The Seven Sisters

The Great Oil Companies and the World They Made

by Anthony Sampson

11
The Crunch

The price of an article is exactly what it will fetch.
-- Marcus Samuel of Shell, 1911


AFTER the Teheran and Tripoli agreements, for the next two-and-a-half years, the companies were in trouble on three separate fronts. First the producers were demanding part-ownership of the concessions, or 'participation'. Second, there were increasing signs of an oil shortage. Third, the Arab-Israel situation was again heading towards conflict. The convergence of the three was to produce the greatest crisis in the history of world oil.

Participation

For the more radical Arabs the whole concept of oil concessions -- which had been leased to the companies under quite different regimes and conditions for very long periods -- was increasingly unacceptable. The notion that a producing country was entitled to part-ownership of the concession -- as opposed to merely taxing it -- had been enshrined as long ago as 1920, as we have seen, in the San Remo agreement over Iraq, and ever since ignored. In the meantime the angrier radicals had favoured the more extreme course of wholesale nationalisation. But that drastic remedy, whether in Mexico in 1938 or in Iran in 1951, carried the danger of excluding the producers from the oil markets. How could producers take over control, and yet remain part of the world market system? In the late 'sixties they began to concern themselves with the idea of gradual nationalisation, under the tactful slogan of 'participation'.

The chief advocate of participation was not one of the fiery extremists from Libya or Iraq, but the man who had been the special favourite of the oil companies, a graduate from Harvard, from the most conservative country of all. Sheikh Zaki Yamani of Saudi Arabia was to be the dominant figure in the next stage of the conflict. He had gained great confidence since he had first become King Feisal's oil minister in 1962. His old oil company friends, who used to regard him as a clever young protegé, now found themselves being kept waiting outside his huge office in Riyadh, or pursuing him as he flitted between capitals, exercising his growing power with obvious relish. He was quicker than most of them; with his sharp eyes, his Mephistophelean beard and his debonair style, he was like an unbottled genie from Arabia, impatient to take over from his master.

Yamani had been a director of Aramco since 1962, but his apparent involvement only made him more aware of his exclusion from the crucial decisions. As he put his case later, 'I want to know what is going on and I want to have a say in it. And that is what frightens them most.' (Leonard Mosley: Power Play, London, 1974, P. 395.) Yamani realised the dangers of abrupt nationalisation, and the need to maintain the orderly system of the oil companies; and in this he was at loggerheads with his predecessor Tariki, who was now advising other oil countries, and firmly advocating nationalisation. Yamani believed that the oil producers should gradually edge their way into the intricate world system, without disrupting it. The producing countries could take over a share of the oil, and could thus build up their own national oil companies -- Petromin in Saudi Arabia, KNPC in Kuwait, NIOC in Iran. In other words, OPEC would not beat the cartel, but join it.

Yamani had been interested in some form of participation for many years, but he first boldly proclaimed his policy in a seminar at the American University in Beirut in June 1968. It was in the wake of the humiliation of the Six-Day War, when the West was most sceptical of Arab effectiveness and Yamani felt the need for a militant initiative. He pointed out that many of the newcomers to the Middle East had agreed to various forms of partnership, and he warned the sisters: 'the June war, with all its psychological repercussions, has made it absolutely essential for the majors -- and not least Aramco -- to follow suit if they wish to continue operating peacefully in the area. Partnership with the host governments is a must; any delay will be paid for by the oil companies concerned.' (Middle East Economic Survey, June, 1968.) A meeting of OPEC in the same month duly endorsed the principle in a Declaratory Statement, that 'the Government may acquire a reasonable participation'.

But the oil companies were very far from agreeing. Some company men realised that their control could not last, but the sisters could not bring themselves to give anything up before they had to -- for the profits were still so vast that every extra day seemed worth hanging on to. Some ammunition to the Arabs was given in 1970 by the U.S. Department of Commerce. It estimated that the net assets of the petroleum industry in the Middle East were $1.5 billion, yielding profits of $1.2 billion, a return on investment of 79 percent -- compared to only 13.5 percent from smelting and mining industries in the developing countries. It was a calculation that was carefully noted by OPEC. (Abdul Amir Kubbah: OPEC Past and Present, Vienna 1974, p. 78.)

Yamani saw the Saudis' position as being now so strong that they could get what they wanted; and in March 1969 he described participation to Richard Johns of the Financial Times, as creating a bond which 'would be indissoluble, like a Catholic marriage'. At the same time, he urged that participation would be in the interests of the oil companies. 'It will save them from nationalisation,' he explained at a seminar in Beirut, 'and provide them with an enduring link with the producing countries'. But some of the majors, he observed wryly, 'seem to be obsessed with the empire they have built. It is so vast and it took them so many decades to achieve. And now they see these newcomers -- these national oil companies in the producing countries -- wanting to come and take a piece of their cake, which is the last thing they want to happen.' (3rd Seminar of Economics of the Petroleum Industry, American University of Beirut, 1969.)

It was not until after the Teheran agreement in 1971, when OPEC was stretching its muscles, that Yamani made much further progress. The Saudis again felt the need to show an initiative, after the success of the Shah, and the two chief oil producers were more than ever rivals for leadership. The Teheran agreement, binding for five years, appeared to leave no room for argument; but participation provided a field for demands outside the agreement. 'It was like labour unions', said one Dutch Shell director: 'when they've agreed about wages, they go for co-determination.' For the next two years the battle for participation took over from the battle for prices.

At the OPEC conference in June 1971 Yamani succeeded in convincing most other members, against the arguments of Tariki, that they should immediately demand a 20 percent share in the. companies' operations, to be gradually increased to 51 percent, with the assets to be paid for at 'net book value'. Later Yamani was put in charge of negotiating with the companies for all the Gulf countries. The companies on their side again resolved to stand together. John McCloy got special permission from the anti-trust chief, McLaren. The seven sisters and others met in London to decide on common tactics, renewing their agreement to share out their oil if one company was singled out.

The two sides were again heading for confrontation: the pace was quickening, and the more radical members of OPEC were determined not to be outdone.

Already in February 1971 Algeria, after bitter disputes about prices, had nationalised 51 percent of all French interest in her oil, thus dashing French hopes of a special connection. Now ten months later, just as OPEC was meeting again, the Libyans announced the nationalisation of all BP's assets, on the unconvincing grounds that Iran had just occupied three islands in the Persian Gulf that technically were under British protection; and that BP, because it was half-owned by the British government, must take responsibility. The nationalisations encouraged the other producers to be more militant.

In January 1972 OPEC met the companies again in Geneva. OPEC's first aim was to obtain more money because the dollar had been devalued: the companies quickly agreed to link the posted price to a basket of currencies, instead of the dollar, and thus put up the price by 8.5 percent, which cost the consuming countries another $700 million a year for oil from the Persian Gulf alone. Then OPEC went on to demand participation in more detail: the companies soon bitterly complained about the terms, and the new battle began.

The prospect of participation placed the sisters in a much more exposed position, stuck in their no-man's-land between producers and consumers. Their problem was forcefully analysed by the oil consultant Walter Levy in New York, a man who from now onwards was to play an increasingly important role in oil policy. Levy had a very international background: he had been educated in Hamburg and worked as an oil journalist in London before moving to Washington during the war; and then set up as an independent consultant. He was now retained as adviser to all seven sisters, and to several governments. Writing in Foreign Affairs in 1971, Levy warned that participation was a grand design, in Yamani's mind, to 'bind the interests of the oil companies.' Levy predicted that 'the oil companies would be destined to become completely subservient to their host government.' They would thus face a major decision: 'to what extent and for how long they can be held hostage by their resource interests in producing countries ... It should now be recognised that their position as an internationally integrated private industry depends on a closer relationship and better understanding with consuming governments.'

The companies were already, as Sir Eric Drake put it in 1970, the tax-collectors of the producers; now they would be much closer partners. Professor Maurice Adelman of MIT, writing in 1972, accused them of being simply 'agents of a foreign power'. (Foreign Policy, New York, Fall 1972.) For a few oilmen participation appeared a worse evil than nationalisation, for it would impair their freedom of movement, and commit them to the producers' side: Sir David Barran of Shell (which had no huge Middle East concessions like the Aramco partners) said in April 1972 that nationalisation would be preferable to participation, which he regarded as 'intolerable'. But most of the companies, though they were to argue bitterly over terms, were inclined slowly to give way to participation; for it was still the crude oil that provided most of their profits. And they began to perceive that what mattered in a growing shortage was not so much who owned the oil, as who was able to buy it.

Aramco was now the critical battleground for participation; it was both on Yamani's home ground, and it was by far the richest prize in the Middle East. The four owner-companies -- Exxon, Texaco, Socal and Mobil -- were more thoroughly dependent on it as the shortage elsewhere was more pronounced, and for each of them Aramco was the source of 'the incremental barrel'. Since the 'fifties the Aramco company town at Dhahran had expanded into a settlement with every indication of permanence. Trees, gardens and two-storey houses had grown up inside the barbed wire, and the 'Aramcons' had become almost a separate breed. There was now a generation of employees who had been born and brought up in the desert. It had become a kind of symbol of the no-man's land of the oil companies, belonging to no culture and no country. Visiting it, I felt as if I were inside an idealised America, like an old cover of the Saturday Evening Post; an America untouched by the turmoil of the 'sixties, by long hair or drugs, with its citizens watching old movies on Aramco TV, playing baseball or mending their cars. To the Aramco engineers the compound offered not only fat salaries and early retirement, but a kind of engineer's utopia -- progress without politics, and technology without doubts. All around them the twisting pipes, the giant towers and flares were the monuments to their skills.

The Aramcons had done what they could to satisfy the Saudis. Ever since the early 'fifties, the headquarters of the company had been out in the desert, whither the directors would fly from New York or California. Saudi engineers lived alongside the Americans and hundreds of Saudis were sent to America for training. There were Saudi-pleasing public relations projects, and Aramco experts on Saudi culture, history and politics. The new president, Frank Jungers, had been in Arabia ever since graduating at Washington University, and his son was following him into Aramco. A stocky slow-speaking engineer, Jungers was essentially a pragmatist, talking about Saudi politics in the same matter-of-fact style as he talked about Aramco's great projects -- the unique installations, the 'first-time-built size-wise facilities'. His Texan-style house, with romanticised pictures of idealised Arabs on the walls, looked on to a bright green garden, with the desert beyond the wire: Aramco was his life, and Dhahran was his home. Jungers disseminated to the Saudis a quiet confidence in all things American. As one oilman described him: 'he's like W. C. Fields, who dropped out of the sky into the bed of a fair maiden, and reassured her in a state of shock: "Don't worry about a thing ma'am. I'm a citizen of the United States of America."'

Yamani began his negotiations withJungers early in 1972. The two men got on well, but in the background the owning companies -- 'the four neurotic parents' -- were standing fast. Yamani was exasperated by their stubbornness: 'It is always hard to be moderate,' he complained to a British visitor in January 1972, 'but it is particularly hard with American oil people, because they are apt to mistake moderation for weakness ... I am afraid that sometimes, when oilmen think only from a money angle, they get blind.' (Mosley, pp. 400-402.) Aramco put forward a rival proposition, that the Saudis could have a 50 percent share in future developments, which Yamani quickly rejected.

Aramco also rashly tried to recruit the help of Washington, thus breaking the tradition of separation from government. Ken Jamieson, the Chief of Exxon, called on Nixon at the White House, who passed a message to Riyadh. Yamani, furious at the intervention, retaliated by recruiting the support of the King himself. The next day he read a stern message from His Majesty, with a clear threat of unilateral action. 'Gentlemen: the implementation of effective partnership is imperative, and we expect the companies to co-operate with us with a view to reaching a satisfactory settlement. They should not oblige us to take measures in order to put into effect the implementation of participation.'

Yamani warned that the producers 'must prepare for battle', and convened another extraordinary conference of OPEC. But on the eve, Aramco accepted the principle of immediate government participation of 20 percent. It was now the Americans who were making the mistake that they had attributed to BP in Iran twenty years before; of 'failing to yield gracefully that which they were no longer in a position to withhold'. (Dean Acheson, quoting Burke: see Chapter 6.)

The next month Yamani continued his talks on participation in San Francisco with the Aramco sisters and BP and CFP. The diehard companies were still resisting, and Socal bluntly told Yamani that their share in Aramco was not for sale. There were more attempts at U.S. government pressure; John Connally, then Secretary of the Treasury, made a hawkish speech on April 18, saying that the U.S. would soon have to back up private corporations in dealing with foreign governments which controlled natural resources critical to America. The OPEC negotiators promptly warned that any such intervention would greatly complicate the participation negotiations. The State Department agreed with the companies that the Teheran agreement did not allow for participation; and they made representations through the Ambassadors in Iran, Saudi Arabia and Kuwait. But they eventually restricted themselves to protesting about compensation at book value, pointing out that future OPEC investments in the U.S. might meet a similar fate -- an issue which was eventually resolved with a complex compromise. (James Akins: Foreign Affairs, April 1971.)

Participation was now the catchphrase of the Middle East. The rich Sheikhdoms of Abu Dhabi, Qatar and Kuwait all soon wrested agreements for 20 percent ownership from the companies. And in Iraq the long arguments with the IPC, the grandfather of all the consortia, were reaching a bitter climax. The Iraqis were demanding a greater share in the revenue, participation in the concessions, and a guarantee of high production; they complained that the companies had been restricting production to punish Iraq for the past decade. (The Nationalisation of IPC's Operations in Iraq, Baghdad, 1974, p. 8.) Eventually in June 1972 Iraq finally nationalised the consortium, and soon afterwards agreed with the French company, CFP, to take its usual share of the nationalised oil. The Iraqis, in a time of shortage, could now play the French against the seven. The old warning of 'look what happened to Mossadeq' was no longer valid, as the nationalised companies showed they could operate their own oil.

Through 1972 Yamani went on bargaining with Aramco, who still resisted, and the King repeated his warning. Eventually in October the companies met in New York with the five Persian Gulf States, headed by Yamani, and reached a 'General Agreement', that they would give up 25 percent of the established concessions, rising to 51 percent in 1983. The final agreement was signed at the end of the year in Riyadh.

But the Battle for Aramco still raged, now centring on the question of the price the four companies should pay for the oil that they bought back from the Saudi government's share -- the so-called 'buy-back price'. Yamani knew that he now held the whip hand, and the four sisters, led by Exxon, could not risk a real showdown. For the Aramco board had now approved a plan to expand vastly the Aramco oilfields to provide for 13.4 million barrels a day by 1976, and as much as 20 million barrels a day by 1983. For this breathtaking prospect, even though it would be shared with the Saudis, the Aramco partners were prepared to yield over prices. Their greater fear was that the Saudis would sell their oil to other companies.

By December 1972 George Piercy of Exxon noted that Yamani was 'prepared to relax and await capitulation' and recommended his colleagues to improve their offers. But Gulf, which was outside Aramco, was exasperated by the other companies' willingness to 'buy back at inflated and irrational prices'. Gulf did not have the same self-contained system of outlets as Exxon or Mobil, and was thus more concerned about price -- and about consumers. Their chairman Bob Dorsey protested to the team: 'your insistence on maintaining control of the oil for your own use has given strength to the OPEC position and has brought us to this point'. He went on with asperity to suggest that the prompt acceptance of higher prices 'might not prove acceptable to consumer interests'. (Multinational Report: 1975, p. 136-7.) But Aramco was desperate to settle their access to the oil, and Gulf eventually had to negotiate an agreement in Kuwait similar to Aramco's.

Yamani could now divide and rule the sisters, as they had once done with him. Mobil, still hungry for crude oil, and more militant under the regime of Warner and Tavoulareas, was determined to get more than its 10 percent share of the 'buyback oil'. They were threatening to make a separate deal with the Saudis if their terms were not good enough, as the Socal negotiator, Jones McQuinn, anxiously observed (Ibid: p. 139-40), and Yamani could use the threat to extract better terms from the others.

The negotiations dragged on through the summer of 1973. Yamani refused to bargain on the buyback price, and at one point in August, he warned the Aramco team: 'don't be surprised if at any moment, I pick up the phone and instruct Brock or Frank [Brock Powers, chairman of the board of Aramco, and Frank Jungers, president of Aramco, see Multinationals Report, p. 138] to cut production to seven million barrels a day.' At last, on September 13, 1973, the Aramco partners gave in to Yamani's stiff terms -- a buyback price of 93 percent of the posted price -- which would soon increase the price to the West.

Yamani had got what he wanted -- a stake in the great concession. And the companies, having fought so long and ruthlessly, were now more relaxed about the new prospect. For participation now established a common interest between the companies and the producing countries, with both sharing the same interest in the orderly world market. It worked like the fifty-fifty tax deal twenty years earlier, but at a deeper level. The oligopoly of the companies had now been effectively joined by the oligopoly of OPEC.

But to the radical critics the new arrangement was at least as sinister as the old one. Professor John Blair, the compiler of the original FTC report on the Petroleum Cartel, suspected that the industry was now entering a new phase of 'bilateral monopoly', with the producing countries as sellers and the companies as buyers: so long as the companies kept the exclusive right to buy the oil, he believed, they could control the supply, 'which is the heart of the control of the price'. Professor Adelman saw the whole situation after the Teheran agreement as a take-over of the old cartel by the new one: 'The producing countries now have a cartel tolerated by the consuming countries and actively supported by the United States.' 'OPEC,' he warned, 'has come not to expel, but to exploit.'

Certainly, as Levy, had warned, the companies' role was now much more awkward, much harder to separate from politics. As Jim Akins warned them from the State Department, they might find themselves as minority partners of both producer and consumer governments, with a more circumscribed role in negotiating. 'How the companies react to these pressures,' wrote Akins, 'and what they offer as alternatives, will to a large extent determine their future form and their future activities'. In fact, they did not react. Pressed on both sides, they hoped for the best, and for the time being they seemed to co-exist peacefully with the producers.

But even as the Aramco agreement was being prepared a new crisis was brewing up in the Middle East; and before it was signed, Yamani had left the U.S. in a hurry. A chain of events had been started which was to mix up the question of prices inextricably with the question of politics, a mixture made more dangerous by the growing world shortage of oil.

Shortage

Up till the late 'sixties, the sisters were worried about having too much oil, not too little. In May 1967 Michael Haider, then chairman of Exxon, answered a shareholder's question at the annual meeting in Houston with the words: 'I wish I could say I will be around when there is a shortage of crude oil outside the United States.' A year later Socal in California was specially worried about the Alaska discoveries, in which they had no share. A Socal company memo in December 1968 warned that 'within five to ten years there may be large new crude supplies from the Arctic regions of the world seeking markets and thereby extending and magnifying the surplus supply problems.' (Multinational Hearings: 1974, Part 7, p. 360.)

In 1969 George Piercy of Exxon was fairly confident that his company's future supplies would meet demands. On the one side he expected that the boom in Japan -- the biggest single importer of oil -- would begin to slow down. On the other hand there were the huge new expected sources of oil, including Alaska, Libya and eventually the North Sea. But already there was an ominous turn-down in Exxon's master-graph, showing spare capacity compared to world demand. By 1970 the trend was much more serious.

The world's demand for oil was ahead of all the predictions; a memo from Gulf in March 1970 pointed out that their estimates of two years earlier were 8 percent lower than the actual consumption: 'if once again our estimates of future free world demand prove low, then a strain on productive capacity may be approached before 1980'. Was this consistent underestimation always a genuine statistical error, or was it sometimes inspired by the companies' instinctive fear of a glut?

Within the United States, production of oil was no longer going up, and after 1970 it went down. For the first time the optimism of the early drillers that there would always be oil somewhere else was now unfounded. Already by 1970 28 percent of the oil used in the U.S. was imported. The possible danger of this to national security prompted President Nixon to appoint a special Cabinet task force, headed by George Schultz, which reported in 1970 with historic complacency, against the advice of the oil companies (see submissions by Exxon, Texaco, Mobil and Socal: Investigations Subcommittee, Jan. 21, 1974, p. 184-194), that there was little danger of an Arab boycott, and that existing import controls should be liberalised. The president did not accept the report, but import quotas were nevertheless relaxed, and the imports of Middle East oil went up and up.

The oil-producers had already begun to realise that their bargaining position was stronger, as Yamani had warned Piercy in February 1971 ('George, you know you cannot take a shutdown'). By 1972 many experts reckoned that the world was heading for an acute oil shortage in a few years, and Shell was sending out serious warnings. In October 1971, Barran of Shell warned that the days of cheap oil were over, and that by the end of the century oil consumers would be 'looking down the muzzle of a gun'. There was a new danger sign when Kuwait decided in 1972 to conserve its resources and to keep its production below 3 million barrels a day.

For BP and Gulf, the two partners in Kuwait, this was menacing news. But Exxon, like the other American partners in Aramco, was not seriously worried, for they were confident that Saudi Arabia could supply all the extra required. By early 1973 the Saudis were producing 61 million barrels a day, and the prospects were even more dazzling. As other parts of the world became more uncertain, so Saudi Arabia became more crucial.

After the companies had agreed to Yamani's participation terms, it soon emerged that they would push up prices. For there was now great demand for the relatively small amount of oil that the producing countries were selling on the free market. And by the beginning of 1973 the price in the free market was rapidly rising. ('The rise in the market price,' commented Petroleum Press Services in November 1973, 'is partly accounted for by the disruption of normal trading relations following the participation agreements. It was the high prices obtainable by state companies for participation crude -- equivalent to only about 21 percent of the Middle East market -- that whetted the appetites of host governments.')

In April 1973 a new warning appeared in the august pages of Foreign Affairs, much more alarming than Levy's two years before, from none other than Jim Akins, now increasingly outspoken. He presented the ominous statistic that world consumption of oil for the next twelve years was expected to be greater than the total world consumption of oil throughout history up till 1973. The loss of production from any two Middle East countries could cause a panic among consumers. The price of oil was likely to go up to $5 a barrel well before 1980. The Arabs could use oil as a political weapon, for the advanced countries were obviously now vulnerable to boycott.

Akins' warnings were prophetic, but some of his critics insisted that they were self-fulfilling. The State Department was virtually advising the Arabs to put up prices, and advertising the West's weakness. Adelman, writing in the fall of 1972, had insisted that the talk of shortage merely reflected the interests of the big oil companies, in cahoots with the Arabs. There was 'absolutely no basis to fear an acute oil scarcity over the next fifteen years'. (Foreign Policy, New York, Fall 1972.) Adelman, like many other oil experts at the time, was confident that an Arab embargo could not be sustained, as the fiasco of 1967 had suggested.

But the Arabs hardly needed Akins' advice. For the signs of a shortage were now visible everywhere. The summer of 1973 was an eerie one for the oil companies. The demand for oil was going up above the wildest predictions -- in Europe, in Japan, and most of all in the United States. Imports from the Middle East to the U.S. were still racing up: production inside the United States was still falling. In April President Nixon had again lifted restrictions on imports of oil, so that Middle East oil flowed in still faster; and the administration did nothing to control a scramble for oil. While the majors were trying to establish their safe sources of supply, the independents were bidding frantically for the 'participation oil' from the producers, thus pushing the price up and up. (See testimony of Dillard Spriggs, Multinational Hearings 1974, Part 4, p. 61.)

In the gathering crisis, some oil companies tried to involve the consumer governments. Sir Eric Drake in the BP annual report of 1972 said there was an urgent need for consuming governments 'to adopt coherent, balanced and co-ordinated energy policies'. And in June 1973 Frank McFadzean of Shell told a seminar at Harvard that the energy problem was now a question of political power which required government intervention. (Petroleum Intelligence Weekly: April 23, 1973.) The State Department, urged by Jim Akins, had tried periodically since 1971 to arrange joint talks with the Europeans, without success, but it was not till June 1973 that OECD set up a group to discuss emergency oil policy, to report in November: and it was too late. The prospects of serious coordination across the Atlantic and Pacific were anyway slender: each continent had a different dependence on oil, and a different attitude to the Arabs and Israel. The more political the oil, the more it divided the West.

Yamani and the other oil ministers soon became aware of their new opportunity. InJune 1973, as prices were zooming up, OPEC summoned another meeting in Geneva, to insist on a further increase because of the further devaluation of the dollar. The militants -- Algeria, Libya and Iraq -- were now pressing for unilateral control of price, but eventually OPEC agreed on a new formula which put up prices by another 12 percent. One evening after midnight Yamani went on a jog through Geneva with three correspondents, and predicted that this would be the last time prices would be negotiated with the companies.

In early August Yamani warned Aramco that the Teheran agreement would have to be renegotiated well before its time limit of 1975. The next change would be a very large one and there would be no real negotiation: 'there will be discussion within OPEC,' Yamani told them, 'with the wild ones insisting on a very high level. And there will be a compromise within OPEC, but then the companies will have no choice.' (Company cable to New York: Multinational Report, p. 148.)

By September 1973, for the first time since OPEC's beginning, market price of oil had risen above the posted price. It was a sure sign that OPEC were now in a very strong bargaining position. The glut that had weakened and divided them since 1960 was now emphatically over. Armed with this knowledge, OPEC invited the companies to meet them in Vienna on October 8 to discuss 'substantial increases' in the price of oil.

The King's Message

While the shortage loomed, the Arabs were at last achieving closer unity. They were determined to use oil as a weapon against Israel, and by 1973 the militants were being joined by the country on which the four American sisters had pinned all their expectations for increase. The very fact that Saudi Arabia was now far the biggest oil exporter made King Feisal more vulnerable in the face of his Arab colleagues, and the danger of an embargo more likely; for he could not afford to be seen as a blackleg.

The oil companies became well aware of Feisal's worsening predicament but their attempts to warn Washington were met with scepticism. As with the shortage, it was a case of Wolf, Wolf. The oil lobby, which had always been so ready to invoke the national interest to protect profits, were now really dealing with the national interest -- but it was disbelieved or ignored. It was an ironic consequence of the State Department's policy, proclaimed twenty years before, that 'American oil operations should be the instruments of foreign policy in the Middle East'. They had now delegated that policy so completely that when the warnings came, the bells did not ring.

Ever since the Six-Day War, the Aramcons in their compound in Saudi Arabia had become alarmed by King Feisal's growing concern over Israel. Frank Jungers and his colleagues carefully briefed all visitors to the camp, ranging from Senator Gravel to General Goodpaster, about the depth of Arab feelings and the dangers of the U.S. foreign policy. 'The story of the senseless dissipation of the goodwill we used to have among the Arabs,' said one of many such briefings, 'constitutes one of the saddest chapters in the history of our foreign relations.' (Multinational Hearings: 1974, Part 7, p. 524.)

At the beginning of 1973 the King was taking some trouble to influence Washington, both through Aramco and through Akins, who provided the chief link between the Arabs and Washington. But Akins had to go to extreme lengths to convey the Saudis' views: in January 1973 John Ehrlichman, President Nixon's aide at the time, was preparing a visit to Saudi Arabia. Akins asked Aramco to arrange for Sheikh Yamani to 'take Ehrlichman under his wing and see to it that Ehrlichman was given the message: we Saudis love you people but your American policy is hurting us.'

On May 3, 1973 Jungers paid a courtesy call on King Feisal, for half an hour. The King was cordial but his tone was quite different to that of earlier meetings. The King touched only briefly on his usual hobby-horse of the Zionist-Communist conspiracy, but he warned Jungers that Zionists and Communists 'were on the verge of having American interests thrown out of the area'. Only in Saudi Arabia, the King stressed, were American interests relatively safe; but even in his kingdom it 'would be more and more difficult to hold off the tide of opinion'. The King was amazed that Washington failed to perceive its own interests: 'it was almost inconceivable in any democratic state' (he told Jungers) 'for a government to be so far away from the interests of its people'. But it was easily put right, he went on: 'a simple disavowal of Israeli policies and actions by the U.S. Government would go a long way ...' (Multinational Hearings: Part 7, p. 506 ff.)

Jungers then went on to see Kamal Adham, the King's chamberlain and close adviser, who gave a more ominous message. The Saudis he said, in spite of their problems with the Egyptians, could not stand alone when hostilities broke out. Adham was sure that Sadat, a courageous and far-sighted man, would have to 'embark on some sort of hostilities' in order to marshal American opinion to press for a Middle East settlement. It was a very specific and accurate warning on top of the King's audience: 'I knew he meant war', said Jungers later, 'the King liked to give signals, first subtly and then explicitly. It was quite different from his earlier warnings.' (Interview with author, February 1975.) Jungers quickly passed on the warning to Exxon and Co. in New York and California.

Three weeks later the four Middle East directors of the parent companies -- Hedlund of Exxon, Moses of Mobil, Decrane of Texaco and McQuinn of Socal -- were at the Geneva International Hotel for a meeting with Yamani to negotiate about participation. Yamani suggested that they might pay a courtesy call on the King, who had just been to Paris and Cairo, where Sadat had given him 'a bad time' (as Yamani put it) pressing him to step up his political support. The King, after a few pleasantries, was much more curt and abrupt than usual. He warned the four directors that time was running out. He would not allow his kingdom to become isolated, because of America's failure to support him, and he used the phrase 'you will lose everything' -- which to the visitors could only mean that their oil concession was at risk. The King asked them to make sure that the American public were told where their true interests lay, instead of being 'misled by controlled news media'.

The Aramco men lost no time, and a week later they were all four of them in Washington to lobby top government officials. To each they repeated the King's message, that unless action was taken urgently, 'everything would be lost'. On May 30 they called first on the State Department, to see a team led by Joseph Sisco, in charge of Middle Eastern affairs. But Sisco had heard such warnings before, and he assured them that his information was otherwise. The CIA had reported, through its own contacts including close relatives of the King, that Feisal was only bluffing: he had resisted pressure from Nasser in the past, and could resist pressure from Sadat now.

They then went to the White House, hoping to see Kissinger; but they were fobbed off with General Scowcroft, and other advisers including Charles Debono, then the energy expert. Finally they went to the Pentagon to see Bill Clements, who was then acting Secretary of Defence, while James Schlesinger was awaiting confirmation. Clements had been an oil man himself, with his own drilling company, and was widely regarded in Washington as a key figure in the oil lobby. But he made clear to his visitors that he had his own information and views about the Arabs: they would never unite, the companies' fears were unfounded, and King Feisal was dependent on America. At the end of their day in Washington, the Aramco men cabled sadly back to Jungers in Saudi Arabia that there was 'a large degree of disbelief' that any drastic action was imminent. 'Some believe that His Majesty is calling wolf where no wolf exists except in his imagination.' (Multinational Hearings: Part 7, p. 509.)

But the four companies still wanted to show the King that they were trying to influence American opinion. Each wanted to protect their future share of the concession, and they soon vied with each other to show their helpfulness. Bill Tavoulareas, the president of Mobil, was a close friend of Yamani, and he personally lobbied Sisco at the State Department; but Sisco again was sceptical. Mobil also prepared an advertisement for the New York Times on June 21. It was very cautiously worded: it explained how America was becoming increasingly dependent on imports from Saudi Arabia, how relations were deteriorating and how 'political considerations may become the critical element in Saudi Arabia's decisions'. It concluded that it was 'time now for the world to insist on a settlement in the Middle East.' But the New York Times thought it too inflammatory for the usual position for Mobil's advertisements, opposite the editorial page. In Saudi Arabia, nevertheless, the advertisement had the required effect: Yamani wrote a letter to Mobil recognising this 'positive step'.

Exxon was rather more discreet in their support. They decided against advertising, but Ken Jamieson pressed their case in Washington, and Howard Page gave a speech in New York to alumni of the American University in Beirut, about the need to relieve the strained political relationships between the United States and the Arab countries. In California, Socal now became worried that they were slipping behind, and their Foreign Review Committee was concerned that 'Socal will be conspicuous in our absence'. Consequently Socal's very conservative chairman, Otto Miller, wrote a letter to shareholders on July 26, urging that the U.S. should work more closely with the Arab governments, and 'acknowledge the legitimate interests of all the peoples of the Middle East...' The letter was well-publicised, and caused a small furore among Jewish communities, especially in San Francisco.

There was also plenty of activity from old Jack McCloy, now seventy-nine, and still representing all seven of the sisters. He talked to his friends in Washington: he warned Sisco that the Saudis meant what they said, and he urged Kissinger to try to mediate. 'I kept jumping on him,' he told me, 'to say that it was an imperative of statesmanship to get the Middle East settled; that the administration mustn't just think in terms of the next New York election'.

The companies were certainly persistent enough. Why, then, did they have no discernible effect? Had not the oil companies given at least $2.7 million to President Nixon's campaign? Had not Gulf Oil been contributing millions of dollars, including a secret gift of $100,000 in 1971, with the express understanding that they would be 'on the inside track'? Yet, when four huge global companies, with billions of assets behind them, wanted to pass a critical message from King Feisal they apparently had no influence whatever.

There were several explanations. The Israeli lobby was undoubtedly far stronger, and American intelligence about the embargo and the war was heavily influenced by the Israelis. Secondly the administration, having for so long separated the two strands of Middle East foreign policy, still kept them in different compartments. But thirdly, the American oilmen -- as some of them wryly admit -- had lost nearly all their credibility. When the companies did have something serious to say, hardly anyone believed them.


In the meantime the oil weapon was gathering support among the other Arab states. In May, Dr. Nadim Pachachi, the ingenious Iraqi in exile who had been secretary of OPEC, put forward a new political proposal which took advantage of the shortage: he suggested that the supply of crude oil to the West should be frozen to enforce Israel's withdrawal from the cease-fire lines of 1967. The next month the Libyans set a new pace of militancy. Colonel Qadaffi nationalised Bunker Hunt's concession, saying that the United States deserved 'a good hard slap on its cool and insolent face'.

President Sadat of Egypt, instead of moving closer to the Libyans, now significantly altered his alignment. At the end of August 1973 he flew to Saudi Arabia for a secret visit to King Feisal. The meeting was momentous. Feisal promised Sadat that, if American policy in the Middle East did not change, he would restrict the increases of oil production to 10 percent a year -- far short of Aramco's requirements. Thus Egypt, for the first time, had oil pressure behind her diplomacy.

Just after the visit, Qadaffi, celebrating the fourth anniversary of the Libyan revolution, announced that he would nationalise 51 percent of all the oil companies operating in Libya, including the subsidiaries of Exxon, Mobil, Texaco, Socal and Shell. Two days later the Libyans announced that the price of Libyan oil would go up to $6 a barrel -- nearly twice the Persian Gulf price -- and threatened to cut off all exports to America if Washington continued to support Israel. Soon afterwards all ten foreign ministers of the Arab oil exporting countries (OAPEC) met to discuss the possible use of oil as a weapon to change American policy. A fortnight later Sheikh Yamani formally warned the United States that there could be a cutback of Saudi Arabian oil.

President Nixon appeared on television to warn the Libyans of the dangers of a boycott of oil, reminding them of the experience of Mossadeq in Iran twenty years before. But oil experts knew that the threat was hollow. As Ian Seymour asked in the New York Times: 'could it really be that the President of the U.S. had not yet grasped the predominant fact of life in the energy picture over the coming decade, that the problem is not whether oil will find markets, but whether markets will find Oil?' (New York Times, October 7, 1973.)


Next: 12 - Embargo

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