and rising prices. A hundred truckers snarled rush-hour traffic for thirty miles along the Long Island Expressway, infuriating tens of thousands of motorists. Soaring gas prices were not the only problem. Inflation was also moving up to an unprecedented level.

As had happened before, in times of short supply if not outright panic, support was growing in Washington for a huge “synthetic fuels” program to reduce American dependence on imported oil. In the view of many, Three Mile Island had closed the door on nuclear power. The alternative was a program to produce several million barrels per day of synthetic fuels, primarily oil-like liquids and gases, through chemistry and engineering. The main methods would be hydrogenation of coal—a process similar to that the Germans had used during World War II—and the pulverizing and heating of shale rocks in the Rockies to temperatures up to nine hundred degrees Fahrenheit. Such a program would, to be sure, cost tens of billions of dollars at a minimum, it would take years to implement, it would raise major environmental issues—and it was not at all certain that it would actually work, at least on the scale proposed. Politically, however, the concept seemed increasingly irresistible.

Even as the growing support for “synfuels” added further to the pressures on the beleaguered Administration, Carter himself departed for his next foreign trip, to Tokyo to meet the leaders of the other major Western countries for an economic summit. Fearing the impact of the oil shortage on the overall health of the international economy, the seven leaders of the Western world turned Tokyo into an all-energy summit. It was also a very nasty one. Tempers were badly frayed. “This is the first day of the economic summit, and one of the worst days of my diplomatic life,” Carter wrote in his diary. The conference discussions were harsh and acrimonious. Even lunch, Carter noted, “was very bitter and unpleasant.” German Chancellor Helmut Schmidt “got personally abusive toward me…. He alleged that American interference in the Middle East trying to work for a peace treaty was what had caused the problems with oil all over the world.” As for Britain’s Prime Minister Margaret Thatcher, Carter found her “a tough lady, highly opinionated, strong-willed, cannot admit that she doesn’t know something.”

Carter’s next stop was supposed to be a vacation in Hawaii. But Stuart Eizenstat, the chief White House domestic policy adviser, feared that a holiday now would be a political disaster of the first order. He thought that the Presidential party, which had been traveling abroad for most of a month, did not comprehend the mood of the country. On the way to the White House one morning, Eizenstat had sat for forty-five minutes in a gas line at his local Amoco station, on Connecticut Avenue, and he had found himself seized by the same almost uncontrollable rage that was afflicting his fellow citizens from one end of the country to the other. And the target of the national fury was not merely hapless station operators and the oil companies, but the Administration itself. “It was a black, dark period,” Eizenstat later said. “All the problems, inflation and energy, were coalescing together. There was a sense of siege and an inability to get on top of the issue.” The President, preoccupied with foreign affairs, needed to understand what was happening at home.

So, on the last day of the Tokyo Summit, Eizenstat dispatched a grim, depressing memorandum to Carter about the continuing gas shortage: “Nothing else has so frustrated, confused, angered the American people—or so targeted their distress at you personally.” He added, “In many respects, this would appear to be the worst of times. But I honestly believe that we can change this to a time of opportunity.” The exhausted Carter canceled Hawaii and, returning from Tokyo, found that his approval rating in the polls had plummeted to 25 percent, matched only by Nixon’s in the final days before his resignation. He retreated to Camp David, in the Maryland mountains, where, equipped with a 107-page dissection of the national mind by Patrick Caddell, his favorite pollster, he aimed to meditate on the nation’s future. He also met with a cross-section of American leaders and embraced a new book that found “narcissism” at the heart of America’s problems.

In July, the Saudis pushed up their output from 8.5 to 9.5 million barrels per day. They had heeded the implorings from the United States and had responded to their assessment of their own security interests. The Saudi boost would help ease the shortage over the next few months, but it was not a longterm solution, nor, as events had suggested over the previous couple of months, something on which to base America’s and the Western world’s entire well-being. Nor could the extra supplies do much immediately to cool the hot temper of the American public.

As a result, Carter was compelled to do something, and to be seen doing something—something big, something positive, something that seemed to offer that long-term solution. He embraced the concept of a vast synthetic fuels plan, essentially based on the hundred-billion-dollar program put forward by Nelson Rockefeller in 1975. This would be the “sexy and affirmative program” that was desperately needed, and his staff worked feverishly to turn it into a specific proposal. Some voices were raised in doubt. TheNew York Times reported in a front-page story on July 12 that a new study from a group of researchers at the Harvard Business School argued that the United States could reduce its oil imports much more cheaply and quickly through a program of energy conservation than through synthetic fuels. Others warned that a synthetic fuel program would have enormous adverse environmental consequences. But in the speech he delivered in July to a distraught nation on America’s “crisis of confidence,” Carter announced his own plan to make 2.5 million barrels per day of synthetic fuels by 1990, primarily out of coal and shale oil. He had originally wanted to propose 5 million barrels per day, but had been talked out of it. Though he did not use the word, his address became known as Carter’s “malaise” speech.

Carter also wanted to make changes in his own Cabinet, and in particular, to force the resignations of two of its members, Treasury Secretary Michael Blumenthal and Health Secretary Joseph Califano. His political advisers, Hamilton Jordan and Jody Powell, had convinced him that the two Cabinet officers were disloyal. Stuart Eizenstat argued otherwise to the President, saying that he had worked with the two men every day and that they were committed to the Administration. Eizenstat urged the President more strongly than he had ever urged him on any other matter not to fire Califano, who had strong political support, and Blumenthal, who was the Administration’s chief inflation fighter. But Carter had already made up his mind. They would have to go. But how? Just before a Cabinet meeting, Carter told a few of his senior staff that he had decided to have all his Cabinet members submit their resignations and then he would keep only those he still wanted. Some of the staff members fervently tried to dissuade him. Such an action could create a panic. No, the President insisted, it would be seen as positive by a crisis-weary nation, the turning over of a welcome new leaf.

Carter immediately went into a tense Cabinet meeting dominated by the grim situation that the Administration found itself in. As worked out beforehand, Secretary of State Cyrus Vance proposed that all Cabinet secretaries submit their resignations so that Carter could begin afresh. The President concurred. A few minutes later, Robert Strauss, the Middle East peace negotiator, walked in and, not knowing what had just transpired and why the room was so somber, jokingly said that everybody ought to resign. His remark was greeted with silence. Finally, one of the other Cabinet secretaries leaned over and whispered, “Bob, shut up.” They had all just resigned.

Altogether, five people left the Cabinet, some fired and some resigning. The aim was to bolster Presidential leadership. It had quite the opposite effect. The sudden news of the departures sent tremors of uncertainty throughout the country and the Western world. Over lunch that day, the national editor of the Washington Post muttered darkly that America’s central government had just collapsed.9

The Cat-and-Mouse Dialectic

Spot prices in the world oil market eased off in the summer of 1979, but only slightly. Some OPEC countries continued to reduce their output. Iraq announced that it was extending its embargo to preclude shipments to Egypt—the champion of Arab nationalism and the oil weapon in 1973—to punish Anwar Sadat for the sin of having signed the 1978 Camp David peace accords with Israel. Nigeria, in the most dramatic use of the “oil weapon” since 1973, nationalized BP’s extensive holdings in that country in retaliation for the British company’s alleged indirect sales to South Africa, and then turned around and auctioned off its newly nationalized supply at higher prices.

All the while, buyers continued their quest for oil to build up inventories and fill storage tanks to the very brim in the face of uncertainty and fear for the future. The assumption was that demand was continuing to grow. It was a fatal miscalculation. In fact, a decline had already set in, reflecting the first effects of conservation as well as an economic downturn, but the fall was almost imperceptible at first. And buying remained frantic. As Shell’s supply coordinator observed, “Every negotiation with a producer government was a finger-biting exercise: there was one dominant thought in the mind of company presidents and negotiators alike—to hold on to term oil and limit the need for spot acquisition. The suppliers of course sensed this, and a cat-and-mouse dialecticbegan.… Both the terms of contracts and the prices that had to be paid became continuously worse.”

As in most panics, information—or rather the lack of information—was the key. If there had existed timely, credible, reliable, widely accepted data, companies would have recognized earlier that they were increasing stocks to an unnecessarily high level and that the underlying demand was weakening. But there was not much in the way of such statistics, and what early indicators did exist were not given much attention. So the stock build continued more or less unabated—as did rising prices.

The increases were not limited, by any means, to the OPEC countries. Britain’s new state oil company, BNOC, raised prices on its desirable and secure North Sea crudes, and, for a moment, was even leading the market. “If BNOC, and by implication the British Government, were behaving like OPEC, who could expect OPEC to put an end to the oil price spiral?” asked one observer of the oil market. With the exception of Saudi Arabia, the OPEC countries lost no time in catching up. The market was further churned by the traders, for whom the volatility, disarray, and confusion made this a heyday. Some were from established commodity trading houses, some had entered the business after 1973, and some were johnny-come-latelies who rushed into the fray, their only capital requirement being what was needed to get a telephone and a telex installed. They were everywhere, it seemed, in every transaction, vying with the traditional oil companies for ownership, as cargoes still on the high seas were sold and resold—one cargo, fifty-six times over. The traders’ only interest was the quick sale. Enormous sums were at stake; a single cargo on a supertanker could be worth $50 million.

The raison d’être for the traders was the breakdown of the integrated systems of the majors. In the old days, oil had stayed within a company’s integrated channels or was swapped among companies. But now state oil companies accounted for larger and larger shares of total production, they had no down-streams of their own, and they sold their oil to a wide spectrum of buyers: major oil companies, independent refiners, and traders. The traders did best when they could take advantage of the enormous arbitrage between the lower prices in the term-contract market and the higher, more-volatile prices in the spot market. “The trader could be in a superb position,” observed a senior executive from one of the majors. “All he had to do was manage to get himself a term contract of some sort.” He could then turn around and sell it for eight dollars a barrel more on the spot market, making an enormous fortune for himself on a single cargo. And how did the trader obtain his fantastically lucrative term contract? “What he had to do to get his contract was to pay a ridiculously small commission to the appropriate parties. And sometimes the required brown envelopes would be passed.” By comparison to what the trader in turn could make, this was hardly more than a gratuity.

Thus, in the summer and early fall of 1979, the world oil market was in a state of anarchy whose global effects far exceeded those of the early 1930s, in the wake of Dad Joiner’s discovery in East Texas, and those of the very earliest days of the industry in western Pennsylvania. And while the pockets of the producers and traders swelled with money, consumers were forced to dip ever deeper into their own pockets to pay the price of panic. For many of the exultant exporters, it was another great victory for oil power. There was no limit, they thought, to what the market would bear and what they would earn. Some in the Western world gloomily began to fear that what was at stake was not only the price of the world’s most important commodity, not only economic growth and the integrity of the world economy, but perhaps even the international order and world society as they knew it.

“The World Crisis”

Among those leaving Jimmy Carter’s Cabinet in that summer of 1979 was James Schlesinger. Depressed by the unfolding situation not only in energy markets but in international politics—and by the position of the United States—Schlesinger decided to give vent to his feelings in a farewell speech in Washington, just as he had done four years earlier, when Gerald Ford forced him out as Secretary of Defense. Unusually somber, even for him, Schlesinger intended his speech this time to be hortatory and a warning. He began by invoking as his text The World Crisis, Winston Churchill’s history of World War I. It was in the pages of that book that Churchill wrote of his efforts to convert the British Navy from coal to oil, despite the risk that would come from depending upon oil from Iran. Now, six decades later, eerily and uncannily, that risk had become reality.

“Today we face a world crisis of vaster dimensions than Churchill described half a century ago—made more ominous by the problems of oil,” said Schlesinger. “There is little, if any, relief in prospect. Any major interruption—stemming from political decision, political instability, terrorist acts or major technical problems—would entail severe disruptions…. The energy future is bleak and is likely to grow bleaker in the decade ahead.” But as Schlesinger would later say of himself, “I’m not a brooder,” and in this instance there was nothing more that he could do about the situation. And so with that foreboding valedictory, yet also with some sense of relief, he departed public life. Very shortly after, the pessimism reflected in his remarks, and the dark anxieties about what he saw as growing Western vulnerabilities and what others were now calling the decline of the West, were to take on yet more bizarre and devastating significance.10

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