The Rise and Fall of OPEC in the Twentieth Century 2019931801, 9780198832836

Citation preview

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

T H E R I S E A N D FA L L O F O P E C I N T H E T W E N T I E T H C E N T U RY

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

The Rise and Fall of OPEC in the Twentieth Century G I U L I A N O G A R AV I N I

1

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

1 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Giuliano Garavini 2019 The moral rights of the author have been asserted First Edition published in 2019 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2019931801 ISBN 978–0–19–883283–6 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

A Checca, Clio e Margherita, le mie risorse naturali inesauribili

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Contents List of Figures List of Tables

Introduction: Sovereign Landlords in the Twentieth Century Prologue: Petrocapital and the Birth of the Petrostate Big Oil Maracaibo The Red Line Achnacarry Petronationalism 1. Fifty-Fifty The Venezuelan Model Mission to the Middle East Fifty-Fifty in the Middle East The Coup in Iran

ix xiii 1 11 12 15 22 32 39 53 54 62 67 78

2. OPEC The Spirit of Suez The Oil Pentagon The Independents Arab Oil The Baghdad Meeting The End of the Fifty-Fifty

88 89 101 107 111 116 125

3. The Consumer’s Decade Producers and Consumers OPEC’s Modernizers The Royalty Negotiations New Oil Regions The Petroleum Policy Statement

135 136 139 145 159 168

4. The Energy Crisis The Petrostate’s 1968 Peak Oil The Producer Market Nationalization and Participation Limits to Growth

179 180 187 193 203 210

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

viii Contents 5. The Oil Revolution The Oil Shock Sovereign Consumer Politics Boumedienomics The Algiers Summit

216 217 230 236 247

6. Uneasy Dialogue North–South Dialogue Trilateralism Malaise Revolution OPEC’s Long-Term Strategy

254 255 266 272 280 289

7. The Failed Cartel Relaunching the Anglocene Non-OPEC The Cartel Yamani’s Last Battle

301 302 317 326 346

Epilogue: The Crisis of the Petrostate Desert on Fire Apertura Archives and Online Sources Books Journal Articles Index

361 362 373 393 397 409 413

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

List of Figures 0.1. La Rosa oilfield in Maracaibo started production in 1922

18

0.2. Plaza de Toros in Juan Vicente Gòmez’s home town of Maracay, inaugurated in 1933

21

0.3. Map image of the1928 Red Line Agreement

29

0.4. The harbor of Kuwait in 1918, before the beginning of the “age of oil”

38

0.5. The Venezuelan petroleum workers’ strike of 1936

45

1.1. Main hydrocarbon reservoirs in the Gulf

69

1.2. General view of the Abadan refinery in the 1950s (Braim housing for European expats in the foreground)

80

1.3. Protests by Iranian oil workers in 1951. Some of the slogans read: “Shame on the assassins of the workers . . . Khuzestan”; “Honour to the petroleum workers of Khuzestan who resisted the tyranny, they have been killed but did not surrender”

84

2.1. Informal settlement for Arab labor at the beginning of the 1950s in the north of Ahmadi, the “oil town” of Kuwait

97

(Shell Historical Heritage & Archive, 190F-00801)

(No known copyright)

(BP Archive, ARC117446/001)

(Qatar Digital Library, Ref: Photo 496/6/35)

(https://commons.wikimedia.org/w/index.php?curid=68707021) (A.S. Alsharhan, “Petroleum systems in the Middle East”, 2014)

(BP Archives, ARC 180451/007)

(Getty Images, License 50865335)

(KOC Archives)

2.2. El Pentágono Petrolero: the Oil Pentagon. The five sides of the Pentagon, starting from the top, are: 1. Reasonable participation; 2. CCCCH, the commission in charge of analyzing production, marketing and prices; 3. No more concessions; 4. CVP, the Venezuelan Petroleum Corporation; 5. OPEC

106

2.3. Manuel Egaña and Juan Pablo Pérez Alfonzo shake hands with Nasser at the first Arab Oil Congress in Cairo in 1959

112

2.4. Heads of delegations to the Baghdad meeting of September 1960 from top to bottom: Fuad Rouhani (Iran), Tala’at al Shaibani (Iraq), Ahmed Sayed Omar (Kuwait), Abdallah Al-Tariki (Saudi Arabia), Juan Pablo Pérez Alfonzo (Venezuela)

121

2.5. Membership of the Petroleum Exporting Countries (OPEC) in1975 3.1. Comparative oil production in the Middle East (1948–73)

123 141

(Juan Pablo Pérez Alfonzo, El Pentágono Petrolero, 1967)

(Courtesy of Bernard Mommer)

(OPEC Archives)

(Petroleum Press Service)

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

x

List of Figures

3.2a. Leaflet from OPEC’s PR Department in 1963

150

3.2b. Leaflet from OPEC’s PR Department in 1963

150

4.1. Peak production and the rise of import dependence in the US. “Conventional” oil production peaked in 1970; since then the US has been increasingly reliant on petroleum imports. The new increases in production in the 2000s are due to “unconventional” oil

190

4.2. The two chief negotiators, Jamshid Amouzegar for OPEC and Lord Strathalmond for the international oil companies, shake hands after signing the Tehran Agreement in February 1971

198

4.3. French President Georges Pompidou addresses chief French negotiator (minister F.X. Ortoli) during Franco-Algerian oil talks: “What I am reading Ortoli? Are you willing to compromise on the crucial issue?”

206

4.4. The “World Model Standard Run” from the 1972 edition of the Limits to Growth Club of Rome report shows widespread consensus at the beginning of the 1970s on swiftly declining resources

212

5.1. Evolution of the official price of Arab Light crude

222

5.2. Book cover of Arabia Without Sultans by Fred Halliday (1974). A rich Arab sheik (resembling king Faisal of Saudi Arabia) drowns in oil. Elites in the Gulf had to respond both to nationalist pressures from within, as well as to widespread global activism

232

5.3. The North–South divide in 1975. OPEC countries were then considered as the “spearhead” of the G77 developing countries 5.4. Houari Boumediene inaugurating the 1975 OPEC Summit in Algiers

238 249

6.1. The bus carrying Carlos (in front to the right of the driver) and his hostages from OPEC countries to Vienna’s airport, December 22, 1975

256

6.2. The hotel where the “Doha split” OPEC meeting in 1976 took place. The skyline of Doha was far from the impressive collection of skyscrapers it is today

262

6.3. OPEC price increases in the 1970s spur efforts at energy conservation in OECD countries: a Mini Morris advert of 1980

273

6.4. Popular representation of the relationship between Western Europeans and Arab sheiks during the oil price increases of the 1970s

279

(ENI Historical Archives) (ENI Historical Archives)

(US Energy Information Administration)

(BP Archive, ARC174241/023)

(Le Figaro, 6/1/1971. Copyright: Coll. et Cliché Caricadoc)

(The Limits to Growth, 1972)

(Ian Skeet, OPEC. Twenty-Five Years of Prices and Politics, 1988)

(Copyright Peter Fluck)

(Getty Images, license 956645300)

(AP Images,  ID 070125017577)

(AP Images, Id: 534889738499)

(British Motor Museum)

(Frankfurter Allgemeine Zeitung, 1979)

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



List of Figures

xi

6.5. At the OPEC Conference meeting in Bali in December 1980, the Iranian delegate to OPEC sits next to the portrait of the Iranian Petroleum minister then held captive by Iraqi military forces

299

7.1. Mass rally of striking miners in Mansfield (UK) in May 1984

309

7.2. The Statfjord B platform in the Norwegian North Sea became operational in 1982. At the time this “monster” was the world’s largest concrete platform, testifying to the gigantic financial and technological effort to develop North Sea oil

312

7.3. Increase in non-OPEC oil production from the second half of the 1970s; parallel decline of OPEC output at the beginning of the 1980s

322

7.4. The rise and fall of oil revenues in selected OPEC countries in the first decade after the 1973 oil revolution

348

7.5. Historical evolution of crude oil prices

355

E.1. International oil rent per family group in Venezuela in the twentieth century

373

E.2. National Monument (MONAS) in the middle of Merdeka (Independence) Square in Jakarta. The other towering building on the square is the headquarters of the Indonesian national oil company PERTAMINA

377

E.3. Arial view of Abu Dhabi town and the Corniche in 1960

379

E.4. The towering new building of ADNOC (the old ADNOC building is the small building on the right) on the Corniche of Abu Dhabi

379

E.5. Fire and looting in the center of Caracas during the Caracazo, February 27, 1989. The official death toll was 300 victims

383

E.6. Global fossil fuels consumption (1965–2005). The graph shows a decline in petroleum consumption from the middle of the 1970s to the middle of the 1980s

390

(AP Images, Id: 98853415334)

(The Daily Mail, 3 March 2014)

(https://commons.wikimedia.org/wiki/File:Statfjord_B_(DEX_PR_000829).jpg)

(DOE, Annual Energy Review, 1985)

(OPEC, Annual Statistical Bulletin, 1985) (BP, Statistical Review of World Energy)

(Asdrúbal Baptista, Teoría Económica del Capitalismo Rentístico)

(Photo taken by the author)

(BP PLC and Abu Dhabi National Archives)

(Photo taken in 2018)

(Photo by Tom Grillo. Archivo Fotografia Urbana, image 127710)

(Simon Pirani, Burning Up, 2018)

E.7. Increasing levels of carbon emissions from fossil fuels during the Anthropocene 391 (Tyler Volk, CO2 Rising, 2008)

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

List of Tables 0.1. Main commodities exported by Venezuela from 1913 to 1940

19

0.2. Net petroleum exports by region from 1938 to 1960

39

1.1. Leading joint ventures in the Middle East

70

(Miguel Izard, Series estadísticas para la historia de Venezuela, 1970) (Petróleo y Otros Datos Estadísticos (PODE), 1960) (Ian Skeet, OPEC, 1988)

3.1. Outcome of the royalty-expensing negotiations in 1964

154

5.1. These figures for the oil production in Abu Dhabi in 1974/5 show that OPEC countries, even when (as in this case) they had not nationalized all oil production, were taking in most of the value of a barrel of oil

229

7.1. OPEC establishes a collective production ceiling and individual quotas starting from 1982 (OPEC Bulletin) E.1. Saudi budget deficit from the 1986 to 2000

333 372

(The Economist, January 23, 1965)

(Figures taken from TNA, FCO 8/2432)

(Steffen Hertog, Princes, Brokers and Bureaucrats, 2010)

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Introduction Sovereign Landlords in the Twentieth Century The mansion of modern freedoms stands on an ever-expanding base of ­fossil-fuel use.1 Dipesh Chakrabarty [Proprietors of land] are the only one of the three orders whose revenue costs them neither labour nor care, but comes to them, as it were, of its own accord, and independent of any plan or project of their own. That indolence, which is the natural effect of the ease and security of their situation, renders them too often, not only ignorant, but incapable of that application of mind which is necessary in order to foresee and understand the consequences of any public regulation.2 Adam Smith Herein lies the enormous difference, as regards the land, between old countries and colonies: the legal or actual non-existence of landed property.3 Karl Marx

Most people have entrenched ideas about petroleum. Some think that it must be the ultimate explanation for the wars raging in the Middle East and elsewhere. Others consider oil companies as responsible for worldwide corruption and ­environmental damage. Many of those who lived through the oil price shocks of the 1970s have vivid memories of car-free Sundays, lines at gas stations, widespread inflation, and place the blame for these evils either on the oil companies or the Gulf sheiks, or on both. Arguing that petroleum has been the most valuable commodity and the most important energy source of the twentieth century sounds like a truism, much like the fact that John D. Rockefeller was the richest man on Earth up to when he died in 1937. The price of petroleum is a hotly debated topic. The price of copper or that of coffee (itself a key energy source of a different kind) is not on verybody’s lips. The price of oil, on the contrary, often makes the news’ 1  Dipesh Chakrabarty, “The Climate of History: Four Thesis”, in Critical Enquiry, 35:2 (Winter 2009), pp. 197–222. 2  Adam Smith, An Enquiry into the Nature and Causes of the Wealth of Nations (Hartford: Lincoln & Gleason, 1804), p. 206. 3  Karl Marx, “Transformation of Surplus-Profit into Ground-Rent”, Capital, Vol. III, Part IV.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

2

The Rise and Fall of OPEC in the Twentieth Century

headlines worldwide. When, from 2011 to 2013, the price of Brent crude oil had risen well above 100$ a barrel it was hard to get it off people’s minds. Consumers seem to think that a price of petroleum of over 100$ a barrel is not acceptable. But if Coca Cola or Bertolli olive oil sold in barrels (an oil barrel equals almost 160 litres) their price in 2019 would be respectively in the order of 110$ for Coke and 960$ for Bertolli oil. Consumers are so responsive to the price of petroleum because it is perceived as being in a different league when compared to copper, coffee, or bauxite, representing, as opposed to Coke or olive oil, an essential pillar of our modern way of life. Petroleum is experienced in different ways: in the form of an indirect tax on the consumer’s general lifestyle, as a trigger for global political instability, as gasoline for automobiles. The closest consumers come to contact with this liquid is through the smell of gasoline at gas stations, advertisements of companies such as EXXON, or by observing from the distance the smoking chimneys of refineries. Petroleum derivatives such plastics or synthetic textiles, together with hundreds of other such byproducts, are hardly ever mentally associated to the natural resource itself. This distance from the materiality of crude oil (something that is also true for other raw materials) is felt not just by consumers, but also by the majority of those living in the countries where crude oil is extracted in order to then be exported all around the world. The areas where some of the most productive oil fields in the world are located, Lake Maracaibo in Venezuela, the East of the Arabian Peninsula, the platforms off the coast of the Niger Delta or in the rough waters in the North Sea, are remote, hidden from the daily gaze of citizens, except for the relatively small number of workers employed by extracting industries. The way the history of petroleum has mostly been written reflects this distance from the materiality of the natural resource as well as the hysteria about price levels and the fears about the possibility of “running out of oil.” Historians have mostly been interested in the wealth that oil trade generates, its impact on military and economic power, and the way it has promoted industrialization and consumerism or induced panic reactions among consumers. Up until the early 1990s, most accounts of the rise of the petroleum industry were typically written either as criticism of the machinations of large multinational companies (as in the first examples of investigative journalism such Ida Tarbell’s enquiry on Standard Oil at the very beginning of the twentieth century, or in John Blair’s The Control of Oil after WWII) or as a paean to the entrepreneurship, vision and machinations of the titans of the oil industry (as in the best of these accounts, Daniel Yergin’s classic The Prize).4 These narratives share the underlying assumption that while oil production itself has been beneficial in providing a cheap and abundant energy source, the main problem resided in the distribution of oil profits and in the geopolitical conflicts for the control of the resource. Parallel narratives have always been present of course, as well as early criticisms of over-consumption fossil fuels, but they have 4  John Malcolm Blair, The Control of Oil (New York: Pantheon Books, 1976); Ida Tarbell, The History of Standard Oil Company (New York: McClure and Phillips, 1904); Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Free Press, 1991).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Introduction: Sovereign Landlords in the Twentieth Century

3

been far from mainstream.5 In 1931 Lewis Mumford wrote possibly the first world history in which energy sources featured prominently as history-shaping agents and expressed his hope that “carboniferous capitalism” would soon be substituted by a new civilization based on solar energy.6 By the beginning of the 1990s the advent of the age of petroleum has instead been increasingly associated, in both academic literature and public opinion, with fundamentally negative shifts that have occurred during the twentieth century: the rise of consumerism with the pollution and waste this has generated (including the formation of plastic continents floating around the oceans); the corruption and authoritarianism in the oil exporting countries; the triumph of neoliberalism and the financialization of the economy triggered by the “recycling of “petrodollars” in the 1970s; and, crucially, the damning accusation that the massive use of fossil fuels is the most important cause of global warming, with potentially catastrophic consequences for life as we know it on planet Earth. Amitav Ghosh summarizes some of the recent criticism of fossil fuels, and of petroleum in particular: Think of the vocabulary that is associated with these substances: naphtha, bitumen, petroleum, tar, and fossil fuels. No poet or singer could make these syllables fall lightly on the ear. And think of the substances themselves: coal and the sooty residue it leaves on everything it touches; and petroleum—vicious, foul smelling, repellent to all the senses. Of coal at least it can be said that the manner of its extraction is capable of sustaining stories of class solidarity, courage, and resistance, as in Zola’s Germinal, for instance, and John Sayles’s fine film Matewan. The very materiality of coal is such as to enable and promote resistance to established orders. The process through which it is mined and transported to the surface creates an unusual degree of autonomy for miners; as Timothy Mitchell observes, “The militancy that formed these workplaces was typically an effort to defend this autonomy”. It is no coincidence, then, that coal miners were in the front lines of struggles for expansion of political rights from the late nineteenth until the mid-twentieth century, and even afterward. [. . .] The materiality of oil its very different from that of coal: its extraction does not require large numbers of workers, and since it can be piped over great distances, it does not need a vast workforce for its transportation and distribution. This is probably why its effects, politically speaking, have been the opposite of those of coal. That this might be the case was well understood by Winston Churchill and other leaders of the British and American political elites, which was why they went to great lengths to promote the large-scale use of oil.7

According to Ghosh (here echoing an argument first popularized in Timothy Mitchell’s Carbon Democracy), the deleterious impact of the rise of the global petroleum industry extends well beyond climate change and the “imperialism” of 5  Christophe Bonneuil and Jean-Baptiste Fressoz, The Shock of the Anthropocene: The Earth, History and Us (London: Verso, 2017). 6  Lewis Mumford, Technics and Civilization (London: Harcourt, 1934), pp. 222–4. 7  Amitav Ghosh, The Great Derangement: Climate Change and the Unthinkable (Chicago: University of Chicago Press,2016), pp. 73–4.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

4

The Rise and Fall of OPEC in the Twentieth Century

oil multinationals to include issues such as the weakening of democracy and of working-class activism, and the advent of an “economy” grounded in the utopia of unlimited and painless growth.8 Andreas Malm has argued that coal was not inherently more productive than other energy sources (say hydro-power) at the beginning of the industrial revolution, but that fossil capital triumphed because it allowed steam engines to be placed in areas where workers could be more easily controlled.9 Other scholars are now emphasizing that it was the willingness to ­promote peculiar technological, social and economic systems, rather than demand, that launched the age of fossil fuels: “push” factors prevailed over “pull” factors when it came to energy models.10 Rather than debating the positive or negative connotations of the advent of petroleum as a key global energy source I try, from the peculiar vintage point of a “diplomatic historian”, to see how the twentieth century looks like when viewed from the perspective of the landlords that rule over the most productive oil regions in the world. These very few areas still hold the vast majority of the world’s proven reserves of petroleum: as of 2017, countries that are members of the Organization of the Petroleum Exporting Countries (OPEC) accounted for more than 80 percent of global oil reserves, the vast majority being concentrated in the Middle East and Latin America.11 The sovereign landlords that are protagonists of this book, the most important raw materials exporters of the twentieth century, I have called “petrostrates”, a term that I did not invent and that is often used with negative connotations (the Collins English Dictionary describes a petrostate as a “small oilrich country in which institutions are weak and wealth and power are concentrated in the hand of a few”).12 These territories did not decide to become so dependent on petroleum exports. It was both foreign capital and foreign countries that encouraged them, at the beginning of the twentieth century, to become suppliers of an increasingly important energy source. I am well aware that people who live in petrostates might consider the term diminishing, insufficient to describe sophisticated societies and elaborate traditions present everywhere from Iran and Saudi Arabia to Nigeria and Venezuela. The label “petrostate” does not render justice to the complexity and diversity of such territories and societies. Equally problematic is the fact that there is no clear-cut definition of what a petrostate is. A petrostate is in fact more than an oil producer. Neither the United States nor Russia, and not even Great Britain, Norway, or Mexico have ever been petrostates. From my ­perspective, two basic features define petrostates. The first is a peculiar geological conformation that makes parts of their territory incredibly productive in terms of a natural resource that is in high demand globally. This means that if (or rather when) demand for petroleum will fade away, petrostates will inevitably cease to be 8  Timothy Mitchell, Carbon Democracy: Political Power in the Age of Oil (London: Verso, 2011). 9 Andreas Malm, Fossil Capital: The Rise of Steam Power and the Roots of Global Warming (London:Verso, 2016). 10  Simon Pirani, Burning Up. A Global History of Fossil Fuel Consumption (London: Pluto Press, 2018). 11 OPEC, Annual Statistical Bulletin, 2017. 12  https://www.collinsdictionary.com/dictionary/english/petrostate. Consulted on 8 January 2019.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Introduction: Sovereign Landlords in the Twentieth Century

5

such. The second feature is that petroleum must account for the vast majority of their exports, while income from these exports must make up a very significant proportion of their economy and fiscal revenues—according to the International Energy Agency the oil sector, in the period from 2010 to 2014, accounted for 17 percent of Iraq’s GDP, 32 percent of that of Kuwait, 19 percent of that Saudi Arabia and 11 percent of that Venezuela; while for all these countries oil revenues represented more than 60 percent of their fiscal income. In their history of the SAMA (the Saudi version of a central Bank), Ahmed Banafe and Rory Macleod explain the crucial role that the revenues from oil exports play in the Saudi economy to this day: “if oil money stopped coming in - if, say, there was a breakthrough in the cost of renewables so the oil price collapsed and stayed down - the government would have nothing to spend unless it raised money from local taxes, something that would decimate the economy.”13 This means that production size matters, but isn’t everything. If a major oil producer such as the United States becomes a net oil importer, something that happened as early as 1948, by ­definition it cannot be defined as a petrostate. At the same time a country such as Mexico, which started exporting petroleum once again in the late 1970s, cannot be defined a petrostate because the value of these exports, while significant, still constitutes a relatively small portion of its economy. To sum up: for a petrostate to exist there must be a significant global demand for petroleum and participation to this global market must be vital for the country in question. By founding OPEC in 1960, a handful of countries have made it even easier to identify petrostates.14 Intellectuals and politicians in OPEC countries have been very outspoken about the key role petroleum has played, and continues to play, in their countries. The Venezuelan historian and writer Domingo Alberto Rangel noted that “no event in Venezuela can be separated from oil [. . .] It is the fundamental force that shapes national life. All aspects of the Venezuelan economy are legitimate or bastard children of that substance that irrevocably stained our history.”15 In both Iran and Nigeria, numerous intellectuals and politicians have dealt with the primacy of oil in the countries’ economic and political systems, for better and for worse.16 The profound legacy of political figures such as Mossadegh in Iran or Boumediene in Algeria is deeply associated to the nationalization of the oil sector. Even in petrostates in which the debate over the role of petroleum industry has been more muted, everything their citizens experience—from skyscrapers to desalination plants, from highways to migrant housemaids, from citizenship regulations to fiscal regimes, from shopping malls to traffic jams—can inevitably be linked to the development of the petroleum industry and its relationship with the global market 13  Ahmed Banafe and Rory Macleod, The Saudi Arabian Monetary Agency, 1952–2016. Central Bank of Oil (London: Palgrave MacMillan, 2017), p. 4. 14  Indonesia was readmitted to OPEC in 2015 even though it was by then a net oil importer. It decided to “freeze” its membership again, less than a year later. 15  Quoted in: Miguel Tinker Salas, The Enduring Legacy: Oil, Culture, and Society in Venezuela (Durham and London: Duke University Press), p. 2. 16  For example Abohlassan Banisadr in the Iranian case or Ken Saru-Wiwa in Nigeria testify as to how oil was, and still is, at the very centre of the political and social struggles in those two countries.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

6

The Rise and Fall of OPEC in the Twentieth Century

for petroleum. In a petrostate petroleum exports cannot explain everything, but nothing can be really explained without taking into account the impact of these petroleum exports. Petrostates are often disliked because of their “rentier state” status.17 They have the aura of a “pariah state” status when compared to other “productive” members of the international community. Land rent has been progressively marginalized as a topic of mainstream political economy, and has generally negative connotations for liberal and Marxist intellectuals and economists alike.18 The general dislike for rent as “undeserved wealth” lies very deep in widely engrained religious and cultural views all over the world. Variations of Paul’s biblical admonition that “if any would not work, neither should he eat” (Thessalonians 3:10) exist in many different cultures. I hold no such prejudice against land rent and sovereign landlords. I simply observe that land rent exists because the Planet Earth is finite and because much of the ecosphere has been split up in the twentieth century among sovereign landlords that we call nation states. Each of these nation states has peculiar geographical and cultural characteristics and has to deal with them. The existence of petrostates such as Venezuela, Saudi Arabia, Nigeria, and Iran, countries with such an important regional and global role, while at the same time crucially dependent on international land rent (a rent deriving from mineral exports), cannot be easily dismissed as the outcome of a quirk of international political economy that has generated extravagant regimes. I am not interested here in closely describing the formation of petrostates, how they have built up their state bureaucracies, or how they represent themselves politically and culturally. Other scholars are heading in this direction, and I have used some of their extremely valuable work that manages to embed the natural endowment of a territory with the analysis of its politics, economics, and ­identity.19 My focus is instead on the international cooperation among petrostates and the way they have struggled to negotiate their presence in a world that became increasingly dependent from the trade in hydrocarbons as a key energy source. I concentrate on the petrostates’ governments, oil technocrats, and elites, and the way they have cooperated (or clashed) over what is best to be done with petroleum. This book starts by describing the emergence of Venezuela in the 1920s as the biggest 17  The classic here is: Hazem Beblawi and Giacomo Luciani (eds.), The Rentier State: Nation, State and Integration in the Arab World (London: Croom Helm and IAI, 1987). 18  For a theoretical discussion of the theory of rentier capitalism and the role of international ­mineral rent: Asdrúbal Baptista, Teoría económica del capitalismo rentístico (Caracas: Banco Central de Venezuela, 2010). 19  A few examples quoted in this book of how fertile recent research on the impact of petroleum on the culture, politics, society and institutional setting of individual oil producing countries: Andrew Apter, The Pan-African Nation: Oil and the Spectacle of Culture in Nigeria (Chicago: Chicago University Press, 2005); Fernando Coronil, The Magical State: Nature, Money, and Modernity in Venezuela (Chicago: The University of Chicago Press, 1997); Christopher  R.W.  Dietrich, Oil Revolution: Anticolonial Elites, Sovereign Rights, and the Economic Culture of Decolonization (Cambridge: Cambridge University Press, 2017); Michael Herb, The Wages of Oil: Parliaments and Economic Development in Kuwait and the UAE (Ithaca: Cornell University Press, 2014); Douglas Rogers, The Depths of Russia: Oil, Power, and Culture after Socialism (Ithaca: Cornell University Press, 2015); Myrna Santiago, The Ecology of Oil: Environment, Labor and the Mexican Revolution 1900–1938 (Cambridge: Cambridge University Press, 2006); Robert Vitalis, America’s Kingdom: Mythmaking on the Saudi Oil Frontier (Stanford: Stanford University Press, 2007).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Introduction: Sovereign Landlords in the Twentieth Century

7

oil exporter in the world and with the parallel formation of the oil “concessions system” in the Middle East during the 1920s and 1930s. It explains the reasons for the birth of OPEC in 1960, and then follows the success and failures of the cooperation among petrostates up to the beginning of the 1990s, when the organization seemed to so weak as to be ready to collapse. More specifically, the book starts with the transformation of Venezuela into the world’s first petrostate during the 1930s and ends at the beginning of the 1990s, when powerful internal and external forces were pushing this country that had so crucially contributed to the creation of OPEC out of the organization. The reason I decided to write about petrostates and OPEC is because I reckon that international cooperation among petrostates tells us a great deal about some of the driving forces of twentieth-century international history. These pages could be read as the story of the interaction between global capitalists (the international oil companies that have throughout the twentieth century consistently ranked among richest companies in the world), sovereign landlords (petrostates), and ­sovereign consumers (the governments of the key oil consuming countries). This triangular global interaction between capitalists, sovereign landlords, and sovereign consumers has generated its own peculiar forms of international cooperation: oil companies have cooperated in what has been defined by some as the International Oil Cartel, an oligopoly of the largest international oil companies that lasted up to 1973; petrostates did the same with the creation of OPEC in 1960; and sovereign consumers eventually reacted to the growing power of OPEC by launching the International Energy Agency (IEA) in 1974. This global triangular interaction for the control and management of natural resources speaks volumes about some of the key political and economic conflicts of the twentieth century, complicating a narrative of the international history that still overwhelmingly focuses either on the Cold War and on great power politics. It is worth noting here that the countries that gave birth to OPEC found themselves on opposite sides of the Cold War divide, and even on opposing sides of various regional “cold wars” as highlighted in the tensions between Iraq, Saudi Arabia, and Iran. Their citizens spoke different languages, belonged to different religious faiths, ate different foods, inhabited regions that varied from tropical forests to deserts, and organized themselves politically in different systems, including democracies, socialist regimes, and absolute monarchies. It is safe to say that most of them did not share cultural identities, political models, or international alliances. What brought them together was both their position as raw materials exporters, their distinctive natural resource endowment, and the willingness to stand up to the tremendous external pressures that shaped them and weighed heavily on their key industry and income source. There are some excellent histories of OPEC (or memoirs in which OPEC plays a prominent role), written by former policymakers in petrostates, journalists, or practitioners in the oil industry.20 I have learned from these accounts, and they are 20  Histories of OPEC have been written by: Abdul Amir Q. Kubbah, Bernard Mommer, Francisco Parra, Ian Seymour, Ian Skeet, Pierre Terzian. Key memoires and essays by protagonists have been written among others by: Belaid Abdessalam, Philip Asiodu, Ali Al-Naimi, Mana Al-Otaiba, Abdallah Al-Tariki, Fadhil J. Chalabi, Manuel Egaña, Juan Pablo Pérez Alfonzo, Fuad Rouhani.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

8

The Rise and Fall of OPEC in the Twentieth Century

extensively quoted. The wealth of knowledge about petroleum and OPEC is generally far greater than what we know about other commodities and raw materials in the twentieth century.21 But most histories of OPEC have been written before the beginning of the 1990s (when OPEC still featured prominently on global news), while none has been published by a professional historian or is based on in-depth archival research. By using previously unavailable archival material, my main ­contribution to the literature has been twofold. First: I have tried to link the rise of OPEC with the ongoing debates on development and with the efforts of other Third World countries influence the ­international agenda. OPEC has been the first international organization of the so-called “Global South.” It was created one year before the Non-Aligned Movement was launched in 1961 and four years before the creation of the United Nations Conference for Trade and Development (UNCTAD). Petrostates, particularly through OPEC, have in many ways embodied and spearheaded the international struggle for sovereignty over natural resources that came to represent and symbolize one of the key developmental strategies of “post-colonial” governments, as well as one of the priorities in the international human rights debate of the late 1960s and early 1970s. In this struggle for state sovereignty over natural resources OPEC countries, specially through increasing state control over their key industry industry, have been so successful that the oft-repeated representation of raw materials producers from the developing countries simply as being “pillaged” throughout the twentieth century by industrialized countries and avid corporations has more to do with the realm of myth than that of historical reality. On the other hand, being successful in taking over a key industrial sector is not the same as avoiding the trap of dependence, as begin able to resist massive influx of money and avoiding the over-exploitation of the country’s natural resources. Secondly, I have also tried to connect the history of petrostates more deeply with environmental history. If petroleum is “commodified” (i.e. simply considered a commodity to be exchanged on the market), states become mere market actors, and natural resources such as petroleum are separated from the environment in which they are produced, the pollution and development models they generate, and the conditions of local populations.22 On the contrary, local elites, workers, and political movements have often approached petroleum as an exhaustible ­natural resource and refused to consider it a commodity as any other. Petrostates have played an active role in influencing oil consumption worldwide by manipulating prices and by expanding or reducing oil production, and have thus directly affected CO2 emission globally, one of the key environmental concerns today. As  paradoxical as this might seem, sovereign landowners have been, and might actually become once more, active contributors in the effort to reduce fossil fuels consumption. In her environmentalist pamphlet This Changes Everything Naomi 21 The Norwegian University of Science and Technology (NTNU) is trying to overcome the knowledge gap between petroleum and other raw materials with its project History and Strategic Raw Materials Initiative. 22  For example: David Harvey, Spaces of Global Capitalism (London: Verso, 2006).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Introduction: Sovereign Landlords in the Twentieth Century

9

Klein considers that the only critics of “extractivism” (an ideology to which, according to Klein, both the socialists and liberals have become addicted) have been native communities and unorthodox intellectuals.23 As counterintuitive or displeasing (at least for Klein) as this might be, I argue that Gulf sheiks, Persian Shahs, and exotic democratic politicians in the Caribbean, have also at particular moments questioned the limits of “extractivism” and thought about preserving natural resources for future generations. As will be shown in Chapter 4, one of the driving factors behind OPEC’s 1973 increase of the oil prices, commonly referred to as the “oil shock,” was the concern for overconsumption in industrialized countries and for the swift depletion of natural resources. After he was diagnosed with cancer Juan Pablo Pérez Alfonzo, one of the key figures in the history of OPEC and of Venezuela, spoke about the failure of OPEC as to act “ecological force.”24 This book is partly the story of the rise and fall of OPEC as such an “ecological force.” The reason that finally convinced me to write this book is that, after looking into the archives of various governments, international organizations, and oil ­companies, I have been able to access the (previously unavailable) minutes of the OPEC Conferences, starting from the founding of OPEC in 1960 up to the so-called oil “countershock” of 1986. Since the OPEC Conference is the main decision-making body of the organization—the institution where ministers and delegates from their respective countries meet to discuss, and eventually to approve, binding resolutions—this proved to be an immensely valuable source. These minutes are edited and are subject to approval by all delegates, and are thus somewhat “sanitized.” On the other hand, they are also long and well-articulated documents (frequently well over 200 pages) that reflect in great detail hours or days of discussions, and present the official views of the OPEC member countries at crucial junctures in the history of petroleum. They offer, in other words, a wonderful tool to get behind the curtains of one of the most recognizable acronyms in the world. * * * I have done much travelling from Venezuela to Indonesia, including spending a few years in Abu Dhabi. During these travels I had the opportunity of interviewing some of those who played a role in the petroleum industry of their respective countries or in OPEC itself, as well as of chatting with people I considered well-informed observers with historical memory. I have used these interviews as background, as a device that allowed me to better understand the mentality and way of thinking— often alien to me—of oil technocrats and politicians from different OPEC countries. I hardly ever quote my conversations directly because this left my interlocutors more freedom in our conversations. Among others, I want to thank for their patience: Belaid Abdessalam, Abdul Amir Al-Anbari, Abdullah bin Hamad Al-Attiya, Issam Al-Chalabi, Yousef Khalifa Al-Yousef, Abdulla Al-Naibari, Philip Asiodu, Fadhil J. Al-Chalabi, Sid Ahmed Ghozali, Khair El Din Haseeb, David 23  Naomi Klein, This Changes Everything: Capitalism vs. The Climate (New York: Simon & Schuster, 2014), pp. 176–83. 24  “El Testamento de Pérez Alfonzo”, Resumen, September 16, 1979.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

10

The Rise and Fall of OPEC in the Twentieth Century

Heard, Hosseini Kazempour Ardebili, Hocine Malti, Michael Olunrenfemi, Siham Razzouki, Ramzi Salman, Ian Skeet, Dr. Subroto, Pierre Terzian. Although they surely disagree with many of the things I have written, and might consider a few of my “outsider’s” observations as very naive, former Venezuelan Governor to OPEC Bernard Mommer and former Saudi Governor to OPEC Majid Al-Moneef have been to this book what Juan Pablo Pérez Alfonzo and Abdullah Tariki have been to OPEC: in different ways they have been crucial to my research and have deeply influenced my way of viewing things. I have benefited from significant funding by the Italian Ministry of Education, University and Research (MIUR) through the FIRB project Engines of Growth that I co-directed at the University of Padua with my friend, colleague, and intellectual partner Duccio Basosi from the University of Venice. I was fortunate enough to be appointed Senior Research Fellow in the Humanities at NYU Abu Dhabi for three years, a position that allowed me to have time to think and write as well as access to travel funds. This book would not have existed without the NYUAD Humanities Research Fellowships Program and this is why I left the key OPEC documents I used in the book to the NYUAD library so that they can be used by other researchers. Reindert Falkenburg and Martin Klimke, heads of my program during my stay at NYUAD, had confidence in me and in my research. Alex Sandu, the program manager, made my stay easy and helped in every possible way. All the rest of the team at the NYUAD Institute make it such a great place. I have written some of these pages during my stay as Senior Braudel Fellow in the enchanted Villa Salviati of the European University Institute. My Norwegian c­olleague Dag Harald Claes co-funded a conference on OPEC at NYU Abu Dhabi and shared his views and comments about international energy politics and economics. The list of colleagues that have helped me one way or the other is endless. More are left out than those I can mentioning here: Ervand Abrahamian, Touraj Atabaki, Alain Beltran, Juan Carlos Boué, Bao Maohong Éric Buissière, Chris Dietrich, Nelida Fuccaro, Stephen Gross, Victor McFarland, Einar Lie, Molly Nolan, David Painter, Werner Sollors, Henning Turk, Corinna Unger, Robert Vitalis. A special mention goes to my Italian friends working on or around international energy issues, or simply for their support: Elisabetta Bini, Massimo Bucarelli, Mario Del Pero, Silvio Labbate, Marta Musso, Leopoldo Nuti, Francesco Petrini, Federico Romero, Massimiliano Trentin, Antonio Varsori. Christopher Wheeler was the first at OUP to believe in the project. After he left Cathryn Steele took over the responsibility and I could not have been in better hands. I also have to thank especially Richard Nybakken for having helped with translating and editing some of the chapters of the book, as well as to Giancarlo La Rocca for helping with the index.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Prologue Petrocapital and the Birth of the Petrostate And over there in Europe, people had begun making smaller machines still, with even greater power, or at least with the same power as steam-engines. Indeed not with steam. With oil. [. . .] The forces of nature were beginning to be changed by man so as to be put to his service.1 Pramoedya Ananta Toer, This Earth of Mankind We owe it to the progress of the world and to the world’s need for its natural resources to see to it that the republics of Tropical America behave like citizens of the world rather than like pirates or members of savage headhunting tribes.2 Hiram Bingham, The Future of the Monroe Doctrine, 1920

While travelling through Latin America at the beginning of the nineteenth century, the German naturalist and philosopher Alexander Von Humboldt pointed to the relationship between colonialism and the exploitation of nature. According to his biographer Andrea Wulf, Von Humbolt debated nature, ecological issues, imperial power and politics in relation to each other. He criticized unjust land distribution, monocultures, violence against tribal groups and indigenous work conditions—all powerfully relevant issues today. As a former mining inspector, Humboldt had a unique insight into the environmental and economic consequences of the exploitation of nature’s riches. He questioned Mexico’s dependence on cash crops and mining, for example, because it bound the country to fluctuating international market prices.3

A century after Von Humbolt’s trip, the petroleum industry was on its way of becoming a sophisticated and globally interconnected system for the economic exploitation of nature. Small scale trade in bitumen and crude oil for various uses had been going on for centuries, but the modern petroleum industry now stretched out from the United States and the Russian Empire, into Southeast Asia, Latin 1  Pramoedya Ananta Toer, The Earth of Mankind, trans. Max Lane (New York: Penguin, 1996), pp. 17–18. 2  Hiram Bingham, “The Future of the Monroe Doctrine”, in Journal of International Relations, 10:4 (April 1920), pp. 392–403 (p. 400). Bingham was professor of Latin American history at Yale University and the Journal of International Relations would later be renamed Foreign Affairs. 3 Wulf, The Invention of Nature, p. 105.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

12

The Rise and Fall of OPEC in the Twentieth Century

America, and the Middle East. These new oil regions were, either formally or informally, under tutelage from one or the other of the Great Powers. Some of these oil regions could be identified on early twentieth-century colonial maps by the pinkish-red of the British Empire, the purple-blue of its French rival, or the yellow-brown of the Dutch Empire. Once the Soviet revolution had blocked Russian petroleum exports, AngloAmerican petrocapitalism quickly managed to gain almost absolute control over a trade that already by the 1920s was among the most profitable in the world. Oil money poured into US oil companies and into mammoth financial institutions such as the Chase National Bank, partly owned by the founder of Standard Oil John D. Rockfeller. Oil fueled the automobile industry that would constitute the paradigm of industrialization and consumerism for the rest of the twentieth century. Anglo-American petrocapital was comfortably dealing with colonized ­territories such as Kuwait, or with subaltern states such as Iraq. Unfettered access by private ­ etroleum as the companies to the oilfields represented a key asset for the advent of p energy source of the future. The male tycoons and the technocrats of the oil industry, as well their backers within their own governments, espoused a racialized view of international relations that placed responsibility for maintaining global stability and for the free flow of raw materials in the hands of white (preferably AngloAmerican) nations alone.4 Labor relations everywhere from Venezuela, to Saudi Arabia, to Iran to the Dutch East Indies, were characterized by ­discrimination against non-white workers, unfair pay, inequitable working conditions, and substandard accommodations, as well as unequal access to technical knowledge and positions of authority. The new oil exporting regions in the 1920s and 1930s were among the most precious gems of the Earth of Mankind. But the Mankind in question was almost exclusively white, its civilization propelled by Wall Street or the City of London. But while petrocapital flourished in the 1920s and 1930s, one of the unintended consequences of its expansion was the birth of its nemesis: the petrostate. The petrostate, increasingly dependent for its very survival on the rent generated by petroleum trade, was a sovereign landlord that struggled to exert some degree of control over its natural resources. This chapter will review some key features of the expansion of petrocapital in Venezuela and in the Middle East (Iran, Iraq, as well the Arabian Peninsula) and will deal with the less known story of the emergence of Venezuela, under the rule of its strongman general Juan Vicente Gómez, as the first petrostate of the twentieth century. BIG OIL Already by the beginning of the twentieth century most of the key protagonists of petrocapital had emerged. 4 Robert Vitalis, White World Order, Black Power Politics: The Birth of American International Relations (Ithaca: Cornell University Press, 2015).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

13

John D. Rockefeller’s Standard Oil had gained control of the largest refineries in the US and monopolized the distribution of crude oil via railroads and pipelines. By the end of the nineteenth century it controlled almost 85 percent of US ­petroleum production and provided the US and European market with kerosene, at the time the most important refined product derived from crude oil. Standard Oil was thus able at the same time to earn an enormous amount of money and to “rationalize” an industry that was prone to boom and bust cycles by providing it with a modicum of organization which helped stabilize the price. In 1911, the Supreme Court of the United States, bowing to the public pressure of the “muckrakers”, partly endorsed by President Theodore Roosevelt, busted Standard Oil, ordering it to be split up into thirty-four different companies. The most important of these—and the most relevant to this story because of their future involvement in the exploration for petroleum outside the US—were Standard Oil of New Jersey (SONJ, later EXXON), Standard Oil of New York (SOCONY, later MOBIL), and Standard Oil of California (SOCAL, later Chevron). TEXACO (eventually merging with Chevron) was born instead in 1902 soon after the discovery, with the famous Spindletop gusher, of the huge oilfield of Southeast Texas that put the state on the global oil map. On the other side of the Atlantic, meanwhile, Europe’s second industrial revolution also required increasingly significant quantities of lighting oil and lubricants for machinery. By the middle of the nineteenth century, crude oil production (always for kerosene) had begun in Galicia and Romania. Of even greater ­importance, however, was the development of the other great hub of oil production (alongside the US): the city of Baku on the Caspian Sea. There, the Rothschilds and the Swedish-Russian Nobel family had taken on the job of building a railway from Baku to the city of Batumi in Georgia, in order to move crude oil from the Caspian to the Black Sea to supply the European market. The transport company Shell, owned by Marcus Samuel, a British businessman of Iraqi-Jewish descent, soon entered the Russian oil game, obtaining the rights to sell Caspian crude oil east of Suez. By the end of the century Baku oilfields were producing three times more than the US fields. In 1905, after massive worker’s protests in Baku—whose leaders included a Bolshevik revolutionary later known by the name of Stalin— the Rothschilds partnered with Shell, exchanging the rights to Russian oilfields for shares of company stock. Both the United States and Russia had pioneered the development of oil industry auditioning for their roles as twentieth-century energy superpowers. In the Dutch East Indies, the Royal Dutch Petroleum Company had begun drilling on the island of Sumatra, in the steamy jungles of the South Pacific, the heart of what is now Indonesia, In 1907, Royal Dutch merged with Shell Transport, the Dutch providing 60 percent of the capital and the British the remaining 40 percent. The new company, which kept the Shell symbol (the scallop logo), controlled promising oil deposits in both Europe (Baku) and Asia, and owned a fleet specialized in crude oil shipping. Royal Dutch Shell quickly affirmed its status as the most important international petroleum company, becoming Standard Oil’s greatest competitor. Responding to the hostile bids by Rockefeller’s Standard

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

14

The Rise and Fall of OPEC in the Twentieth Century

Oil, Henry Deterding, the charismatic head of Shell demonstrated a precocious ­inclination for splitting up the international market: It is not wise for Standard to buy us. I dream and (if we have success in Romania, California or Russia this will soon be realized) I believe our goal is to be the only opponent, and therefore silent partner of Standard. There is no place for a monopoly on this earth, but there is for two great companies working together wherever this is possible.5

By the end of WWI, Shell was drilling in the Dutch East Indies, Romania, Mexico, and Russia. It had secured the most promising oil concessions in Venezuela and, between 1919–20 it also began to produce oil in the United States, thus taking the competition onto Standard’s own turf. In 1920 Shell became the world’s largest oil producer—though not necessarily the most profitable—and accounted for some 11 percent of worldwide production. Shell had managed to surpass in production the largest US company, Standard Oil of New Jersey (SONJ), which had to rely almost exclusively on US crude production.6 The first petroleum concession in the Middle East was granted in 1901 by the Shah of Persia to William Knox D’Arcy, an English businessman who had made a fortune in mining in Australia. The concession was supposed to last for sixty years. It extended across three-quarters of the country, excluding only the five northern provinces that fell under the Russian sphere of influence, and granted the Shah a 16 percent ownership and share in the companies’ future profits and shares.7 Because of a lack of funds, D’Arcy was very soon forced to sell the concession to the British Burmah Oil (even though the Shah was not consulted, the government said goodbye to its 16 percent ownership), which in 1908 uncovered the giant oilfield at Masjid-i-Sulaiman in the southwestern Arab province of Khuzestan. After this discovery, the Anglo-Persian Oil Company (APOC, later the Anglo-Iranian Oil Company, and finally British Petroleum) was founded in 1909 under the auspices of the British Empire: a British monopoly in Persia was thought to be useful in part to prevent Russian oil from reaching Asian markets. Anglo-Persian immediately set out to build a pipeline capable of transporting crude oil from the fields in Khuzestan to a new refinery located on the hot, humid island of Abadan on the Shatt Al-Arab, where the Euphrates and the Tigris rivers join before discharging into the Gulf. Not long after the British company had discovered the first oil deposits in the Middle East, the Admiralty, headed by the then Liberal MP Winston Churchill, decided to convert the vessels of the Royal Navy—the institution protecting all the vital lifelines of the British Empire—from coal to oil power, in the belief that this new fuel source would deliver better performance for its warships and greater ­flexibility in refueling and supply. Oil weighed less per thermal unit and did not 5  Jan Luiten van Zanded, Joost Jonker, Stephen Howarth, Keetie Sluyterman, A History of Royal Dutch Shell, Vol.1, (Amsterdam/New York: Oxford University Press: 2007), p. 116. 6  George S. Gibb and Evelyn Knowlton, History of Standard Oil Company (New Jersey), vol. 2: The Resurgent Years, 1911–1927 (New York: Harper, 1955), p. 454. 7 R.W. Ferrier, The History of the British Petroleum Company, vol. I: The Developing Years (1901–1932) (Cambridge: Cambridge University Press, 1982), pp. 32–3.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

15

require stokers to continually feed the boilers, thus releasing a significant amount of labor for other duties. It was also cleaner when burning, which provided a major advantage in battle at sea, since smoke could be detected over great distances. This crucial strategic choice for the Navy pushed the British government to invest directly in Anglo-Persian - once again without any previous consultation with the Qajar Shah - acquiring a 51 percent majority stake upon the outbreak of the First World War in August 1914. Critics denounced the decision on multiple grounds: as an unthinkable intrusion of the state into the economic sphere; a waste of public funds; a rash decision to rely upon a strategic resource basically non-existent within the lands of the Empire; a potential source of tension with the Persian government. Churchill won the day by emphasizing that it was vital for the Empire to exert direct control over such a promising oil region—there were as yet no known crude oil deposits in lands directly under British control—and suggesting that the Navy could be supplied at cost. Betraying the widespread racialist and nationalistic sentiments of the era, he also cautioned against relying on an Anglo-Dutch venture such as Shell, which was after all run by a Jew, Marcus Samuel, alongside the Dutchman Deterding. After the end of WWI, Churchill congratulated himself for the significant returns that the Persian oilfields had bestowed upon His Majesty’s coffers: some £16 million in appreciation on the government’s initial investment, £6.5 million in dividends, as well as savings of £3 million in oil procurement.8 “We shall be entitled also to claim,” he famously added, “that the mighty fleets laid down in 1912, 1913 and 1914, the greatest ever built by any power in an equal period, were added to the British Navy without costing a single penny to the taxpayer.”9 MARACAIBO The Great War had highlighted the strategic importance of petroleum, not simply for the production of kerosene as an illuminant, but also as fuel for the new modern warfare both on sea and land (and in the air). The importance of petroleum to the US economy increased dramatically in the decade following the Great War: 23 million cars already motored along American roads by the end of the 1920s, and the countryside was increasingly crisscrossed with highways and dotted with gas stations. The automobile industry of Great Britain, France, and Germany, meanwhile, still lagged behind, having not yet fully exploited the Fordist efficiency model. The perspective of the expansion in the use of the combustion engine and of electricity networks led petrocapital to invest in the most productive oil regions and to hunt globally for concessions. In this endeavour it was supported by a US department of Interior that, after the war, was increasingly worried about the possible overexploitation of the US oil fields. As summarized by Megan Black: “The

8  John Blair, The Control of Oil (New York: Vintage, 1978), p. 49. 9 George W. Stocking, Middle East Oil: A Study in Political and Economic Controversy (Nashville: Vanderbilt University Press, 1970), p. 20.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

16

The Rise and Fall of OPEC in the Twentieth Century

conservation debate [. . .] was catapulted to the international stage.”10 Nature had not been democratic in the distribution of easily accessible crude oilfields, so that investments were concentrated in very few areas: suffice it to say that in 1938 some 56.9 percent of global exports came from Venezuela, while an additional 29.5 percent came from the Middle East.11 We must be careful though, not to overstate the impact of petroleum in the interwar years on everyday life in the industrialized countries and in that of the new oil exporting regions—with the very notable exception of Venezuela. King Coal remained the primary commercial energy source until the end of the beginning of the 1960s, and lost its primacy in the realm of transportation only in the course of the 1930s. The coal miners, as George Orwell reminds us, remained the backbone of the interwar industry, and also continued to play a significant political role well after the end of WWII: Our civilization, pace Chesterton, is founded on coal, more completely than one realizes until one stops to think about it. The machines that keep us alive, and the machines that make machines, are all directly or indirectly dependent upon coal. In the metabolism of the Western world the coal-miner is second in importance only to the man who ploughs the soil.12

The consumption of non-renewable fossil fuels—that is, both coal and ­petroleum— was highly concentrated in a very limited number of industrial centers; seven nations consumed more than 80 percent of the world’s fossil fuels before WII.13 Few observers would have yet thought to define the twentieth century as the “petroleum century.” In 1925, the only country where petroleum accounted for as much as one-fifth of energy consumption was the United States, where it eventually reached one-third of total energy consumption only on the eve of the Second World War.14 Outside of the United States, petroleum remained a secondary energy source until after WWII, accounting in 1925 for 16 percent of global commercial energy use (up from 6 percent before WWI) and primarily employed for transport and military vehicles.15 Having said this, the importance of petroleum had already caught the i­ magination of politicians, writers, and journalists. Anton Zischka, a Viennese journalist and writer, and an astute observer of global commodity flows (as well as a future Fascist sympathizer), noticed at the end of the 1930s that in the Musée du Trocadéro in Paris there was an African musical instrument made out of a Shell oil can and remarked that: “According to the statistics of the global conference on motor 10  Megan Black, The Global Interior. Mineral Frontiers and American Power (Cambridge: Harvard University Press, 2018), p. 65. 11 Ruptura, El imperialismo petrolero y la revolución venezolana. Tomo 3: La OPEC y la nacionalizaciones. La renta absoluta (Caracas: Fondo Editorial Salvador de la Plaza, 1979), p. 42. 12  George Orwell, The Road to Wigan Pier (London: V. Gollancz Ltd, 1937), p. 21. 13  John Clark, The Political Economy of World Energy: A Twentieth-Century Perspective (Chapel Hill: University of North Carolina Press, 1991), p. 53. 14  Mary Nolan, Transatlantic Century: Europe and America 1890–2010 (Cambridge: Cambridge University Press, 2012), p. 82. 15 Pirani, Burning Up, p. 13.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

17

power, all this worldwide mechanical energy corresponds to the muscular strength of twenty-five billion men; that is, for each of the earth’s inhabitants, there are about twelve of these so-called ’steel slaves.’ And without oil, one out of five of these slaves could not exist.”16 * * * The oil region outside the US (remember Russia had become marginal to global oil trade in the aftermath of the Communist revolution) where petroleum production and exports developed most rapidly after the end of the Great War was Venezuela. This was far from a given: until 1921 Mexico was the second biggest oil producer in the world after the US, while Venezuelan production was next to non-existent in comparison. Venezuela had already declared its independence as far back as 1811. At the end of the nineteenth century it was still one of the poorest countries in Latin America. The geography of Venezuela is like that of a Latin America in miniature: the mountains of the Andes to the west; a typically Caribbean coastline to the north, featuring palm trees, atolls, and white sand beaches; and agricultural plains with immense stretches of impenetrable Amazonian rainforest to the center and the south. It is also endowed with a very intricate water system dominated by the Orinoco, whose Delta in the north-east, explored by Von Humboldt during his travels, also holds immense reservoirs of “unconventional” (extra-heavy) crude oil. Despite a relatively moderate climate, with an average annual temperature of 27 degrees Celsius (approximately 80 degrees Fahrenheit), and despite easy access to food (especially fruit), Venezuela, with a landmass four times larger than that of Great Britain, had no more than 3 million inhabitants in the 1930s. Before the Great War, it was a sparsely populated country with basically no industrial base. This was the territory in which the “new Spaniards” descended with their foreign technology: One day some Spaniards mounted a dark apparatus on three legs, a grotesque stork with crystal eyes. They drew something (on a piece of paper) and opened their way through the forest. Other new Spaniards would open roads [. . .] would drill the earth from the top of fantastic towers, producing the fetid fluid [. . .] the liquid gold converted into petroleum.17

In 1914 Mene Grande, close to Lake Maracaibo, became the first oil field to be commercially exploited by international oil companies. Then in 1922 another massive reservoir was struck at La Rosa, on the eastern shore of Maracaibo (Fig. 0.1).18 The Barroso II well marked the presence of Venezuela on the international oil map. It was capable of producing more than 100,000 barrels a day. With the first gusher at La Rosa, oil “covered the trees, the vines and in ever-growing streams flowed through the underbrush like black serpents”; the saturated land 16  Anton Zischka, La guerra segreta per il petrolio (Milano: Bompiani, 1936), p. 5. 17  José Rafael Pocaterra quoted in Gustavo Coronel, The Nationalization of the Venezuelan Oil Industry, (Lexington: Lexington Books: 1983), p. 10. 18  The quest for Venezuelan oil is described in: Ralph Arnold, The First Big Oil Hunt, Venezuela 1911–1916 (New York: Vantage Press, 1969).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

18

The Rise and Fall of OPEC in the Twentieth Century

Fig. 0.1.  La Rosa oilfield in Maracaibo started production in 1922. (Shell Historical Heritage & Archive, 190F-00801).

would remain barren for several years.19 Just by way of comparison the Spindletop field in Texas, a crucial discovery that in 1901 allowed to US production to surpass that of Baku and provided half of the US production, produced less than La Rosa. Venezuelan oil fields were attractive. Geographically, Maracaibo was close to the potential export markets, in particular to the United States and, in Western Europe, to Great Britain. The two islands of Curaçao and Aruba, just off the coast and part of the Dutch Antilles, offered a guarantee of political stability (they were part of the Dutch empire) and a perfect geographical location to build refineries. On top of all this, the waters and delta of the vast estuary-lake of Maracaibo were home to gigantic and hyperproductive deposits, such the one mentioned in La Rosa, that promised lower extraction costs when compared to US oil fields. But Venezuela was also politically attractive at the beginning of the 1920s. The US elite had long held a racist and patronizing attitude towards the Latin American neighbors. The US Council on Foreign Relations founded in 1921 argued that if the native inhabitants were not capable of developing their natural resources, somebody else would have to intervene “regardless of the ethics.”20 A US report on Venezuela produced in 1924 argued that “the major proportion of the population is degenerating in its thought physically, morally and mentally,” the reason being that the “amalgamation of white, negro and several Indian stocks” tended to weaken the race.21 Weakening racial stock aside, Venezuela had become attractive at the precise moment when the Mexican revolution was endangering the position of the international oil companies there.22

19  Miguel Tinker Salas, The Enduring Legacy: Oil, Culture and Society in Venezuela (Durham: Duke University Press, 2009), p. 55. 20  Mats Ingulstad and Lucas Lixinski, “Raw Materials, Race, and Legal Regimes: The Development of the Principle of Permanent Sovereignty over Natural Resources in the American”, in World History Bullettin, Spring 2013, p. 35. 21  Quoted in: Tinker Salas, The Enduring Legacy, p. 35. 22 Jonathan Brown, “Why Foreign Oil Companies Shifted Their Production from Mexico to Venezuela during the 1920s”, American Historical Review 90:2 (1985): 362–85.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

19

All of these factors accounted for the massive wave of investments, first by Shell and then by US companies, that poured into Venezuela. Oil production multiplied 300 times between 1924 and 1930. In 1924, Shell produced virtually all of Venezuela’s crude oil. US companies such Gulf Oil (born with the above-mentioned Spindletop discovery in Texas near the Gulf of Mexico) and Standard Oil of Indiana then started to produce offshore in Maracaibo, making massive discoveries. As a result of a number of agreements and shady deals by the end of the 1930s three companies (the Big Three) had basically monopolized the entire Venezuelan production: Standard Oil of New Jersey had 52 percent, Shell 40 percent, while a smaller share remained for Gulf and Standard of Indiana. In 1928, Venezuela had taken over the US as the largest oil exporting country, a position it would hold for more than forty years, until the end of the 1960s. By 1936 it exported as much crude as the next seven exporters (US, Peru, Iran, Romania, the Dutch East Indies, Iraq, and the Soviet Union) combined, and had become crucial for European imports (Table 0.1).23 The main beneficiaries of this manna were the oil companies themselves, of course. But oil production also transformed Venezuela in the process. The influx of petrocapital progressively transformed Venezuela into the world’s first petrostate: a country for which oil income represented the single most ­important voice in government income, and in which petroleum represents by far the most important export sector. Already in 1927 the contribution of petroleum to the GDP was higher than that of the agricultural sector. Between 1913 and 1935 the volume of non-petroleum exports, in particular the country’s traditional exports such as coffee and cacao, declined by 40 percent, in part because the ­campesinos were either streaming into the petroleum sector or were employed in public works projects financed by oil rents. The state bureaucracy expanded from 13,500 employees in 1920 to 53,100 in 1936. By the same year nearly 35 percent of government income came from the mineral sector. The state itself, still in the process of building up its structures, accumulated such wealth that by 1929 Venezuela had managed Table 0.1.  Main commodities exported by Venezuela from 1913 to 1940. YEAR   1913 1921 1929 1936 1940

COFFEE AND COCOA

PETROLEUM

VALUE

%

VALUE

%

109,1 84,7 158,0 51,1 27,2

71,4 63,4 20,3 6,7 3,2

– 11,8 593,6 684,2 809,0

– 8,8 76,2 89,0 94,0

Source: (Miguel Izard, Series estadísticas para la historia de Venezuela, 1970).

23  Anand Tropani, Oil and the Great Powers. Britain and Germany 1914–1945 (Oxford: Oxford University Press, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

20

The Rise and Fall of OPEC in the Twentieth Century

to pay off all its foreign debts: a position of unheard-of privilege compared to its Latin American and Caribbean neighbors, constantly in debt and facing the omnipresent threat of military intervention on the part of their creditors (in particular the United States). Venezuela became the poster-child for the mainstream economists of the time: Today’s Venezuela presents a picture to fill the heart of any orthodox economist with joy. Almost alone in our turbulent world, the country regularly enjoys balanced ­budgets, absurdly low taxes, and no foreign debt, while it could pay off its minor domestic obligations tomorrow, if it wished, in order to boast a well-stocked treasury. Its currency, based solidly on gold, is without a doubt the healthiest in the world. Wages are stable and unemployment is virtually nonexistent.24

General Juan Vicente Gómez governed the country from his inauguration in 1908 until his death in 1935, and was the political incarnation of the early ­transformation of the country into a petrostate. He exercised dictatorial power and was seen as an ideal partner by US administrations, which regarded him as one of the shining lights of Latin America. Gómez was able to curtail the power of regional landed elites and foreign coffee merchants, particularly the Germans, while at the same time allowing a small number of families with ties to the regime to thrive by selling their concessions to the foreign oil companies.25 According to Domingo Alberto Rangel, Gómez “became the demolisher of the old caste of caudillos.”26 Oil rents also contributed to the creation of one of the key instruments of nation-building: the Venezuelan army. Gómez did relatively little in terms of social and infrastructural investments, relying mostly on the oil companies to fulfill many of the obligations of the local authorities, such as investment in schools, roads, and sanitation. He encouraged the oil companies’ land-grab against the opposition from expropriated small and medium landowners, and also from the rebel indigenous tribes, such as the Bari stretching from Lake Maracaibo to Colombia, who kept fighting and inflicting harm upon the oil crews with bows and arrows well into the 1930s (Fig. 0.2). The General himself became the largest single landowner in Venezuela, and one of the richest men in the entire South America. His residence, Maracay, was made a de facto capital city, and was adorned with swimming pools, palaces, and tropical gardens. He retained exclusive control over the soap, paper, cotton, milk, butter, and matchmaking industries. He controlled the flow of trade in Puerto Cabello, one of Venezuela’s main ports, and was a major shareholder in the country’s most important shipping company.27 Moreover, as we will see, through the company he controlled CVP (that was assigned most of the national reserves) he sold oil concessions to the foreign companies for huge sums and even retained 2.5 percent share 24 Manuel Caballero, Gómez, el tirano liberal. Anatomía del poder (Caracas, Alfadil Ediciones, 2003), p. 352. 25 B.S. McBeth, Juan Vicente Gómez and the Oil Companies in Venezuela: 1908–1935 (Cambridge: Cambridge University Press, 1983), pp. 70–85. 26  Tinker Salas, The Enduring Legacy, p. 17. 27 William  M.  Sullivan, “Situación económica durante el periodo de Juan Vicente Gómez, 1908–1935”, in Política y economía en Venezuela, 1810–976 (Caracas: Ediciones de Fundación John Boulton, 1976), p. 266.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

21

Fig. 0.2.  Plaza de Toros in Juan Vicente Gòmez’s home town of Maracay, inaugurated in 1933. (No known copyright).

in oil profits in those concessions.28 Gómez can be considered the first “Gulf sheikh”—the Gulf of Venezuela rather than its counterpart in the Middle East— and Venezuela was the first country to be entirely transformed by the petroleum industry. Asdrùbal Baptista, who has spent his life researching social and economic change in Venezuela, points out that in 1929 the extractive industry employed 27,220 workers, a figure that represented twice the number of people employed in the rest Venezuelan industrial sector in 1913: “In short, a backward and rural society was replaced, in the span of little more than a generation at most, by a society of a completely different character: urban, capitalist, expansive, all supported to a significant degree by the influence of international oil revenue.”29 Furthermore, the concentration of workers from various regions in the oil towns—groups as distant as the Andinos and Orientales, which had seldom encountered each other—made a significant contribution to the formation of a Venezuelan national identity. Maracaibo, a sleepy export port for coffee at the beginning of the twentieth century, became a bustling town of 40,000 inhabitants by the end of the 1920s, the second city in Venezuela, and its busiest port. The damage to the ecology of the lake, setting aside the beneficial impact of the eradication of malaria, was even more visible than the growth of the city Maracaibo.30 The swift transformation of Venezuela into a petrostate was also encouraged by a  legal framework extremely favorable to petrocapital. But this did not happen as smoothly as one might think. The Venezuelan government did try to establish a coherent oil policy to deal with the “new Spaniards.” It’s worth citing a passage from a 1918 memorandum by the minister for Development (the ministry of Petroleum

28 McBeth, Gómez and the Oil Companies in Venezeula, pp. 97–107. 29 Asdrúbal Baptista, Teoría económica del capitalismo rentístico (Caracas: Banco Central de Venezuela, 1997), p. 134. 30  Edwin Lieuwen, Petroleum in Venezuela: A History (Los Angeles: University of California Press, 1954).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

22

The Rise and Fall of OPEC in the Twentieth Century

did not exist yet), Dr Gumersindo Torres, who was the promulgator of the first oil law in the country in 1920, as well as one of the first of the petrostate’s technocrats: The mining tax is a participation in profits that must vary with the wealth that the mine concedes and with the profits that the mine produces. Three systems can achieve this goal: the creation of a tax on the monetary profits of the enterprise; a percentage of the commercial value of the material extracted from the mine; or a tax that varies on the model of a sliding scale, according to the value of the mineral on the markets that regulate its price: the United States for oil and England for copper.31

This passage shows that the Venezuelan government, both because of its formal political independence and the attractiveness of its fields, retained theoretical sovereignty over taxation. In 1920 Torres drafted the first Venezuelan oil law that, among other things, imposed limits on the duration of the exploration phase and on the extension of the concessions. Eventually in 1922 Torres was removed from his office and a new law (which did not replace previous concessions) was approved that same year. The 1922 law watered down many elements of the previous one, such as the duration of exploration, the level of royalties, and the prescription to have Congress approve each new concession. The law did not promote the formation of a national petroleum industry, nor did it reduce tax-exempt imports, a measure that applied to all the foreign oil companies. The share of total petroleum profits acquired by the Venezuelan government remained very small. As we shall see, it was higher than that in Middle East (26 percent compared to 16 percent), but lower than the share of profits earned by private landowners in the US, despite the fact that costs in Venezuela were lower and that the productivity of the wells incomparably higher. The local refining industry had yet to be developed and only 4 percent of the oil produced in Venezuela was refined locally by the end of the 1920s. The oil companies were authorized to import anything they wanted, vital or not, without paying a single cent in customs duties. This state of affairs was to the grave detriment of local firms, which were deprived of potentially lucrative customers for their own products. THE RED LINE While Venezuela had already become by 1928 the largest oil exporter in the world, in the Middle East oil production on a significant scale had only started in Persia. In Iraq as well as in the Gulf sheikdoms, such as Kuwait, Bahrain, or Qatar, and even in Saudi Arabia, oil was first struck only at the end of the 1920s, while crude oil export on a significant scale would have to await the end of WWII. To the Arab countries in the Gulf, oil was not nearly as vital a natural resource as water, nor as valuable a commodity as the pearl. George Habib Antonius, the

31 Ruptura, El imperialismo petrolero y la revolución venezolana, Tomo 2, La Ganancias Extraordinarias y la Soberanía Nacional (Caracas: Fondo Editorial Salvador de la Plaza, 1979), p. 47.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

23

first Arab historian to write about the spread of nationalism in the region, while discussing the kingdom of Saudi Arabia in the 1930s wrote: Prospecting for minerals has yielded abundant sources of oil, some gold and various ore deposits. And while the oil and the metals may not mean more than an increase of income, the new resources of water and adoption of fast means of locomotion will accelerate the two most momentous changes taking place in the Peninsula today.32

What, then, drew US petrocapital to invest so much energy in challenging the British in the Middle East? First there was the fact that the British oil companies, particularly Anglo-Persian and Shell, had grown to the point that together they represented an existential threat to the dominance of US petrocapital. W.E. Perdew from the US Bureau of Mines argued that without access to foreign production “American marketing companies will be at a serious disadvantage, which will be reflected upon every phase of the American petroleum industry.”33 In addition to these crucial commercial concerns there was increasing fear in Washington about the potential exhaustion of national petroleum reserves. In December 1919, US Secretary of State Robert Lansing wrote a concerned letter to the British ambassador in Washington, signaling US ambitions in the lands of the former Ottoman Empire: The best technical authorities seem to believe that the peak of petroleum production in the United States will soon be reached, and that the reserves will be practically exhausted within a measurable period. The situation in the United States will be more serious because of its domestic consumption, and because in the past there has been relatively little investment of American capital in important foreign producing fields.34

Later that year, the US Geological Survey released the following alarming report: America is running through her stores of domestic oil and is forced to look abroad for future reserves. [. . .] The British position is impregnable. All the known oil fields, all the likely or probable oil fields outside of the United States itself, are in British hands or under British management or control, or financed by British capital. [. . .] To the tune of many million pounds a year, America before very long will have to purchase from British companies.35

Mark Reqa, Director of the US Fuel Administration and leading “conservationist,” used every possible opportunity to stress that without unlimited access to ­petroleum the US had no future: “Mechanical power is the dominant determination to the future industrial supremacy; the products of petroleum are essential in the development of this power.” Thus, according to Reqa, every effort should be directed so 32  George Antonius, The Arab Awakening: The Story of the Arab National Movement (New York: G.P. Putnam’s Sons, 1946), p. 349. 33  William Stivers, “International Politics and Iraqi Oil, 1918–1928: A Study in Anglo-American Diplomacy”, The Business History Review, Vol. 55, No. 4 (Winter, 1981), pp. 517–54. 34  The Foreign Relations of the United States (FRUS), 1919, Vol. 1, Doc. 224, The Secretary of State to the British Appointed Ambassador (Grey), Washington, December, 1919. 35  The International Petroleum Cartel: Staff Report to the Federal Trade Commission, Vol. 1 (Washington, DC: US Government Printing Office, 1952), p. 41.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

24

The Rise and Fall of OPEC in the Twentieth Century

that “reserves supplies are increased at every opportunity through the acquisition by our nationals of reserves in foreign lands.”36 When Herbert Hoover, who had been a mining engineer himself before entering politics, became Secretary of Commerce in 1921, he pressed even harder for the US government involvement in support of American petrocapital in the Middle East. The US “open door” policy for oil explorations had these basic tenets: to maintain close government/business relationship, to obtain reciprocity with Great Britain and The Netherlands (respectively in the Middle East and the Dutch East Indies) in exchange for oil exploration on US territory, and to counteract nationalist policies.37 The Middle East was especially attractive because most of the region’s rulers were politically subordinated, although not all of them formally subjected to European colonial administration. The states in the region were either British “protected states” (such as the Gulf Sheikdoms), or were British “mandates” under the League of Nations (such as Iraq), or were subjected to very heavy foreign influence (like Persia). In his otherwise pessimistic account of the Rising Tide of Color against white supremacy published in 1920, the American political theorist (and eugenicist) Lothrop Stoddard also had some positive things to say about the outcome of WWI: This war has been primarily a struggle between white peoples, who have borne the brunt of the conflict and have suffered most of the losses. Nevertheless, one of the war’s results has been a further whittling down of the areas standing outside white political control. Turkey is today practically an Anglo-French condominium, Persia is virtually a protectorate of the British Empire, while the United States has thrown over the endemic anarchy of Haiti the aegis of the Pax Americana.38

Political subordination was attractive for international oil companies because it allowed freedom of maneuver and opportunity for huge profits, especially when looking at the ongoing revolutionary turmoil in other oil regions such as the Soviet Union and Mexico. Concessions could be gained in aeternum and potentially encompassed even the entire territory of the country. Much like in the case of Venezuela, the most obvious advantage offered by Persia, Mesopotamia and the Arabian Peninsula lay in their geology, which seemed most promising. As the British Arabist Stephen Longrigg, one of APOC’s most prominent officials, stated in unequivocal terms: “By far the greatest of the advantages of Middle Eastern oilfields was partly already manifest in Persia, partly awaited further demonstration in Arabia and Iraq: the extraordinary size of its oil-bearing structures, the vast scale of the reservoirs, and the productivity of single wells compared with the fields of North America or the Caribbean.”39 It was an oilman’s Garden of Eden: the only 36 Gaetano Di Tommaso, PhD dissertation, America’s Energy Transition, the Evolution of the National Interest, and the Middle Eastern Connection at the Dawn of the Twentieth Century, p. 247. 37 Stephen J. Randall, United States Foreign Oil Policy Since World War I. For Profits and Security (Montreal: McGill-Queen University Press, 2007), p. 25. 38 Lothrop Stoddard, Rising Tide of Color Against White World-Supremacy (New York: Charles Scribner & Sons: 1921), p. 4. 39 Stephen Longrigg, Oil in the Middle East: Its Discovery and Development (Oxford: Oxford University Press, 1954), p. 48.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

25

drawback being that this earthly paradise was situated in a region where the climate was anything but celestial. In order to reach Paradise, however, these captains of industry would have to go through the Purgatory of obtaining their “scrap of paper”: official government ratification of an oil concession. In the wake of WWI, the Middle East was a battleground of economic competition between oil companies, each backed by the menacing shadow of their government protector. The official history of New Jersey Standard perfectly captures the dilemmas faced by the largest US oil company with respect to the challenges of “internationalization”: it would have to transition away from controlling a market of small producers and dealing with small private landowners, to engaging in direct negotiations with sovereign landlords in the Middle East. The new challenge required tact, diplomatic subtlety, and, where necessary, the ability to flash a hint of the iron fist concealed inside the velvet glove: Abroad, the restrictions and attitudes were of a markedly different nature, and rivalry was largely between organizations enjoying strong protection for their respective governments. Survival in the foreign business was necessarily and directly contingent upon the use of power politics and commercial combination.40

Imperial and capitalist competition for petroleum could be considered a virtually inevitable consequence of the almost complete division of the world among the colonial powers in the wake of WWI, while any hypothesis of cooperation through international organizations such as the League of Nations for access to natural resources was sidelined. * * * The inter-imperialist struggle became most heated in Mesopotamia. Until the end of the Great War the region was part of the Ottoman Empire, divided into provincial administrative units called vilayets: Basra in the south, Baghdad in the center, and Mosul to the north. Mesopotamia had never existed as a single administrative entity under Ottoman rule. The vilayets were inhabited by peoples of different religious faiths and by different ethnic groups; Shi’ite Muslims occupied the south and center, Sunni Muslims the north, and Christian and Kurdish peoples the Turkish border. Mesopotamia’s eternal flame had been burning outside of Kirkuk in the north since antiquity, bringing warmth and comfort to shepherds and a source of income for local traders in bitumen. After the emergence of the Young Turks in the Ottoman Empire, a concession to explore for crude oil in its lands had been assigned in 1912 to the Turkish Petroleum Company (TPC), formed by British interests (Shell) and German ­capital (Deutsche Bank), together with Ottoman capital and a smaller share held by the Armenian financier and mediator Calouste Gulbenkian. In 1914 the TPC obtained an exploration license for the regions of Baghdad and Mosul. This permit was confirmed in writing, but was nevertheless far from a proper concession agreement. German influence over the Ottoman Empire, which had resulted in projects 40  Gibb and Knowlton, History of Standard Oil, p. 78.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

26

The Rise and Fall of OPEC in the Twentieth Century

financed by German capital such as the Berlin–Baghdad railway, had waned away after the defeat of the Kaiserreich in the Great War. The Arab lands of the Ottoman Empire were then divided up between the British and French on the basis of secret negotiations that had taken place while the war still raged. The 1920 San Remo Treaty formally sanctioned the creation of a “mandate system” under the supervision of the League of Nations for the Arab lands of the former Ottoman Empire: the British would claim Mesopotamia and Palestine; the French, Syria and Lebanon. A specific clause in the San Remo agreement established that the French would gain 25 percent of the TPC (the German share) and, at the same time, that the Mosul region—which in theory should have fallen under the French mandate over Syria and was thought to hold promising petroleum deposits— would instead be included in the British mandate over Iraq.41 An a­ dditional clause in the San Remo agreement, which would unsurprisingly soon be forgotten, stipulated that the new Iraqi government should be entitled to 20 percent participation in the company that would eventually control Iraqi oil. Shortly after the signature of the San Remo agreement, the Compagnie Française de Pétrole (CFP, today TOTAL) was created under the leadership of Ernest Mercier in order to sell the French quota of Iraqi oil. CFP was a French private company—the Government acquired a 35 percent stake in 1929—and included several US shareholders. In practice, the European oil market itself was by now basically in the hands of AngloAmerican companies, which controlled more than 90 percent of the market. In the aftermath of the San Remo agreement the Iraqi people experienced their first jolt of nationalist tumult. The betrayal of Woodrow Wilson’s promises of the self-determination, however limited, provoked a violent rebellion against the occupying British armed forces. The revolt, which was still relatively disorganized and encouraged by the Shi’ite clerics of Najaf and Karbala, was repressed only with the help of thousands of British soldiers (numbering as many as 100,000 in October 1920). The recourse to aerial bombardment, indiscriminate roundups, and the destruction of crops, left a lasting impression in the minds of the Iraqi people. The “revolution of 1920” is still considered a foundational moment in the history of the modern Iraqi nation, with its own Pantheon of heroes who died for the cause of freedom. The precarious state of British imperial finances, already under strain from the need to repay wartime debts to the United States as well from the costs associated with the “pacification” of Iraq, helped shape the solution to the Iraqi problem. In London, the pendulum shifted away from those who favored direct control under the administration of the Viceroy of India, toward those who proposed a path to formal independence under the aegis of a monarch willing to bend to British interests. The appointment of Faisal as King of Iraq possessed the twin advantages of ­limiting the loss of British prestige for having allowed the French to remove the Hashemites from Syria, while at the same time it would reassure British taxpayers who faced the financial strains of the postwar years. Iraq would thus have a sovereign capable of mobilizing Baghdad’s troops in other parts of the Middle East to defend 41  Memorandum of Agreement at San Remo, April 24, 1920: https://www.scribd.com/doc/ 71911534/Memorandum-of-Agreement-San-Remo-Apr-24–1920. (Consulted on June 5, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

27

pan-Arab (and English) interests against the danger presented by the Turks and, later, by other powers.42 The British High Commissioner in Iraq summarized the strategy thusly: “It is our intention that the proposed Treaty not substitute for the Mandate, but that the Mandate be defined and implemented in the form of a Treaty.” In August 1921 the Hashemite Faisal was crowned the first King of Iraq, and in 1922 he was invited to sign a treaty of alliance that gave London control over the government’s revenues, installed British consultants in every ministry, and provided for the maintenance of His Majesty’s soldiers stationed in Iraq at the Iraqi government’s expense. In exchange, the British pledged their support for Iraq’s future admission to the League of Nations. The Iraqi Assembly, after very heated debate, ratified the treaty in May 1925, while the question of Iraq’s control of the vilayet of Mosul, still contested by Turkey, was resolved soon thereafter. The Treaty of Lausanne signed in 1923 between Turkey and the victorious ­powers had left the question of Mosul unresolved. The definitive decision on the matter was taken by the League of Nations, which in 1926 rejected Turkey’s claims that Mosul was not an Arab region—it was, after all, home to a predominantly ethnic Kurd population—as well as Ankara’s accusations regarding Britain’s thinlyveiled interest in its oil. Mosul was finally incorporated into Iraq. In parliamentary debates back in London, only Sir Harry Brittain dared mention the British interest in what lay beneath the ground in the region: I am not afraid at all to take up the subject of oil. Whenever oil is mentioned there are in some quarters of the house sure to be sneering observations in regard to it. Whether you like it or not we have arrived at the age of oil. We live in a country in which there is plenty of coal and no oil. We have to get oil with which to run our ships where shipowners insist upon burning oil [. . .]43

In 1925, while the Mosul question remained yet undecided, the Iraqi government and the TPC had signed the first agreement granting it a concession over the entire territory of Iraq, except for the Basra area to the south. TPC would be able to select certain zones for exploration, while the remaining areas would be divided into lots for sale at auction to other, primarily American, companies. French and British predominance over the promising oil region seemed a foregone conclusion. But others were insistently knocking at the door of the Middle East. After the end of WWI, the United States, whose GPD had equaled that of the entire British Empire in 1916, made persistent diplomatic efforts to tear down barriers to international trade and investment: the so-called “open door” policy.44 This pressure was exerted all the more strongly in the areas subjected to “mandate” by the League of Nations, thus not formally included within European colonial empires. Washington considered the TPC concession to be void because it had originally been signed by a government, the Ottoman Empire, that no longer 42 Helmut Mejcher, “Iraq’s External Relations 1921–26”, in Middle Eastern Studies, 13:3 (Oct. 1977), pp. 340–58. 43  Benjamin Shwadran, The Middle East, Oil, and the Great Powers (New York: Praeger, 1955), p. 241. 44  Adam Tooze, The Deluge: The Great War, America, and the Remaking of the Global Order, 1916–1931 (London: Allen Lane, 2014).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

28

The Rise and Fall of OPEC in the Twentieth Century

existed. Faced with US pressure, the British initially took a defensive posture. Lord Curzon, the British Foreign Minister, argued that the Middle East was only of marginal interest to the global petroleum market: Persia, after all, represented only 4.5 percent of worldwide output, while together the United States and Mexico produced more than 80 percent of the world’s oil. These arguments did little to dissuade Washington, and the US government continued to support the creation of an American consortium to acquire a share of Mesopotamian oil. In 1920 Washington enacted legislation that allowed the US to block oil exploration on its soil by companies based in countries (or empires) that did not allow exploration on their territory. British companies could hardly afford to be left out of the US market, while the British military were still entirely dependent on US imports in case of war. The problem, then, mainly concerned what form US entry into Mesopotamia would take. In June 1927, TPC struck oil at Baba Gurgur, outside Kirkuk. This turned out to be what in industry jargon is known as a supergiant: every oilman’s dream, it sent crude oil shooting more than forty meters into the sky with such volume and intensity that it took more than a week to bring it under control. After this massive discovery, TPC abandoned all its efforts in other neighboring regions. After the Kirkuk discovery the US oil companies soon shifted their strategy, seeking to join the lucky company rather than continuing their quest for their own Iraqi concessions. They created a new group, the Near Eastern Development Corporation, which would eventually take part in the Iraqi concession. On July 31, 1928, a new agreement stipulated that TPC shares would be equally divided among Anglo-Persian, Shell, CFP, and the American group (each holding 23.75 percent), along with Calouste Gulbenkian and his 5 percent (hence his oftremembered nickname of “Mister Five Percent”). As in the case of Persia, the Iraqi government participation as shareholder established in 1920 was easily forgotten. The participants agreed they could explore and seek new concessions, within an area circumscribed by a “red line” drawn upon a map of the Middle East, only in conjunction with their associates (the so-called “self-denying” clause) (Fig. 0.3). This red line encompassed almost all the Arab lands of the former Ottoman Empire, including the Arabian Peninsula with the notable exclusion of the emirate of Kuwait, where the British were convinced oil was very likely to be found. In the wake of the “Red Line Agreement” TPC was renamed the Iraqi Petroleum Company (IPC): a service company designed to supply oil to the group’s affiliates. The IPC became the first oil consortium in the Middle East. With its creation, the apportionment of the region’s petroleum resources among the major American, British (and French) oil companies was officially underway. The United States, which had initially pushed for its “open door” policy in preparation for a winnertake-all battle, had instead quickly adapted to the terms of the imperial game as played by its British allies. Once the door to the Middle East had been thrown open to its own oil companies, Washington very quickly closed the door behind its own back. * * *

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

29

Fig. 0.3.  Map image of the1928 Red Line Agreement. (BP Archive, ARC117446/001).

The British, on the other hand, had achieved exclusive control over Persian oil. Persia encompassed a vast swath of land, from the imposing mountain ranges of the Alborz before the Caspian Sea in the north and the Zagros along its western border with Iraq, to the desolate and arid east and southern coastline along the Persian Gulf and Gulf of Oman. In between stood vast plains, where the absence of modern agriculture, constant threat of locusts, and the dearth of water meant that its inhabitants eked out a hardscrabble existence. The lack of navigable rivers made trade arduous, while the majority of the population lived in earthen huts, mostly enslaved by a few large landowners. In my visit to the country I have seen late-nineteenthcentury photographs of Isfahan, the once glorious capital of the Muslim Safavid empire, show the architectural wonders around its central square in ruins. At the beginning of the Great War, the Qajar dynasty lacked a proper army and was only nominally in control of the country. Various tribes enjoyed a substantial degree of autonomy, while foreign interests dominated trade and services. Russian and British merchants and bankers monopolized the nerve centers of the country’s economy, enjoying tax exemptions and even minting their own money until the end of the 1920s. The war had brought famine and the requisitioning of food to feed Russian and British troops fighting the Ottoman Empire. There were even reports of episodes of cannibalism.45 45  Peter Avery, Gavin Hambly, Charles Meliville,The Cambridge History of Iran, Vol. 7, From Nadir Shah to the Islamic Republic (Cambridge: Cambridge University Press, 1991), p. 209.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

30

The Rise and Fall of OPEC in the Twentieth Century

The Qajars had, as we have seen, already signed an oil concession in 1901. By then, in the words of Roxane Farmanfarmain, “it seemed that Persia had sold all there was to sell. Only oil apparently remained.”46 The concession had eventually been passed on to APOC and the firm (which would soon be known in Britain simply as “the Company”) had uncovered deposits at Masjid-i-Sulayman, supplying the British merchant marine as well as local and Asian markets. The concession granted the Company immunity from customs duties on all imports—in essence, a complete tax exemption—in exchange for a commitment to employ Persian workers (with the notable exception of skilled positions), and a for 16 percent share by the Persian government in the company’s profits. As we have seen, the provisions setting for Persian government participation in the Company’s management had soon been forgotten. Any legal disputes between the Company and the government were to be settled through arbitration. Furthermore, the Persian government had basically no control over the territory of Khuzestan, where the Company essentially played the role of the state and delegated many of its security tasks to the independent Bakhtiari tribes, which acted as an informal territorial army and provided cheap labor force. Arnold Wilson, the British military officer who oversaw the discovery of the Persian oil fields, liked the Bakhtiari: they looked like “stage assassins,” he noted, but made no fuss about the British Empire.47 Production of Persian crude oil had grown from its initial level of 273,000 tons annually to more than one million tons by 1919 (more or less 23.000 barrels per day). British imperial soldiers stationed in Persia occupied positions designed to defend the oil wells and the refinery of Abadan. While the country remained under virtual British military occupation, the Qajar government signed the Anglo-Persian Agreement giving the British Empire almost complete control over the country’s economy and military apparatus.48 Persia was not totally immune, however, from the nationalist ferment rippling outward from Russia as well as from neighboring Turkey, where Mustafa Kemal had begun to repel foreign armies from the Anatolian peninsula in order to establish a strong, centralized state. In February 1921, a brigade of Cossacks led by Reza Kahn, a colossus of a man from rather humble origins who had enlisted as a young boy and soon distinguished himself for his military talents, marched on Tehran and overthrew the reigning dynasty. The Anglo-Iranian Agreement was scrapped. After a turbulent few years, in which supporters of a republic clashed with advocates of a new monarchy, the Persian parliament, the Majlis, proclaimed Reza Kahn as the new Shah in 1925. For his new dynasty, Reza chose the name Pahlavi. Persia thus had a new strongman—with the consent of the British, who feared the potential nationalist tendencies of a republican government. In short order Reza Shah’s government announced new negotiations with Anglo-Persian to settle all 46 Roxane Farmanfarmaian, “The politics of concession: reassessing the interlinkage of Persia’s finances, British intrigue and Qajar negotiation”, in Roxane Farmanfarmaian (ed.), War & Peace in Qajar Persia. Implications Past and Present (London: Routledge, 2008), pp. 213–29. 47  Quoted in: Victor Kiernan, The Lords of Human Kind: European Attitudes to Other Cultures in the Imperial Age (London: Zed Books, 2015, 1st printed 1969), p. 134. 48  See: Farmanfarmaian, War and Peace in Qajar Persia.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

31

past disagreements. These talks formally began in 1928. Sir John Cadman, then head of the APOC after having been a close advisor to Churchill, indicated he had little hope for a quick resolution: “the demands of the Persian Government were greatly in excess of anything which the Company could accept.”49 The most thorny issue turned out to be how to calculate the Persian state’s 16 percent share in APOC’s profits. The government itself had no way of verifying the numbers provided by the Company, while the Company managed in various ways to limit the profits of APOC to the benefit of its other subsidiaries. Reza Shah was turning out to be a somewhat tougher partner than the British had bargained for. * * * Minor variations aside, concessions throughout the Middle East would by the middle of the 1930s eventually share the same key features. First, their duration—sixty years, on average, as in the case of Iran—was long enough to presume the complete exhaustion of the natural resource over the concession’s lifespan. Second, their bounderies extended across the entire territory of the state. By way of comparison, it should be noted that in the US, beginning in the1920, the maximum size of a single lease on public lands was 2560 acres (more or less the size of a building block). Third, there was no “release” clause for inadequately explored areas: the concessionaires could thus prevent other upstarts or more ambitious competitors from carrying out explorations and monopolize production. Fourth, sovereign landlords had no control whatsoever over production, much less over the price at which crude oil was sold (although the first concession signed in Persia and Iraq included some significant government participation this provision was soon forgotten). Middle Eastern governments received a fixed price per unit (the royalty), usually four shillings per ton of crude extracted, while they were eventually forced to forego any share of the profits obtained by the concessionaire for lack of a credible mechanism for verification. Fifth, the moment the concession was signed, Middle Eastern states lost their fiscal sovereignty in this key economic sector: they renounced to both direct and indirect taxation, including any duties on imports necessary for the oil companies’ activities. At the same time, the companies could install any type of infrastructure or facility necessary for their operations, from airports to railroads to telegraphs, in areas where such structures were lacking. The international companies tended to monopolize such services, in essence replacing the government and establishing a “state within the state.” Sixth, any legal dispute between concessionaires and states was resolved not in a local court of law—courts that generally did not exist in the first place, and whose jurisdiction was in any event not recognized—but through international arbitration. Finally, a practice that would provide reasons for harsh accusations in the future, the concessionaires were under no formal obligation to extract the natural resources according to best techniques and conservation practices available at a given time.

49 George W. Stocking, Middle East Oil: a Study in Political and Economic Controversy (Nashville: Vanderbilt University Press, 1970), p. 27.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

32

The Rise and Fall of OPEC in the Twentieth Century

When it came to petroleum, differences between Venezuela and the Middle East were: the persistence in Venezuela of key elements of fiscal sovereignty; the more limited extension of the concessions which allowed for the presence of multiple companies instead of only one consortium; the shorter duration of contracts (in Venezuela forty years compared to seventy in the Middle East); and the existence of a royalty based on the international price of crude (a fixed percentage of the value of a unit of product) rather than the fixed figure of four shillings per ton. At the end of the nineteenth century, the Belgian King Leopold II complained about the slow pace with which his emissaries managed to wrest control of territory away from the various tribal leaders of the future Congo. As he wrote to his men on the spot: “The text of the treaties Stanley has signed with the chieftains does not please me. It should at least contain an article stating that they relinquish their sovereign rights to those territories [. . .] The treaties must be as brief as possible and, in the space of one or two articles, assign all rights to us.”50 British, American, and French businessmen and colonial officers found themselves dealing with elites who were better equipped to resist complete subordination. But p ­ etroleum concessions in the Middle East would not have completely disappointed King Leopold. The Iraqi economic historian Abbas Alnasrawi, one of the leading Marxist scholars of the modern Arab economy, would level a damning assessment of exploitative nature of the concessions system in the Middle East: “A host government had no control over how resources were developed or over how much oil was produced or the price at which it was sold.”51 The opinion of George Stocking, president of the American Economic Association in the 1950s, was not much different. As he put it, paraphrasing Churchill: “Never in modern times have governments granted so much to so few for so long.”52 The reason why Middle-Eastern oil concessions were so unbalanced in favor of petrocapital, it should be clear by now, was not simply the difference in technical and juridical knowledge among the signatories. A key role was played by the direct political and military pressures exerted by imperial powers that allowed international oil companies to impose their own rules, such as in the cases of Iraq and Iran that were forced to abandon (as we shall see soon) any legal pretense to participating as shareholders to the petroleum industry of their countries. A C H N A C A R RY At the end of the 1920s, soon after the signing of the Red Line Agreement, the global oil market took a dramatic turn. Concerns about the scarcity and the race to secure the most promising deposits gave way to fears of oversupply. A trade war between Shell and New Jersey Standard on the Indian market had already provided 50  David Van Reybrouck, Congo: The Epic History of a People, trans. Sam Garrett (New York: Ecco, 2014), pp. 50–1. 51  Abbas Alnasrawi, Arab Nationalism, Oil, and the Political Economy of Dependency (Westport, CT: Greenwood Press, 1991), p. 13. 52 Stocking, Middle East Oil, p. 130. For his view of all the concessions, see pp. 130–43.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

33

a taste of this downward trend. After WWI US oil companies were besieged by the Anglo-Dutch in the Middle East, Asia, Latin America, and even within the United States itself, but now the situation had been reversed thanks to the spectacular recovery of US companies outside their country’s borders. It was now time to cooperate and not compete. In August 1928 a selected group of oilmen including Sir John Cadman of Anglo-Persian, Henry Deterding of Shell, and Walter Teagle of SONJ met for a round of hunting and fishing at the Achnacarry castle in Scotland. The records of the mansion show that between August 10–18, the prominent group of lodgers took little interest in hunting duck (they went for only one shoot, for just a couple hours), but rather engrossed themselves in petroleum discussions that had started already before the meeting.53 On August 18 participants to the gathering emerged with a signed draft of what would become known as the Achnacarry Agreement. The document was a very lucid assessment of the problems facing the industry. It argued that the oil industry had managed to avoid scarcity and the depletion of reservoirs, and had successfully invested in new territories: Now the situation has changed. An adequate supply for a long time to come is assured. This is the result of the application of science to the petroleum industry. More effective methods of handling crude have been enormously increased. On the other hand, methods of consumption are being made more economical [. . .] Up to the present each large unit has tried to take care of its own overproduction and tries to increase its sales at the expense of someone else. The effect has been destructive rather than constructive competition.54

The Achnacarry agreement denounced “destructive” competition and suggested several solutions. First, the parties declared themselves to be satisfied with their respective share of the global market, expressing their willingness to maintain current production levels and further agreeing that any eventual increase would only take place in the face of an increase in international demand. Second, they agreed to share their existing refining and distribution infrastructure, without adding further capacity, in order to minimize costs and maximize profits. To that same end, the parties consented to carve up the markets so that crude oil would be sold on the closest market (Iranian crude oil would henceforth be sold in India, for ­example, rather than the United States). Their actions demonstrated a paradox of international capitalism, which lies in the ambiguous nature of private monopolies in strategic sectors of the global economy (the same could probably apply today to Big Finance or Big Tech). Petroleum was beginning to play an increasingly important role in industrial manufacturing, especially in the transportation sector, and thus the companies that provided oil should be assured a steady flow of profit. Whenever profit margins began to dry up too quickly because of “destructive competition”, or, even worse, as a result of the 53 J.H.  Bamberg, The History of the British Petroleum Company. Vol. 2: The Anglo-Iranian Years, 1928–1954 (Cambridge: Cambridge University Press, 1994), pp. 107–12. 54  Draft Achnacarry Agreement, 18 August 1928: http://fingfx.thomsonreuters.com/gfx/ce/4/143/ 143/ACHNACARRY%20AGREEMENT%20(DRAFT).pdf. (Consulted on June 11, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

34

The Rise and Fall of OPEC in the Twentieth Century

political humors of the oil producing countries, the multinational corporations could find it impossible to invest in production and technological improvements. The resulting oil scarcity would then damage industrialized countries, such as the United States, and potentially throw consumers and voters into a panic. The global private oil oligopoly was acquiring a public role, and the profitability of the largest oil companies was increasingly necessary to ensure broader capitalist prosperity. * * * The “would be Cartel” established in Achnacarry had more than one weak spot though. One problem was that cooperation did not extend to the US market (we will soon return to this issue), while the other was that a few areas of the Middle East still escaped the control of the IPC consortium and its Red Line agreement. After WWI the Persian Gulf was in many ways a British lake. By the end of the nineteenth century the British Raj had signed exclusive agreements with most of the Arab Gulf rulers (including with the Saudi Ruler of Najd and Al-Hasa). By signing these agreements the Gulf sheikdoms became “British-protected states” under the British Indian Empire.55 Although the various Gulf Rulers did not transfer territorial sovereignty to Britain, they were barred from entering into formal agreements with non-British parties, non-British parties could not freely visit their territories, and Rulers could not sell or mortgage any part of their territories except to British agents. The British in essence provided money and “security,” in exchange for being able to build military bases in Oman, Sharjah, and Dubai. In all these territories, pearling and date farming remained the main economic a­ ctivities up to the 1930s.56 Then came the age of petroleum. The first area close to the Arabian Peninsula to be explored was the island of Bahrain, a few kilometers off the eastern coast of Saudi Arabia. Bahrain boasted significant quantities of spring water and a strip of fertile land on its northern shore planted largely with dates and pomegranates. Inhabited primarily by Shi’ite Muslims, the island had long been a flourishing entrepôt and center of pearl trading at the heart of the Dilmun civilization, which once dominated the Gulf and was even remembered in Sumerian tales. The island was under British control (Sheikh Al-Khalifa had signed a treaty in 1880) and constituted the British Raj’s main political and military outpost in the Gulf region. What piqued the interests of oilmen were the outcroppings of limestone on the island, which appeared similar to those along the Iranian coast on the opposite side of the Gulf. Crude oil seepages along the shore raised interesting prospects. The first to obtain an exploratory concession was a New Zealander, Major Frank Holmes, an adventurer who would soon earn the Arab nickname of Abu Naft (“the father of oil”). In 1930, Holmes sold the concession to the Bahrain Petroleum Company, a Canadian-based subsidiary of Standard Oil of California 55  Christopher Davidson, After the Sheiks: The Coming Collapse of the Gulf Monarchies (London: C. Hurst & co, 2012), p. 23. 56 Guillemette Creuzet, “A golden harvest: exploitation et mondialisation des perles du golfe Arabo-Persique (vers 1870–vers 1910)”, in Revue Historique, Vol. 2, No. 658, 2011, pp. 327–56.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

35

(SOCAL)—since Bahrain was a British protectorate, no concession could be granted to any firm outside the empire, hence the Canadian solution. The first crude oil shipment from Bahrain left the island in 1934. That same year, SOCAL ceded half of the concession to the Texas Oil Company (TEXACO): together, the two corporations formed a distribution company named CALTEX to market the oil. The Bahrain concession called for a royalty of 3.5 shillings per ton. The income from the royalty was divided into three equal shares: one-third went to the Sheikh, another third was earmarked for internal development (largely through British companies), and the final third was invested abroad—which in practice meant it made its way back to the City of London. Bahrain’s finances were totally controlled by the British, but American petrocapitalism had established its first independent foothold in the Middle East. The 1932 Buick given to Isa bin Salman Al-Khalifa by US companies is still today proudly on display at the Bahrain National Museum as a token of early American engagement with the Persian Gulf. The most important petroleum discoveries would take place in Saudi Arabia, even if they would remain largely irrelevant until after the Second World War. The Arabian Peninsula, frequently imagined of as a uniformly barren desert, is in fact composed of several different climatic zones. In the middle stands the Najd, characterized by rocky plateaus and desert plains that at the time were criss-crossed by tribes of Bedouins (Bedu) and small oasis farmers (Hader), with the stronghold of Riyadh in the middle. To the east, toward the Gulf, lie the fertile oases of the province of Al-Hasa, with its predominantly Shi’ite population. To the west is the Hijaz, the most geographically varied region and the area most open to commercial exchange via the Red Sea, holding the great Muslim holy sites of Mecca and Medina, as well as the busy port city of Jeddah. To the south stretches the Rub Al-Khali, an enormous expanse of sand largely devoid of any oases or signs of life: the British called it “the empty quarter.” According to the Russian Arabist Alexei Vasiliev, the Arabian economy and society had remained largely immune to change from the Middle Ages through the end of the nineteenth century. For the vast majority of the people of the Najd, Al-Hasa, and the Hijaz, life was tied primarily to two types of activity: farming, which depended upon the irrigation of the oases, and the nomadism of pastoral life and constant barter.57 We have already noted how during the Great War the British lent military support to Hussein, the Sharif of Mecca, and to his sons, providing them with weapons and encouraging them in their struggle against the Ottoman Empire. Things became even more complicated when Hussein adopted the title of Caliph of Mecca, thus proclaiming not too subtly his own hegemonic ambitions over the entire Arab world. Hussein’s most powerful rival in the region was the leader of the Najd, Abd Al-Aziz Al-Saud (Ibn Saud), who back in 1915 had signed a treaty with Great Britain that essentially recognized British patronage over his territory and secured the neighboring British protectorates in the Gulf. After the end of the war, Ibn Saud had gained the support of the India Office and of Harry St John Bridger Philby (also know as Jack Philby), a British colonial officer who would convert to Islam 57  Alexei Vassiliev, The History of Saudi Arabia (New York: NYU Press, 2000), p. 30.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

36

The Rise and Fall of OPEC in the Twentieth Century

and become one of the Ibn Saud’s most trusted advisors. Thanks in part to the military contributions of fighters of strong Wahhabi faith that descended from bedu tribes, known as the Ikhwan, the clash between Hussein and Ibn Saud for control of the heart of the Arabian peninsula tilted decisively in favor of the latter, who ultimately entered Mecca in triumph in 1924. The following year the British recognized the Saudi annexation of the Hijaz. In exchange for his legitimation by the British, Ibn Saud recognized the borders established between his state and Transjordan to the north, which was then under British mandate. In 1926 Ibn Saud attributed to himself the title of Sultan of the Najd and King of the Hijaz. The primary obstacle to complete control of the region, by this point, lay in the Ikhwan themselves, who sought to continue their mission of indoctrinating ­peoples and tribes that had not yet converted to Wahhabism.58 In December 1926 the Ikhwan issued a seven-point platform that was intended to limit the power of Ibn Saud. Among these were a ban on automobiles and telegraphs; the abolition of all customs barriers for the Muslims of the Najd; a prohibition on trade with Kuwait (which was part of the British Empire); the cutting off of all negotiations with the British; and the forced conversion or, alternatively, extermination of the Shi’ites of Al-Hasa. The result of the ultimatum, however, was that Ibn Saud declared war upon the Ikhwan, defeating them militarily and incarcerating or otherwise subjecting them. The twentieth-century Saudi state, after having encouraged Wahhabism, was thus created in opposition to the radicalism of Bedouin warlords and by constraining the power of the Wahhabi clerics. It was also built on a familial politics that saw Saud take dozens of wives from the major tribes, thus establishing bonds that reinforced the dynasty of the royal blood above and beyond any tribal division. After 1927, Ibn Saud could devote himself to the monumental task of building state power across the peninsula, a process that he practically had to begin from scratch. The largest sums flowing into the royal coffers came from taxes on the pilgrimage to Mecca, as well as from zakat, the Islamic religious obligation to charitable giving that he extended to all his subjects by the middle of the 1920s.59 The funds thus obtained were rather paltry. Officials did not receive regular pay, they were frequently housed in the royal palace, while their salary consisted of generous but voluntary gifts from the sovereign. Ibn Saud’s diplomacy was essentially carried out by traders from the Hijaz—a dedicated ministry of Foreign affairs was only established in 1944.60 In 1932 Ibn Saud founded the Kingdom of Saudi Arabia, thus identifying the territory and its inhabitants with the name of his own family. The formal establishment of a Kingdom was not enough though to fill the kingdom’s coffers. In the wake of the Great Depression the royal treasury was under severe strain, the result in particular of the dwindling number of pilgrims to the holy cities. The steady stream of visitors had dropped from an average of 120,000 58 John S. Habib, Ibn Sa’ud’s Warriors of Islam; The Ikhwan of Najd and Their Role in the Creation of the Sa’udi Kingdom, 1910–1930 (Leiden: Brill, 1978). 59  Kiren Aziz Chaudry, The Price of Wealth: Economies and Institutions in the Middle East (Ithaca, NY: Cornell University Press, 1997), pp. 64–5. 60  Madawi Al-Rasheed, A History of Saudi Arabia (Cambridge: Cambridge University Press, 2002), p. 87.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

37

during the 1920s to only 20,000 by the beginning of the following decade. For the King, an empty royal purse meant that large numbers of functionaries and simple hangers-on would have to do without his customary generosity. The potential for social and political instability was real. Thus, in 1933, contravening the prescriptions of religious hardliners who fulminated against trading with the infidels, Ibn Saud opened talks on petroleum concessions in a country that, at that time, hosted fewer than fifty non-Muslim residents.61 Philby, the King’s most trusted advisor and, in all likelihood, not an impartial observer given that he was on stipend from SOCAL, nudged the sovereign toward an agreement with an American company. In any event the offers from the IPC group were not sufficiently tempting and distrust towards the British was strong, while individual participants to the consortium could not bid for the Saudi concession because of the constraints of the Red Line Agreement. This was how SOCAL won what turned out to be the world’s most important oil concession. The agreement for the Al-Hasa region was to last for sixty years, and called for the customary royalty of four shillings per ton, and complete exemption from ­taxation. The only difference here with respect to the other regional agreements was that Saud received a fairly sizable advance. As had happened before in Bahrain, TEXACO came on as a joint partner with SOCAL and shortly thereafter, in March 1938, ground was broken on well no. 7 in Dammam, in the region of Al Hasa, which quickly belched out petroleum in commercial quantities. The era of Saudi oil was about to begin. Just to the south of Bahrain, on the eastern shore of Saudi Arabia, lies the peninsula of Qatar, which juts out into the Gulf for some 160 kilometers. Scarcely 1 percent of its land allows for cultivation. On the southeastern shore of the peninsula lies the harbor of Doha. In 1907 Qatar had basically no agriculture and a tiny merchant class with a very weak territorial ties or tribal allegiance. The majority of men lived near to the sea and took part in the pearl trading business, which peaked during the summer. Qatar was still formally under Ottoman rule until the Great War, when in 1916 Abdulla Al-Thani signed a treaty with the British Empire.62 Doha was to host a British Agent and a telegraph, while Sheikh Abdulla agreed to suppress slavery, piracy, and gunrunning, and to keep the maritime peace. Qatar thus joined the “trucial system” that we have mentioned before. As long as the ruling families did not pose any problems in the Gulf, and thus imperil trade with India, the British did not make much fuss about their internal family quarrels, and did not care at all about the economic and social development within their protectorates. The British became interested in the Trucial States’ oil in 1935, after the granting of the Saudi concession to US companies. In 1935 the IPC, through Petroleum Development Ltd, reached agreements on exploration with the emirates of Dubai, Ras Al-Khaima, Sharjah, and Abu Dhabi, and at the same time obtained a concession in Qatar. After the creation of Qatar Petroleum oil was struck in commercial quantities in Dukhan, but the first crude oil exports did not start until after WWII 61 Al-Rasheed, A History of Saudi Arabia, p. 91. 62  Jill Crystal, Oil and Politics in the Gulf: Rulers and Merchants in Kuwait and Qatar (Cambridge: Cambridge University Press, 1995), p. 113.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

38

The Rise and Fall of OPEC in the Twentieth Century

in 1949. At that time there were probably less than 1600 inhabitants in Doha, the most important village in Qatar, and the British Agent stationed there remarked that it was “little more than a fishing village straggling along the coast for several miles and more than half in ruins.”63 Already long under the British sphere of influence, Kuwait had officially become a protectorate in 1899. Given its geographical proximity to Iran, Kuwait—as we have seen—had not been included in the Red Line Agreement. In Kuwait, as in Bahrain, pearling and trade between India and Basra in Southern Iraq had formed the basis of the pre-oil economy. Until WWI, Kuwaiti merchants had enjoyed their position as the opening to the Gulf for the city of Basra (in Iraq), and prospered as a hub in the long-distance trade linking Mesopotamia and India. The war, along with subsequent British hostility to the local government—which had sided with the Ottoman Empire—and subsequently the embargo enacted by Ibn Saud, who wanted to swallow up part of the Kuwaiti territory, destabilized the Gulf city. These difficulties were compounded by the arid landscape, where all sustenance had to be imported. There were no oases. Poor quality drinking water had to be transported in wooden barrels from the Shatt Al-Arab. Under such circumstances, the sheikh agreed (could he have done otherwise?) to allow exploration for hydrocarbons in

Fig. 0.4.  The harbor of Kuwait in 1918, before the beginning of the “age of oil”. (Qatar Digital Library, Ref: Photo 496/6/35).

63 Crystal, Oil and Politics in the Gulf, p. 117.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

39

1933, and an agreement was eventually signed with Anglo Persian and Gulf Oil in 1934. Andrew Mellon, who’s family owned Gulf Oil, had capably exploited his position as the US ambassador to London to patiently erode any objections on the part of the British. The two corporations formed the Kuwait Oil Company (KOC), which would be granted a concession lasting seventy-five years on terms similar to those in the other Arab regions. Production began in 1942, after the Burgan oilfield had been discovered in 1938: another supergiant field that would write the history of Middle Eastern petroleum. To sum up: by the end of the 1930s, seven large international oil corporations had acquired control of the most productive oil regions of the world. These companies had obtained key concessions and some of them had joined forces in various consortia. These seven corporations, that I will most refer to with the widely used term “the majors” were (in order of productive capacity): SONJ, Shell, APOC, Gulf Oil, TEXACO, SOCAL, and SOCONY (to which we might add the French CFP, by far the smallest, with access only to the French market). The majors were mostly Anglo-American, and enshrined the dominance of the two powers in one of the most promising and profitable industries of the interwar era. Some numbers show the incredible success enjoyed by these companies in their endeavor to ­dominate global petroleum production and exports. By 1949, they produced 99 percent of Middle Eastern oil, more than 80 percent of the oil coming from Venezuela and the other countries of the Western Hemisphere, and more than 80 percent of oil from the Dutch Indies and other Asian countries, as well as 31.5 percent of oil in the United States.64 When it came to petroleum, the Earth was their playground (Table 0.2). P E T RO N AT I O N A L I S M Let us now turn once more to the Achnacarry castle. Not only did the 1928 agreement aim at carving up the markets among the majors, it also called for the fixing of the global oil price following a model called Gulf Plus. According to this model Table 0.2.  Net petroleum exports by region from 1938 to 1960. Year 1938 1948 1958 1959 1960

Venezuela Middle East Soviet Union Indonesia Other World tbd Exports/ Global % % % % % Production % 56,9 53,6 36,0 34,4 31,6

29,5 40,6 55,2 55,4 56,9

− − 2,6 3,8 5,2

− − 3,9 3,5 3,5

13,6 5,8 2,4 3,0 2,7

955 2.399 6.785 7.303 8.208

Source: (Petróleo y Otros Datos Estadísticos (PODE), 1960).

64  Federal Trade Commission, International Oil Cartel, p. 24.

17,5 25,6 37,7 38,0 39,3

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

40

The Rise and Fall of OPEC in the Twentieth Century

the Cif price (Cost/insurance/freight)—that is, the price to import crude oil inclusive of transportation costs—should be equivalent to the cost of US crude, plus the transportation cost from the port of Houston, Texas (on the Gulf of Mexico), to the port of destination. The price of US oil, the US being then the largest oil producer and a key exporter at the time, set the rest of prices. For example: crude produced in Iran would be sold in India as if it was produced in the United States and then shipped from Houston. The objective of the Gulf Plus system was to protect the competitiveness of US oil and at the same time to guarantee substantial profits for corporations that produced petroleum from more productive oilfields, especially if closer to their destination markets. At the end of the 1920s, shortly after the Achnacarry meeting, this “price structure” was immediately rocked by several major shocks. The most important of these being of course the outbreak of the Great Depression in the United States. Starting off as a financial crisis, this soon had a devastating impact on manufacture and employment, leading to a significant reduction in the demand for petroleum and to a slide of its price on the US market. This shock alone could perhaps have been shielded through some control (that is, a reduction) of the US output. But this was difficult both because the US market was excluded from the Achnacarry agreement, and because in the US there was a greater degree of fragmentation in an industry that still included many smaller “independent” producers. As if to add insult to injury, the discovery in East Texas of enormous oilfields inundated the United States with new oil, provoking the first “oil glut” of the twentieth century. This complete saturation of the market would repeat itself once again only in the middle of the 1980s. Downward pressure on world petroleum prices seemed unstoppable and had severe repercussions, both in the US and in the rest of the oil-producing regions in the world. While in the US the crisis led to the first serious state efforts to regulate the domestic market; elsewhere the oil glut reinforced, or even generated, the first nationalist or proto-nationalist sentiments in the oil-producing regions. * * * The downturn of the petroleum industry in the US was as ugly as the rest of Great Depression economics. The radical journalist and political activist Harvey O’Connor described the miserable conditions forced on US oil workers (arguably the most privileged ones in the global oil industry): Hunger and misery crept through the oil fields in the early 1930s. When it seemed that wages barely sustained a family’s life, the companies began “sharing the work”. In many fields men got only 15 days a month wages as low as those paid 20 years before. The inhuman 12-hour day and the 7-day week still reigned supreme in the nation’s richest industry, but there just weren’t enough 12-hour days worked in the month [. . .] Despite all that, the men who were working were told they were ‘lucky’—how about the thousands of hapless oil workers who had no jobs at all? Hordes of hungry men roamed the highways; entire families took to the road, begging gasoline to keep going to the next town where there might be a job.65 65 Harvey O’Connor, History of the Oil Workers International Union (Denver: Oil Workers International Union, 1950), p. 29.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

41

Part of the problem lay in the fragmentation of the ownership structure of the oilfields. Small producers were encouraged to drill a large number of wells right next to each other in order to extract crude as fast as they could and capture it before their neighbors. Hydrocarbon reservoirs were exploited with techniques and with an intensity that was far from optimal, without any consideration for the need to maintain sufficient internal pressure. The discovery of the East Texas oilfields led to the drilling of hundreds of new wells. Until the 1950s Texas alone would represent 40 percent of US oil production. This gave birth to the landscape that we identify today with the rural Texas skyline, of vast plains full of derricks called “nodding donkeys,” lazily but constantly in oscillation, frequently a­ ccompanied by tumbleweeds carried along by a dusty wind. It has been estimated that, as of today, onequarter of all the world’s oil wells can be found in Texas. To push back the rising black tide that risked bankrupting Texas oilmen and depleting the fields, the Lone Star state introduced a system that would provide a source of inspiration for future technocrats and statesmen in the oil exporting countries. The scheme was clearly devised to block the seemingly unstoppable decline in prices. The implementation of production controls in Texas fell on the Texas Railroad Commission, which established a cap on output for every single well, the so-called “proration order”, in the name of the conservation of natural resources and of the defense of the national interest (openly defending prices would have run counter to the sacred principle of free competition).66 At the federal level, regulation of the market was enacted after 1935 through the Interstate Oil Compact Commission: here companies and state authorities cooperated, while no binding quotas were set.67 In this way the US government contributed to halting the fall in prices, while the private oil industry had to surrender to some degree of direct government intervention. * * * The other unintended consequence of the Great depression was the irruption and spread of nationalist sentiments in the new oil regions. Protests and movements against decline in raw materials prices and working conditions did not affect only the oil regions, as testified for by the “copperbelt strikes” of 1935 in British Northern Rhodesia which led to the creation of the first trade unions and the rise of African nationalism in the region. The nationalist movement of the 1930s with the strongest impact on the oil industry emerged in Mexico.68 In 1917, the first republican constitution had proclaimed public ownership of the country’s natural resources. In the following years the international oil companies, fearing a possible direct government action, intensified extraction of Mexican oil, while at the same time skimping on investments 66  Bernard Mommer, Global Oil and the Nation State (Oxford: Oxford Institute for Energy Studies, 2002), pp. 40–3. 67  Francesco Petrini, Imperi del profitto. Multinazionali petrolifere e governi nel XXI secolo (Milan: FrancoAngeli, 2015), pp. 63–5. 68  On the role of Mexico: Christy Thornton,“A Mexican International Economic Order? Tracing the Hidden Roots of the Charter of Economic Rights and Duties of States”, Humanity: An International Journal of Human Rights, Humanitarianism, and Development, Vol. 9, No. 3, Winter 2018, pp. 389–421.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

42

The Rise and Fall of OPEC in the Twentieth Century

in exploration and production, thus allowing Venezuela to easily surpass Mexico in crude oil output. At the beginning of the 1930s, Shell, which controlled the largest oil company in the country, El Aguila, discovered promising new oilfields at Poza Rica. But in 1936, the Mexican trade unions in the petroleum sector led a series of strikes and demonstrations to demand significant wage increases and improvements in working conditions. Workers objected to the ingrained racism of an industry exclusively run by European or US managers while Mexicans were left with menial jobs, terrible working conditions, and shabby accommodations. The oil city of Tampico on the coast of the Gulf of Mexico had grown from a population of 120,000, at the beginning of the 1930s, to something more than 700,000 by the middle of the decade. The oil crisis, though, left the city looking like it was in the midst of a war: miserable hovels made out of rotten wood, semi-nude children with starved bodies, meat stores with a couple of slabs covered by flies [. . .] immobile men seating by the side the road; misery, filth, indolence. On the other side of the river, houses that used to be two or three stories high, abandoned and crumbling, boilers turned upside down, walls falling apart, broken storage tanks.69

When, after months of labor conflict, prices started to recover, the government asked the oil companies to meet the unions’ demands. Lázaro Cárdenas, a general of the Mexican revolution and President of Mexico since 1934, evoked the issues at stake: “The formation of our own economy will liberate us from that kind of capitalism that does not even care to reinvest its profit in Mexico, that becomes a danger to our nationality in times of misfortune, and that leaves behind nothing but infertile lands, impoverished subsoils, starvation wages.”70 The companies didn’t cave in, refusing to acknowledge the authority of the Mexican judiciary, convinced they could essentially exempt themselves from the nation’s laws. In November 1937 El Aguila finally signed an agreement that increased the royalty paid to the Mexican government to 35 percent, almost three times the amount then paid to Venezuela, and multiple times the figure in the Middle East, yet it still refused to accept the new Mexican labor standards. Finally, on March 18, 1938 the Cardenas government decided to nationalize the petroleum industry. The date remains a national holiday to this day. A national oil company, Petróleos Mexicanos (PEMEX), was established, and it would eventually increase production by 10 percent between 1937 and 1940. The British, who had the largest stake in the Mexican economy, believed that the government’s maneuver smacked of “advanced socialism”, and that it threatened to infect other countries in the region. Nationalization had to be opposed by any means necessary: “leaders of other countries in Latin America where the British hold important concessions—i.e., Venezuela, Colombia and Peru— would be encouraged to think that it might be in their national interest to carry 69  Myrna Santiago, The Ecology of Oil: Environment, Labor and the Mexican Revolution 1900–1938 (Cambridge: Cambridge University Press, 2006), p. 312. 70 Santiago, The Ecology of Oil, p. 325.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

43

out a policy of theft like Mexico’s.”71. The US government, while adamant that compensation be paid, considered that it was of paramount to avoid a possible Mexican slide towards an alliance with Nazi Germany or Fascist Italy, so that the State department asked the companies to show “flexibility in the face of nationalistic legislation altering royalty structures, modifying exploration and development periods, stipulating the hiring of host-country nationals, and secondary industrial development.”72 The primary reason why Mexican nationalization was able to survive the boycott was that the majority of Mexico’s oil output was soaked up by its domestic market: already by 1938, Mexico absorbed more than 81 percent of its own production. Petronationalism was also beginning to bubble up in the rest of Latin America. Argentina, for example, created its own national oil company, Yacimientos Petrolíferos Fiscales (YPF), and in 1935 nationalized its petroleum. Also in Bolivia, young nationalist officers attacked US interests in the region in 1937, by nationalizing the oil sector that was in the hands of Jersey Standard.73 These Latin American examples were beyond the reach of Venezuela. On the one hand the stakes for petrocapital in that country were much higher than in the rest of the continent since, as we have seen, by the end of the 1920s Venezuela had become the biggest oil exporter in the world. On the other hand the perspective of nationalization, mooted only by the small Venezuelan Communist Party, essentially meant a leap into the void because the domestic market was still far too small to absorb a meaningful portion of the country’s oil production. This did not mean that the winds of nationalism did not reach Venezuela as well, bringing with them significant shifts in the relationship between the Venezuelan state and the concessionaires. In 1928 a largely democratic and student-led protest movement arose in ­opposition to General Gómez, taking sides against the compradora bourgeoisie, dependent from the United States, and demanding greater support for the heavily indebted agricultural sector. One of the leaders of this protest movement was Rómulo Betancourt, who would go on to become one of the key figures in the Venezuelan political life. The demonstrations had shaken the regime, but ultimately ended in jail time or exile for many of its leaders, including Betancourt. And yet, even within the regime itself, Gumersindo Torres (briefly reappointed minister of Development at the height of protests) publicly criticized the tax exemptions enjoyed by the oil companies: “The comparison of these figures reveals the disconsolate fact that it would have been better not to tax production but rather to have received payment for custom duties that were exempted.”74 Before being once 71  Lorenzo Meyer, “The Expropriation and Great Britain”, in The Mexican Petroleum Industry in the Twentieth Century, Jonathan Brown and Alan Knight (eds.), (Austin: University of Texas Press, 1992), p. 159. 72 Randall, United States Foreign Oil Policy, p.79. 73  George Philip, Oil and Politics in Latin America: Nationalist Movements and State Companies (Cambridge: Cambridge University Press, 1982). 74  Quoted in Ruptura, El imperialismo petrolero y la revolución venezolana, Tomo 2, p. 66.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

44

The Rise and Fall of OPEC in the Twentieth Century

more dismissed in 1931, Torres also denounced that the gasoline produced from Venezuelan crude in the US was cheaper than in Venezuela, that no crude was yet refined locally, and that many companies did not abide by the regulations of Venezuelan legislation. The dictator managed to endure the first years of the Great Depression, but after his death in December 1935, the Venezuelan people unleashed their long-repressed frustrations, toppling statues of Gómez and setting their sights on anyone who could be readily identified with the hated ancien régime. The man who took power, General Eleazar López Contreras, reacted to this widespread demonstration of hatred against the former strong-man by passing a series of reforms: making overtures to the country’s bourgeoisie which had been calling for greater domestic economic development; opening to greater press freedom; legalizing the Communist Party and leftist trade unions; and readmitting political exiles. Some of Gómez’ democratic critics, such as the novelist Rómulo Gallegos—who would go on to be elected as the first President of a democratic Venezuela—were coopted into the new government. Gallegos, one of Latin America’s great writers, did not sugarcoat the poverty, squalor, and superstition that colored the lives of most Venezuelans. In one of his best-known stories, Marina, he described two boys in a typical coastal town of the north: “They were two tiny boys, sick-looking, their bellies distended, with bristly reddish hair leaping savagely from their heads. Their bodies were c­ overed in a crust of filth and their faces splattered with the sticky juice of the nopal.”75 Awareness of the profound social problems endured by the Venezuelans became even more acute in December of 1936 when, in conjunction with the ongoing protests in Mexico, oil workers in the producing regions of Zulia and Falcón began a strike that would last for six months (Fig. 0.5). The walkout involved more than 20,000 workers, and would be remembered as one of the crucial political events in the history of twentieth-century Venezuela. The strikers, joined on occasions by students and according to Shell observers subject to “strong communistic influence,” accused companies of having acquired concessions illegally, of having set up refineries outside the country in Aruba and Curação, and demanded wage increases, the eight-hour working day (with paid overtime), medical facilities, full pay during hospitalization and the use of Club Houses for workers.76 There was widespread resentment among local workers because of discrimination from foreigners but, according to Shell observers, only the most radical speakers “urged the labourers to run the foreigners away and then to take possession of the things which the foreigners now enjoyed.”77 For the first time Venezuelan democratic nationalism 75  Cited in Francesco Tentori, Narratori ispanoamericani del Novecento (Parma: Guanda, 1960), p. 164. 76  Shell Historical Heritage and Archive, Shell Group Archives London (SGAL), GHC, VEN, A13-3, Memorandum, Venezuela and Foreign Petroleum Interests, 31.3,36. See also Stephen Rabe, The Road to OPEC: The United States Relations with Venezuela, 1919–1976 (Austin: University of Texas Press, 1982), p. 53. 77  Shell Historical Heritage and Archive, SGAL, GHC, VEN, A13, 1-1, Letter from N.O. Watson, Maracaibo, March 29, 1936.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

45

Fig. 0.5.  The Venezuelan petroleum workers’ strike of 1936. (https://commons.wikimedia.org/w/index.php?curid=68707021).

became a relatively unified movement, with a decidedly anti-American and anti-British outlook. The stakes were high: the most important industry in the country, instrumental for securing a decent future for the Venezuelan people, was in the hands of foreign capital. In the oil towns around Lake Maracaibo the homes of the Europeans and the Yankees appeared to be a world unto themselves, compared to the shantytowns of local workers. There was a growing sentiment that the Americans and the British, who had stormed into the country by the thousands, were treating the Venezuelan people like trained monkeys. This atmosphere of social and racial tension was captured by Domingo Alberto Rangel in a fictional description of a Shell board meeting during the strike: This remark came from the quietest of the English, Mister Dandridge, the head of the department of exploration, an introverted and solitary geologist. “Here, my dear,” this Englishman said, “the same struggle is taking root in Venezuela that the workers in England put up to be recognized as human beings. The English working masses spent almost a century, from the end of the Napoleonic Wars, trying to win this recognition. It cost them many bloody sacrifices. Only after the Great War, my friends, were the workers in English looked upon as human beings. “Here it will be worse, because it intersects with racial and cultural prejudices. We Europeans believe we are superior to the rest of humanity, we despise those with dark skin, above all if they are workers.”78

78  Domingo Alberto Rangel, Que Molleja de huelga. La huelga petrolera de 1936–7 (Universidad del Zulia: Maracaibo, 2007), pp. 43–4.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

46

The Rise and Fall of OPEC in the Twentieth Century

From 1936 petroleum became a national issue for the Venezuelan people and for its political and social movements; no longer a topic to be discussed only by the local elite and the company boards. In this, too, Venezuela was somewhat ahead of the majority of the oil-producing countries of the Middle East. Ideas about natural resources and national economic development circulated and informed these early discussions. One significant contribution came in the form of Arturo Uslar Pietri’s 1936 unsigned article “Sembrar el Pétroleo,” that can probably be considered the most important op-ed in the history of Venezuelan journalism (the same article is also attributed to the economist and minister of Agriculture Alberto Adriani).79 Literally translated as “sowing oil,” the phrase expressed the idea that oil revenues should have been used to revive the flagging agricultural sector: “Rather than oil being a curse that makes the people useless and parasitic, it should instead be a stroke of luck that with its sudden wealth accelerates and reinforces the productive evolution of the Venezuelan people.”80 The goal, ultimately, was to invest oil revenues to make the country less dependent upon oil extraction. Much of this discourse survives to this day. Petroleum is still often viewed a source of embarrassment, a “curse” from which the petrostate needs to emancipate itself from as quickly as possible by “diversifying” the economy and investing in productive sectors. Sowing oil meant transforming a foul, lifeless substance into a fecund seed. On one side there was the destructive extractive industry, while on the other the productive agricultural wealth. In many ways the “oil curse” theory, we can see, is neither a Western invention, nor is it a recent one. In 1937, General López Contreras broke the oil strike but also approved wage increases in line with the demands of the unions while, at the same time, his government began to question important clauses of the oil concessions, such as the companies’ tax exemption on imports. Manuel  R.  Egaña, a lawyer who would become another key oil technocrat was named minister of Development in 1938, and he immediately set out to sketch out a new coherent national oil policy. While Big Three had a vital interest in keeping control of Venezuelan oil and had made some concessions on the worker’s demands, they were unwilling to accept a further reduction of their profits, and coordinated to prevent any weakening of their united front. Companies argued to government officials that the competiveness of Venezuelan oil was threatened both by the rise of synthetic fuels (specially in Nazi Germany) as well as by “increased natural oil production progressing by leaps and bounds in other countries such as Iraq and all other parts of Arabia.”81 On the other hand Shell delegates lectured government officials reminding them that Venezuela was already appropriating 25 percent of the oil rent and that “if the Government of Venezuela with Bs.100 million per year income from the oil industry, without taxing the people and with no national debt, could not make 3 and 1/2 million people of Venezuela among the happiest and most prosperous in the 79  Franklin Tugwell, The Politics of Oil in Venezuela (Stanford: Stanford University Press, 1975), p. 33. 80  Uslar Pietri, “Sembrar el petróleo”, Periódico Ahora, Julio 17, 1936. 81  Shell Historical Heritage and Archive, SGAL, GHC, VEN, A13, 1–2, Telegram from A. Agnew, 21.7.36.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

47

world, it would be their fault.”82 In 1941 Egaña, undeterred by pressures from the oil industry that were blocking a revision of the concessions, produced a memorandum that asked for an increased role of the state in the industry, for a simplification of taxes, and for re-investment of oil money in the country.83 One clearly measurable consequence of the simultaneous social upheavals in Mexico, Venezuela, and elsewhere in Latin America was that New Jersey Standard, which in 1938 controlled 40 percent of the Latin American market and had seen its sales double since 1928, nevertheless saw its operating profits fall by one-quarter compared to 1927.84 * * * In the Middle East, as opposed to Latin America, the various skirmishes between governments and the concessionaires—some of them extremely heated—failed to produce before WWII any significant change in the nature of the relationship between local governments and petrocapitalism. None of the governments of the Middle East nationalized production (we have seen that in many places concession agreements had been signed only in the middle of the 1930s), nor did they manage to negotiate significant portions of sovereign control over taxation as the Venezuelan government had done. The first Middle Eastern government to call into question its relationship with a concessionaire (in this case, Anglo-Persian) was Persia, where production by foreign companies had started first. We have already seen how the controversy over petroleum taxes had continued throughout the second half of the 1920s. Shah Reza Pahlavi had undertaken a process of top-down modernization that required a constant stream of state spending. The primary goal of the policy was to consolidate the position of the state (including its armed forces) in a country with a deep-rooted tradition of tribal autonomy. Atavistic religious beliefs and entrenched social customs seemed to thwart efforts at economic reform, while the majority of the population was malnourished and prey to recurrent epidemics of disease.85 The Shah needed not look far beyond Persia’s borders to find examples of authoritarian state-driven modernization. To the West he could observe the allencompassing process of secular modernization carried out by Turkey’s Atatürk. The Shah intended to maintain a standing army of five divisions and, order to pursue that goal, 40 percent of the government’s budget was earmarked for military spending. Education received a significant boost: school attendance, in a system that continued to exclude the poorest segments of the population, grew from 55,000 registered pupils after WWI to 460,000 by the end of the 1930s. Ground was broken on the University of Tehran in 1935, and a trans-Iranian railway was built to link the Caspian Sea in the north with the Persian Gulf in the south for the first time. 82  Shell Historical Heritage and Archive, SGAL, GHC, VEN, A13, 1–3, Michael O’Shaughnessy, New York, April 9, 1938. 83  Manuel Egaña, Tres décadas de producción petrolera (Caracas: Imprenta Nacional, 1947), p. 161. 84 Philip, Oil and Politics in Latin America, p. 54. 85 Michael Axworthy, A History of Iran: Empire of the Mind (New York: Basic Books, 2008), pp. 221–2.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

48

The Rise and Fall of OPEC in the Twentieth Century

The government also made an effort to shift the country’s culture and customs in a more secular direction. The Shah proposed a linguistic reform to eliminate all words not of Persian origin, enacted a ban on the veil for women, and in 1935 replaced Persia with Iran (since the latter was the term commonly used among Iranians themselves) as the internationally recognized name of the country. The Shah also needed to reverse the decline of an economy that in the 1920s Lord Curzon had described thusly: “Factories, as the term in understood in Europe, do not exist in Persia; and the multiplication and economy of labour-force, by the employment of steam-power, or even water-power, is hardly known.”86 To jumpstart the Iranian industry and basic infrastructures the Shah needed money, and the oil sector was supposed to provide a critical contribution. A significant element of tension in the Shah’s relationship with the Company stemmed from the working conditions prevalent in Anglo-Persian’s facilities, in particular the refinery in the island of Abadan. While the skilled workers employed there were mainly Europeans or Indian, an embryonic Persian working class was nevertheless growing continuously by the 1920s. In the early years of the oil industry, many workers were selected among the local Bakhtiari tribes: these were seasonal employees, who followed their herd during the summer season. During the 1920s, the Company decided it needed a more permanent labor force and began introducing fixed salaries and basic amenities to retain local workers. Even so, Persian oil workers lived in miserable shantytowns or in tents. By the 1930s the population of Abadan had reached 40,000, approximately half of whom worked for the refinery. A 1924 petition described the subtle ways in which the Company strived to convert tribesmen into disciplined labor: Abadan is a city where the majority of residents are poor and wretched. Facing ­unemployment in their home town, these residents accepted the offer of the company to work in the very harsh and hot climate of Khuzestan, with all infections around for the period of nine months a year, receiving a salary of thirty rupees per month. However, every month, the company deducts some amount from their salaries. According to the company, paying the full salary stops the workers from staying at work during the summer when the weather is hot.87

In 1932, Anglo-Persian announced that, because of the crisis and anemic global demand, its payments to the Iranian government would drop from 1,288,000 shillings the previous year to a mere 307,000 shillings. One of the government’s largest revenue streams had just dried up. The Shah quickly took action. At the end of 1932, he unilaterally revoked the concession, leveling a number of accusations. The government argued that the original concession had been obtained through colonial arm-twisting, that it had no means to control whether the oil payment calculations 86  “European Economic Penetration”, in Peter Avery, Hambly, Gavin, and Meliville, Charles, The Cambridge History of Iran, Vol. 7, From Nadir Shah to the Islamic Republic (Cambridge: Cambridge University Press, 1991), p. 608. 87  Quoted in: Touraj Atabaki, “From ’Amaleh (Labor) to Kargar (Worker): Recruitment, Work Discipline and Making of the Working Class in the Persian/Iranian Oil Industry”, in International Labor and Working-Class History, 84, Fall 2013, p. 173.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

49

were correct, that Anglo-Persian was refusing to submit to taxation by the Iranian state, that the profits generated by the APOC in Iran had been invested in other parts of the world to the detriment of the Iranians themselves, that the cost of products refined and sold in Iran was excessive and, last but not least, that the oilfields were not adequately developed.88 That same day, the British government, sparing the usual diplomatic subtleties, announced that it would take “every legitimate measure” to fight such an inconceivable maneuver in its Gulf b­ ackwaters. It warned the Persian government that it would be held responsible for any eventual damage sustained by Anglo-Persian facilities. London immediately deferred Persia to the League of Nations’ Permanent Court of International Justice, based in The Hague, for its failure to uphold international contracts.89 The US weekly The Literary Digest described scenes of jubilation erupting on the streets of Tehran upon receiving the news of the cancellation of the concession. The police had ordered the lights to be kept on through the night to prevent looting by groups of citizens who had gathered outside. Lines of automobiles (there would hardly have been many), some overflowing with people, drove up and down the main roads, the weekly reported.90 In the international legal proceedings, the British government backed its appeal by invoking the beneficial effects of Companies’ policies on the Iranian economy: road construction; jobs for more than 25,000 people who were their families’ breadwinners; the installation of water, sanitation, and all other sorts of facilities in the areas where it operated. To the Persian government, which argued that The Hague lacked jurisdiction over a matter involving a sovereign state acting to protect the interests of its people, Great Britain responded with the time-honored rule regarding the sanctity of contracts: Pacta sunt servanda. It should come as no surprise that the British argument won the day. The League of Nations had neither the strength, nor in all likelihood the will, to oppose the interests of one of the imperial powers. Ultimately, in 1933 Anglo-Persian was awarded a new concession that called for the cancellation of the Iranian government’s 16 percent share in the APOC’s profits, in exchange for the standard royalty fixed at four shillings per ton of oil. The only novelty in the agreement was that it established a minimum annual payment due by Company, in order to guarantee at least a portion of the government’s rent in the event of a market downturn. The concession was set to last until 1993 (seemingly until the lands would run out of oil), and called for the gradual “Iranianization” of the company, including at the technical and management levels. In 1935, Anglo Persian was renamed the Anglo Iranian Oil Company (AIOC) in deference to the Shah’s linguistic preferences. Calls for “Iranization” aside, the Iranian government remained in a state of total subalternity. Iranian authorities had no voice in setting of prices or production levels, and had ultimately renounced to fiscal sovereignty by agreeing to accept payment with 88 L.P.  Elwell-Sutton, Persian Oil: A Study in Power Politics, 1955 (Westport: Praeger, 1976), pp. 67–82. 89  Katayoun Shafiee, Machineries of Oil: An Infrastructural History of BP in Iran (Cambridge: MIT Press, 2018). 90  “The Anglo-Persian Oil Flare-Up”, in Literary Digest, December 24, 1932, pp. 10–11.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

50

The Rise and Fall of OPEC in the Twentieth Century

a fixed royalty that would replace any other form of taxation. The Companies’ General Council wrote that “it was the best Concession he had ever seen.”91 Tehran was thousands of miles away from Caracas, and not only geographically. * * * In Iraq, too, the global economic crisis of the early 1930s was beginning to make its effects felt. A reduction in the price of grain measurably impacted government’s finances. Iraqi farmers, the fellahin, saw themselves deprived of essential resources for their survival, and flocked to the cities in large numbers, looking for work or, failing to find any, begging for alms. Popular discontent with a government largely controlled by the British (with the help the Sunni elite protected by Faisal) overflowed in 1931, leading to a general strike that rocked the largest metropolises. As British a diplomat observed: The Government is—I suppose inevitably—in the hands of a limited oligarchy composed essentially of Sunni Arab townsmen really representing a very small minority of the country. It is therefore easy for any agitator to play on the racial, religious or personal prejudices of anybody who is not an Arab, or if a Muslim not a Sunni or a townsman, or educated.92

Despite these tensions—perhaps precisely because of these tensions—in 1931 the IPC signed a new concession deal with Faisal that included an Iraqi waiver to the agreed principles of parceling parts of the land to other companies, the relinquishment of the unexplored territories North of the Tigris, as well as a commitment on the part of IPC to building a refinery on Iraqi territory.93 The following year, after the signing of the new concession and the acceptance of ongoing British military presence, Iraq was admitted to the League of Nations. According to Susan Pedersen, the British also favored Iraqi independence in order to have a freer hand over its oil, without any further possible risk of League of Nations interference.94 Shortly thereafter, the government received its first royalty payments from the IPC. The production of crude oil did not get underway, however, until after the completion in 1934 of the first oil pipeline capable of transporting oil from Kirkuk to the Mediterranean, with a bifurcation into two main branches, one leading to Tripoli, Lebanon, and the other with a terminal in Haifa, in the then-British mandate of Palestine, where a large refinery was built. In 1938, the IPC also absorbed the concession for Basra in the South, thereby controlling all of the Iraqi territory. With this last piece in place, alongside Baghdad and Mosul, the IPC group had finally achieved full control over all Iraqi oil. In 1936, Nuri Al-Said, the Prime minister with close ties to the British, was ousted from his then-post as minister for Foreign 91  Gregory Brew, “In Search of ‘Equitability’: Sir John Cadman, Rezā Shah and the Cancellation of the D’Arcy Concession”, Iranian Studies 50:1 (2017), 125–48. 92  Peter Sluglett, Britain and Iraq: Contriving King and Country (London: IB Tauris, 2007), pp. 211–12. 93  Francisco Parra, Oil Politics: A Modern History of Petroleum (London: IB Tauris, 2009), p. 13. 94  Susan Pedersen, The Guardians: The League of Nations and the Crisis of Empire (Oxford: Oxford University Press, 2015), pp. 269–77.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Prologue: Petrocapital and the Birth of the Petrostate

51

Affairs by a more nationalist government, which did not however last very long. The nationalists’ main point of contention was the Anglo-Iraqi treaty, and the way it restricted sovereignty over foreign policy, the issue of Palestine, and the slow development of Iraqi oil.95 But they had not yet managed to establish a ­durable bond with the people in the countryside or with the masses of unemployed workers flooding the cities. By the end of the 1930s, oil money already constituted onequarter of all government revenues. Iraq was on its way to becoming a petrostate. Proto-nationalist movements also appeared in the 1930s in the small Gulf sheikdoms under British influence and control. While tribal loyalties still shifted among different territories, and no national citizenship for the sheikdoms existed at the time, the need to delineate the perimeters of the oil concessions was forcing the establishment of clearer state boundaries in the Arabian peninsula. In Kuwait, Bahrain, and Dubai, the crisis in the pearl trade led the merchant class to protest the power of the ruling families and against any increase in taxation without a parallel increase in representation. Protests were mostly directed against the rising power of the ruler’s families and also touched the oil sector. Merchant classes did not consider the ruling families to be above them. They organized and called for assemblies, asked to have some say in the distribution of the first oil checks (still very modest, since oil production had started only in Bahrain), and demanded more spending on education and infrastructure. These were elite movements, and were ultimately repressed by the sheikhs with the help of their British protectors: neither the ruling families nor the British had much interest in fostering greater public participation or to jumpstart economic development in the Gulf sheikhdoms.96 In Kuwait, 1938 is known as “the year of the Majlis.” Merchants established both a municipal council and an education council, and the Ruler was eventually forced to accept the creation of an assembly. They demanded that the rent owed to the Al-Sabah family be limited to that coming from their date farms. The assembly issued laws in favor of merchants and consumers (rents in town were lowered and Al-Sabah was forced to abolish free labor), provided funds to build three schools, and asked that the next oil check be returned to them. The assembly represented only the Sunni elite, and held yet little appeal for the Shia or to the Bedouin population.97 Sheikh Al-Sabah managed to find common ground with these excluded groups, accusing the merchants of conspiring with Iraq, from where many of the teachers in the Kuwaiti schools came from, and eventually suppressed the assembly. In that same year a consultative assembly was created in Bahrain, the most economically developed of the all the Gulf sheikhdoms. It demanded more work for locals and less for Indian immigrant laborers, including in the oil sector. Here, too, the sectarian divisions between a Sunni minority and Shia majority facilitated the repression of the movement. In Dubai—which at the beginning of the twentieth 95  David Commins, The Gulf States: a Modern History (London: IB Tauris, 2014), p. 131. 96  Michael Herb, The Wages of Oil: Parliaments and Economic Development in Kuwait and the UAE (Cornell University Press, 2014), pp. 30–8. 97 Rosemary Said Zahlan, The Making of the Modern Gulf States: Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman (London: Routledge, 1989), p. 29.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

52

The Rise and Fall of OPEC in the Twentieth Century

century was growing in importance as an entrepôt, after the Arabs had been expelled from southern Iran—the merchants’ main concerns were the manumission of slaves by the British, the curb on illegal arms trafficking, and the opening of airplane routes that limited business for local shipping. In the rest of the Trucial States and in Qatar, the merchant class was still too weak and mobile to have any incentives to protest. While all of these movements were ultimately repressed, and emerged in t­ erritories that were sparsely populated and still economically marginal compared to their northern neighbors of Iraq and Iran, it is important to mention them here for two reasons. First, they signaled a broad willingness on the part of the merchant classes to have a say in the distribution of the oil rents in the Gulf sheikhdoms. Second, the repression of these movements contributed to a widespread distrust toward British rule, because of its intrigue and lack of interest in local development. Having said this, it is safe to say that even after the end of WWII, very few would have foreseen the huge economic potential of the Gulf sheikdoms. As late as 1946, the British political agent in Bahrain could still write to London that there would be no need to inform the sheikhdoms of the results of the Bretton Woods negotiations because: “they have no currency of their own [. . .] and it seems extremely unlikely that either the International Monetary Fund or the International Bank will have representation or own assets in the Sheikhdoms.”98

98  Quoted in: Tim Niblock, (ed.), Social and Economic Development in the Arab Gulf, (New York: Routledge, 2014, 1st printing 1980), p. 75.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

1 Fifty-Fifty Access to raw materials by nations in need of those raw materials should be recognized as involving at the other end - and particularly in the case of oil - the exploitation of wasting resources in the supplying country. It is not through economic accident that the great oil bearing regions of the world are, for the greater part, backward in social and economic development.1 Max Thornburg, 1942 The 50-50 represents a tested principle for maintaining an equality of interest through all the aspects of an inevitably complex relationship intended to endure for many years.2 Jackson Rathbone, President of Standard Oil of New Jersey

In Killers of the Flower Moon David Grann tells an intriguing story. The Osage nation, a Native American tribe that had settled in Oklahoma during the nineteenth century, happened to be sitting on top vast reserves of crude oil. By the early 1920s, thanks to the royalty payments, the Osage nation was probably the community with the highest per capita income in the world. The US government soon started worrying about the luxury and “waste” to which the Osage were getting used to, and decided to assign a white “guardian” to most of its members.3 The same logic also applied to the oil exporting countries in Latin America and the Middle East after the end of WWII. The fifty-fifty revenue sharing model, introduced for the first time in Venezuela in 1948 and then exported in the Middle East, meant more money for local governments, thus accelerating their ­transformation into petrostates. At the same time it celebrated a political and economic marriage between Anglo-American petrocapital, protected by Washington and London, and the sovereign landlords of the key oil exporting regions in the world. Why did such a new model become necessary? Part of the explanation lies in the fact that WWII had resurrected fears about the availability of natural resources. US Secretary of Interior Harold Ickes noted in 1945 that “the prodigal harvest of minerals that we have reaped to win the war has bankrupted some of our most vital mineral resources”, and pessimistically concluded that “we can no longer be 1  Quoted in: Randall, United States Foreign Oil Policy Since World War I, p. 124. 2  Quoted in: The Financial Times, London, March 6, 1958. 3  David Grann, Killer of the Flower Moon: Oil, Money, Murder and the Birth of the FBI (Random House, 2017), pp. 76–80.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

54

The Rise and Fall of OPEC in the Twentieth Century

listed with Russia and the British Empire as one of the “Have” nations of the world.”4 In his 1948 neo-Malthusian bestseller The Road to Survival, William Vogt issued a stark warning about the unchecked exploitation of Mother Nature: The Old World industrial structure was jerry built of the same laths. New lands— including Africa and Australia, as well as the Americas—provided the fuel to keep the populations fires burning. From these lands came raw materials and food—wheat, corn, tobacco, cotton, wool, timber, oil, minerals, and a host of others. Europe bought the products, trade balances were struck, the Reverend Thomas Malthus fell more and more into disrepute, and the government, economists, and millions of people, content with this best of all possible worlds enrolled under the banner of Dr. Pangloss. They shared, with our own pioneers, the illusion of “limitless” resources.5

Vogt’s solution was essentially to put the industrial man on a diet. But industrialized countries moved in the opposite direction. Governments in the US, Europe and Japan invested massively in industrial reconstruction, and in gigantic fossil-based infrastructural projects such as highways and electrification, and needed to access ever increasing amounts of natural resources and raw materials in order to feed their industries and keep a lid on social and political tensions. The complicity between sovereign landlords in “underdeveloped” countries and the international oil companies was essential to guarantee increasing supplies of petroleum. Between 1948 and 1954, with the spread of the fifty-fifty model, the oil majors enjoyed their “golden age” and came the closest to forming a mighty global cartel. They begun to cooperate in territories where such coordination had previously been weak or non-existent: SONJ, for example, entered the Saudi concession (the most promising in the world), while US companies managed to get a share of the previously all-British Iranian concession. The majors now basically controlled all crude oil exports and at the same dominated the most important outlets (particularly in Western Europe and Japan) . . .  THE VENEZUELAN MODEL General Isaías Medina Angarita became President of Venezuela in 1941, just as the US was preparing for war with Japan and the other Axis powers. Medina Angarita had been educated at the military academy, as many of the future leaders in newly independent and developing countries. Despite reports of his alleged sympathies for Italian fascism, the general continued to guarantee press freedom and domestic opposition, both democratic and Communist. Venezuela, as we have seen, was the largest petroleum exporter in the world, and its crude was of strategic importance to the British and US military effort—particularly after the flow of Middle Eastern oil to the Mediterranean had been interrupted due to the closure of the Suez Canal. During the war, Great Britain received most of its oil from Venezuela. Up until 4  Quoted in: Christophe Bonneuil and Jean-Baptiste Fressoz, The Shock of the Anthropocene: the Earth, History and US (London: Verso, 2016), p. 168. 5  William Vogt, The Road to Survival (New York: William Sloane Associates, 1948), p. 68.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 55 1948, New Jersey Standard accumulated half of its profits from its Venezuelan concessions, and its output in Venezuela was larger than that in the US.6 After the Mexican nationalization, Venezuela was the only country in Latin America that allowed foreign companies to operate on any significant scale. Under Medina Angarita’s presidency, the non-compradora middle class, which sought to strengthen the domestic industry at the expense of foreign imports, was gaining the upper hand. This evolution concerned reflected what as happening in many other countries throughout Latin America in the 1930s, and contributed to the rise of protectionist trade policies designed to bolster native industries behind higher tariff barriers. The Venezuelan budget was in 1942 in an especially ­precarious state, not least because it had to confront a 25 percent reduction in petroleum exports due to submarine warfare in the Atlantic. The state lacked funds to support a bureaucracy that, in just a few years, had grown from roughly 7000 employees in 1936 to more than 47,000 in 1942.7 Stimulus for economic development and support for the state budget could only come from oil revenues. The government thus needed to milk Creole (New Jersey Standard), Shell, and Mene Grande (Gulf Oil), the Big Three concessionaires. Rising international oil prices during the war made the Venezuelan state all the more determined to grab a larger share of the pie. The Big Three, however, still refused to negotiate major changes to petroleum legislation, while they had refused to bid for new concessions under the previous legislation approved by Lopez Contreras. The main objective that Medina was pursuing was to unify all the concessions under the same legal regime (cancelling the previous oil laws) and to ­stimulate the growth of Venezuelan industry, especially in refining sector. He thus wrote directly to the US President Franklin Delano Roosevelt lamenting the “passive resistance” he faced from the companies, while “international circumstances” made US-Venezuelan cooperation essential.8 At the same time, in order to force the oil companies to the negotiating table, he went “Mexican:” the general began talking directly to the people in a nation-wide political campaign on petroleum that included staging public rallies outside the factories. In one of these impassioned speeches Medina argued that Venezuela had to be allowed “a participation adequate to its stature as the owner of this substance” and that petroleum’s “industrial transformation in Venezuela must multiply the job opportunities for Venezuelan workers.” He also optimistically declared that: It is my conviction that in this year 1942 an era in the history of our oil is coming to a close: an era of tentative efforts, of ignorance, of empiricism. Today we know where we stand, and it is the duty of my government to begin the phase that we might call one of technical, economic, and financial exploitation in the service of the state, in cooperation with business.9 6  Fernando Coronil, The Magical State: Nature, Money, and Modernity in Venezuela (Chicago: The University of Chicago Press, 1997), pp. 106–7. 7  Bernard Mommer, La Cuestión Petrolera (Caracas: UCV, 1988). 8  Rafael Arraíz Lucca, El petróleo en Venezuela: Una historia global (Caracas: Editorial Alfa, 2016), p. 42. 9  Isaías Medina Angarita, Medina ante el pueblo de Venezuela: la jira del primer magistrado nacional a los estados Trujillo, Mérida y Zulia, y sus repercusiones nacionales e internacionales (Caracas: Oficina nacional de prensa, 1943), pp. 40–2.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

56

The Rise and Fall of OPEC in the Twentieth Century

Medina’s political campaign, shaped by the technical expertise of Manuel Egaña, finally took the form of a new petroleum law that went into effect on March 13, 1943. The law had been discussed in depth with experts sent by the Roosevelt administration, such as Max Thornburg, and was finally accepted by Arthur T. Proudfit of Creole. It called for an increase to up to one-sixth in the royalty (that is, 16.67 percent, a higher level than in the US), cancelled all tariff exemptions, and reaffirmed Venezuela’s complete sovereignty over fiscal policy with the establishment of a new income tax mainly directed at the oil industry. According to calculations by Venezuelan officials, and based on oil prices prevailing in the 1937 to 1941 period, the new tax regime would provide the Venezuelan state with an average 60 percent share of oil income.10 Oil income for the state increased from 80 million dollars in 1942, to 135 million in 1943, to 242 million in 1944, a massive boost in fiscal revenues.11 This new 60:40 split of the oil profits in favor of the state was justified by the fact that the oil fields were being heavily exploited, and that companies had already been able to recoup their investments many times over. The 1943 petroleum law also included several other more controversial provisions: The renewal of all existing concessions; the resolution of all outstanding legal disputes; the suspension of all “reversions” (concessions that would expire and then go back to state); the option for the state to claim royalties payments in crude oil (which it could then sell directly on the market); the licensing of new concessions, thus potentially challenging the monopoly of the Big Three. A very important footnote to the new legislation concerned the US: The income taxes paid abroad by US companies (not the royalties that is) could in large part be credited against what they owed the Internal Revenue Service. Thus one of the indirect consequences of the Venezuelan legislation was to transfer resources from the government in Washington to its counterpart in Caracas. People such as Max W. Thornburg, a former employee of SOCAL who joined the petroleum team at the State department in 1941 (while still being paid also by his former employer), had pressured the companies to come to terms with the Venezuelan government. He could claim a partial success in that all the key concessions were renewed for period of forty years. But, at the same time, the 1943 petroleum law was very slippery for the Big Three, since they had no formal guarantee against the possibility of future tax increases, while they had to face at the same time the potential risk of petroleum exploration being opened up to other oil companies. The 1943 Venezuelan oil law opened a new era in which the state could, albeit by no means unilaterally, renegotiate all concessions. * * * On October 8, 1945, a coup d’état removed Isaías Medina Angarita from power. With the people clamoring for democracy, jobs, and better working conditions, the military establishment chose Rómulo Betancourt to head a civilian-led 10  Osmel Manzano and Francisco Monaldi, “The Political Economy of Oil Contract Renegotiation in Venezuela”, in William Hogan and Federico Sturzenegger (eds.), The Natural Resources Trap (Boston: MIT Press, 2010), pp. 409–465. 11  Arraíz Lucca, El petróleo en Venezuela, p. 148.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 57 “­revolutionary junta.” Betancourt, as we have seen, had already taken part to the student protests against Gómez and was one of the young leaders of the opposition to his regime. In the 1930s he had written extensively on petroleum issues and had ­traveled widely in both the United States and Europe. Eventually, he concentrated on organizing the democratic movement known as Acción Democrática (AD): The party, formally established in 1942, brought together pro-democracy militants and the major trade unions. During the parliamentary debates over the 1943 ­petroleum law, Betancourt had delegated the role of party spokesman to the forty-year-old Juan Pablo Pérez Alfonzo. The latter had studied for several years in the US before graduating from the Universidad Central de Venezuela in Caracas with a thesis on “property law,” and had then gone on to become one of the founding members of AD. Pérez Alfonzo had voted against (voto salvado) the 1943 petroleum law on the grounds that it condoned all past illegal actions of the foreign companies. Gulf, Jersey Standard, and Shell had obtained their concessions in the 1920s under very opaque terms, in the face of considerable opposition from local landowners and indigenous people and, after 1943, they would avoid any trouble for past mischiefs. Furthermore, the AD spokesman noted, should international oil prices have increased, Medina’s fiscal regime would not guarantee an equal distribution of the oil income between the state and the companies (according to his projections it would drop below the 50:50 income split). The position of Pérez Alfonzo and Betancourt, the vanguard of the democratic movement, thus appeared to be even more radical and nationalist than that of the Medina Angarita’s administration. In his Política y Petróleo (Politics and Petroleum), written between 1937 and 1939 (but first published in Mexico only in 1956), Betancourt wrote: [Our country] appeared to be a notable exception amid the rest of the other Latin American nations with their inadequate public finances and their slow economic development. We had no external debt. The internal debt was small. Each year there was a surplus over the budget and everybody enjoyed a delightful, happy life. Nothing could have been further from the truth. Venezuela was one of the most backward nations of America in technical matters, and its population was mired in misery, ignorance, and abandon.12

Betancourt stressed that, according to the 1941 census, 75 percent of the adult population of the country remained illiterate. Thus his government, pushed by its allies in the trade unions, focused on improving the country’s labor standards and overall quality of life, as well as on the need to reduce unemployment. By 1946 workers in the petroleum sector enjoyed by far the best working conditions of all, and were a key component of the labor movement, protected by a solid collective bargaining agreement. Betancourt prepared the ground for Venezuela’s first free democratic elections that were held in 1948 and resulted in the victory of Rómulo Gallegos. The leader of Acción Democrática refused to accept that it was Venezuela’s ­ineluctable destiny to remain poor, as had seemingly been written in its complicated 12 Rómulo Betancourt, Venezuela: Oil and Politics, trans. Everett Bauman (Boston: Houghton Mifflin, 1979), p. 124.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

58

The Rise and Fall of OPEC in the Twentieth Century

geography and meager population. He sought to escape this destiny while at the same time shying away from the nationalization policy adopted by its northern neighbor Mexico. He knew all too well that, in 1944, 92 percent of Venezuela’s imports were paid for by petroleum sales, and feared that premature action would stifle the petroleum industry and deprive the country of its most valuable source of revenue, further impoverishing the people. In the meantime, his right-hand man Pérez Alfonzo, from his new post as minister of Development, set about defining the contours of AD’s oil policy. The policy of Pérez Alfonzo during these years could summarized in these key points: Preserving the hydrocarbons law of 1943; no more concessions; preservation of the reservoirs; fair participation to the profits of oil companies; promotion of the Venezuelan petroleum industry.13 One of the first measures adopted by the government was to halt all new oil concessions, a decision outwardly justified by the need to preserve the country’s most precious natural resource, as well as to stabilize international oil prices by limiting additional output. This approach made him an ante litteram advocate of the “conservationist” approach in oil exporting countries. The government also imposed a reduction of Venezuelan gasoline prices and incentivized the creation of refineries on Venezuelan soil. The emphasis of the administration was on the promotion of workers’ rights and on the push for industrial development, to foster which the Venezuelan Development Corporation was created. Equally important, however, was the regulatory mechanism that Pérez Alfonzo devised to “complete” the hydrocarbons law of 1943, which continued to remain in effect. The new amendment passed in 1948, when Pérez Alfonzo was named minister of Development in the new Gallegos government, and provided that if the total amount due to the Venezuelan state did not reach one-half of the concessionary company’s net revenues, an additional tax would be introduced to grant the state one-half of the company’s net petroleum income.14 This was the birth of the fifty-fifty profit sharing model, immediately hailed as a great nationalist success by both the Betancourt government and by Acción Democrática, and still today celebrated as such by most historians. The fifty-fifty model was in fact the result of a carefully calibrated compromise with the large concessionaires and was designed to ensure they would continue to enjoy stable and very substantial profits. There was no need in fact for any a­ dditional legislation to guarantee equal distribution of oil revenues between the state and the oil companies. All the Venezuelan government needed to do was to raise general taxation or royalties to the needed level. Furthermore, Venezuela could in theory have aspired to a level of participation in the petroleum revenues that exceeded 50 percent, as had already happened before 1948 under Medina Angarita in 1943. After all, the companies aim at securing an adequate return on their investments. In the case of the Venezuelan petroleum sector (that is an industry that benefited from high market prices for the commodity it produced, low extraction costs, 13  Arraíz Lucca, El petróleo en Venezuela p. 172. 14  This model is often defined as “profit” sharing. Here I use the terms “revenue,” “profit,” and “income” with much the same meaning even though technically they stand for different things.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 59 and very productive wells) this “adequate return” could well have allowed for a state participation higher than 50 percent. Today, a combination of taxes and royalties exceeding 90 percent of oil revenues (the situation prevailing in Abu Dhabi or Saudi Arabia at the time of writing) still guarantees to international oil companies an adequate return on their investment. We know that the oil companies themselves were involved in promoting the fifty-fifty model from the very beginning. Just one week after the coup of October 1945 a representative of the Big Three met with Betancourt. The company official reported that he had the impression “that the junta will be realistic and that no change is contemplated in the oil law and concessions contracts [. . .]. They feel, therefore, it would be wiser to concede everything reasonable at once instead of have measures forced on them later.”15 The summary of the 1948 Venezuelan fiscal agreement in Daniel Yergin’s classic account of the history of petroleum, a enjoyable read and the best book on the history of petroleum written from the perspective of petrocapital, clearly illustrates the benefits that the oil companies derived from the fifty-fifty model: Jersey simply could not risk losing its position in Venezuela [. . .]. Jersey installed a new top man in Venezuela, Arthur Proudfit, who sympathized with the country’s social objectives, and who would show considerable sensitivity to the changing Venezuelan political scene. Proudfit had been part of the migration in the 1920s of American oil men from Mexico to Venezuela; he brought with him a lasting memory of the disaster of government company relations and of the bitter labor strife in the oil fields, along with a determination to apply the painful lessons he had learned in Mexico. All the main players—the Venezuelan and American governments, Jersey and Shell—wanted to work things out [. . .] With the assistance of the consultants, a settlement was hammered out based on the new principal of “fifty-fifty.” It was a landmark event in the history of the oil industry. According to this concept, the various royalties and taxes would be raised to the point at which the government’s take would about equal the companies’ net profits in Venezuela. The two sides would, in effect, become equal partners, dividing the rents down the middle. In exchange, the questions about the validity of various concessions would be overlooked—and there were certainly pointed questions about how some had been obtained by Jersey and the companies it had acquired. The title to existing concessions would also be solidified and their life extended, and new exploration opportunities would be made available. These, for the companies, were very desirable gains.16

Both the notion that US officials “helped” Venezuelan officials and that the government-take would “about equal” the companies’ net profits (when in fact the result of the negotiation was understood by the companies as meaning that the government-take would “at the most equal” the companies’ net profits) are quite revealing. The regulations issued by Betancourt’s government (even though Pérez Alfonzo would later argue that this formula was never considered by the Venezuelan 15  Miguel Tinker Salas, The Enduring Legacy: Oil, Culture and Society in Venezuela (Durham: Duke University Press, 2009), p. 208. 16  Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Simon & Schuster, 1991), pp. 434–5.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

60

The Rise and Fall of OPEC in the Twentieth Century

Congress as something “static or permanent”) provided the oil companies with a guarantee of immense profits and a theoretical cap on the state’s freedom in the fiscal realm: its participation to the oil net revenues would not exceed fifty percent.17 The rationale was that the only way the state could increase its oil revenues in the future would be by allowing for more production (it could not influence oil prices), thus by increasing the oil companies’ revenues by an equal amount. Venezuela had in essence entered into a marriage of convenience with the Big Three. This wedding was indeed one step ahead from the predatory approach of petrocapital prevailing up to the 1930s, but it was no significant advance compared to the 1943 petroleum legislation. As a result of the arrangement there would be no room for nationalization, despite the insistent pressures coming from large segments of the labor movement and from the Communists, and there would be limits set to the fiscal sovereignty enjoyed by the government. Even the policy of “no more concessions” was far from harmful to the oil companies. The Big Three had the guarantee that they would not be forced to compete for new concessions with smaller or more aggressive companies. Arthur Proudfit, president of Creole, confirmed that “this policy contributes to the orderly exploration and development of the large concession now held.”18 The circumstance that the fity-fifty was accepted by the international oil companies without any reservation—or even encouraged as we have seen— ­ emerges also from the minutes of a 1948 meeting between Pérez Alfonzo and US president Harry Truman: Dr. Pérez Alfonzo referred in general terms to the 50/50 net profit arrangement with the petroleum companies and added that the relations between the Government and the companies were most satisfactory. President Truman said that he was pleased to know that and that the companies as well as the Mexican government had learned a lesson from the experience in Mexico and that both now realize they made a mistake. Pérez Alfonzo pointed out that he shared this view and that Venezuela has also benefited from experience and that his country preferred to work with the private ­companies in developing the petroleum resources.19

The support of the US government should not come as a surprise. US Secretary of Defense James Forrestal had made it abundantly clear that the protection of Venezuelan oil resources was “vital to the defense of the Western Hemisphere and to the United States in any possible future,” so that the US should be prepared to intervene militarily to protect oil facilities if needed.20 Washington had also by then made it clear that Latin American countries should expect no Marshall plan-like intervention to revive their economies, and had to rely instead mainly on

17  Juan Pablo Pérez Alfonzo, El Pentágono Petrolero (Caracas: Ediciones Revista Política, 1967), p. 9. 18  Tinker Salas, The Enduring Legacy, p. 220. 19 Foreign Relations of the Unites States (FRUS), 1948, Vol. IX, The Western Hemisphere, Memorandum of Conversation Between President Truman and the President of Venezuela (Gallegos), July 21, 1948. 20 Randall, United States Foreign Oil Policy Since World War I, p. 235.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 61 private foreign direct investments.21 In that very same year the US had also withdrawn from the negotiations for the creation of an International Trade Organization where raw materials and employment issues would be discussed and coordinated at an international level.22 Truman was thus willing to let market forces work their magic in developing countries. Creole (Standard Oil) told Fortune magazine in 1949 that it “does not worry so much about the effects of the fifty-fifty tax as it does about the future politicians who may have sixty-forty or even seventythirty ideas.”23 After a visit to Latin America in February 1950 George Kennan, one of the architects of US foreign policy at the beginning of the Cold War, clearly expressed his contempt towards Venezuelans who, according to him, basically acted as parasites to the US extracting companies: “The local population had not moved a finger to create this wealth, would have been incapable of developing it, and did not require for its own needs the thousandth part of what was apparently there.”24 He made it very clear the only reason the US was acting the soft way rather than the hard way was because this was “a sort of ransom to the theory of state sovereignty and the principle of non-intervention which we had consented to adopt,” as well as because “the companies could pay this tribute and still make money . . .”25 Kennan forgot to mention, though, that there was no reason why the oil majors should reap gigantic profits (far greater than any other capitalist company) deriving from a natural wealth they themselves had done nothing to create. Nor did he mention that the taxes paid by oil companies in Venezuela (thus excluding the royalty that is considered a cost) could be credited against taxes paid to the US government. Thus if the Venezuelan tax rate did not exceed the corporate tax in US (and they did not) the effect of the 50:50 regulation would have simply been to transfer payments from those due to US Treasury to revenues for the Venezuelan government, with a neutral impact on the company’s net revenues. Not surprisingly, the issue of the “tax credit” enjoyed by US companies was hardly ever mentioned by Pérez Alfonzo, or by the then Finance minister Manuel Pérez Guerrero (whom we will meet later for his crucial role both in the Venezuelan petroleum industry and foreign policy) nor by Betancourt when they remembered their success in 1948.26 Only a few days after the approval of the fifty-fifty regulation, the newly elected AD government led by Gallegos, the first democratically elected President of Venezuela, was toppled by yet another military coup. The coup initially brought to power a military junta led by three generals, until in 1952 the assassination of one member of the triumvirate, Delgado Chalbaud, resulted in the assumption of 21 Arturo Escobar, Encountering Development: The Making and Unmaking of the Third World (Princeton: Princeton University Press, 1995), p. 29. 22  Eric Helleiner, Forgotten Foundations of Bretton Wood: International Development and the Making of the Postwar Order (Ithaca: Cornell University Press, 2014), pp. 260–4. 23  Fortune Magazine, n.2, February 1949. 24 George F. Kennan, The Kennan Diaries (New York: W.W. Norton, 2014), p. 245. 25  Ibidem. 26  Francisco Parra, Oil Politics: A Modern History of Petroleum (London: I.B. Tauris, 2009), p. 16.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

62

The Rise and Fall of OPEC in the Twentieth Century

unilateral power by Marco Pérez Jiménez. The military coup helped nourish the myth that the fifty-fifty agreement was a major step forward by democratic AD in fighting back the power of petrocapital. In reality the advent of the generals’ junta was more properly attributable to a conservative reaction against several of AD’s social policies, such as its support to the trade unions (including in the petroleum sector) and calls for redistribution of wealth towards the middle class.27 But there is absolutely no proof that the coup was encouraged by the concessionaires operating in Venezuela, nor did the Big Three pressed in any way for the new military regime to amend the fifty-fifty model that fitted them so well. M I S S I O N TO T H E M I D D L E E A S T When we have dealt with the Achnacarry Agreement we have mentioned that until WWII the price of crude oil was theoretically based on a formula known as gulf plus: a calculation that reflected the price of crude from the Gulf of Mexico plus the cost of shipping it from Houston, Texas to the port of destination. After the outbreak of hostilities the British government, and in particular the committees tasked with coordinating the supply of raw materials for the war effort, began to criticize this model. Their logic was straightforward: the oil supplied to the British Navy in the Persian Gulf, as well as in all the Empire’s ports east of Suez, was sold at the same price as if it had been shipped from Houston. In India, Iranian crude oil cost the same as Venezuelan crude, despite the geographic proximity of the former. This artificial premium for the companies was called phantom freight. To defuse the increasing pressures stemming from wartime governments, international oil companies began to adopt a new pricing mechanism that would limit the phantom freight. The new “price structure” would be based both on the crude exported from the Persian Gulf, in particular from the Saudi export terminal of Ras Tanura, as well as from the Gulf of Mexico. The double based system had the advantage of lowering the final oil prices East of Suez, while “equalizing” prices in Great Britain: Venezuelan crude and Middle Eastern crude would be sold in Britain, and across the rest of Europe, at the same price. After the end of WWII this model too started to be called into question. In 1948 total petroleum output in the Middle East had grown from 4.8 percent to 12.2 percent of global production. Whereas in 1938 only 23 percent of European imports came from the Middle East and 47 percent from Venezuela, by 1950 the Middle East accounted for 85 percent of European imports, while Venezuela and the Caribbean only 13 percent.28 The year 1948 also marked another structural shift in the oil market, the repercussions of which continue to be felt to this day: the United States ceased to be a net oil exporter and became a net oil importer—in 27  Daniel Hellinger, “New Perspectives on Acción Democrática”, Latin American Perspectives, 1:4, 1984. 28  George Lenczowski, Oil and the State in the Middle East (Ithaca: Cornell University Press, 1960), p. 38.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 63 fact they would soon become the largest oil importer in the world until they were overtaken by China in 2015. European governments, including the British, began to question why fob (free on board) prices in the Middle East should remain equal to those in the Gulf of Mexico, despite the sudden surge in Middle Eastern output and lower extraction costs. The US government, meanwhile, also began to take an interest in lowering prices for its crude imports at a time when international oil price was rising sharply. The British minister of Transport, seeking cheaper supplies for the Royal Navy, asked the oil companies to clarify their production costs in the Middle East. At the same time, parliaments both in Europe and the United States began to question the enormous profits being accumulated by the multinational companies from their Middle East concessions. The oil companies, for their part, carefully avoided revealing the extremely low production costs in the Middle East, information that would further strain their relationships with local authorities and compromise their commercial advantages. Instead, in 1949 they came up with a new price structure that “equalized” the final cif price of crude oil from the Gulf of Mexico and Ras Tanura in New York. As a result, whereas in 1948 the fob price of oil was $2.22 per barrel around the world, under the new system, the fob price in Ras Tanura dropped to $1.88 per barrel in April 1949, well below the US crude price. The Middle Eastern oil had become the cheapest in the world. The majors, who basically traded all Middle Eastern crude, stood to benefit tremendously from their oligopoly, provided they did not overproduce. Additional downward pressures on Middle Eastern oil prices would continue with the ­inauguration of the European Recovery Program (better known as the Marshall Plan) in Western Europe. On the other side of the Atlantic, US oil had suddenly become more expensive, a fact that spurred the Federal Trade Commission (FTC) to investigate Big Oil and what it deemed the artificially high price of US crude oil in 1952. The results of this inquiry would become an important source of knowledge about the petroleum industry, but in the short term they led nowhere. As the US Department of Justice would acknowledge, Americans’ horror of monopolies and cartels “did not extend to the most important industry in the world.” * * * This rather long technical premise is essential to fully comprehend the concerns of the Venezuelan government for the advent of cheap oil from the Middle East. In 1945, Manuel Pérez-Guerrero, who would serve several terms as Venezuelan minister of Petroleum starting from the 1960s, and would also go on to play a major role within the United Nations, was still a young diplomat. He was a delegate to the San Francisco conference that would ultimately lay the groundwork for the establishment of the UN. There, he had his first encounter with Arab representatives from the Gulf, a region he would come to know quite well (indeed, he would be one of the first Venezuelan officials to be fluent in Arabic): My first conversations on oil with Saudi Arabia date from that time, from the train taking us to San Francisco with some of the younger chaps of the Saudi Arabian ­delegation. I told them that a lot of oil existed in their country, which they didn’t

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

64

The Rise and Fall of OPEC in the Twentieth Century

know about. They knew that some of it existed, but they didn’t know that it was really very big. We the Venezuelans were much more informed on that.29

In his history of Venezuelan oil published in 1947, Manuel Egaña, who we’ve encountered previously as the drafter of the 1943 Venezuelan hydrocarbons law, said that: “the Middle East (Iraq, Iran, Saudi Arabia, Kuwait, and the island of Bahrain) constitutes a serious threat to Venezuelan oil, because of the enormous productivity of its deposits and the low cost of production [. . .]. What should be done is not to ignore it or reject it, but seek to foil the threat and neutralize it.”30 Believing that the Middle East concessions penalized local governments, Egaña suggested that Caracas should send representatives to the new oil producing countries of the Middle East to sound out the potential for a global regulation of production along the lines of the scheme enacted in the United States by the Texas Railroad Commission: The only countries in the world in the same state as we are with respect to petroleum are Iran, Iraq, and recently Saudi Arabia. With their enormous yet unrewarding landscape (even though millennia ago, the Mesopotamia of great rivers and irrigation was the home of the greatest world civilization); with their small, poor, indolent, and backward populations; with their low agricultural production and their dependence on oil, these countries all resemble Venezuela. But those countries have been limited to practicing a rather timid fiscal petroleum policy, and on this level they have nothing to teach us. In reality, it is we who must set the example for them.31

In 1949, Egaña was in charge of the Venezuelan petroleum sector, a position he would hold until November 1950. Very quickly, as early as August 1949, he set up a mission—composed of an engineer, a high-ranking official in the ministry for the Development (Eduardo Luongo Cabello, head of the mission who would also become the first Petroleum minister of Venezuela in 1951), a specialist in mining law (Dr. Ezequiel Monsalve Casaso), an economist and diplomat (Luis E. Monsanto), and of an Italian who spoke a number of “oriental languages” (Milo Panella). The mission’s mandate was the following: Venezuela is now so dependent on petroleum that any change in the rhythm of production has tremendous repercussions across the economy [. . .]. Venezuela must be ready for whatever might occur in the global oil industry in 1955, in 1960, or in 1970. [. . .] Undoubtedly, it is in Venezuela’s interest to establish friendly direct relations with the governments of the Middle East, with the goal of attaining an equilibrium of oil prices from both sources, so that all oil can be accommodated on world markets without affecting the benefits that we obtain for ours.32

The objective of the mission that lasted from September to December 1949, was not to fight the entry of Middle Eastern oil onto global markets, including in the US market, but rather to cooperate on price and production so as to achieve a win-win situation. At its core, this scheme drew upon the same principle that was, 29  United Nation Oral History Project, Interview with Manuel Pérez Guerrero, April 27, 1983. 30  Quoted in Dorothea Melcher, OPEC: La Organización de Países Exportadores de Petróleo. La prehistoria de su fundación (1943 a 1960), Unpublished, 2010, p. 11. 31  Ibidem. 32  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 65 and still remains, at the root of trade union movements: to prevent the influx of a younger, more productive, and potentially cheaper workforce from threatening the hard-earned gains of older, more experienced, and more organized labor. At the time, this idea of direct transnational cooperation among what were then considered underdeveloped nations was imaginative, to say the least. Venezuela had no direct diplomatic ties with any of the countries in the Middle East. Not only did it lack any relations in the petroleum sector, it generally lacked significant relations whether in the cultural, political, or economic sphere, except for small waves of Arab immigrants in the late nineteenth century (significant immigration from Syria would only start in the 1950s). The Venezuelan mission had to go through Washington or London just to obtain entry visas in most of the countries it aimed to visit. Washington’s embassies in the oil producing countries of the Middle East were extremely suspicious of the possible motives behind the Venezuelan mission. Its diplomats were heavily influenced by the oil companies, which certainly did not look kindly upon face-to-face conversations among the producers. Saudi Arabia, for one, refused to grant entry visas to the Venezuelans, mentioning that it did not welcome foreigners with a Jewish background, and pointing to Venezuela’s support for Israel in the UN. Eyewitness accounts of the meeting in Iran convey the tenor of the Venezuelan mission, which also included stops in Iran, Egypt, Iraq, and Kuwait. The four Venezuelan officials landed in Tehran in November 1950 and were welcomed by Manucher Farmanfarmaian, the director-general for Hydrocarbons in the ministry of Economy. Farmanfamaian had been schooled in France and was a descendant of one of Iran’s most distinguished families—one of the handful that basically ruled the country under the Shah. The Venezuelans had prepared English and Arabic translations of their country’s concession contracts and key petroleum legislation, as well as copies of Egaña’s book on the history of Venezuelan oil. One of the ­delegation’s members, Luis Monsanto, opened the discussions by acknowledging that the Middle East was becoming the center of global oil production and that, while Venezuela stood alone in the Western Hemisphere, Iran was surrounded by “oil brothers.” Farmanfarmaian struggled not to display his amusement at both the Arabic texts, as to the rather naive definition of Iran’s Arab neighbors: The Gulf Arabs were our neighbors, but we’d always thought of them as enemies rather than family. I almost laughed out loud [. . .] But the Venezuelans had a point. We were all on the same side; we shared a common industry. Our suspicions of each other were heightened by our lack of contact. I silently thanked Ambassador Ala for having gone against his orders. How cowed we all were, how afraid and alone inside our borders. What the Venezuelans were suggesting was revolutionary and would drive the British government crazy! [. . .] That evening we began a four-day marathon of conversation, the first open exchange of information ever held between two oil producing nations. It was invigorating and inspiring—the first step in the emancipation of the oil industry and the seed that ten years later would flower into OPEC.33 33  Manucher Farmanfarmaian and Roxane Farmanfarmaian Blood, and Oil: Memoirs of a Persian Prince (New York: Random House, 1997), pp. 229–30.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

66

The Rise and Fall of OPEC in the Twentieth Century

As Farmanfarmaian’s recollections suggest, the comedy of errors produced by their superficial mutual understanding was not the only outcome of the visit. In the meetings, the parties discussed a host of oil-related questions in great detail, and the Venezuelans invited their interlocutors to participate to an “oil convention” to be held in Caracas the following year. They compared their experiences dealing with respectively with US and British companies, and agreed that British companies needed to be far more transparent and that their colonial DNA showed yet no signs of evolution. As Monsanto noted: “What different souls the British and American companies have. There is no comparison between their companies: the Company in our country is civilized and an open book, in yours it is mean. We can talk to ours without killing each other. Americans understand the psychology ­ nchangeable, and the interests of Venezuela. The British do not bother. They are so u so . . . enigmatic!”34 The British were quite fearful of the tenor of conversations the Venezuelans might have with the sheik of Kuwait. They had reasons to be nervous. A memo prepared for local diplomats by officials of the British ministry of Fuel and Power explained that the Venezuelans aimed at defending the competitive position of their oil and promoting their fiscal regime, admitting that: “it is of course self evident that the Kuwait Oil Company’s payment per ton is low compared with payments made in Venezuela and for that matter with payments made in some other Middle Easter countries.”35 The only advantage of Kuwait was that the fixed royalties per ton paid to the Sheik were not linked to world prices and thus would only increase if production did the same. In any event, as reported by the British Political agent that overlooked the conversations, the Venezuelan visit to Kuwait turned out to be harmless: “The Arabic interpreter was left behind in Damascus [. . .] Only, one member of party in Kuwait spoke English. They saw what they were shown and had one short interview with the Sheikh at which conversation was entirely on trivialities.”36 In his interview for the UN Oral History project, cited above, Pérez Guerrero tends to downplay the importance of this first Venezuelan mission to the Middle East arguing that: If it had not been because of our dictator Perez Jimenez taking over the Government from us, from Betancourt and his associates and our military colleagues in 1948, we would have had OPEC in the early 1950s. But Pérez Jiménez did not do anything; the only thing he did was to make some contacts with oil-exporting countries in the Middle East because we had already—Pérez Alfonzo and myself—prepared the ground for these contacts. And yet they were useful.37

It is highly debatable (if not altogether impossible) to suggest that OPEC could have been created in the early 1950s, given the prevailing political climate prevailing 34 Farmanfarmaian, Blood and Oil, p. 231. 35  Qatar Digital Library, IOR/R/15/5/270, File C 5/18, Venezuelan Oil Mission, Letter from MAB Borrows, October 13, 1949. 36  Qatar Digital Library, IOR/R/15/5/270, File C 5/18, Venezuelan Oil Mission, Telegram from Political, Kuwait, November 10, 1949. 37  United Nation Oral History Project, Interview with Manuel Pérez Guerrero, April 27, 1983.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 67 in the Arab world at the time. As even Pérez Guerrero admitted between clenched teeth, the meetings did leave an important legacy in that they sowed the seeds of mutual understanding. Farmanfarmaian, who left Iran after the 1979 r­evolution because of his status as a member of the ruling class close to the Shah, chose to spend the rest of his life in exile in Venezuela, thus highlighting the strength of the bonds that grew out of this initial visit. In the other stops of their Middle Eastern tour—Kuwait (as we have seen), Iraq, Egypt, and Syria—the Venezuelan delegation received a much chillier reception. The hosts’ distrust in Egypt was mitigated only by the invitation to participate to the Venezuelan “oil conference” and by the offer of scholarships to study petroleum issues in Caracas. In fact the government would organize in 1951 the first National Oil Conference and invite both Farmanfarmaian and another figure about which we will have much so say, Abdallah Al-Tariki (Tariki from now on), then visiting Venezuela for the first time. Farmanfamaian also has a nice tale about this meeting. At a dinner dance in Caracas while the Iranian guest was dancing with his wife, Tariki whispered to him that Muslim women were not supposed to dance. A Venezuelan, overheard the comment, and suggested acidly: “Then perhaps you should put down that whiskey in your hand, Mr. Tariki.”38 This nice story tells us that by 1951 some of the key protagonists of the creation of OPEC nearly a decade later already knew each other well enough. FIFTY-FIFTY IN THE MIDDLE EAST The global war against the Axis had definitively convinced the US and the British governments of the inescapable nexus between petroleum and military power. It was also clear that the Red Line agreement was generating tensions between the US and Great Britain in Middle East, since 81 percent of production in the region was controlled by British companies, leaving their US counterparts in a minority position. Once more, as very briefly after WWI, direct government oversight over this critical natural resource was debated as a possible solution. In August 1944, London and Washington signed the Anglo-American petroleum agreement. The following year the two governments sought to pursue an even more ambitious project that had been brought to the attention of the new US President Harry  S.  Truman, on the creation of an International Petroleum Commission under the auspices of the United Nations. The idea was to coordinate petroleum production and demand outside the United States: undue competition for oil production in the Middle East would be avoided, local governments would get a fair share, and consumers would be guaranteed stable supply.39 It must be remembered that during the Bretton Woods negotiations more than one delegate, including 38 Farmanfarmaian, Blood and Oil, pp. 267–8. 39  Francesco Petrini, Imperi del profitto. Multinazionali petrolifere e governi nel XX secolo (Rome: Franco Angeli, 2015), pp. 97–106.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

68

The Rise and Fall of OPEC in the Twentieth Century

John Maynard Keynes, had come out in favor of international regulation for trade in raw materials. But the oil majors were very skeptical of any government intervention that might influence the dynamics of global supply and demand (and thus price and profits). They ultimately threw their weight behind the strong o­ pposition of independent US producers to any international agreement that would curtail their freedom and allow increasing quantities of foreign oil into the United States. Invectives against the monopoly of the “petroleum cartels” on the part of the World Federation of Trade Unions (not yet under the domination of communist organizations), and the campaigns run by the first consumers’ associations, such as the International Cooperative Alliance, thus fell on deaf ears. In the US, meanwhile, a Petroleum Reserve Corporation had been set up during the war to work as a state oil agency. It was intended to have access to its own reserves to ensure that American consumers and the armed forces would not lack oil supply. The oilfields of Saudi Arabia, controlled by US companies, were widely perceived as being able to support the US military for years to come. In November 1943 the Petroleum Reserve Corporation, led by Secretary of the Interior Harold Ickes, sent a technical mission to the Eastern provinces of Saudi Arabia with the purpose of assessing the oil prospects of the region. The eminent geologist Everette  L.  DeGolyer led the mission and confirmed the extent of petroleum reserves in the Gulf: they were indeed larger than US reserves, and accounted for more than half of all oil reserves worldwide.40 DeGolyer famously concluded that: “the center of gravity of world oil production is shifting from the Gulf-Caribbean area to the Middle East—the Persian Gulf area [. . .] and is likely to continue to shift until it is firmly established in that area” (Fig. 1.1.)41 Saudi Arabia was thus the perfect target for the Petroleum Reserve Corporation, whose ultimate aim was to preserve shrinking US hydrocarbon reserves by investing in production abroad. President Roosevelt had already declared Saudi Arabia “vital to the interests of the United States,” in order to allow his administration to issue loans under the Lend-Lease Act to Ibn Saud, who needed the funds desperately.42 Ickes argued that the United States had already reached “peak” petroleum production, and that the country would need “extra-territorial reserves to guard against the day when our steadily increasing domestic demand can no longer be met by our domestic supply.”43 He suggested that the Petroleum Reserve Corporation should acquire a controlling share in the Saudi consortium CASOC (or ARAMCO, Arabian American Oil Company, as it would be renamed in 1944) and that it should invest in the construction of a pipeline to transport Saudi crude to the Mediterranean. This would give the US government direct control over the most productive oil region in the world, and thus a say in the global supply and price of oil. 40 Michael B. Stoff, Oil, War and American Security: The Search for a National Policy on Foreign Oil, 1941–7 (New Haven: Yale University Press, 1982), p. 136. 41  This became one of the most widely quoted geological reports in the history of petroleum. For example: H.B. Milner, “Middle East Oil”, in Nature, No. 162, September 25, 1948. 42  On the US oil policy after WWII: David S. Painter, “Oil and the American Century”, Journal of American History, Vol. 99, Issue 1, June 2012, pp. 24–39. 43  Cited in Gerald D. Nash, “Energy Crises in Historical Perspective”, Natural Resources Journal, Vol. 21, Issue 2 (1981), p. 349.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 69 Natf-e-Shah

Hjleyan

Tang-e-Bijar

48°

Z

L UR E S TA N

Veyzenhar Kabir Kuh Kuh-e-Samand Dehluran Abu Ghirab Amara Buzurgan

Sarkan Maleh Kuh Halush

K

Kabud Qalehnar

Danan

50° a H

g U

r

o

ZE

52°

54°

s

Lab-e-Safid S T A

56°

N

LEGEND

T

Palangan Darpari h N Lali Cheshmeh r Karun u Kohesh Papileh Fuqa Shakheh Zeloi s Masjid-e-Suleyman Noor 32° Par-e-Siah t Paydar Paydar Halfayah Ramin Naft Safid West Rifai z Haft Kel Susangerd Rig Marun Mamatain Doudrou Majnoon Jufeyr Kupal IRAQ Shuroun Karanj Ahwaz Bangestan Ab-Teymour West Qumah Agha Parsi Nahir Mansouri Rumaila Mokhtar Jari Khaviz Darquain Pazanan Umr Subba North Shdegan Khayrabad Tuba Ramshir Rattawi Gachsaran Zubair Abadan Tangu Rumaila Luhais Siba Rag-e-Safid Chillingar South

Jurassic Oil Field Main Cities

32°

50 km

o

n

e

I

R

A

N

30°

Garangan Siah Rachi Ratqa Hendijan Abdali Makan Sulabedar Raudahtain Ash Shahama Behregan Sar Binak Kilur Karim Rudak-Milaton Sabiriyah Mutriba Bahrah Margesi Nowruz Binak Gulkhari Shiraz Medina KUWAIT Abu Khaimah Abouzar Doroud Kuwait Dharif (Ardeshir) (Darius) Abduliyah Soroush Greater I n t e r i o r Dorra Bushgan Minagish (Cyrus) Burgan F a r s Umm Gudair Dalan Hout Faroazan Kuh-i-Mand Lulu South Umm Gudair (Fereidoon) Wafra Kuh-e-Kaki Zuluf Marjan Rimthan Fuwaris Khafji Lawhah Kangan South North Pars Dibdibah Hamur Safaniya Ribyan Mahrah Hasbah Sadawi Jauf Nar Harqus 28° A Varavi Al Haba Habari Manifa Bandar Karan R Sharan Kurayn A Taheri Faridah B Juraybiat Assaluyeh West Assaluyeh Khursaniyah I Jurayd Dhib A Abu Jana Bakr N Jaladi Hadriya Abu Safah South Pars Fadhili Berri Samin Qatif Dhiba Bilal Dammam (Bahram) Zaqeh

Safwan

30°

Co

as

ta

l

Fa

rs

Abqaiq

Jaham

26°

BAHRAIN Manama Awali

Dokhan

Ghawar

Abu Jifan Farhah

QATAR

Qirdi

Dilam

Mazalij

Umm Shaif

El Bunduq Satah

Hilwah Talhah

Tinat

Hamzah Nuayyim

Dalma Arzanah

Abu Dhabi

Ghinah

Bu Hasa Huwaila

Hazmiyah

46°

Sahil

UNITED ARAB EMIRATES

48°

SAUDI ARABIA 50°

52°

North Kidan

24°

Jarn Yaphour

OMAN

Asab

Jawb

Hawtah

Sajaa

Al Ain

Ghash-Bu-tini Hail

Lughfah

26° GULF OF OMAN

Margham

Bab

Raghib

Strait of Hormuz

Zakum

Hair Dalma Harmaliyah

Sarkhum

Henjam Saleh Bukha Baih West Mubarak

G

Ulayah

24°

Namak Bandar Abbas South Gash Suru Gavarzin Salakh

U Maydan L F Mahzam A C Sirri E Resalat Reshadat D Bul (Rostam) (Raksh) Fateh Falah Hanine Abu Al Sharjah SW Fateh Bukhoosh Nasr Idd El Shargi Rashid Dubai

Doha

Khurais

28°

Shah

Zarrara/ Shaybah

54°

Mender

56°

Fig. 1.1.  Main hydrocarbon reservoirs in the Gulf. (A.S. Alsharhan, “Petroleum systems in the Middle East”, 2014).

The project was strongly opposed by Big Oil, which went as far as to accuse the government of trying to spread socialism into the United States. Ickes and his supporters were denigrated by oil lobbyists as “socialistic and communistic-minded New Dealers.”44 Such vitriol stopped them in their tracks. The US government could be given a shot at regulating domestic production (albeit only in cooperation with the companies), but it could not be allowed to have a direct hand over production and distribution abroad (Table 1.1.). 44 Irvine H. Anderson, Aramco, The United States, and Saudi Arabia: A Study of the Dynamics of Foreign Policy, 1933–1950 (Princeton: Princeton University Press, 2014), p. 98.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

70

The Rise and Fall of OPEC in the Twentieth Century

Table 1.1.  Leading joint ventures in the Middle East Country

Operating Company

Parent Companies

Iran

The Consortium

BP Shell Jersey, Texaco, Gulf, Stancal, Mobil

Iraq Abu Dhabi Qatar

The Iraq Petroleum Co. Ltd & Associated Companies

Kuwait

Kuwait Oil Co. Ltd

Saudi Arabia

Aramco

40% 14%

CFP U.S. independents

7% each 6% 5%

Shell, BP, and CFP

23.75% each

Jersey and Mobil One independent BP and Gulf Jersey, Texaco, and Socal Mobil

11.875% each 5% 50% each 30% each 10%

(Ian Skeet, OPEC , 1988).

What was the best way of dealing with the advent of Saudi oil then? While King Ibn Saud had allowed the US to build a military base at Dharhan, this was scheduled to be returned to the Saudi government after five years. The Arab-Israeli war of 1948 and recognition of Israel by the United States had also led to increasing tensions with Saudi Arabia. ARAMCO, whose owners were not participants to the Red Line agreement nor had been part of the Achnacarry conversations, could expand production at will as well as fight for new markets, seriously jeopardizing cooperation among the majors. One CALTEX manager argued that its profits were “terrifying.” US interest in Saudi oil led to a course of action far different from that forecast by Harold Ickes. In the event, the badly-needed funds for investment in Saudi oil production, and guarantees of access to the international markets, were offered by Standard of New Jersey (acquiring a 30 percent stake in the concession) and SOCONY (acquiring 10 percent). By 1948 ARAMCO, thus strengthened with the necessary capital, had more than enough resources to transform Saudi Arabia into the world’s most productive oil province. That year, as we have said, the discovery of oil at Ghawar, 100 km southwest of Dhahran, revealed a supergiant field some 280 km long and 30 km wide—the largest oil field ever discovered. The arrival of the two US majors in Saudi Arabia formally scrapped the Red Line Agreement that bound the IPC companies to work together in the Middle East. Only the French tried to mount a last-ditch defense of the agreement,

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 71 but they were rebuffed and denied participation in the Saudi consortium.45 The Americans, emboldened by their emerging global role as the world’s policeman, begun to question the British role in the region. Truman quickly picked up the traditional mantle of economic liberalism to defend US petrocapitalism once it was firmly established in Saudi Arabia, endorsing the position already expressed by US majors that: “private enterprise is the best medium for oil development, and that oil controlled by American oil corporate interests is equally available for the needs of national security with that owned wholly or in part by the United States government”, thus the “American petroleum industry should be encouraged to expand its plans for developing the world’s resources.”46 * * * The development of Saudi oil was crucially linked to the emergence of a promising new market for Middle-Eastern petroleum in western Europe. The reconstruction of European economies needed a stable and growing influx of raw materials to generate the economic growth necessary to resist the spread of international communism. Oil consumption in Europe had grown from 27 million tons per year in 1938 to 37 million tons in 1947.47 After the end of the war, oil consumption began to grow at a rate of 13 percent a year, accounting for some 18 percent of all European energy needs by 1955. This increasingly rapid transition from coal to oil as Western Europe’s primary energy source, while not totally imposed from abroad, was heavily incentivized by Washington who perceived it as a way to bind the Atlantic together. Outside the US, the oligopoly of international companies by the mid-1950s controlled 85 percent of crude production, monopolized distribution in Japan, and controlled over 90 percent of distribution in Europe.48 While the continent was becoming increasingly dependent upon an imported energy resource, Western European governments made no serious efforts to rump up internal production of coal until the end of the 1950s. Writing on the relative decline of the coal sector in Europe, Alberto Clò and Romano Prodi note that: Production fell by a factor of 2 between 1950 and 1970, employment by about three times (to little more than 600,000 workers, today there are just 100,000), and mines gradually began to shut down everywhere, despite the huge volume of resources still untapped. And in the coal industry every closure is irreversible. What for two c­ enturies had been the glory of the European economy became merely a social preoccupation.49

Walter J. Levy—who, as we shall see, would serve as one of the key intermediaries between several US administrations and the oil majors was in 1948 and 1949 the head of the oil branch of the Economic Cooperation Administration, which 45 Anand Toprani, “The French Connection: A New Perspective on the End of the Red Line Agreement, 1945–1948”, Diplomatic History, n. 2, 2012, pp. 261–99. 46  George Philip, Oil and Politics in Latin America: Nationalist Movements and State Companies (Cambridge: Cambridge University Press, 1982), p. 75 47 Lenczowshki, Oil and State in the Middle East, p. 28. 48 Peter R. Odell, Oil and World Power (New York: Routledge, 2013, first ed. 1970) pp. 120–1. 49  Romano Prodi and Alberto Clò, “Europe”, in Raymond Vernon (ed.), Daedalus: The Oil Crisis, September 1975, p. 89.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

72

The Rise and Fall of OPEC in the Twentieth Century

administered the Marshall Plan in Europe. He encouraged the use of Marshall Plan funds for the construction of a pipeline to bring Saudi oil to the Mediterranean (and thus to the European market), as well as to build refineries in various countries in Western Europe. In 1949, he testified before the US Congress and justified the use of American taxpayers’ money to finance refineries in Europe and for the construction of a pipeline owned by private US companies. According to Levy, American “dollar oil” had to find an outlet in Western Europe, even at the expense of British “sterling oil.” He also pointed out how both the economic and the geopolitical interests of US firms aligned with those of the majors: The foreign operations of our industry are an integral part of our defense system. For our defense we must be able to count not only on a sound and healthy domestic oil industry but also on US-owned foreign oil resources. This is obvious in terms of Western Hemisphere oil. It is no less correct in terms of Middle East oil. Imagine for a moment what it would mean to the economic and political position of the United States if the oil resources of the Middle East were controlled by a hostile power on whose good will all the Eastern Hemisphere countries would then depend for their essential oil supplies.50

The Saudi-Mediterranean pipeline, called the TAPLINE, was completed in 1950, and the first shipment of Saudi crude from the Lebanese city of Sidon took place at the end of the year. Although the pipeline, which passed through Syria, would remain perpetually hostage to the region’s chronic political instability, it became a key channel for the supply of oil to Western Europe.51 An increasingly critical part of safeguarding the supply to Western European and international markets, as well to guarantee the constant flow of profits to the oil companies, now concerned the stability and the security of the relations with the Gulf oil exporting countries. This was how George McGhee, a trained geologist with a PhD in Oxford who had long worked in the petroleum sector and then moved on to became one of the most influential US diplomats in the Middle East, would describe the situation: At the time, the Middle East was perhaps the most critical area in the world in the contest between ourselves and the Soviets. The governments in the area were very unstable. We had no security pact covering this area. The Soviets had threatened Greece, Turkey and Iran [. . .] The Arab States were very hostile to us because of our involvement in the Israeli affair[s], as we know. Saudi Arabia which is, I assume, the key country we will be discussing, was more tolerant than others. King Ibn Saud always seemed a little less affected by Israel in his relations with us than the other Arab States. There were, however, threats of strikes against us in Saudi Arabia. Always in the background there was the possibility of some nationalist leader, particularly in the countries where there were kings and sheiks, who might seize power as Nasser did later.52 50 W.J. Levy, Oil Strategy and Politics, 1941–1981 (Boulder: Westview Press, 1982), p. 82. 51  Helmut Mejcher, “Saudi Arabia’s ‘Vital Link to the West’: Some Political, Strategic and Tribal Aspects of the Transarabian Pipeline (TAP) in the Stage of Planning 1942–1950”, in Middle Eastern Studies, 18:4, 1982, pp. 359–77. 52  Hearings before the Subcommittee on Multinational Corporations, Multinational Corporations and the Unites States Foreign Policy, Pt. 4, January 1974, pp. 84–5.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 73 In fact World War II had posed serious problems—particularly, but not solely, for the Gulf countries—because of the interruption in the shipping of foodstuffs, which was accentuated by a reduction in oil revenues. Crude oil prices spiked upwards immediately after the war. The concessions that linked Middle Eastern states’ revenues only to the royalty of four shillings per ton penalized them all too clearly, when compared to the booming profits enjoyed by the concessionaires. The fixed royalty meant that governments would earn the same amount of money from the sale of a ton of oil, regardless if its price was $1 or $100 per barrel. The governments of the region thus began to ask for a larger share of a rapidly growing pie. Matters were exacerbated in 1949, when production in Saudi Arabia fell from 530,000 to 462,000 barrels of oil per day by the end of the year, thus reducing government income by $25 million. At the same time the increasing pressures that workers were exerting on the oil companies for better housing, better salaries, better education, and better services (including in Saudi Arabia where the workforce in the oilfields had reached a total of 15,000, including 3000 US citizens, 1200 Italians, 800 Indians and altogether 12,000 Arabs),53 made international ­companies more responsive to the idea of sharing the burden with local governments.54 The Saudis had denied entrance to the Venezuelan mission in 1949, but they were far from unaware of the enormous profits reaped by ARAMCO while, at the same time, Ibn Saud’s finances struggled. Abdullah Sulaiman, the right hand of the King when it came to the Kingdom’s finances, exerted increasing pressures on US companies to have them pay more to Saudi Arabia while ARAMCO was handing 38 percent of its profits to the US Treasury. Some of the arm-twisting involved making imports more complicated by close inspection of ARAMCO goods and the shutting down of its radio facilities.55 US concessionaires finally responded to these pressures by offering the fifty-fifty sharing model that had proven so successful in Venezuela, and that was already on the radar of several of the Gulf rulers (thanks, at least in part, to Venezuelan mission). Saudi Arabia would be the first Middle Eastern country where this model would be negotiated and implemented. In The Control of Oil, a classic contribution to the lengthy US bibliography denouncing Big Oil, John Blair, who worked at the Federal Trade Commission as a Big Oil buster, writes that: “The devising of a solution that would give Ibn Saud his fifty-fifty participation without reducing ARAMCO’s profit margin must be regarded as an act of pure genius.”56 Interestingly enough, oil company managers and US officials went as far as arguing that Saudi Arabia had sovereignty over ­taxation to prevent any possible internal criticism to the application of the 50:50 in Saudi Arabia (something they had previously denied, and would consistently continue to deny in their negotiation with Middle East producers up to the beginning of the 1970s). In a meeting at the State Department between ARAMCO, SOCAL, 53  Qatar Digital Library, IOR/R/15/2/483, Saudi Arabia Monthly Economic Report, Jan./Feb., 1948. 54 Michael E. Dobe, A Long Slow Tutelage in Western Ways of Work: Industrial Education and the Containment of Nationalism in Anglo-Iranian and ARAMCO, 1923–1963, PhD dissertation, 2008. 55 Ellen A. Wald, Saudi Inc.: The Arabian Kingdom’s Pursuit of Profit and Power (New York: Pegasus Books, 2018), pp. 53–60. 56  John Malcolm Blair, The Control of Oil (New York: Pantheon Books, 1976), pp. 197–8.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

74

The Rise and Fall of OPEC in the Twentieth Century

Jersey, and MOBIL officials together with Assistant Secretary for Near Eastern Affairs Mc Gee “there was general agreement [. . .] that despite the words in the concession agreement, no valid objection could be raised against the Saudi action because a sovereign cannot sign away his sovereign rights over taxation.”57 Just after the issuing of two royal decrees that imposed an income tax on ­companies engaging in hydrocarbons production, on December 30, 1950 ARAMCO signed with the Saudi government an amendment to the concession that declared that: “In no case shall the total of taxes, royalties, rentals and exactions of the Government for any year exceed fifty per cent (50%) of the gross income of ARAMCO, after such gross income has been reduced by ARAMCO’s cost of operation.”58 Eventually, a “posted price” was established as a basis from which to calculate ARAMCO’s gross income, and thus the 50 percent it owed to the Saudi state. The new payment, which took the form of an income tax to a foreign government, could be claimed against taxes to be paid in the US under a foreign tax credit that protected the oil companies from double taxation. As long as the Saudi income tax would not be higher than what the companies would have paid in the US, the taxation, as in the case of Venezuela, was neutral to them. The Saudi government and ARAMCO shareholders had just celebrated a marriage of convenience that was even more tighter than in the case of Venezuela. The concessionaires would be sure to reap enormous profits (at the time the yearly return on investment was estimated at 50 percent) and were guaranteed against any possible increase in taxation. Unlike in the Venezuelan case, in fact, the new tax provisions were written down in the concession agreement and excluded any further increase in taxation. At the same time, the Saudi government would enjoy higher and more predictable revenues from the exploitation of its natural resources. On the surface, at least, the big loser in the deal seemed to be the American taxpayer: by the mid-1950s, some 96 percent of ARAMCO’s payments to Saudi Arabia were credited against taxes to be paid in the United States.59 In 1950 ARAMCO paid the US Treasury $50 million in taxes, while Saudi Arabia received $60 million in fees and royalties. The next year, after the application of the 50:50, ARAMCO paid the US government $6 millions while the Saudi government received nearly $110 millions.60 Just glancing at the figures, Ibn Saud stands out as the big winner. There is no doubt that the new agreement shored up his position, while at the same time tying him even closer to the US companies. Judging from the reactions of the most knowledgeable observers at the time, however, the real winners were ARAMCO’s shareholders: without paying one dollar more than they already did in taxes (whether they paid King Saud or the US Internal Revenue Service made no difference to them), they obtained complete control over the most promising and productive 57  Quoted in: Parra, Oil Politics, p. 18. 58  J.C.  Hurewitz, ed., Diplomacy in the Near and Middle East: A Documentary Record, Vol. 2: 1914–1956 (Princeton: D. Van Nostrand, 1956), pp. 314–21. 59 Zuhayr M. Mikdashi, A Financial Analysis of Middle Eastern Oil Concessions, 1901–65 (London: Praeger, 1966). 60  Rachel, Bronson, Thicker than Oil: America’s Uneasy Partnership with Saudi Arabia (Oxford: Oxford University Press, 2006), p. 105.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 75 oil fields in the world, guaranteed their access to the booming markets of Western Europe, and shored up their relationship with the Saudi government for decades to come (theoretically, at least, until the complete exhaustion of Saudi oil fields). The British ambassador to Jeddah upon hearing the news of the new legislation commented that: It is clear from the Articles 3 and 4 of the Agreement that by submitting to the principle of equal profit-sharing, more or less on their own initiative, ARAMCO have secured the withdrawal of namely less important Saudi claims, and the understanding that it is a once-for-all agreement until the ARAMCO concession expires. Having conceded more to the concessionary government, in principle and, at present profits, in total annual payments, than any other oil company in the Middle East (except the Pacific Western Oil Company) ARAMCO will admittedly be able to sit back on their laurels for a while.61

The fresh liquidity provided by ARAMCO allowed the Saudi monarch to reinforce the nascent state apparatus. Ibn Saud established a ministry of Finance in 1951 and the created in 1952 from whole cloth the Saudi Arabian Monetary Agency (SAMA, a central bank that would only allow interest payments on its overseas accounts) to regulate trade in foreign currencies and payment of the oil revenues. Many of these new state agencies, including courts of law, were built under the pressure from the oil companies, which needed to interact with a structured state bureaucracy to operate at their best. ARAMCO thus was critical to the very foundations of the modern Saudi state. The national history museum in Riyadh concludes the arc of its historical narrative of the Arabian peninsula with the discovery of petroleum in the country’s eastern province. In many ways, however, this was exactly when the creation of modern Saudi state truly began. By the end of the 1950s Saudi Arabia had fully transformed into a petrostate. The head of SAMA, the former IMF expert Anwar Ali that headed SAMA from 1958 until his death in 1974, underlined in 1962 that: “Government spending (based itself largely of oil revenue) is the primary determinant of the general level of incomes in the country”, while this government spending basically translated itself into a “demand of foreign exchange for imports and other purposes.”62 For the Saudis, more oil money came with increasing responsibilities. As DeGolyer explained at a 1950 conference, while in the pioneering phase it had been advantageous for the international oil companies to provide a wide range of services themselves, including everything from healthcare to education, in the future the oil companies would be better off concentrating on production, transport, and refining—that is, focusing strictly on business—while leaving other associated spheres of activity (and thus the expenses) to the local governments. By the end of the 1940s ARAMCO had abandoned the idea of following the example of the AIOC in Iran. Between 1936 and 1950—and especially after the General Strike of 61 A.L.P.  Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 1: 1947–1959 (Archives Editions, 2004), British Embassy, Jeddah, January 24, 1951, Secret. 62  Ahmed Banafe and Rory McLeod The Saudi Arabian Monetary Agency, 1952–2016. Central Bank of Oil (London: Palgrave, 2017), p. 39.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

76

The Rise and Fall of OPEC in the Twentieth Century

1946, as we shall see—the AIOC had built something like 21,000 new homes in Abadan, as well as shops, restaurants, and recreational facilities, including nineteen cinemas, twenty-seven pools, and various sports grounds.63 This effort had not diminished in any meaningful way the resentment most Iranians felt for their British masters. As  G.J.H.  Dowling, a former ARAMCO Government Affairs official, argued: Saudi employees’ demands for equal family housing and schools for their children presented a conundrum. Extending the enclave model to the thousands of Saudi employees and their families would be extraordinarily expensive and embed an American company in Saudi society in uncertain ways. At the same time, citing the concession terms as a “legal” way to rebuff legitimate societal needs was equally unattractive.64

ARAMCO focused instead on what is defined as “technical training,” increasing the numbers of the Saudi workforce (also at the expense of Italian workers), and persuading some Saudi employees to start their own service companies with ARAMCO-backed credit.65 * * * The fifty-fifty model was soon introduced in other Gulf countries under British protection. The result was that the British would now aim to further tighten their control over the sheikdom’s finances. In Kuwait in 1950 the new Emir Abdullah Al-Salim Al-Sabah had to accept the British proposal to appoint several experts to oversee various state departments, from Finance to Police.66 While the Ruler steadily excluded Kuwaiti merchants from decision-making, he also resisted British overtures when possible, and was far from immune from the siren song of the rising Arab nationalism. By the middle of the 1950s, the British Political officer had to concede that the British options were limited: “I do not believe that we can afford to go any further than we have already gone without a revolutionary change of policy and without being prepared to take over, by force if necessary, a large measure of internal control.”67 In Qatar, where until the end of the 1950s very little investment had taken place, three-quarters of Qatari oil income went to an account jointly managed by the Sheik and his British advisor, while the police force was under the direct control of the British. The instructions given by the Political officer to the British advisor to the ruler of Qatar were very clear: “His Majesty’s Government’s interests in the Persian Gulf Arab States is not confined merely to 63 Dobe, A Long Slow Tutelage in Western Ways of Work, p. 128. 64 G.J.H. Dowling, The New York Review of Books, March 21, 2013. Commenting on Robert Vitalis, America’s Kingdom: Mythmaking on the Saudi Oil Frontier (Stanford: Stanford University Press, 2007).  65 Paul Stevens, “Saudi Arabia: Saudi Aramco—A Giant Among Giants”, in D.G.  Victor, D.R. Hults, Mark Thurber (eds.), Oil and Governance: State-Owned Enterprises and the World Energy Supply (Cambridge: Cambridge University Press, 2011), Chapter 5. 66  Abdullah Ahmad Alnajdi, Shaick Abdullah Al-Salim Al-Sabah, 1895–1965, PhD Dissertation, 2009, p. 190. 67  Jill Crystal, Oil and Politics in the Gulf: Rulers and Merchants in Kuwait and Qatar (Cambridge: Cambridge University Press, 1995), p. 73. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 77 constructing their ‘external relations’ [. . .] Marked examples of the principles I  have tried to state are finance, relations with the oil company, slavery and smuggling.”68 The fifty-fifty model was also subsequently introduced in Iraq in 1952, although the process went far less smoothly than it had in Saudi Arabia, Kuwait, or Qatar. The Iraqi oil industry had a longer history, and the legal and political controversies that ensued were deeply rooted. But even more than its Saudi counterpart, the Iraqi state needed increased revenues to guarantee employment and sustenance for a growing population. As Stephen Longrigg wrote: If the Kirkuk oilfield, so favored by nature, was thus in well-designed and well-provided production, appropriate efforts had been made for the welfare of workers. Trade Union organization, though permitted by ‘Iraq law, was in practice discouraged by successive government and its place in Kirkuk was in part taken by Joint Committees of workers and management, working in friendly consultation. Visible unrest among workers occurred only when political agitation from outside—as in the Communistinspired strike of 1946—was patently the cause.69

Even here, in the words of one of the IPC’s managers, a sanitized narrative in which its author speaks of paid holidays, high wages, and respect for local labor, the political tensions that existed among the workers and their distrust of the “foreign” firms comes through crystal clear. Longrigg, of course, attributed this hostility solely to communist influence, and not to oppressive working conditions. The gravest accusations leveled against the IPC concerned the fact that it had not sufficiently invested in Iraqi production, privileging neighboring Iran—in 1948 Iranian output was six times greater than Iraqi production—and Saudi Arabia, not to mention the fact that payments for crude oil were made in sterling rather than in gold. Thanks to pressure from the pro-British Prime Minister Nuri Al-Said, such disputes were ultimately papered over in Iraq by applying the fifty-fifty agreement. This only happened against the opposition of the more nationalistic segments of public opinion, after demonstrations by petroleum workers and open protest by the Iraqi Communist Party.70 Eventually the government created an Iraqi Development Board, with British representatives there playing a key role, through which 70 percent of the oil revenues would be channeled.71 Generally speaking the fifty-fifty model in the Gulf reinforced the position of dynastic rulers at the expense of nationalist opposition movements (where they existed) and of local merchant families. Another of the effects of the diffusion of this model and of the increased revenues available for local rulers was the decline in the extractive capacity of the State—in 1955, for instance, Saudi Arabia abolished income tax for all its citizens—and as well as the acceleration of the t­ ransformation 68 Crystal, Oil and Politics in the Gulf, p. 122. 69  Stephen Hemsley Longrigg, Oil in the Middle East: Its Discovery and Development (Oxford: Oxford University Press, 1954), p. 177. 70 Bamberg, The History of the British Petroleum Company. Volume 2: The Anglo-Iranian Years, 1928–1954, p. 340. 71 Fadhil J. Chalabi, Oil Policies, Oil Myths: Observation of an OPEC “Insider” (London: I.B. Tauris, 2010), p. 13. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

78

The Rise and Fall of OPEC in the Twentieth Century

of all the oil exporters in Middle East in petrostates.72 Furthermore, the rising importance of Middle Eastern petroleum for the global oil supply made it crucially important that the Gulf countries would be able to bolster their armed forces and formally enter pro-Western military alliances. For all these reasons no oil exporting country in the Middle East could be allowed to refuse the marriage of economic and political interests embodied in fifty-fifty model, since it would then represent a dangerous and destabilizing element in the region and in the global oil market. THE COUP IN IRAN Britain and France had both nationalized their coal industry during or soon after WWII. Coal production had even spurred quasi-federal cooperation in Western Europe, as demonstrated by the launching of the European Coal and Steel Community in 1951. There was no lack of state intervention in the energy sector in Europe, where governments were also leading the “electrification” process. On the other hand, in order to lessen their “dollar shortage,” Western European countries also needed to support their reconstruction efforts by relying on imports of cheap raw materials and commodities from their former colonies. Government intervention was therefore acceptable at home, but was unacceptable if applied to colonies and developing countries in general. This was particularly true in the case of Great Britain, whose political elite including the Labour party, still imagined the country as the center of an Empire and a world-class military power. Iran was by far the weakest link in the chain of petrocapital’s control over Middle Eastern oil. We have already seen how the Shah had attempted to cancel the concession in the early 1930s. Complicating matters even further was the fact that the Iranian government dealt with a company in which the majority shareholder was the British government itself, the dominant imperial power in the region. In ­addition, the Iranian economy was not yet solely and exclusively dependent on oil revenues: it could rely upon an embryonic industrial base and a substantial degree of agricultural self-sufficiency, at least during peacetime. Would it be able to endure a confrontation with petrocapital? During the war, Iran had been occupied by both British and Soviet forces. While the British had solicited the southern tribes to protect the oilfields, the Soviets had encouraged the autonomist dreams of the northern provinces, supporting ­separatist movements in a manner reflective of the nineteenth century Anglo-Russian “Great Game”. The end of the war had not defused political and social instability. The Soviets were asking for their share of Iranian oil. Two northern provinces, the Azerbaijian People’s Government and the Republic of Mahabad, had declared their independence, while the Tudeh, a mass party close with strong support in the cities and in the most industrialized areas of the country, grew in numbers of affiliated and in organizational capacity. It was only in 1946, after the threat of open military 72  Kiren Aziz,Chaudhry, The Price of Wealth: Economies and Institutions in the Middle East (Ithaca: Cornell University Press, 1997), p. 76. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 79 hostilities backed by the United States’ nuclear monopoly, that the Anglo-Americans managed to persuade the Red Army to retreat from Iran. In Iran’s largest industry, the petroleum sector, and in particular at the Abadan refinery, the largest in the world at the time, workers’ protests were becoming increasingly radical. The “Iranization” of the company had been halted during the war. Inflation had reached more than 900 percent, food was expensive and of poor quality, and accommodation and sanitation were nonexistent for more than 30 percent of the workforce. This is Manucher Farmanfarmaian’s recollection of a visit to the Abadan refinery in 1945: During the war conditions had deteriorated markedly. Oil companies were not known for their generous treatment of local workers—Mexico’s nationalization in 1938 was a direct result of labor discontent over unlivable conditions—and AIOC was not acting better. Wages were cut 50 cents a day. There was no vacation pay, no sick leave, no disability compensation. The workers lived in a shantytown called Kaghazabad, or Paper City, without running water or electricity, let alone such luxuries as iceboxes or fans. In winter the earth flooded and became a flat, perspiring lake. The mud in town was knee-deep, and canoes ran alongside the roadways for transport. When the rains subsided, clouds of nipping, small-winged flies rose from the stagnant waters to fill the nostrils, collecting in black mounds along the rims of cooking pots and jamming the fans at the refinery with an unctuous glue. Summer was worst. It descended suddenly without a gasp of spring. The heat was torrid, the worst I’ve ever known—sticky and unrelenting—while the wind and sandstorms whipped off the desert as hot as a blower. The dwellings of Kaghazabad, cobbled from rusted oil drums hammered flat, turned into sweltering ovens.73

On top of these conditions, Farmanfarmain remarked, there was the enduring ­racist disdain of British officials towards workers that ate with their hands, and the stark difference of accommodations for Iranians when compared with the “lawns, rose beds, tennis courts, swimming pool and clubs” in the British section. Even Company observers depicted a similar scenario. Donald McNeil, an industrial relations officer, in a confidential paper circulated in 1949, described housing issues thusly (Fig. 1.2.): The vast majority of our labour force are still living in scandalous accommodation in urine-tainted squalor, in little manzels (houses) built against the hillside as in Janaki village and a dozen other places in fields, or houses of empty paper cement bag construction as in Kaghazabad in Abadan, without sanitation or no ventilation at all.74

In his essay AIOC/Iranian controversy, written at the heart of the conflict in the mid-1950s, L.P.  Elwell-Sutton, another former AIOC official, also sketched a rather rough portrait of the working conditions in the torrid Abadan in 1950. The refinery employed more than 40,000 workers, the majority of whom were on 73 Farmanfarmaian, Blood and Oil, p. 185. 74  Quoted in: Touraj Atabaki, “Chronicle of a Calamitous Strike Foretold: Abadan, July 1946”, in K.H. Roth (ed.), On the Road to Global Labour History: A Festschrift for Marcel van der Linden, (Leiden: Brill, 2017), pp. 93–128.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

80

The Rise and Fall of OPEC in the Twentieth Century

Fig. 1.2.  General view of the Abadan refinery in the 1950s (Braim housing for European expats in the foreground). (BP Archives, ARC 180451/007).

short-term contracts and could be fired at will. The manual laborers were divided into three classes according to their function. Only the first of these had the right to regular lodging, while the workers in all three classes were often addressed using racialized epithets like “wogs,” louses, or bastards. The on-site hospital, constructed explicitly per the terms of the concession, maintained only 590 beds for a total population of more than 180,000 people.75 It should then come as no surprise that in July 1946 a massive strike broke out in Abadan and, in a very short time, spread through Khuzestan’s oil fields. While the strike lasted less than three days, it managed to mobilize more than 70,000 workers—both Iranians and foreigners—and became the largest labor protest in Iranian history up to that moment. According to Touraj Atabaki, with nearly fifty dead, this was the bloodiest labor protest in the Middle East labor history recorded up to then.76 After the end of the strike, as if waiting for worse to come, Abadan was militarized, with sentinels brandishing machine guns on the roofs of private homes.77 British Labour politicians were well aware of the potential conflict between the AIOC and the Iranian government when it came to the need for substantial improvements in oil workers’ living conditions. After the July strike, the charismatic 75  Laurence Paul Elwell-Sutton, Persian Oil: A Study in Power Politics, 1955 (Westport: Praeger, 1976), p. 102. 76  Atabaki, “Chronicle of a Calamitous Strike Foretold”, pp. 93–128. 77  Rasmus Christian Elling, “War of Clubs: Struggle for Space in Abadan and the 1946 Oil Strike”, in Nelida Fuccaro (ed.), Violence and the City in the Modern Middle East (Stanford University Press, 2016), pp. 189–210.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 81 British Labour leader and minister for Foreign Affairs Ernest Bevin, a fervent anti-communist but also a former trade union leader, wrote a sharp note to his colleagues in the ministry of Fuel and Power arguing that AIOC was famous for its anti-union policies, that it did not fully understand the objectives of Iranian nationalists and that it needed to consult more with work people, interacting with them “as with actual men, not on a feudal basis but with the appreciation that all over the world the sense of equality is rapidly developing.” He also argued for a softer approach to what he still called the “Persian Government”: You speak of stopping the royalties in case of a strike. Would it not be better to work out some different method of sharing with the Persian Government instead of merely paying royalties? They will be able to point to us and say we are nationalizing our resources, why should we deny the same to them?78

The reply from the ministry of Power sternly reminded Bevin of what was at stake. Playing with oil concessions was playing with fire: As long as British oil companies can be given a reasonable measure of freedom to work, we are able, not only to get the oil supplies we need for ourselves, but also to make a very large contribution to our overseas trade and are thus enabled to earn foreign currencies and help our general exchange position. We are also enabled to have a considerable say in the sources from which materials and equipment for the ­maintenance of the oil industry are obtained, to further benefit of our export trade. If British oil companies enter into partnership with foreign governments, it is clear to me that we shall not have the degree of freedom which is so important, commercially and economically, and which is vital from a strategic point of view.79

It further argued than a different partnership with the local government would only endanger the situation: “if we were to enter into arrangements on, say, a 50:50 basis, how long could it be before the country granting the concessions desired to have a larger say, and we would have to accept a 60:40 or 70:30 basis, or perhaps to drop out altogether?”80 London was at least of two minds about how best to deal with the Iranians. The first option, the most flexible, took account of the plight of the workers and the need for domestic development within Iran. The second focused on the need to preserve British companies’ complete freedom of action at any cost, for it was only by guaranteeing this absolute freedom that London could ensure itself of the fiscal and strategic benefits, particularly in the context of growing competition from the United States for the European market. Both strategies aimed to preserve a key position for British industry in Iran, but the hardline approach became even harder when the conservatives returned to power with Churchill in 1951. 78  Documents on British Policy Overseas (DBPO), Series I, Vol. VII, The United Nations: Iran, Cold War and World Organizations 1946–1947, Minute from Mr Bevin (Paris) to Sir O. Sargent, Paris, June 23, 1946. 79  Documents on British Policy Overseas (DBPO), Series I, Vol. VII, The United Nations: Iran, Cold War and World Organizations 1946–1947, Ministry of Fuel and Power, Letter from Mr E. Shinwell to Mr Bevin, July 31, 1946. 80  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

82

The Rise and Fall of OPEC in the Twentieth Century

The AIOC, based in London in the modestly named Britannic House, was not like just any other company. In the postwar period it maintained an endowment of £24 million and held £92 million sterling in foreign currencies. The Company regularly distributed dividends to shareholders—including the British government— that increased in the order of 30 percent a year.81 Although the AIOC held participations in other concessions in Kuwait, Qatar, Iraq, and Egypt, Iran represented 75 percent of the company’s profits. The refinery at Abadan alone provided 85 percent of the fuel for the Royal Navy and Royal Air Force in Asia. In 1949, the Company paid £22.3 million to the British Treasury (nearly 5 percent of the entire UK fiscal revenue that year), £7.1 million to its shareholders, and pocketed £18.4 million as a reserve, while Iran received £13.5 million in royalties—roughly half of what the company paid in taxes to the British government. The Iranian government was not provided with any information about the geological characteristics of the Iranian oil reservoirs. Gasoline and all other refined products were sold in Iran at market prices, while they were distributed with significant discount to the British military. The AIOC did not pay taxes on any of the machinery or equipment it imported. It flared virtually all the natural gas produced along with crude oil without much regard for Iranian energy needs. To top it all off, the Company had signed agreements with the local tribes that threatened the very authority of the central government in Tehran. As late as June 1946 the British Foreign ministry and ministry of Power had contemplated various options to retain control of Iranian oil: • To encourage local separation in South-West Persia and develop an “Azerbaijan” there, under British inspiration. • Reducing the amount of the Persian government’s royalties in the event of a strike. • To attempt to split the Tudeh Party by winning over to ourselves those who, while genuinely anxious to reform, are not communist and do not really wish to follow dictates of Moscow. • The use of force. It could be decided that if the Persians would not keep order we would.82

In essence the AIOC operated like a state within a state, pursuing the interests of the British Empire, generating ever growing resentment and hostility, which British diplomats still liked to dismiss as “irrational” or “emotional” outbursts. To counteract the lack of control over Iranian natural resources, the Tudeh staged demonstrations and protests against the AIOC. It was also at this time that Mohammad Mossadegh’s star began to rise in parliamentary debates. Mossadegh, much like Farmanfarmaian, came from the landed aristocracy that had governed the country from time immemorial, well before the advent of the Pahlavi dynasty. He had been educated in France and Switzerland, specializing in law. After the 81  Neveen Talat Hassan Abdelrehim and Steven Toms, “The Obsolescing Bargain Model and Oil: The Anglo-Iranian Oil Company 1933–1951”, in Business History, 59, 2017, pp. 554–71. 82  Atabaki, “Chronicle of a Calamitous Strike Foretold”, pp. 93–128.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 83 Great War he had made a name for himself as a reformer who sought to abolish the system of “capitulations” for foreign companies operating in Iran (the mechanism that allowed some companies were placed outside Iranian jurisdiction), and aimed to introduce a civil code based on the European model. As a supporter of a constitutional monarchy he had frequently found himself at odds with the Shah, and for some time had withdrawn from political life. Mossadegh was very far from begin a Communist, and was in fact rather wary of the Soviet Union. At the end of WWII he had argued that Iran should observe strict neutrality in the coming conflict between the two superpowers, a policy he called “negative equilibrium,” rooted in the desire to avoid conceding any specific advantage to either of the two sides in the emerging Cold War. His policy was non-alignment ante litteram. While he had supported the denial of petroleum concessions to the Soviet Union, he had also opposed a proposed revision of the AIOC concession agreement that would have simply increased the royalty from four to six shillings per ton, essentially confirming the status quo. In 1949, along with other members of the Majlis, and with the support of a section of the Islamist opposition of the bazaar (the merchant class), he promoted the creation of the National Front, a relatively loose political movement united by the refusal to submit entirely to the economic and political interests of Great Britain. In 1951, after that AIOC had made clear it did not intend to apply the Saudi style fifty-fifty model to Iran, Mossadegh managed to get the Petroleum committee in the Majlis to vote unanimously to reject the “supplementary agreement” with the AIOC. At the same time the committee considered a new piece of petroleum legislation based on a single article: For the happiness and prosperity of the Iranian nation and for the purpose of securing world peace, it is hereby resolved that the oil industry throughout all parts of the country, without exception, be nationalized; that is to say, all operations of e­ xploration, extraction, and exploitation shall be carried out by the Government.83

On March 14 the Majlis approved the nationalization law by a large majority. By this point, Mossadegh had become the most popular political figure in the country, the embodiment of Iranian nationalism, and a symbol of Persian pride. Even the Tudeh, which up until that point had maintained a rather cool stance toward Mossadegh, believing him to be the representative of a servile Iranian upper class, began to warm to him. In April 1951 Abadan witnessed the largest oil strike since 1946. British and other foreign engineers began to feel their very lives were at risk before the enraged mob. Iranian students from the technical school, the most educated segment of the youth population in the island, revealed themselves to also be the most radicalized: they ransacked the cinema and occupied the student dormitories. The army had to call in fourteen armored tanks and transport vehicles full of soldiers to restore order. But the strike had nevertheless given a fresh breath of oxygen to further stoke nationalist fires. Solidarity with the strikers spread to Tehran and Isfahan (Fig. 1.3.). 83  Quoted in Alan W. Ford, The Anglo-Iranian Oil Dispute of 1951–1952. A Study of the Role of Law in the Relations of States (Berkeley: University of California Press, 1954), p. 268.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

84

The Rise and Fall of OPEC in the Twentieth Century

Fig. 1.3.  Protests by Iranian oil workers in 1951. Some of the slogans read: “Shame on the assassins of the workers . . . Khuzestan”; “Honour to the petroleum workers of Khuzestan who resisted the tyranny, they have been killed but did not surrender.” (Getty Images, License 50865335).

The vast majority of the country, including a sizable portion of Islamist public opinion, supported Mossadegh by this point. At the end of April 1951 he was named Prime minister. On May 1, international workers’ day, the Shah, the most improbable of allies of the proletariat, placed his signature on a law that declared the nationalization of the Iranian petroleum industry. The Americans had repeatedly pushed the British government to put some heat on the AIOC and force it to compromise. Numerous emissaries from Washington, including the mentioned oil experts McGhee and Levy, had shuttled between London and Tehran singing the praises of the fifty-fifty model. It was more difficult for Anglo-Iranian to offer this this deal, however, also because the AIOC did not enjoy the same foreign tax credit as US companies did. In any event, it was one thing to pressure the British and promote the virtues of the US model, and quite another to accept open defiance against the international oil companies, the destabilization of oil concessions through the Middle East and the potential drift of Iran towards the Soviet Union. Iranian nationalization constituted a radical challenge to the established political and economic order in the Middle East, and thus, at least in theory, to the security of Western European and American oil supplies as well. Tehran would now be able to decide on output according to its own needs, not just the need of the consumers. For Britain in particular, nationalization meant at the same time the loss of essential income, loss of control over a vital commodity, and the potential loss of a market for its industrial products. In other words, Iranian nationalization was a non-starter both for the US and for Great Britain.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 85 The US administration very quickly opened talks to encourage Mossadegh to see the light of reason. The Americans played the “good cop,” displaying a willingness to understand opposing points of view, and to make concessions. They offered the occasional cup of coffee and cigarette. Mossadegh asked for technical assistance to improve the efficiency of the Iranian petroleum industry, but refused to give an inch on the decision to nationalize: “Mossadeq said he was confident Iran with help of non-Brit oil experts could profitably exploit its oil; if he was wrong, the country would not by any worse off than it had been in the past, since most of funds which Iran had received from Co[mpany] had been spent for military purposes and, in his opinion, wasted. The oil could remain underground for future generations.”84 The British, meanwhile, played the “bad cop,” brandishing the physical threat of armed intervention, and immediately seeking to have Iran sanctioned by the UN International Court of Justice in The Hague. Iran was accused of having abrogated the concession without submitting to the established arbitration procedures. London asked for an indemnity equal to the potential profits generated by the AIOC over the length of the entire concession—an obvious impossibility. But times were changing within the United Nations, where the independence of countries such as India and Indonesia had greatly expanded both the number and the leverage of non-European countries. In 1951, Mossadegh went in person to the United Nations’ glass palace along the East River in New York to defend the cause of nationalization. He made reference to the “legitimate aspirations of the peoples of India, Pakistan, and Indonesia, and others who had fought to obtain the right to enter into the family of nations in conditions of liberty and complete equality,”85 and asked that his country be granted the right to economic independence so as to be able to consolidate its political independence. The British representative retorted accusing the Iranian of being “intemperate” and “suicidal” and argued that the Company was not only being generous but also acted as a “trustee” for the Iranian people; to which a member of the Iranian delegation Allahyar Saleh retorted that the profits of the Company only in 1950 “after deducting the share paid to Iran, amounted to more than the entire sum of 144 million sterling paid in royalties to Iran in the course of the past half century.”86 In mid-1952 the International Court of Justice decided that it could not rule on a case regarding a dispute between a sovereign state and a private entity, in essence coming down on the side of Iran. A decade had passed since the previous controversy concerning the Iranian concession. The interpretation of international law after the establishment of the United Nations was starting move in a different direction from that which had prevailed under the League of Nations. That very same year, under pressure from the revolutionary government of Bolivia, which had just nationalized its own mineral resources, the UN General Assembly approved a resolution stressing that “the right of peoples to the free use and enjoyment of their own natural resources is inherent to their sovereignty”; admonishing however that 84 FRUS, 1952–1954, Vol. X, Iran, The Ambassador-Designated in Iran (Henderson) to the Department of State, Tehran, September 28, 1951. 85  “Text of Jebb’s Speech and Excerpts from Mossadegh Adress in U.N.”, in The New York Times, October 16, 1951. 86 Farmanfarmain, Blood and Oil, p. 271.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

86

The Rise and Fall of OPEC in the Twentieth Century

this right had to be exercised with due regard “to the need for maintaining the  flow of capital in conditions of security, mutual confidence and economic ­co-operation among nations.”87 While the British legal case against Iran’s actions was proving to be a total failure, the United States and Great Britain began an underhand media campaign to describe the Iranian statesman as an eccentric and unhinged madman, who frequently received visitors in his pajamas and was prone to migraines that prevented him from focusing on serious matters for long periods of time. In his perceptive book on the coup d’état in Iran, Ervand Abrahamian mentions some of the various terms used by the Western European and US press to describe Mossadegh and his closest allies. This list of superficial and racist epithets does little credit to journalists and “experts” of the day: “irrational,” “headstrong,” “tiresome,” “obstinate,” “violent,” “volatile,” “unstable,” “malcontented,” “inefficient,” “ignorant,” “xenophobic,” “childlike,” “unwilling to recognize facts,” “sentimentally mystical,” “lacking common sense,” “swayed by emotions,” and “devoid of positive content.”88 The one move that was tremendously effective in the Anglo-American struggle against nationalization was the total embargo on Iranian oil. The majors, in complete harmony with policymakers on both sides of the Atlantic, warned any oil company from purchasing Iranian crude, which was branded as “stolen oil.” They acted as well-tuned instruments in an orchestra, increasing production in neighboring Middle Eastern countries and in the United States to compensate for the loss of Iranian output. Mossadegh’s government began to face serious domestic difficulties as a result of the loss of oil revenue, which dropped from $400 million in 1950 to virtually nothing by 1953. He started imposing a series of increasingly unpopular countermeasures, introducing the first income tax on all Iranians, rationing agricultural products, and threatening to enact a land reform that would entail profound changes in the relationship between landowners and farmers in order to increase agricultural productivity. At the same time the partnership between Mossadegh and the Tudeh fed growing distrust in religious circles and in the bazaar, segments of the population that had initially supported him. It was at this point that the series of machinations that would eventually defenestrate Mossadegh began. In 1953, once the Prime minister had stripped the Shah of all his powers, there were no more good cops, and the new US republican administration guided by general Dwight  D.  Eisenhower took an increasingly radical stance (probably helped by the perceived difficulties of the Soviet Union with Stalin’s death).89 A coup d’état (the execution of which was rather shambolic) was organized by Kermit Roosevelt Jr on behalf of the CIA in August 1953. In the absence of an adequate military response on the part of Mossadegh and the Tudeh, the coup succeeded in restoring the Shah to power, eliminating the Tudeh, and removing Mossadegh and the National Front from the Iranian political landscape. 87  UNGA 160; A/RES/626 (VII), Right to Exploit Freely Natural Wealth and Resources, December 21, 1952. 88  Ervand Abrahamian, The Coup: 1953, the CIA, and the Roots of Modern US-Iranian Relations (New York: The New Press, 2015), p. 98. 89  Francis J. Gavin, “Politics, Power, and U.S. Policy in Iran, 1950–1953”, in Journal of Cold War Studies 1:1 (1999), pp. 56–89.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fifty-Fifty 87 Churchill—who by this point was hard of hearing, suffered vision problems on his left side, and had difficulty speaking—declared to Roosevelt Jr in a burst of youthful enthusiasm that he was so impressed by the coup that he regretted that he was too old to have taken part in the brilliant operation in person. Iran would soon join the Western military alliance called the Baghdad Pact in 1955, abandoning its policy of “negative” equilibrium and transforming itself into a pillar of US foreign policy in the region. The CIA had made it clear in 1954 that the loss of Iran had never been an option since it would “constitute a major threat to the security of the entire Middle East.”90 The coup has been interpreted in various ways, but Abrahamian has offered a succinct summary of some of its key consequences: the “denationalization” of the oil industry; the destruction of secular opposition to the Shah; the discrediting of the monarchy; and finally, the aggravation of the Shah’s paranoid style of government.91 With respect to the first element, which most concerns us here, a new petroleum Consortium was created shortly after the coup in 1954, and its shares were divided among AIOC (40 percent), Shell (14 percent), Jersey, SOCONY, Texas, Gulf, and SOCAL (8 percent each), and CFP (6 percent). The Consortium was to be headquartered in the Netherlands rather than the United Kingdom. The AIOC, soon rebranded British Petroleum (BP) that year, was compensated by Iran for the revenues lost during nationalization with money that came primarily from the United States under the so-called “point 4” program. The new National Iranian Oil Company (NIOC) was left with the goal of exploring and producing oil in Iran, wherever possible (not where the Consortium operated). Iranian oil remained formally nationalized, the oil production assets were owned by NIOC, but production was managed entirely by the members of the Consortium that took every decision and pocketed the profits. The majors had thus reasserted their power, and the fifty-fifty model was finally extended across the entire Middle East. Concessions seemed destined to last forever. Every significant oil exporting region of the world (except the Soviet Union) was now in the hands of an oligopoly of international oil companies. By 1954 the majors’ interests were so intertwined that one could actually define their ­cooperation as a Cartel. They were able to fine tune production in the various oil exporting regions in order to keep prices under control so that they would not fall too low. The novelty of the post-WWII period lay in the expansion of the role of the US companies throughout the oil producing countries of the Middle East, even in those from which they had heretofore been excluded. In many ways the failure of Mossadegh’s attempt at nationalization and the expansion of US companies in Iran marked the Cartel’s crowning achievement. Most of histories of petroleum have interpreted the fifty-fifty model as a success for producers because they managed to squeeze more money out of the oil ­companies. By the end of this chapter the reader will probably have more than one reason to argue that, when seen from the perspective of newly born petrostates, the glass was only half-full. 90 Randall, United States Foreign Oil Policy Since World War I, p. 260. 91 Abrahamian, The Coup: 1953, pp. 206–7.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

2 OPEC They treat us like children.1 Abdullah Al-Tariki It is the absolutists of contract . . . who are the real parents of revolution.2 John Maynard Keynes, 1923 We are probably witnessing the end of the Western civilization [. . .] In another 50 years yellow and black men would take over [. . .] On the whole we had all had a very good time of it for about 500 years.3 Harold Macmillan, 1956

According to the most recent literature on the Anthropocene, the Great Acceleration of this new era in which human beings have been able for the first time to radically alter the Earth’s geology and ecosystem begun in the 1950s.4 Global oil output grew by four times between 1950 and the end of the 1960s; by 1968 oil and gas had overtaken coal and accounted for 60 percent of global commercial energy consumption.5 While the Great Acceleration of fossil fuel consumption was taking place, an oligopoly of mainly Anglo-American companies had become dominant over global petroleum production and exports. The oil majors could punish one exporter, if they believed it was misbehaving, while at the same time rewarding another. This was particularly true in the Middle East where, as Francisco Parra has argued: “it is difficult to imagine a real-life situation on this scale further removed from what an economist would describe as competition.”6 Could this oligopoly over what had become the world’s key energy source have lasted for long? The founding of the Organization of the Petroleum Exporting Countries (OPEC) in 1960 sent a clear signal to the majors. This was an international ­organization in which government representatives from the largest oil exporting regions in the world (taken together they represented more than 90 percent of global crude exports) could talk amongst themselves free, at least in theory, from the 1  Middle East Economic Survey (MEES), November 4, 1960. 2 John  M.  Keynes, A Tract on Monetary Reform (1923), in D.  Moggridge (ed.), The Collected Writings of John Maynard Keynes: Vol. IV (London: Macmillan, 1971), pp. 56–7. 3  Quoted in: Bronson, Thicker Than Oil, p. 72. 4 J.R.  McNeill and Peter Engelke, The Great Acceleration: An Environmental History of the Anthropocene since 1945 (London: Belknap Press, 2016). 5 Pirani, Burning Up, p. 79. 6 Parra, Oil Politics, p. 72.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 89 indiscreet eyes and ears of the oil companies. OPEC, bringing together governments from Latin America, the Middle East, and Asia, was the first organization of the emerging Global South. It was created one year before the first meeting of the NonAligned Movement in Belgrade in 1961, and four years before the creation of United Nations Conference for Trade and Development (UNCTAD), in which Third World countries coordinated within a group called G77, among other things to seek better terms of trade for raw materials exports. The birth of OPEC cannot be understood if not in this context of international activism by non-Western natural resource exporters, encouraged by the emerging awareness that petroleum was on its way to become the key fuel of the Anthropocene. OPEC was intended as an instrument to prevent any reduction of the oil rent accruing to petrostates at a time of declining market prices of petroleum as of most other commodities. It was also an instrument through which the petrostates’ elites, by embodying the effort to gain some degree of control over the world’s most valuable commodity and the key domestic income source, could strive to consolidate their power and secure greater legitimization and domestic support. THE SPIRIT OF SUEZ By the end of the 1950s, the grip of European colonial empires was loosening at a seemingly inexorable pace. The “decolonization” process could be slowed down only by military interventions of such magnitude and violence that they generated increasingly widespread opposition both among the colonized and also within colonial metropoles themselves.7 The creation of OPEC would take place at the end of the decade, within this broader context of anticolonial and nationalist struggles in the Middle East, as well as Latin America, Africa, and Asia. In 1955, the first meeting of anticolonial leaders from Africa and Asia took place in the Indonesian city of Bandung, not too far from the capital Jakarta. This meeting of twenty-nine heads of state and government had been promoted by president Ahmed Sukarno of the Indonesian National Party. After guiding the independence movement against the Dutch, Sukarno now sought to block Chinese expansionism in Asia, de-escalate the Cold War in Asia, and combat the last vestiges of the old colonial empires.8 Bandung’s Final Communiqué referred to the need for “economic cooperation,” and pointed to the respect for national sovereignty in the economic sphere as an essential prerequisite for development in the Third World. It also referred to the possibility of international coordination to stabilize raw materials prices, highlighting that “exchange of information on matters relating to oil, such as remittance of profits and taxation, might eventually lead to the formulation of

7  Martin Thomas, Fight or Flight: Britain, France and their Roads from Empire (Oxford: Oxford University Press, 2014). 8 Robert Vitalis, “The Midnight Ride of Kwame Nkrumah and Other Fables of Bandung (­Ban-doong)”, in Humanity, 4:2, Summer 2014, pp. 261–88.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

90

The Rise and Fall of OPEC in the Twentieth Century

common policies.”9 A high profile delegation from the Arab world had traveled to Bandung. It included the Saudi Prince Faisal and the Egypt’s Gamel Abdel Nasser—future rivals for regional influence—as well as Abdel-Khalek Hassouna, the Egyptian Secretary-General of the Arab League. As soon as Hassouna returned to Cairo, he met with Mohammad Salman, the Iraqi engineer who directed the Petroleum bureau of the Arab League, to discuss future initiatives on petroleum. The Arab League’s oil experts had by then started to shift their focus from the use of oil as a possible weapon against Israel, to its use as an engine to promote economic development in the Arab world.10 In 1956, Nasser successfully nationalized the Anglo-French Suez Canal Company, despite the combined diplomatic efforts and military intervention of Great Britain, France, and Israel. As a result of this success, Nasser would manage to embody the new Arab nationalism, which had already been growing in strength since the Arabs’ 1948 defeat at the hands of Israel. Nasser used his growing regional prestige to call for a pan-Arab renewal based on cooperation among the Arab countries, increased popular political participation and the re-appropriation of natural resources. Nasser’s speeches were broadcast throughout the Middle East by Radio Cairo’s the “Voice of the Arabs,” inflaming public opinion against Israel, against imperialism generally, and in particular against the most deeply rooted of European empires in the region, the British. In his book The Philosophy of the Revolution, published one year before the Suez Crisis, Nasser mentioned petroleum as one of three assets for the revival of Arab civilization: “[it] is the vital nerve of civilization, without which none of its means can exist, neither huge works for production, nor modes of communication by land sea and air [. . .].”11 The Middle East held more than 50 percent of the world’s oil reserves. Without these reserves, Nasser wrote, all the wonders of modern technology would be nothing more than “mere pieces of iron, rusty, motionless and lifeless.”12 In Latin America, radical nationalist movements had for example led to the nationalization of Bolivia’s tin mines in 1952. But there were also intellectuals that were formalizing new economic theories concerning the need for raw materials producers to break the vicious cycle of economic dependence and jumpstart the process of industrialization. The Argentine economist Raul Prebisch, in a pathbreaking 1949 study for the United Nations Economic Commission for Latin America (in Spanish the Commisión Económica para América Latina, or CEPAL), came to be identified with a theory of “unequal exchange.” He posited that, while the prices of commodities exported by the developing world were experiencing a structural decline, prices for the manufactured goods exported by the industrialized world would continued to rise because of technological advances and rising salaries 9  The Final Communiqué of the Asian-African conference of Bandung (24 April 1955) can be found at: http://franke.uchicago.edu/Final_Communique_Bandung_1955.pdf (consulted on July, 24 2018). 10  Zuhayr  M., Mikdashi, The Community of Oil Exporting Countries: A Study in Governmental Cooperation (Ithaca: Cornell University Press, 1972), p. 29. 11  Gamal Abdel Nasser, The Philosophy of the Revolution (Cairo: Mondial Press, 1954), p. 67. 12  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 91 secured by organized labor.13 Versions of this theory, alternatively presented under the name of “dependency theory,” “unequal exchange” or “structuralism”, would represent one a powerful theoretical tool in the diplomatic arsenal of raw materials producers in the Third World. Whatever their political system and ideological outlook—whether the absolute monarchy of Saudi Arabia, the progressive military dictatorship of Egypt, or the Indian democracy—whatever their differences in religion or culture, elites in Third World countries could potentially identify themselves as belonging to a “periphery” of commodity producers in a tug-of-war with the industrialized regions of the “center”; a Global South needing redemption from a wealthy, exploitative North. * * * In 1953, Saudi King Abdulaziz Ibn Saud died, and was succeeded by his firstborn son, Saud. The new King governed alongside his brother prince Faisal. In the Eastern oil provinces of Saudi Arabia profound social upheavals were taking place, as well as momentous changes to a natural environment previously dominated by desert, oases, and scattered villages. Former officials would paint rosy pictures of the beginning of ARAMCO’s adventure, evoking exotic interactions with Bedouins as well as the exploration of the seemingly endless sand dunes: What we did for Saudi Arabia is a story that’s never been told. We brought them into the world. We buried them. Oil was almost just a sideline. I’ve never seen anything so paternal. We helped eradicate malaria. We set up hospitals. We set up camel [. . .] for Bedouins. We started a farm to take care of the table for the royal family. Something like 40 per cent of our workforce were Shia from the Eastern Province and they loved ARAMCO because the government was not doing a damn thing for them. The government used to refer to them as “dogs”.14

Although it is understandable that those who helped build ARAMCO into the world’s most important oil company would see only roses, the reality of daily life in the oil industry was far more thorny. The company’s treatment of its Saudi employees (often called “coolies,” borrowing from British colonial terminology) was racist, salaries were low and very unequal, knowledge and power was concentrated among a few American officials. Robert Vitalis’ account paints a picture of the life outside the “American camp” that is not much different from the one prevailing in other companies throughout the rest of the Middle East.15 By now, thousands of Saudis were employed in the oil fields—primarily those belonging to the Shi’ite minority—lured away from agricultural work or from the businesses and caravans of the Bedouin. In just a few years, this new working class abandoned the open desert and their thatched roof dwellings to take up residence in prefabricated shelters made of corrugated metal on the outskirts of Dammam 13  Edgar Dosman, The Life and Times of Raúl Prebisch, 1901–1986 (Montreal: McGill, 2010). 14  Jeffrey Robinson, Yamani: The Inside Story (New York: Atlantic Monthly Press), p. 86. 15 Vitalis, America’s Kingdom, p. 90.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

92

The Rise and Fall of OPEC in the Twentieth Century

and the port of Dhahran. Saudi historian Madawi Al-Rasheed quotes from the memoirs of one of these early Saudi workers on American-run production sites: I did all sorts of jobs. For the first time in my life I found myself with other tribesmen from Utayba, Shammar and Qahtan, each had their stories and dialect. It was amazing. We had a communal kitchen, it was our “restaurant” [. . .] The food was awful. But the Najdis would not say anything. They were shy: they would not complain. They would not ask for more money or food. They just left the Indians to eat there. Later in the 1950s they began to ask things from ARAMCO. When the Worker’s Committee told us to ask for more cash and better food, we did not respond. People were not beggars. But when they told us to ask for political rights, we all responded and joined the strikes in 1953. I sent money to my family. All I wanted to buy myself was a radio. I wanted to hear about what was going on in Palestine and Egypt. Palestinian workers told us about their problems. We listened to the news together.16

In the first novel of his series Cities of Salt, Abdul-Rahman Munif—a Saudi writer who completed his education in Belgrade, made a career in the petroleum industry, and had close ties to the Iraqi Ba’ath Party until 1963—provides a glimpse of the upheaval caused by oil production: the arrival of “rednecks” from Texas, Britain, and Australia, hard-living and highly skilled workers who built ARAMCO’s derricks and drilled its wells; the contrast between the foreigners’ habits and the much more modest Saudi customs; the repercussions of a sedentary lifestyle and dull, repetitive labor on Bedouin workers used to roaming large distances in complete autonomy; the occasional sight of exotic blond women, who arrived by ship across a sea that the Saudis viewed as more of a treacherous barrier than a gateway; the clumsy attempts of ARAMCO’s “cultural ambassadors” to communicate with the Saudis in their own language. No matter how strong the efforts of the “Arabists” of the oil company, they still found it hard to purge themselves of trite stereotypes about the East. As one of these “experts” commented on the Saudi royal family in 1960: The Arab is by nature Mercurial. Like almost every Arab, Faisal is a devoted friend and a bitter enemy [. . .]. With Arabs in general and Faisal in particular words are apt to become more important than deeds. In public and private pronouncements facts are  trusted cavalierly; when inconvenient or unpleasant they are ignored or lightly dismissed. Opinions are swayed by emotions. There is a proneness to exaggerate and to regard everything as either black or white. The language may be beautiful, but the logic sometimes warped.17

In 1956, ARAMCO, noting the locals’ passion for Western movies shown at the small American air force base nearby, conducted a series of interviews to reassure themselves that these Arabs did not identify too closely with the hunted Indians. According to Munif, the oil industry was triggering a development model that was both transformative and extremely fragile—“cities of salt” that would inevitably 16  Madawi Al-Rasheed, A History of Saudi Arabia, 2nd ed. (Cambridge: Cambridge University Press, 2010), p. 94. 17 Georgetown University Library, Booth Family Center for Special Collections, William E. Mulligan Papers (WMP), Box 1, f. 70, Faisal, not dated (probably 1960).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 93 dissolve when the first waves crashed upon their shores, revealing just how foreign this model was to the Arab desert civilization. Strikes rocked the Saudi oil industry as early as 1953, involving some 20,000 employees asking for higher wages and better working conditions. Ali Al-Naimi, who rose from being an “office boy” to become the first Saudi President and CEO of ARAMCO in the 1980s, and later Saudi Petroleum minister, recalls the impressions of a Saudi friend in 1951: “They had the community, you know, with nice houses and so on, on the beach. And they housed the expatriates. The Saudis, they were divided into two levels. Those that are higher grades are put into homes with fans, but no conditioners. And the rest are put in tents.”18 Radical ideas were spreading both among the Shia and the Sunni communities in the East, including Arab nationalism, Ba’athism, and Communism. These ideas were mainly coming from Bahrain or were imported along with the professors from Syria, Lebanon, or Egypt teaching at the ARAMCO school.19 A few of the strikers’ demands for better working conditions were granted, but they fell well short of the legalization of union organization, while at the same time the movement was violently repressed. When King Saud came in person to visit Dharhan (ARAMCO headquarters) later in June 1956, he found himself face to face with large crowds singing the praises of Nasser and of his struggle against Western imperialism. Protesters evoked their experiences of discrimination in pay and job status, living conditions, the lack of investment in education, and the absence of company transport. They reacted to the subsequent beatings and arrests with a strike demanding the ­elimination of any ARAMCO influence over Saudi domestic policy, the closure of the American military base in Dharhan, the legalization of trade unions and, perhaps most subversively, the creation of a representative assembly in order to transform Saudi Arabia into a constitutional monarchy. The workers could boast the support of the International Confederation of Arab Trade Unions, pro-Nasserite and based in Cairo.20 By 1957 Saudi workers were offered free accommodation and had gyms and swimming pools built for them, as well as libraries and mosques. They were ­entitled to free transportation to and from work, as well as to their native villages on their days off. The use of the derogatory term “coolies” was soon a thing of the past. A forty-five hour working week was introduced, with paid overtime. Employees were given four weeks’ annual paid leave and free medical care for themselves and their families. Families also received an allowance if the primary breadwinner died. Special school classes were opened to teach the illiterate; those who wished to continue their studies received vocational training.21 At the same time labor agitators were imprisoned or executed or forced into exile, while the Saudi National Guard was reinforced in order to quell nationalist tendencies in the Army. 18  Ali Al-Naimi, Out of the Desert: My Journey from Nomadic Bedouin to the Heart of Global Oil (London: Penguin Books, 2016), p. 44. 19 Toby Matthiesen, “Migration, Minorities, and Radical Networks: Labour Movements and Opposition Groups in Saudi Arabia, 1950–1975”, in International Review of Social History, 59: 3, December 2014, pp. 473–504. 20 Vitalis, America’s Kingdom, pp. 181–4. 21  Alexei Vassiliev, King Faisal of Saudi Arabia: Personality, Faith and Times (London: Saqi Books, 2012), p. 191.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

94

The Rise and Fall of OPEC in the Twentieth Century

These internal tensions were reflected in Saudi foreign policy. Saudi Arabia found itself at loggerheads with Great Britain over the 1955 Baghdad Pact, with which London sought to consolidate a political and military alliance among the moderate, so-called Northern-Tier countries—Turkey, Pakistan, Iraq, and Iran— in order to forestall the potential expansion of international communism (and of Arab nationalism) in the Middle East. Saudi opposition to the Baghdad Pact was certainly not triggered by sympathy for Moscow. Rather, it reflected Saudi hostility toward the Hashemites of Iraq and Jordan, the main regional allies of the British, and the persistent tensions with Great Britain over the oasis of Al-Buraimi (which the Saudis considered an integral part of their country, while London backed the claims of their ally, the Ruler of Abu Dhabi). On the Arabian Peninsula, borders still depended on shifting tribal loyalties. It was oil, and the need to define once and for all the ownership of the oilfields, that dictated the drawing of clear national boundaries and increased tensions among the various tribes and rulers. The tensions between the Saudis and the British only increased during the Suez Crisis, when Saudi Arabia aligned itself with Nasser by supporting an oil embargo that lasted from July 1956 until early 1957. Western Europe ran the risk of being deprived of two-thirds of its oil supply, and began for the first time to think ­seriously about its growing dependence from this new energy source coming from the Middle East. On this occasion, at least, the crisis was ultimately averted thanks in part to relief in the form of oil provided by the United States and increased Venezuelan production.22 This political and cultural climate helped shape a generation of Saudi technocrats and civil servants, including Abd Al-Aziz Ibn Muammar, who would be one of the architects of the effort to “modernize” the Kingdom at the end of the 1950s, as well an Arab nationalist with a leftist political outlook.23 More importantly for our purposes, the nationalist fervor of the 1950s provided the context for the ascent within the Saudi bureaucracy of Abdullah Al-Tariki— whom we have met already in Caracas (chapter 1) and would become one of the key figures for both the history of petroleum in the Middle East as well as for the beginning of ­international cooperation among the oil exporters.24 Born in a village in Najd, Tariki had begun to deal with the world of trade by the age of ten. He followed his elder brother to India to serve under the mentorship of Abdullah Al-Fawzan, a Saudi merchant on the subcontinent. Due to Al- Fawzan’s prominent position in India, he was later chosen by King Abdulaziz Al-Saud to represent the Kingdom’s interests as a de facto ambassador to that country. Under Al-Fawzan’s tutelage, Tariki would go on to learn English and accounting.25 Impressed by Tariki’s 22  Philippe Tristani, “De la fermeture du canal de Suez au sabotage des pipelines de l’Iraq Petroleum Company. L’Occident face à l’arme pétrolière, novembre 1956–juin 1957”, in Alain Beltran, (ed.), Le pétrole et la guerre (Brussels: Peter Lang, 2012), pp. 123–159. 23  On the importance of leftwing movements in Saudi state bureaucracy: Rosie Bsheer, “A CounterRevolutionary State: Popular Movements and the Making of the Saudi Arabia”, in Past & Present, Vol. 238, Issue 1, February 2018, pp. 233–77. 24  Stephen Deguid, “A Biographical Approach to the Study of Social Change in the Middle East: Abdullah Tariki as a New Man”, International Journal of Middle East Studies,1:3, (1970), 195–220. 25  Muhammad Abdullah ibn Al-Sayf, Rocks of Oil, Sands of Politics: Biography of Abdullah Al-Turaiqi (Beirut: Institute for Arab Studies and Publishing, 2007), pp. 40–2. Original in Arabic.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 95 performance, Al-Fawzan recommended that Tariki pursue a formal education. Tariki subsequently moved to Cairo in Egypt, where he completed his degree, initially at his own expense, before he managed to earn a scholarship. By the end of his studies Tariki was one of very few Saudis with a university degree. King Abdulaziz thus sent a telegram to ARAMCO to have Tariki pursue higher education in the United States. The message read: “Abdullah Tariki, of the people of Al-Zulfi, who is studying now in Egypt with a scholarship, and who has been praised for his hard work, would be useful in this matter since the government now needs people who are proficient in these technicalities, so please run this by the California company and inform us of their reply.”26 During Tariki’s tenure at the University of Texas at Austin he experienced racial discrimination in person. Because Saudi Arabia was basically unknown to most Americans in the 1940s, he was often mistaken for a Mexican, giving him precious first-hand experience of the segregation then prevalent in the United States. During the drafting of Tariki’s MA thesis, titled The Geology of the Kingdom of Saudi Arabia, he thanked ARAMCO for providing some company reports and maps, but noted how secretive the company was with its internal information, especially when it came to the location of its oil fields and their reserves.27 After a lifetime spent traveling and learning, bouncing between Saudi Arabia, Kuwait, India, Egypt, and various locations in the US, Tariki trained at the Texas Railroad Commission and at TEXACO. When Tariki was passing through Mexico in 1951 the US attaché remarked that he hung out with PEMEX people and was “strongly impressed by the advantage of nationalizing oil.”28 In that same year, as we have seen, he was invited to Caracas for the first International Petroleum Congress held in Venezuela. There, he not only met with Manuel Egaña (the organizer of the Venezuelan mission to the Middle East), forging a strong relationship, but he also had the opportunity to visit the oil fields and compare the conditions of Venezuelan workers with their harsh treatment in Saudi Arabia. In 1953, Tariki returned to his homeland and in 1954, at the age of thirty-five, he assumed responsibility for the newly created directorate of Oil and Mining Affairs at the ministry of Finance: this was the most influential position in Saudi oil policymaking (other than the King and royal family, of course). In 1956 he returned to Venezuela to shore up his contacts there. One year later, he confessed that he was struck by how much more advanced Creole was in its relations with the Venezuelan government compared to ARAMCO: “it is above all run from Caracas. Ten of its fourteen directors reside in Caracas. It is run in Venezuela in the interest of the Venezuelans.”29 This young man of humble Bedouin origins, whose political sympathies lay probably closer to Nasser than to the House of Saud, would be the first Saudi to take part to the meetings of the ARAMCO Board in 1959.

26  Ibidem, p. 54. 27  Ibidem, pp. 60–6. 28 Wald, Saudi Inc., p. 126. 29 Quoted in: Juan Carlos Boué, “The Road Not Taken: Frank Hendryx and the Proposal to Restructure Petroleum Concessions in the Middle East after the Venezuelan Pattern”, in Dag Harald Claes and Giuliano Garavini, eds, The Handbook of OPEC and the Global Energy Order (London: Routledge, forthcoming).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

96

The Rise and Fall of OPEC in the Twentieth Century

Tariki took little time to realize that the Saudis had no operational role and next to no voice in the management of the most important (and the only) industry of their own country. The rivalry between Saud and Faisal—the latter considered to be Tariki’s protector—and the fact that there were few Saudis with a formal education considered capable of holding their own with the managers of Western oil companies, allowed the young and passionate bureaucrat considerable freedom of maneuver. His role as promoter of global petroleum diplomacy was incredibly inflated when balanced with his relatively junior position as a director at the ministry of Finance (just compare this with the high level oil negotiations directly involving heads state and government from the 1970s up to this day). Toward the end of the 1950s his approach to the management of petroleum resources grew more radical, though never spilling into outspoken support for Egyptian-style nationalization. He viewed Saudi Arabia as a land burying two treasures of global relevance: the birthplace of the Prophet, which constituted a destination for pilgrims from around the world; and petroleum, which could improve the life of the Saudi people living in the midst of the most inhospitable desert. To exploit Saudi oil wealth to the fullest, Tariki dreamed of transforming ARAMCO into an “integrated” company which would be able to produce, refine, and sell its own oil. He was convinced, though numbers hardly proved him right, that most of the profits of an oil company came from the refining and marketing phases. He called for the Saudis to have greater direct participation in the US consortium, so that the government would not simply act as a tax collector, but would also acquire the experience necessary for strategic and industrial decision-making. Finally, he was convinced that it was necessary to modify the original oil concession to the state’s advantage. Throughout his career, he would consistently support the cause of establishing a petrochemical industry in Saudi Arabia, building locally an infrastructure of refineries capable of handling at least 30 percent of Saudi production. * * * With the possible exception of the Trucial States—where educational facilities remained poor or nonexistent (Abu Dhabi’s first primary school opened in 1960), poverty was widespread (Fig. 2.1.), and divisions among the sheiks were cleverly exploited by the British—the political and social atmosphere in the Arab Gulf was heating up throughout the 1950s. In Bahrain—where, as we have seen, oil production had started early and the majority of workers were locals—typically nationalist demands such as the formation of popular assemblies and the legalization of trade unions, were raised by the Higher Executive Committee in 1954. The post of (British) Advisor to the Ruler was abolished in 1957. In Kuwait, the situation in the oil city Ahmadi, named after the sheik Ahmad and modeled on Abadan because also because it had planned by the same architect, raised concerns. Most unskilled workers from Kuwait and the rest of the Gulf had no proper accommodation. Still in 1958 a local newspaper described the Arab “settlement” as hovels “merely consisting of four walls and a ceiling”, while “”humans and animals lived together and drinking from the same

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 97

Fig. 2.1.  Informal settlement for Arab labor at the beginning of the 1950s in the north of Ahmadi, the “oil town” of Kuwait. (KOC Archives).

polluted waters.”30 Ahmad Al-Khatib, who had studied at the American University of Beirut and eventually would be the deputy-Chair of the council that drafted the Kuwaiti Constitution, headed a nationalist front in protest against British imperialism and the excessive concentration of power in the hands of the Al-Sabah ­dynasty.31 By 1954, British-led development efforts such as the creation of an airport, of a desalination plant, and investment for the first expansion of the city, left the state on the verge of bankruptcy. More than 4000 people gathered in support of Nasser at the National Cultural Club in 1956 and then a big demonstration headed by Al-Kathib, and including even the head of police Jasim Al-Qatami, marched to the oilfields. Violent riots took place in Kuwait City on the first anniversary of the creation of the United Arab Republic between Egypt and Syria in 1959. The ruler Abdullah Al-Salim Al-Sabah then initiated a second phase 30 Reem Alissa, “The Oil Town of Ahmadi since 1956. From Colonial to Nostalgic City” in Comparative Studies of South Asia, Africa and the Middle East, Vol. 22, No. 1, 2013, pp. 41–58. 31  On Al-Khatib see: Yousef Khalifa Al-Yousef, The Gulf Cooperation Council States: Hereditary Succession, Oil and Foreign Powers (London: Saqi Books, 2017).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

98

The Rise and Fall of OPEC in the Twentieth Century

of development efforts, with a larger role for Arab experts, contracts for local merchants rather than the five privileged British companies, and the inauguration of a welfare system that would constitute a model for the entire Arabian Peninsula. New welfare provisions included: the acquisition of land as a way to redistribute oil revenues (with mixed results); investment in basic and higher education; universal healthcare and social security; greater employment opportunities in government offices.32 Throughout the 1950s, in the absence of visa requirements, Arab workers kept flowing into the country, linking Kuwait ever more strongly with the Arab world. Even in Dubai, the richest emirate on the Trucial coast, a National Front was formed in protest against British intrigues and the interference of foreign merchants.33 In all of these places (at least, where petroleum production had started in earnest), 1956 witnessed a wave of labor agitation and protests against British interference. * * * The golden age of Arab nationalism probably reached its peak in 1958. On February 1, Egypt and Syria announced they had forged a political union that would henceforth be called the United Arab Republic. This was basically an ­incorporation of Syria into Egypt, despite the fact that the two territories were not geographically contiguous. With this first decisive step toward regional unification, Nasser’s prestige reached its apex. In May of that year, pro-Nasser Libyan Muslims seemed on the verge of overthrowing the still pro-Western government in that country. The struggle for independence in neighboring Algeria, meanwhile, spearheaded by the military campaign of the National Liberation Front (Front de Libération Nationale, or FLN), attracted widespread support throughout the Arab world, and received aid (including military assistance) from Nasser’s Egypt. Yet the episode that set the decisive tone for 1958 was the revolution of July 14—a date with auspicious echoes for any revolutionary—in Iraq. A group of military officers organized on the model of the Egyptian “Free Officers,” led by the duo of Abd Al-Karim Qassim and Abdul Salam Arif, overthrew the Hashemite ­monarchy and cast aside the powerful pro-British Prime minister Nuri Al-Said. The heir to the throne was killed in the royal palace, along with the majority of his court. Al-Said suffered the same fate. The people of Baghdad, crammed into shantytowns on the capital’s outskirts, responded with looting and summary executions. The royal palace and the British embassy were besieged. Those that could be easily identified with the ancien régime were herded into the prison of Abu Ghraib, just outside the city limits. The atmosphere was one of fervent anti-British and anti-imperialist sentiment. On the ground the direction of Iraq’s future still remained to be decided. The new government reflected all the most significant political opposition groups, but two major ideological currents stuck out: the “Arab nationalists,” who wanted immediate unification with Syria and Egypt; and the “radicals,” communists, and Ba’athists who sought to preserve Iraq’s 32 Alnajdi, Shaikh Abullah Al-Salim Al-Sabah, 1895–1965, pp. 121–64. 33 Commins, The Gulf States, p. 156.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 99 autonomy, prioritizing internal socio-economic reform rather than the immediate fulfillment of Arab unity.34 In the short term the Qassim emerged triumphant, in part by resorting to the jailing of dissidents and control of information, but also by seeking the support of the Iraqi Communist Party, one of the most deeply rooted and highly disciplined political organizations in the country. Iraq’s foreign policy became hostile to Nasser and started leaning towards the Soviet Union—even though Moscow regarded its relationship with Cairo as far more strategic than that with Baghdad. While general elections and the creation of a democratic Iraq was postponed to a later and less turbulent time, Qassim set to work on economic and social reforms. Among these: the lowering of the cost of housing, price controls on foodstuffs, the legalization of trade unions, a reduction of working hours through the adoption of the eight-hour day, and investment in public housing, particularly in the capital, to replace the omnipresent shantytowns. Most controversial was the first “agrarian reform,” which aimed to weaken large estates and redistribute land in favor of small landowners. Spending for education increased. Studying abroad was encouraged, including in the Soviet Union. The revolution sparked the eruption of an incandescent magma of cultural and political ideas. As Fadhil Al-Chalabi (a future OPEC deputy Secretary-General from whom will hear much more from later) put it: “[U]ntil the late 1960s Baghdad was a cauldron of political and ideological movements and flourished as a dynamic centre for the arts.”35 Ambitious social projects, however, cost money. The issue of petroleum revenues and how to increase them was thus crucial, not only for the success of the regime’s reforms, but for its very survival. By 1961, petroleum represented 27 percent of Iraqi GDP, 45 percent of government earnings, and all of its exports and hard currency reserves. The heart of Qassim’s petroleum strategy lay in the renegotiation of the terms of the IPC concession. Three fundamental issues (bundled up with a wide number of recriminations about the past) emerged in the oil talks that began in 1959: first, Iraq’s 20 percent participation to the IPC that had never been implemented; second, the fate of the country’s inadequately explored oil regions; and third, an increase of the state’s share of oil revenues. Qassim and his closest advisors revealed themselves to be hardened negotiators who, encouraged by public opinion, sought to have a greater say in the oil industry of their own country. On the other hand, IPC would not renounce an inch of control, or a cent of its profits, without some serious fighting. * * * All this nationalist revolutionary ferment in the Arab Middle East made Western capitals uneasy. The dust had barely settled after the coup against Mossadegh in Iran, than the phoenix of nationalism was rising again in the neighboring Arab Gulf. The British minister of Power wrote to conservative Prime minister Harold Macmillan only two weeks after the Iraqi revolution to remind him just how valuable complete control of Middle Eastern oil remained for the British economy: 34  Phebe Marr, The Modern History of Iraq (New York: Avalon Publishing, 2012), pp. 153–83. 35 Chalabi, Oil Policies, Oil Myths, p. 12.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

100

The Rise and Fall of OPEC in the Twentieth Century

a. We get about 70 million tons of oil to a value of about £450 millions. Of this we consume 20 million tons and the balance is used on our oil trade overseas [. . .] c. Our world wide trade in oil enables the UK to obtain oil worth £220 million a year and overseas assets valued at £100 million without direct cost to our monetary ­position (this means that UK profits £320 million a year from concessions). d. Oil assets in the Middle East are financed entirely out of company profits in that area which, in addition, provide a valuable surplus for the development of oil supplies elsewhere (this means that with concessions you can freely finance development of North Sea oil). e. The sterling earnings (by oil royalties or otherwise) of the Middle East countries encourage and finance UK exports to those countries. In sum: Only if there is a completely commercial chain from oil to well to consumer can we hope to retain the financial and economic benefits we derive from our oil trade and afford the consumer a reasonable assurance of continuity of supply. If we cannot get direct company access to the oil, some form of international supervision might be necessary to safeguard prices and supplies against sectional exploitation. This would at least be preferable to a combination of Arab States with unrestricted control of their own oil production.36

Shortly before the Iraqi revolution, the American journalist Wanda Jablonski, founder of the authoritative Petroleum Intelligence Weekly (PIW) and one of the most important commentators on global oil issues with access to key decisionmaking figures, had been invited by the board of Standard of New Jersey to assess the impact of Arab nationalist sentiments on the oil industry. Jablonski, otherwise a firm believer in the preserving the role of the majors, could not help but remark that the United States themselves “would not tolerate the exploitation of its sole strategic resource by foreign companies.”37 In 1957, Homer Metz thought that even if the Arab nationalists “were no more capable of governing the Middle East than the remnants of the Red Indians were of governing the United States of America,” they were nevertheless a “fact of Middle Eastern life with whom the oil companies had to deal with as best they could.”38 Widespread pan-Arab and nationalist sentiments also encouraged regional cooperation. In the early 1960s the oil exporters had yet to tap their full economic and financial power: in 1962, small Arab producers such as Egypt, Syria, and Lebanon still possessed 62 percent of the wealth in the Arab world. Nasser’s ­political prestige had not tarnished by the relative decline of Egypt’s economy relative to that of Saudi Arabia or Iraq. The director of the Oil bureau of the Arab League, Mohammed Salman, worked with Tariki and the Palestinian lawyer Anis Qasim, in charge of Libyan Oil affairs, to conduct a survey of the major Arab oil producers and compare their various concession deals, as well as the geological 36  Minister of Power to the Prime Minister, Secret and Personal, July 29, 1958, in: A.L.P. Burdett, ed., OPEC: Origins & Strategy 1947–1973, Vol. 1: 1947–1959 (Cambridge: Archives Editions, 2004). 37  Anna Rubino, Queen of the Oil Club: The Intrepid Wanda Jablonski and the Power of Information (Boston: Beacon Press, 2008). 38 The National Archives (TNA), Foreign Office (FO) 371/127213, Meeting of Oil Company Public Relations Officers, September 25, 1957.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 101 characteristics of their oilfields. This was no easy task, for the oil companies ­preferred not to any disclose meaningful information (productions costs, prices, profits, reserves, contracts, etc.). Many countries in the Gulf, such as Kuwait, Bahrain, and Qatar, were not independent yet, and could do nothing to prevent the obstructionism of British authorities.39 Regardless of the obstacles, an ever-widening consensus was forming in the Arab world about the need for some collective action. An Arab Petroleum Congress, the first ever such meeting, was duly scheduled to take place in 1958 (though it was subsequently pushed back a few months because of the political tensions between Iraq and Egypt). In the run up to the congress, BP informants managed to get hold of an advance copy of Tariki’s prepared remarks. By now, Tariki was one of the most high-profile oil experts in the region, sought out by the international press. The text Tariki had prepared included calls for the nationalization of the oil pipelines in Arab territories, Arab participation in international shipping, the creation of local refining industries, claims to a share of the income from the marketing oil, and direct participation of local governments in the industrial sector to help raise employment levels. The BP analyst bitterly rued the damage that the oil companies had inflicted upon themselves by underestimating the emergence of a new g­ eneration of Arab oil technocrats, declaring that: “The document, despite its verbosity and bombast, resembles Hitler’s ‘Mein Kampf ’ in foreshadowing all the problems the oil companies are likely to be confronted with in the nearer future.”40 T H E O I L P E N TA G O N The year 1958 not only represented a peak for the Arab nationalist movement. The same year the political scene in Venezuela took yet another decidedly radical turn. Under the administration of General Marcos Pérez Jiménez, between 1950 and 1957, Venezuela had doubled its oil production, maximizing output to satisfy the booming demand in the industrialized world, especially by voracious US ­consumers. Venezuelan exports had been propped up first by the political instability in Iran and later by the closure of the Suez Canal. New concessions had been signed, and they came at the right time for Venezuela because of increasing prices and because the ministry of Petroleum, created in 1950, was guided by Luengo Cabello, a very capable technocrat of unquestionable integrity. In 1954, President Dwight D. Eisenhower awarded Pérez Jiménez the Legion of Merit. The following year, Time magazine dedicated one of its cover stories to the general—his portrait bearing the caption, “from buried riches, a golden rule”— and described Venezuela as a Yankee paradise in which petroleum revenues had opened the doors of consumer’s paradise. Every luxury item, from refrigerators to air conditioners, was now available, at least for the 4000 newly wealthy residents 39 Dietrich, Oil Revolution, pp. 67–9. 40  Brandon H. Grove to Sir Roger B. Stevens, November 5, 1958, in A.L.P. Burdett, ed., OPEC: Origins & Strategy 1947–1973, Vol. 1: 1947–1959.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

102

The Rise and Fall of OPEC in the Twentieth Century

of Caracas who could afford to keep two Cadillacs in their garage. According to Time, all of this affluence reflected the vision of the Venezuelan dictator: Other Latin American countries may also be sitting atop lakes of oil. But in the ’20s and ’30s, when the business was growing up, Mexico and Bolivia expropriated foreign companies, Brazil shut them out, Peru, Argentina and Colombia discouraged them. In effect, the other countries channeled investment into Venezuela, which prudently held its royalties to an average 8% during the early, expensive job of exploration. Once the companies struck it rich, Venezuela raised royalties (to 16 and 2/3%) and taxes, eventually pioneered the celebrated 50-50 agreement that has now been copied in the Middle East and elsewhere. The companies went along with little complaint, led by Creole.41

Pérez Jiménez himself had almost certainly received ample if unreported financial “recognition” for his services from Creole, which had guaranteed its parent company (New Jersey) some $3.8 billion in profits, equal to one half of the company’s total profits worldwide. Between 1956 and 1957, as a result of the Suez crisis, Shell’s profits rose from 574 million bolivars to 974 million, while 83 percent of natural gas produced was still flared.42 In 1957 Venezuelan exports to the US represented one quarter of all exports from Latin America to the US.43 The Venezuelan leader’s investments in pharaonic public works projects, including some of great architectural importance such as the new campus of the Universidad Central de Venezuela in Caracas (considered one of the finest examples of South American modernism), or the road connecting Caracas to the Caribbean coast, increased debt and left the state at the mercy of a potential decline in petroleum prices. Despite the many Cadillacs in the garages of the wealthy, the opening of the first Dior boutique in Latin America, and the state’s grandiose infrastructure projects, the vast majority of Venezuelans was still afflicted by poverty and illiteracy. Caracas’ population had doubled since the war as had the population of Venezuela which rose from 3.8 million in 1941 to 7.5 million in 1961, due in part to government incentives to attract European immigrants, aimed at bettering the so-called “race balance.” The pressures for better employment, better social services, and better housing were strong.44 In January 1958 it was Pérez Jiménez’ turn to be unseated by yet another military coup, once again triggered by wide protests from student, workers, and the army. The plotters were supposed to lay the groundwork for democratic elections, but they were simultaneously forced to confront the pressing issue of the country’s deteriorating balance of payments. After the reopening of the Suez Canal, Jersey Standard estimated that in the Western hemisphere alone there was a spare oil production capacity of 4 million barrels a day. At a meeting held in Punto Fijo, the home of the Christian-Democratic leader Rafael Caldera, Venezuela’s leaders of the largest democratic political parties (AD, 41  “Venezuela: Skipper of the Dreamboat”, Time, February 28, 1955. 42  Shell Historical Heritage and Archive, SGAL, GHC, VEN, E4/1/1, CSV, Financial Survey and Miscellaneous Facts and Figures, The Hague, October 24, 1957. 43 Randall, United States Foreign Oil Policy Since World War I, p. 263. 44  Stephen Rabe, The Road to OPEC: United States Relations with Venezuela, 1919–1976 (Austin: University of Texas Press, 1982), p. 129.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 103 ARD, COPEI) had agreed that they would respect the results of the elections and preserve the democratic system, maintain a moderately pro-US attitude, avoid nationalizations, and fight the Communists. Rómulo Betancourt, in full campaign mode for new presidential elections with Acción Democratica, argued that the country should come up with the resources it needed at the expense of the ­petroleum industry: foreign companies had enjoyed a ridiculously high annual return on investment of approximately 32 percent. This was a tremendous profit rate for any enterprise, even more so for an industry that Betancourt likened to a public utility. He made it very clear that, if elected, his administration would immediately increase taxes on the oil companies.45 Shell (wrongly) feared that Betancourt would also aim to nationalize oil production. Companies’ observers were worried about the announced visit to the Venezuelan oil fields next January by Lázaro Cárdenas of Mexico, accompanied by Jesús Silva Herzog, an economist who had worked with him on the nationalization and then had been posted as a diplomat to the Soviet Union.46 The fact that Pérez Alfonzo, Betancourt’s oil expert, had spent his time in exile in the 1950s in Mexico, and thus had acquired a deep knowledge of the experience of nationalization there, probably reinforce the fear of the companies. To convey a sense of the political atmosphere of 1958 in Venezuela one should consider that the President of the Junta, admiral Wolfgang Larrazábal, who would run for the elections that year in coalition with the Communists, when commenting on the widespread protests during the April visit to Caracas of US Vice-President Richard Nixon, commented that, had he been younger, he would have done the same.47 The provisional military government, thanks in particular to the President Edgar Sanabria who became interim President when Larrazábal resigned to run for elections, anticipated Betancourt’s move on taxation, and on December 18, 1958 (Betancourt would become president in February 1959) issued a presidential decree raising taxes on the oil companies. As a result, the government-take would increase from 50 to 64 percent: that is, the revenue-sharing arrangement would change from 50:50 to 64:36. Venezuela had thus dealt a significant blow to the financial structure of the international oil industry. Not only had the country called into question the by now almost sacred fifty-fifty principle, but it had done so through governmental fiat, without any previous consultation with the oil c­ ompanies. The reaction of the president of Creole Walter H. Haight, just three days following the approval of the decree, was very different from the conciliatory mood prevailing in 1948. He wrote to the Venezuelan Petroleum minister that he was “surprised and alarmed” because, while in the past there had always been ”exchange of ideas”: On this occasion, the first news received about the promulgation of a new law, which included a vastly increased complementary tax, was when we heard the speeches ­delivered by the President, the Minister of Finance [still José Antonio Mayobre] and 45 Coronil, The Magical State. 46  Shell Historical Heritage and Archive,SGAL, GHC, VEN, A10-2, Highlights for the Week Ending 15th November, 1958, November 19, 1958. 47  Pierre Terzian, OPEC: The Inside Story (London: Zed Books, 1985), p. 77.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

104

The Rise and Fall of OPEC in the Twentieth Century

you. And we have been alarmed [. . .] because the increase in complementary tax, without taking into account the balance which has been sought between the government and the oil industry by means of the 50–50 formula, breaks with the respectable agreement that has given excellent results both to the government and the industry.48

Creole asked for “reconsideration” because of the “enormous excess” of world capacity. The minister responded coolly that, since the tax decree was a sovereign act made after careful deliberation, there was no need for further discussion or renegotiation. Haight’s visa was revoked just after the delivery of the letter. Before leaving for the US, his final words to the press were: “Venezuela has denied our acquired rights and has ignored its moral—if not legal—obligation to negotiate.”49 Once in power, Betancourt was immediately subjected to intense pressures from the Communists and other left-wing radical groups. It was, after all, 1959, the year of the triumphant Cuban revolution. Very quickly, the government party was cleaved in two, its left wing splitting off to form the MIR (Movimiento de Izquierda Revolucionaria, or Revolutionary Left Movement), which sought to head down the path carved by the Cuban revolutionaries, floating the idea of nationalizing the oil industry and aiming at weaning the country completely away from the influence of United States. The new Betancourt administration, with Pérez Alfonzo now heading the Petroleum ministry, rejected these radical pressures. It fought the Communist armed revolutionaries (in January 1960 there were bombings followed by hundreds of arrests) and continued in the country’s mainstream reformist tradition based on engagement with the US and reliance on international investment in the petroleum sector, while simultaneously working to develop a long-term national petroleum strategy. The US State department was well aware that Betancourt was better than any of the possible alternatives and decided, especially considering the tough decisions Washington would very soon be forced to take to protects US producers, that it was better to appease him rather than antagonize him: Mr. Betancourt’s political orientation may be best described as nationalistic, leftist, non-communist, and frequently outspokenly anti-Communist [. . .] When in power he co-operated with the United States [. . .] It is believed that he is basically friendly towards this country.50

In a conversation in March 1960 with the Venezuelan President the heads of the Big Three asked for a lay-off of workers and for improved fiscal terms to resist foreign competition. To this Betancourt replied that the government was under strong pressure to improve the conditions of the working class and to promote ­industrialization, and that Venezuela needed to “make a deal” with the countries of the Middle East in order to avoid further reduction in prices since: “it was most unfair from consuming countries to take advantage of oversupply bearing in mind that oil was a non-reproductive commodity without which the exporting countries 48  Arraíz Lucca, El petróleo en Venezuela, p. 201. 50 Salas, The Enduring Legacy, p. 226.

49  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 105 could not live.”51 They were left with the impression that Betancourt was “still very much under the spell of Pérez Alfonzo.”52 The new Venezuelan oil strategy would find its finest a posteriori formulation in the book El Pentágono Petrolero (The Oil Pentagon), written by Pérez Alfonzo in 1964 and published three years later. As Luis Beltrán Prieto Figueroa, one of the founders of Acción Democratica, made sure to note in his preface: “[the Pentagon] does not, of course, refer to the building of the United States Department of Defense, but rather it simply depicts five principles, one for each side of a pentagon, upon which Venezuelan petroleum policy must be founded.”53 The five pillars of this strategy, basically adopted by Betancourt’s government after 1959, were: i) “reasonable participation” and revenue sharing between the companies and the state; ii) the creation of a coordinating committee for hydrocarbon conservation and trade; iii) the creation of a national petroleum company (Corporación Venezolana del Petróleo, or CVP); iv) the principle “no más concesiones” (“no more concessions”); and v) the creation of an organization of the petroleum exporting countries (OPEC). The main novelties, compared to Perez Alfonzo’s plan nearly two ­decades before, were the creation of a national oil company and the creation of OPEC (Fig. 2.2.). Pérez Alfonzo’s essay started from the premise that Venezuela found itself in the same situation as that of other countries dependent on the export of a single commodity (the reference here was to Prebisch’s dependency theory). The added complication for Venezuela, as for the rest of petrostates, was that this “monoproduct” was a non-renewable resource, unlike other “monoproducts” such as coffee or sugar. Reasonable participation in the petroleum revenue was justified by the fact that between 1950 and 1957 alone, concessionaires had extracted more Venezuelan crude than they had in all of the previous five decades combined. The Big Three companies had enjoyed an average return of 26 percent annually. The state should thus raise taxes enough to cap these “super-profits” to a maximum (and very reasonable, according di Pérez Alfonzo) of 15 percent per year. The second principle of the pentagon spoke to the need of ceasing to extract petroleum in such massive quantities without considering the consequences of speeding up the exhaustion of these resources for future generations. Venezuela needed a governmental body that could keep an eye on output and international crude oil prices, as well as on demand in the key markets, in order to avoid overproduction and sudden price swings. The third principle concerned the establishment of a state oil company, the CVP, with the goal of acquiring a monopoly over domestic distribution, investing in refineries, and participating in the direct ­exploration and production of the country’s petroleum. This was directly linked to the fourth principle (“no more concessions”), regarding the need to halt new concession contracts that had generated such immense wealth for the oil corporations. 51  Shell Historical Heritage and Archive, SGAL, GHC, VEN, A13/4/3, (Mr. Warder, Caracas, 9.3.60). 52  Ibidem. 53  Juan Pablo Pérez Alfonzo, El Pentágono Petrolero (Caracas: Ediciones Revista Política, 1967), p. viii.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

106

The Rise and Fall of OPEC in the Twentieth Century

Fig. 2.2.  El Pentágono Petrolero: the Oil Pentagon. The five sides of the Pentagon, starting from the top, are: 1. Reasonable participation; 2. CCCCH, the commission in charge of analyzing production, marketing and prices; 3. No more concessions; 4. CVP, the Venezuelan Petroleum Corporation; 5. OPEC. (Juan Pablo Pérez Alfonzo, El Pentágono Petrolero, 1967).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 107 Existing concessions holders would not face the risk of nationalization, but in the future every new deal between the foreign companies and the state would have to follow the model of “service contracts”: companies would not own the crude but would simply perform the task of extracting it for a fee. The final principle, so ­critical to our story, stemmed from an awareness that there was no way to control Venezuelan output and combat the downward trend in global oil prices without some coordination with the other regions of world, especially the Middle East, where total exports (and reserves) were larger than those of Venezuela. Pérez Alfonzo’s vision of a future oil producers’ association was suggestive, not the least because it was presented (but consider his Pentágono was written the very same year of the creation of UNCTAD in 1964) as a model instrument for global economic cooperation even for other developing countries: Because of the importance of oil, because of its concentration in a limited number of countries, because of its status as a non-renewable resource, OPEC is the international organization best placed to triumph in the broader battle to protect commodities prices. In addition to achieving its objectives of particular interest to the petroleum exporting countries, the Organization will also exert an exemplary influence on similar organizations created to protect other commodities and natural resources.54

Pérez Alfonzo’s Pentagon remains to this day one of the most incisive formulations of oil policy in an oil exporting country. Starting off from an historical analysis of the state of the economy of Venezuela, and then attempting to define the current needs of its citizens, the Pentagon prescribed a straightforward and effective set of measures bound together by a geometrical logic and potentially applicable to all other oil exporters. THE INDEPENDENTS During the 1950s, global oil consumption had been constantly on the rise, and the petroleum companies were accumulating sizeable profit margins, much higher in fact than those in any other manufacturing sector; incomparably higher than for any other commodity. In 1948, some 9.4 million barrels of oil were produced each day, 25 percent of which were destined for export. Eleven years later, in 1959, not only had worldwide oil production more than doubled, reaching more than 20  million barrels per day, but 40 percent of global demand was now met by exports. Oil was the quintessential traded commodity. By 1970, 8.3 percent of all the imports in the world were in petroleum, by far exceeding the trade in any other commodity.55 In 1960 the majors controlled more than 80 percent of petroleum production outside the United States and the Soviet Union. While they had accumulated enormous profits and were by now undoubtedly some of the wealthiest and most 54  Pérez Alfonzo, El Pentágono Petrolero, p. 73. 55 Steven  A.  Schneider, The Oil Price Revolution (Baltimore: Johns Hopkins University Press, 1983), p. 55.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

108

The Rise and Fall of OPEC in the Twentieth Century

powerful corporations in the world, one potentially dangerous threat to their dominance—in addition, obviously, to the pressures for greater national previously evoked here as the “spirit of Suez”—lay in the emergence of a number of cutthroat competitors then called “the independents” (i.e. not associated to the oligopoly). These independent oil companies tried to make a living and to thrive by hunting for bargains and for the “left-overs” in the most promising oil regions. But to win contracts they first had to overcome stubborn resistance from the majors. Most of these industrious independent companies were based in the US. They used plenty of free market rhetoric and evoked scenarios of cheaper gasoline prices for the American consumer (and voter) in order to pressure Washington into helping them to go international, particularly in the Middle East. American independents constantly referred to US anti-trust legislation, which had helped them win a participating share in the Iranian Consortium after the coup against Mossadegh. They were similarly active on the newest oil frontier in Libya. But in addition to the US independents, there were also several state-owned European and Japanese “independents,” the most ambitious of which was probably Italy’s national oil company (Ente Nazionale Idrocarburi ENI) guided by Enrico Mattei. These staterun enterprises were incorporated in countries (such as Italy, France and Japan) that were increasingly dependent on oil and gas consumption, but possessed virtually none of their own. In Western Europe alone, petroleum consumption had risen from 97 million tons per year in 1954 to 201 million tons in 1960, while the share of petroleum in European energy consumption rose from 20 percent to approximately 35 percent over the same period. The state-run independents had a mandate to seek oil wherever it was available, with the goal securing supply and reselling it to their domestic consumers at the lowest possible price in order to boost industrial growth. Mattei’s ENI had joined the boycott against nationalized oil in Iran, confident that Italy would then be repaid for its loyalty with a share in the Iranian Consortium after the fall of Mossadegh. It was most probably the disappointment of seeing ENI excluded from Iran that led Mattei—a former anti-Fascist resistance fighter and high-ranking member of the ruling Christian Democratic party—to launch a global challenge to the majors he had taken to calling Le Sette Sorelle, or the “Seven Sisters.” The big, bad Americans had treated the Italian oil industry like a bastard half-sibling of inferior stock, the representative of a nation unworthy of a seat at the international decision-making table.56 The independents were willing both to offer local governments more advantageous conditions compared to those offered by the majors, and to sell petroleum products at lower prices to their costumers. To achieve these parallel objectives, they needed to cut out “the middleman” (the majors) and accept lower profit margins compared to them. ENI offered a widely publicized example of this aggressive strategy. In an August 1957 agreement with the National Iranian Oil Company (NIOC), Mattei introduced a new form of collaboration based on the creation of an equally shares joint venture (fifty-fifty each) between the two national oil 56  Paul Frankel, Mattei: Oil and Power Politics (London: Praeger, 1966), p. 136.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 109 enterprises. The idea was to involve engineers and experts from the oil producing countries themselves in the management of their own natural resources, sharing both overall strategy and technical know-how. With regard to ENI’s 50 percent equity, profits would be split in half according to the prevalent arrangement throughout the Middle East (50:50). The final result thus would roughly be a 75:25 revenue-sharing model to the advantage of the producer’s national company. This was an innovation in two ways: first, because local governments would be directly involved as industrial partners and not simply as tax collectors and rentiers; second, because it offered the producer countries a better financial deal. These initiatives aimed at winning over the producers’ diffidence toward newcomers, and it was especially attractive because it came wrapped in a package that included a political and cultural challenge to the imperialism embedded in the old concessionary model. ENI seemed to be outlining a potential new scenario that included direct dialogue between the national oil companies of both consuming and ­producing countries in order to identify an acceptable price structure, and foster mutually beneficial industrial cooperation. Mattei’s vision still remained unfulfilled when he died in a mysterious airplane crash (later it would be proved that a bomb had been planted on the plane) in 1962. A decade after his death, however, this model of state-to-state oil cooperation between producers and consumers that he had helped to pioneer, came much closer to becoming a reality. * * * While the governments of the consumer nations could not be fully aware of the production costs prevailing in the Middle East, it was widely known that market prices were sinking faster than the official posted prices set by the oil oligopoly. Discounts to refineries had become a common practice. Consumer governments started pushing the majors also to reduce the posted prices for imported crude: they saw no justification for the majors charging their affiliates unrealistically high posted prices, thus raising the foreign-exchange cost of imported oil while at the same time they helping these companies to escape taxation (remember that taxes paid to local governments could be credited against home taxes). At the same time the practice of companies such as ENI showed that it was possible to offer lower gasoline prices to drivers. The first contract between ENI and the Soviet Union in 1958, shortly after the Suez crisis, further strengthened this trend, bringing crude oil at very reasonable prices, lower than those for Middle Eastern crude. The first effect of this downward pressure on market prices was that in 1959 the US approved “mandatory quotas” on oil imports. This measure was essential for the smaller and higher cost producers in Texas, Lousiana, and Oklahoma that had managed to forge an alliance with coal producers, while at the same time it also prevented a domestic war between US independents and US majors that had access to cheaper oil.57 The program, which lasted until 1973, confirmed Washington’s willingness to employ protectionist measures in defense of the 57 Steve Isser, The Economics and Policies of the United States Oil Industry, 1920–1990: Profits, Populism and Petroleum (New York: Garland Publishing, 1996), p. 77.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

110

The Rise and Fall of OPEC in the Twentieth Century

nation’s oil sector, and limited imports to no more than one-eighth of domestic consumption. US producers could thus benefit from far higher prices compared to their counterparts around the globe. Imports from Mexico and Canada remained unaffected, but limits were otherwise applied to the rest of the world. Oil prices in the US had effectively been totally decoupled from those prevailing in global market prices. This legislation was a sharp blow to Venezuela, the main US foreign supplier. Overall it deprived international oil companies of some 250 million tons of potential exports, totaling approximately one billion dollars a year in royalties. Venezuela’s first reaction to US protectionism was to seek an agreement with Washington to establish production quotas for the Western hemisphere. Washington, however, responded to the Venezuelans with an unequivocal no, in part to avoid making Middle Eastern producers even more nervous. As a result, Venezuelan leaders became even more convinced of the urgent, vital need to come to terms directly with Middle Eastern producers in order to avoid fratricidal competition. Another consequence of the introduction of mandatory quotas for the US market was that the crude oil that the independents so tirelessly sought in every corner of the globe no longer enjoyed unfettered access to the United States, the largest market in the world. They were now forced to compete against Russian oil for Western European and Japanese markets, where there was already a supply glut. The market price for oil accordingly sank even further. To avoid ceding precious market share to competitors, the majors now had only two options available. The first was to offer discounts on their crude oil and refined products while leaving the posted price untouched. This would have entailed a modest cap on their profits. The second option was to force the cost of the ­discounts down the throat of the producers by reducing the posted prices for crude, thus lowering their tax bill to the oil producing countries. Unsurprisingly, they opted for this latter path. On February 12, 1959, BP announced a reduction in posted prices that brought them 5 cents below the level prevailing prior to the Suez crisis. This decision was extremely instructive: it showed to the producers in no uncertain terms that when it came to their key industry and export, they were completely at the mercy of foreign companies that had to accommodate consumers’ needs. What could these producing governments do then to defend themselves from further income reductions? The only guarantee that they had in the past was that the posted price for Middle Eastern oil had remained more or less tied to the price of crude in the US, which was unlikely to fall because of the political influence of US producers. But if the majors were now prepared to allow the price of Middle Eastern crude to drop without any kind of safety net, oil exporters could no longer have any ­certainty on their future revenues, while at the same their domestic development needs never stop growing. The role of the independents, and particularly of ENI, served to demonstrate to the leaders of the main oil producing countries that a different kind of relationship with the oil companies was indeed possible. It is worth citing a lengthy passage from one of Mattei’s speeches, given in Tunisia in 1960, which embodies the role

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 111 that the Italian energy company sought to play in the Mediterranean and North Africa. These words capture quite well the tenor of the reasoning that the ruling classes of the newly independent countries were willing to hear: I am here to answer your call for investment, and to help you in the fight against underdevelopment. I am not afraid of the war in Algeria. I am not afraid of decolonization. I believe in decolonization not only for reasons of moral dignity, but also for reasons of economic productivity. Without decolonization it is impossible to elicit the energies and enthusiasm from the Afro-Asiatic peoples necessary for the improvement of Africa and Asia. Now, the riches of Africa and Asia are immense. The geography of hunger is a legend: it is determined only by the passivity, the inertia created by colonialism in native populations. It served colonialism well to encourage fatalism and resignation. I always read your speeches, and what has struck me most is your fight against fatalism and resignation. [. . .] Colonialism is not only political: it is also, and especially, economic. Colonialism exists when there is not a sufficient industrial infrastructure for the processing of raw materials. Colonialism exists when the game of supply and demand for a vital raw material is manipulated by a hegemonic power: even a private power, a monopoly or oligopoly. In the petroleum sector this hegemonic-oligopolistic power is the cartel.58

Mattei also spoke in terms of civilizations and imperialism: “The cartel is AngloSaxon, but I am against the Anglo-Saxon world.” Also this language that took account of the prevailing racial divisions, was appreciated in the politically charged atmosphere of 1960: the “year of Africa.” ARAB OIL Following BP’s posted price reduction, the balance sheets for Middle East p ­ roducers were in serious, but not yet critical, conditions. The reduction would certainly have affected state revenues, especially in countries such as Saudi Arabia where public finances were spiraling out of control, but posted prices had simply been reassessed at pre-Suez crisis levels. More worrying was the situation for Venezuela. Here the concessionaires paid taxes based not on posted prices, as in the Middle East, but on “realized prices” (the actual sales price of crude on the global oil market that faced increasing downwards pressures). In 1959 the difference between posted and market prices began to widen, to the detriment of the latter. This gap would not show any signs of improvement throughout the 1960s. In April 1959 the Venezuelan Parliament approved a resolution that, in addition to urging the creation of a national oil company and calling for another round of tax increases, invoked the launching of a new international body to regulate oil prices, modeled on similar organizations set up to control the markets for coffee and sugar. 58  Enrico Mattei, Scritti e discorsi, 1945–1962 (Milan: Rizzoli, 2012), p. 147.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

112

The Rise and Fall of OPEC in the Twentieth Century

That same month, the final preparations for the first Arab Petroleum Congress were concluded. The goal of the meeting in Cairo, which had already been postponed more than once, was to discuss more effective regulation of the oil industry. Organized by the Arab League, the meeting also welcomed observers from Iran, as well as a very large delegation from Venezuela, comprising all of the country’s top policy-makers both past, present and future: Egaña, Pérez Alfonzo, the future Petroleum minister Pérez Guerrero (who spoke Arabic as we have seen previously and had just been assigned diplomatic posts in both Morocco and Egypt), and Eduardo Acosta Hermoso (head of the ministry of Mines, who had already had met Tariki while studying in Texas).59 The conference, which began in April 21, 1959, was remarkable for two reasons: first, because several of the topics discussed would remain at the heart of the petroleum international negotiations for several years to come; and second, because it can be considered the first concrete step on the path leading to the creation of OPEC (Fig. 2.3.). The Arab Petroleum Congress was, at least on the surface, conducted in an air of diplomatic calm and in the spirit of cooperation between the companies and the governments. Representatives of the majors had been invited as observers, and they

Fig. 2.3.  Manuel Egaña and Juan Pablo Pérez Alfonzo shake hands with Nasser at the first Arab Oil Congress in Cairo in 1959. (Courtesy of Bernard Mommer).

59  Macky Arena, “Nadie entendía por qué nos uníamos con los árabes”, Interview with Eduardo Acosta Hermoso, Venezuela Primero, March 20, 2010.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 113 took the opportunity to set up advertising displays and exhibitions highlighting their successes in the various Arab countries. They sat in on debates and didn’t forego an opportunity to talk up the role of their respective companies. In some cases, like those of Kuwait or Qatar, which were not yet independent, company delegates had the chance to speak also as members of the government delegations. The generally conciliatory tone of the talks grew more radical, however, when the discussants spoke Arabic rather than English. A set of remarks that received widespread support from the Arab crowd came from Salman, the meeting’s key organizer. In front of the assembly of 500 industry hands, the Iraqi expert called for a joint revision of the concessions in order to appease the deep sense of hostility present across a broad swath of Arab public opinion. Tariki affirmed his status as the rising Arab star in the oil industry in the Middle East, not least because he was the only government delegate from an key Arab oil exporting state with real power: Iraq had not sent any official representatives to Cairo because of the ongoing tensions with Nasser, while Kuwait, Qatar, and Bahrain were not yet members of the Arab League. The most heated controversy was sparked by a speech given by Frank Hendryx, an American lawyer and Tariki’s general counsel (they had met in 1956 in Venezuela), who attacked frontally and brutally the principle of the “sanctity of contracts.” This principle required that any amendment to the concessions be the result of an agreement between both parties or, failing this, that it be submitted to international arbitration. His remarks were received skeptically by some of the Arab representatives and met the open resentment of the delegates from the majors, finding support only from the ENI’s representative. Hendryx sought to answer a key question: What is the situation created when such a government, in the best interests of its own citizens, for example, wishes to modify the area granted to a concessionaire and embodied in an existing concession contract? Much has been said and written about the companies’ rights in such matters and there has been on their behalf considerable loose reference to acquired and vested rights and interests. Next to nothing has been said about those correlative rights and interests of the independent sovereign government, which in theory exists and operates solely to serve the interests of its citizens.60

After reviewing the precedents in British and American common law, as well as in the French civil code, Hendryx came to the conclusion that industrialized countries had always supported the prerogatives of the state over private concerns in matters regarding the public interest, even unilaterally disregarding and modifying previous contracts. Hendryx thus openly called into question the foundations of the oil concessions system in the Middle East and stepped into a political-legal minefield: without absolute, rock-solid certainty concerning the legitimate basis for the concessions, the future prospects of the majors would hinge on shifts in the political, cultural, and economic landscape of the oil producing countries. This notion of 60  “Text of Hendryx Talk at Oil Congress”, Platt’s OILGRAM News Service—New York Edition, April 28, 1959.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

114

The Rise and Fall of OPEC in the Twentieth Century

the inherent instability of the concessions system was captured, with almost prophetic foresight, in a 1960 book by George Lenczowski, a prominent US Middle East expert, which was published just prior to the founding of OPEC: The concession document is the most important legal safeguard that a company possesses. Naturally, therefore, it will tend to insist on its binding force as the main ingredient of the company–government relationship. The host government on the other hand is in many respects an unequal partner: economically it may be weaker than a concessionaire company, but it usually possess the attribute of sovereignty, which places it in a position of superior strength vis-à-vis a private corporation. This inequality of partners carries within itself a germ of considerable tension.61

During the Cairo conference the prestige—and even the mere presence—of the substantial Venezuelan delegation drew great interest, as did the arrival of a qualified representative from the Iranian government in the person of Manucher Farmanfarmaian. The Cartel’s observers couldn’t help but notice how Pérez Alfonzo managed to persuade even relatively hostile interlocutors, such the Sheikh of Qatar, of the Venezuelans’ good intentions: “his country (Venezuela) was ready to limit production to 1958 levels and was not interested in increasing production in parallel with the growth in world consumption.”62 He argued in the conversation that his government had sufficient revenues, and that an oil income that increased too quickly was not in the national interest: not every Venezuelan needed to own a Cadillac, or to be able to travel twice a year to Paris. The Venezuelan minister closed his monologue with the Qatari delegate by declaring that: “no country could spend too much wisely in too short a time, and that material and social development had to go hand in hand, otherwise the national mood would suffer the risk of degeneration and the economy would suffer from inflation.”63 The Venezuelan’s asceticism was perhaps not the best way to impress the representative of a country such as Qatar, where the population had still very little access to consumer goods, but his reassurances of Venezuela’s desire to limit production were certainly welcome. In his fundamental history of OPEC Pierre Terzian recalls that journalist Wanda Jablonski was apparently the first to introduce Tariki to Pérez Alfonzo in Cairo. The Venezuelan greeted him by saying: “so that’s you making all that noise.”.64 While the two met in person for the first time in Cairo there was little need, as  I  have extensively shown, for a mediator to facilitate contacts between the ­protagonist of the oil industry from Venezuela and the Middle East. * * * Outside the venue of the congress, in the Cairo suburb of Maadi, a select group gathered for a series of closed meetings. Among those present were Saleh Nesim, 61  George Lenczowski, Oil and State in the Middle East (Ithaca: Cornell University Press, 1960), p. 87. 62  Report of Shell Qatar Representative, The First Arab Petroleum Conference, Doha, June 20, 1959, in A.L.P. Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 1: 1947–1959. 63  Ibidem. 64 Terzian, OPEC, p. 28.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 115 the representative for the UAR (Egypt/Syria), Tariki (representing Saudi Arabia), Ahmed Al-Sayed Omar (Kuwait), Farmanfarmaian (Iran), Pérez Alfonzo (Venezuela), and Salman himself. While Iraq had no formal representation, Salman could be considered an informal delegate: the head the Arab League’s Petroleum bureau also had particularly close ties to Qassim and, only a few months after the congress, he would be named Iraqi Petroleum minister. ARAMCO discreetly kept tabs on the group’s movements: “They held daily secret meetings at the Maadi Yacht Club—in the garden to avoid eavesdropping.”65 At the end of these semi-clandestine meetings, the participants came to a “gentlemen’s agreement,” later known as the Maadi Pact, which would only be made public in 1961 by the Venezuelan government. As Pérez Guerrero, who accompanied Pérez Alfonzo, recalled: We set forth in a memorandum our own policy to counteract the decline of oil prices and to ask to be consulted. That’s what we were asking for: to be consulted by the companies before anything could be done and not just to be surprised by what they did through the press or whatever. [. . .] Nobody knew at the time that we had already drawn up that memorandum. Everyone took just one copy of it.66

The protagonists of the Maadi Pact agreed on the need to establish a joint consulting committee to discuss petroleum matters, and reached consensus on several key issues: improving governments’ share of oil revenues to at least 60:40, on a par with Venezuela; retaining “posted pricing” which in the future could only be modified by agreement of all interested parties (that is, no more unilateral reductions by the  oil companies); creating opportunities to recoup profit from all phases of the petroleum industry, both upstream and downstream; developing capacity for on-site refining; creating national oil companies; establishing a commission to regulate prices and production in each country, on the model of the one established in Venezuela.67 Francisco Parra, a future OPEC Secretary General, later downplayed the agreement: When the pact was signed only Tariki and Perez Alfonzo had some authority. The Kuwaiti representative Ahmed Sayyid Omar had no authority on his country’s foreign relations and travelled with a British passport. The Iraqi, Mohamad Salman, though presumed to have influence with the Iraqi government, held no position in Iraq but was simply the head of the Arab League’s Petroleum Committee, and he was most certainly not representing the Arab League when signed. The Iranian, Manucher Farmanfarmaian, was present at the conference only as an observer on behalf of the National Iranian Oil Company, of which he was director. He had no authority to commit the company (let alone the Iranian government) to anything. The UAR representative, Saleh Nesim, appears to have been invited only out of courtesy, as the delegate of the host country to the Congress.68

65 Vitalis, America’s Kingdom, p. 209. 66  United Nations Oral History Project (Dag Hammarskjöld Library), Transcript of Interview with Manuel Pérez-Guerrero, April 27, 1983, p. 87. 67  The text of the Maadi Pact can be found for example in: Ian Skeet, OPEC. Twenty-Five Years of Prices and Politics (Cambridge: Cambridge University Press, 1988), pp. 15–16. 68 Parra, Oil Politics, p. 95.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

116

The Rise and Fall of OPEC in the Twentieth Century

With the exception of the idea transform concessionaires such as ARAMCO into “integrated companies”—Tariki’s personal crusade and a key objective of ARAMCO not at the time of writing—the 1959 Maadi Pact was probably the last demonstration of the strength and power of the “Venezuela model” as a guide for the other exporting countris. In the following years, Venezuela would certainly retain a high-profile role within OPEC, but it would never again reacquire the same influence it enjoyed up to the early 1960s. THE BAGHDAD MEETING After the Arab Oil Congress, both the efforts at Arab oil cooperation and the dialogue between the Arab technocrats and the Venezuelans continued apace. The Arab oil technocrats Tariki, Salman, and Qasem met in Jeddah and tried to define the pillars of a common Arab petroleum legislation. Hendryx, also present, argued that the fifty-fifty profit sharing model was untenable due to the bountiful nature of oil discoveries in the Middle East and the profits they had generated: “the percentage figure [. . .] had no significant legal or moral justification nor had it any sanctity, like all legislative enactments, permanence was not inherent in it.”69 The first few months of the 1960 were dominated by a whirlwind of meetings and memos that nevertheless failed to produce anything of substance. The Venezuelan ­ egotiations, ambassador to Cairo and Saudi Arabia, and a protagonist in the n following a meeting with Prince Faisal, was pessimistic on the likeliness of a common initiative by exporting countries: The Crown Prince’s response was completely the opposite of what I had hoped, and he calmly and politely, in a friendly yet firm voice, explained to me that they “were satisfied with what they were getting from ARAMCO and that they would not change anything with respect to their own industry, since under no circumstances would they go against their interests” [. . .]. It is clear that the largest producer in the Arab world does not share our ideas, and that, to the contrary, given its position, it could become a fearsome competitor [. . .]. I will close, citizen minister, by declaring that I believe the creation of a granite-like united front to be almost impossible, as appears to be the possibility that we might take an active role in a new oil policy outside our borders, from which our country might derive significant benefit, for the conditions I encountered do not reflect this reality.70

As Prime minister from 1958 until the end of 1960, Faisal tried, in collaboration with the International Monetary Fund, to implement an “austerity” program to rein in some of the “extravagances” of the House of Saud. At the peak of its 69  In: Juan Carlos Boué, “The Road Not Taken: Frank Hendryx and the Proposal to Restructure Petroleum Concessions in the Middle East after the Venezuelan Pattern”, in Dag Harald Claes and Giuliano Garavini, eds., The Handbook of OPEC and the Global Energy Order (London: Routledge, forthcoming). 70  Archivos Histórico Ministerio Poder Popular para Relaciones Exteriores (AHMPPRE), Arabia Saudita, Situación Política, 1960, Embajador Antonio M. Araujo, Entrevista con el Príncipe Heredero Faisal, en Arabia Saudita, El Cairo, Marzo 31, 1960.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 117 indebtedness in 1958 Saudi Arabia owned more than one year oil revenues both abroad and to local merchants.71 He could be counted upon as a moderate when it came to the relations with ARAMCO and with the US. He certainly feared the radical tendencies prevalent in neighboring Arab countries such as Iraq, while Saudi Arabia and its monarchy was constantly criticized by Nasser as reactionary and subservient to foreign interests. But if Faisal refused the constant claims to “Arabization” and “nationalization,” and supported negotiations with the oil ­companies, this does not mean that he did not aim for some changes in the relationship. As US Ambassador Donald Heath reported Faisal’s reasoning: The parent companies and ARAMCO should realize the government is under great pressure. The youth of SA were almost in a “frenzy” in demanding a better deal from ARAMCO. He could not disregard this movement. He had to have something into which to channel the exuberance of the nation’s youth. He realized perfectly that “Arabization” of the company was impossible nor was it one of the aims of SAG.72

Ambassador Heath commented: “I found Faisal very friendly but was appalled to the extent which he has been infected by Tariki’s hatred of ARAMCO and by Tariki’s misrepresentations.”73 Faisal was pressured from many sides. Nasir Al-Said, one of the leaders of the workers’ protest movements in the east of the country, published a Message to the King in 1958 calling upon the King Saud to allow freedom of association for workers and a more representative form of government. There were many leftist journals and publications circulating in Saudi Arabia denouncing ARAMCO and US influence in the country. An editorial of one the most outspoken of these journals Al-Adwa (The Lights) read: “Threaten us all you want, ARAMCO, with your mercenaries and your public relations office [. . .] The political awareness of the people and the King’s attentiveness to the country’s interest will shatter your stubbornness.”74 By the end of 1960, King Saud himself would reclaim full control of the government by appointing Prince Talal to the ministry of Finance and other two princes belonging to the “free princes” movement to the Interior and Communications Ministries. In this government, also known as the “progressive cabinet,” six out of the twelve cabinet posts were offered to “commoners” outside the royal family for the first time. Tariki would head of the newly created Petroleum ministry, while the “free princes” openly called for the transformation of Saudi Arabia into some form of constitutional monarchy.75 While these changes were strongly opposed by the more conservative sectors of society, especially the ulema, the King also marked the government’s radicalization in 1961 by cancelling the US Air Force’s concession for the Dhahran airbase which was due to expire anyway in 1962. Such was the political atmosphere in Saudi Arabia in 1960. 71  Banafe and McLeod The Saudi Arabian Monetary Agency, p. 38. 72  FRUS, 1958–1960, Near East Region, Iraq; Iran; Arabian Peninsula; Vol. XII, 334. Telegram From the Consulate in Dhahran to the Department of State, Dhahran, January 24, 1960. 73  Ibidem. 74  Quoted in: Rosie Bsheer, “A Counter-Revolutionary State: Popular Movements and the Making of the Saudi Arabia”, in Past & Present, Vol. 238, February 2018, p. 19. 75 Vassiliev, The History of Saudi Arabia, Chapt. 17.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

118

The Rise and Fall of OPEC in the Twentieth Century

On April 9, 1960 New Jersey Standard announced it would cut the posted price of Saudi crude exported at Ras Tanura by 14 cents. With this decision, the price of crude outside the United States fell to a low of $1.80 per barrel, a price that would not be revised, if not upward, in the years to come. This was the proverbial straw that broke the camel’s back. The patience of the oil producing governments, however moderate their leaders might have been, had been tested once too often. In his useful book on the history of OPEC, Ian Skeet (a Shell manager that played a hands-on role in negotiations with Middleastern producers during the 1970s) commented: “For OPEC the equivalent to the murder of Archduke Ferdinand in Sarajevo was the decision by Esso to reduce the posted price of Arab light crude.”76 Later Howard Page, the most prominent Middle East expert of New Jersey Standard from 1949 to 1965, would comment that main problem of the fifty-fifty was that it did not take into account the possibility of declining market prices, and admitted that “I only regret one thing: my decision to cut oil prices in August 1960.”77 The following month, Tariki and Salman were invited to Caracas. In a joint ­declaration with the Saudi minister, Pérez Alfonzo reaffirmed that economic ­cooperation between oil exporting countries was no less rational and justifiable than Europe’s economic blocs, or than agreements on commodities such as coffee; in fact a petroleum agreement was crucial because it “protects against the loss of a natural resource of extraordinary importance for the world, a resource that is depleted through production.”78 The three oil experts started working on a global “prorationing” scheme that would help restore market prices for oil. The Shah of Iran, who aspired to become the United States’ primary regional ally, and who owed his place on the Peacock Throne to US support, leveled harsh criticism at the reduction of posted prices in a press conference on August 27, 1960: “The question facing us was whether the oil companies could take such a unilateral action, even if justified, without consulting the real owners of the oil. The logical and right way would have been for the companies to discuss their problems with us, the owners of the oil.”79 Farmanfarmaian, even though he ultimately was not appointed to head the Iranian delegation, still recalled the Shah’s instructions: Shah was standing on the stairs of the Sa‘dabad Place when I arrived. He told me: “you will be representing of Iran in the Baghdad. I want you to put asides all past disputes and find a common stand with the Arab states. Oil is the sole revenue for us and we need money to feed our growing population.” Then he added “the shameless oil ­companies are steeling our poor people’s wealth and keeping us at their mercy. I want to cooperate with the Arab states to end this.”80

76 Skeet, OPEC, p. 6. 77 Terzian, OPEC, p. 38. 78  Dorothea, Melcher, OPEC: La Organización de Países Exportadores de Petróleo. La prehistoria de su fundación, 1943 a 1960 (Unpublished study, 2010). 79 Mikdashi, The Community of Oil Exporting Countries, p. 45. 80  Quoted in Touraj Atabaki, “OPEC and the Restructuring of Iranian Economy in 1960s”, in Dag Harald Claes and Giuliano Garavini, eds, Handbook of OPEC and the Global Energy Order (London: Routledge, forthcoming).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 119 In 1960 Iran was also facing the possibility of bankruptcy due to its spending on huge infrastructural projects like the Karaj projects aimed at providing drinking water to Tehran and the plans to irrigate Khuzestan, which had led to inflation and increased foreign debt. While the seven-year plan of 1955–62 relied on oil money for 65 percent of government spending, oil revenue had declined by 55 percent by the end of the 1950s.81 After the repressive campaign of 1957 aimed at eliminating the influence of the National Front and the Tudeh, the Shah faced protests from the middle class, most notably culminating with the teachers strike of early 1961, as well as from the poorest sectors of society. All of these pressures, coupled with the changing policies in Washington under the new Kennedy administration, would eventually convince the Shah to name Ali Amini as Prime minister in 1961. The new Prime minister simultaneously tried to rein in spending with the help of his minister of Finance Jamshid Amouzegar, while also pressing for land reform. The reformist effort lasted until the end of 1962, when Amini was forced to resign under protests from the more conservative sectors of society. Sensing the widespread discontent against the majors in the Middle East, Qassim seized the momentum—remember there had been no Iraqi delegation to the petroleum congress in Cairo—calling a meeting in Baghdad among the ­signatories of the “Maadi pact” a year earlier. He did so to bolster his own prestige in the turbulent climate of Iraqi politics, to counteract Nasser’s influence, and to lay the groundwork for the rest of Arab producers to support Iraq in the tough ­negotiations underway with IPC. These negotiations would soon end with the signing of Iraqi Law 80 of December 1961, which re-appropriated for the state 99.5 percent of land included in the IPC concession, including the promising South Rumaila oilfields. Iraq would thus become the first Arab producing country to act unilaterally against the majors by changing the concession agreement. It needed all the support it could muster to avoid potential reprisals. The Iraqi government media hailed Law 80 in triumphalist tones because it “removed the injustice done to the homeland as a result of indulgence shown by the rulers of the exterminated regime regarding the homeland’s rights and resources.”82 The result of Qassim’s initiative was that, from September 10 to 14, 1960, representatives from the largest oil exporting countries converged on Baghdad: Kuwait, led by Sayed Omar; Iran, led by Fuad Rouhani (soon to be named the first OPEC Secretary General); Iraq, led by Tala’at Al-Shaibani; Saudi Arabia, led by Tariki, accompanied by Hendryx who had a significant role in the discussion; and Venezuela, led by Pérez Alfonzo. The delegates, only three of which were Petroleum ministers (both Sayed Omar and Rouhani were not) arrived with somewhat divergent, if not diametrically opposed, interests. Tariki had to somewhat drag the House of Saud along in this adventure: the royal family’s goal to further exploit the country’s enormous petroleum reserves relied entirely on the support of the concessionary companies. Venezuela, a producer with relatively high production 81  Ibidem. 82  Archivio Storico ENI (ASE), Relazioni Internazionali, Busta 127, Reasons Justifying law n.80 of 1961 Defining the Exploitation Districts for the Oil Companies.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

120

The Rise and Fall of OPEC in the Twentieth Century

costs (compared to the Middle East that is), was the world’s largest exporter and, as such, the most inclined to control global production in exchange for higher and more stable prices. Iraq, as we have seen, needed support for in its battle against the IPC consortium and aspired to marginalize the Arab petroleum congress, ­dominated by Nasser. Iran wanted to achieve parity of production with the largest exporters in the region, not just for economic reasons but also as a boost to its prestige. But the Shah felt his reputation had been damaged by the unilateral price reductions of the Consortium and needed to score points some points with an unstable public opinion (although there was still much hostility within the NIOC and the ministry of Finance against production agreements with the Venezuelans or the Arabs). Kuwait, the largest Gulf exporter in 1960, with overflowing financial reserves and a very small population—albeit one roused by loud calls for nationalization after 1956, amplified significant immigration from Egypt, Jordan, and Palestine—saw participation in this elite exporter’s club also as a way to ­legitimize its call for full independence from Great Britain (Fig. 2.4.). The Baghdad meeting ended with the approval of three resolutions expressing criticism towards the unilateral initiatives of the oil companies on posted prices, while at the same time enumerating a series of objectives.83 These objectives were: to maintain stable prices and bring the posted price back to where it was prior to  the 1960 reductions; to introduce international regulation of production (prorationing)—but softening this point with the caveat that this regulation should “keep in mind the due interests of the consumers” and assure “a fair return on their capital to those investing in the petroleum industry”; to show solidarity with the countries boycotted by the Cartel (the majors) as retribution for their sovereign decisions; and, finally, to establish an entity to be named the Organization of the Petroleum Exporting Countries. Once again, as with the Maadi Pact, Francisco Parra thought these resolutions were rather weak, in that they contained something for the companies (guarantees for their profits), something for consumers (availability of supply), and something for the producers (stability of posted prices). He concluded that “the united needle-workers trade unions of greater Manchester would have produced something with more red blood in it.”84 * * * The five participants to the Baghdad conference would hence remain the “founding members” of the new organization, but the doors to OPEC were to be kept open. Its statute, approved one year later, stated that: “Any other country with a substantial net export of crude petroleum may become a Full Member of the Organization if accepted by all Founder Members.” What “substantial net export” meant in numbers remained unspecified. In 1965 this article was revised to include a clause indicating that new members must have “fundamentally similar interests to those of Member Countries.” The clause was probably introduced to avoid potential 83  OPEC resolutions are identified first by a Roman numeral, the meeting of the Conference at which it was adopted, then by an Arabic numeral, indicating the specific resolution. 84 Parra, Oil Politics, p. 99.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fig. 2.4.  Heads of delegations to the Baghdad meeting of September 1960 from top to bottom: Fuad Rouhani (Iran), Tala’at al Shaibani (Iraq), Ahmed Sayed Omar (Kuwait), Abdallah Al-Tariki (Saudi Arabia), Juan Pablo Pérez Alfonzo (Venezuela). (OPEC Archives).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

122

The Rise and Fall of OPEC in the Twentieth Century

tensions from the admission of countries such as the Soviet Union: a significant exporter whose admission (never even considered by the Soviet Union but encouraged by some including Pérez Alfonzo) would have compromised the political equilibrium of the group.85 Fuad Rouhani in his history of OPEC highlights some of the common traits of the Baghdad participants: (1) the founder members were developing countries, (2) they were large exporters of petroleum, (3) the financing of their development projects and equilibrium of the budgets depended on the revenues of these exports, (4) they were not able to exploit their oil resources without the assistance of foreigners, and accordingly their oil industry was in the hands of the major oil companies, and (5) the agreements that governed the operation of their oil industry were to a large extent similar, and consequently the problems that presented themselves and the disputes that arose between the host countries and the operating companies were often identical.86

Differences among OPEC countries were, in many respects, far more significant than the similarities highlighted by Rouhani. Their inhabitants spoke different languages: Spanish, Farsi, Arabic, and soon also Indonesian, French, and English, as well as a variety of dialects. They worshiped most of the major religious faiths, in their various declinations. While they were all located closer to the Equator than the most industrialized countries (it is actually improper to speak about a Global South in geographical terms), their respective climates were extremely diverse: ­everything from the tropical jungles of Venezuela or Indonesia, to the arid deserts of the Arabian Peninsula, to the mountains of Iran. Their governments shared no common political ideology and their citizens were ruled according to different political and institutional models, anywhere from the liberal democracy of Venezuela, to the authoritarian Socialist regime of Iraq, to the absolute monarchy in Saudi Arabia. They had different (increasingly so) approaches in foreign policy, although in 1960 only Iraq was leaning towards the Soviet Union. There were ­basically no direct economic links between future OPEC members, even among neighboring states in the Gulf that mostly traded with the Commonwealth area, the US, or Europe, more or less that order. No formalized diplomatic network had yet been established among most of the participants. So what linked these governments together was that they were either petrostates (such as Venezuela, Kuwait, or Saudi Arabia) or very close to becoming one. They were sovereign landowners and developing countries that sat on top of some the most productive petroleum reservoirs in the world to this day, forced to deal with each other because of a peculiar relationship with petrocapital and with Nature during the Great Acceleration of the Anthropocene (Fig. 2.5.). 85  The meaning of membership in OPEC has been recently been challenged by the readmission of Indonesia in 2015 even if it was a “net importer” at the time (while the country left again in 2016). The Soviet Union reacted positively to the birth of OPEC considering it: “a new factor in the struggle of the underdeveloped countries against the domination of monopoly capitalism.” Quoted in: Terzian, OPEC, p. 44. 86  Fuad Rouhani, A History of OPEC (New York: Praeger, 1981), p. 82.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 123 Organization of the Petroleum Exporting Countries (OPEC), 1975

Iraq (*1960)

Iran (*1960) Kuwait (*1960)

Algeria (1969)

United Arab Emirates (**1967) Venezuela (*1960) Ecuador (1973)

N W

Libya (1962) Saudi Arabia Qatar (1961) (*1960)

Nigeria (1971)

Indonesia (1962)

Gabon (1975)

Key E

S

(Year joined OPEC) * = Founding member ** = Joined first as Abu Dhabi

Fig. 2.5.  Membership of the Petroleum Exporting Countries (OPEC) in1975.

As an organization OPEC was an international organization of a “functional” type—that is, one focused on cooperation in a specific economic area—along the lines for example of the European Coal and Steel Community (ECSC) established in 1951. It is worth noting that while it would later become commonplace to define OPEC a “cartel,” the organization had none of the attributes of cartel. None of its members directly controlled production. None of its members controlled prices. It was an organization of sovereign countries, created specifically to counterbalance the power of a Cartel of international oil companies that imposed on them a very similar governance of the oil sector. While public opinion in the industrialized world, with consumers pretty satisfied with low petroleum prices, largely ignored what had taken place in Baghdad, the majors were hostile from the moderately or heavily hostile from the beginning. Leo Welch of New Jersey argued that the production controls announced by OPEC were completely different from the prorationing scheme implemented in the United States by the Texas Railroad Commission since the 1930s.87 His comments betrayed fears that the oil companies would find themselves caught in the crossfire of increasing control over production and demand for cheap gasoline from the consumers. He predicted that Iran and Iraq would not be trustworthy partners,

87  FRUS, 1958–1960, Foreign Economic Policy, Vol. IV Memcon, Standard Oil Company (New Jersey) views on the Organization of Petroleum Exporting Countries (OPEC), October 19, 1960, doc.310.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

124

The Rise and Fall of OPEC in the Twentieth Century

given their commitment to significantly increase production, and that the Soviet Union would continue to push oil prices downward: Jersey thinks that progress can be made with the Arabs by taking oil economics. They would argue the Arabs not to go too fast in OPEC without knowing what the consequences may be. The companies can show the Arabs that they have not been hurt by the present concession system or by the recent price cuts; there has been no reduction in national revenues from oil, and increases in world demand should protect governments from future loss of revenues. OPEC on the other hand might hold production back, for example in Iran, Iraq, and Kuwait, without offering certainty of higher prices to compensate for it.88

The widespread opinion in British government circles was that the new ­organization constituted a “potential threat” to the interests of the companies and consumers: “If the Middle East and Venezuela began coordinating their own policies it is anything but clear what type of forces could be used to oppose them.”89 Having said this, very few predicted at the time that the Baghdad meeting would be the beginning of the end of the majors monopoly control over global oil exports. US President Eisenhower dismissed the meeting arguing that: “as far as the Middle Eastern countries in the new Organization were concerned, anyone could break up the Organization by offering five cents more per barrel for the oil of one of the countries.”90 One of the few to register the extent of what had taken place was the radical Harvey O’Connor that we have encountered before: “In all their majesty, these rulers of petroleum [the majors] looked very much like King Canute. The tide of history was not waiting for them.”91 In the Arab world the creation of the new organization was generally greeted as a signal for potential Arab renaissance (I would argue that the organization still keeps its positive aura to this day in the Arab world), at least among those in the know, as demonstrated by this letter to The Economist by the oil expert Omar Kamil Haliq, author in 1958 of the pamphlet A Statement of Arab Oil Objectives: The marginal existence of millions in the Middle East amidst the background of an obsession for industrialization, and of the fantastic affluence of a few irresponsible patricians, explain the insecurity of supplies and prices—not the machinations of the Matteis, the inner fury of the Tarikis, the dumping of the Russians and the monkeying of independents.92

Ashraf Lutfi, a Palestinian advisor to the Kuwaiti government who also became OPEC Secretary-General in 1965, expressed very clearly in 1959 the willingness of

88  Ibidem. 89  Note of an informal meeting held at the Ministry of Power on Thursday, September 29, 1960, in A.L.P. Burdett, ed., OPEC: Origins & Strategy 1947–1973, Vol. 2: 1960–1963 (Cambridge: Archives Editions, 2004). 90  FRUS 1958–1960, Near East Region, Vol. XII, 91. Memorandum of Discussion at the 460th Meeting of the National Security Council, Washington, September 21, 1960. 91  Harvey O’Connor, World Crisis in Oil (New York: Monthly Review Press, 1962), p. 411. 92  In: David Hirst, Oil and Public Opinion in the Middle East (New York: Praeger, 1966), p. 56.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 125 a generation of Arab technocrats to use a key natural resource as a springboard for industrialization and economic independence: Let us be grateful for this [God’s] gift [oil] and show our gratitude by creating a new generation of Arab Oil men capable of developing what is today our national wealth and what will be tomorrow the mainspring of our industrial greatness. Let this ­generation be the nucleus of future generations, the sturdy oak whose branches will spread beyond the confines of oil into other fields of industrial endeavour.93

One of OPEC’s primary objectives, maintaining stable crude oil prices and preventing any further decline, could theoretically also been in the Cartel’s interest. On the other hand, the Cartel could not formally engage OPEC on prices since the oil companies would then be perceived among the consumers as a threat, and would run the risk of losing the privileges they were enjoying, particularly in terms of tax breaks. The strength of international corporations lies precisely in the widespread perception that they are devoid of a clear political and economic agenda, but exist primarily to serve the consumer. In reality the conflict between OPEC and oil majors was structural. The new organization called into question the complicity of the fifty-fifty arrangement (money in exchange for total freedom on the part of the companies), asserting producers’ right to a potentially larger share of petroleum revenues and demanding greater involvement in the management of the petroleum industry. After the Baghdad meeting, the fifty-fifty model was already dead in spirit, if not in letter. For all the moderation of the first OPEC resolutions, this in itself was a groundbreaking result. THE END OF THE FIFTY-FIFTY The five founding members of OPEC met for the second time in Caracas in January 1961. The primary aim of this meeting was to approve the statute and establish the structure of the organization. Venezuela’s President Rómulo Betancourt opened the Caracas meeting by ­reiterating the urgency of common efforts to raise commodities prices. As a vestige of the colonial past, he argued, the concessions system would have to be replaced by a new model based on “service contracts.” Pérez Alfonzo in turn expounded upon the virtues of a global prorationing scheme, not as a way to give the consumers a hard time but to “develop a policy that will in the long run be of benefit to everybody.”94 The Venezuelan Petroleum minister lived up to his growing reputation as a “conservationist”: People talk and exaggerate about production surpluses in relation to demand, overlooking the unquestionable fact that present petroleum reserves in the whole world 93  Ashraf Lutfi, Arab Oil: A Plan for the Future (Beirut: The Middle East Research and Publishing Centre, 1960), Chapter 8. 94 NYUAD Library, Archives and Special Collections (ASC), Giuliano Garavini Collection (GGC), MC-038, Minutes of the Second Meeting of OPEC, Caracas, January 15–21, 1961.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

126

The Rise and Fall of OPEC in the Twentieth Century

will not continue to increase at the same rate; that the discoveries of new important fields in our already much drilled world have become less frequent; and that the meeting of the growing world demand will run into serious problems in the future if a prudent conservation policy is not adopted. Providence has places in trust with us a non-renewable natural resource, life-blood of the modern world, and we would be ignoring our own duty were we not to intervene to avoid it being squandered.95

Discussions on strategy, however, were only the appetizer. And even playing home in Caracas the Venezuelans were not able to convince the other members about the feasibility of introducing production quotas. H.W. Page of New Jersey commented that prorationing was non-starter: “There are 43 oil producing countries in the world and 15 of these are net exporters with the possibility that new producers, as for example Libya and Algeria, will be added at any time. There would be great incentive to speed up development in non-cartel areas and to rearrange supply sources from existing surpluses in such areas.”96 The main course of the meeting consisted in the effort to build OPEC’s bureaucratic apparatus. The resolutions approved in Caracas established three central bodies. The Conference: OPEC’s supreme authority, composed of delegates from all the member states, which would meet at least twice a year and decide on resolutions that were binding for all members on the basis of a unanimous voting. The Secretariat: in charge of the day-to-day administration of the organization, led by a Secretary-General that would rotate every year, and would head of a series of departments (including an Economic commission). Fuad Rouhani was eventually selected as the first Secretary-General for three main reasons: because he was a wellrespected expert also in international law; because Iran had suffered more than the rest of oil exporters during the Mossadegh years (and had good reasons to be ­skeptical of production controls), and finally because Iran came first among the members in alphabetical order.97 The third body was Board of Governors: composed by delegates from each of the OPEC members, appointed for a two-year term, charged with preparing the agenda for the Conference and overseeing the budget and operations of the Secretariat. The official language of the organization would be English. Already in 1960, English was by far the most appropriate working language for officials that spoke Spanish, Arabic, Farsi, or Indonesian as their mother tongues. English had become by then the official language of an industry that had mainly spread to the world from the United States and that was dominated by Anglo-American petrocapital (with the Soviet Union in a marginal position). More than one member would later seek to add to English another official language (there would be for example calls for the use of Arabic or French), but such proposals would always be rejected on the grounds of their cost and impracticability. Since Baghdad had not been deemed acceptable as the permanent seat of the organization by most members (also because of the political instability of the country), the delegates wanted to establish the seat of OPEC in Geneva, and asked 95  Ibidem. 96  Middle East Economic Survey (MEES), February 3, 1961. 97  Eduardo Acosta Hermoso, Análisis Histórico de la OPEC (Mérida: Talleros Gráficos Universitarios, 1969), p. 69.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 127 for diplomatic privileges from the Swiss government. Switzerland was a neutral country that already hosted other international institutions, such as the UN and the GATT, with which a profitable dialogue could be established. The Swiss government, while allowing the organization to establish its office in Geneva, refused to extend diplomatic privileges to OPEC’s officials on the grounds that the ­organization did not include every oil producer and exporter in the world, that it “defended limited economic interests,” and that Switzerland itself was not a member and would not benefit from it.98 Rouhani and the other OPEC delegates were surprised and taken aback by the Swiss attitude. On the other hand, as we now know, Bern was pressured by companies of the majors not to recognize OPEC as an international organization, thus denying it representation in other international organization such as UNCTAD.99 The international recognition of OPEC would have eventually forced the oil companies to recognize it and to negotiate with it while, as argued by a Shell official to Dutch diplomats: “they would very much prefer OPEC not to be built up.”100 The official policy of both American and British majors was “neutral non-recognition”: avoiding contacts and engagement with the organization, while not actively seeking to dismantle it. Only in 1965 would OPEC manage to negotiate a permanent agreement with the Austrian Foreign Minister Bruno Kreisky (who would demonstrated a vivid interest for the politics of Arab world throughout his political career), and eventually established its headquarters in Vienna, a city eager to raise its international profile after having been first stripped of its empire after WWI and then “neutralized” at the beginning the of Cold War. The Austrian government recognized the extraterritoriality of OPEC headquarters, granted immunity to its property, archives, internal communications, and extended to its officials the same privileges and immunities as those enjoyed by diplomats of comparable rank. That very same year, OPEC was also formally recognized as an international organization within the UN. We can thus argue that by 1965 OPEC had formally established its status as an actor in global international diplomacy: its acronym, at the time next to unknown, was soon to become one of the most recognizable among international organizations. * * * According to historian Nathan Citino, the birth of OPEC foreclosed the dreams of a militant pan-Arabism that viewed oil as the economic pillar on which to build the Arab nation.101 There were indeed some tensions between OPEC and the Nasserite Arab Oil Congress. Salman tried to diffuse these tensions by arguing that 98  Diplomatic Documents of Switzerland (DDS), 1948–1972, Note, Organisation des pays exportateurs de pétrole, Novembre 9, 1962. 99 Fabian Trinkler”,The OPEC’s Struggle for International Recognition (1960–1965). How a Denied Seat Agreement in Switzerland Influenced the Early Development of the OPEC”, in Giuliano Garavini and Dag Harald Claes, eds., Handbook of OPEC and the Global Energy Order (London: Routledge, forthcoming). 100  TNA, FO 371/164606, PJE Male, Geneva, April 30, 1962. 101  Nathan Citino, From Arab Nationalism to OPEC: Eisenhower, King Sa’ud, and the Making of U.S–-Saudi Relations (Bloomington: Indiana University Press, 2002).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

128

The Rise and Fall of OPEC in the Twentieth Century

while the Arab congress discussed policy issues, such as oil legislation and common investments in the petrochemical industry, OPEC primarily dealt with global prices. When it came to prices and relations with the majors, large exporting countries had no other choice but to organize their cooperation on a global scale, if they wanted to avoid being played off one against the other. Within OPEC a variety of moderate and more radical positions co-existed side by side. Pérez Alfonzo and Tariki, with Salman’s support, pushed for unilateral measures on prices and taxation, and at the same time supported a global “prorationing” on the model of the Texas Railroad Commission in the US. As Acosta Hermoso, who been part of the Venezuelan delegation to the Cairo congress and had been appointed the first Venezuelan Governor to OPEC, commented: “If the tendency towards significant technical and administrative control is justified in the US for its domestic oil industry, would it not be even more justified if when the industry is entirely in the hands of foreign investors who’s interests are structurally divergent from those of the country that owns petroleum?”102 This group represented the “radical” faction. Tariki continued to participate in the oil congress hosted by the Arab League, eventually coming to embody the public face of Arab oil nationalism. At the second Arab Petroleum Congress in October 1960, while commenting on the international oil price structure, Tariki argued that the ­companies had essentially stolen no less than 5 billion dollars from the producers: one merely had to look at the difference between the Middle East oil prices and those prevailing in the United States. Shell’s observer remarked that the goal of the “red sheikh” seemed to be to kick ARAMCO out of Saudi Arabia, in order to do the same thing later with the companies in Iraq and Kuwait: “He is a fanatical nationalist, whose ultimate aim may be to head a revolt to overthrow the royal house of Saud.”103 Tariki’s performance at the second congress in Cairo drew similar reactions from John McCloy, who we will get to know better as the US “lawyer” of the oil majors: He very pointedly departed from the written text (which he only summarized in presentation) to charge the oil companies with “cheating” the Arabs by hiding facts and their handling of inter-company accounts; tying the Arab governments to a 50% income tax whereas the Venezuelans could change the tax rate; major companies’ mismanagement of oil operations as a contributory cause of the present overproduction for which the “peoples of the underdeveloped countries should not have to pay (through lower revenues).” In his closing comments Tariki drove the point, with enthusiastic Arab response, that the oil companies must cooperate more closely on the day-to-day conduct of the oil operation [. . .] It must be remembered that both Perez Alfonzo and Tariki are fanatics on this ­subject [oil].104 102  He is referring to both the Texas Railroad Commission and the introduction of mandatory import quotas: Acosta Hermoso, Análisis Histórico de la OPEC, p. 49. 103 W.L.F.  Nuttall, Note on the Second Arab Petroleum Congress, Beirut October 1960, Beirut, 22.10.1960, in A.L.P. Burdett, ed., OPEC: Origins & Strategy 1947–1973, Vol. 2: 1960–1963. 104  Amherst College Archives & Special Collections (ACASC), John McCloy Papers, International Oil 1, Note, November 1960.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 129 At the third Arab Petroleum Congress held in late 1963 Tariki, by then not the Saudi Petroleum minister anymore, once again took the center stage arguing that proven reserves in the Middle East were by now of such magnitude that no more outside investment was needed: local governments could take direct control of production through their national companies that would later enter in supply arrangements with international oil companies. He went as far as arguing that Iran should be compensated for the loss of exports it had to endure during the Mossadegh years by allowing it to benefit from the greatest share in the increased demand for Middle East oil. He imagined a system in which international oil prices would be coordinate through the UN system. Observers commented that: “The idea of an Arab Petroleum Congress without Abdullah Tariki is well-nigh unthinkable, and there was an unmistakable sense of anticipation in the crowded hall on Thursday morning as he mounted on the rostrum to deliver his paper.”105 There were equally heated debates over the now recurrent topic of the “sanctity” of concessions agreements. At the end of one of these skirmishes, the chairman of the Kuwait Oil Company declared: “As far as I am concerned, Mr. Hendryx, I’m afraid we don’t live in the same world as you.”106 And yet, while in public the heads of the majors accused OPEC hardliners of ingenuity, radicalism, and naivety, in private they were very worried. Walter Levy, who we encountered earlier as one of the most trusted US government advisors on international oil politics, was summoned by the board of IPC to share his thoughts on the situation in Iraq as well as in the other OPEC countries. Levy reminded IPC managers that the oil price was not determined by the market: there were enormous profits to be reaped in the production phase, in contrast to refining and distribution where competition was much more intense. He also reiterated that global oil production level itself was not determined by market conditions. Finally, he advised that the current fifty-fifty model prevailing in the Middle East was far less advantageous for local governments than the Venezuelan model. Drawing together these three observations, Levy believed a tax increase in the oil exporting states was likely, also taking into consideration the level of taxation of oil products in the industrialized countries. He concluded that for the companies “it was impossible to simply say no to OPEC’s requests.”107 OPEC itself, meanwhile, had commissioned one of its studies on the ­international oil industry to ENI’s research division, headed by professor Giorgio Fuà. Having analyzed the stratospheric returns on investment in the petroleum sector between 1950 and 1960 (four times greater than in other industrial sectors), the ninety-one pages report concluded that: We have shown not only that the rate of profit from production is excessively high from any point of view (even assigning “downstream” operations rates not below the

105  “The Congress Gets Under Way”, in MEES, VII: 1, November 8, 1963. 106  Archives Historiques du Groupe TOTAL (Archives TOTAL), 82ZX818-1/2, The Middle East Research and Publishing Center, Second Arab Petroleum Congress (Octobre 17–22, 1960). 107  Archives TOTAL, 82ZX818-4, Entretien avec M.W. Levy, Décembre 18, 1961.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

130

The Rise and Fall of OPEC in the Twentieth Century

norm), but also that the petroleum industry has enjoyed exceptionally favorable circumstances for the accumulation of profits.108

Both the majors and the “independents” were thus well aware of the extravagance of oil profits in the Middle East, at least in private. The time seemed right for OPEC to take a bite out of these profits. * * * The first obstacle in the way of any immediate OPEC action were the tensions provoked by the independence of Kuwait, granted by Great Britain in June 1961. By the end of the 1950s, the tiny city-state already boosted one of the highest per capita incomes in the world, had developed the foundations of a modern welfare state, and attracted immigrants from all over the Arab world. Upon independence, the small Gulf state approved a new Constitution that established an hereditary constitutional monarchy, coupled with the creation of a parliamentary Assembly that would constitute a potential thorn in the side of the reigning Al-Sabah dynasty. Kuwait’s minister for Foreign affairs had outspoken nationalist tendencies. The sovereignty of Kuwait, initially safeguarded by the British military, was soon also recognized by the rest of Arab countries - including Saudi Arabia that even sent troops as protect it. Kuwait’s independence was perceived by Iraq, however, as a demonstration of the British drive to foment division in the Arab world by encouraging the creation of small subaltern states that would be forced to rely on London’s political and economic authority. The Iraqi ambassador to the United Nations, having just heard the news of Kuwaiti independence, remarked: Kuwait is not more than a small coastal town on the Gulf. There is not and has never been a country of a national entity called Kuwait, never in history. It is only a town surrounded by barren desert which is inhabited by nomads who roam the deserts stretching from the Euphrates in south central Iraq to the Nejd in the heart of the Arabian peninsula. It has a population of 206,473 according to the 1957 census, of whom more than three-quarters reside in the town of Kuwait. Of these, the sheiks considered only 30,000 as citizens of Kuwait. So here we have a situation whereby a small town with none of the historical and legal prerequisites of statehood is composed, according to its de facto ruler, of 85 per cent of foreigners and only 15 per cent citizens, and we are now called upon to elevate that town to the dignity of national statehood.109

In protest against Britain’s decision, Iraq sat out subsequent OPEC conferences— although it avoided exerting its veto on any of the resolutions adopted—until 1963 when Qassim was shot dead and displayed on television by the authors of yet another coup d’état. With the removal of Qassim the new Iraqi government recognized both Kuwait’s independence and its admission to the Arab League. 108  ASE, Estero, Busta 441, The Profitability of Integrated Operations of International Oil Companies, January 1962. 109  Adnan Pachachi, Iraq’s Voice at the United Nations, 1959–1969: a Personal Record (London: Quartet Books, 1991), p. 344.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 131 Another obstacle in OPEC’s way was Tariki’s ouster from the Saudi government. In March 1962, using King Saud’s health problems as a pretext, Faisal returned to power and forced Tariki—who had denounced the corruption in Faisal’s entourage and was known to be close to the “Free Princes” movement—to hand in his resignation from the Petroleum ministry. The “red sheikh” would eventually retreat to Beirut, from where he would continue to proclaim himself the voice of Arab oil and co-found (with Nicholas Sarkis) a research center on petroleum issues, ­publishing a journal called Arab Oil and Gas. Tariki’s new mission from this point forward would become that of advising Arab governments, as well as to encourage Arab public opinion to ask for direct Arab control over their own natural resources. Exiled by Faisal along with Tariki, Prince Talal also left Saudi Arabia for Nasser’s Egypt. Faisal, meanwhile, reclaimed full control over the Saudi state. In 1964 he would be formally proclaimed King in his brother’s place (in January 1965 Saud, after three months under house arrest, left the country) and set out to promote several reforms that included the abolition of slavery, still practiced in the Gulf, a reform of the judiciary and of the educational and health systems, but also the strengthening of the absolute power of the monarch.110 In 1962 a national oil company called PETROMIN was created, and a College of Petroleum and Minerals based in Dhahran began training Saudis to managerial positions. Some of these initiatives followed closely in the footsteps of Tariki’s efforts. In foreign policy, on the other hand, Saudi Arabia continued to distance itself further from the Arab nationalists and to pursue a moderate and openly anti-Nasserite stance symbolized by the war against the Yemen Arab Republic and by the launching in 1962 of the Muslim World League. This strategy was still quite unpopular in a country whose inhabitants retained a deep mistrust towards Great Britain but also towards the United States, and where the pan-Arab ideal continued to exert a powerful fascination. * * * Despite these tensions, and despite the divergent priorities of its founding members, OPEC nevertheless managed to take several important decisions at the fourth meeting of the Conference, held in Geneva in April 1962. It formally welcomed as new members Libya, an emerging oil producer about which more will be said in the next chapter, and Indonesia, its only Asian member, less significant for its petroleum exports than for its high profile on the i­ nternational stage, due to president Sukarno’s activism. At the beginning of the twentieth century, the Dutch East Indies had been one of the major oil exporting regions in the world. By the end of the 1950s, however, with its output of 407,000 barrels per day—compared to Venezuela’s 3 million—the island nation occupied a relatively marginal position. Indonesia’s weakness as an exporter was heightened by the fact that, while its landmass was distributed across some 17,000 islands, the country boasted a population of approximately 90 million people, in comparison with 110  Bruce Riedel, Kings and Presidents. Saudi Arabia and the United States since FDR (Washington: The Brookings Institution, 2018), pp. 27–57.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

132

The Rise and Fall of OPEC in the Twentieth Century

Venezuela’s 10 million. Domestic consumption, necessarily coming at the expense of exports, thus possessed enormous potential. In 1949 the Dutch, having fought to prevent Indonesia’s independence, and while continuing to finance both ­separatist movements and the Islamic opposition to the republican government, were forced to cede power to Sukarno. Although West Papua could not yet be included in the new state, the Republic of Indonesia had been proclaimed on August 15, 1950. The new Indonesian government sought to create a unified secular state and a model of democracy distinct from the one prevailing in the West. It promoted its own brand of internationalism that rejected the binary logic of the Cold War. At the same time it worked to establish a socialist economy, an objective pursued by both of the country’s two largest and most deeply rooted political parties, the Indonesian National Party (PNI) led by Sukarno and the Communist Party of Indonesia (PKI). The modernization and industrialization of a newly independent Indonesia required significant investment, but was immediately hampered after the Korean War by a reduction in commodities prices, as well as by the need to repay debts owed to the Dutch.111 The subsequent struggle against Dutch economic interests left the Indonesian oil industry on shaky ground in the 1950s. Royal Dutch Shell (which had conveniently eliminated any reference to its colonial past by simply rebranding itself as Shell) and CALTEX were its lar­ roducers, operating under the standard fifty-fifty revenue sharing agreement. gest p But they invested little in Indonesia since their concessions were being challenged, their exemption from import duties was questioned, and since the Indonesian government had set controls on capital movement. In 1957, the government decided to nationalize a large number of foreign assets in the name of economic independence: Sukarno was heading down the road of “guided democracy.” The Indonesian constitution of 1945, and in particular article 33, proclaimed that every strategic sector of the economy and every resource capable of improving living conditions for the majority of citizens, including water and other natural resources, should be under the direct state control: “The land, the waters and the natural resources within shall be under the powers of the State and shall be used to the greatest benefit of the people.” This general statement—hard to reconcile with oil concessions—was given pragmatic content with the oil and gas law of October 1960. Sukarno needed the oil sector to help finance the huge public deficit and the government’s vast investment program in infrastructure and military expenditures. The new oil law was embedded in the 1963 Tokyo agreements with the oil ­companies that included the end of concession. These were substituted by service contracts of twenty years’ duration. The new model was based on: increasing reliance on Indonesian staff, sales and distribution in Indonesia to be delegated the Indonesian state company, the creation of an Indonesian refining industry, and a 60:40 revenue split in favor of the state to be calculated on realized prices.112 The idea was to eliminate “concessions” through a legal formula that would 111  Adrian Vickers, A History of Modern Indonesia (Cambridge: Cambridge University Press, 2013). 112  Alex Hunter, “The Indonesian Oil Industry”, in Australian Economic Papers, 4:1, June 1966, pp. 59–106.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

OPEC 133 s­imultaneously guarantee state control and foreign investment.113 Whatever the legal nature of the agreements, by the beginning of the 1960s the Indonesian government guaranteed the oil companies more or less the same profits as their counterparts in the Middle East, but it was in a much stronger position when it came to the management of the oil industry.114 In Geneva, OPEC produced three binding resolutions and a thirteen-page explanatory memo to go with them.115 With Resolution IV.32, OPEC called for posted prices to return to levels prior to their reduction in August 1960. The memo explained that the prices of manufactured goods had increased steadily—the price index rose from 100 in 1953 to 107 in 1960—while commodities prices were constantly in decline so that: “It is no longer possible to live in peace in a world where the rich are getting richer and the poor poorer. The problems of decreasing export values for the underdeveloped countries is not peculiar to petroleum.”116 An increase in the price of crude oil was all the more legitimate since taxes on petroleum products in the consumer countries moved up in such a way that low crude prices were not even being passed on to consumers. Resolution IV.33 established the principle of “royalty expensing.” This implied that royalties (in the Middle East they were set at 12.5 percent of the posted price) could no longer be included within the 50 percent revenue share owed to local governments. The royalty would instead have to be deducted, as any other production cost, before calculating revenues. The royalty could not be considered a normal tax on revenues because it did not depend on profits. Rather, it represented a compensation paid to the landowner by the lessee in exchange for possibility of extracting a non-renewable natural resource. The explanatory memorandum pointed out that in the United States the companies paid a royalty of 12.5 percent to the private landowner, and this was unrelated to the taxes then eventually owed to the state. The only difference with the US was that in the Middle East—as in the rest of the world—the landowner was the state, which would come to benefit both from the royalty as well as from the general tax. The memo also noted that in Venezuela, where the royalty was set at 16.67 percent, this was considered an operating cost, and was paid before taxes. Under the system then in prevailing in the Middle East, which included royalty in the fifty-fifty profit share, royalties were basically invisible, and thus devoid of any meaning. The final measure, Resolution IV.34, requested the elimination of “marketing allowances”: a cost that the companies subtracted from their overall revenue, justifying this practice as a contribution to marketing discounts in order to compete in consuming countries. OPEC argued that the marketing costs should not come out of the producers’ share, but should rather be borne entirely by the companies themselves.

113  Khon Cho Oon, The Politics of Oil in Indonesia: Foreign Company–Host Government Relations (Cambridge: Cambridge University Press, 1986), pp. 40–43. 114  Sevinc Carlson, Indonesia’s Oil (Boulder: Westview Press, 1976), pp. 7–24. 115  ASE, F 62, Explanatory Memorandum on the OPEC Resolutions. 116  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

134

The Rise and Fall of OPEC in the Twentieth Century

The three resolutions, if promptly applied, would have implied a transfer of resources from the companies to the local governments. Such a transfer of resources would have been all the more significant at a time of declining market prices. What conclusions might one draw from the fourth meeting of the OPEC Conference, then? The first thing to note is that the OPEC members avoided adopting any unilateral measures on taxation, but trusted in the process of n ­ egotiation with the oil companies and in the power of their arguments. Moderation had prevailed over radicalism. Negotiation over legislation. OPEC countries did not follow the examples set before by Venezuela and Indonesia, nor had they behaved as Tariki would have liked: as sovereign states legislating on a domestic matter such as taxation. The other observation is that any change in the posted prices, to push them back in line with the prices prevailing in the US or to the levels prevailing before 1960, would have implied decision-making power by producers either over prices or over output. The nature of the concessions system in the Middle East prevented the local governments from taking binding decisions on prices (as well as on taxation), while no agreement had been reached on a common production policy mainly pushed by Venezuela. As remarked by Parra, Pérez Alfonzo “was always driven by unrealistic fears of premature depletion” that were absent then in other OPEC countries.117 Ultimately, the decisions on royalty expensing and elimination of marketing allowances were the proof that the ambition of the Gulf producers seemed to lie more in increasing their take on each crude barrel (a higher percentage of the posted price), rather than attempting to influence market prices for oil. The deal with the Venezuelans was that only after having negotiated marketing allowances and royalty expensing would OPEC start dealing with the prorationing issue. Moderate as they were, and implying negotiation rather than legislation, the three resolutions of 1962 definitively confirmed, even from a theoretical point of view, the end of the fifty-fifty model born in 1948. The opposition to any future possible reduction in “posted prices” (in an situation of declining market prices), combined with the royalty expensing resolution, meant that the share of net ­revenues for the companies would certainly fall below 50 percent. The resolution also demonstrated the advantage of being able to compare the different fiscal regimes and legislations prevailing in oil exporting countries. From 1960 onwards it would be increasingly difficult for the majors to set the posted prices and thus their profit margins, but they would not let go of their massive returns on investment without putting up a very serious fight.

117 Parra, Oil Politics, p. 92.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

3 The Consumer’s Decade After all, Iran had to become another United States or another European country, another England.1 Khodad Farmanfarmaian on the “White Revolution,” 1982 If the 1950s have been called the “Golden Years of the Oil Companies”, the 1960s could equally be called the “Golden Years of the Oil Consumers.”2 Christopher Tugendhat

J. Paul Getty, the son of a small oil producer, ended up heading one of the large US oil independents. In his memoirs, he describes a car trip from Paris to the Neutral Zone between Kuwait and Saudi Arabia. He had time to admire the monuments, the changing landscape and the local customs: on the long drive from France to the Neutral Zone—a trip since repeated with identical results—served to emphasize again what my travels to various parts of the world have always impressed upon me—namely that most people are not particularly “for” or “anti” any political philosophy or belief. All they want and care about is achieving a better life for themselves and their children. They want food and clothing and shelter, and they long for the comforts and luxuries of life which the vast majority of Americans take for granted.3

Getty was an oil baron, a lover of the good life and an art collector. He was the embodiment of the, increasingly challenged, 1960s optimism. Global oil production grew by 80 percent during the decade as OPEC countries, along with new oil-producing regions, rushed in to pump out and sell as much oil as possible. Consumers in the industrialized countries massively increased demand for ­petroleum, while at the same time they were also enjoying decreasing oil prices. An old artisan, from my hometown Rome, recalled for me that, not even in his twenties, he made a large sofa for a bourgeois family at the beginning of the 1960s. After getting paid, he went straight to the nearest FIAT car dealer having earned half the money he needed to buy his first FIAT Cinquecento. Salaries and opportunities in industrialized countries were on the rise. After the US, also Japan and several European countries had transitioned to mass car ownership: by 1970 there were 1  Quoted in: April R. Summitt, “For a White Revolution: John F. Kennedy and the Shah of Iran”, in Middle East Journal, 58:4, 2004, pp. 560–75. 2  Christopher Tugendhat, Oil: The Biggest Business (New York: G.P. Putnam’s Sons, 1968), p. 150. 3  J. Paul Getty, My Life and Fortunes (London: George Allen & Unwin, 1964), p. 253.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

136

The Rise and Fall of OPEC in the Twentieth Century

11.5 million cars in UK, 12 million in France and 10 million in Italy.4 Gasoline prices were not an issue. For the first few years after its creation, OPEC appeared incapable of making a visible impact on an international distribution of wealth that penalized raw ­materials producers. Within OPEC, output maximization took precedence over gaining control of the petroleum industry, over the fight for higher oil prices and over deliberate efforts to preserve the natural resource for the future generations. Only Venezuela, Iraq, and Indonesia (albeit for different reasons) tried to resist this trend at prioritizing output. In fact, for all its difficulties, OPEC had already begun to chip away significantly at the power of the oil majors. By 1968, with the approval of OPEC’s Petroleum Policy Statement, the era of passivity in the petrostates’ efforts to control the petroleum industry was over, and a new era was about to begin. P RO D U C E R S A N D C O N S U M E R S Development was the hashtag of the 1960s.5 The Kennedy administration hoped to achieve it through spreading its “modernization” theory. The Soviet Union, specially after Leonid Brezhnev’s ascent in 1964, aimed at direct state intervention into heavy industry. Most international organizations during the 1960s pointed to development as their key target. The Organization for Economic Co-operation and Development (OECD) was created in 1961 to help spread the gospel of development around the world. The countries that founded it, primarily industrialized Western nations, promised to contribute financial resources in the form of “development aid” to promote the new religion globally. The United Nations did not want to be left behind. That same year, the UN proclaimed the 1960s as its first Development Decade, with the goal of helping all countries in the world to achieve an average GDP growth of at least 5 percent per year. In 1960 the International Bank for Reconstruction and Development (IBRD) created the International Development Association (IDA), and shifted its focus from financing industrialized countries to becoming the World Bank we know today, primarily operating in the developing countries. As we have seen before, the power of Prebisch’s theory of “unequal exchange”, increasing popular during the 1960s, was that it made a neat split between consumers and producers of raw materials or, in geographical terms, between the Global North and the Global South. Development, the dogma of the 1960s, according to the unequal exchange theory, would not come as a concession from the rich countries, but had to be achieved through a structural change in favor of raw material producers. In 1961, during the first meeting of the Non-Aligned Movement, the Indonesian President Sukarno proclaimed the Third World’s aim 4 Pirani, Burning Up, p. 85. 5  A few recent volumes include: Sara Lorenzini, Global Development. A Cold War History (Princeton: Princeton University Press, 2019); Stephen  J.  Macekura and Erez Manela (eds.), The Development Century: A Global History (Cambridge: Cambridge University Press, 2018); Corinna  R.  Unger, International Development: A Postwar History (London: Bloomsbury, 2018).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

137

to economic independence, but he also spoke of cooperation with the world’s wealthiest nations: Ours is a revolution of rising demands. Emergent nations demand not only independence and non-interference. They demand goods, equipment, the wherewithal to build their own industries. Do not fear us as competitors, welcome us as emancipated partners. Together we can build an affluent world with a boundless future before it.6

In 1963, countries of the Third World, meeting under the auspices of the UN as the Group of 77 (G77), had pushed for the creation of the United Nations Conference for Trade and Development (UNCTAD), which would convene its first meeting in 1964. The primary goal of this new body, headquartered in Geneva, was to come up with a viable alternative to the policies of international economic institutions such as the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT). UNCTAD’s motto, the brainchild of its first Secretary General Prebisch, said it all: “Trade not aid”. Countries that relied on the exports of raw materials should demand higher prices for such c­ ommodities, while at the same time they should benefit from preferential access for their own manufactured goods into the markets of the industrialized countries. There was no point in talking about “development aid” if not within the context of such structural change. UNCTAD’s program was not a blueprint for a global revolution, but a platform for trade reform.7 Oil exporting countries would strongly support UNCTAD’s reformism: support cost nothing, could help build precious diplomatic alliances and, if UNCTAD finally managed to achieve something of consequence on the price of raw materials, it would certainly do no harm to the exporters of the most valuable raw material on the planet. Venezuela, in particular, had repeatedly and consistently asked OPEC to fight for higher market prices for oil (at the beginning with little success, as shall see). Pérez-Guerrero, Venezuela’s Petroleum minister after Pérez Alfonzo, was named as the second UNCTAD Secretary General in 1967, following the resignation of a disillusioned Raúl Prebisch. The Venezuelan diplomat and politician had perfected his Arabic working for the UN both in Egypt and in Tunisia between 1953 and 1958, and was ideally placed to link UNCTAD and petrostates closer together. While Pérez-Guerrero was assuming his new position, the first Conference of the G77 countries met in Algiers—Algeria would join OPEC shortly thereafter—and produced the group’s first (and only) Programme of Action, otherwise known as the Charter of Algiers. OPEC, still an acronym largely unknown to the broader public in the West, had already gained significant recognition in Third World diplomacy, and its members had acquired a prominent role within UNCTAD 1967. The United Nations had also sparked another debate of terrible consequence to OPEC countries. The UN’s first resolution on the “Permanent sovereignty over 6 Department of Information, Republic of Indonesia, Address by President Sukarno before the Belgrade summit conference of the Non-Aligned countries on 1st September 1961. 7  Plans for a global revolution of the colored nations and for a clean cultural and political break with the colonial masters were moribund by the middle of the 1960s. The Tricontinental conference in Havana, Cuba, in 1966 would seal the fate of the global anti-imperialist revolution in the 1960s.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

138

The Rise and Fall of OPEC in the Twentieth Century

natural resources” (PSNR) had been approved in 1952, as we have seen, in the wake of the international controversy over the nationalization of the Iranian oil industry. While relatively anodyne, the resolution had nevertheless been passed in the face of considerable opposition from Great Britain, the United States, South Africa, and New Zealand. In 1958, the UN had created a Human Rights commission to further investigate the issue. Then, on December 14, 1962, it adopted another resolution on permanent sovereignty reiterating that considerations of public utility, security, and national interest should prevail over private interests (foreign or domestic): any government could nationalize its own natural resources so long as it offered “adequate compensation”. Commenting at the margins of the debate over this UN resolution, Herman J. Schmidt, Vice President of MOBIL, remarked bitterly that after centuries of looking for a legal principle to ensure the peaceful coexistence of nations (that is, free trade and private commercial law), the UN resolution promised “a kind of return to the law of the jungle.”8 At the end 1966, the scope of the UN resolution on permanent sovereignty was further broadened: foreign companies exploiting natural resources should allow local governments to participate directly to the management of their own natural resources. Because the human rights language has primarily been used after the 1980s to refer to individual rights (freedom of speech, religion, gender, and race equality, etc.); it takes some degree of imagination to appreciate the spirit of an era in which the focus was rather on collective rights as a premise to the real enjoyment also of individual ones.9 OPEC countries, most of which were guided by authoritarian governments, were obviously keen to place collective rights well ahead of individual rights. This partly explains why the first UN International Conference on Human Rights was held in the most improbable of places, at the invitation of the most unlikely of hosts, and during the most interesting of times (May 1968). The conference took place in Tehran, under the benevolent gaze of the Shah. Princess Ashraf Pahlavi, the Shah’s sister, was the conference’s President. This was the Shah’s take on human rights as presented in his introductory remarks: As I have said repeatedly in the last few years, human rights until not very long ago meant first and foremost the political and juridical equality of individuals. In our day, however, political rights without social rights, justice under law without social justice, and political democracy without economic democracy no longer have any true meaning. Viewed in this light, the real progress of our time consists in breaking daily some more of the chains which privileged minorities have for centuries imposed on the less fortunate masses [. . .]. The gap which is consistently widening between the developing nations and the more privileged ones is one of the most powerful brakes hampering the full realization of human rights.10 8  Cited in Vanessa Ogle, “State Rights Against Private Capital: The ‘New International Economic Order (NIEO)’ and the Struggle Over Aid, Trade, and Foreign Investment, 1962–1981”, Humanity, 5:2 (Summer 2014), pp. 211–34 (quote on p. 217). 9  Samuel Moyn, The Last Utopia: Human Rights in History (Boston: Harvard University Press, 2012), Chapt. 3. 10 Roland Burke, “Some Rights are More Equal than Others: The Third World and the Transformation of Economic and Social Rights”, in Humanity, 3:3, 2016, pp. 427–48.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

139

Independently of how they treated their own citizens, and of their more or less authoritarian style of rule, Third World governments, and petrostates among them, were presenting themselves as an instrument for overcoming economic colonialism (neocolonialism) and for global wealth redistribution. Producers (developing countries and raw material exporters) were increasingly presenting themselves as a coherent unit that could bargain with consumers (industrialized countries and raw materials importers). The reality, as we will explore here in the case of OPEC, was far less straightforward. Until the end of the 1960s OPEC, with most of its members committed to production maximization rather than to direct management of their natural resources, was far from actually embodying a common Third World struggle against neo-colonialism and for the redistribution of wealth. Still, it had created potentially useful bonds and had the kind of visibility and strength that could make such a struggle possible in the future. OPEC’S MODERNIZERS Unlike other Third World countries, oil exporters needed relatively little external funding to embody the “non-communist” route out of poverty, as prescribed in Walt  W.  Rostow’s “non-communist manifesto” and modernization theory.11 In order to modernize, all they needed to do was to let petrocapital do its job of extracting and selling ever-increasing quantities of oil, then invest the revenues in modernization projects. By the middle of the 1960s the radicalism expressed at the beginning of the decade by the governments of Venezuela, Iraq, and Indonesia that were asking for more control of the petroleum industry and for a greater say in the mechanism of price formation, seemed something of the past. Most OPEC members seemed happy to have their incomes shielded by a stable posted price (­basically a guaranteed fiscal revenue per barrel), while presenting themselves as reliable petroleum suppliers and promising export markets for foreign goods. Accounting for this moderate shift by the middle of the 1960s is important to understand the results of the first OPEC negotiations with the oil majors that started off in 1962. * * * Iran and Saudi Arabia were the champions of OPEC’s moderate front. The majors handsomely rewarded the two countries for their cooperation by steadily increasing their production to nearly 4 million barrels per day in 1970—practically ­double their 1965 output. By the beginning of the 1960s it was evident that the Shah had not managed to win the full support of the new educated class emerging from the universities or from the expanding ranks of technocrats and government officials. His trips to European capitals also made him appear aloof and indifferent to the living conditions in the countryside and the needs of the bazaar, an influential segment of the 11 Walt  W.  Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge: Cambridge University Press, 1960).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

140

The Rise and Fall of OPEC in the Twentieth Century

urban population. The bazaar, with its daily bustle of thousands of merchants and customers exchanging goods—and opinions—was not easily seduced by the Western way of life and the pictures of the Shah shopping in Via Veneto, the street of La Dolce Vita in Rome. Confronted domestically by recurrent agitation in the universities and among state employees, and pressured by the Kennedy administration, the Shah promised substantial reforms to win allies in Iran’s rapidly changing society. This “revolution of the Shah and the people,” to use the Shah’s own words, is commonly known as the “White revolution.” Approved via referendum in January 1963, the White revolution represented an effort to counterbalance the twin threats of a “red” revolution on the left and of a “black” counter-revolution driven by the conservative mullahs, on the right.12 The Shah’s program centered on land reform, the privatization of state-run companies, women’s suffrage, the nationalization of forests, the creation of youth groups to fight illiteracy in rural areas (in the vein of Kennedy’s Peace Corps), and greater worker participation in company profits. These initiatives achieved some success in boosting education in the countryside; they expanded health services and stimulated private entrepreneurship. These measures generated unimpressive social gains though, when compared to an economy that grew 7 percent a year between 1963 and 1968.13 During the five year Development plan (1963–9), 81.5 percent of the oil revenues were spent on development and infrastructure projects with little visible direct benefit to the average Iranian.14 While the Shah was able to secure his country a constant increase in the oil rent through increased production, he also managed to alienate a substantial segment of the Shi’ite ulema, which began to contest his regime precisely because of the White revolution. In 1963, Khomeini rose to prominence in the city of Qom by attacking the Shah’s sordid, corrupt administration and its servility to the United States, amply demonstrated according to him by the fact that Iran was a key oil supplier to Israel. As a result, Khomeini was forced into exile in the city of Najaf, in Iraq, from where he would relentlessly work to destabilize the Shah’s regime. By December 1966 the Shah was already turning up the pressure on the Consortium to increase oil production yet again, in order to fuel the ailing effort to modernize the country. As we have seen in the previous chapter Faisal was eventually proclaimed king of Saudi Arabia in 1964. Iran and Saudi Arabia, potentially rivals in their drive to the leading oil exporter in the Middle East, were united in their hostility toward republican Nasserism and its efforts to destabilize the region and to unify the Arab world. For the Saudis this hostility took the form of a proxy conflict in Northern Yemen, where they supported the royalist faction against the local nationalists of

12  Ali M. Ansari, “The Myth of the White Revolution: Mohammed Reza Shah, ‘Modernization’ and the Consolidation of Power”, Middle Eastern Studies, 37:3, 2001, pp. 1–24. 13 Nikki R. Keddie, Modern Iran: Roots and Results of the Revolution (New Haven: Yale University Press, 2006). 14 Touraj Atabaki, “Trade, Not Aid. OPEC and the Restructuring of Iranian Economy in the 1960s”, in G. Garavini and D.H. Claes, eds., Handbook of OPEC and the Global Energy Order.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

141

the Yemen Arab Republic, aided militarily by Egypt (in 1966 there were more than 60,000 Egyptian troops in Yemen). Large segments of the Saudi public were anything but enthused by this foreign policy, particularly given the conspicuous numbers of Palestinian and Yemeni immigrants among the country’s educators and merchant class. Faisal, much like the Shah, sought to reinforce national unity, as well as his own authority, by riding the tiger of “modernization.” The most grueling manual labor, including jobs in the oilfields or in the construction sector, began to be filled primarily by migrant guest workers. Manufacturing remained virtually nonexistent, while there were advances in the service sector. The only television networks belonged to the g­ overnment and ARAMCO. There were two airports, one in Jeddah and the other at Dhahran, so that there was no major direct air transport to the nation’s capital, Riyadh. On the other hand there were strong investments in building the national road network such as Red Sea-Gulf highway that was completed in 1967. While the raising and breeding of camels remained the primary income source for the majority of the population, many Bedouin were forced to migrate to the cities, where they had troubles finding a job and integrating in urban life. The results of the modernization drive, setting aside the moral benefits of the abolition of slavery and of an expanding state bureaucracy that provided well-paid jobs, were rather mixed. The government had still little control over the petroleum industry, and the state bureaucracy was fragmented in fiefdoms controlled by different members of the royal family. Key sectors of the state machinery remained under the supervision of foreign civil servants. (Fig. 3.1.).15 * * * 400 350 300 250 200 150 100 50 0 1948

1953 Kuwait

1958 Iran

Iraq

1963 Saudi Arabia

1968

1973

Logarithmique (Iraq)

Fig. 3.1.  Comparative oil production in the Middle East (1948–73). (Petroleum Press Service).

15 Steffen Hertog, “Shaping the Saudi State: Human Agency’s Shifting Role in Rentier-State Formation”, in International Journal of Middle East Studies, 39:4 (2007), pp. 539–63.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

142

The Rise and Fall of OPEC in the Twentieth Century

Indonesia and Iraq embodied at the beginning of the 1960s a more radical development model, one that flirted with the Soviet Union and aimed at state-driven industrialization. Sukarno and Qassim had each taken power under the banner of anticolonial struggles, and invoked a break in dependence from foreign powers in both political and economic terms. Sukarno’s Guided Democracy aimed at fostering an economy free from “nekolim”: an acronym that blended together the terms neocolonialists, colonialists, and imperialists. Central Jakarta’s landscape was entirely revolutionized by new public spaces and new monuments, such as the “national monument” meant to symbolize a new era of popular unification after the dark ages of colonialism. The plan of creating a brand-new capital city in the jungle of Central Kalimantan, building upon the example of Brazil (Brasilia), would also signal a clean break with the colonial past. The state-run oil companies (there were three, with PERMINA the most important) played a more significant role, also due to the importance of the internal market. Reflecting the centrality of these state-run enterprises, Ibnu Sutowo, an officer in the Indonesian army, would be tabbed to head PERMINA in 1958, and subsequently named the country’s first delegate to OPEC when Indonesia first joined the organization. He would remain the key figure in the country’s oil policy up to the middle of the 1970s, surviving the fall of Sukarno and the subsequent regime change. Sukarno’s anti-imperialist campaign ratcheted up in intensity after 1963, in part as a way of diverting attention away from the dire situation faced by the domestic economy. The campaign led first to the annexation of the last Dutch stronghold in Western Guinea in 1962, and then centered upon opposition to the Federation of Malaysia, which Jakarta viewed as the reincarnation of British imperialism in Southeast Asia. Domestically, it took the form of expropriation of foreign ­companies and import controls, designed to protect Indonesian socialism and demonstrate that the country was capable of “standing on our own two feet.”16 Sukarno strengthened ties with China, evincing Indonesia’s desire to emancipate itself from Western capitalism. In conjunction with his allies in the Indonesian Communist Party (PKI), he announced an agrarian reform that increased the number of farmers from 26,000 to 700,000. By 1964, though, inflation was out of control and the country was unable to present a budget.17 In 1965, after a failed coup attempt blamed on the Indonesian Communists, the army, with the support of conservative Islamists and the urban lumpenproletariat, undertook a campaign to exterminate Communist party members and fellow travelers—or, more simply, any citizens of Chinese descent, who were suspected of constituting a “fifth column” of Red China. This resulted in one of the great mass murders after the Second World War. Estimates number the dead at around 500,000, many of them tortured, others summarily executed. 16  Adrian Vickers, A History of Modern Indonesia (Cambridge: Cambridge University Press, 2013), p. 150. 17  Robert Cribb and Colin Brown, Modern Indonesia: A History Since 1945 (London: Longman, 1995), Chapt. 6.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

143

Sukarno could not prevent the purging of the PKI and in 1966, having failed to impose his ideology of Nasakom (nationalism/religion/communism), was forced to cede power to the military under the leadership of General Suharto. Indonesia, the fifth most populous country in the world and the largest in Southeast Asia, soon reopened its doors to foreign investment and imports and adopted the recipes for economic stabilization prescribed by international economic institutions, in particular those of the US-educated economists known as the “Berkeley Mafia.”18 Suharto gave his brand of modernization the ominous-sounding name the “New Order,” in many ways Indonesia’s version of Iran’s White revolution. In the ­petroleum industry, the events of 1965–6 did not lead to a return to the age of concessions. Sutowo retained Suharto’s support and managed to prevent this from happening. But Indonesia ceased to be part of OPEC’s progressive wing, pushing for unilateral measures against the concessionaires, and became something of a mediator in the struggles among the organization’s most active members. In Iraq, General Qassim was summarily executed in February 1963 as a result of a military coup. His supporters were tracked down and suffered the same fate. Power fell into the hands of Arab nationalists, who were split between the “Ba’athists” (members of the Ba’ath party, who argued for a sui generis form of pan-Arab socialism) and Nasserites (who sought to follow the Egyptian model). Their success came particularly at the expense of the Iraqi Communists, who enjoyed strong support among the Shi’ite population and were banned and persecuted. The divisions of those years were primarily of a social and political nature: relations with Nasser and with the Soviet Union; attitudes towards IPC; the degree of state intervention necessary to achieve a socialist society; the degree of openness towards foreign trade and investment. In my conversations with former Iraqi oil technocrats from that period, I frequently noted a similar response to my questions regarding religious tensions: “at that time I didn’t even know whether I was Sunni or Shi’ite.” The regime change of 1963 was welcomed by the US administration because it was considered a major blow for the Soviet Union in the Middle East.19 There was also some sympathy in Washington toward the new thirty-three-year old Petroleum minister Abdul Aziz Al-Wattari, who had received his PhD in the US. But the US hope in Al-Wattari (who soon intermingled with radical Iraqi technocrats with Socialist inclinations such Khair El Din Haseeb and Adib Al-Jadir) was misguided, both because Wattari could not simply disregard Law n.80, by then a symbol of Iraqi nationalism, and because IPC had no willingness to negotiate and to increase production from Iraq (with the exception of the French company CFP that was “short” in crude). The first Ba’athist government ended in another coup at the end of 1963, that led to the Nasserites taking over.20 18 Bradley  R.  Simpson, Economists with Guns. Authoritarian Development and U.S.-Indonesian Relations, 1960-1968 (Stanford: Stanford University Press 2008). 19  Brandon Wolfe-Hunnicutt, “Embracing Regime Change in Iraq: American Foreign Policy and the 1963 Coup d’état in Baghdad”, in Diplomatic History, 39:1 (2015), pp. 98–125. 20  A guide to the very intricate story of Iraqi oil policy from 1963 to 1968 is: Brandon WolfeHunnicutt, The End of Concessionary Regime: Oil and American Power in Iraq, 1958–1972, PhD Thesis, Stanford University, 2011.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

144

The Rise and Fall of OPEC in the Twentieth Century

The  government’s new strongman, General Arif—the same man who had been jailed by Qassim, and who would remain in power until 1968—started a policy of ­nationalizations and import restrictions that paralleled the increasing role of the state in the Egyptian economy after 1964. An Iraqi National Oil Company (INOC) was created in 1964. In June 1965 Petroleum minister Al-Wattari negotiated a draft agreement to solve the deadlock with IPC. The agreement, at first kept secret, was not very popular with the Iraqi public. It was seen as a capitulation to the petrocapital, because among other things it allowed the IPC to resume producing in lands that had been appropriated by Qassim, particularly the north of Rumaila, where IPC would have majority participation, with INOC as junior partner. Prominent Nasserites declared themselves in opposition to the agreement and resigned from the Cabinet. Tariki openly denounced the “Wattari Agreement” which, in his opinion, only reaffirmed once more that IPC acted as a “state within a state.” Fadhil Chalabi, who was to play a prominent role both in the Iraqi Petroleum ministry and in OPEC between the 1970s and 1980s, considers that the rejection of the Wattari agreement was instead a very big mistake because, in exchange for Rumaila, IPC would have allowed INOC to enter into joint ventures with other European and independent companies in the North of the oilfield, while such agreements and investments were held back due to the ongoing controversy between the Iraqi government and IPC.21 Iraqi’s oil policy seemed to be descending into further chaos which, of course, did not displease the majors one bit. As plainly admitted by BP officials in 1971: We have been able for some years past to look at the big picture and recognize that the paralysis in Iraq served as a useful warning to others not to pass Law 80s, but [we] also kept out of circulation a certain amount of crude oil, which could have a further depressing effect on the market. We were able to use Iraq’s misbehavior as a reason for avoiding investment.22

Blocking the Wattari agreement was apparently the last success of the radicals. By the end of 1965 Arif seemed to have embarked on a more moderate route, opening up to the private sector, blocking further nationalizations and, with the choice of Abdul Rahman Al-Bazzaz as new Petroleum minister, seemed prone to ­compromise with IPC. By the end of 1965 both Indonesia and Iraq, due to internal political changes, were open to compromise with the oil majors so as to increase oil production and attract for foreign investments. Shell had left Indonesia in 1965 due to the political instability and the risk of punitive legislation and nationalization, but it very soon regretted the its decision after Suharto established himself as the new strong man in the country.23

21 Chalabi, Oil Policies, Oil Myths, pp. 79–80. 22  Quoted in Philippe Tristani, “Iraq and the Oil Cold War: A Superpower Struggle and the End of Iraq Petroleum Company, 1958–72”, in E. Bini, F. Romero, G. Garavini, eds., Oil Shock: The 1973 Oil Crisis and its Economic Legacy (London: IB Tauris, 2016), p. 75. 23  S. Howarth, J. Jonker, K.E. Sluyterman, J. L. van Zanden, A History of Royal Dutch Shell. Vol. 2 (Amsterdam/New York: Oxford University Press, 2007), pp. 225–41.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

145

By the middle of the 1960s also the most vigorous nationalist demands in the Arab Gulf sheikdoms had been muted by local rulers. In Qatar, the National Unity Front, established in 1963, asked for a curb on the royal family’s privileges, a reduction of the number of foreign employees, the recognition of labor unions, and better distribution of the oil rent.24 Ruler Al-Thani reacted to three weeks of strikes by imprisoning protesters and exiling the most prominent nationalist figures, while at the same time moderately reducing family allocations. In Kuwait, Abdullah Selim died in 1965 and was replaced by Jaber Al-Ahmed, a ruler much less inclined to compromise with the nationalist opposition and to accept the ­democratic participation in general. The January 1967 elections to the Kuwaiti Assembly, in which the nationalist opposition suffered a staggering defeat, were most probably rigged, and resulted (as we will see) in Kuwait finally accepting a royalty-expensing agreement with the Cartel that it had previously refused in 1964. A 1965 general strike in Bahrain was welcomed with unyielding repression. On the Trucial Coast, the British created a Development Fund in 1965, funded primarily with oil money from Abu Dhabi and entirely managed by British staff, with the objective of investing in infrastructure.25 That same year, the British had managed to prevent the establishment of an office of the Arab League in Sharjah, and replaced its ruler Sheikh Saqr bin Sultan in June 1965, fearful he would have promoted Arab development projects in alternative to those planned by the British.26 In 1970 Britain still provided more than 30 percent of the imports in the lower Gulf States. Petromodernization in the Trucial States was still largely driven by British financial and commercial interests, and responded to British priorities. T H E ROY A LT Y N E G OT I AT I O N S Keeping this background in mind, I will now describe the outcome of the ­negotiations that began in 1962 between the OPEC governments and the oil majors, starting with a couple of preliminary observations. These were not negotiations between states, as was commonly the case for other international negotiations on commodities within the United Nations. These global oil talks pitted OPEC and its members against a select group of oil multinationals. Washington and London consulted with the oil companies through both formal and informal channels, while most of the other governments (and obviously their citizens), had little idea of what was going on, no matter how important petroleum was to their daily lives and to the economy of their countries. In the United States, the John McCloy group (which will figure in prominently later) fostered contacts between the US government and the majors. In the United Kingdom the secret monthly discussions that after 1959 brought together the Foreign Office, the ministry of Power, 24  David, Commins, The Gulf States: a Modern History (London: I.B. Tauris, 2014), pp. 188–9.  25 Kevin G. Fenelon, The United Arab Emirates: An Economic and Social Survey (Harlow: Longman, 1973), pp. 26–7. 26  Matthew McLean, Spatial Transformations and the Emergence of “the National”: the Formation of the United Arab Emirates, 1950–1980, PhD Dissertation, New York University, 2017.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

146

The Rise and Fall of OPEC in the Twentieth Century

and BP and Shell were, unsurprisingly, named “tea parties.”27 Both governments were convinced that companies were doing just fine in defending the consumers’ interests in the face of pressures from petrostates: “There was complete unanimity of view on the attitude which both governments should take towards OPEC. Thus both sides agreed that it would not be to their mutual interest to undertake discussions with OPEC member governments nor with the Organization itself on OPEC matters.”28 Due to US anti-trust legislation, the majors could not formally negotiate ­collectively with OPEC. These companies had closely coordinated their positions on production and prices since the Achnacarry agreement in 1928, they had dealt together with crises such as the nationalization in Iran and the Suez embargo, but more open and formal coordination would have been very suspicious to US authorities and would have been opposed by independent producers and public opinion in general. * * * Oil negotiations began soon after the approval of the resolutions adopted by the fourth OPEC Conference in 1962. One critical question immediately presented itself: who was to participate in these negotiations? OPEC was still not recognized by the majors as an international organization. On the other hand, oil companies themselves claimed they could not negotiate collectively because of US anti-trust laws. The majors had no intention of legitimizing an organization that would allow ­ osition oil producers to wield greater negotiating power. One consequence of their p was that, at the very beginning, the companies of the Iranian Consortium insisted they would only negotiate with Fuad Rouhani, OPEC’s Iranian Secretary-General, as the representative of the Iranian government. In fact, they did not even want to talk directly to Rouhani, but with NIOC’s Abullah Entezam, who would in turn report to Rouhani. Any outcome of the negotiations would thus only be applicable to Iran. At the same time they would negotiate in parallel with the Saudis. In August 1963 OPEC members decided that Rouhani would be the sole negotiator for all the members together. The companies of the Consortium then responded by establishing a triumvirate of negotiators including John Pattinson of BP, Howard Page of New Jersey Standard, and George Parkhurst of SOCAL. OPEC thus achieved its first success simply by bringing the quasi-cartel of the majors out into the open: the “Three Ps,” as the trio was nicknamed in the industry press, were the visible embodiment of the oligopoly. Page later explained this shift in the major’s approach by arguing that Rouhani had the mandate of the Iranians, but “we knew that if we went to another OPEC country to, we would only find Rouhani with a new mandate.”29 27  Jonathan Kuiken, “Striking the Balance: Intervention versus Non-Intervention in Britain’s Oil Policy, 1957–1970”, in Britain and the World, 8:1, 2015, pp. 5–26. 28  FRUS, 1961–1963, vol. XVIII, Near East, Doc. 291, Memorandum From the Deputy Director of the Office of Near Eastern Affairs (Davies) to the Assistant Secretary of State for Near Eastern and South Asian Affairs, Washington, July 5, 1963. 29 Terzian, OPEC, p. 60. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

147

Rouhani, whose diaries have recently been published in Persian, was an honest and intransigent petro-nationalist, a commendable virtue in an industry in which monumental sums are placed in the hands of a relatively narrow elite of technocrats and politicians. Educated in London and Paris, Rouhani was in many respects a vestige of the Mossadegh era, and worked tirelessly to help OPEC gain recognition as an international organization in Geneva—the rejection of this application by the Swiss government came to him as a great humiliation. The Secretary General sought to negotiate on all four 1962 resolutions at the same time, but two of them were almost immediately put on ice. The resolution on “prorationing” was set aside because only Venezuela had both the juridical strength and the political will to regulate production so as to obtain higher market prices. The Shah on the other hand, not only had no intention of limiting Iranian production, but actively sought to re-establish his country as the largest producer in the Middle East (as it had been at the beginning of the century), capable of producing up to one half of all the petroleum extracted in the region all by itself. The r­ esolution demanding the return of posted prices to pre-1959–60 levels was also temporarily (and in the event definitively) set aside. Such an increase of the posted prices seemed unrealistic given the widespread practice of discounts in the prevailing consumer markets, coupled with the above-mentioned unwillingness of OPEC to impose to the majors a “prorationing” scheme. The talks focused then on just two of the 1962 resolutions. First came the ­elimination of the “marketing allowance”: a relatively minor issue in terms of its financial consequences, and one that was solved relatively easily. Then there was the far more thorny issue of the “royalty expensing”. Considering an average price of $2 per barrel for Middle Eastern crude, and a royalty of 12.5 percent, royalty expensing implied an increase of next to 12 cents in the government take per barrel. This would have been a significant transfer of resources from the majors to the host governments. For Venezuela, both issues that were being negotiated were of secondary ­importance. The marketing allowance did not apply because Venezuela calculated taxes on realized prices, while the royalty expensing had already been implemented in Venezuela long before. The Venezuelan government would thus remain on the sidelines, cheering for an OPEC victory and asking it to take strong positions as a biased observer with every interest in an increase in the per-barrel take for Middle Eastern governments. If nothing else, this would help forestall any further reduction in market prices by the oil companies. Was there a possibility for a smooth agreement on the royalties issue? Rouhani would later argue there was no need to engage in such a bitter confrontation: The world markets had to be assured of an uninterrupted supply, on reasonable conditions; the groups that furnished the financial, technical, and other means were entitled to the benefit of fair remuneration; and the producing countries had a right to receive the maximum amount of revenue compatible with the two other principles.30 30  Fuad Rouhani, A History of OPEC (London: Praeger, 1971), p. vi.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

148

The Rise and Fall of OPEC in the Twentieth Century

This meant shaving off some profit per barrel for the companies in favor of local governments. Consumers would have to be guaranteed low prices for petroleum products. The majors would have been assured a stable (in fact increasing) secure supply of Middle Eastern oil for the years to come. The oil companies, on the other hand, considered that any increase in their per barrel payment was unacceptable, particularly in a weak crude oil market. They thus chose the path of obstructionism and conflict. The majors point of view was well encapsulated in a Shell memorandum ­published in the industry press in 1963.31 Shell’s analysts began by noting that the volume of oil transported by sea every year was larger than that of all other ­commodities combined. Petroleum consumption was uniquely important to the economies of the industrialized world. The oil companies were thus being pressed by their home governments to explain why posted prices were standing higher than market prices: parliaments and government officials had the lingering ­suspicion that the companies were accumulating excessive profits in the production phase. On the other hand, Shell’s analysts commented that the companies’ return on investment was on average limited to a very reasonable 20 percent annually. It was difficult to see how these profits could be reduced any further without s­ eriously jeopardizing new investment and thus the stability of future oil supplies. As if that were not enough, the simple fact that taxes were levied on posted prices rather than market prices meant that the oil producing countries were actually already receiving more than 50 percent of the net revenue from every barrel. The memo ended with the usual invocation of the pacta sunt servanda principle: the concessions system could not be modified unilaterally, without provoking a swift and harsh reaction. OPEC chose to return fire in this battle to influence the key politicians in oil consuming countries by producing its own memorandum.32 It argued that the companies had admitted that oil prices were not the result of a natural play of supply and demand, but were in fact already being manipulated unilaterally, even though they represented the most “vital interests of the producer states.” OPEC’s memo then accused Shell’s experts of not knowing their math, for the return on investment for Middle East oil was closer to 50 rather than 20 percent. OPEC argued that there was ample margin for a reduction in the Cartel’s profits, and that the decline in market prices had to be halted: Much has been said recently about realism and prices, but one fact has still to be faced: a truly free pricing mechanism will not, in times of surplus, support low-volume, high-cost production alongside low-cost, abundant production. A free  pricing ­mechanism will pull prices down towards operating costs and rob producing countries of royalties and tax revenues which represent fair compensation for the use and depletion of their natural resources. 31  “Text of Shell Analysis of World Pricing Problems”, Petroleum Intelligence Weekly, September 2, 1963. 32  “Pricing Problems: Further Considerations. OPEC Replies to Shell Memorandum on World Pricing Problems”, Middle East Economic Survey (MEES), vol. VI, n. 45, September 13, 1963.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

149

A bit of propaganda distributed in a 1963 pamphlet titled OPEC and the Consumers used charts and graphics to illustrate how much of the revenue per barrel went to the producers, and how much ended up in the hands of companies or of the governments of the consumer nations. On average, a barrel of petroleum in the OECD cost $11. Of this, some 45.5 percent of its value went into the treasuries of the consumer countries in the form of indirect taxation, while another 6.8 percent went to the same in the form of direct taxes. The oil companies pocketed an ­additional 6.9 percent in profits. This left oil exporters with only 6.7 percent. The moral was clear: a slight increase in revenues for the producer states would only have a minor impact on the final price of petroleum to the consumer. The talks appeared to have reached a dead end when the “Three Ps” presented Rouhani with their final offer at the end of August 1963. They accepted the principle of royalty expensing, but only if the companies would at the same time get a discount of 8.5 cents on posted prices. In practice, the producing governments would gain between 3.5 and 4 cents more on the barrel, instead of the 12.5 cents they called for in their original proposal. At the same time, accepting the offer implied that OPEC would agree not to make any further changes to the concessions agreements. Questioned by a US government official about why the c­ ompanies preferred a discount on the posted price rather than asking a partial royalty expensing, Pankhurst replied that: “if you accepted expensing of part of royalties, the oil company position against expelling this beachhead is shaky.”33 These terms were very hard to digest, also because the discount implied a reduction in posted prices, while one of the reasons why OPEC born is precisely to avoid any further reductions. Rouhani responded firmly to efforts to soften his position by offering direct advantages for his own country: “He could not accept any proposal which was aimed at Iran and would not produce a somewhat similar financial benefit in the other Middle East OPEC countries.”34 During an OPEC coordination meeting in Beirut at the beginning of December 1963, the discussions among the delegates grew heated. Al-Wattari, the Iraqi Petroleum minister, joined his Venezuelan counterpart and Rouhani in opposing any compromise. In the end, the OPEC countries unanimously decided that if the oil companies did not soften their position before the next OPEC Conference, scheduled for the end of the month, OPEC would stop negotiating and start l­ egislating (i.e. it would adopt royalty expensing unilaterally). If the companies then retaliated by cutting posted prices, OPEC governments were prepared to block any production increases in order to force prices upward. The British Foreign Office appeared concerned: “The consequences of a major dispute between the international oil industry and the Middle East are incalculable”(Figs. 3.2.a and 3.2.b).35

33  FRUS, Near East 1962–1963, Doc. 382, Memorandum of Conversation: Near East Development and OPEC, Washington, December 6, 1963. 34  Archives TOTAL, 04AH026-94, Note, OPEC Matters, October 18, 1963. 35  NA, FO 371/172532, Organization of Petroleum Exporting Countries, December 24, 1963.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

150

The Rise and Fall of OPEC in the Twentieth Century

Fig. 3.2a.  Leaflet from OPEC’s PR Department in 1963. (ENI Historical Archives).

Fig. 3.2b.  Leaflet from OPEC’s PR Department in 1963. (ENI Historical Archives).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

151

Then something happened. Some of the links in the chain of OPEC solidarity began to weaken. And Iran turned out to be the weakest link of all. The country was subjected to intense pressure by both the Consortium and the US government. While until the middle of 1963 the Shah seemed open to take unilateral action, also due to the need to placate internal criticism against his subordination to the US interests (including from Khomeini), by the end of the year tensions had eased, while the need to have enough resources to fund the White revolution suggested compromise.36 Rouhani was pushed aside, while key players in the government—Asodallah Alam, the Prime minister (who spoke fluent French and had argued to the Shah that he would “discipline Rouhani”), and the new head of NIOC Reza Fellah (who had substituted Abdullah Entezam in Autumn and was described in OPEC circles as “BP’s delegate to OPEC”) leaked to their own contacts in the Consortium that: “the Prime minister is very concerned by the ­situation and personally would be happy to leave OPEC.”37 Fellah travelled to London for meetings with BP and confided that: The Shah realized that he had been misled by Mr. Rouhani and it came as a surprise to him that OPEC was supposed to have supra-national powers [. . .]. Provided that the Shah could demonstrate to his people that he can get better returns from the oil industry through his own efforts, he was prepared to vote against any sanctions being taken by OPEC. The Shah was also determined that on no account would he permit an interruption in the flow of oil.38

Fellah declared that Iran would be willing to accept a reduction in posted prices if the Consortium was able to guarantee a general increase in state revenues through increased production. In essence, Iran was willing to leave the other OPEC countries in the cold, particularly its Arab neighbors, in exchange for financial support to  feed its White revolution. Iran was promised several things in exchange for its change in attitude: a reduction in the marketing allowance; “neutrality” for its income in the case of a decline in posted prices; an increase in Iranian production of up to 10 percent annually; American and international financing for development projects. As the Consortium’s Maurice Bridgeman, a personal friend of the Shah, remarked, after that Tariki and Pérez Alfonzo were not in charge of the petroleum sector of their own countries anymore: “With them had gone the driving force for the destruction of the international oil industry as it is now constituted.”39 This was the backdrop for the fifth meeting of the OPEC Conference in Riyadh, which opened on December 26, 1963. In a preparatory meeting with Rouhani the 36  The complex internal debate within the Iranian government over how to deal with the “royalty expensing” negotiations is described in great detail in Rouhani’s diaries: Gholamreza Tadjbakash and Farrokh Najmabadi (eds.), The Diaries of Fuad Rouhani: First Secretary General of the Organization of the Petroleum Exporting Countries (OPEC) (Washington: Foundation for Iranian Studies, 2013) (In Farsi). 37  Archives TOTAL, 04AH026-94, A.T. Lamb, December 10, 1963. 38 A.T.  Lamb, OPEC, December 17, 1963 in A.L.P.  Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 3: 1963–1966 (Cambridge: Archives Editions, 2004). 39  James Bamberg, British Petroleum and Global Oil, 1950–1975. The Challenge of Nationalism, Part II of the History of British Petroleum (Cambridge: Cambridge University Press, 2000), p. 155.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

152

The Rise and Fall of OPEC in the Twentieth Century

Shah told him with half a smile that “probably they will tell us that we are traitors.”40 The Venezuelan delegation was forced to spend Christmas Day on the plane, and the rest of their holiday immersed in petroleum talks. In the dark about the secret negotiations going on between Iran and the Consortium, Pérez Alfonzo accompanied the new Venezuelan Petroleum minister, Pérez Guerrero, so that they could witness together the organization’s first unilateral action. Witnessing OPEC’s affirmation on the international scene would have certainly been worth spending Christmas away for. When Rouhani brought to him the sad news of the new Iranian position, Wattari apparently broke down in tears asking why Iran had changed its position from just a few weeks before, and how he was to explain OPEC’s impasse to his own government.41 The talks immediately moved in a direction that the Venezuelans failed to anticipate. Pérez Alfonzo made a last-ditch effort to appeal to the conscience of the other delegates: He felt that the acceptance of the Companies’ offer would be tantamount to bringing about the dissolution of the Organization, not only because the sum offered by the Companies was inadequate, but specially because the underlying intention of the Companies was to incapacitate the Organization from pursuing its price policy. OPEC, in his opinion, was not meant to be merely an establishment for technical or commercial cooperation; it was an organization with a fundamental objective. If other Members felt that they could postpone action on this basis, this was certainly not the attitude of the Government of Venezuela, which considered the present position as hopeless. Venezuela had obtained from the companies all that is considered to be right, through recourse to legislation and the exercise of its sovereignty. The help that it expected from the Middle Eastern countries consisted of taking steps which would strengthen the price of crude oil. Such help not having so far materialized, the Venezuelan people were fast becoming impatient. If the Organization was unwilling or unable to more in this all-important direction, there would be no point in Venezuela remaining a member.42

The Iranian delegation responded by arguing that a unilateral act by OPEC would only result in an embargo on its exports. Zaki Yamani, the new Saudi Petroleum minister—who would remain in that post for nearly thirty years until 1986, but then was still a junior in international meetings—prudently reminded the Venezuelans that it was already quite an achievement to have successfully blocked any further decline in posted prices. He was subjected to verbal abuse by Wattari and, after losing his temper for one of the few times in his career, left the meeting room.43 But Saudi Arabia was still open to compromise with the hardliners, as 40  Tadjbakash and Najmabadi (eds.), The Diaries of Fuad Rouhani, p. 194. 41  Tadjbakash and Najmabadi (eds.), The Diaries of Fuad Rouhani, p. 213. 42  NYUAD Library, ASC, GGC, MC-038, Proceedings of the Second Session of the Fifth Conference, Riyadh, Saudi Arabia, December 25–31, 1963. 43  “I have only twice walked out of an OPEC meeting. The first time was in 1963 when the Iraq’s oil minister said that Saudi Arabia was the agent of the oil companies. I asked for an apology and wanted his comments to be removed from the minutes. He refused, so I left. We then refused to attend any other further OPEC meeting at the ministerial level. We sent someone as representative just to sit and listen, but I wouldn’t appear. In the end the Iraqis simply had to give in and apologize. And their comments were removed from the records.” Robinson, Yamani, p. 284.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

153

demonstrated by another member of the Saudi delegation Hisham Nazer. When asked by the press at the margins of the Conference about royalty expensing he argued: Just as the companies do not count their contribution of know-how and capital as part of their share of the profits but deduct its value before hand—which indeed is as it should be—so the states which own the oil must also have the right to deduct the value of their contribution before-hand rather than counting it as part of their share of profits.44

The final Declaration of the Conference made no reference to unilateral action. Instead, it named a three-man committee to resume talks: Rouhani was n ­ ominated, alongside the Iraqi Abdul Rahman Bazzaz, and the Saudi Hisham Nazer. In other words, while Rouhani had not been completely sidelined, he had been given an “escort.” His time as OPEC’s leading negotiator had come to an end. * * * The following year, 1964, was probably one of the darkest in OPEC’s twentiethcentury history, on of its worst crisis until the “counter-shock” of 1985–6. The organization, born in a burst of optimism and nationalist sentiment, was very nearly disbanded. The majors had successfully managed to capitalize on the priority of output maximization both for Iran and Saudi Arabia, as well as the on the deepening political and economic ties between the United States and its key allies in the Middle East. In June 1964, the sixth Conference meeting convened in Geneva. Just before the meeting, Reza Fallah received a new offer from the Consortium that, in exchange for the acceptance of royalty expensing, called for a discount of 8.5 percent on posted prices for the first year, with the new provision (compared to the previous offer) that this discount would decrease to 7.5 percent in 1965, and 6.5 percent in 1966 (Table 3.1.). By this point, the majority of OPEC countries were inclined to accept the offer. Like the precious offer also this one implied a series of “non financial” consequences including: the refusal to negotiate on the other resolutions, acceptance by OPEC countries of international arbitration for legal disputes, and confirmation of the concessions system. Amir-Abbas Hoveyda, then Iran’s Finance minister, suggested in Geneva that each government should now talk with the majors individually. He argued that the negotiations led by OPEC had been a failure: In his opinion, it was the Governments that counted in the Organization. He said that the contracts differed in each country. Therefore, he said he could not be a part to any committee. He said the Conference would decide its course, and Iran would decide its. He said that OPEC was not going to sign a contract for Iran and OPEC itself was not a Government.45 44  Stephen Deguid, Technocrats, Politics and Planning: The Formulation of Arab Oil Policy, 1957–1967, PhD Thesis, Simon Fraser University, p. 166. 45  NYUAD Library, ASC, GGC, MC-038, Minutes of Sixth Conference of OPEC, Geneva, July 6–14, 1964.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

154

The Rise and Fall of OPEC in the Twentieth Century

Table 3.1.  Outcome of the royalty-expensing negotiations in 1964. Present Basis Posted price. Costs . . .

New Basis $1.80 20

Posted price Costs . . .

$1.80; less 8½% 20 …

  

  

Royalty . . .

Taxable Income . . .

1.60

  

Tax at 50 per cent Less Royalty.

80   23

Taxable income . . . Tax at 50% Total government income

Net tax payable . . .

57

per barrel (royalty plus tax).

Total government 80 cts. income per barrel Ostensible share of taxable profits: 50 per cent.

23 …   

  

$1.647 20 23    1.217 .608   83.8 cts.

  Ostensible share of taxable profits on comparable basis: 58 per cent.

(The Economist, January 23, 1965).

Once again the Conference could not reach a unanimous decision. The split between Iraq, Venezuela and Indonesia on one side, and the rest of OPEC countries on the other, appeared irreparable. Fellah continued to be described in British diplomatic cables as “an agent of the companies.”46 The British Foreign Office rejoiced that the “unholy alliance” between Venezuela, Iraq and Indonesia would not last for long.47 Outside OPEC’s meeting rooms, public opinion in the Arab world was growing increasingly radical, but this radicalization was hardly reflected within the organization itself. The culmination of these two-year series of talks on royalties would arrive with the seventh meeting of the Conference, held from November 23–8, 1964 in Jakarta in Indonesia. This was to be the final showdown. The talks at Jakarta grew once again extremely heated. The Indonesian delegate opened the meeting by quoting the local proverb “duduk sama rendah, berdiri sama tinggi” (roughly, “we need them as partners not as leeches”). He added that “for Indonesia—talking out ­ egotiation of experience—the answer from the beginning is clear and obvious: that n is not an effective instrument.”48 Wattari and Pérez Alfonzo (the latter attending yet again even if he had no formal government position) renovated their call for a unilateral move to apply the 1962 resolutions, and warned that the organization was “losing momentum.” Wattari asked the Iranian delegation to explain him how posted prices could ever be effectively negotiated in the future once the “arbitration” clause had been accepted. Hoveyda replied that no one could prevent Iran from signing an agreement that it believed to be advantageous for its own people. The two sides remained firmly entrenched in their positions. Iraq wanted to reject 46 British Embassy to Foreign Office, Kuwait, July 15, 1964 in: A.L.P.  Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 3: 1963–1966. 47 Randall, United States Foreign Oil Policy Since War I, p. 272. 48  NYUAD Library, ASC, GGC, MC-038, Minutes of the Seventh Conference of OPEC, November 23–8, 1964, Djakarta.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

155

the offer. Venezuela and Indonesia, though not directly affected, insisted that OPEC turn it down. The other members (Saudi Arabia, Qatar, and Libya) all pushed for accepting the offer. Kuwait was on the sidelines. Considering the requirement that every OPEC decision be unanimous, the organization found itself facing the very real risk of coming asunder. The final decision then represented the only formula that could save the exporters organization from an inglorious end, only a few years after its creation: members agreed to ­disagree. The phrasing adopted to bring talks over royalty expensing to a conclusion was that every member state would “refer to the views expressed by Member Countries on the matter as recorded in the Minutes of this Conference.” In other words: each member would decide for himself. 49 * * * After the Jakarta Conference the distance between the OPEC negotiators and important sections of the Arab public came out very strongly. In 1964, Egypt renewed its propaganda campaign calling for pan-Arab oil ­cooperation, proposing the creation of an Arab oil company to jointly market Arab oil. This time, Iraq offered to help by agreeing that this could potentially market non-IPC oil from North Rumaila. Yamani replied that Saudi Arabia was not interested, since the proposed company would not find any markets for its oil and would disrupt the established price structure. Besides, Riyadh did not want to spend money outside the Kingdom, and had already established PETROMIN to market its own oil. In an interview for the Review of Arab Petroleum Economics, Abdul Amir Kubbah’s journal published out of Baghdad, Tariki accused the Shah of considering “the appeasement of the monopolistic companies and of the imperialist governments behind them as quid pro quo for past favors.”50 At the Arab Petroleum Congress of 1965, Tariki then sarcastically translated the acronym OPEC in the far from flattering “Organization of the Oil Exporting Companies.” In a pamphlet written for ­ ationalization that occasion, Tariki tried to persuade Arab public opinion that n was by now a vital necessity to free the Arab people from foreign ­domination. One of the founding fathers of OPEC had by now taken a decisive stand in favor of the nationalization of the petroleum industry and against any further negotiations with the oil companies. Tariki’s publication, Arab Oil and Gas (based in Beirut), engaged in pro-nationalization propaganda in every issue.51 In 1965, responding to Tariki’s comments, the new Iraqi OPEC Secretary General Abdul Rahman Al-Bazzaz argued that Tariki “said he wanted to address our minds but, to be frank, he was appealing not our minds but our emotions.”52 Tariki presented his arguments 49  NYUAD Library, ASC, GGC, MC-038, Minutes of the Seventh Conference of OPEC, November 23–8, 1964, Djakarta. 50 Christopher R.W. Dietrich, Oil Revolution: Anticolonial Elites, Sovereign Rights, and the Economic Culture of Decolonization (Cambridge: Cambridge University Press, 2017), p. 114. 51  Abdullah Tariki, Nationalization of the Arab Petroleum Industry is a National Necessity, paper presented at the fifth Arab Petroleum Congress, March 1965. Quoted in Dietrich, Oil Revolution, p. 117. 52 Deguid, Technocrats, Politics and Planning, p. 208.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

156

The Rise and Fall of OPEC in the Twentieth Century

in favor of nationalization yet again at the Arab Petroleum Congress held in March 1967.53 He argued that the Cartel was manipulating production levels to punish politically unreliable countries such Iraq and Kuwait (until the latter signed the royalty agreements), that the majors were still reaping enormous profits, and that Western Europe and Japan had no alternative to Arab oil. Considering that all the Arab countries would not join forces, it was left to Iraq, Algeria, and hopefully to Kuwait to move forward in the nationalization agenda. The comments from the Saudi delegation to the Congress show that, for all his prestige, Tariki’s ideas were most probably still minority views among Arab oil technocrats at the beginning of 1967: I feel completely confident in saying that this congress—both in its proceedings and its resolution—constituted another link in the chain of total defeats being inflicted to the Arab world’s professional political demagogues and purveyors of anarchy and their agents, who assume the guise of consultants and adopt professional titles when they are no more than merchandise in the Marxist slave-market [. . .] The crowning moment of victory came when the congress, despite the efforts of the buffoons, adopted the views of the Saudi delegation.54

The Kuwaiti Assembly, where the nationalist opposition members had invited Tariki to explain the technicalities of the royalty agreement, refused to ratify the agreement on royalties in 1965. In January Al-Khatib spoke to the Assembly arguing that he had gone trough the agreement more than once and still could not understand why OPEC had not legislated. He said that he would not accept anything that would imply more money on the short term, while depriving the country of greater financial benefit on the long term. He also commented that the absence in Saudi Arabia of someone like Tariki was deeply felt and asked his peers to stand up: “can Kuwait a progressive country, be compared to Iran?”55 Eventually, as we will see, also Kuwait was forced to give in and sign the royalty agreement in 1967. Acosta Hermoso, one of the most prominent OPEC experts in Venezuela, also raised strong criticism of the Jakarta resolution since it had basically shelved all hopes on the possibility of increasing market prices for oil, the main reason Venezuela was still in OPEC. He proposed a new cooperation between countries that had obtained some degree of “political autonomy,” such as Indonesia, Venezuela (provided it hardened its foreign policy), Egypt, Iraq (but there was always the risk that it could capitulate), Kuwait (if the nationalists prevailed in the Assembly) and Algeria (where a revolutionary government was in power).56 Meanwhile, the approach by Pérez Guerrero (and Pérez Alfonzo) within OPEC, had come to be criticized even within Venezuela by right wing politicians such as Uslar Pietri that accused it of discouraging investment in Venezuelan oil and of having failed to increase market prices. In 1966 AD proposed to enact a new tax 53  “Can we nationalize?”, MEES, March 17, 1967. 54 Deguid, Technocrats, Politics and Planning, p. 224. 55 Eduardo Acosta Hermoso, Analisis Historico de la OPEP. Vol. II (Caracas: Editorial Arte, 1970), p. 99. 56  “El ocaso de la OPEP”, in La Esfera, June 26, 1965. Quoted in: Eduardo Acosta Hermoso, La comisión económica de la OPEC (Caracas: Editorial Arte, 1970), p. XII.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

157

on companies, but the proposal was blocked by the government. At the same time oil production was increased by 4 percent and Venezuela adopted the posted ­pricing prevailing in the rest of OPEC, basically renouncing the battle for higher market prices and for production control with which it had been identified.57 Pérez Alfonzo, disillusioned with an organization that Venezuela itself had first proposed, emigrated to Mexico, where he came into contact with Ivan Illich, one of the harshest critics of “development” and among the earliest theorists of “degrowth.” The former Venezuelan Petroleum minister enjoyed agriculture and manual labor, admired Swedish social democracy and conducted an increasingly modest life shaving of all his hair and dressing only in local fabric. OPEC itself had to admit that the negotiations over royalties had highlighted the weakness of its position: A brief examination of the development of the OPEC royalty negotiations was attempted with particular emphasis on the practices and procedures employed by the oil companies. Generally, the tactics used include: (a) delaying tactics; (b) tactics to undermine OPEC collective bargaining; (c) the making of obviously unacceptable offers; (d) attempts to divide Member Countries; and (e) last-minute modifications of offers before OPEC Conferences.58

The conclusions was that: “This experience automatically opened an unavoidable debate within OPEC regarding the very principle of negotiation itself in future dealings with the major oil companies on issue that might be much more ­important than the royalty issue.”59 * * * How are we then to judge these first OPEC negotiations with the benefit of hindsight? The agreement meant that the majors had finally accepted royalty expensing but with discounts on posted prices of 8.5 percent for 1964, 7.5 percent for 1965, and 6.5 percent for 1966. Although this implied that Middle Eastern governments would earn much less than initially forecast, and although discounts on posted prices were a very far cry from returning to pre-1959 posted prices, the agreement guaranteed OPEC countries a higher per-barrel take, not unwelcome to their governments’ treasuries. This was how the Economist commented: A hundred million dollars extra a year and more to come is not a bad return on two and a half years’ argument, even if it is not all OPEC wanted. Oil companies agreed to pay it: but there is no reason why consumers in the West should.60

This outcome was all the more significant, given that market prices for petroleum were declining. The fifty-fifty profit split as it had been implemented in the Middle East was now shelved not only in substance but also in form (since royalties had 57  Eduardo Mayobre, Juan Pablo Pérez Alfonzo (Caracas: Editorial El Nacional, 2005), p. 34. 58  Michael Tanzer, The Political Economy of International Oil and the Underdeveloped Countries (Boston: Beacon Press, 1969), p. 74. 59  Ibidem. 60  The Economist, January 23, 1965.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

158

The Rise and Fall of OPEC in the Twentieth Century

been previously been included in the 50:50 in the Middle East). Petrostates also obtained revenue increases per unit of product that were unthinkable for other commodities producers at the time. The danger that OPEC potentially represented was recognized both by the majors, within the tight inner circle that met under the chairmanship of John McCloy that started to think of OPEC as a bigger threat than Soviet oil, and also by British observers: Since the world’s available production potential of oil has well exceeded demand since about 1958 the actual prices (realized prices) at which oil is sold (except where it is transferred between affiliates within the same group) have been falling steadily. Until 1960 the companies were able to reduce “posted prices”, and hence their income tax liabilities, to follow the market trend. Since the formation of OPEC they have not felt able to do so.61

Why, then, did the founding fathers of OPEC such as Tariki and Pérez Alfonzo react so viscerally to the outcome of the royalty negotiations? First because the majors had managed to bring the organization to the brink of self-destruction by playing upon the conflicts among its members and by selectively offering some of its members advantages in terms of increased production or direct financial benefits. Then they had induced OPEC to forgo any increase in posted prices, thus legitimating ex post all the reductions of 1959 and 1960. The majors had also obtained yet another reaffirmation of the legal standing of the concessions system: the 1964 agreement was in fact called “supplementary,” when compared to the “principal” agreements represented by the original concessions. Furthermore, OPEC countries had refused legislation, had refused measures to take direct control of the petroleum industry, while they had submitted to the paradigm maximizing output, thus shelving all the efforts at production control. Some of the legacies of the colonial era appeared alive and well, even though now disguised behing the “modernization” paradigm. The storm clouds on the horizon for petrocapitalism, which had grown darker and more ominous after the creation of OPEC, for now had evaporated. The battle over royalty expensing, however technical, had also demonstrated how problematic cooperative agreements between oil majors and the oil-producing states would have been anyway. Cooperation with OPEC, in the shape of an increase in government take and a consequent increase in gasoline prices, would have made the companies suspect in the eyes of the consumer nations where they were based, thus exposing them to the risk of punitive legislation and the hostility of public opinion. The companies chose to protect their profits, while at the same time preventing negotiations from having a significant impact on consumers. Not surprisingly OPEC’s acronym still remained virtually unknown to the citizens of the United States, Europe, and Japan. 61  J.T. Fearneley, Top Secret, February 4, 1966, in: A.L.P. Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 3: 1963–1966. See also, Amherst College Archives & Special Collections, John Mc.Cloy Papers, Oil 2, Minutes of Meeting of Oil Company Representatives, June 21, 1965: “McCloy then briefly summarized the day’s discussion. He stated that the major threat now appears to be nationalization or, short of that, greater government participation by the producing countries, rather than increased Soviet exports.”

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

159

NEW OIL REGIONS Among the reasons for the relatively poor results of the first OPEC negotiations, there was also a key structural issue: new oil kept coming onstream, curtailing OPEC countries’ bargaining power and furthering adding to excess production. On December 24, 1951, King Idris Al-Sanusi proclaimed the creation of the United Kingdom of Libya, bringing together the territories of Cyrenaica, Tripolitania, and Fezzan. The union of these geographically diverse lands, and of the tribes that populated them, had been imposed by the victors of the Second World War. The Kingdom was a federation, with internal borders patrolled by armed forces, a substantial degree of regional autonomy, and a correspondingly weak central administration. The Kingdom of Libya, although there had been heroic resistance against Italian colonial occupation, was a relatively artificial construction and was easily included in Western sphere of influence. Both the United States and Britain established military bases, the presence of which helped discredit the monarchy in the eyes of the younger generation of Libyan nationalists. King Idris himself was a reluctant monarch who probably would have been content to rule over Cyrenaica alone. He was a far cry from the charismatic nationalist figures that were seizing power throughout Africa and in many other Third World countries. If Libya’s political leadership was weak, its economic prospects were described in even more unsparing terms by Benjamin Higgins in a 1953 study on behalf of the United Nations: Libya combines within the borders of one country virtually all the obstacles to development that can be found anywhere: geographic, economic, political, sociological, technological. If Libya can be brought to a stage of sustained growth, there is hope for every country in the world.62

Little seemed to have changed since the critics of Italy’s colonial ambitions in Libya in the early twentieth century had described those ambitions as an assault on a “box of sand.” Most of its territory was indeed desert. The little arable land, roughly 2 percent of the total, was largely in the hands of Italians residing in Tripolitania. The infant mortality rate remained as high as 50 percent, and the Kingdom exported nothing but castor oil seeds and scrap metal left behind from the Second World War. The country’s dependence on American and British aid was near total. The strategy of the Prime minister Mustafa Ben Halim, appointed in 1954, focused on the prospect of petroleum exploration and production as the cornerstone of the country’s future: My first government, formed in April 1954, followed a clearly defined two-track policy to arrive at full economic independence. There was a short-term policy aimed at getting the maximum of Western economic aid via the leasing of military bases and employing aid in a concentrated manner to stimulate the economy and build the infrastructure. There was also a long-term policy aimed at exploiting the country’s 62  Dirk Vandewalle, A History of Modern Libya, (Cambridge: Cambridge University Press, 2012), p. 50.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

160

The Rise and Fall of OPEC in the Twentieth Century

natural resources and using the income to liberate the national economy: this implied eliminating dependence on aid in the form of rent of the military bases from foreign powers, with its consequent diminution of the country’s sovereignty.63

As it turned out, the “box of sand” was in fact a very promising and productive piece of land. Its geographical location was very favorable to the rapid development of the hydrocarbons industry. One need only to think at the seemingly never-ending stream of rubber boats depositing their freight of refugees and migrants on the coasts of Sicily from the 2000s, to understand Libya’s proximity to the promising Western European crude oil market. Unlike in the Middle East, pipelines could transport crude directly from inland wells to the oil terminals on the Mediterranean shores without having to cross borders and face the risks of political instability. Furthermore Libyan crude was both “light” (that is, much less dense, and with a higher proportion of lighter hydrocarbon fractions) and “sweet” (meaning that it had low sulfur content and was easier to refine). In short: Libyan crude possessed the twin advantages of a prime location and prime quality. However attractive the location of Libyan petroleum, by 1955 there had been still no commercial discovery. On the other hand, one stroke of “luck” for Libya was that the first petroleum law was designed in 1955 by a team that included consultants from independent US oil companies—for which Libya represented one of the very few promising “virgin” territories—the future OPEC Secretary General Nadim Pachaci, and the Prime minister Ben Halim himself.64 The latter was not a petro-nationalist embarked on a crusade against the oil companies, but an astute politician who understood the importance of leaving some space to the independents. The 1955 law outlined a system of incentives and penalties. The main innovations it introduced concerned a limit to the extension of concessions, and precise rules for the “release” of unexplored lots. Although Ben Halim was removed from office in 1957, in all likelihood due to his thinly-veiled Nasserite sympathies, and although a Petroleum commission entrusted to “foreigners” managed petroleum resources, the Libyan model established a launching pad for the country’s meteoric rise as a major new oil region. The legal landscape left the government with a few aces up its sleeve, should it ever be willing to play its cards at the right moment, pitting the oil companies against one another. The first oil reservoirs in Libya were discovered by New Jersey Standard in 1956, and were quickly followed by the discovery of the giant Zelten oilfield (eventually renamed Nasser field after the death of the Egyptian leader). Discoveries were speeded up by the Suez crisis and the closure of the canal that had made Libyan oil’s direct access to the Mediterranean much more appealing than before. The first crude shipment left the port of Marsa Brega in 1961. Unlike the rest of the Middle East, where concessions extended across entire countries, in Libya as of 1962 there were some eighty-four concessions, managed by nineteen different companies, among them a large number of American independents such as Marathon, 63  Mustafa Ben-Halim, Libya’s Hidden Pages of History: A Memoir (Cyprus: Rimal Publications, 2014), p. 197. 64  Geoff Simons, Libya: The Struggle for Survival (London: Palgrave Macmillan, 1993), p. 191.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

161

Continental, Amerada, Bunker Hunt, and Occidental. By 1963, petroleum made up virtually all of Libyan exports. By July 1968, Libyan production had surpassed that of Kuwait. The following year, little more than a decade after the first commercial oil discovery, production would reach an output of 3.3 million barrels per day, making Libya the fourth largest oil exporter in the world and Harmand Hammer, the owner of Occidental, one of the most richest oilmen. The Kingdom of Libya joined OPEC in 1962. It initially found itself in the position of the late-arriving student who has to play catch up to his more advanced classmates. In 1963 the Petroleum commission was replaced by a ministry of Petroleum and, that same year the government approved the creation of the Libyan National Oil Company. The need to use oil revenues in a manner more consonant with the new modernization paradigm led to a greater centralization of the administrative apparatus. On November 20, 1965, as we have already mentioned, Libya introduced posted prices as the tax reference prices, very much against the wishes of the independents. This change, in line with OPEC standards, generated consistent increases in the oil rent, even though Libyan crude remained underpriced because of both its prime quality and proximity to major markets. The dark shadows that loomed over this quite rosy picture were: a growing hostility among the Libyan people toward the Italian community, which went hand in hand with the persistent racism of white expats towards Libyan workers; the rise of pro-Nasser sentiment, particularly among the military, one of the few genuine national bureaucracies; the radicalization of Libyan trade unions that blamed the hardships for Libyan workers on foreign companies and the pro-American government.65 There was also the problem generated by the presence of a large number of oil companies trying to deal with a weak state that had a difficult time regulating and overseeing the petroleum sector. Many of these independents relied almost completely on Libyan crude, and had every interest in increasing production as quickly as possible. This feverish churning of output inevitably led to great waste and a less than optimal use of the oil fields (in the United States, remember, the Texas Railroad Commission was called upon to regulate precisely this type of competition among small producers). Like a marathoner who sprints the first one hundred meters all-out, the country and the companies operating within it risked running out of breath (or in this case oil) before the race had even truly gotten started. * * * The Ruler of Abu Dhabi, Shabkut Al-Nayan, had signed a concession agreement with IPC in 1939.66 Throughout the 1950s, the emirate was left at the margins of the petroleum industry on the Arabian Peninsula. Shakbut was considered a conservative leader, resistant to changes in the traditional customs and lifestyle of his 65  Elisabetta Bini, “From Colony to Oil Producer: US Oil Companies and the Reshaping of Labor Relations in Libya During the Cold War”, in Labor History, DOI: 10.1080/0023656X.2019.1536502 66 David Heard, From Pearls to Oil: How the Oil Industry Came to the United Arab Emirates (Motivate Publishing, 2011).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

162

The Rise and Fall of OPEC in the Twentieth Century

people. Within the emirate of Abu Dhabi, the oases of Liwa (the original homeland of the Al-Nayan tribe), Al-Ain, and Buraimi (the possession of which was disputed by Saudi Arabia) provided potable water and dates harvests. All around, however, lay the immense Rub Al-Khali and its endless sand dunes, rich in iridescent color but virtually devoid of life. The small settlement on the island of Abu Dhabi lingered on painfully due to the inexorable decline of the pearl trade. The closest serviceable “airport” was located in the neighboring emirate of Dubai: a pontoon plane run by British Imperial Airways landed on Dubai Creek, shuttling back and forth between the emirate and the nearest international airport in Bahrain. Otherwise, the only permanent building on the sandswept island of Abu Dhabi, encircled by shallow waters and mangrove forests, was the emir’s fort, built close to the only freshwater well. Abu Dhabi was much poorer than its northern neighbors Dubai and Sharjah, and far less connected to regional as well to Indian Ocean trade. The Bab oilfield, some 100 kilometers west of Abu Dhabi, was discovered in 1958, and crude oil export began in 1963 (offshore production would start shortly thereafter, since the geological structures were essentially the same). Until 1966 the Abu Dhabi Petroleum Company, an IPC affiliate, kept its headquarters outside Abu Dhabi. There was only one school on the island, no port, and no proper roads connecting it to other areas of the Trucial Coast. Goods were unloaded by barefoot workers off small boats and skiffs. The life of the desert brought with it discomfort and illness: images from the 1960s frequently depict groups of children, their weak eyes covered with flies. This was a description of Abu Dhabi in the 1960s: The town is roughly rectangular in shape and consists of approximately 600 buildings, constructed of materials ranging from palms fronds to cinder blocks. The main part of the town stretches for a mile and a half along the coast and is backed by a thin line of palms and a row of shallow wells which are still used a source of brackish water.67

Shakbut’s first “modernization” initiative in 1962 was in fact to invest in two water desalinization plants, as well as in the construction of a bridge to connect the island of Abu Dhabi with the mainland.68 But planning for these initiatives was sketchy, given that there was as yet no viable administration, let alone departments or ministries, nor any monetary authority. Oil companies used to pay their taxes (still the fixed royalty per ton) directly into the account of the Ruler, according to the provisions set in the original concession signed in the 1930s. At the end of the day, the Ruler received only 15 percent of total oil revenues, compared to at least 50 percent in the neighboring oil exporting countries in the Gulf.69 In September 1965 Shakbut signed the fifty-fifty revenue sharing agreement with IPC, thus moving one step closer to OPEC standards. From that moment on, oil rents would increase 67  Seif A. El-Wady Ramahi, Economics and Political Evolution in the Arabian Gulf States (Sheffield: Carlton Press, 1973), p. 34. 68  Christopher Davidson, Abu Dhabi: Oil and Beyond (Oxford USA: Oxford University Press, 2011), pp. 25–43. 69  Helene von Bismarck, British Policy in the Persian Gulf, 1961–1968. Conceptions of Informal Empire (London: Palgrave Macmillan, 2013), p. 24.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

163

significantly, and the petromodernization paradigm based on maximizing at the same time petroleum exports as investments became inescapable. A changing of the guard, hardly unwelcome by the British, saw Shakbut’s brother Zayed Al-Nayan brought to power in August 1966. Under Zayed’s leadership, Abu Dhabi threw open its doors to foreign investment, began contributing to development projects in the rest of the Trucial States, and entered a phase of tumultuous socio-economic change. The British grip on the emirate remained very strong: justice for non-Muslims was administered by the British; most departments set up by the end of the 1960s were staffed by either British or Arab nationals, including Jordanians, Iraqis, and Palestinians (foreigners constituted one half of the overall population); the Abu Dhabi Investment Board kept its head office in Britain; and no local currency had yet been established. Zayed applied for Abu Dhabi to become a member of OPEC in 1967, in part encouraged, as we shall see, by the radicalization that affected the rest of the Arabian Peninsula after the Six Day War, as well as by the numerous locals who were coming back from the more advanced Kuwait or Bahrain. Not being yet fully sovereign and lacking welldefined borders, Abu Dhabi, together with Qatar, had just begun its path to petromodernization in the late 1960s. * * * Algeria was in a completely different situation compared to both Libya and Abu Dhabi. In terms of size, Algeria is the largest African country. Although much of its territory is dominated by the sands of the Sahara, it contains expanses of mountains and hills as well as ample waterways. French colonization had encouraged a flourishing wine industry, primarily for export: winemaking remained the top item Algerian export for much of the 1960s. Algiers was a lively city, both politically and culturally. The University of Algiers, with a student body that was 20 percent Muslim Algerian before independence, had been one of the first universities established by the Europeans in Africa. Significant segments of the population had taken part to the liberation struggle against the French that had become a symbol for anti-imperialist activists around the world. The revolt guided the National Liberation Front (FLN, using the French acronym) and the repressive French response against Algerian militants (including the use of torture), attracted the sympathy of some the intellectual “stars” of the 1960s, from Frantz Fanon to Jean Paul Sartre, and elevated the “battle of Algiers” to one of the paradigmatic episodes of decolonization. The FLN had made its voice heard through regional organizations in the Arab and African world, as well as in the United Nations, long before winning independence for Algeria. All of this to say that, when the country finally gained its independence from France in 1962, its ruling elite was strongly nationalistic and heavily engaged in an international struggle against colonialism. Furthermore, in contrast to the states of the Arabian Peninsula and to neighboring Libya, Algeria’s leaders took the reins of a country that had a relatively established educational and bureaucratic infrastructure. The problem was that all state institutions had been staffed by French nationals who

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

164

The Rise and Fall of OPEC in the Twentieth Century

had fled the country en masse soon after independence, and it proved very hard to replace them in the short run. Furthermore, unlike in the rest of the OPEC members, Algeria was the only oil exporting country where French companies had total control over petroleum production. When the Évian Accords were signed in March 1962, French companies were guaranteed a majority stake in oil and gas concessions.70 In exchange for total control over the petroleum sector, France had pledged to assist Algeria’s economic development and to support the country’s education system, which was bolstered by the thousands of French teachers in Algerian schools. According to Pierre Guillaumat, the key figure in French energy policy during the 1960s, Algeria (and Francophone Africa more generally) would be the key to French energy independence from the Anglo-American majors, as well as an instrument to promote French technology abroad. After having failed in the 1950s to separate the Sahara from Algeria, the French would not agreed to quit Algeria without having previously secured control over its hydrocarbons resources. Belaid Abdessalam, who until the end of the 1970s would be the public face of the FLN’s oil policy, first as the first head of the Algerian state oil and gas company and then as minister of Energy and Industry, argues that the FLN accepted French monopoly because they were afraid the former colonial master would blow up the facilities in the Sahara rather than leaving them to the Algerians.71 Ahmed Ben Bella, the first President of independent Algeria, countered the enduring dependence on French companies, on French markets (for wine exports), and on French development aid with an internationalist and anti-colonial rhetoric that aligned him with other Third World leaders such as Ghana’s Kwame Nkrumah and Indonesia’s Sukarno. This anti-imperialist foreign policy, which eventually made Algiers the “Mecca of the Revolution,” also partly explains why Algeria did not immediately apply for OPEC membership. In his study of Algerian hydrocarbons, Abdessalam argues that Algeria at the beginning had not asked to join OPEC member since its members only seemed to aim at improved “fiscal terms” (squeezing the majors), while oil exploration and production were left as if by “divine commandment” to the companies of the rich developed countries.72 In 1965, Algeria was scheduled to host a second Afro-Asian summit to follow up on the 1955 Bandung Conference. At the same time, Ben Bella hoped to ­renegotiate successfully its arrangements with France, including in the oil sector, with the aim of achieving more direct control. The Algiers meeting was supposed to serve as a theater for even more radical and anti-imperialist rhetoric than its predecessor, one that would reflect the spirit of Che Guevara’s speech prepared for the occasion: “there should be no more talk about developing mutually beneficial trade based on prices forced on the backward countries by the law of value and the 70  Hocine Malti, Histoire secrète du pétrole algérien (Paris: La Découverte, 2012); Roberto Cantoni, Oil Exploration, Diplomacy, and Security in the Early Cold War: The Enemy Underground (London: Routledge, 2017). 71  Belaid Abdessalam, Le pétrole et le gaz naturel en Algérie (Algiers: Editions ANEP, 2012). 72 Abdessalam, Le pétrole et le gaz naturel en Algérie, p. 392.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

165

i­nternational relations of unequal exchange that result from the law of value.”73 In June, shortly before Afro-Asian summit was about to begin, a coup d’état led by colonel Houari Boumediene overthrew Ben Bella and replaced him with a Revolutionary Council led by Boumediene himself. It looked like this could be the first act of a moderate and pro-Western restoration, much like what was happening in Indonesia. But the new leader did not stick to the script. Boumediene was shy and reserved and, at least initially, a poor public speaker. While he distrusted the Communists, with whom Ben Bella had established increasing contacts, and was also cautious in his relationship with Nasser, he was an Arab nationalist educated at the University of Cairo—unlike most of the Algerian ruling elite, which had been trained in the French educational system. Boumediene’s first moves were indeed relatively moderate, but basically in line with his predecessor when it came to the oil industry. He dismissed the cooperative model for small business favored by Ben Bella, with its focus on agriculture, in favor of a more pervasive role for the state in the economy as a promoter of industrialization, especially in the petroleum sector. His government took its first steps in this direction in 1965 by signing a new Franco-Algerian oil  agreement, to be renewed after five years.74 While petroleum only made up 13.5 percent of state revenue in 1965, the agreement called for the national oil company SONATRACH (Société Nationale de Transport et de la Commercialisation des Hydrocarbures), which had been created in 1963, to be fully in charge of transporting Algerian gas. The Algerian government (through SONATRACH) also gained 50 percent participation in SN REPAL (the company that managed some of the largest oil fields in the country such as Hassi Messaoud) as well as in the other major companies operating in Algeria. An Algerian was named to president of the company. By 1969, the state and the oil companies would share oil profits according to a new 55:45 split in favor of the state, and the OPEC royalty expensing agreement would also be applied in Algeria. A new Association under joint FrenchAlgerian ownership (ASCOOP) was supposed to invest in hydrocarbons exploration and production. The 1965 oil agreement was subject to some criticism because it failed to make the state a majority participant in any of the companies— thus the concession system basically remained in place—but nevertheless the regime hailed the new model as “an example for the Third World.”75 The head of SONATRACH and then minister for Energy and Industry starting from 1965, Belaid Abdessalam, still considered membership in OPEC to be unnecessary because it would block a takeover of the French companies (the key strategic ­objective of the FLN), while he considered prices and the government take satisfactory, for the moment at least. 73  Speech delivered by Che Guevara at the Second Economic Seminar of Afro-Asian Solidarity, Febrary 24, 1965: https://www.marxists.org/archive/guevara/1965/02/24.htm (Consulted on January 16, 2019). 74  Samir Saul, “SN REPAL, CFP and ”Oil-Paid-in-Francs”, in Alain Beltran (ed.), A Comparative History of National Oil Companies (Brussels: Peter Lang, 2010), pp. 93–123. 75  Ali Aissaoui, Algeria: The Political Economy of Oil and Gas (Oxford: Oxford University Press, 2001), p. 70.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

166

The Rise and Fall of OPEC in the Twentieth Century

The agreement represented incremental change for the better, particularly when compared to the situation in the other producer states both within and outside OPEC, but it didn’t fundamentally alter Algeria’s economic dependence on France. Gas production at this point was virtually nil, because of a lack of investment: most of the natural gas was simply flared. France, which had sufficient supplies of cheap oil and coal, did not need to import gas and had no interest in investing large sums of money to provide it to Algerian industry and consumers or to SONATRACH. Control over Algerian oil remained in the hands of French industry. The most ambitious plans for Algerian industrialization were thwarted by a lack of French investment, and by the fact that Paris blocked Algeria’s access to international credit out of fear of losing its influence. The FLN had won the battle of Algiers, but Algeria’s war for economic independence had only just begun. * * * Nigeria is another African giant. If Algeria is the continent’s largest country by extension, Nigeria is by far its largest in terms of population. Like the other giant of Sub-Saharan Africa, the Congo, Nigeria’s name evokes that of a river, the Niger, which traverses it from north to south before spilling into a delta in the Gulf of Guinea. Like the nearby Congo, Nigeria had been connected to the global economy since the nineteenth century, exporting slaves, palm oil, and coal, among other, both before and during the era of European colonization. Like the Congo, Nigeria is a country composed of diverse ethnic groups with distinct languages and traditions that had been organized in their own complex state systems. Unlike the Congo, however, Nigeria exploited its petroleum resources relatively early. The human geography of Nigeria can be divided into three dominant ethnic groups: the Muslim Hausa-Fulani in the more arid north; the Yoruba to the southwest, in the region around the active commercial hub of Lagos; and the Igbo, a farming and trading people, in Niger Delta region to the southeast. Christian missionaries and the British Empire had imposed English as the official language of communication between these groups, and a large part of the country’s elite had been educated in British schools and universities (the University of Ibadan, the country’s first, was founded in 1948). Wole Soyinka, the first African to win the Nobel Prize for literature, is Nigerian, also a testament to the quality of the educational system set up by the British. To this day, people in Lagos still speak to each other in English on the streets. The Niger Delta region, already known as the Oil Regions as early as the nineteenth century due to its exports of palm oil, had been the focus of special attention by geologists because of the presence of bitumen and significant crude oil seepages. The first explorations were undertaken by the German owned Nigerian Bitumen Corporation but it was only after 1914, however, that the British ­seriously begun to search for crude oil within the empire’s borders. The Nigerian mining law of 1914 allowed oil exploration only to British companies. These initial ventures took on a rather picaresque hue:

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

167

We got No.5 Well on oil again and it started to flow at the rate of about 2000 bbls per day but after it had flowed a few hours at this rate it came on hot water and we are only getting about 50 bbls of oil from it now. I expect there was great excitement in London when they got the news that Suiogu was flowing so much oil. The lagoon is at present all covered with oil [. . .] and there was so much oil at our wharf here that the Doctor got all covered last night when he went in swimming.76

We can see in our mind’s eye a lush tropical landscape, the oppressive humidity, and a white engineer looking to cool off, jumping in to a murky lagoon at sunset. And we can imagine his surprise when the lagoon turned out to be a pool of jet-black oil. These petroleum deposits were found in densely populated areas characterized by a delicate lacustrine ecosystem made up of canals, lake beds, and fishing and farming villages; the polar opposite of the desert lands of the Middle East or North Africa. Like in the case of Venezuela’s Lake Maracaibo, Nigerian oil deposits were close to the ocean and thus could easily be shipped from the oil terminal of Bonny Island (the Bight of Biafra had also been one of the hubs of slave exports the previous century). The first oil concession was obtained jointly by Shell and BP (then called AIOC) in 1937, and covered all of Nigeria. It was the classic colonial formula. Explorations were often undertaken despite the hostility of the local population, which viewed work in the oil industry as a form of semi-enslavement and feared the despoliation of their natural surroundings. After a commercial find in Oloibiri in 1956 in the East of the Niger Delta region, crude oil exports from Port Harcourt started in 1958. Non-British companies were also granted the opportunity to begin ­exploration soon after. In 1959 the Petroleum Profit Tax Ordinance imposed the 50:50 revenue sharing model. In 1960, the year the country obtained independence along with many other African nations, oil accounted for 2.6 percent of Nigeria exports and 1 percent of the federal government budget. The potential for greater oil revenues soon became very appetizing to the Nigerian ruling class, also as a tool to placate i­ nternal tensions. Nigerian crude, competitively priced because of its high quality, could challenge the more expensive Venezuelan crude. On the other hand, at the beginning of the 1960s there was still no ministry of Petroleum, and essentially no state apparatus to run the petroleum sector. Festus Marinho, who would become the first CEO of the Nigerian National Petroleum Corporation (NNPC), recalled the Mining division where he worked in the following terms: There were no resources of any kind to employ or to build upon: no precedents for guidance, no indigenous pool of technical expertise to draw from, no petroleum laws and regulations to administer (except those contained in the covenants applicable to each concession) and very little help from the State, which did not stimulate sufficient interest for employment in the public sector of the industry.77 76  Phia Steyn, “Oil Exploration in Colonial Nigeria, c.1903–58”, in The Journal of Imperial and Commonwealth History, 37:2 (2009), pp. 249–74. 77 Festus F.R.A. Marinho, Nigeria’s Petroleum Industry, a Maverick Pioneer: A Recollection of My Life, Times, and Contributions to Nigeria’s Prosperity (Lagos: Macmillan, 2010), p. 3.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

168

The Rise and Fall of OPEC in the Twentieth Century

The oil companies basically acted as they pleased. In 1963 the Nigerian government established its first department of Petroleum resources—and yet the department itself did not possess a single complete map of all concessions. Ethnic tensions in the country came to a boil in 1966 and shook a state structure designed by the British to favor the more conservative Muslim groups in the north. In 1967, civil war broke out between the federal government of Lagos and the Igbo in the Niger Delta, a conflict that would become known as the Biafran War. That very same year the military government accepted a joint Shell–BP proposal to apply OPEC terms to Nigeria, in particular on the issue of posted prices and the royalty expensing. At this point oil represented only 16.6 percent of government revenue, and there were still other exports that were more important.78 But the petroleum industry had a bright future ahead of it, and its centripetal force was one of the factors that prevented the country from disintegrating only a few years after it had achieved independence. The civil war ended in 1970, after three years during which Nigerian oil exports declined markedly. The oil question had begun to play an important role in national political debates, including on the possible membership to OPEC. In the Ahiara Declaration of June 1969, written also with the help of Nobel prize-winning novelist Chinua Achebe, the Igbo leaders of the “Biafran revolution” accused the Federal government being “powerless to check foreign exploitation” and of waging a war with the help of “Biafran oil royalties” offered by Shell and BP. The lesson of the Biafran War for the Federal government of Nigeria was that oil money was indispensible to fight rebellions but at the same time that it needed to redistribute some of the rents and gain some autonomy from the whims of foreign companies. T H E P E T RO L E U M P O L I C Y S TAT E M E N T On June 5, 1967 Israeli jets, flying just over the surface of the Mediterranean to avoid detection, attacked Egypt’s armed forces by surprise, virtually annihilating the country’s air force. Shortly thereafter, the tanks and infantry of the Israeli Defense Forces (IDF) invaded by land and took care of the rest. In the span of just six days, the IDF occupied the Sinai Peninsula up to the Suez Canal, then Jordan and East Jerusalem, and ultimately the Golan Heights in Syria. The Six Day War signaled the rise of Israel as a new regional power and revolutionized the ­geopolitical map of the Middle East. Three Arab states—Egypt, Syria, and Jordan—­simultaneously suffered a crushing defeat. The rest of the Arab states had shown themselves incapable of providing adequate support. The Suez Canal, the new border between Egypt and Israel, was closed to navigation. Hundreds of thousands of Palestinian refugees poured into the neighboring Arab countries, or found themselves living under Israeli occupation. The origins of the war are beyond the scope of this book.

78 Scott  R.  Pearson, Petroleum and the Nigerian Economy (Stanford: Stanford University Press, 1970), p. 57.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

169

What is relevant to our story, however, is its immediate fallout on the Arab petroleum industry, and its long-term consequences. One of its most salient effects was that Nasser, whose influence and diplomatic intrigues had for years kept other Arab governments in the region (and specially the Gulf monarchies) alert, saw his international prestige tarnished by military defeat. He offered to step down, but Arab people took the streets from Cairo, to Damascus, to Baghdad, to Amman to Beirut, to Algiers demonstrating that he still remained a symbol of Arab nationalism. But the Egyptian leader, also due to the occupation of Egyptian oilfields in the Sinai, had to cave in and ask for economic relief also from the Arab moderate monarchies, in particular from Saudi Arabia. Saudi Arabia, Libya, and Kuwait would contribute approximately $378 million a year for the reconstruction of Egypt. Nasserism, that powerful but slippery Arab republican and nationalist ideology that had experienced extraordinary success throughout the 1960s, started fading away. And with Nasserism down went the Arab Petroleum Congress that received its marching orders and funding from Cairo. This does not mean that the Arab people had blithely accepted their defeat and subaltern status with respect to Israel and to their key ally, the United States. To the contrary, the Six Day War radicalized Arab public opinion against Israel and US imperialism. This was especially true for the younger generations that became increasingly critical of their ruling elites. The Arab ruling classes were deemed guilty of failing to lift millions of Arabs from Iraq to Morocco out of misery, and were at the same time held responsible for the humiliation suffered by the Arab armies. All over the Arab Gulf there were protests against Israel and stoppages of both production and exports towards countries that had supported Israel. In Kuwait workers went on strike sabotaging Getty’s AMINOIL and partially obstructing the exports of the Kuwait Oil Company. Spontaneous demonstrations and boycotts took place in Libya, where trade unions shut down refineries for more than a month. In Iraq and Algeria, reactions to the Israeli offensive grew extremely heated. Radio Baghdad broadcast a message from the trade union of Iraqi oil workers that asked its members to be on the lookout for acts of sabotage to the oil facilities.79 Even in Saudi Arabia there were demonstrations and strikes in the oilfields. In June 1967, the American consulate in Dhahran was attacked by thousands of protesters, while ARAMCO employees had rocks thrown at them. Kai Bird, the son of a US diplomat, recalls that Arabs stoned cars and nearly ransacked the house of ARAMCO’s head Tom Barger.80 As recalled by one of his biographers, Faisal held a mass rally at Riyadh’s horse racing track, but was unable to placate the audience which kept shouting “cut the oil”: The people expected Faisal to say in his speech at the very least that oil supplies to the states supporting Israel would be discontinued, and also to make a statement on matters 79  “Arab Oil Flow and Suez Canal Cut”, MEES, June 9, 1967. 80  Kai Bird, Crossing Mandelbaum Gate: Coming of Age Between the Arabs and Israelis, 1956–1978 (New York: Scribner, 2010), p. 210.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

170

The Rise and Fall of OPEC in the Twentieth Century

of Arab unity. Yet the king said nothing of the kind. Then the rally spontaneously turned into a vast popular demonstration. Instead of cheering the King, the people chanted just two words: Nasser and Petroleum.81

Having discovered that domestic support was weaker than expected, the House of Saud was forced to rely primarily on the Bedouin and the National Guard, and was left no other choice but to expel hundreds of Palestinians who represented an ­internal source of destabilization. Another destabilizing factor in the Arabian peninsula was Britain’s decision, announced the following year in 1968, to abandon its increasingly expensive military presence “East of Suez,” and to devalue the sterling. While Britain’s “East of Suez” decision questioned its future military role in the region, the devaluation for the sterling was very painful for those Gulf countries that held vast amounts of reserves in sterling.82 British “retreat” also coincided with a general radicalization of politics throughout the region. The MAN nationalist movement founded by the aforementioned Kuwaiti political leader Al-Khatib radicalized away from a more liberal approach to a Marxist one under the influence of a new generation of activists. In July 1967 MAN presented a report where it argued for “Arab revolution” and for direct intervention by the masses into the political realm: “the way out lay in the assumption of leadership by the ‘oppressed classes’ (workers, peasants and revolutionary intellectuals) and their turn to scientific socialism.”83 The Arabian Peninsula People’s Union, a movement that included participants to the Saudi strikes of the 1950s, was also trying to upend the Saudi monarchy with acts of sabotage.84 In November 1967 South Yemen achieved independence from Britain, soon branding itself as the People Democratic Republic of Yemen, with a constitution modeled on that Communist East Germany and close ties to China. As if the creation of a Socialist country on the Arabian peninsula was not enough to worry Gulf rulers, in 1968 the Dhofar Liberation Movement that was fighting the conservative government of Oman, established a Popular Front for the Liberation of the Occupied Arab Gulf, with the outspoken aim of overthrowing all the ­monarchies in the region. The decline of Nasserism and the end of the Arab Cold War seemed to have been replaced by even more radical local movements: Arab nationalism was turning Marxist and even more radical in its political strategy. * * *

81 Vassiliev, Faysal, p. 306. 82 Steven G. Galpern, Money, Oil, and Empire in the Middle East: Sterling and Postwar Imperialism, 1944–1971 (Cambridge: Cambridge University Press, 2009). 83  Abdel Razzaq Takriti, “Political Praxis in the Gulf: Ahmed Al-Khatib and the Movement of Arab Nationalists, 1948–1969”, in Jens Hanssen and Max Weiss (eds.), Arabic Thought Against the Authoritarian Age. Towards and Intellectual History of the Present (Cambridge: Cambridge University Press, 2018), pp. 86–112. 84 Toby Matthiesen, “Migration, Minorities and Radical Networks: Labour Movments and Opposition Groups in Saudi Arabia, 1950–1975”, in International Review of Social History, 59:3 (Autumn 2014), pp. 473–504.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

171

Arab governments could not afford to stand still. The petroleum industry, by far the most important economic sector for most Arab producing countries, was obviously affected by the social and political upheaval in the region. For the Algerian President Boumediene, 1967 war was an opportunity to take the measure of public opinion in his country for the first time, and to develop an “emotional connection” with his people. As Ahmed Taleb-Ibrahimi, one of his closest advisers, later recalled: 1967 was the year in which Boumedienne raised his standing by getting closer to the state of mind of the Algerian people: he declared war on Israel; uncompromisingly supported Egypt, Syria and Jordan by providing soldiers, weapons and any needed aid; he broke diplomatic relations with the US and interrupted oil exports to the countries supporting Israel and took over Anglo-American oil concerns.85

Boumediene launched a program of technical cooperation on hydrocarbons with the Soviet Union. He also accelerated the nationalization of key sectors of the economy. Algiers broke off diplomatic relations with Washington, flying in the face of those who had hoped that the Algerian President would be more ­conciliatory than his predecessor Ben Bella. During the aforementioned Algiers Conference of the G77 in1967, convened to prepare the way for the UNCTAD Conference to be held the following year in New Delhi, Boumediene guided the country once again to the front lines of the Global South, pressing the case not only for higher commodity prices, but also for direct control and management by Third World governments of their own natural resources. Iraq, meanwhile, witnessed first a radicalization of the political landscape, and eventually another episode of regime change. Within the government headed by Arif ’s brother, Al-Raman Arif, pro-Nasserite supporters of a rapid transition towards a socialist economy were once more in the ascendant. After breaking off relations with the United States, the Iraqi government passed Law 97 in August 1967, once again without any consultation with IPC. The Socialists Khair el Din Haseeb and Adib Al-Jadir sought to carve out a larger role for the Iraqi National Oil Company (INOC) than it had under the Wattari agreement in 1965. Law 97 gave the INOC exclusive rights to the oilfields of north Rumaila, while simultaneously blocking any new concession. The new board of the INOC ­ approved “service contracts” with international oil companies for the development of new fields and for natural gas production, and at the same time welcomed the offers of technical cooperation coming from the Soviet Union. Concessions no longer had a future in Iraq. With some of the country’s most important oilfields no longer under its control, IPC saw its monopoly on Iraqi oil start to evaporate. The winds of nationalization were blowing louder than ever. Arab members of OPEC also tried to employ the oil weapon by declaring an oil embargo against Israel’s allies on June 6. This was a half-hearted effort that virtually none of its supporters believed would succeed. But the majority of the Arab Gulf 85 Ahmed Taleb-Ibrahimi, Mémoires d’un Algérien. Tome 2: La passion de bâtir (1965–1978) (Algiers: Kasbah Editions, 2008), pp. 203–4.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

172

The Rise and Fall of OPEC in the Twentieth Century

exporters felt a moral and political obligation to express their solidarity with the Arab armies and, for a short while, the embargo did scare consumers. The Arab League summit in Khartoum at the end of August 1967 simultaneously announced the policy of “three no’s” (no peace, no recognition, and no negotiation with Israel), and issued a very awkward statement that ended the embargo: The conference of Arab Ministers of Finance, Economy and Oil recommended that suspension of oil pumping be used as a weapon in the battle. However, after thoroughly studying the matter, the summit conference has come to the conclusion that the oil pumping can itself be used as a positive weapon, since oil is an Arab resource which can be used to strengthen the economy of the Arab States directly affected by the aggression, so that these States will be able to stand firm in the battle. The conference has, therefore, decided to resume the pumping of oil.86

On the short term, the main consequence of the Arab oil embargo was to provide more room for Venezuelan and Iranian oil. Iran, in particular, continued to supply Israel, while simultaneously pressuring the US government for more advantageous terms from the Consortium. The Shah had discovered that secret Consortium agreements limited Iranian production in tandem with Saudi production, and argued he was now prepared to go to war with the companies: “This time it would not be with a Mussadiq, but with a united Iran behind the Shah himself.”87 While the Shah’s threats seemed to be in line with standard requests for an increased output, this time they were more worrisome from the major’s perspective because the Shah had, at the same time, started signing contracts to sell gas to the Soviet Union, thus proving that he felt confident enough to gain more autonomy in his foreign policy. * * * The Six Day War also forced the Saudis to step up their profile on the international stage. Saudi Arabia was a key US ally but, as the cradle of Islam, it could not avoid taking a hard line against Israeli imperialism on Arab and Muslim land, including its threat to the Islamic holy sites in East Jerusalem. The monarchy, while increasing military expenditure to 20 percent of GDP to guarantee international and internal stability, continued to face challenges: the vast majority of the population was still not integrated into the national economy because the petroleum industry did not provide enough employment, nor had the oil rent provided enough investment in the non-oil sector. In order to placate potential domestic unrest, the Saudi monarchy was forced to step out of Nasser’s giant shadow. Even Fred Halliday’s Arabia Without Sultans, written by one of the most widely read intellectuals of the British New Left, an academic who had been embedded for some time with the rebels of Dhofar, conceded that Saudi policy was far more nuanced than it looked: It is mistaken to [view] Saudi Arabia as a just a US colony with the appearance of independence. The wealth of Saudi Arabia and the political character of the ruling 86  The Khartoum Resolution, Arab League Summit, September 1, 1967: http://content.ecf.org.il/files/ M00092_ArabLeagueSummit-Khartoum1967-EnglishText_0.pdf (Consulted on January 16, 2019). 87 Dietrich, Oil Revolution, p. 159.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

173

family enabled it to forge an alliance with the US in which its ruling class wielded a degree of real power consonant with the preservation of US interests.88

King Faisal, a staunch critic of Zionism, chose the path of unity and solidarity among Muslim peoples as a way to counter socialist and nationalist tendencies in the Arab world. The path proved to be arduous. At the Islamic Summit held in Rabat in 1969, only twenty-five of the thirty-five Muslim countries invited actually sent delegations, and only ten of those were led by heads of State or government. The religious card still possessed relatively limited appeal as a spur to political action, or as a motive for international solidarity and cooperation. Somewhat more successful in the short term was the oil policy conducted by the Saudi Petroleum minister Yamani, by this time one of the key players in global oil politics. His meticulously manicured goatee and nuanced understanding of Western culture (he had studied law at NYU under the then-president of the Ford Foundation Henry  T.  Herald) would soon become a standard feature in the ­iconography of the major international economic forums of the 1970s. From Yamani’s perspective OPEC, which until the beginning of 1967 had avoided unilateral measures, was running the risk of turning into a lion’s den. The Iraq leadership, now deeply involved in its courtship with the Soviet Union, was talking openly of nationalization and struggle against foreign economic interference. Outside OPEC, the political atmosphere in the Arab world was if anything even worse. Yamani had to devise a strategy that would allow Saudi Arabia simultaneously to continue its fruitful cooperation with the ARAMCO’s shareholders, while giving up something to those sectors of Arab public opinion that insistently asked for nationalization and struggle against American and Israeli imperialism. Yamani called this new strategy “participation” and conceived it in direct opposition to “nationalization.” This new participation strategy—drawing on a concept invoked earlier by the very same Tariki—was presented for the first time at a conference held at the American University of Beirut at the end of 1967, and once again two years later. Yamani explained that the oil majors had every interest in preventing crude oil prices from dropping too low (“they are now the only bulwark of stability in the world market”), and that nationalization at a time of surplus production, would only pit the producers one against the other, so that the would eventually be forced to introduce “prorationing” in order to avoid prices from falling too low: So it is clear that nationalization would be a disaster that would hurt all the parties concerned in the oil industry. It would hurt the producing countries immediately. It would hurt the consumers in the long run, because the producers would eventually be obliged to form a cartel. And it would also hurt the majors because they would be deprived of their quasi-exclusive ownership of low-cost crude supplies, which is the real basis of their earning capability and the power in the market. These are the facts

88  Fred Halliday, Arabia Without Sultans (London: Penguin, 1974), p. 69.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

174

The Rise and Fall of OPEC in the Twentieth Century

about nationalization and the prospects do not look as plight as they might do on the pages of a daily newspaper.89

The Saudi minister’s strategy aimed at participating not only in the production phase but, even more importantly, also in the downstream sector so as to avoid upsetting the stability of the market. Even though many of Yamani’s c­ onsiderations were prophetic, he never explained why concessionaires should be willing to let OPEC governments to participate in the downstream activities in consuming countries. What was clear though was that, since this strategy essentially aimed at removing the threat of nationalization, the level of participation would be set below 50 percent. Above that level, the difference between participation and nationalization would be quite small. The first tangible result of Yamani’s offensive was the creation of a new entity intended to be autonomous from OPEC, and able to divert the pressures from the more radical Arab countries. On January 8, 1968 a new body was formally ­created: the Organization of the Arab Petroleum Exporting Countries (OAPEC). Membership was reserved to countries for which petroleum was the main source of national income—thus it excluded Syria, Egypt, and also Algeria. Its first members were Saudi Arabia, Kuwait, and Libya, all of them monarchies. Iraq refused to join since Nasserist politicians such as Al-Jaddir thought that organization’s main objective was to isolate Egypt. Abu Dhabi, Qatar, and Bahrain were quickly selected for admission. The scope of this new organization was essentially to end the era of Arab oil congresses, and to bring together Arab petrostates with a compatible alignment, so they could shield themselves from the pressures towards nationalization and the “politicization” of oil (embargo). Yamani explained the rationale behind the creation of OAPEC to the British ambassador to Kuwait in these terms: It was something new in the oil world: an organization dedicated to the proposition that oil affairs should be separated from politics and that the consuming countries, as well as producers, had legitimate interests. These he would define as a reasonable price and—above all—security of supplies. The hand of OAPEC, he went on, was stretched out in cooperation; and he hoped that the consumer countries, as well as the oil ­companies, would grasp it. He was determined to build up the organization into something constructive.90

OAPEC, as we shall see, would grow up to become a very different animal than the creature conceived by Yamani. It eventually opened up also to non-exports such as Egypt and Syria, and ultimately failed to contain the radical pressures in the Arab world. The second prong of the Yamani’s strategy, strictly linked to “participation,” concerned the future direction of OPEC. The organization had to reset its strategic 89 Ahmad Zaki Yamani, “Participation Versus Nationalization a Better Means to Survive”, in Z.M. Mikdashi, S. Cleland, I. Seymour (eds.), Continuity and Change in the World Oil Industry (Beirut: Middle East Research and Publishing Center, 1970). 90  British Embassy, Kuwait, October 1, 1968 in: A.L.P. Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 4: 1967–1971 (Cambridge: Cambridge Archives Editions, 2004).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

175

aims after the end of the negotiations over royalty expensing, and after that the numerous debates over “control of production” (prorationing) had led down so many dead ends because OPEC members (as we have seen with the notable exception of Venezuela until 1966) continued to prioritize output maximization. OPEC Secretary General from 1965 to 1966, Ashraf Lutfi, noted that the oil majors would never have relinquished without a fight their ability to “manipulate ­production” in the Middle East, since this was “a potent weapon which they have used and will no doubt continue to use to very good effect against individual countries in the area.”91 In the absence of production control, many in OPEC remarked, the national oil companies in OPEC countries risked ending up competing against one another by being forced to offer ever more advantageous terms of sale for their own oil to enter the market.92 The organization was stuck. Yamani encouraged the organization to concentrate on finally identifying the fundamental principles that would guide its future oil policy: to focus on the big issue, rather than petty ones such as royalty-expensing and marketing allowances. Nationalization, quite obviously, would not be one of these principles. After interminable debates over the semantics of whether and how to render the new rules binding—whether it was better to speak of a “uniform law,” a “uniform code,” or something else—Jamshid Amouzegar, the Iranian Finance minister (the Shah had not established a ministry of Petroleum for reasons that will become clear later), another of the emerging players of the international petroleum industry up until the Iranian revolution in 1978, offered a potential solution during the OPEC Conference of June 1968: he personally thought that it could be possible to have as Dr. Yamani had explained, a uniform code, a uniform set of principles for petroleum which need not to be binding on the present agreements, then the Conference would recommend to the Member Countries that they try to change and improve the existing agreements to meet with the new set.93

The debates at the Conference demonstrated a clear shift in tone and rhetoric compared to period preceding the 1967 June war. Yamani, who only a few months earlier had declared it impossible to legislate on oil issues and considered proposals to increase posted prices as the product of a febrile mind, now argued that the oil exporters had to “fight for a new principle of legality.” He also executed a U-turn on posted prices: “This should not be left to someone else to do and Member 91  Ashraf Lutfi, OPEC Oil (Beirut: Middle East Research & Pub, 1968), p. 68. 92  The idea that national oil companies might end up fighting against any mechanism of production control is important to understand the history of OPEC. The issue would emerge since the early days of the organization: “There was the fear if OPEC did not help to create a healthy atmosphere in the international market, for the National Oil Companies, these companies might not be a help but rather a hindrance to the OPEC governments in their efforts to safeguard the national interests of Member Countries. As Governments, it was their aim to protect revenues—the price; on the other hand, an oil company whether national or international, wanted to sell its commodity at the prices it could get.” NYUAD Library, ASC, GGC, MC-038, Minutes of the 12th OPEC Conference, Kuwait, December 4–8, 1966. 93 NYUAD Library, ASC, GGC, MC-038, Minutes of the 16th OPEC Conference, Vienna, June 24–5, 1968.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

176

The Rise and Fall of OPEC in the Twentieth Century

Countries should not accept the oil companies as a partner to decide upon their income, their future and their budget.”94 He went as far as arguing that “any sovereign country decides the price of products to be exported. In Iran they decided the price of caviar, for instance.”95 At the seventeenth Conference meeting held in Baghdad in December 1968, the organization finally approved a Declaratory Statement of Petroleum Policy in Member Countries that was prepared under the supervision of the Secretary General Parra and the head of OPEC’s Legal department Hasan Zakariya. The statement provided a non-mandatory policy orientation. The key elements and aims of OPEC’s policy statement were the following: to explore and produce through national oil companies whenever possible; to obtain the highest possible degree of participation from foreign operators; to introduce participation clauses into every concession, under the law of “changing circumstances;” to obtain the release of territories left unproductive by concessionaires; to base taxes on posted prices, which in turn should move in parallel with the price of manufactured goods; and to introduce best available conservation practices in all oilfields. The approval of this policy statement was considered a success by Yamani, rightly so. This would remain one of the handful of circumstances in which OPEC countries managed to agree on a long-term strategy for petroleum, one that did not only deal with prices. The basic approach was moderate, and key aim was to placate the pressures for nationalization. That said, the statement was also a clear and an effective summary of oil debates during the 1960s, offered a realistic way forward. The document opened with a reference to the UN resolution on the permanent sovereignty over natural resources and enunciated principles that would have been considered heretical only a few months earlier. The was the reference to the “changing circumstances” in opposition to the old norm pacta sunt servanda (we might recall how Hendrix had been portrayed as a lunatic for having expressed this very same idea in 1959). There was the objective of “participation” that had been considered revolutionary when first proposed by Mattei. The reference to “indexation” to avoid deteriorating terms of trade for commodites, potentially implied meddling with sacred price setting mechanisms. The sections on the “best practices” for conservation, taking both Venezuelan and US legislation as a model, was very significant because it could have allowed (as it did for Libya in only a few months time) OPEC governments to ask concessionaries to cut production because of lack of respect of the best conservation practices.96 One of the reasons why the Algerian government finally announced its decision to join OPEC after 1968 was that, by approving the petroleum policy statement, OPEC had (from the Algerian point of view) finally admitted that obtaining a significant degree of direct control over the petroleum industry was one of its key objectives. To sum up. In this chapter, we have considered a period than spans from the first OPEC negotiations with the companies in 1962 to the first formulation of OPEC’s petroleum policy at the end of 1968. This period is characterized in the specialist literature as one dominated by the consumers, basically a lost decade for 94  Ibidem.

95  Ibidem.

96 Parra, Oil Politics, p. 112.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Consumer’s Decade

177

oil exporters before entering the incredibly successful 1970s. For example Daniel Yergin argues that, beyond having stopped companies from reducing again the posted price, “OPEC had so little to show for its first decade.”97 Some observers have offered more nuanced views. Michael Tanzer has suggested that OPEC was successful only in areas where the companies had traditionally been willing to make concessions, such as on fiscal terms, but that it had “virtually no success” when it threatened the vital interests of the majors. He explains OPEC’s failure on issues such as production control, price formation, and the resistance to nationalization in the following terms: First some of the major oil-exporting countries have paternalistic, dictatorial regimes which are primarily interested in oil money for their won luxury living [. . .] Thus they have no interest in any attempts at “rocking the boat” which might jeopardise these revenues. Further, these rulers tend to be greatly dependent on Western governments for maintaining their power, and would be in grave danger of overthrow if they were to undertake such a policy. Second, the structural factors discussed previously make nationalization by any single oil-exporting country, without assistance from the other oil exporters, a perilous economic prospect [. . .] Finally there is always the underlying threat, owing to the close relationship between the international oil companies and their home governments, of the use of outside force against nationalisation.98

Parra, who as Secretary General had a key role in the formulation of OPEC’s ­petroleum policy in 1968, also tends to downplay OPEC’s role in the 1960s. He considers its main achievement to be the spread of knowledge about the industry among its members, and the establishment of a dialogue with other developing countries in international organizations such as UNCTAD, so that when the time do “real business” would come, none of the oil-importing developing county would openly side against OPEC.99 He also argues that companies would have had to accept the freezing of posted prices and some royalty expensing “anyway,” and goes as far as suggesting that “perhaps OPEC member countries traveled more slowly together that they might have done individually” (a reference to the role of Iran in putting “the brakes on OPEC”).100 Fadhil Chalabi, although recognizing that the petroleum policy statement in 1968 was a “revolution,” also points to the fact that, since their monopoly control over exports was endangered by the competition from new independent companies, the oil majors had an interest in OPEC enforcing the same strong terms to every producer through the extension of the posted price system: in fact the majors managed to recover a share both in upstream and downstream from the independents during the 1960s, also thanks to OPEC policies.101 Having said all the above, there is much more to be said about the successes of these early years of OPEC. First of all, at a time when the prices of the rest of 97 Yergin, The Prize, p. 505. 98 Tanzer, The Political Economy of International Oil, p. 74. 99 Parra, Oil Politics , p. 112. 100  Ibidem, p. 98. 101 Chalabi, Oil Policies, Oil Myths, pp. 35–43.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

178

The Rise and Fall of OPEC in the Twentieth Century

c­ ommodities traded globally were falling, OPEC, by basing its fiscal revenues on a “posted price” that was never formally reduced after its first meeting in 1960, managed to guarantee a higher per barrel income to oil exporters. Yamani highlighted the crucial importance of the posted pricing: Posted price is absolutely essential for us. Firstly, without it, it would be impossible to plan our budget—which in Saudi Arabia is 90 per cent made up of oil revenue. With the posted price we have a firm tax base to determine our income in advance. But the realized price fluctuates. How could I link my budget to the market for oil in Europe?102

Oil exporting countries were thus moving in the opposite direction from most other raw materials producers in the 1960s, for whom income per unit of exported commodity was falling. This might have happened also without OPEC since, as we have said, also the majors had an interest in spreading “posted pricing” in order to prevent better oil deals for its competitors: we will never know. But we do know that the majors suffered a significant decline in their profit margins, in part as result of direct negotiations with OPEC on issues such as “marketing allowance” and “royalty expensing”. The very success of the posted-pricing mechanism also weakened the push by petrostates to move towards pro-rationing, since the nominal posted prices never declined during the 1960s. The organization had become a magnetic pole to which the new oil provinces of Libya, Abu Dhabi, Algeria, and eventually Nigeria were, independently from the political profile of their governments, fatally attracted. Not only that, OPEC had already become an example for other raw material producers. For example the Intergovernmental Council for Copper Exporting Countries (CIPEC in the French acronym, including Chile, Congo, Peru, and Zambia) was established in November 1967 in Lusaka and openly had the organization of petroleum exporters as a reference point.103 If the main role of OPEC, for most of the 1960s, lay in protecting and increasing government take rather than in promoting control of the industry - something that was in some ways contradicted the “petromodernization” model - the 1968 statement on petroleum policy was a also a significant step in trying to influence how the industry operated, particularly because it asked for “participation” and for the application of “best practices” for the preservation of the natural resource. The fact that petroleum had become the most important energy source in the world by the end of the 1960s with no easy cheap alternative to it, and that it was exported from a very limited number of regions with a bright future ahead, obviously gave petroleum sovereign landlords a significant degree of power, and made a decisive contribution to OPEC’s success in comparison with other Third World commodities organizations.

102 NYUAD Library, ASC, GGC, MC-038, Minutes of the 16th OPEC Conference, Vienna, June 24–5, 1968.  103  Karen A. Mingst, “Cooperation or Illusion: An Examination of the Intergovernmental Council of Cooper Exporting Countries”, in International Organization, 31:2 (Spring, 1976), pp. 263–7.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

4 The Energy Crisis People who have lived without oil for 5000 years can live without it again for a few years in order to attain their legitimate rights.1 Muammar Gaddafi, 1970 The era of low-cost energy is almost over. Popeye is running out of cheap spinach.2 Peter G. Peterson, US Secretary of Commerce, 1972 Growth for the sake of growth is the ideology of the cancer cell.3 Edward Abbey, 1977

In June 1973 Stephen King published Trucks, a short story which would later go on to be adapted into the blockbuster movie Maximum Overdrive. I was fascinated by the movie, directed by King himself to terrible reviews. I was attracted by the AC/DC soundtrack and a by the plot revolving around trucks rebelling against their human masters, after a comet had brushed past the Earth. A few of these trucks ultimately trap a group of people inside a gas station, forcing them to refuel them, while other trucks wait in line for miles. When the gas station finally runs out of gas, the machines become very angry, and start to take their revenge. At the end of the story King writes that the only option left for humans seemed to be to go “back to the caves”: Not even that. So much of the world is paved now. Even the playgrounds are paved. And for the fields and marshes and deep woods there are tanks, half-tracks, flatbeds equipped with lases, masera, heat-seeking radar. And little by little, they can make it into the world they want. I can see great convoys of trucks filling the Okefenokee Swamp with sand, the bulldozers ripping through the national parks and wildlands, grading the earth flat, stamping it into one great flat plain.4

The often-arbitrary periodization of the twentieth century into decades is quite appropriate when discussing the rising of power of the petrostates. In 1970 the oil 1 In: Petroleum Intelligence Weekly, Supplement, April 22, 1974. 2 Quoted in: Paul Sabin, “Crisis and Continuity in US Oil Politics, 1965–1980”, Journal of American History, 99:1, June 2012, 177–86. 3  Edward Abbey, The Journey Home: Some Words in Defense of the American West (New York: Plume, 1991), p. 183. 4  Stephen King, “Trucks”, in Night Shift (New York: Doubleday & Co, 1978), p. 142.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

180

The Rise and Fall of OPEC in the Twentieth Century

market shifted quite suddenly from a buyer’s to a seller’s market, with oil supply seemingly lagging behind demand and pressures towards an increase in market prices. That year marked the passage from the optimism of unlimited growth to concerns about the “limits to growth”; from faith in unlimited natural resource supplies to the widespread fears of resource exhaustion; from cheap to expensive oil. Petroleum had become so vital for consumers in industrialized countries that, at least on the short term, they seemed to have basically no way out of paying more for it if they did not want to “go back to the caves” (not even that, as this option was considered only by a minority of “hippies”). Petrostates started wielding real power in negotiating with the oil majors, while OPEC for the first time appeared consistently on the front pages of the most important newspapers around the world. T H E P E T RO S TAT E ’ S 1 9 6 8 In late 1960s global anti-imperialist struggles and protests from the jungles of Vietnam, to the streets of Paris, Prague and Mexico City, mixed themselves in many Third World countries with broad calls for greater autonomy in foreign policy and for emancipation from neocolonialism.5 On July 17, 1968, a military coup led by general Ahmad Hasan Al-Bakr restored the Ba’ath party to power in Iraq. Ba’ath party membership was still limited.6 Al-Bakr thus sought to consolidate his position by engineering a sophisticated network of political alliances. On one side he surrounded himself with the military, a support base indispensable for any government in the Arab world. On the other he turned to the Ba’athist “left,” appropriating their radical rhetoric and objectives of transformation of the Iraqi society and economy, expansion of worker’s rights, and land reform. The new Constitution of 1970 stated that Iraq was a Sovereign People’s Democratic Republic whose “principal aim is to fulfill the united Arab State and to establish the Socialist System.” Among other social provisions, it guaranteed each Iraqi citizen free education all the way through university, as well as free health care.7 President Al-Bakr surrounded himself with trusted political advisors, many of them Sunni relatives from his native province of Tikrit. Among these, one soon began to stand out: Saddam Hussein, who before long was named Vice-President. Hussein not only controlled the regime’s repressive ­apparatus, but also quickly acquired a detailed knowledge of the oil industry, becoming Ba’ath’s representative in the talks with the IPC. The Ba’ath alliances network extended as far as the Iraqi Communist Party, feared for its extensive organization. The Soviet Union, by now an Iraqi ally, provided technical assistance for the exploitation of 5  A recent edited volume conveys the scale of the political as well as cultural turmoil of the “global sixties”: C. Jian, M. Kirasirova, M. Kimke, M. Nolan, M. Young, J. Waley-Cohen (eds.), The Routledge Handbook of the Global Sixties: Between Protest and Nation-Building (Abingdon: Routledge, 2018). 6  Phebe Marr, The Modern History of Iraq (New York: Avalon Publishing, 2012, 1st printing 1985), p. 138. 7  The 1971 New Interim Constitution of Iraq can be found at: http://www.hrcr.org/hottopics/ statute/scans/iraq1.pdf (Consulted on January 19, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

181

the Iraqi oilfields, especially in north Rumaila. Iraq seemed to be moving inexorably towards open warfare with the concessionaires. IPC’s Managing director drily remarked in September 1971: “It is quite unrealistic to hope that a nice gentlemanly, rightwing collection of Sandhurst trained Colonels with a strong belief in the Capitalist system will take over and be ready to deal with us. There are none left.”8 On September 1, 1969 the winds of Arab nationalism and anti-imperialism swept Libya. A group of military officers overthrew the King without encountering significant resistance. The monarchy was weak and compromised with foreign powers. The oil majors themselves had little interest in fighting to preserve the old regime since they enjoyed no monopoly over Libyan production. Leadership of the new Revolutionary Command Council (RCC), a group made of up “free officers” along the Egyptian model, soon went to Colonel Muammar Gaddafi. Gaddafi was only twenty-seven years old at the time. He came from a line of goat herders, and his home, as he would frequently recall throughout his political career, had long been a Bedouin tent. He used to carry a tent around on his state visits up until the very end of his regime. He had entered the military academy because this was the only way a family with limited means could provide their children with a proper education. This social and cultural background supposedly left him willing to do without the privileges and the comforts offered by the West and provided him with a key to criticize the inequalities in Libyan society: Libyan society was controlled by favoritism and corruption, and dominated by foreign elements, which were everywhere. Foreign languages had gradually supplanted Arabic as the national tongue, and were even used on forms of identification. Meanwhile the citizens of Libya had not achieved even a minimally decent standard of living, despite the enormous oil wealth in the country.9

In his view, 1969 was to represent the true beginning of Libyan independence, after the “limited sovereignty” it enjoyed since 1951. The nationalist officers in power had no well-defined plan in mind for Libya’s future other than the ­elimination of foreign military bases, regaining control over Libya’s natural resources, coupled with support for the Arab cause. Gaddafi had a message for Nasser: “Tell President Nasser we made this revolution for him. He can take everything of ours and add it to the rest of the Arab world’s resources to be used for the battle.”10 These political upheavals in two Arab OPEC member states helped generate a new dynamic within an organization that was also soon to welcome also revolutionary Algeria in July 1969. Algeria participated to its first OPEC Conference with the largest delegation of all. Only after significant Saudi pressure did the Algerians agreed to withdraw Al-Tariki from their first delegation, but the “red sheik” would remain an advisor to the Algerian government. Sid Ahmed Ghozali, 8  Cited in Wolfe-Hunnicutt, The End of the Concessionary Regime: Oil and the American Power in Iraq, 1958–1972, p. 209. 9  Federico Cresti and Massimiliano Cricco, Storia della Libia Contemporanea (Rome: Carocci, 2015), p. 208. 10  Joe Stork, Middle East Oil and the Energy Crisis (New York: Monthly Review Press, 1975), p. 153.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

182

The Rise and Fall of OPEC in the Twentieth Century

the head of SONATRACH, speaking for the Energy minister Abdessalam who had been hospitalized, clearly outlined the his government’s objectives within the organization: Having rejected, from the very beginning, the role of mere tax collectors to which the traditional concession system has confined us, we have worked out and implemented various exploitation formula which enable us to carry out the training for Algerian personnel and to directly assume our responsibilities in the valorization of our hydrocarbon resources and to use these resources for economic development.11

Clearly, in Algerian eyes, OPEC was meant to be a tool to overcome the concessionary system and impose sovereign control over natural resources. Fadhil Chalabi describes Abdessalam, who would come to play a prominent role in the i­ nternational oil diplomacy in the years to come, in evocative terms: with his fair complexion, serene blue eyes, unhurried and calmly majestic gait, exuded an air of self confidence. He was, in fact, a revolutionary from the mountain tribes called the Kabyl, and his apparent calm concealed an extraordinary degree of extremism when dealing with oil affairs.12

Not only was Abdessalam self-confident (after an interview he told me: “if you want to write me a letter address it to Belaid Abdessalam, Algiers; it will reach to me”), he also embodied an approach to natural resources and development. As much as Pérez Alfonzo embodied the policy of “conservation” of natural resources, Abdessalam embodied the policy of using natural resource rents to jumpstart rapid industrialization. Yamani’s moderating tactic with the creation of OAPEC had failed: petroleum had become once more a terribly hot political issue for the Arab producers. While overturning the concessionary system was not the priority for the Gulf monarchies, they were forced to raise the stakes with the majors. and to demonstrate to their citizens a far greater autonomy in foreign policy. No longer could they be content with minor fiscal adjustments and with following most of the investment priorities decided by key allies and former colonial powers. In the early 1970s, Saudi Arabia became the oil superpower we still know today. Between 1970 and 1973, the Saudi share of world oil exports rose from 12.8 percent to 21.4 percent. Saudi production over the same time span increased by 3.2 million barrels a day to some 7.5 million barrels, as if a second Libya had been discovered. In addition to a great influx of money, this also brought with it a hefty load of domestic pressures and international responsibilities. The needs of its own citizens compelled the Saudi government to improve living conditions for workers in the oil industry and to encourage industrialization in order to provide new job opportunities. To assuage Arab public opinion abroad, as well as to react to the increasing number of terrorist attacks within the country, Faisal started using all the diplomatic means at his disposal to try to weaken the United States’ political and military support for Israel. 11  NYUAD Library, ASC, GGC, MC-038, Minutes of the 18th OPEC Conference, Vienna, July 8–9, 1969. 12 Chalabi, Oil Policies, Oil Myths, p. 50.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

183

Kuwait’s government also came under strong pressure from trade unions, Palestinian immigrants, and from broad sections of its own Assembly to show greater solidarity with the progressive Arab countries and active support for the Palestinian cause—including, if necessary, the use of the oil weapon. Kuwait City had become a crossroads for politically-engaged Arab intellectuals (also had Tariki opened his office there after leaving Beirut) and a propaganda hub against Israel and US imperialism. In 1971, members of the Arab nationalist movement (not a formal political party, but a significant political network nevertheless) were elected the Parliament once again. According to US diplomats Abdullah Al-Naibari, one of the influential members of the nationalist opposition, was in contact in the early 1970s with the following organizations: “Istiqlal Party in Morocco; Socialist forces (i.e. union, associations, etc.); Arab parties operating in France, England, Sweden, Denmark; Baath party in Syria; Baath Party in Iraq; Organizations operating in the Gulf (PFLOAG?); PFLP; all groups of the Palestine liberation movement; national fronts; People’s Democratic party in Yemen; Peoples Democratic Party in Saudi Arabia.”13 Quite the melting pot of nationalist and “anti-imperialist” organizations! The January 1968 decision by the Labourite British Prime Minister Harold Wilson to withdraw British forces East of Suez threw the sheikdoms that still formed part of Britain’s informal empire over the Gulf into a state of turmoil. The rulers of Bahrain, Qatar and the Trucial States (foremost among them Abu Dhabi) all looked on anxiously. They feared the possible expansion of Soviet influence or, more tangibly, the aggressive moves of neighboring Iran, which had territorial ambitions in the region and could encourage unrest among the sizable Shi’ite minorities. There were also pressures from Socialist South Yemen and from the revolutionary Dhofar rebellion in Oman. To assuage these fears and safeguard its own economic and political influence, Great Britain agreed—at the behest of Saudi Arabia and Kuwait—to push for the creation of a federation that included all nine Gulf emirates. Ultimately, after lengthy negotiations, both Bahrain (historically the epicenter of British regional influence) and Qatar declared their own independence in 1971, and soon joined the United Nations. Shortly thereafter, the remaining seven Trucial States, the wealthiest of which were Abu Dhabi and Dubai, proclaimed the birth of a new federation, named the United Arab Emirates. The Ruler of Abu Dhabi, Sheikh Zayed Al-Nayan, was chosen as President. At least initially, this federation of the Emirates existed almost only on paper, for at the time of the founding there was not even a single paved road linking Abu Dhabi and Dubai, nor any meaningful pre-existing bureaucratic structure. Petroleum, as well as the rest of natural resources, “was to be considered the public property of the respective emirate:” meaning that oil revenue would flow to each emirate (with a percentage directly to the ruling family) rather than to the Federal government. Even before it was created, the UAE had to face the 13  Wikileaks, Canonical ID 1974KUWAIT02249_b: https://wikileaks.org/plusd/cables/1974 KUWAIT02249_b.html (Consulted on January 19, 2019). Cable, American Embassy in Kuwait to Office of the Secretary of State, Assembly Leftists Resume Attack on Atiqi, Washington DC, June 3, 1974.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

184

The Rise and Fall of OPEC in the Twentieth Century

humiliating loss of the islands of Abu Musa and the Greater and Lesser Tunbs to Iran. The new country, while still obviously under heavy British influence, was also affected by the nationalist and anti-imperialist climate prevailing in an Arab world. Abdullah Omran Taryman, who would be the UAE Education minister from 1972 to 1979, and had taken part in the negotiations over the drafting of the first Constitution, had these words for the former colonial master: For 150 years Britain had keenly observed its official responsibility in the region against those who sought change for the better, against nationalist voices, against demands for education, political consciousness, social amenities such as roads and hospitals, and economic liberty. It had exercised this responsibility against freedom fighters and true nationalists, and against external assistance, whether from the Arab League or from individual sister Arab states, indeed, against anything judged to ­contradict purely British interests.14

On the other hand support for the Palestinian cause, and willingness to forge a new Arab identity, was clearly not the driving force behind Iran’s increasingly ­assertive foreign policy. The Shah wanted to play a greater role in the Gulf while British power was fading, and needed to shore up his domestic support. In October 1971, the Shah commemorated 2500 years of Persian monarchy in Persepolis, apparently convinced he had been chosen to revive the great Persian civilization. To celebrate, he held an unforgettable party for dignitaries and heads of State from around the world, all suitably attired in formal evening wear or full military dress uniform, and lavishly entertained by all the pomp and splendor the Shah could muster: the banquet menu included quail eggs brought directly from Maxim’s in Paris. The Shah wanted to build Iran into the Middle East’s foremost regional military and economic power. In pursuit of this goal, and in his desire to wipe away his original sin—the American support in the 1953 coup—he was ready to step on a few friendly toes. * * * While in the Middle East the sands beneath the Cartel’s feet were starting to burn, the political and social climate in Latin America was no less heated. Nationalizations swept the continent. In 1969, a radical military government in Peru nationalized the International Petroleum Company (IPC) holdings, and also entered into a trade deal with the Soviet Union to stave off retaliation. In 1970, the Chilean Socialist Salvador Allende won his country’s general elections in an alliance with the Communists. His aim was a Socialist transformation of the society, to be achieved in no small measure by nationalizing the largest copper mining industry in the world, as well as by claiming in parallel higher prices for copper exports. Chile was not Cuba. It was not an island in the Caribbean that could be subjected to embargo or depicted as an exotic experiment. Allende soon became a charismatic voice, not only throughout Latin America, but also for other raw materials 14  Abdullah Omran Taryam, The Establishment of the United Arab Emirates, 1950–85 (London: Croom Helm, 1987), p. 185.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

185

exporting countries that aspired to take control of their industries and increase export revenues. Indeed, Raúl Prebisch had developed his “dependency theory” while he was running CEPAL in the Chilean capital city of Santiago. It was in that very same city in 1972 that the third meeting of the UNCTAD Conference, the largest meeting of Third World diplomats to that date, relaunched the objectives of sovereign control over natural resources, of changing the terms of international trade in favor commodities, and of reforming international economic institutions and the international monetary system.15 On the surface, Venezuela appeared to be moving in a more moderate direction. In 1968, the national elections had been won by the moderate Christian Democratic party (COPEI). But its victory margin had been extremely narrow and it was unable to form a government without the support of multitude of radical parties, as well from the ample platoon of AD, the party of Pérez Alfonzo and Betancourt which had taken an increasingly confrontational stance towards the oil industry. In 1971 Pérez Alfonzo published Petróleo y Dependencia, a devastating critique of the role of played by foreign capital in the economies of developing countries, and of his country in particular.16 He wrote that the kind of development promoted by the UN Decade of Development was “false and illusory,” and that Venezuela risked “economic indigestion” since it could not productively invest the money that was flowing in: by the end of the 1960s it had become totally dependent from a nonrenewable source of taxation that now represented 71 per cent of government income and was essential to finance current expenditure. He critiqued foreign companies for having squeezed the oilfields to their limit and for lagging behind in investment. The Big Three had “extracted” from Venezuela more that 2 billion dollars between 1961 to 1969, a figure calculated by Pérez Alfonzo by taking into account their profits that exceeded a “normal” profit rate of 15 percent: “In the case of Venezuela the experience with foreign direct investments has been disastrous.”17 His critique extended beyond foreign companies, and addressed the basic political compromise between “creole capitalism” and Venezuelan state bureaucracy: On the one side national bureaucracy attends to the increasing needs in terms of general services by liquidating national assets, something that allows it to avoid the difficult task of taxing those who should contribute more. On the other, the big potential contributors applaud and ask for more state expenditure because this is not realized by taxing them.18

This new parliamentary and cultural landscape in Venezuela, combined with the pressures of a left-wing opposition that engaged in guerrilla tactics and widespread social unrest (there was a seemingly unending series of students and workers strikes after 1969), led the COPEI administration of Rafael Caldera to opt for a clean break with the concessionary era. This was probably the last time Venezuela would 15  Giuliano Garavini, After Empires: European Integration, Decolonization and the Challenge from the Global South 1957–1986 (Oxford: Oxford University Press, 2012), pp. 132–41. 16  Juan Pablo Pérez Alfonzo, Pétroleo y Dependencia (Caracas: Sintesis Dos Mil, 1971). 17  Ibidem, p. 65. 18  Ibidem, p. 50.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

186

The Rise and Fall of OPEC in the Twentieth Century

move ahead of the Middle East. In 1970, the Caldera administration decided that it would unilaterally fix the posted price of Venezuelan crude. In December of the same year it decided, again unilaterally, to increase the tax on the Big Three to 60 percent. Then, in March 1971, it took its strongest decision again petrocapital by approving the “law of reversion”: as of 1983—the expiration date of the key concessions—all the assets of the concessionaires would automatically “revert” to the Venezuelan state.19 The reversion law, in order to prevent progressive damage to the facilities and to the oilfields, also forced the concessionaires to undertake the investments necessary to safeguard the assets, thus implementing a measure of direct state control over petrocapital. It is worth remembering that in March 1971 Venezuelan production had reached its historic peak of 3,866,649 barrels per day, after which it would start a decline that would continue up until the present. It was thus vitally important for the state to limit overexploitation and invest in ­exploration. The nationalist impulses coursing through the veins of the Venezuelan Parliament also had a direct impact on Caracas’ foreign policy, leading Caracas to seek greater autonomy from the United States, and moving it one step the closer to the Non-Aligned countries: In this moment it is important that the African and Asian countries recognize the nationalist and anti-neocolonial aspect of our measures in respect to oil, and that they be disposed to ally themselves with Venezuela in a solid front against the hegemonic forces that would try to deny us the right to dispose entirely of our main resource. Also, it is important that Venezuela will not remain at the margins the visible historical process represented by the making of new power centers and new alliances.20

Nigeria was the first nation from sub-Saharan Africa to join the OPEC, until the admission of Gabon in 1975. Although Nigerian petroleum had accounted for only 1 percent of total exports in 1958, it came to represent 75 percent of Nigeria total exports by July 1971, when the country finally joined OPEC. One of the strong supporters of Nigeria’s application to OPEC, as well as of direct state involvement in the petroleum industry, was the Oxford-educated Permanent secretary to the ministry of Petroleum Chief Philip Asiodu who argued that the concessionary companies up to 1971 had employed only a tiny number of Nigerians in the management positions and had failed on the job creation front. He advocated for the creation of a national oil company (following OPEC’s prescriptions) that would participate in the concessions because this would be a way to acquire direct knowledge of the industry, to incentivize other Nigerian ­companies offer their services to the petroleum industry, and because this would be a way to invest productively the increasing oil rent.21 After consultations with Algerian and Libyan representatives, the Nigerian government had been guaranteed that it would remain aloof from Arab politics 19  Franklin Tugwell, The Politics of Oil in Venezuela (Stanford: Stanford University Press, 1975), p. 121. 20 AHMPPRE, Argelia, IV: Conferencia de Jefes de Estado y Gobierno de los Países no Alienados, Director de Política Internacional, Venezuela y Los Países No Alineados, 15 Enero 1973. 21  On Nigeria’s adhesion to OPEC: Philip C. Asiodu, “Aspects of Indigenous Participation and Control in the Oil Industry in Nigeria (1972)”, in Essays on Nigerian Political Economy (Lagos: Sankore Publishers, 1993).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

187

(as much as Iran, Venezuela, and Indonesia had been unaffected by the Arab embargo in 1967) and that it would not be forced into prorationing schemes before reaching a satisfying level of production (any such measures required unanimity). According to Asiodu Nigeria had finally agreed to join the organization because membership would have strengthened Nigerian negotiating power with the ­companies as to the level of participation of the national oil company, and also when it came to setting crude prices. The Nigerian Federal Republic had put forward a Second National Development Plan (1970–4) to signal the revival of the country’s economy. Without mincing words, the plan’s promoters declared that the government could now “lay a solid foundation for a socio-economic revolution in Black Africa.”22 This revolution would have to come about mostly thanks to Nigerian resources and by breaking the vicious circle of development aid: in the future outside funding would represent no more than 25 percent of the total government budget. I read a copy of the Nigerian development plan at the library of the Nigerian Institute for International Affairs—located in a modernist building on Victoria Island in Lagos—that was a hub of great cultural and political activism in the 1970s, symbolizing the pride of a country that now saw itself not only as a leader in western Africa, but also as beacon for all of Black Africa. PEAK OIL While petrostates were pushing for greater control of petroleum industry so as to satisfy their own development priorities, consumers were starting to be increasingly pessimist as to the generosity of Mother Nature. During the 1960s, new oil had come on stream from Abu Dhabi in the Gulf, from Algeria and Libya in North Africa, and from Nigeria in sub-Saharan Africa. Between 1964 and 1967 alone, oil consumption had gone from 6.9 to 9.2 million barrels per day in Western Europe, from 11.6 to 13.6 million in North America, and from 1.5 to 2.5 million barrels per day in Japan. In 1968, new supertankers capable of transporting each 300,000 tons of crude made their debut, making it possible to ship lakes of crude from one corner of the globe to another. The vast majority of this crude came from OPEC countries, especially from the Middle East where the majors still appeared firmly in control of the most productive and remunerative concessions. Consumers in the industrialized world rarely came into direct contact with the slick, foul-smelling substance on which they had come to depend so much. Petroleum remained almost invisible: a miraculous energy source stored in barrels, moved through pipelines and siphoned into the tanks of automobiles. It traveled thousands of k­ ilometers, from desolate, far-off lands about which little was known, to magically transform itself into “a tiger in your tank,” as a lucky Esso campaign called its gasoline.

22 “Prescriptive Signals for Nigeria’s Foreign Policy in the 1970s. The View from the Second National Development Plan”, in G.O. Olusanya and R.A. Akindele, eds., Nigeria’s External Relations: The First Twenty-Five Years (Ibadan: University Press Limited, 1986), pp. 59–70.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

188

The Rise and Fall of OPEC in the Twentieth Century

This physical availability of petroleum was also accompanied by a “discourse” on growth that echoed through the economics departments.23 Economics, once labeled the “dismal science,” because it had to deal with the distribution of scarce resources, became a “gay science” that explained how, by applying the proper policy mix, such as playing with interest rates and stimulating public investment, governments could foster uninterrupted growth and full employment. Nature, and the limits it placed on man, found little place in the social science of economics. Fressoz and Bonneuil argue that between 1870 and 1970 the study of natural resources only occupied a minor place in general economic theory: a branch called the economics of conservation “which took its ontology and mathematical tools from marginalist theory.”24 Andrew Shonfield wrote in Modern Capitalism, one the classic economics textbooks of the 1960s: Since the collapse of the Korean War boom the industrial countries have generally enjoyed the benefit of falling prices for the primary produce which they import and the rising prices for industrial goods which they export. They would, of course, have been ruined by this situation long ago, if they had depended for the prosperity of their export trade on the buying powers of the primary producers.25

Citizens and political leaders in the industrialized countries believed themselves to be virtually immune from the events taking place in the developing world: they imported cheap raw materials and then transformed them into industrial products to be primarily sold to other industrialized countries. The Italian chemist Giulio Natta won the Nobel Prize in 1963 for his studies on plastics and polymers. The Italian chemical industry was on the cutting edge in developing new materials derived from the petrochemical industry, which held the promise of liberating new consumer goods from the limits imposed by the imports of natural rubber, wood, bone, or iron. European and American homes are still full of such modernist furniture from a time when plastic gave physical form to the optimism of modernity and of perpetual growth. The economist Nicholas Georgescu-Roegen reminded his readers that: “To maintain further that ‘the world can, in effect, get along without natural resources’ is to ignore the difference between the actual world and the Garden of Eden.”26 * * * The management boards of the oil majors acted on the premise, given adequate investment and the right political atmosphere, there would never be serious problems 23 Mitchell, Carbon Democracy, p. 139. 24  Jean-Baptiste Fressoz and Christophe Bonneuil, “Growth Unlimited: the idea of infinite growth from fossil capitalism to green capitalism”, in Iris Borowy and Matthias Schmelzer (eds.), History of the Future of Economic Growth: Historical Roots of Current Debates on Sustainable Growth (London: Routledge, 2017), p. 57. 25 Andrew Schonfield, Modern Capitalism: The Changing Balance of Public and Private Power (Oxford: Oxford University Press, 1965), p. 23. 26  Nicholas Georgescu-Roegen, Energy and Economic Myths: Institutional and Analytical Economic Essays (London: Pergamon, 1976), p. 17.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

189

in terms of supply of natural resources. The OECD Oil Committee risk-assessment exercise for 1970 stated that: “There is not reason to fear physical shortage of oil in the period up to 1975—or, indeed up to 1980; that barring political interventions, there is unlikely to be any major rise in costs.”27 During the twentieth OPEC Conference held in Algeria in June 1970, OPEC delegates still shared the paradigm of unlimited oil supply and of market prices in constant “deterioration.” The Venezuelan minister Hugo Pérez La Salvia offhandedly warned his colleagues that “sooner or later each country would face the fact that realized prices were pulling down any prices that were used for the purpose of taxing.”28 Without introducing production controls, La Salvia continued, low market prices would inevitably drag down posted prices, plunging all OPEC nations into a financial crisis. Morris Adelman, an internationally renowned oil expert with a supreme dislike for both OPEC (first) and the oil majors (second), had declared in 1963 that oil prices would fall to $1 a barrel. While the 1970 market price for crude, adjusted for real inflation, basically did get to that level, something new was happening the nature of which shocked Adelman: “some powerful force has overridden demand and supply” a force, he added, that did not exist “before the middle of 1970 at the earliest.”29 After the summer of 1970, the petroleum industry would have to start contemplating an entirely different scenario. In a matter of weeks businessmen, government officials, and analysts had to shift from talking weak oil prices and unlimited supply, to the opposite paradigm of increasing prices and concerns for security of supply. In the face of growing and seemingly unstoppable demand, most of the supply would have to come from OPEC countries, and from the Middle East in particular. But how much oil was really available out there? M. King Hubbert came from a farming family in San Saba, Texas, a small town on the state’s vast central plains. He might well have grown to believe that natural resources must be used in moderation simply by looking out the window. After earning his undergraduate and graduate degrees in geophysics, he became convinced that scientists needed to have a leading role in policymaking, and became a prominent member of the early 1930s “technocracy movement.” In the postwar period King Hubbert was one of the most reputable geologists in the service of Shell in the US. It was in this capacity that, during a 1956 conference, he introduced his theory of “peak” petroleum production, better known today as “peak theory,” or “Hubbert’s peak.” Hubbert started off by the premise that discoveries of new oil fields on the US continental shelf would inevitably slow down, since there was a finite quantity of hydrocarbons lying beneath US soil, which he estimated to contain somewhere between 150 and 200 billion barrels of oil. At 1956 US consumption rate, peak oil production would be reached somewhere between 1966 27  Rüdiger Graf, Oil and Sovereignty. Petro-Knowledge and Energy Policy in the United States and Western Europe in the 1970s (New York: Berghan, 2018), Chapt.6. 28 NYUAD Library, ASC, GGC, MC-038, Minutes of the 20th OPEC Conference, Algiers, June 24–6, 1970. 29  M.A. Adelman, “Is the Oil Shortage Real? Oil Companies As OPEC Tax-Collectors”, in Foreign Policy, 9, Winter 1972–3, pp. 69–197.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

190

The Rise and Fall of OPEC in the Twentieth Century

20,000

Thousand Barrels a Day

15,000

Only counting crude oil imports & not other petroleum imports 10,000

5,000

1859 1861 1863 1865 1867 1869 1871 1873 1875 1877 1879 1881 1883 1885 1887 1889 1891 1893 1895 1897 1899 1901 1903 1905 1907 1909 1911 1913 1915 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

0

Domestic Field Production

Imports

Exports

Fig. 4.1.  Peak production and the rise of import dependence in the US. “Conventional” oil production peaked in 1970; since then the US has been increasingly reliant on petroleum imports. The new increases in production in the 2000s are due to “unconventional” oil. (US Energy Information Administration).

and 1971. After this, US output would undergo constant and irreversible decline, no matter how much money would be poured into exploration.30 (Fig. 4.1.) When it was delivered, Hubbert’s idea sounded heretical. It was either quickly dismissed altogether, or filed away as an inconvenient truth. But in 1971 US oil production did in fact reach its “peak,” earning Hubbert well-deserved fame (although the recent rise of so-called “unconventional oil” such as shale would, ultimately, push production in the United States back to 1971 levels). As a consequence of peak production, US oil imports rose from 19 percent of total US consumption in 1970 to 35 percent of consumption in 1973. The disappearance of American “spare capacity” also meant that Washington could no longer provide oil to its allies should there be any new supply interruption in the Middle East. On March 19, 1972, for the first time in twenty-four years, oil production in Texas was set at 100 percent capacity. As Byron Tunnel, the head of the Texas Railroad Commission, commented: “Texas oil fields have been like a reliable old warrior that could rise to the task when needed. That old warrior can’t rise anymore.”31 Up until the very end of the 1960s the US debate had focused on whether or not to allow in more cheap oil from the Middle East. Just a couple years later, the focus became petroleum scarcity, and the abolition of import quotas was not an option anymore but a necessity. Considering that the US was both the largest oil producer and consumer in the world, America’s peak production—and its increasing dependence on Middle Eastern oil—may be viewed as a key turning point in the 30 See: Kenneth  S.  Deyeffes, Hubbert’s Peak. The Impending World Oil Shortage (Princeton: Princeton University Press, 2008); Ronald E. Doel, “Hubbert, M. King”, New Dictionary of Scientific Biography, Vol. 21, (New York: Scribners, 2007). 31 Petrini, Imperi del profitto, p. 223.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

191

history of the petroleum industry. And as, if this were not enough, Venezuelan oil production also reached its peak production in parallel with the US. Alongside these epochal events in the history of petroleum, other concomitant factors further altered the balance between petroleum supply and demand. In May 1970, an excavator working for the Syrian Public Works Ministry “accidentally” destroyed the TAPLINE to the Mediterranean, depriving the European market of more than 400,000 barrels of Saudi crude per day. Replacing such a large volume of crude on short notice was no simple task, particularly since the Suez Canal had been closed after the 1967 war. * * * These insidious bottlenecks on the supply side occurred at precisely the same time that hydrocarbons demand in the industrialized world was growing exponentially, thanks to a wave of wage increases in Western Europe and to unprecedented growth in manufacturing both in Western Europe and Japan. New standards for air quality, particularly in large urban areas, further incentivized petroleum consumption by requiring that coal be replaced with lighter and less environmentally harmful hydrocarbons such as natural gas or unleaded gasoline. Western Europe at the beginning of the 1970s depended on oil imports—the vast majority of which came from Africa and the Middle East—for some 70 percent of its energy needs. Japan was entirely dependent on imports.32 In 1960, “strategic reserves” of ­petroleum worldwide were approximately equal to between 40 and 50 percent of global production. These reserves could be tapped to help deal with any temporary market instability, bringing prices back in line. This had proven true during the 1956 embargo, and yet again during the Six Day War in 1967. But in 1970 no oil producing country, with the possible exception of Saudi Arabia, had “strategic reserves” that could immediately stabilize the market (even if they had been willing to do so). This new scenario generated what was immediately identified as an “energy crisis” (particularly in the United States). The energy crisis was the first incarnation of the 1973 “oil shock.” This is how Steve Isser described the development of the energy crisis in the US: A perception that an energy crisis was upon the country emerged during the winter of  1972–3. The collision of environmental regulations, price controls, natural gas regulation, oil import constraints, and explosive demand growth resulted in apparent shortages of fuel. Air pollution controls restrained the use of coal and high sulfur residual, increasing demand for natural gas, whose price was controlled at artificially low levels by the Federal Power Commission. Shortages of natural gas shifted consumption to heating oil, whose supplies were limited due to price controls.33

By 1971, the US oil industry already considered the “crisis” to be the new fact of life, while price controls for natural gas also contributed to significant natural gas 32 Schneider, The Oil Price Revolution, p. 108. 33 Isser, The Economics and Politics of the Unites States Oil Industry, p.130; For the energy crisis in the US: Jacobs, Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s (New York: Hill and Wang, 2016).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

192

The Rise and Fall of OPEC in the Twentieth Century

shortages. A peek into the sancta sanctorum of petrocapital, the London Policy Group, where the heads of the majors exchanged ideas and strategies under the capable management of the lawyer John McCloy (we will speak about this group later), reveals quite clearly that petrocapital was in “crisis mode” long before the oil shock. In June 1971, McCloy, noting that consumption in Western Europe had risen from 5 to 13 million barrels per day over the course of a decade, stated plainly that: “without the location of some really great new oil reserves it is difficult to see how either the return to coal, the use of shale or the increase of nuclear energy application is going to make much of an impact on this situation in the reasonable future.”34 In October 1971 the head of Shell, during a lunch at 10 Downing Street, delivered the same bad news to Britain’s Conservative Prime Minister Edward Heath: It was not possible to foresee in the next ten to fifteen years any major contribution from new sources [. . .] Reserves in Kuwait might last for another ten years, those in Saudi Arabia for thirty to forty years. [. . .] Gaining oil from tar sands and from shale presented formidable technological and environmental problem [. . .] Coal reserves were virtually unlimited; the limiting factors were cost and technical and social problems of recovery [. . .] Avoidance of pollution could itself increase the consumption of oil: decisions in 1973 that the motor fuel should in future be lead-free and fuel oil sulfur-free could increase consumption by 2,1/2 per cent a year [. . .] Solutions would be: nuclear, coal, natural gas, discourage waste of energy in every possible way. For example, the use of private transport by commuters should be discouraged, and public transport made more attractive.35

The majors were sending the dark message to consumer governments: “Houston, we have a problem.” The United States began to witness occasional (and unsettling) lines at the fuel pump. By 1972, US cabinet officials—here Secretary of State William P. Rogers in a memo to President Nixon—were forced to reckon with the energy problem: Our conclusions to date are as clear as they are disturbing. Unless present trends are reversed, the United States by 1980 will be producing little more oil than it produces today while consumption will rise from 15.8 million barrels per day in 1971 to 24 million barrels per day in 1980. At that time we will be forced to import half our petroleum needs, largely from the Arab States, which contain at least two-thirds of the non-Communist world’s oil reserves. Our NATO allies and Japan are in an even more precarious position. They are already heavily dependent on the Arabs for a large share of their total energy consumption. In 1980, by all accounts, this dependence will be still greater.36

Then (as now) there were scholars and intellectuals eager to demonstrate that the “energy crisis” was nothing but conspiracy: the scarcity had been deliberately 34  Amherst College Archives & Special Collections, John J. McCloy Papers, International Oil 3, Notes for International Oil Meeting on Monday, June 7, 1971. 35  Note for the Record, October 5, 1971, in: A.L.P. Burdett (ed.), OPEC: Origins & Strategy 1947–1973, Vol. 4: 1967–1971 (Cambridge: Cambridge Archives Editions, 2004). 36 FRUS 1969–1976, vol. XXXVI, Energy Crisis, 1969–1974, Doc. 116, Memorandum From Secretary of State Rogers to President Nixon, Petroleum Developments and the Impending Energy Crisis, Washington, March 10, 1972.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

193

­ anufactured by Big Oil in order to be able to raise prices at the pump and line m their own pockets. The majors, as we have seen, had in fact begun to experience a (relative) crisis of profitability already at the end of the 1960s. According to Joe Stork, in 1963 the oil companies operating in the Middle East boasted profits of $1.7 billion; by 1969, their profits had declined to $1.6 billion, despite the fact that they had doubled production.37 In essence, the companies were earning far less per barrel than they had in the past because of the twin impact of rising tax rates in the OPEC countries and declining market prices. They seemed to have had a vested interest in increasing crude oil prices, provided that they could also increase at the same product prices. As much as they may have benefited from the “energy crisis” the oil majors this time were by no means alone in the driver’s seat as they had been previously for most of the century. The “energy crisis,” far from being a conspiracy by petrocapital, signaled a shift from the availability of cheap crude, as well as a shift in the balance of power between producers and consumers. T H E P RO D U C E R M A R K E T The actions of the producers themselves were of vital importance for the end of “cheap crude.” From the summer of 1970 until October 1973—when OPEC, for the first time, starting imposing posted prices unilaterally—OPEC member states acted according to an improvised, but highly effective script. On of its members, like the more daring miner, would take a chance and dig a little deeper in search of a new seam. The rest of the team would then step in and shore up this new vein to prevent the mineshaft from caving in. The protagonists of the dismantling of the power of the majors and of the concessions system were the individual petrostates. OPEC, however, played a key role in discouraging counter-offensives, preventing retrenchment and in keeping the information stream among petrostates always updated. OPEC’s support to the action of individual petrostates was conceded by one of the organization’s arch-critics, the mentioned Maurice Adelman: “When panic abated, OPEC nations worked a ratchet, they put up a firm floor under the new high price level by raising taxes. In 1974, demand fell, and installed capacity was in excess, yet they kept raising taxes and price in concert.”38 The first of the daring miners to look for a more valuable gem was Gaddafi’s Libya. In 1969, the country was a crucial source for Western Europe’s energy supply. Some 45 percent of West German crude oil imports came from Libya, as did 28 percent of Italian imports. After a brief phase of cat-and-mouse, talks between the Libyan government and the companies began in earnest in early 1970. Gaddafi had named Ezzedin Al-Mabrouk, a lawyer trained in Great Britain and Egypt, as minister of Petroleum, while vice President Abdessalem Jalloud had the political oversight over the negotiations. Mahmoud Al-Maghribi was placed in charge of 37 Stork, Middle East Oil and the Energy Crisis, p. 120. 38  Morris Adelman, The Genie Out of the Bottle: World Oil Since 1970 (Cambridge MA: MIT Press, 1996), p. 4.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

194

The Rise and Fall of OPEC in the Twentieth Century

the committee tasked with negotiating an increase in the posted price (Libyan crude was more valuable than Gulf crude because of its prime quality and location). By May, the oil companies realized that the talks were going to be unpleasant, not just because of the summer heat that had begun to descend upon Tripoli. The Libyan government took advantage of the unique structure of the country’s petroleum industry, in which a number of independents operated alongside the majors. Libyans could aim their blows precisely where they would hurt the most. The first to pay the price was Armand Hammer’s Occidental. Though he had previously negotiated oil deals even with Lenin, Hammer was now dependent on Libya for practically all of his company’s crude. Libyan negotiators asked Occidental for an increase in the posted price of almost 40 cents per barrel, retroactive to 1965. Hammer, who flew back and forth every day from Paris in his private jet because he could not stand the heath in Tripoli, was unable to obtain any significant support from the majors, and not for lack of trying. Jalloud had the unpleasant habit of convening his counterparts at the last minute, or at odd hours. He often forced his interlocutors to listen to his long anti-imperialist tirades, made even more theatrical by the presence of two revolvers on his desk. On the other hand Al-Maghribi had not only received his law degree in the United States, but he had also guided the Libyan oil workers’ trade union and had been jailed in 1967 for his stubborn support for the embargo on crude exports. Once in office, he also brought in Abdullah Tariki and Nicholas Sarkis as advisers. Occidental offered an increase of 10 cents per barrel, which was to serve as back payment for all past controversies, an offer Libyans derided as laughable. Sarkis commented: “it is difficult for the companies to recognize that things really have changed and that Colonel’s Ghadafi’s Libya is not the Libya of King Idriss and the cabal of courtiers and crooks who enriched themselves under the regime.”39 To show they were not fooling around, the Libyans imposed a reduction in Occidental’s production quota from 800,000 to 500,000 barrels a day, cutting the company’s profits nearly in half. Coming on the heels of the sabotage of the TAPLINE, the European market suddenly lost access to approximately 800,000 barrels of crude per day, an amount that could not be easily or readily replaced. And the Libyan government would not ease up on Hammer. After all, as Gaddafi often repeated, the Libyans had lived in tents for centuries, and needed oil revenues far less than the oil companies needed profits or the European consumers needed their gasoline. Finally, on September 2, 1970, Hammer capitulated and was forced to come to an agreement: an increase of 30 cents in the posted price (plus an additional 2 cents a year for the following five years). This price was made retroactive to the beginning of 1965. To collect the arrears, the Libyan government increased the tax on oil profits from 50 to 55 percent of net income. The quality of Libyan oil would also be recognized with a premium in the future. Ian Skeet remarked that the Libyans, to their surprise “found that they had won not only the battle against Occidental but the war against the industry.”40 This was the first time since OPEC’s 39 Terzian, OPEC, p. 118.    40 Skeet, OPEC, p. 62.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

195

creation in 1960 that one of its members had managed to increase the prices. Posted prices had finally been “unfrozen.” Libya’s victory triggered a chain reaction. As noted, the Libyan negotiators had obtained a 5 percent increase in the tax rate to 55 percent. Two points need to be underlined here: first, this 55 percent had been achieved as compensation for back payments to 1965; second, OPEC countries actually already raked in more than 50 percent of net oil revenues because the posted price was higher than the market price, not to mention the fruits of their other minor victories over the years such as royalty expensing. Nevertheless, the symbolic breaking of the 50 percent barrier in revenue share was perceived as a symbolic victory of the Libyan government, and set new terms that every other OPEC nation now rushed in to claim. * * * By the end of 1970, a snapshot of the relations between the oil companies and OPEC members would have revealed the following. The Algerians had already unilaterally increased the posted price (since their oil had previously been underpriced, and were negotiating with the French government to obtain majority control over the entire petroleum industry. The fifty-fifty profit sharing model, after having been torn away in substance, had now also been overcome in form by the Libyans. Several increases in posted prices had already been agreed upon, and premiums had been assigned to lighter and higher quality crudes. Then, on December 7, 1970, a few days before the twenty-first meeting of the OPEC Conference to be held in Caracas, the Venezuelan government, as we have seen, unilaterally raised income taxes on companies to 60 percent. The Venezuelan President Caldera explained the measure with these words: As technological progress goes forward, the number of permanent workers employed in extracting and delivering oil diminishes, that is why in each one of our countries we feel the urgency of transforming the financial profit obtained from oil into stable employment opportunities for the majority of the population of our countries.41

This was the climate on the eve of a meeting that, a decade after OPEC’s founding, had the objective of calming a volatile situation and providing a clear way forward. Fear guerrilla activities in Caracas and of possibility of political kidnappings, the government decided to host the meeting in a luxury resort on the coast. The Algerian Belaid Abdessalam, the outgoing president of the Conference, opened the Caracas meeting by noting that the current situation offered the opportunity for a clear break with the past: We have reached a time when, contrary to what had happened in the 1960s, the demand for energy products in major oil consuming markets, upsetting all data and forecasts, surpasses the supply in unparalleled proportions. The hikes in oil prices of recent weeks and the steps taken by some consuming countries in order to attempt to prevent a shortage damaging for their economies, are, in the final analysis, the external 41  NYUAD Library, ASC, GGC, MC-038, Opening address, Minutes of the 21st OPEC Conference, Caracas, December 9–12, 1970.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

196

The Rise and Fall of OPEC in the Twentieth Century

manifestations and direct consequences of this crisis which takes on the aspects of a long-term trend.42

After a long debate over the measures to be taken, a new and shockingly combative Yamani took the floor, showing no less enthusiasm than Abdessalam: “during the nine years he had attended OPEC Conferences, the present one was historical, if not perhaps the most important Conference he had ever attended.”43 He added that he was confident that “during the next decade in the life of OPEC they would prove to the whole world that it was a very strong Organization.”44 OPEC’s Resolution XXI.120, approved in Caracas, stated that the minimum tax rate on profits would henceforth be 55 percent (formal addio to the fifty-fifty). It requested a standard, uniform increase in posted prices, and approved different grades for the quality of oil as well as the elimination of any type of discount for oil companies. A committee of three ministers, under the leadership of the Iranian Jamshid Amouzegar, was tasked with negotiating on behalf of the Gulf members OPEC in Tehran. The aim was to get the oil companies to formally agree an increase in posted prices and to put into practice all the other principles agreed in Caracas. But who would Amouzegar - another Iranian after Rouhani had led the first OPEC negotiations - be negotiating with? The novelty of this round of talks was that Washington had (with the quiet assent of the other major Western countries) agreed for the first time to allow all the oil majors, together few other independents, to create a coordinating body with real negotiating power—albeit with explicit assurances that this body would only coordinate policies towards OPEC countries. The London Policy Group (i tmet in London and not in New York because of the needed to be closer to where the action was taking place) was thus formally established in January 1971 with the aim of leading the next negotiations for the oil companies. The coordinator of the group was a man we have already met a few times, John McCloy, an embodiment of the postwar US establishment. Previously the President of the World Bank, of the Ford Foundation, of the Council for Foreign Relations, and of the Rockefeller Foundation, McCloy also served as an adviser to seven different administrations and was a friend, former sailing instructor, and lawyer to David Rockefeller (the owner of Chase Manhattan Bank and still one of the largest shareholders in New Jersey Standard/EXXON). It was in the bank’s offices at Chase Manhattan Plaza 1, in the heart of New York City, that McCloy had chaired the discussion group between representatives from the majors since 1961 (this, too, with the Justice Department’s seal of approval): a group that had been mostly concerned with blocking the potential entry of Soviet crude into Western Europe. The reason why the oil majors encouraged the ­formalization of the London Policy Group before negotiating with OPEC was clearly explained in a note by Erik Drake of BP to British Prime Minister Heath:

42 NYUAD Library, ASC, GGC, MC-038, Minutes of the 21st OPEC Conference, Caracas, December 9–12, 1970. 43  Ibidem. 44  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

197

Quite apart from the immediate problems which this situation presents, it seems likely to lead to fundamental and far reaching changes in the relationship between the ­companies and the producing governments. These would for instance be on an entirely new basis, if the producing governments established the practice of dictating by means of legislation the commercial terms on which oil was obtained from their countries [. . .] In short the producing countries are now directly confronting Europe with a sharp increase in the cost of energy (on which our economic well-being largely depends).45

The companies knew that they would have to give up something substantial, and that every inch of ground they ceded in Tehran on prices would inevitably either cut into their own profits (something that, by definition, private companies are not inclined to accept) or would lead to increased oil and product prices (something for which they would need governmental support). The major ran the risk of being terribly unpopular in their new role as tax collectors for OPEC countries, and it was absolutely vital for them to secure political backing to avoid punitive legislation. The majors’ primary objectives in Tehran were to reaffirm the viability of the concessionary system, to have an increase in posted prices that was both moderate and predictable, and above all to sign an agreement that would apply across the board to all the OPEC countries, including to African members such as Libya. In essence, they wanted to avoid the potentially damaging game of “leap-frogging” between the Mediterranean and the Gulf. By demanding to negotiate terms ­applicable to all OPEC member states, the majors assumed the mirror opposite position to their stance a decade earlier when they were trying to exploit the weakness of the producer countries, insisted on negotiating only with individual OPEC members and never with OPEC as a whole. The London Policy Group’s representatives in Tehran found their room for maneuver constrained significantly, however, by the growing radicalization of the Gulf countries and, especially, by the Shah’s new posture as a regional leader. The Shah, after an initial break in the talks, opened the twenty-second OPEC (Extraordinary) Conference by meeting the press. His calculated words portrayed him in a new light, as a crusader for the cause of the developing nations: Although one of the principal objectives of OPEC, which was established in 1960, was the raising of the posted prices to their pre-1960 levels, nevertheless, not only has this goal not been achieved, but, due to the general inflation throughout the world, the real value of our earnings has been considerably reduced. The United Nations’ Index of Export Commodities for the industrial countries of the West, for example, shows that during the past 3 years export prices have been rising at an average rate of 3 per cent annually. This makes the United Nations’ use of the term “The Development Decade” for the sixties rather ironical insofar as the developing countries are concerned [. . .]46

45  Erik Drake to the Prime Minister, London, January 5, 1971, in: A.L.P.  Burdett (ed.), OPEC: Origins and Strategy (1947–1973), Volume 4: 1967–1971. 46  NYUAD Library, ASC, GGC, MC-038, Minutes of the 22nd OPEC Conference (Extraordinary), Tehran, February 3–4, 1971.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

198

The Rise and Fall of OPEC in the Twentieth Century

OPEC member in Tehran had agreed to take a hard line: in the absence of an agreement with the London Policy Group, the Gulf countries would simply impose posted prices and fiscal terms unilaterally. This negotiating position was announced solemnly by the Shah when speaking in front of the Iranian Majlis. Faced with this threat, which they understood to be credible, on February 14 the majors signed an agreement that contained the following clauses: an increase of 35 cents in posted prices across the Gulf; the establishment of different premiums for crude quality; an increase of 2.5 percent per year in posted prices to compensate for inflation and of 5 cents per year to keep up with the prices of manufactured goods; the e­ limination of all existing allowances; the confirmation of the 55 percent tax rate; a pledge by  the Gulf states not to demand new negotiations if the terms agreed with Mediterranean producers proved more advantageous; a “quit-claim” to resolve all disputes pre-dating the Tehran talks; and a binding duration of five years (Fig. 4.2.). Immediately the majors came under fire in the consuming countries for having caved in to OPEC’s “blackmail.” Their accusers claimed that it was in their interest to raise crude oil prices, because they could simply pass on the increase to ­consumers by increasing crude and product prices. The great fanfare created by the Shah about his triumph in Tehran helped spread the notion that the agreement was an extraordinary victory for OPEC, one that was to be primarily attributed to Iranian

Fig. 4.2.  The two chief negotiators, Jamshid Amouzegar for OPEC and Lord Strathalmond for the international oil companies, shake hands after signing the Tehran Agreement in February 1971. (BP Archive, ARC174241/023).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

199

leadership. And if one takes into account the subsequent negotiations in Tripoli on Mediterranean crude (a 90 cent posted price increase, including 25 cents to compensate for the closure of the Suez, with the new price for Libyan crude shooting up from $2.55 to $3.447), petrostates undeniably obtained a significant increase in their revenues. The representative of Hunt oil company, Henry Mayer Schuler, in his very critical report on the Tehran negotiations published two years later attacked the weakness displayed by the majors and by Western governments: “Having seen the capitulation of the companies and (consumer) government in Tehran and Tripoli, [OPEC states] correctly judged that the time was ripe for ‘participation’ or creeping confiscation.”47 Reality, however, comes in shades of gray. The reasons why the negotiators of the London Policy group preferred to cede ground were well encapsulated in these points: “(a) the ‘agreement terms’ will probably be less onerous than the ‘legislation terms’ and (b) the evidence that consuming countries would rather pay more than see supplies interrupted.”48 For the consumers, increases in fuel prices were far from alarming yet, and in any event small price increases were far better than any supply disruption. The increase in posted prices only cut into the ultimate selling price of a barrel of oil by 3 to 5 percent. Besides, the market price for crude sold to European costumers was still lower than it had been in 1957. As for the majors they were able to pass on the cost through the price of end products (like gasoline) while their profits on crude production went up by only 0.5 cents per barrel because of increased OPEC taxation. One last factor to bear in mind was that OPEC’s crude price increase was relatively less onerous for the United States, where domestic price was higher and imports weighted less on consumption than they did in Western Europe or Japan. Some of the obove considerations contributed to the rising tensions on the two sides the Atlantic, as well as to a long academic and political debate on a supposed betrayal of Western European consumers on the part of the US government and of US-based oil multinationals, supposedly aiming at higher prices also to develop higher cost crude for example in Alaska.49 Overall, I think we can agree with the balanced conclusion of Pierre Terzian: “1970–71 saw a convergence of interests between the producing countries, the international oil companies and the United States.”50 Petrostates got more money. Oil companies were able to slightly increase their profit per barrel. US oil become more competitive. The “Tripoli–Tehran–Tripoli” negotiations, with emerging international protagonists such as the Shah, Yamani, or Gaddafi, hinted to a potential shift in the economic center of gravity, as well as in the then prevailing mental geography, away from the Atlantic and toward the Mediterranean, the Middle East and the developing world. These agreements also definitively established that, at a time when 47  George Henry Mayer Schuler Statement, Petroleum Intelligence Weekly, Supplement, April 22, 1974. 48 Ellingworth, Oil Negotiations, February 10, 1971, in A.L.P. Burdett (ed.), OPEC: Origins and Strategy. (1947–1973), Volume 4: 1967–1971. 49  This argument remains very strong in French academia and was advanced as soon as posted prices started rising: Jean-Marie Chevalier, Le nouvel enjeu pétrolier (Paris: Calman-Lévy, 1973). 50 Terzian, OPEC, p. 145.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

200

The Rise and Fall of OPEC in the Twentieth Century

commodities prices were on the rise, producers could secure an ever-larger share of oil profits, and would be willing to act unilaterally, if necessary. Iraqi President Al-Bakr was so happy for the result OPEC negotiations in Tehran that he handed Chalabi, as part of the Iraqi team of negotiators, an envelope with $1500. Although unwilling to accept, he finally took the money: “After all, the President was a Bedouin, despite his military rank, and for a Bedouin such a gesture of gratitude was culturally engrained within the tradition of generosity.”51 * * * On August 15, 1971, Nixon announced that the US government was suspending the dollar convertibility, while at the same time imposing an import surcharge. The goal was to rein in the first trade deficit in US history, as well as to counter speculation against the dollar.52 The immediate result was a devaluation of the dollar, first against gold and then against other currencies such as the Deutsche mark and Japanese yen. The unilateral decision by the Nixon administration was a broadside to the postwar international monetary system based on the Gold-Dollar Standard. Since oil, like most other commodities, was traded in dollars, the devaluation of the “greenback” entailed significant losses for the purchasing power of petrostates both in terms of loss of purchasing power and because of the devaluation of their dollar reserves. After hastily enacting a series of temporary measures (the so-called Geneva I and Geneva II agreements), OPEC began to realize that the dollar’s devaluation rendered the Tripoli–Tehran–Tripoli price settlements—which called for a yearly 2.5 percent increase in posted prices to adjust for inflation—increasingly obsolete. The effects of the weakening dollar were particularly negative on two levels. First, the oil companies bought their oil in a currency (the dollar) that left the producers with decreasing purchasing power to buy goods manufactured in countries with stronger currencies (that is, Western Europe and Japan). Second, the oil companies paid for crude in devalued dollars but then sold their products in European currencies, thus earning considerable added profit. OPEC had already discussed this “monetary crisis” at the twenty-fifth Conference meeting in September 1971. Secretary General Adnan Pachachi noted: The bulk of their imports—over 60 per cent—originated from the countries whose currencies had been floating upward in relation to the Dollar. The total OPEC estimated losses in 1971 alone could, he said, be in the neighborhood of $570 million, representing an increase of 10 per cent in the import bill of OPEC Member Countries from those countries.53

Until early 1973, as we will see in the next chapter, OPEC meetings were venues for full-blown debates on the future of raw materials, for forging alliances with other developing countries, and for criticism of the industrialized countries’ 51 Chalabi, Oil Policies, Oil Myths, pp. 62–3. 52  Harold James, International Monetary Cooperation since Bretton Woods (Oxford: International Monetary Fund and Oxford University Press, 1996). 53  NYUAD Library, ASC, GGC, MC-038, Minutes of the 26th Meeting of the OPEC Conference, Abu Dhabi, December 7, 1971.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

201

irresponsible consumerism. But no immediate decisions on the revision of “oil price structure” were yet taken. At the thirty-second (Extraordinary) Conference in March 1973, several members, Algeria and Iraq foremost among them, called for a new round of price talks. The Saudi delegation, however, blocked any decision. Then in April, James Akins, the US State Department’s oil expert and “Arabist” (he had actively participated to the Tripoli–Tehran–Tripoli negotiations and would soon be appointed US ambassador to Saudi Arabia), wrote an incendiary article for Foreign Affairs under the title: “The Oil Crisis: This Time the Wolf Is Here.” Observing that Western Europe was completely dependent on Middle Eastern oil, and the US increasingly so, and that demand had by then surpassed supply, Akins argued that a price of about 5 dollars a barrel (more or less the price of US domestic crude) would not be the end of the world. Akins’ aim was to warn Western Europeans and the US government of the impending danger, to encourage the consumers to reduce their imports and to invest in alternative energy sources. Akins himself famously believed in conservation, walking to his office every day and wisely controlling the heating in his apartment. He also pushed for a more conciliatory stance toward the Arab Gulf states: That most of the world’s proven reserves are in Arab hands is now known to the dullest observer. That the probable reserves are concentrated even more in the Middle East must also be the judgment of anyone who is willing to look at the evidence. And that the relations between the United States and the Arab countries are not generally cordial should be clear to any newspaper reader. Even king Faisal of Saudi Arabia, who has said repeatedly that he wishes to be a friend of the United States and who believes that communism is a mortal danger to the Arabs, insists to every visitor that the US policy in the Middle East, which he characterizes as pro-Israeli, will ultimately drive all the Arabs into the Communist camp.54

That same month, Nixon eliminated quotas on oil imports and replaced them with tariffs, while at the same time supporting some increase in natural gas prices and the building of the Trans Alaska pipeline that would eventually transport the Alaskan crude from the giant oilfield of Brudhoe Bay. There was no way for the US to slow down the pace of rising oil imports. In May, market prices for crude were on the rise. In June Qatar managed to sell its “equity oil” (oil it owned due to participation in the consortium) above the posted price, while Libya, now convinced it could sell its own oil without much difficulty, acquired majority control of all operating companies.55 In light of such market pressures Saudi Arabia could no longer prevent OPEC from forming a committee to study possible revisions to the Tripoli–Tehran–Tripoli agreements. According to the report presented by the Iraqi delegation, market prices had increased by 13 percent, meaning posted prices needed to be adjusted upward immediately in order to avoid giving away enormous revenues to the oil companies. The same study also argued that, while throughout 54  James E. Akins, “The Oil Crisis: This Time the Wolf is Here”, in Foreign Affairs, April 1973. 55 Henry Tanner, “Libya Takes Over All Oil Companies Operating There”, New York Times, September 2, 1973.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

202

The Rise and Fall of OPEC in the Twentieth Century

the 1960s inflation had grown at a rate of 3 percent a year, between 1970 and 1972 it had jumped to 8 percent annually. OPEC’s Secretary General, the Algerian Abderrahman Khene, stated publicly that the price of crude was far too low. For the desert countries of the Middle East, water was as important as oil was for the industrialized world: how much water could an OPEC country fetch, Khene asked, with a barrel of oil?56 At the thirty-fifth (Extraordinary) OPEC Conference, held in Vienna in September, the working group on the petroleum market issued a report stating that, in order to restore the revenue split between companies and local governments back to Tehran levels, government-take would have to increase from $1.80 to $3.70 a barrel (which implied that posted prices would have to move upward to somewhere between $5.80 and $6.20). Amouzegar, the Iranian representative, cautioned that they could not simply push posted prices above market prices in the current situation. In his opinion, the objective was to ensure that the producers retained 80 percent of the oil revenues. Both the Kuwaiti and Iraqi representatives objected, arguing that there was no longer any justification for allowing 20 percent net revenues to the oil companies: oil was a “national resource” and companies should be allowed significant profits only in the refining and marketing phases.57 The new round of OPEC price talks with the oil companies was scheduled to begin on October 8. The two sides had by now completely irreconcilable views, particularly given that OPEC’s demands now entailed a doubling of the posted prices. The majors warned Nixon that they had no more reserves, that OPEC’s demands could upset the balance of payments in the Western world, and finally that any military intervention in support of Israel would have a dramatic impact on the moderate Arab states. Furthermore, Western Europeans and Japanese could not withstand any interruption in supply: they would eventually be forced to turn against the United States.58 Essentially the majors abandoned negotiations, and lost decision-making power over prices, without a fight. A circumstance, as we will see, that would also generate (as with the Tehran negotiations) a significant number of conspiracy theories. On October 16, 1973 a meeting of the OPEC Gulf member states in Kuwait, also attended by representatives of the other OPEC countries, set the governmenttake on the main Saudi crude, Arabian Light, at $3.65 a barrel (arguing that the resulting posted price would only be 17 percent higher than current prices in the region). This meant a new posted price of $5.119. Arabian Light became the “marker crude,” and the correlation of government-take to posted price was fixed at a ratio of 1:1.4. In the future every time market prices went up, posted prices would rise in turn.

56  Abderrahman Khene, “Problemas actuales del petróleo, vistos por la OPEC”, in Nueva Sociedad, 10 (January–February 1974). 57  NYUAD Library, ASC, GGC, MC-038, Minutes of the Thirty-Fifth (Extraordinary) Meeting of the OPEC Conference, Vienna, September 15–16, 1973. 58  Amherst College Archives & Special Collection, John J. McCloy Papers, Oil 2, Memorandum to the President, October 12, 1973.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

203

Thus on October 16, 1973, under the combined pressures deriving from increasing market prices, uncontrolled inflation in the industrialized nations, dollar depreciation, peak production in the United States and Venezuela, scant investment in alternative energy sources, and scarcely any serious consumer government regulation to enhance energy conservation, all of the above coupled with yet another conflict between the Arab world and Israel, an era in the history of OPEC came to an end. For it was on October 16 that the OPEC member states proclaimed that they would henceforth unilaterally decide the price of oil. Yamani remembered that “I realized the political and economic impact of the date as soon as it happened” and then concluded that: “For the first time the producers faced the consumers of the major industrialized countries without anyone in the middle. October 16 was the demarcation. It was the day that OPEC seized power. The real power.”59 N AT I O N A L I Z AT I O N A N D PA RT I C I PAT I O N If the 1970/71 Tripoli–Tehran–Tripoli agreements did not halt the pressures on the posted prices, even less did they placate the growing calls for direct control of the petroleum industry. The “progressives” such as Algeria, Iraq, and Libya argued that only direct control would allow OPEC countries to fully master the technology and knowhow needed to optimize production, to limit gas flaring as well any other waste of precious hydrocarbons, and to allow the state to fully exploit all the segments of the petroleum industry, including the petrochemical sector, as a lever to promote industrialization and create jobs. The was becoming the new consensus among OPEC countries. Venezuelan technicians called on by Gaddafi had reported on malpractices of foreign companies that operated the Libyan fields. In Kuwait, a country that was producing 3.2 million barrels a day in 1971, the nationalist opposition in the Assembly uncovered a plan by Gulf and BP to rapidly ramp up production to 5 million barrels a day. This would have probably compromised the long-term efficiency of the oil fields. The public outcry against this project ­ultimately succeeded in blocking the project. But the lesson seemed clear: foreign oil companies’ could not ensure optimal management of the fields. While by 1971 petrostates agreed that there needed to be more direct control, they were still of two minds as to the best model to pursue that basic objective. On the one side stood those who proudly waved the flag of nationalization. The idea that had been popularized throughout the Arab world by Tariki, and was now invoked by Arab workers’ unions and the “progressive” Arab states. On the other side stood the supporters of participation. This policy was inextricably identified with Yamani. Between 1971 and 1973, however, participation—at least, if compared to its original version—would undergo a metamorphosis so radical as to make this policy virtually indistinguishable from nationalization. Poetry and prose would eventually converge on similar content. 59 Robinson, Yamani, p. 83.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

204

The Rise and Fall of OPEC in the Twentieth Century

The first OPEC country to nationalize the hydrocarbons industry was Algeria. Under the leadership of Boumediene, by the beginning of the 1970s, is had assumed an outsized leadership role in OPEC—and far beyond it as we shall see—when compared to its weight in terms of oil output. The swelling tides of ­nationalization had risen steadily in the country after independence. In 1963 the government nationalized tobacco products, matches, and transportation; in 1966, insurance and mining; in 1968 the banks, along with thirteen oil companies and sixty-three other industrial concerns; in 1970, five lumber importers. The FLN government justified these measures by arguing first that these businesses needed greater investment to prosper and generate jobs, and then that the foreign businesses repatriated the most of their profits to France at the expense of the domestic economy. In 1970, five years after the signing of the1965 agreements, France and Algeria were scheduled to renegotiate the terms of their cooperation. Algeria’s position was that the new agreements needed to signal a new era in the relations between producers and consumers. The simple fact that SONATRACH already had five-years experience in marketing its 50 percent share of Algerian petroleum made the government’s positions stronger. Abdessalam noted that while de Gaulle had invested in an autonomous French nuclear strike capability (force de frappe) to achieve its independence from NATO, the “Algerian force de frappe, 10 years after its independence, was called SONATRACH.”60 The French negotiators were well aware of the many advantages France had accrued through its control of Algerian hydrocarbons: the ability to purchase oil at a favorable price; a stable supply of up to 20 percent of French imports; geographic proximity of crude oil for shipping and distribution. Control of Algerian oil, furthermore, allowed French companies to export high value added machinery and to invest in the latest extraction technology. The Algerians complained that France had not adequately invested in oil and natural gas (still mostly flared), and denounced French oil companies for having earned 6.2 billion dinars in five years, while reinvesting in the country only one-sixth of that amount. France had benefitted for too long from importing the cheapest oil in the world. The talks were supposed to signal a new era in the relationship between the colonizer and the colonized or, as the Algerian Foreign Minister Abeldaziz Bouteflika called it, a cooperation “free from the colonial e­ lement.” In October 1970 Sid Ahmed Ghozali, head of SONATRACH presented Algeria’s objectives to French negotiators: Oil is a gift of nature and we cope with it in the same way as we do with other negative gifts: for example we are cruelly short of water and we have vast amounts of uncultivated land. We intend to take full advantage of this gift. We have a development plan to fulfill by mobilizing the resources of our country to their full potential, and that includes oil: its exploitation, its industrial processing, and its taxation. The rent engendered by the existence of these riches must belong wholly to Algeria, which owns them.61 60 Abdessalam, Le pétrole et le gaz naturel en Algérie, p. 373. 61 Historical Archives of the European Union (HAEU), François-Xavier Ortoli (FXO), FXO05_02, Réunion du 28 Octobre 1970.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

205

The French government (speaking for French state-owned companies) was prepared to offer the Algerians the same conditions as those had been offered by the London Policy Group in Tehran. Nothing more. The one thing it wanted to avoid was losing majority control over production. In the end, French state companies preferred to see their concessions nationalized rather than remaining a minority shareholder with a 49 percent stake or less, which would have entailed French investment in natural gas production, even if this did not strictly align with French interests. As consequence of the failed negotiations, on February 24, 1971, the anniversary of the birth of the Algerian trade unions, speaking in front of Algerian oil and gas workers, Boumediene announced the nationalization of the petroleum industry. Nationalization was presented at the same time the seizure of a fundamental lever of the nation’s economy, but also as a tool to create a more just and equal society. Oil nationalization was thus directly linked to Algeria’s domestic social transformation. A former high French official in Algeria commented: “it’s the end of France in the Sahara.”62 The Algerian nationalization, according to Abdessalam, accelerated a similar wave of takeovers in other oil exporting countries, and had far more to do with nationalism than with socialism: “no reminder is needed that neither the Saudis nor the different Emirates in the Gulf are Socialist fans.” (Fig. 4.3.)63 In 1971 SONATRACH, with a daily production of 546,000 barrels a day, had to market more crude that the rest of the oil exporting countries taken together, despite its production was only 3 percent of total OPEC production. Its advice and expertise would be sought during the 1970s by many other oil producers. The other clamorous nationalization episode took place in Iraq. In some ways, this was even more shocking for the majors, given that IPC had been the first oil consortium in the Middle East (while Algerian hydrocarbons were considered a “French affair”), and that Iraq held some of the largest oil reserves in the world. Here too nationalization reflected both the political willingness to showcase independence from foreign powers, as well as the ambition of speeding up the industrialization of the country. Looking back with thinly veiled criticism of the Ba’athist regime, Fadhil Chalabi would later argue that by nationalizing Saddam Hussein basically aimed at strengthening his own prestige as well as that of the Ba’ath; while its main consequence was that it drove investments by the majors outside of the Middle East.64 On the other hand there is little doubt that Iraqi production had been penalized by the majors since the issuing by Qassim of Law 80 in 1961. This was precisely what the Iraqi Petroleum minister Sadun Hammadi—an engineer with a degree from the University of Wisconsin, a Shi’ite and at the same time a convinced Arab nationalist—tried to explain to his OPEC colleagues after Baghdad made public its decision to nationalize IPC in June 1972.

62  Entretiens avec Roger Goetze: haut fonctionnaire des Finances. Rivoli–Alger–Rivoli (Paris: Comité pour l’histoire économique et financière de la France, 1997), p. 295. 63 Abdessalam, Le pétrole et le gaz naturel en Algérie, pp. 452–3. 64 Chalabi, Oil Policies, Oil Myths, Chapt. 4.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

206

The Rise and Fall of OPEC in the Twentieth Century

Fig. 4.3.  French President Georges Pompidou addresses chief French negotiator (minister F.X. Ortoli) during Franco-Algerian oil talks: “What I am reading Ortoli? Are You willing to compromise on the crucial issue?”. (Le Figaro, 6/1/1971. Copyright: Coll. et Cliché Caricadoc).

Hammadi argued that throughout the 1960s, increases in Iraqi production had been lower than average increases in the rest of the region. This had generated a massive loss of potential oil revenue. While the oilfields in the north of the country had been “underdeveloped,” production from the fields to the south, by now owned and managed by INOC, was being openly boycotted. As an extreme measure to fight nationalization, the oil companies had reduced production in the north, while at the same time they had blocked ships delivering materials for the development of Rumaila in the south, offering to purchase crude only at a 20 percent discount on the posted price. Iraq depended on northern oil for 93 percent of its government revenues, so cutting the output of crude that would otherwise have sold at the highest Mediterranean prices was jeopardizing the feasibility of the Iraqi five-year plan. The Iraqi Petroleum minister ended by arguing IPC was blocking the country’s development and openly maneuvering for regime change: “Iraq had then no other solution but to nationalize oil.”65 Whether Hammadi’s analysis is true or not, 65 NYUAD Library, ASC, GGC, MC-038, Minutes of the 28th (Extraordinary) Meeting of the OPEC Conference, Beirut, June 9, 1972.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

207

Iraqi nationalization of IPC facilities in the north was undeniably the outcome of a conflict that had begun in 1961 and had never abated. Between 1972 and 1973, Libya also progressively nationalized or gained majority control in its oil production, in piecemeal fashion. By then, these three “progressive” OPEC Arab countries were forced to market a very significant amount of oil, and were looking for buyers. OPEC member states were acquiring first-hand experience about the global oil market and the arcana of price formation. * * * While witnessing these nationalizations basically as a spectator, in July 1971 OPEC started talks with the oil companies on the issue of “participation.” All the members supported this effort led by Yamani (the Algerians more robustly, the Iraqis only reluctantly). A the beginning the negotiations involved all OPEC countries with the exception of Algeria that had nationalized, Venezuela that would soon gain direct control of all concessions after “reversion,” and Nigeria that wanted to begin from a higher level of participation. By the middle of 1972 Iraq also essentially dropped out (it had nationalized the IPC concession in the north) , soon to be followed by Iran where the Shah now wanted to follow its own strategy. “OPEC negotiations” now then concerned only the Gulf monarchies of Saudi Arabia, Kuwait, Abu Dhabi (part of the UAE), and Qatar. Constantly under the spotlight in the Arab media, and often accused of servility towards American petrocapital and the US government, the Yamani of 1971, while always the calm negotiator, was no longer the moderate of 1968. His idea of participation had evolved from that of a strategic alliance (a “Catholic marriage” also in the downstream sector) between the oil majors and the producers, simply into that of an instrument to prevent excessive competition among national oil companies. The majors controlled the most extensive distribution networks in the world: without access to these networks, OPEC member states would be forced into all-out competition to sell their oil. Yamani’s intervention at the twenty-fifth meeting of the Conference when launching the participation negotiations, once again highlighted some of the problems that petrostates would face a decade later, in the context of declining global consumption: Now, however, they would be faced by the problem how to coordinate among the NOCs [National Oil Companies]; these companies would, in the future, become the owners of large volumes of oil and, although at the moment they were thinking of a small percentage of participation, there was no doubt that this would eventually increase to a much higher percentage—involving huge amounts of crude—later on. What, he asked, were they going to do with such an amount of oil, how would their activities be coordinated on the market?66

The key issues of Yamani’s negotiations concerned: the level of participation, the compensation price and the price at which “participation oil” (the oil to which the 66 NYUAD Library, ASC, GGC, MC-038, Minutes of the 25th Meeting of the Conference (Extraordinary), Beirut, September 22, 1971.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

208

The Rise and Fall of OPEC in the Twentieth Century

local government was entitled) would be sold back to the oil companies. Needless to say, the companies themselves hoped for the lowest possible level of participation (in any event, less than 50 percent), very generous compensation that would potentially take into account all proven reserves and loss of potential profits, and a price for participation oil that was as close as low as possible. But Yamani was no pushover. A transcript of one of the first meetings between OPEC negotiators, led by Yamani, and the companies’ delegates, led by Texaco’s Al DeCrane, conveys a sense of their intensity. The Saudi minister had asked for 20 percent participation rising to a maximum of 51 percent, then the discussion continued: DeCrane:  Why are you unhappy with the existing arrangements? Yamani: 1.  We have the right to acquire all our natural resources but this is not our aim. We want to acquire parts and stay with the companies. 2.  From the legal point of view times have changed. There is a definite change in circumstances which make it necessary to readjust oil concessions. There is also a very important policy for each nation to control its own natural resources. We don’t want full control but we must have some. Martin:  In spite of existing agreements? Yamani:  This is within our existing agreements. There is a principle of change of circumstances inherent in our contracts which allows change. DeCrane:  I don’t accept the doctrine, but given this, what changed circumstances have occurred to require a change in the concessions? [. . .] Yamani:  Some examples of changes of circumstances are: 1.  When ARAMCO signed its agreement, no Saudis had been to university and no Saudis had experience in the oil industry—now there are thousands of Saudi graduates and hundreds with experience in the oil industry. 2.  At the date of the signature, there were no agreements with partnership provisions. Now all new agreements provide for partnership. Even the majors are accepting it in both new and existing concessions. IPC offered 33% participation to solve the law 80 problem. Partnership is a must in the Middle East. Long ago we received an offer from a major for a 50% deal in Saudi Arabia. Now just recently we have another offer from a major under similar terms. 3. The trend now is to nationalise all resources. Participation is a substitute for that trend; a blend of joint venture capital and nationalisation. This is our offer of partnership—a source of stability.67

This is not the stuff of two actors in on a conspiracy, or the token opposition of oil companies interested in governmental complicity, as hypothesized by US New Left author and publisher Joe Stork in his classic account of Arab oil. These were real

67  Amherst College Archives & Special Collections, John J. McCloy Papers, International Oil 3, Report of a Meeting Held in Geneva at the Intercontinental Hotel (4 pm), January 21, 1972.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

209

negotiations that would lead to more producers’ influence over the management of their own industries and natural resources. At the end of October 1972 Yamani reached a first agreement with the ­companies. The deal called for 25 percent participation with a gradual increase up to 51 percent in 1983. It established that compensation would be at “updated book value”—that is, not the actual value of oil assets, but a higher figure more in line with what the companies had asked for—and that participation oil would be split between buy-back oil (which would be resold to the companies at a discount) and equity oil (which would be resold at market prices). As soon as it was signed, however, Yamani’s participation agreement underwent heavy criticism from a number of producers. Libya and Iraq reprimanded Yamani in front of the other OPEC delegates for having conceded too much ground on the issue of compensation. Other Gulf states, such as Kuwait, where the agreement was bashed in the Assembly, complained against the low levels of participation, deeming anything under 50 percent to be unacceptable. In essence, Yamani’s agreement was already outdated even in 1973, and his prestige as a negotiator had been dealt a severe blow. On January 23, 1973, the tenth anniversary of the White revolution, the Shah declared that he would challenge the 1954 Consortium Agreement, stating: [T]he oil industry is a complex operation. If you take more oil out of a well than is technically safe, you actually may kill that well. If you don’t attend to secondary recovery, that is not protecting the nation’s interests. If you don’t inject the gas back into the well using sound scientific methods, this is not in the nation’s interests. These have not been done for our country.68

In the end, Iran signed a new participation agreement on March 24, 1973 that included the following terms: the Consortium was replaced with a Sales and Purchase agreement with its members that would remain in effect for twenty years; NIOC (the National Iranian Oil Company) would own the country’s oilfields (while a service company run by the Consortium would continue operating most of the fields) and would and invest in expanding production; output would increase steadily up to 8 million barrels per day and flaring would stop by 1978; the NIOC would sell oil to members of the Consortium at prices equivalent to those of other Middle Eastern countries; the quota of oil at the disposal of the NIOC would start from 200,000 barrels per day in 1973 and increase to 1.5 million barrels in 1981; NIOC would take over the ownership and management of the refinery at Abadan.69 In the end, even the Shah had obtained (albeit not in strictly financial terms) more than Yamani had with his negotiations. By the beginning of 1973 it was clear that the cooperative arrangement Yamani had in mind was not enough and that while he had once spoken about “particpation vs nationalization” the two approaches would in practice become quite hard to distinguish in the future. 68  Quoted in: Gholam Reza Afkhami, The Life and Times of the Shah (University of California Press 2009), pp. 274–5. 69 Farrokh Najmabadi, “Government Policy and Evolution of the Iranian Oil Industry”, in Robert E. Looney (ed.), Handbook of Oil Politics (New York: Routledge 2012), pp. 264–5.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

210

The Rise and Fall of OPEC in the Twentieth Century L I M I T S TO G ROW T H

In 1972, the technology then available made it possible to take the first photographs of planet Earth from space, courtesy of the Apollo 17 mission. Readers of the glossy illustrated magazines of the era could admire this perfect sphere, filled largely by the deep blues of the ocean, overlaid with wisps of clouds like cotton candy and interspersed with chunky agglomerations of brown and green, representing the various continents. A terrific, immense blue marble suspended in the silent, eminently dark void of the universe. This was both a perfectly self-sufficient ecosystem and a delicate bubble whose continued existence required constant vigilance and care, transcending differences of race, borders, and competing political ideologies. For the youth of the 1960s, certainly for all those who had absorbed the spirit of the protests against the war in Vietnam, the “blue marble” moral was crystal clear: with such great advances in science and technology, war and ­ideological divisions had become absurd. Everyone needed to join forces to protect the planet. There was a shift in the mentality of vast segments of the educated population. Many people, and not just in the more industrialized countries, started to doubt that consumption could increase indefinitely without compromising the environment and exhausting the planet’s natural resources. With the clamor over incidents such as the one that occurred to the supertanker Torrey Canyon in 1967, when 120,000 tons of crude spilled onto the coasts of Cornwall, petroleum was introduced to television viewers in its natural and unrefined state. Even my own childhood memories of the summer vacations in the early 1980s on the island of Ponza, off the coast of Rome, are still tainted by the insidious enemy that hid beneath the sands and rocky inlets cradling the crystalline waters: “il catrame” (tar). Once it came into contact with the soles of one’s feet or the fabric of one’s bathing suit, this dense, viscous black substance was impossible to remove without the help of one’s elders. The era of cars and the spread of mass consumption was leading to a waste of precious and finite natural resources, while replacing them with an ocean of products mainly good for fueling further consumption.70 Robert Sherrill starts his voluminous compendium on American energy policy in the 1970s by painting the following scene: A significant segment of the people got mad. Consumer groups and environmental groups and their smallish but vocal band of allies in the Congress began to demand changes. These hotheads were no longer willing to forgive everything in return for cheap energy. Hell, they took cheapness for granted. Now they demanded social responsibility as well; they wanted the oil companies to start paying their share of taxes and show more concern for the safety of the environment and for the conservation of the nation’s resources. They insisted on stiffer regulation of, and a closer accounting from, 70  “In a compelling harmony with all the above thoughts we should cure ourselves of what I have been calling ‘the circumdrome of the shaving machine’, which is to shave oneself faster so as to have more time to work on a machine that shaves faster so as to have more time to work on a machine that shaves still faster, and so on ad infinitum.” Nicholas Georgescu-Roegen, “Energy and Economic Myths”, in Southern Economic Journal, 41:3, January 1975, pp. 347–81.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

211

the oil companies. The Torrey Canyon spill, in 1967, the Santa Barbara spill in 1969, the proposed pell-mell construction of the Alaska pipeline, the absurdly costly oil import program, the endlessly illogical oil depletion allowance-case were some of the things that aroused anger and fear.71

In 1960, environmental organizations in the US boasted approximately 123,000 members; by 1970, their membership rolls had risen to more than 800,000, and polls revealed that nearly 70 percent of Americans thought that water and air pollution were problems requiring urgent government action.72 Take the titles of a few contemporary bestsellers: Silent Spring (1962), by Rachel Carson; The Costs of Economic Growth (1967), by Ezra Mishnan; Spaceship Earth, (1966), by Barbara Ward; The Population Bomb (1968), by Paul Ehrlich; The Tragedy of the Commons (1968), by Garrett Hardin; Future Shock (1970), by Alvin Toffler. All these books, which sold thousands of copies, shared an “alarmist” view of the changes underway (as well as common origins—their authors were all Americans) (Fig. 4.4). This “alarmist” trend probably reached its peak with the publication of the Club of Rome’s report The Limits to Growth in 1972, which was translated into some fifteen languages in the two years after its release and remains a classic with a ­sizable number of acolytes to this day.73 The Club of Rome brought together highlevel officials, intellectuals, scientists, and managers with ties to the OECD, and estimated that, at the then-current rates of growth, the world’s population would increase from 3.6 billion in 1972 to approximately 7 billion in 2011 (the world’s population in 2017 is estimated at 7.5 billion). An inevitable corollary of population growth would be the outbreak of wars and conflicts to grab scarce resources, and the spread of epidemics, malnutrition, and related diseases. The only way to halt these inevitable catastrophes, in the Club report’s opinion, was to put a brake on population growth and to environmental degradation, avoiding further squandering of natural resources. The Club of Rome report appeared only a few weeks before the convening in June 1972 in Stockholm of the first United Nations Conference on the Human Environment. The text of its final Declaration was the subject of intense, hardline negotiations between the industrialized nations and the developing countries, with critical interventions by Brazil, the Soviet Union, and China. In the end, the first point of the Declaration read: Man is both creature and molder of his environment, which gives him physical ­sustenance and afford him the opportunity for intellectual, moral, social and spiritual growth. In the long and tortuous evolution of the human race on this planet a stage 71 Robert Sherrill, The Oil Follies of 1970–1980: How the Petroleum Industry Stole the Show (and Much More Besides) (New York: Anchor Press, 1983), p. 2. 72  Stephen Macekura, Of Limits and Growth: The Rise of Global “Sustainable Development” in the Twentieth Century (Cambridge: Cambridge University Press, 2015), p. 100. 73  Matthias Schmelzer, “Born in the Corridors of the OECD: The Forgotten Origins of the Club of Rome. Transnational Networks, and the 1970s in Global History”, Journal of Global History, 12:1, March 2017, pp. 26–48. On the “afterlife of the Club of Rome”: Luigi Piccioni, “Forty Years Later. The Reception of the Limits to Growth in Italy, 1971–1974”, in I Quaderni di Altronovecento, n. 2, Fondazione Luigi Micheletti, 2012.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

The Rise and Fall of OPEC in the Twentieth Century

B B B B B B B B B B B B B B B B

R

B

D

B

R R R R R R R R R R R R R R R R R

212

B

B

R

D B D B FS B I D F S B F I S S BR D I F D P I F S B B R S P F D B S P D P B S DI I I P S B FD P B S XD P D BP D D B DB P

D D

D

D D

D D D D D D D D D D

B

D

R

resources

population pollution

I

I

I

I X X X

X X X

F F R RX F I X F SR I S R FS I R S R X S R R SF SR R S F R S F F S 2100. S F R

I I

industrial output per capita

X

X X X X

1900.

SP I S P SP I S S I SP

F F F F F F F F I PS F I PS IP S F IP S F SF I SF I I SF

S S

S

food per captia

Fig. 4.4.  The “World Model Standard Run” from the 1972 edition of the Limits to Growth Club of Rome report shows widespread consensus at the beginning of the 1970s on swiftly declining resources. (The Limits to Growth, 1972)

has been reached when, through the rapid acceleration of science and technology, man has acquired the power to transform his environment in countless ways and on an unprecedented scale. Both aspects of man’s environment, the natural and the manmade, are essential to his well-being and to the enjoyment of basic human rights— even the right to life itself.74

We might consider this Declaration, with all the vicissitudes surrounding it, as representing the grand entrance of the environmental question in international politics. But how meaningful could environmental degradation be to the African child with no food or medicine, to the Brazilian in the shantytown on the outskirts of Sau Paolo, to the Chilean miner compelled to plunge into the deepest recesses of the earth to extract copper, or to the Indian peasant who had never known any 74  Declaration of the United Nations Conference on Human Environment, Stockholm, June 1972: http://www.un-documents.net/unchedec.htm (Consulted on January 19, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

213

means of transportation other than his own legs? During the preparatory talks for the Stockholm conference, the developing countries strongly criticized the first version of the Declaration because “it unduly dissociated the environmental issues from the general framework of development and development planning, in such a manner as to render it an instrument for a purely restrictive, anti-developmental and ‘conservationist’ policies.”75 One could not talk about the environment without talking about development. Indira Ghandi addressed the conference arguing that environmental degradation could be interpreted as an act of aggression by developed countries looking to grab the resources of developing ones. Or, as the Pakistani economist Mahbub Ul Haq, a key intellectual figure in the development debates throughout the 1970s, put it: “In your world, there is a concern about the quality of life; in our world, there is a concern about life itself which is threatened by hunger and malnutrition.”76 And yet, some of the arguments against rampant consumerism and the squandering of natural resources were very relevant to the cultural, political, and economic battles fought by the commodities producers, and in particular by oil producers. * * * The clearest example of this line of “environmentalist” thinking in petrostates is represented by the very same Juan Pablo Pérez Alfonzo, who we last encountered in the mid-1960s as a friend and admirer of Ivan Illich. By the end of the decade he had become a ferocious critic of petromodernization based on ramping up production and of overconsumption of natural resources. He had embraced the  ­environmentalist critique and was closely monitoring the evolution of the debate in Europe, in the Soviet Union and in the US: “having woken up to the horrible reality of what has happened to their own immense territory, the US people are making environmental plunder a key issue.”77 At the entrance to his country home outside Caracas Pérez Alfonzo had parked a large old American automobile—Caracas is probably the only city in the world where these enormous gas guzzlers still run to this day—that had rusted while waiting for its import permit. It was intended as a warning to all those who believed in the illusion of consumerism. In a collection of his writings from 1972 to 1975, published under the title Hundiéndonos en excremento del Diablo (“Wallowing in the Devil’s Excrement”), the former Venezuelan Petroleum minister, now a guru among the Venezuelan radicalized youth, argued that petroleum represented a precious, almost mystical resource.78 Crude oil should be refined, he argued, with increasingly sophisticated technology so as to generate products of a value comparable to vintage French wine. Certainly, this would be better than simply burning fossil fuels to produce energy! The overproduction of Venezuelan crude by the end of the 75 Louis  B.  Sohn, “The Stockholm Declaration on Human Environment”, in The Harvard International Law Journal, Vol. 14, No. 3 (Summer 1973), pp. 423–515. 76 Mahmub Ul Haq, The Poverty Curtain: Choices for the Third World (New York: Columbia University Press 1976), p. 82. 77  Pérez Alfonzo, Petróleo y Dependencia, p. 73. 78  Juan Pablo Pérez Alfonzo, Hundiéndonos en el Excremento del Diablo (Caracas: Editorial Lisbona, 1976).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

214

The Rise and Fall of OPEC in the Twentieth Century

1960s, rather than improving general welfare of its people, had actually increased social inequality in the country: only 5 percent of the Venezuelans held 20 percent of the nation’s wealth (as I am writing, 1 percent of citizens owns 40 percent of US wealth); at the same time the cities attracted all the financial and manpower resources while the countryside and the agricultural sector were gradually abandoned to their fate.79 Lake Maracaibo had become so polluted that hardly any life form managed to survive in its damaged ecosystem. Pérez Alfonzo argued that it was vital to reduce global oil production and to concentrate instead on a global redistribution of energy consumption towards poorer countries. Ten countries, representing 14 percent of the world’s population, consumed more than two-thirds of all oil worldwide. Sweden, the very country that had hosted the UN Conference on the Human Environment, was first among these privileged nations: in 1972 the Swedes consumed an average of 30 oil barrels per person, as opposed to the 0.25 barrels per person consumed in India.80 The industrialized consumers would have to pay more per barrel, while at the same time consuming far less. For their part, producing countries such as Venezuela would have to impose caps on production, bring government spending under control, and invest surpluses abroad in order to keep domestic inflation in check. This radical critique of Western consumerism, coupled with a call to control oil exports, as well as with the prescription of redistributing the oil rent toward public goods rather than private consumption, was an integral part of the philosophy of Abolhasan Bani-Sadr. The Iranian intellectual, who would later become the first President of the Islamic Republic of Iran, publicized this discourse in books such as Pétrole et Violence (“Oil and Violence”) that would exert an influence on the Iranian educated public.81 Both Pérez Alfonzo and Bani-Sadr proposed radical solutions that implied direct confrontation with the most voracious consumers and a clear break with the era of petromodernization. By the beginning of the 1970s the likes of Pérez Alfonzo and Bani-Sadr were certainly among the most extreme, but they were by no means isolated voices in petrostates. Almost all the delegates to OPEC, whether progressives or moderates, began to share the view that oil had been sold off too cheaply and in massive quantities for too long, and that sooner rather than later reserves in their countries would start running dry. The Libyan Ali Attiga, Secretary General of OAPEC in 1973, toured a number of countries to publicize a new strategy that would be advantageous to both the producers and consumers alike. He later named this strategy Interdependence on the Oil Bridge. In his view, an increase in the price of a scarce commodity such as petroleum should have led the West to invest in alternative energy sources and reduce its domestic consumption to the mutual benefit of producers and consumers.82 In the OPEC meetings of mid-1973, the delegates agreed that petroleum was to be considered a finite natural resource that the industrialized 79  Ibidem, pp. 29–30. 80  Ibidem, pp. 145–147. 81  Paul Vieille and Abolhassan Bani-Sadr (eds.), Pétrole et violence: terreur blanche et reistance en Iran (Paris: Editions Anthropos, 1974). 82 Ali Ahmed Attiga, Interdependence on the Oil Bridge: Risks and Opportunities (Kuwait City: Petroleum Information Committee of the Arab Gulf States, 1988).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Energy Crisis

215

nations had abused for far too long: they had been drugged by cheap oil for so long that they appeared to be suffering withdrawal symptoms like drug addicts. These were the words of the Venezuelan Petroleum minister Pérez La Salvia, a member of the Christian Democratic COPEI party, speaking before the thirty-second OPEC Conference in March 1973 (arguments that would soon be used with even greater efficacy by the Iranians, even though as we have seen the Shah had boasted he wanted to see Iranian production increased to 8 million barrels a day): They all knew that proved reserves, at the present rate of consumption, would last for 38 years, but that if consumption increased as foreseen, they might last about half of that time. They all knew that development of new sources of oil would be increasingly costly and difficult and that the OPEC Countries would continue to be the main suppliers of oil for a long time to come, even if they took into account recent, or p ­ rospective finds outside their area. [. . .] Their oil not only provided gasoline for their cars and heating and electricity for their homes, it was now, and would increasingly become, the actual blood of their entire industrialized societies. There was practically no industrial product that did not require energy for its manufacture, and oil had every day a greater share in the production of energy. Both industry and agriculture required in evergreater amounts the products derived from oil through petrochemical process. Indeed, of the multitude of goods and services that made up the high standard of living in the wealthy nations, very few, if any, did not require the use of oil in one form or another in their production. All this wealth was made possible by their oil. And their oil, he stated, was a source that did not renew itself, so that, sooner or later, it would inevitably be exhausted. The increase in their wealth fed on the depletion of their own. And what did they get in return? 83

Ideas about the deterioration of the environment and especially about the over­ exploitation of natural resources, such as those put forward by the Club of Rome, had generated widespread alarmist consensus. This played right into the hands of those who argued that rising commodities prices would be inevitable. Indeed, higher prices could be part of the solution to the problem of overconsumption and environmental degradation. In 1973 a collection of essays by leading environmentalists, technocrats, and critics of growth, including writings by Barbara Ward and Aurelio Peccei (one of the founders of the Club of Rome), but excluding any Third World intellectual or public figures, had the title: Who Speaks for Earth? 84 As strange as it might seem today, some of OPEC’s technocrats and politicians, felt they were entitled to be speaking both for their own citizens as well as in the of the preservation of natural resources. They started thinking of OPEC as both an instrument to support the struggle of developing countries for higher raw materials prices as well as an “ecological force” against unrestrained consumerism.

83  NYUAD Library, ASC, GGC, MC-038, Minutes of the Thirty-Second (Extraordinary) Meeting of the OPEC Conference, Vienna, March 16–17, 1973. 84  Maurice Strong (ed.), Who Speaks for Earth? Seven Citizens of the World On Major Issues of the Global Environment (New York: W.W Norton & Company, 1973).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

5 The Oil Revolution For the Third World to embrace the cause of OPEC, OPEC has to embrace the cause of entire Third World.1 Juan Pablo Pérez Alfonzo

In a matter of a few weeks between October and December 1973, embargoes, production cuts and booming oil prices, made OPEC in general, and Arab producers in particular, the talk of the day. Governments and citizens in industrialized countries feared what petrostates would do next. Some US Native American tribes, under the leadership of the Navajo Nation, formed in 1975 the Council of Energy Resource Tribes (CERT), often defined as “the Indian OPEC”, taking the fight against petrocapital even directly on US territory.2 Governments and citizens in oil-importing developing countries, on the other hand, hoped petrostates would either spare them or, even better, support them. British historian E.H. Carr voiced some of the concerns of the panicked elites in industrialized countries in the preface of the second edition of his classic What Is History? written just after the “oil shock” of 1973: The current wave of skepticism and despair, which looks ahead to nothing but destruction and decay, and dismisses as absurd any belief in progress or any prospect of a further advance by the human race, is a form of elitism—the product of elite social groups whose security and whose privileges have been most conspicuously eroded by the crisis, and of elite countries whose once undisputed domination over the rest of the world has been shattered.3

Peter Odell, one of the prominent European energy experts, born to a workingclass family in the mining town of Coalville in Leicestershire, grew increasingly frustrated by the optimism of many of his European colleagues who believed in a possible cooperation with oil producers: It appears to stem from an unwillingness to accept the idea that there has been a revolutionary change in the world of oil power and to face the fact that, for the first time in some 400 years, there has been a loss of control by the western world over an essential element in its system to a set of countries which have hitherto considered to be decision-taking entities with that system.4 1  Pérez Alfonzo, Hundiéndonos en el Excremento del Diablo, p. 13. 2 Black, The Global Interior, pp. 214–217. 3 E.H. Carr, What Is History? 2nd ed. (London: Penguin, 1987), p. 5. 4 Peter  R.  Odell, The Western European Energy Economy: Challenges and Opportunities (London: Athlone Press: 1975), p. 17.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

217

Odell considered there was more than one reason to be pessimistic: first because the new “decision-takers” lacked the experience to adequately gauge the consequences of their policies; second because these new actors had no interest in preserving a system that for hundreds of years had made them “victims of western economic exploitation;” and third because while Arab producers wanted to destroy Israel, the West was engaged in protecting it. Even though from different angles, Carr and Odell both agreed that a revolutionary change had taken place, one that was possibly even more significant than the political and cultural turmoil generated by the “global 1968.” Bonneuil and Fressoz, noting that for industrialized countries “the imports of materials, measured in tons aggregating all products together (minerals, energy carriers, biomass, construction materials, and manufactured goods) rose by 7.59 percent a year from 1950 to 1970,” conclude that “the non-Communist world was being emptied of its high-quality energy and materials.”5 The 1973 oil revolution was a way of redressing this unbalance against natural resource exporters. It shook the transatlantic, white, liberal, Keynesian civilization that had emerged from WWII to its core. It reinforced calls for a global redistribution of wealth and decision-making power from the industrialized countries towards of the developing “darker” regions of the world. It called for an even stronger role of the “developmental state” as a promoter of more equitable international economic relations in the face of mounting challenge by multinationals described in Raymond Vernon’s 1971 classic Sovereignty at Bay.6

THE OIL SHOCK On Saturday, October 6, 1973, as Israelis prepared to celebrate Yom Kippur, the Syrian and Egyptian armies launched coordinated attacks on Israel both from the north and south. They managed to catch the Israeli army off guard. The Egyptians overwhelmed Israeli defenses on the Eastern side of the Suez Canal—the Bar Lev line, believed to be impregnable—restoring some of the Arab pride so gravely wounded in 1967. The military operation earned Sadat the title of the “Hero of the crossing.” Soon enough though, by October 14, the Israelis had mobilized their reserves, reorganized their forces, and retaken the Golan Heights in Syria. On October 16, the counteroffensive continued in full force, aided by massive shipments of weapons and logistical support from the United States. The Israeli Defense Forces (IDF) would gradually roll back also the Egyptian army and even threaten to re-cross the Suez Canal.7 As we have seen in the previous chapter, October 16 was also the date when Gulf producers convened in Kuwait, along with delegates from other OPEC countries, and decided on their first unilateral increase in posted prices. The decision on 5  Bonneuil and Fressoz, The Shock of the Anthropocene, Chapt. 10. 6  Raymond Vernon, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York: Basic Books, 1971). 7  Avi Shlaim, The Iron Wall: Israel and the Arab World (New York: W.W. Norton & Co., 2001).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

218

The Rise and Fall of OPEC in the Twentieth Century

posted prices was only tangentially linked to the war raging in the Middle East, and had already been on the calendar for quite some time. The following day, OAPEC (the A for “Arab” here is important, specially since both Egypt and Syria were members of this organization) delegates reconvened instead to specifically address the war and to decide on how to support the Arab armies. In the course of the meeting, preceded by secret talks between Faisal and Sadat, alternative action plans were offered. The Iraqi government argued that the only way to force Washington to truly listen to the Arab world would be to nationalize US oil interests everywhere (US companies still controlled approximately 36 percent of oil in the Middle East), to withdraw all funds from US banks, and to break off diplomatic relations with Washington. The fallout of these measures would have conveniently fallen on the rest of Arab oil exporters since Baghdad had already nationalized most of its concessions (it would soon also nationalize Dutch and US interests in the Basra Petroleum Company in the South), held no funds in US banks, and had already broken diplomatic relations with Washington. Iraqis, on the other hand, opposed curtailing oil production, since they considered themselves to have been already sufficiently penalized by IPC and since there was no need to punish the whole world, including the friends of the Arab nation.8 The Algerian Abdessalam, who presided over the OAPEC meeting, derided Iraqi proposals as non nearly as radical as they were impractical. In the event, the prevailing line was the one championed by Saudi Arabia. Faisal called for a generalized production cut in order to soften up the consumers and compel them to exert diplomatic pressure both on the Nixon administration and on Israel. On October 17, 1973, OAPEC, under pressure from the Kuwaiti government, thus announced a minimum 5 percent reduction in crude exports across the board, with a specific clause attached: The same percentage will be applied in each month compared with the previous one, until the Israeli withdrawal is completed from the whole Arab territories occupied in June 1967 and the legal rights of the Palestinian people restored. The conferees are aware that this reduction should not harm any friendly state which assisted or will assist the Arabs actively and materially. Such countries would receive their shares as before the reduction.9

That same day Abu Dhabi, through its minister of Petroleum Mana Al-Otaiba (then just twenty-seven years old), announced a complete embargo on the United States. On October 19, President Nixon requested that Congress earmark $2.2 billion in aid for Israel. This was not a loan, but a gift and a demonstration of unwavering support. The next day Saudi Arabia, along with the rest of the Arab states, proclaimed a total embargo on all direct oil shipments to the United States and to a few other countries, including the Netherlands. The embargo eventually extended to Portugal, Rhodesia, and South Africa. One of the two pillars of Washington’s grand strategy in the Gulf seemed to have turned its back on Richard Nixon. Faisal, according to one of the most prominent Saudi government officials of the 8 Chalabi, Oil Policies, Oil Myths, p. 109.

9  “The Oil Weapon”, MEES, October 13, 1973.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

219

time, Ghazi Al-Gosaibi, privately told his visitors that Saudi Arabia “was prepared to go back to the days of tents and dates.”10 The King, who had already visited revolutionary Algeria numerous times, deepened his cooperation with Boumediene, whom he considered the most prominent statesman in the Arab world. Ellen Wald adds a further layer of explanation to the Saudi willingness to curtail production: the policy also made sense as a way to preserve reservoirs from over-exploitation, considering that oil production had surpassed 8mbd in a very short time.11 On October 25 a ceasefire was reached, providing a temporary respite from the hostilities. By then the military balance had clearly shifted in the Israeli’s favor. On November 4 the Arab oil producers, expect Iraq, decided to cut production by 25 percent across the board, and simultaneously created three distinct classes of costumers: preferred countries, which would receive all of requested shipments at pre-October levels; neutral countries, which would receive less than their September quotas; embargoed countries, subject to a complete ban. At the same time, OAPEC sent Yamani and Abdessalam on a public-relations tour in the key industrialized countries to explain the motives and objectives of the embargo. In November, the reduction of global oil production was, according to Steven Schneider, on the order of 4 million barrels per day.12 According to the US Federal Energy Administration, Arab crude oil production had dropped from 20.3 million barrels per day in September, to 15.8 million barrels per day in November 1973.13 While the oil market was increasingly tight, a few OPEC countries—Iran, Iraq, Nigeria, and Venezuela among them—made every possible effort to increase production, counterbalancing the worst consequences of the embargo. Overall, the global reduction in production during the embargo period would not surpass 5 percent. It must also be noted that some of the countries specifically targeted by the embargo were also among the most resilient to its effects. The Netherlands, for example, consumed only 15 percent of its oil imports (since most of the imported crude was processed in Rotterdam refineries to be then re-exported), and could also count on the largest natural gas field in Europe. On the other side of the Atlantic, 6.7 percent of US oil imports came from the Middle East so that the impact of the embargo was potentially far from negligible. On the other hand the very nature of the oil trade, based on flexible distribution networks, made control over the flow of crude very difficult to implement. In the event, among the countries hardest hit by the embargo, were also countries that had been classified as “friendly” such as France or Belgium and, more generally, the oil-importing developing countries. It is also important to note that the measures taken by a number of OPEC countries to reduce production, also represented the first time that petrostates acted (even though this was an emergency situation) as a “protocartel” that tried to coordinate production levels. 10 Ghazi A. Algosaibi, Arabian Essays (London: Kegan Paul, 1982), p. 36. 11 Wald, Saudi Inc., pp. 188–9.  12 Schneider, The Oil Price Revolution, p. 229. 13  David  S.  Painter, “Oil and the October War”, in Asaf Siniver (ed.), The October 1973 War: Politics, Diplomacy, Legacy (London: Hurst, 2013), pp. 175–93.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

220

The Rise and Fall of OPEC in the Twentieth Century

Even taking into account some of its operational weaknesses, as well as the fact that Israel never felt compelled to retreat from the territories acquired in 1967, the 1973 embargo was far from a failure on a par with those of 1956 and 1967. First of all it allowed Arab governments to shield themselves from the popular rage against Israel that could, if left unanswered, even topple some the weaker Arab petrostates.14 Also, given the conditions then prevailing on the oil market, it helped drive market prices through the roof and created widespread panic about an impending oil scarcity among consumers—both governments and common citizens.15 The US oil majors started pressuring Washington to cuddle up to the Saudis, and did so very publicly, buying full-page advertisements in the most prestigious newspapers. The European Community (EC) countries, meanwhile, started their shift to an openly pro-Arab stance for the very first time.16 With their declaration of November 6, the nine EC members acknowledged the inadmissibility of ­territorial acquisitions obtained through force, called on Israel to retreat from the territories it had occupied 1967, and urged that any future peace agreement take into account the “legitimate rights of the Palestinians.”17 Eventually, after the meeting of EC leaders in Copenhagen in December 1973, where four Arab ministers were present to voice their case, the first formalized Euro-Arab Dialogue was launched. Although this dialogue would run into a fair amount of trouble, especially because the Europeans wanted to avoid it being too “political,” the dialogue would last until 1978 and provide a venue to voice Arab concerns.18 Western European governments were far from convinced that the oil majors and the US government could (or would) look out for the interests of European consumers in a worst-case scenario. They feared that interruptions in crude oil supplies would further nourish the already polarized and quasi-revolutionary political and social atmosphere that permeated the majority of Western European countries in the early 1970s. For the Nixon administration the Saudi “betrayal” was a new foreign policy jolt at a time when it was striving to make an honorable exit from the disaster of the war in Vietnam. The embargo, followed by oil price increases, could reinforce inflationary pressures and plunge the country even further into the energy crisis. It was soon considered a “Pearl Harbor” kind of menace and provoked quite a hysterical reactions in Washington and repeated threats of military intervention.19 But despite the hard talk, often tainted by racism, there was little possibility on the 14  On the effectiveness of the Arab oil embargo: A.F. Alhajji, “The Oil Weapon: Past, Present and Future”, in Oil & Gas Journal, 05/02/2005. 15 Rüdiger Graf, “Making Use of the ‘Oil Weapon’: Western Industrial Countries and Arab Petropolitics in 1973–74”, in Diplomatic History, 36:1 (2012), pp. 185–208. 16  Luca Riccardi, “Sempre più con gli arabi: la politica italiana verso il Medio Oriente dopo la guerra del Kippur (1973–1976)”, in Nuova Storia Contemporanea, 6 (2006), pp. 57–82. 17  Declaration of the Nine Foreign Ministers of 6 November 1973 on the Situation in the Middle East: http://www.cvce.eu/content/publication/1999/1/1/a08b36bc-6d29-475c-aadb-0f71c59dbc3e/ publishable_en.pdf (Consulted on January 22, 2019). 18 Haifaa  A.  Jawad, Euro-Arab Relations: A Study in Collective Diplomacy (Reading: Garnet Publishing, 1992). A number of essays on the Euro-Arab Dialogue can be found in: G.  Galasso, F. Imperato, R. Milano, L. Monzali (eds.), Europa e Medio Oriente: 1973–1993 (Bari: Cacucci, 2017). 19  For the US reaction to the energy crisis: Jacobs, Panic at the Pump.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

221

short term to do without Arab oil. The minutes of Kissinger’s staff meetings constitute an almost inexhaustible well of caustic sarcasm and thinly veiled threats aimed at the Arab oil producers: Secretary Kissinger: I know what would have happened in the nineteenth century. But we can’t do it. The idea that a Bedouin kingdom could hold up Western Europe and the United States would have been absolutely inconceivable. They would have landed, they would have divided up the oil fields, and they would have solved the problem [. . .] That would have been done. And I am not even sure that this is so insane. But that obviously we cannot do.20

The embargo destabilized the Atlantic Alliance, and at the same time reinforced the petrostate’s drive to take full control of oil production, rendering previous agreements on participation immediately obsolete. How could the monarchies in the Gulf justify still holding a minority position in their oil industry when it was obvious that oil would be used also as a political weapon and that marketing oil would be now very easy, with or without the help of the majors? After the end of 1973, all OPEC countries speeded up the pace in gaining full control over production. Kuwait would achieve 100 percent participation by 1975. Saudi Arabia and Iran would do the same by the end of the decade. Qatar, following the Kuwaiti model, obtained “full participation” by 1976. In March 1974 Libya nationalized all remaining Shell assets in the country. In December 1975, Iraq nationalized the Basrah Petroleum Company in the south. In August 1975, Venezuela nationalized all concessions, effective as of 1976 (we will return to this later). Abu Dhabi, Libya, and Nigeria also acquired majority control, but left some equity shares to the international oil companies. Although their technical e­ xpertise, marketing experience and facilities remained crucial, after the 1973 embargo the majors basically either become privileged OPEC customers or were paid a fee for their services: the once mighty global oil oligopoly was now the petrostate’s junior partner. * * * The Arab embargo and production cuts, however significant, are not the events we commonly associate with the term “oil shock.” The shock that would still be remembered to this day was the “price revolution” that followed the embargo. If Faisal had been the protagonist of the Arab embargo, the Shah of Iran would be the protagonist of the price revolution. Both Washington’s twin pillars in the Middle East spearheaded initiatives that were far from welcome both in Washington and in the other capitals of the Western world. On 22–3 December, the Gulf members of OPEC held another extraordinary meeting in Tehran, with the rest of OPEC countries attending. In November, a few weeks before the meeting, Nigerian crude had been auctioned at $16 dollars a barrel. By the beginning of December, the Iranian government managed to auction some of its own crude for the unprecedented price of $17.40 per barrel (Fig. 5.1.). 20  FRUS, Energy Crisis 1969–1974, Minutes of the Secretary of State’s Staff Meeting, Washington, October 26, 1973.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

222

The Rise and Fall of OPEC in the Twentieth Century

40.00 36.06

35.00

34.15 31.61

30.00

31.72 28.78

27.54

28.06

25.00 20.00 15.00

13.92 11.58

10.00 2.24

2.48

2

3.29

19 7

19 7

19 7

19 7

0

0.00

1

1.80

14.02

3 19 74 19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85

5.00

11.53

12.80

Fig. 5.1.  Evolution of the official price of Arab Light crude. (Ian Skeet, OPEC. Twenty-Five Years of Prices and Politics, 1988).

The day before the Tehran meeting, the Shah had granted an interview to the New York Times in which he had openly voiced his ambitions: “in 20 or 25 years I want it [Iran] to be ahead of the greatest nations of the world. We will have 60 million people in 25 years [. . .] Some people say that we will be one of the five most developed countries in the world.”21 He foresaw an Iranian production growing to 9 million barrels per day, eventually reaching peak production by 1977; the sands would then gradually begin to run out of the hourglass, and the countdown to the exhaustion of the oil fields would inevitably begin. The only way to speed up the momentum and become one of the five most industrialized nations in the world would be a massive increase in the price of crude. The Shah’s interview ­earlier that month with the Italian journalist Oriana Fallaci—in which he alternately came off as a Socialist (“your old socialism is finished [. . .] Swedish Socialism. It didn’t even nationalize forests and water. But I have”), a misogynist (“nobody can influence me, nobody at all. And women still less. In a man’s life women count only if they’re beautiful and graceful and know how to stay feminine”), and a reactionary (“with five-year-olds going on strike and parading the street. Is that what you call democracy?”)—while probably not endearing him to public opinion in Western Europe and the US, offered him an opportunity to outline his vision when it came to energy: In less than 100 years, this oil business will be finished. The need for oil increases every day, existing fields are becoming exhausted, and you’ll soon have to seek some other 21  “Shah of Iran Urges Arabs to End their Oil Embargo”, New York Times, December 22, 1973.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

223

source of energy. Atomic, solar, or what not. You’ll have to resort to several solutions, one won’t be enough. For instance, you’ll have to exploit the power of ocean tides with turbines. Or else you will have to dig deeper, seek oil 10,000 meters below the sea-bed or at the North-Pole [. . .] I don’t know. All I know is that the time has already arrived to take measures, not to waste oil as we always have. It’s a crime to use it as we do nowadays.22

Iranian government officials, even at the highest ranks, were not yet fully aware of what was going to happen at the Tehran meeting. Khodadad Farmanfarmaian, in charge of preparing the Iranian fifth economic plan starting in 1974, had estimated oil income at 20 billion dollars for the next five years. In a conversation just before the Tehran meeting the Shah warned him: “No. You don’t know. It’s going to be more, much more” (the figure would turn out be four times the amount previously estimated by Farmanfarmaian).23 The end result of the Tehran meeting on prices was communicated to the outside world in the following terms: Although the findings of the Economic Commission Board, as well as direct sales realized by some Member Countries, indicated a price in excess of $17 per barrel, the Ministerial Committee decided to set government-take of $7 per barrel for the market crude, Arabian Light 34 degree API. The relevant posted price for this crude will, therefore, be $11.651.24

The press release ended with a piece of ominous-sounding advice for the industrialized countries: “considering that the government-take of dollars per barrel is moderate, the Ministers hope that the consuming countries will refrain from further increases of their export prices.”25 The style was dry, bureaucratic, measured. The substance, however, was a bomb. The posted price of crude had doubled for a second time since October 16, 1973. The Tehran decision on prices triggered one of the most rapid transfers of wealth from one part of the globe to the other in world history. OPEC countries also warned that they would not accept “further increases” in the prices of manufactured goods in the future. To sweeten the pill, if only slightly, immediately after the meeting, OAPEC governments announced a reduction in production cuts from 25 to 15 percent, as well as a re-release of oil placed under embargo onto the open market. Since the December price increases are still considered one of the pivotal moments in the history of the twentieth century, the decision-making process that led to the Tehran decision merits further discussion. The figure that stands out here is not so much the $11.651 per barrel posted price (the figure mostly remembered in history books). Far more interesting is the $7 per barrel that the 22  Oriana Fallaci, “The Shah of Iran: An Interview with Mohammad Reza Pahlevi”, in The New Republic, December 1, 1973. 23  Harvard Center for Middle Eastern Studies, Iranian Oral History Project, Interview with Khodad Farmanfarmaian, Plan Organization Director, December 17, 1982. 24  NYUAD Library, ASC, GGC, MC-038, Press release n. 18–73, Ministerial Meeting of the Six Gulf Members of OPEC, Vienna, December 24, 1974. 25  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

224

The Rise and Fall of OPEC in the Twentieth Century

OPEC member states claimed as their “government-take”: the posted price was then simply derived from this figure following the established 1:1.4 relation between the government-take and posted price. I have mentioned before that market pressures amply justified an increase in the posted price in order prevent the oil companies from reaping most of the benefits from the price increases. The question that needs to be asked, then, is: why did the producers fix their expected income from exporting of barrel of oil at precisely $7? While the minutes of the Tehran meeting are not available, most accounts agree that this figure was the outcome of a compromise, promoted by Iran, between the hawks (Iraq for example proposed $8) and the doves (Saudi Arabia proposed $6, just above the US domestic crude price). In his statement after the meeting, the Shah clarified that oil was a “noble product” that would run out in thirty years’ time, while thousands of billions of tons of coal remained underground. The world needed to diversify its energy sources: “so I have suggested to the Gulf members of OPEC that we have to agree on a price which will go into effect on 1 January 1974. This will correspond now to the minimum price that we will have to pay either to get the shale oil or liquefaction of coal or gasification of coal.”26 Fadhil Chalabi, who was in Tehran as a member of the Iraqi delegation, recalls that the deputy head of NIOC Reza Fallah, while hosting all the OPEC delegates in his palace and during the meeting: “described oil in new language, unheard of outside journals of ecology [. . .] a ‘noble commodity’ that should not be burnt up to generate energy, but conserved only for advanced technology, as in the petrochemical industry.”27 Amouzegar, at the OPEC Conference the following January, reiterated the four key considerations that led the organization to agree on the $7 figure: first, the cost of producing energy from other sources; second, the need to protect the purchasing power of oil; third, the “intrinsic value” of oil; fourth, the fact that oil had the advantage of not being merely an energy source, but also a raw material for the petrochemical industry.28 Among these four considerations, the one on the “intrinsic value” of oil is the most ambiguous, but also very revealing of the then prevailing political and cultural mindset. The Venezuelan Acosta Hermoso, whom we have encountered before numerous times, already spoke in the 1960s of a fair price for oil that would have to take into account the “extrinsic” value of ­petroleum, based on numerous market considerations, and at the same time its “intrinsic” value as a non-renewable natural resource. This intrinsic value, according to Acosta Hemoso, had to be safeguarded by OPEC, by taking cues from what the United States had done to preserve its domestic oil through the Texas Railroad Commission or the impositions of import quotas, and also by acknowledging the efforts by the oil majors to coordinate global production levels.29 Faced with the need to set unilaterally the value of its own resource, in a volatile market that 26  “Statement of the Shah”, Kayhan International. December 23, 1973. 27 Chalabi, Oil Policies, Oil Myths, pp. 111–12. 28  NYUAD Library, ASC, GGC, MC-038, Minutes of the 37th Meeting of the OPEC Conference, Geneva January 7–9, 1974. 29  Acosta Hermoso, Análisis histórico de la OPEC, pp. 35–40.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

225

offered no stable reference, OPEC decision-makers made a decision that took into account what they believed to be the “intrinsic” value of the natural resource as opposed to the simple “market” value of crude oil. In other words: according to OPEC petroleum could not be simply be considered a commodity. Each OPEC country obviously had specific reasons to support a price increase at the end of the 1973. The Shah in particular was pressured by the fact that Iran had scarce foreign currency reserves and was using up to 18 percent of its oil revenues to repay foreign debt, by the need to boost the military build-up, as well as by the desire to speed up the Great Civilization program through rapid ­industrialization.30 Some analysts even argued that the Shah had already received his cancer diagnosis, and wanted to witness the rapid transformation of Iran before it would be too late. According to Fadhil Chalabi, the Iranian shift from price moderation in April 1973 to its hawkish position at the end of the year was far too puzzling to be simply explained with Iranian internal priorities. He credits theories, such as those put forward by William Engdhal and others before him (Pierre Terzian probably stated this same theory in the most convincing way), according to whom the price revolution was basically promoted with the “tacit understanding” of international oil companies and the US government. Their objective was to increase the companies’ profits, thus allowing them to invest in non-OPEC production that up to 1973 was “prohibitively expensive to develop under the oil low-price regime,” and at the same time to allow both Iran and Saudi Arabia to pursue their military build-ups by purchasing huge quantities of US military hardware.31 These arguments have a number of weaknesses. First of all the US government was far from happy to see international oil prices rise above domestic crude oil prices. Most US industries and citizens were interested in low crude prices, and were prepared to rise up (as they did) against any Washington politician that would allow high crude prices to affect production costs, household income, and general lifestyle. Secondly, the massive weapons sales to the Middle East and the so-called “petrodollar recycling” can be far more easily explained as a consequence rather than a cause of the booming oil rent in petrostates. And finally, while Iran might have been encouraged to follow Washington’s oil-pricing directives (and there is no evidence of this), other OPEC governments, in fact the most radically anti-American ones such as Libya or Iraq, also wanted even higher price increases than those suggested by the Iranians. I would argue that the specific figure that was chosen at the December Tehran meeting, a price of $7 for Saudi crude, can basically be explained by taking Amouzegar’s arguments at face value, considering the prevailing political and cultural atmosphere

30  Fereidun Fesharaki, Development of the Iranian Oil Industry: International and Domestic Aspects (New York: Praeger, 1976) p. 132. 31 Chalabi, Oil Policies, Oil Myths, pp. 4–5. William Enghdal, A Century of War: Anglo-American Oil Politics and the New World Order (London: Pluto Press, 1991), pp. 127–38. Also: Andrew Scott Cooper, Oil Kings: How the US, Iran, and Saudi Arabia Changed the Balance of Power in the Middle East (New York: Simon & Schuster, 2012).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

226

The Rise and Fall of OPEC in the Twentieth Century

at the time (see footnote 33 for further details on how the Iranian minister came to that specific figure).32 * * * A few weeks after December 22, 1973 the producers resumed price discussions. Inflation was continually eating away at the value of crude and oil price increases were still directly or indirectly over-benefitting the majors themselves. The oil companies benefitted indirectly,, because they could increase prices for their own products (provided that consumer governments did not interfere). But they also benefitted directly, because companies that still held equity oil—oil that had not been nationalized—were assured of a significant increase of $1.20 per barrel in their revenues thanks to the increase in prices. OPEC’s next step was to abolishing the 1:1.4 relationship between government-take and the posted price, and to increase taxation so that petrostates would appropriate almost all the revenues in the production phase. At the fortieth meeting of the OPEC Conference, the Secretary General proposed to increase posted prices, so as to take into account the 14 percent increase in inflation in 1974, and to couple this with a tax hike from 55 to 85 percent of the company’s net revenues. After a Saudi veto to accept any increase in posted prices, OPEC only agreed to a modest bump of 2 percent in royalties. It is worth citing lengthy passages of the exchanges between Yamani and Amouzegar during the meeting because their arguments on pricing reflect how political the pricing issue had become. That is not to say that these exchanges fully voiced the deeper motives of their own governments. Saudi moderation, in fact, can also be explained by the fact that it had just negotiated a bilateral agreement with the United States, and wanted to prevent any further deterioration in its relationship with the US. Iranian activism has much to do with its insatiable appetite for weapons imports, as well as with the investment needs of a country with still significant rates unemployment. It is significant, however, that both the “hawks” and “doves” now perceived themselves as key players in international economic negotiations.

32  Just a few weeks later Amouzegar would explain in detail how OPEC had settled on the $7 figure: “From where, he asked, had the figure of $11.65 come? If they would recall, the Economic Commission had suggested a posted price of $14 on the basis of the actual sale by the Government of Algeria. It had also recommended a $9 posted price on the basis of the calculation of netting-back the products out of Rotterdam. The Iranian Delegation had explained that if the principle of conservation was taken into account then they should neither go by the netting-back of the Rotterdam prices, nor by the $14 sale of a maximum of say a million barrels per day by the Algerian Government. The Iranian Delegation had gone on to explain that Iran had sent missions to various parts of the world and had found that the cost of developing alternative sources of energy such as tar sands, shale oil and atomic energy varied anywhere from $7 to $12.50 per barrel. Therefore, it had been argued that if they wanted to divert the investments of the rich countries of the world into the development of these other sources of energy, the price of oil should at least be comparable to its closest substitute, that of $7. The $7 stake corresponded to the $11.65 posted price for the marker crude.” NYUAD Library, ASC, GGC, MC-038, Minutes of the 40th Meeting of the Conference, Quito, June 15–17, 1974.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

227

The dove Yamani argued that the embargo had produced a sharp increase in the market price of oil even though Arab producers “had no intention whatsoever of reaping any economic financial benefits, as it had been regarded as a purely ­political decision.”33 The new December price had been set at too high a level so that not only it was having an impact on the global economy, but OPEC countries might face: “a sharp decrease in the demand for oil and a huge amount of money being invested in new sources of supply and, if they continued the same policy, they might be faced with a situation, not too far off, where this golden era of the oil producers might diminish.”34 The “hawk” Amouzegar replied that Yamani, by focusing on the embargo, had not taken into account the Iranian argument for the new posted price of $11.65 set in December. While underlying his respect for the longest-serving minister in OPEC, he repeated that the new price was based on the “principle of conservation,” on the need to force developed countries to invest in “alternative energy sources” and on a global interest in avoiding depletion of the oil fields: Therefore, on December 22nd, they had all argued that regardless of who owned the oil, it was unfair to humanity’s all future unborn oil-less generations to deprive them of the benefits and advantages of their precious natural resource without any other satisfactory solution being found. With oil as they knew it today, 70,000 different petrochemical products, useful in the civilized world, could be produced. Therefore, he did not think they were right to completely exhaust their natural resource without having thought of the requirements of future generations.35

Amouzegar then went on with a long tirade against overconsumption in the, West that reveals a surprisingly “environmentalist” sensitivity: When passing through the famous cities of the highly industrialized countries of the world, and he thought all of them had visited these places, they had no doubt found that the skyscrapers were completely sealed off, it being impossible to open a window; in addition to central heating and air conditioning, there was usually a 24-hour ventilation system. Why, he asked: because it was cheaper to use oil as a fuel to provide this 24-hour ventilation than to have door knobs, open windows, etc. This, he said, was what the affluent societies of the world did if provided with cheap oil and this was what had, indeed, happened over the last twenty-five years. They were now awaiting that humanity and posterity would stop the waste of this precious premium natural resource. He, himself, had visited one floor of a skyscraper which had 28 rooms; there had been only one switch controlling all the lights for these rooms and when he had asked what would be if only one room was used, he had been told it was cheaper to have all the lights on that to have the 28 rooms individually wired and switched. The price and structure of electricity in the most populated city of the world was such that the more electricity used the cheaper it became, therefore, it was better for the firms to have the lights on than off, which explained the waste of energy in the 33  NYUAD Library, ASC, GGC, MC-038, Minutes of the Fortieth Meeting of the Conference, Quito, June 15–17, 1974. 34  Ibidem. 35  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

228

The Rise and Fall of OPEC in the Twentieth Century

form of electricity along the so-called beautiful avenues, because when one walked about at 4 a.m. in the morning all the lights were on, whereas that amount of energy could be used for the production of petrochemical products one hundred years from now. In addition, he continued, he saw no reason why they should give away this precious natural resource to those rich countries of the world, when 60, or even 20 years from now, their children or grandchildren might have to beg for their own energy requirements within their own countries [. . .].36

In Amouzegar’s understanding, the expensive oil was both in the interest of the producers and of the consumers because the only way that consumers could be forced to reduce their dependence was if they had to pay a higher price for their oil. On the other hand, Amouzegar never explained how this “conservationist” to petroleum approach could be reconciled with the Shah’s outspoken objective of massively ramping up Iranian production to 9 million barrels per day. The Yamani–Amouzegar exchange illustrates the two prevailing approaches to oil pricing within OPEC in mid-1970s. There was the idea of preserving the centrality of petroleum as a key energy source and the need to prevent a possible reduction in OPEC’s market share. But there was also the idea that oil prices had to be measured against the domestic development needs of the oil producing countries, as well as with the inescapable need to rationalize consumption and allow more space for “alternatives”. * * * At the end of 1974, all the OPEC governments agreed on a further increase in the government-take, while they avoided another hike in market prices. They ended up capturing practically all profit to be made in the upstream sector (Table 5.1.). The oil ­multinationals were left with very little in the production phase, save for the far from insignificant advantage of being able to buy crude directly from the producers, some times at a discount. As Ian Seymour explains by in his history of OPEC: December 1974 marked the last occasion for collective OPEC involvement in the company margin issue. From then on it became a matter for individual governments. In some OPEC Countries where 100 per cent nationalization is not counterbalanced by the provision of any production services by the companies (i.e. Iraq, Algeria, Venezuela, Kuwait, Iran), the company margin has been phased out entirely. In Saudi Arabia and Qatar it has been replaced by a fixed service fee per barrel; while in those countries where equity involvement by the companies persists (the UAE, Libya and Nigeria notably) the margin is still calculated on a tax/royalty basis.37

By the beginning of 1975 almost all crude oil production in petrostates was under their direct control. Posted prices disappeared from OPEC debates, while the issue of taxation of the international oil companies (as well as of the national oil ­companies that took their place) became marginal. This closed a chapter that had begun in 1960. OPEC had been created specifically to fight against a reduction in 36  Ibidem. 37  Ian Seymour, OPEC: Instrument of Change (London: Macmillan, 1980), p. 144.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

229

Table 5.1.  These figures for the oil production in Abu Dhabi in 1974/5 show that OPEC countries, even when (as in this case) they had not nationalized all oil production, were taking in most of the value of a barrel of oil (Figures taken from TNA, FCO 8/2432). ABU DHABI Relationship with Companies: Participation: 60:40 (wef 1.1.74)   Companies involved:        

(a) Abu Dhabi National Oil Co (ADNOC) (state oil company) (b) Abu Dhabi Petroleum Co (ADPC) (BP, CFP, Shell 23.75% each Exxon, Mobil 11.875% each Partex 5%) (c) Abu Dhabi Marine Areas (ADMA) (BP 36⅔%; CFP 33⅓% Japan Oil Development Company (JODCo) 30%)

Production* - April 1975 1.4 mbpd,   Prices     A  Posted price

  1974 1.4 mbpd (1.1.75) $bbl 39° Murban 11.686

           

Equity Crude (40% of total) B C D E F G

  Operating costs Royalty (16⅔% of A) Basis for Tax (A-B-C) Tax (65.75% of D) Total Government take (C+E) Tax-paid cost (B+F)

 

Participation Crude (40% of total) H

  Buy-back price (93% of 10.768 A-10¢)

   

Average Cost to the Companies J

  (average of G+H)

  10.545

Direct Government Share K

(20% of total) Cost to external companies (93% of A)

  10.868

0.25 2.337 9.099 7.734 10.071 10.321

* Production is distributed as follows: 40% Equity oil, 40% participation oil sold to the Companies and 20% Direct Government share of participation oil.

posted prices and to coordinate fiscal regimes for oil production. From this moment onward, the producers’ focus turned away from fiscal issues and away from joint management of their relationships with the international oil companies (and national oil companies), to concentrate instead on the market price for oil and on the international repercussions of pricing decisions. It is worth mentioning now that while on fiscal issues, such as posted prices and royalty expensing, OPEC countries might have had broadly similar interests, on pricing issues their preferences diverged significantly because of their different petroleum reserves, populations, foreign policy outlooks, development strategies.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

230

The Rise and Fall of OPEC in the Twentieth Century S OV E R E I G N C O N S U M E R P O L I T I C S

The January 1975 report of the US Senate Subcommittee on Multinational Corporations opened with the following statement: “The United States and the rest of the non-Communist world face the most serious economic crisis since the depression of the Nineteen Thirties. If strong policies are not immediately adopted, this crisis can undermine the economic foundation of the non-Communist world and jeopardize our democratic form of government.”38 While the economic slowdown of the 1970s would come nowhere close to resembling the Great Depression of the 1930s, and was actually relatively limited in duration (the average GDP growth in OECD countries was more than 3 percent over the course of the decade), the embargo and oil price increases did have both a psychological and an economic impact on the consumers. Western European, American, and Japanese citizens discovered, almost overnight, just how vulnerable they really were, not just to domestic social and political turmoil, but to external shocks originating in the Third World. In the winter of 1973 many consuming countries adopted conservation measures. Such measures ranged from the imposition of speed limits on the highways, to carless Sundays, to so-called “odd-even” rationing, to obligatory carpooling or ride-sharing. The British government reduced the working week to three days because of the combined impact of the oil embargo and the crippling strikes by the coal miners, whose blackmailing power had been reinforced by the instability of the petroleum market. The US government, while mostly relying on voluntary energy conservation measures, appointed in December 1973 an “energy Czar”, in the person of William Simon, with the task of overseeing a system of price controls and fuel allocations in order to deal with oil scarcity. In the United States c­ ommuters were suddenly made aware that the fuel on which they depended did not simply fall miraculously out of the sky. In December 1973 more than 1600 truck drivers blocked the Delaware Memorial Bridge in New Jersey, creating a twelve miles long traffic jam. One of them said: “We figured if trucks could do without fuel, the country could damn well do without trucks.”39 Bewildering dependence on oil and gasoline sparked countless songs, movies, and books in virtually all the more industrialized countries. In 1974, the consumers’ energy bill risked climbing as high as $88.8 billion, compared to $22.8 billion just one year earlier. The increase in the price of crude brought with it two kinds of economic fallout. On the international level, a significant amount of financial resources and also of political prestige shifted from the industrialized nations toward OPEC countries. Within the consuming countries themselves (especially in those with significant domestic production such as the US), there was potentially a huge financial transfer from consumers and manufacturing industry to the 38 Subcommittee on Multinational Corporation, Report to the Committee on Foreign Relations United States Senate, January 5, 1975 (Washington: US Government Printing Office: 1975), p. 1. 39  Quoted in: Meg Jacobs, “America’s Never-Ending Oil Consumption”, in The Atlantic, May 15, 2016.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

231

energy companies and oil-producing states. Both these trends triggered reactions forcing consumer governments to intervene much more both in national as in international energy politics. * * * The 1973 price increase hit the United States hard, because by the end of the year the international crude oil price had, for the first time, far surpassed that of domestic US crude. This unprecedented circumstance forced the Nixon administration to consider an exit strategy. It basically had three options: to spearhead an international coalition of consumers able to force a reduction in international oil prices so as bring them back in line with US domestic prices; to reduce US consumption and oil imports, possibly in combination with promoting investments in “alternative” energy sources; to implement price controls in order to shield US consumers as much as possible from rising gasoline and product costs. The ideal strategy would have included some combination of the three approached. But, as we shall see, in the short term the various US administrations were basically left to rely mostly on domestic price controls as a way to shield US consumers as much as possible from expensive oil.(Fig. 5.2.). Secretary of State Henry Kissinger tried hard to build Western consumer solidarity to force oil producers to bring prices down (or at least block any further increases). This consumer cooperation strategy had been predicated by W.J. Levy as early as 1971: after the Tehran agreement, the influential oil consultant was convinced that the oil majors were no longer acting as effective middlemen, and that governments of consuming countries had to form a cartel to stand up against OPEC.40 The media campaign unleashed against OPEC in the West looked to blame the oil producing countries for most of the ills afflicting the advanced industrial econ­ onetary omies: from inflation, to unemployment, to the crisis of the international m system, and even the tragedy of world hunger. Terzian remembers how OPEC was attacked from all sides after 1971: “Rising unemployment? Undoubtedly caused by the rise in oil prices and the resulting recession. Galloping inflation? Oil again. A currency forced in de facto or de jure devaluation? The Arabs must be speculating against it.”41 These accusations gained some momentum despite common sense, and evidence that the ills in question—particularly inflation and the instability of the international monetary system—could be traced back well before 1973. The campaign against OPEC was designed to reconsolidate a Western front that had been gradually eroding as a result of Washington’s unilateral economic decisions in 1971, as well as because of its hugely unpopular war in Vietnam. As we have seen, OPEC had already sent Abdessalam and Yamani to lead diplomatic missions to Western Europe, Japan, and the United States to clarify the strategy of Arab oil producers. These missions unfolded one after the other between November 1973 and February 1974. At each stop, the two ministers each repeated 40  W.J. Levy, “Oil Power”, in Foreign Affairs, .49:4, July 1971. 41 Terzian, OPEC, p. 204. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Fig. 5.2.  Book cover of Arabia Without Sultans by Fred Halliday (1974). A rich Arab sheik (resembling king Faisal of Saudi Arabia) drowns in oil. Elites in the Gulf had to respond both to nationalist pressures from within, as well as to widespread global activism. (Copyright Peter Fluck).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

233

in their own language that the embargo and price increases were not related to one another. While the embargo was an initiative by the Arab states to back Israel into a corner—it would ultimately be rescinded in March 1974 in recognition of the United States’ efforts to bring Israel to the bargaining table—, the increase in oil prices had been primarily sponsored by the Shah, hardly a champion of the Arab cause. For its part, the Nixon administration—especially Kissinger, who admittedly knew little about international oil issues but saw the larger strategic picture very sharply—began to evince growing fears of a possible western European slide toward “neutralism”,and opposition to US diplomacy in the Middle East. The nationalizations in the Middle East had been observed with some sympathy by those Western European governments that had long sought to shed their dependence on AngloAmerican majors.42 Most of these Euroepan governments by now had a national oil company. Great Britain had created its own national oil company, the British National Oil Company, in 1975, hoping to fully exploit the promising oil and gas fields out in the North Sea. Even Canada’s Prime minister Pierre Trudeau sponsored the creation of the national oil company Petro-Canada in a country that, up to that point, had been considered virtually a US oil province. In Kissinger’s mind, trilateral cooperation between the US, Western Europe and Japan in the energy field also aimed at reasserting the role of the oil majors, thus avoiding protectionism and bilateral deals between European and Japanese national companies and OPEC countries. An openly anti-OPEC initiative was convened in Washington on February 11, 1974. Kissinger presented to his staff the basic ­objective of the energy conference in unambiguous words: We have said it a hundred times and it’s bull . . .—excuse me for using that language. It is, of course, designed to create a united front. That’s the only purpose of a consumer meeting. We can waffle around this and we can say elegant things. And, of course, we should say it—but, for God Sakes, in a senior group here, let’s not kid ourselves. The purpose is to create a consumer group that improves the bargaining power of the consumers [. . .] I mean we will say all the appropriate platitudes about this not being a confrontation with producers. The fact of the matter is that the only way the consumers can protect themselves against what is a revolution in international finance, in international economics, is to share a common perception and organize it.43

The meeting was supposed to produce a cooperation on energy conservation and to promote energy policy coordination. The result was a hard-won compromise, immediately rejected by France under the leadership of Gaullist President Georges Pompidou. The French minister of Foreign Affairs was quite frank in his assertion that Paris’ “friends” (Arab producers) had been left outside the room.44 The French were convinced that rather than being interested in moderating petroleum prices, 42  Alberto Clò, Oil Economics and Policy (New York: Springer-Verlag, 2010), p. 91. 43  FRUS 1969–1976, Vol. 36, Energy Crisis, Doc. 273, Minutes of the Secretary of State’s Staff Meeting, Washington, January 31, 1974. 44  Daniel Möckli, European Foreign Policy During the Cold War: Heath, Brandt, Pompidou and the Dream of Political Unity (London: I.B. Tauris, 2008), p. 272.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

234

The Rise and Fall of OPEC in the Twentieth Century

something that could be achieved better through negotiation, the US simply aimed at reinforcing the Atlantic alliance and break OPEC. At the end of the meeting Washington agreed not to object to European bilateral deals with the producers, while the other participants, led by West Germany (prodded by Washington’s threats to withdraw American troops), accepted the creation of a “working group”. In November 1974, the International Energy Agency (IEA) was officially established under the auspices of the OECD, in Paris rather than in Washington, in a deliberate effort to avoid its total identification with US interests. The trend toward bilateral deals between the consumer governments and OPEC countries reached its climax soon after the Washington energy meeting. Typically, these deals involved the supply of crude in exchange for technical cooperation and for weapons sales. After several meetings involving Nixon and Saudi prince Fahd, even the United States signed its own bilateral deals with Saudi Arabia in June 1974. The agreement called for US technical assistance in the areas of solar energy, desalinization, agricultural development, and especially military cooperation, in exchange for financial investments by SAMA (the Saudi Arabian Monetary Agency) in the US, in the form of the acquisition of a special series of government bonds. The deal meant that SAMA would end up holding a significant quantity of its own reserves in US Treasury bonds, and at the same time it allowed SAMA to avoid placing its assets mostly in commercial banks, something that would have been very risky for it.45 Washington denied that this was a bilateral oil deal, since it did not directly imply crude oil sales to US companies. On the other hand, the deal possibly helped smooth access by US oil majors to the largest crude oil reserves in the world, and prevented the dollar from sliding any further. OPEC observers were far from impressed by the results of Kissinger’s efforts to coordinate Western energy policies: The Conference on Energy that met in Washington on 11 February and lasted three days, rather than the two days envisioned, engendered more controversy and conflict than cooperation. It was largely dominated by disagreements between France and the United States, and disagreements between France and its partners in the Common Market. Very little, if anything, came out of all this controversy to raise Algerian concerns. Whatever the hopes its participants might have nurtured, the Conference was unable to produce an effective bloc of states capable of exerting economic and diplomatic pressure on the oil producing countries.46

OPEC’s Secretary General, the Algerian Dr. Abdurrahman Khene, summed up the view of the producing countries thusly: “We think Washington is surely the wrong place to discuss such an issue involving the fate of all nations. In my opinion, it would have more sense to have dealt with it in New York. The opportunity is 45  Duccio Basosi, Finanza e petrolio. Gli Stati Uniti, l’oro nero e l’economia politica internazionale (Venice: La Toletta, 2012); Ahmed Banafe and Rory McLeod, The Saudi Arabian Monetary Agency, 1952–2016. Central Bank of Oil (London: Palgrave, 2017) pp. 51–52. 46  Archives Nationales d’Algérie (ANA), Fond Abdessalam, Mission d’explication des mesures prises par les Pays arabes producteurs de pétrole au lendemain de la guerre du 6 octobre 1973. Commentaires sur la visite de Adessalam aux EUA du 2 au 10 Févier 1974.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

235

indeed a good one in which to revise a lot of thought and behaviour, confined not only to oil price relationships but extended to what mankind should undertake with a view to achieve a more equitable world.”47 The Washington conference negotiations, as well as Khene’s observation, demonstrated a fundamental shift in the global petroleum industry: governments, of both producers and consumers, now claimed the central role in international oil diplomacy, while the majors were left to adapt to the new scenario. * * * As consumer governments were drawn into international oil diplomacy, petrocapital was increasingly exposed to public opinion, particularly in the US where it had been closer to policy-making in Washington. Bringing Big Oil to trial meant pillorying a key protagonist of US capitalism, one that had not only shaped the social, environmental and industrial landscape of the country, but had also influences some of Washington’s key foreign policy decisions. Between 1973 and 1976 senator Frank Church, a Democrat from Idaho, led a series of hearings that dragged some of the highest-ranking officials in the oil industry and government to the Capitol. The Church Committee hearings were broadcast live on television to an audience already unsettled by defeat in Vietnam, and increasingly troubled by revelations of corruption in US politics that reached all the way up to the White House. The Watergate break-in, which ultimately led to Nixon’s resignation, marked the first time in US history that a sitting President had been forced to resign. Senator Church opened one of the hearings with these remarks: We are today opening a public hearing into the relationship of the multinational petroleum companies and the US foreign policy and whether, and to what extent this relationship has contributed to the energy crisis with which we are all so familiar. That experience now encompasses long lines at local gas stations, confused and daily ­changing statements by Government officials as to the dimensions, scope, and characteristics of the crisis; major consuming countries, allied to the United States, strike out their own “to cut a deal” with the Arab Governments in what, increasingly has all the characteristics of a mad scramble for the petroleum which come out of the desert sands of the Middle East. Above all, there is a pervasive suspicion among the American people of oil companies, Government officials and, yes, the US Congress. Indeed, anyone who has had anything to do with the decisions which affect international oil is today suspect in the public mind.48

The accusations against petrocapital revealed the prevailing mindset: first, that greater federal intervention was needed to avoid heavy dependence on Middle East oil and to diminish dependence, and second that Big Oil, all the way back to the fifty-fifty agreements, had managed to deprive the US Treasury of enormous sums 47  Abderrahman Khene, “Problemas actuales del petróleo, vistos por la OPEC”, in Nueva Sociedad, January–February, 1974. 48 United States Congress, Senate Committee on Foreign Relations, Subcommittee on Multinational Corporations, Pt. 4: Multinational oil corporations and U.S. foreign policy: Second Session on Multinational Petroleum Companies and Foreign Policy (Washington: US Govt. Print. Off., 1974), p. 1.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

236

The Rise and Fall of OPEC in the Twentieth Century

of money through tax breaks such as the depletions allowance (as late as 1972 EXXON paid only 6.5 percent on gross profits, the highest rate among all the majors, while MOBIL paid just 1.3 percent). In such a political climate any decision to “decontrol” US oil prices (bringing them up to OPEC levels), thus facilitating exploration and incentivizing production of US domestic production, would have amounted to political suicide. The 1973 oil revolution had not only called into question the trans-Atlantic relationship, but it also appeared to have put the entire US oil industry—a pillar of American capitalism as well as a key economic activity in US oil-producing states—on trial as well. BOUMEDIENOMICS Every generation looks at the world through different cultural and political lenses. In the “year of oil” 1973, the cartographer Arno Peters produced a new vision of the Earth. In his “equal area projection”, Peters rejected the standard cartography set by Gerardus Mercator in 1569, which he considered a product of the early era of Western expansion, with Europe at the center of the world, surrounded to the East and to West by territories over which it would eventually spread its influence.49 The 1973 Peters’ projection, claiming to represent the continents’ true dimensions, redistributed a large portion of the planet’s land mass from the Global North to the Global South: the enormous, angular masses of Africa and Latin America were now at the center stage. Peters offered a perfect embodiment of the ambitions of the developing countries. This new vision, which began to pop up on the walls of university lecture halls around the world—and not coincidentally featured on the cover of the Brandt Report in the later 1970s—depicted Africa at its center, including an unexpectedly vast Algeria, sitting side-by-side with an equally immeasurable Libya. In the real world of petroleum, the Libyan government had been first to sound the charge against the majors, while Algeria would on the frontline of OPEC’s efforts to redistribute wealth and technology from the industrialized world to the raw materials producers of the Global South. “Interdependence” was all the rage among political scientists at the beginning of the 1970s. In the eyes of academics such as Robert O. Keohane and Joseph S. Nye, interdependence meant that economic nationalism and military power were becoming marginal due to the increasing role of multilateral institutions, multinational actors, and global opinion movements.50 The Algerian President Houari Boumediene, meanwhile, had his own vision of interdependence.51 “Boumedienomics” would be the 1970s incarnation of Prebisch’s structuralism. 49 Jerry Brotton, A History of the World in 12 Maps (New York: Viking Penguin, 2012), pp. 373–404. 50  Robert O. Keohane and Joseph S. Nye, Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 1977). 51  Victor McFarland, “The New International Economic Order, Interdependence, and Globalization”, in Humanity: An International Journal of Human Rights, Humanitarianism and Development, Vol. 6, No. 1, Spring 2015, pp. 217–33.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

237

Its main novelty, when compared to Prebisch’s approach in the 1960s, was that it considered nationalization and full control over natural resources, and not simply increases in commodities prices, as a prerequisite for the international redistribution of wealth and technology (Fig. 5.3.). But how did Algeria become so central to international diplomacy at the beginning of the 1970s? In part, it was because after its celebrated anti-colonial struggle against the French, Algiers had become the Mecca of liberation movements both in African and far beyond it. As Amilcar Cabral, one of the leaders of the African struggle against Portuguese imperialism, announced at a press conference on the margins of the Pan-African Festival of Algiers in 1969: “Pick a pen and take note: the Muslims make the pilgrimage to Mecca, the Christians to the Vatican and the national liberation movements to Algiers.”52 On the other hand the appeal of Algeria (as well as its budget to finance anti-imperialist movements and host revolutionaries from around the world) was due to the fact it was a petrostate and a member of OPEC, the most successful international organization of the Global South. Algeria had an Energy and Industry minister, the mentioned Abdessalam, with a commanding personality in the Arab world and beyond it, and also an interest in high oil prices to finance its liquefied natural gas (LNG) project. The diplomatic struggle waged by the raw materials producers had seemingly gotten bogged down during the second UNCTAD conference in New Delhi in 1968. By the end of the decade, however, hostility toward the hypocrisy of industrialized countries’ aid programs (most of them “tied” to buying from lenders) and towards widening global economic inequality had flared up once more. Student movements—not just in the United States and Western Europe—forcefully declared themselves in opposition to the war in Vietnam, as well as to any other manifestation of imperialism or neocolonialism, even when concealed beneath the logos of the multinationals. Intellectuals from the Third World assumed a leading role in this cultural struggle. One example among the many was Walter Rodney, a Guyanese historian teaching in Tanzania, who argued that in his bestseller How Europe Underdeveloped Africa that: African and Asian societies were developing independently until they were taken over directly or indirectly by the capitalist powers. When that happened, exploitation increased and the export of surplus ensued, depriving the societies of the benefit of their natural resources and labour. That is an integral part of underdevelopment in the contemporary sense.53

Then there was the Uruguayan journalist Eduardo Galeano, whose 1971 book Open Veins of Latin America explored the legacies of Europeans’ exploitation of the New World, starting from the pillaging of the silver mines of the Bolivian Potosì. In his classic account Galeano had a long section of the book on petroleum in 52  Olivier Hadouchi, “African Culture Will Be Revolutionary Or Will Not Be: William Klein’s Film of the First Pan-African Festival of Algiers (1969)”, in Third Text, Vol. 25, Issue 1, 2011, pp. 117–28. 53 Walter Rodney, How Europe Underdeveloped Africa (Nairobi: East African Educational Publishers, 1972), p. 14.

Arctic Ocean

U.S. Iceland Finland

Norway Sweden

Canada

Denmark Ireland United Kingdom Belgium ‘F.R.G Luxembourg FranceSwitz. Austria Yugo Italy

United States

The Bahamas Mexico

Cuba Haiti Dom Rep Jamaica

U.S Guatenals El Salvador

Honduras Nicaragua

Costa Rica

Panama

Cape Verde

Ecuador

South

Algeria

Ocean

Barbados Grenada Trinidad and Tobago Venezuela Guyana

Greek Malta

Tunisia

Morocco

Atlantic

Colombia

Pacific

Portugal Spain

North

Mauritania Mali

Libya

Turkey Cypres Syria Lebanon Iraq Jasden

Egypt

Niger Chad

Pakistan

Ocean

Paraguay

Uruguay

India

South

Botswana

Mozambique

Swaziland Lesotho

Burma

*Central African Republic Federal Republic of Germany United Arab Emirates

Ocean

Laos

Thailand

Vietnam Cambodia

Philippines

Sri Lanka Maldives Malaysia Singapore Indonesia

Meiagasy Mauritius Republic

Western Samoa

Indian Ocean

Members of the Organization for Economic Cooperation and Development

Ocean

Argentina

North Pacific

Bhutan

Tanzania

Atlantic Chile

Nepal

Bangladesh

Zambia

Bolivia

Japan

Afghanistan

Senegai Yemen Yemen Sudan The Gambia (Sana) (Aden) Upper Guinea Guinea Volta Dahomey Bissau Somalia Ivory Nigeria Sierra Ethiopia Cost C.A.R Leone Ghana Cameroon Liberia Togo Equatorial Uganda Gabon Guinea Kenya Sao Tome Congo Zaire Bariadi and Principe

Brazil

Peru

S.Korea Iran

Kuwait Baharin Qatar Saudi U.A.E Arabia Oman

Members of the Group of 77 that belong to the nonaligned group

Fiji Australia

New Zealand

Members of the Group of 77 that do not belong to the nonaligned group All Non-Aligned Nations are members of the Group of 77 except Cyprus and Malta.

Fig. 5.3.  The North–South divide in 1975. OPEC countries were then considered as the “spearhead” of the G77 developing countries.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Alignment of the states at the Seventh Special Session of the UN General Assembly (1975) Arctic Ocean

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

239

Latin America where argues that the oil wealth that had been drained from Venezuela exceeded both what the Spanish had gained from Potosì and the British from India. To express the high regard in which he held the achievements of the oil companies on the continent he quoted the novelist Salvador Garmendia on Maracaibo: Have you seen the apparatus that extracts crude petroleum? It looks like a big black bird whose sharp-pointed head rises and falls heavily day and night without stopping for a second: it is the only vulture that doesn’t eat shit.54

One might think of dozens of other books inspired by the same approach. For most of these writers the exploitation of the Global South had started in the sixteenth century. Colonial commodities had given a fundamental contribution to European industrialization, while the Third World had been repaid for its generosity first with military repression and later with more subtle economic exploitation and cultural manipulation, all of this combined with environmental degradation. Postcolonial industrialized countries were not simply importers of raw materials, they were also directly responsible for the underdevelopment of the rest of the planet. President of Tanziania Julius Nyerere and Prime minister of Jamaica Michael Manley frequently underlined in the 1970s the link between exploitation of workers with the industrialized countries, and exploitation of the Third World by capitalist companies: “Just as the exploitation of the working class and rural sectors generated the wealth of industrializing societies, the exploitation of the colonial periphery and the persistence of relations of dependence after formal colonial rule ended made possible the global dominance of the Western world.”55 The third UNCTAD conference, hosted as we have seen in Chile during the presidency of Salvador Allende in 1972, took place in this heated political and cultural climate. For the occasion Allende made available the new National Congress building, which hosted an event for more than 2600 delegates, including representatives of dozens of Non-Governmental Organizations.56 There were many impassioned speeches, but despite some overtures from the European Community (whose president, the Dutch socialist Sicco Mansholt, made several unusual remarks about the need for “degrowth” in the industrialized world), despite the establishment of a commission guided by Mexicans tasked with drafting a Charter of Economic Rights and Duties of States, and despite the launching of the Committee for Reform of the International Monetary System (the Group of 24 that met for the first meeting in Caracas), the G77 countries still lacked the bite necessary to these translate radical calls for reform into practice. At the thirty-first meeting of the OPEC Conference, held for the first time in Lagos (still Nigeria’s capital back then) in November 1972, petrostates were well 54  Eduardo Galeano, Open Veins of Latin America: Five Centuries of Pillage of a Continent (Monthly Review Press, 1997), p. 165. 55  Adom Getachev, Worldmaking after Empire. The Rise and Fall of Self-Determination (Princeton: Princeton University Press, 2019), p. 158. 56  Giuliano Garavini, After Empires: European Integration, Decolonization and the Challenge from the Global South 1957–1986 (Oxford: Oxford University Press, 2012), pp. 132–41.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

240

The Rise and Fall of OPEC in the Twentieth Century

aware of the risk of remaining isolated from the rest of the Third World. The delegates discussed the creation of an special OPEC fund for development. ­ Venezuela, Libya, and Algeria envisaged a fund that would provide loans at low or perhaps even zero percent interest, while Saudi Arabia preferred loans provided at 1 percent below market rate. Several OPEC members demanded that contributions to the fund be based on gross national income or on their respective oil production level; others insisted that all contributions be equal. The discussions led nowhere. At the following OPEC Conference in Vienna in March 1973, the pro-Third World tone was raised a few decibels. The Venezuelan delegate Pérez La Salvia, remarked: It has been stated by UNCTAD, of which they were all members: measures had been proposed and resolutions had been adopted from New Delhi to Santiago de Chile. They had met with the arrogance or the indifference of the developed countries, those same countries that presumed preaching to OPEC Members about responsibilities towards Mankind. Therefore, Excellencies, while the general clamor of the Third World for fair prices for their exports of raw materials went unheeded, they, in OPEC, through their unity and determination showed the way by securing a fair return for their oil. They had served effectively as the spearhead for their developing brothers and even now efforts were being made to follow their example with regard to other basic products.57

In June, while OPEC delegates were animatedly discussing possible increases in the posted price for oil, Al-Chalabi warned that without a strategy for cooperation with the other Third World countries, the latter would likely turn against OPEC. During the course of the same thirty-fourth Conference, the International Council of Copper Exporting Countries (ICCEC) requested to establish a formal system of consultation with OPEC. What Kissinger would later define as the “unholy alliance” between petrostates and other oil-importing developing countries was beginning to take shape. Algeria would be the mastermind behind this alliance. At the end of the 1960s, according to Jürgen Dinkel, the Non-Aligned countries found themselves at an impasse, politically divided and without a clear sense of direction.58 After the second meeting of the Non-Aligned Movement, which took place in Cairo in 1964, no less an authority than the Yugoslav leader Tito had predicted that there would not be a third. Many of their initial objectives had already been achieved, from the gradual, if still incomplete, dismantling of colonial empires, to the beginning of détente between the two superpowers. On economic issues, meanwhile, their efforts at international cooperation were being negotiated primarily through UNCTAD. Most of all, the Six Day War in 1967 had convinced Nasser, one of the founders of Non-Alignment, that the movement was no use anymore and that the interests of Egypt lie squarely on the side of the Soviet Union.59 57  NYUAD Library, ASC, GGC, MC-038, Meeting of the 32nd (Extraordinary) Meeting of the OPEC Conference, Vienna, March 16–17, 1973. 58  Jürgen Dinkel, The Non-Aligned Movement: Genesis, Organization and Politics (1927–1992) (Leiden: Brill, 2019), pp. 84–131. 59  Vojislav Pavlocic, “The Israeli-Arab War of 1967: The Watershed in Tito’s Foreign Policy”, in G. Galasso, F. Imperato, R. Milano, L. Monzali, Europa e Medio Oriente.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

241

In 1973, Algeria held the rotating presidency of the Non-Aligned Movement, and an Algerian, as we have seen, also sat as the Secretary General of OPEC. Algeria was simultaneously a founder of the Non-Aligned Movement, one of the driving forces in the G77, as well as a member of the only organization of raw materials exporters that had demonstrated any ability to put some pressure on the industrialized world. In his memoirs, Chalabi recognized this outsized diplomatic role, coupled with the country’s ability to stear OPEC in directions that did not necessarily reflect the priorities of all its member states: A remarkable feature of these OPEC meetings was the extent of influence and power exerted by small oil producers within the organisation [. . .] Notwithstanding Algeria’s very small 1.5 per cent share in total OPEC reserves (in marked contrast to the 82 per cent held by Gulf countries) and small production capacity, which did not exceed 3.5 per cent of OPEC’s total, Algeria was nevertheless able to exert a great degree of pressure to serve its own national interests [. . .] The Algerians, in this way—and at that time—could exploit their country’s position as one of the most prominent leaders of the Non-Aligned Movement of the Third World.60

In September 1973, the fourth Non-Aligned Conference met in Algiers. There were delegations from seventy-five countries, the majority of which were led by their respective heads of State or government, including Tito, Castro, and Indira Gandhi, among others. It was an unexpected success for a coalition that, seemingly on the verge of collapse, had instead managed to bring together an improbable mix of fellow travelers. “There are feudal kings, upstart commoners, conservative reactionaries, revolutionary Communists, generals, colonels, army privates, survivors of the first non-Aligned Conference in 1961” declared one observer.61 The Algerians pointed out that superpower détente had limited appeal for the Global South, as demonstrated by the scant results achieved by UNCTAD in Santiago. Détente had done very little, for example, to halt economic exploitation: “[A]s long as colonial wars, apartheid, imperialist aggression, alien domination and foreign occupation and power politics, economic exploitation and plunder prevail, peace will prove limited in principle and scope.”62 As if to confirm the validity of these concerns, only two days after the end of the Algiers meeting, the Chilean government of Salvador Allende, one the strongest supporters of the struggle for economic sovereignty, was toppled by a military coup d’état. Algerian diplomats tried to link the cause of diffusing military conflicts also to the need for economic development in the world’s most impoverished countries. In Towards a New International Economic Order, the Algerian legal scholar Mohammed Bedjaoui and later Algerian minister noted that: “In the history of non-alignment, the Algiers Conference of 1973 has been to the Third World’s struggle for economic 60 Chalabi, Oil Policies, Oil Myths, p. 123. 61  Quoted in Jürgen Dinkel, “Third world begins to flex its muscles: the Non-Aligned Movement and the North–South conflict during the 1970s”, in S. Bott, J.M. Hanhimäki, J.M. Schaufelbuehl, and M. Wyss (eds.), Neutrality and Neutralism in the Global Cold War (London: Routledge, 2016), p. 112. 62  Fourth Summit Conference of the Heads and State or Government of the Non-Aligned Movement, Algiers, September 5–9, 1973: http://cns.miis.edu/nam/documents/Official_Document/4th_Summit_ FD_Algiers_Declaration_1973_Whole.pdf (Consulted on January 22, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

242

The Rise and Fall of OPEC in the Twentieth Century

emancipation what the Bandung Conference of 1955 and the Belgrade Conference of 1961 were to the struggle for political liberation.”63 * * * Thus, even before the oil revolution of December 1973, Algeria had invested heavily in rising the status of petrostates in international diplomacy. By January 1974, OPEC was a household name. It seriously ran the risk of being targeted as the scapegoat for everything that was going wrong in the international economy. The time had come, once more, for an Algerian initiative. Kissinger, as we have seen, had come up with the Washington anti-OPEC consumer initiative. On January 18, 1974, the French government put forward its own proposal for an energy summit between the OPEC, the industrialized countries, and oil-importing developing nations. Boumediene responded to French proposal with a much more ambitious project. On January 31, 1974 he sent the UN Secretary General a letter in which he lamented the consequences of inflation, of the rising costs of manufactured goods and of debt servicing, while reiterating that “transnational firms and other monopolies [are] benefitting from the plundering of developing countries.” He then unveiled his counter-proposal: There can be no doubt that the current international conditions have conferred particular significance upon the joint action of the oil-producing countries, which, in exercise of their sovereignty, are undertaking the mobilization of their domestic resources to place them at the service of development and of the advancement of their populations [. . .]. It seems to us that the proposal made by the French Government on 18 January 1974 could be of value if instead of being restricted to the problems of energy alone, it ­covered all the questions relating to all types of raw materials [. . .] in view of establishing a new system of relations based on equality and the common interests of all the States.64

Boumediene’s proposal resulted in the convening of a special session of the UN General Assembly on raw materials and development. This would be the first UN General Assembly meeting to be entirely devoted to economic issues. In theory, the oil-importing developing nations should have been among the hardline opposition to the OPEC, guilty of driving up the cost of their energy imports. This, at least, was the hope of the likes of Kissinger. But the rising oil price was less disruptive for many Third World countries than it was for the industrialized nations, both because their “energy intensity” was far lower and because they also had a parallel interest in increasing the prices for the their own commodities exports. In 1971 the World Bank only 4 percent of the rural population in SubSaharan Africa, 15 percent in Asia and 23 percent in Latina America had access 63  Mohammed Bedjaoui, Towards a New International Economic Order (New York: Holmes & Meier, 1979), p. 90. 64  Letter dated 30 January from the Permanent Representative of Algeria to the UN addressed to the Secretary-General, Original French: http://legal.un.org/avl/Documents/Scans/A%209541%20A%20 9542.pdf (Consulted on January 22, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

243

to electricity.65 On the other hand was a relatively small number of significant oil importers in the developing world, such as Brazil where the cost of oil imports represented 47 percent of its foreign revenues. Also, the political and cultural glue generated by the struggle against the industrialized world’s economic imperialism, as well as OPEC’s proactive diplomacy since the 1960s, proved to be resilient and effective. Finally, the Gulf oil producers, as much as most OPEC countries from Venezuela to Iran, were emerging as increasingly important outlets for migrant labor. These economic ties helped cement political alliances. This was for example the case of Pakistan, which became one of largest non-Arab labor exporters to the Gulf States, and was rewarded with a boost in remittances that greatly helped its balance of payments. In a letter of May 1975 to Zbigniew Brzezinski—the then Director of the Trilateral Commission who was struggling to foster cooperation between industrialized and developing countries—the ambassador for Mauritania in Washington Ahmedou Ould Abdallah explained quite succinctly why countries such as his own Mauritania staunchly supported OPEC.66 First, he pointed out, OPEC countries had contributed $7.8 billion in 1974 to developing countries— far more than Great Britain—two-thirds of which went through the IMF and the World Bank, despite the fact that they had very weak voting power in these institutions (“I therefore find it difficult for OPEC nations to increase their contribution if their voting power is not increased accordingly,” he argued).67 In fact, it must be noted that private banks collected roughly 40 percent of OPEC’s financial surplus in the period 1974-878, while the second most important destination of these funds were bilateral and multilateral aid institutions. But, most important, the ambassador noted, while from 1963 to 1974 the price of iron ore exported by Mauritania never increased significantly, the price of imported equipment had skyrocketed by 300/400 percent: “I sincerely believe that if the prices of commodities was fair and reasonable, the need for most international aid would be eliminated.”68 Another reason for raw material producers to stand with OPEC was that their share of profits from production, especially in the mining sector, had often moved in parallel to that of the petrostates.69 For example Chile was able to increase taxes on copper companies in parallel with the effort of the Venezuelan government towards petroleum companies. So there were more reasons to side with OPEC than there were to side with OECD countries. The thirty-ninth meeting of the OPEC Conference was convened in Geneva, shortly before the opening of the UN Special Session scheduled to last through April. To get a sense of the degree of prestige wielded by petrostates, it is worth noting that the UN Secretary-General Kurt Waldheim invited OPEC delegations for dinner and offered them the use of UN facilities for their meetings. Waldheim had been Austria’s minister of Foreign Affairs from 1968–70, so he already knew the organization well enough. As he wrote in his memoirs, he was 65 Pirani, Burning Up, p. 89. 66  Rockefeller Archives, The Trilateral Commission (North America), Records (FA420), Letter by Ambassador of Mauritania to the Director of the Trilateral Commission, May 27, 1975. 67  Ibidem. 68  Ibidem. 69 Vernon, Sovereignty at Bay, p. 54.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

244

The Rise and Fall of OPEC in the Twentieth Century

convinced that while Cold War tensions were then becoming “relatively less prominent in UN affairs”: In a world which had not really taken note of the historic dimension of this dramatic awakening in the Third World, the United Nations was the one single place where these forces could express themselves and mobilize the community of nations [. . .]. The facts were incontrovertible. In the North, one-fourth of the world’s population possessed more than nine-tenths of its manufacturing and received more than fourfifths of its outcome.70

Waldheim’s courteous offer to OPEC in Geneva was a testament to just how far the organization had come. Only ten years earlier, the Swiss government had declined to even acknowledge OPEC’s status as an international organization. Now they were as special guests of the UN Secretary General. In any event, the objective of the thirty-ninth Conference was to reach a final agreement on the creation of a development fund so as to present OPEC in the best light to fellow developing countries before the UN meeting. Iran proposed a “neutral” fund, with a participation of OPEC and non-OPEC donors, as well as of recipient countries. This format would allow industrialized countries to participate in a financial instrument that would come with fewer strings attached than either aid from the World Bank or IMF. The Algerians wanted nothing to do with co-financing a new institution in conjunction with the industrialized nations, and demanded a fund solely managed by OPEC. The Saudis remained firm in their conviction that should any OPEC financing institution be established it would have to distribute loans at market rates. In short, yet again, there was nothing to report. All of the OPEC ministers delivered speeches at the Special Session of the UN General Assembly on “raw materials and development.” Boumediene, who was welcomed to the podium with a standing ovation, was the first to take the floor, delivering a speech in which he defended nationalization (“nationalization is in itself an act of development”), the increase in oil prices, and the need for solidarity with the Third World.71 Manuel Pérez Guerrero, who had just vacated the office of UNCTAD Secretary-General to return to his old position as Venezuelan Petroleum minister asked for new realism: “Some dreamers still believe that the old system can be repaired. But that system has ceased to exist. We must turn the page.”72 Some weeks before, in February 1974, while still holding his position as UNCTAD Secretary General, Pérez Guerrero had written to Enrique Iglesias, the head of the Economic Commission for Latin America, that while he had no doubt that high oil prices were also hurting developing nations, there was now a unique ­opportunity of “taking advantage of the new negotiating power in the hands of the OPEC nations to the benefit of all the Third World.”73 The Iraqi Petroleum minister Hammadi offered a scathing rebuke of Richard Nixon, reaffirming that 70  Kurt Waldheim, In the Eye of the Storm: a Memoir (London: Weidenfeld & Nicholson, 1985), p. 111. 71  Proceedings of the Sixth Special Session of the General Assembly, New York, April 9–May 2, 1974, Meeting 2208. 72  Ibidem, Plen. 2230. 73 Dietrich, Oil Revolution, p. 278. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

245

“the United Nations is the legitimate body which carries the responsibility of providing a sound and ever-growing international order.”74 But it was probably Amouzegar who delivered the most structured speech. Most oil technocrats were forced, willingly or not, into the spotlight of international politics. Since Iran had no Petroleum ministry (the Shah preferred to deal directly with the NIOC), Amouzegar had served as the country’s OPEC delegate from his position as Finance minister. Even though in his own country Amouzegar was but a technocrat in the Shah’s shadow, he had emerged as one of the key figures within OPEC. By 1974 he had demonstrated himself to be no junior of his Saudi colleague Yamani, was well respected by the international oil industry for his negotiating skills and, with full support from the Shah, had become another spokesman for the global redistribution of wealth. Khodadad Farmanfarmaian would later say of him: “This individual was extremely well-trained, alas, as an engineer and he did think like one. But now slowly, slowly he had learned about economics also and I assure you that he was better in understanding economics than ninety percent of the economists I knew in Iran.”75 Amouzegar argued that at their peak, oil prices had contributed to increase inflation in the OECD countries by only 1 percent, but that their current inflation rate was already at 12 percent. If one wanted to look at the root of the inflation problem, one would do well to think about the impact of the war in Vietnam, the instability created by the Eurodollar market, and a hundred other reasons besides. Thus Rather than lower the price of oil by $1 or $2 per barrel, with the result that 85 percent of the benefits would go to the most industrialized nations, the OPEC member states should create a fund of $2–$3 billion for the most impoverished countries, and let the industrialized world simmer in its own juices, given that it had been responsible for every decision to date on the international economic system, beginning with the devaluation of the dollar, decisions made out of complete and utter self-interest.76

The UN meeting ended up with a Declaration on the establishment of New International Economic Order. As Nils Gilman ably summarized it: “The NIEO was more than just a technical economic-legal proposal; it was also an explicitly political initiative, an attempt to extend the realignment of international power that the process of decolonization had begun”.77 The NIEO project was to be ­coupled with realignment of control of the global media network, a New World Information Order (NWIO), to provide more coverage of the news and culture coming from the Global South. Another corollary of new economic order was a reformulation of international law, as theorized by Mohammed Badjaoui who, viewing decolonization as a major historical break on a par with the French or 74  Proceedings of the Sixth Special Session of the General Assembly, New York, April 9–May 2, 1974, Plen. 2217. 75  Harvard Library, Iranian Oral History Project, Interview with Khodad Farmanfarmaian (Plan Organization Director), January 19, 1983. 76  Proceedings of the Sixth Special Session of the General Assembly, New York, April 9–May 2, 1974, Plen. 2209. 77 Nils Gilman, “The New International Economic Order: A Reintroduction”, in Humanity Journal, Spring 2015, p. 5.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

246

The Rise and Fall of OPEC in the Twentieth Century

Russian revolutions, saw the NIEO as the fulfillment of the process of political decolonization and the beginning of a truly global legal system.78 The NIEO declaration also included a multi-point action plan emphasizing: national sovereignty over the management, extraction, and marketing of raw ­materials; the creation of a common fund for raw materials to stabilize commodity prices; international regulation of the activities of multinational corporations; incentives for the transfer of technology; trade preferences for the developing countries; and the restructuring of international debt. A few months later, as if in a coronation for starring role of the nation state as the supreme actor in development issues, the UN approved the Charter of the Economic Rights and Duties of States, which proclaimed in Article I that: “Every State has the sovereign and ­inalienable right to choose its economic system [. . .] in accordance with the will of its people.”79 For OPEC, the weeks following the UN April session were very busy. The basic premise of the NIEO—that most of the work of redressing economic injustice had to be done by industrialized countries—had won the spotlight, but external pressures on the organization were mounting. The Pakistani economist Ul Haq, the aforementioned guru of development economics at World Bank, believed OPEC was bound to the rest of the Third World by language, race, and by its i­ nternational status, and saw it as a potential solution for a large number of the economic problems facing the developing nations. He proposed raising the price of crude by $1 per barrel, for example, so that the producers could operate as “tax collectors” for the less developed countries.80 The fortieth meeting of the OPEC Conference was held in June 1974 in Quito, Ecuador, after the country’s formal admission to the organization as an associate member. Invitations were extended to representatives from the G77, the NonAligned Movement, and the Council of Copper Exporters. Raul Prebisch himself came to present a special UN fund to deal with the food emergency. Observers from Bolivia, Colombia, Congo, and Peru were also in attendance. The President of the Republic of Ecuador, General Guillermo Rodriguez Lara, who had taken power through a coup d’état in 1972 and headed yet another “progressive” nationalist military government, opened by confirming the need for OPEC to act as the spearhead for the Third World in the confrontation between David (the South) and Goliath (the North): OPEC gave birth to a new source of international right: the association of backward nations of different Continents for posing before the large nations of the planet revendications for an indisputable justice, and deep conscience changes based on the right assigned to them and in the capital importance of their resources. The day is dawning when Science and Technology will circulate through the blood vessels of mankind without being conditioned to the rich peoples, whereupon every country will be the 78 Bedjaoui, Towards a New International Economic Order, pp. 87–90. 79  UN General Assembly, Twenty-Ninth Session, The Charter of Economic Rights and Duties of States, December 12, 1974: http://www.un.org/ga/search/view_doc.asp?symbol=a/res/3281(XXIX) (Consulted on January 22, 2019) 80  Ul Haq, The Poverty Curtain, p. 196.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

247

master of its fate, whereupon foreign investment will not be a strangling rope but a contribution made in good faith for the advancement of the Third World States.81

The G77’s representative at the Conference reaffirmed the group’s solidarity with OPEC: “They had shared the Member Countries’ erstwhile poverty, they had shared also their aspirations to escape it because they had shared their economic subjugation; they had applauded their courage and resolution in breaking free of it.”82 The G77 countries stood together as one with petrostates in all international affairs. The problem was that UN resolutions alone “didn’t pay for bread or oil,” while the bill for their imports had increased by $10 billion since 1972 and would increase by another $30 billion in 1974. They needed short-term assistance while they awaited the materialization of the New Economic Order. OPEC could, for example, apply a discount on crude sales to the less industrialized nations while at the same time making the rich pay more. The Peruvian minister Gomez, a member of a progressive military government that, as previously mentioned, had expropriated and nationalized virtually all of Peru’s main industries, intervened on behalf of the copper exporters’ organization (ICCEC), explaining that Algeria and Iran had been invited to witness their extremely ambitious next meeting in Lusaka: OPEC, itself, as an Organization and the International Bauxite Association would also be present at the meeting, giving a new dimension to the June gathering in Lusaka. He believed that they had to take a few initial steps here and there to make it possible to materialize in the future the Association of Raw Material Producing and Exporting Countries of the Third World. This was an historical challenge that they had to answer with dignity, serenity and decisiveness.83

To sum up. Over the course of 1974, developing countries led by petrostate Algeria were able to force the approval of a series of documents and declarations within the UN. Some of these declarations even received the support of a significant number of governments in the industrialized world. OPEC was still able to shield itself from criticism coming from developing countries. But the hard truth was that petrostates were still facing pressures from fellow developing countries while, in the face of opposition or obstruction from the industrialized countries, the rules of international trade, finance, and aid could not be changed unilaterally. THE ALGIERS SUMMIT On October 24, 1974 Saudi Arabia advanced its own proposal for the meeting of a select group of producers and consumers - both developed and developing- to be held the following year. This would be different from the chaotic sessions of the United Nations, where the leaders’ political posturing generally prevailed over efforts to compromise. This time, even the new US administration of President 81  NYUAD Library, ASC, GGC, MC-038, Minutes of the 40th Meeting of the Conference, Quito, June 15–17, 1974. 82  Ibidem. 83  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

248

The Rise and Fall of OPEC in the Twentieth Century

Gerald Ford was willing to participate in talks between producers and consumers, temporarily setting aside the confrontational strategy of the Washington energy conference. At the December 1974 summit in Martinique between French President Valéry Giscard d’Estaing and President Gerald Ford—both newly in office—the French President offered some concessions on energy cooperation and financial assistance among the OECD countries, in exchange for US assent on an energy dialogue with the oil producers.84 Once again, the ball fell in Algeria’s court. The economic outlook for the industrialized countries in 1975 looked bleak, and this would reflect both in their development aid and their imports of raw materials. Yet again Boumediene delivered an innovative response, reviving the link between OPEC’s revolution and the need for international cooperation in favor of the developing nations. His idea was to call for a high profile meeting in Algiers, the first OPEC Conference of sovereigns, heads of state and government, that would demonstrate the solidarity of petrostates towards the rest of the Third World. This was intended as OPEC’s ultimate ­political show. The agenda of the Algiers summit was officially approved during OPEC’s conference of Foreign ministers, which met in Algiers on January 26, 1975. French observers noted that the Iranian delegation revealed itself to be “strikingly” firm in their refusal to accept price moderation, while the Algerians displayed creativity and flexibility to avoid any possible road block.85 Preparations for the Algiers summit, to be held from March 4–6, were completed at the forty-third (Extraordinary) OPEC Conference, which discussed the contents of a final document prepared by a working group led by Fadhil Chalabi. This document mainly reiterated OPEC’s standard defense of its policies and achievements, both in terms of prices as well as in terms of bilateral aid to developing countries, asked for a greater role of developing countries in international economic institutions, and attempted to establish guidelines for future oil pricing. The main novelty consisted in a draft document on the creation of an OPEC fund for developing countries. But the document could not be made public because there was not yet unanimous consent on some of the practicalities (Fig. 5.4.). In March Algiers was carpeted by posters painting OPEC as the defender of the Third World. Boumediene, symbolically dressed in a Western suit and tie beneath a traditional Algerian robe, spoke in Arabic and French to the international media. The summit ended with a Solemn Declaration that reiterated OPEC’s support for all the basic points of the NIEO. OPEC pledged to discuss a future stabilization of oil prices in exchange for the adoption of the measures called for in the NIEO declaration, such as the reform of the international monetary system, technology transfer, and stabilization of raw materials prices. The Declaration also stated that: The Sovereigns and Heads of State agree in principle to holding an international conference bringing together the developed and the developing countries. 84  FRUS (1969–1976), Vol. XXXVII: Energy Crisis, 1974–1980, Memorandum of Conversation between President Gerald Ford and French President Valéry Giscard d’Estaing, December 15, 1974. 85  Archives TOTAL, ELF, 1SG/44, Télégramme, Conférence Ministérielle de l’OPEC, Alger, le 25 Janvier 1975 (2502).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

249

Fig. 5.4.  Houari Boumediene inaugurating the 1975 OPEC Summit in Algiers. (Getty Images, license 956645300).

They consider that the objective of such a conference should be to make a significant advance in action designed to alleviate the major difficulties existing in the world economy, and that consequently the conference should pay equal attention to the problems facing both the developed and the developing countries.86

Giscard’s proposal had finally been accepted, but with a different twist. The idea of  a meeting in a smaller forum than that of the UN was now acceptable. But the principle of a meeting only dealing with energy (petroleum) issues was not. The new meeting should discuss instead also all the other problems related to the ­international economy and underdevelopment, such as the stabilization of raw materials prices, the reform of the international monetary system, and development cooperation. Although only seven of the ten OPEC leaders were present for the entire ­duration of the Algiers summit (they all joined later for final Declaration), and despite internal differences, the spirit of Algiers seemed to loom over a still cohesive group. One of the best-selling books on the oil industry, Anthony Sampson’s 86  NYUAD Library, ASC, GGC, MC-038, Conference of Sovereigns and Heads of State of OPEC Member Countries, Solemn Declaration, Algiers, March 4–6, 1975.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

250

The Rise and Fall of OPEC in the Twentieth Century

Seven Sisters, was published in 1975 and opened with the author’s own lively first-hand account of the meeting: It all seemed very confident and cheerful, this brave new world. Oil seemed to have united these disparate countries, not only to keep up its price, but to dissolve their political differences. The Majesties sat next to the Brothers, the Africans congratulated the Arabs; and at the close of the conference president Boumédienne suddenly presented himself as the peacemaker between two of the bitterest enemies in the Middle East who for years had been raiding across each other’s frontiers. Saddam Hussein of Iraq walked across the hall to the Shah of Iran. The delegates all around the horseshoe stood up and clapped, and the two leaders kissed and embraced.87

This was indeed the Kodak moment of the Algiers Accord, in which Iran and Iraq—or at least Saddam Hussein and Shah Reza Pahlavi—reached a compromise through the mediation of Houari Boumediene, appearing to have settled years of discord between the two countries. The Algiers agreement established that Thalweg would be the border between Iran and Iraq on the Shatt Al-Arab, that Iran would cease financing the Kurdish insurrection in Northern Iraq that had recently destabilized the country, and that the Ba’athist regime would in turn commit to ­financing the development of its Kurdish regions. The Algiers summit marked the peak of Algerian global diplomacy between 1973 and 1975. Algiers in 1975 was a magnet for elites in the developing world, as well as for political and social activists even from industrialized countries. And here I am also speaking partly for my own family history (as I discovered while researching for this book). In March 1975, my father, one of the leaders of the CGIL, the Italy’s largest trade union and at that time probably the strongest labor organization in Western Europe, was invited to Algiers as an observer. While sifting through boxes of family photographs, I had stumbled more than once upon the pictures of that trip to Algeria, which I had always imagined in a sort of folkloric vein: the mission of a European trade union leader, invited to eat couscous and talk about the success of workers’ movements in Europe. I was struck by the images of Algerian trade union activists dressed like police officers from Los Angeles in some 1970s television show: leather jackets, bell-bottom trousers, long sideburns and moustaches, alongside girls in short skirts. I never seriously ­considered the true nature of that trip. The Algerian trip of a European trade union leader testifies just how much Algiers was in the mid-1970s a crossroads of political and cultural trends that went far beyond the global petroleum market. There was a lingering notion, especially among neighboring countries in the Mediterranean, that the workers’ movements in the industrialized world and governments of developing countries could squeeze the multinational corporations into a more equitable distribution of the revenue between labor, capital, and sovereign landlords. The new equilibrium could help ease tensions within the industrialized world, racked at the time by violent social and political conflicts, as well between 87  Anthony Sampson, The Seven Sisters: The Great Oil Companies & the World They Shaped (Viking, 1975), p. 3.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

251

the Global North and South, where the tensions threatened to escalate from economic friction into armed conflict. The notion that an Italian blue-collar worker might potentially share any interests in common with an Arab oil producer might today seem outlandish. At the time less so. * * * Ian Skeet has portrayed the results of the Algiers Summit in a rather negative light, emphasizing its contradictions and limits: no agreement to regulate production; no commitment to index the price of oil to the price of manufactured goods; no explicit condemnation of the United States; no practical decision on how to assist other developing countries.88 Former OPEC Secretary General Parra has, if possible (not surprisingly considering his consistently negative comments on OPEC’s past achievements), been even more critical of the final document of the Algiers conference: It was a long pretentious document, dripping with crocodile tears for the oil-importing developing countries, argumentative, tendentious, pompous at times, and generally hostile to the developed countries on major issues of international trade: a thoroughly Algerian document, drafted almost entirely by the Algerians, but aided and abetted by the Venezuelans.89

Fadhil Chalabi, even though he coordinated the preparatory work for the final Declaration in Algiers, later wrote that this was basically a “political” document that was based on the wrong premise of oil scarcity, on the need for conservation and of speeding up the use of alternative energy sources, and on unlikely promises such as linking the price oil petroleum to that of new technologies.90 Also Terzian noted that some of the most ambitious projects on the agenda, such as a joint production program, an agreement for support the “real price of petroleum,” and a “defense pact” against the possibility of military aggression, were shelved.91 Certainly, a primary roadblock at Algiers stemmed from the failure to establish an OPEC fund for development that would act as a development bank for the Third World, due to the enduring differences of opinion on how this should work. The fund would have eased the concerns of developing countries that multilateral lending sources, such as the IMF’s oil facility, largely assisted developed countries, such as Italy or Great Britain.92 This said, it must be remembered that in March 1975 all the OPEC member states except for Ecuador, Gabon, and Indonesia were involved in one capacity or the other in programs to provide financial assistance to the poorest nations. Saudi Arabia had created the Saudi Development Fund in 1974. Then there was the Arab Special Fund for Africa, the Iraqi External Development Fund, the Abu Dhabi Fund, the Kuwaiti Fund for Arab Economic Development, and others. Indeed the total aid contributions by OPEC countries amounted to $7.69 billion, or 2.92 percent of their 88 Skeet, OPEC, p. 170. 89 Parra, Oil Politics, p. 192. 90 Chalabi, Oil Policies, Oil Myths, pp. 131–2. 91 Terzian, OPEC, pp. 215–16. 92  Margaret Garritsen de Vries, Balance of Payments Adjustment, 1945 to 1986: The IMF Experience (Washington: International Monetary Fund, 1987), pp. 117–28.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

252

The Rise and Fall of OPEC in the Twentieth Century

GDP—a much higher percentage than that of the OECD countries.93 OPEC leaders nevertheless tasked their Finance ministers with undertaking a further study on the establishment of a fund. A survey of the history of oil published in the 1970s by a group of left-wing Venezuelan revolutionaries and intellectuals that called itself Ruptura (some of them eventually ended up with leadership positions in the oil industry during the Chavez years), portrays a very different account of the “spirit of Algiers”: The United States’ efforts had failed to divide the Third World with the creation of a “fourth world,” made up of those non-oil producing countries of the Third World that were suffering from the increase in oil prices. The oil producers responded to this move by rejecting any conference between the capitalist developed countries and OPEC to discuss oil prices, and called in turn for a conference between the capitalist developed countries and those of the Third World, to discuss the unresolved problems concerning all raw materials.94

In his Arabia Without Sultans, published in 1974, even Fred Halliday a­ cknowledged that the petroleum revolution “involved a new political role for producer states” (although he argued that it might ultimately help to “stabilize” capitalism and to increase the “oppression of the people in oil-producing countries”).95 I think one could argue that by the mid-1970s OPEC countries had obtained a number of significant achievements that taken together might qualify well as an “oil revolution”: they now largely controlled most of the exports as well os the pricing of the most valuable (from a purely financial perspective) natural resource in the world; they had marginalized the international oil companies and compelled consuming governments to enter into direct negotiations with them (something they had sought to do since the 1960s); they had forced the largest consumers and most formidable military powers in the world to drop their confrontational stance (at least for the time being) and accept direct dialogue; and all of this while at the same time retaining the support of other developing countries. Not bad for raw material exporters that in 1960 could not even find a seat for their organization! Why did OPEC engage itself in demanding the establishment of a New International Economic Order? OPEC countries were thinking in terms of international alliances that would shield them from a possible retaliation by OECD governments, while they also hoped and expected to find new consumers and new partners in the developing world. The NIEO was also a public relations affair. OPEC’s ability to stand on the front lines with the Third World countries was indispensable for some of the petrostate’s ruling elites, shielding them from the widespread internal public rage against the US and Israel in their own countries, as well from the potential political destabilization coming neighboring non-oil 93  Ibrahim Shihata, The OPEC Fund for International Development: The Formative Years (London: Routledge, 2010), p. 10. 94  Ramon Rivero, El imperialismo petrolero y la revolución venezolana, Tomo 3, La OPEP y la nacionalizaciones: la renta absoluta (Caracas: Fondo Editorial Salvador de la Plaza, 1979) p. 194. 95 Halliday, Arabia Without Sultans, Chapt. 3.  

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Oil Revolution

253

producers either in Latin America or the Middle East. The NIEO strategy was to a certain extent inevitable for OPEC given that the countries that would have suffered more from oil price increases were neighboring developing countries. All in all, two years after the price revolution in December 1973, and in part also due to the global appeal of Boumedienomics, the world still seemed a pretty good place for petrostates.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

6 Uneasy Dialogue Like it or not, the fate of America and of its major allies is tied to OPEC.1 Albert Wohlstetter, 1979 OPEC, as an ecological group, has really disappeared. Still I feel OPEC is a good instrument for the Third World. It just has not been used properly.2 Juan Pablo Pérez Alfonzo, 1976

On December 21, 1975, a commando squad led by the Venezuelan-born Ilich Ramírez Sánchez—better known as Carlos the Jackal—stormed OPEC’s headquarters in Vienna. After leaving a few dead on the floor, the group, made up of radicals from various countries, held OPEC delegates hostage in the name of Palestinian liberation and of the anti-imperialist struggle. Delegates were split into three groups: the “progressives” or “friends” (the Iraqis, Algerians, Libyans and, after some hesitation, the Kuwaitis); the “foes” or “reactionary” (the Saudis, Iranians, Emiratis and Qataris); and the “neutrals” or “non-aligned” (the Indonesians, Nigerians, Gabonians, Ecuadorans and Venezuelans). Carlos coldly informed Yamani and Amouzegar that they had been sentenced to death as Washington’s puppets and traitors to the Palestinian cause.3 Austria’s socialist Chancellor Bruno Kreisky—whom Carlos considered an “anti-Zionist Jew” and “friend of the Palestinian cause”—negotiated on behalf of the hostages, convinced that no good would come from using the force. The Austrian government then secured a letter from the heads of all delegations declaring their consent to leave the country. Carlos was given an airplane that would end up taking the group first to Algiers, then to Tripoli, and finally back to Algiers. After protracted negotiations, the Algerian minister for Foreign Affairs Abdelaziz Bouteflika informed Carlos that his country would refuse the terrorists’ request for political asylum should any of the OPEC delegates be harmed. The resolve of the Algerian government led to the liberation of the entire group, probably in exchange for a substantial financial sum.4 Yamani (who had gone so far as to prepare his final will, which he entrusted to Carlos) would refuse to return to Vienna until 1979. He would eventually accept to go back only after being awarded an honorary doctorate from an Austrian university and, most importantly, personal 1  Albert Wohlstetter, “Lesser Excluded Cases”, New York Times, February 14, 1979. 2  Quoted in: Terzian, OPEC, p. 85. 3  Thomas Riegler, Tage des Schreckens: Die OPEC-Geiselnahme 1975 und die Anfange des modernen Terrorismus (Published independently, 2015). 4  For an eye-witness account: Chalabi, Oil Policies, Oil Myths, pp. 135–53.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

255

security detail. From 1976 to 1979, as a consequence of the Carlos affair, the OPEC delegates would meet on a sort of globe-trotting world tour, eagerly followed by a traveling media circus. Yamani’s dramatic and detailed account of his ordeal, broadcast on Saudi television shortly after the attack, sheds some light also on OPEC’s policy dilemma after the 1975 Algiers summit. Yamani recalled that he initially believed that the “gang” was made up of European terrorists: “I thought at first that those who attacked us were Europeans complaining against the rise of oil prices and that they had come to avenge themselves.”5 He also (quite naturally) feared for his life: “I kept silent reading the Koranic verses [. . .]. When it was three o’clock Carlos asked me to accompany him to one of the rooms to speak with me, and I thought then that the man was intending to commit his crime by killing me, for when they kill a hostage they take him to an isolated place.”6 Finally, Yamani said that: “Carlos does not believe in the Palestinian cause or in the Arab nationalism, but—as he said—he considered them as a phasic step or as a factor helping the spread of the International Revolutionary Movement.”7 The Carlos ordeal was perceived by both Arab and non-Arab members of the organization, according to Fadhil Chalabi, as an: “attack against OPEC itself, at the high of its power.” (Fig. 6.1.)8 This act of terrorism carried a number of lessons for OPEC moderates such as Yamani and the House of Saud. Raising oil prices could destabilize governments in Western Europe, further encouraging the spread of radical or revolutionary movements. On the other hand price moderation and dialogue with Western countries, thus abandoning the previous engagement for a New International Economic Order, would feed radicalism in both the Arab world and in many other Third World countries. OPEC members were caught in a policy dilemma between engagement and confrontation with industrialized countries. N O RT H – S O U T H D I A L O G U E The formal dialogue between OPEC, OECD members, and oil-importing developing countries lasted nearly two years between the end of 1975 and the middle of 1977. This period was characterized by price moderation on the part of OPEC countries. While this dialogue has now mostly been forgotten, or relegated to the footnotes of history books, the North–South Dialogue has been the most promising venue for global cooperation on energy, raw materials and development up to this day. The negotiations opened with both sides seemingly stuck in reverse. Initially, Washington maintained that the International Energy Agency was the only proper forum to reinforce consumer solidarity and bring petrostates to heel. But the IEA was something of a paper tiger, weakened by the absence of France (a founding 5  Kreisky Archiv, Kreisky Briefcase 9, Yamani Relates the Story of His Severe Sufferings at the Hands of the Terrorist Gang Which Assaulted OPEC’s Headquarters in Vienna, Text of TV Interview broadcast by Saudi TV Station, 5.1.76. 6  Ibidem. 7  Ibidem. 8 Chalabi, Oil Policies, Oil Myths, p. 150.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

256

The Rise and Fall of OPEC in the Twentieth Century

Fig. 6.1.  The bus carrying Carlos (in front to the right of the driver) and his hostages from OPEC countries to Vienna’s airport, December 22, 1975. (AP Images, ID 070125017577).

member of European Community, and one of the world’s largest economies), not to mention the unwillingness of its members to set consumption and imports targets, the only measures that might have given OPEC some serious reason to worry on the short term. The French government guided by Valéry Giscard d’Estaing, on the other hand, considered dialogue with petrostates as an opportunity. Seen from Paris, the 1973 oil shock had marked a watershed that required structural adjustments in the international economy. French minister for Foreign Affairs Louis de Guiringaud, explained that France sought a transition from the liberal Bretton Woods order to an “organized market” system: The postwar order, based on the lowering of economic borders, rested on Americanled agreements (Bretton Woods—Atlantic Pact) and naturally drew its propulsion from New York, the successor to London as the primary center for international trade and finance [. . .]. The order presently needed must reconcile the right of each government to intervene in the determination of its national destiny with the advantages provided by the free circulation of goods, capital, men, ideas, and technology in a unified economic sphere; it will rest as a result on the collective management of these great global mechanisms by the community of states.9 9  Archives Nationales (AN), 5AG3, AE 54, M.  de Guiringaud, Rapport a M.  le Président de la République, Réunion Préparatoire à la Conférence sur la coopération économique internationale, Paris, October 20, 1975.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

257

The United States’ outright opposition to dialogue with OPEC manifested itself at the preparatory meeting (Preparatory conference: Prepcon) for the planned summit between producers and consumers, scheduled to take place in April 1975 in Paris. Kissinger wanted to stall the initiative: “I think the more Prepcons we have, the better. As you know, I have never been eager for a conference with the producers.”10 US President Ford agreed that the best option for the US was to “screw up negotiations,” while some in his administration went as far as threatening military intervention in the Gulf to gain control of the oilfields.11 James Akins, now the US ambassador to Saudi Arabia, increasingly at odds with Kissinger, cautioned against this aggressive posturing: It is a truism to state that oil is a wasting asset, that once used it is gone forever. But most consumers chose to ignore this; they compared the profit on a barrel of oil with the profit on a bushel of wheat and they seemed convinced that the comparison was valid. The oil producers, on their side, believed they must maximize their income, invest their money and prepare to face the post-oil age.12

Akins would be dismissed from his post shortly after sending his memorandum. As spring turned to summer 1975, the situation looked like this: the French were pushing for a meeting between producers and consumers to stabilize oil prices; the Algerians sought a dialogue that would not focus exclusively on energy and oil prices but also on other development issues; the Ford administration boycotted negotiations altogether; OPEC continued to portray itself as a spearhead of the Third World, with several of its members aiming at a new round of price hikes to counteract inflationary pressures. During the forty-fourth meeting of the OPEC Conference, held at Libreville in Gabon in June 1975, the Gabonese president Omar Bongo reminded delegates that the world continued to be split between the haves and have-nots (“the wretched of the Earth [. . .] good only to wander about and beg for so-called international aid”).13 The deputy OPEC Secretary General Chalabi, presented the results of studies undertaken by the OPEC’s Economic commission, which concluded that oil prices had to be stabilized (not “frozen”) while petrostates were engaging in dialogue with the consumers. In September, the OPEC Conference reconvened in Vienna to discuss prices. Iran proposed a 15 percent hike to keep up with dollar inflation. Saudi Arabia, joined by Algeria—a vocal supporter of the need for a global dialogue on energy and development—proposed a more modest 5 percent increase. Yamani argued that the industrialized countries, still mired in recession, would not tolerate substantial increases, and that inflation passed on producers was not “true” inflation.14 10 FRUS, 1969–1976, Vol. XXVII, Energy Crisis, 1974–1980, Memcon, Tactics for Producer/ Consumer PrepCon, Washington, March 25, 1975. 11 Dietrich, Oil Revolution, p. 289. 12  FRUS, Volume XXXVII, Energy Crisis, Doc.52, Airgram From the Ambassador to Saudi Arabia (Akins) to the Department of State, Jidda, April 13, 1975. 13 NYUAD Library, ASC, GGC, MC-038, Minutes of the Forty-Fourth Meeting of the OPEC Conference, Libreville, June 9–12, 1975. 14  NYUAD Library, ASC, GGC, MC-038, Minutes of the Forty-Fifth Extraordinary Meeting of the Conference, Vienna, September 24–7, 1975.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

258

The Rise and Fall of OPEC in the Twentieth Century

His arguments drew a philippic from Amouzegar, who decried the Faustian bargain between Algerian revolutionaries and Saudi moderates. The final compromise was on a 10 percent increase. Shortly after the Conference, OPEC Finance ministers decided to double down on the creation of an OPEC Fund for development that in 1976 would see its endowment reach $1 billion. The organization still managed to retain wide support from developing countries. For example the Group of 24, a group of developing countries that met within the IMF to discuss a reform of international finance, in its June 1975 meeting remembered that “OPEC as a group had contributed 2.2 per cent of GNP in Official Development Assistance whereas, the figure for DAC members [OECD countries] was 0.33 per cent.”15 In autumn the US administration radically changed its approach to the New International Economic Order. Back in June, Kissinger was still arguing that the basic strategy was to bring about a different market balance through cooperation among consuming countries, while at the same time “trying to break up the LDC coalition so that we can deal with each issue separately.”16 A few months later he was forced to admit that open opposition to NIEO had failed and that a different tactic was need. In the course of the seventh Special Session of the UN General Assembly in September 1975, the Ford administration openly transitioned from opposition and obstruction to “engagement.” In the remarks prepared by Kissinger and delivered by the US ambassador to the UN, Daniel P. Moynihan, the US government advanced a series of “compensatory measures” in favor of developing countries under the auspices of Bretton Woods institutions.17 The basic idea was to generate some increased funding opportunities for the poorest oil-importing developing countries mainly through Bretton Woods international institutions, while leaving the structure of international trade and finance basically unaltered. The US government had agreed to the creation of a modest IMF “oil facility” of $5 billion to recycle petrodollars towards countries with balance of payments problems (in the end Italy and Great Britain proved to be the main beneficiaries) but blocked most proposals to have petrodollars mostly invested in international institutions, as opposed to private banks. The World Bank played a minor role in the recycling of petrodollars, with OPEC countries providing almost 80 percent of the World Bank’s borrowings for the first two years after 1973.18 But the core US petrodollar recycling strategy was to rely on market mechanisms through an expanded role of Western financial institutions: private European and US banks would deliver some 200 billion $ in commercial loans between 1974 and 1980.19 15  IMF Archives, Central Files, International Organizations, UN, Communiqué of the Ministers of the Intergovernmental Group of Twenty-Four, June 10, 1975. 16  FRUS, Volume XXXVII, Energy Crisis, Doc.65, Memcon, Foreign Economic Policy, Washington, June 10, 1975. 17  Daniel Sargent, A Superpower Transformed: The Remaking of American Foreign Relations in the 1970s (New York: Oxford University Press, 2015) pp. 131–65. 18 Patrick Allan Sharma, Robert McNamara’s Other War: The World Bank and International Development (Philadelphia: Penn Press, 2017), p. 72. 19 Jeffrey Frieden, Global Capitalism: its Fall and Rise in the Twentieth Century (New York: W.W. Norton, 2007), p. 370.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

259

A number of factors pushed Washington towards engagement: the increasing isolation of the United States within the UN system; growing anti-American sentiment throughout the Third World and Western Europe; the tarnished legacy of the Nixon administration within the United States itself; the rise of socialist and communist movements in southern Europe, and the danger stemming from anticolonial revolutions in Africa from Angola to Mozambique; the repeated failures of the efforts to bring down oil prices as well as to drive a wedge between OPEC and the rest of the developing world. Ul Haq commented: “the United States came around, reluctantly but surely, to the prospects of serious negotiations with the Third World, both because of the lack of any decent alternatives and because of the fear of losing support of its European allies if its negative attitude persisted.”20 Be that as it may, one of the outcomes of the shift towards “engagement” with petrostates and developing countries would materialize at the first meeting between the leaders of the six largest world economies, at the castle of Rambouillet, a few miles outside of Paris. Here the dialogue between oil producers and consumers was a primary topic of conversation.21 The Rambouillet summit had been called jointly by the French President Giscard and the German Chancellor Helmut Schmidt as a means to coordinate with the United States and Japan, avoid protectionist measures, and find a solution for international monetary instability during a period of intense economic and social upheaval within Western democracies. At the same time it paved the way for the launching of the North–South dialogue. In the very memorandum with which Chancellor Schimdt first outlined the contours of the Rambouillet summit, he wrote about the necessity of a meeting in Paris also on “oil and raw materials,” specifying that: “we attach great importance to a co-operative approach to the oil producing and developing countries. Any aggravation of the conflict leads in industrialized countries [. . .] to deepening pessimism and recession.”22 Though he sought to avoid a possible indexation of the prices for raw materials to the prices of manufactured goods, something he considered structurally inflationary, Schmidt cautioned the other leaders on the need to guarantee one way or the other the revenues of raw materials producers. He concluded that: “The real problem is that OPEC countries are still playing football with us. I really have not heard a sound strategy for preventing this.”23 The result of such considerations was expressed in the final communiqué of the Rambouillet summit: We welcome the convening of the Conference on International Economic Co-operation scheduled for December 16. We will conduct this dialogue in a positive 20  Ul Haq, The Poverty Curtain, p. 145. 21 Federico Romero, “Refashioning the West to Dispel its Fears: The Early G7 Summit”, in Emmanuel Mourlon-Druol and Federico Romero (eds.), International Summitry and Global Governance: the Rise of the G7 and the European Council (London: Routledge, 2014), pp. 117–137. 22 TNA,PREM 16/356 Private Memorandum on International Concertation of Economic Action (Helmut Schmidt Proposals), July 31, 1975. 23  Margaret Thatcher Foundation, Ford Library, NSA, Memcon (Box 16), G7: Rambouillet Summit (Session 2), November 17, 1975: https://www.margaretthatcher.org/document/111078 (Consulted on January 28, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

260

The Rise and Fall of OPEC in the Twentieth Century

spirit to assure that the interests of all concerned are protected and advanced. We believe that industrialized and developing countries alike have a critical stake in the future success of the world economy and in the cooperative political relationships on which it must be based.24

The North–South dialogue was officially inaugurated with a meeting in Paris in December 1975, under the name of the Conference for International Economic Cooperation (CIEC). The negotiation involved twenty-seven participating countries, including eight OECD members and nineteeen Less Developed Countries (LDCs). The participants appointed two co-presidents, the Canadian Secretary of State Allan J. Mac Eachen to represent the OECD countries, and Peréz Guerrero, the then Venezuelan minister of State for International Economic Affairs, representing LDCs. Discussions were conducted into four commissions: Energy, Raw materials, Development, and Financial Affairs. Both OPEC and the IEA were guaranteed a seat as observers. The CIEC (CCEI in the French acronym) was soon referred to in the media as the North–South dialogue. The patron saint of the CIEC was the French President Valéry Giscard d’Estaing, who offered to host the talks. The driving force behind the negotiations, however, was the Algerian President Boumediene, the early promoter of the idea of a dialogue dealing at the same time with energy, development, and the reform of international economic institutions. While the Rambouillet meeting among the leaders of the most advanced economies was at the time considered a one-off event (even though it would later be institutionalized as the G7), the meeting in Paris started off a structured global dialogue that caught much of the international spotlight of the time. * * * By binding themselves to the North–South dialogue, OPEC countries were assuming their share of the responsibility in world economic affairs after the oil revolution. But the start of the negotiations did not calm internal tensions over oil pricing. Clear divisions emerged within OPEC. On one side were the “hawks,” petrostates with larger populations and relatively smaller petroleum reserves that sought higher prices in order to promote rapid industrialization and full employment, bit also as a way to pump their international prestige and military capability. On the other were the “doves”, countries with smaller populations and abundant reserves that could afford a longer-term approach and had a vested interest in the stability of industrialized countries of the West, where they held significant financial investments and on which they relied as the ultimate safeguard to their internal political stability and external borders. Similarly, there were divisions between “progressives” and “moderates,” both in terms of their respective domestic political and social models, and their willingness to challenge US hegemony. But the labeling game was complicated. Iran and Saudi Arabia, both US allies and interested in being supplied with the latest US military technology (“moderates”), had at the time opposing pricing policies. 24  Declaration of Rambouillet, Ramboulliet, November 17, 1975: http://www.g8.utoronto.ca/ summit/1975rambouillet/communique.html (Consulted on January 28, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

261

At the Bali Conference in May 1976, OPEC agreed to set aside $400 million from the OPEC Special Fund for the creation of the International Fund for Agricultural Development (IFAD). This was one of the few decisions on which the organization managed to achieve unanimity. The Cairo-born Ibrahim Shihata had been named as the first Director of the OPEC Special Fund, after long discussions over how this should work. Arab countries, and Saudi Arabia in particular, happy about the freedom of maneuver offered by their national aid agencies did not want the creation of a new institution endowed with its own resources. Iran and Venezuela wanted a new institution, possibly structurally linked also to the World Bank. Algeria wanted to have nothing to do with an financial organization dominated by industrialized countries. The final compromise was the OPEC Fund would be refinanced each year and operationally dependent the national development agencies. These agencies “would keep the contribution of the country within their accounts,” while the OPEC Special Fund would “just be the coordinator.”25 Also the Special Fund would not be totally autonomous from other multilateral lending institutions. In 1977 of the fourteen projects approved by the OPEC fund, eight were co-financed by the World Bank.26 The Bali meeting started off more than a year of intense skirmishes between Saudi Arabia, a supporter of stable prices, and Iran (backed by the majority of the other members) calling for crude price increases to keep pace with global inflation. The “Coca-Cola paradox” became a letimotif of the Shah’s interviews. This was a classic talking point, still used to this day by the diplomats of petrostates. The argument goes more or less like this: how can a liter of petroleum, so crucial to every aspect of the modern life, cost less than a liter of Coca Cola essential, so to speak, only for the preparation of a Cuba Libre? During the opening of the Bali Conference, Indonesian President Suharto reminded the rest of participants that his country exported not only oil but also other commodities: “successful efforts of the Group of 77 in seeking improvement and justice for the prices of those commodities will bring positive influence on the possibility of a stable and fair price for crude oil, which is also to the interest of OPEC members.”27 The Algerian head of OPEC’s Economic commission argued that from October 1975 to June 1976, OPEC countries had lost 20 percent of their purchasing power due to global inflation. We don’t know what happened in the subsequent debates among the delegates—there are no minutes of the discussions held in Closed session—but we do know that Saudi Arabia ultimately succeeded in resisting further price increases (Fig. 6.2.). The Saudis managed to keep prices frozen until December 1976, when OPEC held in Doha one of its most turbulent meetings since the 1964 meeting on royalty negotiations. The ruler of Qatar in his opening remarks underlined that while OPEC countries were experiencing “imported inflation” (price for the goods purchased by petrostates) in the order of 110 percent they had increased prices only by 25  The World Bank Group, Historian’s Office, Oral History Program, Transcript of Interview with Ibrahim F.I. Shihata, May 11, 1994. 26  Yasmina Aziki, “L’OPEP: un acteur de l’aide au développement du Sud ancré dans la coopération trilatérale”, Relations Internationales, Vol. 177, No. 1, 2019, pp. 111–157. 27  NYUAD Library, ASC, GGC, MC-038, Minutes of the 47th Meeting of the Conference, Bali, May 1976.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

262

The Rise and Fall of OPEC in the Twentieth Century

Fig. 6.2.  The hotel where the “Doha split” OPEC meeting in 1976 took place. The skyline of Doha was far from the impressive collection of skyscrapers it is today. (AP Images, Id: 534889738499).

10 percent between 1975 and 1976. This, he considered: “proves, beyond any doubt, that there is no real link between oil prices and the international economic crisis. People are by now well aware that this latter has many reasons, none of which bear any relation to the oil issue.”28 Then the delicate dance began. Amouzegar reiterated that OPEC’s purchasing power had fallen by 26 percent compared to October 1975, and argued that by now even the industrialized countries expected a hike in prices. Abdessalam repeated that he had been in favor of a price freeze for 1976 in order to encourage a successful outcome of the North– South negotiations, but that in 1977 prices would have to rise by 15 percent, an increase that could largely be absorbed by the industrialized countries. The Iraqis supported this position, saying that growth in the more industrialized countries had picked up. The Saudis responded by emphasizing that thanks to the strategy of price restraint, OPEC’s share of the global petroleum market had grown from 26 to 30 million barrels per day, that global economic forecasts did not predict any significant improvement in industrialized countries, and that the price freeze would have to continue for a little while longer. The delegates all agreed on one point: any price increase would have to be accompanied by a greater effort on OPEC’s part to engage with the developing world, both in terms of direct aid as well as in terms of political commitment to achievement of the New International Economic Order. 28  NYUAD Library, ASC, GGC, MC-038, Minutes of the 48th Meeting of the Conference, Doha, December 1976.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

263

The outcome of the meeting was a compromise that came to be known as the “Doha Split.” Regarding prices, the final communiqué announced the establishment of a two-tier price structure, one for Saudi Arabia and the UAE, and another one for everyone else: “eleven countries, within the Conference, decided to increase the price of dollars 11.51/bbl (former price of the Marker Crude) to dollars 12.70/bbl as of January 1st, 1977, and to dollars 13.30 as of July 1st 1977. The price of all other crudes shall be increased by the same amount. Saudi Arabia and the United Arab Emirates decided to raise their prices by 5% only.” In terms of aid for the developing countries OPEC announced an additional $800 million contribution to the OPEC Special Fund in 1977, half of which would be earmarked to finance the creation of a common fund for commodities, as requested by UNCTAD and in line with the ongoing negotiations within the North-South dialogue. Responding to Algerian requests for guarantees that the Saudis would not take advantage of their more competitive pricing to gain market share at the expense of the other OPEC countries, the Saudi minister Abdul Aziz Al-Turki remained non-committal: while prices were negotiated as a group, “the matter of production level in Saudi Arabia can only be tackled and decided upon by high authorities in his country.”29 Abdessalam would later comment that an increase in Saudi production would be seen as a “political aggression against OPEC.”30 Saudi Arabia and the UAE announced they would remove their self-imposed production limits and end up producing nearly 45 percent of OPEC production. Having said this, even within Saudi Arabia, key policy-makers such as the minister for Planning Hisham Nazer resisted the idea of increasing production as a way to pressure other OPEC countries and were increasingly worried about sustaining such high production levels. Saudi resistance to price increases can be explained in various ways: with their willingness to prove themselves a credible US partner before the inauguration of the new Carter administration; as a way to discourage the emergence of alternative energy sources; as a move to ease the situation in Western European countries, already under strain from protest movements and growing support for communist parties; or as the signal of a new foreign policy alignment after the death of Faisal, the promoter of the “oil weapon.” Francisco Parra later described the Saudi stance, not without malice, as a reflection of Saudi political weakness: What would you do if the only significant power you had in the world was to set the price of oil (and, indirectly, all energy), but at the same time you were militarily feeble, faced several hostile neighbors, were trying to maintain a regime and a way of life for it that you knew was universally rejected outside the country, and fear for your internal security because of (among other things) divisions between your eastern and the western provinces, tensions between your newly rich merchant class and the royal family, tensions between immigrant (especially Shia) and native populations? You would keep your head down. But if you are the natural price leader by virtue of producing 40 per cent of all OPEC oil, the only way you can keep your head down is to make sure that whoever is seen to be leading the price extravagantly up, it isn’t you.31 29  Ibidem.   30 Terzian, OPEC, p. 244.    31 Parra, Oil Politics, p. 235.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

264

The Rise and Fall of OPEC in the Twentieth Century

Yamani himself explained the reason for Saudi moderation in a January 1977 interview with the German weekly Der Spiegel: q: Why did you not go along with the price increase? a: There were important economic and political reasons. We are extremely worried about the economic situation in the West, worried about the possibility of a new recession, worried about the situation in Great Britain, Italy, even in France and some other countries. And we do not want another regime to come to power in France or Italy. q: Do you mean a communist regime? a: The situation in Spain is also not healthy, and the same is true in Portugal.32 If one recalls Yamani’s comments after the very painful Carlos affair, this interview must be considered at least a credible component of the answer. There were very significant pressures on “moderates” coming not only from key allies but also from an international organization such as the OECD. This is certainly the time when Yamani became dearest to the Western media. Newsweek described him as: “comfortable wearing Western clothes or the flowing dishdasha robes”; a man “that feels at home in almost every situation,” be it in the fashionable salons or “squatting in a Bedouin desert chatting with illiterates and herders”; both a “good Muslim” and open to all “sybaritic pleasures;” an intellectual who wrote poetry, enjoyed classical music, and could easily be considered an authority in Islamic law.33 Many of these features applied to also other technocrats in the Middle East, but their politics was more controversial, so they hardly made the headlines. The UAE lined up behind the Saudi position only after the personal intervention of Sheikh Zayed, who had to overcome significant internal opposition against breaking solidarity with the other Arab producers.34 In the event, the “Doha Split” produced extremely heated disagreements, but the crisis never seriously endangered the survival of the organization, as had happened with the previous 1964 crisis. * * * At the beginning of 1977, Saudi Arabia wielded the threat of increasing production to prove its key role among producers. The new Venezuelan President Carlos Andrés Pérez of AD took on the role of mediator, shuttling across the Middle East to find a common ground. He hoped to focus OPEC’s agenda on promoting the New Economic Order rather than on internal quarrels. His effort was laudable, but internecine tensions were running high, as evidenced by the remarks Iraqi ambassador in Caracas here referring to the Saudi oil policy: Why has this country reduced prices? Why has it increased production? There is no rational answer. And do you know why there is none, your Excellency? Because they 32  Mason Willrich and Melvin A. Conant, “The International Energy Agency: An Interpretation and Assessment”, in Journal of American Society of International Law, Vol. 7, No. 2, April 1977, p. 201. 33 Graf, Oil and Sovereignty, p. 110. 34 Al-Yousef, The Gulf Cooperation Council States, pp. 112–13.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

265

are not rational people. So what are they, then? Bedouins, wanderers, illiterate, without culture, products of one of the most barren regions in the world, which apart from petroleum contains nothing but sand; with a pseudo-economy, devoid of industries, schools, hospitals, and agriculture. Its government is immoral, for all its princes and members of the royal family are animated by a single desire, which is to become millionaires by selling oil.35

This characterization of Saudi Arabia was not far from the trite stereotypes on Arab sheikhs that then appeared daily in the Western press. While not reflecting the official position of the Iraqi government, it certainly revealed some of the lingering tensions among public opinion and policy-makers in the Middle East. The new Iraqi Oil minister Tayem Abdul Karim, with his attacks on Saudi price moderation, would be later criticized by Fadhil Chalabi for his scant knowledge of both the petroleum industry and for his use of language: “he’d been a primary school English teacher, yet seemed unable to construe or understand a single line of English.”36 But also the Shah fired back at Yamani, through the pages of the Iranian national daily Kayhan, calling him: “a stooge of the capitalist circles, a yellow belly, and a traitor, not only to his own king and country but also to the Arab world and the Third World.”37 OPEC countries that sold at higher prices resisted by forcing international companies to honor their long-term contracts and buying more expensive oil rather than cheaper Saudi oil. In June 1977 the North–South dialogue came to a close, with results that fell far short of the very high expectations foisted upon it. The CIEC was supposed to end in 1976, but its work was postponed until after the inauguration of the Carter administration, considered to be more open to compromise with the developing countries. The agreements signed on June 2, 1977 concerned the need to ensure a transition to alternative energy sources, acceptance in principle of the establishment of a common fund for commodities under UNCTAD management, an increase in the volume of aid from industrialized countries, a “special action” totaling $1 billion for the poorest countries, and access for developing countries to the Western capital market.38 Several OPEC countries had invested their prestige on the success of the North–South dialogue. The results did not justify their commitment to moderation. The Bretton Woods system had not been significantly reformed in favor of the Global South (although minor changes benefitting the developing countries had been approved). The dialogue failed to come up with practical solutions for the problem of raising debt in several Third World countries. Above all, the common fund for commodities, the most insistent Third World demand since the UN meeting on raw materials in 1974, had not been created. The failure of the CIEC was a defeat for OPEC itself. While Algeria, Venezuela, and Iran had played such an important role during the Paris talks, they had proven incapable of forcing the industrialized countries into making more generous concessions. Secretary of 35  AHMPPRE), Memo, Análisis y recomendaciones en relación al Proyecto de Comunicado Conjunto Arabia-Venezolano, presentado por la Embajada de Irak en Caracas. 36 Chalabi, Oil Policies, Oil Myths, p. 122. 37 Skeet, OPEC, p. 135. 38 Garavini, After Empires, pp. 227–8.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

266

The Rise and Fall of OPEC in the Twentieth Century

State Cyrus Vance could rejoice that development aid had not been considered a substitute for private capital, while the Uruguayan director of CEPAL Enrique Iglesias bitterly remarked that the Paris dialogue marked: “The end of the Prebischinspired UN Conference for Trade and Development scheme.”39 After the failure of Paris dialogue OPEC price hawks now had more room for maneuver. Both Saudi Arabia and Abu Dhabi also had to face technical problems in keeping up with increasing production. Riyadh thus chose to compromise. The OPEC Secretary General, the Qatari Ali Jaidah, had announced already in June the end of the two-tiered price system. Saudi Arabia would raise its prices by 5 percent, while the other countries would forego the further anticipated 5 percent increase. This sealed the fate of the Saudi policy of forcing its own oil pricing decisions down the throat of other OPEC members. It would later become known that Saudi oilfields had been severely damaged by its efforts to boost production too fast so that ARAMCO had been forced to slow down production and spend a lot of money to repair the damages caused by a drop in pressure in sub-soil structures and the collapse of several surface installations.40 At the OPEC Conference in Stockholm in July, Jaidah hailed the fact that OPEC countries had achieved the inclusion of energy within the UN global negotiations. On the other hand, in the face of Iraqi requests to introduce prorationing (planning petroleum production), Saudi Arabia—through Yamani—reiterated that his country had repeatedly rejected production quotas back from his very first day as Petroleum minister and saw now reasons to change strategy.41 With the end of the North–South dialogue, OPEC’s unitary price structure had been reconfirmed once again. But the organization now faced deep challenges, both in terms of its relations with the other developing countries and because it lacked a clear strategy on prices and on production controls. T R I L AT E R A L I S M In his inaugural address in January 1977, US President Jimmy Carter, a democrat from the South and devout Baptist, declared that “moral sense dictates a clear-cut preference for those societies which share with us an abiding respect for individual human rights.”42 While most petrostates were hardly champions of individual rights, Carter was quite good news for OPEC. He was careful to court Saudi Arabia and reinforce the relationship with Iran. On the medium term Carter’s aimed at reducing dependence on oil imports and to achieving significant improvements in energy conservation. His Chief Domestic Policy Advisor Stuart (Stu) Eizenstat would later argue that Carter had moved energy on “top of the agenda” and on this matter he was a “conservationist” who “abhorred waste”, also when it 39 Dietrich, Oil Revolution, p. 309. 40 Terzian, OPEC, pp. 244–7. 41  NYUAD Library, ASC, GGC, MC-038, Minutes of the Forty-Ninth Meeting of the Conference, Stockholm, July, 1977. 42 Jimmy Carter, Inaugural Address, January 20, 1977: https://millercenter.org/the-presidency/ presidential-speeches/january-20-1977-inaugural-address (Consulted on January 28, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

267

came to oil and natural gas, and was prepared to as far as to “change the behavior of American people.”43 In an early speech in April 1977 he defined the energy crisis as “the moral equivalent of war” (critics ridiculed the expression with the acronym MEOW). In the short term the new Democratic government was forced to rely quite heavily on the willingness of the Saudis, and possibly of the Iranians, to play a moderating role within OPEC thus preventing further price increases. The emphasis placed by Carter and his National Security Advisor Zbigniew Brzezinski on the trilateral economic dialogue between the US, Western Europe, and Japan did not have the same anti-OPEC flavor as Kissinger’s Washington energy conference in 1974. Quite the contrary. The Trilateral Commission (of which Carter had been a member and Brzezinski its first Director) had been imagined by David Rockefeller in 1973 as an instrument to rally liberal American decisionmakers and businessmen with substantial financial interests in healthy relations with Gulf petrostates. In fact Carter had to resist strong pressures from a broad section of the Democratic party to assume a tougher stance towards Saudi Arabia and Iran. Senator Frank Church, the same who had opposed the Vietnam War from the outset and coordinated the Senate investigations into the CIA’s dirty wars, believed the time had come to revise US policy in the Gulf: It is time we stopped viewing Saudi Arabia and Iran as pawns in the Cold War with the Soviet Union. They have demonstrated that they have the will and the capacity to impose great economic harm on the oil-consuming world. Indeed, they have achieved a greater degree of destabilization in the West than the Communists have ever been able to achieve.44

Rather than antagonizing petrostates, the focus of Carter’s trilateral strategy implied coordination with the other industrialized countries to promote expansionary policies that would bolster US exports and prevent a further depreciation of the dollar. The vision was one of a global Keynesianism in desperate need of expansionist policies from West Germany and Japan, the countries with the largest trade surpluses. The global Keynesian project also required OPEC not to raise prices, at least not in any significant or abrupt way, in order to limit inflationary pressures and avoid the risk of triggering recessions and protectionism among industrialized economies. In its report Energy: Managing the Transition, published in June 1978, the Trilateral Commission argued for a smooth increase in prices (relying here on cooperation with Saudi Arabia to avoid shocks) as a way to stimulate investment in alternatives and reduce consumption.45 The G7 summit in Bonn in July 1978 was supposed to mark the realization of the Keynesian “locomotive theory,” according to which Germany and Japan would lead the rest of the world out of stagnation and protectionism. The trilateral compromise in Bonn largely consisted in a commitment by West Germany and Japan to adopt expansionist budgetary measures, in exchange for US commitment to 43 Stuart E. Eizenstat, President Carter: The White House Years (New York: St. Martin’s Press, 2018), p. 151. 44 Sherrill, The Oil Follies of 1970–1980, pp. 298–9. 45 Terzian, OPEC, p. 252.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

268

The Rise and Fall of OPEC in the Twentieth Century

limit oil consumption, which should have arrested the devaluation of the dollar, then in free fall. The German “sherpa” for the preparation of the summit had conveyed to the US representative the message of German Chancellor Schmidt: “I am prepared to follow an expansionist policy, but there is a price for it, and the price is oil decontrol [increasing domestic US prices] on your part.”46 Carter promised that the United States would eventually reduce oil imports by 2.5 million barrels a day by 1985. * * * Between the end of the CIEC and the end of 1978, OPEC remained stuck in neutral. Some of its members were facing severe domestic challenges (we will get to this to later on), as well as an increasingly unstable foreign policy environment, especially in the Middle East. The organization itself needed to establish future strategic goals and, if it wanted to avoid diplomatic isolation, needed to show support for Third World countries that were now suffering from a decline in commodities prices, coupled with raising foreign debt and increasing prices for manufactures imports. Throughout this period, and despite such pressures, the price of crude was never increased. The Saudi leadership, while increasingly concerned by the dollar devaluation, was nevertheless somewhat relieved by the conciliatory tone of the Carter administration. Even Iran was slipping from the ranks of the hawks. In the latter half of 1977, the Shah, facing intensifying domestic unrest, took up the flag of moderation, possibly in the hopes of greater US military and diplomatic support: The Shah said that he can notice that the cost of items which he has been buying since 1973 and the present have sometimes gone up as much as five times in price. He was giving these figures simply for the sake of speaking about facts. However, as far as Iran’s policy is concerned he knows that the Western economies are not in such good shape, especially in Europe, and if they were brought under more pressure they might not be able to solve their problem of unemployment. This could in turn affect the situation in France, Italy and other countries. Iran would feel it very badly if something happened in Europe. Therefore, Iran’s attitude was to be silent and, if necessary, to tell them what we think, i.e. “let’s give the Western nations a break,” and even to work for a freeze.47

It was in this context of seemingly shared interests that Carter, during a state visit in early 1978, (in)famously defined Iran as “an island of stability in one of the more troubled areas in the world.”48 Saudi Arabia and Iran together now constituted an insurmountable obstacle to any hopes of increasing oil prices. The OPEC Conference of December 1977 in 46 Eizenstat, President Carter, p. 209. 47  FRUS, Volume XXXVII, Energy Crisis, Memcon, Doc. 139, President’s Meeting with the Shah of Iran, November 16, 1977. 48  David S. Painter, “From the Nixon Doctrine to the Carter Doctrine: Iran and the Geopolitics of Oil in the 1970s”, in Robert Lifset (ed.), American Energy Policy in the 1970s (Norman: University of Oklahoma Press: 2014), p. 75.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

269

Caracas embodied this new internal balance of power. No steps were taken on prices, despite ferocious criticism coming from the Algerians and the Libyans on the decline of petrostate’s purchasing power. As the Libyan Petroleum minister Al-Mabruk noted: “when looking back on the decisions they had taken regarding the annual increases in the price of crude, they had indeed been so moderate that this bordered on naiveté, as they had been far more concerned about world economy, indeed more so than the industrialized countries themselves.”49 The Iraqi delegate declined to even attend the meeting out of disagreement with the new Iranian position. No decision could thus be made to reconsider the role of the dollar as a reference for oil purchases, while delegates began worrying about the increasing quantities of non-OPEC oil coming on stream. The Venezuelan President, repeating the then-standard mantra that the true bipolar conflict was no longer between East and West but rather between North and South, suggesting an increase of slightly less than 10 percent in prices “to be fully devoted to the repayment of debt of developing countries that lack oil.”50 He backed this proposal by arguing that this would also help reduce consumption among the industrialized countries. The Venezuelan proposition went nowhere. Before the Bonn G7 meeting in 1978, OPEC countries experienced increasingly intense pressures as a result of the devaluation of the dollar and widespread fears of overproduction. Yamani continued, albeit less peremptorily than in the past, to pump the brakes on replacing the dollar as the reference currency, arguing that: “Now was not the time to shift from the dollar, even though this might be advisable at some future date when the circumstances would be better than at present.”51 Though OPEC had not come to any decision on prices or on establishing a new reference currency, it did adopt several initiatives to enable more robust strategic planning for the future. The OPEC Conference in Geneva in June resolved to launch a seminar on energy issues, which was to be held in Oxford (the aptly titled Oxford Energy Seminar). The goal of the seminar, in the words of the Secretary General, would be to offer: “opportunities for contact and debate between industrialists, officials and other professionals from OPEC Member Countries, from the major Western countries, and from developing countries, at the same time providing considerable opportunities for representatives from the oil producing countries to present their contributions and express their views.”52 The seed of this idea would ultimately blossom into the establishment in 1982 of the Oxford Institute for Energy Studies. This institution, under the direction of Robert Mabro and in collaboration with St. Anthony’s College, Oxford, would play an important role in promoting dialogue between key decision-makers and intellectuals from both the oil companies, key consuming countries and petrostates. In a way the Oxford 49  NYUAD Library, ASC, GGC, MC-038, Minutes of the 50th Meeting of the Conference, Caracas, December 1977. 50  Ibidem. 51  NYUAD Library, ASC, GGC, MC-038, Minutes of the 51st Meeting of the Conference, Geneva, June 1978. 52  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

270

The Rise and Fall of OPEC in the Twentieth Century

seminar was a substitute for direct government level dialogue between energy consumers and producers. Marcello Colitti—a longtime official with ENI and a family friend—was a recurrent participant in the seminar. Dressed in a linen suit and floral-print shirt, with a matching tie and cowboy boots, he casually observed that only the British were capable of creating such opportunities for informal, free, and open dialogue. And yet, as we shall, see the most unyielding, radical, and ideologically-charged counteroffensive against petrostates would also emerge from Great Britain. The second initiative, sponsored by Yamani, was the launching in Ta’if of an OPEC committee that would discuss a Long Term Strategy that would guide the organization in the future, preventing the internal clashes of the previous months and improving the predictability of OPEC decision-making. * * * By the end of summer 1978, the Middle East and the Arab world was once more in turmoil. This was not only due to the explosion of the anti-Shah protests in Iran, but also to the shock of the US-sponsored talks between Egypt and Israel at Camp David, which would eventually lead to the peace agreement signed in March of the following year. The Camp David separate talks put the Saudis in the position of having to choose between Egypt—which would imply abandoning the Palestinian cause and the fight against Israel, a legacy of the late Faisal—and Iraq, by now the standard-bearer of Arab nationalism. In the end the Saudis chose to side with Iraq, possibly worried by the widespread domestic opposition to any compromise with Israel.53 Saudi Arabia was being criticized ever more severely for its lack of solidarity with the Arab world. Nicolas Sarkis remarked that while $40 billion of oil rent were sent to industrialized countries, while at the same time non-oil-producing Arab countries with large populations were in dire need.54 The Saudis’ tougher foreign policy posture, which inevitably clashed with that of the US under Carter, eventually also spilled over to oil policy. In the first half of 1978 OPEC’s output had decreased by more than 3 million barrels per day compared to the last part of 1977, also due to new non-OPEC oil coming onstream mainly from Alaska, the North Sea and Mexico. On top of this, the head of OPEC’s Economics and Finance commission, the Iraqi Adnan Al-Janabi, reported that: [T]he biggest portion of OPEC revenues have been recycled to the industrialized counties through the new instrument of international income redistribution, i.e. inflation. The $93.6 billion of OPEC imports from the industrialized countries (in 1978) were worth only $25.2 billion in 1973 money.55

53  F.  Gregory Gause III, The International Relations of the Persian Gulf (Cambridge: Cambridge University Press, 2009), pp. 41–2. 54  Nicolas Sarkis, “Les arabes riches et les arabes pauvres”, Le Monde Diplomatique, August 1978. 55  NYUAD Library, ASC, GGC, MC-038, Minutes of the Fifty-Second Meeting of the Conference, Abu Dhabi, United Arab Emirates, December 1978.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

271

During the first part of the year Saudi Arabia, Nigeria, Libya and Algeria reduced production to try to counter the glut. But, while the debate was still focused on the potential glut for OPEC oil, the Iranian crisis, with 40,000 workers on strike at the end of October 1978, changed the scenario completely with a sudden loss of 5 million barrels of Iranian production. At the OPEC Conference that met in the newly opened Intercontinental Hotel in Abu Dhabi in December 1978, the organization now had much more space to maneuver. According to OPEC’s Economic commission, between 1976 and 1978 oil had lost anywhere between 28 and 48 percent of its value as measured in terms of purchasing power. All the delegates now agreed that some a price increase was inescapable. The Algerian delegate Ghozali proposed a 15 percent hike to account for the upswing in the global economy, while emphasizing that the dollar remained the key concern: “the dollar was an international currency used on a worldwide basis—this was a fact they had to, and did, live with, therefore, in deciding to remain with the dollar they had decided to knuckle under to any kind of manipulation of the value of that currency.”56 Ghozali also shot down an argument—one that in truth was not entirely new— regarding the need to add Arabic to English as the official language of the organization: “they should now stop discussion of this topic as meanwhile their oil prices and incomes were deteriorating and it might be that they would not even have the possibility to pay for the translation facilities.”57 In the event, the decision was to raise prices by 10 percent. The moderation phase was coming to an end, as the attention of OPEC’s member states started focusing once again on how best to protect their own purchasing power. In Seymour’s assessment: It would be fair to say that the hard line was generally represented by Iran, Iraq, Libya, Nigeria and sometimes Algeria (though the latter did show some understanding for the Saudi position up to until mid-1976), whereas such countries as Kuwait, Venezuela and Indonesia tended towards a more middle-of the-road position. But all of them regarded the accelerating diminution of the purchasing power of their oil barrel through inflation and dollar depreciation with growing dismay and resentment.58

The results of a few years of international dialogue were disappointing for all the participants. Even with a modest decline of oil prices in real terms, inflation and unemployment indicators showed no significant sign of improvement in most OECD countries. The dollar had not been strengthened and the US had not managed to reduce oil imports. Many of the OPEC countries had effectively drawn down on their current account surpluses, and had revealed themselves to be both insatiable importers of goods and equally generous exporters of capital. Alternative energy sources remained a vision for the distant future. The problems for oil-importing developing countries were getting worse, particularly the ballooning international debt. There were political tensions and social conflicts both within consuming countries and, as we will see, also within petrostates. All these factors were pushing towards confrontation rather than cooperation.

56  Ibidem.   57  Ibidem.   58 Seymour, OPEC: Instrument of Change, p. 149.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

272

The Rise and Fall of OPEC in the Twentieth Century MALAISE

Malaise is not the illness itself. It is a warning that something is out of kilter and that, if a remedy is not found soon, there will be serious trouble. In the US and Western Europe there was ample talk of “crisis” during the 1970s: crisis of democracy, identity crisis, energy crisis, crisis of confidence.59 Referring to the energy crisis Lester Thurow wrote in 1980 that the actions of a “few desert sheiks” reminded Americans that they could be forced to line up at the gas stations and to diminish their living standards: “sudden economic vulnerability is disconcerting, just as that first small heart attack is disconcerting.”60 Industrialized countries of the West were being pushed, also by the impact of OPEC’s oil revolution, to reform and rethink their Keynesian development model. In Western Europe, economic and social instability immediately led governments to promote greater direct intervention in the economy. The 1970s were the golden age of European social democracies and of “welfare state” politics, embodied in a generation of leaders such as Bruno Kreisky in Austria, Olof Palme in Sweden, Willy Brandt in the Federal Republic of Germany, François Mitterand in France, Felipe González in Spain, with the possible inclusion of the Italian Enrico Berlinguer, the theorist of “Eurocommunism” (the democratic alternative “real existing socialism”). Even an atypical liberal such as the Canadian Prime minister Pierre Trudeau acknowledged that: “the time has come when we must adopt a new life-style. We are being forced to do this not merely by our economic situation but by the worldwide evolution of mankind.”61 The oil shock was interpreted by some of these socialist leaders as an opportunity to invest in collective goods and limit consumerism. In the transportation sector, for example, Brandt, Kreisky and Palme theorized a shift away from the rampant individualism represented by the automobile, towards the primacy of the collective transport such as trains and buses.62 Erhard Eppler, SPD minister for Economic Cooperation between 1968 and 1974, figured a new energy policy was needed: Oil stinks, oil is flammable and dangerous; no one actually wants oil: what people want are the heated rooms or the moving cars made possible by oil. Instead of trying to produce more energy, West Germany should use its existing supply more efficiently.63

While Western European governments were promoting diversification of the energy supplies and reduction of petroleum consumption, their citizens were forced to pay more for their oil (and gasoline) because almost all petroleum was imported and product prices in Europe had to reflect market prices (Fig. 6.3.). 59  Charles S. Maier, “Malaise: The Crisis of Capitalism in the 1970s”, in N. Ferguson, C.S. Maier, E.  Manela and D.J.  Sargent (eds.), The Shock of the Global: The 1970s in Perspective (Cambridge: Belknap Press, 2010). 60  I would like to thank Victor McFarland for pointing me to this passage: Lester C. Thurow, The Zero Sum Society: Distribution and the Possibilities for Change (New York: Basic Books, 1980), p. 3. 61 Robert A. Wright, Three Nights in Havana (New York: Harper Collins, 2008), p. 147. 62 Willy Brandt, Bruno Kreisky, and Olof Palme, La social-démocratie et l’avenir (Paris: Gallimard, 1976). 63  Stephen G. Gross, “Reimagining Energy and Growth: Decoupling and the Rise of a New Energy Paradigm in West Germany, 1973–1986”, in Central European History 50:4 (2017), pp. 514–46.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

273

Fig. 6.3.  OPEC price increases in the 1970s spur efforts at energy conservation in OECD countries: a Mini Morris advert of 1980. (British Motor Museum).

Although the changes in Western European energy policies are an interesting story, one that will have a significant impact on OPEC, here we will focus on the United States and Great Britain because their choices affected petrostates even more directly. Great Britain in addition to being home to two of the majors (BP and Shell), by the end of the 1970s had become a new oil exporting province; thus was not only a military and economic power but could become a dangerous competitor for OPEC countries. The US, was the largest oil importer in the world, the largest oil producer, home to most of the oil majors, and at the same time the most important military power among OECD countries. * * * BP had discovered a new oilfield in the North Sea (the Forties) in 1970, and the increase in petroleum prices now made its commercial exploitation more viable. Prime Minister Edward Heath had already attempted to push both for tax increases and for state participation in the North Sea concessions. In 1973, he floated the idea of a price freeze on gasoline, coupled with a windfall tax on oil profits. BP reacted coldly, to say the least: “Unless you are prepared to move from the rigid position you have adopted over oil prices please do not bother to reply to this

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

274

The Rise and Fall of OPEC in the Twentieth Century

letter.”64 As it turned out, the Conservatives did not remain in power long enough to decide on the governance of the petroleum sector. Labour won the 1974 elections after that the coal miners had delivered the final blow to the Conservatives, and the North Sea issue had to be handled by the new government led by Harold Wilson. In late 1974, Labourites passed legislation that called for a significant state role in the gas and petroleum production. Since Great Britain was both of member of the IEA and of the EC—as well as home to BP—it could hardly enact policies that might qualify as expropriation and antagonize consumers: direct state participation in the production phase was thus ruled out.65 Labour’s 1974 White Paper on North Sea oil called for higher taxation of the oil revenues (though lower than OPEC’s), state participation in future licenses (but only in terms of availability of crude oil), majority participation in all new commercially viable North Sea fields, and the creation of a British National Oil Company (BNOC).66 In 1974 a UK department for Energy was created and its energy policy, based on promoting North Sea oil, increasing coal production, investing in gas production and nuclear energy in order to diminish dependence from OPEC, was fully entrusted to national companies and grounded on the medium term perspective of increased energy demand.67 BNOC would guarantee oil supply from North Sea oil in case of disruptions such as the 1973 embargo. Nationalized mines would guarantee coal production to generate electricity, that in turn would be produced and distributed by another state company. Gas production would be provided the British Gas Corporation. The short term reaction to the “oil revolution,” also in Britain, was to reinforce state control and long-term planning over energy policy. Tony Benn, the leader of the Labourite left, was appointed minister of Industry under Wilson and later minister of Energy, under his successor James Callaghan. While the UK, facing a serious balance of payments problems and a weakening sterling, was forced to accept IMF loans, Benn hoped that the British hydrocarbons sector would provide a stimulus for reviving the ailing British industry through the state-run BNOC and investments in the petrochemical sector. Popular pressures for government control of North Sea oil and mistrust towards petrocapital was intense. The following is a snippet of a dialogue from a very popular Scottish play that filled theaters in the mid 1970s: texas jim:  Good thinking, good thinking. Your wonderful labourite govern­ ment was real nice: thank God they weren’t socialists. 64  Jonathan Kuiken, Empires of Energy: Britain, British Petroleum, Shell and the Remaking of the International Oil Industry, 1957–1979, PhD Dissertation, Boston College, 2013, p. 366. 65  The possibility of British membership in OPEC was soon dismissed: “It may be tempting to imagine than we could build bridges by having a foot in both camps. In practice we would probably end by being at home in neither. It is also relevant that the Norwegian Government, who are keen to make an associate agreement with the IEA, have recently stated publicly that they do not intend to seek OPEC membership.” TNA, PREM 16/613, Energy Dept. FCO, The UK and OPEC, November 28, 1974. 66  Refer to: Alex Kemp, The Official History of North Sea Oil and Gas: The Growing Dominance of the State (Vol. 1), (London: Routledge, 2012). 67  Dieter Helm, Energy, the State, and the Market: British Energy Policy since 1979 (Oxford: Oxford University Press, 2004), pp. 15–43.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

275

mc1:  The Norwegian Government took over 50% of the shares in exploration of their sector. mc2:  The Algerian Government controls 80% of the oil industry in Algeria. mc1:  The Libyan Government are fighting to control 100% of the oil industry in Libya. whitehall:  Our Allies in NATO were pressing us to get the oil flowing. There were Reds under the Med. Revolutions in the Middle East. texas jim:  Yeah, Britain is a stable country and we can make sure you stay that way. (Fingers pistol).68 At a meeting with the Shah in January 1976, while subjected to the imperial mantra that in the future every Iranian family would own two cars (one that ran on gasoline for long journeys and an electric car for the city), Benn also received a kernel of the sovereign’s wisdom: “North Sea oil would transform our prospects if we were not imprudent.”69 Somewhat fascinated by the Shah’s long-term view, Benn concluded: “He is a man for whom it would be impossible to have affection but who could count historically as having been a good king.”70 The British Energy minister was unable to win support for the strategy of BNOC direct participation in production or in strategic decision-making, but he did manage to secure a significant percentage of North Sea crude for the state company, while the structure of the fiscal regime remained relatively favorable to the oil companies, as will be extensively discussed in the next chapter. Towards the end of 1978, Benn theorized that Great Britain could play the role of mediator between OPEC and the oil  consumers in order to foster more stability in both production and prices. To further this objective he promoted an OPEC-Consumer meeting, to be held in March 1979.71 But the second “winter of discontent” of 1978–9, with strikes spreading across multiple sectors of the economy in reaction to spending cuts and the systemic reduction of public sector wages, demonstrated that Labour was unable to keep trade unions under control. A broad segment of British public opinion now saw the country as an hostage to these seemingly omnipotent trade unions, first among which were the National Union of Mineworkers (NUM), the only ones able to “dim the lights” by blocking coal deliveries to power stations. With Labour’s domestic position eroding, the prospects for cooperation with the oil producers soon faded away and the wind start blowing in the opposite direction of confronting them. * * * The 1974 report A Time to Choose, financed by the Ford Foundation and directed by David Freeman, argued among other items that conservation would be the best strategy to deal with the US energy crisis: “Conservation is a means to alleviate 68  John McGrath, The Cheviot, the Stag, and the Black, Black Oil (London: Bloomsbury, 2015), p. 150. 69  Tony Benn, The Benn Diaries: 1940–1990 (London: Random House, 1995), p. 342. 70  Ibidem, p. 343. 71 Benjamin Shwadran, “Middle East Economic Developments 1983–84”, in Middle East Contemporary Survey, VII: 1984, pp. 265–78.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

276

The Rise and Fall of OPEC in the Twentieth Century

shortages, preserve the environment, stretch out the supply of finite resources and protect the independence of U.S. foreign policy.”72 By the autumn of 1975, with the failure of Kissinger’s confrontational strategy against OPEC and the beginning of the “engagement” strategy, it became increasingly evident that there was no way of bringing OPEC prices down to the level of domestic US prices. The alternatives left would be to reduce consumption, to invest in domestic production and alternative sources, and to at least prevent further increases in international crude oil prices. Problem was that, between 1975 and 1978, domestic oil consumption never stopped growing, with imports ring from 6 million barrels a day in 1973 to 8 million barrels a day in 1978, now accounting for 40 percent of total US petroleum consumption. On the energy savings side, both the Ford and Carter administrations enacted several pieces of legislation. In December 1975, the US Congress approved the Energy Policy Conservation Act (EPCA), which sought to incentivize production of domestic petroleum and encouraged fuel savings, particularly by imposing improved gas economy standards for automobiles and speed limits on the highways. Upon his election, Carter created in March 1977 the department of Energy tasked, among other, with promoting research and investment in alternatives. With the passing of the National Energy Act in 1978, Carter pointed to a 2.5 million barrels a a day reduction of oil imports by 1985, while at the same time introducing a number of tax incentives to incentivize energy conservation. Later, with the Energy Security Act in 1980, the Carter administration introduced further incentives for energy savings, such as loans for the installation of solar panels, while at the same time sponsoring the creation of a US Synthetic Fuels Corporation to promote investment on synthetic fuels. The sum of these initiatives to promote energysaving and “alternatives” significantly expanded the scope of government action on energy issues and would have an impact on the medium term but, as we have seen, did not immediately have much of an impact. If tax incentives and regulations were not enough on the short term, the only immediate way to limit consumption (and incentivize domestic production) would have been to increase US domestic oil prices. This measure would have at the same time boosted domestic investments in production. Paul Frankel soon noted that both price increases and a boost to internal energy production would be hard to achieve for the Carter administration: Carter’s main trouble must have been that his basic tenets are hardly compatible: he has been elected to some extent on the environmental ticket, and is thus handicapped in stressing the need for more intensive forms providing energy, such as nuclear power, offshore drilling and coal, without raising problems and engendering resistance on ecological grounds. Also, he could not allow the full advantage of higher energy prices to accrue to entrepreneurs and investors, lest public opinion recoil from letting them benefit unduly.73 72  A Time to Choose. America’s Energy Future, Energy Policy Project of the Ford Foundation, Director David Freeman (Cambridge: Ballinger Publishing Co, 1974), p. 11. 73  Archives TOTAL, 2 SG-1, P.H Frankel, Topical Problems: Carter’s Prescriptions: Remedies and Side Effects, April 1977.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

277

Also Stu Eisenstat remarked that “American people were angry at everyone: the president, the Arab oil states, and most particularly the American oil companies, which they accused of a conspiracy to make record profits.”74 Public debate in the US, especially among the democrats-dominated Congress, focused on bashing Big Oil for its cunning and deceitful creation of artificial scarcity. A significant portion of public opinion favored breaking up (“divestiture”) the majors and taxing them as a way to guarantee cheap energy. After the passage of the Tax Reduction Act in 1975, which eliminated the “depletion allowance” and reduced foreign tax credits, McCloy voiced Big Oil’s growing alarm for the new brand of democrats in a meeting with George Ballou of SOCAL: Baillou pointed out that there are no more power or decision-making groups on the Hill. People like Connally, Rayburn, Kerr, Johnson and Mills are gone. The campus radicals of a few years back are rather liberally represented on the staffs today which are dealing with some of the most fundamental economic problems of our times. Kristol calls them a new class. They are pressing for successive waves of tax reforms, equalization of wealth and control over energy. Their main objectives at the moment are divestiture and government participation in negotiation with the Arabs.[. . .] People and Congress have forgotten the strategic contribution which the oil industry, primarily the American industry, rendered in winning of two world wars and the recovery of Europe.75

The oil companies were also worried that any increase in OPEC prices would directly translate into public criticism towards them.76 In the eye of the public Big Oil had become indissolubly linked to OPEC and Arab sheiks, but it had not way to influence the petrostates’ production and pricing policies. After the oil price increases at the OPEC Conference of December 1978 in Abu Dhabi, the limits of Carter’s energy strategy became evident. Without the  support of Iran, now in the midst of revolutionary turmoil, Saudi Arabia could no longer afford to remain isolated as the only moderate member of the organization.77 In early 1979, the Saudi leadership thus sought to shed their reputation as a surrogate for the United States: “internally there is too much opposition to big increases in production to permit them to be effective currently as they have been in the past.”78 Gas lines and widespread protests by truck drivers once more rocked the US as they had done in early 1974. Carter became the target of increasingly violent attacks for his failure to deal effectively with

74 Eizenstat, President Carter, p. 139. 75 Amherst Archives & Special Collections, John McCloy Papers, Oil 4, John McCloy, Memorandum of Conversation with George Ballou on Tuesday June 1st at the Links Club in New York, June 2, 1976. 76 Amherst Archives & Special Collections, John McCloy Papers, Oil 4, Memorandum Supplementing Meeting with Assistant Attorney General Baker on October 12, 1976 in Washington. 77  FRUS, Doc.179, Telegram From the Embassy in Saudi Arabia to the Department of State, Jidda, December 31, 1978. 78  Amherst Archives & Special Collections, John McCloy Papers, Oil 4, Texaco, From A.C. DeCrane to Mr John J. McCloy, 4/16/79.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

278

The Rise and Fall of OPEC in the Twentieth Century

producers. Daniel  P.  Moynihan was only one of the new brand of neoliberals leading the charge: We were told that the enemy was us, that our “profligacy” in the use of energy was the main cause of our problems, and that by curtailing the use of energy at home, our problems would be eased. But this sort of analysis is a way of disguising the magnitude of the foreign policy defeat which really caused our energy crisis—and the economic problems that went along with it [. . .] We must make the breaking of the power of the oil cartel a principal objective of American policy.79

Having failed “containment” (limiting price increases and curbing domestic consumption), Carter was now left with the “nuclear option.” This did not mean massive investments in alternatives such as nuclear power, a policy made all the more complicated by the accident at Three Mile Island in March 1979 and by the pressures from environmentalist movements, but rather allowing domestic crude oil prices to move upwards to international levels. This policy decision (its first steps had already been taken by Ford) went by the name of “decontrol,” and would call into question the centrality of cheap energy, and in particular of cheap gasoline, to the American way of life, as a key component of the underlying pact between the government and the citizen-consumer (Fig. 6.4.). Looking back on his time in the White House, Carter would argue: “we realized that our domestic prices would have to rise in order to stimulate American production and encourage conservation, but the increase needed to be brought about in a predictable and orderly fashion.”80 Decontrol, announced on June 1, 1979, would be eventually accompanied to make it fairer on the US consumers by a “windfall profits” tax on the oil companies, so that a portion of the gigantic sums brought in by domestic oil producers would be reinvested for the purpose of changing the US energy consumption paradigm and benefit lower-income Americans. On June 20 Carter had solar panels installed on the roof of the White House as a tangible reminder of the technological challenge underway. He explained to Congress: “No foreign cartel can set the price of sun power; no one can embargo it.”81 While these measures (with the possible exception of the windfall profit tax) failed to galvanize the liberals, Republicans were increasingly opposed to new taxes and to increased government intervention in energy policy. Some in his administration, such aEizenstat, counseled Carter to look for an external scapegoat: “with strong steps we can mobilize the nation around a real crisis and with a clear enemy—OPEC.”82 While on vacation, Carter took some time off to discuss the matter with dozens of politicians, union leaders, intellectuals, and religious figures. At the end of his meetings, on July 15, 1979, he appeared on television to deliver what would go down in history as the “malaise speech.” While reaffirming that US military might remained intact, he acknowledged that the 79  Daniel P. Moynihan, “How to Cut Off OPEC’s Power”, in Newsday, 12.27.78. 80  Jimmy Carter, White House Diary (New York: Farrar, Straus and Giroux, 2010), p. 94. 81  Jimmy Carter, Solar Energy Message to the Congress, June 20, 1979: https://www.presidency.ucsb. edu/documents/solar-energy-message-the-congress, (Consulted on April 14, 2019). 82  “Carter Urged to Blame OPEC to Save Himself ”, The Washington Post, July 7, 1979.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

279

Fig. 6.4.  Popular representation of the relationship between Western Europeans and Arab sheiks during the oil price increases of the 1970s (Frankfurter Allgemeine Zeitung, 1979).

American people were living through a much deeper “crisis of confidence” that went far beyond OPEC: We were sure that ours was a nation of the ballot, not the bullet, until the murders of John Kennedy, Robert Kennedy, and Martin Luther King Jr. We taught that our armies were always invincible and our causes always just, only to suffer the agony of Vietnam. We respected the Presidency as place of honor until the shock of Watergate. We remember when the phrase “sound as a dollar” was an expression of absolute dependability, until ten years of inflation began to shrink our dollar and our savings. We believed that our nation’s resources were limitless until 1973, when we had to face a growing dependence on foreign oil.83

His speech, which echoed the criticism of rampant individualism expressed by Christopher Lasch in The Culture of Narcissism, drew swift condemnation not only from the Republicans (already in full campaign mode), but also by union leaders and a broad swath of liberal public opinion which felt betrayed by a President 83  Jimmy Carter, Address to the Nation on Energy and National Goals: “The Malaise Speech”, July 15, 1979: https://millercenter.org/the-presidency/presidential-speeches/july-15-1979-crisis-confidencespeech (Consulted on January 28, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

280

The Rise and Fall of OPEC in the Twentieth Century

ready to make substantial concessions to Big Oil. Irving Kristol, a star of the emerging American right, denounced Carter’s weakness: “If political decadence can be identified with a failure of nerve, then the reaction of the West to the emergence of OPEC is about as clear a sign of decadence as one could imagine.”84 For their part, liberals inveighed against booming profits for Big Oil, and warned that higher oil prices would disproportionately impact the poor and act as a brake on economic growth by reducing available income for consumption. Representative Bob Eckhardt rhetorically asked: “if it be conceded that it would be good for people to drive less, does it follow that the oil companies [. . .] should be permitted to tax them until they behave properly?”85 Secretary of Energy James Schlesinger, dismissed by Carter in August 1979 as a scapegoat for the enduring gas lines, would leave the administration with gloomy predictions: Oil, the fuel of choice that has driven the vast economic expansion since World War II, will no longer be available in increasing quantities to fuel the further growth of the world’s economy. Prices will inevitably reflect the increasing pressures of demand against constrained supply [. . .]. Quite bluntly, unless we achieve the greater use of coal and nuclear power over the decade, this society just cannot make it.86

The 1979 decision to decontrol domestic US prices contributed to momentous internal changes in the American economic and political landscape, favoring a shift in resources from the old industrial “rust belt” in the Northeast to the oil-rich “sun belt” in the South and West, and would also eventually contribute to momentous changes in the international petroleum market. But, as of 1980, most US citizens saw a weak President, a country still dependent on Arab oil imports, gas lines, and increasing gasoline prices. All of this coupled with a government that claimed an ever-increasing role over the energy policy while being unable to deliver cheap energy or avoid disruption. Democrats were demoralized by Carter’s support of Big Oil, and failed to convince the President that it would have been better to institute allocations and rationing rather than increase domestic prices. As in the UK, also in the US the perceived failure of Carter’s strategy to adapt to higher oil prices and to “appease” the OPEC moderates opened the way for a much more aggressive stance by the new Republican administration headed by Ronald Reagan. R E VO LU T I O N In the 1972 Kuwaiti movie The Cruel Sea the pearl trade in the Gulf was described as tough and dangerous labor, while the Arab Gulf societies that had been shaped for decades by this trade, ruled by rich merchants and carried on indebted seamen, were depicted as no less cruel than the sea itself. The age of oil, coming after the age of pearls, was supposed to end the experience of hardship once and for all. 84  Irving Kristol, “The OPEC Connection”, The Wall Street Journal, February 22, 1977. 85 Sherrill, Oil Follies, p. 423. 86  Steven Rattner, “Schlesinger, in Farewell, Demands Balance with Russians in the Mideast”, The New York Times, August 17, 1979.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

281

Booming oil rents after 1973 raised wide hopes in all petrostates. OPEC g­ overnments engaged in ambitious development plans everywhere from Indonesia, to Nigeria, to Venezuela in the hope of diversifying the economy and entering a different era. These plans were sold to citizens in grandiose names. The Shah’s plan was: The Great Civilization. Venezuelan President Carlos Andrés Péres’s (CAP) had La Gran Venezuela. The Nigerian government confidently proclaimed that while in the past the challenge had been to “manage scarcity,” in the future the challenge would be to “manage abundance.” These efforts notwithstanding, and is some ways because of these efforts, the pressure cooker of rising popular expectations was hard to contain. * * * To get a sense of the scale of the ambitions of the new development plans, take the case of two of OPEC’s founding members Saudi Arabia and Venezuela, that focused on a mix of State intervention and private entrepreneurship; and of Algeria, where the effort to build a socialist economy was to be entirely driven by the state. In Saudi Arabia the period after 1973 is still remembered to this day as the “Age of Abundance” or “Renovation.” The first five-year plan (1970–1975 had been designed to spend $9 billion and focused primarily on infrastructure investment, with the expansion of the two ports of Jeddah on the Red Sea and Damman on the Gulf, the creation of a road network, improvements to infrastructure related to the pilgrimage, as well as efforts to spread of higher education, with the establishment of King Faisal University. The second five-year plan (1970–1980, after the 1973 boom, was eventually earmarked for it $180 billion. Some 40 percent of the total budget was allocated to Defense (in 1980, Saudi military spending per capita was ten times greater than that of the NATO countries). Steffen Hertog who has studied in depth the evolution of the Saudi state lists some of the striking features of the Saudi Age of Abundance: A quickly expanding service infrastructure benefited more and more Saudis: electricity and desalinated water were provided to small consumers at strongly subsidized prices. Domestic consumption of—strongly subsidized—refined products increased from 26.1 million barrels in 1970 to 395.2 million barrels in 1984. The number of operating telephones multiplied more than tenfold between 1970 and 1984 to about nine hundred thousand. Hospital beds increased from 9,000 in 1970 to 26,800 in 1984, with medical services provided free of charge. Medical and paramedic personnel grew from zero in the late 1960s to 3.6 million by 1984.87

The capital city was moved from Jeddah to Riyadh, in the center of the country, and the merchant class of the Nejd was given a significant support through state procurements and more generally through a “sponsorship” system (the same prevailing in all Gulf monarchies), according to which foreign entrepreneurs were required to obtain a local sponsor to operate in the country. In 1976, the government 87  Steffen Hertog, Princes, Brokers and Bureaucrats: Oil and State in Saudi Arabia (Ithaca: Cornell University Press, 2010), p. 109.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

282

The Rise and Fall of OPEC in the Twentieth Century

started investing directly in the creation of a petrochemical sector with the establishment of the Saudi Basic Industries Corporation (SABIC) and the transformation of the Al-Jubail port from a small fishing village on the eastern coast into a large petrochemical cluster. SABIC is today one of the biggest petrochemical industries in the world. ARAMCO, with the Saudi government now a majority shareholder, also contributed to the mad investment race. As Al-Naimi recalled: “we were buying all the steel and concrete and hiring all the drilling rigs we could find. By 1975, our payroll had risen to 19,500 double that of just five years before.”88 The Government, aiming at fuelling a Kingdom-wide industrial network, also paid ARAMCO in 1975 to develop a Master Gas System that was, according to former ARAMCO’s head Frank Jungers “unprecedented in scope and it cost.” So huge were the needs of labor to build these gas gathering and processing units that ARAMCO could not host all the workers in inland camps and had to tow from Japan and Singapore five-story barges: “each with its own generators, desalination facilities, air conditioning, dining halls and recreation facilities. These ‘floating hotels’ as they were called, were anchored offshore near Dhahran and housed about 4.500 workers.”89 Al-Naimi evokes the vision behind the massive gas investment: The cornerstone of the second five-year plan, the largest among many massive projects, was the Master Gas Plan. With an estimated price tag of $12–14 billion—more than $40 billion in today’s dollars—it was the largest energy development ever. The goal of the plan was to transform the country’s economy and begin to diversify it from its near total reliance on the oil industry and its affiliated construction and service industry. The natural gas which for the most part was being burned off by flares at our production facilities at the time would be harnessed and used to power the next generation of Saudi industry and commerce.90

Carlos Andrés Pérez (popularly known as CAP), a former assistant to Romulo Betancourt and onetime minister of the Interior from the AD party, was elected president of Venezuela in 1973, remaining in office throughout OPEC’s golden age from 1974 to 1979. His economic plan, the mentioned La Gran Venezuela, called for the nationalization of the iron ore industry and, after 1976, also of the petroleum industry. The latter was a largely symbolic move and would cost enormous sums of money: all concessions were already scheduled to freely “revert” to the state in a few years time. Bernard Mommer has explained some of the limits of the still widely contested nationalization that resulted in the creation of the new holding company called PDVSA: Petróleos de Venezuela, Sociedad Anónima (PDVSA), would be a joint stock corporation with only one shareholder, the Venezuelan state. PdVSA was conceived as a holding company, and the more important concessionaires would become affiliates, but now 88 Al-Naimi, Out of the Desert, p. 94. 89  Frank Jungers, The Caravan Goes On. How Aramco and Saudi Arabia Grew Up Together (Newport: Medina Publishing, 2013), pp. 191–192. 90 Al-Naimi, Out of the Desert, p. 98.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

283

presided over by the highest-placed Venezuelan managers within them, rather than by foreigners. The PdVSA Board of Directors would in turn protect these affiliates from the “political” intervention of the State. In essence, the fiscal regime would also remain unchanged. So it is fair to say that, at the level of the concessionary companies in Venezuela, the shift brought about by nationalisation was strictly limited to a change in their ultimate shareholder. Everything else stayed the same.91

La Gran Venezuela included measures to pursue full employment and introduce a minimum wage, as well as the creation of an investment fund designed to help “productive” sectors of the economy and to invest in the exploitation of other mineral resources. Spending on health and education increased significantly. The Venezuelans’ average life expectancy, only thirty-three years in the 1930s, and fiftyfive in the 1950s, came to reach sixty-eight by the late 1970s; by then per capita GDP was on a par with that of west Germany and in many sectors salaries were even higher than in the richest economy in western Europe. Algeria was the OPEC country that pursued the utopia of fast-pace industrialization most consistently. Dozens of state-owned businesses—with SONATRACH leading the way—were at the center of a system run by the ministry of Industry. By the end of the 1970s, some 105,000 workers were employed in heavy industry and in the petrochemical sector, with an additional 133,000 in light industry. Algeria accumulated capital at a stunning rate by pursuing the strategy of “industrializing industries.” According this strategy massive investments in petrochemicals and heavy industry would generate a trickle-down effect throughout the rest of the manufacturing and service sectors. With the electrification of the countryside, the spread of the use of natural gas, the development of municipal transport, subsidies for essential goods, and free medical care for all, Algerians’ standard of living underwent a profound change for the better. In a single decade, the population exploded from 12.6 to 18 million.92 On the other hand countryside, already struggling due to the decline of the wine industry, found itself lagging behind the cities. In 1980, agriculture provided for only 30 percent of domestic needs, while land collectivization—an important measure to win support in the countryside— failed to make a substantial dent in the country’s dependence on imports. Yet, the experiments of Boumedienne’s Algeria were in many ways a success, as described in one of the few biographies of the Algerian statesman: Life expectancy increased by a decade for both men and women between 1965 and 1984, while the infant mortality rate fell by a third between 1961 and 1980. Education was a government priority and the effects were telling. Primary school enrolment doubled for both boys and girls between 1960 and 1980, secondary school enrolment tripled, and literacy rates for men and women jumped 100 per cent during these same years. Algeria had no universities when the French abandoned the country in 1962; there were ten by 1980. And for all the problems with Algeria’s economy, 91  Bernard Mommer, “Venezuela and OPEC, Fifty Years Later”, in Oxford Energy Forum, Issue 83, 2011. 92  Gianpaolo Calchi Novati and Caterina Roggero, Storia dell’Algeria indipendente. Dalla guerra di liberazione a Bouteflika (Milan: Bompiani, 2018), p. 204.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

284

The Rise and Fall of OPEC in the Twentieth Century

the gross national product (GNP) more than doubled between 1965 and 1985, though much of this was due to the increase in oil and gas prices, and unevenly distributed.93

In his very detailed study on OPEC governments’ management of their oil rents between the 1970s and the 1990s, the Iranian economist Jahangir Amouzegar summarized some of the petrostates’ priorities after 1973: exchange of natural wealth (oil and gas) for man-made capital (infrastructure, industrial equipment, technical skills)—in other words “diversification” to provide for the future generations after the depletion of the oil fields; national security considerations such as food self-sufficiency and defense commitments; creation of employment opportunities and some degree of income distribution and social welfare; even efforts to protect the environment.94 By 1978, most of these objectives were still far from being achieved (could it be otherwise in such a short time?) and petrostates found themselves to be dealing with bottlenecks, inflation, and severe balance of payments problems. Abbas Alnasrawi, the arch-critic of imports and Arab economic dependence, noted that the trade surpluses of OPEC countries had declined from $68 billion in 1974 to a meager $3 billion by 1978.95 The problem cannot only be grasped only through the figures of trade deficit or inflation. Once he had moved back to Riyadh after the death of Faisal, Tariki, looking out the window of his modest office was left wondering: “We are going too fast: human beings cannot cope with such an accelerate rate of economic growth.”96 In Saudi Arabia, due to the inelasticity of supply, housing costs rose by 390 percent between 1970s and 1977. Growth in all petrostates was as exciting as it was chaotic. This was Galeano’s description of Caracas in 1970: Today it is a supersonic, deafening, air-conditioned nightmare, a center of oil culture that might pass as the capital of Texas. Caracas chews gum and loves synthetic products and canned foods; it never walks, and poisons the clear air of the valley with the fumes of its motorization; its fever to buy, consume, obtain, spend, use, get hold of everything leaves it no time to sleep. From surrounding hillside hovels made of garbage, half a million forgotten people observe the sybaritic scene.97

By the end of the 1970s the situation was even more extreme. The capital became one modern capitals of the world, the beneficiary of a massive influx of investments, full of European immigrants and boutique fashion shops in the vein of Swinging London. The Venezuelan Bolivar was a respected currency with its rate pegged to the dollar. The bourgeois Venezuelan lady, vacationing in Florida or Paris, was widely known by her stereotypical catchphrase, “dàme dos” (“give me two”). The supersonic Concorde even began servicing from Paris to Caracas for a brief 93 Radia Kesseiri, Algeria: An Account of International Politics: President Houari Boumedienne, 1965–1978 (London: LAP Lambert, 2011), p. 42. 94 Jahangir Amouzeger, Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls (London: I.B. Tauris, 1999), pp. 1–9. 95  Abbas Alnasrawi, Arab Nationalism, Oil, and the Political Economy of Dependency (Westport: Greenwood Press, 1991), pp. 102–3. 96 Terzian, OPEC, p. 94. 97 Galeano, Open Veins of Latin America, p. 166.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

285

time in 1976 to cater for the high end Venezuelan costumers. By the end of the decade, Venezuela experienced many of the evils that were plaguing other petrostates: rising inflation coupled with an increase in foreign debt; the flowering of a significant balance of payments deficit (which was temporarily eliminated by a second increase in prices in 1979–80); and growing dependence on agricultural imports. Pérez Alfonzo did not mince words to the describe La Gran Venezuela: “It is a plan for national destruction.” He considered that the one wise thing to do after the boom in oil rents would have been to repay foreign debt, buy assets abroad, and reduce oil production in order to have just enough money to pay for current expenditure.98 According to him Venezuela had been forced to become the largest oil exporter in the world up to 1968; now, in order to avoid “economic indigestion” and Efecto Venezuela, it had to fight for the privilege of being able to progressively reduce production to zero, or at least to a level where the “influx of foreign currency would be compatible with a healthy econonmy.”99 * * * Elites in petrostates were facing public opinions and citizens that, in the face of booming oil revenues demanded more welfare, more participation, more social and cultural cohesion, while they were witnessing increasing levels of economic inequality as well a massive waves of immigration. The seemingly more stable Gulf monarchies were also affected by this climate. The Emir of Kuwait dissolved the National Assembly in 1976 due to popular pressures for a more pro-Arab foreign policy and for a greater say over the distribution of oil rents.100 In the UAE there were pressures for a new Constitution that would attribute more power to the federal level, including the control of 75 percent of the country’s resources, and would at the same allow for the creation of a National Council on the Kuwaiti model, with something more than an advisory role. In 1979 hundreds of citizens from various emirates and various walks of life gathered in Abu Dhabi to press for a new federal Constitution, for a more restrictive immigration policy, and for greater protection from foreign business. Many of the demands were resisted, in particular by the ruler of Dubai. Resistance to the new constitution led to the resignation of some of the ministers that had supported a stronger federal government and a speedier process of nation-bulding.101 In Algeria Boumediene felt the need to promote a nation-wide debate to define the political and cultural landscape of Algeria after it had achieved political as well as economic independence. After the consultations, the government produced in 1976 a National Charter, approved via referendum, while Boumediene was elected President of the Republic. After February 1977, Algerians could also vote for a National Assembly, even if the candidates had to be members of the FLN. Boumediene argued that this participatory was “necessary to the socialist process 98  Eduardo Mayobre, Juan Pablo Pérez Alfonzo (Caracas: Editorial El Nacional, 2005), p. 14. 99  Pérez Alfonzo, Hundiéndonos en el excremento del diablo, p. 244. 100 Crystal, Oil and Politics in the Gulf, pp. 89–93. 101 Taryam, The Establishment of the United Arab Emirates, pp. 242–3.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

286

The Rise and Fall of OPEC in the Twentieth Century

that Algeria wants to embody, but it will be very difficult.”102 After a sudden illness, followed by a controversial trip to the Soviet Union for medical treatment, Boumediene died, and his death was announced to the public on December 27, 1978. Foreign journalists reported that more than two million Algerians reacted to the news by taking to the streets in front of the Palace of the People, “many of them weeping.”103 Gaddafi embraced the rhetoric of a socialist Islamic discourse on the one hand, while enshrining himself as the moral guide of the revolution on the other. He called his personal vision of government the Third Universal Theory: a new Islamic ideology that situated itself somewhere in between capitalism and communism. This “vision” was presented in condensed form in the Green Book, the first two volumes of which appeared between 1975 and 1977. Libya was envisaged as a political community ruled not by the democratic mechanism of representation, but by direct popular participation. Citizens would exercise power through People’s Committees and People’s Congresses—although petroleum, foreign policy, and policing were kept out of these decision-making mechanisms. This new model was enshrined in 1977 with the changing of the country’s official name to the Socialist People’s Libyan Jamahiriya (“state of the masses”). Libyan Jamahiriya rejected workers’ subordination to either state or employer and enacted the abolition of private property. Citizens were even banned from owning their own home, which was to be guaranteed by the state. In Indonesia, the “Malari riots” in Jakarta of 1974 forced Suharto to review some of the tenets of the New Order, while in Nigeria in 1979 widespread protests against austerity measures and political and cultural activism resulted in new democratic elections after a military rule that had lasted more than thirteen years. * * * This pressure cooker of raising expectations exploded most dramatically in one petrostate. Once again, as it had in 1951, the petroleum industry played a prominent in Iran role as a site for popular mobilization both during the protests and after. The first version of the Shah’s Great Civilization project was already in the works before the oil revolution, coming to fruition in the fifth development plan launched in 1973. As explained by the Shah, this plan balanced the need for investments with an emphasis on social welfare: The first thing will be the complete absence of illiterate people in the whole territory. Every Iranian will be able to write his or her letter, or read the papers or write his own report. In addition, every citizen will own a house or apartment. Iranians love to own their own house, which symbolizes for them the positive idea of shelter, a refuge, and also the idea of a family and of a haven, so necessary for the keepsake of dear memories [. . .] 102  TOTAL, 2 SG 15, Audience Accordée par Monsieur Le Président Boumediene, Algiers, October 29, 1977. 103  “Algerians Mourn Death of Boumedienne”, The Washington Post, December 28, 1978.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

287

Longevity will be the treasured possession of every Iranian, disease will have completely disappeared and men and women will live more than a hundred years.104

After the doubling of oil prices in December 1973, the development plan was revised the following year with greatly expanded ambitions to transform the country into a regional military and industrial power. Private consumption increased by 40 percent from 1973 to 1978, capital formation by 100 percent, and imports by 350 percent.105 There were improvements in the road and railway system (the completion of the Tehran–Tabriz line, for instance), and incentives for the local production of automobiles—including the infamous Paykan, assembled in Iran. Car output grew from 7000 to more than 100,000 by the end of the 1970s. Most of these investments did not trickle down. The Shah’s penchant for socio-political experiments also led him in 1975 to replace the Islamic calendar with a new one starting with the foundation of the Achaemenid Empire, and to introduce measures in support of women’s rights, such as the prohibition of marriage before the age of eighteen. Religious clerics, the Bazaar, and the poor south of Tehran, meanwhile, were growing increasingly hostile to his rule. Thousands of Iranian students that had been sent to study abroad in American and European universities, influenced by the then prevailing antiimperial and anti-capitalism critique that permeated Western academic departments, became outspoken critics of the Shah. Muslim students leveled a number of accusations towards the regime: that Iran was an ally of Israel and the Shah a puppet of the United States; that a few privileged families still controlled most of the country’s economy; that the Shah was a playboy, whose sisters gambled lavishly in the casinos of the Riviera; that there were more than 850,000 arrogant Americans in Iran, who acted as though they were above the law. Tehran had become a megalopolis of concrete and contradictions. Americans waved around the vast sums of money they made in the country, while women from the educated middle class walked side by side with unemployed peasants from the countryside. Inflation kept on rising until 1977, when the Shah was forced to introduce deflationary measures and rein in spending. The first rumblings of unrest against the Shah began in January 1978, in protest against the austerity measures announced the year before. University students, the radical left, and the religious establishment were all united against the corruption and privilege embodied by the Pahlavi Foundation and against the vulgar imitation of the West defined as Gharbzadegi, or “Westoxification” (the term popularized by Jalal Al-e-Ahmad). In September, barricades went up in the working-class neighborhoods of Tehran. The Shah, already weakened by his fight against cancer, wavered between repression and dialogue. Then a series of strikes began obstructing one sector of economy after another, ultimately spreading to the petroleum industry. A Western ambassador in Tehran noted: “Iran’s oil supplies are the 104  Mohammad Reza Shah Pahlavi, Towards the Great Civilization (London: Satrap Publishing, 1994). 105  A good summary of Iranian planning in the 1970s in: Scheherazade Daneshkhu, The Political Economy of Industrialisation in Iran, 1973–1978, PhD Thesis, London School of Economics, 2004.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

288

The Rise and Fall of OPEC in the Twentieth Century

regime’s jugular vein. To cut these supplies is to cut the Shah’s throat.”106 By December Iran was plunged into chaos, and Americans began to flee the country en masse. On January 16, 1979, the Shah left the country for the second and last time, and on February 1 Khomeini returned from Paris to Tehran in triumph, mobbed in the streets by enormous crowds, fully invested with moral authority as the Shah’s primary political opponent since the early 1960s. The Iranian revolution was decidedly anti-American, anti-imperialist, and had a very strong class component. Mehdi Bazargan, the former head of the NIOC during Mossadegh’s nationalization, and a nationalist who had opposed the Shah, was named Prime minister by Khomeini. Thus began a tug of war between liberal constitutionalists, the left and nationalists, against the supporters of an Islamic government, with Khomeini, the theorist velayat-e faqih (guardianship of the Islamic jurist), at the center of this turmoil. In March 1979 a referendum proclaimed the birth of the Islamic Republic, at Khomeini’s behest, defying liberals who had called for a Democratic Islamic Republic—according to Khomeini, Islam should not be preceded by any adjective. While discussions over a future constitution began, the parties’ military factions, such Pasdaran and Hezbollah—tied to Khomeini’s Islamic Republican Party—began to ramp up their preparations. The Constitution that emerged from this tense climate retained some democratic elements, including an elective Assembly and an elected President. But it was a democracy closely monitored by the religious authority, vested in the Guardian Council and the Supreme Leader, Khomeini himself, who had to approve every law and every key Government post. The Iranian revolution was initially viewed positively in a number of Arab countries, as testified by the words of Jalloud, the second most influential person in the Libyan government: The movement of the Iranian people armed with knifes, home made grenades and primitive guns. The heroic Muslim people under the leadership of the great militant Ayatollah Khomeini has not only won over the Shah. The victory of the Iranian people has been a victory of the civilization of the East against the materialistic civilization of the West.107

Also the Saudi minister for Industry and Electricity Al-Gosaibi was prepared to admit that the Iranian revolution was not “against development” but against failure to develop by which, he added, he did not refer to “ambitious projects” (what today would be called “vanity projects”) or “white elephants” but instead development intended as: “more schools, better public services and eradication of illiteracy and poverty.”108 In neighboring Iraq, the revolution of booming oil rents did not produce, strictly speaking, regime change but led to concentrating of power in the hands of Saddam Hussein. The Iraqi Ba’ath party had played an increasingly crucial role in 106  Peyman Jafari, “Reasons to Revolt: Iranian Oil Workers in the 1970s”, in International Labor and Working Class History, 84, Fall 2013, pp. 195–217. 107  International Institute for Social History (IISH), 5th World Anti-Monopolistic Conference of the Oil Workers, Tripoli, March 26–30. 108 Ghazi A. Algosaibi, Arabian Essays (London: Kegan Paul, 1982), p. 114.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

289

the economic and social life of the country. Within the party, one man steadily rose up the ranks: Saddam Hussein, who, having already obtained control over oil policy, orchestrated his promotion to general in order to strengthen the grip over the military as well. In 1978, the Ba’ath initiated a campaign against its main political ally, the Iraqi Communist Party, and subsequently Iraqi foreign policy made a show of greater flexibility. A military campaign to assert sovereignty over Kurdishcontrolled territory proceeded apace, while the country more overtly positioned itself as the new leader of the Arab world, aiming to unseat Egypt, now discredited by its bilateral negotiations with Israel. After the Iranian Revolution, which threatened to destabilize Iraq’s vast Shi’ite population, Saddam Hussein had himself named President of Iraq in July 1979. A purge of the party, with the arrest of more than sixty members deemed too far to the left or too friendly with Syria, and the beginnings of a cult of personality soon followed. At the age of forty-two, Saddam Hussein became at once president, Secretary-General of the Ba’ath Party, head of the Revolutionary Command Council (RCC), and Commander in Chief of the Armed Forces. Statues and portraits of him went up in town squares and schools. In 1980, a toothless National Assembly was established, and Iraqi intellectuals and professionals who had enjoyed broad freedom of speech and action throughout the 1970s began taking the road of exile. In 1960 OPEC members basically had a common interest in wresting decisionmaking power away from the oil majors and in appropriating a greater share of the oil revenues. Twenty years later, by the end of the 1970s, petrostates had taken control over the petroleum industry, and their leaders were forced on the one hand to reconcile natural resource extraction and nation-building, and on the other to think about how to manage an international oil market where they now played a key role. On both issues there were a variety of conflicting approaches with OPEC, and the increasingly unstable oil market made it even more difficult to find a common ground. O P E C ’ S L O N G - T E R M S T R AT E G Y In December 1978 oil prices began to inch upward. The following two years would be remembered as the years of the “second oil shock.” Prices began to spiral upward. Petrostates followed this market trend by adjusting their prices upward individually, thus contributing to the upwards trend. There was no reference price anymore. This mad chase between the so-called “spot prices” (the price of crude oil sold on the “free market”) and pricing by OPEC countries only came to a halt in 1981, when OPEC agreed on a reference price for the Saudi marker crude at $34 per barrel, up from $14 where it was at the beginning of 1979. During this period prices increased both in nominal and in real terms, giving the petrostates the impression they could simply throw more money at some of their internal problems. If OPEC itself had a significant role during the price increases of 1973, it was next to irrelevant during second oil price shock.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

290

The Rise and Fall of OPEC in the Twentieth Century

At the root of the second price shock were both structural changes in the petroleum market, as well as political instability in the Middle East. The fundamental structural problem was that by the end of the 1970s the largest oil consuming countries, first and foremost the United States, had not yet managed to reduce significantly their oil consumption and their dependence on imports: in 1973, foreign oil accounted for 52.9 percent of energy consumption among the OECD countries, while in 1978 this figure remained stuck at 52 percent. The inelasticity of oil demand to prices was still considered an undisputable fact of economic life, notwithstanding the reality that Western European and Japanese imports were by then declining. While new oil regions were emerging—including the North Sea, where production climbed above 2 million barrels a day in 1979—some OPEC countries, thanks to increasing prices as well as to the political instability in Iran, could afford the luxury of maintaining self-imposed production ceilings. Aggravating these upward pressures on prices was an increase in the availability of “spot” crude thanks to the breakdown of the traditional supply channels controlled by the oil majors. Though this short-term market represented less than 10 percent of the global crude oil trade in 1979, it played a key role because spot prices became a justification to modify long-term contracts upward (otherwise companies which had access to crude oil at favorable official OPEC prices would have gained too much), because it incentivized large buys and the building up of stocks, and because in the short term it reinforced the position of price hawks within OPEC. On the political side, the OPEC country that starting pushing once again for price increases was Iran. The country’s foreign policy took a radical turn with the seizure of the US embassy in Tehran in November 1979. Al-Akbar Moinfar became the new (in fact, the first) Petroleum minister, and in January 1980 Abolhassan Bani Sadr was elected, with Khomeini’s support, to be the first President of the Islamic Republic of Iran. Bani Sadr had been a student activist in the early 1960s, spent time in prison, and subsequently emigrated to France to continue the propaganda struggle as well as his studies. As we have already mentioned, he had written extensively on petroleum issues. His last book, Naft va Solteh (Oil and Domination) was published in 1977 and vehemently denounced the Shah’s “development” policies for having condemned Iran to political and economic dependence. The oil industry, he argued, had “pillaged” the country. OPEC itself, he wrote, “has always been an instrument of the United States.”109 Bani Sadr considered that the petroleum industry had been little more than a mechanism designed to pump out oil out of the country while transforming the natural resource into imports. He viewed this as a perverse cycle: the creation of purchasing power that domestic production could not satisfy; concentration of wealth in urban areas and in the upper classes which tended to export capital; expansion of the state sector, and in particular the army, leading once again to more imports; contraction of investments in alternative sectors; the introduction of interest rates (usury); an inflated exchange rate; and the funneling of investment into infrastructure to open up the domestic 109 Shaul Bakhash, The Politics of Oil and Revolution in Iran (Washington: The Brooking Institutions, 1982), p. 6.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

291

markets to foreign goods. This “curse” only served the interests of a ruling elite in league with global capitalism and American imperialism: The dominant class is a bureaucratic class: it is made up of high-level functionaries, technocrats, and military officers, by the prominent politicians who control the production and distribution of state revenues (petroleum, essentially, but also gas, copper, etc.). This class is structurally dependent on the dominant economies, its role is to shape society to fit the global market, to provide it with the raw materials it demands, to organize the consumption of goods it offers; its status as the dominant class in the country is linked to this function, that it has fulfilled as the driving force of the state apparatus for the global market.110

One of the consequences of this line of reasoning was an emphasis on the need to stabilize oil exports while at the same time asking for higher prices. The new government pressed for prices that would at least equal those of alternative energy sources (interestingly enough, the very same argument Amouzegar had presented in December 1973 Tehran meeting), and for production controls among OPEC countries (pro-rationing) to counteract any possible reduction in global demand. The request to deepen cooperation among OPEC countries, especially on production levels, co-existed uneasily, however, with Khomeini’s menacing proclamations to the broader Muslim world, including of course the Muslims in the Arabian peninsula. As Khomeini declared in February 1980: We all know that the Islamic world is waiting for the full fruition of our revolution [. . .] we will export our revolution to the entire world, because our revolution is Islamic; until such time that the cry, “there is no God but on Allah, and Mohamed is his Prophet”, does not yet ring throughout the world, the struggle continues. And wherever in the world there is struggle against the oppressor, we are there too.111

Such words could not help but destabilize and inflame the Shi’ite communities in the Gulf including in Saudi Arabia and Iraq, where the Shi’ite Dawa Islamic religious party was gaining a growing number of adherents, and had even attempted to assassinate the deputy Prime minister Tariq Aziz in April 1980. While now once again producing at full speed to fill in the gap left by declining Iranian production, Saudi Arabia was also rocked by the shockwaves of religious radicalism in late 1979. In November that year, Juhayman Al-Otaybi led a group of militants and religious followers to occupy the Great Mosque in Mecca, proclaiming the arrival of the new Mahdi before the final Day of Judgment. The rebels used the mosque’s loudspeakers to announce the end of oil exports to the US and the expulsion of all foreign civilians and military personnel from the country. Saudi units needed several days to recapture the mosque, and did so only after hundreds of people were killed.112 That same month, the Shi’ite population in the east of the country violated a nationwide ban on the public celebration of the 110  Abol-Hassan Banisadr, Quelle Revolution Pour l’Iran? (Paris: Fayolle, 1980), p. 256. 111  Bakhash, The Politics of Oil and Revolution in Iran, p. 19. 112  Yaroslav Trofomivov, The Siege of Mecca: The Forgotten Uprising in Islam’s Holiest Shrine (London: Penguin, 2008).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

292

The Rise and Fall of OPEC in the Twentieth Century

Ashura. They had been further radicalized by the perceived discrepancy between their own rather low standard of living and the booming investment in the oil cities of Dahran and Damman. A few weeks later, Iranian pilgrims in Mecca and Medina also staged public protests against the Saudi government. The Islamic revolution in Iran threatened to destabilize the entire region. US support for the bilateral peace deals between Egypt and Israel, which was seen as an affront in Saudi Arabia as in much of the rest of the Arab world, further contributed ignite political tensions in the Gulf. In early 1979, Prince Fahd had already warned American diplomats that the US foreign policy would have repercussions also on Saudi oil policy: One has to take points that were made by Prince Abdullah—we are producing 10.5  million barrels per day and will continue to do so as long as possible—the companies that were being supplied from Iran will continue to be so, but I can tell you that a great deal of this depends on the Peace Treaty that Sadat signs. Remember, Resolution 242 and the Palestinians. If there is a proper treaty, it would be an economic boom, however, if the Palestinian people feel they are cheated, then it is better not to sign a Peace Treaty, and wait for further developments. From the very beginning of the shortages in oil, due to the crisis in Iran, I have ordered the Minister of Petroleum to increase production to compensate for the shortage. We want to help the world.113

Al-Gosaibi also argued that counting on ever-increasing Saudi production could not be considered a long-term solution to the energy crisis, while a better approach would be: “active conservation, active exploration and active development of alternative energy sources.”114 After the signing of the peace treaty between Egypt and Israel in March 1979, Fahd—considered the member of the royal family with closest ties the United States—had left the Kingdom for three months of medical treatment abroad, while Egypt was expelled from the Arab League. The CIA was convinced that, because of Camp David and the fall of the Shah, a “conservative tide” was moving the House of Saud away from its closed ties with the US.115 Even the UAE, one of the key allies of Saudi Arabia, was increasingly concerned by US policy in the Middle East. The Ruler of Abu Dhabi, Zayed, worried about the escalation of Cold War tensions in the Gulf that we will see in the next chapter, declared in March 1980 that: “the peoples of the world would cooperate and live in peace if it were not for the intervention of big powers, so these powers must work to keep the Gulf region clear of rivalry.”116 * * * As structural and political factors were pushing oil prices upward, petrostates and consumers were not talking to each other anymore. The main forum for such talks, the CIEC, had been dissolved in 1977 and replaced by UN “global negotiations”, a 113 Amherst College Archives & Special Collections, McCloy Papers, Oil 4, Memorandum of Conversation with Crown Prince Fahd at the Royal Dirwan, January, 24, 1979. 114 Algosaibi, Arabian Essays. p. 118. 115 Riedel, Kings and Presidents, p. 65. 116 Zuhayr  M.  Mikdashi, Transnational Oil: Issues, Policies and Perspectives (London: Palgrave Macmillan: 1986), p. 111.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

293

framework that was unlikely to generate practical results. OPEC members and the most industrialized nations, now regularly meeting within the G7, were engaged in a dialogue of the deaf—each trying to gain support from oil-importing developing countries, while at the same time primarily focusing on internal priorities. The leaders of G7 were having bitter discussions on how best to limit oil consumption as a way to ease the upward pressure on prices and curb dollar depreciation. At the G7 meeting in Tokyo on June 29, 1979, the European Community fought collectively to keep its imports target at 1978 levels, while Japan, Canada, and the United States made a commitment to set import ceilings.117 Carter later recalled a sharp exchange with German Chancellor Helmut Schmidt: “we had luncheon and it became very bitter and unpleasant. Schmidt got personally abusive towards me when I pushed the individual target position. For instance, 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.”118 While in the period between 1973 and 1979 oil imports in Europe and Japan had declined by respectively 130 and 12 million tons, imports to the US over the same period had increased by 177 million tons.119 The final communiqué of the Tokyo summit included a strongly-worded paragraph against OPEC price increases, but at the same time left the door open to energy negotiations: We deplore the decisions taken by the recent OPEC Conference. We recognize that relative moderation was displayed by certain of the participants. But the unwarranted rises in oil prices nevertheless agreed are bound to have very serious economic and social consequences. They mean more worldwide inflation and less growth. That will lead to more unemployment, more balance-of-payments difficulty, and will endanger stability in developing and developed countries of the world alike. We remain ready to examine with oil-exporting countries how to define supply and demand prospects on the world oil market.120

Especially because of the pressures coming from some Western European governments, the following G7 in Venice in June 1980 would emphasize the need for stronger cooperation among consumers, and at the same time ask for negotiations with OPEC Countries. The Venice Declaration listed a number of measures to “break the existing link between economic growth and consumption of oil”: the use of a price mechanisms that reflected the market price for oil, energy saving for residential housing, the production of more fuel-efficient vehicles and diversification of oil supplies and energy sources. As regards the relationship with petrostates the G7 leaders declared that: “we welcome a constructive dialogue on energy and related issues between energy producers and consumers in order to improve the

117  Noel Bonhomme, “Le G7 face au coût de l’énergie: les limites de la concertation occidentale, 1975–1985”, in Annales d’histoire de l’électricité, 10:1, 2012, pp. 17–29. 118  Jimmy Carter, Keeping Faith: Memoirs of a President (New York: Bantam Books, 1983), p. 112. 119  Alessandro Roncaglia, The International Oil Market (London: Palgrave, 1985), p. 99. 120  Declaration of the G7 Summit, Tokyo, June 28–9, 1979: http://www.g8.utoronto.ca/summit/ 1979tokyo/communique.html (Consulted on January 29, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

294

The Rise and Fall of OPEC in the Twentieth Century

coherence of their energy policies.”121 The IEA Secretariat also asked for the convening of “coherent exchanges about energy alone,” as opposed to “unorganized development of producer/consumer relations through North/South Dialogue.”122 But in the meanwhile, momentous political changes had taken place in key consuming countries and these would eventually lead to confrontation rather than to dialogue with oil exporting countries. OPEC itself was concentrated on avoiding being singled out by the rest of the developing countries because of its price increases, and was trying to define a Long Term Strategy that could overcome internal differences. As after Six Day War of 1967, the effort to use OPEC as an instrument to diffuse radical pressures and to find a common ground, was coordinated by Yamani. This time with little success. OPEC began to come in for increasing criticism within the United Nations. This strong criticism could at the same time destabilize petrostates internally (for example in the case of pro-Palestinian militants in Gulf countries) and even threaten their territorial integrity. At the fifth UNCTAD Conference in May 1979, the Pakistani representative emphasized the sad reality that between 1968 and 1978 the trade deficit of the non-oil producing developing countries had grown from $11.3 billion to some $31 billion, while accumulated debts had exploded from $56 billion to $300 billion.123 At the OPEC Conference of June 1979 in Geneva, the Secretary General René Ortiz upped the ante by acknowledging that OPEC was now viewed as having a hand in the crisis underway: “so much so that some of those countries now saw OPEC oil pricing policies as a major cause of the economic development and balance of the payments problems.”124 True, oil price increases had contributed both to increasing external debt and current account deficits in many non-oil-exporting developing countries (NOPEC) from 1973 onwards, but the situation was in fact far more nuanced than commonly presented. The increase in external debt until 1979 was made easier to service by a parallel increase in inflation, as well as by the improvement in the terms of trade for other raw materials. Also debt problems were primarily concentrated in ten developing countries. Current account deficits where compensated in some of less developing countries, mainly in the Arab world and in Africa, by politicallymotivated OPEC bilateral and multilateral aid (in 1977 aid by OPEC countries was on average 2.65 percent of their GNP, while aid by OECD counties was 0.31 percent by their GNP).125 The problem was that further oil prices increases would have widely overshot price increase for other raw materials, and that most international debt held by LDCs had been accumulated towards commercial banks 121  Declaration of the G7 Summit, Venice, June 22–3, 1980: http://www.g8.utoronto.ca/summit/ 1980venice/communique/index.html (Consulted on January 29, 2019). 122  Henning Turk, “The Oil Crisis of 1973 as a Challenge to Multilateral Energy Cooperation among Industrialized Countries”, in Historical Social Research, 39:4 (2014), pp. 209–230. 123  AMPPRE, Interiori, Asuntos Petroleros, 1979, Memo, Informe sobre los temas energéticos tratados en la V Conferencia de la UNCTAD, Periodo: del 7-5-69 al 18-5-79. 124  NYUAD Library, ASC, GGC, MC-038, Minutes of the 54th Meeting of the Conference, Geneva, June 1979. 125  Paul Hallwood and Stuart W. Sinclair, Oil, Debt and Development: OPEC and the Third World (London: Allen & Unwin, 1981).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

295

and was short term, and with relatively high interest rates. A radical change in the financial climate and in interest rates would have had devastating consequences. The Venezuelan government suggested creating an OPEC News Agency to counteract Western propaganda against producers. Once again there were also discussions concerning the creation of a more permanent development fund, with contributions from both OPEC and the OECD countries. There were proposals to set aside a few cents per barrel to promote industrialization projects and refinancing the OPEC Special Fund, and there was an Iraqi proposal to channel any oil price increase towards the developing countries in order to shield them from imported inflation. None of these were accepted. At the following OPEC Conference in Caracas in December 1979, the Venezuelan President Luis Herrera Campins (with Algerian support) proposed the creation of a new bank for the developing countries, to be endowed with over $20 billion for the following decade. The Algerian representatives Belkacem Nabi noted that the proposed $800 million refinancing of the Special Fund had not yet taken place, while the cost of imports in the less developed countries had risen by $5 billion. Ultimately, the Conference decided to increase financing for the Special Fund by a total of $2.4 billion, in the absence of a more permanent mechanism for financial cooperation with the developing world (consider that between 1979 and 1981 petrostates had gained $255 billion while less developed countries had accumulateed a current account deficit of $244 billion). But OPEC clung stubbornly to its self-perception as the “spearhead of Third World.” The twentieth anniversary of OPEC’s founding to be held in Baghdad would be commemorated with a book written by Ian Seymour of the Middle East Economic Survey (MEES), as well with a film on the history of oil directed by the Algerian Lakhdar Hamina, a winner of the Cannes Film Festival in 1975 with a movie on the origins of the revolution against French colonialism in Algeria. In parallel with discussing measures to help developing countries, OPEC continued to debate its Long-Term Strategy (LTS), the most important component of which concerned prices. The meetings of the LTS committee, hosted by Yamani and made up of representatives from the five founding members, were frequently held at the London office of the Saudi national oil company PETROMIN or at Yamani’s country house in Surrey in order to provide for a relaxed environment that would favor cooperation and forward thinking. On one side, Saudi Arabia and the Emirates were in favor of moderation, reminding the other delegates that OPEC had not been established just to increase prices and that, sooner or later, overvalued prices would lead to a drastic reduction of consumption. On the other side there were the hawks, once again led by Iran, that wanted prices to equal those for alternative energy sources and aimed for production controls to avoid excess supply—production controls that were vetoed, yet again by Saudi Arabia. At the May 1980 OPEC Extraordinary Conference in Ta’if, Saudi Arabia, the only item on the agenda was the final report of the LTS committee, that by now had been convening for two years. The committee addressed three basic issues: the long-term price strategy, the relationship between OPEC and the developing countries, and the relationship between OPEC and the industrialized world. Yamani,

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

296

The Rise and Fall of OPEC in the Twentieth Century

as the host and coordinator of the group, summarized the committee’s work up to that moment: 1. Prices should be corrected in order to take care of the inflation rate, as well as of currency fluctuations; following this there should be an annual increase in real terms, to be related more or less to the GNP rate of growth in the industrialized countries and the cost of the other sources of energy (in case of a glut there should be production cuts). The Marker Crude should retain its position provided there is an agreement on differentials. 2. The OPEC Fund as it now existed should be given an identity, in other words it should be transformed into an international development agency [. . .]. 3. For relations with the industrialized countries, there had been a lengthy discussion as to whether a dialogue was required or not; eventually the Committee had felt the necessity for this and certain suggestions had been made as to what could be obtained from those industrial countries in lieu of what was given them, namely the security of supply. Mention had been made in this connection of access to the markets of the industrial countries, access to their technology, the removal of any existing barriers or sanctions, or at least some of them, against OPEC Member Countries; apart from this there was the issue regarding the possibility of finding certain solutions in the financial field.126 As confirmed by Fadhil Chalabi, the basic idea on prices was to establish a threshold, and then have prices move up gently and steadily in real terms in order to encourage some degree of conservation and compel the consumer countries to diversify their energy supplies. This idea was not so different from the one that had been put forward by the Trilateral Commission in 1978, broadly endorsed also by the Carter administration. Ali Akbar Moinfar, the Iranian representative, objected to this arguing that production levels and prices could not be crafted on the needs of the industrialized consuming countries, and that OPEC’s priority had to be the safeguarding of the oil reserves of its members, the promotion of their long-term interests in terms of socio-economic development, as well as an agreement on production levels to safeguard prices. He asked if any OPEC country would be willing “to deplete their resources in 20, 50 or 100 years” and warned that if they did not “exert their responsibility as a community” they would be endangering not only their own well-being but that of the “future generations of the world.”127 Later, the very same Chalabi would be once more very critical of the work to which he had contributed, arguing that the group was “completely out of touch with the economic realty” and the Long Term Strategy was “instilled with the doom-laden belief that, as the world was about to run out of oil, oil production

126  NYUAD Library, ASC, GGC, MC-038, Minutes of the 56th (Extraordinary) Meeting of the Conference, Taif, Saudi Arabia, May 1980. 127  NYUAD Library, ASC, GGC, MC-038, Minutes of the 59th Meeting of the Conference, Bali, Indonesia, December, 1980.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

297

must be curtailed, demand must be curbed and consumers must abandon or at least conserve oil.”128 The OPEC meeting set for September in Vienna was supposed to pave the way for the summit in Baghdad, where the organization’s Long Term Strategy would be solemnly unveiled as part of the twentieth anniversary celebrations. During the meeting there was talk of an excess of supply on the global oil market that could put pressures on prices. There was a debate on the need for a better inflation index to decide on future oil prices increases. There was talk of an automatic adjustment mechanism for prices based on a basket of nine currencies. There was even talk of a mechanism to control production with a formula based on historic production levels, exports, proven reserves, and individual development needs. The delegates decided against any direct talks with the OECD countries, much less with the International Energy Agency, and confirmed the priority of global dialogue on energy and development issues under the auspices of the United Nations. Petrostates still believed themselves to be sailing with the wind at their backs. Their spirit was not too far away from that of the 1975 Algiers Summit. While in 1978 OPEC current account balance was in deficit, by 1980 it had a surplus of 111 billion.129 In the summer of 1980 Walter Levy, once again, announced the tragedy looming over a Western order that would not be able to maintain its “cohesion” nor to provide for its citizens due to the “onslaught of future oil shocks.”130 Then, on September 17, 1980, the very final day of the Conference, Iraq announced it was formally abrogating the 1975 Algiers agreement with Iran (which, among other things, defined the borders between the two nations), marking the beginning of one of the bloodiest conflicts in the Middle East—the first of many that would devastate the region to this day. * * * War had been in the offing between Iran and Iraq for some time. The leader of the Iraqi Dawa party, Muhammad Baqir Al-Sadr, had been arrested following the assassination attempt against Tariq Aziz. After massive protests among the Shi’ite community, more than 30,000 people were expelled to Iran. While tensions showed little signs of easing, with Iranian propaganda only fanning the flames, Saddam Hussein decided on September 17 to reclaim the entire Shatt Al-Arab and thus consolidate his hold over the country. He was well aware of the need to reinforce his legitimacy, be this through elections or in some other way: “the problem is not one of time, or one of occupation from external power, the real crisis, fundamental and historical, is the isolation of the ruler from its people.”131 He also hoped to recover part of “Arabistan” in southern Iran, and thus to obtain control over the vital Gulf waterway. He believed he could count on the general support of 128 Chalabi, Oil Policies, Oil Myths, p. 173. 129 Mohammed  E.  Ahrari, OPEC: The Failing Giant (Lexington: University of Kentucky Press, 1986), p. 158. 130  Walter J. Levy, “Oil and the Decline of the West”, in Foreign Affairs, Summer 1980. 131  Adeed Dawisha, Iraq: a Political History from Independence to Occupation (Princeton: Princeton University Press, 2009), p. 229.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

298

The Rise and Fall of OPEC in the Twentieth Century

Arab public opinion and of fellow Arab countries in this venture, while taking advantage of the precarious political and economic conditions afflicting rival Iran. But Saddam’s move had unintended consequences. It allowed the new Islamic government to rally popular support for Khomeini, exploiting both Iranian nationalist sentiments as well as ethnic resentment against their Arab neighbors. Khomeini grew from an acclaimed religious leader into an icon of national unity and resistance. The OPEC Baghdad summit had to be cancelled (proving it had been a wise decision not to establish the seat of the organization in the Iraqi capital), and the last OPEC Conference of 1980 was held in Bali in December. The Indonesian island, now a glamorous destination for travelers in search of the peaceful and the exotic, offered an atmosphere diametrically opposed from that of the war then raging in the Middle East. And yet the echoes of the conflict were impossible to fully repress. The hotel where the Conference was held, owned by Indonesian national oil company PERTAMINA, had been fenced off for the occasion, with all points of access guarded by a total of more than 2000 soldiers. Both Iranian and Iraqi bodyguards refused to hand over their weapons anyway. The new Iranian Petroleum minister, Mohammad Javad Tonguyan, had been taken prisoner in the course of the Iraqi army’s advance. The solution devised by the Indonesians to allow the meeting to proceed—the Iranians were opposed to starting discussions in the absence of their official delegate—was rather creative: a portrait of minister Tonguyan was placed on one of the chairs at the delegates’ table (Fig. 6.5.). Another member of the Iranian delegation took the floor to denounce Iraq’s unilateral abrogation of the Algiers agreement and offered himself as a prisoner in the minister’s stead. Another problem requiring solution consisted of Iran’s insistence in recording their accusations against Iraq in the official minutes of the Conference, something that Iraq obviously rejected and that alarmed the other delegations for its injection of “politics” into OPEC decision-making. According to British observers,the Indonesian minister of Mines Dr Subroto: told the Conference the Indonesian proverb of the Simalakama fruit: a son is given a fruit to eat and told that if he eats it his father will die and if he doesn’t his mother will die. Dr. Subroto suggested to his fellow Ministers that his dilemma over Iranian statement was of this kind. They therefore agreed not to force a decision, and thereby sidestepped the last real threat at the Conference on the unity of OPEC.132

Indonesia could claim victory in that the conference went ahead as planned, and that the organization didn’t fall apart. But the tone of the meeting was obviously heated, particularly on the subjects of production controls, still rejected by Saudi Arabia, and of prices, considered far too high by the Kuwaitis, the Saudis, and the Emiratis. The UAE minister Mana Al-Otaiba remarked that: Prior to the 1973 price adjustment, the price of their crude had been US$ 3 per barrel, whereas it was at that moment in time more than US$30 and he did not think that 132  TNA, FCO 96/1260, OPEC Ministers’ Conference—Bali December 1980, December 30, 1980.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



Uneasy Dialogue

299

Fig. 6.5.  At the OPEC Conference meeting in Bali in December 1980, the Iranian delegate to OPEC sits next to the portrait of the Iranian Petroleum minister then held captive by Iraqi military forces. (AP Images, Id: 98853415334).

during the past seven years inflation had increased by ten times: that, he concluded, was an argument they presented to the outside world but he did not think they really believed is amongst themselves.133

Needless to say, while OPEC had managed to survive the outbreak of a war between two of its founding member states, its efforts to define a long-term policy failed. The Bali Conference ended, once again after the “Doha split”, with a twotier price for petroleum: a marker of $32 a barrel for Saudi Arabia and the price moderates (Saudi Arabia was thus able to increase its production to 10mbd) and one of $36 for the rest of the OPEC countries. It was on this note that the “decade of OPEC” came to a close. 133  NYUAD, ASC, GGC, MC-038, Minutes of the 59th Meeting of the Conference, Bali, Indonesia, December, 1980.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

300

The Rise and Fall of OPEC in the Twentieth Century

At the end of the 1970s, the five-year window of opportunity for an international dialogue on energy and at the same time for a comprehensive reform of international trade and finance had been definitively slummed shut. Until 1977 OECD countries had dragged their feet, but finally participated to the, basically unsuccessfu,l North–South dialogue together with petrostates and other developing countries. Between 1978 and 1980, in a situation dominated by booming prices on the “spot market” (high prices that were also encouraged by new producers such as the British BNOC and the Norwegians), OPEC was unable to play the role of a stabilizer, while most petrostates were unwilling to enter into a dialogue with key oil consumers. Saudi Arabia’s effort to rebuild a new “price structure,” based on moderate price increases but with no commitment to “prorationing,” failed once OPEC’s Long Term Strategy was shelved with the outbreak of the Iraq–Iran war. By the beginning of the next decade a new revolution was about to take place; one that would make all talk of “energy crisis” look like a distant memory.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

7 The Failed Cartel They think it is a ghost. The British are very kind to ghosts, but they are not very kind to that ghost. They wanted it to disappear. [. . .] We cannot think in terms of OPEC disappearing. So this in itself is an incentive for us to agree in the end.1 Manuel Pérez Guerrero, 1983 The oil price decline of the 1980s has been a triumph not of government, but of the free market; and not of political leaders but of freedom itself.2 Ronald Reagan, 1986

I still remember the first time I watched Back to the Future, Robert Zemeckis’ science-fiction blockbuster first screened in 1985. In its final sequence Marty McFly, returning to the present after having altered his parents’ past, walks to his family’s garage to find himself the owner of a gleaming black Toyota 4WD truck.3 A couple of years later, a teenager myself, I was craving an Atala scooter with a 50cc engine. It felt like being the King of Rome on those two wheels that on a downhill hardly reached 40 kmh (25 mph)! I could not even imagine that on the other side of the Atlantic someone my age could seriously think of owning a 4WD pickup to go to the movies. Between 1981 and 1986, the oil price plummeted from nearly $40 per barrel to less than $10. The price of gasoline in the US fell by more than 40 percent over the same period.4 Fuel economy became less important than horsepower in determining consumer choice, at least in the US. Faith in the American way of life had been finally restored and the energy crisis of the 1970s now seemed a distant memory. Debates over “peak oil” faded away in the midst of the oil glut. In the 1970s OPEC had been the specter haunting the nights of Western political leaders and consumers, specially in its embodiment as a wealthy Arab sheiks. Now the ­organization was now struggling for its very survival.

1  United Nations Oral History Project, Interview to Manuel Pérez Guerrero (27 April 1983), online at: http://dag.un.org/bitstream/handle/11176/400569/PerezGuerrero27-28Apr83TRANS. pdf?sequence=1&isAllowed=y (Consulted on January 30, 2019). 2  UCSB, American Presidency Project, Radio Address to the Nation on Oil Prices (April 19, 1986): http://www.presidency.ucsb.edu/ws/index.php?pid=37156 (Consulted on January 30, 2019). 3  But the movie also briefly showed a futuristic car in the form of a flying DeLorean fueled by recycled waste. 4 Pirani, Buring Up, p. 128.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

302

The Rise and Fall of OPEC in the Twentieth Century

A few figures help to understand the extent of the challenge faced by OPEC countries in the first half of the 1980s. While in 1977 the IEA predicted that OECD imports from OPEC countries would increase from 23 mbd in 1976 to 33 mbd in 1985; between 1979 and 1985 OPEC was actually forced to reduce output by 10 mbd to compensate for an increase of 6 mbd in non-OPEC production, as well as for reduced consumption by industrialized countries.5 While in 1973 petroleum represented 53 percent of the OECD energy mix, by the middle of the 1980s it had fallen back to 42 percent, particularly because of the huge reduction in the demand for fuel oil that could be easily substituted with coal, gas, and nuclear energy for power generation. By 1986 OPEC-controlled oilfields could no longer constrain growth and energy consumption in the industrialized world. Nobel Prize-winning economist Milton Friedman had predicted the end of OPEC as early as March 1974: The world crisis is now past its peak. The initial quadrupling of the price of crude oil after the Arabs cut output was a temporary response that has been working its own cure. Higher prices induced consumers to economize and other producers to step up output. It takes time to adjust so this reactions will snowball. In order to keep prices up, the Arabs would have to curtail their output by even larger amounts. But even if they cut their output to zero they would not for long keep the world price of crude at $10 a barrel. Well before that point the cartel would collapse.6

From 1982 to 1985, OPEC tried for the first time in its history to transform itself into a cartel and stop the free fall in prices. It sought to exert control over both crude oil production (the pro-rationing invoked by the Venezuelans all the way back from 1949) and global prices. Saudi Arabia eventually woke up to the nightmarish scenario described by Friedman, constantly having to reduce its own output to prop up the price of oil. After three years of heated debates, so severe that they also prevented the organization from selecting a new Secretary-General, OPEC was forced to throw in the towel. OPEC had finally tried to transform itself into an “ecological force,” as Pérez Alfonzo had asked for a long time, but it proved to be to late. R E L AU N C H I N G T H E A N G L O C E N E The Anglo-American petrocapitalism had given birth to the concessions system in the Middle East between the 1920s and the 1930s, and had transformed crude oil into the world’s primary energy source. The oil majors had been progressively weakened from 1960 until the oil revolution of the 1970s, with OPEC governments now taking full control over their petroleum industry, and international companies left to recalibrate their long-term strategies. From the point of view of 5  Majid Al-Moneef, “Saudi Arabia and the Countershock of 1986”, in D. Basosi, G. Garavini, and M. Trentin (eds.), Counter-shock: The Oil Counter Revolution of the 1980s (London: I.B. Tauris, 2018), pp. 99–117. 6  Milton Friedman, Newsweek, March 4, 1974.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

303

CO2 emissions due to fossil fuels combustion, as noted by Bonneuil and Fressoz, the Anthropocene can actually be called the “Anglocene”: Great Britain and the US made 60 percent of cumulative total emissions to date in 1900, 57 percent in 1950 and almost 50 percent in 1980.7 The elections of Margaret Thatcher in Great Britain in 1979, and subsequently that of Ronald Reagan in the United States in 1980, coincided with an effort to re-launch an Anglo-American energy order that would overcome the numerous constraints imposed by OPEC on the energy consumption and, more broadly, on the international economy. * * * Through the end of the 1970s the Third World countries, with OPEC still acting as their spearhead, were still seen as a force to be reckoned with.8 OPEC’s LongTerm Strategy in 1980 was based on the very optimistic premise that oil prices would increase and that some of the lavish proceeds would have to redistributed toward the less developed countries. OPEC’s analysis that prices were one the rise was widely shared by experts and international agencies. Fadhil Chalabi remembers that the studies by OPEC and by widely respected specialists such as Robert Mabro converged “with those of the US Energy Department, of EXXON, the IEA and others, all conveying the same theme of an imminent dearth of energy resources.”9 The Independent Commission on International Development Issues (better known as the Brandt Commission), chaired by the former German socialdemocratic Chancellor Willy Brandt and sponsored by the World Bank, in its first report published in 1980 deemed stabilization of commodity prices and energy issues as two primary areas of cooperation between the Global North and Global South. As Abdlatif  Y.  Al-Hamad, the chairman of the Kuwaiti Fund for Arab Economic Development and a member of the Brandt Commission, declared: “the most powerful instrument of the South is oil. Therefore, the best symbol of interdependence between the North and South is energy supply.”10 In a June 1980 statement, the executive body of the European Community (EC), the European Commission, pointed to a possible cooperation with raw materials producers, even one based on indexing prices of manufactured goods to those of commodities.11 That same month, the Venice European Council—the summit of heads of State and government of the EC—endorsed the idea of reviving the dialogue with oil producers on the possible creation of a common fund for the stabilization of raw materials prices.12 7  Bonneuil, and Fressoz, The Shock of the Anthropocene, p. 76. 8  For a “pessimistic” view of the impact of the Third World on international policies: Stephen D. Krasner, Structural Conflict: The Third World Against Global Liberalism (Berkeley: University of California Press, 1985); For an “optimistic” view: L.S. Stavrianos, Global Rift: The Third World Comes of Age (New York: William Morrow & Co., 1981). 9 Chalabi, Oil Policies, Oil Myths, p. 169. 10  Archives TOTAL, P.H. Frankel, TOPICAL PROBLEMS: Brandt Commission and OPEC Long Term Strategy Committee. 11  TNA, EG 14/81, Secretary of State for Energy, EEC/Gulf, June 30, 1980. 12  Giuliano Garavini, “Western Europe and the Long Energy Crisis of the 1970s”, in Claudia Heipel (ed.), Europe in a Globalizing World: Global Challenges and European Responses in the “Long” 1970s (Baden Baden: Nomos, 2014), pp. 147–65.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

304

The Rise and Fall of OPEC in the Twentieth Century

The most important meeting to engage in this effort was set for the fall of 1981: the North–South Summit in Cancun, to be hosted by the government of Mexico, a country that had recently become (once again) a major oil exporter.13 French President François Mitterand chose Régis Debray, the friend of the Cuban revolution, as a special advisor on Foreign policy, and pushed hard, along with Canadian Prime Minister Pierre Trudeau, to make the North–South dialogue a success: Why did France not join the International Energy Agency? Why does it not intend to join? For one extremely simple reason. I told you before that there were two vastly different scenarios: ⁃ The scenario relative to the absence of a world organization (one we will find ourselves in if we do nothing); ⁃ And one of an ordered world, that of a global concert. There are two ways to achieve a global concert. There is the “strong” way: that which at one time inspired the creation of the International Energy Agency, the rationale being the following: since there is a cartel of producers, we must create a cartel of consumers [. . .] The French government at the time was convinced that there is another way to achieve a concert: that which consists of discussing things as calmly and correctly as possible.

The United States and Great Britain put up instead a resolute opposition to what they now considered the tired ritual of global economic negotiations. Mitterrand encouraged Reagan to discuss the renegotiation of the debt of developing countries and other measures that would favor Third World exports. Reagan answered by cutting US development aid by 15 percent. Thatcher did likewise. Shortly before the Cancun summit, the US representative to the IEA declared that: “an agreement with OPEC countries on prices was not compatible with the economic attitudes of the new US Administration which favored laissez faire, budget cuts, and putting domestic economy in order before negotiating abroad.”14 He added that “OPEC’s expectations for a quid pro quo—on technology, indexation, etc.—were exaggerated.”15 The British minister for Foreign Affairs talked along the same lines: “did anybody believe that if we had met this demand at the CIEC in reply for supply and price assurances, these assurances would happen to be honored by Khomeini?.”16 In the event, the Cancun summit held in October produced little more than a  tropical photo op for the twenty-two heads of State and government: the Philippines President Ferdinand Marcos in all white, Mitterrand in suit and tie, Reagan in a polo shirt, Indira Gandhi in an elegant sari, all arrayed before a resplendent Caribbean beach. Margaret Thatcher, referring to Cancun, would later note t­riumphantly: “we were not to know it at the time, but 1981 was the

13 Guia Migani, “The Road to Cancun: the Life and Death of a North-South Summit”, in Mourlon-Druol and Romero (eds.), International Summitry and Global Governance, pp. 174–198. 14  TNA, EG 14/83, Letter to the Energy Secretary, Consumer Producer Dialogue: Informal Discussion (Paris, 31 March), April 6, 1981. 15  Ibidem. 16 TNA, EG 14/81, UK/Norwegian Co-ordinating Committee Meeting at D/Energy, London—16 JUL 1980, July 18, 1980.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

305

last year of the West’s retreat before the axis of convenience between the Soviet Union and the Third World.”17 The head of OPEC’s press service, James Wilkie, sensed how the cultural and political climate in industrialized countries was quickly turning against “thirdworldist” rhetoric. With OPEC being the most recognizable embodiment of efforts at Third World economic cooperation, Wilkie published in 1981 a very comprehensive (and defensive) note on its international role. He highlighted that: while the organization was still identified with the 1973 embargo, only seven out of its thirteen members were Arab countries, that the population of its Arab members was 45 million out of a total of 282 million, and that by 1980 OPEC’s Fund had distributed 4 billion dollars in loans to seventy-six developing countries. “Western suspicion and hostility towards OPEC,” he added: Can without doubt be attributed partly to ignorance, and partly to the very real fear of losing control over their economic lifeblood as the oil-producing nations progress towards full management and control of the hydrocarbon industry in their sovereign territories. One intangible factor, however, is almost certainly a subconscious and ingrained felling of superiority on the part of the white races, coupled with an ­unspoken resentment at seeing other peoples undertaking activities which were until recently the prerogative of the Western world.18

Accusing the West of racial prejudice could do little to counteract the powerful combination of a strengthening dollar, rising interest rates, economic stagnation and thus reduced imports by the industrialized world, all of which were causing the debts in many Third World countries to explode.19 While OPEC’s own role in the transformation of the “energy crisis” into a “debt crisis” has been inflated, petrostates now were at the very center of a new critique of the “developmentalist state” and of its claims to redistribute wealth both among its own citizens and between different nations.20 As argued by Odom Getachev: “surveying the p ­ olitical crises of secession, famine and state repression, observers concluded that the right to selfdetermination, with its collectivist and statist claims, was now passé.”21 This new critique, at its most radical such as in Peter Bauer, rejected the whole development aid logic which it accused of transferring the money “from the poor people in rich countries to the rich people in poor countries.”22 Thomas Walde, a recognized authority on international mineral law, neatly summed up the new cultural and ideological winds blowing from the Atlantic in the face of the sponsors of the New International Economic Order: One might be tempted to view some facets of the NIEO debate as the struggle of the “rich of the poor” against the “poor of the rich.” There was also a prevailing attitude of 17  Margaret Thatcher, The Downing Street Years (London: Harper Collins, 1993), p. 157. 18  James Wilkie, The Unknown OPEC: Putting the Record Straight, OPEC Press Service, 1981. 19 James  E.  Cronin, Global Rules: America, Britain and a Disordered World (New Haven: Yale University Press, 2014), p. 101. 20  On the rise of individual human rights and the crisis of the developmentalist state in the 1980s: Samuel Moyn, Not Enough: Human Rights in an Unequal World (Boston: Belknap Press, 2018). 21 Getachev, Worldmaking after Empire, p. 180. 22  Quoted in Diane Coyle, The Soulful Science: What Economists Really Do and Why it Matters (Princeton: Princeton University Press, 2010), p. 82.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

306

The Rise and Fall of OPEC in the Twentieth Century

scapegoatism and externalization of responsibility: The then prevailing models, widely taught in universities around the world—and probably still underlying much of our senior colleagues’ conceptual toolbox, suggested that underdevelopment was the exclusive responsibility of the rich countries. Internal failings—such as the lethargy, inefficiency, and corruption involved in the statist model of economic development, unequal distribution of wealth, lack of a culture encouraging entrepreneurship and initiative, a stifling system of bureaucratic overregulation, lack of political stability; overconsumption by a politically powerful military feeding off national chauvinism against neighboring states, existing historic border disputes or ethnic divisions, were conveniently disregarded or added to the accusations against the developed world. Many developing countries were—and many still are—essentially “proto-states”: They show the trappings of modem statehood—constitutions, laws and ambassadors, but do not have the strength of a modern state—cohesion, strength and effectiveness of public institutions, of public infrastructure, safety, education and healthcare, to name the most important.23

As late as 1979, while speaking about “national sovereignty and multinational enterprise”, C.C. Pocock—for three decades managing Director of Shell and later head of the London Business School—lamented the long list of obstacles then prevailing for multinationals and international capital: foreign investment was seen by the developing countries as a “relic of colonialism”; international fora (such as UNCTAD) proposed “over-ambitious conditions and unrealistic controls”; trade union leaders put up “sterile attempts to exercise trade union influence across national borders”; while “the greatest worry is the argument about control.” He closed his remarks by saying that “the world is not ready for international economic government.”.24 In just a matter of a few months, Pocock would be able to breathe a great big sigh of relief as the North–South dialogue failed, and with it down went most of the talk about regulating foreign investments, controlling m ­ ultinational companies, redistributing global wealth towards raw materials producers. * * * The 1970s had been a decade of inflation-generating oil price shocks, of Western governments perceived as “hostage to OPEC”, of public scrutiny over Big Oil, of long lines at the pump, all of this coupled with price controls and growing government interventionism in energy policy. Bringing down oil prices would, on the other hand, boost consumer confidence, help keep inflation in check, rebalance the current account, and corner all those who kept invoking more government intervention as a solution to the crisis. The scalp of OPEC, from the point of view of the British and American “neoconservative” leaders of the 1980s, would bring back home a political, economic, and moral victory over the forces of state planning at both the national and international level.25 23  Thomas Walde, “A Requiem for the ‘New International Economic Order’: The Rise and Fall of Paradigms in International Economic Law”, CPMLP Discussion Paper, n. DP 8. (June 1995). 24 C.C. Pocock, Address to the international Business Club, “National Sovereignty and Multinational Enterprises”, Harvard, University, February 20, 1979. 25  Daniel Rodgers, Age of Fracture (Cambridge: Harvard University Press, 2011), pp. 41–77.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

307

The United States were one of the biggest oil producers in the world and, starting from 1948, it had become also the largest oil importer. Reagan could use two different strategies to weaken OPEC and lower global crude oil prices. The first was to reduce significantly domestic oil consumption. The second was to increase domestic production of both oil and “alternative” energy sources. Both strategies had already been initiated and implemented, as we have seen, under the previous administrations, and in particular under Carter. Reagan was lucky enough to b­ enefit from the tough political choices of his predecessors. Reagan’s personal contribution to solving the “energy crisis” was to wipe Carter’s policies clean of any references to the need to alter the American way of life, of its criticisms of consumerism, and of most measures to tax the excessive profits generated by the oil companies (taxes on oil companies were actually lowered, while the “windfall profit tax” was eliminated altogether in 1988). He also avoided further tightening of the fuel efficiency standards for cars, and reigned in government expenditure for research in alternative energy sources.26 Reagan focused instead on the success of “decontrol”. Upon his election, even before his inaugural speech, Reagan had drafted an executive order to eliminate all residual crude price controls. In his autobiography, he called this measure: “my first effort to liberate the economy from excess government regulation.”27 During the electoral campaign he had railed against the waste and red tape paralyzing the department of Energy, and had threatened to eliminate it altogether—something he later backed away from, choosing instead to curtail its role. When he presented his first National Energy Plan to Congress in July 1981, he began by saying that: Our national energy plan should not be a rigid set of production and conservation goals dictated by Government. Our primary objective is simply for our citizens to have enough energy, and it is up to them to decide how much energy that is, and in what form and manner it will reach them. When the free market is permitted to work the way it should, millions of individual choices and judgments will produce the proper balance of supply and demand our economy needs.28

Reagan did not view natural resources as finite, or as a possible constraint on the potential of the homo economicus. In his more lyrical and evocative speeches, he explained how the American work-ethic, knowhow, and technology could even transform the desert into a garden of Eden. The decontrol of crude prices between 1979–80, the depressive effects of the economic crisis produced in the early 1980s by the US soaring interest rates (German Chancellor Schmidt would famously define prevailing real interest rates in 1981 as the highest “since the birth of Jesus Christ”) and the stronger dollar, combined with the delayed impact of the energy-saving measures enacted by the Ford and 26  On Reagan’s oil policy in the 1980s: Victor McFarland, “The United States and the Oil Price Collapse of the 1980s”, in D.Basosi, G. Garavini, M. Trentin (eds.), Counter-shock, pp. 259–78. 27 Ronald Reagan, An American Life: The Autobiography of Ronald Reagan (New York: Gallery Books, 1999), p. 227. 28  UCSB, American Presidency Project, Message to the Congress Transmitting the National Energy Policy Plan (17 July 1981): www.presidency.ucsb.edu/ws/?pid=44096 (Consulted on January 30, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

308

The Rise and Fall of OPEC in the Twentieth Century

Carter administrations during the 1970s, effectively reduced oil consumption in the United States. This was matched by an even greater drop in consumption in the rest of the OECD countries. Economic growth and increases in petroleum consumption no longer seemed to be going hand in hand in OECD countries. Between 1979 and 1985, the GDP of OECD countries grew at an average rate of 2 percent, while demand for petroleum declined at an average rate of 3 percent per year. Matthieu Auzanneau has pointed out that in 1973, one-quarter of electricity in the OECD nations was produced with diesel fuel, whereas in 1980 that figure had fallen to one-tenth.29 In Western Europe, petroleum accounted for 62 percent of all energy consumption in 1973, but only 45 percent by 1985, and the target for the European Community was get petroleum below 40 percent energy consumption.30 The decline in oil consumption relative to GDP was more significant in Western Europe and Japan than in the United States in part because reduction in crude oil prices was soon compensated by an increase in excise taxes on gasoline—acting as a brake on any possible increase in consumption. Only toward the end of the 1980s did oil consumption in the industrialized nations return to pre-1979 levels. Reagan was far less successful, however, in expanding US domestic oil production. Despite slashing corporate taxes (and despite the fact the department of Energy kept funding the development of new technologies, such as hydraulic fracturing, that would have a massive impact in the future) US output did not experience a significant increase. In a symbolic gesture against government meddling with energy choices, and as a token of his ultimate triumph over OPEC, Reagan had the solar panels installed by the Carter administration removed from the roof of the White House in 1986. * * * The strategy of increasing oil production as a means of overcoming the energy crisis and hit directly at OPEC’s market power was instead fully deployed on the other side of the Atlantic. Margaret Thatcher could fight OPEC with a weapon that Reagan could not wield. The North Sea was the most important new oil region in the world, and the petroleum extracted from its depths could be used as a lever to influence the global oil market. North Sea oil allowed Thatcher to achieve three goals at once, and in so doing etch her place in the history of the twentieth century. First North Sea oil could be used as tool to weaken OPEC: it offered a source of non-OPEC production that in the span of a few years surpassed 2.5 mbd. Second, Thatcher could experiment in the North Sea with a new model of natural resource governance extremely favorable to the private companies: the hydrocarbons sector was in fact the very first in which the British state began its dramatic retreat from controlling the commanding heights of the economy. Finally, the availability of North Sea crude was essential to overcome the most serious political threat to the Thatcher 29  Matthieu Auzanneau, Or Noir. La Grande Histoire du Pétrole (Paris: Éditions la Découverte 2015), p. 45. 30 Chalabi, Oil Policies, Oil Myths, p. 170.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

309

government (as it had been for the previous conservative governments): the strike wave led by the powerful National Union of Mineworkers (NUM) led by Arthur Scargill (Fig. 7.1.). This epic labor battle, something between a civil war and national psychodrama, lasted from 1984 to 1985 and involved more than 140,000 workers, making it the largest strike since the titanic, and equally unsuccessful, general strike of 1926 to protect miners from wage reductions and worsening labor conditions. Mother Nature had come to the rescue of the Thatcher government, whose policy of tax reductions (cutting the highest bracket from 83 percent to 60 percent, and the midrange bracket from 33 percent to 30 percent), without compensation from other income sources, would have otherwise bankrupted Britain or lead to social turmoil. From 1979 to 1982 oil rents represented roughly 8 percent of British tax revenues, while in 1981 they allowed Great Britain to record the first positive trade balance since WWII. Despite a fiscal regime extremely favorable to oil companies, which could for example recoup all their investments before paying taxes, the combination of royalties and of the Petroleum Reserve Tax (PRT) allowed the British state to replenish its increasingly empty coffers. The BNOC, which had the right to purchase and resell almost half the oil produced in the North Sea, did nothing to restrain the price of oil, despite pressing demands from the British partners of the European Community. Thatcher did not repay Nature’s generosity. In her memoirs, she never once mentions the riches of the North Sea as a factor playing out in her political success.

Fig. 7.1.  Mass rally of striking miners in Mansfield (UK) in May 1984. (The Daily Mail, 3 March 2014).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

310

The Rise and Fall of OPEC in the Twentieth Century

In a TV interview at the height of the conflict with British coal miners in 1985 she was very clear about the marginal role natural resources played in her conception of the economy: “I regard coal as a bonus; I regard oil as a bonus.”31 Oil never entered into the British collective imagination the way it did in the United States, for example with the television soap opera Dallas, the epic story of the Ewing family, ruthless proprietors of Ewing Oil.32 By remaining silent about the deep water ally, Thatcher further fueled the myth that the economic “recovery” of the early 1980s (the manufacturing sector fell by 25 percent during the decade and ­unemployment rose significantly) was simply due to the success of market-oriented policies and privatizations. In 1981 the Thatcher government had been humiliated once again by the coal miners and had been forced to renounce plans to cut coal production and investment. After the 1982 victor in the Falklands War, which bolstered Thatcher’s extremely low popularity, the new Energy secretary Nigel Lawson took his battle toward the state industries in the energy sector, considered responsible for keeping prices too law, for irrational over-investment in capacity, and for being unable to keep labor costs under control. Echoing Reagan, Lawson declared that “I do not see the government’s task as being to try to plan the future shape of energy production and consumption,” but that “our role is rather to set a framework which will ensure that the markets operates in the energy sector with a minimum of distortion.”33 The revolution in the energy market was to start in the hydrocarbons sector. Royalties were lowered in 1983 and again in 1989 before being finally abolished altogether. The primary fiscal tool to recoup the oil rent, the PRT, was ­redesigned midway through the 1980s, then reduced by 50 percent in 1993, and finally eliminated entirely for all new oilfields. At the same time, the BNOC— which sold significant portion of North Sea oil—was privatized in two phases, the first in 1982 and the second in 1985. The government also freed itself in stages from its share in British Petroleum. In 1977, the state controlled 51 percent of BP, in 1981, that share was 46 percent, in 1983, 31.5 percent. In 1987 the Company was entirely privatized, with a farewell to the legacy of Winston Churchill. In terms of their overall value, the privatizations in the hydrocarbons sector, including gas, were by far the most significant privatizations in Great Britain and contributed to overturning the nationalization consensus that existed had prevailed in energy sector after WWII. The combination of all these measures helped establish the British North Sea as the “freest” oil region in the world. As a result, crude oil produced from the Brent field, the main crude produced on the UK continental shelf, became a reference for global oil prices. As Robert Mabro explained: at the beginning of the 1980s only Brent crude had the characteristics of relevant volume, variegated ownership, an 31 Margaret Thatcher on TV Eye, 1985: https://www.youtube.com/watch?v=uDx-6pEohE4 (Consulted on April 16, 1985). 32  Christopher Harvie, Fool’s Gold: The Story of North Sea Oil (London: Penguin, 1995). 33  Dieter Helm, Energy, the State, and the Market: British Energy Policy Since 1979 (Oxford: Oxford University Press, 2004), p. 44.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

311

institutional framework favorable to business and low taxation, to make it appealing for traders and to encourage the creation of a major financial market for ­petroleum futures.34 Juan Carlos Boué described the crucial role played in the history of oil by the British North Sea crude: For example, on the technological front, the UK North Sea was the place where the offshore petroleum industry not only first ventured into water depths significantly greater than those encountered in its birthplace (the US sector of the Gulf of Mexico) but also had to develop new ways of coping with an unprecedentedly harsh marine operating environment. On an industrial economics front, the genesis and expansion of forward and futures markets for Brent crude oil were at the forefront of marketisation and financialisation processes whereby the international oil trade assumed an inverted pyramidal structure, with the bulk of the volume of oil traded being priced on the basis of signals emitted from a small set of paper and cash markets with a narrow output base, but whose joint trading volume is a large multiple of daily global crude oil production. On the global macroeconomics front, the significant incremental flows from the North Sea at a time of rapidly contracting demand made a key contribution to the demise of the administered price structure that the Organisation of the Petroleum Exporting Countries (“OPEC”) had sought to erect after its most important members began to sell directly the oil that had been commercialised by their erstwhile concessionaires. And one should not forget that the UK North Sea was also at the forefront of the process of redefinition of the economic frontiers of the State: the disposal of state-held North Sea oil and gas assets—specifically, the upstream interests of both the British National Oil Corporation (BNOC) and British Gas and, arguably, the British government’s shareholding in British Petroleum—proved to be the spearhead of a privatisation wave that was to sweep Great Britain, first, and then the much of the rest of the world, during the 1980s and early 1990s.35

The availability of oil from this “deregulated” oil region was also essential for Thatcher to defeat the most powerful British labor union once and for all. In 1984–5 the abundance of cheap oil was critical to overcome the embargo on the provision of coal to British power stations by converting them to heavy oil (Fig. 7.2.). The quantity of diesel burned by those plants grew from 131,000 tons in the first week of the strikes to as much as 650,000 tons, thus allowing an uninterrupted supply of electricity to British consumers.36 For the Thatcher government the fight against the constraints of the “labor standard,” when it came to national coal production and power generation, and the fight against the “OPEC standard,” when it 34  Paul Horsnell and Robert Mabro, Oil Markets and Prices: The Brent Market and the Formation of World Oil Prices (Oxford: Oxford University Press, 1993), pp. 1–31. 35 Juan Carlos Boué, “The 1973 Oil Shock and the Institutional and Fiscal Framework for Petroleum Exploration and Production Activities in the UK North Sea”, in A. Beltran, E. Bussière, G.  Garavini (eds.), L’Europe et la question énergétique. Les années 1960/1980 (Brussels: Peter Lang, 2016), pp. 233–53. 36  John Kemp, “Thatcher’s Secret Weapon in the Miners’ Strike Shut: Ending an era”, Reuters, April 1, 2015: https://www.reuters.com/article/us-britain-electricity-oil-kemp/thatchers-secret-weapon-inminers-strike-shuts-ending-an-era-kemp-idUSKBN0MR2B520150401 (Consulted on January 30, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

312

The Rise and Fall of OPEC in the Twentieth Century

Fig. 7.2.  The Statfjord B platform in the Norwegian North Sea became operational in 1982. At the time this “monster” was the world’s largest concrete platform, testifying to the gigantic financial and technological effort to develop North Sea oil. ((https://commons.wikimedia.org/wiki/File:Statfjord_B_(DEX_PR_000829).jpg).

came to the international petroleum market and prices of raw materials in general, marched in parallel and reinforced one another (on the other hand, it could be argued, OPEC’s “oil revolution” had indirectly helped British coal miners in their struggles both in 1973/74 and in 1978/1979). * * * The Reagan administration was indebted to its the previous Democratic one not just for its response to the energy crisis, but also in the realm of foreign policy. Reagan inherited from Carter an increased military engagement in the Gulf. This was a relatively new development—remember the US had been forced to withdraw from the Dhahran air base in 1962—that effectively sealed the US replacement of

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

313

Britain as the key Western military power in the region.37 While before 1979 the US could count on two key allies in the Gulf, the twin pillars of Iran and Saudi Arabia as enshrined in the “Nixon doctrine”, over the course of the following decade it was forced to rely primarily on the Saudis, thus offering virtual unconditional support to House of Saud in the name of the struggle against global Communism. Also British diplomats underlined the strategic importance of Saudi Arabia in the Gulf after the Iranian revolution: She is firmly committed to the West. “Do not try to test our will to resist the Soviet Union,” said her Foreign Minister to me; “it is stronger than yours”. She has no diplomatic or commercial relations with the Communist world. Her financial reserves are invested in the West. Her policies on the pricing and the production rates of oil are moderate, and concerned always not to disrupt the Western economic system, despite severe pressure from the extremists in OPEC. The West needs her co-operation ­politically, economically and perhaps, in the future militarily in the conflict with the Eastern bloc. This co-operation depends on the survival of the present regime; any other would be bound to be less favourable to our interests.38

Under Reagan, the political, economic, and military links between Saudi Arabia and the US became so tight that it would be very hard (if not altogether inconceivable) for the Saudis to mount a direct challenge to the US government and American consumers on the par of the oil embargo sponsored by King Faisal in 1973/74. The tensions due to both the separate peace between Israel and Egypt, and later to the Israeli invasion of Lebanon in 1982, soon faded away. It is thus worth exploring, however briefly, the reasons for the escalating US military presence in the Gulf. In the analysis of the experts of the Carter administration, the circumstance that the Middle East held roughly one half of the world’s conventional petroleum reserves was a source of increasing concern. This was all the more worrisome because both the Strait of Hormuz (between Iran and the Arabian Peninsula at the mouth of the Gulf ) and the Bab-el-Mandeb (between Yemen and Africa at the outlet to the Red Sea), were politically unstable areas that represented possible “chokeholds” for global free flow of crude oil. Several scholars continue to argue that the US could not (and cannot) do much to control crude oil flows: no hard intervention is necessary since oil always eventually finds its markets thanks to flexible transport networks, coupled with the producers’ addiction to oil income.39 However rational and valid such arguments might seem to academics (and they are valid), key decision-makers in the Carter administration, backed by intelligence, were persuaded of the imminent exhaustion of global petroleum reserves and of a coming scramble over scarce resources. Indeed in 1980 what Roger Stern has called the “oil scarcity ideology” probably reached its peak. Once the Iranian revolution 37  Roland Popp, “Subcontracting Security: The United States, Britain, and Gulf Security before the Carter Doctrine”, in Victor Mauer and Daniel Möckli (eds.), European-American Relations in the Middle East: From Suez to Iraq (New York: Routledge, 2010), pp. 171–86. 38  TNA, PREM 19/901, James Craig, Saudi Arabia: the Forthcoming State Visit of King Khalid, Jeddah, May 18, 1981. 39  For example: Roger R. Stern, “Oil Scarcity Ideology in US Foreign Policy, 1908–1997”, Security Studies, Vol. 25, Issue 2, 2016, pp. 214–57.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

314

The Rise and Fall of OPEC in the Twentieth Century

was followed by the dramatic spike in oil prices, the darkest predictions about petroleum scarcity, the fears of a possible collapse of the US economy, coupled with the dismantling of the Atlantic alliance due to Western European total dependence on Middle Eastern oil, seemed to be coming true. The hawks in the Carter administration, such National Security Advisor Zbigniew Brzezinski, began as early as 1978, during the early rumblings of protests in Iran, to speak about an “arc of crisis” that spanned the breadth of the Indian Ocean: a strategically vital but unstable region vulnerable to Communist influence. The Shah had helped defeat the Dhofar revolution in Oman, thus defusing the revolutionary ferment in the Arabian Peninsula, had supported the conservative cause in Lebanon, and was assisting President Sadat marginalize radical Arab nationalists in Egypt in order to have free hands to negotiate with Israel.40 The Iranian revolution and the overthrow of the Shah called into question the allegiance of the fourth largest oil producer in the world, as well as the most reliable US military ally in the region. A series of localized crises and conflicts, all tainted by the threat of expanding international Communism, caused the greatest concern both in Washington and in Riyadh. Hostile forces appeared to be jeopardizing the free flow of oil around the Arabian Peninsula. Mengistu’s Ethiopia, propped up by Soviet aid and 15,000 Cuban soldiers, recaptured Ogaden in 1978, imperiling the Siad Barre regime in Somalia and threatening to spread its influence over the Horn of Africa, and thus along the shores of the Red Sea. In February 1979, the president of North Yemen, Ali Abdallah Saleh, appealed to the United States and to Saudi Arabia to help defend itself from the presumed expansionism of South Yemen, a Socialist regime that still haunted the monarchies of the region. But the biggest threat of all was undoubtedly the Soviet invasion of Afghanistan in December 1979. The invasion was a controversial, and ultimately disastrous, decision. If the Soviets had chosen not to intervene on behalf of the Afghan Communists, they would have lost all influence in the country, and most likely, would have ended with an Islamic, anticommunist, and pro-American Afghan government—like that of Muhammad Zia ul-Haq, who became president of Pakistan in 1978—on their doorstep. The Soviets would also have lost most of their influence in the Arab and Muslim world: they had already “lost” Egypt and were embroiled in an increasingly unstable relationship with Saddam Hussein’s Iraq. “We cannot lose Afghanistan in any case” was the state of mind among Soviet decision-makers.41 On the other hand, by intervening militarily they knew they were dealing a severe blow to Détente, would face a war on strategically difficult terrain, all of this coupled with hostile reaction in a large part of the Third World. The Soviet Foreign minister Gromyko, who ultimately chose to support the invasion, nevertheless clearly foresaw some of deleterious consequences.42 40  Richard Cottam, “Goodbye to America’s Shah”, in Foreign Policy, March 16, 1979. 41  Alexey Vassiliev, Russia’s Middle East Policy: From Lenin to Putin (New York: Routledge, 2018), Chapt. 7. 42  Vladislav Zubok, A Failed Empire: The Soviet Union in the Cold War from Stalin to Gorbachev (Chapel Hill: University of North Carolina Press, 2007), p. 260.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

315

In his diaries, Carter described the invasion of Afghanistan as the worst threat to national security that the United States had faced during his presidency. The Carter administration responded decisively to a possible spread of the Soviet influence in the Indian Ocean. The United States led sixty-five countries in a boycott of the Moscow Olympics in 1980, halted talks on the SALT II nuclear arms treaty negotiations, and deployed economic sanctions, including an embargo on the construction of the Trans-Siberian pipeline that would have delivered Russian natural gas to Western Europe. In January 1980, in his State of the Union address, Carter declared: The region which is now threatened by Soviet troops in Afghanistan is of great s­ trategic importance: It contains more than two-thirds of the world’s exportable oil. The Soviet effort to dominate Afghanistan has brought Soviet military forces within 300 miles of the Indian Ocean and close to the Straits of Hormuz, a waterway through which most of the world’s oil must flow. The Soviet Union is now attempting to consolidate a strategic position, therefore, that poses a grave threat to the free movement of Middle East oil [. . .] Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.43

Carter’s remarks were immediately labeled the “Carter doctrine.” The Gulf region was recognized as probably the most dangerous and pivotal area for the national security of the United States. Carter fast-tracked the creation of a Rapid Deployment Joint Task Force (RDJTF) to coordinate swift intervention by the Navy, Army, and Air Forces in the Middle East in the absence of fixed bases in friendly countries in the Gulf. He began funding the anti-Soviet mujahideen in Afghanistan. At the same time, he started negotiations with Egypt, Oman, Somalia, and Kenya to establish forward military bases. The US department of Defense purchased rapid transport vessels capable of shipping war materiel to its various regional military bases, and positioned “floating reserves” at the Diego Garcia atoll in the Indian Ocean to provide logistical support in the event of a rapid deployment. In 1983 the area was brought under a new Central Command (CENTCOM), following those already established for Europe, the Pacific, the Atlantic, and Latin America. Although it did not allow a direct US military presence on its territory, Saudi Arabia was now increasingly surrounded by a network of US military installations, while the massive Saudi imports of sophisticated US weaponry depended on US military training and technical support for being operational. In his rather sobering account of US military policy in the Middle East, Andrew Bacevich notes that the Carter doctrine marked the beginning of a new era for the US military: before 1980, no American soldier had ever been killed in the region; since then, the vast majority of US servicemen would lose their lives while fighting in the Middle 43  UCSB, American Presidency Project, Jimmy Carter, The State of the Union Address Delivered Before a Joint Session of the Congress (January 23, 1980): https://www.presidency.ucsb.edu/documents/thestate-the-union-address-delivered-before-joint-session-the-congress (Consulted on January 30, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

316

The Rise and Fall of OPEC in the Twentieth Century

East.44 The fear of a possible loss of access to essential raw materials was used once more to justify US interventionism in the Middle East, as had happened before for the first time in the 1920s. During the Reagan administration, ties with Saudi Arabia were further reinforced, particularly after Fahd—considered more pro-American than his predecessor Khalid—became King in 1982. The deepening alliance was embodied in Prince Bandar bin Sultan Al-Saud, the Saudi ambassador to Washington from 1983 until 2005, and the face of Saudi influence over US policy. A man of the world, lover of fine cigars and US history, always dressed in Western fashion, among his negotiating successes he could count the contract for AWACS surveillance aircraft, overcoming fierce opposition from the powerful pro-Israel lobby in Washington. The elder George Bush was known to consider Prince Bandar like a “son.” Several key figures involved in setting the foreign policy priorities of the Reagan administration had very close ties with the Saudi royal family. Caspar Weinberger, the secretary of Defense from 1981 to 1987 (under his leadership US military spending increased by 11.4 percent between 1981 and 1982), had previously been on the board of the engineering and construction giant Bechtel. Beginning in the latter half of the 1970s, Bechtel had helped build the industrial city of Jubail in the East, an achievement which the company in 2016 boosted as: “The biggest civil ­engineering project in modern times”. Secretary of State George Schultz, likewise, was a “Bechtel man”. The Saudi monarchy supported the Islamic opposition to the Soviet Union, in part by financing a radicalization of religious discourse in the entire Arab world. In terms of diplomacy, it promoted an extraordinary session of the Islamic Conference of Foreign Ministers, held in Islamabad in January 1980, which unilaterally condemned the invasion against a people that had never tolerated foreign domination, one that would defend with all its might “the glorious heritage of Islamic values, traditions and culture.”45 Militarily, it shouldered with the US part of the economic burden of financing Islamic guerrillas in Afghanistan, while Saudi funds even contributed to the anti-communist cause as far away as Nicaragua. While there were obvious complementarities, the increasingly tight bond between the United States and Saudi Arabia was also contradictory in many ways. From the US side it implied support for Islamist movements that could hardly be considered consonant with the political, economic, and social model embodied by American capitalism and US lifestyle. Also, as remarked by Yamani in 1981, international communism and the question of Israel exerted an opposite influence in the US Saudi relations: “the first helps to reinforce our friendship with America, while the second is a threat to that friendship.”46 In the oil sector, Reagan wanted to hold OPEC’s scalp in front of US citizens, thus helping a further reduction in gasoline 44 Andrew J. Bacevich, America’s War for the Greater Middle East: A Military History (New York: Random House, 2016), p. 11. See also: Toby Craig Jones, “America, Oil and the War in the Middle East”, in Journal of American History, Vol. 99, No. 1, 2012, pp. 208–218. 45  Islamic Conference of Foreign Ministers: Extraordinary Session, Islamabad, January 27–9, 1980: https://www.jstor.org/stable/41393627?seq=1#page_scan_tab_contents. (Consulted on June 11, 2019). 46 Mikdashi, Transnational Oil, p. 51.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

317

prices and making the lines at the pump a relic of the past. This hardly paralleled the interests of the largest petroleum exporter in the world: a country for which oil revenues financed both the massive weapons imports program and represented almost all government income, ensuring state employment for Saudi citizens and political stability. Notwithstanding these contradictions, which did not fail to materialize, increasing American military presence in the Gulf and the tightening of the links between the US and Saudi Arabia can be considered another (albeit indirect) element of the re-launching of the Anglo-American energy order, based on low crude oil prices as well as on pressures for a more consumer-friendly regulatory regime by oil exporting countries. NON- OPEC The United States and Great Britain were not the only countries that would cause OPEC serious headaches in the early 1980s. A number of new oil exporters ­benefited from the price increases of the 1970s and were able to attract significant investments in their petroleum industry. At the time of OPEC’s creation in 1960, its members controlled virtually all oil exports. By the beginning of the 1980s, OPEC’s share of exports had dropped to little more than 60 percent, and kept going down. Non-OPEC exports in general more than doubled from the end of the 1970s to the middle of the 1980s to 4.2 million barrels a day. There were minor new oil producers and exporters such as Angola, Oman, Egypt, Malaysia, Brunei, and China. These were developing countries whose interests did not necessarily coincide with those of OPEC members: either their exports were not substantial enough, or they had not yet consolidated control over their petroleum industry, or they wanted to avoid any external pressures on their production levels, or they simply did not look at petroleum as pivotal to their economy. Having said this, even for these “free-riders” falling oil prices would became a serious concern. When things began to go really bad on the price front, seriously jeopardizing revenues needed to repay international loans and sustain public spending, several of these countries began consulting with OPEC, if only to have privileged access to first hand information. None of these countries’ exports, however, were significant enough to impact directly the global petroleum market. There were other producers who’s exports were substantial enough to have a direct impact on the global market in the 1980s. One quarter of non-OPEC increases in the first half of the 1980s came from Mexico, almost one quarter from the UK, 15 percent from the Soviet Union and the rest mostly from Norway, Canada, and Egypt.47 These countries, at least in period where they managed to be net oil exporters, are generally lumped together in the specialist literature as “non-OPEC” countries. They were substantial oil exporters whose economies and s­ ocieties were shaped to some extent by hydrocarbon production, but they could hardly be defined 47 Parra, Oil Politics, p. 259.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

318

The Rise and Fall of OPEC in the Twentieth Century

as petrostates because of the complexity of both their international commitments (specially in western institutions) but mostly because their economies were far more diversified than those of OPEC countries. * * * The first of these countries was Mexico. After having run the risk of becoming a net oil importer from 1971 to the middle of 1974, Mexico transformed itself into one of the five largest oil exporters a decade later. Until the 1973 oil revolution the country’s petroleum policy was cautious and conservative. After the 1938 nationalization, Mexican leaders had sought to continue exporting oil, but the ensuing international boycott had proved quite ­effective, draining all hopes of attracting the necessary investments to expand production. Ultimately, the Mexican ruling elite took what can be considered a wise decision to use the nation’s petroleum to meet domestic needs and support the Mexican industry, as per the import-substitution model. This development model, that had guaranteed a long period of economic growth relatively free from the pressures from the cumbersome neighbor in the North, was however in crisis by the end of  the 1960s, as exemplified both by rising unemployment and growing social discontent. The national oil company PEMEX was a very different animal when compared to the national companies in OPEC countries. Its goal was to guarantee that Mexican businesses and consumers would be provided with an adequate oil  supply at reasonable prices. It did not have to generate revenues from the international trade in crude oil, but rather to allow Mexico to be self-sufficient, while preserving natural resources for future generations. Even during the presidency of Luis Echeverría, who held the office from 1970 until 1976, the idea of significantly increasing output and opening up the industry to foreign capital had been rejected, despite significant pressures from the United States. As Jaime Dovalì, the head of PEMEX, said in March 1973: We have had offers for technical advice in exploration and drilling matters, as well as loan proposals to support those activities and to finance the necessary production and transportation facilities. All of them include, as a basic condition, payment for services offered, or amortization of credits and interest, with a share of Mexican production [. . .]. The national oil resources should be destined only to the satisfaction of our needs, no matter how seductive the offers from abroad may look, or how strong may be the pressure to make us accept them.48

When in 1974 Mexico was able to export small quantities of petroleum Horacio Flores de la Pena, secretary of National Heritage (SEPANAL), clarified that these exports would do no harm to OPEC since Mexico: “sees and has always seen with sympathy and solidarity the struggle of OPEC member countries to obtain better prices for their oil and greater fiscal participation [. . .] OPEC is eminent part of the world-wide struggle for the revaluation of commodities and raw materials and the 48  José López Portillo, Primer Informe de Gobierno, September 1, 1977, p. 24. http://www.diputados. gob.mx/sedia/sia/re/RE-ISS-09-06-15.pdf. (Consulted on January 30, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

319

search for a New International Economic Order.”49 The statement concluded by arguing that “Mexico will never be the Trojan Horse of the transnational oil companies.” After two years of internal debate on whether Mexican interests could align with those of OPEC members, and on the possible US reactions, the idea of becoming applying for OPEC membership was definitively shelved in 1976. In December 1976, the new Mexican President José López Portillo appointed a new Director of PEMEX, Jorge Díaz Serrano, who inaugurated the phase known as the “oil boom”. Petroleum exports were now viewed as the key to boosting employment and revitalizing the Mexican industry, while the fears for the “Dutch disease” that had surfaced during the OPEC membership debate were soon dismissed. López Portillo emphasized the role petroleum would play as boost the economy: “we can divide the countries of the world into two types, the ones that have oil and the ones that do not. We have oil.”50 The new Mexican challenge would be that of managing abundance.51 Several factors motivated this policy revolution that George Philip defined “the most momentous economic change in the history of Mexico since Alemán committed it to a policy of conservative industrialization just after the Second World War.”52 First, there was the discovery of new oilfields in the states of Tabasco and Chiapas, as well as under the continental shelf of Campeche in the Gulf of Mexico. Second there was the concern for Mexico’s growing international debt, which had reached $22 billion by 1976: private investment had begun to turn elsewhere, increasing pressures to use oil export revenues as a source of hard currency. When López Portillo was elected President he signed a protocol with the IMF that included a cap on new debt, a clause that could only be honored by ramping up oil exports. The changing of the guard at the top of PEMEX that led to the rise of Díaz Serrano was instrumental to the change in oil policy. Díaz Serrano saw oil production as a way to attract foreign capital because “if foreign banks financed us based on the amount of our new reserves, we would receive the signal that the recovery could begin.”53 The offensive strategy of the new petroleum czar called for increasing output from 700,000 barrels a day in 1976, to 2.2 million barrels daily by 1982. Díaz Serrano’s program was fully endorsed by the international creditors and the US government, which saw a politically reliable supplier in the hemisphere that could be added to Canada. The new PEMEX would be a company primarily focused on exports and investment in petroleum-related industrialization, earning it the support of Mexico’s trade unions, that hoped for new employment ­opportunities in a country in which emigration to the US was increasing by the year. Unlike 49 Claudia J. Piña Navarro, “Between the Superpowers and Third-Worldism: Mexico and OPEC, 1974–1982”, in Dag Harald Claes and Giuliano Garavini (eds.), Handbook of OPEC and the Global Energy Order (New York: Routledge, forthcoming). 50  Quoted in: George W. Grayson, “The Oil Boom”, Foreign Policy, 29: Winter 1977–78, pp. 65–89. 51  On the auge petrolera (“oil boom”): Lorenzo Meyer and Isidro Morales, Petróleo y Nación: La política petrolera en México (Ciudad de México: Fondo de Cultura Económica, 1990), p. 174. 52 Philip, Oil and Politics in Latin America, p. 361. 53  Jorge Díaz Serrano, Yo, Jorge Díaz Serrano (Planeta: Mexico, 1989), pp. 65–6.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

320

The Rise and Fall of OPEC in the Twentieth Century

OPEC national oil companies, that turned most of their revenues directly to the state or reserved a small percentage for international companies as a “service fee,” PEMEX paid a tax of 58 percent on exports revenues. The company was taking on the contours of a state within the state, following in the footsteps of Indonesia’s PERTAMINA. The mad run to increase exports and become a reliable supplier led Díaz Serrano to commit political suicide in 1981. PEMEX’s customers started complaining that Mexican oil was overpriced, and pushed for discounts. Díaz Serrano decided that his costumers came before the Mexican people and cut the price of crude by a staggering 4$ a barrel. This decision he took without even informing the López Portillo administration beforehand. The decision would have devastating consequences for the government budget and for Mexican ability to repay public debt, whose service alone took up 50 percent of exports earnings. The decision echoed that of the oil majors in 1960, when they had unilaterally decided to cut the posted price, thus the revenues of exporting countries. Díaz Serrano lost his job almost immediately. The price cuts were reversed. José Andrés De Oteyza, secretary for Economic Development—that is, the political establishment—took control of pricing decisions and of the overall PEMEX strategy in his hands. None of this meant that the economic and financial situation of Mexico actually improved. The debt strategy, partly encouraged by PEMEX, had now made the country increasingly dependent on its creditors, a situation that revealed itself with dramatic clarity in 1982 when, due to a declining GDP and capital flight, Mexico found itself for the first time on the brink of default. López Portillo nationalized Mexican banks and introduced austerity measures that reduced government wages and reigned in public spending. But the specter of a debt that had now reached $80 billion remained omnipresent, and oil sales, which made up 75 percent of export earnings, were essential to guarantee the continued influx of US dollars. Mexico thus had an interest in cooperating with OPEC to keep oil prices high but it could not allow itself to slash exports without consulting with its creditors, nor could it run the risk of being seen as a potential thorn in the side of the United States, its primary creditor and export market, as well as the final destination for widening streams of Mexican migrants. * * * Norway, however reluctantly, took a place of its own in the global oil market. The Norwegian oil sector grew from zero percent of the country’s GDP in 1974 to nearly 20 percent in 1985. While in 1971 it had not exported a single barrel of oil, petroleum constituted nearly 40 percent of the country’s exports by 1985.54 The primary instrument for this expansion of the petroleum sector was STATOIL, the national oil company. Norway’s state-run oil company had some similarities with national companies in OPEC countries. The Norwegians were even labeled

54  Data on the evolution of the Norwegian oil sector, also in terms of fiscal income: www.­ norskpetroleum.no/en/economy/petroleum-tax/ (Consulted on January 31, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

321

(improperly as we will see) as the “blue eyed sheiks.”55 Compared to Britain’s BNOC, STATOIL had a 50 percent controlling share in every block (in some fields its share was as high as 85 percent), and had expanded its activities both downstream and into other oil-related sectors. STATOIL was conceived as a tool to promote industrialization and technological innovation within the oil sector and soon became the main Norwegian operator in terms of crude oil production. Unlike PEMEX, STATOIL paid taxes and royalties that accounted for almost 80 percent of its revenues, while simultaneously being bound to a relatively more prudent depletion policy. The Norwegian petroleum governance was also designed with the help of Arab consultants such as the Iraqi Farouk Al-Kasim, a former IPC manager who from 1972 to 1990 headed the resource management of the Norwegian Petroleum Directorate, something that would have been quite unthinkable in the case of Great Britain.56 What distinguished Norway from most OPEC countries, on the other hand, was that international oil companies were left with equity oil and, significantly, that oil income still did not surpass 20 percent of government revenue in 1985. Also, the Scandinavian country was firmly entrenched in the Atlantic Alliance, was an associate member of the International Energy Agency and a full member of the OECD, while a there was significant support for a possible membership to the European Community. Norway had a strategic interest in keeping a seat at the table in Western decision-making bodies. None of its oil policies could be perceived as being directly harmful to the other industrialized countries, its key economic and political partners. Furthermore, established as a limited liability company with management formally independent from the government, STATOIL differed even here from its counterparts in OPEC countries, where the boundaries between the company management and government were far more elusive. In 1974 the Norwegian Parliament, the Storting, had argued for state to control over the oilfields depletion rate, in order to ensure that production would match domestic capability to absorb the income. The goal was to avoid the pitfalls of the “Dutch disease,” with ensuing deterioration of the competitiveness of non-oil sectors. In a White Paper from 1974, the Finance ministry famously described Norway’s oil policy in the following terms: “Wishing for a long-term perspective in the exploitation of resources, and after a comprehensive evaluation of its social aspects, the Government has concluded that Norway should take a moderate pace in the extraction of petroleum resources.”57 Norway’s depletion policy was theoretically far more prudent than that of neighboring Great Britain. STATOIL committed to significant investments (Fig. 7.3.), while the prospects of large oil rents contributed to rising Norwegian salaries and to improve welfare provisions. The state also kept ailing companies in mature industrial sectors afloat with various subsidies and “technical adjustments” to the 55  Helge Ryggvik, The Norwegian Oil Experience: A Toolbox for Managing Resources? (Oslo: Centre for Technology, Innovation and Culture: 2010). Online at: www.sv.uio.no/tik/forskning/­ publikasjoner/tik-rapportserie/Ryggvik.pdf (Consulted on January 31, 2019). 56  Martin Sabdu, “The Iraqi who saved Norway from oil”, in The Financial Times, August 29, 2009. 57 Ryggvik, The Norwegian Oil Experience, p. 35.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

322

The Rise and Fall of OPEC in the Twentieth Century

Millions of barrels per day 70

60

50

40

30

20

10

0 1975

1980

1985

OPEC

United Kingdom and Norway

United States

Other

Mexico

Soviet Union and China

Fig. 7.3.  Increase in non-OPEC oil production from the second half of the 1970s; parallel decline of OPEC output at the beginning of the 1980s. (DOE, Annual Energy Review, 1985).

currency—depreciation—that helped the Norwegian economy weather the crisis of the early 1980s.58 But generous Keynesian policies had reached their limits by the end of the 1970s. The first limits to STATOIL’s continuous expansion were set when the Norwegian Conservatives formed a coalition government with the Agrarian Centre and Christian Peoples’ Party after the general elections of 1981. The new government, while moderate in comparison with the Conservatives in the UK, nevertheless aimed to reign in the state’s share of the GDP, reduce overall taxation, and liberalize the credit market as well as the country’s industrial policies and public utilities, whenever possible. One of the Conservatives’ objectives was STATOIL, perceived as too independent in its investment decisions. In 1984, the “historical STATOIL 58  Einar Lie and Dag Harald Claes, “The Counter-Shock in Norwegian Oil History”, in: D. Basosi, G. Garavini, and M. Trentin (eds.), Counter-Shock, pp. 199–218.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

323

compromise” between Conservatives and Labour deprived the state company of part of its dominant position in the petroleum sector with the creation of the State’s Direct Financial Interest (SDFI) in January 1985. With this new instrument, the state covered a portion of the costs in line with its share of ownership in a field, also directly receiving a corresponding share of income. In the second half of 1985, the depreciation of the dollar made a huge impact on the Norwegian economy. The State had to invest heavily in the petroleum industry at a time of declining prices, and actually lost in 1985–6 on the SDFI. The combination of dollar depreciation and oil price reduction made the oil rent decline from NOK 71 billion in 1985 to NOK 16 billion in 1988.59 This tremendous shock, coupled with a change in government in 1986, made the Norwegian government far more receptive to coming to terms with OPEC. * * * The Soviets viewed petroleum and gas exports as a function of their domestic economic priorities, as well as of their commitment to retaining their sphere of influence in the Communist countries of Eastern Europe. They were prepared to support “progressive” oil exporters, but International raw materials politics, including the debates on the New Economic Order, was not a key Soviet concern. Moscow was investing a disproportionate amount of its resources in the e­xploitation of its hydrocarbons to prop up an industrial system that was growing increasingly energy hungry and technologically obsolete. Until the mid-1970s the Soviet leadership could still claim the superiority of the Soviet economic model. While the United States was weakened by anxious debates on the energy crisis and by protests against gas lines, Alexei Kosygin, Chairman of the Council of Ministers of the USSR, boasted in a speech on June 12, 1974 that “such upheavals are not a feature of our Socialist planned economy.”60 He could count off a long list of extraordinary successes of the Soviet energy machine: annual petroleum output had grown from 31 million tons in 1940 to 450 million tons by 1974, natural gas production over the same span had risen from 3.3 billion to 256 billion cubic meters. Soviet Foreign minister Andrei Gromyko, in the April 1974 Special Session of the UN General Assembly (the one that produced the NIEO Declaration), declared that the energy crisis had nothing to do with the physical availability of natural resources, but that it was instead the reflection of political and social crisis: “the fact that the socialist world has virtually not been affected by it is clear evidence of this.”61 Thanks to its exploitation of the Caucasus first, then the Volga-Urals region, and later in the 1960s of Western Siberia, the Soviet Union had become the second largest petroleum producer in the world, only behind the United States. In 1968, the giant oilfield of Samotlor was discovered in Western 59  Ibidem. 60  Quoted in Jeronim Perovic and Dunja Krempin, “The Key is in Our Hands: Soviet Strategy During the Détente and the Global Oil Crisis of the 1970s”, in Historical Social Research, Vol. 39, No. 4, 2014, pp. 113–44. 61  Michael de Groot, “A Golden Opportunity? The Soviet Union, CMEA, and the Energy Crisis of the 1970s”, Unpublished article quoted with permission from the author.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

324

The Rise and Fall of OPEC in the Twentieth Century

Siberia, and by the end of the 1970s the gas field of Urengoy—at the time ­considered the largest natural gas field in the world—had also come online. Siberia had become one of the most important oil regions in the world, and the heartbeat of the Soviet economy. The United States had reached peak production at the end of the 1960s. The Soviet Union, meanwhile, was seemingly overflowing with energy. This increased production of oil and gas was accompanied, after the advent of Détente, by a tremendous 270 percent increase in exports between 1970 and 1988, accounting for as much as 30 percent of Soviet petroleum output.62 The expansion of oil and gas production had allowed the Soviet industrial system to keep growing and satisfied at the same time the daily needs of Russian citizens. Soviet hydrocarbons also met the demands of the Warsaw Pact countries that, particularly after the increase in oil prices after 1973, received Russian petroleum at a discount over world prices for domestic consumption. The USSR had passed from a trade deficit with its Eastern European allies in 1972, to a very significant trade surplus by 1977. Finally, the exploitation of Western Siberia also allowed the USSR to purchase grain to make up for the deficit of domestic agricultural production and to acquire at the same time various new technologies needed to re-modernize Soviet manufacturing. If Détente was meant to favor the USSR’s entry onto the global marketplace, the only Soviet goods in high demand on the market were petroleum and natural gas. By 1980 hydrocarbons accounted for 80 percent of Soviet hard currency income.63 But increased output came at the expense of intensive exploitation of Soviet reservoirs and massive investments. Its immense oilfields, in Western Siberia in particular, were situated in climatic zones even more hostile to human life than the scorching sands of the Arabian peninsula. Intense cold made the winter months almost uninhabitable. The frozen permafrost extended as much as 300 meters below sea level in places, making drilling operations very complex affairs. Transportation of heavy machinery and instruments from European Russia was further complicated by ice in the winter and muddy marshes in the spring and summer. Hints of a looming “Soviet energy crisis” began to surface and be debated around 1977. The CIA, drawing upon studies by Soviet geologists, published a couple of memoranda on the imminent Soviet peak production.64 Realizing the nature of this existential threat to the Soviet economy and society, as well as to the stability of its sphere of influence in Eastern Europe, the communist leadership began to analyze possible countermeasures. One line of thought, in some ways parallel to Carter’s critique of consumerism, called for diversification of investments towards alternative energy sources, particularly coal and nuclear, along with diversification in other manufacturing sectors to stimulate other lines of exports. But the prevalent line, endorsed by the Secretary-General of the Communist party Leonid Brezhnev, centered on a sort of hormonal therapy for Siberian hydrocarbon production, 62  Thane Gustafson, Crisis amid Plenty: the Politics of Soviet Energy Under Brezhnev and Gorbachev (Princeton: Princeton University Press, 2014), p. 55. 63  de Groot, “A Golden Opportunity”. 64  CIA, Intelligence Memorandum, The Impending Soviet Oil Crisis, March 1977. Online at: www. cia.gov/library/readingroom/docs/DOC_0000498607.pdf (Consulted on January 31, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

325

coupled with investment in infrastructure such as the new 4324 ­kilometer stretch of the Trans-Siberian Railway called the Baikal-Amur Mainline (BAM), which Brezhnev himself called “the construction project of the century.” Between 1981 and 1985, 85.5 percent of available resources for the five-year plan for industry were earmarked for projects in the energy sector, primarily focusing on sustaining Siberian production.65 These projects included the construction of a new energy artery: the Urengoy–Pomary-Uzhgorod pipeline (also known as the Trans-Siberian pipeline) to bring Siberian gas to Eastern and Western Europe, which was completed in 1983, despite US boycott. Such a significant outlay in terms of both investment and labor—increasingly onerous at a time of flattening oil prices and rising fixed costs for production—managed to stave off decline in oil and gas output through the early 1980s, thus contributing to aggravating global petroleum overproduction. The Russian economy would pay a very high toll for the project dubbed “Siberian Might”. Overinvestment in the hydrocarbons sector played an i­mportant role in the weakening , of the Soviet economy. Most Soviet resources were directed at increasing energy supply, and little or no attempt was made to reduce consumption by either citizens or the industrial system. While the OECD countries had started laboriously reining in energy consumption per GDP unit, including through improved manufacturing technologies, the Soviet Union was ever more dependent on power-hungry industries and constantly increasing domestic energy use. This might also have to do with the fact that petroleum in the Russia had never been depicted as of strategic importance to the Soviet way of life, nor the energy sector was viewed as the avant-garde of the Soviet economy. As noted by Douglas Rogers: “Soviet citizens did not experience oil as directly associated with massive inequalities, destabilizing influxes of money, soaring expectations of rapid modernization, or grand cultural spectacles.”66 Between 1977 and 1981 domestic consumption grew even faster than expanding energy exports. And domestic difficulties weren’t the only problems Moscow was facing. The problem was that oil and gas exports had become vital to guarantee continued imports of agricultural goods, and to support the other Communist regimes of Eastern Europe. In 1981, the German Democratic Republic was begging the Soviet Union for more oil to ward off the impact of West German propaganda. The Soviet Planning Chairman Nikolai Baibakov was exasperated by Berlin’s requests: “Should I cut back on oil to Poland? [. . .] Vietnam is starving [. . .] should we just give away South-East Asia? Angola, Mozambique, Ethiopia, Yemen [. . .] we carry them all. And our standard of living is extraordinarily low.”67 The chickens came home to roost in 1985, when Soviet output suddenly fell and exports to OECD countries dropped by 24 percent. The collapse of crude oil prices and the parallel dollar depreciation meant that the terms of trade for Soviet 65 Gustafson, Crisis amid Plenty, p. 25. 66  Douglas Rogers, The Depths of Russia: Oil, Power and Culture after Socialism (Ithaca: Cornell University Press, 2015), p. xiii. 67  Stephen Kotkin, “The Kiss of Debt: The East Block Goes Borrowing”, in N. Ferguson, C. Maier, E. Manela, D. Sargent (eds.), Shock of the Global, p. 83.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

326

The Rise and Fall of OPEC in the Twentieth Century

oil vis-à-vis German manufactured goods worsened by 60 percent in 1986.68 This “countershock” forced the Soviet leadership to acknowledge that the international price of oil had become important for their own economy, and demonstrated just how dependent the Soviet Union had become on fossil fuels production and exports. While this led the Soviets for the first time to engage in a direct dialogue with OPEC countries, on the other hand agreements on international prices were less a priority than the question of redistribution of its limited domestic resources, of reforming the economy and of dealing with the overexploitation of Siberian hydrocarbon reserves. T H E C A RT E L Severely tested by a war among two of its founding members, facing a buyer’s market and challenged by entry of new oil exporters, petrostates finally attempted to transform OPEC into a real cartel. For the very first time the organization tried to control both prices and production levels of its members. This transformation began in March 1982 with the introduction of a cap on the total production of its member states. The vision outlined for OPEC more than twenty years earlier by Pérez Alfonzo (but it had been advanced by other Venezuelan oil technocrats such as Manuel Egaña already from 1949), that a of a global “prorationing” ­organization working more or less along the lines of the Texas Railroad Commission in the US, finally seemed to become reality. The 1981–2 biennium was characterized by a change in tide from a producer to a consumer market. While the building of stockpiles had accelerated the upward ­ epreciation trend in prices through 1979–80, the selling of stocks for fears of their d accelerated the downward trend. The biennium was also characterized by the emergence of non-OPEC producers, by the definitive failure of the North–South dialogue after the 1981 Cancun summit, and by the growing isolation of Iran, both within OPEC as well as internationally (it was left alone with Libya in wanting to destabilize the Western world by cutting off its fuel supply). That Iran would become an increasingly radicalized petrostate is quite comprehensible. The country was under attack both from without and from within. One of the Islamic Republic’s few pieces of good news was that the Iraqi invasion had not led to the anticipated (by Saddam) uprising in the Arab region of Khuzestan. “It’s true that we are Arab and proud of it,” explained a local resident, “but we are not Iraqi and that’s what’s important. It’s not true that we weren’t happy with the Emam. In the past we had had some troubles with the Persians, for they can be very arrogant and the Shah encouraged that attitude.”69 In October 1980, Abadan was bombed, thus rendering the biggest refinery in the country unserviceable. By the end of 1981 the country was in the midst of a full-blown economic crisis due 68 Gustafson, Crisis amid Plenty, p. 47. 69 Michael Axworthy, Revolutionary Iran: A History of the Islamic Republic (Oxford: Oxford University Press, 2013), p. 198.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

327

to the US-imposed economic sanctions, the flight of international capital and technical assistance, as well as because of the need to support refugees fleeing the war zone. Petroleum production had dropped below 1.2 mbd from the nearly 6 mbd where it was under the Shah. The drop in production and the terrible state of the economy had predictable consequences in terms of decreasing government revenues, and heightened pressures to increase the state’s role in the economy, particularly in the industrial sector, in services and the regulation of international trade and capital flows, in order to redistribute the scant resources available and support the war effort.70 Land was redistributed, most goods were subsidized, but small property was protected. Meanwhile, the Marxist Mujahideen of the MKO (People’s Mujahedin of Iran), still enjoying support particularly among the urban middle classes, claimed several victims and threatened the stability of the regime from within. On June 28, 1981 a bomb exploded in the headquarters of the Islamic Republican Party, killing seventy-two high party officials and wounding many more. Further attacks on Khomeini’s Islamic party soon followed, killing President Mohammed Ali Rajai together with the Prime minister. It was the beginning of a war without quarter that took on the contours of a civil war. Iranian internal economic crisis and political turmoil went hand in hand with increasing diplomatic isolation. The Sunni monarchies of the Gulf supported the Iraqi war effort, abiding to the eternal logic of the “lesser of two evils.” Saddam Hussein presented himself as an Arab bulwark against the Persian and Shia menace. Iran offered a model of Islamist government that could challenge the ­legitimacy of regional monarchs and thus had to be contained in every possible way. On May 26, 1981, Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman formed the Gulf Cooperation Council (GCC), nominally a forum for economic and cultural exchange, but marked in reality by the desire to repel both the Iranian and the Soviet threats. In 1982, after Syria had cut off the Iraqi pipeline to the Mediterranean, Kuwait and Saudi Arabia contributed to the Iraqi war effort with 300,000 barrels from their shared “neutral zone” production.71 Saudi Arabia, during the eight years of conflict, would contribute the hefty sum of $3 billion a year to the Iraqi military effort. The United States also moved cautiously but steadily closer to Iraq, its main enemy in the Gulf during the 1970s, ultimately removing it from the list of the sponsors of terrorism in 1982. The Soviet Union itself maintained an ambiguous relationship with Saddam.72 For its part, the Iranian Islamic government nurtured resistance among Shi’ite minority populations around the Gulf, encouraged the politicization of Shi’ite pilgrimages to Mecca, and supported a series of Shi’ite political movements in the region, including Lebanon’s Hezbollah. The Islamic revolution was also supported by many intellectuals and political leaders in the Arab 70  Ervand Abrahamian, A History of Modern Iran (Cambridge, MA: Cambridge University Press, 2008), pp. 155–196. 71  Kristian Coates Ulrichsen, “The Gulf States and the Iran–Iraq War: Cooperation and Confusion”, in Nigel Ashton and Bryan Gibson (eds.), The Iran–Iraq War: New International Perspectives (New York: Routledge, 2013), pp. 109–25. 72 Lawrence Freedman, A Choice of Enemies. America Confronts the Middle East (New York: PublicAffairs, 2008), pp. 150–68.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

328

The Rise and Fall of OPEC in the Twentieth Century

world in the name of the continuing struggle against imperialism, and was viewed with enduring sympathy by the Libyan government.73 In April 1982 the Iranian army began to shift from a defensive to an offensive war against Iraq. Counting also upon the numerical superiority of its forces, Iranians deployed a tactic known as the “human wave,” throwing thousands of young and inexperienced volunteers into frontal assaults against Iraqi positions. By the summer of 1982, Iran’s strategic objective non longer simply involved the recapturing lost Iranian territory, but rather the fall of the Saddam Hussein regime. The decision to take the war to Iraq on its territory, in particular toward Basra, was a turning point and, along with the request for Saddam’s ouster, eviscerated any hope of a negotiated peace.74 Iran’s diplomatic isolation in the Gulf, as well as of its efforts to increase state power over the economy and curb imports, was reflected also in an extremely aggressive oil policy. Until 1981 the Islamic government supported a policy of output reduction that proriotize the domestic needs of OPEC countries rather than exports, and aimed at the highest possible level of crude prices (a strategy also endorsed by Libya and Algeria). The Iranian government now had complete control over the natural resources that the Constitution of 1979 had defined as Anfal (public good). By the end of 1981, and without ever backing off its demands for higher prices, Iran repeatedly asserted its right to increase production, after it’s export facilities had been disrupted by the war. To achieve this aim it did not hesitate to employ “creative” trade tactics to sell its crude, otherwise less competitive due to the political and military risks incurred by potential buyers who had to enter a war zone to load at Iranian terminals. Iran wanted to prove, even if left alone, it could undermine OPEC from within. The Saudi dominant role within OPEC was obvious at the end of the 1970s, as demonstrated by the blatant discrepancy between Saudi output and that of the other members. At the beginning 1981, while Saudi production stood at 8.5 mbd, that of Iran and Iraq combined totaled a mere 1 mbd. Whereas Saudi Arabia raked in $110 billion a year in oil rent, Iran and Iraq—far more populous and in the midst of war—took in roughly $10 billion each, less than one-tenth (while before the 1979 revolution Iran’s annual oil revenues were a little more than half of Saudi Arabia’s, and Iraq’s more than a quarter).75 This imbalance, somewhat less striking until 1980, since it had gone hand in hand with increases in crude oil prices, became a source of tremendous tension in 1981, when downward pressures on global prices started stinging. The imbalance between Saudi Arabia and the rest of OPEC was so blatant that even Saddam Hussein felt compelled to issue the Saudi allies a prudent (and indirect) rebuke: We direct our friendly but also serious criticism toward some Arab brothers whose production and marketing policies have led to the creation of a glut in the oil market. 73  Georges Corm, Pensée et politique dans le monde arabe. Contextes historiques et problématiques, XIXe–XXIe siècle (Paris: La Découverte, 2015), p. 233. 74  Pierre Razoux, La guerre Iran-Irak. Première guerre du Golfe 1980–1988 (Paris: Editions Perrin, 2013), pp. 224–36. 75  Abbas Alnasrawi, “Economic Consequences of the Iran–Iraq War”, Third World Quarterly, Vol. 8, No. 3, 1987, pp. 869–94.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

329

We cannot possibly find convincing arguments in favour of this policy and its goals. Its harmful effects upon the Arab oil producing states and others is very clear. If some oil producing states have financial surpluses, we do not all possess such an accumulation of wealth.76

At the sixtieth OPEC Conference held in Geneva in May 1981, the President, the Indonesian Subroto—who as we have seen now enjoyed the reputation of a wise mediator—warned that spot prices were declining for the first time since 1979, as a result of a reduction in demand by the industrialized countries, as well as due to the ongoing expansion of Iranian and Iraqi production. The Secretary General further noted that the demand for OPEC oil (26.9 mbd) was at its lowest since 1971. In this changing market, the dialogue with the consumers and oil companies now seemed to become somewhat more interesting for OPEC countries (although still not for all of them). The organization sponsored the creation of a research center in Oxford under the leadership of the Egyptian-born scholar Robert Mabro of St. Anthony’s College (which ultimately, despite Iranian opposition, opened as the Oxford Institute for Energy Studies in 1982).77 The Vienna-based o­ rganization, meanwhile, struggled to find a joint position on the North–South summit in Cancun. While celebrating its twenty-first anniversary, on the eve of the Cancun conference, OPEC issued a communiqué highlighting its historic achievements. It emphasized not only the efforts to fight the depreciation of natural resources and to ensure a place for alternative energy sources, but also its vision for a “post-oil world,” with its “unwavering” support for fellow developing countries and their desire to reform the international trade and finance.78 This support for developing countries, OPEC declared, had involved “according priority to other developing countries in securing oil supplies at official prices,” as well as “using its strength as a group of strategic commodity producers in negotiations with the developed states on achieving a New International Economic Order” and, last but not least, was visible in its “commendable financial aid transfers.”79 During the Conference, Yamani was left alone, however, in arguing that producers needed to gird themselves for a new future in light of Cancun, and had to define as soon as possible their Long-Term Strategy. Faced by delegates that demanded significant cuts in production in order to keep on increasing prices, Yamani responded that different groups within OPEC had completely different interests. In particular there were countries 76  MEES, July 27, 1981, pp. 1–2. 77  Yamani warned OPEC by rhetorically asked his colleagues whether: “OPEC wished to withdraw completely from the industrialized world and refrain from any activity therein, confining itself only to the developing countries—a line of action which HE Sadat appeared to be advocating—or whether OPEC felt it necessary to conduct some activity in that part of the world, which was exactly what they were doing at that moment.” To reply to those who argued that institutions to deal with energy issues should only be created in the “Third World,” Yamani pointed out that: “their headquarters were situated in Vienna, following a decision of their Organization, and OPECNA was also situated there. They had before them a proposal to create an OPECNA office in New York, the very heart of the capitalist world, where it was felt there was a need for more public information. The Institute presently under discussion was a unique opportunity through which OPEC could advocate its case.” In: NYAUD Library, ASC, MC-038, Minutes of the 60th Meeting of the Conference, Geneva, May 1981. 78  Press release n. 5–81, OPEC’s 21st Anniversary, Vienna, September 14, 1981. 79  NYUAD Library, ASC, GGC, MC-038, Minutes of the 60th Meeting of the Conference, Geneva, May 1981.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

330

The Rise and Fall of OPEC in the Twentieth Century

that would very soon end being exporters, then there were countries that would cease exporting some time in the mid-90s, while a third group had huge reserves from which they could export well into the coming century: Accordingly, he believed their interests were not identical and that they had a very legitimate reason for worrying about the future. They had, particularly up until 1978, really wanted conservation in order to avoid a crisis situation where they would be called upon to produce more, but the situation that day was that the consumers had turned to conservation and alternative sources of energy to an extent which was against their interests. Saudi Arabia, he concluded, wanted to halt that trend and there was where the differences between them existed.80

By the fall of 1981 downward pressures on crude oil prices were becoming ever more intense, hitting harder on the member states in the most precarious financial conditions. The North–South dialogue was now a relic of the past. OPEC started focusing on self-defense rather than on the defense of the Third World, while OECD governments, spearheaded by Reagan and Thatcher, had by now lost any interest (however formal this might have been) in a global economic dialogue along the lines of the New Economic Order. Nigeria, as we have seen, had proclaimed its “second republic” in 1979 under the presidency of Shehu Shagari of the National Party of Nigeria. His administration continued to undertake massive investments in infrastructure, particularly for the development of the new capital city of Abuja in the middle of the country. It also invested heavily in industry with the financing of two large steel plants, including the Ajaokuta Steel Mill supposed to become soon “the bedrock of Nigeria’s industrialization.”81 The investment was partly covered by international loans, facilitated by the increase in oil prices from 1979 to 1980. When oil prices started declining in tandem with government revenues, pressure on the Nigerian naira led to capital flight. A massive wave of strikes, triggered by the workers’ loss of purchasing power as a result of inflation, affected the public sector. In a country in which the majority of the population still lived in extreme poverty, the government could only respond to declining oil prices by trying to safeguard oil revenues. Nigeria, whose oil competed directly with that of the North Sea crude in terms of quality, became a thorn in OPEC’s side, ready to answer any drop in Brent prices with one of its own. With this in mind, at the sixty-first Extraordinary OPEC Conference held in Geneva on October 29 (minutes of which are lacking) delegates decided to “reunify” oil prices (which as we have seen since 1980 had fluctuated disorderly upward) by fixing them at $34 a barrel for the Arabian Light. Although this meant reunifying prices at the Saudi level, for many OPEC countries it actually meant a step down from the prices they were then charging their clients. “Reunification”, though, failed to solve the pricing issue. The problem immediately shifted to defining the “differentials” between various grades and locations of crude, thereby 80  Ibidem. 81  Toyin Fayola and Julius Omozuanvbo Ihonvbere, The Rise & Fall of Nigeria’s Second Republic: 1979–84 (London: Zed Books, 1984), p. 197.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

331

triggering a fierce debate that saw various delegations accusing the Nigerian government, in particular, of underpricing its oil. Iran too was offering discounts and signing contracts that were favorable to buyers in order to sell its heavy crude. Iran’s Petroleum minister Mohammed Gharazi defended this policy by arguing that “the blood of his brothers had taken the price of OPEC oil from its level of approximately $12 to what it was today,” and warned that “if the revolution had brought the price of oil up, it was a fact that could do other things too” (a thinly-veiled threat to offer further discounts if necessary).82 Talks now revolved around not just price “stabilization” and “unification,” but also around a possible price reduction. Yamani, who still coordinated the discussions on the LongTerm Strategy, explained that by then two different schools of thought had emerged: the first attributed OPEC’s difficulties to price increases through 1979–80, and believed that future increases needed to be equal to one-half of inflation, so as to have a decline in prices in real terms; while the second continued to believe in maximizing rents through annual increases in real prices.83 The Saudi minister for Planning Hisham Nazer publicly argued in April 1981 that in the period 1980–1 Saudi Arabia could have met its requirement with half the level of exports, but that it was trying to force other producers to moderate their price demands and finally agree to a long term pricing strategy.84 Rather than lowering official crude oil prices, OPEC turned to an instrument that in the past it had always refused to employ due, among the other, to Saudi opposition: prorationing. At the end of January 1982, North Sea spot prices remained more than $2 below the official prices set by the BNOC, which were still tied to OPEC prices. Downward pressure on the BNOC was growing stronger: it would be increasingly difficult for it to sell its oil at higher prices than other companies in the North Sea such as BP and Shell. If BNOC gave way, then Nigerian prices would follow suit. This, in turn, would call into question OPEC’s entire price structure.85 On March 6, 1982, while in Doha for an OAPEC meeting on regional energy cooperation, Saudi Arabia suggested an informal OPEC meeting to discuss how to react in light of poor market conditions. During the meeting, Saudi officials proclaimed themselves ready to contribute to stop the slide by cutting Saudi output to 7.5 mbd.86 At the sixty-third OPEC Conference that same month in Vienna, the outgoing President Al-Otaiba sketched a troubling portrait dominated by a 5 percent decline in global oil demand, coupled with an increase of in non-OPEC production of 2 mbd through 1980–2. Deputy Secretary General Chalabi, who would serve as acting Secretary General between 1983 and 1988, added that the stockpiling of reserves by IEA members was becoming a tool to exert political pressure: Historically when the oil companies had controlled the up-stream side of the industry, stock movements had been made on a technical, operational and seasonal basis, in 82  NYUAD Library, ASC, GGC, MC-038, Minutes of the 62nd Meeting of the Conference, Abu Dhabi, December 1981. 83  Ibidem. 84 Mikdashi, Transnational Oil, p. 48. 85  “Spot Market Slide Intensifies Pressure on Crude Prices”, MEES, February 1, 1982. 86 Skeet, OPEC, p. 184. 

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

332

The Rise and Fall of OPEC in the Twentieth Century

which case a supply of 45 days could be considered reasonable without the oil in transit. However, since OPEC took over the up-stream side of the industry and the pricing of oil, there had been a major change in the sense that the consumers looked at stocks not only from the angle of security of supply and a safeguard against supply disruptions, but also from the point of view of influencing the market in what was called a “subcrisis” situation.87

According to Al-Otaiba, the only way to react to declining prices was to come to some agreement to reduce OPEC production, if possible below the total of 18.5 mbd. This figure was based on OPEC internal calculations that factored in global demand, non-OPEC output, stockpiles, as well as estimates of lower demand during the summer months. The Iranian Petroleum minister argued that they needed to do more than that to win back their market control. They would have to break the West’s stockpiles by dramatically cutting OPEC output to less than 10 mbd (a sacrifice that wouldn’t affect Iran). Yamani argued that it would be impossible to convince non-OPEC countries, with the possible exception of Mexico, to help curb supply. Norway and Great Britain, in particular, formed the backbone of an “opposite camp” that had no intention of cooperating with OPEC. Countries such as Angola, Oman, Malaysia, and Egypt, meanwhile, simply aimed at maximizing their output in order to foster their own domestic development. Yamani thus chose to line up Saudi Arabia with those who wanted a cap on OPEC production. Complete minutes of the meeting are not available, but, as might be expected, discussions concerning individual quotas were intense. In the event, the ceiling on total OPEC production was fixed at 18 mbd, and the “differentials” between various grades of crude were set at the levels prevailing before the second shock of 1979–80. Mana Al-Otaiba was to chair a Monitoring committee with the purpose of of keeping an eye on the market (Table 7.1.). We can draw several conclusions from this meeting. First that it was historic, making it the first time OPEC decided just to set crude oil prices, but also engaged in production management. The agreement, by ceding a little wiggle room to Nigeria, also allowed the African country to stick with OPEC system. Secondly, it most be noted that the transformation of OPEC into a cartel was above all the result of a Saudi strategic decision. While the country had historically been opposed to “prorationing”, it had now approved the collective ceiling, cut back on its own output, and implicitly offered itself up as a guarantee for the entire system since no other country would accept production cuts. We cannot know for sure what ­motivated this significant policy U-turn—the first of many surprises that the Saudi government would reveal over the following months. There is certainly some truth to Alnasrawi’s notion that prorationing was in part a victory for Iran: the Islamic government had demonstrated its ability to increase its output at the expense of Saudi Arabia’s by undercutting official prices. Iran did not feel compelled to respect quotas and would only benefit from Saudi willingness to control production and defend global prices. The Iraqi government, financially supported by the Gulf 87  NYUAD Library, ASC, GGC, MC-038, Minutes of the 63rd Meeting of the Conference, Vienna, March, 1982.

Table 7.1.  OPEC establishes a collective production ceiling and individual quotas starting from 1982 (OPEC Bulletin). Apr 82-Mar 83 Apr 83-Oct 84 Nov 84-Aug 86

OPEC OPEC excl Iraq

Nov 88

Dec 86

Jan 87-Jun 87 Jul 87-Dec 87

Jan 88-Dec 88

Jan 89-Jun 89

1/

2/

3/

4/

5/

6/

7/

8/

9/

10/

650 200 1,300 1,200 1,200 800 750 1,300 300 7,150 1,000 1,500

725 200 1,300 2,400 1,200 1,050 1,100 1,300 300 5,000 1,100 1,575

663 183 1,189 2,300 1,200 900 990 1,300 280 4,353 950 1,555

663 183 1,189 2,300 1,200 900 990 1,300 280 4,353 950 1,555

£69 221 1,193 2,317 − 921 999 1,304 300 4,353 950 1,574

669 221 1,193 2,317 − 999 999 1,304 300 4,353 950 1,574

635 210 1.133 2,255 1,468 948 948 1,238 285 4,133 902 1,495

667 221 1,190 2,369 1,548 995 995 1,301 299 4,343 948 1,517

667 221 1,190 2,369 − 996 996 1,301 299 4,343 948 1,517

695 230 1.240 2,640 2,640 1,037 1,037 1,355 312 4,524 988 1,636

17,350  

17,350  

15,863

  14,801

  14.879

15,648  

16,441  

  14,901

18,334  

15,863  

 

(continued)

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Algeria Ecuador Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela

Sep 86-Oct 88

Jul 89-Sep 89

Algeria Ecuador Indonesia IR Iran Iraq Kuwait SP Libyan AJ Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela OPEC OPEC excl Iraq

Oct 89-Dec 89 Jan 90-Jul 90

Aug 90

Apr 91-Sep 91 Oct 91-Jan 92* Feb 92-Sep 92 Oct 92-Dec 92* Jan 93-Feb93

Mar 93-Sep 93

11/

12/

13/

14/

15/

16/

17/

18/

19/

20/

733 242 1,307 2,783 2,783 1,093 1,033 1,429 329 4,759 1,041

771 254 1,374 2,926 2,926 1,149 1,149 1,501 346 5,014 1,094

822 273 1,374 3,140 3,140 1,500 1,233 1,611 371 5,380 1,095

827 273 1,374 3,140 3,140 1,500 1,233 1,611 371 5,380 1,500

827 373 1,443 3,217 − − 1,425 1,840 399 8,034 2,320

na na na na na na na na na na na

760 273 1,374 3,184 505 812 1,395 1,751 377 7,887 2,244

na na na na na na na na na na na

764 − 1,374 3,490 500 1,500 1,409 1,857 360 8,395 2,260

732 − 1,317 3,340 400 1.600 1,350 1,780 364 8,000 2,161

2,235

1,724

1,812

1,945

1,945

19,325

20,316

21,899

22,294

na

2,147

na

2,360

2.257

23,650

22,709

24,200

24,289

23,301

22,013

Notes: Totals may not add up due to independent rounding. Angola joined OPEC in January 2007; Ecuador suspended its membership from December 1992 to October 2007 - No production level allocated. naNo distribution made. * Includes Gabon. # OPEC excluding IR Iran and Iraq.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Table 7.1. Continued

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Agreed at the: 1/ 63rd (Extraordinary) Meeting of the OPEC Conference, March 19–20, 1982. 2/ 67th (Extraordinary) Meeting of the OPEC Conference, March 14, 1983. No production level allocated to Saudi Arabia which will act as the swing producer. Venezuela: 1.7mb/d including condensates. Nigeria: At the 70th Meeting of the OPEC Conference, July 10–11, 1984, a temporary production rise to 1.4mb/d and 1.45mb/d in Aug84 and Sep84 respectively was decided. 3/ 71st (Extraordinary) Meeting of the OPEC Conference, October 29–31, 1984. Retained at the 75th (Extraordinary) Meeting of the OPEC Conference, October 4, 1985. 4/ 78th Meeting of the OPEC Conference, June 25–30, 1986 and July 28 to August 5, 1986, with the exception of Iraq. 5/ 79th (Extraordinary) Meeting of the OPEC Conference, October 6–22, 1986, with the exception of Iraq. 6/ 79th (Extraordinary) Meeting of the OPEC Conference, October 6–22, 1986, with the exception of Iraq. 7/ 80th Meeting of the OPEC Conference, December 11–20, 1986. 8/ 81st Meeting of the OPEC Conference, June 25–27, 1987. 9/ 82nd Meeting of the OPEC Conference, December 9–14, 1987, with the exception of Iraq. Extended at the 83rd Meeting of the OPEC Conference, June 11–14, 1988, with the exception of Iraq. 10/ 84th Meeting of the OPEC Conference, November 21–28, 1988. 11/ 85th Meeting of the OPEC Conference, June 5–7, 1989. 12/ 3rd Meeting of the Eight-Minister Monitoring Committee, September 23–7, 1989. 13/ 86th Meeting of the OPEC Conference, November 25–8, 1989. 14/ 87th Meeting of the OPEC Conference, July 26–7, 1990. Sep00–Mar01: Oil Ministers’ informal c­ onsultations and 1st Ministerial Monitoring Committee, August 26–9, 1990 (Interim course of action; OPEC shall consequently increase production in accordance with need). Retained August 1990 agreement at the 88th Meeting of the OPEC Conference, December 12–13, 1990. 15/ 3rd Meeting of the Ministerial Monitoring Committee, March 11–12, 1991. Reservations were made by Algeria and IR Iran to the total OPEC production level. Reiterated without reservations at the 89th Meeting of the OPEC Conference, June 4, 1991. 16/ 4th Meeting of the Ministerial Monitoring Committee, September 24–5, 1991. Retained at the 90th Meeting of the Conference, November 26–7, 1991. 17/ 6th Meeting of the Ministerial Monitoring Committee, February 12–15, 1992. Reservations were made by IR Iran to the total OPEC production level and by Saudi Arabia to their allocated production level. Rollover (inclusive the reservations) at the 91st Meeting of the OPEC Conference, May 21–2, 1992. The Conference also decided to allow any additional production from Kuwait. 18/ 9th Meeting of the Ministerial Monitoring Committee, September 16–17, 1992. Reaffirmed to allow for any additional production from Kuwait. 19/ 92nd Meeting of the OPEC Conference, November 25–7, 1992 with full support of Member Countries, except Iraq and the allowance of additional volumes to Kuwait as they become available during the 1Q93. 20/ 10th Meeting of the Ministerial Monitoring Committee, February 13–16, 1993 with full support of Member Countries, except Iraq. Rollover of this agreement at the 93rd Meeting of the OPEC Conference, June 8–10, 1993 with full support of Member Countries, except Iraq and Kuwait.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

336

The Rise and Fall of OPEC in the Twentieth Century

monarchies, had every interest in a further weakening of Iran but could not oppose a the Saudis. It is equally undisputable that the prior level of Saudi production, so much larger than the rest of OPEC countries, offered a good argument for the critics of the Saudi royal family for its subservience to the West, and that, as we will see, even within the Saudi government many still favored a more “conservative” oil production policy that would not endanger oilfields and overheat the economy. It should also be remembered, however, that in 1982 the Saudi budget was on its way to shrink for the first time since the 1950s, with potential for significant fallout in terms of public sector employment, and for endangering the social and political fabric of the country. The Saudi government had every incentive in preventing oil prices from going into free fall, to avoid a possible fratricidal war among OPEC countries, and to attempt to keep the output of other producers as much as possible under some degree of control. * * * OPEC’s metamorphosis into a cartel from March 1982 until the summer of 1985 was hardly welcomed in Washington and London, and basically lasted until Saudi Arabia took on the responsibility of propping up the entire system. This effort cost it dearly, not only in terms of a progressive reduction of output, and thus of state income, but also because the decline in crude oil production meant lower production of associated gas, with detrimental consequences for private citizens and industry, including the country’s vital water desalinization plants. With its second five-year plan of 1975, the Saudi government had undertaken, as we have mentioned, an massive natural gas development plan that risked being jeopardized by low oil production. The March 1982 agreement to cap OPEC production was not only problematic for Saudi Arabia. Iran had never accepted its quota—or rather, it had nominally accepted it only because at the time it wasn’t capable of producing more than 1.2 mbd. Immediately after March, Iran began offering further discounts and managed to increase its output from 1.1 to 2.8 mbd by the end of the year.88 This aggressive oil marketing strategy, that included barter agreements with countries in Eastern Europe, was accompanied by the military offensive against Iraq, a country that also hoped to find new outlets for its oil after Syria had cut off the pipeline that carried Iraqi crude to the Mediterranean (also here due to Iranian pressures). To make matters worse Nigeria, in the midst of a deepening socio-economic crisis, remained linked to OPEC by an increasingly fraying thread, with voices in the national media and in the Parliament insistently calling for a withdrawal from the organization. At the sixty-fifth Extraordinary OPEC Conference of July 1982, the clash between Iran and Saudi Arabia reached an unprecedented level of acrimony. Gharazi accused Riyadh of demanding cuts from Iran when it had disproportionately increased its own production to profit from the political instability caused by Gulf war. The Iranian delegate argued that the total output of Saudi Arabia, Iran, and 88  Farrokh Najmabadi, “Government Policy and Evolution of the Iranian Oil Industry”, in Looney (ed.), Handbook of Oil Politics, Chapt. 19.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

337

Iraq should be set at 10 mbd, hissing that “his country had the capacity to produce 8 million barrels per day and they would show Yamani that he was not the king of the area.”89 Faced with such harsh personal attacks (to which he never responded directly), Yamani announced he felt ill, and left the room for the second time since he had begun attending OPEC meetings. The Monitoring committee alerted that in 1981, nine out of the fourteen most important commodities exported by the countries of the Third World, had seen their prices fall between 10 and 52 percent. Compared to that debacle, petroleum had actually done relatively well. But tensions remained high due to the cheating on quotas (especially on the part of Iran and Libya) and to the various discounts offered to consumers (particularly by Nigeria). The Nigerian minister Umaru Dikko defended his country by arguing that it had no intention of undercutting the OPEC brethren, but that competition from the North Sea left it little choice: “He had not witnessed any oil companies approaching him and telling him that his crude was cheaper than that of Saudi Arabia or anyone else; to the contrary, the oil companies merely approached him and said that his oil was more expensive than Ekofisk or Forties [both North Sea oilfields].”90 The goal of the Conference was to find a shared and lasting solution on how to distribute the overall production ceiling of 17.5 mbd, but agreement was still a long way off. Iran continued to demand further sacrifices on the part of Saudi Arabia and asked for some “objective parameters” to determine respective quotas. Gharazi unleashed another threat: “If necessary his country would use force to regain its share from Saudi Arabia.”91 Al-Turki, the Saudi delegate who had momentarily replaced Yamani, responded in kind: “Nobody was able to force Saudi Arabia to change its policy as to how it considered production levels and he was at a loss to understand what HE Gharazi had meant by saying he would use force.”92 Gharazi remained undeterred: “He was not prepared to accept an agreement which benefitted those whose money flooded into western institutions and banks.”93 The Venezuelan delegate Calderon-Berti suggested that OPEC was making a fool of itself in the eyes of the rest of the world by establishing a cap on production that none of its members respected. Gharazi replied that he couldn’t allow his own citizens to starve while a sea of oil remained beneath their feet, and repeated that quotas would have to take into account historical production levels, reserves, population size, and real needs (that is, Saudi production could not be three or four times that of Iran). The discussion went around in circles, without achieving any practical result. At the Conference of December 1982 in Vienna OPEC’s problems were compounded by the need to select a new Secretary General. A twisting discussion over the rotation between countries appeared to be little more than an excuse to avoid naming an Iranian to the post. Iran, in turn, blocked the nomination of any nonIranian Secretary-General. This is the reason why Chalabi would, as previously mentioned, serve as the acting Secretary General for some time to come. 89  NYUAD Library, ASC, GGC, MC-038, Minutes of the 65th (Extraordinary) Meeting, Vienna, July, 1982. 90  Ibidem. 91  Ibidem. 92  Ibidem.   93  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

338

The Rise and Fall of OPEC in the Twentieth Century

In January 1983, GCC countries, along with Nigeria, Iraq, and Indonesia, threatened to lower crude oil prices if quotas were not agreed to and respected. On February 18, 1983 BNOC finally slashed prices by $3 a barrel. Nigeria, even though it had been financially supported by Saudi Arabia, responded with an even greater cut of its own, while simultaneously guaranteeing better fiscal terms to international companies so as to encourage them to produce more in Nigeria. In March 1983 the first “futures” contract for West Texas Intermediate (WTI) was sold, thereby increasing the volume of oil (in addition to spot oil) priced at ­favorable market conditions. Pressures to lower prices seemed unstoppable, and ultimately OPEC was forced, to back down and accept, once more for the first time in its history, a lower oil price. In the span of a few short months it made two historical decisions: first to set production quotas, and then to lower the official selling price of crude oil. The sixty-seventh Extraordinary OPEC Conference was held, significantly, in London (the source of so many of the organization’s problems), and lasted a full twelve days. Ian Skeet summarized the tenor of the meeting: “Argument over quota allocations took up days of wrangling, with Venezuela and the UAE the most difficult to dislodge from their opening positions. Heads of state appealed to heads of state. Ministers contested, compromised and cajoled. Nigeria was ­poetically insulted by the UAE. Qatar almost torpedoed the final agreement.”94 The reference here is to a poem that UAE delegate Al-Otaiba (whose poems were also mandatory readings in Abu Dhabi schools) wrote in the closing days of the conference to encourage a solution, a section of which, in its official English translation from Arabic, reads: To each a share in the market, And let supplies be divided, And as a reduction of the price Cannot be now avoided, Let us arise and all declare: “A new measure is decided, Lest we lose these markets we seek, And fell disturbed or derided.”95

By the end of the Conference Iran provisionally accepted a quota of 2.4 million barrels per day only because it knew that its numerous technical problems would make that level very had to be reached in the near future (in fact it would reach 2.4 mbd only after 1988).96 Iraq also accepted its quota. The UAE delegation, which could only control the production of Abu Dhabi—and not that of Dubai, over which Al-Otaiba had no authority since petroleum did not fall under federal jurisdiction—accepted its quota in exchange for a commitment that its quota be ­revisited in short order. In the course of the discussions Yamani explained that 94 Skeet, OPEC, p. 192. 95 Terzian, OPEC, p. 318. 96  Farrokh Najmabadi, “Government Policy and Evolution of the Iranian Oil Industry”, in Looney (ed.), Handbook of Oil Politics, p. 266.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

339

King Fahd had ordered him not to accept any Saudi quota below 6 mbd. In order to avoid disregarding this mandate, Yamani accepted the final agreement without committing to any specific figure. Saudi Arabia would instead play the onerous role of swing producer: it would cover the difference between the total OPEC output (according to their respective quotas) and demand for OPEC oil. This implied, based on the OPEC total cap of 17.5 mbd, that Saudi production would likely not exceed 5 mbd. Yamani explained the Saudi position in the following terms: After their present Meeting, he would return to his Government with no quota for Saudi Arabia, and inform them that nothing had been allocated to his Country as that would at least enable him to return home without having violated the strict instructions he had received. There was, therefore, no quota for Saudi Arabia, which would play the role of the swing producer. However, that in itself was not the problem, as the problem being faced was much deeper and more serious. The problem for his Country was not one of revenue but rather one of associated gas which was required by Saudi Arabia, especially during the summer season when the peak demand for gas was reached at a time when the demand for crude was at its lowest. Using the present ratio of production of Arabian Light vis-à-vis other Saudi Arabian crudes, an output of anything below 5.3 million mbd would not allow his Country to meet its natural gas requirements and he wished his colleagues to know that Saudi Arabia would never take a decision to close some of its generators or reduce the amount of water produced by the seawater desalination plants during the summer, and he did not want his colleagues to then accuse Saudi Arabia of doing anything against OPEC.97

The final resolution of the Conference declared that: “no quota is allocated to the Kingdom of Saudi Arabia which will act as a swing producer to supply the b­ alancing quantities and meet the market requirements.”98 The resolution also announced, as we have seen, the first price cut in the history of OPEC, with the price of Arabian Light dropping from $34 to $29 per barrel. In essence, Yamani accepted an increase in Iranian production and the role of swing producer for the his own country, in exchange for lower official crude oil prices—an objective Saudi Arabia had sought since the second oil-shock. The Saudi government accepted this uncomfortable burden because it believed that the new price level would soon allow OPEC to increase output in the near future. Saudi Arabia, the swing producer, would thus soon be able to soon rump up production. During the London meeting, there had also been discussions with the British secretary of Energy Nigel Lawson, who had expressed to several delegates his willingness to talk about the problems facing OPEC. As archival sources reveal, however, although oil revenues were important to the British Treasury, there was no real interest on the part of the Conservative government to cooperate with OPEC. Crude oil price

97 NYUAD Library, ASC, GGC, MC-038, Minutes of the 27th (Extraordinary) Meeting of the Conference, London, March, 1983. Yamani also added that the Saudi problem might disappear in 1985, when the production of “non associated” natural gas would begin. 98  OPEC Press Release n. 2–83, London, March 14, 1983.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

340

The Rise and Fall of OPEC in the Twentieth Century

increases were considered extra taxation on the British consumer, while support for OPEC would clearly contradict the general lines of Whitehall’s foreign policy: i. The moderate fall in the oil price which we have now seen will help world ­economic recovery but it is desirable both for the world and for the UK that the fall should go neither too fast nor too far [. . .] ii. There is little the UK alone can do to ensure the fall is gradual. A link between ourselves and OPEC would probably be ineffective and would request a major departure from our existing policies, risking a break in our relations with the other industrial countries. iii. The successful pursuit of the Government’s economic strategy requires that we maintain output and sales of North Sea oil. This is of great importance for revenue, PSBR and balance of payments reasons, and therefore also part of the counter inflation policy. It is not in our interests to cut our oil production. Short of drastic action through new powers we lack the means to do so on any significant scale. And we cannot afford to undermine confidence in our readiness to really on the market economy to develop North Sea oil by claiming to know better than the companies the balance of advantage between present and future oil production. iv. However, while it is beyond our power to do much to keep oil prices up we should do what we should not add to the pressures driving them down. Our stance should be one of acquiescing to downward market adjustments while keeping a low profile relation with OPEC [. . .] If OPEC can agree on an effective production programme, we are not needed; if it cannot, it is only in very unusual circumstances that our cooperation would provide the necessary cement.99

The outcome of the London meeting was ideal from the point of view of the British government that would potentially benefit from stable prices without having to engage in any cooperation. Lawson commented: “the importance of OPEC is that it became the swing producer for the world and Saudi Arabia is the swing producer of OPEC.”100 Strangely enough, this official transformation of OPEC into a cartel, with quotas and everything, while not actively encouraged by the UK, the US, or by the IEA was not considered, as it would have been in the past, a crime against consumers. A weak OPEC, while not in control over oil prices, could actually step in to avoid a free fall. * * * The entire effort to prop up global oil prices thus fell on the shoulders of OPEC, which had failed, however, to definitively resolve its own internal problems. Each of its member states had an incentive to cheat on both production and on prices, while trusting that the others would keep respecting the rules (the incentive to act 99 TNA, PREM 19/1016, Secretary of Energy to Prime Minister, The Oil Price and the UK Economy, March 16, 1983. 100 Mikdashi, Transnational Oil, p. 58.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

341

as a free rider). If quotas were not respected, the London agreement on the “swing producer” implied that Saudi Arabia would continually be forced to reduce output in order to protect prices. The Saudi hope that a reduction in prices would soon translate into a boost in Western consumption quickly revealed to be unfounded. At the next OPEC Conference in Helsinki, the Economic commission offered the sobering assessment that the reduction of 5 dollars had not been transmitted to consumers because, except for Germany where there had been some decline in gasoline prices (albeit less than the OPEC cut): “consumer governments did not reduce internal prices, with the difference being cashed by the Treasury of the consuming countries, in the form of taxes.”101 Yamani chimed in, reiterating that OPEC’s entire Long-Term Strategy had to be revised by prioritizing dialogue with the non-OPEC countries. The organization’s position of refusing to negotiate prices with the consumers would also have to be revisited. Prices would in all probability have to be lowered further. But the problem now was opposition from the industrialized countries themselves: [T]hey could not decrease their price again as even assuming that they themselves would accept it, the consumers would not. The consumers would not let OPEC play with the price of oil in order to manipulate demand: instead, they would impose tariffs and taxes in order to continue their policy of reducing dependence on oil and OPEC.102

The main enemy of any idea of price reduction remained the Iranian Gharazi, for whom the taxes imposed by the consumer nations demonstrated the futility of any further price reductions, and indeed the need for a price hike. On December 8, 1983, the Nigerian Senate passed a resolution publicly calling on the President to increase Nigeria’s quota from 1.3 million barrels a day to 1.9 million barrels because it had not been given a “fair and adequate” share. A number of pressure groups and media outlets called for the country to leave OPEC. Competition from the North Sea continued to take its toll. The Nigerian technocrats of the NNPC sought to slow opposition that railed against the “Arab ­organization” by pointing out that a steady rise in Nigerian output—the likely result of ­withdrawal from OPEC—would seriously threaten the availability of oil for future generations.103 At the OPEC Conference in Geneva in December, the Monitoring committee reported numerous violations of production quotas. The Algerian Energy minister Belkacem Nabi said that talks about prices and quotas were now insufficient, and that OPEC would now also have to discuss how to help members that were unable to respect the agreements. Gharazi continued to call for a reduction in Saudi production, while urging reprisals against Great Britain for its anti-producer stance. Yamani invited everyone to remain calm, arguing that one could not simply ask a country that was a member of the OECD, IEA, and EC, ruled by a “proudly 101  NYUAD Library, ASC, GGC, MC-038, Minutes of the 68th Meeting of the Conference, Helsinki, Finland, 1983. 102  Ibidem. 103  Author’s interview with Chief Michael Olorunfemi (Academic and former NNPC officer), January 26, 2017.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

342

The Rise and Fall of OPEC in the Twentieth Century

conservative” government, to openly negotiate prices and production controls. Contacts, if there were to be any, would have to be under the radar. He also wondered: why the Conference tended to focus its attention on Great Britain where the upper limit of intended production was 2.3 million bd, a level which could be maintained for a-year or two after which output would start to decline. Norway, on the other hand, which had produced 500,000 bd in 1982 and which had increased its output by 40% in 1983, was expected to reach 1 million bid very soon. Moreover, Norway was in a very different position as that country’s dependence on oil revenues and the contribution of oil to its economy was far greater than in the case of Great Britain. He believed, therefore, that OPEC should focus more attention on Norway as the threat of an increase in production was greater from Norway than from Great Britain.104

The situation was no better in 1984. Indeed, as if to demonstrate just how severe the problems generated by the fall of prices were for Nigeria, the year opened on January 1 with a military coup led by General Muhammad Buhari. This was not necessarily bad news for OPEC, since Buhari had previously worked for the ­petroleum industry, and the statement announcing the coup explicitly mentioned respect for the country’s engagement within OPEC. The underlying problems remained the same: the devaluation of certain currencies against the dollar, as well as the gasoline taxes in OECD countries, affected growth in consumption. The only non-OPEC country to offer cooperation was Mexico. The developing countries that actually benefitted from the reduction in prices and could thus increases crude imports could be counted on one hand—India, Brazil, Taiwan, and South Korea, in particular—while others were actually harmed, in terms of declining imports from OPEC countries and fewer o­ pportunities in the Gulf for migrant workers, whose remittances were an essential source of revenue. In several countries, popular pressure to take off the shackles of OPEC quotas was ever stronger. The head of the commission on Mining, Industry, and Investment of the Nigerian Parliament declared publicly that: “should the country’s interest conflict with those of OPEC, national interest should prevail”.105 The Venezuelan delegate to the ­seventieth OPEC Conference of July 1984 stated that one-third of his country’s revenues were now being used to pay off its international debt, and that respecting its production quota was strangling its people.106 The delegate from Nigeria argued maliciously that the Nigerian people could not understand how an agreement could be so binding if it was not even set down in black and white (mainly because of Saudi resistance, OPEC resolutions did not mention member’s quotas): [T]he quota set-up was, in fact not the subject of a tangible OPEC Resolution but a loose understanding to which some Member Countries had voluntarily subscribed their support or commitment, to the extent they found it comfortable to do so. The principle enunciated and upheld by some Members that the fixing of production rates 104 NYUAD Library, ASC, GGC, MC-038, Minutes of the 69th Meeting of the Conference, Geneva, December 1983. 105  Platts Oilgram Newswire, June 19, 1984. 106  NYUAD Library, ASC, GGC, MC-038, Minutes of the 70th Meeting of the Conference Vienna, July 1984.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

343

was the exclusive sovereign right of a country was now being raised more frequently and ever more loudly in Nigeria.107

In October 1984, just before an OPEC conference scheduled for the end of the month, Yamani’s “Norwegian prophecy” came true. The Nordic producer, which had long managed to keep a low profile, revealed how far off target had the description of the Norwegians as “blue eyed sheiks” been. STATOIL began to offer a discount of $1.50 a barrel to its clients, completely disrupting the preparations for the OPEC Conference, set to discuss a possible increase in production quotas. BNOC announced a $1.50 discount of its own, and Nigeria immediately responded by increasing its discount by a further $2. OPEC’s member states found themselves having to tighten their belts once more. The North Sea Brent had become officially a new reference point for the global oil market. During the Conference, Yamani referred to his meetings with the non-OPEC countries, Mexico and Egypt in particular, as well as his numerous phone calls with the British secretary of Energy. The Norwegian minister of Oil and Energy, Kåre Kristiansen, who met with Yamani and Al-Chalabi on October 26, had informed Yamani that the fateful decision had been made independently by STATOIL. It was not intended as a political statement, nor did it express Norway’s desire to position itself as a market leader. Kristiansen had promised not to increase production for the following year (a promise that would be disregarded).108 Yamani was skeptical in any event, and believed that Norway would soon come under “­political” pressure to avoid reaching any agreements with OPEC. The only thing that was left to do was to decide upon how much to reduce production, a decision which, if respected, would be equally painful for all. The Nigerian minister David-West then counted off the various social and economic problems facing his country: For instance, tens of thousands of workers had been retrenched as a result of the severe decline in the Nigerian economy and several industries had been closed down or were, at best, in a state of suspended animation. As an illustration, statistics from 800 private establishments employing about 90,500 showed that 19,400 or about 21.4% had so far been retrenched. Also out of a total of 45,000 who had graduated from their institutions of higher learning, universities and polytechnics in 1983, only 5,000 had been placed. In other words, 40,000 professional bodies were roving the streets of Lagos and other cities of Nigeria. In addition, foreign and domestic debts inherited from the last civilian administration stood at about US$44 billion. Because of all the above, their teeming population of about one hundred million people were being subjected to very biting austerity measures by government.109

All these figures were an ex post facto justification for Nigeria’s price cut in defiance of the OPEC resolution on prices, which effectively left the country on the outside 107  Ibidem. 108  On the evolution of Norwegian relations with OPEC in the mid-1980s: Dag Harald Claes, The Politics of Oil-Producer Cooperation (Oxford: Westview Press, 2001). 109  NYUAD Library, ASC, GGC, MC-038, Minutes of the 71st (Extraordinary) Meeting of the Conference, Geneva, October 1984.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

344

The Rise and Fall of OPEC in the Twentieth Century

of the organization looking in. “[O]ne could not be a member of OPEC and, at the same time, act outside OPEC,” Yamani warned.110 At the end of the talks OPEC decided to reduce its production ceiling from 17.5 mbd to 16 mbd. To avoid setting the Saudi quota in stone, the resolution once again only referred to the reduction of the overall production ceiling, to which every country pledged to contribute their fair share. Only Iraq and Nigeria were to be left unaffected. The most significant cut was that of the Saudis, who would have to lower production by roughly 600,000 barrels. In this way, Saudi Arabia first openly exercised its role as the swing producer, agreeing to a de facto quota of 4.35 mbd in the hope that reduction would be temporary because during the winter the demand would go up. In December 1984, the OPEC conference in Geneva had to take stock of the situation generated by OPEC’s production cuts. And the situation was, according to Al-Otaiba, that the combination of continued slow growth in the industrialized countries, a better than usual winter, reductions in international stockpiles, pressures from spot prices, and the increasing availability of non-OPEC oil, were continuing to generate problems. Yamani summarized the European perspective thusly: “Europe, for instance, faced with the two problems of the dollar and the price of oil, very much needed a lower oil price in order to support a real economic recovery, and it was easier to reduce the price of oil than to reduce the value of the dollar.”111 The Algerian minister Nabi agreed: “The economic crisis was not ­imagination but a reality and OPEC Member Countries constituted the weakest part of the international economic order. If the industrial countries could help themselves by taking some billions of dollars away from OPEC, it was normal that such countries would do so.”112 Most worryingly, OPEC was continuing to lose credibility and reputation. The Monitoring committee had learned that the OPEC countries were cheating on their obligations in a variety of imaginative ways: offering discounts, signing supply contracts with refineries, bartering oil in exchange for other goods and services. The national oil companies were not collaborating with one another (indeed, meetings among them had been suspended), because they believed their own contracts with the oil multinationals should remain secret. The mechanism pushing prices ever lower was devilish. A price reduction of $2 a barrel should theoretically have been met by OPEC with a corresponding reduction in output. But, in practice, every drop in price pushed the OPEC countries to increase production in order to protect their revenues. It was a vicious cycle. But how could OPEC’s credibility be salvaged? Gharazi suggested involving heads of State and government directly: “OPEC Heads of State were not busier than the Heads of State of the western, industrial countries, which latter got together every six months to decide and conspire against OPEC.”113 Yamani cautioned that they were dealing with serious people on the other side, “who were bugging their 110  Ibidem. 111  NYUAD Library, ASC, GGC, MC-038, Minutes of the 72nd Meeting of the Conference, Geneva, December, 1984. 112  Ibidem. 113  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

345

meeting and overhearing every word being said,” and probably knew more about their situation than they knew about it themselves. “[I]t was said that if one cornered a cat she would fight back,” he added “[W]ondering whether a cat was better than OPEC, HE Yamani suggested that the Organization behave like a cat at least once.”114 For Yamani, the right way to react was to adopt stricter rules than they had in the past. He proposed creating an Executive council to monitor outbound shipping from OPEC countries, and thus prevent any attempt to cheat. After all, “Even the superpowers—and there he was talking of Russia and the United States of America—had accepted the principle of foreign bodies to investigate their armed forces and weapons.”115 Yamani warned the most recalcitrant countries that they would face the risk of being “suspended” from the o­ rganization, since it was unacceptable for most OPEC countries to submit to controls while others refused to do so. The final communiqué confirmed the establishment of a system of controls (Yamani’s Executive council) to restore the organization’s credibility and good name. By January 1985 it was abundantly clear that the coal miners’ strike in Great Britain had been defeated. This would have the effect of reducing emergency petroleum demand in the United Kingdom, and thus increasing the supply of oil looking for a market. Algeria, Libya, and Iran, which made up OPEC’s radical front, remained firmly opposed any further reduction in the price of crude. In June the price of Brent crude continued to fall. In between the meetings of ­ elivered the Executive council in Taif, Saudi Arabia, on June 2–3, 1985, king Fahd d the unmistakable warning that if OPEC countries continued to overproduce their respective quotas, Saudi Arabia would do likewise. If the other members offered discounts, Saudi Arabia would do that as well. Saudi production had by now dropped to below 2.5 mbd, the lowest it had been since the founding of OPEC, and the King’s message was a clear message that Riyadh would not continue to hold the OPEC fort alone.116 The only reason why such low production levels had not already generated internal chaos was because ARAMCO had in the interim managed to produce a substantial amount of non-associated gas to keep Saudi industry going. The OPEC Conference in July was preceded by the privatization of the BNOC— meaning that henceforth, British prices would simply follow market trends. In the North Sea, OPEC’s only remaining potential partner was Norway, but it was unwilling to cooperate. The IEA (with the exception of Greece and Austria) had no interest in cooperating with OPEC on discussing either production levels or prices, as confirmed by the US representative in an informal lunch in February 1985: “The US was firmly opposed to participating in any multilateral discussion about the price of oil or about the levels of production.”117 Once again the outlook was grim. OPEC’s Economic commission emphasized that the modification of fiscal terms on equity oil in some petrostates allowed 114  Ibidem.   115  Ibidem. 116  “Saudi Arabia Warns OPEC Members on Consequences of Continued Production and Price Indiscipline”, MEES, June 10, 1985. 117  HAEU, CA 2, Note for the Attention of Mr. Mosar, Contacts between producers and consumers of oil, 05.02.85.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

346

The Rise and Fall of OPEC in the Twentieth Century

international companies to offer discounts. Al-Otaiba reported that non-OPEC production had increased by 500,000 barrels a day. Some 70 percent of the oil in circulation was now outside OPEC’s control, and of the 30 percent still exported by OPEC the vast majority was not being sold at official prices. Yamani defended the role of the Executive council by describing it, somewhat excessively, as a unique model of “supranationalism” in the history of international organizations. By the end of the Conference there was a modest downward revision of oil prices, followed by a rather unreassuring message on the part of Iraq: once construction of the pipelines carrying crude through Saudi Arabia and Turkey had been completed, Baghdad would no longer accept output limitations of any kind. Y A M A N I ’ S L A S T B AT T L E Official OPEC pricing basically ceased to exist for Saudi Arabia in September 1985. The announcement was made off-handedly by Yamani himself while attending a seminar at the Oxford Institute for Energy Studies. During one of the sessions, Yamani, Chalabi, and Ali Attiga of OAPEC had accused the OECD and non-OPEC countries of generating an unsustainable situation. Yamani argued that Saudi Arabia was not “willing or able to take that heavy burden and duty [protecting the price of oil]” thus its cooperation in the future “cannot be taken for granted.”118 Chalabi, who was close to Yamani (and would in the future become his associate in a private oil consulting firm), said: I cannot see that OPEC will continue to be the only price defender by systematically holding back its production and undermining its development programs and the financial and political equilibria inside its member countries. I cannot imagine that within OPEC one country could act as the downward swing producer accepting the whole reduction of output.119

The tool that the Saudi minister chose to regain market share were so-called “netback contracts”. Majid Al-Moneef explains such contracts this way: “the intention was to induce buyers to prefer Saudi crude by linking the FOB prices of its crude types to their CIF product price realization, thus abandoning the defense of official prices”.120 Historically, netbacks had allowed the integrated oil companies to shift profits from production to refining for fiscal or other reasons. Netbacks meant guaranteed profits for the refiners, while adapting the price of crude to account for these profits. All the risk was shunted onto the seller (the exporting country), which could not be entirely certain of the final price of its own crude. In exchange for accepting this price risk, Saudi Arabia, the first country to introduce netbacks, managed to double its output in just a few months. Netbacks, coupled with the 118  Robert Mabro (ed.), OPEC and the World Oil Market: The Genesis of the 1986 Price Crisis (Oxford: Oxford University Press, 1986), p. 166. 119  Ibidem, p. 191. 120  Majid Al-Moneef, “Saudi Arabia and the Counter-shock of 1986”, in D. Basosi, G. Garavini, and M. Trentin (eds.), Counter-Shock, pp. 105–6.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

347

abundance of crude oil in circulation, pushed global prices further downward and generated a turmoil in the market that reflected Yamani’s warnings in December 1984 that: “when we enter that war we will not create a stable lower price for oil. We will just go up and down and at whatever floor we want to hit [. . .] Damage will be very serious, not only for the UK, but for banks in the US. Mexico could not service its debts.”121 It is thus legitimate to ask why the country (and the Petroleum minister) that had invested the most in fixing a production ceiling in order to defend official OPEC prices—even advertising the Executive council as a model of international cooperation—opted for a new tactic that sealed the fate of OPEC’s price structure. While a definitive answer must probably await the opening of Saudi archives, it is possible to hazard a few guesses (Fig. 7.4.). The first explanation concerns Saudi Arabia’s increasingly precarious financial situation, with an expanding population and declining state revenues. The plan of 1975-1980 had obviously not been able to generate new sources of export revenues and, while tax revenues had not gone up, Saudi GDP fell by 24 percent from 1982 to 1987 Oil rents had dropped from $119 billion in the peak years of 1980 to merely $26 billion in 1985. While ARAMCO paid SAMA $8 billion a month in 1982, in three years this had gone down to two billion.122 Foreign exchange reserves similarly dropped from $100 billion in 1983 and would fall to $60 billion in 1987.123 Not only oil revenues were decreasing in absolute terms; but in 1985 the dollar began to lose value once again. The greenback had appreciated by more than 40 percent between 1980 and February 1985, only to depreciate by 17 percent by September of that year. That month, the Finance ministers of the five most industrialized countries agreed to a further devaluation of the dollar, which would continue its downward slide throughout the following year. While the devaluation of the dollar allowed the United States to address its trade deficit, and allowed the most heavily indebted countries to catch some breath, it was devastating for petrostates because their crude was paid in a currency that could no longer purchase the same volume of goods outside the dollar area. In addition to the precarious economic situation, the Saudi hydrocarbons industry was experiencing specific difficulties. At the dawn of the 1980s, ARAMCO employed 61,227 people; by 1987, that number had fallen to 43,500.124 Its production facilities, especially offshore, which had involved a tremendous investment effort (requiring, for e­ xample, the building of new residential complexes for workers), were underutilized and subjected to a costly process of “mothballing” to preserve their functionality for better days. The challenges facing the Master Gas Plan, planned for a production of between 12–15 million barrels a day, had been mitigated only by the discovery of non-associated gas fields. By 1985 the “conservatives” in terms of oil policy such 121  Rabinovich, Hamar, and Haim Shaked (eds.), Middle East Contemporary Survey, Volume IX: 1984–85 (Oxford: Westview Press, 1985), p. 261. 122  Dermot Gately, “Lesson from the 1986 Oil Price Collapse”, in Brookings Papers on Economic Activity, No. 2, 1986, pp. 237–84. 123  Banafe and Macleod, The Saudi Arabian Monetary Agency, p. 80. 124 Al-Naimi, Out of the Desert, Chapt. 10.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

348

The Rise and Fall of OPEC in the Twentieth Century Millions of dollars per day (1982 dollars)

1200

1000

800

600

400

200

0 1975

1980

1985

Iran

Others

Kuwait, United Arab Emirates, and Qatar

Iraq

Libya and Algeria

Saudi Arabia

Fig. 7.4.  The rise and fall of oil revenues in selected OPEC countries in the first decade after the 1973 oil revolution. (OPEC, Annual Statistical Bulletin, 1985).

as Crown Prince Abdullah, who had once famously argued that Saudis could also survive on a production of one million barrels a day, or as minister Al-Gosaibi (who lost his ministerial post in 1984) were losing their influence in favor of the proponents of a more aggressive policy. It should also be remembered that by now Yamani had reached the conclusion that OPEC output would not rebound anytime soon (the main reason why he had agreed to an OPEC production ceiling in the first place in 1982). Reduced OPEC output appeared to be a structural factor, one that required immediate countermeasures. In the fall of 1985 Yamani cryptically remarked that “15 [OPEC’s production ceiling at the time] is not divisible by 13.” Some authors also emphasize

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

349

the “strategic” aspects of Yamani’s netbacks move. At the behest of King Fahd, the new Saudi policy, according to some, aimed at weakening Iran (as well as the Soviet Union) at a time when, thanks to the offensive on the Al-Faw peninsula, Tehran seemed to be gaining the upper hand in the Iran–Iraq war.125 Admirers of President Reagan would later argue that Saudi Arabia, by lowering crude prices, had acted as a tool of US foreign policy to cripple the cash-starved Soviet Union. This latter argument should be considered for what it is, an integral part of the Cold War propaganda.126 Saudi Arabia’s war to recapture its market share was instead designed to lead to an immediate improvement in the country’s economic outlook, to punish non-OPEC producers with more expensive crude (particularly North Sea producers), and at the same time to force its OPEC allies to finally respect their assigned q­ uotas. It would take a bloodbath to restore a more stable, orderly system in which OPEC could resume its positions as the leader of the global oil market, perhaps now in collaboration with some of the non-OPEC countries. The notion of a future cooperation between OPEC and non-OPEC countries echoes in some ways the idea that Yamani had at the end of the 1960s of a possible union (“indissoluble marriage”) between international oil companies and OPEC governments for stable prices. At heart, Yamani, as the most heads of the oil majors up to when they controlled the market, had always preferred some form of international cooperation over the anarchy of market competition. Both times, at the end of the 1960s and then again in 1985, Yamani underestimated the forces that led to conflict rather than cooperation between natural resource exporters and their customers. * * * When OPEC met for its seventy-fifth Conference in October 1985, several members were dealing with complex domestic situations that left them little room for compromise. Iraq wanted to increase its output, having just completed its new oil pipeline. OPEC’s market share had dipped to 14.5 million barrels a day, a far cry from the 31 million barrels it had in 1979. The Executive council had essentially failed its mission, given that its primary supporter (Yamani) had given the green light to netbacks which, in addition to practices such as “countertrade,” were on the council’s list of “malpractices”, together with any other mechanism that allowed a member state to sell crude below official price. Algerian Energy minister Nabi, from the prosecutor’s chair, argued that it was one thing if a country with a per capita income of $600 a year cheated on prices, quite another for a country with a per capita income of $1200 a year. Yamani, far from being defensive, retorted that there were countries like Saudi Arabia that had played by the rules, others like Kuwait or Venezuela that had honored their commitments because they 125  For example: Shireen  T.  Hunter, Iran and the World: Continuity in a Revolutionary Decade (Indiana University Press, 1990), p. 119, Razoux, La guerre Iran–Irak, p. 33. 126  On the Reagan “victory school”: David  S.  Painter, “From Linkage to Economic Warfare: Energy, Soviet–American Relations, and the End of the Cold War”, in Jeronim Perovic (ed.), Cold War Energy. A Transnational History of Soviet Oil and Gas (Basingstoke: Palgrave Macmillan, 2017), pp. 283–318.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

350

The Rise and Fall of OPEC in the Twentieth Century

had ­refineries both domestically and abroad, and then there was the vast majority of countries that had sold their oil at a discount, or exceeded their quotas. Tricks of all kinds had been devised to get around the rules. He had come these practices himself as the head of the Executive council. “It was true that Saudi Arabia had embarked on netback arrangements,” Yamani remarked, but this was because it had not been taken seriously and anyway it “remained stricter, more conservative and less progressive at heart than other Member Countries.”127 Saudi Arabia had been forced to pump crude merely to have associated gas available for its petrochemical plants, leaving the crude unsold in large storehouses around the Gulf. From now on, Yamani declared, OPEC would have to make decisions on volume and let the market set the price. OPEC members should be free to retake their “fair share” of the international crude oil market. At the OPEC Conference in December that year Subroto, the great mediator, counted off four potential options to dig their way out of the crisis: [T]he first was that OPEC would, more or less, continue as theretofore, in other words, OPEC would remain the residual supplier; the second was to decide on a ­pricing policy that was ultimately market-oriented; the third option was to have a fixed revenue, something which was imperative for developing countries, such as OPEC Members, and the fourth option was to determine a market share that OPEC was willing to fight for.128

Given that no country (and certainly not Saudi Arabia) would accept further decline in its own production, Yamani replied, these options were all merely ­theoretical (“philosophizing was a waste of time”).129 The problem was that nobody wanted to lower their volumes and that the production ceiling of 16mbd was already not respected by many members, while probably there would be not enough demand for OPEC oil in 1986. The only open option, according to Yamani, was to fight for market share “until one day, perhaps in 1988 or 1989, they would return to the old system.”130 And the only strategy that would not require sacrifices from OPEC was to ask solutions “from the non-OPEC p ­ roducers, those countries which had continually increased their production year after year had to give up some of their market share and come down with their production.”131 With these words, Yamani, one of the protagonists of OPEC’s transformation into a cartel, declared that the experiment was over. During the same Conference, only the new Iranian Petroleum minister, Gholam Reza Aghazadeh (who would remain in office until 1997), admitted that in a price war only Saudi Arabia would be able to increase output and conquer new markets. Aghazadeh, previously responsible for marketing Iranian crude, including the use of countertrade deals, knew all too well that the rest of OPEC countries were producing at near full capacity. The other OPEC delegates, meanwhile, were left supporting the use of guerrilla tactics against the non-OPEC producers. The final communiqué declared 127  NYUAD Library, ASC, GGC, MC-038, Meeting of the 75th (extraordinary) Meeting of the Conference, October 1985. 128 NYUAD Library, ASC, GGC, MC-038, Minutes of the 76th Meeting of the Conference, December 1985. 129  Ibidem. 130  Ibidem. 131  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

351

that: “the Conference has decided to secure and defend for OPEC a fair share in the world oil market consistent with the necessary income for Member Countries’ development.”132 The following weeks would demonstrate whether the twin goals of increasing production, while at the same time avoiding painful side effects in terms of oil revenues, could truly be reconciled with one another. In his memoirs Al-Naimi recalled that OPEC had decided to “flood the market, get the price down and see the producers from Alaska and the North Sea come begging at OPEC.”133 Unfortunately for OPEC, however, the non-OPEC ­producers did not come running hat in hand. In March 1986, Nigel Lawson betrayed no signs of regret for the falling prices for North Sea crude: Meanwhile let me repeat that there is no question whatever, and never has been any question, of the United Kingdom cutting back its oil production in an attempt to secure a higher oil price. In the first place the whole outstanding success of the North Sea has been based on the fact that it is the freest oil province in the world, in which decisions on levels of output are a matter for the companies and not for the government. In the second place we are not only, or even principally, a major oil producer; we are also a major world producer and trader of many other goods and services, and a major oil consumer. There is no overall United Kingdom interest in keeping oil prices high.134

The seventy-seventh OPEC Conference in March 1986 was equally interminable. In January, prices had dropped from $26–$27 a barrel to just $22. In February they fell to $17–$18. By April they were down to $13–$14, sinking rapidly towards $10 a barrel. At the same time, OPEC countries—with the exception of Saudi Arabia—were not achieving significant increases in production. Even for the Saudis, increased production did not compensate for the dramatic fall in prices. During the Conference, more than one delegate reported on their meetings with representatives of non-OPEC countries, including the USSR and China (at the time a net oil exporter). The Kuwaiti Oil minister Al-Sabah had traveled to the Soviet Union and had been reassured that Moscow would not increase production in 1986. But the Soviet Union would not align itself with OPEC, or with any effort to boost prices, because of its relationships with the oil importing countries in Eastern Europe and other developing nations such as India. The meetings of the Conference president with the Norwegians had not gone well, even though the new Labour government was known to be more open to dialogue, especially considering that also the Scandinavians were now facing huge financial problems. The Mexican Petroleum minister Labatistada, invited to attend as an observer, mentioned his contacts with the British Energy secretary Peter Walker, the results of which had been thoroughly negative: “Great Britain was willing to fight and destroy OPEC.”135 But then how could OPEC demand the non-OPEC countries do something in terms of limiting production when it was not at all clear that it was willing or able to do something itself? The President of the Iranian Islamic Republic appealed 132  OPEC Press Release n. 8/85, Geneva, December 7–9, 1985. 133 Al-Naimi, Out of the Desert, p. 136. 134  Keesing’s Contemporary Archives, London, Longmans, April 1986. 135  NYUAD Library, ASC, GGC, MC-038, Minutes of the 77th (Extraordinary) Meeting of the Conference (Part 1), March, 1986, Geneva.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

352

The Rise and Fall of OPEC in the Twentieth Century

directly to the ministers of OPEC countries, arguing that time had come to regain control of the international market: OPEC, he emphasized, still controlled 55 percent of global exports, whereas the perspectives of alternatives to petroleum were overvalued, as was non-OPEC output. Midrange forecasts, he added, predicted an increase in global demand. Iran, Libya, and Algeria wanted higher prices and lower OPEC production quotas. They were also willing to halt all crude oil exports for a month, as a shock measure, before restricting production to 10 mbd. The GCC countries, on the other hand, sought to continue pursuing their battle for market share. Venezuela and Indonesia stood somewhere in the middle. During the discussions it appeared obvious that few countries were prepared to cut back on their own production, and at any rate no one could agree on their respective quotas. Nigeria would continue to pump out as much oil as it could. The UAE ignored its quota. Al-Otaiba declared that: “his Country has started cutting wages and staff and life was becoming very difficult. He wondered whether his colleagues wanted the United Arab Emirates to start having political problems, instability, and coup d’etats.”136 Subroto presented a proposal that called for an across the board cut of 12 percent for all member states, to something a little over 14 million barrels a day, with a slightly larger sacrifice of 19.83 percent on the part of Saudi Arabia. All the ministers agreed to consult with their respective governments, but in the end only Iran, Libya, and Algeria were willing to accept cuts in their own production. The final communiqué referred to a price of $28 per barrel and ongoing collaboration with Angola, Egypt, Malaysia, Mexico, and Oman, but also made clear there were different strategies at work in terms of how to achieve the $28 per barrel goal. Since OPEC had yet no coherent strategy, and prices were well below the $28 target, Yamani’s market share battle essentially remained in effect. * * * While the IEA members were afraid that fall in crude prices might endanger energy policies and investments in non-OPEC production, they still stuck stubbornly to the mantra that international oil prices should be determined by the market.137 Western Europeans were convinced they could counteract any fall in crude prices with increased taxes on products such as gasoline so as not to give consumers “wrong signals.” Little help was to be expected from them. In April the EC Commission Director General for Energy, during meetings with Saudi and Kuwaiti officials, mentioned the possibility (“horror scenario” as defined by his Arab interlocutors) of the introduction of petroleum tariffs in the US, and perhaps even in the EC, if prices fell too low (below 10$).138 The same month the US Vice President George H.W. Bush made a trip to Saudi Arabia, during which he perorated the cause for stable oil prices. Low prices were beginning to hurt domestic US ­producers and might force the United States to reintroduce limits on crude oil imports. There 136  Ibidem. 137  HAEU, CA 4, Note for the Attention of M. Mosar, IEA Dinner on 17 February 1986, Paris, February 18, 1986. 138  HAEU, CA 4, Note, Mission de M.  Audland en Arabie Saoudite et au Kuwait (26–9 Avril), Brussels, May 12, 1986.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

353

were more than 450,000 “stripper wells” (wells producing less than ten barrels a day) for an overall production of more than 1.2 million barrels a day, and half of them were considered uneconomical with a price of less than 20$.139 “I think it’s essential that we talk about stability, ”Bush announced “and that we not just have free fall, like a parachutist, simply without a parachute”.140 This did not signal a change in the Reagan administration’s stance toward OPEC. But it can be considered a warning that an utter collapse of prices could also potentially reflect on the relations between Saudi Arabia and the United States. The warning came from a politician who had forged close ties with Texas producers and whose family was directly involved in the oil industry. A great deal of ink has been shed regarding this meeting, which in the short term did not alter significantly Saudi oil policy (Saudi Arabia in fact increased production in the immediate aftermath of the meeting). It certainly contributed to make the Saudi leadership aware that its strategy of recapturing market share at all costs could not last indefinitely and had to face an increasing number of enemies. When OPEC met again in June at Brioni (an island resort frequented by Tito in the former Yugoslavia), low oil prices were beginning to adversely impact all ­producers, including the non-OPEC countries. Norway’s financial situation was becoming dire. Oil revenues were in the midst of a plummet from 71 billion NOK to 16 billion NOK by 1988, and had led to the fall of the Conservative government and the inauguration, as we have mentioned, of a new Labour administration headed by Gro Harlem Brutland in May 1986. This new government was more open to talks with OPEC. According to the Conference President: “That position, by a major industrialized oil producing-exporting country could open the way for a concerted all-oil-producers’ effort to stabilize the market in the face of a possible price disaster.”141 Yamani, charged with sounding out the non-OPEC countries, reported that the British were a “hopeless case”, while the Norwegians, despite belonging both to the IEA and NATO, believed that something had to be done in order to shore up prices. When Yamani asked him to be more specific about pricing, the Norwegian Petroleum minister mentioned that “a range above 15$, but not more than 20$, was thought to be a reasonable level for the time being.”142 During his meeting at the Hotel Danieli in Venice with his Norwegian colleague, Yamani had even referred to the problem of starving babies in Nigeria as a way to pressure one of the leading nations in development aid, and obtained a commitment to control output and cooperate with OPEC.143 This was probably the first significant point scored by Yamani’s market share strategy, although Parra would later remark that Norwegian cooperation proved hardly effective during the 1980s.144

139 Parra, Oil Politics, pp. 290–1. 140  Victor McFarland, “The United States and the Oil Price Collapse of the 1980s”, in D. Basosi, G. Garavini, and M. Trentin (eds.), Counter-Shock, p. 268. 141  NYUAD Library, ASC, GGC, MC-038, Meeting of the 78th Meeting of the Conference (part 1), Brioni, June 1986. 142  Ibidem. 143 Claes, The Politics of Oil-Producer Cooperation, pp. 308–13. 144 Parra, Oil Politics, pp. 274–5: “The Norwegian ‘restrictions’ may have initially provided some sort of psychological fillip for OPEC, but as a market-support measure, it was nugatory. Norwegian

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

354

The Rise and Fall of OPEC in the Twentieth Century

The Iranians argued on the other hand, that first it was necessary to stabilize official prices, and that production levels should be discussed only at a later date. In the end, no decisions were made, while the Saudis continued their push to regain market share. In June, Milton Friedman triumphantly declared OPEC a failed cartel. “I believe OPEC has no future” he wrote, adding that in the long-term oil prices would settle somewhere between $8–$10 a barrel, in essence returning to their levels before the oil revolution of 1973.145 It wasn’t the first time someone announced the demise of OPEC. And it wouldn’t be the last. At the end of June, faced with a dire budget situation, King Fahd of Saudi Arabia declared to the Saudi press agency that they would need to re-establish a ceiling of 16 mbd on OPEC production, which would bring about an increase in prices.146 Talk of $18 a barrel began to circulate as the magic price level that would now be considered acceptable for both producers and consumers. This would return real crude price to its levels just after the 1973 oil revolution.147 It is somewhat ironical that the same crude price level that had once been considered responsible for the decline of Western civilization was now considered realistic, even desirable, by consuming countries. Fahd’s statement regarding the need to return to production quotas and price increases was the first partial public rebuke of Yamani’s strategy. The Saudi Petroleum minister continued to believe in avoiding the setting of an official reference price without first having put in place a credible structure for OPEC production quotas, ideally with the involvement of non-OPEC countries (Fig. 7.5.). The next OPEC Conference met between the end of July and beginning of August. Yamani’s approach had already changed, and Saudi Arabia was now looking for an agreement to avoid the continued downward slide in prices. Yamani explained the change of strategy this way: If the consuming countries imposed taxes and tariffs and raised the price of oil to the end-consumer, not only would it deprive OPEC of the hoped for increase in demand but would enable the consuming countries to accumulate huge revenues which could be used to subsidize their own local oil industries, research into alternative sources of energy and so on.148

Yamani had already used this very same argument to justify the defense of oil prices in 1982. But in September 1985 he had moved to the “market share” strategy that implied a competition which would drive prices downward. In practice, he had retraced his footsteps. Some years later, Al-Chalabi would remark that six months of the “Yamani cure” had not been enough to teach a lesson to the non-OPEC countries and to discipline the rest of OPEC members.149 production increased 17 percent in 1987 over 1986, 13 percent in 1988 and 27 percent in 1989. By 1992, it was more than double its 1987 level. OPEC must have wondered: With friends like these . . .” 145  MEES, Monday June 23, 1986. 146  Ibidem. 147 Yergin, The Prize, pp. 697–726. 148  NYUAD Library, ASC, GGC, MC-038, Minutes of the 78th Meeting of the Conference (Part II), Geneva, July–August, 1986. 149 Chalabi, Oil Policies, Oil Myths, pp. 203–15.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

‘Arab Spring’

Invasion of Iraq

Asian financial crisis

Iraq invaded Kuwait

Netback pricing introduced

Iranian revolution

355

Yom Kippur war

Suez crisis

Loss of Iranian supplies

Post-war reconstruction

East Texas field discovered

Growth of Venezuelan production

Fears of shortage in US

Discovery of Spindletop, Texas

Sumatra production began

Russian oil exports began

The Failed Cartel

Pennsylvanian oil boom



130 120 110 100 90 80 70 60 50 40 30 20 10 1861– 1870– 1880– 1890– 1900– 1910– 1920– 1930– 1940– 1950– 1960– 1970– 1980– 1990– 2000– 2010– 0 69 79 89 99 09 19 29 39 49 59 69 79 89 99 09 19

$ 2017 (deflated using the Consumer Price Index for the US) $ money of the day

1861–1944 US average. 1945–1983 Arabian Light posted at Ras Tanura. 1984–2017 Brent dated.

Fig. 7.5.  Historical evolution of crude oil prices. (BP, Statistical Review of World Energy).

The most significant obstacles to an agreement were Iran and Iraq—given that the latter demanded a production quota equal to that of the former. The Iraqi Oil minister argued that his country could not respect quotas established at a time when its exports infrastructure had not yet come online. President Saddam Hussein addressed the Conference directly: Iraq can, under no circumstances, accept a quota incompatible with its reserves, population and the legitimate requirements for defending its sovereignty and the security of the entire region. Under the current circumstances, we are not prepared to accept a quota less than that of Iran, as the latter is spending all its oil revenues on its war machine. Any increase in these revenues over Iraq’s now practically means an increase in Iran’s ability to continue the war and to threaten the stability of the region.150

150  NYUAD Library, ASC, GGC, MC-038, Minutes of the 78th Meeting of the Conference (Part II), Geneva, July–August, 1986.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

356

The Rise and Fall of OPEC in the Twentieth Century

Kuwait, that had approved a new law stating that the country had to produce at least 1.25 million barrels a day, was another obstacle. After tough negotiations, private meetings between Yamani and Aghazadeh, and a direct appeal by the Saudi King, an agreement was finally reached. All OPEC countries except for Iraq would be bound to honor the quotas set in August 1984, for an overall production ceiling of 16 million barrels a day, valid until the next OPEC meeting in the fall. The result was a defeat for Yamani, who found himself having to accept a cut in Saudi production to prop up prices. But it was a defeat balanced by an important concession by Iran on Iraqi output, which demonstrated a newfound Iranian pragmatism in the pursuit of its long-term objectives—a pragmatism further demonstrated that same year by the revelations of the complex Iran-Contra scheme that ­ultimately saw the United States selling weapons to Iran. Prices did rise slightly the following month, but respect for the quotas remained nominal at best. * * * At the following Conference in October, which would last virtually the entire month, Yamani—who kept threatening the return of netbacks if the other countries didn’t honor their quotas—had his authority openly called into question. King Fahd had publicly declared his hopes for a price of around $17–$18 a barrel. This contradicted Yamani’s conviction about the impossibility of controlling both prices and production levels at the same time. Cooperation with the Norwegians, that in September had agreed to limit future production growth, was still deemed insufficient. The President of the Conference, the Nigerian Lukman, recalled: They were told that it would be preferable if decisions on production levels were left to market forces, even though the records showed that in the past intervention, in one way or another, had been necessary to restore order to a chaotic market. Memories were, indeed, very short. OPEC believed that oil was all too important and strategic a commodity to be left to the vagaries of a volatile market.151

The United Arab Emirates delegate, who could not speak for the production coming from Dubai, put up desperate but futile resistance. Countless words were spent to justify formulas for the distribution of the quotas—whether they should be based on accumulated international debt, on per capita GDP, on depletion rates and proven reserves, only on exports, on historical production levels, etc. Yamani sought to reach an agreement that “compensated Saudi Arabia for what it had done in the past.”152 An agreement, in other words, that would justify the Saudi battle for market share, avoiding any return to the exact same situation the ­organization was facing before the fall of 1985. Ultimately, he was forced to acknowledge that “the Saudi Arabian position was known with regard to prices, namely the desire of His Majesty King Fahd to fix the price of oil at a range between US$17–19/bbl— preferably US$18/bbl—until the end of 1987.”153 SAMA was now very worried 151  NYUAD Library, ASC, GGC, MC-038, Meeting of the 79th (Extraordinary) Meeting of the Conference, Geneva, October, 1986. 152  Ibidem. 153  Ibidem.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

357

that reserves would fall below $ 25 billion endangering the stability of the economy, while the Finance ministry stopped some of the bills payments. One year later, the Saudi government announced cuts in subsidies and hikes in taxes, including an income tax on foreign workers to which they simply responded by stopping to work (the tax was soon cancelled). Eventually SAMA was force for the first time in its history to issue government debt to cover some of the shortfall in oil revenues.154 There was a strong pressure on the oil sector to provide more income, even if this meant abandoning the previous “market share” strategy. Yamani’s declaration on fixing a new reference price of $18 was certainly humiliating, in that it went directly against his philosophy. The final communiqué committed OPEC countries to honor their respective quotas until December, when a more formalized system to allocate quotas would be established and, at the same time, announced that OPEC would return to a “fixed price structure.” Shortly after the Conference Yamani learned about his dismissal from the Petroleum ministry on television. His official biographer argues he was surprised. By that point he had already lost a great deal of his credibility in the organization, as he kept spending an increasing amount of time away from meetings waiting for the King’s instructions. The Venezuelan Petroleum minister Grisanti dryly commented on the news of Yamani’s ousting: “Now there will be only one lawyer” (himself ).155 Symbolically, Yamani’s exit was very significant since in 1986 he was the most senior OPEC delegate, and had been one of the heavyweights in the organization since 1962. He embodied a generation of technocrats/politicians who had been able to successfully shape national oil policies and had a very political and long term understanding of petroleum as a developmental tool. He had been part of a generation of technocrats that came of age when the international oil majors totally dominated the oil market, and left office once petrostates had taken control of the petroleum industry. Yamani’s exit was subject to various interpretations. It was said that he had been closer to Faisal than to Fahd, and that his departure was only natural. Many would note that he favored an increasing role for PETROMIN, the brainchild of Faisal, as a tool to manage Saudi oil production, and was thus suspect in the eyes of ARAMCO people. He was deemed to be too close to the United States, at a time when Saudi Arabia seemed more eager to negotiate with Iran. Al-Naimi considers that Yamani had been at his best in the 1970s, when called upon to negotiate with the international oil companies, while by the 1980s, not being an industry expert, he had made some ill-advised decisions.156 Here it is worth noting that both of Yamani’s strategies in the 1980s ultimately failed. OPEC’s transformation into a cartel capable of regulating both production and prices failed because the emergence of non-OPEC producers proved to be a structural factor, and thus Saudi Arabia, the swing producer, was being increasingly penalized by the loss of OPEC market share. Having realized this, by the end of 1985 Yamani belatedly spearheaded the “fair share” strategy. Although this policy did create problems for North Sea producers, as well as for domestic US producers, and 154  Banafe and Macleod, The Saudi Arabian Monetary Agency, p. 97. 155 Chalabi, Oil Policies, Oil Myths, p. 209. 156 Al-Naimi, Out of the Desert, Chapt. 10.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

358

The Rise and Fall of OPEC in the Twentieth Century

although Norway did eventually start cooperating with OPEC, this policy too failed because it didn’t account for the “political” sustainability of a price war waged by governments that were entirely dependent on oil revenues to sustain their economy as well as their political legitimacy. Whatever errors he may have made, Yamani, a stubborn and astute negotiator, strongly believed in the ­cooperation among oil exporters (potentially including non-OPEC producers) to stabilize the petroleum market after the end of the oligopoly of the oil majors. Rather than being subservient to US interests, Yamani embodied in flexible ways the Saudi strategy defined by Jahangir Amouzegar as “maintaining the role of oil in the world of energy, and the role of Saudi Arabia in oil.”157 At the following meeting in Geneva in December 1986, the OPEC Economic commission continued to argue that low oil prices were not boosting consumption because of taxes on products in OECD countries. However afraid some of the IEA ministers might have been of low oil prices because they endangered energy-saving policies and investments in nuclear and non-OPEC production, they were happy leaving all necessary adjustment to OPEC. The Irish minister said it explicitly: “Much depended on OPEC’s ability to get its acts together”.158 Earnings from the sale of OPEC oil now were one-quarter of what they were in 1981. Even Saudi Arabia, as we have seen, despite increasing production in 1986, had seen its oil revenues slashed by 52 percent, and had been forced to introduce austerity measures. Prices hovered around $15 a barrel, well below OPEC’s target price of $18. This, according to the President of the Conference, was the only price that would: benefit to all partners of the industry—producers, oil companies and consumers. For producers a fixed price will ensure the predictability of a minimum income revenue, for oil companies a profit margin to encourage reinvestment and for the consumer a re-activation of demand. It must be observed at this juncture that the end-consumer did not benefit from low oil prices at the pump, except in a few countries and only partially. This notwithstanding the fact that we have witnessed a 65 per cent fall in prices in real terms.159

The final agreement, approved by the new Saudi Petroleum minister Hisham Nazer, the former minister for Industry, called for a ceiling of 15.8 mbd, with a cut of more than 7 percent in production, in addition to an OPEC reference price— no longer based on Arabian Light, but derived from a basket of various crudes, including those of non-OPEC producers—of $18 a barrel. In the event, however, any reference to the “OPEC price” of $18 a barrel was soon rendered moot by mid-1987, when the reference prices became those set outside OPEC, such as Brent and WTI. The end result, a relatively marginal role of OPEC in determining global crude prices and basically no global agreement on production levels (but a

157 Amuzegar, Managing the Oil Wealth, p. 45. 158  HAEU, CA-6, Summary Record of Informal Meeting of the Energy Ministers at the Dormy House Hotel, Broadway on 16th September. 159  OPEC Press information n. 8/86, “Address to the 80th Meeting of the Conference”, Geneva, December 11, 1986.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi



The Failed Cartel

359

lot of negotiations and infighting on the respective OPEC quotas) was certainly a very different outcome from the cooperative solution Yamani would have favored. By the end of 1986 OPEC was no more the powerful organization eagerly ­followed by the international media circus. But, pace Friedman, OPEC did not collapse altogether in 1986, even though it lost its only recently-acquired power to set the price of oil. What happened is that, for the first time since the creation of Standard Oil’s monopoly at the end of the nineteenth century, there was no longer a petroleum “price structure.” The price of crude oil had been more or less controlled since the beginning of the petroleum industry by a tiny group of actors: first by the Standard Oil Trust, then by the oligopoly of the oil majors (and by the Texas Railroad Commission for the domestic US market), and later by OPEC countries after 1973. After 1986 “the market” would now be setting the price of the world’s most important energy source. To be considered acceptable by Western governments this price should not be so high that it would force dramatic changes in the lifestyle of their citizens, nor so low that it would discourage investments in non-OPEC oil regions, including within the US. In the new market-determined crude price environment, dominated by Brent and WTI and by futures contracts, OPEC was not a bad thing as a stabilizer in times of need, but it would only take what was left to it and would have to accept a significant reduction of the rent accruing to its members. Since the middle of the 1980s, scholars have attempted to identify OPEC’s weaknesses: incentives to cheat, resistance to limitations of national sovereignty, political and military infighting, the lack of adequate enforcement procedures, the incoherence of trying at the same time to control crude prices and set production quotas, and many other variables besides.160 It is worth emphasizing here, taking a somewhat larger perspective, some aspects of OPEC’s ultimate failure to act as a cartel in the 1980s. First, that petroleum was too vital a commodity for industrialized countries and major military powers to allow OPEC to unilaterally set its price and production levels according to the priorities of its members. As we have seen, both Reagan and Thatcher made the defeat of the organization—overcoming the limits this had imposed on the purchasing power of their citizens, as well sabotaging its potential cooperation with other developing countries and raw materials producers—a significant political goal in both domestic and foreign policy. Second, that new producers from the North Sea and elsewhere now accounted for a significant portion of global exports: this was a structural change in the oil market that could only be dealt with by some form of cooperation between OPEC and non-OPEC countries. Third, that consumption policies (leading for example to a reduction of petroleum consumption per GDP unit growth) and diversification strategies (leading for example to an increasing role of nuclear, coal and gas) proved at least as important as production policies in affecting the global petroleum market. Thus without some dialogue also between producers and consumers on their respective targets it would have been very hard for OPEC to determine world prices, if not by being prepared to continuously adapt production levels and budget 160  For instance: Bassam Fattouh and Lavan Mahadeva, “OPEC: What Difference has it Made?”, Oxford Institute for Energy Studies, MEP 3, January 2013.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

360

The Rise and Fall of OPEC in the Twentieth Century

requirements. Fourth (a frequently overlooked element), OPEC countries had by the 1980s quit discussing the respective domestic governance of the oil sector, on issues such as fiscal regimes, regulation of the oil industry, state and private partnership in production, and internationalization strategies. Investment and ­strategic decisions were increasingly being delegated also to their national oil companies, fundamentally in competition with one another and potentially hostile to OPEC’s “political” decisions. If all these factors are taken in account, the real miracle is that OPEC, however weakened, did not disappear since it still embodied the fundamental interest of sovereign landlords in protecting an international rent deriving from trading a non-renewable resource.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

Epilogue The Crisis of the Petrostate The history of OPEC’s struggle [. . .] will certainly inspire other raw materials exporters in the Third World.1 Luis Lugo, 1994 Rich states may fight trade wars with each other; poor states may fight violent wars with each other but an international class war between the poor South and the wealthy North is almost as far from reality as one happy harmonious world.2 Samuel Huntington, The Clash of Civilizations, 1996

I have used the term “oil revolution” rather than “oil shock” to describe the end of cheap oil in 1973. Petrostates acquired control over petroleum production and used (or misused) the booming oil rents to improve the living standards of their citizens and to jumpstart industrial development and infrastructures, as well as to build up their military. The fall in crude oil price in 1986, coupled with OPEC’s loss of control over pricing, can then be referred to as a “counter-revolution.” It was followed by calls for “depoliticization” of the petroleum industry, by widespread criticism over the direct role of the state in managing natural resource wealth, by amendments to the petroleum legislations and by attempts to re-define the very same concept of “permanent sovereignty over natural resources.”3 Two episodes clearly stand out when thinking about the difficulties that the petrostates encountered in keeping their hold over the petroleum sector during the “counter-revolution” era. Both were directly or indirectly linked to the advent of the so-called $18 barrel oil that prevailed for nearly two decades, from the middle of the 1980s up to the beginning of the 2000s. The first episode was triggered by Saddam Hussein’s decision to invade Kuwait—the second time in only a decade Iraq attacked an OPEC founding member—followed by the devastating punishment inflicted to both the Iraqi army and the Iraqi people by an international coalition of forces led by the United States. The US-led military campaign eventually resulted in the imposition of a sanctions regime and in external control over Iraq’s 1  Luis Lugo, La singular historia de la OPEP (Caracas: Ediciones CEPET, 1994), p. 63. 2  Samuel Huntington, The Clash of Civilization and the Remaking of the Modern World (New York: Touchstone, 1996), p. 33. 3  Thomas Walde and George Ndi (eds.), International Oil and Gas Investment: Moving Eastwards? (London: Graham & Trotam, 1994), pp. 3–29.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

362

The Rise and Fall of OPEC in the Twentieth Century

economy and crude oil exports. The second episode was the battle waged at the beginning of the 1990s by PDVSA—Venezuela’s national oil company—to force its own government out of OPEC, while at the same time asserting its complete freedom to determine production levels, also in partnership with international oil companies and shielded by bilateral investment treaties. During the “counter-revolution” era the petrostate’s sovereign control over the world’s most valuable natural resource came to be questioned both from outside (as in case of Iraq) and from within (as in Venezuela). But petrostates and OPEC would not go down without a fight, nor would petroleum become a commodity as any other. The underlying tension between sovereign landlords (petrostates), fossil capitalism (oil companies), and sovereign consumers (now including economic superpowers such as China), endures to this day. It will probably carry on for as long as hydrocarbons remain key global energy sources, as well as natural resources heavily concentrated in a limited number of very productive regions. D E S E RT O N F I R E On January 17, 1991 millions of Italians were glued to the television set for the big event being broadcast live on CNN. January 1991 was for me even more emotional than the scenes of jubilation of the Berliners tearing down in 1989 the wall that symbolized Cold War Europe. I awaited the expiry of the ultimatum to Iraq with the same mixed feelings one experiences when witnessing, from a safe vantage point, some powerful act of nature such as a storm at sea, or the eruption of a volcano. There was dread, but also inevitable attraction. I watched the flat rooftops of Baghdad, a city about which I virtually knew nothing, shrouded in darkness. The anticipation only vanished once the sky lit up with flashes of greenish light, the tracers of anti-aircraft fire as viewed from night cameras. It was war, terrifying and loud, like New Years’ Eve celebrated in empty streets. Journalists played the military experts and commented about smart bombs that could somehow tear down whole buildings without human “collateral damage.” Every target struck was intended to arouse wonder and admiration for the superior technology of the West, embodied in Cruise missiles and invisible F-117 Stealth Fighters. My generation, not having lived the trauma of the war in Vietnam, was being educated to believe in a war without bloodshed. The war against Saddam’s Iraq was presented as the opening act of a new international order after the end of the Cold War. Iraq, the country where the first OPEC meeting took place three decades before, would be the testing ground of this new order. In the days that followed the beginning of the offensive campaign I had my first political experiences in a deeply divided Italy. Together with most of my fellow students we occupied our school in protest against Italy’s participation to the bombing campaign. Not that any of us actually sympathized with Saddam, but we felt that conflicts cannot be solved by reducing a country’s infrastructure to rubble, only to leave its hopeless people to die of hunger and resentment. Along with millions of Italians, and millions of other people around the world, I wondered: what

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

363

if Kuwait’s primary export product had been dates rather than petroleum? January 1991 marked the outcome of the US military buildup in the Gulf that had started at the beginning of the 1980s and would only grow in proportion in the following decades. It was also the result of rising nationalistic tensions and militarized confrontations among petrostates, exasperated by the impact of low oil prices on government revenues. * * * The Iran–Iraq war had not diminished in intensity following the OPEC agreement of December 1986. Iraqi forces bombed Iranian cities as well as tankers shipping Iranian crude through the Gulf. Though its air forces lacked spare parts since the 1979 revolution, Iran returned the favor by bombing the ports and facilities of Iraqi allies. In 1987 an Iraqi warplane attacked a US navy vessel, killing thirtyseven servicemen. The US government blamed Tehran. As Andrew Bacevich put it: “A and B are at war; A attacks C; C holds B responsible and exacts punishment.”4 Shortly after the incident the United States assumed responsibility for escorting Kuwaiti vessels throughout the Gulf, now engaging more openly on the side of Iraq. This would be the real beginning of the US military buildup that would be massively scaled-up in 1990–1. Saddam Hussein took full advantage of US support by bombing Kurdish towns and villages in the North—also relying on the use of chemical weapons—thus addressing a longtime thorn in the side of the regime. In 1988, the Iraqi army went on the offensive. It retook the Al-Faw peninsula from the Iranians. By now, the US had engaged a low-profile naval war against Iran that went under the codename of operation “Praying Mantis.” Iranian elections in April 1988 still witnessed the victory of the radical front against the “liberal” policies sponsored by Khatami that were defined as “the Islam of the profiteers and of the capitalists who preferred to ignore the suffering of the mostazafin.”5 The Iranians were still unprepared to end the conflict, but the balance of power was inexorably moving in Iraq’s favor. By 1988 Iraq was superior in terms of artillery and airpower and benefited from the military support of the United States. In Iran inflation had reached 40 percent and the government was forced to spend 30 percent of its revenues on the armed forces. In July the USS Vincennes, a high-tech American naval warship, “accidentally” brought down a civilian aircraft flown by Iran Air en route to Dubai from Tehran, killing all 290 passengers on board. In August Khomeini, no longer able to see any path forward to victory for a country increasingly impoverished by the war effort, declared a ceasefire. As Khomeini’s son Ahmad recalled: When, on balance, he felt he should accept the ceasefire, when he drank the poisonous chalice, I was with him. The television was showing our soldiers and he kept hitting himself with his fists saying “ah”. No one dared to see him. After accepting the ceasefire he could no longer walk. He kept saying “My Lord, I submit to your will”.

4 Bacevich, America’s War for the Greater Middle East, p. 94. 5 Axworthy, Revolutionary Iran, p. 275.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

364

The Rise and Fall of OPEC in the Twentieth Century

He never again spoke in public. He never again went to speak at the Jamaran mosque and [eventually] fell ill and was taken to the hospital.6

After withdrawing demands for the ouster of Saddam, Khomeini also withdrew from the public eye and died in June the following year. * * * In addition to reinforcing nationalist sentiments among their respective populations, provoking inflation and primary goods scarcity, the Iraq–Iran war failed to generate any lasting military advantages for either of the belligerents. What it left behind was the huge problem of how to finance postwar reconstruction after the end of the war economy. There were essentially two possible paths to reconstruction: either through an increase in oil prices, which implied a high degree of cooperation among OPEC members; or by opening up to foreign investments in the oil industry, coupled with a wave of privatizations, to ease the pressures on the state budgets. The first option was extremely complicated because it implied trust and discipline among petrostates at a time when they were battling to regain market share from nonOPEC producers. The second option, although tempting to both the Iraqi and the Iranian leadership, partly contradicted the ideological orientations of both regimes since it implied, at least on the short term, a significant increase of domestic inequality, opening up to Western capitalism and, inevitably, to a greater degree of US and Western political influence. Attempts to defend the OPEC basket price of $18 a barrel had ceased in the latter half of 1987, in part because of the growing tensions with Iran. Chalabi took part in the OPEC delegation that in 1987 toured all OPEC countries to ask members to comply to their respective quotas. Chalabi’s account of the trip reflects the enormous political, cultural and geographical variety of the different OPEC countries: the oppressive heat and humidity in Lagos and the hotels filling up with prostitutes in the evening; the enormous changes in Dubai since he first visited the then small trading center in 1971; the contrast between the opulence of palace of the UAE Petroleum minister Al-Otaiba in Abu Dhabi and the relatively unassuming residence of the Venezuelan oil minister Arturo Hernandez Grisanti. At the end of his tour, Chalabi pointed to the impossibility of finding an agreement between different priorities.7 In 1988, prices sank even further below where they had been in 1986. Until that moment Iraq had not seriously objected to this trend because it could still count on the financial assistance of its allies in the Gulf and the West, because it was confident in the possibility of ramping up its own output, and because the Iraqi leadership believed that low oil prices were actually helping Iraq turn the tide of the war. Once the war was over, in August 1988, Saddam Hussein began to view the situation in a completely different light. The Arab states of the Gulf refused to count off Iraq’s debts, which were now in the order of some $60 billion. Saddam 6  Ibidem, p. 281.

7 Chalabi, Oil Policies, Oil Myths, pp. 221–41.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

365

considered this to be a betrayal of the heroic efforts of the Iraqi people to repel the Persian enemy. The Iraqi government started being very selective in debt repayments, privileging Western lenders that were also key suppliers of weapons, as well of industrial and consumer goods, while at the same time neglecting to repay lenders from the Gulf in the name of Arab solidarity.8 Iraq, which during the war had not managed to produce more than 1 million barrels a day, now sought to produce 4.8 million barrels a day thanks to the newly available pipelines that crossed Turkey and Saudi Arabia, as well as to the restoration of the Al-Bakr port on the Gulf. The possibility of increasing output existed only on paper though, because of the precarious condition of Iraqi oil facilities, and because of the country’s lack of access to international credit—Iraq had acquired the reputation of an unreliable borrower. As if that was not enough, both Kuwait and the UAE opposed efforts to increase prices. While Saudi policy remained tethered to Yamani’s hope for a possible “recartelization” of the oil market, which would perhaps bring back higher oil prices, Kuwaiti and Emirati rulers were now looking to produce and sell as much crude oil as possible. Abu Dhabi faced pressures by the foreign companies operating in partnership with ADNOC.9 According to the Kuwaiti government, low prices would reinvigorate international demand, discourage investment in alternative energy sources, and supply crude to its own refineries and distribution networks abroad. The Kuwaiti petroleum minister Al-Sabah explained his country’s objectives this way: We want the price of oil to remain at around $18/B for a sufficient period of time, and then afterwards follow the market in a manner that would not reduce demand. We have reserves of about 100bn barrels. Fortunately, every year since 1980 we have been discovering four, five or even ten times as much as we produce each year, so we hope to be able to sell that oil during for a long time and this is one of the factors which influences our pricing policy.10

Kuwait planned to sell at least 2 million barrels a day to address its budget deficit, assist Kuwaiti banks threatened by the Souq Al-Manakh stock market crash, and finance a Reserve Fund for Future Generations with 10 percent of its oil revenues. The UAE, which was facing budget problems itself, sought to increase its OPEC quota in order to allow the Sharjah and Dubai emirates to be free to produce as much as they wanted, without putting undue pressure on Abu Dhabi to cut production. At the OPEC Conference of November 1989, Kuwait’s quota was increased from 1.149 million barrels a day to 1.500 (though it was producing 2 million barrels a day), while the UAE were exempted from their original quota (they produced roughly 2.2 million barrels a day). Quotas existed only on paper and efforts to find some objective criteria to redefine them such as historical ­production levels, population, reserves, internal consumption, while presented as perfectly rational were all politically biased in one direction or the other. 8  Glen Rangwala, “The Finances of War: Iraq, Credit and Conflict, September 1980 to August 1990”, in Ashton and Gibson (eds.), The Iran–Iraq War, pp. 92–3. 9  HAEU, FXO-115, B. Madinier, TOTAL Abu Al Bu Khoosh, December 27, 1988. 10  Press Conference Ali Khalifa Al-Sabah, MEES, November 28, 1989.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

366

The Rise and Fall of OPEC in the Twentieth Century

At the end of 1989 Iraq started openly pressuring Arab oil producers to commit to higher prices. This petro-diplomacy was accompanied by the assertion of a leading role for Iraq in the struggle against Israel and against all the enemies of the Arab nation. Iraq reinforced its position as the main supporter of the Palestinian cause— now revived by the Palestinian grassroot uprising in occupied West Bank and Gaza that started in December 1987 under the name of Intifada—and indirectly called into question the nationalist credentials of the Gulf monarchies. The battle to increase oil prices and to revive Arab nationalist pride were blended together by Saddam in a potentially explosive mix. Oil prices dropped once again between January and February of 1990. Saddam Hussein sent messages to the rulers of Kuwait and Saudi Arabia, asking for higher oil prices and greater understanding for the social and economic problems affecting the most populated Arab producers such as Algeria, countries that did not have the option of increasing production. In March, the Petroleum ministers of Kuwait, Saudi Arabia, and Iraq met for talks. They agreed on their respective quotas, but disagreed on prices. Iraq wanted a basket reference price higher than $18 a barrel, since that price had been set in 1986 and in real terms was now worth about $15 a barrel. Al-Sabah of Kuwait thought that quotas should only be applied in case the price fell below $18: “I think that our obligation to stay within the quota applies when the price of the OPEC basket is below $18/b. If the price is above $18, I  think everyone should be, and be encouraged to be, producing above their quota.”11 More than anything else, Al-Sabah’s main goal was to get rid of the quota system as soon as possible and let the market work its magic. At the meeting of the ministerial Monitoring committee in Geneva in May, it was agreed to slash OPEC production by 1.5 mbd. Upon exiting the meeting, the Iraqi Foreign minister Tariq Aziz denounced that overproducers where participating to a “Zionist-imperialist campaign against Iraq.”12 Only Saudi Arabia apparently honored its quota. The basket price soon reached $14 a barrel, also due to “overproduction” in Kuwait and in the UAE. In July, during a meeting of the Arab Gulf producers in Jeddah, the new Kuwaiti Petroleum minister announced that his country would now accept the quota of 1.5 million barrels a day. The UAE also accepted a quota equal to that of Kuwait, probably an outcome of the pressures exerted by Saudi king Fahd on Zayed, the ruler of Abu Dhabi. While commemorating the anniversary of the Iraqi revolution on July 17, Saddam Hussein had once more harsh words for Arab “overproducers”: The imperialists and Zionists hope that they will succeed with this method where they failed with traditional methods, and that they will achieve their goal of halting Iraq’s scientific and technological progress, both civilian and military. They hope they will achieve the goal of this campaign, which our enemies failed to achieve by their traditional direct methods, by new methods implemented by Arabs, by individuals and perhaps by states in the region. By that I mean the new oil policy being followed by some of the rulers of the Gulf states based on a fall in the price of oil without any 11  MEES, February 12, 1990. 12  “Iraq Warns OPEC Over-Producers”, MEES, 33:31, May 7, 1990.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

367

economic justification and against the wishes of the majority of OPEC producers, as well as against the interests of the Arab nation [. . .] For example, a drop of one dollar in the price of a barrel of oil as a result of this policy will lead to a fall of $1,000mn in Iraq’s annual oil revenues. The reduction of the price of oil from the $27–28/B level prevailing not so long ago to the current depressed level has led to Iraq losing $14bn dollars a year at a time when a few billion dollars could solve much that has been at a standstill or postponed in the life of the Iraqis—this struggling people which has waded through a lake of blood defending its honor, freedom, sovereignty and security, and defending the honor, freedom, sovereignty and security of the Arab nation.13

Only one day earlier, Tariq Aziz had written to his peers in the Arab League that if the Arab producers had not been forced to accept a reduction in oil prices, they could have come to the assistance of the other Arab countries facing severe economic and social turmoil. Saudi Arabia and Kuwait, for example, cut their aid respectively by 49 and 72 percent between 1980 and 1988, while population and public debts in the MENA region had exploded.14 Tariq Aziz reminded his Arab colleagues that Kuwait not only had accepted and indeed encouraged low petroleum prices, but that it had refused to forgive Iraq’s debts and had built oil facilities to exploit the fields in South Rumaila, thus “stealing” oil from beneath Iraqi feet. He suggested creating a Fund for Arab Development and Assistance financed with every dollar earned above $25 a barrel. Grievances against Kuwaiti oil policy were blended with Iraqi territorial claims and accusations of treason to the Arab cause in a mixture that was quite unprecedented since the creation of OPEC. Iraq had previously been sharply critical of the Saudi moderate oil policy, but it had never openly extended such criticisms to include connivance with the enemy and territorial usurpation. Arab producers were now turning the oil weapon against each other. The OPEC Conference in Geneva ended on July 26 with an agreement to raise the basket price to $21 a barrel. Iraq had requested an increase to $25, and in any case had no faith that the others would honor their quotas. Iraqi troops, meanwhile, continued massing on the border with Kuwait. Yamani had sought to defend the oil price up to 1986, first by asking for the creation of the Executive council to monitor violations, and later with his “market share” strategy to punish rule breakers. Saddam, unable to impose OPEC solidarity, finally decided he would help the Iraqi economy and impose discipline by taking over the Kuwaiti oilfields, resorting to an army hardened by years of war and made up of soldiers jealous of the standard of living enjoyed by their neighbors. In a private meeting with king Fahd, Saddam defined the Kuwaitis as “rich fat people” who went to Iraq to gamble, drink and sleep with prostitutes (Saddam was right about Kuwait’s wealth, since the country then held $200 billion in financial reserves).15 A clash between Arab Gulf neighbors that had begun with skirmishes over the oil policy was about to 13  “Documentation on Iraq–Kuwait Crisis”, MEES, 33:42, July 23, 1990. 14  Massimiliano Trentin, “Divergence in the Mediterranean: The Economic Relations Between the EC and the Arab Countries in the Long 1980s”, in Journal of European Integration History, 21:1 (2015), pp. 89–109. 15  Banafe and Macleod, p.101.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

368

The Rise and Fall of OPEC in the Twentieth Century

turn into open military conflict. A 1990 report published by the Oxford Institute for Energy Studies left little doubt about the stakes in this fratricidal spat: “The current Gulf crisis is largely a conflict about oil. It is likely to develop into a war which would thus become the first oil war in world history.”16 It is unclear why Kuwaiti leaders downplayed the many signs and threats emanating from Iraq. Part of the explanation is that Saudi King Fahd had been so close to Saddam, especially during the Iraq–Iran war, that such an hostile move on the part of the Iraqi leader seemed almost inconceivable. On the other hand it is by no means obvious that a greater willingness on the part of the Gulf monarchies to cooperate more effectively with the OPEC majority and with Iraq would have significantly altered Saddam’s plans for aggression. * * * On August 2, the Iraqi army launched the invasion and soon after Kuwait was formally declared the nineteenth province of Iraq. Having absorbed Kuwait, Iraq would now be the world’s second largest oil exporter, only behind Saudi Arabia. The Kuwaiti people found themselves living under the yoke of an army with a great deal of pent-up rage. The “international community,” with a series of resolutions voted by the UN Security Council condemned the invasion, demanded Iraqi withdrawal, embargoed all Iraqi exports, and finally set an ultimatum on January 15, 1991 for an Iraqi retreat, after which it would authorize the use of force to compel Iraq to respect UN resolutions. The pacifist and third-worldist spirit that had permeated the US and Western European societies in the 1960s and 1970s, manifesting itself most openly in the widespread protests against the Vietnam war, was fading away. While there was no sympathy for the Kuwaiti, there was also little sympathy for Hussein. The Arab League, usually requiring unanimous voting, departed from its norms. Led by Saudi Arabia and Egypt (with the more or less spirited opposition of the PLO, Jordan, Tunisia, Algeria, Libya, and Mauritania), it approved the participation in a military coalition to restore the legitimate government of Kuwait and to protect Saudi Arabia from a possible Iraqi strike. By the end of the year, the number of Arab soldiers taking part in the coalition against Iraq had reached 100,000, while supporters of Saddam in the Arab world raised their tone against imperialism, against the subaltern monarchies of the Gulf and even found support among the Muslim “fundamentalist” parties and public opinion in the region.17 The driving force behind the coalition was the United States. Having won Saudi approval to deploy non-Muslim troops on its territory, as well as having secured an agreement that Riyadh would pay the full financial burden for all military operations on Saudi soil, Washington sent soldiers, tanks and planes, all accompanied by an imposing fleet. Bringing US military on Saudi soil was a painful decision for the 16  Oxford Institute for Energy Studies, The First Oil War: Implications of the Gulf Crisis in the Oil Market, OIES, SP1, 1990. 17  Bruce Maddy-Weitzman, “The Inter-Arab System and the Gulf War: Continuity and Change”, Occasional Papers Series, The Carter Center of Emory University, 2:1, 1991: www.cartercenter.org/ documents/1223.pdf (Consulted on February 1, 2019).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

369

House of Saud. Fahd was convinced that what had happened in Kuwait would sooner or later repeat itself also in the Saudi oilfields, while his intelligence reported that even if Egypt sent its entire army to protect Saudi borders, this would still not have been enough.18 In the first sixty days of operation Desert Shield alone, the US deployed four aircraft carriers and 100,000 ground troops. The battle against Saddam became a vehicle to address many of the lingering traumas that had haunted the United States since the 1970s, finally overcoming the specter of defeat in Vietnam. Bacevich has aptly labeled the American intervention as “a proxy war waged against the past.”19 Reagan had already overcome the psychological and economic shock of the energy crisis and could boast of having eliminated lines at the gas stations. Bush would have to transcend memories of the US diplomats hurriedly leaving Saigon from the rooftop of the embassy in 1975. The Iraqi army was reported to be one of the strongest in the world, hardened and battle-tested by the long war of attrition with Iran. Iraq, even though it had recently become a US ally, was also a socialist country, well suited to step in for the Soviet Union as a major threat for the security the Gulf. Furthermore the United States possessed much more solid footing than it had in Vietnam in terms of supply, and international and domestic support for the campaign. CENTCOM had established a network of military bases in the region, and the war zone between Saudi Arabia and Kuwait was well suited for the type of pitched battle in which to bring to bear the full weight of its technological superiority. The war against Saddam could trace the contours of a new era not only in the Gulf, but throughout an entire world in the process of emerging from the Cold War. On September 11, 1990, US National Security Advisor Brent Scowcroft added a fifth goal to the President’s address to Congress on the Iraqi crisis: We stand today at a unique and extraordinary moment. The crisis in the Persian Gulf, as grave as it is, also offers a rare opportunity to move toward an historic period of cooperation. Out of these troubled times, our fifth objective—a new world order— can emerge: a new era—freer from the threat of terror, stronger in the pursuit of justice, and more secure in the quest for peace. An era in which the nations of the world, East and West, North and South, can prosper and live in harmony [. . .] A world where the rule of law supplants the rule of the jungle.20

Al-Naimi notes that ARAMCO took its share of burden in the anti-Saddam struggle. Fair enough, considering that the protection of Saudi oil fields was one of the declared motives behind American intervention. The Saudi national oil company brought all the facilities it had mothballed back online, and increased production by 4 million barrels a day (four times the Iraqi production!) to make up for the blockade on exports from Iraq and Kuwait, thus preventing a dramatic spike in oil prices: By the year’s end, these crews were able to recommission an astounding 146 oil wells and a dozen gas oil separation plants in our Harmaliyan, Khurais and Ghawar fields, as well as the saltwater treatment pipeline. From our average daily production of 18 Riedel, Kings and Presidents, p. 105. 19 Bacevich, America’s War for the Greater Middle East, p. 117. 20 George  H.W.  Bush, Address Before a Joint Session of Congress, September 11, 1990: www.­ millercenter.org/president/bush/speeches/speech-3425 (Consulted on February1, 2019).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

370

The Rise and Fall of OPEC in the Twentieth Century

5.4 million barrels per day in July, we were producing 8.5 million barrels per day by December. No other country in the world would have been remotely capable of bringing that much additional capacity to market in that length of time.21

By the end of 1990, the international coalition summed up some 950,000 soldiers from thirty-four countries. Three out of four servicemen were American. Until January 15 would-be mediators advanced dozens of proposals to resolve the impasse in a peaceful manner. Saddam rejected them all, and refused to back down. Then, at 2:40 am on January 17, 1991, the defensive operation Desert Shield came to a close. The offensive operation Desert Storm began, with a bombing campaign that would last uninterrupted for forty days. More than 100,000 aerial missions destroyed most of Iraq’s vital infrastructure: its roads, bridges, military outposts, television stations, and water purification systems. The country was in many respects bombed back to before the “oil revolution.” On February 22, Saddam ordered the blowing up of Kuwait’s oil wells and the dumping of crude oil from its refining facilities into the Gulf waters, something that resonated globally with an increasingly environmentally-conscious public opinion. This action provided a key narrative for the rebuilding of a new Kuwait after the war. Since the Kuwaiti army had not played a significant role, the firefighter brigades became a symbol of Kuwaiti pride and courage, while at the same time the arch-enemy would now be Iraq rather than the British Empire as it had been just after independence. On February 2 the coalition began its land offensive, quickly demonstrating the utter superiority of American tanks and military hardware, and forcing the Iraqi army into a hasty retreat. On February 28 the war was over, after Iraqi surrender and the deaths of at least 100,000 Iraqi soldiers—although Saddam’s elite Republican Guard remained largely intact—against only a few dozen coalition casualties (mostly from friendly fire). President Bush did not, however, order the coalition troops to march on Baghdad. Such an order would have clearly superseded the coalition’s broad international mandate, and signaled not the liberation of Kuwait but the invasion of an Arab state by foreign troops. It was also deemed unwise to further weaken a country that still represented the most significant bulwark against Iranian influence in the Gulf region. Saddam managed to salvage part of his army and could continue his repression of Shi’ite and Kurd domestic opposition unmolested. While Saddam was left in power, Iraq was barred from international credit, foreign imports, and of course from exporting its petroleum. Iraq retained only the barest skeleton of its sovereignty, and became in essence a pariah state in the global community, drowning in debt and forced to pay reparations for war damages (later set at 30 percent of its oil revenues). Iraq’s per capita income plummeted from $2700 in 1989 to only $500 at the end of the 1990s. Unemployment in the manufacturing sector reached record levels, as high as 70 percent. Food and medicine were rationed, and previously eradicated diseases resurfaced as a result of the 21 Al-Naimi, Out of the Desert, p. 155.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

371

destruction of infrastructure like water treatment facilities, coupled with the state’s inability to repair them. Only in 1996 did Saddam accept the “oil for food” program, which allowed the country to purchase some food products and medicines under international supervision. Until then, oil could only be sold under the table, well below market rates, further contributing to the overall weakness of global oil prices. After 1991, Iraq was in practice no longer an OPEC country, and was excluded from the quota system. The war against Saddam, as we have seen, was much more than a war for petroleum but it did end much of the problems that the “oil revolution” had generated for the US and for other large consumers. Despite the turmoil in the region crude oil would remain cheap. The petrostates of the Gulf had become much reliable than they were the 1970s. Saudi Arabia was now politically far more dependent from the US than it had been in the 1970s and Arab petroleum nationalism, as embodied by the Iraqi law n. 80 in 1961 or by the 1973 “oil embargo,” was now a distant memory. The US military would be stationed in the Kingdom and from there the US Air Force would monitor the effectiveness of the no-fly zones in Iraq. If Iraq was bombed “back to the Stone Age,” then also for Saudi Arabia the economic and political economic consequences of the war were very significant. The Saudi state was the main financier of the war effort against Iraq. As the US ambassador Charles W. Freeman remarked: “the Saudis paid for the transportation and indeed, the equipment of many of the Third World forces who arrived, essentially in jock straps and flip flops, requiring everything from uniforms to guns to jeeps to artillery, all of which the Saudis provided, along with salaries and housing and water and food”.22 Ambassador Freeman also believed the Saudis might have trouble meeting the challenges they now faced: “Saudi Arabia’s financial problems throughout the 1990s, which had their roots in the 1986 price collapse and were further strained by Desert Storm expenses, ran deep, making it difficult for the royal family to buy off domestic opposition and meet growing commitments, including major outstanding debts to the United States.”23 By 1994 king Fahd had to admit that the Saudi economy was in crisis due to budget deficits that had endured since 1982 (deficits would last up to 2003), the need to repay US suppliers, the necessity of cutting expenditure, the increase in population that passed from 8 million at the end of 1970s to 16 million in 2004. Fahd also had to face wide calls for greater participation indecision-making (Table E.1.).24 Saudi financial reserves dropped even further as a consequence of the “Asian crisis” in 1998 and 1999: this was the worst time for Saudi finances in 40 years and the Kingdom risked being unable to pay for its imports.25 Also, external protection from the West could not buy for Gulf petrostates what Ghazi Al-Gosaibi, in his brilliant essay on the Gulf crisis, has defined “permanent security.” This, according to the former Saudi minister, could only be achieved if 22 Bronson, Thicker than Oil, p. 198. 23  Ibidem, p. 199. 24 Al-Rasheed, A History of Saudi Arabia, pp. 158–71. 25  Banafe and Macleod, The Saudi Arabian Monetary Agency, p. 7.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

372

The Rise and Fall of OPEC in the Twentieth Century Table E.1.  Saudi budget deficit from the 1986 to 2000. Year 1986 1987 1988 1989 1990/1991 1992 1993 1994 1095 1996 1997 1998 1999 2000

Total revenues

Total expenditure

Deficit/surplus

76,498 1,03,811 84,600 1,14,600 3,16,639 1,69,647 1,41,445 1,28,991 1,46,500 1,79,085 2,05,500 1,41,608 1,47,454 2,58,065

1,37,422 1,84,919 1,40,856 1,54,870 4,87,435 2,38,987 1,87,890 1,63,776 1,73,943 1,98,117 2,21,272 1,90,060 1,83,841 2,35,322

−60,924 −81,108 −56,256 −40,270 −1,70,786 −69,340 −46,445 −34,785 −7,443 −19,032 −15,772 −48,452 −36,387 22,743

(Steffen Hertog, Princes, Brokers and Bureaucrats, 2010).

Gulf petrostates did not isolate themselves from the wider Arab world, lest the problems of the region would eventually turn against them: Permanent security requires of the people of the Gulf that they stop thinking according to the mentality of a closed “club of the rich” and open themselves to the urban Arab centres, not with more money, but with more love and friendship. Housing problems in Egypt must concern Gulf officials as much as Egyptian officials. The economic problems of the Moroccan people must not be left entirely on the shoulders of the Moroccan government. Aid does no have to be a “tribute” imposed on the party that provides it. Nor does it have to be mere “charity” for the one who receives it.26

Since the outbreak of the Iran–Iraq war, the oil facilities of the region with the largest petroleum reserves in the world had been subjected to every possible kind of trial and tribulation. Iraq and Iran had tried to damage each other as much as possible. Kuwait had been invaded and its oil fields set ablaze. Iraq had been cut off from the global oil trade, and basically ousted from OPEC. The magic of all this situation is that there never was a problem of petroleum scarcity and that consumption was once again on the rise worldwide. This happened because there were new oil-producing areas, including Russia that increased its production again, but also because by the beginning of the 1990s petrostates could no longer focus on maximizing their per barrel income and on preserving their most valuable natural resource for future generations. With more immediate and pressing concerns, petrostates decided to focus instead on maximizing production and on re-launching the competitiveness of petroleum as the key energy source.

26 Ghazi A. Algosaibi, The Gulf Crisis. An Attempt to Understand (London: Kegan Paul International, 1993), p. 114.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

373

A P E RT U R A As petroleum revenues for OPEC countries declined from a peak of $286 billion in 1980 to less than $79 billion in 1986, so did the ability of petrostates to provide services and employment opportunities for their citizens.27 The grand, if often misconceived, diversification plans of the 1970s showed their limits, both in terms of the over-optimistic premise of ever-increasing oil prices and of their ability to generate alternative revenues streams for the states. Take the example of the “Plan for the valorization of hydrocarbons” (VALHYD) presented by the Algerian ministry for Energy in 1977 and aimed at assessing the financial resources that the hydrocarbons sector would provide to the state for investment in the medium term. Although prudent, both in terms of production rate and prices, it nevertheless was based on the premise of a moderate increase in the price of petroleum over time and never dealt with the possibility of a decline in prices (a hypothesis considered “very unlikely”).28 The literature on the “resource curse” blossomed precisely during these times of economic, social, and political upheaval in many petrostates and flourished by the beginning of the 1990s.29 Up to the late 1970s the conventional wisdom concerning the relationship between natural resource abundance and development was that the former was advantageous for the latter. By the end of the 1980s a resource that had drawn to petrostates migrant workers, technocrats, and intellectuals from around the world, and that had put the names of OPEC countries on the front pages of the world’s most prestigious newspapers, started to be viewed as a curse leading to corruption, poverty, authoritarian governments, wars, and environmental damage (Fig. E.1.). 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 1936

1952

1968

1984

2008

Fig. E.1.  International oil rent per family group in Venezuela in the twentieth century. (Asdrúbal Baptista, Teoría Económica del Capitalismo Rentístico).

27 Amuzegar, Managing the Oil Wealth, p. 39. 28 Abdessalam Le pétrole et le gaz naturel en Algérie, pp. 459–83. 29  Paul Stevens, Glada Lahn, and Jaako Kooroshy, “The Resource Curse Revisited”, Research Paper, Chatham House, August 2015.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

374

The Rise and Fall of OPEC in the Twentieth Century

This is not the right place to engage with the literature on the resource curse. Generally speaking, this literature is more helpful as a way of capturing specific aspects of the crisis of the petrostates (the risk of overspending on the security apparatus for example), than when it tries to define, once and for all, the long-term relationship between natural resource endowment, state building, and social and economic development (a relationship that changes over time). Jahangir Amuzegar lists a number of troubles that challenged petrostates during the 1980s. Even if OPEC members had allocated to national education and health a greater share of their income than any other country in the world, and even if they had done so much in terms of state-building and infrastructural investment, in the period from 1980 to 1990 the average real GDP growth, Amouzegar notes, was negative in Libya, Qatar, Iraq, and the UAE, and it never surpassed 1 percent in the rest of OPEC countries. Since GDP stagnation went hand in hand with a general increase in population, by 1990 real per capita GDP in Iraq, Kuwait, and Venezuela ended up going back to the level of the 1960s. Asdrubal Baptista talks about a “collapse” of rentier capitalism in Venezuela in the 1980s, with key indicators such as the number of houses per inhabitant, monetary stability, real salaries, and security in free fall when compared to the period from the 1930 to the end of the 1970s.30 From being the “Pearl of South America in the 1970s,” Caracas became a den of shantytowns and organized crime. Dense vines and tropical vegetation began to sprout from the windows of the ultra-modernist skyscrapers of grey cement built from the 1950s to the 1970s, somewhat resembling the modernist version of the ancient ruins of the Roman Forum. Algeria found itself in a similar downward spiral of cuts in industrial investment, skyrocketing unemployment, and growing international indebtedness. By the end of the 1980s, popular protests against the rising cost of living, especially in Algiers, acquired a near-revolutionary nature, and contributed to formally end the single-party system and to ignite a civil war between Islamists and the FLN at the beginning of the 1990s. State budgets for OPEC countries were all continuously in deficit for the entire decade of the 1980s with the result that there was now far less money to spend in improving public services, to sustain state employment, or to subsidize basic goods. The electric grid operated by the Nigeria Electric Power Authority (NEPA) was then popularly renamed Never Expect Power Always. Foreign debt was negligible for all OPEC countries in 1970. By 1994 Algeria, Indonesia, Iran, Iraq, and Nigeria all had joined the ranks of the “heavily-indebted nations.” The diversification plans, absorbing vast amounts of oil rent and specially directed at building up the industrial and the service sector, had not managed to achieve full employment, with petroleum remaining for many petrostates the only significant export sector. OPEC countries spent from two to ten times more than the rest of developing countries on military and defense. Populations living in oil-producing regions, seeing the benefits of the oil windfall slip further away from them, were far less 30  Asdrúbal Baptista, Teoría económica del capitalismo rentístico (Caracas: Banco Central de Venezuela, 2010), pp. 219–30.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

375

prepared to witness passively the despoliation and pollution of their lands. In 1990, protests against pollution and widespread poverty in the oil regions of the Niger Delta turned into an undercurrent civil war. Not every OPEC country fared the same. Gulf monarchies, with smaller populations, were able to draw on their huge financial reserves accumulated during the 1970s and to adapt their immigration policies in order to moderate both labor and political instability. By 1985 Arabs had been increasingly replaced by Western or Western-trained expats, for jobs that required a higher degree of specialization, and by workers from Pakistan, India, and Southeast Asia, for the more menial occupations. The percentage of Arab immigrants in the GCC countries dropped from 75 percent of the total in 1975 to 56 percent in 1985, and continued to fall continuously thereafter.31 Between 1975 and 1985, the share of the Arab workforce in Saudi Arabia crumbled from 90 to 32 percent.32 Repatriation, or simply non-renewal of contracts, was used as a tool to shrink the labor pool in times of economic weakness, but also as an instrument to guarantee labor discipline. Having said so, the immigration remained, for the Gulf monarchies far more so than for the rest of OPEC governments, a key economic and social question: Indeed, the issue of immigrant labour is simultaneously political, economic, social and cultural as well as one of security, and any approach to it should take all these factors into account. It is one of the major problems which gives constant worry to the citizens since it causes the proportion of nationals to shrink every year and threatens their very survival.33

For all the difference in performance, the crisis of the petrostates and of rentier capitalism had striking similarities across OPEC countries. Jahangir Amouzegar sums it up this way: “When thirteen disparate nations starting from different vantage points, end up with uncommonly similar internal and external imbalances, dislocations and setbacks, the results cannot be attributed to bad luck.”34 Amouzegar, in the spirit of the “neoliberal” times in which he was writing, attributed most of the problems to state-led industrialization and misallocation of resources on the part of the state. But even countries such as Indonesia, that followed the IMF model of diversifying and opening up to foreign investments and privatizations, eventually saw their economy collapse in the middle of the 1990s. * * * The reason why I have spent a few words on the crisis of the petrostate during the oil counter-revolution is because this crisis implied, almost by definition, a parallel crisis of the petroleum sector. The difficulty for the petrostates in keeping their 31 Abdulhadi Khalaf, “Politics of Migration”, in Abdulhadi Khalaf, Omar AlShehabi, Adam Hanieh (eds.), Transit States: Labour, Migration and Citizenship in the Gulf (London: Pluto Press, 2015), p. 47. 32  Nazli Choucri, “Asians in the Arab World: Labor Migration and Public Policy”, Middle Eastern Studies, 22 (1986): 252–73. 33 Taryam, The Establishment of the United Arab Emirates, p. 261. 34 Amuzegar, Managing the Oil Wealth, p. 206.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

376

The Rise and Fall of OPEC in the Twentieth Century

petroleum sector under control at a time of declining prices did not concern only OPEC countries. The Soviet oil industry was thrown into chaos, and then privatized to a large degree, following the collapse of the Soviet Union: Alongside the saga of the Russian oil industry is the parallel story of the collapse and revival of the Russian state. The two are inseparably intertwined. It was the weakness of the Russian state in the 1990s that enabled the oil industry to restructure, privatize, and begin to modernize. The resurgence of strong state power since 2000, supported by rising oil prices, partially reversed those changes and enabled the state to regain control over the oil industry, even as the state itself became increasingly dependent on oil revenues.35

In 1987, Soviet production equaled 11.5 mbd. In 1996, output had declined nearly by half. Then a series of daring acquisitions and takeovers concentrated 83 percent of Russian oil production in a handful of private companies, the most ambitious of which were Mikhail Khodorkovski’s YUKOS and Roman Abramovich’s SIBNEFT. In 1998, while the Russian state remained bankrupt, these companies had revived oil production in grand style, achieving double-digit growth figures. The state, now viewed as terminally weak (even militarily), was left with crumbs. Most of the oil rent fled the Russian ministry of Finance and was reinvested overseas, materializing in the legendary fortunes of the “oligarchs,” symbolized most garishly perhaps by the sudden appearance in the Mediterranean of yachts the size of transatlantic ocean liners. Then came the new Russian president Vladimir Putin, who managed to restore some order in relations between the state and the private petroleum sector, while at the same time recovering a large part of the oil revenues from the hands (and bank accounts) of the oligarchs. The state, as we have seen, was retreating from energy production and marketing also in most of the OECD countries. According to the new consensus prevailing in Western Europe from the 1980s the state had to shift from direct industrial involvement in the hydrocarbons industry and in power generation mainly to the role of market regulator. We have seen how Thatcher privatized BNOC, and then eventually sold off all government stakes in BP. In France, the state-run ELF was also privatized and eventually absorbed by the private oil company TOTAL. Beginning in 1995, the Italian ENI was listed and the state was left with a minority controlling share. Also STATOIL was eventually listed on the stock market in 2001. In the United States, where bipartisan political consensus had successfully resisted the creation of a state petroleum company, low oil prices led to restructuring and concentration within the private sector. Emblematic of this process was the acquisition of Gulf Oil, one of the seven sisters, by Chevron in 1984. Nine of the ten largest mergers in US history up to the 1990s took place under the Reagan administration, and eight of those concerned the petroleum sector. As the head of the Federal Trade Commission explained: “Most recent oil mergers are driven by the desire for crude oil, which is much cheaper to acquire on Wall Street than

35 Gustafson, Wheel of Fortune, p. 3.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

377

through exploration and drilling.”36 In the 1990s the tendency toward megamergers of international private oil companies reached its apex with the mergers between EXXON and MOBIL, between BP and AMOCO, and between CHEVRON and TEXACO for a total value of next to 265 billion dollars. This Darwinian competition between “market” actors was seen as the best solution to guarantee low energy prices for the consumers in the foreseeable future, even though private companies were reluctant to invest in the low prices environment prevailing up to the beginning of the 2000s, and even though they now accounted for less 10 percent of global crude oil production and for a tiny share of global oil reserves.37 OPEC countries could not follow exactly the same trajectory as the OECD countries. Increasing state control over the petroleum industry, coupled with an adequate fiscal regime to recoup the natural resource rent, had been a key to statebuilding. (Fig. E.2.) Oil nationalizations had represented in many petrostates one of the iconic struggles of the post-independence era (the Algerian government celebrates every year the anniversary of the nationalization of the petroleum industry on February 24, 1971). As admitted by Thomas Walde: “the likelihood of popular opposition to the sale of SPEs [State Petroleum Enterprises] to overseas private investors is bound to constitute a key consideration for the government in formulating decisions as to the scope and extent of the intended privatization

Fig. E.2. National Monument (MONAS) in the middle of Merdeka (Independence) Square in Jakarta. The other towering building on the square is the headquarters of the Indonesian national oil company PERTAMINA. (Photo taken by the author).

36  Library of Congress, Daniel  P.  Moynihan Papers, Energy, Box. 1213, Folder 4, Testimony of Michael Pertschuk Commissioner, Federal Trade Commission, Before the Senate Judiciary Committee, March 15, 1984. 37 Maugeri, The Age of Oil, pp. 196–83.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

378

The Rise and Fall of OPEC in the Twentieth Century

measures.”38 International petroleum rent was vital to guarantee the very survival of the state. Straightforward privatization of the petroleum sector was therefore not an option (at least not up to the time of writing), since it would have unleashed significant popular resistance and might have endangered vital state revenues. As former Algerian Energy minister Abdessalam admonished in his memoirs published in 2012: “this sector, which nobody neglected then as they do now, is the most important source of the financial resources necessary to support our development and to balance our different national budgets.”39 The weakening of state control over the petroleum sector in the OPEC countries then took the form of a subterranean struggle by the national oil companies (NOCs) to free themselves from the shackles imposed by the state. It was a tendency to privatize in substance, if not in form. National oil companies sought to take on a leading role in the global oil market, equaling if not surpassing the achievements of the oil majors. They started presenting themselves as market agents, while divesting themselves from their previous incarnation as development agents, proudly waving the banner of their superior efficiency and productivity. In the latter half of the 1980s, and throughout the 1990s, national oil companies were on the ascendant while Petroleum ministries—where they existed (in almost all the OPEC countries except for Nigeria)—were losing personnel, power, and prestige. One need only compare today the modest and relatively unassuming ministry of Energy in Abu Dhabi (Fig. E.3.) with the sparkling new headquarters of national oil company ADNOC (Fig. E.4), stretching some 342 meters into the sky, with a breathtaking view of the Presidential Palace and of the luxurious Emirates Palace Hotel, to have a sense of where the economic resources, human capital, and possibly real decisionmaking powers lie. OPEC could not count anymore on the towering figures of ministers such as Amouzegar, Yamani, or Abdessalam: technocrats with key decisionmaking power over oil policy who considered the petroleum industry as a key ­element of the development project of their countries. From the very beginning of the nationalizations of the 1970s, controlling the activities of the newly empowered national oil companies proved challenging for the state administration. Fadhil Chalabi, while he was undersecretary at the Iraqi Oil ministry, argued that by the mid-1970s key decisions were all taken directly by Saddam Hussein: “it seems unthinkable that neither Iraq’s new Oil Minister Ta’eh (despite being a member of the Revolutionary Command Council) not I, his Undersecretary, had a clue of how much or even at what price Iraq was producing and selling its oil.”40 The situation had been paradoxically more straightforward before the nationalizations when IPC directly paid its taxes in hard currency to the Iraqi Central Bank and the Central Bank officially published the figures of the foreign reserves it held. In Iran, the Petroleum minister retained the authority to scrutinize and approve every project undertaken by INOC, but in the majority of OPEC countries the Petroleum ministries were losing control over 38  Walde and Ndi, International Oil and Gas Investment, p. 6. 39 Abdessalam, Le pétrole et le gaz naturel en Algérie, p. 237. 40 Chalabi, Oil Policies, Oil Myths, p. 159.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

379

Fig. E.3.  Arial view of Abu Dhabi town and the Corniche in 1960. (BP PLC and Abu Dhabi National Archives).

Fig. E.4.  The towering new building of ADNOC (the old ADNOC building is the small building on the right) on the Corniche of Abu Dhabi. (Photo taken in 2018).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

380

The Rise and Fall of OPEC in the Twentieth Century

the planning of future investments and over the costs of these investments. Here too a comparison with what took place after the fall of the Soviet Union in Russia is not completely unwarranted: In the bleak winter of 1991–1992 the newly created Russian Ministry of Fuel and Power moved into the drafty headquarters of the former Soviet Ministry of Electrification at Number 7 Kitaigorodskii Proezd, near Red Square. For a time the old building had no security at all. Visitors entered as they pleased through the creaky swinging doors, brushed past the pensioners posted to check documents that no one bothered to present, then walked up the dusty and chipped marble steps and down dimly lighted hallways, the walls still festooned with fading posters proclaiming the achievements of the Soviet power industry. The offices were dingy, many were empty; everything smelled musty and disused. Only the vast offices of the minister and his deputies retained some vestiges of decayed grandeur.41

Ironically rise of national oil companies in the second half of the 1980s was a  ­component of the oil counter-revolution. Lower crude prices implied, for a government that sought to honor its OPEC quota, to limit the opportunities for the national oil company to invest within the nation’s borders, which pushed the NIOCs toward greater “internationalization.” Even where governments turned a blind eye to their OPEC quota, or favored capacity expansion, low prices implied the need to attract foreign investments towards the more challenging oil fields. The national oil companies sought (or pretended) to escape political patronage, corruption, and ministerial bureaucracy. This was one of the explanations offered in Saudi Arabia in order to prevent PETROMIN, the national oil company created by king Faisal, from gaining control of the Saudi production sector, which remained instead fully with the more “independent” ARAMCO (subsequently renamed Saudi ARAMCO).42 Several national oil companies, such Angola’s SONANGOL or the Venezuelan PDVSA (as we shall see), took this line of antibureaucratic discourse to its rhetorical limit, projecting an image of themselves as islands of rigor and productivity amid their country’s sea of political corruption and inefficiency.43 On the one side were their gleaming headquarters, well-­manicured lawns, and the English-speaking young urban professionals educated at the world’s finest universities. On the other, endless paperwork, faceless bureaucratic mediocrity, low productivity, meager wages, and dusty ministerial hallways. Much of this rhetoric echoed that of the concessionary companies that used to portray themselves as islands of modernity and progress (when not of racial privilege), that had to face backward and uneducated populations, and greedy local governments. The contradiction between their willingness to act as commercial entities on one side, and their rent-generating function coupled with their role as a guarantee against the squandering of the natural resources on the other, was common to all 41 Gustafson, Wheel of Fortune, p. 63. 42  Paul Stevens, “Saudi ARAMCO: The Jewel in the Crown”, in David G. Victor, David R. Hults, Mark C. Thurber (eds.), Oil and Governance: State-Owned Enterprises and the World Energy Supply (Cambridge: Cambridge University Press, 2012), pp. 173–233. 43  Ricardo Soares de Oliveira, “Business success, Angola-style: postcolonial politics and the rise and rise of Sonangol”, in Journal of Modern African Studies, 45:4 (2007), pp. 595–619.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

381

national oil companies. As market actors they had every interest in investing and expanding production, as well as in acquiring refining and marketing facilities abroad so as to generate profits in all phases of the industry and to guarantee stable outlets for their own crude. In one of the main studies conducted on the rise of national oil companies, Valérie Marcel considers that: “the view of crude as a resource with a national flag hoisted on it is being tested by the NOCs international expansion downstream.”44 A former ADNOC General Counsel considered that his company’s objectives were to “reconcile national and commercial objectives and strike a balance between the dictates of national interests and the considerations of normal commercial practice.”45 The sentence, involuntarily, says much about the recently acquired decision-making capabilities of national oil companies: in theory, it was not up to ADNOC managers to uphold the “national interests,” as these kind of strategic decision-making was still theoretically in the hands of rulers, elected politicians, and ministers. The Kuwait Petroleum Company (KPC) of the 1980s, led by Ali Al-Khalifa, provides an illustrative example in this regard. The company was bound by a 1980 law that required its budget to be approved by the Kuwaiti Parliament, and its overall strategy to be designed by the Petroleum ministry. By law, the KPC sold crude oil on the international market at a price decided for by the government, skimming for itself only production costs and a small percentage for marketing services. There was very little incentive in this mechanism to reduce costs. Any cost reduction would simply translate into larger state fiscal revenues. The KPC thus started venturing outside Kuwait, particularly through the acquisition of refineries and distribution networks. It acquired a series of marketing and retail facilities in Europe, creating the brand Q8 for this specific purpose. In 1987, after the stock market crash, the Kuwait Investment Authority acquired 22 percent of BP (later the British government limited this participation to less than 10 percent), thus becoming its main shareholder and effectively marrying into the interests of consuming countries. As suggest by Paul Steven, while boosting the pride of Kuwaiti petroleum technocrats, this international campaign was not necessarily in line with the national interest in petroleum revenue maximization: Operational integration allowed KPC to capture a greater share of the rent for itself. The government, both the administration and the National Assembly, saw KPC’s efforts to remain operationally vertically integrated as an attempt to allow greater rent seeking. Thus, from the very beginning of KPC as a national firm, suspicion of its intentions and strategy has been rife.46

In the 1980s, many a national oil company abandoned the objective they had shared up to the 1970s to assist the broader industrialization dreams of their gov44  Valérie Marcel, Oil Titans: National Oil Companies in the Middle East (Washington: Brookings Institution Press, 2006), p. 204. 45  Atef Suleiman, “The Oil Experience of the United Arab Emirates and its Legal Framework”, in Journal of Energy & Natural Resources Law, 6:1 (1988), pp. 1–24. 46 Paul Stevens, “Kuwait Petroleum Corporation (KPC): an Enterprise in Gridlock”, in David G. Victor, David R. Hults, Mark C. Thurber (eds.), Oil and Governance. p. 343.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

382

The Rise and Fall of OPEC in the Twentieth Century

ernments, choosing instead to concentrate on their core business of petroleum production, refining, and marketing. On the one hand, this was a wise decision, given that industrial investments frequently resulted in a waste of public funds (remember the bankruptcy of PERTAMINA in the mid-1970s). On the other hand, when compared to investment in refineries and marketing networks abroad, local industrial projects still represented an opportunity to boost domestic employment and promote local technical and industrial knowhow. The national oil companies could in certain cases take out direct loans whose repayment would eventually force them to sell significant quantities of oil. They offered scholarships and built an internal welfare system, including schools and hospitals, often better than those provided by the states themselves. In some cases these internal welfare systems were developed to the point that, particularly in countries where government budget resources for services were scarce or in decline, they became a sort of state within the state, with an odd resemblance to old consortiums. * * * The most extreme case of the contradictions generated by the ascent of national oil companies in their new guise of market agents materialized in Venezuela. PDVSA went “international” in the second half of the 1980s and started what might be defined as a guerrilla war against Venezuela’s own legacy as a petrostate. Since this book begins with the rise of Venezuela as the first petrostate, it is quite fitting that I should end it in the 1990s in that very same country. During that decade, there was serious risk that Venezuela would abandon OPEC, the organization it had first conceived as a bulwark in defense of petrostates. By 1982 Venezuela’s finances were seriously compromised. The government then decided to repatriate more than $5.5 billion that PDVSA kept as reserve funds in its New York bank accounts to reinforce the Central Bank’s reserves. But soon thereafter the government was forced to devaluate the Venezuelan currency in order to reduce imports. The result was that those $5.5 billion, indispensable to PDVSA’s future investments, were nearly pulverized. From that moment onward the oil company started an internationalization campaign that increasingly strained its relations with the government. It formed joint ventures with Germany’s VEBA refineries, and subsequently acquired 50 percent of CITGO’s refineries in the US.47 It sold oil cheaply to its foreign outlets in order to inflate profits abroad. The Venezuelan state had a hard time trying to recoup such profits. In 1988, Carlos Andrés Pérez (CAP) was elected President for the second time: an homage to the glory days of La Gran Venezuela and a vote affirming the popularity of his criticism of IMF structural adjustment policies which he defined: “a neutron bomb that killed people, but left buildings standing.” To address the disastrous state of public finances, however, CAP was soon forced to submit to the austerity treatment recommended by the IMF. His government increased gasoline prices, 47  Juan Carlos Boué, Venezuela: The Political Economy of Oil (Oxford: Oxford Institute for Energy Studies, 1993), pp. 153–75.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

383

depreciated the currency, and opened up the country to foreign investments— with the notable exception of the petroleum sector. As a reaction to these measures, and especially to the increases in gasoline prices, at the beginning of 1989 widespread looting and popular unrest started in the capital and threatened to plunge the entire country into anarchy. Only the proclamation of a “state of emergency” and hundreds of dead- ultimately ultimately quanched the Caracazo, as the revolt came to be known (Fig. E.5). Faced with the increasing weakness of the state and CAP’s failure in stabilizing the country, PDVSA began to promote the policy of apertura (“opening”). In spite of having been appointed by CAP himself, PDVS’s new chairman Andrés Sosa Pietri, began a frontal assault on OPEC. In his memoir Petróleo y Poder (“Oil and Power”, published just after his resignation in 1993) Sosa Pietri wrote that OPEC had never been able to control prices and was more a “myth” than a reality.48 He defined Pérez Alfonzo himself as a “legend” that had done more harm than good to Venezuelan politics. According to Sosa Pietri the price increases of the 1970s had damaged the developed countries by leading stagflation; the developing countries by generating debt; and the producers themselves since they undermined the role petroleum as a global energy source. OPEC had introduces in 1982 the despicable

Fig. E.5.  Fire and looting in the center of Caracas during the Caracazo, February 27, 1989. The official death toll was 300 victims. (Photo by Tom Grillo. Archivo Fotografia Urbana, image 127710).

48  Andrés Sosa Pietri, Petróleo y Poder (Caracas: Planeta Venezolana, 1993).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

384

The Rise and Fall of OPEC in the Twentieth Century

quota system, but was unable both to regulate prices and to impose productions levels. According to the new head of PDVSA the nationalizations of the 1970s had been a mistake in that they had pushed the ministers to interfere with the production strategies of the oil companies. The objective was clear: PDVSA had to be managed “as any other commercial company” and should, if possible, even go public.49 Sosa Pietri’s grand plan was to increase production to more than 3,5 million barrels a day by 1995 (up from less than 2 million), to beef up the internationalization of the company also through strategic partnerships with foreign companies, to reduce oil taxation, to develop extra-heavy crude in the Faja del Orinoco (Orinico river belt whose strategic reserves could come to represent an “alternative to Middle East”) and, finally, to reinforce the relationship with the Unites States in order to gain a privileged treatment on the par of Canada and Mexico.50 This strategy basically amounted to wiping out completely the legacy of Pérez Alfonzo and of Venezuelan oil technocrats up to the 1970s. In June 1990 the daily El Nacional reported that Sosa Pietri insisted on Venezuela’s withdrawal from OPEC because the quota system ran against to the national interests of Venezuela.51 In 1994, after the fall of CAP, Rafael Caldera was elected for the second time to the Presidency. His first term as President, as we have seen, had been characterized by the re-launching of OPEC during the Caracas Conference of December 1970. But this time Caldera named Luis Giusti, an early supporter of apertura, as head of PDVSA. The Venezuelan Congress agreed to allow foreign companies back into the petroleum sector, and approved a new set of contracts for international oil companies that guaranteed their investments and significantly lowered the taxes on oil profits. Different types of contracts (risk sharing agreements, service contracts, strategic associations) were enacted to increase production from existing fields, from marginal fields, and for expanding operations in “non-conventional” ultra-heavy crude, especially in the Orinoco river basin. PDVSA replaced the Petroleum ministry as the ultimate regulator of these new contractual relationships. In the new joint-ventures between PDVSA and large IOCs (including companies such as EXXON, MOBIL, BP, and CHEVRON) PDVSA held a minority share, the royalty was slashed to 1 percent for the first ten years, while the tax rate was based on the non-oil tax reference of 34 percent. By the end of the 1990s more than 600,000 barrels a day were produced in marginal oil fields by international companies. Venezuela witnessed a sudden explosion of crude oil exports and ended exceeding OPEC’s quota by 800,000 barrels a day. All in all apertura brought thirtytwo operating agreements, eight exploration and profit-sharing agreements, four strategic associations and one association agreement for bitumed-based Orimulsion. Between 1994 and 2006 over $25 billion were invested in the country. Luis Giusti recalls that he had to “fight OPEC, despite the fact that I was not the Minister,” because previously “Venezuela had silently and gently accepted a quota of 2.15 million barrels per day, which did not correspond with the nation’s reality, our 49  Ibidem, p. 79. 50  Ibidem, p. 125. 51 Mommer, Global Oil and the Nation State, p. 175. See also: Alí Rodríguez Araque, El Proceso de Privatización Petrolera en Venezuela (Caracas: Fondo Editorial Darío Ramírez, 2014).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

385

population, our reserves.”52 There is no need to mention that as an unelected oil executive his job description did not include fighting OPEC, nor assessing what his nation’s “reality” was. In, The Quest, his book on the history of petroleum and energy from the 1990s, Daniel Yergin describes apertura in the following terms: La apertura was highly controversial. To some it was anathema, heresy. After all, the traditional route that had been followed—nationalization, state control, expulsion of the “foreigner”—was enormously popular. But to Giusti, this was all ideology. What mattered was not appearances and symbolism, but revenues and results [. . .] With la apertura, Venezuela might be able to double its production capacity over six or seven years, and the state would capture the lion’s share of the additional revenues through taxation and participation.53

Yergin’s remarks could have featured in a public relations leaflet produced by Giusti’s PDVSA, but they are at odds with reality. The facts and figures of apertura were far less rosy for the Venezuelans. In 1981 income from petroleum exports totaled $19.7 billion and state oil revenues amounted to $13.9 billion. In 2000 petroleum sales reached a record high $29.3 billion, while the revenue accrued by the state equaled $11.3 billion. The Venezuelan state, at a time of historically high level of petroleum production, received the smallest share of the oil revenues in its history, very far from “the lion’s share” Yergin talks about.54 It’s not hard then to derive that those who benefited the most from apertura and from the exploitation of Venezuela’s natural resources were the oil companies themselves. The story of the PDVSA illustrates quite well that the progressive dismantling of sovereign control over the petroleum sector could come from within OPEC countries themselves, and not simply be forced on them from the outside as had happened in case of Iraq. Since the rise of national oil companies had been generally identified with the postcolonial nationalist struggle, it was all the more difficult for Parliaments and political leaders to legislate against them and curtail their power. The politically attractive argument of the struggle against foreign domination could not be used against one’s own national oil companies. This effort to jeopardize state control and fiscal sovereignty over the petroleum industry ultimately aimed at transforming the petroleum sector into an economic activity as any other: one where regular taxes would apply and where the state would not appropriate the resource rent. Petroleum would no longer be considered an exhaustible natural resource to be managed for the greatest long term benefit of the local population and with a view of preserving natural resources. Eventually the reaction to the policy of apertura was reflected in the rise of Hugo Chavez as 52  Quoted in Antulio Rosales, Stringent, Open and Hybrid State Treatment of Foreign Investment: Three Eras of the Oil Industry in Venezuela and Ecuador, PhD Thesis, University of Waterloo, 2017, p. 102. 53  Daniel Yergin, The Quest: Energy, Security and the Remaking of the Modern World (London: Penguin Books, 2012), p. 119. 54 Bernard Mommer, “Subersive Oil”, in Steve Ellner and Daniel Hellinger (eds.), Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict (London: Lynne Rienner Publishers, 2003), pp. 131–47.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

386

The Rise and Fall of OPEC in the Twentieth Century

President of Venezuela in 1999. Far from leaving OPEC, Chavez revived his ­country’s tradition as an early advocate of cooperation among oil exporters. The new government went as far as expelling more than 18,000 workers that had shut PDVSA’s oil production in protest against government policies, and reasserted state control over the national company. The slogan of the Chavistas became: La Nueva PDVSA tiene rostro de peublo (“the New PDVSA has the people’s face”). A new oil law cancelled all the operating contracts and associations established during Apertura, increased the fiscal revenues, established new joint-ventures with majority Venezuelan participation, and submitted them only to national legislation (as opposed to international arbitration as was previously the case).55 On the occasion of the takeover of the EXXON MOBIL assets in the Orinoco river basin in 2007, Chavez declared that: “Venezuelans now have full operational control over their oil, upon which the whole development and power of the nation will depend for years to come.” Pulitzer price-winning journalist Steve Coll in his history of EXXON wrote that Chavez “looted PDVSA for revenues” since the company “handed over about 70 per cent of its gross revenue to the Chavez regime in 2006.”56 The readers who had the patience to read this book from the beginning should know by now that 70 per cent of gross revenues is not a particularly high taxation level on oil companies that extract an exhaustible natural resource, specially at a time of booming prices as the 2000s were. * * * The governments of the largest oil importing countries were by far the main ­beneficiaries of the 1986 oil counter-revolution. The combination of lower crude oil prices and of increased taxes on oil products was the economic equivalent of a war fought and won by OECD countries. By the middle of the 1980s OECD governments were able to appropriate most of the final value of a barrel of crude—in fact more so than in 1963, when OPEC had violently attacked the indirect taxes levied by consumer governments (which then made up 44 percent of the final value of an oil barrel). In 1986 gasoline taxes in the European Community ranged from 54 percent of the final price in Luxembourg to 76.35 percent in Italy.57 Alberto Clò describes the striking case of Italy: At the end of 1995 the average weighted price of oil products was about 121 dollars per barrel in Italy, compared with 35 of the average price net of taxes and just 18 of the cost of the raw material. 86 dollar per barrel, or 71% of the final price, was made up of taxes. From an annual petroleum consumption of around 2 mbd, the Italian state collects taxes equal to what Saudi Arabia takes from exporting 8 mbd. The figures speak for themselves.58 55  Alí Rodríguez Araque and Bernard Mommer, “Vuelvan Caras! Primer Centenario de la Venezuela Exportadora de Petróleo”, in Suplemento dominical del Correo del Orinoco, December 6, 2017. 56  Steve Coll, Private Empire. Exxon Mobil and American Power (New York: Penguin Books, 2012), p. 206. 57  HAEU, CA 4, Evolution des taxes appliquées aux produits pétroliers pour la période du 1.1.86 au 15.4.85. 58  Alberto, Clò, Oil Economics and Policy (Milan: Springer Verlag, 2010), p. 121.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

387

But how did OECD governments achieve such an overwhelming victory? We have already described the tough game played by both the US and Great Britain to antagonize and weaken OPEC. We have also witnessed the internal quarrels among OPEC countries that made it very difficult for the organization to enforce its quota system. Consumer coordination within the IEA also played its part after 1977. By proposing a variety of conservation measures the IEA contributed to discourage petroleum consumption. Chalabi remembers that in Vienna, the seat of OPEC, electric trams after the 1973 oil shock bore the slogan Mit uns fahren, Energie sparen (Travelling with us saves energy).59 Until at least the early 1980s, the energy policies of the OECD countries, ranging from energy conservation to playing with crude stockpiles, to increased product taxation, were closely monitored every year (although the IEA had no legal authority to stop “counterproductive measures” such as the lowering taxes for oil companies in the US or the absence of speed limits on the German highways). It is quite telling that once the objective of lowering crude oil prices had been achieved by 1986, the IEA was not longer that much concerned about measures to promote energy efficiency and incentivise alternative energies. Helga Steeg, Executive Director of the IEA from 1984 to 1994, soon after taking her office declared that: Most of IEA work is in removing impediments to a free market in oil, gas, coal and nuclear energy. [. . .] I am a strong believer in letting the market allocate energy resources, and giving governments as small a role as possible.60

Some western European governments were worried that low oil prices could jeopardize conservation and diversification strategies. But they did nothing to bring crude prices up once again. Not only that. Western European governments started actively sponsoring a new international governance for the energy sector, including the spread of bilateral investment treaties and of legal texts as the European Energy Charter, that operated structurally in favor of international energy investors (including European multinationals) while at the same time limiting the sovereignty of local governments over their natural resources.61 The market was considered the ultimate solution in the hope that it would eventually bring the price of crude much closer to its low average production cost, then keep it that way for the foreseeable future. While consuming countries, both developed and developing, and their citizens were once again enjoying low prices, we have seen that petrostates were facing massive internal and external pressures. This crisis of petrostates, in turn, was reflected in the progressive weakening cooperation among OPEC members that failed to comply with their quotas. By the middle of the 1980s OPEC had already ceased to represent a reference point for developing countries, let alone the “spearhead” of 59 Chalabi, Oil Policies, Oil Myths, p. 117. 60  Quoted in: Henning Turk, “Reducing Dependence on OPEC Oil: The IEA’s Energy Strategy between 1976 and the Mid-1980s”, in D. Basosi, G. Garavini, and M. Trentin (eds.), Counter-Shock: The Oil Counter-Revolution of the 1980s, p. 254. 61  Thomas Walde (ed.), The Energy Charter Treaty: An East–West Gateway for Investment and Trade (The Hague: Kluwer Law International, 1996).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

388

The Rise and Fall of OPEC in the Twentieth Century

the Third World. As shown in the precious chapters, Algeria had in the 1970s been at the forefront of an international struggle to promote a New International Economic Order. Mexico, not a petrostate but a significant oil exporter from the developing world, had promoted the adoption of the Charter of Economic Rights and Duties of States approved in 1974. By the end of the 1980s the fabric of Algerian society was torn apart by the civil war, while both Mexico and Algeria had become a showcase for the IMF’s experiments in “structural adjustment” programs aimed at opening up their economies.62 Abdessalam commented on IMF-induced policies noting that: “for the pontiffs of the IMF and of market economy, 150 years of colonial domination are not a good reason enough to justify a national politics of economic reconstruction that would escape the predators of international markets.”63 Petrostates had been the protagonists of international economic diplomacy during the energy crisis of the 1970s. They became a locus of experiments in socio-economic regime change at the time of the debt crisis of the 1980s. While many tend to view the “recycling of petrodollars” as a root cause of the debt crisis in developing countries in the 1980s, it is worth remembering that borrowing money was extremely advantageous up to the end of the 1970s, with average real interest rates no higher than 1 percent. Only the increase in US federal interest rates in 1979 transformed international debt into a massive problem.64 By the beginning of the 1980s all OPEC countries faced budget deficits, and a few of them, as we have seen, became heavily indebted countries themselves in the hands of their creditors. The 1990 invasion of Kuwait, followed by the war against Iraq, was the first time OPEC countries were unable to exploit a major international crisis to achieve better terms of trade for petroleum. Ecuador, with a public debt that was over 100 percent of GDP by the end of the 1980s, suspended its membership in 1992 (and eventually reactivated it in 2007) and allowed foreign companies to sign production-sharing agreements that reversed the previous nationalist oil policy of the 1970s. The companies were left with 80 percent of production compared to 20 percent going to the state.65 This was the first time one of the members abandoned the organization. Gabon also left OPEC in 1995 (only to rejoin in 2016). Iraq was a “sleeping” member, and also Venezuela came, as we have seen, very close to abandoning the organization (anyway it was not abiding by the quota system during the 1990s). Iraq and Iran, for different reasons, were undergoing sanctions that curtailed their production efforts and limited their autonomy. With the decline of OPEC as a key protagonist of global economic negotiations, there was a parallel downfall of UNCTAD and of most other international organizations that had promoted state-led cooperation on trade and development issues. 62 Greg Grandin, Empire’s Workshop: Latin America, the United States, and the Rise of the New Imperialism (New York: Holt & Company, 2007), pp. 185–96. 63 Abdessalam, Le pétrole et le gaz naturel en Algérie, pp. 88–9. 64 Robert Solomon, Money on the Move: The Revolution in International Finance since 1980 (Princeton: Princeton University Press, 1999), p. 362. 65  Carlos Larrea, “Petróleo y estrategias de desarrollo en el Ecuador: 1972–2005”, in Petróleo y desarrollo en el Ecuador: 3. Las ganancias y pérdidas (Quito: FLACSO-Ecuador, ILDISFES, Petrobrás, 2006), pp. 57–69.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

389

At the same time self determination and sovereignty over natural resources, the human rights that had offered moral, political and juridical support to the rise of OPEC up to the 1970s, were replaced in the 1980s by an emphasis on individual rights and on free market policies, issues on which petrostates basically had to play defensive.66 * * * This leads me to write a few more closing words about the title of this book: The Rise and Fall of OPEC in the Twentieth Century. Petrostates survive to this day, although some of the recent “diversification plans” (such as Saudi Vision 2030) as well the possible public listing of Saudi ARAMCO, seem to imply that hydrocarbons production and exports will no longer be considered a national developmental tool, but an investment to be carried out according to a strictly commercial logic. Also OPEC survives to this date. Indeed it is searching for a new role, through its increasingly strong partnership with non-OPEC countries such as Russia (an alliance that is defined these days as “OPEC-plus”). OPEC, a key international actor in the twentieth century, especially as a voice for sovereign raw materials exporters and developing countries, might also play a role in the future, even if the world progressively turns away from the use of hydrocarbons as a key energy sources.67 First, OPEC countries have acted for many years, if mostly unwillingly, as an international “carbon tax” collectors, forcing industrialized consuming countries to adapt to higher crude prices, either by consuming less oil or by diversifying their energy sources. The only time when there has been a global reduction in oil consumption in the twentieth century has been when OPEC was at the peak of its power during the 1970s. The weakening of OPEC during the “counter-revolution” era coincided with a change in demand patterns, the most notable of which was the emergence of new demand growth centers in Asia and Latin America. Total world petroleum consumption increased from 58 million barrels a day in 1983 to 80 million barrels a day in 2003, with the developing countries’ share of global oil consumption increasing from 37 to 52 percent between 1987 and 2015.68 The increase in daily consumption in these twenty years was equal to the total daily consumption at the time when OPEC was born in 1960, with the resulting massive increase of CO2 emissions. While some economists argue that the best solution to reduce fossil fuels consumption would be to levy a global “carbon tax,” we have no guarantee that there will ever be enough support for such a measure (in fact we know that such a measure will face significant opposition), nor that it could

66  Jessica Whyte, The Morals of the Market. Human Rights and the Rise of Neoliberalism (London: Verso, 2019). 67  I stress here the importance of the “climate change” debate to justify today’s enduring relevance of OPEC and the possibility of some form of cooperation with the governments of consuming countries on an environmental agenda. On the importance of connecting more deeply energy issues with the debate on climate change: Thijs Van de Graf, “Is OPEC Dead? Oil Exporters, the Paris Agreement and the Transition to a Post-Carbon World”, in Energy Research & Social Science, 23: 2017, pp. 182–8. 68 BP, Statistical Review of World Energy.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

390

The Rise and Fall of OPEC in the Twentieth Century

actually be conceived in such a way as to be equitable for both the poorest countries and for the oil exporters themselves. Also, should the budgets of the most industrialized countries rely so significantly on the revenues from carbon taxation (even more than it is today), there might actually be a very strong disincentive to achieve zero net growth in CO2 emissions. When it comes to petroleum it would probably be better for governments in consuming countries to acknowledge the role of OPEC as a potential partner in fighting climate change, and try to coordinate with it on production levels, on regulation of the most harmful ways to extract petroleum, on the prevention of downwards competition on fiscal regimes for natural resources and on environmental standards. I fully subscribe to Leonardo Maugeri’s point of view (and of many others with him) that some form of global regulation for oil is necessary (Fig. E.6.and Fig. E.7.): Without monopolistic control such as that created by John  D.  Rockefeller, the oil market is bound to remain prey to volatility, maintaining its characteristics cycles of booms and busts, of expensive and cheap oil. Rockefeller feared booms no less than

12000

96

mtoe 10000

94

92 8000 90 6000

88

86

4000

84 2000 82

80 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 coal

gas

oil

% of total commercial energy (right hand scale)

Fig. E.6.  Global fossil fuels consumption (1965–2005). The graph shows a decline in petroleum consumption from the middle of the 1970s to the middle of the 1980s. (Simon Pirani, Burning Up, 2018)

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Epilogue: The Crisis of the Petrostate

391

8 7

Billions of tons

6

Gas

5 4

Oil

3 2 1

nature’s release of carbon into the biosphere

0 1850

1900

Coal

1950

2000

Fig. E.7.  Increasing levels of carbon emissions from fossil fuels during the Anthropocene. (Tyler Volk, CO2 Rising, 2008).

busts, because he realized clearly that the booms were only the prologue for the busts, and vice versa.69

Without some global regulation of production, to be achieved in partnership with OPEC (provided that petrostates would be willing to cooperate as they have been in the past), there is a risk that during the “bust” cycles cheap oil will push back the needed radical transition away from fossil fuels, independently from all the political, technological and economic incentives to move as rapidly as possible towards renewable energy sources. Secondly, OPEC is still a good venue for petrostates to debate some of their key present and future challenges. OPEC countries have been at their best when dealing collectively with the international oligopoly of the majors, up to end of the concessionary regime and the oil nationalizations of the 1970s. They should not only be discussing prices, as they seem to be doing today. Sooner or later petroleum will decline as a share of their exports, while revenues from petroleum trade will represent a smaller share of their GDP and will not pay for all their imports. But I don’t find a convincing explanation of why a weaker control over the petroleum sector, a smaller share of the oil revenues accruing to the state, or the pursuit of output maximization to the detriment of cooperation among petrostates, should provide a stable path towards this more diversified economy. Revenue maximization for hydrocarbons production, coupled with very careful depletion policies, can be 69 Maugeri, The Age of Oil, p. 257.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

392

The Rise and Fall of OPEC in the Twentieth Century

used to build large sovereign funds that will freeze the oil rent for the benefit of future generations, and can be geared towards collective goods such as education, health, and infrastructures. In turn, these collective goods will provide the basis to be less dependent from petroleum exports in the future. Petrostates might now debate collectively the best long-term strategy to adapt to a future scenario of peak demand for their petroleum—a peak due to a combination of expansion of unconventional oil, environmental concerns, decreasing prices for renewables, and a shift away from petroleum in the transportation sector. They might collectively discuss the best governance and taxation regime for the petroleum sector, improve their collective ability to analyze global consumption patterns as well as the legal and political challenges they face internationally. While OPEC cannot influence oil prices alone, it can do much to coordinate the regulation of the petroleum sector among its members so that instead of competing for markets, national oil companies might actually learn from each other. Finally, OPEC has been one of the (if not the) most successful example of cooperation among sovereign landlords of a tradable natural resource. As much as higher oil prices have been harmful to non oil-exporting developing countries, OPEC has also offered a model for any country dependent on the export of raw materials. Even if there will be a shift in the future energy regime away from overdependence on hydrocarbons, and toward a greater role of renewable energy sources (as is to be hoped), there will still be a need for a variety of natural resources, for example to produce solar panels, wind turbines, or batteries. If these natural resources are scarce, and highly concentrated in a few regions, they will generate a significant land rent. The only alternative to cooperation among landowners to safeguard this rent are either the re-enacting of a formal or informal colonial model that leaves only the crumbs to local governments and populations (as with petroleum at the beginning of concessionary regime in the 1920s), or through the spreading of private governance of natural resources, which leaves very limited space resource conservation and for environmental concerns. As I write these lines, international cooperation seems to be sidelined by a new wave of nationalism. “Globalism” is the new hate word for many politicians and citizens, particularly in the US and within the European Union, ironically the strongest promoters of the market-driven globalization ideology during the 1980s and 1990s. The history of OPEC proves that there is no inherent contradiction between defending national interests (the role of nation-states as a safeguard for the rights and welfare of their citizens as well as of their natural resources) and cooperating with other countries in order to strike deals and compromises potentially beneficial to everyone. What really clashes with national sovereignty and compromises world peace in the long term is the willingness to impose the same legal norms, cultural values, and political and economic models all around the world. The history of OPEC should be seen as an antidote to this quest for homogeneity, and as a proof that geographical development is inherently uneven, so that economic strategies, political systems, and cultural imagination have to adapt to the infinite variety of the environment and of the peoples that live within it.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

Archives and Online Sources H I S TO R I C A L A RC H I V E S AHMPPRE, Archivo Histórico Ministerio de Poder Popular para Relaciones Exteriores, Caracas Amherst College Archives and Special Collections, Amherst John J. McCloy Papers ANA, Archives National d’Algérie, Algiers Fond Abdessalam AHTOTAL, Archives Historiques du Groupe Total, La Défense, Paris Fonds ELF-ERAP Fonds Total-CFP ASE, Archivio Storico ENI, Rome Carte INSMLI, Fondo Bonomi Fondo Estero CHAN, Centre Historique des Archives Nationales, Paris 5AG3, Fond Giscard d’Estaing Georgetown University Library, Booth Family Center for Special Collections, Georgetown, Washington DC WMP, William E. Mulligan Papers HAEU, Historical Archives of the European Union, Fiesole CA, Christopher Audland FXO, François-Xavier Ortoli IMF Archives, Washington IISH, International Institute for Social History, Amsterdam Central Files Kreisky Archiv, Vienna Library of Congress, Manuscript Division, Washington DC Daniel Patrick Moynihan Papers NYUAD Library, Archives and Special Collections, Abu Dhabi GGC, Giuliano Garavini Collecion, MC-038 RAC, The Rockefeller Archive Center, Sleepy Hollow The Trilateral Commission (North America) Records Shell Historical Archives and Heritage, The Hague Group Archives London (SGAL), GHC, Venezuela TNA, The National Archives, Kew EG, Department of Energy FCO, Foreign and Commonwealth Office OFFICIAL DOCUMENTS COLLECTIONS Burdett A.L.P. (ed.), OPEC: Origins & Strategy 1947–1973 (6 Volumes) DBPO, Documents on British Policy Overseas DDS, Diplomatic Documents of Switzerland FRUS, Foreign Relations of the United States OPEC, Official Resolutions and Press Releases

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

394

Archives and Online Sources O N L I N E S O U RC E S

Cámara de Diputados, Dirección General de Servicios de Documentación, Información y análisis http://www.diputados.gob.mx/sedia/biblio.htm Central Intelligence Agency, Electronic Reading Room https://www.cia.gov/library/readingroom/docs/ Harvard Library, Iranian Oral History Project https://library.harvard.edu/collections/iranian-oral-history-project Margaret Thatcher Foundation Archive https://www.margaretthatcher.org/archive Qatar Digital Library Archive https://www.qdl.qa/en/search/site/?f[0]=document_source:archive_source The Official Document System of the United Nations https://documents.un.org/prod/ods.nsf/home.xsp UC Santa Barbara, The American Presidency Project http://www.presidency.ucsb.edu/index.php United Nations Digital Library, Yale University UN Oral History Project https://digitallibrary.un.org/search?f1=830&as=1&sf=title&so=a&rm=&m1=e&p1= UN%2520Oral%2520history%2520project%2520%2528Series%2529&ln=en University of Toronto, G7 Information Centre http://www.g8.utoronto.ca/summit/ University of Virginia, The Miller Center, Presidential Speeches https://www.millercenter.org/the-presidency/presidential-speeches Wikileaks https://wikileaks.org/ S TAT I S T I C S BP Statistical Review of World Energy https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-worldenergy.html IEA, International Energy Agency Statistics https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-worldenergy.html OPEC, Annual Statistical Bulletin http://www.opec.org/opec_web/en/publications/202.htm SPECIALIZED PERIODICALS Arab Oil & Gas MEES, Middle East Economic Survey Oil & Gas Journal OPEC Bulletin PIW, Petroleum Intelligence Weekly Platt’s OILGRAM News N E W S PA P E R S A N D M A G A Z I N E S Foreign Affairs Foreign Policy Il Corriere della Sera

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

Le Monde Diplomatique New Republic Newsweek Reuters The New York Times The Atlantic The Financial Times The Wall Street Journal, The Washington Post Time

Archives and Online Sources

395

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Books Abbey, Edward, The Journey Home: Some Words in Defense of the American West (New York: Plume, 1991). Abdessalam Belaid, Le Pétrole et le Gaz Naturel en Algérie (Algiers: Editions ANEP, 2012). Abrahamian, Ervand, A History of Modern Iran (Cambridge: Cambridge University Press, 2008). Abrahamian, Ervand, The Coup: 1953, the CIA, and the Roots of Modern US-Iranian Relations (New York: The New Press, 2013). Adelman, Morris, The Genie Out of the Bottle: World Oil Since 1970 (Cambridge: The MIT Press, 1995). Aissaoui, Ali, Algeria: The Political Economy of Oil and Gas (Oxford: Oxford Institute for Energy Studies, 2001). Al-Fahim, Mohammed, From Rags to Riches: A Story of Abu Dhabi (London: I.B. Tauris Limited, 1998). Al-Gosaibi, Ghazi A., Arabian Essays (New York: Routledge, 1985). Al-Naimi, Ali, Out of the Desert: My Journey from Nomadic Bedouin to the Hearth of Global Oil (London: Penguin, 2016). Al-Rasheed, Madawi, A History of Saudi Arabia (Cambridge: Cambridge University Press, 2010). Al-Yousef, Yousef Khalifa, The Gulf Cooperation Council States: Hereditary Succession, Oil and Foreign Powers (London: Saqi Books, 2017). Alnasrawi, Abbas, Arab Nationalism, Oil, and the Political Economy of Dependency (Westport: Greenwood Press, 1991). Amuzegar, Jahangir, Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls (London: I.B. Tauris, 1999). Ananta Toer, Pramoedya, The Earth of Mankind (New York: Penguin, 1996). Antonius, George, The Arab Awakening: The Story of the Arab National Movement (New York: G.P. Putnam’s Sons, 1946). Apter, Andrew, The Pan-African Nation: Oil and the Spectacle of Culture in Nigeria (Chicago: The University of Chicago Press, 2005). Araque, Alí Rodríguez, El Proceso de Privatización Petrolera en Venezuela (Caracas: Fondo Editorial Darío Ramírez, 2014). Arnold, Ralph, The First Big Oil Hunt: Venezuela, 1911–1916 (New York: Vantage Press, 1960). Ashton, Nigel and Gibson, Bryan (eds.), The Iran–Iraq War: New International Perspectives (New York: Routledge, 2013). Asiodu, Philip C., Essays on Nigerian Political Economy (Lagos: Sankore Publishers, 1993). Attiga Ali, Ahmed, Interdependence on the Oil Bridge: Risks and Opportunities (Kuwait City: Petroleum Information Committee of the Arab Gulf States, 1988). Auzanneau, Matthieu, Or Noir: La grande Histoire du Pétrole (Paris: La Découverte, 2015). Avery, Peter, Hambly, Gavin, and Melville, Charles, The Cambridge History of Iran: Vol. 7, From Nadir Shah to the Islamic Republic (Cambridge: Cambridge University Press, 1991). Axworthy Michael, A History of Iran: Empire of the Mind (New York: Basic Books, 2008). Axworthy, Michael, Revolutionary Iran: A History of the Islamic Republic (Oxford: Oxford University Press, 2013).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

398 Books Bacevich, Andrew J., America’s War for the Greater Middle East: A Military History (New York: Random House, 2016). Bamberg, James H., The History of the British Petroleum Company: Vol. 2, The Anglo-Iranian Years, 1928–1954 (Cambridge: Cambridge University Press, 1994). Bamberg, James  H., British Petroleum and Global Oil 1950–1975: The Challenge of Nationalism (Cambridge: Cambridge University Press, 2000). Banafe, Ahmed and MacLeod, Rory, The Saudi Arabian Monetary Agency, 1952–2016: Central Bank of Oil (London: Palgrave, 2017). Baptista, Asdrúbal, Teoría Económica del Capitalismo Rentístico (Caracas: Banco Central de Venezuela, 2010). Basosi, Duccio, Finanza e petrolio. Gli Stati Uniti, l’Oro Nero e l’Economia Politica Internazionale (Venice: La Toletta, 2012). Basosi, Duccio, Garavini, Giuliano, and Trentin, Massimiliano (eds.), Counter-Shock: The Oil Counter-Revolution of the 1980s (London: I.B. Tauris, 2018). Beblawi, Hazem, and Luciani, Giacomo (eds.), The Rentier State: Nation, State and Integration in the Arab World (London: Croom Helm, 1987). Bedjaoui, Mohammed, Towards a New International Economic Order (New York: Holmes & Meier, 1979). Beltran, Alain (ed.), A Comparative History of National Oil Companies (Brussels: Peter Lang, 2010). Beltran, Alain (ed.), Le Pétrole et la Guerre (Brussels: Peter Lang, 2012). Beltran, Alain, Bussière, Éric and Garavini, Giuliano (eds.), L’Europe et la Question Énergétique. Les années 1960/1980 (Brussels: Peter Lang, 2016). Ben-Halim, Mustafa, Libya’s Hidden Pages of History: A Memoir (Cyprus: Rimal Publications, 2014). Benn, Tony, The Benn Diaries: 1940–1990 (London: Random House, 1995). Betancourt, Rómulo, Venezuela: Oil and Politics (Boston: Houghton Mifflin, 1979). Bini, Elisabetta, Romero, Federico, and Garavini, Giuliano (eds.), Oil Shock: The 1973 Oil Crisis and Its Economic Legacy (London: I.B. Tauris, 2016). Bird, Kai, Crossing Mandelbaum Gate: Coming of Age Between the Arabs and Israelis, 1956–1978 (New York: Scribner, 2010). Black, Megan, The Global Interior: Mineral Frontiers and American Power (Cambridge: Harvard University Press, 2018). Blair, John Malcolm, The Control of Oil (New York: Pantheon Books, 1976). Bonneuil, Christophe, and Fressoz, Jean-Baptiste, The Shock of the Anthropocene: The Earth, History and Us (London: Verso, 2016). Boué, Juan Carlos, Venezuela: The Political Economy of Oil (Oxford: Oxford Institute for Energy Studies, 1993). Boulton, Alfredo (ed.), Política y Economía en Venezuela, 1810–1976 (Caracas: Ediciones de Fundación John Boulton, 1976). Brandt, Willy, Kreisky, Bruno, and Palme, Olof, La Social-démocratie et l’Avenir (Paris: Gallimard, 1976). Bronson, Rachel, Thicker than Oil: America’s Uneasy Partnership with Saudi Arabia (Oxford: Oxford University Press, 2006). Brotton, Jerry, A History of the World in Twelve Maps (New York: Viking, 2012). Brown, Jonathan  C., and Knight, Alan (eds.), The Mexican Petroleum Industry in the Twentieth Century (Austin: University of Texas Press, 1992). Calchi Novati, Giampaolo, and Roggero, Caterina, Storia dell’Algeria indipendente: Dalla Guerra di Liberazione a Bouteflika (Milano: Bompiani, 2018).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Books

399

Cantoni, Roberto, Oil Exploration, Diplomacy, and Security in the Early Cold War: The Enemy Underground (London: Routledge, 2017). Carlson, Sevinc, Indonesia’s Oil (Washington: Center for Strategic and International Studies, 1976). Carr, E.H., What Is History? (London: Penguin, 1987). Carter, Jimmy, White House Diary (New York: Farrar, Straus and Giroux, 2010). Chalabi, Fadhil  J., Oil Policies, Oil Myths: Observations of an OPEC “Insider” (London: I.B. Tauris, 2010). Chaudhry, Kiren Aziz, The Price of Wealth: Economies and Institutions in the Middle East (Ithaca: Cornell University Press, 1997). Chevalier, Jean-Marie, Le Nouvel Enjeu Pétrolier (Paris: Calmann-Lévy, 1973). Citino, Nathan J., From Arab Nationalism to OPEC: Eisenhower, King Sa’ud, and the Making of U.S.–Saudi Relations (Bloomington: Indiana University Press, 2002). Claes, Dag Harald, The Politics of Oil-Producer Cooperation (Boulder: Westview Press, 2001). Clark, John  G., The Political Economy of World Energy: A Twentieth-Century Perspective (Chapel Hill: University of North Carolina Press, 1991). Clò, Alberto, Oil Economics and Policy (Milan: Springer Verlag, 2010). Commins, David, The Gulf States: a Modern History (London: I.B. Tauris, 2014). Cordesman, Anthony H., Saudi Arabia Enters the Twenty-First Century: the Military and International Security Dimensions (Westport: Praeger and the Center for Strategic and International Studies, 2003). Coronel, Gustavo, The Nationalization of the Venezuelan Oil Industry from Technocratic Success to Political Failure (Lexington: Lexington Books, 1983). Coronil, Fernando, The Magical State: Nature, Money, and Modernity in Venezuela (Chicago: The University of Chicago Press, 1997). Coyle, Diane, The Soulful Science: What Economists Really Do and Why It Matters (Princeton: Princeton University Press, 2010). Craig Jones, Toby, Desert Kingdom: How Oil and Water Forged Modern Saudi Arabia (Cambridge: Harvard University Press, 2010). Cresti, Federico, and Cricco, Massimiliano, Storia della Libia Contemporanea: dal Dominio Ottomano alla Morte di Gheddafi (Rome: Carocci, 2012). Cribb, Robert, and Brown, Colin, Modern Indonesia: A History Since 1945 (London: Longman, 1995). Cronin, James E., Global Rules: America, Britain and a Disordered World (New Haven: Yale University Press, 2014). Crystal, Jill, Oil and Politics in the Gulf: Rulers and Merchants in Kuwait and Qatar (Cambridge: Cambridge University Press, 1995). Davidson, Christopher M., Abu Dhabi: Oil and Beyond (Oxford USA: Oxford University Press, 2011). Davidson, Christopher  M., After the Sheiks: The Coming Collapse of the Gulf Monarchies (London: C. Hurst & Co., 2012). De Vries, Margaret G., Balance of Payments Adjustment, 1945 to 1986: The IMF Experience (Washington: International Monetary Fund, 1987). Díaz Serrano, Jorge, Yo, Jorge Díaz Serrano (Mexico City: Planeta, 1989). Dietrich, Christopher  R.W., Oil Revolution: Anticolonial Elites, Sovereign Rights, and the Economic Culture of Decolonization (Cambridge: Cambridge University Press, 2017). Dinkel, Jurgen, Third world begins to flex its muscles: the Non-Aligned Movement and the North– South conflict during the 1970s, in: Bott, Sandra, Hanhimäki, Jussi  M., Schaufelbuehl,

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

400 Books Janick  M. and Wyss, Marco (eds.), Neutrality and Neutralism in the Global Cold War (London: Routledge, 2016). Dinkel, Jürgen, The Non-Aligned Movement: Genesis, Organization and Politics (1927–1992) (Leiden: Brill, 2019). Doel, Ronald E., Hubbert, M. King, New Dictionary of Scientific Biography, Vol. 21 (New York: Scribners, 2007). Dosman, Edgar, The Life and Times of Raúl Prebisch, 1901–1986 (Montreal: McGillQueen’s University Press, 2008). Egaña, Manuel, Tres Décadas de Producción Petrolera, (Caracas: Imprenta Nacional, 1947). Eizenstat, Stuart E., President Carter: The White House Years (New York: St. Martin’s Press, 2018). El-Wady Ramahi, Seif, A., Economics and Political Evolution in the Arabian Gulf States (Sheffield: Carlton Press, 1973). Elling, Rasmus Christian, War of Clubs: Struggle for Space in Abadan and the 1946 Oil Strike in Nelida Fuccaro (ed.), Violence and the City in the Modern Middle East (Stanford University Press, 2016). Ellner, Steve and Hellinger, Daniel (eds.), Venezuelan Politics in the Chávez Era: Class, Polarization, and Conflict (Boulder: Lynne Rienner Publishers, 2003). Elwell-Sutton, Laurence P., Persian Oil: A Study in Power Politics, 1955 (Westport: Praeger, 1976). Engdahl, William, A Century of War: Anglo-American Oil Politics and the New World Order (London: Pluto Press, 1991). Escobar, Arturo, Encountering Development: The Making and Unmaking of the Third World (Princeton: Princeton University Press, 1995). Falola, Toyin, and Ihonvbere, Julius  O., The Rise & Fall of Nigeria’s Second Republic: 1979–84 (London: Zed Books, 1984). Farmanfarmaian, Manucher, Blood and Oil: Memoirs of a Persian Prince (New York: Random House, 1997). Farmanfarmaian, Roxane (ed.), War & Peace in Qajar Persia: Implications Past and Present (London: Routledge, 2008). Fenelon, Kevin  G., The United Arab Emirates: An Economic and Social Survey (London: Longman, 1973). Ferguson, Niall, Maier, Charles S., Manela, Erez, and Sargent, Daniel J., (eds.), The Shock of the Global: The 1970s in Perspective (Cambridge: Belknap Press, 2010). Ferrier, Ronald W., The History of the British Petroleum Company: Volume 1, The Developing Years, 1901–1932 (Cambridge: Cambridge University Press, 1982). Fesharaki, Fereidun, and Bamberg, James  H., Development of the Iranian Oil Industry: International and Domestic Aspects (New York: Praeger, 1976). Ford, Alan W., The Anglo-Iranian Oil Dispute of 1951–1952: A Study of the Role of Law in the Relations of States (Berkeley: University of California Press, 1954). Frankel, Paul H., Mattei: Oil and Power Politics (New York: Praeger, 1966). Freedman, Lawrence, A Choice of Enemies: America Confronts the Middle East (New York: Public Affairs, 2008). Freeman, David, A Time to Choose: America’s Energy Future (Cambridge: Ballinger Publishing Co., 1974). Frieden Jeffry A., Global Capitalism: Its Fall and Rise in the Twentieth Century (New York: W.W. Norton, 2007). Galasso, Gianvito, Imperato, Federico, Milano Rosario, and Monzali, Luciano, (eds.), Europa e Medio Oriente (1973–1993) (Bari: Cacucci, 2017).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Books

401

Galeano, Eduardo, Open Veins of Latin America: Five Centuries of the Pillage of a Continent (New York: Monthly Review Press, 1997). Galpern, Steven  G., Money, Oil, and Empire in the Middle East: Sterling and Postwar Imperialism, 1944–1971 (Cambridge: Cambridge University Press, 2009). Garavini, Giuliano, After Empires: European Integration, Decolonization and the Challenge from the Global South 1957–1986 (Oxford: Oxford University Press, 2012). Gause, Gregory F. III, The International Relations of the Persian Gulf (Cambridge: Cambridge University Press, 2010). Georgescu-Roegen, Nicholas, Energy and Economic Myths: Institutional and Analytical Economic Essays (New York: Pergamon, 1976). Getachew, Adom, Worldmaking after Empire: The Rise and Fall of Self-Determination (Princeton: Princeton University Press, 2019). Getty, Paul J., My Life and Fortunes (London: George Allen & Unwin, 1964). Ghosh, Amitav, The Great Derangement: Climate Change and the Unthinkable (Chicago: University of Chicago Press, 2016). Gibb, George S. and Knowlton, Evelyn, History of Standard Oil Company (New Jersey): Vol. 2, The Resurgent Years, 1911–1927 (New York: Harper, 1956). Grandin, Greg, Empire’s Workshop: Latin America, the United States, and the Rise of the New Imperialism (New York: Holt & Company, 2006). Grann, David, Killer of the Flower Moon: The Osage Murders and the Birth of the FBI (New York: Random House, 2017). Graf, Rüdiger, Oil and Sovereignty: Petro-Knowledge and Energy Policy in the United States and Western Europe in the 1970s (New York: Berghahn, 2018). Gustafson, Thane, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge: Belknap Press, 2012). Gustafson, Thane, Crisis amid Plenty: The Politics of Soviet Energy Under Brezhnev and Gorbachev (Princeton: Princeton University Press, 1989). Habib, John  S., Ibn Sa’ud’s Warriors of Islam: The Ikhwan of Najd and Their Role in the Creation of the Sa’udi Kingdom, 1910–1930 (Leiden: Brill, 1978). Halliday, Fred, Arabia Without Sultans (London: Penguin, 1974). Hanssen, Jens, and Weiss, Max (eds.), Arabic Thought Against the Authoritarian Age: Towards an Intellectual History of the Present (Cambridge: Cambridge University Press, 2018). Harvey, David, Spaces of Global Capitalism (London: Verso, 2006). Harvie, Christopher, Fool’s Gold: The Story of North Sea Oil (London: Penguin, 1995). Haykel, Bernard, Hegghammer Thomas, and Lacroix, Stéphane (eds.), Saudi Arabia in Transition (Cambridge: Cambridge University Press, 2015). Heard, David, From Pearls to Oil: How the Oil Industry Came to the United Arab Emirates (Abu Dhabi: Motivate Publishing, 2011). Heipel, Claudia (ed.), Europe in a Globalizing World: Global Challenges and European Responses in the “Long” 1970s (Baden Baden: Nomos, 2014). Helleiner, Eric, Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order (Ithaca: Cornell University Press, 2014). Hermoso, Eduardo Acosta, Análisis Histórico de la OPEC (Mérida: Universidad de Los Andes, 1969). Hermoso, Eduardo Acosta, La Comisión Económica de la OPEP (Caracas: Editorial Arte, 1971). Hirst, David, Oil and Public Opinion in the Middle East (New York: Praeger, 1966). Hogan, William, and Sturzenegger, Federico (eds.), The Natural Resources Trap (Cambridge: MIT Press, 2010).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

402 Books Horsnel, Paul, and Mabro, Robert, Oil Markets and Prices: The Brent Market and the Formation of World Oil Prices (Oxford: Oxford University Press, 1993). Hunter, Shireen T., Iran and the World: Continuity in a Revolutionary Decade (Bloomington: Indiana University Press, 1990). Huntington, Samuel, The Clash of Civilization and the Remaking of the Modern World (New York: Touchstone, 1996). Hurewitz, Jacob C. (ed.), Diplomacy in the Near and Middle East: A Documentary Record. Vol. 2: 1914–1956 (Princeton: D. Van Nostrand Co., 1956). Isser, Steve, The Economics and Politics of the United States Oil Industry, 1920–1990: Profits, Populism, & Petroleum (New York: Garland Publishing, 1996). Jacobs, Meg, Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s (New York: Hill and Wang, 2016). James, Harold, International Monetary Cooperation since Bretton Woods (Oxford: International Monetary Fund and Oxford University Press, 1996). Jawad, Haifaa  A., Euro-Arab Relations: A Study in Collective Diplomacy (Reading: Ithaca Press, 1992). Kapuścinski, Ryszard, Shah of Shahs (London: Penguin, 2006). Keddie, Nikki  R., Modern Iran: Roots and Results of the Revolution (New Haven: Yale University Press, 2006). Kemp, Alex, The Official History of North Sea Oil and Gas: Vol. 1, The Growing Dominance of the State, (London: Routledge, 2011). Keohane, Robert  O., and Nye, Joseph  S., Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 1977). Khalaf, Abdullhadi, Al Shehabi, Omar, and Hanieh, Adam (eds.), Transit States: Labour, Migration and Citizenship in the Gulf (London: Pluto Press, 2015). Khon, Cho Oon, The Politics of Oil in Indonesia: Foreign Company–Host Government Relations (Cambridge: Cambridge University Press, 1986). Kiernan, Victor, The Lords of Human Kind: European Attitudes to Other Cultures in the Imperial Age (London: Zed Books, 2015). King, Stephen, Night Shift (New York: Doubleday, 1978). Klein, Naomi, This Changes Everything: Capitalism vs. the Climate (New York: Simon & Schuster, 2014). Krasner, Stephen  D., Structural Conflict: The Third World Against Global Liberalism (Oakland: University of California Press, 1985). Larrea, Carlos, Petróleo y Estrategias de Desarrollo en el Ecuador: 1972–2005 in Fontaine, Guillaume (ed.), Petróleo y Desarollo Sostenible en Ecuador: 3. Las Ganancias y Pérdidas (Quito: FLACSO-Ecuador, ILDISFES, Petrobrás, 2006). Lenczowski, George, Oil and State in the Middle East (Ithaca: Cornell University Press, 1960). Levy, Walter J., Oil Strategy and Politics, 1941–1981 (Boulder: Westview Press, 1982). Lieuwen, Edwin, Petroleum in Venezuela: A History (Los Angeles: University of California Press, 1954). Lifset, Robert (ed.), American Energy Policy in the 1970s (Norman: University of Oklahoma Press, 2014). Longrigg, Stephen  H., Oil in the Middle East: Its Discovery and Development (Oxford: Oxford University Press, 1954). Looney, Robert E. (ed.), Handbook of Oil Politics (New York: Routledge, 2012). Lorenzini, Sara, Global Development: A Cold War History (Princeton: Princeton University Press, 2019).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Books

403

Lucca Arráiz, Rafael, El Petroléo en Venezuela: Una Historia Global (Caracas: Editorial Alfa, 2016). Lutfi, Ashraf, OPEC Oil (Beirut: Middle East Research Pub Center, 1968). Mabro, Robert (ed.), OPEC and the World Oil Market: The Genesis of the 1986 Price Crisis (Oxford: Oxford Insitute for Energy Studies, 1986). Macekura, Stephen J., Of Limits and Growth: The Rise of Global “Sustainable Development” in the Twentieth Century (Cambridge: Cambridge University Press, 2015). Malti, Hocine, Histoire Secrète du Pétrole Algérien (Paris: La Découverte, 2010). Marcel, Valérie, Oil Titans: National Oil Companies in the Middle East (Washington: Brookings Institution Press, 2006). Marinho, Festus R.A., Nigeria’s Petroleum Industry, a Maverick Pioneer: A Recollection of My Life, Times, and Contributions to Nigeria’s Prosperity (Lagos: Macmillan, 2010). Marr, Phoebe, The Modern History of Iraq (New York: Avalon Publishing, 2012). Mattei, Enrico, Scritti e Discorsi, 1945–1962 (Milan: Rizzoli, 2012). Mauer, Victor, and Möckli, Daniel, (eds.), European-American Relations in the Middle East: From Suez to Iraq (New York: Routledge, 2010). Maugeri, Leonardo, The Age of Oil: The Mythology, History, and Future of the World’s Most Controversial Resource (London: Praeger, 2006). Mayobre, Eduardo, Juan Pablo Pérez Alfonzo (Caracas: Editorial El Nacional, 2005). McBeth, Brian S., Juan Vincente Gómez and the Oil Companies in Venezuela, 1908–1935 (Cambridge: Cambridge University Press, 1983). McGrath, John, The Cheviot, the Stag, and the Black, Black Oil (London: Bloomsbury, 2015). McNeil, Richard J., and Engelke, Peter, The Great Acceleration: An Environmental History of the Anthropocene since 1945 (London: Belknap Press, 2016). Medina Angarita, Isaías, Medina Ante el Pueblo de Venezuela: la Jira del Primer Magistrado Nacional a los Estados Trujillo, Mérida y Zulia, y sus Repercusiones Nacionales e Internacionales (Caracas: Oficina nacional de prensa, 1943). Melcher, Dorothea, OPEC: La Organización de Países Exportadores de Petróleo. La Prehistoria de su Fundación, 1943 a 1960 (Unpublished study, 2010). Meyer, Lorenzo, and Morales, Isidro, Petróleo y Nación: La Política Petrolera en México (Mexico City: Fondo de Cultura Económica, 1990). Mikdashi, Zuhayr  M., A Financial Analysis of Middle Eastern Oil Concessions, 1901–65 (London: Praeger, 1966). Mikdashi, Zuhayr M., The Community of Oil Exporting Countries: A Study in Governmental Cooperation (Ithaca: Cornell University Press, 1972). Mikdashi, Zuhayr M., Transnational Oil: Issues, Policies and Perspectives (London: Palgrave Macmillan, 1986). Mikdashi, Zuhayr, Cleland Sherill, and Seymour, Ian, Continuity and Change in the World Oil Industry (Beirut: Middle East Research and Publishing Center, 1970). Mitchell, Timothy, Carbon Democracy: Political Power in the Age of Oil (London: Verso, 2011). Möckli, Daniel, European Foreign Policy During the Cold War: Heath, Brandt, Pompidou and the Short Dream of Political Unity (London: I.B. Tauris, 2009). Mommer, Bernard, La Cuestión Petrolera (Caracas: Trópikos-UCV, 1988). Mommer, Bernard, Global Oil and the Nation State (Oxford: Oxford Institute for Energy Studies, 2002). Mourlon-Druol, Emmanuel, and Romero, Federico (eds.), International Summitry and Global Governance: the Rise of the G7 and the European Council (London: Routledge, 2014).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

404 Books Moyn, Samuel, The Last Utopia: Human Rights in History (Cambridge: Harvard University Press, 2010). Moyn, Samuel, Not Enough: Human Rights in an Unequal World (Cambridge: Belknap Press, 2018). Mumford, Lewis, Technics and Civilization (London: Harcourt, 1934). Nasser, Gamal Abdel, The Philosophy of the Revolution (Cairo: Mondial Press, 1954). Niblock, Tim (ed.), Social and Economic Development in the Arab Gulf, (New York: Routledge, 2014). Nolan, Mary, Transatlantic Century: Europe and the United States, 1890–2010 (Cambridge: Cambridge University Press, 2012). O’Connor, Harvey, History of the Oil Workers International Union-CIO (Denver: Hirschfield Press, 1950). O’Connor, Harvey, World Crisis in Oil (New York: Monthly Review Press, 1962). Odell, Peter  R., The Western European Energy Economy: Challenges and Opportunities (Athlone Press, 1975). Odell, Peter R., Oil and World Power (New York: Routledge, 2013). Olusanya, Gabriel O., and Akindele, Richard A. (eds.), Nigeria’s External Relations: The First Twenty-Five Years (Ibadan: University Press Limited, 1986). Omoweh, Daniel, Shell Petroleum Development Company (Trenton: Africa World Press, 2005). Orwell, George, The Road to Wigan Pier (London: V. Gollancz Ltd., 1937). Pachachi, Adnan, Iraq’s Voice at the United Nations, 1959–1969: a Personal Record (London: Quartet Books, 1991). Pahlavi, Mohammad Reza, Towards the Great Civilization (London: Satrap Publishing, 1994). Painter, David  S., Oil and the American Century (Baltimore: Johns Hopkins University Press, 1986). Parra, Francisco, Oil Politics: A Modern History of Petroleum (London: I.B. Tauris, 2009). Pearson, Scott R., Petroleum and the Nigerian Economy (Stanford: Stanford University Press, 1970). Pedersen, Susan, The Guardians: The League of Nations and the Crisis of Empire (Oxford: Oxford University Press, 2015). Pérez Alfonzo, Juan Pablo, El Pentágono Petrolero (Caracas: Ediciones Revista Política, 1967). Pérez Alfonzo, Juan Pablo, Hundiéndonos en el Excremento del Diablo (Caracas: Editorial Lisbona, 1976). Perovic, Jeronim (ed.), Cold War Energy. A Transnational History of Soviet Oil and Gas (London: Palgrave Macmillan, 2017). Petrini, Francesco, Imperi del Profitto. Multinazionali Petrolifere e Governi nel XXI secolo (Milan: FrancoAngeli, 2015). Philip, George, Oil and Politics in Latin America: Nationalist Movements and State Companies (Cambridge: Cambridge University Press, 1982). Pirani, Simon, Burning Up: A Global History of Fossil Fuel Consumption (London: Pluto Press, 2018). Rabe, Stephen G., The Road to OPEC: United States Relations with Venezuela, 1919–1976 (Austin: University of Texas Press, 1982). Rabinovich, Itamar, and Haim, Shaked (eds.), Middle East Contemporary Survey: Vol. IX, 1984–85 (Oxford: Westview Press, 1985). Randall, Stephen  J., United States Foreign Oil Policy Since World War  I.  For Profits and Security (Montreal: McGill-Queen University Press, 2007).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Books

405

Rangel, Domingo Alberto, Que Molleja de Huelga! La Huelga Petrolera de 1936–37 (Maracaibo: Universidad del Zulia, 2007). Razoux, Pierre, La Guerre Iran–Irak: Première Guerre du Golfe 1980–1988 (Paris: Perrin, 2013). Reagan, Ronald, An American Life: The Autobiography of Ronald Reagan (New York: Gallery Books, 1999). Riedel, Bruce, Kings and Presidents: Saudi Arabia and the United States since FDR (Washington: The Brookings Institution, 2019). Riegler, Thomas, Tage des Schreckens: Die OPEC-Geiselnahme 1975 und die Anfange des modernen Terrorismus (Published independently, 2015). Rivero, Ramon (ed), El Imperialismo Petrolero y la Revolución Venezolana: Tomo 3, La OPEP y la Nacionalizaciones: la Renta Absoluta (Caracas: Fondo Editorial Salvador de la Plaza, 1979). Robinson, Jeffrey, Yamani: The Inside Story (New York: Atlantic Monthly Press, 1988). Rodgers, Daniel T., Age of Fracture (Cambridge: Harvard University Press, 2011). Rodney, Walter, How Europe Underdeveloped Africa (Nairobi: East African Educational Publishers, 1972). Rogers, Douglas, The Depths of Russia: Oil, Power and Culture after Socialism (Ithaca: Cornell University Press, 2015). Rostow, Walt W., The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge: Cambridge University Press, 1960). Roth, Karl H., (ed.), On the Road to Global Labour History: A Festschrift for Marcel can der Linden (Leiden: Brill, 2018). Rouhani, Fuad, A History of OPEC (New York: Praeger, 1971). Rubino, Anna, Queen of the Oil Club: The Intrepid Wanda Jablonski and the Power of Information (Boston: Beacon Press, 2008). Ruptura, Comisión Ideológica (ed.), El Imperialismo Petrolero y la Revolución Venezolana. Tomo I, II, III (Fondo Editorial Salvador de la Plaza, 1975–7–9). Ryggvik, Helge, The Norwegian Oil Experience: A Toolbox for Managing Resources? (Oslo: Centre for Technology, Innovation and Culture, 2010). Sampson, Anthony, The Seven Sisters: The Great Oil Companies and the World They Shaped (New York: Viking, 1975). Santiago, Myrna  I., The Ecology of Oil: Environment, Labor and the Mexican Revolution, 1900–1938 (Cambridge: Cambridge University Press, 2006). Sargent, Daniel J., A Superpower Transformed: The Remaking of American Foreign Relations in the 1970s (Oxford: Oxford University Press, 2015). Sayf, Muḥammad Ibn ʻAbd Allāh, Abdullah Al-Tariki: Oil Rocks and Policy Sands (Beirut: Riyad al-Rayiss lil-Kutub wa’l-Nashr, 2007). Schneider, Steven A., The Oil Price Revolution (Baltimore: The Johns Hopkins University Press, 1983). Schonfield, Andrew, Modern Capitalism: The Changing Balance of Public and Private Power (Oxford: Oxford University Press, 1965). Scott Cooper, Andrew, Oil Kings: How the US, Iran, and Saudi Arabia Changed the Balance of Power in the Middle East (New York: Simon & Schuster, 2012). Seymour, Ian, OPEC: Instrument of Change (London: Palgrave Macmillan, 1980). Shafiee, Katayoun, Machineries of Oil: An Infrastructural History of BP in Iran (Cambridge: MIT Press, 2018). Sharma, Patrick  A., Robert McNamara’s Other War: The World Bank and International Development (Philadelphia: Penn Press, 2017).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

406 Books Sherrill, Robert, The Oil Follies of 1970–1980: How the Petroleum Industry Stole the Show (and Much More Besides) (Norwell: Anchor Press, 1983). Shihata, Ibrahim (ed.), The OPEC Fund for International Development: The Formative Years (London: Routledge, 1981). Shlaim, Avi, The Iron Wall: Israel and the Arab World (New York: W.W.  Norton & Co., 2001). Shwadran, Benjamin, The Middle East, Oil, and the Great Powers (New York: Praeger, 1955). Simons, Geoffrey L., Libya: The Struggle for Survival (London: Palgrave Macmillan, 1993). Simpson, Bradley R., Economists with Guns: Authoritarian Development and U.S.-Indonesian Relations, 1960–1968 (Stanford: Stanford University Press 2008). Siniver, Asaf (ed.), The October 1973 War: Politics, Diplomacy, Legacy (London: Hurst, 2013). Skeet, Jan, OPEC: Twenty-Five Years of Prices and Politics (Cambridge: Cambridge University Press, 1988). Sluglett, Peter, Britain and Iraq: Contriving King and Country (London: I.B. Tauris, 2007). Smith, Adam, An Enquiry into the Nature and Causes of the Wealth of Nations (Hartford: Lincoln & Gleason, 1804). Solomon, Robert, Money on the Move: The Revolution in International Finance since 1980 (Princeton: Princeton University Press, 1999). Sosa Pietri, Andrés, Petróleo y Poder (Caracas: Planeta Venezolana, 1993). Stavrianos, Leften  S., Global Rift: The Third World Comes of Age (New York: William Morrow & Co., 1981). Stocking, George  W., Middle East Oil: A Study in Political and Economic Controversy (Nashville: Vanderbilt University Press, 1970). Stoddard, Lothrop, The Rising Tide of Color Against White World-Supremacy (New York: Charles Scribner & Sons: 1921). Stoff, Michael B., Oil, War and American Security: The Search for a National Policy on Foreign Oil, 1941–47 (New Haven: Yale University Press, 1982). Stork, Joe, Middle East Oil and the Energy Crisis (New York: Monthly Review Press, 1975). Strong, Maurice (ed.), Who Speaks for Earth? Seven Citizens of the World On Major Issues of the Global Environment (New York: W.W Norton & Company, 1973). Tadjbakhsh, Gholamreza, and Najmabadi, Farrokh (eds.), Diaries of the First OPEC Secretary General of OPEC Fuad Rouhani (Washington: Foundation for Iranian Studies, 2013). Taleb-Ibrahimi, Ahmed, Mémoires d’un Algérien: Vol. 2, La passion de Bâtir (1965–1978) (Algiers: Kasbah Editions, 2008). Tanzer, Michael, The Political Economy of International Oil and the Underdeveloped Countries (Boston: Beacon Press 1969). Tarbell, Ida M., The History of Standard Oil Company (New York: McClure and Phillips, 1904). Taryam, Abdullah Omran, The Establishment of the United Arab Emirates, 1950–85 (London: Croom Helm, 1987). Tentori, Montalto, Francesco (ed.), Narratori ispanoamericani (Parma: Guanda, 1960). Terzian, Pierre, OPEC: The Inside Story (London: Zed Books, 1985). Thatcher, Margaret, The Downing Street Years (London: Harper Collins, 1993). Thomas, Martin, Fight or Flight: Britain France and their Roads from Empire (Oxford: Oxford University Press, 2014).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Books

407

Thurow, Lester  C., The Zero Sum Society: Distribution and the Possibilities for Change (New York: Basic Books, 1980). Tinker Salas, Miguel, The Enduring Legacy: Oil, Culture, and Society in Venezuela (Durham: Duke University Press, 2009). Tooze, Adam, The Deluge: The Great War, America, and the Remaking of the Global Order, 1916–1931 (London: Allen Lane, 2014). Tropani, Anand, Oil and the Great Powers: Britain and Germany, 1914–1945 (Oxford: Oxford University Press, 2019). Tugendhat, Christopher, Oil: The Biggest Business (New York: G.P. Putnam’s Sons, 1968). Tugwell, Franklin, The Politics of Oil in Venezuela (Stanford: Stanford University Press, 1975). Ul Haq, Mahbub, The Poverty Curtain: Choices for the Third World (New York: Columbia University Press, 1976). Unger, Corinna R., International Development: A Postwar History (London: Bloomsbury, 2018). Van Reybrouck, David, Congo: The Epic History of a People (New York: Ecco, 2014). Vandewalle, Dirk, A History of Modern Libya (Cambridge: Cambridge University Press, 2012). Vassiliev, Alexei, The History of Saudi Arabia (New York: New York University Press, 2000). Vassiliev. Alexei, King Faisal of Saudi Arabia: Personality, Faith and Times (London: Saqi Books, 2012). Vassiliev, Alexei, Russia’s Middle East Policy: From Lenin to Putin (New York: Routledge, 2018). Vernon, Raymond, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York: Basic Book, 1971). Vickers, Adrian, A History of Modern Indonesia (Cambridge: Cambridge University Press, 2013). Victor, David G., Hult, David R., and Thurber, Mark C. (eds.), Oil and Governance: StateOwned Enterprises and the World Energy Supply (Cambridge: Cambridge University Press, 2011). Vieille, Paul, and Bani-Sadr, Abolhassan (eds.), Pétrole et Violence: Terreur Blanche et Reistance en Iran (Paris: Anthropos, 1974). Vitalis, Robert, America’s Kingdom: Mythmaking on the Saudi Oil Frontier (Stanford: Stanford University Press, 2007). Vitalis, Robert, White World Order, Black Power Politics: The Birth of American International Relations (Ithaca: Cornell University Press, 2015). Vogt, William, The Road to Survival (New York: William Sloane Associates, 1948). Volk, Tyler, CO2 Rising: The World’s Greatest Environmental Challenge (Cambridge: MIT Press, 2008). Von Bismarck, Helene, British Policy in the Persian Gulf, 1961–1968: Conceptions of Informal Empire (London: Palgrave Macmillan, 2013). Wald, Ellen R., Saudi Inc.: The Arabian Kingdom’s Pursuit of Profit and Power (New York: Pegasus Books, 2018). Walde, Thomas (ed.), The Energy Charter Treaty: An East–West Gateway for Investment and Trade (The Hague: Kluwer Law International, 1996). Waldheim, Kurt, In the Eye of the Storm: a Memoir (London: Weidenfeld & Nicholson, 1985). Wilkie, James, The Unknown OPEC: Putting the Record Straight (Vienna: OPEC Press Service, 1981).

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

408 Books Wright, Robert A., Three Nights in Havana (Toronto: Harper Perennial, 2008). Yergin, Daniel, The Prize: The Epic Quest for Oil, Money, and Power (New York: Free Press, 1991). Zahlan, Rosemary Said, The Making of the Modern Gulf States: Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman (London: Routledge, 1989). van Zanden, Jan L., Jonker, Joost, Howarth, Stephen, and Sluyterman, Keetie, A History of Royal Dutch Shell (Amsterdam/New York: Oxford University Press,, 2007). Zischka, Anton, La Guerra Segreta per il Petrolio (Milan: Bompiani, 1936). Zubok, Vladislav, A Failed Empire: The Soviet Union in the Cold War from Stalin to Gorbachev (Chapel Hill: University of North Carolina Press, 2007).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

Journal Articles Abrahamian, Ervand, “Ali Shari’ati: Ideologue of the Iranian Revolution”, in MERIP Reports: Islam and Politics, No. 102, 1982, pp. 24–28. Adelman, Morris A., “Is the Oil Shortage Real? Oil Companies as OPEC Tax-Collectors”, in Foreign Policy, No. 9, 1972, pp. 69–108. Akins, James E., “The Oil Crisis: This Time the Wolf is Here”, in Foreign Affairs, No. 3, 1973, pp. 462–490. Alhajji, Anas F., “The Oil Weapon: Past, Present and Future”, in Oil & Gas Journal, 2005. Alissa, Reem, “The Oil Town of Ahmadi since 1946. From Colonial Town to Nostalgic City”, in Comparative Studies of South Asia, Africa and the Middle East, Vol. 33, No. 1, 2013, pp. 41–58. Alnasrawi Abbas, “Economic Consequences of the Iran–Iraq War”, in Third World Quarterly, Vol. 8, No. 3, 1986, pp. 869–894. Ansari, Ali M., “The Myth of the White Revolution: Mohammed Reza Shah, ‘Modernization’ and the Consolidation of Power”, in Middle Eastern Studies, Vol. 37, No. 3, 2001, pp. 1–24. Araque, Alí R. and Mommer, Bernard, “Vuelvan Caras! Primer Centenario de la Venezuela Exportadora de Petróleo”, in Correo del Orinoco, 2017. Atabaki, Touraj, “From ’Amaleh (Labor) to Kargar (Worker): Recruitment, Work Discipline and Making of the Working Class in the Persian/Iranian Oil Industry”, in International Labor and Working-Class History, No. 84, Fall 2013, pp. 159–175. Bingham, Hiram, “The Future of the Monroe Doctrine”, in Journal of International Relations, Vol. 10, No. 4, 1920, pp. 392–403. Bini, Elisabetta, “Oil Workers, Trade Unions and the Emergence of Oil Nationalism in Libya, 1956–1969”, in EUI MWP, No. 27, 2012. Brew, Gregory, “In Search of ‘Equitability’: Sir John Cadman, Reza Shah and the Cancellation of the D’Arcy Concession”, in Iranian Studies, Vol. 50, Issue 1, 2017, pp. 125–148. Brown, Jonathan C., “Why Foreign Oil Companies Shifted Their Production from Mexico to Venezuela during the 1920s”, in American Historical Review, Vol. 90, Issue 2, 1985, pp. 362–385. Bsheer, Rosie, “A Counter-Revolutionary State: Popular Movements and the Making of the Saudi Arabia”, in Past & Present, Vol. 238, Issue 1, 2018, pp. 233–277. Burke, Roland, “Some Rights are More Equal than Others: The Third World and the Transformation of Economic and Social Rights”, in Humanity, Vol. 3, No. 3, 2012, pp. 427–448. Chakrabarty, Dipesh, “The Climate of History: Four Theses”, in Critical Enquiry, Vol. 35, No.2, 2009, pp. 197–222. Choucri, Nazli, “Asians in the Arab World: Labor Migration and Public Policy”, in Middle Eastern Studies, Vol. 22, Issue 2, 1986, pp. 252–273. Creuzet, Guillemette, “A golden harvest: exploitation et mondialisation des perles du golfe Arabo-Persique (vers 1870–vers 1910), in Revue Historique, Vol. 2, No. 658, 2011, pp. 327–356. Gately, Dermot, “Lessons from the 1986 Oil Price Collapse”, in Brookings Papers on Economic Activity, Vol. 17, No. 2, 1986, pp. 237–284.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

410

Journal Articles

Gavin, Francis J., “Politics, Power, and U.S. Policy in Iran, 1950–1953”, in Journal of Cold War Studies, Vol. 1, No. 1, 1999, pp. 56–89. Georgescu-Roegen, Nicholas, “Energy and Economic Myths”, in Southern Economic Journal, Vol. 41, No. 31, 1975, pp. 347–381. Graf, Rüdiger, “Making Use of the ‘Oil Weapon’: Western Industrial Countries and Arab Petropolitics in 1973–74”, in Diplomatic History, Vol. 36, No. 1, 2012, pp. 185–208. Gross, Stephen G., “Reimagining Energy and Growth: Decoupling and the Rise of a New Energy Paradigm in West Germany, 1973–1986”, in Central European History, Vol. 50, Issue 4, 2017, pp. 514–546. Hellinger, Daniel, “New Perspectives on Accion Democratica”, in Latin American Perspectives, Vol. 11, No. 4, 1984, pp. 33–59. Hertog, Steffen, “Shaping the Saudi State: Human Agency’s Shifting Role in Rentier-State Formation”, in International Journal of Middle East Studies, Vol. 39, No. 4, 2007, pp. 539–563. Hunter, Alex, “The Indonesian Oil Industry”, in Australian Economic Papers, Vol. 5, Issue 1, 1966, pp. 59–106. Ingulstad, Mats, and Lixinski, Lucas, “Raw Materials, Race, and Legal Regimes: The Development of the Principle of Permanent Sovereignty over Natural Resources in the American”, in World History Bulletin, Vol. 29, No.1, 2013. Jones, Toby  C., “America, Oil and the War in the Middle East” in Journal of American History, Vol. 99, Issue 1, 2012, pp. 208–218. Khene, Abderrahman, “Problemas Actuales del Petróleo, Vistos por la OPEC”, in Nueva Sociedad, No. 10, 1974, pp. 58–67. Kuiken, Jonathan, “Striking the Balance: Intervention versus Non-Intervention in Britain’s Oil Policy, 1957–1970”, in Britain and the World, Vol. 8, No. 1, 2015, pp. 5–26. Matthiesen, Toby, “Migration, Minorities, and Radical Networks: Labour Movements and Opposition Groups in Saudi Arabia, 1950–1975”, in International Review of Social History, Vol. 59, Issue 3, 2014, pp. 473–504. McFarland, Victor, “The New International Economic Order, Interdependence, and Globalization”, in Humanity: An International Journal of Human Rights, Humanitarianism and Development, Vol. 6, No. 1, 2015, pp. 83–108. Mejcher, Helmut, “Iraq’s External Relations 1921–26”, in Middle Eastern Studies, Vol. 13, No. 3, 1977, pp. 340–358. Mejcher, Helmut, “Saudi Arabia’s ‘Vital Link to the West’: Some Political, Strategic and Tribal Aspects of the Transarabian Pipeline (TAP) the Stage of Planning 1942–1950”, in Middle Eastern Studies, Vol. 18, No. 4, 1982, pp. 359–377. Ogle, Vanessa, “State Rights Against Private Capital: The ‘New International Economic Order (NIEO)’ and the Struggle Over Aid, Trade, and Foreign Investment, 1962–1981”, in Humanity, Vol. 5, No. 2, 2014, pp. 211–234. Painter, David  S. “Oil and the American Century”, in The Journal of American History, Vol. 99, No. 1, 2012, pp. 24–39. Sabin, Paul, “Crisis and Continuity in US Oil Politics, 1965–1980”, in The Journal of American History, Vol. 99, No. 1, 2012, pp. 177–186. Piccioni, Luigi, “Forty Years Later: The Reception of the Limits to Growth in Italy, 1971–1974”, in I quaderni di Altronovecento, Fondazione Luigi Micheletti, No. 2, 2012. Prodi, Romano, and Clò, Alberto, “Europe”, in Daedalus, Vol. 104, No. 4, 1975, pp. 91–112. Riccardi, Luca, “Sempre Più con gli Arabi: la Politica Italiana verso il Medio Oriente dopo la Guerra del Kippur (1973–1976)”, in Nuova Storia Contemporanea, No. 6, 2006, pp. 57–82.

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi



Journal Articles

411

Schmelzer, Matthias, “Born in the Corridors of the OECD: The Forgotten Origins of the Club of Rome. Transnational Networks, and the 1970s in Global History”, in Journal of Global History, Vol. 12, No. 1, 2017, pp. 26–48. De Oliveira, Ricardo  S., “Business success, Angola-style: postcolonial politics and the rise and rise of Sonangol”, in Journal of Modern African Studies, Vol. 45, No. 4, 2007, pp. 595–619. Sohn, Louis B., “The Stockholm Declaration on Human Environment”, in The Harvard International Law Journal, Vol. 14, No. 3, 1973, pp. 463–464. Stern, Roger J., “Oil Scarcity Ideology in US Foreign Policy, 1908–1997”, Security Studies, Vol. 25, No. 2, 2016, pp. 214–257. Stevens, Paul, Lahn, Glada, and Kooroshy, Jaakko, “The Resource Curse Revisited” in Chatham House Research Paper, 2015. Stivers, William, “International Politics and Iraqi Oil, 1918–1928: A Study in Anglo-American Diplomacy”, in The Business History Review, Vol. 55, Issue 4, 1981, pp. 517–540. Summitt, April R., “For a White Revolution: John F. Kennedy and the Shah of Iran”, in The Middle East Journal, Vol. 58, No. 4, 2004, pp. 560–575. Thornton, Christy, “A Mexican International Economic Order? Tracing the Hidden Roots of the Charter of Economic Rights and Duties of States”, in Humanity, Vol. 9, No, 3, 2018, pp. 389–421. Toprani, Anand, “The French Connection: A New Perspective on the End of the Red Line Agreement, 1945–1948”, in Diplomatic History, Vol. 36, No. 2, 2012, pp. 261–299. Turk, Henning, “The Oil Crisis as a Challenge to Multilateral Energy Cooperation among Industrialized Countries”, in Historical Social Research, Vol. 39, No. 4, 2014, pp. 209–230. Trentin, Massimiliano, “Divergence in the Mediterranean: The Economic Relations Between the EC and the Arab Countries in the Long 1980s”, in Journal of European Integration History, Vol. 21, No.1, 2015, pp. 89–108. Van der Graf, Thijs, “Is OPEC Dead? Oil Exporters, the Paris Agreement and the Transition to a Post-Carbon World”, in Energy Research & Social Science, Vol. 23, 2017, pp. 182–188. Willrich, Mason, and Conant, Melvin  A., “The International Energy Agency: An Interpretation and Assessment”, in American Journal of International Law, Vol. 71, No. 2, 1977, pp. 199–223. Wolfe-Hunnicutt, Brandon, “Embracing Regime Change in Iraq: American Foreign Policy and the 1963. Coup d’État in Baghdad”, in Diplomatic History, Vol. 39, Issue 1, 2015, pp. 98–125. UNPUBLISHED THESES Alnajdi Abdullah A., Shaick Abdullah Al-Salim Al-Sabah, 1895–1965, (University of Exeter, PhD Dissertation, 2014). Daneshkhu, Scheherazade, The Political Economy of Industrialisation in Iran, 1973–1978 (London School of Economics, PhD Thesis, 2004). Di Tommaso, Gaetano, America’s Energy Transition, the Evolution of the National Interest, and the Middle Eastern Connection at the Dawn of the Twentieth Century (Science Po and University of Bologna, PhD Dissertation, 2017). Dobe, Michael E., A Long Slow Tutelage in Western Ways of Work: Industrial Education and the Containment of Nationalism in Anglo-Iranian and ARAMCO, 1923–1963 (Rutgers University, PhD Dissertation, 2008). Duguid, Stephen, Technocrats, Politics and Planning: The Formulation of Arab Oil Policy, 1957–1967 (Simon Fraser University, PhD Thesis, 1976).

OUP CORRECTED PROOF – FINAL, 17/06/19, SPi

412

Journal Articles

Kuiken, Jonathan, Empires of Energy: Britain, British Petroleum, Shell and the Remaking of the International Oil Industry, 1957–1979 (Boston College, PhD Dissertation, 2013). McLean, Matthew, Spatial Transformations and the Emergence of “the National”: the Formation of the United Arab Emirates, 1950–1980 (New York University, PhD Dissertation, 2017). Rosales Nieves, Antulio, Stringent, Open and Hybrid State Treatment of Foreign Investment: Three Eras of the Oil Industry in Venezuela and Ecuador (University of Waterloo, PhD Thesis, 2017). Tinkler, Fabian, Die Beziehungen zwischen der OPEC und der Schweiz im internationalen Kontext (1960–1965), (University of Zurich, MA Thesis, 2015). Tropani, Anand, Oil and the Great Strategy: Britain and Germany, 1918–1941 (Georgetown University, PhD Dissertation, 2012). Wolfe-Hunnicutt, Brandon, The End of Concessionary Regime: Oil and American Power in Iraq, 1958–1972 (Stanford University, PhD Thesis, 2011). Yasmina Aziki, “L’OPEP: un acteur de l’aide au développement du Sud ancré dans la coopération trilatérale”, Relations Internationales, Vol. 177, No. 1, 2019, pp. 111–157.

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Index Abadan strike of 1946  79–80 refinery 80f strike of 1951  29f, 83 Abbey, Edward  179 Abdallah, Ahmedou Ould  242–3 Abdessalam, Belaid  164, 181–2, 195, 216, 218–19, 231–3, 237, 261–3, 377–8 Abdullah, Abdulaziz Al Saud, King of Saudi Arabia 347–8 Abramovich, Roman  376 Abu Dhabi National Oil Company (ADNOC)  365, 378, 380–1 Abu Dhabi Petroleum Company see IPC 162 Achebe, Chinua  168 Achnacarry  32–40, 62 Adelman, Morris  189 Adriani, Alberto  46 Aghazadeh, Gholam Reza  350–1, 356 Akins, James  201, 257 Al-Ahmed, Jaber  145 Al-Bakr, Ahmad Hasan  180–1, 199–200 Al-Bazzaz, Abdul Rahman  144, 153, 155–6 Al-Chalabi, Fadhil  99, 143–4, 177, 182, 199–200, 205, 224–6, 240–1, 248, 251, 255, 257, 265, 296–7, 303, 331, 337, 343, 346, 354, 364, 387 Al-e-Ahmad, Jalal  287–8 Al-Fawzan, Abdullah  94–5 Al-Gosaibi, Ghazi  218–19, 288, 292, 347–8, 371–2 Al-Hamad, Abdlatif Y.  303 Al-Jadir, Abid  171 Al-Janabi, Adnan  270 Al-Kasim, Farouk  320–1 Al-Khatib, Ahmad  96–8, 156, 170 Al-Khalifa, Ali  381 Al-Khalifa, Isa bin Salman  34–5 Al-Mabrouk, Ezzedin  193–4, 268–9 Al-Maghribi, Mahmoud  193–4 Al-Moneef, Majid  346–7 Al-Naibari, Abdullah  183 Al-Naimi, Ali  93, 281–2, 336, 351, 357–8, 369 Al-Nayan, Shabkut  161–3 Al-Nayan, Zayed  163, 183–4, 264, 292, 366 Al-Otaiba, Mana  218–19, 298, 331–2, 338–9, 344–6, 352, 361, 364 Al-Otaybi, Juhayman  291–2 Al-Rasheed, Madawi  91–2 Al-Sabah, Abd Allah  51 Al-Sabah, Ali Khalifa  351, 365–6 Al-Said, Nasir  117

Al-Said, Nuri  50–1, 77 Al-Sanusi, Idris, King of Libya  159, 194 Al-Saud, Abdulaziz, King of Saudi Arabia  91, 94–5 Al-Shaibani, Tala’at  121f Al-Tariki, Abdallah  59, 66–7, 88, 94–6, 100–1, 112–20, 121f, 128–9, 131, 134, 143–4, 151, 155–6, 158, 173, 181–3 Al-Thani, Abdullah  37 Al-Turki, Abdul Aziz  263, 337 Al-Wattari, Abdul Aziz  143–4, 149, 151–5, 171 Alam, Asodallah  151 Alemán Valdés, Miguel  319–20 Algeria Charter of Algiers, see Group of 77 (G77) nationalization of foreign companies in 1971 204–5 Algiers Conference of 1973, see Non-Aligned Movement Algiers Summit of 1975, see Organization of the Petroleum Exporting Countries Allende, Salvador  184–5, 239, 241–2 Alnasrawi, Abbas  32, 284, 332–6 Amouzegar, Jamshid  106f, 175, 196, 202, 224–8, 244–5, 254, 257–8, 261–2, 284, 291, 357–8, 375, 378 Angarita, Medina Isaías  54–7 Anglo-Iranian Oil Company (AIOC), see British Petroleum Anglo-Persian Oil Company (APOC), see British Petroleum Anthropocene  88, 302–3, 391f Antonius, George Habib  22–3 Arab Oil Congress  119–20, 127–8, 169, 174 First Congress of 1959  101, 112–14, 112f, 116 the Maadi Pact  114–16 Second Congress of 1960  128 Third Congress of 1963  129 Fourth Congress of 1965  155–6 Fifth Congress of 1967  155–6 Arabian American Oil Company (ARAMCO)  68, 70, 73–6, 347–8, 380 working conditions 1950s  91–2 Arif, Al-Raman  171 Arif, Mohammed  143–4, 171 Asiodu, Philip  186–7 Atabaki, Touraj  80 Attiga, Ali  214–15, 346 Auzanneau, Matthieu  307–8 Aziz, Tariq  291, 297–8, 366–7

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

414 Index Ba’ath Party  143, 180–1, 288–9 Baba Gurgur, oilfield  28 Bacevich, Andrew  315–16, 363, 368–9 Badjaoui, Mohammed  245–6 Bahrain Petroleum Company  34–5 Baibakov, Nikolai  325 Ballou, George  277 Bani-Sadr, Abolhasan  214–15 Baku, oil district  13–14, 17–18 Bandar Bin Sultan, Al Saud  316 Bani Sadr, Abolhassan  290–1 Baptista, Asdrùbal  21, 374–5 Baqir Al-Sadr, Muhammad  297–8 Bauer, Peter  305 Bazargan, Mehdi  288 Bedjaoui, Mohammed  241–2 Ben Bella, Ahmed  164, 171 Ben Halim, Mustafa  159–60 Benn, Tony  274–5 Berlinguer, Enrico  272 Betancourt, Rómulo  43–4, 56–61, 66, 102–5, 125, 185, 282 Bevin, Ernest  80–1 Bingham, Hiram  11 Blair, John  2–3, 73–4 Bongo, Omar  257 Bonneuil, Christophe  188, 216 Boué, Juan Carlos  310–11 Boumedienne, Houari  5–6, 164–5, 171, 204, 218–19, 236–7, 242, 244–5, 248, 250, 260, 283, 285–6 Bouteflika, Abdelaziz  204, 254–5 Brandt, Willy  272, 303 Brezhnev, Leonid  324–5 British National Oil Company (BNOC)  233, 274, 309–10, 320–1, 331, 338, 343, 345 British Petroleum (BP), formerly Anglo-Persian Oil Company (APOC) and AngloIranian Oil Company (AIOC) foundation as APOC  14 transformation into AIOC  48–50 AIOC characteristics  82 Iranian nationalization law of 1951  83 reorganization as BP  87 in the North Sea  273 privatization 310 Brittain, Harry  27 Broz, Josip (Tito)  240–2, 353–4 Brundtland, Gro Harlem  353–4 Brzezinski, Zbigniew  242–3, 267, 314 Buhari, Muhammad  342 Bush George H.W.  316, 352–3, 368–70 Cabello, Eduardo Luongo  64 Cabral, Amilcar  237 Cadman, John  30–1, 33 Caldera, Rafael  102–3, 185–6, 195, 384–5 Calderón-Berti, Humberto  337

Callaghan, James  274 Caltex  34–5, 70, 131–3 Carbon Democracy  3–4 Cárdenas, Lázaro  42–3 Carlos the Jackal, see Sánchez, Ilich Ramírez Carr, Edward H.  216–17 Carson, Rachel  211 Carter, Jimmy  263, 265–8, 270, 275–80, 293, 307–8, 312–16 Oil price decontrol policy  278, 280 Casaso, Ezequiel Monsalve  64 Castro, Fidel  241–2 Chakrabarty, Dipesh  1 Chalbaud, Delgado  61–2 Chavez, Hugo  252, 385–6 Chevron, formerly SOCAL  13, 34–7, 39, 87, 376–7, 384–5 Church, Frank  235, 267 Churchill, Winston  3, 14–15, 30–2, 81, 86–7, 310 Clò, Alberto  71, 386 Club of Rome  121f, 211 Colitti, Marcello  269–70 Coll, Steve  373–92 Compagnie Française de Pétrole (CFP), see Total Contreras, Eleazar López  44, 46–7, 55 Corporación Venezolana del Petróleo (CVP) 105–7 Creole (Company), see EXXON Curzon, George Nathaniel  27–8, 48 D’Arcy, William Knox  14 de Guiringaud, Louis  256 de la Peña, Horacio Flores  318–19 De Oteyza, José Andrés  320 Debray, Régis  304 DeCrane, Al  207–8 DeGolyer, Everette L.  68, 75–6 Dependence theory, see Unequal Exchange Development Decade, First (1960s)  136, 197 Deterding, Henry  13–15, 33 Dikko, Umaru  336–7 Din Haseeb, Khair el  143–4, 171 Dinkel, Jürgen  240 Dovalì, Jaime  318 Dowling, G.J.H.  75–6 Drake, Erik  196 Dutch disease  319, 321 Echeverría, Luis  318 Eckhardt, Bob  279–80 Egaña, Manuel  46–7, 56, 64–5, 73–4, 95, 112, 112f, 326 Ehrlich, Paul  211 Eisenhower, Dwight D.  86–7, 101–2, 124 Eizenstat, Stuart  278–9 Elwell-Sutton, L.P.  79–80 Engdhal, William  225–6

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Index 415 Ente Nazionale Idrocarburi (ENI) agreement with the NIOC  108–9 contract with Soviet Union  109 Entezam, Abullah  146, 151 Eppler, Erhard  272 European Community (EC)  220, 293, 303, 307–9, 352–3, 386 Extractivism 8–9 Exxon, formerly Standard Oil of New Jersey (SONJ)  13, 235–6, 376–7, 385–6 in Venezuela (as Creole)  55, 60–1, 102, 104 Fahd, Abdulaziz Al Saud, King of Saudi Arabia  234, 292, 316, 338–9, 345, 348–9, 354, 356–8, 366–8, 371 Faisal I, Ali Al-Hashemi, King of Iraq  26–7, 50–1 Faisal, Abdulaziz Al Saud, King of Saudi Arabia  89–92, 96, 116–17, 131, 140–1, 169, 173, 182, 201, 218–19, 221, 263, 270, 284, 313, 357–8, 380 Fallaci, Oriana  222 Fanon, Frantz  163–4 Farmanfarmaian, Khodad  135, 223, 244–5 Farmanfarmaian, Manucher  65–7, 79, 82–3, 114–15, 118 Farmanfarmaian, Roxane  30 Federal Trade Commission (FTC)  63 Fellah, Reza  151, 153–4, 224–5 Fifty-fifty “profit sharing” model  53 in Venezuela  54–62 in Saudi Arabia  73–6 in Iraq  77 in Kuwait  76–7 in Qatar  76–7 in Iran  81–7 end of the fifty-fifty  125–34 in Abu Dhabi  162–3 in Nigeria  167 Ford, Gerald  247–8, 257–8, 278, 307–8 Fraser, William Lord Strathalmond  198f Frankel, Paul  276 Freeman, Charles W.  371 Freeman, David  275–6 Fressoz, Jean-Baptiste  188, 216, 302–3 Friedman, Milton  302, 354, 359 Fuà, Giorgio  129 Gaddafi, Muammar  179, 181, 193–4, 199–200, 203, 285–6 Galeano, Eduardo  237–9, 284 Gallegos, Rómulo  44, 57–8, 61–2 Garmendia, Salvador  237–9 Georgescu-Roegen, Nicholas  188 Getty, John Paul  135–6, 169 Ghandi, Indira  212–13, 241–2, 304–5 Gharazi, Mohammed  330–1, 336–7, 341–2, 344–5 Ghawar, oil field  37, 70, 369–70

Ghosh, Amitav  3 Ghozali, Ahmed Sid  181–2, 204, 271 Giscard d’Estaing, Valery  247–9, 256, 259–60 Giusti, Luis  384–5 Gómez, Juan Vicente  12, 20–2, 43–4, 56–7­ González, Felipe  272 Grann, David  53 Great Acceleration  88, see also Anthropocene Grisanti, Arturo Hernández  357–8, 364 Gromyko, Andrej Andreevič  314, 323–4 Group of 7 (G7)  260, 267–9, 292–4 Rambouillet Summit of 1975  259–60 Bonn Summit of 1978  267–9 Tokyo Summit of 1979  293 Venice Summit of 1980  293–4 Group of 77 (G77)  88–9, 137, 171, 239, 241, 246–7 Charter of Algiers  137 Guevara, Ernesto  164–5 Guillaumat, Pierre  164 Gulbenkian, Calouste  25–6, 28 Gulf Oil (Company)  19, 38–9, 87, 376–7 as Mene Grande  17–18, 55 Haight, Walter H.  103–4 Haliq, Omar Kamil  124 Halliday, Fred  172, 232f, 252 Hamina, Lakhdar  295 Hammadi, Sadun  205–7, 244–5 Hammer, Armand  160–1, 194–5 Hardin, Garrett  211 Hassouna, Abdel-Khalek  89–90 Heath, Donald  116–17 Heath, Edward  191–2, 196, 273–4 Hendryx, Frank  113–14, 116, 119–20, 129, 176 Herald, Henry T.  173 Hermoso, Eduardo Acosta  112, 128, 156, 224–5 Herrera Campins, Luis  295 Hertog, Steffen  281 Herzog, Silvia  102–3 Hickes, Harold  53–4 Higgins, Benjamin  159 Holmes, Frank  34–5 Hoover, Herbert  23–4 Hoover, Herbert Jr.  59 Hoveyda, Amir-Abbas  153–5 Hubbert, King M.  189–91 Hussein, Ali  35–6 Hussein, Saddam  180–1, 205, 250, 288–9, 297–8, 314, 326–8, 355, 361–71, 378–80 Ibn Muammar, Abd Al-Aziz  94–5 Ibn-Saud, Abdulaziz  35–9, 68, 70, 72–5, 91 Ickes, Harold  68–70 Iglesias, Enrique  244–5, 265–6

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

416 Index Illich, Ivan  156–7, 213–14 International Energy Agency (IEA)  7, 233–4, 255–6, 293–4, 302–4, 331, 345, 352–3, 387 International Fund for Agricultural Development (IFAD)  261 International Monetary Fund (IMF)  137, 242–4, 251–2, 257–8, 274, 319–20, 375, 382–3, 387–8 International Oil Cartel (the Majors)  7, 39, 54, 61, 63, 71–2, 84, 87–8, 107–10, 119, 129, 146, 148, 158, 177–8, 181, 191–2, 196–9, 202, 207, 221, 359 negotiations with OPEC of 1962–1964 145–59 Iran oil embargo  86 coup d’état  86–7 White revolution  139–40 revolution of 1979  287–8 Iran-Iraq War  297–8, 300, 326–8, 349, 363–5, 367–9, 372­ Iraq Petroleum Company (IPC) after the Red Line Agreement  28 after the Law n. 80 of 1961  119 nationalization in 1972  205–7 Iraq revolution of 1958  98–9 Law n.80 of 1961  119 Law n. 97 of 1967  171 Constitution of 1970  180–1 Desert Shield Operation  368–70 Desert Storm Operation  370–1 Iraqi National Oil Company (INOC)  143–4, 171, 206–7 Isser, Steve  191 Jablonski, Wanda  100, 114 Jaidah, Ali  266 Jalloud, Abdessalem  193–4, 204, 288, 387–8 Karim, Tayem Abdul  265 Kemal, Mustafa  30 Kennan, George  60–1 Kennedy, John  119, 136, 139–40, 279 Kennedy Robert  279 Keohane, Robert O.  236–7 Keynes, John Maynard  67–8, 88 Khalid, Abdulaziz Al Saud, King of Saudi Arabia 316 Khatami, Mohammad  363 Khene, Abderrahman  201–2, 234–5 Khodorkovski, Mikhail  376 Khomeini, Ahmad  363 Khomeini, Ruhollah  140, 151, 287–8, 290–1, 297–8, 304, 326–7, 363–4 King, Martin Luther Jr.  279 King, Stephen  179

Kissinger, Henry  220–1, 231, 233–4, 240, 242–3, 257–8, 267, 275–6 Klein, Naomi, see also Extractivism Kosygin, Alexei  323–4 Kreisky, Bruno  126–7, 254–5, 272 Kristiansen, Kåre  343 Kristol, Irving  279–80 Kubbah, Abdul Amir  155–6 Kuwait Oil Company (KOC)  38–9 Kuwait independence 130 refusal of the royalty-expensing agreement 156 application of the royalty-expensing agreement 145 rejection of the participation agreement  209 invasion by Iraq in 1990  361–2, 368 Kuwait Petroleum Company (KPC)  381 La Rosa, oilfield  17–18 La Salvia, Hugo Pérez  188–9, 214–15, 240 Lansing, Robert  23 Lara, Rodriguez Guillermo  246 Larrazábal, Wolfgang  102–3 Lasch, Christopher  279–80 Lawson, Nigel  310, 339–40, 351 Lenczowski, George  113–14 Leopold II, King of Belgium  32 Levy, Walther J.  71–2, 84, 129, 231, 297 Libya admission to OPEC  131–3, 161 revolution of 1969  181 Libyan National Oil Company (LNOC)  161 London Policy Group  191–2, 196–8, 205 Longrigg, Stephen  24–5, 77 Lugo, Luis  361 Lukman, Rilwanu  356 Lutfi, Ashraf  124–5, 174–5 Mabro, Robert  269–70, 303, 310–11 Mac Eachen, Allan J.  260 Macmillan, Harold  88, 99 Malaise 272–80 Malm, Andreas  3–4 Malthus, Thomas  54 Mansholt, Sicco  239 Marcel, Valérie  380 Marcos, Ferdinand  304–5 Marinho, Festus  167 Marx, Karl  1 Masjid-i-Sulaiman, oilfield  14, 30 Mattei, Enrico  108–11, 176 Maugeri, Leonardo  389–90 McCloy, John  128, 145–6, 157–8, 191–2, 196, 277 McGhee, George  72, 84 McNeill, Donald  79 Mellon, Andrew  38–9 Mene Grande, oilfield  17–18

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Index 417 Mene Grande (Company), see Gulf Oil Mengitsu, Haile Mariam  325 Mercator, Gerardus  236 Mercier, Ernest  26 Metz, Homer  100 Mishnan, Ezra  211 Mitchell, Timothy  3–4, see also Carbon Democracy Mitterrand, François  272, 304–5 Mobil  13, 235–6, 376–7, 384–6 Moinfar, Al-Akbar  290–1, 296 Mommer, Bernard  282 Monsanto, Luis  64–6 Mossadegh, Mohammad  5–6, 82–7, 99, 108, 147, 288 Moynihan, Daniel P.  258, 277–8 Mumford, Lewis  2–3 Munif, Abdul-Rahman  92–3 Nabi, Belkacem  295, 341–2, 344, 349–50 Nasser, Gamel Abdel  72, 89–90, 93–9, 112f, 113, 119–20, 140–1, 143, 160–1, 165, 169–70, 172, 181, 240 National Iranian Oil Company (NIOC)  87, 209 Natta, Giulio  188 Nazer, Hisham  152–3, 263, 331, 358–9 Nesim, Salem  114–15 Netback contracts  346–7, 349 New International Economic Order (NIEO)  245–6, 305–6, 318–19 North-South dialogue  255–66, 304–5 Conference on International Economic Cooperation (CIEC), see North-South dialogue Nigerian National Petroleum Corporation (NNPC) 167 Nixon, Richard  102–3, 192, 200–2, 218–21, 231, 233–5, 244–5, 259, 312–13 Nkrumah, Kwame  164 Non-Aligned Movement Bandung Conference of 1955  89–90, 136–7 Cairo Conference of 1964  240 Algiers Conference of 1973  241–2 Non-OPEC Countries  294–5, 302–18, 326, 331–2, 341, 345–6, 349–51, 353–4, 357–8, 389 Mexico 318–20 Norway 320–3 Soviet Union  323–6 Nye, Joseph S.  236–7 O’Connor, Harvey  40, 124 Occidental (Company)  160–1, 193–5 Odell, Peter  216–17 Oil Counter-Shock  361–2, 375 Oil curse  46, 373–5 Oil pricing  355f Gulf Plus system  39–40, 62

double based system  62 posted price definition 13 reduction by SONJ in Saudi Arabia of 1960 118 effects of the negotiations between Oil Cartel and OPEC of 1962–1964  157–8, 178 increase after the Tripoli-Teheran negotiations of 1970–71  196–8 Kuwait meeting of 16 October 1973, first unilateral setting of posted price by OPECMembers  202–3, 217–18 prize revolution of 1973–1974  221–7 spot price  289–90, 329 OPEC reference  202, 289, 330–1, 339, 346, 358–9 Brent reference  310–11, 343 West Texas Intermediate (WTI)  338 Oil Shock first shock of 1973  191–2, 217–31 second shock of 1979–1980  289 Omar, Ahmed Al-Sayed  114–15, 121f Open Door policy  27–8 Organization for Economic Co-operation and Development (OECD)  136, 188–9, 211, 233–4, 251–3, 255, 260, 290, 294–5, 300, 302, 307–8, 330, 342, 346, 358, 378–80, 386–7 Organization of the Arab Petroleum Exporting Countries (OAPEC) creation of  174 oil embargo of 1973  217–21, 231–3 Organization of the Petroleum Exporting Countries (OPEC) Conferences the Baghdad meeting  119–22, 121f, 123f Caracas Conference of 1961  126–7 Geneva Conference of 1962  133–4 negotiations with the Oil Cartel of 1962–1964 145–59 Riyadh Conference of 1963  151–3 Geneva Conference of 1964  153–4 Jakarta Conference of 1964  154–5 Baghdad Conference of 1968 “Petroleum Statement Policy”  176 Algiers Conference of 1970  188–9 Caracas Conference of 1970  195–6 Algiers Summit of 1975  247–53, 249f Bali Conference of 1976  261 Doha Conference of 1976  262f, 263–4, 299 Abu Dhabi Conference of 1978  271 Bali Conference of 1980  298 Geneva Conference of 1981  330–1 Vienna Conference of 1982  331–2 London Conference of 1983  338–40 Geneva Conference of 1990  366–8 Organization of the Petroleum Exporting Countries (OPEC) Long Term Strategy (LTS)  289–300, 303, 341 Ortiz, René  294–5

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

418 Index Ortoli, François-Xavier  206f Orwell, George  16 Oxford Energy Seminar  269–70 Oxford Institute for Energy Studies  269–70, 329–30, 346, 367–8 Pachachi, Adnan  200 Pachaci, Nadim  160 Page, Howard  118, 126, 146 Pahlavi, Ashraf Princess  138 Pahlavi, Reza Khan Shah  14–15, 30–1, 47–50, 78, 82–3 Pahlavi, Reza Mohammed Shah  65, 84, 86–7, 118–20, 138–41, 147, 151–2, 155–6, 172, 175, 184, 197–200, 207, 209, 214–15, 221–6, 228, 231–3, 244–5, 250, 261, 265, 268, 270, 275, 281, 286–8, 290–1, 314, 326–7 Palme, Olof  272 Panella, Milo  64 Parkhurst, George  146 Parra, Francisco  88, 115, 120, 134, 176–7, 231, 251, 263, 353–4 Participation negotiations of 1971–1972  180–7, 203, 207–9 Pattinson, John  146 Peak oil  187–93, 301 in United States  189–91 in Venezuela  185–6 Peccei, Aurelio  215 Pedersen, Susan  50–1 Perdew, W.E.  23 Pérez, Carlos Andrés (CAP)  264, 281–2, 382–5 Pérez Alfonzo, Juan Pablo  9–10, 56–61, 66, 102–7, 112, 112f, 114–15, 118–22, 121f, 125, 128, 134, 137, 151–2, 154–8, 182, 185, 213–15, 254, 284–5, 302, 326 the “Oil Pentagon”  104–7, 106f Pérez Jiménez, Marcos  61–2, 66, 101–2 Pérez-Guerrero, Manuel  61, 63, 66–7, 112, 114–15, 137, 151–2, 156–7, 244–5, 260, 301 Permina 142, see also Pertamina Pertamina  298, 319–20, 377f, 381–2 Peters, Arno  236 Peterson, Peter G.  179 Petrocapitalism  12–15, 53, 302–3 Petróleos de Venezuela Sociedad Anónima (PDVSA)  282–3, 361–2, 385–6 internationalization 382 apertura petrolera 373–92 Petróleos Mexicanos (PEMEX)  42–3, 318–21 Petroleum Reserve Corporation  68 Petromin  131, 155, 295, 357–8, 380–2 Petronationalism 39–52 Petrostate definition 4–7 first exemplification in Venezuela  19–20, 43

Philby, John Bridger  35–7 Philip, George  319–20 Pietri, Andrés Sosa  383–4 Pietri, Uslar, see also Sembrar el Pétroleo  46, 156–7 Pocock, C.C.  306 Pompidou, George,  206f, 233–4 Portillo, José López  319–20 Prebisch, Raúl  90–1, see also Unequal Exchange 105, 136–7, 184–5, 236–7, 246, 265–6 Prodi, Romano  71 Pro-rationing negotiations on oil production  120, 134, 147, 173–5, 186–7, 266, 291, 300, 302, 331–6 Proudfit, Arthur T.  56, 59–60 Prudhoe Bay, oilfield  201–2 Putin, Vladimir  376 Qasim, Anis  100–1 Qassim, Al-Karim  98–9, 114–15, 119–20, 130, 142–4 Rajai, Mohammed Ali  326–7 Rangel, Domingo Alberto  5–6, 20 Rathbone, Jackson  53 Reagan, Ronald  301–5, 307–8, 310, 312–13, 316–17, 330, 348–9, 352–3, 359–60, 368–9, 376–7 Red Line Agreement map 29f history of  22–32 consequences on Middle East  67 Rentier State, see Petrostate Rockefeller, David  267 Rockefeller, John D.  1–2, 13–14, 390–1 Rodney, Walter  237 Rogers, Douglas  325 Rogers, William P.  192 Roosevelt, Franklin Delano  55, 68 Roosevelt, Kermit Jr  86–7 Roosevelt, Theodore  13 Rostow, Walt W.  139 Rouhani, Fuad  119–20, 121f, 122, 126–7, 146–7, 149–53, 196 Royalty-expensing introduction 133–4 see also OPEC, Geneva Conference results from the negotiations  154t, 157–8, C3.F4f negotiations between OPEC and Oil majors of 1962–1964  147–9 Sadat, Muhammad  217, 314 Salam Arif, Abdul  98–9 Saleh, Ali Abdallah  314 Saleh, Allahyar  85–6 Salman, Mohammad  90, 100, 113, 113–16, 118, 127–8

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

Index 419 Sampson, Anthony  249–50 Samuel, Marcus  13–15 San Remo Treaty  26 Sánchez, Ilich Ramírez  254–5, 256f Santa Barbara, oil spill  210–11 Sarkis, Nicholas  131, 194, 270 Sartre, Jean Paul  163–4 Sayles, John  3 Scargill, Arthur  308–9 Schlesinger, James  279–80 Schmidt, Helmut  259, 293, 307–8 Schmidt, Herman J.  137–8 Schneider, Steven  219 Schultz, George  316 Scocrowft, Brent  368–9 Sembrar el Pétroleo 46 Serrano, Jorge Díaz  319–20 Seven Sisters, the  108, 376–7 Seymour, Ian  228, 271, 295 Shagari, Shehu  330 Shell, formerly Royal Dutch Shell  13, 19, 28, 39, 41–2 in the Caspian Region  13–14 in Indonesia  13–14, 144 in Venezuela  55 in Nigeria  167–8 Sherrill, Robert  210 Shihata, Ibrahim  261 Shonfield, Andrew  188 Shuler, Henry Mayer  198–9 Siad Barre, Mohamed  314 Simon, William  230 Six Day War  168–9, 171–2, 240 Skeet, Ian  118, 194–5, 251, 338 Smith, Adam  1 Société Nationale de Transport et de la Commercialisation des Hydrocarbures (SONATRACH), foundation Sosa Pietri, Andrés  383–4 Soyinka, Wole  166 Spindletop, oilfield  13, 17–19 Stalin, Joseph  13 Standard Oil of California (SOCAL), see Chevron Standard Oil of Indiana  19 Standard Oil of New Jersey (SONJ), see Exxon Standard Oil of New York (SOCONY), see Mobil Statoil  320–3, 343, 376–7 Steeg, Helga  386 Stern, Roger  313–14 Stevens, Paul  381 Stocking, George  32 Stork, Joe  192–3, 208–9 Subroto  329, 350, 352 Suez Canal nationalization 90 Suharto, Haji Mohammad  143–4, 261, 286

Sukarno, Ahmed  89–90, 131–3, 136–7, 142–3, 164 Sulaiman, Abdullah  73–4 Sutowo, Ibnu  142–3 Taleb-Ibrahimi, Ahmed  171 Tanzer, Micheal  177 Tarbell, Ida  2–3 Taryman, Abdullah Omran  183–4 Teagle, Walter  33 Terzian, Pierre  199, 225–6, 231, 251 Texaco  13, 34–5, 37, 39, 95, 207–8, 376–7 Texas Railroad Commission (TRC)  41, 64, 95, 123–4, 128, 161, 190–1, 224–5, 326 Thatcher, Margaret  302–5, 308–12, 330, 359–60, 376–7 Thornburg, Max  56 Thurow, Lester  272 Toer, Pramoedya Ananta  11 Toffler, Alvin  211 Tonguyan, Mohammad Javad  298 Torres, Gumersindo  21–2, 43–4 Torrey Canyon, oil spill  210 Total, formerly Compagnie Française de Pétrole (CFP) 376–7 participation to Iraqi concessions  26, 28 participation to the Iranian Consortium led by BP  87 Treaty of Lausanne  27 Trucial States  37–8, 51–2, 96 birth of the United Arab Emirates  183–4 Trudeau, Pierre  233, 272, 304 Truman, Harry S.  60–1, 67–8, 70–1 Tugendhat, Christopher  135 Tunnel, Byron  190–1 Turkish Petroleum Company, see Iraq Petroleum Company Ul Haq, Mahbub  212–13, 246, 259 Ul Haq, Muhammad Zia  314 Unconventional oil  190–1 Unequal exchange, theory of  90–1, 105, 136–7 United Nations Conference for Trade and Development (UNCTAD)  8, 137, 171, 177, 184–5, 237, 239–40, 263, 265–6, 294–5, 387–8 United Nations Conference on the Human Environment (Stockholm Conference) 211–13 Vance, Cyrus  265–6 Venezuela early development  15–22, 19t, 43–7 strike of 1936  CI.F4f, 44–5 Law of 1943 on profit sharing model 56–8 taxation law of 1958  103 Law of reversion of 1971  185–6

OUP CORRECTED PROOF – FINAL, 18/06/19, SPi

420 Index Vernon, Raymond  217 Vitalis, Robert  91 Vogt, William  53–4 Von Humboldt, Alexander  11–12, 17

World Bank  136, 242–4, 258, 261, 303 International Bank for Reconstruction and Development (IBRD)  136 International Development Association (IDA) 136

Wald, Ellen  218–19 Walde, Thomas  305, 377–8 Waldheim, Kurt  244 Walker, Peter  351 Ward, Barbara  211, 215 Weinberger, Caspar  316 Welch, Leo  123–4 Welles, Summer  59 West, David  343 Wilkie, James  8, 305 Wilson, Arnold  30 Wilson, Harold  183, 273–4 Wohlstetter, Albert  254

Yacimentos Petroliferos Fiscales (YPF)  43 Yamani, Zaki Ahmad  152–3, 155, 173–8, 182, 196, 199–200, 203, 207–9, 219, 226–8, 231–3, 244–5, 254–5, 257–8, 264–6, 269–70, 294–6, 316–17, 329–32, 336–9, 341–59, 365, 367–8, 378 Yergin, Daniel  2–3, 59, 176–7, 385 Yom Kippur War  217, 219 Zakariya, Hasan  176 Zemeckis, Robert  301 Zischka, Anton  16–17 Zola, Émile  3