Poor George

Geoffrey Hawthorn

  • The Prize: The Epic Quest for Oil, Money and Power by Daniel Yergin
    Simon and Schuster, 877 pp, £20.00, January 1991, ISBN 0 671 50248 4

On 3 April 1986, at his filling-station in north Dallas, Billy Jack Mason was protesting about the fall in the price of oil. Cars came from as far as Waco, and by breakfast, the queue was six miles long. He was offering unleaded at zero cents a gallon. Reporters sought Billy’s opinion on the future. ‘That’s overseas. Nothing we can do about that till the Arabs get the price right.’ In less than six months the price of West Texas Intermediate, the standard for the futures market that had started three years before on the New York Exchange, had fallen by three-quarters. In the Seventies, American officials had gone to the Middle East to persuade the Arabs and the Iranians to get the price down. Now, Vice-President Bush – on a visit to support ‘moderate’ Arab states during the Iran-Iraq war – was asking them to get it back up again. American producers, not least in Texas, where Bush himself had founded an oil company, Zapata, in the Fifties, were suffering. The White House disavowed the Vice-President’s conversations in the Middle East. ‘Poor George,’ an aide observed to a journalist. The Reagan Administration’s solution was to let the market decide.

It was the market, though, that was the problem. Daniel Yergin calls the price fall in 1986 the Third Oil Shock. The first had been in 1973, when the Organisation of Petroleum-Exporting Countries had raised the ‘posted price’ of oil, on which their revenues were calculated, to match the rocketing market price. The second had come six years later, in the panic which followed the – in fact relatively small – loss of production in Iran after the revolution there. In fifteen years, at 1990 prices, crude had gone from $4.50 a barrel in 1970 to nearly $25 in 1973, had reached more than $45 in 1979, and was back to about $10. It was the wildest fluctuation since production had begun in Pennsylvania in the 1860s.

Yergin sets out to tell the entire story: more exactly, to tell the story as it might he seen from the United States. He devotes just a few of his impressively documented pages to the North Sea, and next to nothing to those producers of little importance to America – Ecuador, Algeria, Gabon, Nigeria, Indonesia, Russia, Romania and China. His is the story, and it is of course the main story, of the discovery and development of production and marketing in the United States itself, the Middle East, and in passing, Mexico and Venezuela. It is a story in which pressures to allow the market to prevail repeatedly conflict with pressures to control it, and in the course of which the interests of war, empire, national pride and profit become more insistent and intertwined. Yergin’s own particular interest – he is a business economist, a one-time teacher at the Harvard Business School who now runs an energy consultancy in Massachusetts – is in the organisation of the oil industry itself.

This begins with George Bissell, who had been a professor of Latin and Greek at Dartmouth, a journalist in Washington and an inspector of schools in New Orleans. On his way back to New Hampshire in 1853, Bissell passed through west Pennsylvania, where he encountered the primitive ‘rock oil’ industry, in which oil seepages were sopped up in rags and sold as patent medicine. It occurred to Bissell that the mineral might provide the basis for a lighting oil to meet the demand that the increasingly expensive extract from whales could not. He took the advice of a chemist at Yale, who needed the fee and was accordingly enthusiastic, and had a second bright idea, which was that the oil, already being dug up in parts of Eastern Europe and China and there being turned into kerosene, could be got in larger quantities by boring. He put together a small group of investors and hired men to sink a bore near the village of Titusville. This was not immediately successful, and the group soon ran out of funds. The borers had to be paid off. But his letter telling them so was delayed. Two days before it arrived, they struck. That was August 1859. Prospectors flocked to Oil Creek, hit the first flowing well in 1861 (which at once exploded and killed 19 men), and with the end of the Civil War three years later, the boom was on. Prospectors jostled with hustlers, prostitutes, liquor salesmen and entertainers – Titusville soon had an opera house to seat a thousand. Farmers who hadn’t been able to raise a cent on their land in the 1850s were selling out for more than $1 million. Everyone was hysterical, and no prospector seemed to care that the new towns, as one visitor remarked, were thigh-deep in mud and smelled as though a whole army had gone down with diarrhoea. In 1866, the ‘Oil Regions’, as they were now known, produced 3.6 million barrels.

The production, however, was chaotic, the refining more so, and although there was no doubt that there was a market – for lighting and for lubrication – this also was not organised. There was soon a glut. An austere young business man from Cleveland, John D. Rockefeller, set out to capture the refining and extend the marketing in a strategy of what later came to be called ‘integration’. By the 1880s, his corporation. Standard Oil, controlled more than four-fifths of the American market. At the same time, the Nobel family was exploiting the large Russian fields around Baku on the Caspian, Alphonse Rothschild was financing its transport to Batum on the Black Sea and its refining and marketing in Europe, and with Marcus Samuel, a London merchant who named his enterprise after his father’s trade – ‘presents from Brighton’, boxes made of shells – was developing a network of tankers to meet the demand east of Suez. In the early 1890s, Standard, the Nobels and Rothschild came close to an agreement to divide the world. But they failed. And their command of East Asia was soon threatened by a new concern, Royal Dutch, which was exploiting finds in Sumatra.

When Thomas Edison threw a switch in J.P. Morgan’s office in lower Manhattan in 1882, however, and lit up Wall Street with electricity, it seemed that demand would fall. The internal combustion engine revived it. By 1910, sales of gasoline were exceeding those of kerosene, and in 1913, the invention of thermal cracking enabled refiners to extract motor fuel even from indifferent crude. The supply of crude, at least in the United States, had continued to grow, and even before an anti-trust suit in 1911 forced Standard to divide into separate companies, Rockefeller’s corporation – from which he himself had retired in 1897 – was unable to keep its share of the newly-expanding market. Others, the Mellon family, for instance, which agreed that integration was desirable, but unlike Rockefeller, thought that it had to start from the control of production itself, assumed command of the often spectacular new finds in the American South-West.

Meanwhile, attention was turning to the oil seepages that had long been known in Persia. An emissary of the Shah had come to Paris in 1900, looking for men willing to buy concessions from his impecunious ruler. He attracted an Englishman, and an Anglo-Persian oil company was floated in 1909. The Admiralty, which had decided to convert its ships from coal, was interested: it realised that Persia would be its most reliable source in the East. But Anglo-Persian was soon in financial difficulties, and threatened by a consortium of Royal Dutch and Shell. Britain thought the Dutch too close to the Germans, and did not want them to control the Persian supply. In 1914, Churchill, who was First Lord, persuaded the Commons – alluding to ‘monopolies’, ‘trusts’, ‘foreigners’ and ‘cosmopolitans’– that the British Government should take a 51 per cent interest in the company. The Bill received its assent on 10 August. The still small output from Persia, however, was not important in the war. Britain was, ironically, to rely more on Shell’s deliveries from further east, and on the Americans. But it was important to deny oil to the Germans and the Turks. In two feats of derring-do, a British contingent, under ‘Empire Jack’ Norton-Griffiths, blew up the Romanian fields just before the Germans got to them, and a small force from Persia managed to beat the Turks to Baku in August 1918 and forestall the Germans there. The director of France’s Comité Général du Pétrole exaggerated only slightly at a dinner soon after the Armistice when he said that oil, ‘the blood of the earth’, was also ‘the blood of victory’. Ludendorff, more glumly, had agreed.

Political considerations proceeded to govern the exploitation of what, it now seemed, were the considerable resources of oil in the Middle East. To begin with, the politics of the area were a little confused. As a reward for the support that the Sharif of Mecca had given in raising a revolt against the Turks, the British put one of his sons, Faisal, on the throne of the new nation of Syria. That, however, was before things had been sorted out with the French: Syria, it turned out, was to be their mandate. Faisal was deposed, showed up at a railway station in Palestine, where he was given a perfunctory welcome by the British, and left to sit on his luggage, waiting for a connection to exile. London, however, needed a monarch for its own new mandate of Iraq. Churchill, now at the Colonial Office, recalled the compliant Faisal. (Faisal’s brother Abdullah, originally intended for the throne in Baghdad, was dispatched to rule over what one historian has called a third ‘vacant lot’, Transjordan.)

Iraq, it was thought, had oil. The British initially wanted to exploit it themselves. But the Americans, now afraid that they might soon run short at home, wanted it also, and after reflection, the British agreed to a consortium of companies from each country to buy concessions, explore, produce and market. (The Federal Government raised no objections to such a ‘trust’ operating abroad. In 1934, despite objections from the Justice Department, it was to encourage collective agreements within the United States also. In 1928, at a hotel in Scotland, British, American and Dutch companies came to a tacit ‘As-Is’ understanding about the world as a whole.) The supplies from Iraq and Persia were good. When King Saud of Saudi Arabia was persuaded by his friend St John Philby that he might solve his financial difficulties by granting concessions for oil, the consortium – which had assumed the power of first refusal in the region – was therefore not interested. This pleased Philby, who didn’t want the British to prosper. On Philby’s advice, Saud signed a concession for Standard Oil of California. (This was in the east. The consortium later changed its mind and bought concessions in the west. But it never did find oil there.) In 1939, Saud’s retinue drove in 400 cars to Dhahran, pitched 350 tents, and watched the King ceremonially despatch the first American tanker to leave with Saudi oil.

It was oil from America, however, which was decisive in what Stalin called ‘the war of engines and octanes’. ‘I drink,’ he declared at a dinner for Churchill in 1943, ‘to the American auto industry and the American oil industry.’ Oil made up half the total tonnage that was shipped from the United States to Europe. The Americans’ 100-octane aviation fuel enabled Allied planes to outperform the Germans’, which flew on 87-octane. Only in 1944, when the Allied advance through France outran the stocks in Normandy, was supply a problem to the Allies. (Had it not been, Eisenhower might have allowed Montgomery and Patton to move ahead together, and the final battles might not have been so drawn out.) The Germans, in contrast, had more and more difficulty in fuelling themselves. (In December 1944, they came within a few hundred metres of what Yergin describes as ‘Europe’s biggest gas station’, the Allied depot at Stavelot. But they missed it. It would have given them ten days’ supply, and might have enabled them to push the Allies back to the Channel coast.) By 1945, the Japanese – whose early ambitions had much to do with trying to capture East Indian oil, and who never developed a synthetic oil industry – were reduced to asking children to boil up pine roots. (They never used this fuel. When curious Americans tried it in their jeeps, it jammed the engines.)

After the war, the obvious strategic importance of oil, together with the Americans’ fear once again of a shortage of domestic supply, concentrated all minds on the Middle East. That, all reports suggested, was where the largest reserves lay. The oil producers now began to sense their strength. Already in 1938, Cardenas had nationalised the concessions in Mexico. This, however, cut his industry off from the best technical and economic advice. The Venezuelans were shrewder. In 1943, they had passed a law which required the country’s revenues from oil to equal those going to the companies and the United States Government. A few years later, Venezuela asked to be paid in part in oil itself, which it then marketed directly. The ‘50/50 rule’ set the standard, and the companies’ monopoly of marketing had been broken. The Venezuelans translated their law into Arabic and publicised it in the Middle East. Their production costs were high, and if the Arabs could be persuaded to raise their taxes, Venezuelan oil would be more competitive. In time, the division of revenue everywhere was to move in favour of the producers.

The companies, however, had bought their concessions, and the 50/50 rule did not affect their ownership of the reserves themselves. Iran caused a stir in 1951, when Mossadeq tried to ride the nationalist tiger by expropriating Anglo-Iranian. (Its remaining employees, the vicar and the lady who ran the guest-house in Abadan – three days before, she’d attacked an Iranian officer with an umbrella – gathered in front of the Gymkhana Club on 4 October for HMS Mauritius to take them to Basra. The ship’s band sailed away playing ‘Colonel Bogey’.) Other countries did not have to go so far, new concessions were not sold, and in the Sixties, the existing ones reverted.

This was not all that the producers had in mind, however. Perez Alfonso, the Venezuelan Minister of Mines and Hydrocarbons, remained anxious about his country’s potential uncompetitiveness against the Middle East. In 1958, he suggested to the Federal Government that it form a Western hemisphere oil group in which Venezuela would be given a fixed quota of oil imports to the United States. The Americans brushed him aside. But he was persistent, and the oil companies’ unilateral reduction in prices in 1959 to compete with the Soviet oil that was now appearing on the market, gave him his chance. At the Arab Oil Congress in Cairo that year, Wanda Jablonski, a prominent oil journalist, introduced him to the now equally angry Director of Oil and Mining Affairs in Saudi Arabia. These two collected an Iraqi, a Kuwaiti and an Iranian – who was so alarmed by the suggestions they were making that he ran away, and came back only when the others asked the Cairo Police to track him down – and made the first agreement of what was to become OPEC.

OPEC was not originally a cartel. At first, it merely fixed prices, and not production. And in the early Sixties, most of the concessions were still owned by the companies. It was not until the Seventies that ‘the greatest nation on earth’, as President Carter put it in 1976, and other importing countries, had cause to resent ‘being jerked around by a few desert states’. But there was little that they could do. (The promise of Alaskan oil remained a promise, and the new production in the North Sea was not sufficient to replace that from the Middle East and Venezuela – even though Harold Wilson allowed himself to hope that once he retired from Downing Street, he might become president of OPEC.) By the mid-Eighties, however, non-OPEC producers were undercutting OPEC on the informal, or ‘spot’, market. OPEC had nearly halved production to get prices back up in 1982, but to little effect. The organisation had all but lost control, and its dominating presence, the Saudi Oil Minister Ahmed Zaki Yamani – the successor to Perez Alfonso’s ally, who’d backed the wrong faction in Saud’s succession – was fired, perhaps for this, perhaps for a rash remark about the way in which his government made its policy. Independent traders were now not only buying and selling crude on the spot market – in some cases trading $50 million-worth a dozen times or more while it was still on the high seas – but also dealing in futures. Economically, as Yergin says, the industry had all but reverted to the chaos of the early years in Pennsylvania and Texas. In 1986, OPEC tried to salvage what it could, and agreed on a price of $17-$19 a barrel. But this meant a transfer of $50 billion from the producers back to the consumers.

In the preceding forty years, however, the imbalance had been redressed, and where the non-Western producers have not been tempted to over-borrow on their reserves – as Mexico and Venezuela did, with money that Western banks had accumulated from the oil-price rise itself in 1973 – or to use the rising revenues to re-arm and fight expensive wars – as has Iraq – or to indulge in incompetent policies – as has Iran – they remain in a good position. They are incomparably more prosperous, and hold the balance of oil power. For as long as crude remains important, Europe – although not the Soviet Union, which remains the largest producer – East Asia and the United States itself will all depend on them.