Oil Shock: The 1973 Crisis and its Economic Legacy [International Library of Twentieth Century History ed.] 1784535567, 9781784535568

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Elisabetta Bini is Research Fellow at the University of Trieste. She is the author of La potente benzina italiana: Guerra fredda e consumi di massa tra Italia, Stati Uniti e Terzo mondo (1945–1973) and the editor of Working for Oil: Comparative Social Histories of Labor in Petroleum (with Touraj Atabaki and Kaveh Ehsani). Giuliano Garavini is FIRB Research Fellow at the University of Padua and Senior Research Fellow at New York University Abu Dhabi. He is the author of After Empires: European Integration, Decolonization and the Challenge from the Global South, 1957–1986. Federico Romero is Professor of History of Post-War European Cooperation and Integration at the European University Institute (EUI) in Florence.

‘The legacies of the oil price increases of the 1970s have never quite stopped unfolding, and continue four decades later to affect us in diverse ways. Oil Shock offers a timely and panoramic survey of the origins and consequences of 1973 at a time when oil, the politics of oil, and the Middle East are once again back in the headlines.’ – Gopolan Balachandran, Professor of International History and Politics, The Graduate Institute Geneva ‘This superb collection of essays provides a comprehensive analysis of the 1973 oil crisis. Relying on a rich archival research and examining the multiple drivers, facets and reverberations of the crisis, the volume offers important information and insightful interpretations on a pivotal moment in the history of modern international relations. This is essential reading for anyone interested in the 1970s, the Cold War, and the origins of the current global energy regime.’ – Mario Del Pero, Professor of International History, Sciences Po, Paris ‘This book provides an important and valuable contribution to the understanding of the oil shock in 1973 and its long-lasting consequences.’ – Einar Lie, Professor of Economic History, University of Oslo ‘Fifty years down the line, the key factors that gave rise to the first oil shock (the Middle East in flames, the dearth of “easy oil”) are still with us, and yet this anniversary was passed over in near total silence in both the media and academia. This valuable book is the crystallization of the commendable effort to make sure that hard questions about the first oil shock continue to be asked.’ – Juan Carlos Buoè, Research Fellow, Oxford Institute for Energy Studies

OIL SHOCK

THE 1973 CRISIS AND ITS ECONOMIC LEGACY EDITED BY

Elisabetta Bini, Giuliano Garavini and Federico Romero

Published in 2016 by I.B.Tauris & Co. Ltd London • New York www.ibtauris.com Copyright Editorial Selection and Introduction © 2016 Elisabetta Bini, Giuliano Garavini and Federico Romero Copyright Individual Chapters © 2016 Marloes Beers, Brian C. Black, Christopher R.W. Dietrich, William Glenn Gray, Martin V. Melosi, Bernard Mommer, Francesco Petrini, Tyler Priest, Oscar Sanchez-Sibony, Philippe Tristani The right of Elisabetta Bini, Giuliano Garavini and Federico Romero to be identified as the editors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. Except for brief quotations in a review, this book, or any part thereof, may not be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. Every attempt has been made to gain permission for the use of the images in this book. Any omissions will be rectified in future editions. References to websites were correct at the time of writing. International Library of Twentieth Century History 88 ISBN: 978 1 78453 556 8 eISBN: 978 0 85772 958 3 ePDF: 978 0 85772 755 8 A full CIP record for this book is available from the British Library A full CIP record is available from the Library of Congress Library of Congress Catalog Card Number: available Typeset in Minion Pro

Table of Contents List of Illustrations List of Contributors Introduction Elisabetta Bini, Giuliano Garavini and Federico Romero

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Part 1 Origins 1 The Shocking History of Oil Bernard Mommer 2 ‘First Class Brouhaha’: Henry Kissinger and Oil Power in the 1970s Christopher R.W. Dietrich 3 Iraq and the Oil Cold War: A Superpower Struggle and the End of the Iraq Petroleum Company, 1958–72 Philippe Tristani 4 Eight Squeezed Sisters: The Oil Majors and the Coming of the 1973 Oil Crisis Francesco Petrini

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Part 2 Consequences 5 Shifting Sands: The 1973 Oil Shock and the Expansion of Non-OPEC Supply Tyler Priest 6 The OECD Oil Committee and the International Search for Reinforced Energy-Consumer Cooperation, 1972–3 Marloes Beers

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vi  Table of Contents 7 Learning to ‘Recycle’: Petrodollars and the West, 1973–5 William Glenn Gray 8 Energy Hinge? Oil Shock and Greening American Consumer Culture Since the 1970s Brian C. Black 9 Energy and Soviet Economic Integration: Foundations of a Future Petrostate Oscar Sanchez-Sibony 10 Nuclear Energy and the Rise of Environmentalism in the United States Martin V. Melosi Further Reading Index

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List of Illustrations 3.1  Crude oil flows in 1974 (in thousands of barrels per day, b/d)

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3.2  Interlocking holdings between the majors (including CFP) and the major oil companies in the Middle East in 1966

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3.3  Control exercised by the majors over the oil industry in the 1950s

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3.4  The IPC group’s concessions and main oil fields in Iraq in 1967

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3.5  Comparative trends in the oil outputs of Iraq, Iran, Saudi Arabia and Kuwait from 1948 to 1973 (Mt)

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4.1  Eastern hemisphere: production, earnings and payments to governments (seven majors)

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4.2  Oil production in Libya, by operator, 1969 (the independents in bold)

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9.1  Soviet exports of crude oil, in millions of tons, 1946–71

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9.2  USSR trade with West Germany (in millions of current rubles)

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List of Contributors Marloes Beers received her PhD from the University of Cergy-Pontoise, where she wrote a thesis on European energy policies in the 1970s. Her research focuses on energy issues including European common and national policies on oil, gas, technology and the rational use of energy. She has published widely on these issues, with a particular focus on the creation of the International Energy Agency and the influence of the OECD on European energy policy. Elisabetta Bini is a Research Fellow at the University of Trieste. She is the author of La potente benzina italiana: Guerra fredda e consumi di massa tra Italia, Stati Uniti e Terzo mondo (1945–1973) (Rome: Carocci, 2013); ‘Selling gasoline with a smile: Gas station attendants between the United States, Italy and the Third World, 1955–1970’, International Labor and Working-Class History 1 (2012); and ‘A transatlantic shock: Italy’s energy policies between the Mediterranean and the EEC, 1967– 1974’, Historical Social Research 4 (2014). Her current work focuses on the history of international labour policies in the oil industry, and US–Italian relations in the field of civilian nuclear energy during the Cold War. She is co-editing two books on these topics: Working for Oil: Comparative Social Histories of Labor in Petroleum (with Touraj Atabaki and Kaveh Ehsani) (New York: Palgrave Macmillan, 2016) and Nuclear Italy: An International History of Italian Nuclear Policies during the Cold War (with Igor Londero) (Trieste: EUT, 2016). Brian C. Black is Professor of History and Environmental Studies at Penn State Altoona, where he currently serves as Head of Arts and Humanities. He is the author of several books, including the award-winning Petrolia: The Landscape of America’s First Oil Boom (Baltimore:  Johns Hopkins, 2003) and Crude Reality: Petroleum in World History (Lanham: Rowman &

x  List of Contributors Littlefield, 2014). He has contributed essays to more than 20 books and is the editor of a number of others, including Nature’s Entrepot: Philadelphia’s Urban Sphere and its Environmental Thresholds (Pittsburgh: University of Pittsburgh Press, 2012) and Climate Change, a four-volume encyclopedia (Santa Barbara: ABC-Clio, 2012). He also served as co-editor of the special issue of the Journal of American History on ‘Oil in American life’, which was inspired by the 2010 Gulf oil spill, and he is a former editor of Pennsylvania History. He is currently completing Contesting Gettysburg: Preserving an American Shrine (Staunton: GFT Books, forthcoming) and Declaring Our Dependence: Petroleum in 20th-Century American Life (Chicago: University of Chicago Press, forthcoming). Christopher R.W. Dietrich is Assistant Professor of History at Fordham University. He studies US diplomatic history, the history of decolonization and intellectual history. He is finishing a book about the political and ideological origins of the oil shock, and has published articles in Itinerario, Diplomacy & Statecraft, The International History Review, Humanity, CounterPunch and elsewhere. Giuliano Garavini is FIRB (Project RBFR10JOTQ_002) Research Fellow at the University of Padua and Senior Research Fellow at New York University Abu Dhabi. He is the author of After Empires: European Integration, Decolonization and the Challenge from the Global South, 1957–1986 (Oxford: Oxford University Press, 2012). He is currently working on a history of OPEC from its origins to the present times. William Glenn Gray is Associate Professor of History at Purdue University. His first book, Germany’s Cold War: The Global Campaign to Isolate East Germany, 1949–1969 (Chapel Hill: University of North Carolina Press, 2003), explores the global competition between East and West Germany. Recent article projects focus on circulating systems – currencies, nuclear non-proliferation and weapons exports. He is currently writing a book on Germany’s international roles in the 1960s and 1970s.

List of Contributors xi Martin V.  Melosi is Hugh Roy and Lillie Cranz Cullen University Professor and Director of the Center for Public History at the University of Houston, Texas. He is the author or editor of 19 books and approximately 100 articles. His areas of research interest include urban, environmental and energy history and the history of technology. His latest book is Atomic Age America (Boston: Pearson, 2012). Bernard Mommer is a mathematician and social scientist, and graduated in Germany. He dedicated his professional life to the political economy of oil and oil countries, focusing especially on Venezuela. He published, in 1983, Die Ölfrage (Baden-Baden:  Nomos-Verl.-Ges.); in 1987, together with Asdrúbal Baptista, El petróleo en el pensamiento económico venezolano (Caracas: Ediciones IESA); and in 2002, Global Oil and the Nation State (Oxford: Oxford Institute of Energy Studies). Until January 2015 he was the Venezuelan governor to OPEC. Francesco Petrini is Senior Lecturer in History of International Relations at the University of Padova. His research focuses on the interaction between the socio-economic sphere and international relations. Among his most recent publications are ‘Bringing social conflict back in:  The historiography of industrial milieux and European integration’, Contemporanea: Rivista di storia dell’800 e del’900 3 (2014) and Imperi del profitto. Multinazionali petrolifere e governi nel XX secolo (Milano: FrancoAngeli, 2015). Tyler Priest is Associate Professor of History and Geography at the University of  Iowa. He is the author of the prize-winning book The Offshore Imperative: Shell Oil’s Search for Petroleum in Postwar America (College Station: Texas A&M Press, 2007), and co-editor of a 2012 special issue of the Journal of American History on ‘Oil in American History’. In 2010, he served as a senior policy analyst for the President’s National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. His current book project is Deepwater Horizons:  The Epic Struggle over Offshore Oil in the United States.

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xii  List of Contributors Federico Romero is Professor of History of Post-War European Cooperation and Integration at the European University Institute (EUI) in Florence. A  specialist on twentieth-century international and transnational history, he has worked on various aspects of the Cold War and trans-Atlantic relations. He is the author of Storia della guerra fredda (Turin: Einaudi, 2009) and of the recent essay ‘Cold War Historiography at the Crossroads’, Cold War History 14, no.  4 (November 2014). His current research is focused on international governance in the 1970s, on which he co-edited, with Emmanuel Mourlon-Druol, International Summitry and Global Governance: The Rise of the G-7 and the European Council (London: Routledge, 2014) and, with Angela Romano, a special issue, on ‘European Socialist regimes facing globalisation and European co-operation:  Dilemmas and responses’, of the European Review of History 21, no. 2 (2014). Oscar Sanchez-Sibony is Assistant Professor of History at the University of Hong Kong. He is the author of the award-winning book Red Globalization: The Political Economy of the Soviet Cold War from Stalin to Khrushchev (Cambridge: Cambridge University Press, 2014). His current research is on the political relationship between the Soviet Union and the world economy in the 1970s and 1980s. Philippe Tristani is a French historian. He holds the agrégation in History and Geography. In 2014 he defended his doctoral thesis in Contemporary Economic History and International Relations at the Doctoral School of Contemporary History of the University of Paris IV-Sorbonne. The title of his dissertation is ‘L’Iraq Petroleum Company de 1948  à 1975. Stratégie et déclin d’un consortium pétrolier pour le contrôle des ressources pétrolières en Irak et au Moyen-Orient’.

Introduction Elisabetta Bini, Giuliano Garavini and Federico Romero This book aims at assessing the multiple dimensions of the 1973 oil ‘shock’, analysing its global impact, and contextualizing it in a broad and long-term historical perspective. We explore and discuss the relevance of 1973 as a key turning point, and therefore question its many, controversial readings and meanings. Defining that pivotal moment as a ‘shock’ obviously evokes the rhetoric with which it was originally suffered and labelled in the West, and many of the chapters probe and question this language. It also echoes the fortunate formula of the phrase ‘the shock of the global’, since the deep transformations in oil policies and prices were some of its key components.1 The 1973 oil shock is often considered a turning point in the late twentieth century. For most Western industrialized countries, it became the symbolic marker of the end of an era. As sustained growth faltered – to be followed by stagnation, unemployment and social unrest – changes in oil prices and policies came to be seen, and often scapegoated, as the key feature of a new landscape of ‘crisis’. For many oil producers, the shock translated into an unprecedented control over their energy resources,

2  Oil Shock and completed the process of decolonization, leading to a profound redefinition of international relations. Yet, the description of the quadrupling of oil prices and the oil embargo as something entirely unexpected, an exogenous shock to industrialized countries, can and should be challenged in many ways. Among historians, it was probably Eric Hobsbawm who provided the starkest view: that after 1973 the world had ‘lost its bearings’.2 One does not need to endorse such a blunt notion, which referred only to the industrialized countries, and this book is meant to challenge it in as many ways as necessary. Most historical interpretations now converge on the idea that the oil shock was part and parcel of the complex set of intertwined changes that made the 1970s a seminal period of transition.3 In the eyes of its contemporaries, it certainly epitomized the onset of the disorder and uncertainty that Hobsbawm foregrounded. Questioning the idea of the oil shock as a pivotal moment involves placing the cultural and symbolic dimensions of the crisis at the centre of attention, an issue we think deserves further investigation, as some of the chapters here point out. The description of the shock as a turning point has come to imply that, for the different actors involved, the Arab Oil Embargo came as a complete surprise. But most of them had in fact anticipated producers’ policies. These were the outcome of a larger series of changes and discussions that had started between the late 1960s and the early 1970s, and involved debates about peak oil that had emerged much earlier. For many in Western Europe and the US, the idea of a shock evoked fears of a more general crisis of the ‘West’, particularly of its post-war economic growth and prosperity. The oil crisis was often linked to the spectre of the economic crisis of the 1930s or to the end of the empire, while oil producers were portrayed as having huge influence on consumers and the international economy. For many oil-producing countries, on the other hand, the shock was associated with the end of colonialism and with full membership in the international economy, and in many cases it was not at all perceived as a crisis, let alone as a shock. It seems particularly relevant to debunk the different meanings assigned to

Introduction 3 the idea of a shock, how they were used and implemented, the difference that existed between perceptions and emotions on the one hand and reality on the other, and how these different meanings have become part of how we remember and analyse the 1973 oil crisis.4 A central aim of this book is to illuminate the complex specificities and peculiarities of the oil world (because it is evidently not just a self-contained economic ‘sector’ like many others) for the non-specialist. Historians who are not specialists on oil – its economics and politics, its social and cultural history, its relevance for consumption, environmental or labour history – clearly have a serious problem. We recognize and assume the importance of changes in oil regimes, particularly when they hit so suddenly as to shock. To a lesser degree we also acknowledge and appreciate the long-term dynamics of the politics, economics and culture of oil. We accept, that is, that the social and economic metabolism of industrialized societies, of ‘underdeveloped’ or emerging economies, and even of the international system as a whole, can be subtly or dramatically altered by oil or oil-related issues. And yet, we rarely delve any deeper than that. We would probably be relieved if we had at our disposal a well digested and encompassing paradigm like Fordism or even the rather more indistinct category of post-Fordism, but we do not really integrate the political economy of oil, or its culture, in our narratives, by and large because we do not really know it, much less master it. Many of the chapters published in this book bridge the gap between different disciplines, allowing for a better understanding of the ways in which the shock intersected with a set of wider historical transformations. We intend to promote a mutually advantageous dialogue on the multiple implications, ramifications and reverberations of oil in the body and mind of modern societies, in their international relations, and in their multifaceted interconnections.5 Without this crucial passage – a much overdue one in our opinion – many strands of historical research, most noticeably international and economic history, but also the global and cultural history of the late twentieth century, the history of consumption, or environmental history, will remain inherently

4  Oil Shock hobbled and diminished. In this respect, one can take solace from the more advanced integration of oil issues in historical research on the post-colonial redefinition not only of the Middle East and North–South relations – which simply cannot skirt the oil nexus – but more broadly of the ascent, peaking and then decline, if not demise, of the very concept of ‘Third World’. This book examines the extent to which the oil shock was as unexpected as is often depicted, or if it should rather be understood as the end point of a series of changes that started decades earlier. The concern for the origins of 1973 as a turning point is a natural focus for historians and, even though one might think that almost everything has been written about it, not a few of the chapters point out that both the economics and politics of it are still controversial issues. Scholars like Jean-Marie Chevalier posit that the roots of the oil price rise should be found in the attempt by Anglo-American oil multinationals to improve their profit margins at the expense of European and Japanese consumers.6 Although, as Francesco Petrini’s chapter shows, by 1970 the majors were indeed experiencing a decline in per-barrel profit, the contributions to this volume tend to explain the shock or ‘revolution’ as a deliberate attempt by the Organization of the Petroleum Exporting Countries (OPEC) to shift the balance of power in favour of raw-material producers. As Philippe Tristani shows, the 1973 oil shock should be seen in the context of a much longer struggle between the majors and their respective governments on the one hand, and oil-producing countries on the other. This was particularly clear in the case of the Iraq Petroleum Company (IPC), which was the first consortium to be nationalized in the Middle East, leading to a complex overlap between processes of decolonization and Cold War conflict in the region. In particular, Bernard Mommer’s contribution redefines the shock as the peak moment of influence for the nation states (the landlords) over the multinational corporations (the companies). Since oil was one of the main battlefields in a struggle between states and international capital, the shock should be understood as a novel form of globalization

Introduction 5 generated by nation states at the apex of their power after decolonization. In this view, the core of the shock was the end of the ‘concession system’ through which the majors had managed, at will, natural resources located in the Middle East and elsewhere. One could then argue, also on the basis of William Glenn Gray’s chapter on the management of debt, that the reaction of industrialized consumers was pivoted on a relaunch of international capitalism, this time through global financial institutions and coordinating mechanisms that did not carry the baggage of the colonial past with which the majors were associated. A second focus of the book is on the ways in which the oil crisis affected, and was affected by, concurrent processes of globalization. Thus it analyses its impact on international relations and the global economy, and its wider cultural and social implications. Several chapters in particular address the multiple and convoluted connections between the oil shock and the extremely complex process of liberalization, multiplication and acceleration of capital movements, with all the huge consequences that the latter carry for the global history of the last 40 years. That the two are closely intertwined is obvious, and historians have grown used to taking this for granted. But emphasizing such a linkage does not, in and of itself, project much light on vectors, on causal connections or opportunistic responses, on the reshaping of global political and financial geographies, on power shifts that were far from linear and often fractured, or on the many ramifications that the financial management (and, of course, mismanagement) of the oil shock engendered. Various contributions in this volume emphasize the reactions of Western governments (or of multilateral institutions) to the policies of producing countries. Gray, in particular, shows that a simplistic narrative of unilateral neoliberal success simply does not fit the facts, and obscures the complex refashioning of intra-Western relations in the wake of the oil shock. Its intertwining with the monetary crisis, in particular, brought Germany to abandon the idea of a reformed monetary system and to move towards the abandonment of controls on capital movements. Thus ‘the orthodox German quest for stability’, as argued by Gray, played a key role not only for Western responses to oil producers, but for the future

6  Oil Shock of the international monetary system (and, one might notice, for the shape and direction of the European Union). This book is obviously not the first to attempt a comprehensive study of the ways in which the 1973 oil shock intersected with wider economic, political and cultural transformations. Fiona Venn7 has set a standard for future works, but most studies have focused on specific national cases, and have been concerned with the ways in which the crisis reshaped US and Western European energy strategies and international relations in the context of the Arab–Israeli war.8 One aspect that emerges from some of the chapters, but deserves further investigation, has to do with the ways in which the oil shock impacted the Cold War and, vice versa, how bipolarism shaped perceptions of and reactions to the crisis. In this respect, the chapter by Christopher Dietrich highlights an important peculiarity of the 1973 oil shock. Even if in real terms there was a larger increase in oil prices in 2009, this latest episode has had none of the influence and the international impact that the 1973 price increase had. The reason 1973 is remembered to this day, while 2009 was soon forgotten, is that the shock questioned the growth model of industrialized countries, altered North–South relations, and made the management of the bipolar order far more complex and uncertain. On this multilayered impact of 1973 as a potentially ‘systemic’ threat to US dominance, historical scholarship is now beginning to produce interesting and growing results.9 Marloes Beers’s chapter, in particular, looks at the Organization for Economic Cooperation and Development (OECD) Oil Committee to examine the consequences the oil shock had on relations inside the Atlantic bloc, particularly between the US and the European Economic Community (EEC). This topic has been the object of several scholarly works that have pointed out how the oil embargo led consuming countries to engage in an intense trans-Atlantic debate about the meaning of their alliance, relations among EEC members, and those between single Western European countries and oil producers. The oil shock can thus be seen as a turning point in a much wider transformation of US– European relations, which led to new forms of international cooperation

Introduction 7 symbolized by the International Energy Agency (IEA), a failed effort to build a common European energy policy, and the pursuit of bilateral agreements with oil producers.10 On the other hand, those who are studying East–West exchanges – and particularly the contradictory, incomplete and ultimately abortive process of integration of the Socialist economies in the world financial and trading networks – need a serious understanding of Soviet oil economy and politics. Oscar Sanchez-Sibony’s chapter on the USSR points to the importance of analysing the oil shock not only from a North–South perspective, but also from the point of view of East–West relations. As Sanchez-Sibony shows, the USSR always had its own idea of globalization and, more controversially, a strategy to promote it, but its international influence was limited. As a hydrocarbon producer it certainly benefited from the oil price increase, which accelerated its evolution towards becoming a ‘petrostate’, but it was not a driver of the shock. More crucially, it did not in any way rise to be a relevant actor in the international debates and negotiations aimed at reshaping the global economy in favour of raw-materials producers. The extent to which the shock – particularly the increase of relations and exchanges between Western Europe and the USSR  – impacted on the process of détente, how the Soviet shipment of oil and natural gas to the West affected Soviet relations with Eastern European countries, or the effects the oil shock had on the second Cold War, though, still remain to be investigated.11 From this angle, as from so many others, we are just beginning to assess the multiple legacies of 1973 in an integrated way, and to map out its global impact. If some acquisitions are reasonably clear, especially on the reshaping of international relations and correlations of power, much remains to be explored  – and above all evaluated  – as far as cultural reconfigurations and the consequences on energy policies are concerned. As Tyler Priest argues, oil producers’ nationalization of their oil resources ‘changed the international petroleum industry and the world’ (Priest, p.  118). It pushed oil companies and consuming countries to expand non-OPEC supplies by extracting oil in new regions (Alaska, the Gulf of

8  Oil Shock Mexico and the North Sea in particular) and the use of natural gas, making them less dependent on OPEC, an aspect commentators and scholars alike often overlook in the name of consumers’ perceived vulnerability to Arab producers. Connections between the oil shock and the spreading of a conservationist culture and ethic are almost self-evident, but their actual patterns, twists and ambivalences still much less so. The same can be said of the evolving codes and languages of consumption, as well as modes of production. We are still very far from systematizing the complex refashioning of the cultural prisms, intellectual conceptualizations and emotional anxieties with which post-1973 societies looked at issues of resource scarcity or abundance, actual or assumed demographic and economic imbalances, and promises and perils of technology, in the new landscape of post-modern scepticism and disillusionment. Two chapters in this collection contribute to filling these gaps. Brian C. Black explores the ‘greening of consumer culture’ in America in relation to the complex energy transition. Martin Melosi reconstructs the 1970s debate on nuclear power to show that, at least in the US, the energy crisis ‘did not stimulate the fortunes of nuclear power but, to the contrary, was an important factor in undermining its recovery’ (Melosi, p. 257). Much as we would have liked to, we could not include in this volume chapters focused also on the consequences of the huge increase of wealth within oil-producing countries, although several chapters touch upon these issues. How did the shock change their societies and their way of life, and how were their politics transformed? How did it relate to a wider effort to gain control over specific resources and commodities? We are perfectly aware that this dimension, already studied in its own terms of course, should be compared and confronted with the more international and Western one that we deal with in this book. So too should the role of workers and international trade unions in the process of nationalization and control over oil be integrated in an international and transnational history of oil. These, however, are challenges for future scholarship, to which we hope our book will contribute.

Introduction 9 This book originates from a conference held at the European University Institute (EUI) in Fiesole, Italy, on 19–21 September 2013. The event was jointly sponsored by the Department of History and Civilization and the Robert Schuman Centre of EUI, by the Forum for Contemporary History of the University of Oslo, and by the FIRB 2010 (RBFR10JOTQ_002) ‘Engines of Growth’ project at the University of Padua and University of Venice. We would particularly like to thank Professor Helge Pharo (University of Oslo) for his precious scholarly contribution. Without him the whole event could not have taken place. We are also deeply indebted to Dr Bernard Mommer and to Juan Carlos Boué of the Oxford Institute for Energy Studies for their sharp comments, and for their help in planning and staging the conference. When preparing the conference we were surprised by the extensive response to our call for papers. We received many more excellent proposals from highly innovative scholars than we could possibly select and host at the conference. Even though we deliberately aimed at a representative sample of the diverse approaches and angles with which oil issues and politics are studied, we were amazed at the variety and richness of an obviously lively and multifaceted field of historical studies. Here we want to thank all those who responded to our call, in the hope that our book – though inevitably and severely selective in the choice of chapters – will help them pursue their own brilliant projects.

Notes 1 Niall Ferguson (ed.), The Shock of the Global:  The 1970s in Perspective (Cambridge, MA: Belknap Press of Harvard University Press, 2010). 2 Eric J. Hobsbawm, Age of Extremes: The Short Twentieth Century 1914–1991 (London: Michael Joseph, 1994), p. 403. 3 See, among the many recent works in various fields and areas of late twentiethcentury history, Philippe Chassaigne, Les Années 1970: Fin d’un Monde et Origine de notre Modernité (Paris: Armand Colin, 2008); Jan Eckel and Samuel Moyn (eds), The Breakthrough: Human Rights in the 1970s (Philadelphia: University of Pennsylvania Press, 2014); Jeffry A. Frieden, Global Capitalism: Its Fall and Rise

10  Oil Shock in the Twentieth Century (New York: W.W. Norton, 2006); Giuliano Garavini, After Empires: European Integration, Decolonization, and the Challenge from the Global South, 1957–1985 (Oxford: Oxford University Press, 2012); Daniel J. Sargent, ‘The Cold War and the international political economy in the 1970s’, Cold War History 13, no. 3 (2013): 393–425; Andreas Wirsching (ed.), ‘The 1970s and 1980s as a turning point in European history? A forum with Göran Therborn, Geoff Eley, Hartmut Kaelble, Philippe Chassaigne’, Journal of Modern European History 9, no. 1 (April 2011): 8–26. 4 Rüdiger Graf, ‘Making use of the “oil weapon”:  Western industrialized countries and Arab petropolitics in 1973–1974’, Diplomatic History 36, no.  1 (2012):  185–208; Ross Barrett and Daniel Worden (eds), Oil Culture (Minneapolis: University of Minnesota Press, 2014). 5 See, for instance, the interesting contributions on the US in ‘Oil in American history: A special issue’, Journal of American History 99, no. 1 (June 2012). 6 Jean-Marie Chevalier, Les Grandes Battailles de l’Énergie (Paris: Gallimard, 2004). 7 Fiona Venn, The Oil Crisis (London: Longman, 2002). 8 See, among the most recent publications, Aurélie Élisa Gfeller, Building a European Identity:  France, the United States, and the Oil Shock, 1973–1974 (New York: Berghahn Books, 2012); Rüdiger Graf and Franz Boesch (eds), ‘The energy crises of the 1970s: Anticipations and reactions in the industrialized world’, special issue of Historical Social Research 4 (2014); Duco Hellema, Cees Wiebes and Toby Witte, Business as Usual: The Netherlands and the Oil Crisis (Amsterdam: Amsterdam University Press, 2004); Asaf Siniver (ed.), The Yom Kippur War: Politics, Legacy, Diplomacy (Oxford: Oxford University Press, 2013). 9 See, for instance, the special issue on the New International Economic Order of Humanity: An International Journal of Human Rights, Humanitarianism, and Development 6, no. 1 (Spring 2015). 10 Ethan Kapstein, The Insecure Alliance: Energy Crises and Western Politics Since 1944 (Oxford: Oxford University Press, 1990); Daniel Möckli, ‘The EC-Nine and transatlantic conflict during the October War and the Oil Crisis, 1973–4’, in Daniel Möckli and Victor Mauer (eds), European–American Relations and the Middle East. From Suez to Iraq (London: Routledge, 2010), pp. 77–92. 11 See the essays published in Rüdiger Graf and Franz Boesch (eds), ‘The energy crises of the 1970s’. See also the conference Oil, Gas and Pipelines:  New Perspectives on the Role of Soviet Energy during the Cold War, University of Zurich, 14–16 January 2015.

PART 1 Origins

1 The Shocking History of Oil Bernard Mommer1 There can be no question that, in the history of oil, the year 1973 was indeed a pivotal year of global significance. But for all of the universal agreement on this point, perceptions as to what actually happened that year, and what was so shocking about it, can be very disparate, depending essentially on the conception of the history of oil that a given observer subscribes to. In general terms, there are two fundamentally different understandings about the role which natural resource ownership is supposed to play in that history. One posits that natural resource ownership is an issue of minor importance, which has no incidence whatsoever on the formation of oil prices, and therefore merits no academic attention. According to this viewpoint, the history of global oil is, basically, the aggregate history of the oil and gas companies that make up the industry. The second viewpoint is that, on the contrary, natural resource ownership is of great relevance to the formation of prices and, therefore, must on no account be disregarded. In other words, the landlord–tenant relationship between natural resource owners, on the one hand, and the enterprises which produce such resources, on the other, is an essential part of the history of oil.2

14  Oil Shock

Natural Resources and Economics The relevance of natural resource ownership to prices was an issue of the greatest importance in the development of economic thought, notably in the transition from Physiocracy to modern economics. According to the French school of Physiocracy,3 there were only two factors of production: land and labour (the former the dominant one, the latter the subordinate). The British school of Political Economy,4 which succeeded Physiocracy, acknowledged three factors of production:  capital, land and labour. But the key questions that the British school had to address were which of the first two was the dominant one, and whether labour was subordinate to capital or to land. Quite apart from this, regarding the influence of property rights on the balance of supply and demand, Adam Smith reached the conclusion that the class of landlords and the rents they exacted were to blame for rising corn prices. Smith thus referred to a monopoly rent, which Karl Marx would call an absolute rent.5 Some 40 years after Smith, David Ricardo6 argued that capital had actually managed to impose its will and rationality over land by means of free market competition, and that this prevented landed property owners from collecting anything more than differential rents. These Ricardian rents, as they would come to be called, arose because of the different natural fertility of cultivated lands supplying the market. In other words, Ricardo concluded that Smith had been wrong: private landed property had no bearing on prices. It was the growth of population (and hence of demand and, by extension, rising marginal costs) that was to blame for rising corn prices, and which explained rising rents. With this conclusion, Ricardo cleared the way for modern economics to, once again, reduce the factors of production to two, with capital as the dominant factor and labour as the subordinate one. There was to be no place for land (i.e. non-produced means of production) in modern economics.7

The Shocking History of Oil 15

Royalties To sustain his thesis, Ricardo presented a model according to which tenants paid an annuity, which did not prevent them from increasing production up to the point where marginal production costs would equalize market prices (in other words, up to the point where the marginal rent was zero). This theoretical model did not apply to mineral rents, for the simple reason that the usual rent in mining was not an annuity (as was the case in agriculture), but a fixed rent per unit produced or a fixed percentage: a royalty, as it was to be called later. As a practical matter, therefore, it was indisputable that marginal rent was not zero and that, therefore, production could only be increased to the point of equalizing market prices less the royalty agreed upon. This in turn meant, obviously enough, that some marginal mineral deposits could not be exploited by mining companies, as they would not generate enough cash flows to cover costs, remunerate capital and pay such rent. (In his time, Smith had already noted the case of some coal mines that could not afford a royalty and, therefore, could ‘be wrought only by the proprietor’.8) These empirical facts were highly problematic for Ricardo, who wanted to demonstrate that private mineral property could not, and did not, obstruct the flow of investment (a postulate that necessitated that some mines pay no rent, if mineral demand and supply were to match). His way of squaring this particular circle involved manipulating the definition of rent, which he took to be ‘that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil’.9 Thus, royalties were not rents at all (that is, remunerations paid for the use of property) but a consideration paid for the ‘valuable commodity’10 in place. Such consideration was owed to the landlords in whose property the mines happened to be, of course, but that was entirely by the by, a sheer coincidence. This was a white lie, but it served the eminently useful purpose of sweeping the problem posed by private mineral ownership under the carpet.

16  Oil Shock Ricardo’s foremost concern was to take the wind out of the sails of the critics of private property by making it clear that rents had to be brought down, albeit in a manner that did not put private landed property in question. He therefore advocated free trade, so as to bring down the price of corn through worldwide competition. Moreover, he suggested targeting differential rents through taxation, while simultaneously lowering general tax levels. According to his model, this could be done without any impact whatsoever on supply, as landlords would have no option but to accept (differential) rents as determined by the market, and whatever was left after the imposition of taxes. Thus, without formally questioning private ownership of natural resources, these resources would still be transformed, essentially, into a free gift of nature for consumers through tax reliefs. But royalties remained an unresolved issue.

Public Mineral Ownership In Ricardo’s time, public mineral ownership played a very minor role in England, but this was generally not the case in the rest of Europe. In 1791, this issue was even the subject of a significant debate in the French National Assembly. Count Mirabeau11 argued convincingly that it would be absurd to identify property rights over the surface with property rights over the mineral deposits underneath; and the absurdity would be all the greater the deeper the deposits were. For practical reasons, then, surface rights and mineral rights had to be dealt with separately. Thus, minerals were to be declared public property and subject to eminent domain rights, in order to ensure their free access from the surface, and to assign the rights for their exploration and exploitation to mining companies through concessions. These ideas were incorporated in the epochal 1791 French Mining Law. In this way, in mining, the ideal of natural resources being a free gift of nature would be made real, inasmuch as the state would have all the rights over any rents to be collected, and consumers would benefit from lower general taxation.12

The Shocking History of Oil 17

American Oil The oil industry was born in Pennsylvania, USA, in 1859. The industry had to develop on the basis of mineral leases, as private landed property in the US included the mineral deposits beneath the surface. During the first 15 years or so of the history of oil exploitation, standard lease forms developed, establishing standard royalty rates of one-eighth in some regions, and one-sixth in others. The term of the leases was open-ended; that is, it extended to the final exhaustion of the reservoirs. These standard lease forms have proven extraordinarily stable. Indeed, it is no exaggeration to say that the deal struck between property owners and oil enterprises during the first 15 years of the life of the oil industry was pretty much a definitive settlement, whereby royalty owners became ‘sleeping partners’ of the petroleum industry. Standard royalties created a level field for the competing companies which, ultimately, passed on the added cost that they represented to consumers, through higher prices (pace Ricardo). Hence, an economic relationship of sorts between consumers and the natural resource owners was established, though the former admittedly never dealt with the latter directly. Consumers were represented – nolens volens  – by the tenant companies. Of course, consumers could always promote legislation favouring lessors against lessees, which they duly did, and they could also rely on competition to curb monopoly rents. Differential rents, in contrast, would still be open to be collected – if they were collected at all – through higher rents, royalties and bonuses. Nevertheless, whenever academic economists in the twentieth century stumbled across the existence of standard royalty rates, they made great efforts to construe them, against all evidence, as differential rents and to affirm, time and time again, that they had no bearing on prices. For example, Paul Davidson, when discussing the one-eighth royalty, argued that: if marginal royalty and marginal operating costs were the only marginal costs, and since short-run profit maximization would require the firm to equate the sum of these marginal costs to price,

18  Oil Shock then the short-run supply function for the firm would be obtained by elevating the marginal operating cost curve by 1/7, or 14 2/7 per cent, so as to include marginal royalty costs in the supply price.13

Hence, ‘royalties are an important component of the short-run supply function. Nevertheless, since royalties provisions are fixed at the outset and depend upon expectations of the future income stream from the well, royalties are, in the long run, price-determined rather than price-determining’.14 This is true:  the one-eighth royalty was certainly fixed at the outset, but at the outset of the history of the American oil industry in the nineteenth century, not at the outset of production in individual leases. But this is immaterial according to Davidson: ‘Oil lands are obviously analogous to the Ricardian case of agricultural lands of differing fertilities’,15 and ‘royalty payments are […] Ricardian rent payments’.16 It seems reasonable to suggest that Ricardo himself would not have called these standard royalties ‘rents’. Much closer to Ricardo’s understanding of royalties was the popular conception of mineral deposits as a ‘natural capital’, with royalties reflecting, at least partially, its ‘depreciation’. This understanding became of practical interest in the twentieth century with the rise of corporate income taxation. American mining companies and royalty owners managed to be granted a ‘depletion allowance’ based on that very conception, which significantly reduced their taxation burden. Mineral industry and royalty owners’ income was therefore privileged, tax-wise. But in the US, nobody, either in practice or theory, dared question the legitimacy of royalties. By the same token, it could not be admitted that royalties actually had any bearing on prices, as this could easily become a first step to questioning the legitimacy of private mineral rights, something that, from a political viewpoint, was totally unacceptable in the US.

International Oil: The American Reference The oil industry started to become truly international around the time of World War I. By the vagaries of nature, most of the locations where

The Shocking History of Oil 19 gigantic oil pools would be discovered lay in the territories of countries forming part of what would later be known as the Third World. Among the big international oil companies (IOCs), in turn, American concerns outnumbered all others, whether British, Dutch or French. Thus, and not surprisingly, American oil became the natural reference for oil-exporting countries. This fact was pregnant with major economic implications, as the American petroleum governance had emerged in an institutional environment characterized by private property of mineral rights, whereas in the rest of the world oil is in the public domain, and oil companies are granted access to reservoirs through concessions. The adoption of the American Reference meant that, in time, the exporting countries would be asking for the sorts of rents and royalties customarily found on public lands in the US. Moreover, once their respective governments realized that the IOCs were subject to income taxation in their home countries with regard to profits made in the exporting countries, these governments would also claim that such taxes were rightfully owed to them and not to the governments of the IOCs’ home countries. The process whereby these claims would eventually be advanced was a negotiated one, as all concession contracts in the countries that eventually became members of the Organization of the Petroleum Exporting Countries (OPEC) not only covered rents and royalties but also general taxes. In other words, in signing these contracts, all these countries had effectively waived their right to sovereign taxation for the term of the concessions, which ran to 40, 50 or even 75 years. In 1943, in the middle of World War II, Venezuela – at the time the most important oil-exporting country in the world by far – became the first country to succeed in implementing the American Reference, lock, stock and barrel. In a thorough reform, concessions were renewed for 40 years on the basis of a new Petroleum Law, according to which they were no longer conceived of as contracts subject to private law (as had been the case until then), but granted as an administrative act subject to public law. Most importantly, the concessionaires had to explicitly

20  Oil Shock acknowledge the sovereign character of general taxation (in 1943, the first Venezuelan Income Tax Law was also enacted). Hence, the situation in Venezuela was now fully comparable with that on public lands in the US, where the American government certainly entered into contractual landlord–tenant arrangements, but without prejudice to its sovereign power to levy income taxes. The standard royalty rate in Venezuela was set at one-sixth, and income taxes were levied at a rate equivalent to that applied in the US. Immediately after the war, the sum of rents, royalties and income taxes in Venezuela added up, fortuitously, to around 50 per cent of gross profits. In 1948, the government formalized such 50–50 profit sharing by incorporating a surtax of 50 per cent in its income tax law. The following year, the Venezuelan government sent a delegation to Iran and the Arab oil-exporting countries in the Middle East, inviting them to follow suit, which they duly did in the 1950s. The standard royalty rate for Persian Gulf countries was set at one-eighth, but rents, royalties and income taxes were also rounded up and turned into a 50–50 profit-share. However, there was a major difference between the situation in Venezuela and that in the other oil-exporting countries. In Venezuela, the concessions themselves had always been subject to national legislation and sovereign jurisdiction, and international arbitration had always been expressly ruled out by law. In all the other oil-exporting countries, in contrast, the concession contracts were subject to international arbitration, with the relevant law being the ‘general legal principles of the civilized nations’; and the American Reference was implemented exclusively through negotiations and without touching upon the general legal framework. Income taxation, in particular, was part of the renegotiated concession contracts. Though all the oil-exporting countries obtained a very significant increase in their government take, the new arrangements did not go beyond establishing the same level of rents, royalties and income taxes which companies operating on marginal lands were paying in the US. Of course, production from these marginal lands was actually determining

The Shocking History of Oil 21 international price levels. Thus, the fiscal take in Venezuela was relatively low, given that Venezuelan oil fields were much more prolific than marginal fields in the US (or, to put it another way, Ricardian rents were very high, in favour of Venezuelan oil). The fields in the other oil-exporting countries were, in turn, much more prolific, even than those in Venezuela, and Ricardian rents were simply astronomical. Not surprisingly, sovereign Venezuela was the first oil country to leave behind the American Reference. In December 1958, the government increased the applicable income tax rate, to be paid on top of royalties, to 47.5 per cent. Hence, given a royalty rate of one-sixth, the marginal fiscal take increased from 50 per cent to 56.25 per cent. A few months later, Venezuela got in touch again with the other oil-exporting countries, entreating them to increase their own income tax rates to 50 per cent, on top of royalties at the rate of one-eighth, thereby also taking their marginal fiscal take from 50 per cent to 56.25 per cent. Under the leadership of Venezuela, the oil-exporting countries intended to move forward jointly, in a united front, at least as far as their respective fiscal regimes were concerned.

The Organization of the Petroleum Exporting Countries Before anything else happened on the tax front, however, a most significant event disrupted world petroleum markets. In the wake of the continuous loss of (relative) importance of US oil production, and the growing competition represented by dozens of new entrants in world petroleum markets, by the end of the 1950s prices were weakening. In 1959, in order to stabilize prices within the US and to protect its costly national production, the American government adopted a system of oil import quotas. This decision, of course, increased the downward pressure on international prices. For the oil-exporting countries, with their low production costs, this was a

22  Oil Shock really threatening development. In response, in September 1960, they formed OPEC. The first thing OPEC attempted to do – successfully, as it turned out – was to freeze the companies’ official prices, used for the calculation of royalty and income tax obligations. They were thus transformed into a tax reference price, applied over the next ten years, notwithstanding falling market prices. Next, OPEC started collective negotiations to increase the applicable income tax rate to 50 per cent, to be paid on top of the one-eighth royalty. But none of the OPEC member countries concerned followed the example of Venezuela in reforming their income tax laws through sovereign legislation. These countries certainly subscribed to the mantra of Permanent Sovereignty over Natural Resources, but this was understood as a permanent right to renegotiate existing agreements, not full sovereignty. OPEC thus tried to stabilize world market prices by raising a collective fiscal floor. Not surprisingly, economists analysing OPEC had no doubt that, in the light of Ricardian rent theory, this organization was engaged in an enterprise as futile as that of King Canute. Most outstanding among such economists was Morris A. Adelman, who tackled the fundamental question: ‘Will Concession Revisions Put Up Prices?’17 He argued: In theory, the landlord’s share of profit […] has no effect on price because it has no effect on supply. A development is undertaken if it promises at least some profit over and above the costs, including the necessary minimum return on investment. The landlord may get some or all the excess, but he cannot take any more or there will be no project. Therefore […] his rent has no effect on supply and price.18

In other words, ‘so long as any profit expected after rent or royalty is less than enough to induce a private company to make the investment, it is to the landlord’s benefit to take a lower royalty. For his alternative is no operation, and no royalty. The landlord, as residual claimant, simply gets

The Shocking History of Oil 23 what is left, much or little’.19 Adelman’s foregone conclusion was that ‘the whole problem of rents and royalties is superfluous to the determination of price’.20 As a matter of fact, even though prices fell slowly but steadily during the 1960s, the oil-exporting countries’ rent per barrel not only did not fall but actually managed to increase slightly, pace Adelman. Such a result was theoretically anomalous, of course, so economists had to explain it by invoking the deus ex machina of thereto un-appropriated Ricardian rents. True to form, whenever they turned their attention to the long-term trend of oil prices, they continued consistently to exclude the effects of natural resource ownership from their models. Thus, for example, Paul G. Bradley typically stated that ‘the various types of rental payments will not be included in this study as part of the cost of crude because they are not causative elements in the establishment of price’.21 Hence, towards the end of the 1960s, the oil price forecasts of these economists invariably involved falling prices, at least over the following 15 to 20 years. Needless to say, falling prices were supposed to ultimately entail falling rents per barrel.

The Pivotal Year: 1973 In 1970, however, world petroleum markets flipped from a situation of recession to one of boom; and a very special boom it was, for that year not only saw US oil production peak but also that of Venezuela (at the time, the US was the largest oil producer and Venezuela the world’s biggest oil-exporting country). Thus, falling supplies in the Western hemisphere had to be compensated for by additional supplies from the Eastern hemisphere, to face a strongly growing demand. Prices began to creep up and, after a decade of painful negotiations about adding a few cents to its rents per barrel, OPEC was very well prepared to move forward quickly and to increase the fiscal floor for prices, but now by dollars at a time. Then, at the height of the boom, in October 1973, the Yom

24  Oil Shock Kippur War broke out, followed by the Organization of Arab Petroleum Exporting Countries (OAPEC) oil embargo against the United States and the Netherlands. OPEC seized the opportunity to put an end to ongoing negotiations, whereupon all of its member countries went on to deal with fiscal reference pricing and taxation on a sovereign footing. At the beginning of the year 1970, the rent per barrel of Saudi Arabian light crude oil was 86 cents; by the end of the year 1974, it had reached $10.05. For Adelman and other consulting economists, not to mention the governments of the consuming countries, these developments came as a real shock. Even at a theoretical level, these events could not be happening! Hence, conspiracy theories sprang up. Given that OPEC was assumed to be a non-actor, the ‘real’ actors – such as the international oil companies or the American government – were to be found acting behind the scenes, with sinister or misguided motives. For mainstream economists, it was hard to understand, and even harder to admit, that their theoretical framework as such could be, and indeed was, deeply flawed. Moreover, they consistently ignored that, in world petroleum markets, they had to deal with public mineral ownership and, thus, with landlord states claiming sovereign rights. Colonial times were drawing to a close and military actions were not an especially attractive or viable option, certainly not in 1973. OPEC and its member countries, in turn, were surprised by the sheer scope of their victory. But, overall, since they had always been convinced that there was no fundamental reason why their oil should not fetch the same price as comparable American oil, they had no doubt either about their entitlement to the ensuing Ricardian rents.

History of International Oil: The British Reference As we have already mentioned, economics does not recognize land as a factor of production in its own right, though private landed property is formally never called into question. Nevertheless, minimizing rents

The Shocking History of Oil 25 is a real concern, one which is supposed to be taken care of as a political problem by governments, appropriate governance structures and free trade. But, prior to 1973, the problem posed by natural resource ownership and rents was still tackled from a limited national perspective. Yet, the response of taxing away rents and lowering general taxation levels will only work, as originally intended by Ricardo, if the private natural resource owners and consumers are part of the same national entity. Moreover, in the case of public ownership of mineral resources, whatever domestic consumers end up paying over and above the costs of production by way of rents, royalties and taxes is, economically speaking, just a levy on consumption, like excise duties on tobacco or spirits. In other words, as common property owners, domestic consumers enjoy the natural resources extracted from their national territory as a free gift of nature. But for foreign consumers the situation is very different, inasmuch as they ultimately have to pay a rent, implicit in the price, to a government not their own, and lower general taxation levels in the other legal entity favour the inhabitants of the country who are the common property owners of the resource, and not foreign consumers. In strict economic terms, the issue of whether rent ended up being appropriated by inhabitants of consumer countries or, alternatively, by the governments of oil-exporting countries, was a matter of indifference to the oil companies, who just worried about their business. Thus, whether the companies paid income taxes on profits made in an oil-exporting country to the government of this country, or alternatively to the government of their own home country, they could not care less, as long as they did not have to pay twice (and they made sure that an adequate legislation on double-taxation was in place). The companies were certainly representing the interests of consumers vis-à-vis natural resource owners, but this was supposed to be the case objectively – not subjectively – given the existing governance structure and market competition. Yet, when it came to the collective negotiations with OPEC on fiscal reference prices and taxation in the early 1970s, it was clear that every single dollar that

26  Oil Shock the companies might concede to OPEC member countries in rent, royalties and taxes would simply be passed on to consumers through higher prices. Market competition as such was obviously absent. The IOCs thus could no longer play the role assigned to them by competitive markets, and which had been the fundamental reason that the consuming countries’ governments had always supported them in the past against the governments of the exporting countries. Now Adelman began to refer to the companies as ‘OPEC tax collectors’ and, as such, as ‘agents of a foreign power’.22 The consuming countries’ governments decided to step in and to take care directly of the interest of consumers, to be safeguarded by a new international governance structure of oil. Oil had become too important a matter to be left in the hands of the oil companies. Thus, in 1974 – 14 years after the foundation of OPEC – the most important consuming countries formed the International Energy Agency (IEA). The coming into being of an organization like the IEA, with an explicit and militant anti-OPEC mandate, however, could only be part of the picture. A new governance structure to supersede the American Reference (which had been appropriated by OPEC countries for their own purposes) had to be erected. The stellar role in this process of institutional development fell to Great Britain, largely because the most important new oil province to arise after 1973 was the North Sea, but also because it was the home country of two of the most important IOCs, British Petroleum (BP) and Royal Dutch Shell. And, last but not least, Great Britain had always been the leading European power in international oil. The British government had to define a new governance structure that would suit the interests of global consumers, a task that, in all, took about 20  years to complete. Licenses (concessions) would be awarded directly, not through royalty or bonus bidding, but according to the investment and production plans presented by the companies. The game was all about maximizing production. Royalties, as part of the fiscal regime, were to be phased out. It was argued that royalties had the effect of delaying the early development of marginal reservoirs, which might be exploited at a profit but

The Shocking History of Oil 27 only if there was no royalty to be paid (as Smith had already pointed out 200  years earlier). The marginal rent would thus  – at last  – come down to zero. Conversely, excess profits would be collected only as a last resort, on the basis of a life-long (30  years, extendable) assessment of the cash flow. Hence, though excess profits could be taxed on a yearly basis, in lean years  – following a price crash or a major accident, for ­example  – the companies would get money back (as they also would upon decommissioning). Finally, in the mid-1990s, new licences were issued that were subject to no more than normal non-oil corporate income taxation, as if they were mere bakeries. With the rising prices in the first decade of the twenty-first century, an income tax surcharge had to be introduced, but even with this, the British North Sea remains, by far, the lowest-taxed major oil province of the world.23 The British Reference was designed to set an example to a globalized world, with the natural resource being conceived of as a free gift of nature to global consumers. Whether or not, within this grand scheme, Great Britain was a net oil-exporter was considered to be irrelevant.

The Role of National Oil Companies National oil companies (NOCs) were an essential part of the international oil politics of the European powers in the formation of the concession system in the Eastern hemisphere. The NOCs of the exporting countries were only created much later but, by 1972, a policy of participation in the shareholding of the major concessions was already well under way. Even Aramco, for example, the all-American concessionaire of Saudi Arabia, accepted a 20 per cent government participation in the concession, to be implemented on 1 January 1973. Yet other governments were already demanding majority shareholdings. In the Western hemisphere, things were somewhat different. The US never had an NOC, and in Latin America foreign NOCs were

28  Oil Shock largely barred from acquiring concessions. Venezuela was not especially interested in the issue of participation in existing concessions, as the country was looking forward to the reversion of its most important concessions, which was to take place by 1983 and 1984. With the events of the year 1973, however, this evolutionary process towards reversion was cut short. The Venezuelan government was taken by complete surprise when, in December 1973, the major concessionaires announced in Miraflores – the presidential palace – their agreement to be nationalized (something that the Venezuelan government had not proposed to them). Obviously enough, this announcement came in response to the events in the Middle East, where an immediate government majority shareholding in the concessions became inevitable as prices exploded, though it would still take a few years for this shareholding to reach 100 per cent. In the oil-exporting countries, NOCs became all-important. According to the British Reference, the role of the NOCs in the exporting countries was to take over control of the natural resource, displacing the respective Ministries of Oil as far as the administration and stewardship of such resources were concerned, scrapping royalties and creating excess profit levies focused on the internal rate of return in the long run. The mantra for these NOCs was to be all about attracting private investment and maximizing production. Production would eventually, albeit definitively, be re-privatized, but not the NOCs themselves, which would endure as regulating and contracting agencies. Of course, it would always be argued that this was the best option, actually the only option, as OPEC was doomed to succumb, inevitably, to market competition. Ricardo dixit, after all.

From Permanent to Arbitrated Sovereignty The task of convincing NOCs in the oil-exporting countries of the soundness of the British Reference was actually not very difficult. As a

The Shocking History of Oil 29 rule, their personnel, up to the very highest levels, had for decades been trained by the IOCs, with their strong esprit de corps. But the distance between the concessionaires and the governments was lost when the former were transformed into NOCs. Hence, the NOCs became very influential, and quite a few among them began implementing the British Reference with relish. However, there was nothing that could prevent some future government from backing out of such an implementation with one stroke of the sovereign pen. This was, in fact, quite likely to happen, as, in the long run, there was no way to hide the fact that at the heart of the British Reference was the unsustainable tenet that natural resource ownership had no market value per se. Hence, the implementation of the British Reference in the oil-exporting countries had to go hand in hand with the limitation of their sovereign rights. Their successful bid for full sovereignty, in 1973, proved to be short-lived. Surprisingly, even Venezuela did not escape unscathed.24 This country ratified its first bilateral investment treaty (BIT) in 1993 with Holland, through which it granted Dutch investors in Venezuela the right to resort to international arbitration against the Republic, if they so wished. The definition of the term ‘investment’, as it appears in the Dutch treaty, comprises any ‘rights granted under public law, including rights to prospect, explore, extract, and win natural resources’.25 Thus, the most elementary of all sovereign acts of the state – that is, to dispose over its national territory and its integral parts – was subject to international arbitration, against a century-old legal tradition. With regard to the bilateral nature of these treaties, it should be pointed out that a company qualifies as Dutch according to very liberal Dutch legislation, and, therefore, all that is effectively needed is a post office box in Holland and an attorney taking care of the fulfillment of the minimum requirements of Dutch law. In this way, ENI from Italy, Conoco, Chevron and ExxonMobil from the US, CNPC from China, Statoil from Norway, and even Royal Dutch Shell, have all managed to qualify as Dutch investors in Venezuela. Over the 15  years after 1993, Venezuela ratified a further 23 BITs.

30  Oil Shock Developments in other OPEC member countries, whenever the issue of opening up to new private investment came up, followed the same pattern. As a result, and due to the evolution of oil prices in the first decade of the twenty-first century, a majority of OPEC member countries have actually found themselves facing international arbitration.26 By virtue of these BITs (or multilateral investment treaties, like the Energy Charter Treaty, or free trade agreements), the IOCs are always the plaintiffs, while the states are always the defendants, the whole controversy being defined as an investment dispute. Thus, the natural resource disappears completely out of sight, even legally, notwithstanding the fact that, in reality, the majority of these cases involve the right of the oil-exporting countries to collect Ricardian rents, having arisen as a consequence of (sharply) rising prices.

Conclusions Until 1973, the history of oil evolved in the shadow of Ricardian rent theory and the reality of American oil. Ambiguities were theoretically denied and practically accommodated. But there was no way to accommodate sovereign national resource ownership within this framework. Its relevance, so obvious after the end of World War II, was nevertheless systematically denied. Therefore, economists, professional consultants and consuming countries’ governments were deeply shocked when, in 1973, the sovereign landlords appeared to enter the scene suddenly and completely changed the script of the play. Since 1973, the history of international oil has been evolving under the pressure of a new framework created in Great Britain. The ambiguities characteristic of the governance framework that prevailed until 1973 (its tolerance of royalties, for example) were ditched, and public mineral ownership was conceptualized purely as a tool to serve international investors and global consumers through the maximization of production. This new framework was supposed to be implemented in the

The Shocking History of Oil 31 oil-exporting countries by their NOCs and to be stabilized by bilateral or multilateral investment treaties, or free trade agreements, whereby the governments conceded international arbitration to private investors in oil (or other natural resources). At the same time, the NOCs were supposed to be transformed into the new regulating agencies, while production itself would be privatized. There is no doubt that the British Reference, over the last 40 years, has made very significant inroads, politically and ideologically, in the oil-exporting countries (as witnessed again by recent events in Mexico) and within OPEC itself. Nevertheless, its apparently irresistible progress has had little discernible impact on international oil prices in the long run. Over the last few years, prices have been higher than ever before.

Epilogue: Controlling Production From the very beginning of the petroleum industry there has been one striking phenomenon: the extreme volatility of oil prices and their recurrent collapse. This entailed a problem of waste of an exhaustible and non-renewable natural resource  – in other words, low recovery rates and early depletion of reservoirs, but also severe environmental problems. However, nowhere has the situation been worse than in the US, due to private mineral ownership. Surface boundaries have certainly been a big problem for the rational exploitation of the reservoirs, but this was made much worse by leases specifying, for example, a minimum number of wells to be drilled and their locations. Hence, conservation policies have been developed which, without ever formally questioning private mineral property rights, have actually reduced these rights to collecting rents and royalties. The lessors were, of course, still obliged to exploit the deposits without undue delay, all the technicalities, however, being determined by them and, most importantly, by regulations. Petroleum conservation policies also require a stable economic environment. This line of argument led, in the 1930s, to the regulation of

32  Oil Shock production by public bodies in the most important oil-producing states of the Union – the most famous being the Texas Railroad Commission – with the authority to fix Maximum Efficient Rates (MERs) for each well according to technical criteria, and to order production cuts whenever deemed necessary to stabilize oil prices. Moreover, a national coordinating body was created: the Interstate Oil Compact Commission (IOCC). Parallel to prorationing, as it was called, an International Petroleum Cartel (IPC) emerged,27 which integrated the biggest IOCs that virtually controlled all of the richest petroleum lands known at the time outside the US (and the Soviet Union). Cooperation between the IOCC and IPC, albeit informal, was most effective. Thus, during the 1930s, oil prices were stabilized, both in the US and in the rest of the world, for decades to come. However, by the end of the 1950s, the IPC was weakening because of increasing competition, and the international price structure was falling apart, with higher prices in the US and lower prices elsewhere. This led to the foundation of OPEC in 1960. Some of its founding members cherished the idea that, in world petroleum markets, OPEC could become something like the counterpart to the IOCC in the US, and, together, they would be able to mend the price structure. But neither the IOCs nor their home countries were willing to concede OPEC a say in controlling production. This would have amounted to handing over a potent weapon used very successfully against individual oil-exporting countries in the past whenever they ventured too far out of line, limiting production and even imposing embargoes (the most notorious case being that of Iran under Mossadegh). Still, in 1965, OPEC actually approved a joint production programme for the year 1965/6, in an effort to re-establish the traditional link between international market prices and US domestic prices. However, threatened with arbitration by their concessionaires, member countries reneged on their commitments. A  renewed effort was on the cards in 1970, but then OPEC was overtaken by the surprising decline in production in the US and Venezuela.

The Shocking History of Oil 33 In 1973, the US put an end to prorationing (though, of course, not to petroleum conservation policies in general, MERs and the like). The British government, in turn, would later deliver a statement to the same effect, ruling out restrictions on its North Sea production. Thus, when OPEC quotas came back into the picture in 1983, the Organization was on its own and already officially qualified by all of the media as a producers’ cartel, a government-sponsored cartel of NOCs, perhaps not illegal but certainly illegitimate. In the years to follow, private investors in the oil-exporting countries would successfully insist, in their contracts with the NOCs, that they should not be subject to any national system regulating production (such as, for example, US-style prorationing). Production curtailment would only apply to private investors, if it was agreed upon within the framework of some international treaty, but without mentioning OPEC. In parallel, a discussion developed suggesting that OPEC quotas might become legal – being presumptively illegal – if OPEC were to be recognized by the World Trade Organization (WTO) as a commodity agreement. Of course, this would require OPEC to formally fix and disclose the rules applying to the determination of quotas, and its decisions would be subject to WTO arbitration. The question of regulating production is not a question of principles, but of who ought to regulate whom. If OPEC ever came under the purview of the WTO, obviously enough, the consuming countries would prevail as regulators, probably with the support of the IOCs and possibly even that of some NOCs, whereupon – the wishful thinking goes – the sovereign landlords would be regulated again.

Notes 1 Bernard Mommer was Venezuela’s governor to OPEC until January 2015. Special thanks go to Juan Carlos Boué for all his help and advice in writing this chapter.

34  Oil Shock 2 This chapter is largely based on Bernard Mommer, Global Oil and the Nation State (Oxford: Oxford Institute for Energy Studies, 2002), also available in Spanish as Petróleo Global y Estado Nacional (Caracas: Comala.com, 2003). 3 See François Quesnay’s 1758 economic model, Tableau Economique. 4 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: Methuen & Co., Ltd, 1776). 5 Karl Marx, Das Kapital, vol. 3 (New York: International Publishers, 1894). 6 David Ricardo, On the Principles of Political Economy and Taxation (London: John Murray, 1817). 7 Alfred Marshall, Principles of Economics (London: Macmillan and Co., 1890). 8 Smith, Wealth of Nations, Book I, Chapter 11, Part II: ‘Of the produce of land, which sometimes does, and sometimes does not, afford rent’. 9 Ricardo, Principles of Political Economy and Taxation, p. 77. Italics added. 10 Ibid. 11 Honoré-Gabriel Victor de Riqueti Comte de Mirabeau, Collection Complète des Travaux de M. Mirabeau l’aîné, à l’Assemblée Nationale, vol. 5 (Paris: Impr. De la veuve Lejay, 1792). 12 Interestingly enough, around a century and a half later, in 1938, a British Conservative government concluded that, after centuries of coal mining and with mines getting deeper and deeper, private ownership of coal resources was no longer a sustainable proposition. Coal was therefore duly taken into public ownership, in order to reorganize property rights on the deposits in a sensible way, independently from surface property rights. Landlords, of course, received a full indemnity. 13 Paul Davidson, ‘Public policy problems of the domestic crude oil industry’, The American Economic Review 53, no. 1 (1963): 85–108 (91). 14 Ibid., 90n. 15 Paul Davidson, ‘Public policy problems of the domestic crude oil industry: A reply’, The American Economic Review 54, no. 2 (1965): 125–34 (126). 16 Davidson, ‘Public policy problems’ (1963): 104. 17 Morris A. Adelman, ‘The world oil outlook’, in Marion Clawson (ed.), Natural Resources and International Development (Baltimore:  The Johns Hopkins Press, 1964), p. 104. Emphasis in the original. 18 Ibid., p. 107. 19 Ibid., p. 108. 20 Ibid. 21 Paul G. Bradley, The Economics of Crude Petroleum Production (Amsterdam: North-Holland Publishing Company, 1967), p. 10. 22 Morris A. Adelman, ‘Is the oil shortage real? Oil companies as OPEC tax collectors’, Foreign Policy 9 (1972–1973): 69–107 (71). 23 Juan Carlos Boué and Phillip Wright, ‘A requiem for the UK’s petroleum fiscal regime’, in Ian Rutledge and Phillip Wright (eds), UK Energy Policy and the End of Market Fundamentalism (Oxford: Oxford Institute for Energy Studies, 2010), pp. 39–86.

The Shocking History of Oil 35 24 Bernard Mommer, ‘The governance of Venezuela oil in international courts of arbitration’, paper presented at the Open Workshop on Venezuela and Global Oil, Wolfson College, Cambridge, 11–12 January 2013. For an earlier version in Spanish, see ‘El régimen petrolero venezolano en los tribunales internacionales de arbitrajes:  Petróleos de Venezuela, Sociedad Anónima’, special supplement, Le Monde Diplomatique, Venezuelan Edition, Year IV, no. 35 (July 2012). 25 ‘Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Republic of Venezuela’, 1993. 26 In the case of Venezuela, see Juan Carlos Boué, ‘Enforcing Pacta Sunt Servanda? ConocoPhillips and ExxonMobil versus the Bolivarian Republic of Venezuela and Petróleos de Venezuela’, University of Cambridge, Centre of Latin American Studies, Working Papers Series 2, no. 1. This paper is also available in Spanish:  ‘El principio de la santidad de contrato en los arbitrajes internacionales de ConocoPhillips y ExxonMobil contra la República Bolivariana de Venezuela y Petróleos de Venezuela’. 27 United States Senate Select Committee on Small Business, The International Petroleum Cartel, Staff Report to the Federal Trade Commission, 82d. Congress, 2d. Session, Committee Print no. 6, 22 August 1952.

2 ‘First Class Brouhaha’: Henry Kissinger and Oil Power in the 1970s Christopher R.W. Dietrich The sudden death of Egyptian President Gamel Abdel Nasser on 28 September 1970 surprised the world. A brief and respectful silence followed the funeral, but upbeat predictions among Nasser’s detractors soon abounded that his passing meant the demise of pan-Arabism. ‘There could be no Nasserism without Nasser’, the deputy prime minister of Israel Yigov Allon hoped in the most terse instance.1 And it looked for a while as if Nasser’s successor, Anwar el-Sadat, might prove more amenable to a negotiated peace with Israel. Despite the continued war of attrition between Israel and the Arab states along the Suez Canal, Sadat avoided head-on confrontation with Israel and sought to improve Egyptian–American relations in the following three years. But the administration of Richard Nixon did not respond to the promising moves, and in 1973 Egypt began to prepare for war.2 Soviet leaders feared that another Arab–Israeli war would undercut superpower détente and counselled Sadat against such actions. Their advice went unheeded and Egyptian and Syrian units attacked Israeli strongholds

Henry Kissinger and Oil Power in the 1970s 37 in the Sinai and Golan Heights on 6 October 1973. The armies acted with Saudi Arabian, Kuwaiti and Libyan financing, as well as Algerian, Tunisian and Moroccan material support. The Kremlin expressed frustration that Sadat had disregarded their counsel, but nevertheless began to resupply their ‘Arab brothers’ two days later.3 The spectre of a Cold War proxy struggle in the Middle East put Nixon and his newly promoted secretary of state, Henry Kissinger, in a bind. The two men hoped they would not need to lift arms to Israel. But after Sadat refused a ceasefire on 12 October, Nixon told Kissinger, ‘Goddamn it, use every [plane] we have’.4 The airlift decision came despite a recent warning from Saudi Arabia’s King Faisal that American support for Israel would result in an Arab oil embargo and Saudi supply cutbacks.5 Kissinger initially hoped that the link between the Arab–Israeli conflict and the supply of oil to the capitalist world oil economy would remain stillborn. ‘We have to get the bloody Saudi [ambassador] in to keep them from doing something crazy’, he told his chief deputy, Joseph Sisco.6 Sisco requested a meeting with the ambassador to Washington, but to no avail. The timing of the war strengthened the link between the Arab–Israeli dispute and long-running OPEC arguments about control over the supply and price of oil. In a previously scheduled meeting four days before the American airlift, the OPEC ministers met in Kuwait and rejected out of hand an offer from the multinational companies for a 15 per cent price increase.7 The Arab oil ministers hastily reconvened at the Kuwait Sheraton after the American arms run. There they announced the imposition of an oil embargo on the US, general supply cuts, and a 70 per cent increase in Persian Gulf oil’s posted price, from $3.01 to $5.11 per barrel. One participant explained the connection between pan-Arabism and nationalist economic considerations:  ‘The situation presented an opportunity to make money and be a patriot at the same time.’8 More importantly for the capitalist world economy, the rest of the OPEC nations immediately followed suit. Their announcement marked the first time that OPEC nations set the price of oil, a power reserved exclusively for the multinationals until 1970 and subject to joint

38  Oil Shock company–government determination after the 1971 Tehran and Tripoli agreements. The twin threat of punitive Arab oil diplomacy and high prices alarmed officials throughout the industrialized West in October 1973. The NATO allies, except Portugal, refused American requests for the use of their bases to refuel the Israeli airlift.9 To avoid being subjected to supply cuts, France sold weapons to Libya and Saudi Arabia that were transferred to Egypt. Great Britain shipped arms to the Arab states and left its contractual obligations to Israel unfulfilled. After the fighting ended, Japan and the European Community (EC) publicly called on Israel to withdraw to its pre-1967 borders. The Arab producers excluded Japan and most of Europe from the embargo as a result.10 But no country could be immune to the price increases. What influential energy consultant Walter Levy called ‘oil power’ would only be felt more strongly in the following months, as the OPEC Gulf countries increased their posted price to $11.65 on 22 December 1973.11 The 1973–4 energy crisis brought together three distinct issues:  the Arab–Israeli problem, the capitalist world’s dependency on Middle Eastern oil and the rise of oil nationalism. This chapter argues that the margins between these issues closed in October 1973, a result that increased the importance of the broader pattern of oil nationalism, which drew its power and legitimacy from long-standing ideas about economic decolonization. Many western officials, including those in the US government, thus conflated those issues in the common phrase, ‘the Arab oil weapon’.12 But the cataclysm of the price increases also epitomized a protracted search for control over oil in which the crucible among producing nations, Arab and non-Arab, was greater control over oil production and prices. The chapter begins with an analysis of Kissinger’s initial diplomacy towards Saudi Arabia, the most important Arab oil producer by the beginning of the 1970s, in the first months of the energy crisis. His policy, which linked the OPEC price increases to the Arab–Israeli problem, failed in its stated intention of pressuring the Saudi government for a price reduction. The chapter then places that diplomatic failure in the

Henry Kissinger and Oil Power in the 1970s 39 context of the longer pattern of decolonization and oil nationalism about the price of oil. An analysis of Saudi oil policy in 1970 and 1971, in particular during the ill-fated mission of US undersecretary of state John Irwin, reveals a convergence of Saudi policy with that of the more aggressive Libya. Finally, the essay holds that Kissinger began to discern that broader pattern in mid-1974, when he accepted that diplomatic pressure on Saudi Arabia would not lower the price of oil.

Saudi Arabia and the Oil Weapon To Kissinger – who once told his staff, ‘don’t talk to me about barrels of oil, they might as well be bottles of Coca-Cola’ and for whom working as an economist was once likened to ‘being in charge of the military for the Pope’ – the effect of the energy crisis on foreign affairs represented a different sort of challenge from the strategic questions of triangular diplomacy with the USSR and China, the withdrawal from Vietnam or the Arab–Israeli conflict.13 The rigour of Kissinger’s Arab–Israeli ‘shuttle diplomacy’ between 1974 and 1976 – designed as much to side-line the USSR, establish the paramount position of the US and consolidate Israel’s territorial gains as to broker a sustainable peace – is well documented. Less understood are the contours of his policy towards high oil prices.14 Greater attention is important because, notwithstanding his articulated aversion to economics (and economists), Kissinger understood that expensive oil was a formidable predicament and dedicated considerable energy to the oil price problem straightaway. He requested and received detailed reports from the State Department, the Treasury Department and the National Security Council. He held a number of meetings on it with advisers, industry leaders and academics, and met with his Oil Task Force regularly. But his diplomacy was ad hoc and largely ineffective in late 1973 and early 1974. For one, he attempted to convince Saudi Arabia to renege on its commitment to the price increases. To apply pressure on King Faisal, Kissinger threatened to not participate in the Arab–Israeli

40  Oil Shock peace talks until the Arab producers lifted the embargo and OPEC restored prices to pre-war levels. Kissinger believed that his hard-nosed stance would convince Faisal to lower prices.15 The Saudi government did not acquiesce, causing an impasse between the world’s largest oil-consuming government and its largest producer. The potential fallout troubled leaders in the other consuming governments and in the oil industry. ‘They have all the cards!’ the chairman of Exxon, Ken Jamieson, exclaimed to Kissinger in late October. Kissinger disagreed, basing his decision on a Cold War rationale that emphasized the link between military power and international political influence. Israel’s defeat of the Soviet-armed Arabs had avoided ‘a disastrous impact on the US position in the Middle East and globally’ by proving the superiority of American weaponry he told Jamieson. In line with advice from Joseph Sisco and his former special assistant at the National Security Council, now the State Department’s director of policy planning, Winston Lord, Kissinger believed that the US held a trump card in its evident military superiority. The emergency airlift also made Israel’s dependence on American weaponry obvious to the world. Thus, only the US could bring Israeli leadership to the bargaining table. For this reason, the Arabs had overplayed their hand. The price increases provoked ‘romanticism about the Arab position’, Kissinger told Jamieson. Because of their oil power, the Arab producers expected Kissinger to be ‘a prophet who can ride in from the desert on a white horse with a dramatic solution’.16 In self-consciously setting a farcical blend of Orientalist imagery against his own cold-blooded political realism, Kissinger wanted to make clear that he would not be that sort of prophet. At least he would not be right away. He explained his strategy to Jamieson a week later. By making his participation in the peace process conditional upon the resumption of pre-war oil supply and price levels, Kissinger hoped to prove that Saudi Arabia was the main obstacle to regional stability.17 Kissinger began to employ the strategy on 8 November, telling King Faisal that the embargo had inflamed anti-Arab sentiment in the US to such an extent that it was difficult for him to pursue an ‘even-handed’ policy towards

Henry Kissinger and Oil Power in the 1970s 41 the conflict.18 Faisal immediately rebuffed this argument. The embargo would not be lifted ‘until an acceptable solution is found to the Israeli question’, he wrote to Nixon.19 Likewise, when Nixon informed Sadat that the embargo could ruin American attempts to broker an immediate peace, Sadat refused to respond.20 In preparation for a December meeting with the Saudi oil minister, Ahmed Zaki Yamani, Winston Lord elaborated on the strategy for Kissinger, taking pains to note its deficiencies. ‘The whole idea is to convey the notion that we are not in a corner, but he is’, he wrote. Still, Lord recommended that Kissinger use the meeting to move away from the linkage between the peace talks and oil prices. The threat of non-participation carried little weight, especially since Kissinger had already planned a peace-making trip. The first of what would become his many shuttles was already an ‘obvious indication’ of his participation, regardless of whether American demands were met.21 Lord’s counsel was to no avail. In reviewing Lord’s memo, Kissinger approved his other suggestions, but removed the references to compromise from the talking points.22 On 28 December, he overrode a spirited argument from the Near East Bureau that this policy made ‘it more difficult if not impossible for the US to use its influence on behalf of a settlement’. He told his staff: ‘We should hold up the peace talks’.23 Kissinger also added the threat of American military action to the diplomatic arsenal in late 1973. Too much has been made of Secretary of Defense James Schlesinger’s alleged consideration of a Saudi oil field invasion, but Kissinger undoubtedly believed the military threat might prove diplomatically useful.24 He knew that before the embargo began Arab newspapers had noted with concern an increase in the Marines’ desert training exercises and warnings by US politicians that they would not countenance Arab ‘blackmail’.25 He thus issued a stern warning on 21 November, telling the press that he had advised Nixon to consider ‘countermeasures’ if the embargo continued ‘unreasonably and indefinitely’.26 The public threat of American military action had considerable longevity, as Kissinger maintained until 1975 that a military option, while

42  Oil Shock improbable, was viable. Most famously, he did not rule out the use of force in the case of ‘the actual strangulation of the industrialized world’ in a December 1974 interview with Business Week. When informed that his statement had caused uproar among Arab leaders, as he knew it would, he defended it. ‘No nation can announce that it will let itself be strangled without reacting’, he said.27 The replacement for the disgraced Nixon, former Michigan Representative Gerald Ford, engaged in further aggressive rhetoric. ‘Sovereign nations cannot allow their policies to be dictated, or their fate decided, by artificial [price rigging]’, he declared to a Detroit audience. ‘Throughout history, nations have gone to war over natural advantages.’28 In a candid moment in December 1973, Kissinger complained to General Francisco Franco’s heir apparent in Spain, Luis Carrerro Blanco, who less than twenty-four hours later would be assassinated by Basque nationalists. ‘It is really an unbelievable situation’, he said. ‘If some small country had tried in the nineteenth century to do what the Arabs are doing, it would have been occupied.’29 Kissinger could pine for the orderly days of his beloved Metternich and Castlereagh, but the military option was never credible. For one, the ongoing failure in Vietnam eliminated military intervention as a reasonable decision. For another, such a bellicose action would inevitably increase the price of oil further. Saudi oil minister Yamani responded to Kissinger’s first threat in Business Week by telling a New York Times reporter that Saudi Arabia could blow up its wells and still turn a profit.30 The warning by Yamani was serious – oil executives had already told the Chairman of the Republican National Committee, George H.W. Bush, that Faisal had ordered workers to mine Saudi oil fields to prevent a take-over.31 Kissinger’s initial threat of boycotting the peace process was just as implausible. This was because there was little correlation between his participation in Arab–Israeli negotiations and OPEC price control. The global price decision, in other words, transcended regional peace negotiations. Lord advised Kissinger that he was ‘unlikely to obtain any change in the overt Saudi position by only reasserting, however forcefully

Henry Kissinger and Oil Power in the 1970s 43 and persuasively, our own view’.32 Kissinger’s initial expectation of Saudi acquiescence underrated the strength of OPEC, the gravity of higher oil prices, and the US’s ability to influence either. In an international economy characterized by the self-assurance of OPEC, Kissinger’s initial linkage of his participation in the Arab–Israeli negotiations to the price of oil was misguided. The miscalculation discounted the recent history of international oil politics, with which Kissinger was familiar. OPEC had waged a protracted and highly publicized campaign to wrest pricing and production control from the grip of the multinationals in the previous half-decade. Between September 1970 and September 1973, the nominal posted price had already moved from $1.80 to $3.07, its largest sustained increase in history.33 In June 1973, British prime minister Ted Heath wrote to Nixon about the ‘growing peril’ of oil power to the affluence of the capitalist world. ‘All the signs are that this situation is going to get worse, not better’, he believed.34 Nevertheless, the most influential voices within the Nixon administration questioned the influence of OPEC in 1973. Secretary of the treasury George Shultz told European finance ministers that their fear of OPEC’s control of global oil supplies was ‘overly alarmist’.35 Kissinger expressed consistent misgivings about the legitimacy of jeremiads from his oil experts.36 At a nationally televised press conference in September, Nixon responded to a reporter’s question about ‘oil as a club to force a change’ in his Israel policy: ‘Oil without a market, as Mr Mossadegh learned many, many years ago, does not do a country much good’. If Arab leaders continued to nationalize concessions and increase prices, ‘the inevitable result is that they will lose their markets’.37 Sadat, on the other hand, understood the rise of oil power and sought to use it to Egypt’s advantage in 1973. OPEC’s great strides presented Sadat with a more propitious environment than Nasser had ever had for connecting pan-Arabism to oil control. Most importantly, Sadat travelled to Riyadh to visit King Faisal two months before the October 1973 war. For Faisal, linking Saudi production control to the Arab–Israeli conflict

44  Oil Shock would also bring benefits that had not been evident in 1967. Support for Egypt, for one, would increase Saudi Arabian and other OPEC nations’ revenues. It would also enhance Faisal’s prestige in the Arab world, which was under constant attack from the radical leaders in oil-producing Libya, Iraq and Algeria.38 Faisal and Yamani had told the Nixon administration already in 1971 and 1972 that Sadat’s ‘bold’ policies vis-à-vis the USSR merited American action. Both the king and his oil minister added ominously that Saudi Arabia would no longer treat oil and Arab political interests as distinct issues.39 After Sadat’s 1973 visit, Faisal again put American officials on warning, stating unequivocally that no further production expansions would occur without a settlement of the Arab–Israeli conflict. ‘This is the strongest statement yet by Faisal’, Kissinger rightly told Nixon, and, wrongly, ‘his first direct linkage of the Arab–Israeli problem with oil’.40 Oil executives informed the State Department before the war that a Saudi decision to hold production levels made it likely that other OPEC members would also impose production controls. Decreased production added further upward pressure on prices.41 Moreover, Saudi actions reinforced the unswerving push for greater revenue by the Shah of Iran. After meeting the Shah in Tehran in January 1973, Kissinger informed Nixon that he had ‘embarked on another course designed to reinforce his self-styled role as leader and originator of ideas in OPEC’. In a departure from his previous diplomacy, the Shah had begun to emphasize price increases as much as production control.42 Faisal’s support of Sadat thus propelled OPEC’s greater momentum towards control over price and production. OPEC announced a new price target of $6.00 per barrel in September 1973, even as Arab–Israeli tensions heightened.43 The Shah was elated by this advance. Since a series of victories over the oil companies between 1969 and 1971, he had continued to push for higher oil prices in order to pay for his expansive military and civil development projects. When Italian journalist Oriana Fallaci interviewed him for The New Republic in late 1973, he emphasized that increased oil prices

Henry Kissinger and Oil Power in the 1970s 45 were intrinsically connected to the high prices of finished goods from the West. ‘You’ve sent petrochemical prices rocketing’, he told Fallaci. ‘You buy our crude and sell it back to us, refined as petrochemicals, at a hundred times the price you’ve paid us. You make us pay more, scandalously more, for everything, and it’s only fair that, from now on, you should pay more for oil.’44 Soon after the Fallaci interview, the war began. The Shah became convinced that the combined effects of the embargo and the initial price increase would lead to panic buying, which would drive prices higher. Michel Jobert, the French foreign minister, expressed his frustration to Kissinger: ‘It was clear that the Shah was going to push for another major oil price increase by exploiting the current embargo.’45 He did just that when the OPEC ministers met again in Iran on 22 December. The Shah convinced the other delegates to increase prices at that meeting.46 The next day, to the great distress of American officials, he announced that the oil producers had agreed to more than double the posted price of Gulf oil from $5.11 to $11.65 a barrel. It was no surprise that the Shah energetically employed an egalitarian rhetoric to defend that round of price hikes. ‘It is only equitable and just that the oil-producing countries’ had ended the era in which the industrial powers were ‘able to buy oil at ridiculously low prices’.47 James Akins wrote to Kissinger, from his new post as the ambassador to Saudi Arabia, that the Saudi monarchy had urged him to relay the need to muzzle the Shah. But Akins also noted that it was clear that the Saudi leadership, especially oil minister Yamani, held the same final aim for the price of oil, despite statements to the contrary.48

Yamani and OPEC’s ‘Natural Right’ One of the first Saudis to be trained in the US, Ahmed Zaki Yamani had gained the reputation as a friend of the West since his 1962 appointment as minister of oil.49 In a speech at the American University in Beirut in 1966, he had even described the relationship between the

46  Oil Shock oil-producing nations, their industrial consumers and the multinational companies as ‘indissoluble, like a Catholic marriage’.50 But by the late 1960s Yamani had also begun to play a key role in consolidating the power of the OPEC nations to control prices and production. He noted in June 1973 the ‘stark fact’ that the multinationals had yielded power to the producers, who could ‘dictate the flow of oil and the price of oil’ as they wished.51 In lock-step with his radical counterparts in Libya, Iran, Iraq and Algeria, Yamani had used the threat of unilateral legislation to draw several concessions from the multinational oil companies in the early 1970s.52 The bar-setting role of Yamani in that process was most evident in the 1971 Tehran and Tripoli agreements. The Tehran and Tripoli negotiations built on a series of successful pressure tactics put in place by the Libyan Revolutionary Command Council after the September 1969 Libyan Revolution. The Libyan strategy  – spearheaded in its early crucial moments by Mohammed Maghribi and Izz-al Din al-Mabruk in consultation with the Arab oil consultants Abullah al-Tariki and Nicolas Sarkis – set in motion a chain of events in late 1970 and early 1971 that would invalidate the long-standing concessionary arrangements between the oil companies and the producing governments.53 For Mabruk, the objectives of Libyan oil policy were both national and international. He told oil executives in 1970 that Libyan policy placed the men ‘at a turning point of our history’, marked by the rise of Libyan nationalism and more assertive ‘collective action through OPEC’.54 The Libyan Revolutionary Command Council forced down production from 3.7 million to 2.9 million barrels per day between April and September 1970, and by October had extracted agreements from the major oil companies. The agreements increased the price of oil and created a new national tax rate of 55 per cent.55 Libyan terms spread in the following months when Venezuela and the Persian Gulf producers, including Saudi Arabia, demanded and received the 55 per cent tax rate.56 After these individual advances, the OPEC oil ministers met and agreed to cooperate in their subsequent demands. The oil ministers informed the companies in December

Henry Kissinger and Oil Power in the 1970s 47 1970 that they would be required to participate in the first ever joint company–cartel negotiations. Libya announced additional demands immediately following the meeting, a strategy that potentially could have forced the companies to undertake separate negotiations between the Gulf and Mediterranean producers. The multinational companies, in an effort to avoid being caught in an upwardly spiralling price war between Libya and the Gulf producers, sought to replace the binary regional formula with ‘global’ negotiations that included the entire cartel.57 The negotiations, the first time the companies had sought to face OPEC as a unified body, began poorly for the multinationals. This was in part because the success of Libya hardened the attitudes of more moderate actors like Yamani. It was also because the Nixon administration engaged in a policy of accommodating the increasingly tough attitudes of pro-American oil producers like Saudi Arabia and Iran. Nixon dispatched undersecretary of state John Irwin to those two countries in January 1971 with the mandate to convince the Shah and King Faisal to support OPEC-wide negotiations.58 Kissinger expressed his extreme displeasure that he had not been informed of the mission a day before Irwin’s departure. Over the phone, he supplemented Irwin’s instructions. Above all else, Irwin was to ‘get out of the line of fire when the firing starts’.59 Irwin did just that in a two-hour meeting with the Shah on 17 January 1971. He delivered a letter from Nixon and, following instructions, first apologized profusely for the involvement of the US government in the negotiations. Nixon wanted to make clear that the US was not ‘representing or taking the part’ of the oil companies, Irwin said in his repentant preamble. Rather, reviving a link drawn by the Johnson administration between economic interdependence and political moderation, the US government hoped that the Shah could help coordinate a quick, OPEC-wide agreement that would be in ‘the greater interest, including that of Iran’. The recent cycle of price increases had unsettled US strategic thinking, Irwin continued. The fear was that the pattern would be repeated. To prevent this intolerable situation, Nixon insisted on ‘global talks’ between the companies and the producer governments.

48  Oil Shock The Shah responded that he understood that the US government did not want the companies to be ‘whip-sawed by escalation ad seriatim demands by different producers’. Nevertheless, global talks were out of the question. ‘It was not possible for Iran and the Gulf producers to impose their will on Venezuela or radical Arab producers such as Libya, Algeria, and possibly Iraq’, the Shah told Irwin. Global talks were inadvisable because an OPEC-wide arrangement would be hijacked by ‘the extremists’. Taking the soft line recommended by Kissinger, Irwin did not press further.60 Irwin met with King Faisal and Yamani the following day. Faisal agreed with the Shah that separate negotiations were best. ‘[I]‌ntroducing Algeria and Libya into this negotiation will render agreement impossible or at least result in a settlement which will cost the companies much more heavily’, he told Irwin. The Libyans were young officers ignorant on oil issues, Yamani then said, ‘killing the goose that laid the golden eggs’. The Saudi oil minister, who had met with his Iranian counterpart the previous day, held the same line as the Shah. ‘No one should expect the moderates to be able to influence the radicals in an OPEC negotiation’, he said. ‘Indeed if negotiations are in the OPEC framework, the moderates would probably have to settle for the radicals’ demands’.61 Irwin accepted Yamani’s argument, and recommended separate Tehran and Tripoli talks to the State Department the following day. The Nixon administration urged the companies to accept the regional accommodation, over protests from the ambassador in Tripoli, who wrote that the decision would ‘play right into Libya’s hands’.62 Irwin also noted that Yamani’s argument formed part of a new consensus about oil control, in which the space between radicals and moderates was shrinking. The company position on global negotiations assumed that Saudi Arabia and Iran would ‘curb the extremists’. After his discussions with the Shah and King Faisal, Irwin was convinced that ‘such a hope was futile’. Neither the Saudis nor the Iranians were ‘willing or perhaps able to play a moderating role in OPEC-wide negotiations’, Irwin advised.63

Henry Kissinger and Oil Power in the 1970s 49 The companies thus found it impossible to steer clear of the Libyan whip-saw, precisely because the talks had been split along the lines mandated by Yamani and his counterparts in Iran. The leader of the oil companies’ Tehran team, Lord Strathalmond of British Petroleum, briefed Western ambassadors soon after discussions began. The major sticking point of the Gulf negotiations was the ‘companies’ attempt […] to negotiate not only a Gulf price but also a Mediterranean crude price’ for pipeline oil. If the Mediterranean price could be set, it would ‘assist their co-negotiators in Libya’, led by George Piercy of Exxon.64 But the Gulf producers would not yield. The oil ministers in Tehran indicated that they expected to get whatever price was given to Libya for their Mediterranean pipeline outlets. In the ‘gloomy’ consensus, the companies conceded that it was with the Libyan officials that they would conduct discussions regarding Mediterranean prices. The company negotiators blamed their inability to negotiate on the September 1970 settlement. Libyan gains had given the OPEC nations a new ‘sense of entitlement’, they told the State Department.65 The Tehran talks concluded in February with a new tax and price agreement. The oil companies accepted what was considered a substantial price increase – 33 cents per barrel, immediately followed by 5 cents more per year until 1975. In return, the Gulf governments assured the companies that they would not seek to increase their revenues beyond the terms of the agreement for five years. Nor would they support other OPEC members, ‘especially Libya’, whose demands exceeded their own.66 But Yamani and his Iranian counterpart, finance minister Jamshid Amouzegar, also pressed the companies to include a series of debilitating ‘escape clauses’ that would allow them to further raise prices if the Libyans extracted a better deal from the companies. Likewise, both oil ministers discussed positively a paper circulated by Libya and Algeria that posited that the companies’ attempt to keep the negotiations ‘global’ was not only an ‘infringement on the sovereignty of OPEC member nations’ but also a manoeuvre ‘to divide OPEC unity’.67

50  Oil Shock The Tripoli negotiations began soon after. Observers believed it likely that the Revolutionary Command Council would negotiate greater price and tax increases than those in the Gulf. ‘Libya’s overflowing treasury makes it theoretically independent of oil revenues for extended periods’, the State Department wrote.68 The Revolutionary Command Council used its leverage to negotiate a higher posted price than that agreed to in Tehran, as well as a freight premium for its Mediterranean crude. Critically, the Tripoli negotiations also ended with the companies conceding the annual 5-cent increase already in place in the Gulf, plus an additional 2.5 per cent.69 An intelligence report prepared jointly by the Departments of State and Defense, the NSC and the CIA in April 1971 noted that the Libyan success would wipe out the Gulf agreement. Events since the Libyan victory of September 1970 had ‘stimulated regional solidarity’, the analysts wrote. The oil producers were now showing ‘a greater degree of unanimity than had been apparent in the past’. As a result of OPEC cooperation, the oil-producing countries now had faith in the ‘dangerous conviction that they held the whip hand’. The agencies confessed that the successful venture in permanent sovereignty was ‘likely to have lasting effects’.70 The rulers of Saudi Arabia, for example, were careful to disavow Muammar Qaddafi’s extreme brand of pan-Arabism and anti-imperialism, but they were content to sit by and allow the oil ministers of Libya and Iraq to do the leg-work. Yamani told the US ambassador in Jidda in September 1971 that he ‘would leave the running to Libya and Iraq’. If they received better deals, ‘Kuwait and Saudi Arabia could not be seen to be lagging far behind’.71 In the first OPEC meeting after the 1971 negotiations, the oil ministers asserted OPEC’s ‘natural right’ to participation, or partial ownership, in all company operations. ‘OPEC’s oil tax victory over the oil companies earlier this year marked a definite shift in bargaining power in favour of the exporting countries’, the State Department reported.72 At base, the 1971 negotiations can be seen as a sort of good cop–bad cop routine, in which moderates like Yamani set the floor of change not much lower the more radical regimes’ high-reaching goals.

Henry Kissinger and Oil Power in the 1970s 51 While the Saudi and Iranian oil ministers touted their fear that global negotiations ‘would give the radicals opportunities to press the moderates’, an oil executive noted, they also worked to further weaken the company position.73

Changing Circumstances Saudi Arabia continued to urge the oil companies to grant it greater control over production after the Tehran and Tripoli agreements. In particular, Yamani pressed the OPEC countries to renew their demands for ‘host-country participation’ in existing production operations in 1971 and 1972.74 Citing the ‘law of changing circumstances’ that governed oil politics, Irwin accepted Yamani’s 1972 argument positing ‘a new relationship between the oil companies, the producer governments, and the consumers’.75 Yamani’s invocation of ‘changing circumstances’ further revealed the convergence of radicals and moderates in international oil politics, because the reference to changing circumstances is also evidence of the influence of long-running arguments about oil control in OPEC and the broader Third World bloc. The argument about changing circumstances in the oil industry was first put forward by Anes Qasem, a Palestinian lawyer who advised the Libyan government on its oil concessions between 1954 and 1962. Concession terms could not become ‘fossilized’, he wrote in a 1957 memorandum criticizing the long-term deals signed by Saudi Arabia, Iran, Iraq and Kuwait in the 1920s and 1930s. ‘A concession deals with a developing situation and it has to develop and grow to meet changing circumstances’.76 The national sovereignty that had become universal with decolonization meant more than simply asserting the right to control over oil, Qasem said. It also meant that nations had the right to find policies, each progressively better than the previous, that would put more power in government hands. That argument had great staying power because it drew on the egalitarian morality of decolonization, which was the central

52  Oil Shock development of recent history for the radical oil producers. Francisco Parra, a Venezuelan lawyer who became the de facto spokesperson for OPEC in 1962, found the recent history of decolonization significant. He emphasized the concept of changing circumstances to business students at the American University of Beirut in 1963. The old oil concessions in the Persian Gulf and elsewhere had been ‘overly generous’ in their discharge of sovereign rights, he said. Furthermore, the duration of the concessionary agreement had ‘unfortunately’ been applied to the precise conditions under which the companies extracted oil. Some of the old concessions, Parra noted, even included language calling for the nations ‘to abstain from formulating laws which would be applicable to the concessionaire companies’. Even though the nation was officially the landowner and held title to its resources, such clauses limited governmental freedom of action. This was a problem because it meant that when governments did act, it was as advisers ‘rather than by virtue of their sovereign powers’.77 The great problem of the oil concessions, then, was that the inflexibility of the contracts led to an informal removal of sovereignty. These gross inequities moved against the political stream of decolonization for Parra. As seen ‘in the light of changing circumstances elsewhere’, it was time to create ‘a little elbow-room’ for governments to ‘jostle along more comfortably with the general current of events’, he said. If the companies did not allow the changing circumstances to dictate a new pace, Parra believed, the oil producers would have to take more militant action. Any such moves towards greater ‘joint control over supply’, in turn, found their legitimacy in the broader international trend of decolonization and the subsequent push for economic development. ‘We share in common with other underdeveloped countries throughout the world problems which must be overcome’, he concluded. ‘And, provided we retain our spiritual values, we must spare no effort in making our way up the long road to independence from want.’78 He reworked the theme of changing circumstances for a meeting of petroleum engineers in Baghdad a month later. For this audience the

Henry Kissinger and Oil Power in the 1970s 53 content became more technical and the tone more militant. ‘The fundamental question of equity’ in production contracts was whether or not ‘producing countries may optimize their revenues’, he said. The OPEC nations had a right to put their concessions under continuous review until that equity was achieved. What he described as this ‘modern’ vision drew its legitimacy from the attempts by the underdeveloped nations ‘to close their ranks’ vis-à-vis the industrialized nations. ‘Among these shifting sands, the need for flexibility over the terms of these new oil-producing rights is paramount’, Parra said.79 Parra attended the Fourth Arab Petroleum Conference in between those two meetings to deliver a paper on behalf of OPEC entitled ‘Radical changes in the international oil industry during the past decade’. He began with a historical discussion of the old concessions, again stressing that the rights to exploit oil were of extraordinarily long duration; the earliest concession would not expire until 1994, the latest in 2026. Parra then hit on the theme of changing circumstances harder than ever before. The right to exploit oil had been granted ‘with reference to the prevailing circumstances at the time, when those circumstances have everywhere changed’, he said. The concessions needed to ‘adapt themselves to the time’.80 Sayyid Abdelrahman al-Bazzaz, an Iraqi economist who had just finished his term as OPEC Secretary General, agreed with Parra in a 1965 meeting with oil company representatives. Advances that were mutually beneficial to both the producing nations and the multinational concessionaires were only possible if the companies accepted that they had erred in their ‘purely legalistic argument’ that demands for greater control were ‘breaches of contract’. A new understanding of ‘international fairness’ – that ‘when the rules of Law and the rules of equity are in conflict, the rules of equity must prevail’ – was essential to a fruitful debate. Key to his understanding of fairness and international law was the companies’ acceptance of ‘a changing world, changing circumstances […] changing ideals and principles’.81 There was no missing the alert international edge to the politics of changing circumstances within OPEC. Hasan Zakariya, a

54  Oil Shock Harvard-trained Iraqi lawyer hired by Parra in 1967 to direct OPEC’s legal department, wrote a rousing defence of ‘the legal validity of “changing circumstances” ’ in 1968. The principle of ‘changing circumstances’ was widely accepted not only in the historical development of international law, he wrote, but was so ‘deeply steeped in philosophy and ethics’ that many jurists believed it ‘owed its existence to the moral conscience rather than the legal one’. The new development of a broad movement of anti-colonial law and economics thus legitimized the moves by oil producers to take control of their oil. The right of nations to invoke their sovereignty to change the terms of production contracts constituted ‘a clear and unequivocal testimony as to the trend of thought on this matter in the world community as a whole’, he said.82 ‘It is curious indeed that the Arab leaders (including Saudi Minister Ahmed Zaki Yamani) who today appear as the promoters of the participation principle are precisely those known for their “moderation”’, the radical oil consultant Nicolas Sarkis wrote in late 1971.83 The easy sympathy for national power in the work of the OPEC Secretariat left the door open for accommodation between its members. Yamani joined Zakariya, and the others understood with cool clarity that the changing international circumstances necessitated the deflation of the old-fashioned oil concessions.

Conclusion When Yamani invoked ‘changing circumstances’ to Irwin, he thus encapsulated a unifying element of oil power. As the Saudi oil minister became more intransigent in the early 1970s, he set a hard floor for international dialogues about oil power. That a conservative ally in the Cold War did so was important. Yamani would never assail neo-colonialism, but neither would he allow the oil companies to retain control over oil that rightfully belonged to Saudi Arabia. It was a matter of fact that ‘new winds were now blowing’, he told the American ambassador in February 1972, ‘as marked by Algerian action, and Libyan and Iraqi attitudes’.84 That

Henry Kissinger and Oil Power in the 1970s 55 school of thought wove together the endeavours of the radicals and the moderates. Kissinger described the Saudi push for participation as ‘a first class brouhaha’ that year. Oil executives requested government assistance in the negotiations, and Kissinger declined. ‘The less I have to do with this the better’, he told Exxon President Ken Jamieson.85 Afterwards, he told US treasury secretary John Connally that even though the executives’ ‘political acumen [was] not up to their income’, the Nixon administration could not ‘do Standard Oil business’.86 In an earlier conversation, Kissinger had explained to Connally his reason for caution in dealing directly with Yamani and other oil ministers. ‘In general, I don’t like to get a brawl started without knowing where the cards are’, he said.87 But the cards had already been dealt, and Kissinger’s policy in late 1973 and early 1974 towards Saudi Arabia was a failure to directly engage that emerging force in world politics. The failure was not just of diplomacy but of understanding. Kissinger underestimated the closeness of Saudi oil policy to that of its counterparts in OPEC. Yamani complained to the American ambassador in January 1974 that he was ‘extremely annoyed’ by the constant American references to ‘Arab oil gouging’. OPEC as a whole had called for increased prices, he noted.88 Kissinger, undeterred, told an aide a week later: ‘If I was the president, I would tell the Arabs to shove their oil’.89 Reality was otherwise – Kissinger realized that he was dealing not with Arab oil power but with oil power more generally. He backed away from his manufactured impasse officially in a February 1974 press conference, delinking the peace process and the energy crisis.90 The end of those exhausting diplomatic manoeuvrings pointed to Kissinger’s acceptance of a new status quo, and the secretary of state would shift the locus of his energy policy from a single-minded embrace of Saudi Arabia to the question of high oil prices maintained by OPEC. ‘Present prices are unworkable’, he told German minister Egon Bahr in February 1974. ‘There is no way to run deficits of this size for very long without destroying the world system’.91 Kissinger realized, though, that diplomacy towards Saudi Arabia could not provide a quick fix to that

56  Oil Shock problem. This was thus also the beginning of the difficulties the Nixon administration and its successors would face in understanding oil power and oil prices, which came to represent a basic tenet of the global universe that diplomats occupied in the 1970s: its instability.92

Notes 1 ‘Record of conversation between the Minister of State for Foreign and Commonwealth Affairs and the Deputy Prime Minister of Israel’, 6 November 1970, UKNA, PREM 15/125. 2 There exists compelling evidence that Henry Kissinger sought to undermine both US and UN peace missions. See: Salim Yaqub, ‘The weight of conquest:  Henry Kissinger and the Arab–Israeli conflict’, in Frederick Logevall and Andrew Preston (eds), Nixon in the World (New York: Oxford University Press, 2008), pp. 227–58; Salim Yaqub, ‘The politics of stalemate: The Nixon administration and the Arab–Israeli conflict, 1969–73’, in Nigel Ashton (ed.), The Cold War in the Middle East:  Regional Conflict and the Superpowers, 1967–73 (London: Routledge, 2007), pp. 35–58; Uri Bar-Joseph, ‘Last chance to avoid war: Sadat’s peace initiative of February 1973 and its failure’, Journal of Contemporary History 41, no. 3 (2006): 545–56. 3 Victor Israelyan, Inside the Kremlin during the Yom Kippur War (College Park, PA:  Penn State University Press, 1995), pp. 56–61 (57); Vladislav Zubok, A Failed Empire:  The Soviet Union in the Cold War from Stalin to Gorbachev (Chapel Hill, NC:  University of North Carolina Press, 2007), pp. 238–42; Yevgeny Primakov, Russia and the Arabs: Behind the Scenes in the Middle East from the Cold War to the Present (New York: Basic Books, 2009), pp. 143–66. 4 Steven L. Spiegel, The Other Arab–Israeli Conflict: Making America’s Middle East Policy, from Truman to Reagan (Chicago: University of Chicago Press, 1985), p. 255. 5 Alistair Horne, Kissinger: 1973, the Crucial Year (New York: Simon & Schuster, 2009), pp. 237–65. 6 Telecon, 11 October 1973, DNSA, KT. 7 Ian Skeet, OPEC: Twenty-Five Years of Prices and Politics (New York: Cambridge University Press, 1988), pp. 87–91. 8 Ethan Kapstein, The Insecure Alliance: Energy Crisis and Western Politics since 1944 (New York: Oxford University Press, 1989), p. 165; Petroleum Intelligence Weekly, 22 October 1973, p. 3; Memorandum, Quandt to Scowcroft, 10 October 1973, Foreign Relations of the United States, 1969–1976, XXXVI, Energy Crisis, 1969–1973, document 210. 9 Kissinger and Nixon were able to bully the crippled Portuguese dictatorship into submission by promising help with their colonial problem in southern Africa. See: Norrie MacQueen and Pedro Olivieros, ‘ “Grocer meets Butcher”: Marcello Caetano’s London visit of 1973 and the last days of Portugal’s Estado Novo’, Cold War History 10, no. 1 (2010): 29–50.

Henry Kissinger and Oil Power in the 1970s 57 10 Walter Lacquer, Confrontation:  The Middle East and World Politics (New York: New York Times Books, 1974), pp. 175–81; Diane Kunz, Butter and Guns:  America’s Cold War Economic Diplomacy (New  York:  The Free Press, 1997), p. 239. 11 Walter J. Levy, ‘Oil Power’, Foreign Affairs (July 1971): pp. 652–68. 12 See, for example: CIA Memorandum, 25 October 1973, FRUS, 1969–1976, XXXVI, document 228; Jordan J. Paust and Albert P. Blaustein, ‘The Arab oil weapon – a threat to international peace’, American Journal of International Law 48 (1974): 410–27; William D. Smith, ‘The Arab oil weapon comes into play’, New  York Times, 21 October 1973; ‘Calling the oil bluff ’, Wall Street Journal, 16 October 1973; Stephen D. Krasner, ‘The great oil sheikdown’, Foreign Policy 13 (1973): 123–38. 13 Fred Bergsten quoted in Judith Stein, Pivotal Decade:  How the United States Traded Factories for Finance in the Seventies (New Haven, CT: Yale University Press, 2010), p.  29; Kissinger quoted in Daniel Yergin, The Prize:  The Epic Quest for Oil, Money, and Power (New  York:  Simon & Schuster, 1991), p. 565. For the extensive literature on Kissinger, one would do best to begin with his three-volume memoirs and then consult Jussi M. Hahnimäki, The Flawed Architect:  Henry Kissinger and American Foreign Policy (New York: Oxford University Press, 2004) and Jeremi Suri, Henry Kissinger and the American Century (Cambridge, MA: Harvard University Press, 2007). 14 Yaqub, ‘The weight of conquest’; Hahnimäki, The Flawed Architect, pp. 302–31. 15 Spiegel, The Other Arab–Israeli Conflict, p. 270. 16 MemCon, ‘Meeting with oil company executives’, 26 October 1973, NARA, RG 59, CFP 1970–1973, PET 6; Interview with Winston Lord, The Foreign Affairs Oral History Collection, Library of Congress. On the initial company position: Memorandum by the Chairmen of Exxon Corporation (Jamieson), Mobil Oil Corporation (Warner), Texaco, Inc. (Granville) and Standard Oil Company of California (Miller), 12 October 1973, FRUS, 1969–1976, XXXVI, document 212. 17 Telecon, 2 November 1973, RNL, Henry A. Kissinger Telephone Conversation Transcripts, Chronological File, Box 23 (hereafter, HAK Telecons, 23). 18 Marvin Kalb and Bernard Kalb, Kissinger (New  York:  Hutchinson, 1975), p. 582. 19 Lord to Donaldson, ‘Handling the Yamani visit’, 3 December 1973, NARA, RG 59, Lord Files, 346. 20 Richard Nixon, RN:  The Memoirs of Richard Nixon (New  York:  Simon & Schuster, 1990), p. 987; Telegram from the Embassy in Saudi Arabia to the Department of State, 26 November 1973, FRUS, 1969–1976, XXXVI, document 246; Telegram from the Department of State to the Embassy in Saudi Arabia, 27 November 1973, FRUS, 1969–1976, XXXVI, document 248. 21 Donaldson to Kissinger, ‘Your meeting with Yamani’, 3 December 1973, NARA, RG 59, Lord Files, 346.

58  Oil Shock 22 Lord to Donaldson, ‘The Yamani visit; can we ease the embargo?’, 3 December 1973, NARA, RG 59, Lord Files, 346; Lord and Katz to Kissinger, ‘The line to be taken with Yamani’, 5 December 1973, NARA, RG 59, Lord Files, 346. 23 Memorandum of Conversation, ‘Oil embargo’, 28 December 1973, NARA, RG 59, CFP 1970–1973, POL 27-14 ARAB ISR. 24 Lizette Alvarez, ‘Britain says U.S. planned to seize oil in ‘73 crisis’, New York Times, 2 January 2004; Andrew Scott Cooper, The Oil Kings:  How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East (New York: Simon & Schuster, 2011), pp. 129–34; Kissinger, Years of Upheaval (London: Weidenfield and Nicolson, 1982), pp. 878–81. 25 Director of Intelligence and Research, Intelligence Brief, ‘Constraints on oil price increases’, 26 September 1973, NARA, RG 59, CFP 1970–1973, PET 14. 26 Klaus Knorr, ‘The limits of economic and military power’, in Raymond Vernon (ed.), The Oil Crisis (New York: W.W. Norton, 1976), pp. 236–7. 27 Seyom Brown, The Faces of Power: United States Foreign Policy from Truman to Clinton (New York: Columbia University Press, 1994), pp. 297–8. 28 Gerald Ford, ‘Remarks to the Ninth World Energy Conference’, 23 September 1974, in John T. Woolley and Gerhard Peters (eds), The American Presidency Project, available at http://www.presidency.ucsb.edu/ws/?pid=4732. 29 MemCon, ‘Secretary’s call on Carrerro-Blanco’, 19 December 1973, NARA, RG 59, CFP 1970–1973, POL 27 ARAB-ISR. 30 Stein, Pivotal Decade, p. 82. 31 Rousel to Bush, 27 November 1973, FRUS, 1969–1976, XXXVI, document 250. 32 Lord to Donaldson, ‘Handling the Yamani visit’, 3 December 1973, NARA, RG 59, Lord Files, 346. 33 Director of Intelligence and Research, Intelligence Brief, ‘Constraints on oil price increases’, 26 September 1973, NARA, RG 59, CFP 1970–1973, PET 14. 34 Heath to Nixon, 14 June 1973, RNL, NSF 764. 35 George Shultz, ‘Remarks at OECD ministerial meeting’, 6 June 1973, RNL, Papers of Herbert Stein, Box 43. 36 MemCon, ‘Meeting with oil company executives’, 26 October 1973, NARA, RG 59, CFP 1970–1973, PET 6; Memorandum of Conversation, 8 August 1973, FRUS, 1969–1976, XXXVI, document 190; James E. Akins, ‘The oil crisis: This time the wolf is here’, Foreign Affairs 51, no. 3 (1973): 462–90. For a more sceptical perspective, see Maurice A. Adelman, ‘Politics, economics, and world oil’, The American Economic Review 64, no. 2 (1974): 58–67; Timothy Mitchell, ‘The resources of economics: Making the 1973 oil crisis’, Journal of Cultural Economy 3, no. 2 (2010): 189–204. 37 Gerald Ford, ‘Remarks to the Ninth World Energy Conference’, 23 September 1974, in John T. Woolley and Gerhard Peters (eds), The American Presidency Project, available at http://www.presidency.ucsb.edu/ws/?pid=4732. 38 Yusif Sayigh, ‘Oil in Arab developmental and political strategy: An Arab view’, in John Duke Anthony (ed.), The Middle East: Oil, Politics, and Development (Washington, DC: American Enterprise Institute for Public Policy Research, 1975), p.  39. On King Faisal and the radical oil producers, see:  Minutes of

Henry Kissinger and Oil Power in the 1970s 59 Washington Special Actions Group Meeting, 29 November 1973, FRUS, 1969–1976, XXXVI, document 254; Memorandum of Conversation, 20 December 1973, FRUS, 1969–1976, XXXVI, document 269. 39 Kissinger to Nixon, ‘Letter to you from King Faisal’, 17 August 1971, RNL, NSF 761; Mordechai Abir, Saudi Arabia in the Oil Era (London: Croom Helm, 1988), p. 127. 40 Kissinger to Nixon, ‘Connally and Lincoln visits to Saudi Arabia’, n.d., RNL, NSF 1287. 41 Dickman to Sisco, ‘Free world oil supply–demand picture’, 20 August 1973, NARA, RG 59, CFP 1970–1973, PET 10 SAUD. 42 Kissinger and Flanigan to Nixon, 18 January 1973, RNL, White House Central Files, Subject Files: Trade, Box 4. 43 Skeet, OPEC, p. 91. 44 ‘An Oriana Fallaci interview: The Shah of Iran’, The New Republic, 1 December 1973. 45 Cooper, The Oil Kings, p. 145. 46 AmEmbassy Iran to SecState, 26 December 1973, RNL, NSF 630; AmEmbassy Jidda to SecState, 26 December 1973, RNL, NSF 630; Telegram from the Embassy in Saudi Arabia to the Department of State, 30 December 1973, FRUS, 1969–1976, XXXVI, document 276. 47 Telegram, AmEmbassy Vienna to SecState, ‘Shah’s press conference’, 29 December 1973, NARA, RG 59, CFP 73–76, ET. 48 Kissinger, Years of Upheaval, p.  885; Telegram from the Embassy in Saudi Arabia to the Department of State, 3 January 1974, FRUS, 1969–1976, XXXVI, document 278; Telegram from the Embassy in Saudi Arabia to the Department of State, 21 January 1974, FRUS, 1969–1976, XXXVI, document 284. 49 Steffen Hertog, ‘Petromin:  The slow death of statist oil development in Saudi Arabia’, Business History 1, no.  5 (2008):  645–67; Robert Lacey, The Kingdom (New York: Harcourt Brace Jovanovich, 1981), pp. 339–40; Robert Vitalis, America’s Kingdom: Mythmaking on the Saudi Oil Frontier (Palo Alto, CA: Stanford University Press, 2007), pp. 233–4. 50 Anthony Sampson, The Seven Sisters and the World They Made (London: Hodder and Stoughton, 1975), p. 276. 51 New York Times, 12 June 1973, 45. For Yamani’s attempts to navigate radical oil politics, see: Ahmed Zaki Yamani, ‘The oil industry in transition’, Natural Resources Lawyer 8 (1975–6): 391–6; Ahmed Zaki Yamani, ‘Oil: Towards a new producer–consumer relationship’, The World Today 30, no. 11 (1974): 479–86; Ahmed Zaki Yamani, Economics of the Petroleum Industry (Beirut:  Middle East Research and Pub. Center, 1970). 52 Zuhayr Mikdashi, ‘Cooperation among oil exporting countries with special reference to Arab countries: A political economy analysis’, International Organization 28, no. 1 (1974): 1–30. 53 ‘Price “correction” is what it wants, Libya now says’, Petroleum Intelligence Weekly 13, no. 29 (11 May 1970): 5.

60  Oil Shock 54 ‘Address by the Minister of Petroleum and Minerals to executives of oil companies’, 20 January 1970, UKNA, FCO 67/432. 55 National Intelligence Estimate 36.5–71, Washington, 30 April 1971, FRUS, 1969–1976, volume E-5, part 2, document 74; ‘Majors capitulate in Libya to new 55% oil tax rate’, Petroleum Intelligence Weekly 9, no. 41 (12 October 1970). 56 Telegram from the Embassy in Libya to the Department of State, 5 December 1974, FRUS, 1969–1976, XXXVI, document 64; AmEmbassy Caracas to SecState, 1 December 1970, NARA, RG 59, CFP 1970–1973, PET 3 OPEC; Trezise to Flanigan, 17 December 1970, NARA, RG 59, CFP 1970–1973, PET 3 OPEC; SecState to AmEmbassy Tripoli, 6 January 1971, NARA, RG 59, CFP 1970–1973, PET 14 LIBYA. 57 Oil Task Force, Situation Report, 15 January 1971, RNL, NSF 1271; Telegram from the Department of State to Certain Diplomatic Posts, ‘Washington oil talks’, 8 January 1971, FRUS, 1969–1976, XXXVI, document 65; Telegram from the Under Secretary of State (Irwin) to the Department of State, 19 January 1971, FRUS, 1969–1976, XXXVI, document 76. 58 Memorandum from Carter and Stevenson, 14 January 1971, FRUS, 1969–1976, XXXVI, document 68; Memorandum from Bergsten and Saunders to Kissinger, 14 January 1971, FRUS, 1969–1976, XXXVI, document 69. 59 Telephone conversation, Kissinger and Irwin, 15 January 1971, DNSA, KT, KA04738. Four days earlier, Kissinger told Irwin he was ‘not on top of ’ the oil negotiations. See: Telephone conversation transcript, 11 January 1971, FRUS, 1969–1976, XXXVI, document 67. 60 Telegram 277, AmEmbassy Iran to DOS, ‘Under Secretary’s meeting with Shah’, 18 January 1971, RNL, NSF 602. 61 Telegram from Irwin to the Department of State, 19 January 1971, FRUS, 1969–1976, XXXVI, document 75. 62 Telegram from the Embassy in Libya, 20 January 1971, FRUS, 1969–1976, XXXVI, document 77. See also: Mira Wilkins, ‘The oil companies in perspective’, in Vernon (ed.), The Oil Crisis, pp. 167–86. 63 Telegram from Irwin to the Department of State, 19 January 1971 FRUS, 1969–1976, XXXVI, document 76. 64 AmEmbassy Tehran to SecState, ‘Oil situation:  Tehran negotiations’, 27 January 1971, RNL, NSF 602. 65 AmEmbassy Tehran to SecState, ‘Oil situation: First Gulf negotiating session’, 28 January 1971, RNL, NSF 602. 66 State Department, Bureau of Intelligence and Research, Intelligence Note RECN-3, 18 February 1971, NARA, RG 59, CFP 1970–73, PET 3 OPEC. 67 Telegram, AmEmbassy Tehran to SecState, ‘Oil situation’, 3 February 1971, RNL, NSF 602. 68 State Department, Bureau of Intelligence and Research, Intelligence Note RECN-3, 18 February 1971, NARA, RG 59, CFP 1970–1973, PET 3 OPEC. 69 Kissinger to Nixon, ‘International oil situation  – Libyan phase’, 27 March 1971, RNL, NSC 367.

Henry Kissinger and Oil Power in the 1970s 61 70 National Intelligence Estimate, 30 January 1971, ‘The Persian Gulf after the British departure’, 1 April 1971, RNL, NSC 1276. 71 Telegram 745, Jedda to FCO, 19 September 1971, UKNA, FCO 67/561; ‘OPEC countries plan to negotiate with oil companies on participation and monetary changes’, Middle East Economic Survey 14, no. 48 (1971): 1–7. 72 Intelligence Note prepared in the Bureau of Intelligence and Research, ‘Oil: New confrontation over participation’, 11 August 1971, FRUS, 1969–1976, XXXVI, document 91. 73 Telegram, AmEmbassy Tehran to SecState, ‘Piercy: Section Two’, 20 January 1971, RNL, NSF 602. 74 On the history of participation:  Intelligence Note prepared in the Bureau of Intelligence and Research, ‘Oil:  New confrontation over participation’, 11 August 1971, FRUS, 1969–1976, XXXVI, document 91; Intelligence Note RECN–22, ‘Oil:  OPEC demands participation, new price increases’, 13 October 1971, NARA, RG 59, CFP 1970–1973, PET 3 OPEC; Hormats to Kissinger, ‘Oil companies faced with new OPEC negotiating demands’, 20 October 1971, RNL, NSF 367. 75 MemCon, ‘Participation and Saudi–U.S.  oil relations’, 29 September 1972, NARA, RG 59, CFP 1970–1973, PET SAUD. 76 Petroleum Commission, Petroleum Development in Libya, 1954 through Mid-1960 (Tripoli, Libya: Ministry Petroleum Affairs, n.d.), p. 7. 77 Francisco Parra, ‘The oil industry’s organization in the Middle East and some of its fiscal consequences’, 13 November 1963, OPEC PR, OL. 78 Ibid. 79 Francisco Parra, ‘The development of petroleum resources under the concession system in non-industrialized countries’, OPEC PR, EC/64/III,  OL (1964). 80 OPEC, ‘Radical changes in the international oil industry during the past decade’, IVth Arab Petroleum Conference, paper no. 58 (A-1), p. 3. 81 ‘Speech delivered by Al-Bazzaz, OPEC’s Secretary General’, Review of Arab Petroleum Economics (Baghdad) 1, no. 2 (March 1965): 37–9. 82 Hasan S. Zakariya, ‘The impact of changing circumstances on the revision of petroleum contracts’, OPEC Seminar, July 1969, OPEC ID, OL. 83 Nicolas Sarkis, ‘Participation:  Political manoeuvres and economic realities’, Arab Oil and Gas (Beirut) 1, no. 2 (16 October 1971): 3–4. 84 Telegram, American Embassy Jidda to Secretary of State, ‘Discussion re participation with Min-Pet Yamani’, 17 February 1972, NARA, CFP 70–73, PET 3 OPEC. 85 Telephone conversation, Kissinger and Jamieson, 3 August 1972, RNL, HAK Telecons, 15. 86 Telephone conversation, Kissinger and Connally, 5 August 1972, RNL, HAK Telecons, 15. 87 Telephone conversation, Kissinger and Connally, 27 July 1972, RNL, HAK Telecons, 15.

62  Oil Shock 88 Telegram, AmEmbassy Jidda to SecState, ‘Saudi Petroleum Minister’s agreement to work for lower oil prices’, 21 January 1974, FOIA Released Documents, US Department of State Electronic Reading Room (hereafter, FOIA, ERR). 89 Telecon, 30 January 1974, Kissinger Transcripts, FOIA, ERR. 90 ‘Secretary Kissinger and federal Energy Administrator Simon hold joint news conference’, DSB Lxx/1806, 4 February 1974, 117. 91 Memorandum of conversation, 1 February 1974, FRUS, 1969–1976, XXXVI, document 295. 92 This is one of the important arguments in Daniel Sargent, A Superpower Transformed (New York: Oxford University Press, 2014).

3 Iraq and the Oil Cold War: A Superpower Struggle and the End of the Iraq Petroleum Company, 1958–721 Philippe Tristani On 1 June 1972, the Iraqi government nationalized the assets of the Iraq Petroleum Company (IPC),2 which became the Iraq Company for Oil Operations (ICOO). That total nationalization of a British company was the first in the Middle East. It put an end to the activities of the first major oil consortium, which then – by virtue of a concession agreement almost half a century old – held a monopoly over the exploration and exploitation rights for almost the entire Iraqi territory. From 1929 to 1972, IPC associated all of the major international oil companies: Royal Dutch Shell; the Anglo-Persian Oil Company (British Petroleum from 1954); the Compagnie Française des Pétroles (CFP); the Near East Development Corporation (NEDC): the American consortium that included Standard Oil of New Jersey (50 per cent of the NEDC), Standard Oil of New  York (or Socony Vacuum, Mobil from 1966), Gulf Oil, the Pan-American Petroleum and Transport Company

64  Oil Shock and the Atlantic Richfield Company; and a minority shareholder, Partex (established by Calouste Gulbenkian, ‘Mr 5 per cent’). From the time of its creation, IPC was both an emanation of the major Western oil groups and the concrete expression of the oil policy in the Middle East pursued by the major Western powers  – the US, Great Britain and France. However, the predominance of the interests of the English-speaking countries within IPC meant that it was above all an instrument of British and American oil policy in Iraq and in the Middle East. The Iraqi revolution of 14 July 1958 markedly modified the relationships between IPC and Iraq. Thenceforth, successive Iraqi governments, in the name of national development and national sovereignty, constantly limited the scope of IPC’s concession contract. They were supported in their action by the USSR and the Soviet Bloc, which provided them with the technical and financial means needed to counter Western oil ‘imperialism’. We intend to show here how IPC, beginning in 1960, voluntarily limited Iraq’s oil production both to combat the Iraqi legislative measures and to turn the country into an international oil-market adjustment variable. We will see that the Iraqis’ strategy for reducing the pressure exerted by the majors consisted in constructing a national oil industry in partnership with the USSR, and to a smaller extent with France.

Middle Eastern Oil: A Backyard for the Americans and the Soviet Union Due to its worldwide nature and the interregional balance it demands, oil economics requires a particular kind of geopolitics. In 1971, international oil3 represented one billion 350 million tons (Mt) out of world consumption of 2 billion 396 Mt. Of this, 95 per cent was supplied by a dozen developing countries, mainly concentrated in the Middle East.4 It was mainly purchased and consumed by a dozen others, the industrialized

newgenrtpdf

5

13,700 47 189

450

557 225

3,477

2,275

2

356

4,810

980

78

204 769

to Japan

30 8

44

734

1,270

3,711

8,500

828 251

es W S. U.

34

st oa

U. S. East Coast

257 3

79

tC

98 2 1

Figure 3.1  Crude oil flows in 1974 (in thousands of barrels per day, b/d) Source: Bureau of Mines, Division of Petroleum and National Gas, in J. Blair, The Control of Oil (New York, Parethon Books, 1976), p. 30.

66  Oil Shock countries (cf. fig.  3.1). Ninety-five per cent of exploitation, shipment and trade in connection with that product was handled by the majors,5 mainly the American companies. Indeed, during the 30 years following World War II, the Middle East became the Western hemisphere’s main production area.6 Here, the US’s oil policy and diplomacy is based on four objectives closely associating US domestic oil interests, the world oil situation and national security in a Cold War context: • •

•

•

control the oil deposits in the Middle East on the basis of oil concessions allocated, if possible, solely to the American majors; guarantee the security and regularity of supplies on the international oil market while limiting oil dependence, orienting the oil flows from the Middle East towards Western Europe and Japan; install a pricing system aimed both at having oil remain a cheap source of energy and at protecting the profitability of the US oil industry; hold in check and contain the nationalistic demands made by producer countries, to maintain US oil leadership and make the Middle East a sanctuary, or at least a shield, from Soviet ambitions.

According to oil analyst Michael Tanzer: ‘The extraordinary place of the oil companies in the world economy and the controlling influence they have in many producing countries could not have been accomplished without a close and continuing partnership with the U.S. government.’7 Indeed, whatever administration has been in power, the federal state has always supported the American companies abroad. Moreover, there is a real ‘symbiosis based on mutual dependence’8 between the State Department’s public policy and the majors’ action.9 To reach these objectives, in spite of the opposition expressed by the Department of Justice, which wanted to force the majors to respect anti-trust law, the majors jointly created some large companies in the Middle East such as IPC, Aramco and the Iranian Consortium, which were veritable hubs10 of an oligopolistic oil system (cf. fig. 3.2). Indeed,

Iraq and the Oil Cold War 67 as of 1956, the American share in the Middle East’s production exceeded 55 per  cent. Thus until 1972, the Americans owned 23.75 per cent of the IPC group, 40 per cent of the Iranian Consortium, 50 per cent of the Iran Pan American Oil Company, and 50 per cent of the Kuwait Oil Company. They held the entire capital of Aramco, of Dhofar Concessions, of the Petroleum Concessions, of BAPCO in Bahrain, of the American Independent Oil of California Company and of Pacific Western Oil Corporation in the neutral zone between Kuwait and Saudi Arabia, of the Yemen Development Corporation and of the Syrian–American Oil

NEDC BP 66 2/3%

CFP

23,75%

33,25%

23,75%

50%

Abu Dhabi Marine Areas

Kuwait Oil CO.

50% 7%

10%

11,875%

IRAQ PETROLEUM CO.

Iranian Consortium

14%

Shell

30%

ARAMCO

30%

7%

23,75%

Gulf

11,875%

7%

40%

6%

Jersey

Mobil

30%

Texaco

7%

Socal

Figure 3.2  Interlocking holdings between the majors (including CFP) and the major oil companies in the Middle East in 1966 Source: According to E. & T. Penrose, The Large International Firm in Developing Countries: The International Petroleum Industry (London, George Allen and Unwin Ltd, 1968). Control structure (in percentage) Oil deposits Distribution circuits Refining capacity

7 Majors, 5 of them American

Other international companies

98.2

1.8 93.2

73

27

National companies of the producing countries _ _ _

Figure 3.3  Control exercised by the majors over the oil industry in the 1950s Source: F. Raf Serecht, Le marché pétrolier international: ruptures et nouvelles configurations (Paris, la Documentation française, 1985), p. 16.

68  Oil Shock and Gas Company.11 The oil reserves of the Middle East, thus coming mainly under American control (cf. fig. 3.3), contributed to unifying the world oil market to the majors’ benefit. On the side of USSR, the growing Arab–Israeli conflict and the latent anti-Westernism of the Arabs proved far more susceptible to exploitation. The Soviet Union’s concern for the security of its southern borders, exacerbated by the establishment of the Baghdad Pact, also played a critical role in drawing the USSR closer to the Arabs. Following the 1955 Soviet–Egyptian arms deal, the Soviet Union rapidly built a position of power and influence in the region as it skillfully took advantage of an objective shared with the Arabs – the removal, or reduction, of Western influence. From this point of view, the Soviets’ only interest in the Middle-Eastern petroleum industry was in its contribution to Western military and industrial power. Not needing the region’s oil for their own use, they sought to discredit the Western oil companies as agents of Western imperialism. ‘Oil’, it was argued, ‘had for decades enslaved the peoples of the Middle East; was it not high time for them to be liberated from these shackles? Had not the people a better title to the huge revenues than the company shareholders?’12 What better way to weaken the West than by encouraging the local governments to seek their independence by nationalization of the oil companies? Confrontation between the Soviet and the American strategies directly involved Iraq and IPC.

IPC–Iraq Confrontation Until the 1970s, the concession system governed relationships between operating companies and producing countries. Originally, the concessions covered almost the entire area of the producer countries and had a very long duration. In Iraq, on 14 March 1925, the Turkish Petroleum Company obtained a concession from the Baghdad government corresponding to the northern half of the country, for 75 years. In 1932 and in 1938, the Mosul

Iraq and the Oil Cold War 69 Petroleum Company (MPC) and the Basrah Petroleum Company (BPC) rounded out this system in the southern part of Iraq (cf. fig. 3.4). So, on the eve of World War II, the area of the concessions covered all of Iraq. Those agreements ‘create[d]‌veritable de facto monopolies in favor of the companies and grant[ed] them exclusive operating rights over immense domains. [They] actually organize[d] a veritable transfer of sovereignty in the oil domain from the host States to the companies.’13 The producing countries did not control the amounts produced, the level of exports, or prices. They were confined to the role of mere tax collectors. The revolution of 14 July 1958, which overthrew Nouri Saïd’s pro-Western government and brought General Abdel Karim Kassem14 to power, intensified a constant political desire for reappropriation of the Iraqi oil economy in the name of Iraq’s development and national sovereignty. Until the 1970s, Iraq henceforth played a decisive role in the oil decolonization of the Middle East. As of 1958, three demands – which were traditional for a producer country – fed the antagonism between the IPC group and the Iraqi government. The first was application of clause 8 of the 1925 concession contract, which provided for participation by Iraqi capital to the extent of 20 per cent of the operating companies’ capital, thus authorizing the presence of an Iraqi director with executive power in the IPC management team. The second was the return of the IPC group’s concessions15 to enable the government to introduce some new concession holders in Iraq prepared to sign contracts that would be more advantageous than the ones previously concluded by the three operating companies.16 The third concerns the revision of establishment of the ‘posted price’ used as a basis for calculation of the 50/50 agreement.17 On those three points, during the 12 years of negotiations that followed, the Iraqi government ran up against systematic opposition by the IPC group. But this must be qualified. The IPC management, led by managing director Geoffrey Herridge, who took part directly in the negotiations with the Iraqi government starting on 4 July 1958, was convinced that IPC needed to adapt to the changing relationships between producer countries and concessionaire

70  Oil Shock

Kanaquin Oil Co.,

Law 80

Figure 3.4  The IPC group’s concessions and main oil fields in Iraq in 1967 Source: Realization P. Tristani, according to W. Al-Hasheme, L’Irak et son pétrole depuis 1968 (Thèse, 1985).

companies. But Herridge had extreme difficulty in convincing BP and the American groups of the NEDC18 to conclude a general long-term agreement with the Iraqi government.19 The fact is that those companies based their industrial strategy on the following principles: •

above all, protect the American oil interests of Aramco in Saudi Arabia and Great Britain in Iran;20

Iraq and the Oil Cold War 71 •

•

•

•

obtain recognition, at any cost, of the principle of inviolability of the concession contracts so as to maintain the majors’ monopoly and also keep the independent companies out; with that in mind, emphasize the status quo to avoid establishing a precedent and causing a chain reaction in all producer countries along the lines of the ‘domino theory’; in light of the inability to repeat the boycott21 of Iranian oil between 1951 and 1953 at the time of nationalization of the AIOC, reduce Iraqi oil output as far as possible to pressure the government while transforming Iraq into an ‘oil reserve’, making it possible to regulate the international market; to remain in control in the Middle East and in the world, run the risk of nationalization of the IPC and of its subsidiaries in Iraq, rather than the risk of an acquisition of an interest in the majors’ local subsidiaries in the Middle East.

Thus the American and English groups, more sensitive to the international oil scene than to the consequences of the Iraqi revolution, observed the principle of not giving way on anything without obtaining an advantage in return, for fear of the possible repercussions in Saudi Arabia or in Iran, in particular. In July 1959, the British ambassador in Baghdad, Sir Humphrey Trevelyan, explained the following to the Foreign Office: ‘The groups preferred to have to part with 75 per cent rather than giving up more than 54 per cent, because of the implications in the other zones’22 – all the more so in that all of the IPC group partners were convinced that Iraq did not want to endanger its oil income: ‘if we need their oil, they need our markets’.23 This meant that the negotiations were becoming commercial bargaining. BP and NEDC adopted an intransigent attitude towards Baghdad and dragged out the negotiations,24 persuaded, wrongly, that time was working for them. The Iraqi minister of economics denounced a ‘policy of deferment and procrastination’.25 It was under these already tense circumstances that the unilateral reduction of posted prices in the Middle East occurred.

72  Oil Shock As of the end of 1958, at a time when oil was in oversupply, IPC decided unilaterally to lower the posted prices (Free On Board) at the Mediterranean terminals by 10 cents per barrel of crude on average. It was soon followed, in February 1959, by Shell and BP, which lowered the posted prices by 9 per cent,26 while the Eisenhower administration, responding to the pressure exerted by the ‘independents’,27 established oil quotas to reduce US oil imports. The most direct consequence of this series of measures was the 15 per cent decline in the revenue of the producer countries in the Middle East. As a result of that difficulty, the Iraqi government tried to offset the decline of its oil revenue. On 11 June 1960, the Basrah port authority instituted a tenfold increase in export taxes, namely 5.7 shillings per ton of crude oil loaded at the port of Fao starting from 9 September. To the IPC group, that decision was contrary to the 1955 agreements concluded with the port manager. BPC refused to recognize the new rate and, on 30 May 1960, on the pretext of lower demand for crude oil, reduced the loadings in Fao and interrupted production at the Rumaïla field. Thus, BPC’s annual output dropped from almost 8 Mt to 3 Mt.28 In August 1960, while the majors decided on a new reduction of 14 cents per barrel, intergroup decisions were made by the IPC shareholders so that the tendency to reduce liftings in Fao could continue. Thus the shareholder companies were authorized to accumulate unlimited lifting delays (underlift) at the end of the last three quarters of 1960 and of the first three of 1961. As of 21 December 1961, the groups authorized the IPC group’s managing director to defer commitment of expenditures corresponding to a new phase of increasing the pipeline transport capacity to the Mediterranean.29 The most unexpected consequence of that ‘suffocation strategy’ was the initialization of the IPC–Iraq conflict. As of 23 January 1958, at the Afro-Asian conference in Cairo, Syrian representative Marouf ed Davali asserted that the only way for the underdeveloped countries to industrialize quickly was nationalization, which, by putting an end to foreign monopolies, would enable the Asian and African countries to work out joint development plans. That declaration was incorporated into the conference resolutions:  ‘Nationalization, for

Iraq and the Oil Cold War 73 the Afro-Asian countries, is a legal means and a right held by each state on the basis of the principle of national sovereignty.’ In September 1960, at Iraq’s initiative, a number of exporting countries (Saudi Arabia, Iran, Kuwait, Venezuela) which produced 398.7 Mt of oil, namely 38 per cent of world output, and which rejected the unilateral cut in the per-barrel price decided on by the majors, got together again at the Baghdad conference. They decided to establish the Organization of the Petroleum Exporting Countries (OPEC) with some precise objectives: ‘unification of the member States’ oil policies and determination of the best means for protecting their interests’. On the strength of the objective alliance with the other oil-producing countries, Iraq got ready to cope with the IPC pressures. Kassem delivered multiple nationalistic speeches denouncing the concessionaire companies’ imperialism: Every time we have tried to enter into negotiations with the foreign companies, imperialism has made use of its stooges and agents to commit irresponsible acts against our Republic […] We are engaged in a struggle with imperialism and the foreign companies which refuse to recognize our rights until we have fought for them with all our might.30

Kassem’s nationalistic rhetoric made reappropriation of the Iraqi oil industry the core of national independence. Thus the return of the IPC group’s concessions became an extremely sensitive issue between the company and the Iraqi government. In light of a lack of any significant progress in the negotiations, in March 1961 Kassem ordered the company to halt exploration work outside the production spaces. On 12 December, the Iraqi parliament approved ‘Law 80’, known as the ‘Kassem Law’, which nationalized 99.5 per cent of the IPC concession. That act appeared to be the most significant one undertaken in the Middle East since nationalization of the AIOC by Mossadegh in Iran in 1951. The fact is that, even if return of a part of the concessions was common in the oil industry – it was practiced by Aramco as of 1948, by the Iranian Consortium in 1954 and by the concessionaire companies in Libya in

74  Oil Shock 1957 – it was the first time since 1951 that the initiative was taken by a producer country, without any prior negotiations on the issue or compensation. Kassem’s successors rounded out this approach with two other laws: ‘Law 11’ of 8 February 1964, which established the Iraq National Oil Company (INOC), and ‘Law 97’ of 7 August 1967, which transferred the confiscated areas from IPC to INOC. At this stage, one may wonder whether the ‘stalemate strategy’ developed mainly by BP and NEDC paid off for IPC. The first consequence of the conflict that broke out between IPC and Iraq was the marked slowdown of Iraqi oil production. There was a strong contrast between the increase in Iraq’s proven reserves, pushing the country from fifth into third place among oil countries, and its oil output, which rose by only 3.5 per cent per year between 1965 and 1970. At the same time, Saudi Arabian output advanced by 19 per cent, Iranian by 14 per cent and Kuwaiti by 6 per cent (cf. fig.  3.5). We are dealing here with the smallest increase among all of the producer countries in the Middle East and Africa. The objective pursued in this connection by the IPC group was a traditional one: the point was both to make Iraq yield by significantly reducing its main source of income and to send an unambiguous warning to the other producing countries which might be tempted to follow the Iraqi example. However, at the same time the IPC group was pursuing a much more confidential objective. The fact is that, as can be seen from ­figure 3.5, the weakness of the increase displayed by Iraqi oil output began well before 1959–60. Iraq, which was the second-biggest oil producer, after Iran, in 1940, was surpassed in 1946 by Saudi Arabia, and then in 1949 by Kuwait. Thus Iraq’s share in Middle Eastern oil output declined from 16.8 per cent in 1958 to only 15.4 per cent in 1965. According to Thomas Fry: ‘Charges have also been made that the IPC considered Iraq like a storehouse to be used only when most profitable to the IPC, not Iraq.’31 This thought is along the same lines as were taken by Geoffrey Stockwell, a senior BP official responsible for the Middle East. In a ‘strictly confidential’ memorandum addressed to the shareholder groups in 1971, he stated the following:

Iraq and the Oil Cold War 75 400

Kuwait Iran Iraq Saudi Arabia Logarithmique (Iraq)

350 300 250 200 150 100 50 0 1948

1953

1958

1963

1968

1973

Figure 3.5  Comparative trends in the oil outputs of Iraq, Iran, Saudi Arabia and Kuwait from 1948 to 1973 (Mt) Source: Petroleum Press Service and http://www.opec.org/home/.

We have been able for some years past to look at the big picture and recognize that the paralysis in Iraq not only served as a useful warning to others not to pass Law 80’s but also kept out of circulation a certain amount of crude oil which could have had a further depressing effect on the market. We were able to use Iraq’s misbehavior as a reason for avoiding investment.32

Thus, on an oil market that had become tighter because of the disposal of Soviet oil in the West, the closing of the American market and, as a corollary, the sharper competition on the European market, Iraqi oil production was reduced to a mere adjustment variable. ‘The reduction in Iraq production shored up the Companies’ profits and, if needs be, was offset by increased output from the parent companies’ Saudi, Kuwaiti, or Iranian fields.’33 Even if that industrial strategy worked for the majors, on the other hand it directly threatened the position of the IPC and of its subsidiaries in Iraq. The groups’ determination to obtain cancellation of Law 80 prevented the negotiations from succeeding for ten years. But Law 11 and Law 97 definitively broke up the IPC group’s monopoly in Iraq.34 The North Rumaïla oil field was thenceforth controlled by the INOC,35 which could exploit it freely with the companies of its choice.

76  Oil Shock

The Challenge of the North Rumaïla Oil Deposit and the French and Soviet Interventions Until the summer of 1967, Iraq’s expropriation legislation had no marked effect other than lower production in the areas still belonging to IPC. The British company effectively implemented its pressure strategy, consisting in simultaneously playing on the absence of suitable economic and technical executives for developing a national oil policy, on Iraq’s political instability and on its ability to strangle that country, economically and financially, to reach its goals. However, the Anglo-American component of the IPC group underestimated the importance of Arab nationalism, pushed in Iraq by the Baath party. For the latter, struggling against IPC was tantamount to fighting Western imperialism, and hence Israeli imperialism. So the battle for freeing the Arab nation incorporated the fight against IPC to return Arab oil to the Arabs. The political and ideological dimension firmly prevailed over the merely economic and financial concerns, thus making the budgetary reductions imposed on Iraq by IPC’s attitude inoperative. The threats weighing on IPC revived dissensions within the consortium itself, between the groups from English-speaking countries and the CFP. Since Law 80 of 1961, the French company’s strategy, supported by Paris, called for negotiating with Iraq to recover the bulk of the nationalized territories. But the other groups followed such a policy only reluctantly, considering that the economic pressure resulting from the freeze on development of production would get the Iraqi government to give way. However, the Syrian crisis, and then the Six-Day War in June 1967, crystallized the tensions in Iraq centring around development by INOC of the giant North Rumaïla oil field in the southern part of the country. The French and Soviet interventions proved to be decisive in constituting a genuinely Iraqi oil industry able, in the medium run, to thwart the all-powerful IPC. The British company was particularly eager to re-establish itself in the territories explored by it and with respect to the petroleum resources that were proven, even though not exploited. The

Iraq and the Oil Cold War 77 recovery of the territory including North Rumaïla was considered a particularly sensitive point. That territory, with an approximate area of 800 km2, was thought to contain more than 800 Mt of crude oil reserves. Thus North Rumaïla would be one of the rare giant oil fields on the planet. The point was not for the company to exploit that sea of oil, but rather to keep it away from the Iraqis in order to thwart Law 80 de facto, thus restoring its concession rights. Since July 1960, and implementation by the BPC of a drastic reduction of its production in response to the increased loading fees at the port of Basrah ordered by Kassem, Iraq had become aware of its dramatic dependence on IPC and of the resulting financial insecurity. The Iraqi government’s anxiety about the occurrence of long production reductions that could seriously affect the national economy dates from that episode. The 1966 and 1967 crises made this fear a concrete reality and restored to its central position in discussion the issue of the Iraqi government’s ability to neutralize the considerable impact of IPC on government revenue and on the country’s economic development. On 7 August 1967, in the wake of the anti-Israeli and anti-Western exaltation, the Yahya government approved Law 97.36 Even though the Baath party had rejoined the opposition as of November 1963, Law 97 was broadly inspired by the Baathiste oil programme set forth as of October 1960. It put an end to the traditional system of concessions. It barred any return of North Rumaïla to IPC (article 2), and gave INOC the exclusive right to carry out oil operations all over Iraqi territory, except for the areas defined by Law 80 exploited by IPC (article 1). Even though INOC was authorized to form a partnership with any other company to develop the Iraqi petroleum deposits, it was formally prohibited from doing that within the framework of a concession agreement or any other agreement treated as such (article 3). Hence, Law 97 made INOC not only an instrument for installation of a national oil industry, but also the engine for Iraq’s general industrial development. In the memorandum accompanying publication of Law 97, INOC’s tasks are mentioned:

78  Oil Shock for development and expansion of oil operations in Iraq in all phases of the oil industry, including production of crude oil and of products resulting from refining and petrochemicals, exportation and sales operations; takeoff of all operations within and outside the country requiring an increase in national income, satisfactory economic balance and national self-sufficiency.37

Thus INOC had to see to both construction of an independent national oil industry and establishment of the foundations needed for the country’s industrialization. However ambitious it might have been, Law 97 did not modify the basic situation in Iraq. INOC still lacked the technical and financial resources needed for exploiting the lands confiscated from IPC. The vital need for development of INOC was henceforth finding assistance, a partnership that could enable it to develop national petroleum operations. In June 1967, de Gaulle clearly condemned Israel. The shift in France’s Arab policy enabled it to bring about a rapprochement with the Arab states, particularly Iraq. In spite of the proposals made by the CFP, which distanced itself from its IPC partners as of February 1967 to establish a partnership with INOC, the French company was excluded both by the Iraqi government and by the French government because of its excessive ‘closeness’ to the majors from English-speaking countries within IPC. On 23 October 1967, the French ambassador in Baghdad delivered a letter from de Gaulle to President Aref expressing ‘the French Government’s eagerness to establish the closest possible links with the Iraqi Republic in all fields in which Franco-Iraqi cooperation could be profitable to both countries’.38 One month later, on 23 November, the Iraqi government announced agreement on the signature of a 30-year contract between INOC and the Entreprise de Recherches et d’Activités Pétrolières (ERAP).39 It was finally signed on 3 February 1968. It was a question of exploring 10,800 km2 in territory confiscated from IPC and

Iraq and the Oil Cold War 79 2,280 km2 offshore in the southern part of the country for six years.40 ERAP agreed to act as operator on behalf of INOC, which remained the sole owner of the areas to be exploited. Thus, the agreement took the form of an agency contract. That contract, initiated by ENI in Egypt and in Iran, and then by ERAP itself with INOC on 27 August 1966, was thought up under the relatively stagnant economic conditions prevailing at the end of the 1960s. Its merits result from a comparison with the concessions system, vis-à-vis which it was an attractive competitor. Contrary to the traditional concession model, the investment and the risk connected with the uncertain nature of the oil sector were limited, insofar as the foreign operator served the national company, which provided half of that financing. Because of repayment of the loans by the host state, the agency contract provided that state, during the initial years of production, with very small net receipts compared with those enjoyed when a concession got underway. The same applied to the operator, since the risk was smaller. So the interest of that kind of contract did not lie in the anticipated profits but rather, on one hand, in access enjoyed by a national oil company to a territory rich in oil that was cheap but locked up by the majors and, on the other hand, in the assertion of the primacy of the host state’s national sovereignty vis-à-vis the major foreign concessionary companies. In other words, even though it denied this, ERAP’s action in Iraq was indeed aimed at the IPC group. Thus ERAP’s intervention was to the benefit of the Iraqis’ pressure policy exerted against IPC.41 INOC, having succeeded for the first time in cracking the IPC monopoly, used ERAP’s proposals concerning North Rumaïla to consolidate its positions vis-à-vis IPC. In any event, the beginning of ERAP’s operations in April 1968 marked a decisive step in the development of an Iraqi national oil policy. This initial Iraqi victory and INOC’s final decision to operate North Rumaïla itself put an end to the ‘all or nothing’ policy followed by IPC up to that time.

80  Oil Shock

Oil Cooperation with the USSR: Financial Autonomy and Technology Transfer The Soviet oil cooperation with Iraq: The memorandum of understanding of 24 December 1967 Pursing the objective of working out a programme for exploration and development of the vast areas taken away from IPC by Law 80, particularly North Rumaïla, the Iraqi authorities turned to the USSR. As of September 1967, the Iraqi Ministry of Petroleum invited the Soviet representatives in Baghdad to work out an arrangement with that in mind. For several decades, the almost monopolistic position enjoyed by the Western oil companies in the Middle East had provided the Soviet Union with a choice target for its propaganda. Thus, in September 1967, at the time of the Khartoum conference, the Soviets supported the Arabs’ decision to boycott oil sales to certain Western states, particularly to the United States. But since the Soviet market was unable to absorb the phenomenal amounts of oil produced by the Gulf countries, the Soviets refrained from political exploitation of the disputes between the producing countries and the concessionary companies. They could not replace them, and they could not divert the oil flows from the Western markets by offering a higher purchase price in strong currencies. Hence the USSR’s penetration of the Middle Eastern energy market could be commercial only.42 The Soviet Union offered the producing countries the means for maximizing their income by increasing oil output by way of barter agreements and service contracts, at a time at which those countries were having to cope with new competition from such African countries as Libya, Algeria and Nigeria. Thus, on 24 December 1967, Jader, the INOC president, and Semyon Skachkov, the head of the Soviet delegation and Chairman of the Committee for Foreign Economic Relations of the Soviet Council of Ministers, signed a memorandum of understanding by which the Soviets undertook to provide Iraq with technical and financial assistance for its petroleum development programme:

Iraq and the Oil Cold War 81 The Government of the Union of Soviet Socialist Republics grants its assistance to the Government of the Republic of Iraq for direct development of its oil industry. That assistance may be provided by the Soviet organizations in the following fields: drilling of productive wells in the south of Iraq and supply of equipment and of technology required for reaching that objective; geological prospecting studies for oil exploration in the areas in northern Iraq, and delimitation of the precise locations in the zones having proven reserves in southern Iraq […] It is understood that Iraq will provide reimbursement for the expenses borne by the Soviet organizations […] in the form of deliveries to the Soviet Union of crude oil produced by INOC.43

Thus, under INOC auspices, the USSR was called on to develop drilling in North Rumaïla and facilitate shipment and sale of the crude oil. In the eyes of certain Western observers, the Russians’ haste in concluding this barter agreement was due to their major concern for enjoying easy access to the Iraqi oil, thus increasing their available funds for selling the remainder of their stocks to the Western countries and obtaining the foreign currency needed by their economy. Thus from the political viewpoint, the USSR remained the leading supplier of the COMECON States, so the Kremlin’s support for the movement against the main Western oil interests promised significant economic gains for the Soviets.44 Moreover, by becoming players in Iraq’s economic development, they could exploit certain tactical advantages over their Western rivals. The Soviet–Iraqi agreement, by showing that new types of contracts were more advantageous than the existing ones, necessarily had repercussions for the future relationships between producing states in the Middle East and the Western oil companies. So with that type of agreement the Soviet Union did not need to possess any concession rights in order to exploit the oil resources in INOC’s company. The Soviet press emphasized that aspect by stressing that ‘Iraqi public opinion unanimously recognizes the fact that the agreement contains something more than the ordinary commercial contracts.’45 The agreements of June and July 1969 continued that bilateral cooperation.

82  Oil Shock

A technological and financial partnership as an alternative to IPC: The agreements of June and July 1969 With the Baath’s return to power following the military coup of 17 and 30 July 1968, Iraq moved into a new stage in the development of oil nationalism. In the petroleum domain the Iraqi Baath party, which advocated nationalization of the oil industry when it was in opposition, came to realize  – once in power  – the difficulties encountered in reaching that objective. Even though determined to follow a very firm policy and to entrust INOC to an ever-increasing extent with the task of exploiting the country’s crude resources, the Iraqi government decided to proceed stage by stage. The priority was strengthening INOC so as to create ‘a national oil industry to facilitate the direct and accelerated production of the Rumaïla field and of the other deposits.’46 The new Iraqi minister of petroleum and mines, Rachid Rifai, told the press that the new government was considering a project by which Iraq itself would see to disposing of the share of local production due to it, rather than leaving that up to the British concessionary companies. To reach those political and economic objectives, the Baath party recognized very early on that Soviet assistance was indispensable. Iraq intensified contacts with the Eastern European countries and Moscow. Thus, in the summer of 1969, the memorandum of understanding concluded in December 1967 took the concrete form of a programme aimed at enabling INOC to fully realize its potentialities as a national company by developing the territories expropriated from IPC. The Russian assistance took two forms:  one agreement between the Iraqi and Soviet governments, and another between INOC and Russian company Machinoexport. On 5 July, an agreement was signed in Moscow between Iraq and the USSR on behalf of long-term economic and technical cooperation for development of the Iraqi oil industry, particularly for development of the North Rumaïla deposit, with the immediate goal of producing 5 Mt per year. The agreement also called for a programme on behalf of development of five oil fields in southern Iraq, including the technical assistance needed

Iraq and the Oil Cold War 83 to make the Ratawi deposit operational. Finally, plans were to be drawn up for installation of a 130-km pipeline for moving the crude oil from the production areas to the port of Fao. To finance that programme, Russia granted a loan of 70 million dollars at 2.5 per cent, repayable, beginning in 1973, solely in the form of crude oil at the market price. The treaty provided that the North Rumaïla field would be operational at the beginning of 1972. The concrete expression of the Soviet assistance to Iraq was the signature, on 21 June 1969 in Baghdad, of a short-term agreement on general cooperation, for a period of three years, between INOC and Russian company Machinoexport. That agreement recognized INOC’s right to directly operate all territories with which it was entrusted under Law 97 and to obtain any assistance needed to that end. Machinoexport undertook to provide ten drilling units as well as five geophysical and geological teams, oil drainage stations, separators, tanks and other equipment intended for use in exploration, drilling, development, production and shipment in the Al-Halfaya region, in southern Iraq, and in other areas assigned to the national company in which oil deposits had been detected. Within that framework, an additional contract concerned technical assistance, including support by Russian staff and training in the USSR of Iraqi employees. That agreement as a whole was accompanied by a five-year 3 per cent loan of $72m to cover all operating expenses. The Iraqi–Soviet oil cooperation agreement appeared, at the time, to be the most significant event in the history of the Middle Eastern oil industry, particularly in four respects. Firstly, it marked the apogee of the policy initiated by Kassem, which considered expropriation of the territories granted to IPC, without any compensation, as the basis of a national oil industry. Secondly, by providing Iraq with technical and financial aid, the USSR acquired a foothold in an important oil-producing country and markedly expanded its influence in the Middle East. Thirdly, that agreement became the instrument for the development of INOC as an integrated national company immediately enjoying a market for its oil. Finally, if the Russians guaranteed an outlet for Iraqi oil, the selling price was the market price. Moreover Iraq enjoyed the possibility of selling its

84  Oil Shock oil directly on the world markets, without having to operate through the intermediary of the IPC group in future. On 21 October 1969, Baghdad further strengthened its relationship with the Communist Bloc. The Iraqis signed a technical cooperation agreement with Hungarian oil entity Chemokomplex to have it undertake the drilling and equipping of five wells in North Rumaïla, which INOC was getting ready to exploit with Soviet assistance. In that connection, Hungary granted a loan of $15m to Iraq at an annual interest rate of 3 per cent. In December, on a visit to Czechoslovakia, Iraqi interior minister General Salih Mahdi Ammache announced the impending conclusion of a contract with Czechoslovak company Technoexport for construction of an oil refinery in Basrah. Increased Soviet–Iraqi cooperation and coordination in 1971 was demonstrated by the Soviet–Iraqi protocol of August 1971. It guaranteed an immediate market for INOC crude by the Soviet Union. SovietIraqi ties became even closer in April 1972 when Soviet Premier Aleksey Kosygin visited Iraq for the purpose of signing a 15-year treaty of friendship between the two countries. The joint communiqué released at the end of Kosygin’s visit said that ‘The successful completion of the construction of the Rumaila project sets the stage in the struggle of the Iraqi people against the controls of the imperialist oil companies’. Coincidentally, the Rumaila field began production on 7 April. On 1 June 1972, the Iraqi government nationalized the assets of the Iraq Petroleum Company, which became Iraq Company for Oil Operations. That total nationalization of a British company was the first in the Middle East. It put an end to the activities of the first major oil consortium.

Notes 1 The documentation, a substantial amount of it unpublished, used in writing this chapter comes from the records concerning the Iraq Petroleum Company kept by Total Group. It was supplemented by the series of documents concerning the financial year of the Compagnie Française des Pétroles from 1949 to 1973, and by the series of the Petroleum Press Service from 1952 to 1973.

Iraq and the Oil Cold War 85 2 In the following chapter, ‘IPC group’ is used to designate both IPC itself and its subsidiaries in Iraq, the Mosul Petroleum Company (MPC) and the Basrah Petroleum Company (BPC), but also, in Abu Dhabi, the Abu Dhabi Petroleum Company (ADPC) and, in Qatar, the Qatar Petroleum Company (QPC). 3 This means oil that is exchanged and consumed outside the borders of the country where it is produced. 4 The term Middle East did not appear until the beginning of the twentieth ­century to designate that median area between the Near East and the Far East centring on the Persian Gulf. While the Americans sometimes extend it to include the area from Morocco to Pakistan, the Europeans prefer to define it as an arc drawn from the Valley of the Nile to the Irano-Afghan plateaus and from the southern coasts of the Black Sea to the shores of the Indian Ocean. Thus, the word derives from geopolitics, even if the social sciences have seized on it, in an attempt to provide hypothetical coherence for a contrasting and poorly delimited world that has increased in size constantly as a function of the field of Western concerns. Oil is responsible for this widening. Hence, as the relevant area of analysis for our subject, we will take an area spanning from Egypt to Iran, and from Turkey to the Arabian Peninsula including Iraq, since all of those countries, or almost all of them, are concerned with the oil issue. 5 The term designates the world’s seven (sometimes eight) most important oil companies, constituting an informal cartel of vertically integrated companies controlling nine-tenths of the world output of crude oil and two-thirds of the refining capacity and of the pipelines outside the United States and the USSR. The ‘seven sisters’ are five American companies: Standard Oil (of New Jersey, which became Exxon in 1972), Mobil Oil, Texaco, Gulf Oil and Standard Oil of California; one British company and one Anglo-Dutch company:  AngloPersian Oil Company (which took the name Anglo-Iranian Oil Company, AIOC, in 1935, then British Petroleum or BP in 1954); and Royal Dutch Shell. One sometimes speaks of the Compagnie Française des Pétroles (CFP, which became Total in 1991) as an eighth major. 6 In oil language, the world is divided into two spaces: the American continent, which became the Western hemisphere, and the rest of the world, the Eastern hemisphere. 7 Michael Tanzer, in Richard Barnet, Roots of War (Baltimore: Penguin Books, 1973), p. 199. 8 Ibid. 9 As of the 1870s, the American oil industry made substantial exports, since it marketed more than two-thirds of its production to outside markets. It was to counter the strong competition offered by European firms on those markets that the American oil companies decided, at the beginning of the twentieth century, to go beyond the stage of a simple commercial presence abroad, which was insufficient to contain the competition and ineffective in doing so. Thus, as of 1928, the United States broke up the British oil monopoly in the Middle East in the name of the ‘open door’ policy and guaranteed a 23.75 per cent holding for their majors within the IPC.

86  Oil Shock 10 I borrow this English expression from the geographical analysis of globalization, which perceives this macroeconomic phenomenon as a system establishing connections between command stations by transport and communication networks. The latter are concentrated in the central spaces, the hubs. 11 For their part, the British held 50 per cent of Kuwait Oil, 56 per cent of the Iranian Consortium, two-thirds of the Abu Dhabi Marine Areas, 100 per cent of Kuwait Shell Copmany, 85 per cent of Petroleum Development (Oman) and 23.75 per cent of IPC and of its subsidiaries. By way of CFP, the French held the same percentages in IPC and its subsidiaries, one-third of Abu Dhabi Marine Areas, 25 per cent of Dubai Marine Areas and 10 per cent of Petroleum Development (Oman). See André Nouschi, ‘Le Golfe et le pétrole: d’un impérialisme à l’autre?’, Relations Internationales 66 (1991): 141–62. 12 Walter Laqueur, The Struggle for the Middle East (New York: Routledge, 1970), p. 118. 13 Abdelkader Sid-Ahmed, L’OPEP: Passé, Présent et Perspectives (Paris: Economica, 1980), p. 25. 14 In the face of this coup d’état, the United States landed 4,000 men in Lebanon, while Great Britain sent troops to Jordan to ward off contagion, and France sent a cruiser to the area off the Lebanese coast. 15 In 1959, the Iraqi government demanded that IPC return 60 per cent of the area of its concession. 16 As of 1957, Enrico Mattei’s ENI had signed a new kind of contract with Iran, more advantageous than the 50/50 agreement. 17 A note from Shell quoted by Petroleum Press Service in October 1963 defined the posted prices as follows: ‘The prices at which offers to sell crude are made, the said prices being understood as FOB (free on board) from the ports of shipment.’ Hence those prices are determined by the sellers. The posted prices constitute the basis for calculation of the breakdown of profits between producer countries and concessionaire oil companies. In 1950, the new oil agreements which envisaged the equal sharing of the benefit between the concessionary company and country host began to come into effect, applied first of all by Venezuela (the precursor), and then by Saudi Arabia on Aramco’s initiative. 18 Documents concerning CFP financial years 1958 and 1959. Only BPC, as a pledge of good will, returned part of its concession located under Iraqi territorial waters. As to CFP, it was generally much more moderate than its partners, since it drew a third of its oil resources from Iraq and was established for the sole purpose of supplying France with oil. 19 Samir Saul, ‘Masterly inactivity as brinkmanship:  The Iraq Petroleum Company route to nationalization, 1958–1972’, The International History Review 29, no. 4 (November 2007), pp. 746–92. 20 In the 1960s there was no longer any major conflict between American and British majors. On the contrary, the point was thenceforth to defend a community of interests in the Middle East. 21 Mossadegh, the leader of the nationalization policy, who had become prime minister, as of February 1951 proposed nationalization of the oil industry in

Iraq and the Oil Cold War 87 Iran. In May the nationalization of the Anglo Iranian company became effective, and it was replaced by the National Iran Oil Company. From 1951 to 1953, the AIOC, supported by the other majors, decided to boycott Iranian oil production, which was then reduced to nothing. After Mossadegh’s removal by the Shah in October 1953, the conversations between the AIOC and Iran resumed under the US’s aegis. They lasted until April 1954 and wound up in the creation of an international consortium: the Iranian Oil Participants Limited, in which the AIOC, which became British Petroleum on that occasion, held 40 per cent of the shares, the various American companies another 40 per cent, Royal Dutch Shell 14 per cent and CFP 6 per cent. 22 TA (Total Archives) 92.36/50, Trevelyan to the Foreign Office, 12 July 1959. 23 Ibid., Duroc Danner to CFP, 1 September 1958. The threat of a boycott like the one suffered by Iran after nationalization of the AIOC in 1951 hovered over the relationships between producer countries and majors. 24 The negotiations were often broken off. Thus, in 1960, there was no contact between the two parties between 31 August and 19 December. The same applied in 1961, between the spring and the end of August; George Stocking, Middle East Oil:  A Study in Political and Economic Controversy (Nashville, TN, Vanderbilt University Press, 1970), p. 246. 25 TA 82.7/7, Minister of Economics to the IPC, 31 December 1958. 26 By reducing the base on which the tax and the royalties were established, the companies ipso facto reduced Iraq’s receipts, thus violating article 7 of the agreement of February 1952, if not in form, at least in spirit, as it stipulated: ‘nothing will authorize the companies to reduce their obligations [to maintain production and receipts at a minimum level] for commercial reasons or for convenience only’; documents concerning the CFP financial year, 1952, p. 46. 27 In the international oil vocabulary, this word usually designates any company other than the seven majors: in other words, a company not having a global production, transport, refining and marketing system. Thus, according to one American definition, the term ‘independents’ applies to a company that is more than 70 per cent dependent on the outside world for all of its supplies. 28 Stocking, Middle East Oil, p. 240. 29 Documents concerning the CFP financial year, 1961. 30 Middle East Economic Survey, 31 March 1961, cited in Stocking, Middle East Oil, p. 242. 31 Thomas Fry, ‘The role of the Iraq Petroleum Company in the economic development of Iraq, 1950–1962’, Thesis defended at Princeton University, 1964, p. 24. 32 TA 82.7/211, 14 July 1971. A  secret agreement, made public in November 1966, was concluded for the same purpose among the members of the Iranian Consortium to limit Iran’s oil output; see Edward Chester, United States Oil Policy and Diplomacy:  A Twentieth-Century Overview (Westport, CT: Greenwood Press, 1983), p. 268. Moreover, Standard Oil of New Jersey’s participation in the creation of the Iranian Consortium was dictated, according to one of its senior executives, only by political requirements: ‘We would

88  Oil Shock have made more money if we had done added drilling in Saudi Arabia, we had plenty of oil there, we were pushed into the consortium by the U.S. government’; see Mira Wilkins, The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970 (Cambridge, MA:  Harvard University Press, 1974), p. 322. 33 Saul, ‘Masterly inactivity’, p. 23. In the same way, the IPC group increased the output of its subsidiaries, QPC in Qatar and ADPC in Abu Dhabi. Documents concerning the CFP financial year, 1961. 34 TA 92AA 060/205 and TA 92.36/56, Law 80 negotiations, 1961–1967. Even if article 3 of Law 80 provided for a possibility of returning to the IPC group land parcels having an area equal to those available to each of those companies, thenceforth Law 97 excluded any opportunity for BPC to recover its concessionaire rights to the reserves of North Rumaïla. That law considerably increased the risk of seeing the conclusion of a contract between Iraq and another company for development of those reserves. 35 TA 92.36/56, Law 80 negotiations, 1961–1967. 36 ‘Iraq: Law for the allocation of oil exploitation areas to the Iraqi National Oil Company’, International Legal Materials 6, no. 6 (November 1967): 1162–3. 37 MEES, 29 September 1967, in Stocking, Middle East Oil, pp. 304–5. 38 Majid Khadurri, Republican Iraq: A Study in Iraqi Politics since the Revolution of 1958 (London/New York: Oxford University Press, 1969), p. 294. 39 ERAP, resulting from the merger of BRP and RAP, was a state-owned company tasked with consolidating the French efforts in the petroleum domain. Initially focusing solely on exploitation of Algerian Saharan oil in partnership with Algerian national company SONATRACH, ERAP adopted a policy of diversification of its supply sources of hydrocarbons in seeing Algeria nationalize part of its assets between 1967 and 1968. ERAP hastened to extend its prospecting areas in the Middle East. 40 ‘France and Iraq: Oil agreement’, International Legal Materials 7, no. 2 (March 1968): 233–6. 41 Moreover, the contract, concluded hastily, proved to be unfavourable to ERAP interests. The company was called on to bear, alone, the risks connected with prospecting, while the charges weighing on the company were therefore higher than expected and reduced the anticipated profits. Out of the four blocks assigned to the French group, two were the object of protest by Iran. 42 Robert E. Hunter, ‘The Soviet dilemma in the Middle East. Part II: Oil and the Persian Gulf ’, The Adelphi Papers 9, no. 60 (1969): 1–30. AT 92 AA091/29. 43 MEES, 29 December 1967, in Edith Penrose, The Large International Firm in Developing Countries: The International Petroleum Industry (London: Allen & Unwin, 1968), pp. 426–7; ‘Iraq and USSR: Oil agreement’, International Legal Materials 7, no. 2 (March 1968): 307–11. 44 FT 90.4/25, Le Commerce du Levant, 1 February 1968. 45 New Times, 2 (1968) in Hunter, ‘The Soviet dilemma’. 46 TA 90.4/25:  Centre de documentation et de synthèse (CDS)  :  économie et politique dans le monde (1950–1982), Irak: Politique pétrolière, nationalisation, 5 November 1968.

4 Eight Squeezed Sisters: The Oil Majors and the Coming of the 1973 Oil Crisis Francesco Petrini This chapter investigates the role of the oil majors (the eight multinational corporations that controlled crude production in the Middle East) in the events leading up to the 1973 crisis.1 The quadrupling of oil prices in autumn 1973 was, in part, a consequence of the use of oil as a weapon in the Arab–Israeli conflict. However, much more than this, it was the outcome of a long-standing duel between the oil-exporting countries and the oil companies, whose ultimate stake was the control of the international oil market. To limit ourselves to the immediate causes, the overthrowing of the Libyan monarchy in a military coup in 1969 can be seen as the starting date of a triangular dialectic. This dialectic involved oil companies, producing countries and consuming countries, and resulted in the demise of the concessionary system and soaring oil prices.2 In this critical phase, the companies were directly negotiating with the countries that were part of the Organization of the Petroleum Exporting Countries (OPEC), while the consumer governments remained in the background, watching, with growing anxiety, a situation that was increasingly out of Western control.

90  Oil Shock Our narrative concentrates on the crucial months between January 1970, when the new Libyan government demanded a revision of the concessionary terms, and February 1971, when a group of 13 companies and the Persian Gulf producer governments signed, in Tehran, an agreement on new posted prices (the reference prices for tax purposes). We attempt, in this chapter, to go a step further, relative to the existing literature, and to investigate these negotiations in the light of some of the available primary sources. Indeed, very few works have analysed in detail the events narrated here. Even less has been written from the companies’ point of view. Among the most useful is the report drawn up for the hearings on multinational corporations held by the US Senate in 1974 by Henry Schuler, executive of a US ‘independent’3 oil company, who had a direct role in the negotiations.4 In general, as regards the companies’ role in 1970–3, the existing ­literature oscillates between two alternative poles. On the one hand, the ‘seven sisters’ (the majors excluding CPF) are depicted as all-powerful entities, controlling every aspect of the industry, masterminding the intricate relationship with consumer and producing countries. According to this way of looking at events, the rise of oil prices was a plot orchestrated by the companies in conjunction with the US government and financial circles in New York and London.5 This line of analysis, like all conspiracy theories, results in an over-deterministic narrative where nuances and contingency disappear. It completely blurs the role of the producing countries as autonomous political subjects. Moreover, it usually rests on very slight documentary evidence. Partly as a reaction against this conspiratorial interpretation of the oil crisis, another current of thought tends to render the companies passive. They are portrayed as impotent and/or inadequate in the face of the revolution carried out by the exporting countries.6 The companies were – we are told – fundamentally weak because of their unpopularity among consumers and the lack of support from parent governments. They had, according to this point of view, little else to do but surrender. Thus, for

Oil Majors and the Coming of the 1973 Oil Crisis 91 example, the prudent stance assumed in the early 1970s by the governments of the oil importing countries, wary of engaging in an open fight with OPEC, is emphasized as this demonstrates the companies’ isolation and their lack of alternatives.7 Even those authors who are more critical towards big business tend to adhere to this narrative, emphasizing the companies’ inadequacy in the face of decolonization and of a changing oil market.8 While this second narrative contains elements of truth, I think that there is a need to stress the agency of the companies, which had at their disposal unequalled means, knowledge and an unprecedented worldwide network of relationships. At the same time, I am convinced that the documentary evidence does not support visions of the crisis as an intrigue in which the oil-exporting countries were mere puppets in the hands of the multinationals and the US government. I intend to argue that the oil companies, once they had realized that the era of the oil concessions had come to an end, largely succeeded in riding the wave and using the rise in prices to restore their profit margins: in the previous years these profit margins had been squeezed both by producing countries skimming more and more from oil revenues and by the evolution of the petroleum market in which there was an oil glut: too much oil for a steadily increasing but still relatively insufficient demand.

A Crisis of Profitability The years between 1948 and 1960 were a ‘bonanza’ for the oil industry, as Joe Stork has written.9 The price slumps that had hitherto characterized the oil market were no longer a problem thanks to careful market control on the part of the majors that, coupled with the constant increase in demand, assured them unprecedented levels of profit. The area of major expansion for oil production became the Middle East, where the costs of extraction were particularly low. According to Morris Adelman, in 1960, with a market price at $1.63 per barrel (/b), the total production cost of the Persian Gulf crude amounted to $0.18/b, compared to more than

92  Oil Shock $1 in Venezuela and $1.3/b for Texan oil.10 These extraordinarily cheap resources were developed by the majors through an intricate system of participation in joint ventures in the principal producing countries. This system guaranteed high profits for the companies and low prices and stable supply for consumers, a squaring of the circle of sorts:  albeit at the expense of the exporting countries which felt they received an unsatisfactory fraction of the wealth produced from their territory. But, as would soon become evident, the majors’ oligopoly rested on weak foundations. After the end of the Suez crisis, the price of crude started to decline: between 1954 and 1970 the price of the Arabian Light, FOB from the Persian Gulf, passed from $1.90/b to $1.25/b.11 More importantly from the companies’ point of view, the price of refined products tended to fall, especially in Europe and Japan where competition was increasing.12 For example, between 1958 and 1965 the price of oil products in Europe fell by nearly 25 per cent.13 These price reductions were determined by oversupply on the global oil markets. Even though world oil demand between 1950 and 1970 grew more than fourfold, supply grew even more rapidly.14 As Leonardo Maugeri points out, ‘overproduction was the hallmark of the Golden Age of Oil’.15 The combined production of the Persian Gulf countries passed from 1.8 million barrels per day (mb/d) in 1950 to 14 mb/d in 1970.16 In the same period Soviet production grew from 750,000 b/d to 7 mb/d. Even in the US, the world’s best exploited oil region, crude production almost doubled. Furthermore, important new producing countries (such as Libya) entered the industry, while the very lucrative character of the international oil trade attracted a host of new players, both in upstream and downstream operations, and encouraged smaller firms to expand their activities. All this, as pointed out by Edith Penrose, reactivated the price mechanism that for years had lain dormant in the oil markets.17 The majors avoided a steep slump in prices by containing the oil surplus through a careful management of production, and by limiting, to a bare minimum, the development of new producing fields in the Middle East. Thus, they achieved a ‘gently declining price’, provoking, however, resentment in the producing countries who were most

Oil Majors and the Coming of the 1973 Oil Crisis 93 damaged by this policy (especially Iraq and Iran).18 More disturbingly for companies, their policy of production restraint did not prevent profit per barrel from falling. According to Stork’s calculation, in 1963 the total gross profits earned by the oil companies in the Middle East (Iran, Iraq, Saudi Arabia, Kuwait, Abu Dhabi and Qatar) amounted to $1.7 billion. In 1969 total profits fell just slightly, to $1.6 billion. But this stability of profits was made possible only by a doubling in output; that is, by the halving of profit per barrel. As Stork points out, ‘the most prominent and notable trend in these figures is the sharply declining rate of return per barrel’19  – a trend confirmed by a Shell report published in April 1971, according to which the revenues of the seven majors in the Eastern hemisphere passed from $0.565/b in 1960 to $0.327/b in 1970.20 Furthermore, a growing proportion of the oil revenues was no longer going to the majors but to the ‘independents’: the companies outside the circle of the big multinationals, which, since the mid-1950s, had begun to venture into the more profitable areas of oil production in the Middle East and North Africa. Last but not least, the companies’ position was jeopardized by the oil-exporting countries’ attempts to make their natural resources pay better. After the creation of OPEC, the exporting countries succeeded in getting a small but significant rise in the fiscal revenue they received from the concessionary companies.21 Above all, the newfound unity among oil exporters prevented unilateral manipulation of the posted prices by the companies. Thus the sheer divergence between the declining market prices and the stable posted prices was at the roots of a substantial increase in payments to producing governments. According to Shell, between 1960 and 1970, the government take in the Eastern hemisphere grew from $0.708/b to $0.860/b.22 As reported by Adelman, in the 1960s the profits raked in by the oil industry in the Persian Gulf fell by 24 per cent, while payments to Gulf governments grew by 15 per cent. As a result, in 1970 the government take had come to count for nearly 70 per cent of profits.23

94  Oil Shock In sum, as acknowledged by British Petroleum (BP), ‘through much of the decade [the 1960s] the rates of return of the seven major oil companies declined by comparison with those of the US manufacturing industry’.24 According to Dillard Spriggs, an expert on the financial aspects of the oil industry, ‘most of the companies experienced declining rates of return on investment during this period [1967–71]. It was a period of considerable pressure on profit margins world-wide’25 (cf. fig. 4.1).

Revolution in Libya Into this situation came, in September 1969, the military coup in Libya. During the 1960s, Libya had become the new oil El Dorado, thanks to the discovery of vast reserves of high quality crude and thanks, too, to

1957

1966

1967

1968

1969

1970

Production (million barrels)

1,370

3,627

3,928

4,422

5,034

5,832

Net earnings ($millions)

$1,069

$1,491

$1,446

$1,748

$1,785

$1,907

Net worth 1 Jan ($millions)

$5,653

$12,929

$13,542

$14,959

$15,763

$16,818

Return on net worth

18.9%

11.5%

10.7%

11.7%

11.3%

11.3%

Earnings per barrel (¢)

78.0¢

41.1¢

36.8¢

39.5¢

35.5¢

32.7¢

Paid to governments ($millions) $1,070

$2,798

$3,138

$3,675

$4,223

$5,013

77.1¢

79.9¢

83.1¢

83.9¢

86.0¢

Payments per barrel (¢)

78.1¢

Figure 4.1  Eastern hemisphere: production, earnings and payments to governments (seven majors) Source: Petroleum Intelligence Weekly, March 29, 1971, p. 6.

Oil Majors and the Coming of the 1973 Oil Crisis 95 its relative proximity to Europe. In contrast to the Persian Gulf, the main beneficiaries of the oil bonanza in Libya were not the majors but the independent companies which extracted nearly 70 per cent of Libyan crude and sold it to Western Europe (cf. fig. 4.2). In 1970, the tanker shortage, which had existed since the closure of the Suez Canal in 1967, was exacerbated by a host of factors. These included: an unexpectedly rapid increase in European demand; a number of supertanker accidents; and, in May, the rupture of the Trans-Arabian Pipeline (transporting 500,000 b/d of crude from Saudi Arabia to the Lebanese coast) in Syria. Thus, producers of ‘short-haul’ crude were placed in an exceptionally strong bargaining position, a situation the Libyan government quickly exploited. On 20 January 1970 the Oil minister Izz-al Din al-Mabruk demanded a revision of the concessionary terms.26 Immediately, talks began with Exxon and Occidental, with demands for a rise of $0.43/b on the posted price and retroactivity payments back to 1965 in order to redress the Operator Oasisa Exxonb Occidental (US) Amoseasc BP-Bunker Hunt (US)d Mobil-Gelsenberg (FRG)e Phillips (US) Aquitainef Amoco (US) Total

Average daily production (thousands b/d) 789.7 746.2 608.1 368.9 321.3 264.5 6.0 5.5 0.5 3,110.7

Marathon (US, 33.3%), Continental (US, 33.3%), Amerada Hess (US, 16.66%), Shell (16.66%) b Exxon, Atlantic Richfield (US), Grace Petroleum (US) c Texaco (50%) and SoCal (50%) d BP (50%)-Nelson Bunker Hunt (50%) e Mobil (75%)-Gelsenberg Benzin (25%) f   ELF/ERAP (France, 39%), Hispanoil (Spain, 45%), Murphy (US, 16%) a

Figure 4.2  Oil production in Libya, by operator, 1969 (the independents in bold) Source: Hearings, Part 4, pp. 162 and 177.

96  Oil Shock undervaluation of the Libyan crude in the preceding years. The Exxon chief in Libya, Hugh Wynne, categorically refused to acquiesce to Libyan demands. In a secret meeting held in New York the companies agreed that they would hold a firm line, even refusing to table counterproposals, in the hope that the Libyans would soon pass to milder terms.27 In response the Libyans started to apply pressure to the more vulnerable companies (the ones with no alternative sources of crude). Their first mark was Occidental, on which they imposed, in June, a production cut of 300,000 b/d. Occidental CEO Armand Hammer, went to see Ken Jamieson, chairman of Exxon, asking for help in the form of a supply of crude at cost to fuel his refineries in Europe. He was refused.28 The majors (whose production came for the most part from the Persian Gulf) thought that higher Libyan prices would damage the independents, ‘not realizing the extent to which they were opening the floodgates for the next period’.29 By the end of August the production cutbacks ordered by the Libyan government reached 780,000 b/d.30 The independents capitulated, one by one, in early September, deprived of support from the majors and threatened by the loss of their Libyan operations.31 The majors had no need to capitulate. They had plenty of alternative sources and their greatest fear was the worldwide implications of any cave-in, especially on the thorny issue of retroactivity. As the chairmen of BP and Shell, Eric Drake and David Barran, announced to the UK foreign secretary, Alec Douglas-Home, they intended to stand firm, ‘at whatever cost locally, against Libyan demands’. In view of their worldwide interests  – they said  – ‘it would be disastrous […] to concede the principle of host governments decreeing posted price, especially retroactively’.32 In their opinion, the US majors (four out of five  – the exception was Gulf  – were operating in Libya) nurtured similar views. On these grounds a meeting of the seven sisters was arranged in New York for 25 September to formalize an agreement for a common front to oppose Libyan demands. The main obstacle, as pointed out by the Exxon lawyers, seemed to be US anti-trust regulation. Yet the

Oil Majors and the Coming of the 1973 Oil Crisis 97 majors were convinced that the obstacle could be overcome through the good offices of John J. McCloy, an extremely influential figure in American public life, whose law firm represented all of the seven sisters and nearly all of the biggest independents.33 But the companies had not considered another hindrance:  the US State Department. While in the UK Douglas-Home had expressed his support for the companies’ initiative, when the oil executives met US officials, James Akins, director of the Office of Fuels and Energy, the ‘oil man’ in the State Department, did not hesitate to define BP and Shell’s views as ‘totally misguided’. He stated bluntly that the companies had ‘no real options now but to settle on the Libyans’ terms’.34 A complete shut down of the majors’ Libyan production as a response to the rejection of the government’s demands would mean, in the State Department’s estimation, a loss of 1.5 mb/d directed to Europe with winter around the corner, causing a severe energy shortage.35 In this case, it was all the more likely that the Europeans would attempt to reach bilateral deals with the Libyans, bypassing the majors.36 The majors, Akins hypothesized, would probably refuse to run this oil through their refineries. In this situation the danger of nationalization of the companies, not only in Libya but also in Europe, might arise, as the governments concerned might, in the last resort, take over the refineries.37 At that point, the parent governments of the majors would find themselves in a very awkward position. As Akins pointed out, while ‘HMG might be prepared to see British companies’ assets nationalized not only in Libya but also in countries such as Germany and France, the US government was not’.38 The US authorities were under no illusion as to the consequences of giving in to Libyan requests: ‘the result would obviously be that all producing countries would demand the same deal’.39 But, as explained by the President’s assistant for international economic affairs, Peter Flanigan: The increased cost would be passed on to consumers in Europe and Japan and, to the extent the U.S.  imports oil of and from Canada to U.S. consumers. Since this increase would affect 100%

98  Oil Shock of European and Japanese petroleum supplies and only a small per cent of U.S. petroleum supplies, the result would be a competitive benefit to the United States.40

Faced with the State Department’s hostility, but somewhat relieved, having been offered an easy way out by passing on increased costs to consumers, the US majors quickly backed down over Libya.41 By 30 September, SoCal and Texaco, oil industry hardliners, had signed agreements with the Libyan government. They were followed by Exxon, Mobil and BP. Shell, whose Libyan production had been totally shut down by the government, was the last to surrender, on 16 October. The new agreements increased the posted price by $0.30/b and established a higher tax rate on companies’ net profits ranging from 54 per cent to 58 per cent, depending on the company. The new rates were conceived as a substitute for retroactivity, allowing the companies to spread any costs into the future, instead of making a massive lump-sum payment. This was a very short-sighted decision on the part of the companies. As pointed out by Ian Skeet in his excellent history of OPEC, it was a financially efficient method, both because foreign taxes were an allowable expense in computing home tax payments and because of the cash-flow implications. ‘[B]‌ut in terms of public relations and of precedent it was a disaster.’42 In fact, the Libyan agreements immediately became the model that all the other producing countries wanted to adopt. The companies were well aware that resistance would be in vain. Thus, on 14 November, an agreement between the Iran Consortium and the Shah’s government extended the 55 per cent tax rate to that country.43 Afterwards the companies themselves proceeded to offer a new tax rate to all producers in the Gulf, who would quickly accept these terms.44 Some adjustments to the posted price of heavy crude were also agreed, but small adjustments compared to the Libyan gains. The increase in companies’ costs that these changes entailed were quickly passed on to consumers in Europe and Japan. Thus, to give just one example, the price of fuel oil went up, between October 1969 and

Oil Majors and the Coming of the 1973 Oil Crisis 99 October 1970, by 115 per cent in Rotterdam (the main entry port for Western Europe’s oil imports), by 120 per cent in Italy and by 48 per cent in Germany.45 What was really disturbing for the companies was the so-called ‘ratchet effect’ or ‘leap-frogging’: the escalation of demands by the exporting countries. In early December the Venezuelan government introduced a law which raised the tax on oil companies to 60 per cent (from the previous 52 per cent) and gave the government the right to unilaterally raise the oil price from then on. A month later, the Libyan government summoned the companies operating in Libya and demanded a further 5 per cent tax increase, a rise in the freight premium and a compulsory reinvestment of a ‘reasonable’ amount of profits into exploration.46 Libyan requests were based on the solid argument that, if the agreement of early autumn had recognized a premium on Libyan crude in recognition of its quality and freight advantages, that premium had to be restored after the concessions made to the Persian Gulf producers. As summed up by Henry Schuler, the chief negotiator of Nelson Bunker Hunt in Libya: We suddenly found the demand coming back on us. Now, the Libyans said, if the standard rate is 55 per cent for everybody, we didn’t get anything special last September, so we have to have what you gave us last September on top of the new standard. Well, it had obvious implications [:]‌this ratchet would go on interminably.47

Oil Battle in Tehran In fact, the developments of autumn 1970 encouraged the OPEC countries to make further demands collectively. Meeting in Caracas, on 9–12 December 1970, they adopted a series of resolutions aimed at increasing the payments made to them by the companies. In fact, at this point they demanded ‘uniform general increases’ on posted prices.48 A committee of ministers from Iran, Iraq and Saudi Arabia was set up to negotiate on behalf of the six OPEC member countries situated in the Gulf (the other

100  Oil Shock three being Kuwait, Abu Dhabi and Qatar). They insisted that negotiations with the Iranian Consortium should begin, on 12 January 1971, in Tehran. The companies seemed determined to respond jointly to an OPEC which, for the first time, had moved in unison. As summed up by McCloy, ‘unified action by the governments required unified action by the companies’.49 Again, Shell and BP took the initiative and created a common front.50 In early January, Shell advanced proposals for collective action on the part of all oil companies in an attempt to get a firm agreement, lasting at least five years. This agreement was to provide for a general increase in posted prices (their proposal was 15 cents per barrel), a tax rate of 55 per cent and a premium for short-haul crude, open to yearly review.51 On 5 January, Drake wrote to the British prime minister, Edward Heath, who was leaving for Washington to attend intergovernmental talks on the oil situation, stressing the necessity of getting full support from parent governments. Drake said that unless the companies were fully supported by their governments they would have no choice but to acquiesce in any legislation which the producer governments might enact. They would, then, have to pass on additional costs to the consumer. If any attempt were to be made to resist OPEC’s demands, the companies would need the concerted support of all consuming governments. They needed this support both vis-à-vis the producing governments and in order to make sure that no individual Western oil company broke ranks for the sake of immediate commercial advantage.52 At the Washington meeting, on 6–7 January, representatives of the parent governments of the major international oil companies (the UK, the US, France and the Netherlands) met to review the situation created by the OPEC resolutions. There was general agreement on the importance of the companies acting together, preventing ‘leap-frogging’, and also on the necessity of associating independents with the negotiations.53 The common front came together in the following days, when the companies, majors and independents met in New York, from 11 January onwards. They did so under McCloy’s aegis and with the supervision of

Oil Majors and the Coming of the 1973 Oil Crisis 101 a representative of the US Justice Department, to settle on the form of their cooperation and to get a waiver from the US anti-trust authorities.54 First the companies drew up a message to OPEC in which they outlined their common stance for the coming negotiations.55 They proposed a five-year agreement with a revision of posted prices ‘to new levels subject to moderate annual adjustment against the yardstick of worldwide inflation’, no further increase of the tax rate beyond 55 per cent and a premium for short-haul crudes. It is interesting to note that the annual review clause was not present in the original OPEC demands. This shows that the companies’ main interest was not low posted prices per se, but a stable frame of reference which would permit them to guarantee supply. Bigger producing government takes would be passed on to consumers in the form of higher prices and/or fiscal allowances. To avoid leap-frogging the companies’ message specified, as an essential condition, that the negotiations had to be unitary: ‘for our part we are not able to conclude negotiations with individual member countries’. The message was initially signed by 13 companies (all the majors plus five independents).56 Subsequently, another 11 companies associated themselves to the message.57 On 13 January the US Department of Justice gave an anti-trust waiver to the companies’ initiative and two days later the joint message was delivered to OPEC. The same day, 15 January, 15 companies signed the ‘Libyan producers agreement’, valid over three years, which created a safety net for the firms operating in Libya. In practice the agreement (which got the approval of the Justice Department) provided mutual support to the companies, in the form of supplying oil at cost, subject to a cutback imposition.58 This would assure the independents of the support that Jamieson had refused to give to Hammer a few months earlier. A negotiating team was created, headed by George Piercy, the Mid-East chief negotiator for Exxon, and Lord Strathalmond of BP.59 To back up the negotiations the companies created a two-prong structure with a decisional centre in New  York, at the Mobil headquarters, where the CEOs met to decide overall strategy, and another in London,

102  Oil Shock the London Policy Group (LPG), where senior executives followed the day-to-day evolution of negotiations. The parent governments discreetly kept tabs on the companies’ deliberations from outside. As explained by a Foreign and Commonwealth Office (FCO) memorandum, ‘the general feeling […] was that the right course would be to leave the oil companies to make the running, with diplomatic support coming well behind; the dispute would thus be kept as far as possible on a commercial basis’.60 Taking a more proactive stance, the Nixon administration sent undersecretary of state John Irwin to Iran and Saudi Arabia to support the companies’ message. In his talks with the Shah and King Faisal, Irwin was told that the companies’ negotiating position was a reasonable starting point except for the request for OPEC-wide negotiations. If OPEC was treated as one unit – as the Saudi Oil minister, Ahmad Zaki Yamani, explained to Irwin – then moderates in the Gulf would have to associate themselves with radicals, and ‘no one should expect the moderates to be able to influence the radicals’.61 Instead, if the companies dealt with the Gulf separately, there would be ‘stability and assured supplies from the region’,62 and – as he was told by the Shah – ‘Persian Gulf countries would agree to abide by five-year agreement even if oil companies caved in to higher demands of Libya, Algeria, and Venezuela’.63 Irwin and the US ambassador to Iran, Douglas MacArthur II, were convinced by Iranian and Saudi arguments and recommended that the companies ‘be urged to negotiate with Persian Gulf group separately’.64 When Piercy and Strathalmond met the Gulf team (headed by the Iranian finance minister, Jamshid Amouzegar, the Iraqi oil minister, Saadoun Hammadi, and Yamani) in Tehran on 19 January, they were told that global negotiations would ‘not [be] logical nor practical’ and that, if the companies insisted, OPEC would demand ‘Venezuelan terms’ (basically a 60 per cent tax rate and a unilaterally fixed price).65 As the two negotiators noted: it was perfectly clear that Amouzegar believes he and His Imperial Majesty have convinced the American government […] of the

Oil Majors and the Coming of the 1973 Oil Crisis 103 correctness of their position on a Gulf negotiation coming first, with the result that our negotiating stand […] is by no means an easy one.66

Indeed, the news boded ill for the survival of the companies’ unitary front.67 In fact, the demand for separate negotiations introduced a wedge in the companies’ ranks insofar as the independents, especially those operating in Libya, feared being sold off to the ‘radicals’, while the majors, which produced a great deal more in the Gulf than in Libya, were enticed by the prospect of a quick and stable agreement with the Persian Gulf countries. At the first meeting of the LPG on 20 January, different stances emerged, with the majors supporting a change in approach and the independents, headed by Bunker Hunt, openly sceptical about assurances against leap-frogging. However, at the end of the day the LPG unanimously approved a new letter to OPEC in which they did ‘not exclude that separate (but necessarily connected) discussions could be held’.68 The Gulf negotiators replied with a message that criticized the companies’ response as ambiguous and vague, and reiterated the point that negotiations ‘will in no way involve any other country or region’ outside the Gulf.69 On 24 January, the Shah gave a two-and-a-half-hour press conference in which he threatened Venezuelan terms and a halt to the flow of oil were the companies to persist in their requests for an all-inclusive negotiation.70 In the meantime Akins traveled to London, where he briefed the companies on the Irwin mission, pressing for a regional approach. The independents were ‘unimpressed’, as Akins put it, by his (and by the majors’) argument that a reasonable accommodation in the Gulf might make it easier to reach an agreement in Libya. They informed Akins that they had entered into a general agreement with the major oil companies in order ‘to save their skins’ and they thought the majors might undercut the interests of the independents in Libya.71 Insensible to these grievances, the group of the CEOs, meeting in New  York, decided for a conciliatory answer to Gulf producers and

104  Oil Shock declared their readiness to negotiate separately. To preserve the overall approach, or at least a semblance of that approach, the ‘chiefs’ relied on the so-called ‘hinge’ effect: this was the assumption that the Gulf negotiations would also fix the East Mediterranean posted prices (a part of Saudi and Iraqi oil reached the East Mediterranean through pipelines), thus ensuring the ‘necessary connection’ between the Gulf and Libya. On 25 January the LPG, implementing the ‘two-halves-of-one-team’ approach agreed upon by the ‘chiefs’, created two negotiating teams, one for Tehran, headed by Strathalmond, and the other for Tripoli, headed by Piercy. Soon, negotiations stalled in Tripoli, where everybody wanted to wait on the outcome in the Gulf. Schuler tried to defend the original approach, but found himself isolated in a dramatic meeting of the LPG on the evening of 30 January. In that meeting, only the German Gelsenberg sided with his demand to reconsider the ‘chiefs’’ decision.72 All the other companies appeared resigned to the definitive dismissal of the global approach, and the Libyan independents evidently put their hopes of survival in the safety net agreement (and, like the majors, in passing on extra costs to consumers). The talks in Tehran demonstrated that the gap between the companies’ offer and the producers’ demand was still wide. The problem was not so much on the posted price issue, where the companies had raised their initial offer of $0.15/b to $0.27, while the Gulf countries had lowered their demand from $0.54 to $0.35. Above all, the sides were distant on assurances against leap-frogging, something more likely now that the principle of separate negotiations had been accepted. The Gulf countries were willing to offer guarantees about only the crude shipped from the Gulf, not the crude that reached the Mediterranean terminals. This effectively removed the ‘hinge’, the last tenuous claim to a global approach. To make things worse for the companies, the Gulf countries demanded the special transportation differential accorded to Libya in autumn, if the freight fell and the differential was not eliminated. Thus the companies, while not getting any ‘hinge’ tying the Gulf to the Mediterranean, risked a ‘reverse hinge’, with the Mediterranean being tied to the Gulf. This was

Oil Majors and the Coming of the 1973 Oil Crisis 105 an unnerving proposition for them which would have seen them paying a freight premium on a much larger production than that of Libya. By early February, the companies had no global approach, no separate-but-necessarily-connected negotiations, no two-halves-ofone-team and no hinge. In Schuler’s opinion, ‘we met a little resistance and we backed off, and were seen to back off and off and off and off, and later developments showed we constantly moved back’.73 In a last attempt to stop the rout, on 2 February the LPG decided to break off negotiations.74 The OPEC meeting in Tehran, 3–4 February, reacted with a resolution that threatened unilateral legislation unless a settlement was reached by 15 February. On 4 February the majors held a meeting, presided over by Drake, to discuss the situation. With the exception of the French, they agreed that there was no advantage to be gained from accepting the terms offered by producers: ‘the lesser evil was to let them go ahead with legislation. [W]‌ithout assurances, on which there seemed to be no prospect of progress, any deal done with Gulf producers would be valueless.’75 In any case, as Drake made clear to the Foreign Office, the companies had no cash. They would, then, have to raise their prices by more than the price rise of the producers. It seems that the companies, not finding any assurance from the producers, were preparing the ground to discharge their additional costs on to consumers. Given this, they had come to believe that to be legislated against would put them in a position of strength: they could claim that they had done everything possible to keep oil prices low. As indicated, as early as December, by David Steel, managing director of BP, ‘the companies might be better off vis-àvis the consumer governments if the companies were legislated against and the increases were then seen to be a matter between producer and consumer governments’.76 The companies’ decision was not welcomed by the consuming countries. An Organization for Economic Cooperation and Development (OECD) Council meeting indicated clearly that the priority for consuming governments was the regular flow of supply and the price was considered a dependent variable.77 Meanwhile, from Tehran, Lord Strathalmond

106  Oil Shock communicated that any legislation would be far more onerous than previously estimated: it would probably be only for one year and might well be succeeded by still more onerous measures, including perhaps a tax hike.78 These were conditions that consumers would not be very pleased with. In the light of this news the majors made a U-turn, and in a meeting on 8 February they agreed that a negotiated agreement was in their interest.79 In a few days of talks, the two sides reached an agreement on all the main points and, on 14 February, the final document was signed by the six OPEC members from the Gulf and the companies associated with the negotiations.80 The Tehran agreement provided an immediate uniform increase in posted prices of $0.35/b, and introduced a new system of gravity differentials, which represented a further average rise in posted prices of $0.04/b. To meet inflation it gave another 2.5 per cent increase in posted prices on 1 June 1971 (representing an average increase of 4.5 cents a barrel) and on 1 January every year from 1973 to 1975. It also established a further increase on all posted prices of $0.05/b on 1 June 1971 and on the first of January of each year from 1973 to 1975, justified, rather vaguely, with reference to an increase in oil demand in that period.81 In total, under the agreement the posted price of an average Iranian light crude went up by 48.4 cents (to $2.274), from 1 June 1971, while the original OPEC demand had been for an increase in posted price of 54 cents.82 As the British government noted ‘the financial terms of the agreement were very close to those tabled by the OPEC countries on 2 February [when the companies left the negotiating table] and were slightly better for the companies than the original OPEC demands’.83 In terms of stability and assurances against leap-frogging, the points that were of the most interest and concern, the companies got little:  a five-year guarantee on the agreement and no retroactivity. On the thorny issue of freight premium, the majors secured an agreement whereby if the temporary premium agreed for Libya failed to be reduced when freight rates fell, only a small proportion of this premium would be added to

Oil Majors and the Coming of the 1973 Oil Crisis 107 Gulf prices. The companies were unable to obtain assurances on pipeline supplies in the event of Libyan troubles and on East Mediterranean prices and tax rates in relation to a Libyan settlement. Therefore, leap-frogging remained a possibility. Seen from the perspective of the western consumer, the agreement amounted to ‘the industry’s virtually total capitulation to the producing governments’, in the words of an official from the British Embassy in Tehran.84

Conclusion Three years after the signature of the Tehran agreement, Schuler declared that for the companies the agreement had been an ‘unmitigated disaster’.85 Conversely, according to Skeet, a former Shell executive, the Tehran agreement was ‘by no means disastrous’ for the companies.86 Both statements contain some truth. On the one hand, one can agree with Schuler:  the companies had failed to present a united front; the negotiations had shown the extent of their discord87 and had revealed difficulties in coordination between companies and parent governments.88 The constant retreat in the face of producers’ demands gravely damaged the credibility of the companies in the eyes of both consumers and producers and set in motion a chain of events that led directly to the crisis of 1973. On the other hand, though losing a position of supremacy in the governance of oil markets (a position, in any case, untenable in the post-colonial world), the majors managed to survive the storm. They did so, essentially, by passing on the extra costs to consumers. Indeed, why had the companies needed so strenuously to defend low prices? In the 1950s and 1960s, oil oversupply had made it essential for the companies to defend low posted prices – to keep them as aligned as possible with market prices. This had made credible their claim of being the best defenders of consumer interests. In the early 1970s, when the balance between supply and demand had reversed, the rise of posted prices became entirely acceptable for the companies, provided the extra government take could

108  Oil Shock be passed on to their customers.89 As declared by Barran in 1968, ‘pressure from the producing governments on costs is something that we can live with, provided we are not at the same time denied freedom to move prices in the market so as to maintain a commercial margin of profit’.90 And, indeed, this freedom was not denied to the companies. As pointed out by Pierre Desprairies of ELF/ERAP, the final result of the negotiations of early 1971 was, for the European consumers, a price rise of 50 to 100 per cent on refined products.91 The companies’ net profits, after a rise of 1 per cent between 1969 and 1970, in 1971 rose by 11 per cent.92 As noted by Spriggs, the negotiations on the oil prices of 1970–1 had taught the companies that ‘they could pass the tax increase along to the customer’.93 However, the cave-in to producers’ demands was never a foregone conclusion. The negotiations represented a difficult balancing act for the companies, caught between the producers’ offensive and the consumers’ aversion to high prices. The consumer countries were willing to accept higher prices in exchange for stability of supply, but the companies could not afford to give the impression of selling out their customers. There was the fear that these customers, the consuming countries, would simply bypass the majors and seek their own accords.94 Actually, the consuming countries were pushed into a profound reconsideration of their relationship with the majors, given the great deal of discontent aroused by the outcome of the Tehran negotiations even among the majors’ parent governments.95 The companies tried to stem the tide, setting up a united front, but that front soon revealed itself a paper tiger. Thereupon they proceeded to prepare the ground for the price rise.96 It has to be noted that the producers made an attempt to prevent such a development, when the Shah proposed that the agreement include a linking of the posted price to the price of refined products.97 As pointed out by an alarmed Piercy to Yamani, this would represent ‘an attempt by consuming countries to freeze the companies’ margin at the very depressed 1969 and up levels’.98

Oil Majors and the Coming of the 1973 Oil Crisis 109 The moral of the story was aptly summed up by the world-renowned oil consultant Walter Levy, in a talk with Kissinger in August 1973: ‘the profits on foreign oil have never been as large as before; they are unbelievably high […] [T]‌he oil companies will agree to most price increases as long as they are sure they can pass them on to the customers’.99 Kissinger put it more colourfully: I’ve become convinced that the oil companies are politically irresponsible and, in fact, idiots. They are concerned only with profits, to get along with the producer countries, and they, therefore, pass along price increases […] The overriding concern then as now is not to rock the boat, to maintain their access to oil at almost any price.100

Notes 1 In order of their production of crude in 1972:  Standard Oil of New Jersey (Exxon, US), Royal Dutch Shell (UK-Netherlands), British Petroleum (UK), Texaco (US), Gulf (US), Standard Oil of California (SoCal, US), Mobil (US) and Compagnie Française des Pétroles (CFP, France). 2 The main passages were the agreements with Libya in autumn 1970; the agreements on posted prices signed between February and June 1971; the Geneva agreement on compensations for the US dollar depreciation in January 1972; and the agreement on the participation of various Gulf countries to the ownership of the concessionary companies in December 1972. 3 This term indicates any company other than the majors. 4 93rd Congress, US Senate, Committee on Foreign Relations, ‘Multinational Corporations and United States Foreign Policy’, Hearings before the Sub­ committee on Multinational Corporations (Washington, DC: US Government Printing Office, 1974) (Hearings), Part 6, pp. 1–59. Schuler’s testimony is a very insightful source albeit vitiated by the acrimony between majors and independents. Even more useful are the 163 pages, in appendix, of documents regarding the negotiations. Very good accounts can also be found in some companies’ histories: Bennett H. Wall, Growth in a Changing Environment: A  History of Standard Oil Company (New Jersey) 1950–1972 and Exxon Corporation 1972–1975 (New  York: McGraw-Hill, 1988), pp. 753–811; James Bamberg, British Petroleum and Global Oil, 1950–1975:  The Challenge of Nationalism (Cambridge: Cambridge University Press, 2000), pp. 447–61. 5 This view was widely circulating in the French debate at the time; see for example Jean-Marie Chevalier, Le Nouvel Enjeu Pétrolier (Paris: Calman-Lévy,

110  Oil Shock 1973). More recently a similar line has been adopted by Éric Laurent, La Face Cachée du Pétrole (Paris:  Plon, 2006); William Engdahl, A Century of War:  Anglo-American Oil Politics and the New World Order (London:  Pluto Press, 2004). 6 The latter are often depicted, in discourses heavily influenced by the clichés of an Orientalist point of view, as the destroyers of a grandiose system of production and distribution created by corporations presented as evangelists of market and a bulwark of reason in regions marred by irrationality and extremism. In the words of an executive of a French oil group, the majors ‘ne sont jamais qu’un exemple de cette chose magnifique, sans laquelle rien ne se fait dans ce monde et qui est “l’entreprise” ’; they are, of course, ‘au service de la collectivité des hommes’ and without them oil wealth would never have come into existence: Archive de la Compagnie Française des Pétroles (CFP), Paris (ACFP), SC89/15, ‘Le choc pétrolier de 1973 et ses conséquences sur l’économie de l’énergie’, 1973. 7 Not surprisingly this point of view is shared, with different nuances, by companies’ official histories:  Bamberg, British Petroleum and Global Oil; Wall, Growth in a Changing Environment; Stephen Howarth-Joost Jonker, A History of Royal Dutch Shell: Vol. 2-Powering the Hydrocarbon Revolution, 1939–1973 (New  York:  Oxford University Press, 2007). This is also the point of view of the most famous history of the oil industry, Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Simon & Schuster, 1991). 8 This is the case, for example, in the best primer on the history of the oil industry: Anthony Sampson, The Seven Sisters: The Great Oil Companies and the World They Made (Sevenoaks: Hodder and Stoughton, 1985). 9 Joe Stork, Middle East Oil and the Energy Crisis (New York: Monthly Review Press, 1975), p. 56. 10 Morris A. Adelman, Genie Out of the Bottle:  World Oil Since 1970 (Cambridge: MIT Press, 1995), p. 56; Leonardo Maugeri, The Age of Oil: The Mythology, History, and Future of the World’s Most Controversial Resource (Westport: Praeger, 2006), p. 80. 11 Francisco Parra, Oil Politics:  A Modern History of Petroleum (London:  I.B. Tauris, 2004), p. 74. 12 Up to the late 1950s, crude oil prices had a relatively minor significance for the majors, given the fact that the bulk of their oil moved within their vertically integrated structure, from the well to the pump. Edith T. Penrose, The Large International Firm in Developing Countries: The International Petroleum Industry (London: Allen & Unwin, 1968). 13 Ibid., p. 192. 14 Parra, Oil Politics, p. 41. 15 Maugeri, The Age of Oil, p. 80. 16 Adelman, Genie Out of the Bottle, p. 43. 17 Penrose, The Large International Firm, p. 193.

Oil Majors and the Coming of the 1973 Oil Crisis 111 18 Parra, Oil Politics, p. 73. 19 Stork, Middle East Oil, p. 120. 20 Archivio Storico ENI, Pomezia (AENI), BB.III.1–442, Organismi nazionaliinternazionali, Shell Briefing Service, ‘Financial needs of the oil ­industry in the 1970s’, April 1971, Italian translation of 7 July 1971. For similar data see ACFP, ‘Le choc pétrolier de 1973 et ses conséquences sur l’économie de l’énergie’. 21 In 1964 the ‘Royalty Expensing agreement’ abolished the detraction of the royalties paid by companies from the calculation of the taxation of profits. Robert Mabro, On Oil Price Concepts (Oxford: Oxford Institute for Energy Studies, WPM 3, 1984), pp. 7–8; Bamberg, British Petroleum and Global Oil, pp. 151–61. 22 AENI, Shell Briefing Service, ‘Financial needs of the oil industry in the 1970s’. 23 Out of a profit of $1.334/b, defined as the posted price minus the royalty, various discounts and accounting costs, the government take (that is, the royalty plus the income tax at 50 per cent) amounted to .892; Morris A. Adelman, The First Price Explosion 1971–1974 (Cambridge, MA: MIT Center for Energy and Environmental Policy Research–90-013WP, 1990), p. 5. 24 British Petroleum Archive, University of Warwick (BPA), BP57665, Strategy Planning Committee, ‘Energy policy’, 28 March 1973. See also ‘The profits of the majors’, Petroleum Press Service, May 1968, which defines the profit performance of the majors in the preceding decade as ‘poor’. 25 Hearings, Part 4, p. 77. 26 The National Archives of the UK, Kew Gardens (TNA), Foreign and Commonwealth Office (FCO) 67–432, ‘Address by the Minister of Petroleum and Minerals to executives of oil companies’, 20 January 1971. 27 TNA, FCO 67–432, British Embassy in Libya, ‘Posted price negotiations’, 5 March 1970. 28 For an account of the ‘historic meeting between the two opposite sides of the oil business’ see Sampson, The Seven Sisters, p. 225. 29 Paul Stevens, ‘The history of oil’, Polinares WP 3 (2010): 1–20 (9). 30 TNA, FCO 67–434, ‘Summary of cuts imposed on oil companies by Libyan government’, 3 September 1970. 31 A detailed chronology of the Libyan negotiations can be found in Hearings, Part 4, pp. 160–177. 32 TNA, FCO 67–435, Douglas-Home to Embassy in Washington, 23 September 1970. 33 Sampson, The Seven Sisters, p. 226. On McCloy see Kai Bird, The Chairman: John J.  McCloy, the Making of the American Establishment (New  York:  Simon & Schuster, 1992). 34 TNA, FCO 67–435, Briefing note, Derek Eagers, ‘Libyan oil’, 8 October 1970; Douglas-Home to Embassy in Washington, 23 September 1970.

112  Oil Shock 35 Libyan oil exports to Europe amounted to a quarter of total Western European oil imports in 1968:  TNA, POWE 63–769, OECD:  High-Level Group, Briefs, n.d. 36 TNA, FCO 67–435, UK Embassy in Washington to FCO, 26 September 1970. 37 This line of reasoning was suggested by Walter Levy, one of the most prominent oil advisors to Undersecretary U. Alexis Johnson, on the morning of 25 September (TNA, FCO 67–435, R.H. Willmott (UK Embassy in Washington), ‘Libyan oil’, 23 October 1970). 38 TNA, FCO 67–435, D. Eagers, ‘Libyan oil’, 8 October 1970. 39 ‘Memorandum. Libyan oil’, 29 September 1970, US Department of State, Foreign Relations of the United States, 1969–1976 (FRUS), vol. XXXVI, Energy Crisis 1969–1974 (Washington, DC:  Government Printing Office, 2011), p. 131. 40 Ibid. 41 In the meantime Douglas-Home, aware of American doubts, had also hastily toned down his support for the companies’ initiative: TNA, FCO 67–435, Tel. Douglas-Home to UKMIS in New York, 25 September 1970. 42 Ian Skeet, OPEC:  Twenty-Five Years of Prices and Politics (Cambridge: Cambridge UP, 1988), p. 61. In the 1970s, Skeet was in the office for OPEC affairs of Shell. 43 The Consortium comprised all the eight majors plus US independents. 44 Skeet, OPEC, pp. 62–3. 45 ‘Oil prices in Europe soaring sharply at refinery level’, Petroleum Intelligence Weekly (PIW), 7 December 1970. 46 ‘Libya confronts oil firms with shattering list of new demands’, PIW, 11 January 1971. 47 Hearings, Part 5, pp. 79–80. 48 Skeet, OPEC, pp. 63–4. 49 John J.  McCloy to Richard W.  McLaren (Assistant Attorney General, US Antitrust Division), 23 July 1971, in Hearings, Part 6, pp. 231–45, 234. 50 As related by Schuler, he was approached by Shell people in early January asking him to take part in the creation of a common front of companies (Hearings, Part 5, p. 80). 51 ‘Telegram from the Department of State to certain diplomatic posts’, 8 January 1971, FRUS, p. 165. 52 TNA, PREM 15–1090, Drake to Heath, 5 January 1971. 53 ‘Telegram from Department of State to certain diplomatic posts’, 8 January 1971, FRUS, pp. 165–6. 54 TNA, POWE 63–769, OECD High-Level Group, Briefs, n.d. 55 Text in Hearings, Part 6, pp. 223–4. 56 These were Amerada Hess, Continental, Marathon, Bunker Hunt and Occidental. They all had production in Libya. 57 They were not only from the US but also from Germany (Gelsenberg), Japan (Arabian Oil), Belgium (Petrofina) and Spain (Hispanoil). Notable for their absence were the Italian ENI and the French ELF/ERAP.

Oil Majors and the Coming of the 1973 Oil Crisis 113 58 Text in Hearings, Part 6, pp. 224–8. 59 On the organization of the companies’ common front see McCloy’s statement in Hearings, Part 6, pp. 234–7. 60 TNA, FCO 51–242, Research Department Memo, ‘The Tehran oil agreement’, 13 November 1972. 61 ‘Telegram from the Under Secretary of State (Irwin) to the Department of State’, 19 January 1971, FRUS, pp. 189–90. 62 Ibid. 63 Ibid., p. 187. 64 Ibid., p. 192. 65 J. Van Reeven (Shell, Managing Director, Iranian Consortium) to J. Addison (BP, head of the LPG), 19 January 1971, in Hearings, Part 6, p. 67. 66 Strathalmond and Piercy to Addison, 19 January 1971, in Hearings, Part 6, p. 69. 67 See Schuler’s statement in Hearings, Part 6, pp. 12–13 and Piercy’s in Hearings, Part 5, pp. 220–1. 68 Text in Hearings, Part 6, p. 61. 69 See the text in TNA, FCO 67–556, Van Reeven to Addison, 23 January 1971. 70 Text of the conference in Hearings, Part 6, pp. 82–7. 71 FRUS, Doc. 81, ‘Editorial note’ (Telegram 621 from London, 25 January 1971), p. 204. 72 Hearings, Part 6, pp. 21–2. 73 Hearings, Part 5, p. 122. 74 TNA, POWE 63–770, ‘OPEC Negotiations’, 2 February 1971. 75 See the record of a phone conversation between Drake and Denis Greenhill (Permanent Undersecretary for Foreign Affairs) in TNA, FCO 67–557, L.A. Daunt (Oil Department, OD), ‘Oil’, 5 February 1971. 76 TNA, POWE 63–769, ‘Record of a meeting FCO–BP–Shell to discuss the OPEC resolution’, 31 December 1970. 77 TNA, FCO 67–557, R.H. Ellingworth (OD), ‘Oil negotiations’, 8 February 1971. 78 Ibid. 79 Cf. the phone conversation between Drake and Greenhill as reported in TNA, FCO 67–557, Daunt (OD), ‘Oil negotiations’, 8 February 1971. 80 Exception made for the Japanese Arabia Oil Co. and Atlantic Richfield, which signed later. 81 Text of the agreement as a supplement to PIW, 22 February 1971. 82 ‘What was demanded and offered in costly Gulf settlement’, PIW, 22 February 1971, p. 4. 83 ‘The Tehran oil agreement’, 13 November 1972. 84 TNA, POWE 63–771, British Embassy in Tehran, ‘The oil battle in Tehran’, 23 February 1971. 85 Hearings, Part 5, p. 101. 86 Skeet, OPEC, p. 68.

114  Oil Shock 87 Also, the Libyan Producers Agreement did not work as expected. According to Schuler, Texaco, SoCal, Exxon and BP lived up to their obligations under the agreement; Shell, Mobil (which were ‘short on oil’), Gulf and the independents did not (Hearings, Part 5, p. 94). 88 But it is not exactly true to say that the governments failed to support the companies. It is true, instead, that the companies themselves were often wary of US or UK government intervention, lest it ‘politicize’ the talks, and they declined offers of support. For example, at the end of January BP and Shell rejected an FCO proposal for a personal intervention from the Prime Minister (TNA, FCO 67–554, Douglas-Home to various posts, 15 January 1971). 89 In this sense, see Skeet, OPEC, p. 68. 90 Paul H. Frankel, ‘The current state of world oil’, Middle East Economic Survey (September 1968): 6. 91 AENI, BB.III.1, 442, ‘La crise pétrolière de 1970/71 et ses conséquences politiques’, Paris, 7 February 1972, press conference given by Desprairies at the French Chamber of Commerce in Brussels, 2 February 1972. See also ‘Oil firms moving swiftly to pass full cost hike to buyers’, PIW, 8 March 1971. 92 Parra, Oil Politics, p. 134. 93 Hearings, Part 4, p. 55. 94 For an alarmed evaluation of this trend, see BPA, BP36967, Economic Relations Department, ‘The role of the international oil companies’, 26 July 1971. 95 On the UK case see Jonathan Kuiken, ‘Caught in transition: Britain’s oil policy in the face of impending crisis, 1967–1973’, Historical Social Research 39, no. 4 (2014): 272–90; Francesco Petrini, ‘What is good for BP is good for the UK? Oil companies–government relations during the first oil crisis, 1970–73’, in John Fisher, Effie Pedaliu and Richard Smith (eds), The Foreign Office, Commerce and British Foreign Policy since 1900 (London: Palgrave, forthcoming). 96 Parra devotes three pages of quotes to the grim forecasts on oil supply that were typical of the early 1970s. Significantly, all these quotes but one come directly or indirectly from sources linked to the industry (Parra, Oil Politics, pp. 115–17). On the social construction of oil estimates: Timothy Mitchell, Carbon Democracy: Political Power in the Age of Oil (London: Verso, 2011), pp. 189–90. 97 ‘Telegram from the Under Secretary of State (Irwin) to the Department of State’, 18 January 1971, FRUS, p. 186. 98 Piercy to New York, 20 January 1971, Hearings, Part 6, p. 70. 99 ‘Memorandum of conversation’, 8 August 1973, FRUS, pp. 503–4. 100 ‘Memorandum of conversation’, 10 August 1973, FRUS, p. 510.

PART 2 Consequences

5 Shifting Sands: The 1973 Oil Shock and the Expansion of Non-OPEC Supply Tyler Priest The fortieth anniversary of the ‘oil shock’ of October 1973 passed in 2013 with hardly any public commemoration. In the US, in particular, there was little reflection about the pivotal moment when six Persian Gulf oil producers raised their benchmark oil price by 70 per cent and accelerated the renegotiation of long-time concessions to foreign oil companies, while Arab members of the Organization of the Petroleum Exporting Countries (OPEC) embargoed oil shipments to the United States and other countries that backed Israel in the Yom Kippur War. There was not a word about it in the New York Times. There was also nothing from the Richard M. Nixon Presidential Library, which was preoccupied with the latest release of White House tapes. This eerily mirrored how the unfolding Watergate scandal and the first release of White House tapes in October 1973 had distracted the Nixon officials from the oil crisis. The sparse commentary that did come forth overlooked crucial historical details. Many stories mistakenly referred to the ‘OPEC embargo’, when it was Arab members of OPEC, not the organization itself, which imposed

118  Oil Shock the oil restriction.1 They implied that the objective of the embargo was to raise oil prices, when it actually aimed to protest US support of Israel. Journalists repeated the mistake of attributing gasoline shortages to the embargo, when in fact the long lines at gas stations were mostly caused by the misguided policy of price controls and emergency supply allocations imposed by Nixon between 1971 and 1973.2 Op-ed pieces replayed the dirge about how the US, after 40 years, is still dangerously dependent on foreign oil, with differing opinions about whether we can ‘frac’ our way to independence or find deliverance only through a radical shift to ‘renewable’ energy.3 These stories missed the larger implications of the oil shock for both the global political economy and the oil industry itself.4 The embargo was a major contributor to the shock, but only one factor among others. Jay Hakes demonstrates that the US vulnerability to an interruption in foreign supplies of oil, or at least tightness in global supply, resulted from several underlying transformations, especially the loss of US domestic surge capacity in oil. Fiona Venn writes that the energy crisis of 1973 consisted of two ‘distinct but interrelated crises’, one ‘political’, which was the six-month embargo shaped by the Arab–Israeli conflict. The other was ‘economic’, which concerned the renegotiation of oil agreements, beginning in 1971, which increased the level of payments to host governments. By 1974, most of these nations began moving from participation to 100 per cent nationalization. This is the real significance of the oil crisis of 1973. The natural resource owners were now in the driver’s seat and exercised their sovereign power to revise the rules governing oil in their nations and to assert control over oil production and prices. In none of the news stories from October 2013 was the word ‘nationalization’ ever mentioned, leaving the impression that the major oil companies never owned lucrative concessions in OPEC nations.5 The OPEC nationalizations resulted in what Steven Schneider called the ‘largest non-violent transfer of wealth in human history’.6 Nationalization changed the international petroleum industry and the world. In assessing the long-term impact of the 1973 oil shock, historians as well as journalists tend to underplay nationalization in

1973 Oil Shock and Expansion of Non-OPEC Supply 119 favour of an emphasis on the embargo and price shock, especially the varied effects of the quadrupling of oil prices on consumers, economies and governments.7 Like much of the journalistic coverage of the fortieth anniversary, American historians often lament how little has changed in the past four decades to alleviate the nation’s vulnerable dependence on oil. Paul Sabin criticizes the tepid response of US energy policy since the 1970s, which ‘only modestly altered American patterns of energy use’.8 Others are more hopeful about the lesson of the shock for solving ‘America’s hydrocarbon predicament’. According to Mark Fiege: Perhaps the most important legacy of the first great oil shock was a revived and persistent conservation ethic that reminded citizens that they could not sustain their hydrocarbon habits over the long term and that they needed to try something different.9

An equally important legacy of the first great oil shock, besides the ‘conservation ethic’, was a rejuvenated commitment to finding new oil sources. Contrary to the fears of many contemporary observers, the 1973 shock did not produce an oil or energy shortage. Rather, it provided the economic incentive and strategic imperative to expand global hydrocarbon supplies from territorial and geological frontiers beyond the control of OPEC. Consumption patterns may not have changed as much as some people would have liked, at least in the US, but the world of oil production has experienced a major transformation since 1973. This is largely a result of technological innovations in the oil and oil service industries. Rising oil revenues afforded the commercialization of sophisticated oil-field technologies that were needed to reach oil deposits in untested parts of the world and under difficult environmental conditions. The overriding lesson of the oil shock was indeed to ‘try something different’. To a significant extent, that meant trying different things, in different locations, but in pursuit of the same objective – hydrocarbons.

120  Oil Shock

The End of Business as Usual As Francesco Petrini observes in this volume, the literature on the oil companies’ role in the first oil crisis has alternated between interpretations that view the oil majors as all-powerful, complicit in orchestrating the price increases of the 1970s, or isolated and passive, forced to surrender to the new assertion of producer power. In fact, it was even possible for commentators at the time to hold both views simultaneously. Investigative journalist Robert Sherrill, who covered the ‘oil follies’ of the 1970s, alleged that the ‘shortage was so blatantly contrived as to make the word conspiracy seem justified’. At the same time, he warned that ‘anyone born in the 1930s who lives a normal life-span will probably see most of the wells in America come to a wheezing halt as the fields run dry’.10 This was because the oil majors, in his opinion, had become so cozy with OPEC that they shunned exploration in the US and non-OPEC countries and were willing simply to pass on the high costs of OPEC oil to consumers through their control of downstream assets. This snapshot of the situation from the late 1970s sorely misread what was happening. First, the oil majors were hardly co-conspirators with OPEC, especially considering the accelerating renegotiation and nationalization of oil concessions in the early 1970s. Although not passive, the oil majors were clearly unprepared for the new reality thrust upon them. As Joseph Pratt explains in his history of Exxon, the decision-makers at the major oil companies at this time were hobbled by the fact that they ‘made up one of the few generations of oil executives in history whose primary management experience came during an era of relative oil price stability and steady economic growth’.11 Their management structures lacked the tools to cope with extreme price volatility. By the end of 1973, all their price-forecasting methods, which never accounted for the ability of suppliers to double the price of crude oil overnight, went out the window. Not only could they not anticipate drastic price changes, they were also slow to respond to changing market conditions in the late 1960s

1973 Oil Shock and Expansion of Non-OPEC Supply 121 and early 1970s. During the stable period of low crude oil prices in the 1960s, as Sherrill correctly observed, the majors generally eased off oil exploration and shifted capital budgets downstream into refining and chemicals. Upstream planning by international oil companies often did not prioritize exploration opportunities on a global basis. By allocating capital to the top-rated projects of national affiliates, corporate strategy failed to ‘take into account the rise and fall in importance of the regional companies or their potential for growth’.12 The major oil firms, as well as their home governments, were not merely unprepared for the oil shock. They had become so accustomed to business as usual that they disregarded warning signs that the world was about to change, or change a lot faster than they realized. Supply forecasts from some companies, as early as 1971, that spare shut-in well capacity in the US was much less than what was being reported did not find a receptive audience in industry or government until after the embargo. Domestic oil reserve estimates coming out of the US Geological Survey, meanwhile, were wildly inflated. In October 1973, right before the outbreak of the Yom Kippur War, the Aramco partners anticipated only a gradual increase in ‘participation’ by Saudi Arabia through the 1970s, but by the following summer they were forced to agree to 60 per cent participation retroactive to 1 January 1974. As Watergate increasingly distracted and weighed on Nixon and his chief aides, secretary of state and national security advisor Henry Kissinger, who by his own admission knew very little about the oil industry, confidently believed weapons deliveries to Israel would not provoke a boycott.13 The combined effects of the embargo, oil price increases and the ­collapse of the concession system abruptly ended the post-World War II petroleum order. Although surprised at the suddenness of this change, the major oil companies and consuming nations began developing a new structure to defend their interests. The US government and its allies implemented policy reforms that moderated demand and built up strategic stockpiles.14 The international oil companies and their home governments began promoting bilateral investment treaties and contractual

122  Oil Shock arrangements that eroded the concept of state sovereignty at the heart of the OPEC revolution.15 Perhaps the most significant legacy of the 1973 oil shock was the huge impetus it gave to the enlargement and diversification of non-OPEC oil supply. Although many American commentators believed the end of oil was nigh, the tenfold increase in crude oil prices between 1973 and 1981 encouraged feverish new drilling and turned previously marginal deposits into profit machines. Another generation of oil multimillionaires sprouted up in Texas, the ‘land of the big rich’, according to the popular television series, Dallas (1978–91). ‘Suddenly, everyone wanted into the oil game’, writes Bryan Burrough. ‘Geologists fled the majors to become wildcatters. Doctors and dentists pored [sic] money into discovery wells. In Houston, Dallas, and Midland new skyscrapers grew like grass’.16 In addition to producing new fortunes in Texas, soaring crude prices boosted developments in harsh and challenging environments like the North Sea, Alaska’s North Slope, and offshore Gulf of Mexico and Brazil. The industry’s search for oil may have been somewhat half-hearted prior to 1973, but certainly not afterward.

Oil from the North Efforts by oil firms and consuming nations to diversify oil supply away from OPEC and Middle East sources began, of course, before the 1973 oil shock. The 1956 Suez Crisis and the Arab–Israeli war of 1967 (Six-Day War) both cautioned nations and firms about over-reliance on Persian Gulf oil and prompted a quest for alternative supplies. Two of the boldest diversification ventures already underway before the 1973 oil shock nevertheless received a critical boost from it: the Trans-Alaska Pipeline (TAPS) and North Sea oil. Barring the 1973 crisis, TAPS and the 20 per cent of US domestic oil production it was delivering by 1988 (1.5  million barrels per day), might have been long-delayed or, conceivably, stopped. In 1973, the promoters of the project, British Petroleum (BP) and its partners, faced a

1973 Oil Shock and Expansion of Non-OPEC Supply 123 thicket of legal hurdles and political opposition that had delayed authorization for three years. Alaskan native groups and environmental organizations objected that the pipeline, as well as the maintenance highway to be built alongside it, violated both the Mineral Leasing Act and the recently enacted National Environmental Policy Act (NEPA). Prior to 1973, opponents of the pipeline seemed to have the upper hand.17 Against the backdrop of the energy crisis that had already emerged in early 1973, however, environmental organizations were put on the defensive. Even then, and even as domestic supply problems and Middle East tensions rose over the summer, a US Senate amendment in August 1973 declaring that the pipeline fulfilled all NEPA requirements and modifying the Mineral Leasing Act to allow for the pipeline right-of-way only narrowly passed after a tie-breaking vote by vice president Spiro Agnew, who was not long for office as he was under investigation at the time for extortion, tax fraud, bribery and conspiracy. In Congress that autumn, pipeline supporters stepped up their rhetoric blaming environmentalists for the energy crisis. In September, President Nixon reiterated his support for the pipeline, announcing that it was his administration’s priority for the rest of the congressional session. In early November, just after the embargo, Congress quickly passed, by overwhelming majority, the Trans-Alaska Pipeline Authorization Act. This legislation removed the project from further judicial review, provided new financial incentives and authorized construction of the right-of-way.18 The ensuing oil price spike greatly enhanced the economics of building the $7.7 billion (estimated in 1976) pipeline, affording the oil consortium owner, Alyeska, a cushion to absorb the enormous costs of accommodating environmental considerations and mitigating ecological damage, thus retaining public support for the venture.19 One Exxon engineer who worked on the project later maintained ‘the only reason we have an oil pipeline today is because there was an Arab embargo’.20 The 1973 oil crisis also cast a lifeline to the world’s other hugely ambitious frontier oil development at this time, in the North Sea. In 1969, Phillips Petroleum discovered the Ekofisk field in the Norwegian sector,

124  Oil Shock and the following year, BP discovered the Forties field in the UK sector. These were massive fields, but they were farther north, in deeper water, and with more extreme weather conditions than in the southern North Sea, where natural gas fields had been successfully developed in the late 1960s. The technical challenges and costs were so high that success in extracting oil from these new fields was far from guaranteed. Too often, historical accounts of North Sea oil skim past this period of high uncertainty, moving rather quickly from discovery to flowing oil.21 The fact was, explained Dick Wilson, the Brown & Root manager who oversaw the construction of the early production facility at Ekofisk and platforms for Forties, ‘deepwater North Sea oil from fields like the BP Forties was not commercial at $3 a barrel’, the prevailing price of crude at the time. As Phillips and BP moved cautiously ahead with the projects, they ran into delays caused by design changes, materials shortages, labour problems, and inclement weather, all of which ballooned costs and postponed revenues. Wilson recalled one dispiriting meeting with BP representatives, who informed him that ‘this project can’t continue on this basis because […] the costs were just getting too high’. Then, like a divine wind, ‘the October War happened and the price of oil by the end of the year had moved up to where we did not discuss the overall project cost implications again with BP’.22 Oil from the great discoveries at Prudhoe Bay and in the North Sea probably would have been developed eventually, oil shock or not. The fields were simply too large to leave in the ground, and UK and American governments were firmly committed to assisting the diversification of oil supply away from the Middle East even before the price increases. Still, there were many political, economic and technical constraints to overcome. It is safe to say that the 1973 crisis immediately removed those constraints and hastened the process of bringing these valuable non-OPEC sources to market. The impact of this new production was huge. By 1980, Prudhoe Bay output was nearly 1.5 million barrels per day and the North Sea was producing more than 2 million barrels per day, rising to 3.5 million barrels per day five years later.23

1973 Oil Shock and Expansion of Non-OPEC Supply 125 North Sea and North Slope Alaskan oil helped restore supply flexibility for North America and Western Europe, ease pressures on global prices, and calm runaway inflation. In doing so, they also helped to underwrite the political success of right-wing heads of state Margaret Thatcher and Ronald Reagan, and their neoliberal, market-friendly agendas. Finally, oil from the north, especially the North Slope of Alaska, stimulated the oil industry’s curiosity about regions further to the north, in the Arctic, which has become a major focus of oil exploration in recent years.

The Gulf of Mexico The 1973 oil shock also stimulated oil activity in a different region of the world with a long history of oil production – the Gulf of Mexico basin. In the southern sector of the Gulf, the shock set in motion a chain of events that produced one of the world’s largest oil discoveries of the late twentieth century and reshaped the way oil was priced and traded. Along the northern Gulf Coast, the shock helped propel companies and technology into ‘deepwater’ for the first time. Mexico, the world’s largest oil producer in the 1920s and the first nation to nationalize its oil resources (in 1938), had seen its reserves decline sharply by the late 1960s. In 1971, the nation became a net importer of crude oil. The price spike of 1973–4 plunged the nation into economic crisis. The government responded by ramping up oil exploration both onshore and offshore. The big payoff was the 1975 discovery of the first giant field, Chac, in what would become the enormous ‘Cantarell Complex’ of fields, located in the relatively shallow waters (150–200 feet) of the Bay of Campeche.24 When the new government of José Lopez Portillo took office in December 1976, it unveiled a six-year programme to invest $15.5 billion in new oil exploration and development, a large percentage of which was directed offshore. Three other major nearby discoveries in 1977–8 led to a crash programme of offshore drilling and platform construction that lifted Mexico’s oil output from 700,000 barrels per day in 1975 to nearly 2.6 million barrels per day by the end of 1980, half

126  Oil Shock of which came from Cantarell. The second oil price shock following the Iranian Revolution meant that all this new oil was earning tremendous revenues for Mexico.25 These revenues, however, were not enough to stem the fiscal bleeding from Mexico’s heavy foreign borrowing. By the late 1970s, a large portion of these funds went to finance Cantarell and other oil developments. Rising interest rates and a steep US recession in 1981 cut demand for Mexican oil, lowered revenues and dramatically increased the country’s foreign debt. The nation’s finance minister suspended debt service in August 1982, setting off the Latin American debt crisis. Although Mexico negotiated new loans and rescheduled payments, the nation’s fiscal position remained precarious, as oil exports drifted downward, reaching a crisis in mid-1985 when Saudi Arabia ramped up production and introduced ‘netback’ pricing to regain global market share.26 PEMEX, the Mexican national oil company, responded by adopting an innovative marketing strategy called ‘formula pricing’, which linked the price for Mexican crude to estimates for different crudes sold on both long-term and spot contracts. Winning back market share, PEMEX’s new pricing policy brought transparency and simplicity to international oil transactions. It also contributed to the introduction of market forces and the demise of the age-old system of ‘administered’ prices first by the major oil companies and then by OPEC.27 Across the Gulf of Mexico to the north, prior to the shock, offshore operators had been exploring in progressively deeper water, reaching out to 300- to 600-foot depths. They had been searching for new reserves to meet growing demand and offset declining onshore production. Intense competition for acreage, however, had inflated the costs of leasing and production to a point that made offshore oil in the Gulf, as a whole, uneconomical. Since 1954, the industry had invested an estimated $16 billion in the Gulf, but the total value of oil and gas produced by 1972 was only $12 billion.28 The average price for a 5,000-acre lease had skyrocketed from $2.66  million in 1960 to $15.35  million in 1972. According to one study, operators had to

1973 Oil Shock and Expansion of Non-OPEC Supply 127 produce nearly three times the amount of oil that they had ten years before to pay for platforms.29 Although operators made a number of promising discoveries on leases obtained in 1970 and 1972, something still had to give. Accelerated offshore leasing was a key component of President Nixon’s new energy strategy. In April 1973, the administration announced plans to triple lease offerings by 1979 and auction Gulf of Mexico tracts in 600- to 2,000-foot depths, beyond the edge of the continental shelf. Aside from the technical challenges of operating in those depths, which were too much for many companies to stomach, the staggering costs still made deepwater exploration a highly speculative and risky endeavour. Again, the oil shock in the autumn of 1973 changed the equation. Following the embargo, the Nixon administration redoubled its focus on offshore leasing as part of its ‘Project Independence’ strategy and announced its intention to auction off 10 million acres by 1975. This was a highly unrealistic goal, but it signalled the government’s intention to ramp up the pace of leasing. In the March 1974 sale, companies spent $2.2 billion in bonus bids for dozens of tracts. Deeper water offshore offered the best prospects for new oil discoveries, and exploration for new oil was given a major push under Phase IV price controls, implemented in August 1973, which exempted ‘new’ oil production from controls.30 The groundbreaking project that came out of the landmark March sale was Shell Oil’s Cognac platform, installed in 1,000 feet of water at the edge of the shelf. With first production in 1979, Cognac was a hugely sophisticated and costly project, with mammoth cost overruns pushing the total to $800  million from start to finish. But, thanks to high oil prices, it still turned a profit.31 Cognac established the viability of deepwater, which has since become a major focus area for nearly all the major oil companies. It commercialized numerous technologies that would be applied to the expansion of deepwater development, and, thanks to soaring oil prices in the wake of the 1973 oil shock, demonstrated that companies could still make money to bring in valuable domestic oil from this new frontier.32

128  Oil Shock During the 1970s, the Nixon, Ford and Carter administrations experimented with a series of policies to reduce US dependence on foreign oil, including conservation measures, backing oil (and natural gas, for that matter) out of power generation in favour of coal, and the promotion of synthetic fuels, ethanol, nuclear power and other renewables.33 Possibly the most successful policy in this regard, however, was the expansion in federal offshore leasing, which helped increase offshore crude oil output from about 10 per cent of total US production in 1975 (820,000 barrels per day (b/d) out of 8.2 million b/d) to 24 per cent of the total (1.36 ­million b/d out of 5.8 million b/d) by the year 2000.34

Offshore Brazil In addition to the North Sea and the Gulf of Mexico, the first oil shock also spurred oil and technological development offshore Brazil. Prior to the 1970s, the Brazilian state oil company, Petrobras (established in 1954)  had found very little oil domestically, despite intensive onshore exploration. Rapid national economic growth in the late 1960s had raised Brazil’s oil import bill, which, after the OPEC price increases, spiked from $469 million in 1972 to $2.89 billion in 1974. The Brazilian government of General Ernest Geisel (1974–9), a former chairman of the board of Petrobras, borrowed heavily to finance the country’s economic development programme. All of this put immense pressure on Petrobras to reduce dependence on imported oil.35 The company committed more resources to offshore exploration and drilling. In November 1974, it drilled a discovery well on a carbonate prospect called Garoupa in the Campos Basin, off the coast of Rio de Janeiro. This well, in 413 feet (126 metres) of water and 62 miles (100 km) from shore, was a major turning point for Petrobras and Brazil. Not only was this a significant discovery, but it also opened up an entirely new geological play in Cretaceous limestone. As World Oil magazine wrote with some reserved scepticism in 1980, ‘the naturally optimistic Brazilians thought they had at last found the giant that existed in their country’.36

1973 Oil Shock and Expansion of Non-OPEC Supply 129 Garoupa and other early discoveries such as one called Namorada, in less than 650 feet (200 metres), were relatively medium-sized fields by world standards. Driven by the desperate need to replace oil imports and take advantage of high global oil prices, the company searched for ways to shorten the time to production. Installing traditional fixed platforms, like most operators were doing in the Gulf of Mexico, would have required four to eight years of development and a substantial amount of fixed capital investment for fields of that size.37 This Petrobras and Brazil could not afford. ‘Bringing the newly discovered prolific oil province on to production, and at the lowest cost possible, became a key issue for Petrobras’, company officials later reflected. ‘The increased throughput would help reducing [sic] the burden of Brazil to manage its increasing external debts’.38 Fortunately, there were floating production solutions available that could speed development. In 1975, a small US independent, Hamilton Brothers Oil, converted the Transworld 58 semi-submersible drilling vessel into a novel, ‘floating production facility’ for a subsea-completion in the North Sea’s Argyll field, and thus rapidly brought in the first oil production from the UK sector. Two years later, Petrobras applied a similar ‘early production system’ using the converted Sedco-135D semi-submersible and North Sea ‘wet tree’ subsea technology to produce 10,000 b/d from a single well in the Enchova field in 110 metres of water, only seven months after the discovery.39 For more extensive field development, at Garoupa and others, Petrobras found a different solution. In 1977, in an evolutionary step from the use of tankers as single-buoy offshore terminal facilities, Shell España successfully adapted this concept into a Floating Production, Storage, and Offloading (FPSO) facility for the Castellon field in the eastern Mediterranean. Two years after the Castellon, Petrobras began operating the world’s second FPSO, the P.P. Moraes, in the Garoupa field. The Garoupa production system was designed with ‘dry tree’ Lockheed subsea wellheads developed for the Gulf of Mexico.40 Garoupa was a much more trying project than Enchova, suffering one technical setback after another with Lockheed wellhead chambers, the production tower

130  Oil Shock and downhole safety valves. This resulted in long delays and contributed to the escalation in Campos Basin development costs, estimated in 1980 at $3 billion for eight fields with approximately 600 million barrels of recoverable oil. To some extent, the delays undermined the goal of shortening time to production. Still, this experimentation would have long-range benefits. As one Petrobras manager (Carlos Cunha) put it, ‘The P.P. Moraes was a floating lab for testing the FPSO concept’.41 These early production technologies, products of Brazil’s oil self-sufficiency drive in the aftermath of the 1973 oil shock, created a learning curve for developments that would open up significant new sources of oil in deeper waters. By the 1980s, Petrobras had become the world leader in floating and subsea production technology, turning the Campos Basin into a major deepwater province.42 At the end of 1989, thanks largely to the Campos fields, Brazil’s oil production had reached 790,000 barrels per day, 60 per cent of the country’s consumption of 1.3  million barrels per day, which was major progress on the road to self-sufficiency (Brazil became fully self-sufficient in oil in 2007).43 Moreover, the confirmation of the theory of plate tectonics, endorsed by the worldwide core drilling programme of the Joint Oceanographic Institutions Deep Earth Sampling (JOIDES) project launched in 1968, indicated that Brazil’s Atlantic margin was once geologically sown into the hinge of West Africa, meaning that the petroleum geology of the Campos Basin was directly analogous to that of the Gulf of Guinea and the Congo Basin across the Atlantic Ocean.44 Brazil’s deepwater success prompted exploration off West Africa, leading to giant deepwater discoveries off Nigeria and Angola in 1996, opening the world’s third great deepwater oil province.45 A  large number of the production developments off West Africa have employed the FPSO concept that evolved under Petrobras’s leadership in Brazil.46

Innovation in Oil The common theme linking all the developments described above was the application or commercialization of new production and transportation

1973 Oil Shock and Expansion of Non-OPEC Supply 131 technologies to expand oil supply from environmentally challenging locations. The first oil shock placed tremendous time-cost pressures on nations and companies to replace expensive oil that they did not own and bring expensive but potentially lucrative discoveries on line as quickly as possible. For nations like Mexico and Brazil, these pressures resulted from the oil import-debt spiral. For major oil companies like Shell, BP and others, discounted cash-flow considerations shaped decision making for capital-intensive, long-term projects. In an inflationary climate, especially, such appraisals placed a high premium on money earned as early as possible. Furthermore, many people in industry appreciated the cyclical nature of the business and realized that the window of opportunity provided by the huge crude oil price increases might be short.47 One clear way to minimize the time-to-market for oil was to strive for more precision, efficiency and automation in oil operations. By the early 1970s, oil-drilling technology had changed very little since the introduction of rotary drill-bits by Howard Hughes in the 1910s, blowout preventers by James Abercrombie and Henry Cameron in the 1920s and electric well logging by the Schlumberger brothers around the same time. Manual processes still controlled most drilling procedures. Increased time-cost pressures following the 1973 oil shock, however, compelled oil operators, drillers and service companies to automate the rig floor for greater speed and efficiency, as well as safety. Although some advances  – such as hydraulic hoists, mechanical handlers and power swivels  – had been added to mobile drilling vessels during the 1950s and 1960s, the efflorescence of drilling innovations truly burst forth in the 1970s. During 1972–5, labour-saving devices like power slips and spinning wrenches replaced hand tools in roughnecking (the work done connecting the drill pipe into the well bore). Meanwhile, the first multiplexed controls for subsea blowout preventers made their appearance, as did Varco’s (now National Oilwell Varco) patented ‘Iron Roughneck’, which could mechanically torque drill pipe and drill collars with power and accuracy. Other incremental innovations followed, culminating in Varco’s revolutionary ‘Top Drive’ Drilling System

132  Oil Shock (TDS), which removed much of the manual labour previously required to drill wells. Successfully demonstrated in 1982, the TDS consisted of a power-swivel motor suspended from the derrick that provided a tremendous increase in power and torque over the traditional Kelly Joint and rotary table, enough to drill longer, heavier sections of drill pipe with greater speed and reduced frequency of stuck pipe.48 The new ability to acquire real-time information from inside the well bore also enabled faster and more accurate drilling. In the late 1970s, the development of Measurement-While-Drilling (MWD) and Logging-While-Drilling (LWD) techniques, which used a mud-pulse system to measure and transmit formation data to the surface while continuing to rotate pipe and circulate drilling mud, allowed for steerable drilling and immediate formation evaluation. The US Department of Energy’s post-oil shock Drilling, Completion, and Stimulation Program (established in 1975) assisted with the research & development (R&D) for mud-pulse telemetry that went into MWD tools. Together, TDS and MWD/LWD laid the foundation for so-called directional and extended-reach drilling.49 Directional drilling, combined with other watershed innovations pioneered or commercialized in the 1970s, permitted oil firms to explore, drill and produce oil from deepwater. High oil prices provided the economic incentive to improve the technical reliability of expensive and finicky subsea wellheads and flow lines. Directional drilling and subsea completions allowed companies to optimize oil development around a single production facility, rather than have to install more than one for a given prospect or set of prospects. After the first oil shock, conceptual designs for compliant and floating production facilities for deepwater (beyond 1,500-foot depths), such as tension-leg platforms (TLPs), compliant towers and spars, started coming off engineers’ drawing boards.50 In 1974, R&D commenced on remotely operated underwater vehicles (ROVs) to perform tasks in water depths beyond the reach of human divers. Subsea engineers designed first-generation ROVs to inspect pipelines and assist divers, which proved their worth on Shell’s Cognac

1973 Oil Shock and Expansion of Non-OPEC Supply 133 project among others. By the early 1980s, ROV capabilities had evolved to support drilling and subsea installations as well.51 In the same time frame, thanks to major advances in digital computing, the Dallas-based seismic contractor, Geophysical Services Incorporated (GSI) worked out the massive computational challenges of producing three-dimensional images from seismic acoustic signals. By the late 1970s, GSI established the commercial utility of 3-D seismic for developing producing fields and defining reservoirs. As costs of 3-D came down and as wells became more expensive in ever-deeper waters, companies began to gather all their seismic information from 3-D surveys before leasing and exploratory drilling. The result, by the 1990s, was a dramatic increase in drilling success and a growing ability to visualize sub-salt oil deposits, extending offshore exploration into yet deeper waters. Moreover, the impact of digital technology was not limited to exploration and drilling. After the introduction of desktop workstations in the early 1980s, digital technology further advanced the precision, automation and remote monitoring capabilities of offshore oil operations across the board.52 Technological innovation in oil continued and even accelerated through the extended period of low oil prices that began with the bust of the mid-1980s. The bust drove the major exploration and production companies to reduce internal R&D and begin divesting from the great exploration & production (E&P) technology labs they had run for decades. Service companies such as Schlumberger, Halliburton, Baker Hughes, Oceaneering and Varco, however, picked up the slack, increasing their R&D spending almost in direct proportion to the decline by the large E&P firms. New programmes at US research universities, such as the Offshore Technology Research Center at Texas A&M University, created in 1990 with National Science Foundation funding, also became important centres of industry technology development. While high oil prices in the 1970s had stimulated the commercialization of advance oil hunting and drilling technologies, the increasing competitiveness in the oil and oil service businesses and

134  Oil Shock shift in the source of innovation to contractors during the ensuing low oil price regime drove E&P companies to continue applying new technologies, which they could now buy rather than have to build them themselves.53 Many of the technologies first put to use in the high-cost environment offshore also had applications on land, especially for the hydrofracturing of shale gas and shale oil, which, since 2005, has revolutionized the oil and gas industry. George Mitchell’s dogged determination to unlock the natural gas potential of the Barnett Shale in North Texas instigated the fracking boom, but innovation also came from other post-oil shock initiatives.54 Notably, National Oilwell Varco designed a portable Top Drive compact enough to be installed in land-drilling derrick masts. Along with MWD and LWD, Top Drive systems made possible the directional and horizontal drilling required for shale plays. Furthermore, US government research efforts catalysed by the 1973 oil shock again played a role in advancing these technologies. The Department of Energy’s Eastern Gas Shales Program (EGSP), established in 1976, assisted the development of directional drilling techniques in early shale tests. And the Sandia National Laboratory built on 3-D seismic technology to develop 3-D microseismic imaging critical for understanding hydraulic fracturing.55

Conclusion It may be possible to overstate the significance of the 1973 oil crisis to the technological trends in the industry in the 40 years since, but there is no gainsaying the immediate and huge impact that the shock of 1973 had on propelling oil companies into new territorial and technological frontiers. The new supplies discovered as a result gave oil firms and oil-consuming nations a measure of independence from OPEC. Today’s expanding supply of oil and gas from offshore and deepwater provinces, such as the deepwater ‘Golden Triangle’ of Gulf of Mexico–Brazil–West Africa, the growing interest in the hydrocarbon potential of the Arctic,

1973 Oil Shock and Expansion of Non-OPEC Supply 135 and the dramatic shale plays that are emerging around the world can all trace their legacy back to the industry’s technological response to the shock of 1973. The industry’s development of non-OPEC oil sources, combined with the other pillars of the new global structure oil created in the wake of the OPEC revolution, has made our dependence on oil, in security terms, less problematic than much of the commentary on the fortieth anniversary of the shock would have us believe. OPEC nations now provide only 20 per cent of US oil imports, which make up only 40 per cent of US consumption. Globally, the influence of OPEC decisions on oil trading, in both the physical and futures markets, has been steadily declining.56 The world is less vulnerable – although not invulnerable – to supply disruptions than it was in 1973. Even more important, the world is less threatened by the concentrated control over oil, such as by the International Petroleum Cartel prior to 1973, or by the relatively small number of oil exporters in OPEC immediately after 1973. The sudden rebalancing of this control through a wholesale transformation in the ownership of oil in 1973 was what created the shock. The global oil system today is not liable to undergo a similar transformation. Compared to 1973, it is more integrated, with a much wider array of producers, consumers and types of hydrocarbons. For now, the question may be less about whether supply can keep up with demand, and more about whether we have too much supply, too large a carbon budget, to keep from altering the global climate in destructive ways.

Notes 1 Marck Fischetti, ‘40  years after OPEC oil embargo, U.S.  may finally get off imported crude’, Scientific American, 16 October 2013, available at http:// blogs.scientificamerican.com/observations/2013/10/16/40-years-after-opecoil-embargo-u-s-may-finally-get-off-imported-crude/; Robbie Diamond, ‘OPEC embargo – 40 years later’, The Hill, 15 October 2013; Ken Blackwell, ‘Forty years of OPEC manipulation’, Townhall.com, 16 October 2013, available at http:// townhall.com/columnists/kenblackwell/2013/10/16/forty-years-of-opecmanipulation-n1724630/page/full. It is inaccurate to speak of an ‘OPEC embargo’.

136  Oil Shock The embargo was an agreed policy of another organization, the Organization of Arab Oil Exporting Countries (OAPEC), whose headquarters is in Kuwait and whose members were and are Saudi Arabia, Kuwait, the Arab Emirates, Algeria, Bahrain, Egypt, Iraq, Libya, Qatar and Syria. One key member of OAPEC, Iraq, declined to take part. 2 See the analysis in Richard H.K. Vietor, Energy Policy in America Since 1945: A Study of Business–Government Relations (Cambridge:  Cambridge University Press, 1984), pp. 236–71; and Peter Z. Grossman, U.S. Energy Policy and the Pursuit of Failure (Cambridge: Cambridge University Press, 2013), pp. 5–30. 3 Diamond, ‘OPEC embargo – 40 years later’; Fischetti, ‘40 years after OPEC oil embargo’. 4 The profound macro impact of the oil shock is well established. The year 1973 was an epic turning point in the political economy of the late twentieth century. Coming on top of the US retreat from Vietnam and the collapse of the Bretton Woods system, it caused a crisis of US world leadership. The hikes in oil prices, moreover, created simultaneous recession and inflation (‘stagflation’), thus abruptly ending 25 years of sustained global economic growth. Keynesianism yielded to free market orthodoxy. The ‘long boom’ of post-war capitalism gave way to a ‘long slump’, followed by repeated cycles of bubbles and busts that endure to this day. Thomas J. McCormick, America’s Half-Century:  United States Foreign Policy in the Cold War and After, 2nd ed. (Baltimore: The Johns Hopkins University Press, 1995), pp. 161–5 and 238–41. The crisis of 1973 also had unforeseen effects that ultimately bolstered US economic and global power. The recycling of ‘petrodollars’ by newly enriched oil states lubricated the global circulation of capital and guaranteed the continued pre-eminence of the US dollar as the world’s reserve currency. Oil states also lavishly spent their petrodollars on arms from US defence contractors, but at the cost of further destabilizing the Persian Gulf region. One could even argue that the oil crisis marked the beginning of the end for the Soviet Union, as high oil prices made the Russian economy increasingly dependent on oil exports, and when prices collapsed in the mid-1980s it knocked the legs out from under the Soviet economy. Tyler Priest, ‘The dilemmas of oil empire’, The Journal of American History 99, no. 1 (2012): 243–4. 5 Darren Goode, ‘1973 Arab oil embargo shaped energy policy’, Politico.com, 14 October 2013, available at http://www.politico.com/story/2013/10/araboil-embargo-shaped-energy-policy-98300.html; Daniel Yergin, ‘Why OPEC no longer calls the shots’, Wall Street Journal, 14 October 2013, available at http:// online.wsj.com/news/articles/SB1000142405270230338200457913146042097 4406; Jill Tennant, ‘40 years later: legacies of the 1973 oil crisis persist’, World Oil 234, no.10 (2013), available at http://www.worldoil.com/October_2013_40_ years_later_Legacies_of_the_1973_oil_crisis_persist.html; Jeff Colgan, ‘40 years after the oil crisis: could it happen again?’, The Washington Post, 16 October 2013, available at www.washingtonpost.com/blogs/monkey-cage/wp/2013/10/16/40years-after-the-oil-crisis-could-it-happen-again//?print=1.

1973 Oil Shock and Expansion of Non-OPEC Supply 137 6 Steven Schneider, The Oil Price Revolution (Baltimore:  The Johns Hopkins University Press, 1983), p. 1. 7 See, for example, Charles S. Maier, ‘“Malaise”: The crisis of capitalism in the 1970s’, pp.  25–48, and Daniel J.  Sargent, ‘The United States and globalization in the 1970s’, pp. 49–64, both in Niall Ferguson, Charles S. Maier, Erez Manela and Daniel J. Sargent (eds), The Shock of the Global:  The 1970s in Perspective (Cambridge, MA: Harvard University Press, 2011). Most essays in this volume somehow manage to avoid the subject of oil entirely. 8 Paul Sabin, ‘Crisis and continuity in U.S. oil politics, 1965–1980’, Journal of American History 99, no. 1 (2012): 185. 9 Mark Fiege, The Republic of Nature: An Environmental History of the United States (Seattle: University of Washington Press, 2012), p. 400. Unfortunately, Fiege’s chapter, ‘It’s a gas: The United States and the oil shock of 1973–1974’, pp.  358–402, repeats many of the common myths and misunderstandings about the oil shock and the history of oil in its aftermath. Fiege attributes gas lines directly to the impact of the embargo, without any discussion of price controls. He also treats the oil crisis as the beginning of an era of oil shortages, uncritically accepting the disproven claim that world oil production peaked in 2005 (p. 398). In fact, it rose from 73.6 million barrels/day in 2005, to 74  million barrels/day in 2010, to 75.8  million barrels/day by mid-2013. US Energy Information Administration (EIA), Monthly Energy Review, July 2013, available at http://www.eia.gov/totalenergy/data/monthly/ pdf/sec11_5.pdf. For historical treatment of the peak oil debate, see Tyler Priest, ‘Hubbert’s peak: The great debate over the end of oil’, Historical Studies in the Natural Sciences 44, no. 1 (2014): 37–79. 10 Robert Sherrill, The Oil Follies of 1970–1980: How the Petroleum Industry Stole the Show (and Much More Besides) (New York: Anchor Press, 1983), pp. 145 and 506. 11 Joseph A. Pratt with William E. Hale, Exxon: Transforming Energy, 1973–2005 (Austin, TX: Dolph Briscoe Center for American History, 2013), p. 17. 12 Ibid., p. 18. 13 S.G. Stiles, ‘Presentation’, Shell Oil Public Relations Meeting, 21 March 1973, copy provided to author by Mr. Stiles; Priest ‘Hubbert’s peak’, pp.  63–5; Pratt, Exxon, p.  43; Jay Hakes, ‘The road to America’s first energy crisis:  new insights on the growing weakness of the United States as a global energy power, 1967–1973’, H-Energy, 23 June 2013, available at https:// networks.h-net.org/system/files/contributed-files/henergy-j-hakes-road-a mericas-first-energy-crisis.pdf. 14 Reforms in consuming nations involved government policies and investments in energy efficiency (such as fuel efficiency standards for automobiles) and conservation that moderated demand. The phased lifting of price controls in the US, starting in 1979 and completely removed in 1981, after the Iranian Revolution caused another price shock, making it easier to align supply and demand. At the international level, the creation of the International Energy

138  Oil Shock Agency (IEA) in 1974 provided a formal mechanism for the sharing of oil in any future crisis through the establishment of strategic stocks such as the US Strategic Petroleum Reserve (700 million barrels stored in a series of salt caverns in south Louisiana). On the IEA and the new role of consuming countries, see Bernard Mommer, Global Oil and the Nation State (Oxford: Oxford University Press, 2002), pp. 138–42. On the US Strategic Petroleum Reserve, see Bruce Beaubouef, The Strategic Petroleum Reserve:  U.S. Energy Security and Oil Politics, 1975–2005 (College Station: Texas A&M Press, 2007). 15 Mommer, Global Oil and the Nation State, pp.  142–51; Daniel Johnston, International Petroleum Fiscal Systems and Production Sharing (Tulsa, OK: Pennwell, 1994). 16 Bryan Burrough, The Big Rich:  The Rise and Fall of the Greatest Texas Oil Fortunes (New York: Penguin Press, 2009), p. 357. 17 Peter A. Coates, The Trans-Alaska Pipeline Controversy:  Technology, Conser­ vation, and the Frontier (Fairbanks, AK:  University of Alaska Press, 1993), pp. 235–45. 18 Ibid., pp. 245–50. 19 Ibid., pp. 251–65. 20 Morris Foster quoted in Pratt with Hale, Exxon, p. 92. 21 See, for example, Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Simon & Schuster, 1991), pp. 668–9. 22 Wilson quoted in Joseph Pratt, Tyler Priest and Christopher Castaneda, Offshore Pioneers: Brown & Root and the History of Offshore Oil and Gas (Houston, TX: Gulf Publishing, 1997), pp. 223 and 252. See also Charles Woolfson, John Foster and Matthias Beck, Paying for the Piper:  Capital and Labour in Britain’s Offshore Oil Industry (London:  Mansell, 1996), pp. 16–17. 23 For the ‘official’ histories of North Sea Oil, see Alex Kemp, The Official History of North Sea Oil and Gas, Vol 1: The Growing Dominance of the State (London: Routledge, 2011) and Alex Kemp, The Official History of North Sea Oil and Gas, Vol. 11: Moderating the State’s Role (London: Routledge, 2013). 24 In addition to Chac, the other fields are Akal (the largest), Nohoch and Kutz. 25 Pratt, Priest and Castaneda, Offshore Pioneers, pp. 180–8. 26 Netback pricing linked the price of crude oil to refined products, guaranteeing specific profit margins to refiners, and thus attracting buyers. See Robert Mabro, Netback pricing and the oil price collapse of 1986 (Oxford:  Oxford Institute for Energy Studies, WPM 10, 1987). 27 Francisco Flores-Macías, ‘How can a state-owned enterprise become a profit maximizer? A  political and economic history of Pemex’s PMI’, draft paper, March 2011. 28 ‘Will a $16 billion investment pay off?’, Offshore, September 1973, pp. 33–5. 29 Nixon Quintrelle, ‘Lease, production costs require big production in the Gulf of Mexico’, Offshore, February 1973, pp. 43–5. 30 On Phase IV price controls, see Vietor, Energy Policy in America Since 1945, pp. 242–4.

1973 Oil Shock and Expansion of Non-OPEC Supply 139 31 Tyler Priest, The Offshore Imperative:  Shell Oil’s Search for Petroleum in Postwar America (College Station, TX: Texas A&M Univeristy Press, 2007), pp. 191–201. 32 Ibid. 33 On these developments, see Jay Hakes, A Declaration of Energy Independence: How Freedom from Foreign Oil Can Improve National Security, Our Economy, and the Environment (New York: Wiley, 2008), pp. 41–70. 34 Data from the EIA available at http://www.eia.gov/petroleum/. Increases in deeper water production also offset the decline in shallow water production from leases developed in the 1950s and 1960s. 35 Brazil’s foreign oil dependence was extreme. The country depended on oil for 45 per cent of its entire energy consumption, and 80 per cent of its oil demand was met by imports, 65 per cent of which came from the Middle East. Stephen J. Randall, ‘The 1970s Arab–OPEC oil embargo and Latin America’, H-Energy, 26 June 2013, available at https://networks.h-net.org/system/files/ contributed-files/henergy-s-randall-latin-america-and-1973-oil-crisis.pdf. 36 T.J. Stewart Gordon, ‘Brazil: The target is oil at any cost’, World Oil, March 1980, p. 74. 37 Wagner Freire, ‘An overview on Campos Basin’, paper presented at the Annual Offshore Technology Conference, Houston, TX, 2–5 May 1988, OTC 5807. 38 M.I. Assayag, G. Castro, K. Minami and S. Assayag, ‘Campos Basin: A real scale lab for deepwater technology development’, paper presented at the Annual Offshore Technology Conference, Houston, TX, 5–8 May 1997, OTC 8492, p. 509. 39 Salim Armando, ‘Petrobras experience on early production systems’, paper presented at the Offshore Technology Conference, Houston, TX, 2–5 May 1983, OTC 4546. A ‘wet tree’ is a wellhead located on the sea floor. 40 The Lockheed ‘dry tree’ was a wellhead encased in a one-atmosphere chamber on the seafloor. 41 ‘The history of the FPSO unit’, Petrobras Magazine, 2007, p. 9. 42 Joseph P. Riva, Jr., ‘Technology boosting success in Campos Basin’, Oil & Gas Journal, 27 November 1989, pp. 85–8. 43 EIA, Country Analysis, Brazil, available at http://www.eia.gov/countries/ country-data.cfm?fips=BR#pet. 44 On JOIDES, see David K. van Keuren, ‘Breaking new ground:  The origins of scientific ocean drilling’, in Helen M. Rozwadowski and David K. van Keuren (eds), The Machine in Neptune’s Garden:  Historical Perspectives on Technology and the Marine Environment (Sagamore Beach, MA:  Science History Publications, 2004), pp. 183–210. 45 N.R. Cameron and Ken White, ‘Exploration opportunities in offshore deepwater Africa’, paper presented at the IBC Oil and Gas Developments in West Africa Conference, London, 25–6 October 1999. 46 See the list of projects in the FPSO database, available at http://fpso.com/. 47 Shri B. Mathur and Omer Carey, ‘Economic decision-making practices in the U.S.  petroleum industry’, paper presented to the Society of Petroleum

140  Oil Shock Engineers of AIMA, Houston, TX, October 1974, SPE 5011; Gene B. Wiggins III, ‘Oil and gas property evaluation’, in Richard Steinmetz (ed.), The Business of Petroleum Exploration (Tulsa, OK:  American Association of Petroleum Geologists, 1992), pp. 148–9. 48 Michael W. Sutherlin, ‘The path from technology to performance’, World Energy 3, no. 2 (2000); Walt Aldred, Jim Belaskie, Rustam Isangulov, Barry Crockett, Bobby Edmondson, Fred Florence and Sundaram Srinivasan, ‘Changing the way we drill’, Oilfield Review, Spring 2005, pp. 42–9. 49 David Reid, Larry Wells and Jeremy Ogg, ‘Top drives have transformed drilling: now, new design targets ultra-deep ERD’, Drilling Contractor, September/ October 2008, available at http://www.drillingcontractor.org/top-driveshave-transformed-drilling-now-new-design-targets-ultra-deep-erd-1735; Offshore Energy Center, Hall of Fame:  Technology Pioneers, available at http://www.oceanstaroec.com/fame_technology.html; Committee on Benefits of DOE R&D on Energy Efficiency and Fossil Energy, Board on Energy and Environmental Systems, Division on Engineering and Physical Sciences, National Research Council, Energy Research at DOE: Was It Worth It? Energy Efficiency and Fossil Energy Research 1978 to 2000 (Washington, DC: National Academies Press, 2001), pp. 193–7. 50 Conoco’s Hutton TLP, designed for a North Sea field in 485 feet of water discovered in 1973, became the prototype for the first series of TLPs installed in 2,000- to 4,000-foot depths of the Gulf of Mexico in the 1990s. See Pratt, Priest and Castaneda, Offshore Pioneers, pp. 273–6. 51 F.R. Frisbie, R.L. Wernli and D.W. Given, ‘The role of the ROV in 1985: A ­ capability in transition’, paper presented at the Offshore Technology Conference, Houston, TX, 5–8 May 1986, OTC 5169. 52 ‘Digital revolutionaries: Technical advances reverberated through the industry’, AAPG Explorer Special Issue  – A  Century (Tulsa, OK:  AAPG, 2000), pp. 51–2; G.G. Walton, ‘Three-dimensional seismic method’, Geophysics 37, no. 3 (1972): 417–20; C.G. Dahm and R.J. Graebner, ‘Field development with three-dimensional seismic methods in the Gulf of Thailand – a case history’, Geophysics 47, no. 2 (1982): 149–76. 53 On the ‘buy vs. build’ strategy, see ‘Oil and gas technology development’, Topic Paper #26, National Petroleum Council Global Oil & Gas Study, 22 November 2006, p. 16. This topic paper was one of 38 working documents used to produce the 2007 NPC study, Facing the Hard Truths About Energy, available at http://www.npchardtruthsreport.org/. 54 See Diana Davids Hinton, ‘The seventeen-year overnight wonder:  George Mitchell and unlocking the Barnett Shale’, Journal of American History 99, no. 1 (2012): 229–35. 55 National Research Council, Energy Research at DOE, pp.  200–2; N.R. Warpinski, P.T. Branagan, R.E. Peterson, J.E. Fix, J.S. Uhl and R.  Wilmer,

1973 Oil Shock and Expansion of Non-OPEC Supply 141 ‘Microseismic and deformation imaging of hydraulic fracture growth and geometry in the C sand interval, GRI/DOE M-site project’, paper presented at the Society of Petroleum Engineers Annual Technical Conference and Exhibition, 5–8 October 1997, San Antonio, TX, SPE 38573-MS. 56 ‘Oil traders give OPEC short shrift’, Wall Street Journal, 29 November 2013.

6 The OECD Oil Committee and the International Search for Reinforced Energy-Consumer Cooperation, 1972–3 Marloes Beers Initiated by the evolution of the oil market and the emerging energy crisis in the United States, the American government appealed in 1972 and 1973 for a reinforced international cooperation of energy-consumer countries. Concerted action would contribute to a more secure oil supply and a minimization of the risks of outbidding prices. However, other energy-consuming states, such as the European member states, did not always react positively to the idea. While the Americans left open the question of how to accommodate this reinforced cooperation, whether in a new international body or within the existing OECD, the European member states could only find consensus on reinforced cooperation in the latter. Within the OECD, the Oil Committee had for 20 years provided an international forum for the exchange of information on oil. Close cooperation had developed within the OECD’s Oil Committee and its High-Level Group (HLG) in response to earlier oil shortages during the Suez crisis of 1956 and the Six-Day War in 1967.

The OECD Oil Committee 143 In June 1973, the OECD Council explicitly confirmed its dedication to improved cooperation on energy issues. A few months later, during the oil shock, the Oil Committee and especially its HLG would act as an important Western forum for exchange and discussion on the oil problems. However, no real common action would be realized during this crisis when oil supply became uncertain and the market prices exploded. This chapter concentrates on the incapacity of the energy-consumer countries to produce effective cooperation in the period 1972–3. It is interesting that, despite this failure, in mid-December 1973 the American initiative for improved international cooperation in energy was renewed with far more success. Henry Kissinger appealed for an international action group on energy at a dinner at the Pilgrims Society in London. Within a year, the International Energy Agency (IEA) would be created. The political and technological motives for the creation of this agency have been studied before.1 In general, it has been understood as a direct consequence of the 1973 oil shock. Its longer term origins, however, have often been overlooked. Kissinger’s proposition in December 1973 had not been the first serious call for an improved cooperation of energy-consumer countries. As a matter of fact, the theme had already been on the international agenda for at least a year and a half and steps had already been made for its realisation. The oil shock and the linked international economic problems were thus not the sole factors that played a role in the creation of the IEA. It is therefore the ambition of this chapter to fill in some blank spots in our understanding of this process. This chapter does not focus on the eventual creation of the IEA, but it analyses the earlier American attempt for improved energy cooperation in 1972/3. In the first section, an analysis is made of the American initiative for reinforced cooperation and its background. The following section focuses on the structures and history of the OECD Oil Committee, its High-Level Group, its relations with the oil companies and its role in maintaining oil supply during crises since the 1950s. Thereafter, in the third section, a study is made of the positions of the European Community (EC) member states on reinforced consumer cooperation. Finally, the developments

144  Oil Shock during the oil shock within consumer cooperation at the OECD Oil Committee and its High-Level Group are discussed in relation to three recurrent themes within this cooperation: the risks of exploding prices by overbidding, expansion of the apportionment system for oil supplies, and relations between the OECD Oil Committee and the oil companies.

American Appeals for Concerted Action in Energy During the OECD ministerial council on 24 May 1972, the then undersecretary of state in economic affairs, John Irwin, pleaded for reinforced international cooperation on energy. Irwin elaborated on the current and future energy problems. He considered a worldwide shortage in energy, by 1980, of 20 million barrels per day. Without consumers’ cooperation this deficit could result in an escalating scramble for supplies between OECD members, with devastating consequences for price and the international economy. Joint action would therefore be necessary to reduce dependency through three policies:  enlargement of energy sources, coordination of a common response on Middle Eastern oil policy, and construction of an action programme to reduce the risk of serious crises caused by overbidding and an artificial oil shortage.2 The American appeal for reinforced cooperation was founded on both economic and political arguments. Ever since 1947, when the Americans had become net importers of oil, American dependency on Middle Eastern oil had been increasing. In March 1972, prognoses of the State Department estimated a rise of consumption from a daily 15.8 million barrels in 1971 to 24 million barrels by 1980. This would signify a dependency on imports of 50 per cent of national oil consumption at the end of the decade.3 It would also signify an important increase in imports from the Eastern hemisphere:  in 1980 one third of imports would be from the Middle East. The implications were both political and economic, according to the staff of the National Security Council. They warned Henry Kissinger, at that time National Security Advisor, of the risks of such a dependency on oil import from this less secure region. A growing anti-Western nationalism would be noticeable as well as an increasing

The OECD Oil Committee 145 vulnerability of foreign oil concessions. This would be a consequence of the shift of balance of power from companies and consuming countries to producer countries. As a matter of fact, since 1968, oil-producer countries had been able to augment their revenues from the oil market and increase their participation by nationalizing the concessions. Especially since the 1971 Tripoli and Tehran accords on the tax referenced, posted prices, OPEC appeared to have taken over the initiative. As David Barran, chairman of Shell, stated: ‘There is no doubt that the buyer’s market for oil is over.’4 It was believed by the National Security Council that these confrontations could potentially result in supply cuts, overbidding prices and possibly strained relations with current political alliances. Moreover, the balance of payments would be negatively influenced by both the rise of imports and the decrease in US companies’ earnings.5 Along with the changes in the oil market, the American administration was gradually taking steps to improve the American energy situation. It aimed to reduce the growth of oil import as well as to reduce the risks of escalation of severe conflicts between the oil-producing countries and companies. The policy focused both on international and domestic policies. First, at the domestic level, national dependency on Middle Eastern oil could be reduced by energy-saving policies, the substitution of oil by alternative energy sources such as nuclear energy, or the search for other oil suppliers such as Canada.6 This policy for a reduction of dependency on imported oil would gain in importance in the following years. In his address on energy to the American nation, on 7 November 1973, Nixon announced Project Independence, a high-budget five-year programme. His ambitions became clear when he made a comparison between this project and the large and successful American Manhattan Project, which, after significant investments and commitment, had founded the development of nuclear bombs in the 1940s.7 Similar themes recurred in international energy policy. Reinforced cooperation among energy-consumer states was desired in order to encourage lower global consumption of Middle Eastern oil. For instance, greater information exchange on nuclear energy with the Europeans was considered, despite suspicions from, mostly, the French side that these

146  Oil Shock policies were likely to be introduced for American commercial benefit.8 Moreover, the theme of more rational use of energy was introduced in the OECD Council as a focus for study and cooperation at the OECD. In this way, this theme would indirectly spread to the European Community (EC). By the beginning of the oil shock, policy issues such as energy conservation, search for alternative sources and diversification of energy sources were on the agenda in the energy-consumer countries.9 With respect to the oil producers’ demands and their negotiations with the oil companies, diplomatic support to the latter was provided.10 Moreover, consumer solidarity was considered to be vital in the negotiations with the oil producers’ demands in order to minimize the risks of supply shortage and ‘sky-rocketing prices’.11 These risks were real, as forecasts foresaw a substantial rise in world demand for oil in the long term and a related growth of international competition: it was estimated that global consumption would double between 1970 and 1985, and even increase fourfold by the end of the century.12 The question was how such cooperation could take form:  at the OECD or in a new body. Dr Schlesinger, chairman of the Atomic Energy Commission, was convinced in May 1972 that ‘the only way to solve the problem would be through a strong coordinated international organisation similar to the European Coal and Steel community’.13 At the same time, however, reinforcement of the existing cooperation at the OECD had the potential to be realized more easily. The Oil Committee at this organization and its restricted-membership HLG had long been the main international forums for oil-consumer states for exchanges and action on oil questions. It seemed to be an appropriate place to achieve a joint stance on the problems. In any case, it offered a forum for discussion on how to realize reinforced energy-consumer cooperation: within the existing OECD or in a new international body.

The OECD Oil Committee and its High-Level Group The OECD Oil Committee was one of the two functional bodies designed to carry forward the work of the OECD in the field of energy. Together

The OECD Oil Committee 147 with the Energy Committee, it was to deliver regular informative reports on international questions and constituted an international platform for the discussion of current problems. The committees also prepared reports and proposals for submission to the OECD Council. Within the OECD, only the Council had the power to make decisions on energy which acted directly upon member countries’ policies. However, such decisions were rare, as they required unanimity. Agreements between all member countries were difficult to attain, as their situations differed substantially in fields such as dependency on import, substitution possibilities, supply patterns or concepts about the organization of the market. The main asset of OECD cooperation was therefore the platform it offered for business and governments to exchange views and knowledge on energy. Against the background of the turbulence in the oil market, the Oil Committee became an important international medium through which oil-consuming countries could air their policies and take stock for possible joint action. Within the Oil Committee, matters were discussed at different levels. Periodic reports and statistics on oil-related issues such as supply, disposal, refining capacities or stockpiling were compiled by the General Working Group.14 Before being taken to the Oil Committee, these reports were studied by a High-Level Group which consisted of a limited number of member countries:  Canada, France, Germany, Italy, Japan, the Netherlands, Norway, the United Kingdom, the US and the Commission of the European Economic Community. It undertook studies on oil demand and supply and made recommendations to the Oil Committee on the policy it should follow.15 The Oil Committee had played an important role in the assurance of oil supply during the Suez crisis and in 1967. An apportionment scheme for oil in times of emergency had been set up by the European member countries, with the exception of Finland. The need for measures to deal with oil shortages had been plainly manifested in 1951 during the Abadan crisis in Iran, when the supply of crude oil and oil products from Iran to Europe had completely stopped.16 The situation had been

148  Oil Shock controlled partly by the largest oil companies, the ‘majors’, through a re-routing of product movements and partly by an additional American oil supply. Five years later, a new crisis emerged when the Suez Canal was closed in October 1956 and the Iraqi Petroleum Company pipelines to the Mediterranean terminals were damaged in Syria. This time, the OEEC, OECD’s predecessor, sought to arrange an apportionment scheme for its European members and succeeded. Almost all available supplies were shared between the member countries in direct proportion to their share of supply at normal times. Only 5 to 10 per cent of the supplied oil was reserved for special allocations, such as when individual member countries were facing special difficulties. At the same time, additional oil was brought in from the US. Although this system featured some defects, such as the exclusion of already existing stocks from the calculation, it would be formally adopted as a recommendation for the European members, except for Finland, by the OEEC Council on 6 May 1960. Alongside this apportionment scheme, the OEEC worked on other measures to reduce the risks of oil shortages. For instance, these concerned the maintenance of a minimal level of stocks, availability of production capacity and diversification of sources. In 1964, the OECD had issued a recommendation for maintaining a minimum level of oil stocks equivalent to 65 days’ consumption of crude oil and oil products. In December 1968, the Council of the EC would adopt a directive to maintain these stocks.17 An apportionment scheme for oil in times of emergency had been set up in cooperation with a group of oil companies. These enterprises, assembled in the International Industry Advisory Board (IIAB), would regulate oil distribution, when judged necessary by the OECD Council. This board had twice been asked to arrange a sharing of available oil in response to the discontinuities of supply related to the Suez Crisis in 1956 and the 1967 Six-Day War. The IIAB was not confined only to the seven oil majors: it included (partly) national companies such as, in 1972, the Italian ENI, the French ERAP and CFP and the German Deminex.18 In 1972, although Western consuming states had successfully encountered earlier oil crises, it had become evident that the situation had changed

The OECD Oil Committee 149 because of the emerging strength of the oil-producing states since 1968, the changing role of the oil companies and the emerging energy crisis in the United States. For instance, while oil supply to European states had largely been assured by American cargoes during the oil crisis of 1967, the Americans had by now lost their spare production capacity and would not be able to fill the gaps again if a new emergency occurred. The seven majors disagreed on the importance of the OECD Oil Committee for the handling of the oil problem. In general, American companies judged that the problems of the developing oil crisis were mostly related to the Middle Eastern conflict. For them it was an essentially geopolitical problem, not to be dealt with through the Oil Committee. The European oil majors Shell and BP were, however, actively stressing the need for enforced international energy-consumer cooperation. Such cooperation would stimulate policies for the reduction of oil consumption and measures to secure energy supply.19 Oil companies were involved in the development of policy at the OECD, but they were not directly represented at the meetings of the Oil Committee. Shell was, according to one of its own archival reports, actively involved in briefing OECD delegates on its views. Moreover, after August 1971 it would pursue a more direct approach with national governments of the OECD member countries and with the European Commission. Shell’s director general, André Benard, had issued, on 3 August 1971, a letter to all European general managers telling them that ‘a running dialogue with European governments and the EC Commission’20 would be necessary to ensure that their policies on price and security of oil supplies would ‘support instead of handicap us in the service we aim to provide’.21 He put forward an energy strategy for Europe which included four points:  encouragement of diversification in resources for crude oil; (re)implementation of other energy sources such as coal or nuclear; rational use of energy; and a compulsory storage programme (such as the directive on 90-days stocks) and development of a national and international rationing system.22 This letter does not prove the influence of Shell on European policy, not at national, communitarian or OECD level. But still, it shows the

150  Oil Shock relevant preoccupations of policy makers at business and governmental level. During the few months before the oil shock, as is treated below, the European oil companies would seek to participate in the HLG meetings in order to achieve a joint stance among consumer countries on the Libyan nationalizations of oil production and property. At the HLG meeting of July 1972, which is discussed below, a general consensus was reached on the necessity of intensifying relations with the oil companies. Thereafter, the Oil Committee would search for ways to interact more intensively with the companies participating in the IIAB, for example through the presence of delegates or presentations on the current oil situation. Until this date, the board had been maintained on a stand-by basis. But the IIAB’s chairman, J.H. Choufour of Shell Transport, responded to the invitation by saying that the board was not the appropriate body for such interaction, as it was too diverse and was limited by a focus on supply and transport questions instead of policy. Still, he said, the IIAB would be able to take action in an emergency if necessary, with the potential to be operational within 24 hours.23

European Discussions The changing oil market and the important American share of Middle Eastern oil were evidently of prime importance for the European member states. But their enthusiasm for tighter energy-consumer cooperation varied. The Oil Committee and especially the HLG had been the most important international forums for discussion on the changes in the oil market, but agreement on real joint action in relation to the oil producers was still difficult to reach. A reason can be found in the fundamental differences between American and European interests in terms of dependency on imported oil and bilateral relations with the oil-producing states. While, at the beginning of the year, forecasts of a 50 per cent dependency on foreign oil had upset the American government, most European states already relied far more heavily than that on oil import. As a matter of fact, the American energy problems notwithstanding, the US was still the main oil producer in the world.

The OECD Oil Committee 151 An equally unbalanced situation was apparent in other energy-related fields, such as in nuclear electricity, the enrichment of uranium or technological development for offshore oil exploration and exploitation. Concerning diplomacy, the French and English governments had particularly well-developed relations with oil-producer governments. But they did not always follow the American choices: the French government, especially, wished to follow an path independent from the American policy.24 The HLG meeting of 10 January 1972 shows that other European member states were also having reservations about a joint political position. At this meeting, the recent Libyan nationalizations of BP oil concessions were discussed. All participants eventually supported the English plea to prevent the Libyan government from commercially benefitting from its action, which was a violation of the Tehran accords. But at the same time, the European member states (except, evidently, the UK) seem to have been much more reserved than the American delegation. While the latter emphasized the risk of spill-over effects to other companies and producing countries, the Europeans estimated that this crisis for BP was an isolated case, and they refrained from discussing the political aspects of the situation.25 Still, despite these different positions on political and economic issues, significant mutual Euro-American interests were involved in a potentially solid international cooperation. As for the European member states, their governments had stakes in international cooperation at, at least, three levels. First, American diplomacy and the close US ties with the Saudi government were considered indispensable in the assurance of oil supply. Second, solid cooperation was considered vital in order to obviate exploding market prices by overbidding. In Europe, the German government seems to have taken the lead on this issue. Third, in the larger picture of energy politics, cooperation with the United States was interesting because of its high budgets for investment and technological advancement in fields such as nuclear energy or offshore deepwater exploration.26 It has to be recalled that despite the dominancy of the theme of oil, the American propositions concerned potential reinforced cooperation on the wider theme of energy.

152  Oil Shock On the other side of the Atlantic, as we saw in the first section, a joint consumer position was considered to be desirable by the American government in order to confront security and economic problems related to the recent developments in the Middle East. In the summer of 1972, the urgency of handling these problems was felt more on the American than the European side. The meeting of the HLG of 13 June 1972 signified, in American opinion, ‘the frankest exchange ever to take place between delegations’.27 During this meeting, the American delegate James Akins, Director of Fuels and Energy at the US State Department, warned of the imminent risks of low oil supply and subsequently high prices. A week before, the Libyan government had organized a meeting with the US oil companies who maintained concessions in this country. These companies had been given a one-month delay to convince the US government to change its foreign policy in the Middle East. In the HLG meeting, Akins was giving a very pessimistic picture of these companies’ future as a result of their inability to influence American foreign policy. This ‘black Akins picture’28 contrasted substantially with the French ‘rosy Vaillaud picture’,29 as the other participants soon labelled the respective statements of the American and French delegates. Michel Vaillaud, Director for Fuels at the French Ministry for Industrial and Scientific Development, pointed out the inflammatory risks of ‘crying wolf ’.30 His picture of the oil markets’ development was actually not very rosy either, but he did call for a more laid-back consumer stance. The present problems were, according to him, exclusively an affair for the Anglo-Saxon majors, and it was not up to the consumer countries to halt the process. In his opinion, the principal solution to the problem would be a decline of dependency on Middle Eastern oil. Nobody contradicted the importance of such a policy, but the other participants also searched for an intermediate response to the Libyan situation. They seem to have been less pessimistic than Akins, but still favoured action in case a crisis were to erupt. Not surprisingly, this position was maintained by the delegates from the UK and the Netherlands, residence countries of the two European majors. They were searching for means to back the oil companies and thus to avert

The OECD Oil Committee 153 an oil shortage and price increases. But the representatives from Japan, Germany, Italy, the European Commission and Sweden also supported joint action in the case of a crisis developing. Their position, however, was also supported by the representatives. The meeting ended without a consensus being reached, except on the Swedish proposition to intensify relations between the Oil Committee and the company members of its IIAB. European support for reinforced consumer cooperation would suffer after 28 September, as a result of the Saudi proposal to the American government for a contract which would include the assignment of ‘preferred position’31 to American consumers in the supply of oil. The Europeans were astonished, as such a deal would not harmonize with the ongoing American rhetoric on a potential escalation of competition between consumers. On the one hand, the affair alarmed the Europeans and underlined the importance of bilateral relations with oil-producing states, even if Washington rejected the Saudi proposition. However, on the other hand, it intensified American efforts at the OECD. James Akins talked about the Saudi proposition, and the American problems, at several meetings with the Europeans. He insisted on joint action. At the insistence of the Americans, the Council of Ministers of the OECD decided in October 1972 to undertake ‘a preliminary assessment of the problems in the field of oil which could provide a basis for steps towards cooperative action between member countries’.32 For this purpose the OECD Oil Committee was called upon to deliver a report on the perspectives and demand for oil in the OECD zone before 1 March 1973.33 An ad hoc group of the Oil Committee was formed to make this assessment. The resulting report would be discussed at the Oil Committee on 13 June and by its HLG the day before. The decision to look into the possibilities for possible concerted action by energy-consumer countries was not necessarily a sign of European consent on the question. As a matter of fact, the discussions were complicated because of the lack of clarity on the American intentions with regard to reinforced cooperation. First, appeal was sometimes

154  Oil Shock made for improved cooperation at the OECD. Second, on other occasions ideas were put forward on the institution of a new body with the participation of the most important oil-consuming states. Third, bilateral Euro-American cooperation was also hinted at: already, one month before the OECD Council of May 1972 where Irwin proposed improved energy-consumer cooperation, he had put forward a similar idea to the president of the EC Commission, Wilhelm Haferkamp, during one of their regular meetings. This proposition focused on Euro-American cooperation in the field of energy. Haferkamp could not otherwise than avoid the question, as it touched on a contentious issue within European cooperation. At the beginning of 1973, a new American appeal for improved consumer cooperation was put to the European Council. In February 1973, the Council’s president and Belgian foreign minister Renaat van Elslande proposed to send confirmation to the Americans that the EC would act as ‘interlocutor of the United States’,34 but a response from Quay d’Orsay stated that this would be unacceptable.35 As the French pointed out, the American initiatives were too vague and were not specific about the substance of such cooperation. Other matters probably counted as well, such as the strong American position in geopolitics and energy, which would bring along with it an imbalanced relationship. Moreover, concerns were probably related to the risk of rubbing the oil-producer countries’ governments up the wrong way. At the time, within unofficial American circles, ideas were aired by Eugene Rostow, former undersecretary of state for political affairs, on the necessity of facing OPEC with a strong consumer front. A month later, this idea would be publicly expressed by the influential American oil consultant Walter Levy.36 His views aroused protest on the oil producers’ part. For instance, the Saudi minister Sheikh Zaki Yamani warned of unfavourable Arab responses in the case of the creation of a united front among consumers.37 Shortly after his presentation, Levy was engaged in April as the American consultant to the OECD Oil Committee, but the chair of this Committee, Wansink, had the engagement cancelled. Threatening to resign, Wansink criticized Levy’s appointment, which in his opinion should have been ‘cleared’38

The OECD Oil Committee 155 with the Oil Committee beforehand. The affair informs us of American ambitions for consumer cooperation. The engagement of Levy must have been consciously undertaken. It also shows the delicacy of the subject and divergence of positions within the OECD Oil Committee. During spring 1973, the EC member states debated the desirability of possible international cooperation between energy-importing countries. This question was to be on the agenda of the forthcoming Energy Council in May. During the preparatory debates at the European Council’s Energy Group a gradual change is noticeable, from a general prudent approach to a situation of discord between proponents and adversaries. Eventually they all agreed, generally speaking, on a prudent approach in order not to worsen already delicate relations with the oil-producing states. It was imperative to avoid the supposed international consumer cooperation resembling ‘une coalition de pays nantis face aux pays moins développés exportateurs de pétrole’.39 But the EC member states differed on the translation of this approach into policy. For some, such as the French and Italian delegations, it meant rejection of the creation of a new international body. In their opinion it would be much better to intensify contacts and consultations at the OECD. Others doubted that concrete results could be reached within this organization on elementary issues such as oil prices and outbidding or a dialogue with producer states. In the eyes of the English minister Boardman, only close cooperation with other oil-consuming states would guarantee supply. The German minister Detlev Rohwedder stressed growing global oil consumption. In his view, it would boil down to a harmful situation for the Community if the interests of the three large oil consumer regions  – the European Community, the United States and Japan  – were not harmonized.40 Without reaching conclusions, the entire debate was transferred to the European Energy Council of May 1973. In the meantime within the HLG, debates were running on the substance of potential reinforced cooperation. The issue gained in priority as a result of the acceleration of the rise of oil prices caused by two American decisions: first, the 10 per cent devaluation of the dollar on

156  Oil Shock 12 February 1973, and second, the abolition of American quotas on the import of oil during Nixon’s ‘Special Message to the Congress on Energy Policy’ two months later.41 The latter decision resulted in an American surge for Middle Eastern oil: in the summer of 1973, imports to the US accounted for 6.2 million barrels per day, nearly 40 per cent more than the previous year.42 The international run on oil had accelerating effects on the market price, increasing it beyond the sacred official posted price. The response of main exporter Saudi Arabia and other oil-producing states, such as Libya and Kuwait, was to, nevertheless, not increase production. ‘What is the point of producing more oil and selling it for an unguaranteed paper currency?’, questioned the Kuwaiti oil minister.43 The frail advantages of a full basket of money had already been demonstrated by the monetary developments since the abolition of the Bretton Woods system in August 1971, and again by the devaluation of the dollar in February 1973.44 Within the OECD Oil Committee, the discussion on reinforced cooperation gained in substance. A list of possible areas for cooperation on oil between member countries was being established and divided into three broad themes. The first theme concerned cooperation between consumer countries and with producing countries. This included the broader solidarity among consumer countries regarding oil supply, establishment of joint relationships with producer-country governments and the possible creation of a framework of guidelines for oil companies in their relations with oil-producer governments. The second theme concerned coordinated decision making as regards the national measures to prevent a supply emergency or reduce and control oil consumption. Finally the theme of longer-term policy and diversification of energy sources was treated.45 The working document would be discussed by the HLG in April and would be the basis for a more elaborated document later in July. During the European Council of Ministers on Energy in May, the French minister Jean Charbonnel rejected the creation of a new cooperative body straight away. Instead, he said, consultations had to continue at the OECD. He proposed to intensify and possibly reorganize cooperation

The OECD Oil Committee 157 within this company. Charbonnel gained support from the Italian and Danish delegations. The Danish minister for trade, Erling Jensen, preferred that the OECD host a consumers’ cooperation in order not to offend the oil-producing countries. Giorgio Bombassei, permanent representative at the European Commission, referred to current discussions at the OECD relating to matters which were also important to the Europeans.46 He proposed to coordinate a joint European position before this OECD meeting at the beginning of June. Later in the debate, Mauro Ferri, Italian minister for industry and commerce, reiterated the invitation from his Italian colleague. Following Ferri, the OECD functioned already as a channel between Europe and other energy consumers. He proposed that the Europeans should coordinate their positions at the meetings and confirm their willingness to intensify the consultations.47 At the end of the debate, the then president of the Council, Belgian minister for economic affairs Willy Claes, took note of an agreement on Ferri’s proposal to manage a coordinating meeting before the OECD Council of 6–8 June.48 The option of maintaining intensive consultations with other consumer states at the OECD had thus been accepted by all nine. Within two weeks, improved cooperation between energy-consuming states was taking form at the OECD Council of 6–8 June 1973. The agenda of the meeting included the assessment on possible consumer cooperation which had been elaborated in April. During the Council, all participants (European and non-European) declared that their governments were determined ‘to pursue and develop close co-operation within OECD on energy policies’.49 Mauro Ferri, who was also the Italian delegate at this meeting, stressed in addition the link between EC energy policies and the OECD. The French delegate Jean de Lipkowski, secretary of state for foreign affairs, underlined the French support for the continuation and development of concerted action within the OECD. He added that, ‘while hoping for the definition of a Community energy policy, [he] thought that the OECD Member countries could set themselves an immediate target of full and regular reciprocal information on the trend of their medium and long-term energy policies so as to make them more effective’.50

158  Oil Shock

A Reinforced Cooperation? The OECD Oil Committee and the HLG during the Oil Shock On 12 June the HLG deliberated on oil problems. The themes mentioned in the OECD working document of April on the possible areas for cooperation between member countries on oil questions returned to the new agenda. High on this agenda were the risks of overbidding prices and the avoidance of a scramble for supplies. Moreover, a further assessment of the possibilities for an extended repartition system was decided on.51 These themes would be high on the HLG agenda too in the following month. At the same time, the European majors would search for direct intervention in connection with consumer cooperation. However, no real progress would be yielded in these three domains. During the oil shock, the delegations would exchange valuable overviews and short-term forecasts of their supply situation, as well as of the national measures taken for consumption restraint, but no real joint action was decided on.52

The risks of exploding prices by overbidding The risks of exploding market prices and the avoidance of a scramble for supplies had been a major incentive to improve international consumer relations since 1972. It had been central to John Irwin’s pledge to improve consumer cooperation at the OECD in April and May 1972. It was also one of the main European objectives for such cooperation as discussed by the European Energy Council in May. Until mid-October, the issue became ever more urgent. Market prices were reaching very high levels at auction sales in Rotterdam’s export market. Levels of $136 per ton had been reached, which was more than double the prevailing market prices in the Netherlands ($60 per ton) and three times more than the market price in France ($45 per ton).53 The consumer states studied the possibilities for lowering their competition. However, no real progress was achieved within the Oil Committee. The Committee gave two reasons for this failure: first, the making of a reliable assessment on the oil prices

The OECD Oil Committee 159 was hindered by the rapid changes in the oil market. Second, the study of such a highly complex theme made it necessary to take an integrated approach within the OECD.54 Probably, however, other reasons played a role as well. Within the European cooperation, disagreement endured on the opportunity for OECD-wide cooperation in this field. During a meeting of the Energy Group on 16 October, the price increases had apparently not affected the French position on the matter. The French permanent representative in Brussels, Burin des Roziers, received clear instructions that a prior common position in this field would still be a prerequisite for contacting consumer states outside of Europe.55 It might be argued that the desire for improved European energy policy was not all that was on the French minds. Apart from a joint consumer approach, the French government was also searching for a bilateral agreement with the Saudi government. Such an agreement between the French and Saudi governments was signed on 30 November 1973 and would pave the way for large supply contracts in January.56 The French argument ran counter to the German conviction that international action in this matter was urgent. Only a short time prior to this, in a meeting with the American secretaries Shultz and Dent, the German minister of economics had stressed the German preoccupation with avoiding price overbidding by the consumer countries. Destructive competition had to be avoided, in his view. The German perseverance in solving the financial problems related to the oil crisis emerges clearly from a letter from Schmidt to Kissinger proposing intensive consultations, under the radar of the media, on energy matters.57 Further cooperation between consumer countries facing the price increases was also sought by the English government. At the meeting of 25 October, the issue of price increases gave impetus to lively discussion, mainly invoked by the English delegation. Regarding OPEC’s unilateral decision for price increases, Stephen Spain pleaded for an active role for the consumer countries in the situation. Oil-producing countries had to be contacted by consumer governments, he said.

160  Oil Shock Stability was a requisite in terms of market conditions and negotiation structures for price setting and supply guarantees. He emphasized that he did not mean to take over the oil companies’ role in the field, or create a confrontation with them, but that closer relations between producer and consumer countries would be an improvement. He received support from the other delegations on the necessity of improving governmental relations with the oil-producer states. But positions diverged on the necessity of coordinated action in this field. Eventually, it was agreed that consumer countries would individually contact oil-producing countries, in their own way, and with their own time schedule.58 For the American government, this English idea was not compatible with current efforts to reach a peace agreement in the Middle Eastern region. As a matter of fact, Nixon had already received a letter from British prime minister Ted Heath on the matter. The latter had proposed a coordinated approach among the main consumer regions (Japan, US, EC) to intensify producer–consumer relations in order to stabilize supply and prices. Kissinger transmitted a draft reply to Nixon, stating that Heath ‘does not take fully into account the problems posed by the current Arab–Israeli fighting and the need to develop strategy for a longer-range solution to the oil supply problem’.59 This is a good illustration of how political and economic interests were unambiguously interrelated and could hinder a joint consumer approach towards the oil producers.

Expansion of the apportionment system for oil supplies Simultaneously, the OECD sought to improve its system for the apportionment of oil supplies in an emergency. Already, in November 1972, the Council had enforced this apportionment scheme by changing it from a recommendation to a decision. This authorized the Oil Committee, during a crisis, to apportion among the European members the 5–10 per cent of supplies which were subject to special allocation.60 At the same

The OECD Oil Committee 161 time, the four large consumer countries outside OECD Europe  – the United States, Canada, Australia and Japan – started to seek opportunities to join the system after October 1972. An informal group with members of the Oil Committee’s HLG sought out possibilities for creating an OECD-wide arrangement.61 From the start, however, it would prove difficult to find consensus because of the differing situations in the various countries. A  major point of disagreement was whether the calculation of an oil shortfall should be based on the consumption or on the import of oil. Japan, which imported almost 100 per cent of its oil, clearly had different interests from the US, which, in 1972, was only dependent on import for 29 per cent.62 After 16 October, it would rapidly appear that cooperation at the OECD would not succeed in creating concerted action towards the oil-producer countries. In the OECD’s Oil Committee and its High-Level Group, deliberations on the oil shock started with a first meeting on 25 October. A week before, swiftly after the decisions on the cutbacks and price increases, Wansink had convened this extra meeting. The agenda included, among other items, deliberations on the supply situations of the member countries. Although the economies were already affected by the production cutback, most concern was expressed on the potential difficulties in the period ahead. Alongside a review of the current oil supply situation and the recent price increases, the agenda of the 25 October HLG included a discussion on a possible reactivation of the IIAB, which had been on stand-by since 1967. This reactivation would mean that the oil companies which were part of this body would be asked to allocate the oil in the European region following the apportionment scheme. The Dutch delegation and L.G. Wansink, the chair of the HLG who was also from the Netherlands, tried to convince the other participants of the necessity of reactivating the IIAB. But eventually the majority of the participating members were against a formal convocation of this body. It would risk provoking the Arab oil-exporter countries into expanding their production cuts. Moreover, it might cause panic among the public at large. Following the

162  Oil Shock American delegation to the meeting, the French and English delegations had especially spoken against formal reactivation of the industrial body. The affair was temporarily settled by a compromise put forward by Fernand Spaak, director general of energy at the European Commission. He proposed a procedure wherein Wansink would request that the IIAB chairman put the organization on alert. Then, it could be swiftly activated when necessary. The HLG agreed on these procedures and foresaw a renewed discussion on a possible reactivation of the IIAB during the next meeting, on 20 November.63 At the 20 November HLG meeting, the question of the reactivation of the IIAB for the apportionment of oil was discussed again. Just prior to this, Wansink had shared alarming information on the supply situation provided to him informally by the oil companies. He informed the delegations that until 15 November, European supplies would be reduced by 15 to 20 per cent. Forecasts were for a worsening of the situation to 25 per cent. Stocks of oil had been maintained at a level equivalent to 25 days of consumption. During the meeting, the Dutch delegation again pushed to activate the IIAB and were backed by their German colleagues. The French and English positions had not changed, and were enforced by alignment with the Italian delegation. Eventually, the issue was forwarded to the OECD Council for further discussion. Alongside these issues, the delegations provided an overview of their supply situation and forecasts for the period until March. They also informed their colleagues as to the national measures taken for consumption restraint.64

Relations of the OECD Oil Committee with the oil companies Concerning relations with the oil companies, since mid-1972 the Oil Committee had searched for more direct contact. But when the relations between oil-producing countries and oil companies deteriorated further, the member countries were reserved on meeting the oil companies openly. In Libya, the nationalization of oil concessions started on 11 June. The picture

The OECD Oil Committee 163 became very disadvantageous for the majors. Confronted with a development which seemed to lead to complete nationalization in Libya, Shell began an active policy of seeking help from its main customer countries in Europe (France, UK, the Netherlands and Germany) and the EC. After all, consequences for these states would be huge if Libyan oil was cut off. Europe could lose approximately 500,000 barrels per day. Moreover, a victory for Qaddafi could produce chain reactions in the ‘time bombs’65 of Iraq and Kuwait. On 30 August 1973, Michael Pocock from Shell had a meeting with Commissioner Simonet. His main concern was to reach agreement on a joint stance against the developments in Libya.66 A week later, Exxon and Shell joined forces in an information campaign to obtain consumers’ support against the Libyan policy. Apart from an understanding of their position, they would ask for new legislation such as import licences to keep out ‘hot oil’,67 referring to oil directly purchased from producers’ governments at public auctions. They also agreed to approach Western governments on the matter of apportionment schemes for oil in times of emergency. ‘[T]‌hey should get their allocation systems for crude oil imports agreed urgently.’68 In the few weeks before the oil shock, the European companies asked for an invitation to the OECD meeting and they succeeded in bringing the subject onto the HLG agenda. An additional meeting was planned for 17 October. Discussions would cover the approach of consumer governments to the majors. However, after the unilateral decision of OPEC to raise prices on 16 October, Wansink cancelled the meeting. Except for the Dutch and English delegations, the HLG member states no longer supported the idea of inviting the majors to their table.69

Conclusion After the cumbersome process towards reinforced cooperation and the promising determination for close cooperation of the OECD member countries in June, the lack of joint action during the oil shock acted like an anti-climax. The OECD Oil Committee, and especially the HLG, would be the most important international forum for the exchange of

164  Oil Shock ideas and information on the national oil situations during this period. But really close international cooperation and joint action was apparently a bridge too far. The issue of concerted action was delicate because of the diverging economic and political interests on the two sides of the Atlantic, while, at the same time, both the Americans and the Europeans needed cooperation for economic and security reasons. The mixture of political and economic interests in energy politics hindered a real joint stance towards international energy issues among consumer countries. Political and security questions played a large role in the search for reinforced consumer cooperation but also in the failure to develop joint action. To give some examples, the security risks in the Middle East gave an important impetus to the American search for reinforced international cooperation in 1972, especially in the context of the growing dependency of the US on Middle Eastern oil. Second, the decisions by the Arab oil producers on immediate and repetitive oil cuts were closely linked to the conflict in the Middle East, but their effects had an economic nature. After 17 October, each European government tried energetically to keep or improve their individual relations with the Arabs. This Arab policy of divide and rule interfered fundamentally with both European cooperation at the EC level and oil consumers’ cooperation within the OECD’s Oil Committee. Eventually, the IIAB was not reactivated to counter the supply cuts, despite the Dutch appeals. Third, the English ambitions, in autumn 1973, for a joint approach among consumer countries’ towards the oil-producing countries were hindered by the Americans. The latter feared that this would interfere with the peace negotiations in the Middle East. Apart from the mixture of political and economic interests, another problematic factor for close cooperation was the disparity of these interests. For instance, the search for an extension of the OECD oil allocation system to member countries outside the European region failed because of the diverging national interests in, mainly, the US and Japan. Moreover, the national policy of certain governments to obtain bilateral agreements with oil-producing countries contradicted the objective of countering a scramble for supplies.

The OECD Oil Committee 165 At the beginning of the 1970s, the changing oil market had given rise to the need for joint action. In autumn 1973, the oil shock revealed the need for new, stronger cooperation to realize such action. A new international body would provide the American government with a way to align Western policies to its own energy-related foreign policies. On the other side of the Atlantic, most European countries hoped that such a body would make possible a joint approach towards the oil-producing countries. But developments in other fields in energy policy also fed the European desire for closer cooperation. For the past few years, the consumer states had become focused on the need to reduce dependency on oil. Cooperation with the technologically advanced Americans was appealing, and the high-budget Project Independence, which had been announced several times by the American president, worked as a carrot for European consent to the creation of a new body for energy cooperation.70 Indeed, the search for reinforced cooperation was not ended by the oil shock. Instead, a new era began.

Notes 1 For instance, the political aspects are analysed by Daniel Möckli, European Foreign Policy During the Cold War; Heath, Brandt, Pompidou and the Dream of Political Unity (London: I.B.Tauris, 2009). The technological aspects have been studied in James P. Lester, ‘Energy R&D:  US technology transfer to advanced Western countries’, in Henry R. Nau (ed.), Technology Transfer and US Foreign Policy (New York: Praeger, 1976), pp. 120–70. Other publications on the creation of the IEA: Marloes Beers ‘The EC, France and the International Energy Agency’, in Giuliano Garavini, Alain Beltran and Éric Bussière (eds), Europe and Energy (Brussels: Peter Lang, 2016); Ulf Lantzke, ‘The OECD and its International Energy Agency’, Daedalus 104, no. 4 (Autumn 1975): 217–27; Henning Türk, ‘Anti-OPEC or neutral consumer organization? The founding of the International Energy Agency in 1973/1974’, published on H-Net 1973 Energy Crisis Anniversary Discussion, available at https://networks.h-net.org/node/19200/pages/23365/ 1973-energy-crisis-anniversary-discussion; Mason Willrich and Melvin Conant, ‘The International Energy Agency: An interpretation and assessment’, American Journal of International law 71, no. 2 (1977): 199–223. 2 ‘Procès-verbal de la 293ème séance tenue au Château de la Muette, à Paris, le mercredi 24 mai 1972 […]’, C/M(72)15 (prov), Paris 15 May 1972; ‘Long-term energy policies and related questions’, C(72)123 final, Paris, 15 May 1972,

166  Oil Shock OECD Archives. Irwin proposed to include the question of cooperation between oil-consuming states in the studies of the OECD on long-term energy politics. These studies were decided on during this Council, and signified an overall assessment of long-term energy problems by diverse bodies within the OECD. They included studies on diverse problems ranging from a growing demand for energy, and for technological innovation to allow access to natural resources, to the degradation of the environment and changing relations with developing countries. The assessment began in October 1972 and ended in 1974. The Council of the organisation examined the first results during its meeting on 6–8 June 1973. The eventual results were published: OECD, Energy Prospects to 1985:  An Assessment of Long Term Energy Developments and Related Policies (Paris: OECD, 1974). 3 These prognoses were given in the report ‘U.S.  policy and the impending energy crisis’, which was sent to President Nixon by Secretary of State Roberts on 10 March 1972. Linda Qaimmaqami and Edward Keefer (eds), Foreign Relations of the United States [FRUS], 1969–1976, Volume XXXVI, Energy crisis, 1969–1974, (Washington, DC: United States Government Printing Office, 2011). See also: ‘106. Briefing memorandum from the acting Assistant Secretary of State for Economic Affairs (Katz) to the Under Secretary of State (Irwin) Washington’, 18 January 1972, FRUS, pp. 254–6; and ‘116. Memorandum from Secretary of State Rogers to President Nixon’, Washington, 10 March 1972, FRUS, pp. 284–6. 4 Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (London: Simon & Schuster, 1991), p. 582. Barran is cited by Yergin. At the Tehran and Tripoli price negotiations with the oil companies, in January and February 1971, they succeeded in augmenting the posted price, for a five-year period, including a 2.5 per cent annual increase to counter the effects of inflation. 5 ‘127. Memorandum from Robert D. Homats, Richard T. Kennedy, and John D. Walsh of the National Security Staff to the President’s Assistant for National Security Affairs (Kissinger)’, Washington, 11 July 1972, FRUS, pp. 304–7. 6 ‘106. Briefing memorandum […]’, 18 January 1972, FRUS; ‘97. Memorandum from the President’s Assistant for International Economic Affairs (Flanigan) to the President’s Deputy Assistant for National Security Affairs (Haig) Washington, 7 December 1971, FRUS, pp. 228–9; ‘125. Memorandum from the President’s Assistant for International Economic Affairs (Flanigan) to Secretary of Labor Shultz and the President’s Assistant for National Security Affairs (Kissinger)’, Washington, 29 June 1972, FRUS, pp. 301–2; Marloes Beers, ‘The oil crisis, lever or barrier for the development of a common European energy policy? The energy policy of the European Community at the time of the first oil shock’, PhD Diss. University of Cergy-Pontoise, pp. 207–9. 7 On several occasions since June 1973 Nixon had referred lightly to this Project Independence, but in his 7 November address he elaborated more on the subject. RSC, Papers of the Nixon White House, part 7: President’s personal files, 1969–1974, ‘Energy speech’, President’s reading copy, The White House, 7 November 1973.

The OECD Oil Committee 167 8 For that matter, this ‘side-effect’ of cooperation on nuclear energy was not denied by the chairman of the Atomic Energy Commission (AEC), Dr Schlesinger. ‘122. Memorandum of conversation’, Washington, 22 May 1972, FRUS, pp. 295–7. 9 Ibid.; ‘106. Briefing memorandum […]’, 18 January 1972, FRUS. Within the European cooperation, the policy would become an important instrument to reduce dependency on oil in the 1970s: Marloes Beers, ‘Réduire la dépendance énergétique vis-à-vis de l’extérieur: le programme de l’utilisation rationnelle de l’énergie au sein de la communauté européenne dans les années 1970’, in Annales Historiques de l’Electricité 10 (December 2012): 7–16. 10 Especially American–Saudi relations. See for example on the issue of participation: ‘112. Telegram from the Embassy in Saudi Arabia to the Department of State’, Jidda, 17 February 1972, FRUS, pp. 270–4. 11 ‘122. Memorandum of conversation’, 22 May 1972, FRUS. 12 ‘Rapport du Groupe “Energie” au COREPER sur la communication de la Commission concernant les problèmes et les moyens de la politique de l’énergie pour la période 1975–1985’, Brussels, 11 May 1973, CM2/1973 888 temp 801, R/1229/73, Archives of the Council of the European Union, Brussels (ACEU). 13 ‘122. Memorandum of conversation’, 22 May 1972, FRUS. 14 ‘Internal working procedures for the General Working Group of the Oil Committee’, 29 October 1971, DIE/E/PE/71.14 (3rd revision), OECD Archives. 15 Canada and Norway were new members of the HLG in 1972 (Canada joined in January, Norway in October); OECD, ‘List of member countries of the organisation, its committees and other bodies, their mandates and officers’, (Paris, 1976), pp. 474–7. 16 Nationalisation by Iran of the Iranian assets of the Anglo-Iranian Oil Company and the expulsion of Western companies from oil refineries in the city of Abadan. 17 ‘Première note de la Commission au Conseil sur la politique de la communauté en matière de pétrole et de gaz naturel’, SEC(66)469, Brussels, 14 February 1966, Archives Historiques du Groupe Total, SG 92/26  à 36 Questions Européennes; ‘Report on OECD-wide apportionment of oil supplies in an emergency’, Paris, 19 November 1973, DIE/E/PE/73.126, OECD Archives; ‘Review of methods of apportionment of available oil supplies in an emergency in the OECD European area’, Paris, 26 June 1972, C(72)134, OECD Archives; ‘Directive du Conseil faisant obligation aux États membres de la CEE de maintenir un niveau minimum de stocks de pétrole brut et/ ou de produits pétroliers’, 68/414/CEE, Journal Officiel de la Communauté Européenne, no. L308 (23 December 1968): 14. 18 ‘Summary record of the 25th session on 13 June 1973’, Oil Committee, Paris, 27 June 1973, PE/M(73)1, OECD Archives. The members of the IIAB in 1972:  BP, CFP, Continental Oil, Deminex, ENI, ERAP, Exxon, Gulf Oil, Marathon Oil, Mobil Oil, Murphy Oil, Petrofina, Standard Oil, Shell, Texaco.

168  Oil Shock 19 Yergin, The Prize, pp. 618–19. 20 Cited in: ‘12006.777, Shell and the international debate on “apportionment” ’, London, 1 November 1973, SC 91/a/2, Shell Archives London [SLA], p. 16. It should be noted that this report was written by a Shell employee on the basis of primary sources within Shell. These primary sources, however, are not available at the present time. The attempt by Shell to influence these policies is confirmed by Yergin, The Prize, pp. 618–19. 21 Ibid. 22 Ibid. 23 ‘Minutes of the 27th meeting on 25 October 1972’, Paris, 23 November 1972, PE/M(72)3, OECD Archives. 24 See for example: Aurélie Élisa Gfeller, ‘A European voice in the Arab world:  France, the superpowers and the Middle East, 1970–74’, Cold War History 11, no. 4 (2011): 1–18. 25 ‘105. Telegram from the mission to the Organization for Economic Cooperation and Development to the Department of State’, Paris, 12 January 1972, FRUS, pp. 251–3. 26 ‘Orientations et actions prioritaires pour la politique énergétique communautaire’, Brussels, 19 April 1973, SEC(73)1481 final, CM2/1973 888 temp 801, ACEU; ‘Rapport du Groupe “Energie” au COREPER sur la communication de la Commission sur les progrès nécessaires de la politique énergétique; concernant les orientations et actions prioritaires pour la politique énergétique communautaire’, Brussels, 18 May 1973, ACEU, CM2/1973 888 temp 801; ‘Orientations et actions prioritaires pour la politique énergétique de la Communauté’, message of General Secretary Abert Costa de Beauregard to Burin des Roziers, Paris, 9 May 1973, CE/771, Centre des Archives diplomatiques de Nantes, Représentation Permanente aux communautés européennes, Brussels [CADN RP-CE], 2376. 27 ‘130. Airgram from the Department of State to the embassies in all OECD capitals’, Washington, 21 July 1972, FRUS, pp. 313–16. 28 Ibid. 29 Ibid. 30 Ibid. 31 ‘140. Memorandum of conversation’ Washington, 30 September 1972, noon, FRUS, pp.  347–51; see also Morris Adelman, The Genie Out of the Bottle: World Oil Since 1970 (Cambridge, MA: The MIT Press, 1996), p. 102. 32 ‘Document for meeting of Council at ministerial level. 6th–8th June 1973 […] (b)  The on-going energy assessment. (note by the Secretary General)’, C(73)103, 14 May 1973, OECD Archives. Concerning the discussions at the OECD:  ‘144. Telegram from the Deputy Secretary of State (Irwin) to the Department of State’, Paris, 25 October 1972, FRUS, pp. 363–4. 33 ‘Procès-verbal de la 306ème séance tenue au Château de la Muette, 20–24 October 1972’, C M(72) 28 Prov, 1 December 1972, OECD Archives. 34 Translation by author of ‘interlocuteur des États Unis’. ‘Programme de travail relatif à l’établissement d’une politique énergétique communautaire; Proposition de la Présidence’, 7 February 1973, CADN RP-CE, 2375.

The OECD Oil Committee 169 35 ‘Telex très urgent, from J.P. Souviron to Burin des Roziers’, Paris, 15 February 1973, CE/2651, CADN RP-CE, 2375. 36 ‘169. Memorandum from James H.  Critchfield, Special Assistant to the Deputy Director of Operations, Central Intelligence Agency, to the Deputy Director of Operations (Colby)’, Washington, 6 March 1973, FRUS, pp. 424–7. Giuliano Garavini and Francesco Petrini, ‘Continuity or change? The 1973 oil crisis reconsidered’, in Antonio Varsori and Guia Migani (eds), Europe in the International Arena during the 1970s: Entering a Different World (Brussels: Peter Lang, 2011), pp. 211–30 (222). 37 CADN RP-CE, 2375, ‘Reunion du groupe “Energie” des 22 et 23 mars 1973’, Brussels, 26 March 1973. 38 Embassy in The Hague to State, Telegram 1480, ‘Reaction to energy speech of Walter Levy’, The Hague 1480, April 1973, US National Archives and Records Administration [NARA], RG 59: State Department diplomatic records, available at http://aad.archives.gov/aad/. 39 ‘Rapport du Groupe “Energie” au COREPER sur la communication de la Commission sur les progrès nécessaires de la politique énergétique; concernant les orientations et actions prioritaires pour la politique énergétique communautaire’, 18 May 1973; ‘Orientations et actions prioritaires pour la politique énergétique de la Communauté’, Albert Costa de Beauregard to Burin des Roziers, Paris, 9 May 1973, CE/7711, CADN RP-CE, 2376. 40 ‘Projet de procès-verbal de la réunion restreinte tenue à l’occasion de la 244ème session du Conseil (Bruxelles, les mardi 22 et mercredi 23 mai 1973)’, R/1382/73, (PV/CONS/R8), 19 September 1974, CM2/1973 0011 temp 53, ACEU (hereafter ‘PV 244ème session du Conseil’). 41 The complete speech is available at http://www.presidency.ucsb.edu/ws/?pid= 3817. 42 Yergin, The Prize, p. 591. 43 Ibid.: cited by Yergin on p. 595. 44 See for example: Jacques Percebois, Economie de l’Énergie (Paris: Economica, 1989). 45 ‘Possible areas for co-operation between member countries on oil questions; working document for the High-Level Group of the Oil Committee’, Paris, 13 April 1973, DIEE/PE (no number), OECD Archives. 46 The list is given later in the debate by the Italian minister for industry and commerce:  it includes development of nuclear energy, protection of the environment, scientific and technological research, studies on oil supply, monetary problems and others. ‘PV 244ème session du Conseil’, CM2/1973 0011 temp 53, ACEU. 47 Ibid. 48 Ibid. 49 ‘CES/CRC(73)15, Note on the conclusions at the meeting of the Council at ministerial level on 6th–8th June 1973 (327th meeting of the Council)’, Paris, 12 June 1973, National archives of the Netherlands, Ministerraad, 2.02.05.02, inv nr. 1218.

170  Oil Shock 50 ‘The on-going energy assessment’, C/M(73)15 (Prov) Annex Part II, Paris, 8 June 1973, OECD Archives,. 51 ‘Co-operation on oil questions between OECD member countries’, Paris, 24 July 1973, DIE/E/PE/73.71, OECD Archives. 52 As, for instance, during the meeting of 20 November 1973:  US Mission OECD to State, Telegram 30091 ‘Meeting of High-Level Group of OECD Oil Committee, 20 November 1973’, 23 November 1973, NARA. 53 One ton of oil equivalent  =  7.14 barrels. Prices in Rotterdam had thus reached an amount of approximately $18.91 per barrel. ‘Réunion des Hauts Fonctionnaires énergie’, 16 October 1973, RP-CE, 2376, CADN. 54 ‘Future oil prices and their impact on supply and demand’, Paris, 30 July 1973, DIE/E/PE/73.70, OECD Archives; ‘Views expressed at the General Working Group of the Oil Committee on the papers on future oil prices and co-operation on oil questions between member countries’, Paris, 18 October 1973, DIE/E/PE/73.105, OECD Archives. 55 ‘Politique énergétique communautaire’, Paris, 22 October 1973, CE/15903, CADN, RP-CE, 2376. 56 In January 1974, substantial contracts for supply were closed with ELF and CFP for the delivery of 27.6  million tons of oil over the next three years. Pierre Messmer, ‘Un premier ministre dans le premier choc pétrolier (octobre 1973–mars 1974)’, in Mémoires de l’Académie Nationale de Metz 1994 (Metz: Académie Nationale de Metz, 1995), pp. 31–40 (33). 57 ‘Memorandum from Helmut Schmidt to Henry Kissinger’, 14857, Bonn, 5 November 1973, Roosevelt Study Center [RSC], Middelburg, the Netherlands, Nixon Security Files, Reel 13. 58 US Mission OECD to State, 27835 ‘Meeting of High-Level Group of OECD Oil Committee, October 25, 1973’, 26 October 1973, NARA. 59 Cited in ‘220. Minutes of the Secretary of State’s staff meeting. Washington, October 18, 1973, 12:10 pm’, note 4, FRUS, p. 605. Both letters from Heath and draft reply from Kissinger were undated. 60 ‘Minutes of the 308th meeting of the Council, 14 November 1972’, C/M(72)30 (Prov), OECD Archives. 61 ‘Report on OECD-wide apportionment of oil supplies in an emergency’, Paris, 19 November 1973, DIE/E/PE/73.126, OECD Archives. Within this informal group, only a part of the HLG participated: Canada, France, Japan, the Netherlands, Norway, the US and the EC Commission. 62 Ibid. Following Raymond Vernon, the Japanese government also doubted the efficiency of such an international apportionment scheme in an emergency. Raymond Vernon, Two Hungry Giants. The United States and Japan in the Quest for Oil and Ores (Cambridge, MA: Harvard University Press, 1983), pp. 28–37, 96. 63 ‘Summary record of the 26th session, on 25–26 October 1973’, PE/M(73)2, Paris, 30 October 1973, OECD Archives; ‘Meeting of High-Level Group of OECD oil committee, October 25, 1973’, NARA.

The OECD Oil Committee 171 64 ‘Meeting of High-Level Group […] 20 November 1973’; US Mission OECD to State, 29552, ‘Meeting of OECD Oil committee HLG’, 16 November 1973, NARA. 65 ‘Record note of meeting between Mr Pocock and Mr Simonet on 30/8/1973’, SC 33/49, SLA. 66 Ibid. 67 ‘Record of a meeting with Jamieson, Campbell and Garvin (Exxon) on 6/9/1973’, 120/46/38, SLA. 68 Ibid. 69 US mission OECD to State, 27064 ‘Meeting of OECD Oil committee’s HLG’, 16 October 1973, NARA. 70 In Beers, ‘The EC, France and the International Energy Agency’, I have elaborated on the importance of energy issues other than oil in the creation of the International Energy Agency.

7 Learning to ‘Recycle’: Petrodollars and the West, 1973–5 William Glenn Gray Given the far-reaching social, cultural and economic consequences of the ‘oil shock’, historians have tended to look past the more immediate impact on the international monetary system. The 1973 crisis is understood as the end of the post-war boom; a watershed for environmentalism and other post-materialist values; and a contributing factor in the breakdown of trust in government.1 These are all ample reasons to look back on the oil shock and reassess its long-term impact 40  years later. The fears, prejudices and panicked decisions of 1973–5 take on a special fascination when viewed as the fumbling origins of a new society in the West, a jagged break with the progressive optimism of the Apollo era. This chapter calls attention to a practical problem confronted by financial and political leaders in the 1970s:  how to manage the circulation of vast quantities of petrodollars. The oil states were taking in far more money than they could spend, even as the new price levels generated hardship for the industrial West and disaster for the world’s poorest states. A  number of different schemes were put forward for ‘recycling’ the petrodollars, putting them back into the productive flow of the global

Petrodollars and the West, 1973–5 173 economy.2 Before the oil shock, some Americans thought there would be no need for special provisions: the market would handle the expanding wealth of the petrostates smoothly enough. The stratospheric rise in prices cast a new light on the problem, however. In the capitals of Europe and North America as well as the headquarters of major international institutions – the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD) and the European Economic Community (EEC)  – economists and policy makers puzzled over how to keep the international monetary system intact. A fresh reading of their deliberations offers a snapshot of global capitalism at a moment of great vulnerability. The narrative below draws mainly on the perspectives of the two largest trading powers at the time, the US and West Germany. This pairing has special significance since these were the two countries best equipped to withstand the immediate challenges of the oil shock: the US because of its domestic oil industry, Germany because of its phenomenal trade surpluses. Together these two powers acted in the early months of the crisis to promote rather than discourage the free flow of capital; this was a key moment in defining the future of the international monetary system as open and globalizing rather than regional and walled off by trade and financial barriers. When it came to finding specific approaches to recycling, however, the two countries often disagreed – mainly because of the Germans’ dogged vigilance against inflation. Viewing the events of the mid-1970s through a German lens, elements of continuity far outweighed a sense of radical innovation in the basic nature of capitalism. Where other scholars have detected the origins of ‘neoliberalism’, this chapter emphasizes the orthodox German quest for stability.3

Auto-Recycling: The Market Optimism of George Shultz The oil shock of October 1973 is often seen as the moment when the financial realities of Organization of the Petroleum Exporting Countries

174  Oil Shock (OPEC) market dominance hit home. Yet the price of oil had been rising before then, and new arrangements between national governments and the oil companies ensured that a higher proportion of oil revenues were being amassed by the producer states. In June 1973, secretary of the treasury George Shultz surprised bankers at an international monetary conference in Paris by focusing his remarks on the themes of energy independence and the future role of oil money in the world’s financial system. First, he observed, the OPEC states would be making further investments in oil production – with the contracts going mainly to Western multinationals. Second, a significant number of states – he listed Venezuela, Iran, Algeria, Nigeria and Indonesia – would wind up spending the vast majority of their oil revenues on manufactured goods, including consumer goods, capital equipment and military hardware: Oil will be flowing from these countries to Europe, Japan and the United States to help produce the goods which, in turn, go back to the people of the producing lands. This is the meat and potatoes of international trade.4

In Shultz’s account, only the Gulf states (including Saudi Arabia) would pose an anomaly:  their population was too small to absorb the additional wealth, so they would be looking to invest their earnings abroad. Some predicted monetary instability as a result, with ‘billions of short-term “oil dollars” sloshing about in the market’. That was not how Shultz saw things. ‘The basic requirements of the producers are for stable, secure, and profitable investment opportunities – not for a year or two, but for long periods.’ Therefore, it was incumbent upon Western financial institutions to devise ‘safe and attractive outlets’ for Arab investors. He acknowledged that the amount of short-term capital would probably increase, and he did see the need for ‘adequate facilities for absorbing and financing short-term flows’. On balance, though, Shultz thought the oil producers and oil consumers could strike a ‘highly advantageous mutual bargain’, with private bankers playing a central role as middlemen.5

Petrodollars and the West, 1973–5 175 Shultz’s optimism about petrodollars was grounded in his more general embrace of a market-driven monetary system. Unlike most Western finance ministers, he did not really lament the demise of fixed exchange rates; he thought the market could set exchange rates more successfully than government agents or the IMF. Within the Committee of Twenty (‘C-20’), tasked by the IMF with defining the parameters of a reformed monetary order, Shultz constantly underscored the need for flexibility. He was reluctant to endorse any steps that might bind the hands of US policy makers. At the Nairobi conference of the IMF in September 1973, Shultz insisted that surplus countries  – those states that kept accumulating high balance-of-payments surpluses and burgeoning currency reserves – must agree to an automatic adjustment process to keep their parities in line. This put the US at odds with Germany and Japan, the world’s most formidable exporters.6 It also raised awkward questions for the Arab oil-producing states:  would the value of their currencies also have to keep surging upward in value in order to keep their payments in balance? Anticipating this problem, the Treasury Department turned to the C-20 in July 1973 with a proposal to make special allowances for the unusually high Arab surpluses. Rather than appearing in national balance sheets as currency reserves, a certain proportion of the petrodollars might be designated as ‘investment funds’ instead. The idea was to nudge the states of the Arabian peninsula to make long-term investments in poor neighbours such as Egypt – without infringing on the sovereignty of the oil states and without restricting the free mobility of capital. The role of the IMF would be limited to data collection; it would not try to steer the flow of funds towards any particular projects.7 Kuwaiti officials disliked the proposed reporting requirements, pointing to their government’s custom of upholding strict confidentiality about targets of investment.8 Saudi reactions were more prickly still: oil minister Sheikh Yamani warned that ‘if there should be some effort by [an] international regulatory body to exercise control over [the] investment of Saudi reserves’, the government ‘would respond by at once putting a ceiling on

176  Oil Shock oil production’.9 The Saudi central bank governor sounded more relaxed, but he expressed a strong reluctance to mobilize petrodollars on behalf of Arab petitioners such as Algeria and Egypt.10 On 6 September 1973, the Arab oil exporters turned to the C-20 with an alternative proposal. They demanded absolute freedom in the form and target of investment choices. Countries hoping to attract Arab investments should offer appropriate incentives; the advanced industrial states could, for example, fashion interest-bearing accounts guaranteed by gold or by the world’s leading artificial currency, Special Drawing Rights (SDRs). The IMF and World Bank should also participate in the process of ‘recycling’, fashioning investment vehicles denominated in SDRs rather than dollars.11 Put simply, the oil producers did not want to bear the risk of pouring their earnings directly into developing countries, and they were keen to exchange their petrodollars for something other than US currency – which had, after all, been sliding downward in value since 1971. Arab fund managers were proving to be shrewd, if cautious, players in the international financial system.

Ending Capital Controls: Helmut Schmidt’s Outward Turn West Germany did not really have to worry about financing its oil imports, even as the price per barrel rocketed upward. As the world’s largest exporter of manufactured goods, the Federal Republic was on track to book a trade surplus of some 35 billion DM ($13 billion) for 1973. At any rate, West Germany held more than 90 billion DM ($33.3 billion) in currency reserves, dwarfing the war chests of the other industrial powers.12 Even so, finance minister Helmut Schmidt experienced the oil shock every bit as acutely as his Western partners. Quite aside from concerns about oil supply itself, he could see that the sudden price hikes would send inflation soaring throughout the industrial West and flood the world with a new source of volatile liquidity. These developments completely derailed Schmidt’s earlier preferences for international

Petrodollars and the West, 1973–5 177 monetary reform. In the winter of 1973–4, he found himself backing away from agreed European concepts and embracing an American approach to both monetary reform and recycling. Instead of trying to block or control capital movements, West Germany opened the floodgates. Up to this point, Schmidt’s tenure as finance minister had been closely associated with the imposition of capital controls. Indeed, he assumed the post after a bitter feud on this very subject had prompted the resignation of his predecessor in July 1972. German ministers had long opposed the use of government decrees to block the flow of capital into or out of Germany, arguing that ‘dirigiste’ interference in the markets would be ineffective and incompatible with the freedom of enterprise. This position put West Germany at odds with France, Belgium and the EEC bureaucracy, which all held that administrative measures were necessary to stanch the flow of ‘Eurodollars’  – enormous stocks of US dollars held by banks in Switzerland and the leading EEC powers. Throughout the late 1960s and early 1970s, Eurodollars had been the proximate source of several sharp, devastating attacks on fixed exchange rates.13 In 1972–3, under Schmidt’s watch, Bonn gradually introduced restrictions on the influx of foreign capital. First came a ‘cash deposit’ law, then a decree banning the purchase of German assets by anyone outside the country. After February 1973, German businesses needed a permit before they could use external funds to finance their business activities.14 Such controls proved ineffective against sudden, explosive capital movements. On a single day, 1 March 1973, the Bundesbank took in a record $2.7 billion while intervening in the currency markets; speculators were snapping up Deutsche Marks in astonishing quantities in a concerted bet against the dollar’s current parity. Defending fixed exchange rates was coming to seem like a futile exercise. That month, the Bretton Woods system perished in a whimper: henceforth the dollar, the yen, the pound sterling and a ‘snake’ of European currencies were all trading in a kind of liquid suspension.15 Yet Schmidt and his French counterpart, Valéry Giscard d’Estaing, still hoped that the C-20 might settle on rules for the orderly conduct of monetary relations. At the IMF assembly in

178  Oil Shock Nairobi in September 1973, Schmidt spoke of inflation as the greatest single danger to the world economy  – and pointed a finger at the US, whose gaping balance-of-payments deficits was feeding the Eurodollar market in Europe. Schmidt looked forward to a reformed monetary system with tighter control on liquidity and fewer options for financing payments deficits.16 The oil shock made perfectly clear that Schmidt would not get what he wanted. By December 1973, estimates of the Arab surplus in 1974 had leapt from $12 billion to $35 billion; these sums would generate staggering deficits for the rest of the world.17 For most members of the OECD, there was not even a remote chance of achieving equilibrium in the balance of payments. More finance options would be needed, not fewer. Meanwhile, Schmidt anticipated a significant influx of oil money into European banks: petrodollars would become Eurodollars, augmenting the size of the volatile Eurodollar market by one-quarter or even one-third every year. Speaking to his European colleagues in Brussels, he warned of an era of massive instability. Arab fund managers would soon be in a position to shift billions of dollars – or pounds, or lira, or francs, or Deutsche Marks  – from one currency to the next at the stroke of a pen. ‘The outlook for a re-establishment of a world currency order with fixed parities is disappearing on the horizon’, Schmidt concluded.18 His thinking was beginning to align more closely with that of George Shultz, who was now quite concerned about the Arab ability to inflict damage on currency markets.19 By this point, the German cabinet had already approved its famous Sunday driving ban, and Schmidt underscored the need for European solidarity: consumers in one EEC country must not suffer while others remained unscathed. Modern industrial economies could never really go it alone, he observed, seconding observations by Dutch finance minister Wim Duisenberg. If the embargoes continued and oil prices remained too high, there would be a recession across the Western world with unemployment and inflation surging at the same time. Looking ahead to the Copenhagen summit conference, planned for 14–15 December

Petrodollars and the West, 1973–5 179 1973, Schmidt called on the EEC to coordinate its approach towards the Arab states and their petrodollars. ‘So far as I can see, with one exception […] there hasn’t been any serious effort to engage in a conversation with the Arab side about the future of these fantastic surpluses’, Schmidt observed.20 The Copenhagen summit conference did feature an early stab at Euro-Arab ‘dialogue’, as four Arab foreign ministers more or less crashed the proceedings. But among the nine EEC leaders, there was no real progress towards a common energy policy.21 Officials in France and Britain focused on securing their own national oil supplies; this led to a spate of Middle Eastern tours in pursuit of preferential bilateral arrangements, such as an Anglo-Iranian barter agreement swapping oil for commodities.22 German officials responded quite bitterly to this apparent lack of European solidarity. Their anger hardened when the French government abruptly pulled out of the European currency snake in mid-January 1974, signalling a further breakdown of community integration. Bonn had offered to help Paris weather a momentary run on the French franc with a special stand-by credit of $3 billion. Instead, George Pompidou’s government borrowed $1.5 billion on the Eurodollar market.23 Even as France decoupled its currency from European tethers, Schmidt and his German colleagues were anxious to make a stand on behalf of an open trading and financial system. The League of German Industrialists favoured a ‘rapid build-down of existing capital controls’, transforming the Community into a ‘free investment space that is also open to investors from third countries’.24 Schmidt’s finance ministry had a more immediate motive as well:  free flows of capital into Germany would tend to push the Deutsche Mark higher against the dollar, reversing a slide in the final quarter of 1973 and thus helping to neutralize the spike in oil prices. Cheaper imports were a favoured German weapon in the ongoing quest for stability; they helped to minimize inflationary pressures from abroad, known as ‘imported’ inflation.25 In Frankfurt, the Central Bank Council, governing body of the Bundesbank, offered a different read on the situation: left unchecked, incoming petrodollars were

180  Oil Shock prone to inject too much liquidity into the German economy, creating domestic inflationary pressures and therefore jeopardizing stability for a different reason. Schmidt’s top aide, Karl Otto Pöhl, agreed to loosen capital controls in discrete stages.26 Even so, the German cabinet sent an important signal on 30 January 1974 by liberating German companies to seek credit abroad and allowing foreigners to purchase German assets once again. At a time when the oil shock had generated so much uncertainty, the Federal Republic of Germany was placing a bet on the continuing viability of world financial markets.27 This put Bonn and Paris deeply out of alignment on monetary issues. To Pompidou, currency controls were ‘essential’ and should be widened to cover the entire EEC. ‘The alternative would be a generalized system of floating’, he remarked to British prime minister Ted Heath. ‘But this was in fact tantamount to abdication of responsibility in the face of speculation and in the face of the dollar.’28 If France was still imagining a system of controls and relatively fixed exchange rates, West Germany had come down on the side of free-flowing finances and a flexible monetary system – one in which Eurodollars and petrodollars essentially reinforced the dominant position of the US currency.

Channelling the Petrodollars: Five Approaches 1.  Witteveen’s oil facility Intensive discussion of recycling options began in earnest in January 1974, during a series of monetary meetings in Rome. Johan Witteveen, a native of the Netherlands and managing director of the IMF, pushed the conversation forward by proposing a massive new ‘oil facility’ designed to draw in surplus petrodollars and lend out the money to poor countries in a jam. Shultz and Schmidt responded cautiously, wondering whether it was even advisable to find a managerial response to the oil shock. Ministers of six Persian Gulf states had recently agreed on a further doubling of oil prices, effective 1 January

Petrodollars and the West, 1973–5 181 1974.29 Coming at some remove from the hostile emotions of October, this step – championed by Iran and Saudi Arabia in tandem – appeared particularly egregious to many Western observers. Now OPEC members were likely to take in a surplus of $60 billion in 1974 alone, with $9 billion in deficits accrued by developing countries.30 Perhaps it was time to hammer home the irresponsibility of the oil producers, whose actions would cause so much misery for the world economy and for the poorest countries in particular?31 Shultz was no longer talking about auto-recycling; he was hoping that a united stand against the OPEC states could achieve an outright price cut that would diminish the scale of the petrodollar problem.32 Although the Washington Energy Conference of 11 February 1974 did foster cooperation among the most important oil consumers (save France), it did not manage to address the root source of the oil shock, the OPEC cartel’s price decisions. Witteveen moved forward with his plans for an oil facility  – which was, in a sense, nothing more than a variant on what the IMF already did. Ordinarily, members of the institution paid a set quota into the fund and were, in turn, entitled to draw a set amount out again – a proportion of the agreed quota – when facing temporary balance-of-payments deficits. The oil shock completely overwhelmed this mechanism: the import bills for the world’s poorest countries would far exceed their available drawing rights. Jamaica’s currency reserves had already dwindled down to nothing, hindering its ability to participate in world trade.33 Could the IMF simply raise the ‘credit limits’, as it were, by increasing the drawing rights of Third World countries? Activists had long sought to ‘link’ the question of international monetary reform with the creation of new drawing rights. But the IMF leadership and the leading Western countries fiercely opposed the ‘link’, observing that this would create SDRs, the IMF’s form of currency, out of nothing at all – a form of inflation that would inflict considerable harm on the world economy.34 Instead of fashioning SDRs out of thin air, Witteveen’s oil facility relied on buy-ins from the oil producers as well as the industrial West.

182  Oil Shock Witteveen hit the road in the spring of 1974, soliciting pledges from Iran, Kuwait, Saudi Arabia, Venezuela and several other target countries amounting to nearly $3 billion. The facility was denominated in SDRs, not dollars; this made a difference as of June 1974, when the C-20 agreed to tie the valuation of the SDR to a basket of nine currencies.35 Countries facing balance-of-payments problems would be able to take out loans at 7 per cent interest, somewhat comparable to commercial rates. A  subsidy programme was later established for the benefit of the Fund’s 39 poorest members.36 The facility was a solid deal for the oil producers, which faced negligible risk. For the borrowers, the debt was still real. In that sense, the US Treasury had a point:  by distracting attention away from the long-term costs of the oil shock, Witteveen’s approach papered over the problem of unaffordable oil. German officials were nonetheless eager to see the IMF emerge as a major avenue of recycling, since this would help to reduce the volume of petrodollars deposited directly into the Eurodollar market.37

2.  Europe’s community loan programme Could the recycling of petrodollars offer direct relief to the hardest-hit European powers? This could ‘hardly be assumed’, observed British experts in November 1973, when the EEC Monetary Committee sat down for a first look at the fallout of the oil shock. Rinaldo Ossola, deputy governor of the Bank of Italy, seconded this prediction, noting that Italy might be facing an additional $2 billion in payment deficits thanks to the price hikes (the eventual figure was much higher).38 Even if Arab fund managers were willing to recycle petrodollars directly into Britain and Italy, they would surely demand unsustainably high returns. To enhance the borrowing prospects of the hardest-hit EEC members, the European Commission proposed the introduction of ‘community loans’:  the healthier European countries would vouch for their weaker partners. In Frankfurt, members of the Central Bank Council fretted at the prospect. Premature expressions of European financial solidarity would relieve

Petrodollars and the West, 1973–5 183 pressure on the laggards, Britain and Italy, to bring about painful reductions in their balance-of-payments deficits.39 Responding to the German hesitations, the EEC’s committee of central bank governors insisted in July 1974 that community loans must be tied to clear political, financial and economic conditions.40 A number of practical questions remained, most fundamentally, determining who exactly would be taking out the loan. Was the Community itself, the institution based in Brussels, prepared to assume this level of financial burden? Did the Treaty of Rome even support this function?41 Personal relationships at the top helped to overcome the inertia at lower levels. In May 1974, a double turnover in Paris and Bonn ushered in a more compatible team of leaders: finance minister Valéry Giscard d’Estaing won election as President of France, and finance minister Helmut Schmidt stepped into the void left by the abrupt resignation of Chancellor Willy Brandt. Despite their falling out in the winter of 1973–74, Schmidt and Giscard were pragmatic enough to seek common solutions to the deteriorating financial situation in Europe. After months of stony indifference, Schmidt intervened in late August to set up a special $2 billion ‘swap’ for Italy – loaning Bundesbank dollars in exchange for Rome’s gold.42 The timing was hardly accidental. Schmidt and his hardline successor as finance minister, Hans Apel, had been waiting for the Italian parliament to pass a stabilization programme designed to reorder public finances and combat inflation.43 Long before terms like ‘conditionality’ and ‘austerity’ had come to dominate conversations about international finance, West Germans considered it self-evident that assistance must be tied to assurances of what they considered to be proper conduct. Schmidt’s agreement with Italy was only a first step, however. Together, five EEC countries (Italy, Britain, France, Denmark and Ireland) were expected to incur payments deficits totalling $23–25 billion in 1974. Each of them would surely be tempted to introduce unilateral trade barriers – a scenario that worried German experts tremendously. A display of financial solidarity seemed like the best way to stave off a disintegration

184  Oil Shock of the Common Market.44 When Giscard’s France returned to the subject of community loans in September 1974, Schmidt’s cabinet reluctantly gave a green light for sums up to $3 billion. The Commission would be empowered to negotiate on behalf of the EEC members.45 After the procedure was finalized in 1975, it took a full year for the first taker, Ireland, to step forward in search of $300  million from Saudi Arabia. In early 1976, the Saudis also lent $1 billion to Italy at rates far lower than Rome could have obtained on its own. In keeping with German expectations, these community loans featured strict numerical provisions about the acceptable size of state budgets, external borrowing, and internal expansion of credit.46 Petrodollar recycling had become a vehicle for impressing German-style policy constraints upon EEC members.

3.  A solidarity fund for the OECD Even as the IMF’s oil facility and the EEC’s community loan programmes were set in motion in the autumn of 1974, bankers and politicians in the West began to clamour for more recycling options. What would happen if the price of oil remained stubbornly high and the Arab states amassed hundreds of billions of dollars in the years to come? ‘We have to devise a way to sop up the funds before they use them in ways we wouldn’t like’, remarked British foreign secretary James Callaghan. ‘There ought to be a mechanism to get the money to Africa, and so on, where it is needed’.47 Several months of pessimistic brainstorming on the part of Western financial officials yielded a flurry of fresh proposals for recycling. Two stood out prominently: a second IMF oil facility and a ‘safety net’ under the auspices of the OECD. Throughout the first year of the oil shock, private banks in London, New York and European capitals managed the rushing tide of petrodollars remarkably well. From January to September 1974, the Eurodollar market absorbed $15.5 billion from the OPEC members  – amounting to 44 per cent of the surplus generated by the oil suppliers.48 New York bankers also took in vast amounts, eager to devour their slices of the

Petrodollars and the West, 1973–5 185 petrodollar pie. But appetites were waning by the summer of 1974; it was becoming harder to identify worthwhile and safe investments for all the incoming dollars. Bankers complained that the Arab fund managers were devolving all of the credit risks onto them.49 Financial experts were also spooked by the collapse of several banks during this period – among them the distinguished Herstatt Bank of Cologne.50 Chancellor Schmidt’s dark premonitions about the future of the world economy did not inspire any grand plans for action. As he remarked to President Nixon in June 1974, there had to be some way to convince the Arabs to switch over from short-term deposits to long-term investments. But how? At best, he complained, each of the Gulf states had maybe a half-dozen experts who grasped the full impact of the unbridled flow of petrodollars into Europe. (The Shah of Iran, although not an Arab, was Schmidt’s favourable counter-example.)51 Speaking to the IMF assembly in late September, Hans Apel spoke in vague terms about founding a special investment institute that would be managed jointly by the oil-producing and -consuming countries.52 Nothing came of this suggestion, which sounded like a warmed-over version of Shultz’s investment fund idea from the year before. Meeting in smaller circles, Western officials developed bolder plans for wielding the petrodollars already in circulation. Denis Healey, Britain’s chancellor of the exchequer, looked to the IMF for structure, proposing that a new credit facility be established with an eye-popping sum – $25 billion – available for lending at market conditions.53 Henry Kissinger expressed impatience with the IMF, pleading instead for tighter collaboration among the leading industrial states. The five largest industrial powers could establish an internal fund worth $15 billion as a means of demonstrating their strength and independence from OPEC. They must act as ‘a club that runs its own destiny’. Hans Apel demurred, sensing the huge amounts that West Germany would be expected to contribute. Solidarity must not be abused, he noted: every country must get its own house in order and do whatever was necessary to uphold open world trade.54

186  Oil Shock Independent of Kissinger, Emile van Lennep, secretary general of the OECD, had begun to contemplate how that organization might ‘strengthen [the] bargaining position of individual OECD countries vis-à-vis [the] oil producers’. After all, the Arab states ‘cannot escape from investing somewhere in [the] OECD area’, so the club as a whole would be in a position to mobilize funds on behalf of members hardest hit by the price increases.55 This dovetailed perfectly with Kissinger’s thinking, and the secretary of state merged this proposal with his own. As he explained to President Gerald Ford, a solidarity fund would save the weaker OECD members from ‘having to go to the producers on their knees’.56 In a major foreign policy address on 14 November 1974, Kissinger launched the proposal as part of a broader stab at reasserting American leadership on the problems of the world economy. Like Healey, he chose an immense round number for the base of his ‘solidarity fund’ – $25 billion.57 Selling European leaders on this approach proved to be harder than anticipated. The French disliked the air of confrontation between consumers and producers, and proceeded to launch their own initiative for a conference between the two sides in the spring of 1975. As for the Germans, Kissinger tried to persuade Schmidt that the new OECD fund, however massive, would still be cost-effective: ‘The President has […] come to the conclusion that the US – and almost surely the Federal Republic – would be compelled to provide as much or more financing to the weaker economies bilaterally if we have no new facility.’58 Schmidt responded with a battery of questions. Treasury officials assured him that the solidarity fund might be amassed with either loans or guarantees, and that the German share would only amount to around $4 billion.59 Bonn’s finance ministry was not appeased. Apel felt that ‘massive demands’ were being placed on the Federal Republic without comparable concessions in the form of enhanced economic cooperation. How would the German public react if the federal government took out massive credits in order to finance the balance-of-payments deficits of other countries?60 In theory, the IMF and OECD programmes were to complement one another, with the IMF facility meeting the needs of the developing countries

Petrodollars and the West, 1973–5 187 and the OECD fund concentrating on the industrial states. Britain, France and West Germany still preferred the IMF approach, and in January 1975 the Interim Committee (which succeeded the C-20) endorsed a new oil facility for 1975 – albeit at a much smaller volume than Healey had envisioned, just 5 billion SDRs.61 Schmidt did give reluctant assent to an OECD ‘safety net’ after meeting in Hamburg with the chair of the Federal Reserve, Arthur Burns.62 The Germans bargained hard to shape the fund in accord with their priorities. Bonn’s share dropped to 2.5 billion SDRs out of a total size of 20 billion, a low 12.5 per cent, and none of this had to be paid in until borrowers actually approached the OECD; the safety net would remain virtual. Supplicants drawing upon the fund would have to display ‘good behavior in trade policy’ and undertake credible efforts to improve their balance of payments. On this basis, the Germans joined with their OECD partners in signing the fund agreement on 9 April 1975.63 Ironically, the ‘safety net’ never came into operation. Congress balked at the prospect of financing the deficits of other OECD members; Jimmy Carter’s administration withdrew the ratification bill in 1977.64 Given the relative unattractiveness of the EEC community loan programme, Britain and Italy turned to the IMF oil facilities. They borrowed 2.45 billion SDRs under the 1974 and 1975 facilities, an amount nearly equal to the 2.54 billion disbursed to the world’s developing countries and exceeding the 1.9 billion for other developed members (Greece, Spain and New Zealand, among others).65 It is quite likely that London and Rome were hoping to avoid the kinds of conditions that the Germans had been demanding in other contexts. Instead, the IMF itself began exploring the use of credit conditionality. If the IMF was a ‘cruel doctor of fiscal health’, as Mark Mazower has contended, this was as much a response to German prescriptions as anything the US had ordered up.66

4.  Trade and investment: A partial solution For all the talk about OPEC solidarity and the need to avoid restrictive, unfair trade practices, the leading Western powers scrambled vigorously

188  Oil Shock for export markets in the Middle East. After all, the best conceivable form of recycling was the kind that promised steady industrial work at home in the midst of a severe recession. German business leaders arrived in Jidda by the planeload. Relations with Tehran were even cosier: Krupp signed on to build a giant refinery at Bushehr, and German contracts for nuclear power plants were soon to follow. The Federal Republic wound up spending a total of $8.5 billion on oil in 1974, but it sold $3.6 billion right back to the oil exporters.67 Capital investments by the oil producers proved far more contentious. By the end of 1974, Helmut Schmidt had concluded that it was time to develop direct partnerships with the leading Arab investors. Ideally, he supposed, this might give them a greater sense of responsibility about the fate of individual firms and the capitalist economies more generally.68 Even so, the first major purchases of German shares caused a stir in the West German media. In November 1974, Kuwait bought a 14 per cent stake in Daimler Benz; Iran was poised to buy another 29 per cent when the Deutsche Bank stepped in to pre-empt it. Together with a significant Iranian investment in Krupp – for the purpose of pursuing joint ventures in third countries – the German industrial scene appeared to be changing rapidly. Were petrodollars really safer in the form of industrial shares than they had been as Eurodollar deposits a year earlier?69 The Bundesbank complained incessantly, noting that the large-scale foreign purchase of German shares increased demand for Deutsche Marks, exerting upward pressure on the currency’s value. An upward drift in the mark was no longer seen as a useful hedge against inflation; the effects on West German competitiveness were too unpredictable.70 The Central Bank Council was also dismayed when Bonn paved the way for non-residents to buy federal treasury bonds; by early October 1974, Arab investors had already acquired bonds totalling some 500 million DM. Under no circumstances should state or municipalities follow this example, the Bundesbank argued:  there was plenty of liquidity in Germany to go around and there was no use in importing capital in that manner.71

Petrodollars and the West, 1973–5 189 On balance, direct OPEC participation in the German economy proved unsettling to many observers  – just as in the US. Schmidt was reluctant to pass draconian restrictions, however: he remained a foe of capital controls and wished to preserve West Germany’s liberal economic order as he understood it. In early 1975, German corporations were asked to report foreigners’ acquisitions above a certain scale of magnitude – but only on a voluntary basis, and only when it concerned ‘critical’ industries such as communications or energy or infrastructure.72 Talk of a more formal licence regime wound down by the summer of 1975; Schmidt’s cabinet was reassured by a series of conversations with finance experts from around the Gulf region. The Saudi and Iranian governments had already concluded that the wisest course was to act with deliberate restraint, acquiring only small shares of target companies and avoiding headlines. In any event, the Saudi leadership expected to be investing more and more petrodollars into their own economy – to the point that no capital exports would be necessary in ten years’ time.73 Trial and error was, over time, helping the industrial West and the oil producers to find common ground. The oil shock was giving birth to a more broadly distributed global economy – at least for those who had something to sell.

5.  The limits of ‘south–south’ recycling From the very moment they began hiking up prices, OPEC members recognized the delicacy of their position with respect to the Global South. After all, the new price structure dealt a harsh setback to the economic prospects of most developing countries. The oil producers tried to dodge criticism by touting their actions as a blow against the imperialist West and a model to be emulated by other Third World export cartels. By the end of 1974, however, the anti-imperialist rhetoric of the Gulf states was sounding rather hollow. Why did so much oil money flow right back into Western coffers? Algeria, itself an oil producer, lambasted recycling schemes as an insidious method for keeping petrodollars out of the hands of the Third World.74 Other medium-sized powers,

190  Oil Shock including Mexico and Pakistan, expressly demanded more investments from the OPEC states.75 Mindful of the pressure, the leading oil exporters promised financial relief. In February 1974, the Shah of Iran offered to support the creation of a new international lending authority  – one that might issue ‘soft’ development loans while operating independently of the IMF or the World Bank.76 Nothing much came of this initiative, which would have taken years to build into a functioning mechanism. Iranian officials did sign extravagant credit agreements with numerous states – Egypt, Syria, India, Pakistan and various African nations. Unfortunately, the Shah’s chaotic government had scant oversight of its scattered promises; many remained empty and unfulfilled.77 A similar pattern prevailed in Saudi Arabia, where the government relied on ‘informal ad hoc committees sent to evaluate pleas for help, or direct largesse from the king after suitable proof of need or for political purposes’.78 Kuwait, the most sophisticated of the Gulf states, distinguished clearly between ‘hard’ loans intended for wealthy countries and ‘soft’ loans directed towards the Third World. In either case, Kuwaiti officials preferred to parcel out aid and investments bilaterally rather than pouring a large share of their resources into IMF recycling programmes.79 Unfortunately, OPEC’s ad hoc bilateral arrangements offered only sporadic respite for the financial strains faced by the Global South. Poor Muslim neighbours enjoyed considerable largesse; elsewhere, fund managers from the Gulf states were determined to make sound investments, not charitable contributions. As the Saudi finance minister acknowledged privately, oil revenues reinvested in India would be ‘doubtful and insecure’.80 Another financially desperate regime, Brazil, received ‘only a trickle of petrodollars’ – perhaps because it refused to issue the kind of ‘commercial risk guarantees’ demanded by the Saudis.81 When the oil exporters began to shift from short-term bank deposits to medium-term bond purchases, they favoured the industrial nations by a huge margin: France, Japan, the US and even (unwisely) Britain. US banks did, over time, open up lending to riskier Third World borrowers.

Petrodollars and the West, 1973–5 191 Yet this yielded negative headlines and even the threat of Congressional investigation; the perceived instability of the Global South reflected badly on the banks’ bottom lines.82 In the end, the only truly global recycling programme was the IMF oil facilities, and those were quite small relative to the acute needs generated by the oil shock.

Conclusion By the end of 1975, the West’s panic had waned considerably. The world’s financial system could, it seemed, successfully absorb the jolt administered by the sudden inflation of oil prices. Some private banks failed, but the Eurodollar market managed to take in huge volumes of petrodollars and facilitate their transformation into longer-term investments. The IMF’s oil facilities and the European community loan programme played a helpful supporting role, even as the OECD safety net provided the occasion for a demonstrative show of solidarity among the leading capitalist powers. The oil-exporting states did not agree to slash prices, but they did refrain from further price hikes in 1974 – which lessened the oil consumers’ burden in real terms. Further challenges were on the way. A loss of confidence in the pound sterling triggered a rush of petrodollars out of Britain in the second half of 1976. The Iranian Revolution in 1979 touched off another steep hike in oil prices. Yet the same essential mechanism persevered: the oil exporters found ways to spend or invest their vast earnings in non-disruptive ways that complemented the interests of the capitalist West. The losers here, as in any globalized system, were poor countries that had nothing substantial to exchange as the price of oil and food and industrial goods all shot upwards. Along the way, the vast swelling of petrodollars dashed any prospects for re-establishing an international monetary system centred upon fixed exchange rates. Helmut Schmidt, the pivotal figure in Germany, reversed his previous position and sided with the US in scaling back capital controls. Counter-intuitive as it seemed, a more open, globalizing economy complemented Schmidt’s goals very well: relative stability at home could

192  Oil Shock be preserved to a surprising degree as long as floating exchange rates helped to absorb the impact of external inflation. The more stable West Germany appeared, the more likely it was to attract the right kinds of foreign investment. With 1.2 million unemployed in early 1975, the Federal Republic was hardly unscathed by the consequences of the oil shock, but it at least had the option of acting in a formative way on the global economy. In the years to come, the EEC, the OECD and the IMF would increasingly take their cues from German priorities – including the penchant for applying strict terms to loans. Fiscal discipline and consumer restraint remained distinctly German definitions of good economic citizenship; not even the oil shock could shake these deeply ingrained cultural expectations. Neoliberalism was not, for West Germans, an intellectual revolution so much as an effort to maintain the prosperity of the post-war boom amid the inflationary conditions of the 1970s.

Notes 1 Andreas Killen, 1973 – Nervous Breakdown: Watergate, Warhol, and the Birth of Post-Sixties America (New  York:  Bloomsbury, 2006); Hartmut Kaelble (ed.), Der Boom 1948–1973. Gesellschaftliche und wirtschaftliche Folgen in der Bundesrepublik Deutschland und in Europa (Opladen:  Westdeutscher Verlag, 1992). 2 The topic has been the subject of one political science monograph: David E. Spiro, The Hidden Hand of American Hegemony:  Petrodollar Recycling and International Markets (Ithaca:  Cornell University Press, 1999). Spiro’s arguments do not hold up well in light of newly available archival evidence. 3 Christopher Dietrich, ‘The permanence of power:  The energy crisis, sovereign debt, and the rise of American neoliberal diplomacy, 1967–1976’, PhD Diss. University of Texas  – Austin, 2012; David Harvey, A Brief History of Neoliberalism (New York: Oxford, 2005). 4 Shultz, ‘Statement at the American Bankers Association International Monetary Conference’, Paris, 6 June 1973: Politisches Archiv des Auswärtigen Amts – Berlin [PA/AA], B 202, 109322. 5 Ibid. 6 For a summary of Shultz’s views during this period, see his report to Nixon, 30 September 1973, secret/exdis:  Kathleen B. Rasmussen (ed.), Foreign Relations of the United States [FRUS] 1969–76, Vol. XXXI, Foreign Economic Policy, 1973–1976 (Washington, DC: US Government Printing Office, 2009), pp. 194–5.

Petrodollars and the West, 1973–5 193 7 Text of the 17 July proposal cabled from State to US Jidda 157536, 9 August 1973, confidential: National Archives and Records Administration [NARA], Access to Archival Databases, Electronic Telegrams. Available online at http://aad.archives.gov/aad/series-description.jsp?s=4073. 8 US Kuwait (Stoltzfus) 2980 and 3495, 19 August and 25 September 1973 respectively: NARA, Electronic Telegrams. 9 US Jidda (Horan) 3444, 13 August 1973, secret/exdis:  NARA, Electronic Telegrams. 10 US Jidda (Horan) 4167, 26 September 1973, confidential: NARA, Electronic Telegrams. 11 Details of this Arab memorandum appear in a note by the Bundesfinanz­ ministerium (BMF), Betr.: ‘Devisenüberschüsse der Erdölförderländer’, 8 January 1974: PA/AA, B 202, 105693. 12 Figures for Bundesbank reserve holdings from Monthly Report of the Deutsche Bundesbank. 13 Gray, ‘Floating the system: Germany, the United States, and the breakdown of Bretton Woods, 1969–1973’, Diplomatic History 31, no. 2 (2007): 295–323. The root cause of the speculative attacks was not, of course, the Eurodollars themselves, but rather perceived disparities in the official exchange rates. 14 For a chronology of changes in German capital controls, see the BMF memo of 4 March 1975: Bundesarchiv – Koblenz [BArchK], B 126, 65668. 15 Harold James, International Monetary Cooperation Since Bretton Woods (New York: Oxford University Press, 1996), pp. 241–3. 16 Schmidt speech to the IMF/World Bank assembly as conveyed in DG Nairobi (Heimsoeth) 173, 27 September 1973: PA/AA, B 202, 109329. 17 Schmidt comments in the EC Council of 4 December 1973, conveyed verbatim in Eurogerma Brussels (Lebsanft) 4355, 10 December 1973, citissime: PA/ AA, B 202, 105687. 18 Ibid. 19 See comments by Shultz to the German ambassador, Berndt von Staden, reported in DG Washington 19, 3 January 1974: PA/AA, B 202, 109331. 20 Schmidt comments in the EC Council of 4 December 1973, conveyed verbatim in Eurogerma Brussels (Lebsanft) 4355, 10 December 1973, citissime: PA/ AA, B 202, 105687. 21 The four ministers were from Algeria, Tunisia, Sudan and the United Arab Emirates. A  more upbeat assessment appears in Daniel Möckli, European Foreign Policy during the Cold War: Heath, Brandt, Pompidou and the Dream of Political Unity (London: I.B.Tauris, 2009), pp. 240–4. 22 For a defensive British paper justifying the Iran deal, see the note from the Department of Trade and Industry to the Treasury, 28 January 1974:  UK National Archives [UKNA], PREM 15/2097. 23 On the stand-by credit, see Schmidt’s remarks to the Bundestag on 23 January 1974: Stenographische Berichte, 6. Wahlperiode, 4733. 24 Memorandum of the League of German Industrialists (BDI), ‘Thesen zur Europa-Politik’, version of 12 January 1974: PA/AA, B 202, 105686.

194  Oil Shock 25 See Pöhl’s comments in the Zentralbankrat, 403. Sitzung, 11 January 1974, TOP 5:  Historisches Archiv der Deutsche Bundesbank [HABbk] > Online-Recherche > Findbuch Sitzungen des Zentralbankrats, posted to http://bundesbank.faust-web.de. 26 Ibid.; also Zentralbankrat, 404. Sitzung, 22 January 1974, TOP 5. 27 Clyde Farnsworth, ‘Bonn eases curbs on money inflow’, New  York Times [NYT], 31 January 1974, p. 45. 28 Conversation Heath/Pompidou, 17 November 1973, secret:  UKNA, PREM 15/2074, p. 9. 29 Bernard Weinraub, ‘Oil price doubled by big producers on Persian Gulf ’, NYT, 24 December 1973, p. 1. 30 BMF (Weber), ‘Erkenntnisse aus den Sitzungen der Arbeitsgruppe’ 3, 18 February 1974: BArchK, B 126, 43107. 31 BMF (Pieske), ‘Bericht über die Tagung des Zwanziger-Ausschusses und seiner Stellvertretergruppe’, 14–18 January 1974: PA/AA, B 202, 105683. 32 Shultz press backgrounder reported in US Rome 750, 17 January 1974; also DepSta to US Tehran 21432, 2 February 1974: NARA, Electronic Telegrams. 33 For the Jamaica example, see Witteveen’s comments as summarized in Pieske’s report on the C-20 meeting of mid-January 1974, cited  above. On the Washington Energy Conference, see Rüdiger Graf, Öl und Souveränität: Petroknowledge und Energiepolitik in den USA und Westeuropa in den 1970er Jahren (Munich: De Gruyter Oldenbourg, 2014), pp. 297–309. 34 See Pöhl’s comments as summarized in BMF (Pieske), ‘Bericht über die 3. Sitzung des Zwanziger-Ausschusses’, 30–31 July 1973, Washington: PA/AA, B 202, 105683. 35 Communiqué of the C-20, 13 June 1974, printed in Margaret Garritsen de Vries, The International Monetary Fund 1972–1978, Vol. III (Washington, DC: IMF, 1985), pp. 200–5. 36 De Vries, IMF 1972–1978, Vol. I, pp. 351–2. 37 See remarks by Otmar Emminger during the meeting of ‘Working Party 3’, one of the OECD’s most significant advisory groups: US Rome (Volpe) 763, 18 January 1974: NARA, Electronic Telegrams. 38 BMF (Kurzbericht), ‘Sitzung des EWG-Währungsausschuss’, 14 November 1973: PA/AA, B 202, 105688. 39 Zentralbankrat, 405. Sitzung, 7 February 1974, TOP 3. 40 Report by the Governors’ Committee as conveyed to the EC Council, Eurogerma Brussels (Boemcke) 2624, 16 July 1974: PA/AA, B 202, 105687. 41 BMF (Jaeckel), Betr.:  To-Punkt ‘Finanzielle und monetäre Fragen’, 10 September 1974: PA/AA, B 202, 105687. 42 On the ‘Bellagio’ loan, see DG Rome (Meyer-Lindenberg) 1418, 2 September 1974, vertraulich, citissime:  Daniela Taschler, Fabian Hilfrich and Michael Ploetz (eds), Akten zur Auswärtigen Politik der Bundesrepublik Deutschland [AAPD] (Munich: Oldenbourg, 2005), pp. 1079–83. 43 US Bonn (Hillenbrand) 10273, 28 June 1974, confidential/limdis/greenback: NARA, Electronic Telegrams.

Petrodollars and the West, 1973–5 195 44 Memo by Bonn’s economy ministry (BMWi), Referat E 2, 9 October 1974: BArchK, B 102, 185799. 45 Bundeskabinett, 84. Sitzung, 16 October 1974: PA/AA, B 130, 8407, pp. 5–7. 46 For the text of the Council decision of 15 March 1976, placing conditions on Italy, see PA/AA, B 202, 109334. 47 Conversation Ford/Callaghan, 24 September 1974, secret/nodis, 4: Gerald Ford Library – Ann Arbor [GFL], National Security Advisor [NSA], MemCons, Box 6. 48 BMF, Betr.: ‘Gespräche zwischen Herrn BK Schmidt und Herrn PM Wilson; hier: Kontrolle der Euromärkte’, 26 November 1974: PA/AA, B 202, 109326. See also Christopher Kopper, ‘The recycling of petrodollars’, Revue d’économie financière (English ed.) 9 (2009): 37–46. 49 German consulate-general in New York (Posadowsky-Wehner), 17 October 1974: PA/AA, B 202, 109329. 50 ‘Questions concerning recycling’, report by the secretariat of the OECD’s WP-3, 18 September 1974: BArchK, B 126, 43109. 51 Conversation Schmidt/Nixon, Brussels, 26 June 1974, geheim: AAPD 1974, pp. 831–3. 52 Text of Apel’s statement in DG Washington (Staden) 2895, 30 September 1974: PA/AA, B 202, 109329. 53 Pöhl, Betr.:  ‘Treffen der Finanzminister und Notenbankgouverneure in Champs sur Marne’, 7–8 September 1974: BArchK, B 126, 48887. 54 Report of a meeting of the ‘Library Group’, in DG Washington (Hermes) 2885, 29 September 1974, geheim, citissime nachts: AAPD 1974, pp. 1243–8; also Apel’s follow-up on pp.  1255–8. For the American transcript, see Steven Galpern (ed.), FRUS 1969–76, XXXVII, Energy Crisis, 1974–1980 (Washington, DC: US Government Printing Office, 2012), pp. 29–50. 55 US Paris-OECD (Turner) 22870, 27 September 1974, confidential/exdis, immediate: NARA, Electronic Telegrams. For a copy of van Lennep’s eventual proposal, dated 24 October 1974, see Emminger to Pöhl in BAK, B 126, 43109. 56 Conversation Ford/Kissinger, 13 November 1974, secret/nodis:  GFL, NSA, MemCons, Box 7. 57 Henry Kissinger, Years of Renewal (New  York:  Simon & Schuster, 1999), p. 684. On Kissinger’s ‘Southern Strategy’, see Daniel Sargent, A Superpower Transformed:  The Remaking of American Foreign Relations in the 1970s (New York: Oxford University Press, 2015), pp. 175–82. 58 Kissinger to Schmidt, 13 November 1974, confidential/nodis: Galpern (ed.), FRUS 1969–76, XXXVII, pp. 72–4. 59 US Bonn (Hillenbrand) 18266, 22 November 1974, secret/nodis, immediate: GFL, NSA, Country File – Europe, Box 7. 60 Apel to Schmidt, 25 November 1974, enclosing Pöhl’s report on a G-10 meeting in Paris: Archiv der sozialen Demokratie – Bonn-Bad Godesberg [AdsD], Depositum Schmidt, 9014. 61 De Vries, IMF 1972–78, Vol. III, pp.  218–20. For background, see BMF (Fünfgelt), ‘Bericht über die Sitzung des Interimsausschusses’, 20 January 1975: BArchK, B 126, 48887.

196  Oil Shock 62 On the Schmidt-Burns meeting on 9 January 1975, see Klaus Kinkel’s note of 20 January in PA/AA, B 202, 105680; also US Hamburg (Brogan) 42, 11 January 1975, secret/nodis, niact-immediate:  GFL, NSA, Country File – Europe, Box 7. 63 See the BMF description of the solidarity fund, 9 April 1975: PA/AA, B 202, 105681. Japan, France and Great Britain had shares of 11.7 per cent, 8.5 per cent and 8.0 per cent, respectively, while the US share stood at 27.8 per cent. 64 Benjamin Cohen, ‘When giants clash:  The OECD Financial Support Fund and the IMF’, in Vinod D. Aggarwal (ed.), Institutional Designs for a Complex World:  Bargaining, Linkages, & Nesting (Ithaca:  Cornell University Press, 1998), pp. 161–94. 65 Table on pp. 347–8 of de Vries, IMF 1972–1978. 66 Mark Mazower, Governing the World:  The History of an Idea (New  York: Penguin, 2012), pp. 349–50. For a more sober discussion, see James, Inter­ national Monetary Cooperation, pp. 279–82. 67 Craig Whitney, ‘Purchasing by producers is seen high’, NYT, 7 February 1975. 68 Conversation Schmidt/Healey, reported in DG London (Hase) 3055, 1 December 1974, vertraulich, citissime: AAPD 1974, pp. 1537–43. 69 US Bonn (Hillenbrand) 1198, 23 January 1975: NARA, Electronic Telegrams. Also of interest is an interview with the Shah published in Der Spiegel, 20 January 1975, pp. 64–73. 70 Zentralbankrat, 426. Sitzung, 5 December 1974, TOP 4; also 428. Sitzung, 9 January 1975, TOP 6. 71 On the bond sales, see US Bonn (Hillenbrand) 15656, 3 October 1974: NARA, Electronic Telegrams. See also Zentralbankrat, 422. Sitzung, 10 October 1974, TOP 2. 72 For a general description of this approach, see the co-authored memo by the BMWi and AA, 6 March 1975: PA/AA, B 202, 109320. 73 Friderichs to Schmidt, 5 June 1975: AdsD, Schmidt, 9026. 74 For a sample of Algerian polemics against recycling, see DG Algiers (Moltmann) 7, 10 January 1975: PA/AA, B 202, 105687. On Algerian strategy, see Giuliano Garavini, After Empires:  European Integration, Decolonization, and the Challenge from the Global South 1957–1986 (Oxford:  Oxford University Press, 2012), pp. 198–9. 75 US Mexico (Brandin) 9663, 14 November 1974; US Islamabad (Byroade) 421, 14 January 1975, confidential: both NARA, Electronic Telegrams. 76 For a State Department assessment of the proposal, see the INR’s RECN-25, 28 February 1974: NARA, RG 59, P-Reel printouts, Box 36B. 77 US Tehran (Miklos) 188, 9 January 1975, confidential:  NARA, Electronic Telegrams. 78 US Jidda (Akins) 4166, 18 July 1974: NARA, Electronic Telegrams. 79 US Kuwait (Stoltzfus) 3008, 17 July 1974, confidential:  NARA, Electronic Telegrams; also DG London (Hase) 3192, 17 December 1974: PA/AA, B 202, 109326.

Petrodollars and the West, 1973–5 197 80 US Jidda (Akins) 7466, 19 December 1974, confidential/exdis:  NARA, Electronic Telegrams. 81 US Brasilia (Crimmins) 1859, 28 February 1976, confidential:  NARA, Electronic Telegrams. 82 For example, Senator William Proxmire (D-WI) warned that undercapitalization was the single greatest problem facing the American banking system. DG Washington (Matthias) 153, 16 January 1976: PA/AA, B 202, 109321.

8 Energy Hinge? Oil Shock and Greening American Consumer Culture since the 1970s Brian C. Black It was work to open the windows on the two-door Pontiac Tempest. Eight counter-clockwise circuits of your arm were required to spin the long lever and bring the broad window down, into the door. The size of the opening, then, was the great payoff: nearly four feet of open air now extended above the wide door. You remember this lineup of vehicles:  Chevy Malibu, Chevy Nova, Cadillac Fleetwood, Buick Riviera, Ford Grenada GT and Lincoln Continentals (complete with oval ‘opera windows’). Automobiles unlike anything found on the road today. Defined by adjectives such as ‘oversized’, ‘breadth’ or ‘sturdy permanence’, automobiles of the early 1970s were built to last  – for generations, as a matter of fact  – and did not worry about details such as gas mileage, vehicle life-cycles, or the need to fit into typical parking spaces. Although these vehicles did not quite match the girth and weight of models of the 1920s–1960s, such as the Edsel, they were designed to be big and heavy – to flaunt it – at a time when most drivers knew better. But in the US, gasoline was cheap and there was no reason for restraint.

Greening American Consumer Culture  199 In fact, in his flashy film debut, the future director of Star Wars George Lucas had modelled this behaviour for nostalgic Americans while creating a monument to the American fetish with cars. American Graffiti, released in 1973, romanticized the world of muscle cars and the youth culture that went along with it. American Graffiti, of course, tapped into an overall nostalgia for 1950s simplicity that eventually led to television programmes, including Happy Days. Embedded in the film’s view of a simpler time, though, was a view of America’s petroleum culture unhampered by concerns such as supply and price. The reality that met movie-goers outside the theatre differed profoundly from that of Lucas’s nostalgic view of growing up. On 4 November 1974, it mattered not that each of these vehicles could go from zero to 60 miles per hour in under six seconds, nor that they could protect their driver from injury in a head-on collision, nor that they could hold between six and eight adults in unbelted – potentially carnal – comfort. On this day, all the attributes of the Dodge Chargers and Chevy Novas were neutralized as they idled in a bumper-to-bumper line of cars. Queueing at the AYS Service Station in Queens, New York, the cars and their drivers, formerly symbols of American prosperity, were transmuted into symbols of something else entirely. This scene from the doldrums of the 1970s was rooted in soil composted from many different political and economic factors, ranging from Watergate to Vietnam, and from the fallout from 1960s radicalism to growing complexity in world affairs; however, the cause behind these lines of stilled autos possessed a sweeping ubiquity that sliced across Americans’ everyday lives:  it was a moment of true resource scarcity. Termed ‘Learning to Live With Limits’, a socio-economic trend emerged that forced hard realities on to the American consumer at every turn.1 For a generation that knew the expansive culture of energy decadence from previous decades, envisioning scarcity felt like a national failure. More than any other resource, petroleum taught 1970s Americans that times had changed. With the absence of excess supply, our culture of petroleum seemed ridiculously disconnected from reality. Our fetish with

200  Oil Shock size and power, for a fleeting moment, seemed juvenile. Change would almost certainly follow in the nation that consumed more crude than any other, right? Flash forward 40  years, and, in fact, 2013 was one of those sneaky anniversaries about which the historian in each of us could catch others unaware of what significant event had occurred a few decades prior. Most of my overtures on the subject resulted in only blank stares from listeners from a variety of generations and backgrounds. It was extremely easy to feel that, in fact, Americans recalled nothing of the ‘gas crisis’. A cursory scan of a typical 2013 American parking lot might only reinforce a feeling that consumers in the US had not changed much about their relationship with crude. However, when political scientist Michael Ross wrote about the 40th anniversary of the ‘Arab Oil Embargo’ in the pages of Foreign Affairs in October 2013, he was not setting up a ‘teasing’ moment for others to ponder. The title of his article makes his point absolutely clear, when he writes: ‘How the 1973 oil embargo saved the planet: OPEC gave the rest of the world a head start against climate change’. Not only was he proposing that the 1970s energy crisis had, in fact, significantly altered patterns of energy use, he additionally argued that these general shifts would help nations face each future environmental challenge, including climate change. Ross’s provocative article was drawn from his book The Oil Curse: How Petroleum Wealth Shapes the Development of Nations,2 which functions to build an argument that is – at present – somewhat lonely: that humans have learned valuable lessons about energy from the 1973 embargo and ensuing ‘crisis’ that have led to significant changes in energy consumption patterns. In other words, that our species learned its lesson from the over-consumption and wasteful energy patterns of the post-World War II world. While scholars, including Ross, may have been willing to extend this kudos to many European nations, the US has actually significantly increased consumption in the aftermath of the embargo, which has led most critics to dub the reaction to the energy crisis a ‘failure’.3

Greening American Consumer Culture  201 This chapter fleshes out some of Ross’s primary point about the progress made since 1973 by suggesting the necessity of a delicate reading of the American cultural history that has transpired over the last 40 years. In fact, it argues that an important aspect of our energy future requires that Americans overtly accept specific truths that have consistently been resisted by certain portions of our society: first, that the US began an energy transition in the 1970s that will ultimately be judged to have moved the world’s largest guzzler away from over-reliance on petroleum and fossil fuels; and, second, that green consumption has something to do with this change.4 Thus far in the existing historical treatment, green capitalism has not been appreciated for the multiplying effect it may have on an energy transition. By recasting the American energy moment in 2013–15, other scholars have also begun to suggest a ‘greener’ reading of late 20th century US history. For instance, Thomas Jundt’s recently published Greening the Red, White, and Blue initiates a correction to this oversight by tracing the roots of modern environmentalism to the anti-nuclear perspective after World War II but stresses the emphasis of a growing chorus that ‘declared that there was something inherently wrong with the way Americans were living’.5 This intellectual shift was particularly challenging to play out in a democratic, capitalist nation. In such a society, environmentalists need to accept the important development of ‘green thinking’ after 1970 and the critical role that consumers must play in any true cultural change related to energy consumption in the US. Jundt continues: In subsequent decades, as the limits of structural change became clear, green consumers opted for […] a wide variety of products to enhance the enjoyment of the natural environment, as well as everyday products designed to have minimal environmental impact […] Environmentally-minded green consumers constructed what amounted to a separate ‘green economy’ and a distinct subculture.6

Truly, 40 years have seen a remarkable growth in entirely new facets of the American economy; however, it is important to note that such shifts often began from foundational shifts in basic ideas, such as ‘energy’.

202  Oil Shock We live during an era that appreciates and acknowledges the human impact on the environment more than predecessors. In 2015, for ­instance, Steven Heintz, Valerie Rockefeller Wayne and Steven Rockefeller extended a movement begun among colleges and universities as well as pension funds to ‘divest’ from investments associated with fossil fuels. What distinguished this divestment from that of 180 institutions over the last two years is that these three individuals are heirs to a significant portion of the fortune made by John D. Rockefeller as he perfected the modern oil industry through the model of the Standard Oil Trust. Today, the $860 million philanthropic organization Rockefeller Brothers Fund joined the divestment trend in one of the most ironic actions of all. ‘This is a threshold moment’, said Ellen Dorsey, executive director of the Wallace Global Fund, which has organized the divestment action. ‘This moment has gone from a small activist band quickly into the mainstream’.7 Today, in examples such as divestment in fossil fuels, we can more effectively perceive the changes in environmental thought over the twentieth century, as humans used science to ascertain the large-scale implications of many of our actions. For instance, Diane Ackerman’s latest book The Human Age: The World Shaped By Us wastes no time debating the concept of the ‘anthropocene’.8 Referring to humans as one of ‘the most successful [invasive species] of all time’, Ackerman actually moves beyond the dire implications of such a reality to also pose the positive: in control of the Earth’s fate, humans also represent its best hope. In short, realizing our astonishing footprint on planet Earth has also allowed us to enter the next phase of attempting a correction. Economic and environmental realities leave little doubt that a primary portion of this correction must be a shifting of energy regimes – an ‘energy transition’ away from reliance on fossil fuels. Such revolutionary perspectives did not suddenly erupt in 2015 from barren soil; instead, this green perspective has emerged since the 1970s through the broadening influence of environmental thought and – to some degree – as a reaction to the 1970s oil shocks.

Greening American Consumer Culture  203

Post-1970s energy transition and green consumption The energy crisis of the 1970s, of course, awakened humans to the reality that life in the twentieth century had become predominated by a specific ‘energy regime’, in the words of historian John McNeil. Human societies transform resources into work (broadly defined) to define what McNeil describes as ‘the collection of arrangements whereby energy is harvested from the sun (or uranium atoms), directed, stored, bought, sold, used for work or wasted, and ultimately dissipated’.9 Historian David Nye takes the large, systematic argument to a more individual level when he writes that energy systems that a society adopt create the structures that underlie personal expectations and assumptions about what is normal and possible […] Each person lives within an envelope of such ‘natural’ assumptions about how fast and far one can go in a day, about how much work one can do, about what tools are available, about how work fits into the community [etc.].10

McNeil, using the macro-historical view, urges us to realize the centrality of energy in all of human life; Nye, using the micro-style, tells us that through our choices, consumers help to support or alter existing energy regimes. The change that occurs in resource use is referred to as an energy transition. Such transitions often emanate from a new discovery, innovation or technical advance. The transition that defined the American twentieth century grew from the massive supplies that began at Spindletop, Texas in 1901 and reached throughout the globe with each new oil discovery after World War I. After 1950, the American regime took a dramatic turn as it was replaced as the world’s largest exporter and steadily came to import more and more of its required crude. Similar to Ross, my work argues that a similar watershed occurred in the 1970s, however, in the opposite direction. The analysis of the 1970s in this chapter begins from

204  Oil Shock the basic argument that the hegemony of large systems – such as energy regimes – is culturally shaped and reinforced, that our choices as consumers have mattered and that they do matter today. In the US, the reality of petroleum dependence had begun to emerge in many ways by the late 1960s. Some of these realizations grew from the advance wisps of new scientific understanding, ranging from oil spills to acid rain. Others grew from the wake of a complex social movement to reconceive of American patterns of consumption. In The Genius of Earth Day, environmental historian Adam Rome argues that the greening culture that took shape during the 1970s created a ‘New Eco-Infrastructure’. Ranging from ‘e-beats’ for journalists to ‘eco-books’, Rome writes, ‘The post-Earth Day eco-infrastructure gave the environmental movement staying power. After the passions of Earth Day cooled, the first generation of environmental lobbyists ensured that politicians still felt pressure to protect the environment’.11 Together, influences ranging from journalism to politics and from education to planning helped to create the critical, shifting terrain of consumption after the 1970s that affected many aspects of American life, including energy consumption. Emergent green thinking proved to be a crucial catalyst for the energy transition from petroleum dependence. Americans after the 1970s were forced to confront the ethics that drove their ecology of oil; however, culture-wide ethics change very slowly. Most often, historians boil down these socio-economic factors of the 1970s into the term ‘Arab Oil Embargo’ to denote the hinge-point of change in the dynamics of American energy supplies  – not of consumption patterns.12 This proves to be dangerous oversimplification when one attempts to trace each strand of these patterns. In fact, the actual event when OPEC cut its oil shipments to the West in the 1970s is merely one formative moment – albeit critical – in a decade-long remaking of the way that American consumers viewed their petroleum supply. The distinctions between our views on the importance of the oil shock may reveal more about our understanding of certain terms than about whether or not any change can be measured. If we properly interpret

Greening American Consumer Culture  205 the term ‘energy transition’, for instance, and do not expect a ‘crisis’ with immediate results, the American reaction to the 1970s oil shock emerges as a seminal hinge in consumers’ interpretation of the nature of energy supplies. In fact, the gradual nature of this change also reveals a critical dimension of the 1970s oil shock: the application of a new environmental perspective into everyday life and also into regulative policy. More broadly, though, these implications are not just about transportation; they also suggest broader changes in ideas of energy.13 Although the ebb and flow of the public’s zeal for conservation might be found in other modern societies, the US, consuming as much as three-quarters of the world’s petroleum supply at times in the twentieth century, presented the greatest challenge for the implementation of even a common-sense paradigm of energy management or regulation.14 In particular, these cultural impulses met in the 1970s as American consumers and their political leaders reconsidered the concept of conservation and began to reconfigure it as a primary component of the nation’s future.15 It is at least partly the emergent cultural trends today that aid us in properly re-construing the significance of the 1970s. And, in recent years, scholars have made very clear that the energy crisis is open for re-interpretation. In configuring his paradigm in the 2012 book Carbon Democracy:  Political Power in the Age of Oil, political theorist Timothy Mitchell emphasizes the importance of the 1973 oil shock in a counter-intuitive fashion, when he writes, ‘In the 1973–4 oil crisis, the law of supply and demand was not a fiction, but a fabrication. It was a piece of equipment carefully fabricated by certain parties to a dispute’.16 This argument leads him to designate the event as ‘the crisis that never happened’. While such a provocative thesis forces historians to look again at an event that we thought we knew, it still neglects the consumer-side implications of the event – the cultural outcome as consumers responded. Paul Sabin’s The Bet suggests that a grand intellectual debate about the limits of growth and development surrounds the era of energy crisis of the 1970s. While Paul Ehrlich and Julian Simon debated the 1972 treatise The Limits of Growth in universities around the world, 1973, writes Sabin,

206  Oil Shock brought the public a moment when ‘Resource constraints suddenly threatened American prosperity’.17 Similarly, in his recent book Lifeblood, cultural geographer Matthew Huber comes much closer to ascribing significance to the energy crisis. Instead of a signal moment in American culture, Huber writes that the embargo undercut supply and transformed with a neoliberal impulse that began to transform petroleum as a particularly problematic commodity. He writes: Only in the 1970s did the concept of ‘foreign oil’ become problematicized […] Americans were not worried about foreign sources of coffee, bananas, or increasingly manufactured consumer goods, but oil’s saturation of social reproduction and centrality to ideas of life, home, freedom, and mobility made dependence on foreign oil seem unduly precarious.18

The admission that the energy crisis began to problematize the modern way of life associated with cheap oil does not, however, suggest the commensurate strengthening of an alternative paradigm. Resembling an equation that sums an energy transition, supply pressures joined with the multiplying factor of the new mindset that Ross discusses in his 2013 article. He writes that, ‘In the space of just a few years, Americans went from believing that oil would remain cheap forever to believing it would soon run out’. Policies intended to regulate supply, Ross writes, actually stemmed some aspects of consumption and, in the end, ‘have helped address a problem that no one anticipated’. And, in a summation sure to raise the ire of many readers, he concludes:  ‘Environmentalists owe the Arab members of OPEC a debt of gratitude.’19 In particular, though, Ross describes an American regulative infrastructure that was organized around one priority (scarcity) that can now be directed to another (climate change) using the same grassroots support mechanism (modern environmentalism). Such laws and regulations create and reinforce a marketplace organized by an ethic – a paradigm

Greening American Consumer Culture  207 of green commitments and understanding. In short, the US regulative infrastructure that grows out of the 1970s crisis, steeped as it is in an awareness of supply scarcity, provides a legal and policy structure for facing other problems. In addition  – and not unrelated  – I  believe the reaction to the 1970s crisis also offers Americans the cultural and social mechanisms to engage in an energy transition and to face up to environmental difficulties. Particularly in the US, ‘green capitalism’ or ‘green culture’ must be properly claimed as a product of shifting energy ideas in the 1970s and one of the greatest hopes for our energy future.

Conservation by Another Name: Consumption Early in the presidency of George W. Bush, Vice President Dick Cheney responded stiffly when members of the press demanded access to the list of corporate representatives with whom he had consulted over the administration’s new energy policy. He defiantly refused such demands beginning in May 2001, and never relented. As he faced off the press, he defiantly bristled that:  ‘Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy’.20 President Jimmy Carter stood in the White House in 1977 and shared a very different perspective on the same subject: We simply must balance our demand for energy with our rapidly shrinking resources. By acting now, we can control our future instead of letting the future control us […] Our decision about energy will test the character of the American people and the ability of the President and the Congress to govern. This difficult effort will be the ‘moral equivalent of war’ – except that we will be uniting our efforts to build and not destroy.21

Similar to bookends, Cheney and Carter frame the ethic of energy conservation in modern American politics.

208  Oil Shock When embarking on energy transition, societies might alter the conceptions of very basic terms. Since the 1970s, for instance, terms such as ‘energy’ and ‘conservation’ have come to mean starkly different things. In the ensuing 40 years, such shifting in the vernacular has empowered a conservation ethic in American energy use that has utilized this impulse of restraint to structure a new paradigm for consumption. In short, since the energy crisis of the 1970s, American consumers have come to consider energy in such a wholly different way that we now find green consumption as a primary force in our transition from fossil fuels. It is particularly in the area of cultural shifting that we find conservation emerging to play a primary role.22 Unlike European models, however, American change has most often played out within the energy marketplace with scarce assistance from government regulation and severe resistance from industrial lobbies. With such stiff resistance and a lack of support, the American energy transition since the 1970s has been easy to confuse with genuine recalcitrance and inactivity. Particularly in American ‘conspicuous’ energy consumption, however, a complete new energy culture was required. In The Quest, Daniel Yergin, a historian of petroleum who also serves as the world’s leading energy consultant (and energy correspondent for CNBC, the business television network), organizes a new energy worldview around the concept of the transition from fossil fuels. At the heart of his argument, this stalwart proponent that ‘peak oil’ is a myth and that climate change’s link to burning fossil fuels is dubious forecasts a future centrality for ‘the Fifth Fuel’. ‘It goes by different names’, he explains, ‘conservation, energy efficiency, energy productivity. It could even be called energy ingenuity – applying greater intelligence to consumption, being more clever in how energy is used – using less for the same or greater effect’.23 Far from merely a personal virtue, conservation, he argues, is a primary component of any secure nation’s future. In the current culture of energy, conservation has become technology directed by an environmental ethic and guided by consumer choices.

Greening American Consumer Culture  209 Consumers played a primary role in the construction of the high-energy culture of the post-World War II US. Cultural historian Stephanie LeMenager refers to the world that took shape as a ‘petrotopia’, which she describes as ‘signifying petroleum-utopia, to refer to the now ordinary US landscape of highways, low-density suburbs, strip malls, fast food and gasoline service islands, and shopping centers ringed by parking lots or parking towers’.24 Petrotopia took shape from an almost effortless supply of crude that gave little reason to consider conservation. She writes of a society prior to the 1970s in which the world that oil made remained so beloved to Americans that it drowned out the more obvious problem of why it would be difficult to build an entirely ‘new energy infrastructure’.25 However, a society in energy transition is a very different animal. Our current relationship with crude has created another ‘LeMenagerism’: what she calls ‘Petro-melancholia’: a perpetual state of grief at the realization of our impossible reliance on finite supplies of petroleum. She writes simply that, ‘Tough oil isn’t the same resource, in terms of economic, social, and biological costs’.26 A bi-product of this depressing realization of resource limits is a coherent awareness of energy costs and benefits that is a primary understanding of modern environmentalism. The era of Petro-melancholia that was catalysed by the 1970s has now intrinsically impacted American ideas of energy. Part of exploring this question is, of course, to analyse trends in energy use and harvest; however, another aspect is much less quantitative: a critical factor that must be considered is the construction and development of environmental thought. Literally a ‘counter culture’, a green alternative emerges as a consumer alternative in the late 1960s with the magazine The Whole Earth Catalog. The emergence of a sustainable marketplace, of course, possesses a synchronistic relationship with the ability of humans in developed societies to consider new ideas about our place in nature. Climate change, for instance, emerges from being merely a concept of consideration in the 1980s to inform policy decisions and city planning today. In addition, some pockets of consumers (and investors, such as those mentioned

210  Oil Shock above) have come to use climate change and other issues as a determinant of the products they buy and the corporations they are willing to support. By definition, of course, conservation is a synonym for restraint or limiting. Although many observers emphasize iconic images such as the Sport Utility Vehicle (SUV) in order to argue the lack of any energy transition, there is a clear shift in other sectors that must be understood. Once our consideration includes shifts in personal transportation and sources of power for the US electric grid and the information available for each, it becomes more clear that American cultural attitudes towards renewable fuels have changed considerably since the 1970s energy crisis. In fact, a new paradigm appears to have emerged that places environmental or green considerations at the heart of a new model of consumption. In order to consider these changes from the 1970s to the present, this analysis will briefly look at two case studies of green consumption: electricity generation and personal transportation.

Greening Ideas of Electric Power Although there is a clear trend that is observable in the sources used to make the electricity used by Americans, consumers seem to have done little to drive the transition. Unlike the purchase of a car, which will be discussed below, US consumers have only modest input on exactly how their electricity is produced. The industry refers to the renewable energy markets as ‘voluntary’ and that is exactly how their impact plays out. The remarkable story here, though, is that ‘volunteers’ seem to be stepping to the fore to request electricity drawn from renewable sources at a remarkable clip. Between 1973 and 2013, the amount of US electricity drawn from alternative sources (including hydroelectric, biomass, geothermal, solar and wind) nearly doubled, growing from 2850.5 to 4830.6 Trillion BtU.27 Although China leads the world in total electricity generated from renewable sources (largely due to recent additions to its hydroelectric capacity), the US follows closely, along with Brazil and Canada. In fact,

Greening American Consumer Culture  211 the US is the world leader in generating power from non-hydroelectric renewable sources.28 While critics complain that the US draws only 15 per cent of its electricity from renewables, it also must be seen from another direction: only a cultural revolution could have created an energy transition over 40 years that has carved out such a meaningful segment of the American energy pie. This remarkable record of transition in the US has primarily occurred from the top down through government regulation. In a recent report by the Energy Information Agency (EIA), the federal initiatives to stimulate renewables are classified as: •

•

•

 ax credits. The Renewable Electricity Production Tax Credit, a T federal incentive, has encouraged increased generation from wind and other eligible renewable sources. Targets. Many states have implemented Renewable Portfolio Standards (RPS). These standards require electricity providers to generate or acquire a certain portion of their power supplies from renewable sources. Many RPS programmes have ‘escape clauses’ if renewable generation exceeds a specific cost threshold. Markets. A number of states have built Renewable Energy Certificates/ Credits (RECs) into their Renewable Portfolio Standards. These programmes allow electricity providers to sell renewable energy certificates/credits. Some states have made REC markets mandatory.29

Most often, of course, these initiatives work against the patterns that are inherently guiding the majority of power generation derived from coal and other fossil fuels. Chief among these are technological limitations of scale that often make renewable power more expensive, and also the remote location of many renewable sources. These policy initiatives began after the 1970s energy crisis, but their impact has faced a strong headwind from lobbying efforts by energy interests. For every NGO such as the American Council on Renewable Energy (ACORE), there are well-funded industry groups such as the American

212  Oil Shock Petroleum Institute. One of the clearest successes of renewable polices is the Energy Policy Act of 2005, which stirred the movement for ‘net metering’ that has empowered customers in a variety of ways. Because of this federal law, public utilities are now required to purchase wind or solar power created locally for inclusion on the grid. For these intermittent renewable energy sources, this effectively uses the grid as a giant battery to smooth over lulls and fill in production gaps. Some jurisdictions go one step further and have instituted feed-in tariffs, which allows any power customer to actually make money by producing more renewable energy than is consumed locally. As ‘voluntary markets’, however, a consumer may elect to pay an additional surcharge for ‘green power’. In fact, such markets are largely a popularity poll because consumers use electricity from the grid that was most likely not acquired from renewable sources. And, yet, there appears to be a striking trend: between 2006 and 2012 the popularity of voluntarily opting for green power nearly quintupled.30 Gallup polling reports that, as a governing ethic, 60 per cent of Americans today believe the primary emphasis of their energy industry should be conservation over production.31 The use of renewable energy provides one of the primary mechanisms for this transition; however, green consumers continue to have only limited ability to impact the electrical grid (it should be pointed out that in the same Gallup polling, 64 per cent of Americans favoured the development of renewable energy sources over fossil fuels). Primarily, an individual with such green intentions can install his or her own production technology (and hope for government rebates to help to defray the installation costs) or can pay additional fees to their electric company in order to ‘purchase’ power made from renewable sources. Green decision making also influences consumers after they have studied basic usage patterns: in a nation of energy consumers, approximately 40 per cent of American energy goes towards personal transportation. Today, one of the priorities driving the shift to renewable sources of electricity is that a parallel transition is moving personal transportation

Greening American Consumer Culture  213 towards electricity. This remarkable shift might be the single most significant application of renewable resources to occur since the 1970s  – additionally, it is probably the single most succinct representation of the impact of green consumerism in today’s economy.

Greening the American Ride Overall trends in the American fleet of vehicles in the late twentieth century mark one of the most commonly cited reasons to deem any reaction to the 1970s energy crisis as a failure. Oversized trucks and SUVs adopted for non-commercial use were, ironically, one of the outcomes of initial attempts to regulate the efficiency of American vehicles. A convergence of industrial and ideological forces in the 1980s and 1990s joined to dash the initial accomplishments of emissions regulation and the implementation of Corporate Average Fuel Economy (CAFE) standards across the vehicle fleet in 1978.32 In a bitter irony, the CAFE standards and ensuing legislation created the opportunity to build large, heavy, inefficient vehicles. And, to the shock of manufacturers such as Jeep’s AMC and others, Americans wanted such vehicles. What began as a gimmicky, small-selling vehicle for a specific purpose morphed into ubiquity through the odd convergence of consumer taste and auto manufacturers’ interest in exploiting a specific niche in new vehicle regulations. There is no doubt that this is what a culture’s failed response to the 1970s oil shock looks like; however, this was not the end of Americans’ reaction to supply scarcity. Our revision of this story grows from the success of green capitalism. If the story stopped with the SUV, of course, the American reaction to the oil shock was a complete failure in adapting the fleet of vehicles available to consumers. A sector in denial, American vehicle consumers completed their twentieth-century petroleum binge by staring into the face of scarcity and pressing the pedal to the metal – driving more miles in heavier cars than at any other time in history. The petroleum moment had not changed; in fact, scarcity became even more pronounced in the

214  Oil Shock first decade of the twenty-first century and gasoline prices cost Americans record amounts. For this reason, writer Paul Roberts, in The End of Oil, may be stating the obvious when he writes: The SUV represents the height of conspicuous energy consumption. The extra size, weight, and power of the vehicles are rarely justified by the way their owners drive them. Even though owners and carmakers counter that the SUV’s greater size, weight, and capabilities provide an extra margin of safety, studies indicate that SUVs not only are more likely to kill people in cars they hit but, because they roll over more easily, can actually be more dangerous to their occupants as well.33

However, just as we assume that the conservation efforts initiated by policies of the 1970s have been lost – roadkill against the bumper of a super-sized SUV – we find that simultaneous with Americans’ fetish for larger, heavier trucks and SUVs, a clear cultural initiative forced alternatives into the mainstream. As Americans veered to largesse in the 1990s, the State of California worked with manufacturers and scientists to create the first serious alternative vehicles on American roadways. The Electric Vehicle (EV) fate, immortalized in the film Who Killed the Electric Car?, proved a warm-up to prepare Americans for the first release of hybrid and electric vehicles to mass consumers at the turn of the twenty-first century.34 However, the story that continues in the twenty-first century suggests that the ethic and priority of environmental thought has indeed resulted in a steady and intensifying shift. The hybrid rebirth began when the Toyota Prius went on sale in Japan in 1997, making it the world’s first volume-production hybrid car. Today, the five-passenger Prius is the world’s most popular hybrid, but it has been joined by the Honda Insight, first sold in the US as a 2000 model, and the Honda Civic Hybrid, which came to market in the US as a 2003 model. As the Hybrid Electric Vehicle (HEV) sector has grown to include nearly twenty models, other fuels, such as ethanol and other biofuels, emerged as additives and supplements in every state. Thus, we are

Greening American Consumer Culture  215 forced to admit that the environmental ethic that emerged in the 1970s has not faded. Instead, it has persisted and even expanded from roots in the fringe to include mainstream initiatives available to all consumers. This also must be claimed as a legacy of the 1970s. From this start, a new ethical paradigm has entered today’s consumer vehicle market. The collapse of the American car industry in 2008–09, the emergence of global markets for the reconstituted manufacturers, industry innovation and, finally, consumers’ greening tastes have changed the automotive marketplace.35 Today, the vehicle marketplace has changed, with the steepest shifts in sales occurring in large cars while sales of small SUVs known as Crossovers grow most swiftly. The Hummer died entirely, vehicle weight, overall, is down, and many varieties of smaller vehicles are now prevalent in the marketplace. Most important, though  – and most distinct from the 1970s – the HEV category has proliferated, selling approximately 3 million units in the last decade. Although most models require consumers to check their typical desires for size and power at the door, the HEV sector marks a critical expression of green consumerism.36 Between 1995 and 2012, alternative-fuel vehicle use grew from 246,000 to nearly 1.2 million.37 Possibly, a 1970s Gremlin – a vehicle that represented an adjustment by American manufacturers – represents a breadcrumb in the forest, showing consumers the way forward that has emerged through the application of new technology. From its start as the EV-1, the consumer marketplace for automobiles has truly been altered, so that now it is forced to make room for the Tesla. Sold primarily through high-end shopping centres in boutique storefronts, the Tesla is marketed more like a diamond than an automobile. Since its introduction in 2012, nearly 40,000 Teslas have been sold. With sales appearing to double between 2013 and 2014, Tesla seems to indicate that a vibrant market has emerged  – a niche market that will not appeal to every American able to afford an $85,000 vehicle. However, Tesla has made clear that the high costs of super-high-tech can

216  Oil Shock be green; in fact, it possibly represents a high-point of green capitalism: a trophy purchase for the mega-wealthy that is good for the environment.

Conclusion: ‘Sharing Economy’ as Green Capitalism Today, environmental concern and the increasing awareness of humans’ impact on Earth have combined with shifts in technology and pricing to create a dynamic moment of consumption in the US, and clearly a portion of this paradigm shift is an energy transition in the twenty-first century. Since the 1970s, green culture has expanded to become a viable consideration in the marketplace of American capitalism. In its active state, this shifting moment may go by a variety of names, including ‘green culture’, ‘post-ownership’ and ‘the sharing economy’. For many consumers, such as those involved with an organization such as Transition US, green capitalism is an all-encompassing community that defines itself in this fashion: a vibrant, grassroots movement that seeks to build community resilience in the face of such challenges as peak oil, climate change and the economic crisis. It represents one of the most promising ways of engaging people in strengthening their communities against the effects of these challenges, resulting in a life that is more abundant, fulfilling, equitable and socially connected.38

For energy  – and particularly for our life with petroleum  – the emergence of the viability of green capitalism carries irony:  this counter-balancing culture emerges while ‘tough oil’ makes North America the world’s leading producer of oil and the US openly considers becoming an oil exporter for the first time since the 1950s. Particularly for this reason, however, the persistence of green capitalism suggests a shift that may last. There can be little doubt that the current trends of lower petroleum prices and oversupply (particularly thanks to manufactured oil) will not continue. Therefore, green consumerism may represent the more likely trend that is here to stay. Although it took decades to become

Greening American Consumer Culture  217 viable, green consumerism seems to be making a long-term impact on energy markets, particularly in personal transportation. Linking many of these initiatives and stemming from intellectual shifts of the 1970s, we find a paradigm shift in which educated, informed and concerned consumption is more than a fad. Indeed, ‘green capitalism’ composes a growth sector in many arenas and sectors as ‘sustainability’ begins an uphill movement towards relevance. In the energy sector, a post-carbon movement has literally altered the way that people think about energy but also about the exact meaning of conservation. Instead of restraint, a new paradigm of green consumption has emerged that goes by a variety of names; however, the best known might be the ‘sharing economy’. Undercutting the very idea of ownership, businesses provide services ranging from gutter-cleaning to shared office space. Where Airbnb commodified rooms within private homes, Lyft has stimulated car-pooling (one of the first energy-saving icons of the 1970s). Although ‘sharing’ has chiselled out an entire portion of the economy, the revolution is on the side of the empowered consumers who find themselves liberated from the perpetual cycle of purchasing new products or services. In terms of personal transportation, the sharing economy joins with the HEV sector to suggest the first major shift in American automobility in a century, which leads some consumers away from the American rite of vehicle ownership. Uber, begun in 2009, may provide the single most relevant illustration of the new paradigm’s impact on personal transportation. Entirely made possible by an application used on an individual’s smart phone, Uber flipped the very process of hailing a cab – the power shifting from the driver choosing whether or not to stop to the customer setting the pickup spot for his own ‘personal driver’. Using GPS locating, Uber and other applications have significantly impacted urban transportation patterns to, essentially, allow consumers access to a personal driver. And taxi hailing is not the only paradigm that Uber turns on its head, of course.39 Forbes wrote earlier this year that by 2021 these new urban transportation

218  Oil Shock services (particularly Uber and Zipcar) will be partly responsible for more than 1.2 million vehicles not sold to American consumers.40 Although the entire energy transition remains dynamic, the unifying agency of green capitalism promises hope for a different American future. New technologies connect environmental convictions of consumers – whether founded in climate change, peak oil or disappearing rain forest  – through the new autonomy of the marketplace. Through the expression of green consumption, a clear energy imperative has emerged in the area of electricity generation and personal transportation. Consumers have vibrant outlets through which to express their commitments and the ‘green sector’ has become one of the fastest-growing segments of the American economy. The post-carbon movement has a clear footing in the new ‘sharing economy’ and NGOs have empowered green consumption to fan the flames of a true energy transition that traces its roots back to the 1970s.

Notes 1 The most useful survey of the evolution of environmental policy in the 1970s is Richard N.L. Andrews, Managing the Environment, Managing Ourselves:  A History of American Environmental Policy (New Haven:  Yale University Press, 1999), esp. pp. 225–30; see also Robert Gottlieb, Forcing the Spring: The Transformation of the American Environmental Movement, 2nd ed. (New York: Island Press,1994). Also, for consideration of approaches to growth in the 1970s, see Paul Sabin, The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future (New Haven:  Yale University Press, 2013) and Thomas Jundt, Greening the Red, White, and Blue (New York: Oxford University Press, 2014). The connection with energy is made in the work of Amory B. Lovins, Soft Energy Paths: Towards a Durable Peace (New York: Harper Collins, 1979). 2 Michael L. Ross, The Oil Curse: How Petroleum Wealth Shapes the Development of Nations (Princeton, NJ: Princeton University Press, 2012). 3 Michael L. Ross, ‘How the 1973 oil embargo saved the planet’, Foreign Affairs, 15 October 2013. 4 For a discussion of energy transitions, see David Nye, Consuming Power:  A Social History of American Energies (Cambridge, MA: MIT Press, 1999). I also recommend Alfred W. Crosby, Children of the Sun:  A History of Humanity’s Unappeasable Appetite for Energy (New York: Norton & Norton, 2007) and the

Greening American Consumer Culture  219 work of Vaclav Smil for interpretation of larger patterns of energy change in world history. 5 Jundt, Greening the Red, White, and Blue, p. 2. 6 Ibid., p. 4. 7 John Schwartz, ‘Rockefellers, heirs to an oil fortune, will divest charity of fossil fuels’, New York Times, 21 September 2014. 8 Diane Ackerman, The Human Age: The World Shaped By Us (New York: W.W. Norton and Company, 2014). See the discussion in Elizabeth Kolbert, The Sixth Extinction:  An Unnatural History (New  York:  Henry Holt and Company, 2014). 9 John R. McNeil, Something New Under the Sun: An Environmental History of the Twentieth-Century World (New York: W.W. Norton and Company, 2001), p. 298. 10 Nye, Consuming Power. 11 Adam Rome, The Genius of Earth Day:  How a 1970 Teach-In Unexpectedly Made the First Green Generation (New York: Hill and Wang, 2013), p. 210. 12 When Anwar Sadat urged his fellow OPEC members to ‘unsheath the oil weapon’ in early 1973, the primary rationale for this action was politics. Israel’s military aggression outraged its Arab neighbours throughout the late 1960s. Israel’s attack on Egypt in 1967 had resulted in an earlier embargo, which proved unsuccessful because of oversupply of crude on the world market. In October 1973, US President Richard Nixon agreed to provide more military jets to Israel after a surprise attack on the nation by Egypt and Syria. On 19 October, the Arab states in OPEC elected to cut off oil exports to the US and to the Netherlands. In petroleum circles, the Embargo is often referred to as the ‘First Oil Shock’. As such, it combines new market features of the early 1970s: first, production restraints that were ultimately supplemented by an additional 5 per cent cutback each month; and, second, a total ban on oil exports to the US and the Netherlands and eventually also to Portugal, South Africa and Rhodesia. Factoring in production increases elsewhere, the net loss of supplies in December 1973 was 4.4 million barrels per day, which accounts for approximately 9 per cent of the total oil available previously. Although these numbers told of a genuine shortfall in the overall supply, the fickle petroleum market accentuated the embargo’s importance by inserting a good bit of uncertainty and panic. It was the American consumers who felt the impact most. In order to provide oil to consumers, brokers began bidding for existing stores of petroleum. In November 1973, per-barrel prices had risen from around $5 to more than $16. Consuming nations bid against each other in order to ensure sufficient petroleum supplies. For American consumers, retail gasoline prices spiked by more than 40 per cent. Although high costs were extremely disconcerting, scarcity also took the form of temporary outages of supply. For a discussion of the political dimensions of the oil embargo, see the work of David Painter. For a description of factors relating to the 1970s oil crisis, see, for instance, Daniel Yergin, The Prize: The Epic Quest

220  Oil Shock for Oil, Money and Power (New York: Free Press, 2008); Karen Merrill, The Oil Crisis of 1973–1974: A Brief History with Documents (New York: Bedford/St Martin’s, 2007); or Daniel Horowitz, Jimmy Carter and the Energy Crisis of the 1970s: The ‘Crisis of Confidence’ Speech of July 15, 1979 (New York: Bedford/St Martin’s, 2004). 13 The importance of petroleum to social and economic considerations by the late twentieth century has made its access among the chief concerns of developed nations. See Brian C. Black, Crude Reality: Petroleum in World History (New  York:  Rowman & Littlefield Publishers, 2012). Also, Michael Klare, Resource Wars: The New Landscape of Global Conflict (New York: Owl Books, 2001); Kenneth Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage (Princeton, NJ: Princeton University Press, 2008); Paul Roberts, The End of Oil:  On the Edge of a Perilous New World (Boston:  Mariner Books, 2005); and Thomas L. Friedman, Hot, Flat and Crowded 2.0: Why We Need a Green Revolution – and How it Can Renew America (New York: Picador, 2009). 14 Brian C. Black, ‘Oil for living: Petroleum and American mass consumption’, Journal of American History 99, no. 1 (2012): 40–50, special issue on ‘Oil in American life’. This chapter is also a portion of Brian C. Black, Declaring Our Dependence: Petroleum in 20th Century American Life (Chicago: University of Chicago Press, forthcoming). 15 Brian C. Black, ‘The consumer’s hand made visible:  Consumer culture in American petroleum consumption of the 1970s’, in Robert Lifset (ed.), American Energy Policy in the 1970s (Norman, OK: University of Oklahoma Press, 2014). 16 Timothy Mitchell, Carbon Democracy:  Political Power in the Age of Oil (London: Verso, 2013), p. 174. 17 Sabin, The Bet, p. 85. 18 Matthew T. Huber, Lifeblood:  Oil, Freedom, and the Forces of Capital (Minneapolis: Minnesota University Press, 2013), p. 106. 19 Ross, ‘How the 1973 oil embargo saved the planet’. The impact on the rate of consumption cited by Ross is significant as well: he writes, ‘Since 1973, the energy intensity of the US economy […] has fallen by more than half; petroleum use per capita has dropped by more than a third. The most important change has been the deceleration of total carbon emissions.’ 20 Richard Benedetto, ‘Cheney’s energy plan focuses on production’, USA Today, 1 May 2001. 21 Horowitz, Jimmy Carter and the Energy Crisis of the 1970s, pp. 43–6. 22 McNeil, Something New Under the Sun, p. 298. 23 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (New York: Penguin Books, 2012), p. 629. 24 Stephanie LeMenager, Living Oil: Petroleum Culture in the American Century (New York: Oxford University Press, 2013), p. 66. 25 Ibid., p. 69. 26 Ibid., pp. 102–5.

Greening American Consumer Culture  221 27 http://www.eia.gov/beta/MER/index.cfm?tbl=T10.02C#/?f=A&start=200001. 28 Gwen Bredehoeft, ‘The outlook for renewable electricity in the United States:  Assessing the role of policy and other uncertainties’, paper presented at US Energy Information Administration (USEIA) conference, 14 July 2014. 29 Ibid. 30 J. Heeter and T.  Nicholas, ‘Status and trends in the U.S.  voluntary green power market (2012 data)’, National Renewable Energy Laboratory, October 2013. 31 http://www.gallup.com/poll/168176/americans-favor-energy-conservationproduction.aspx. 32 I discuss this at more length in my forthcoming work, Declaring Our Dependence. 33 Roberts, The End of Oil, p. 154. 34 See, for instance, Jim Motavalli, High Voltage: The Fast Track to Plug in the Auto Industry (Emmaus: Rodale Books, 2011). 35 Discussion of the 2008–9 economic collapse can be found in journalistic accounts such as Steve Coll’s Private ExxonMobil and American Power (New York: Penguin Books, 2013). 36 These figures come from the United States Department of Transportation Bureau of Transportation Studies, ‘Table  4-23:  average fuel efficiency of US light duty vehicles’, n.d., available at http://www.rita.dot.gov/bts/sites/ rita.dot.gov.bts/files/publications/national_transportation_statistics/html/ table_04_23.html. 37 ‘Frequently asked questions: how many alternative fuel and hybrid vehicles are there in the US?’, US Energy Information Administration (webpage), n.d., available at http://www.eia.gov/tools/faqs/faq.cfm?id=93&t=4. 38 ‘About us’, Transition United States (webpage), n.d., available at http://www. transitionus.org/about-us. 39 Nick Judd, ‘A recent history of Uber: Lobbying, lawsuits, and a “Scuffle”’ Vice (webpage), 18 July 2014, available at http://www.vice.com/read/a-recenthistory-of-uber-lobbying-lawsuits-and-a-scuffle-718. 40 Mark Rogowsky, ‘Zipcar, Uber and the beginning of trouble for the auto industry’, Forbes, 8 February 2014, available at http://www.forbes.com/sites/ markrogowsky/2014/02/08/viral-marketing-car-sharing-apps-arebeginning-to-infect-auto-sales/.

9 Energy and Soviet Economic Integration: Foundations of a Future Petrostate Oscar Sanchez-Sibony Soviet foreign trade was not invented by Leonid Brezhnev, nor was it the pragmatic outcome of a rise in oil prices, or of bad domestic harvests. Scholars in the past have tended to see Soviet international economic engagement as an innovation of Brezhnev’s government, an altogether reasonable assumption if one looks strictly at the growth in Soviet trade during his tenure.1 I will argue, however, that this was a long-standing policy that went back to Lenin’s most immediate legacy before his death: the reconnection of Russia to the gold standard. Autarky then came to the USSR like a bolt from the blue, with the leadership, now under Stalin’s ruthless direction, radically readjusting social relations to cope with the disintegration of global economic structures. For two decades after the cataclysm of World War II, the world gradually knitted together the new commercial and financial fabric that we know as Bretton Woods. During the process, the USSR was consistent in its attempts to increase its participation in international trade, but succeeded only when American economic and political hegemony was undermined both by a resurgent Europe and Japan and by the very dynamics of the Bretton Woods system.

Energy and Soviet Economic Integration 223 Oil, itself an important element in the reproduction of American economic power in the world, offers an interesting prism for analysing the temporality of these processes of integration. While politically excluded from participation in the gradual rebuilding of a largely demonetized world economy, the USSR resorted to what anthropologist Doug Rogers has called ‘petrobarter’ as a means to acquire a modicum of purchase in international trade.2 By the 1960s, with the end of the dollar shortage and the restoration of the convertibility of European currencies, the sale of oil allowed the Soviets more financial room in which to implement a regime of systematic counter-trade. This in turn led to the integration of Soviet energy resources with European industrial centres that became the fulcrum of Soviet decline after the oil price collapse of 1986. This article will argue that 1973, rather than being a watershed year, accelerated a dynamic that had its practical origins in the late 1950s. The description of this dynamic requires somewhat of a detour away from oil. Oil did not become an important factor in the USSR’s export structure until the Pandora’s Box of international finance and trade was pried open with the end of the dollar shortage and the widespread move towards currency convertibility at the end of 1958, as shown in ­figure 9.1. 80 70 60 50 40 30

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46

20 10 0

Figure 9.1  Soviet exports of crude oil, in millions of tons, 1946–71 Source: Vneshniaia torgovlia SSSR za… Statisticheskii obzor authored by the Soviet Ministry of Foreign Trade (Ministerstvo vneshniaia torgovlia) and published annually. This figure uses the volumes from 1946 to 1971.

224  Oil Shock The first section will retrace the segregation from international trade that the Soviets endured under the tight monetary conditions of the Bretton Woods system, and the bartering means through which they attempted to circumvent this problem. The second section describes the USSR’s integration as an energy provider to Western Europe at a time, the 1960s, when the infrastructure for the large-scale importation of foreign energy in the continent was being established, all in the context of a widespread change towards oil and gas and away from coal. The chapter will range widely around the world, but it will at times detail Soviet trade relations with West Germany to provide focus on the kinds of challenges the Soviets faced in the international financial and commercial arena.

Bartering around Bretton Woods The Bretton Woods system forced the USSR into a mode of exchange that coexisted and interacted with global capitalism but was peripheral to it: barter.3 In a largely demonetized world economy, barter arrangements became an outlet for carrying out the long-standing Soviet objective of participation in international commercial exchange. These peripheral undertakings always looked in the direction of Europe and the United States; the exclusion was a reflection of American power, European financial dependence on the United States and general Western preponderance. It was also an expression of a change in the balance of power between states and international financiers. World War II had essentially signified an end to the international mobility of capital, as controls everywhere appeared in order to harness capital for the war effort. This too was a crucial factor in the kinds of solutions to designing a workable financial architecture that John Maynard Keynes and Harry Dexter White could imagine in Bretton Woods.4 The Bretton Woods talks had as a main objective the eventual convertibility of the European and Japanese currencies. These were to be pegged to the dollar, thereby maintaining one of the most clearly positive features of the gold standard:  exchange rate predictability. Capital

Energy and Soviet Economic Integration 225 controls were to be widely used in order to achieve this goal while allowing governments the freedom to pursue domestic Keynesian policies. This had been a freedom they had not had under the much more stringent peg of the gold standard. International institutions such as the International Monetary Fund (IMF) and the World Bank would keep vigil over the good functioning of the system and were an emblem of the cooperative arrangements that were the core of the new economic ethos. The problem was that in the immediate post-war period, Europe found it very difficult to earn dollars from the US – to export to the US, in other words. And yet these dollars were sorely needed in order to import the raw and manufactured American products necessary for reconstruction. The corresponding deficits created a dollar shortage that compelled the European countries to continue strict controls over capital as well as a draconian system of import–export licences.5 Barter obviated the need for dollars, which was constraining trade in many European countries and making it difficult for countries without empires to exploit to get a hold of basic commodities. Enter the Soviets, who under Stalin were bent on exploiting any advantage to improve their terms of trade. For example, when in early 1950 excess grain supply from the Americas decreased the world price of grain well below Soviet expectations, the Soviets looked around for countries under balance-ofpayments pressure. Mikhail Men’shikov, then minister of foreign trade, suggested that Mexican, Austrian and Egyptian firms might exchange their cotton production for grain, while Dutch and Ceylonese firms might be approached for their rubber, and even Belgian ones might be interested in an exchange of grain for rolled iron.6 Men’shikov’s suggestion had followed a request from an Egyptian firm that had received a licence from its government for an exchange of Soviet grain for Egyptian cotton and rice. An initial request by the Egyptian ambassador in the summer of 1948 for economic exchange and a trade agreement had also been met with a positive response from the Soviets, but the Egyptian government had failed to follow up on it, perhaps fearing Western retaliation.7 By early 1950, Egypt was a country with

226  Oil Shock chronic balance-of-payments problems, tight hard-currency reserves and a sudden enthusiasm for a barter deal with the Soviets. Or three, as it turned out, all at the behest of the Egyptians, whose rising desperation over their dwindling reserves of dollars was matched by the rising price of wheat the Soviets sold them.8 The next year the relationship continued to grow, even when it meant cutting already-negotiated deliveries to Belgian firms, which paid a lower price for grain than the Egyptians.9 The occasional payment in British pounds in times of emergency made the Egyptian relationship especially attractive.10 In Italy a thorny situation resolved itself after a stand-off had arisen over the high price of Soviet grain. Both parties had agreed to exchange Italian rail for Soviet grain. The Italians, however, refused to pay the $90 per ton the Soviets demanded, since American grain could be bought much more cheaply. But a lack of dollar reserves meant that the Italians had to relent and agree to the Soviet price when the Communists threatened to pull out of the deal altogether.11 In the end the deal allowed the Soviets to keep their purchases and add caterpillars, excavators, cranes and an array of other Italian heavy construction equipment. These kinds of barter exchanges were a harbinger of future relations with the new countries that appeared in the wake of Europe’s imperial collapse. Meanwhile, the acute shortage of dollars, the principal currency used in intra-European trade, was making European economic integration nigh impossible, despite the creation of the Organization of European Economic Cooperation (OEEC) to manage the Marshall Plan funds coming from America. The solution was found in the summer of 1950 with the creation of the European Payments Union (EPU), which allowed member states to settle accounts multilaterally and committed them to the coordinated liberalization of commercial and financial barriers. What this meant for the USSR was a more subtle and effective form of exclusion. Whereas earlier the USSR had been one more participant in a hapless network of ineffective barter practices, the EPU lowered the cost of trade immensely within Western Europe, which now drew upon itself to accelerate trade and initiate the famous long economic

Energy and Soviet Economic Integration 227 boom. The upshot for the Soviets was a relative irrelevance. The suddenly slow-moving Soviets could only watch from the sidelines and rage about the subversive American influence as the ‘Marshallized countries’ (marshallizirovannye strany) lowered tariffs and generally did away with obstacles to the intensification of economic exchange among themselves.12 Scholars of Soviet trade, and indeed scholars in general, have long laboured under the assumption that Soviet trade was always subordinate to its politics. Yet reading through their negotiations with Western European governments, it is hard not to sympathize with Soviet officials in their claim that they were far more attuned to commercial considerations than their liberal European counterparts. But then again, the Soviets did not much distinguish between ‘economics’ and ‘politics’, and neither should the historian. The case was succinctly put by deputy minister of foreign trade Pavel N. Kumykin in his initial remarks during the 1957 talks that led to the long-term trade agreement between the USSR and West Germany. He told his audience of Soviet and German negotiators: We proceed from the fact that trade between countries allows for the use of advantages and profits that emanate from the international division of labor, and is also a good foundation for the improvement in mutual understanding and the strengthening of relationships among nations.13

This was not a simple case of dull diplomatic rhetoric devoid of substance. Kumykin, representing a state without significant economic leverage, had little time for guile. The Soviets were ready to buy West German equipment and boats worth 1.9 billion marks (1.8 billion rubles at the prevailing exchange rate) over the next four years, as well as 1.6 billion marks worth of ferrous metals, steel pipes, assorted cables, copper, and medicines and medical equipment. He offered in exchange an increase in those goods the Germans were already buying: timber, paper, cotton and flax fibre, oil and its derivatives, coal, manganese, chromium, zinc and other such primary commodities.14

228  Oil Shock The two sides implemented this general plan over the next half year. As would become routine in Soviet foreign relations, the fact that this trade was institutionalized in 1957 had little to do with the USSR and much to do with the other side. For two years the Soviets had been using all channels in diplomatic and business circles to put pressure on Konrad Adenauer’s government to sign a trade treaty. In this endeavour they could count on German industrialists and businessmen as partners. Everywhere Soviet specialists went in West Germany, they met German businessmen hoping for commercial relations to be revived between the two countries, and everywhere the Soviets fed wood to the fire.15 Soviet officials and German businessmen had to wait for Konrad Adenauer to modify his ‘policy of strength’ into a more accommodating attitude towards the USSR. It seems the chancellor’s turning point came in the summer of 1957: that is, not before achieving his overriding goal of integrating West Germany firmly within the European fold, which he accomplished in March when he signed the Treaty of Rome. As historian Robert Spaulding has argued, the Adenauer government was guided primarily by political goals in their consent to a long-term trade agreement with the Soviets.16 The two countries had established diplomatic relations only two years earlier, after Adenauer parleyed a trip to Moscow into the repatriation of thousands of German prisoners of war (POWs). In agreeing to conduct trade talks with the Soviets in 1957, the Adenauer government officials often invoked the political gains that might be had from the Soviets, particularly in the form of further repatriations. But the outcome of the talks belied somewhat the Germans’ assertions about the primacy of politics. Throughout the negotiations, the Soviets stubbornly refused to be drawn into political negotiations, focusing solely on commercial exchange and making concessions only  – but not very extensively – on the commodities to be exchanged and their quantities. If the negotiations dragged on for seven months, it was the Germans who did the dragging, stalling when they found that their political demands were not being addressed.17 In the end, the Germans gave way on this and other issues. In fact it was the Soviets that ended up with the strictly commercial

Energy and Soviet Economic Integration 229 treaty they wanted, despite all private assertions by the chairman of the German delegation, Rolf Lahr, and his colleagues that they were under less pressure to compromise than their Soviet counterparts.18 It was not that Lahr was wrong in noting that West Germany’s less interested approach to the talks should have afforded the German side more leverage; it was that time was working against the capacity and ambition of the German government to have absolute control over international trade and finance. In his welcoming speech, Kumykin had already pointed out the context of the negotiation: trade between the two countries had only started in 1954, and it was already at 450 million rubles.19 As Spaulding has noted, this fast growth in the absence of a treaty made a nonsense of the Soviet position that the long-term treaty was absolutely necessary for commercial growth. But it also meant that the Adenauer government’s window to use the trade treaty in order to wrest political concessions from the Soviets was quickly closing. The dollar shortage that had incurred such a decisive government presence in all international economic transactions was quickly turning into a dollar glut. The full convertibility of the German mark, which would bring about the further liberalization of international commerce and finance, was two years away. In the final outcome, the Germans went back to Bonn with no resolution to the political questions they had brought to Moscow, and having compromised on most of the tough economic positions they had planned to take. But after seven months of haggling and wrangling they had come around to the opinion expressed by Kumykin at the very start of the process:  ever increasing commercial exchange between the two countries would bring about ever greater mutual understanding and a strengthening political relationship. In the years ahead, the intensification of commercial exchange between the two countries would shrug off successive crises over Berlin.20 By the 1970s it would once again become the most important economic relationship of the USSR, resuming the position the Weimar Republic had occupied in the 1920s. News of the Soviet–West German long-term commercial agreement, which came into effect in 1958, spurred others to approach the Soviets

230  Oil Shock about a similar arrangement. The British were first off the mark, although they wondered out loud to Soviet officials whether such an agreement was possible given the British government’s less coordinated approach to capitalist production than that of the Germans.21 Their qualms were baseless; the treaty would operate in Great Britain as it did in Germany. A five-year Anglo-Soviet trade agreement was signed in May 1959. Many soon followed.

Oil and the European Integration of Soviet Energy By the 1960s, several international currents were pushing the Soviets towards an intensification of economic exchange. The US dollar was no longer the obstacle to global commerce it had been a decade before. It was now in abundance in the rich world, obviating systems of state control aimed at husbanding reserves of it. This accumulation of dollars in Europe and Japan greased the financial gears of world trade and intensified foreign interest in Soviet resources. The dollar glut was also a sign that Europe had recovered, vis-à-vis the US, much of the economic and technological terrain it had lost during the upheavals of the first half of the twentieth century; many of those dollars now being wrested from American consumers were obtained through successful competition with US production. This industrial expansion of the 1960s in Western Europe and Japan came with an important corollary: the wholesale switch from coal to oil as the principal source of energy. In 1955, three-quarters of energy consumed in Western Europe was coal-generated, while oil provided the rest; a decade and a half later the balance of coal versus oil had almost reversed. The change in Japan was, if anything, even more dramatic – from the end of the 1940s to the end of the 1960s oil had grown from providing a mere 7 per cent of the energy consumed to providing 70 per cent.22 This switch in the industrialized world came with a renewed determination to break free of Anglo-Saxon control of the international oil industry, embodied in the oil majors from the United States and Great Britain that dominated the world’s oil production. Europeans needed new and cheaper suppliers

Energy and Soviet Economic Integration 231 of energy. The Soviets, having clamoured for this for decades, were only happy to oblige. Few men fought harder and more successfully to break the oligopoly of the oil majors than Enrico Mattei, head of the Italian state energy conglomerate Ente Nazionale Idrocarburi (ENI). Mattei’s first attempt to spoil the oil majors’ monopolistic hold over the Middle East was to break with the principle of 50/50 profit sharing with the producer countries and to offer Iran a 75 per cent stake in his investment. His brazen move into the Middle East spelled the beginning of the end of the domination of the Western oil majors in the region, but it brought him little profit. ENI’s exploratory oil wells in Iran came up empty, at least for commercial purposes.23 Mattei would have to look somewhere else for cheap oil. The irrepressible Italian next turned east, where there was an even bigger oil industry taboo ripe for the breaking: doing business with the Communists. He quickly signed a contract with the USSR in 1958 for the delivery of oil to Italy. On 12 October 1960, however, he finally got his breakthrough in a deal that netted ENI 12.5  million tons of crude oil over five years in exchange for 240,000 tons of large-diameter pipes, along with other pipeline equipment, diesel engines and synthetic rubber.24 This was the first large-scale pipes-for-oil counter-trade deal that would become so critical to the future relations between the USSR and Western Europe – and that would fail to materialize for the Japanese. The oil majors were quick to complain to the State Department: The ambition of Enrico Mattei to use Russia as a means of harassing and forcing out foreign oil interests in Italy; of developing exports of Italian services and goods to Russia; and of using Russian low-cost supplies as a spring-board for entering Western European markets, coupled with the desire of Italy to increase her foreign commerce, threaten to bring Italy into a dangerous position of subservience to the Iron Curtain block.25

This view came to prevail in the State Department and the White House for the next two decades.26 If State Department officials understood the hypocrisy of their position, they showed no scruples on the matter:

232  Oil Shock The average person in Italy gets his oil cheaper because Italy is importing Soviet oil. Industrialists in Europe can produce at less cost because of Soviet oil. It is hard, under those circumstances, to work up resistance to imports of Soviet oil. Our argument has to be the danger of dependence on Soviet oil.27

The argument was mercenary and fated to fail. When Monroe Rathbone, chairman of Standard Oil of New Jersey (now Exxon), went to northern Europe for an ‘on-the-spot appraisal of Soviet exports of oil’ in the summer of 1961, he came back disturbed. He found that ‘there is considerable interest in, and pressure for, increased trade with the Soviets, with much of this pressure coming from business interests’.28 The reason was simple: Europe, its security arranged for, was integrating its natural and industrial resources on a continental scale. Mattei’s mysterious murder in October 1962 did little to change that process of integration. In talks with American ambassador to Italy Frederick Reinhardt five months before his death, Mattei had insisted that his ‘only aim was to provide Italy with a cheap power source and to put Italian labor to work’, and Soviet oil was the cheapest he could get.29 This was not the whole truth, as both men knew, but it was a powerful motivation nonetheless. And it was much closer to the truth than the State Department’s presumption of a deliberate Soviet ploy to gain market share and subvert the international oil industry. In fact the price of Soviet oil was the outcome of hardball negotiations. And the main argument the Italians and others used to lower Soviet prices was precisely the political pressure the US government exerted on them to stay away from doing business with Communists. ENI’s representatives continued to resist Soviet pressure to raise prices by arguing that the company worked in abnormal political circumstances in which they were constantly attacked in the press for dealing with the USSR; the Italians argued that Soviet oil prices should reflect the risks and bad publicity that flowed from this.30 American-stoked Cold War animosity, in fact, did little to derail the rapprochement between European countries and the USSR. Business had

Energy and Soviet Economic Integration 233 been the first advocate of this rapprochement back in the mid-1950s, and by the mid-1960s European governments were more or less sold on the benefits of such a policy. This is because they were no longer in the abject financial position of earlier years that compelled them to abide scrupulously by America’s political dictates. They could now independently offer the main ingredient necessary for any growth in commercial relations with the USSR: capital. Doing business with the Soviets in the days of acute dollar shortage had entailed a strict adherence to a clearing of accounts. In the 1960s, balanced trade continued to be important, but the Italians could afford plenty of slack because, as Italian foreign minister Bernardo Mattarella informed his Soviet counterpart Nikolai Patolichev in October 1964, Italy’s balance of payments was doing much better, and they could afford to have a deficit with the USSR and even offer credit.31 The Italian government was also willing to support credit from private firms to Soviet organizations. This government support became the basis for the two most important deals of the 1960s between Italy and the USSR, indeed two of the most important deals the Soviets signed with anybody that decade: the Fiat turnkey project in Tolyatti that became the AvtoVaz car factory, and the Trans Austria Gas (TAG) pipeline that piped Soviet gas directly to Western Europe for the first time.32 The fact that the preliminary talks for both these deals happened in the same month, June 1965, was in this sense not merely coincidental.33 In fact, the dollar glut became a great opportunity for the Soviets to use financial competition as a lever to get better terms and quicker results from the rich nations. When, in their 1964 meeting, Mattarella complained that Soviet–Italian trade was not balanced, Patolichev responded, quite beside the point, that the French government had recently offered more credit on better terms than the Soviets had even asked for.34 Two years later, Soviet insistence that there was a viable technical and financial deal with Renault in the works finally decided Fiat and the Italian government to meet Soviet financial demands on the AvtoVaz turnkey project, which was signed in May 1966.35 In commercial operations in Japan this appeal to competition would become the

234  Oil Shock standard stick with which the Soviets progressively obtained ever more capital on ever better terms. The British, quicker on financial matters and in control of the second most international currency in the world, hoped to use their financial advantage to make up for their firms’ esca­ lating lack of competitiveness.36 The country that held out the longest was the one country that consumed most of the Kremlin’s attention:  West Germany. Financial developments worked in the same direction in West Germany as they did elsewhere in Western Europe, but the country was host to a quarter of a million American troops, and West German foreign policy was deeply embedded within an American security structure that remained a constant reference for all West German diplomatic and economic policy making.37 Their approach was therefore very conservative and easily overruled by the US. In fact the relationship suffered a blow in 1962 when the Americans vetoed an important deal that would have sent 163,000 tons of German wide-diameter steel pipe to the USSR, and imposed an embargo on pipe. The Soviets needed to extend the Druzhba pipeline to countries within the bloc, and the German steel mills of the Rhur were suffering from underutilized capacity and were anxious to find new sources of demand for their steel.38 This trade was thus the most promising source of commercial growth between the two countries. The effect of the American veto was to stop this burgeoning relationship in its tracks. Soviet–West German trade reached beyond the 300  million ruble mark in 1962, and would not do so again until five years later (cf. fig. 9.2). That period of purgatory was filled with familiar Soviet complaints and recriminations. Ludwig Erhard’s government had continued the same cautious attitude of the Adenauer government, with similar results. The trade licensing system had been liberalized for trade with most countries, including those of the Soviet bloc, but remained in place for the USSR, a slight that wounded Soviet amour-propre and hurt West Germany’s credibility as a trade partner.39 Meetings at a government level between the two countries took on an irritable tone; mostly the Soviets

Energy and Soviet Economic Integration 235 1400 1200 1000 800 600 400 200

19 72

19 70

19 68

19 66

19 64

2 19 6

0 19 6

19 58

19 56

19 54

0

Figure 9.2  USSR trade with West Germany (in millions of current rubles) The numbers were 304.9 million rubles for 1962 and 319.1 million for 1967. Source: Vneshniaia torgovlia SSSR za… Statisticheskii obzor authored by the Soviet Ministry of Foreign Trade (Ministerstvo vneshniaia torgovlia) and published annually. This figure uses the volumes from 1954 to 1973.

did the grousing. The preliminary talks in September 1965 for a new three-year trade agreement between deputy minister of foreign trade Mikhail Kuz’min and a West German delegation led by state secretary of the Foreign Office Karl Carstens capture the tenor of the relationship during those years.40 During the meeting Kuz’min complained about the embargo on wide-diameter pipe, remarking that the USSR was already producing it by itself. On a sincere note, he explained that the Soviets preferred to buy it in Germany in order to take advantage of the world division of labour and gain time. He then raised the spectre of competition, by now a well-used trope, claiming that if Germany would not sell the pipe, other capitalist countries would. His argument was clear: it was the West German side that was hampering the development of trade between the two countries.41 The Germans for their part avoided the polemics and informed the Soviets that the West German government was now ready to guarantee export credits. They were three years late, Kuz’min reproached the Germans. West Germany’s European neighbours had been offering and guaranteeing credits for a long time. The next piece of good news also failed to placate Kuz’min: West Germany

236  Oil Shock was planning on further liberalizing their trade with socialist countries.42 And so it went for half a decade, the Soviets sore and bewildered about the tightening of a pointless embargo and the Germans bringing only marginal improvements to the table.43 The relationship was much better with the German industrialists. It was almost always the case that Soviet trade and economic officials got along better with businessmen than with civil servants of foreign countries. But with German capital flows still subject to extensive government regulation, the main problem continued to be the inability of the German business community to offer attractive lines of credit. In 1963, for example, an understanding had been reached for the export of equipment and expertise for an oil refinery with the capacity to produce 12 million tons of oil products a year.44 There was no real technical challenge to the project, but the consortium of businessmen that had negotiated it – which was led by steel tycoon Otto Wolff and included Krupp, Siemens and other flagship companies – could not offer long-term credits to the Soviets. They hoped to use the large export order to put pressure on the government to change the credit policy towards the USSR and, after two years of fighting, the question reached all the way to Erhard, who allowed the consortium to offer a ten-year credit line guaranteed by the government. The Soviets continued to put pressure on the German government both directly, and indirectly through their allies in German business circles.45 It is clear that German businessmen adopted the Soviet view on the issue of embargoed items and credit arrangements; they continued to hope to change government policy in order to be able to compete for Soviet orders with other European countries.46 By the mid-1960s, in other words, the Soviets were learning to play the game, substituting diplomatic language about the relationship between trade promotion and world peace for a more aggressive and effective negotiating strategy  – assisted by the persistent vocalization of past and current grievances. But it would be neither Soviet griping nor the industrial lobby that finally broke through the impasse. Wide-diameter pipe had been the basis for

Energy and Soviet Economic Integration 237 most of that initial growth during the first half-decade of trade, and its embargo had been at the centre of the decline in bilateral trade during the subsequent five years. Its resumption meant the resumption of the Soviet–West German commercial relationship. The embargo had always been deeply unpopular in Germany, where it was viewed as a humiliating submission to US priorities – even downright immoral in the way it forced the breach of already existing contracts with Soviet trade agencies.47 Ultimately it was the imminent closing of the deal between ENI and the USSR to build the TAG pipeline that convinced the German government to belatedly join the rest of Europe in defying American edict. With talks intensifying between the Soviets and Italians in 1966, the Germans announced an end to the pipe embargo in November.48 That same month, German ambassador to the USSR Gebhardt von Walter approached the Ministry of Foreign Trade to sound out whether West Germany could get a hold of some of the gas that would flow through Austria and into Italy.49 A  consortium of German firms had failed to secure deliveries of gas from Algeria, and now they were turning to the USSR to see whether they might divert some of that gas into Bavaria. The understanding was that the Germans would pay for the deliveries in wide-diameter pipe, the largest of which, 48 inches in diameter, could only be produced by the Thyssen Group, itself the largest steel company in Europe.50 It took a few years for the complicated deal to come together, but it was finally signed in February 1970. With a financing of $400 million for 12 years at an interest rate of 6.25 per cent, it broke further ground relative to previous arrangements, helping German steel mills with their problems of under utilization and bringing Soviet energy firmly into the core of the Western European economy.51 Here was the beginning of the continental economic integration that had started with the signing of a three-year long-term trade agreement in 1957. It was also the beginning of the end of a USSR that by the 1980s had become too dependent on energy exports, the price of which proved to be too volatile for the anaemic superpower.

238  Oil Shock

Epilogue: 1973 The Soviets had a very well-developed language for understanding and talking about economic crises in the capitalist world economy. The contradictions of capitalism became more visible and more eminently exploitable during such crises, and the oil shock of 1973 was supposed to provide just such an opportunity. Brezhnev could be forgiven for thinking that the subsequent influx of hard currency could help to break through the productivity impasse the Soviet economy had reached in the 1970s. But he did not foresee the problems that the dollarization of the USSR’s participation in international commercial exchange would entail. Barter in the 1950s had helped the Soviets in fostering a small degree of commercial relations in a largely demonetized world economy. In the 1960s, as financial intermediation unshackled itself from the extreme constraints of the embryonic Bretton Woods system, a more intense form of counter-trade between the USSR and Western Europe allowed for the emergence of a transcontinental energy network.52 With these commercial practices and capital infrastructure firmly established, the oil shocks of the 1970s helped to intensify the processes of integration that had been initiated in the 1960s, and which the Soviets had fought for in the 1950s. Oil continued to be the fulcrum of Soviet global endeavours, but its role through the 1970s was multifaceted. The USSR did not merely integrate abstractly into world economic exchange, but also did so quite directly in intra-industrial exchange. Oil swaps with Western companies as well as foreign governments proliferated through the 1970s and 1980s, most importantly with BP, with which the Soviets reached an agreement to meet BP’s commitments in Eastern Europe and parts of Western Europe in exchange for Soviet commitments to Japan and India, which could be more cheaply supplied from BP’s Asian subsidiaries.53 On the other hand, developing ever more counter-trade deals became something of an obsession for Brezhnev. The watchword at the Central Committee plenums from December 1973 was compensation trade, a form of counter-trade in which the

Energy and Soviet Economic Integration 239 imported turnkey projects – that is, the importation of complete factories – were supposed to pay for themselves through later exports of the factory’s production. This had already ‘become very significant’, according to Chairman of State Planning Nikolai Baibakov; he continued, ‘the positive shifts going on in the international situation have created good conditions for the widening of mutually beneficial economic and scientific relations between countries of different social construction’.54 Already, agreements on these terms worth 2.3 billion rubles in hard currency had been struck, and the government was in talks for a few billion more. This would only pay off, however, under much more disciplined conditions than existed in Soviet industry at the time. Both Brezhnev and Baibakov would use their time in Central Committee plenums to berate the heads of industry in the audience into implementing the necessary discipline. As Brezhnev reproached his colleagues in 1975: Given the responsibility of the country to the states from which we have taken loans, the heads of construction ministries, as well as the ministries that have made the import orders, must categorically get these facilities into operation and implement the construction plans in a timely manner.55

The next year, Brezhnev invoked Lenin, who had said that once you have the right line (i.e. compensation trade, in Brezhnev’s world), its success depends on organization.56 By 1979, the situation was ‘now worse than ever, and the USSR will have to pay for it’.57 The Politburo had gotten the Party Control Committee to seek out who was responsible for so much wasted importation, punish the guilty and eradicate the practice. In the event, the USSR never overcame the problem. But oil revenues kept accruing to the USSR, and given the failure of compensation trade to invest them productively – and in the crucial context of an unshackled global finance  – these revenues became increasingly monetized. This took the form of hard currency reserves as well as credit, which was now more liberally doled out to the Communist

240  Oil Shock adversary despite the recrudescence of the Cold War under the Reagan administration. Anthropologists have developed sophisticated models for understanding the effects of monetized debt/credit relations and their influence on conceptions of authority and legitimacy – which they sometimes juxtapose to the more egalitarian anonymity of barter relations, which in turn, and unlike credit/debt, lack a structuring temporal horizon.58 This shift from barter dealing to debt arrangements, a consequence both of the 1973 oil shock and of the increased speed and freedom of global capital, could turn out to be of great explanatory value in understanding the demise of the Soviet system. The dollarization of Soviet oil, which made up a full 50 per cent of Soviet export revenues by the 1980s, may well have rendered Soviet political culture consonant with that of other oil-producing countries which are the subject of studies that see in oil a resource curse, an area of political struggle and a force for the weakening of established institutions.59 But this will have to constitute an agenda for further research. What can be said of 1973 and the USSR is that it was a Faustian bargain that brought together and galvanized a set of processes that had been slowly gestating during the era of Bretton Woods. Barter practices after the war had stoked an interest in Europe in the possibilities of exploiting energy resources in the eastern part of the continent. These possibilities were finally activated after enough capital had accumulated in the western parts of the continent to ignite the construction of an immense infrastructure that could power continental industry as it moved away from the social and environmental difficulties posed by coal. The consequences of this vast new energy system were twofold: it brought together East and West in a political embrace of long duration and it irrevocably changed the way debt was created and maintained within that relationship. Oil and capital had already been reshaping a relationship that could no longer be mediated by the United States and the Cold War logic it had established so successfully in the continent. The year of the oil crisis intensified that political process and made it, for good and ill, irreversible.

Energy and Soviet Economic Integration 241

Notes 1 For example, Thane Gustafson, Crisis Amid Plenty:  The Politics of Soviet Energy under Brezhnev and Gorbachev (Princeton:  Princeton University Press, 1989), p. 15. A similar temporal development with respect to Eastern Europe is described in Stephen Kotkin, Uncivil Society: 1989 and the Implosion of the Communist Establishment (New York: Modern Library, 2009). 2 Doug Rogers, ‘Petrobarter. Oil, inequality, and the political imagination in and after the Cold War’, Current Anthropology 55, no. 2 (2014): 131–53. 3 That phraseology is taken from Rogers, ‘Petrobarter’, as is, loosely, the framing device of this chapter. 4 As argued in Geoffrey Ingham, Capitalism (Cambridge: Polity Press, 2011). 5 The story is succinctly told in Eichengreen, Globalizing Capital:  A History of the International Monetary System (Princeton: Princeton University Press, 2008), pp. 100–4. 6 Russian State Archive of Socio-Political History, Moscow (RGASPI), f.  84, op. 1, d. 61, ll. 139–44. The report is dated 18 January 1950. 7 Vitalii Naumkin et al. (eds), Blizhnevostochnyi Konflikt. Iz Dokumentov Arkhiva Vneshnei Politiki Rossiiskoi Federatsii, Vol. 1 (Moscow: Mezhdunarodnyi fond ‘Demokratiia’, 2003), pp. 43–5 for the request, and ibid., pp.  49–50 for the response, including the observation that the Egyptian ambassador received the news without great enthusiasm, as if he was not expecting a positive answer. 8 In fact, towards the end of that year the Egyptians were paying in British pounds, which the Soviets always welcomed as a means to acquire rubber in other parts of the sterling area. Men’shikov’s reports to Stalin on these negotiations can be found in RGASPI, f. 84, op. 1, d. 61, l. 200; RGASPI, f. 84, op. 1, d. 63, ll. 211–12; RGASPI, f. 84, op. 1, d. 64, l. 1; RGASPI, f. 84, op. 1, d. 67, l. 283. 9 RGASPI, f. 84, op. 1, d. 68, ll. 208–9. 10 As happened, for example, in December 1950. See RGASPI, f.  84, op.  1, d. 67, l. 48. 11 RGASPI, f. 84, op. 1, d. 64, ll. 135–6. Mikhail Men’shikov, who had replaced Mikoyan at the head of the Foreign Trade Ministry in 1949, suggested to Stalin in this report of 30 August 1950 that he take the deal, lest a refusal complicate the Italian market for the Soviets. 12 Ibid., ll. 138–9. 13 Russian State Archive of the Economy (RGAE), f. 413, op. 13, d. 7988, l. 19. Negotiations started on 24 July 1957. 14 Ibid., l. 20. 15 For an example see a delegation’s report from a May 1957 trip to West Germany in State Archive of the Russian Federation (GARF), f. 5446, op. 120, d. 1358, ll. 83–93. 16 Robert Mark Spaulding, Osthandel and Ostpolitik:  German Foreign Trade Policies in Eastern Europe from Bismarck to Adenauer (Providence: Berghahn Books, 1997).

242  Oil Shock 17 This was the reason for the break lasting from August to November 1957, as the chairman of the German delegation, Rolf Lahr, wrote in his report, in which he blamed the Russians for the failure because they had shown no interest in discussing the repatriation issue. RGAE, f. 413, op. 13, d. 7988, ll. 58–60. The Soviets found it interesting that Lahr published his report in the German press on 19 September. This came after two long absences in the summer during which Lahr claimed he had to go back to consult with his government, as Kumykin reported on 26 August. In RGAE, f.  413, op.  13, d. 7988, l. 41–6. 18 As quoted in Spaulding, Osthandel and Ostpolitik, pp. 451–2. 19 RGAE, f. 413, op. 13, d. 7988, l. 19. 20 A similar argument with respect to Great Britain and the Suez and Hungarian crises of 1956 is made in Mark B. Smith, ‘Peaceful coexistence at all costs: Cold War exchanges between Britain and the Soviet Union in 1956’, Cold War History 12, no. 3 (2012): 537–58. 21 RGAE, f. 413, op. 13, d. 8259, ll. 59–61. 22 Daniel Yergin, The Prize:  The Epic Quest for Oil, Money and Power (New York: Simon & Schuster, 1991), pp. 545–6. 23 Ibid., pp. 503–5. 24 The deal is laid out in ‘Memorandum of conversation’, 3 November 1960, in Glenn W. LaFantasie et al. (eds), Foreign Relations of the United States (FRUS), 1958–60, Vol. 7, Part 2 (Washington, DC: US Government Printing Office, 1993), p. 621. 25 Ibid., p. 622. 26 As recounted in the excellent Bruce W. Jentleson, Pipeline Politics: The Complex Political Economy of East–West Trade (Ithaca: Cornell University Press, 1986). 27 ‘Summary minutes of meeting’, 13 December 1961, in Glenn W. LaFantasie et al. (eds), FRUS, 1961–1963, Vol. 9, Foreign Economic Policy (Washington, DC: US Government Printing Office, 1995), p. 774. 28 ‘Memorandum of conversation’, 18 July 1961, in La Fantasie et al. (eds), FRUS, 1961–1963, Vol. 9, Foreign Economic Policy, p. 762. 29 ‘Telegram from the Embassy in Italy to the Department of State’, 27 May 1962, in Department of State (ed.), FRUS, 1961–1963, Vol. 13, Western Europe and Canada (Washington, DC:  US Government Printing Office, 1994), pp. 841–2. 30 RGAE, f. 413, op. 13, d. 9757, ll. 4–9. The meeting took place on 16 March 1963. 31 RGAE, f. 413, op. 31, d. 82, ll. 91–3. On 20 October 1964 the Italians offered 35–45 million rubles in credit (or 25–30 billion lira) to finance the export of machinery, equipment and ships to the USSR, while still complaining that Soviet–Italian trade was not in balance. See ibid., l. 95, 101. 32 In these preliminary talks, which took place on 28 June, Fiat President Vittorio Valletta offered to sell Soviet timber in Italy as ‘an act of friendship’. RGAE, f. 413, op. 31, d. 595, ll. 53–6. The preliminary talks between Patolichev and Eugenio Cefis, vice president of ENI at the time, are in ibid., ll. 64–67, and took place on 17 June.

Energy and Soviet Economic Integration 243 33 As Lewis Siegelbaum documents, there had been low-level talks on the Fiat deal since 1962, but they did not move very far until Valletta’s visit to Moscow in June 1965. The story of AvtoVaz is in Lewis Siegelbaum, Cars for Comrades: The Life of the Soviet Automobile (Ithaca: Cornell University Press, 2008), pp. 80–124. 34 RGAE, f. 413, op. 31, d. 82, l. 93. 35 Siegelbaum, Cars for Comrades, p. 91. 36 See RGAE, f. 413, op. 31, d. 59, ll. 121–4, in which the English Foreign Trade Minister complains about the chronic deficit with the Soviet Union despite English firms’ generous lending practices, and Soviet officials respond that British equipment was of comparatively low quality. 37 For a careful study of this connection see Hubert Zimmermann, Money and Security: Troops, Monetary Policy, and West Germany’s Relations with the United States and Britain, 1950–1971 (Cambridge: Cambridge University Press, 2002). 38 The story of the embargo is recounted in Angela Stent, From Embargo to Ostpolitik: The Political Economy of West German–Soviet Relations 1955–1980 (Cambridge: Cambridge University Press, 1981), ­chapter 5. 39 For example in RGAE, f. 413, op. 31, d. 71, ll. 3–4. The Germans often argued that they were afraid to give German exporters too much freedom to sell to the Soviet Union lest the Soviets not be able to pay back. But the Soviets were very right to feel unconvinced by this, given that they had always paid their debts, as they never tired of pointing out to the Germans. 40 RGAE, f. 413, op. 31, d. 71, ll. 18–27. 41 Ibid., ll. 22–3. 42 Ibid., ll. 24–5. 43 See Manzhulo’s recapitulation of 1962, four years later, in RGAE, f.  413, op. 31, d. 71, ll. 28–33. 44 The following is recounted in a meeting between representatives from chemical company Imhausen International Company and the Soviet Ministry of Foreign Trade on 23 June 1964 in RGAE, f. 413, op. 31, d. 585, ll. 47–8. Three months later, however, industrialist Otto Wolff was reporting that the government guaranteed only eight-year credit arrangements. In RGAE, f.  413, op. 31, d. 585, ll. 78–81. 45 See, for example, the foreign trade department’s talk with Peter von Siemens: ‘Such West German government actions as the export embargo of wide-diameter pipe to the USSR, or the refusal from West German firms to fulfill several contracts in the purchase of Soviet goods, have broken the certainty that West German firms can cope with the fulfillment of this or that order’. RGAE, f. 413, op. 31, d. 585, ll. 63–5. Or the head of trade with Western countries A.N. Manzhulo’s lively meeting in September 1966 with deputies from the Bundestag, in which he complains about not just past grievances, but also a possible new insurance system being negotiated in which West German firms might be insured against losses incurred by sudden government embargoes of Soviet products. This, in Soviet eyes, would make West German firms even less reliable. In RGAE, f. 413, op. 31, d. 1119, ll. 58–61.

244  Oil Shock 46 As expressed in so many words by Otto Wolff in September 1965 in RGAE, f. 413, op. 31, d. 585, ll. 78–81. 47 Stent, From Embargo to Ostpolitik, pp. 109–12. 48 Ibid., p. 166. 49 RGAE, f. 413, op. 31, d. 1119, ll. 121–2. 50 Ibid., ll. 123–4. 51 The deal is detailed in Stent, From Embargo to Ostpolitik, pp. 163–8. 52 On the underappreciated role of barter in capital accumulation see Rogers, ‘Petrobarter’. On the making of the East–West gas grid see Per Högselius, Red Gas:  Russia and the Origins of European Energy Dependence (Basingstoke: Palgrave Macmillan, 2013). 53 Marshall Goldman, ‘The dilemmas of Soviet oil policy’, Challenge 20, no. 3 (1977): 24. See also Central Intelligence Agency, ‘Report on Communist aid to Third World oil industries’, June 1973, available at http://www.foia.cia. gov/sites/default/files/document_conversions/89801/DOC_0000309584. pdf. Other instances included swaps with Mexico and Venezuela to provide oil to Cuba in exchange for oil to Spain. See ‘Mexico–Soviet oil exchange’, New York Times, 30 January 1982 and ‘Venezuela oil swap’, New York Times, 8 August 1983. 54 Russian State Archive of Contemporary History (RGANI), f.  2, op.  3, d. 317, l. 28. 55 RGANI, f. 2, op. 3, d. 342, l. 31. 56 RGANI, f. 2, op. 3, d. 380, l. 19. 57 RGANI, f. 2, op. 3, d. 513, l. 62. 58 The foundational text in modern anthropological scholarship on the subject is Caroline Humphrey and Stephen Hugh-Jones (eds), Barter, Exchange, and Value: An Anthropological Approach (Cambridge: Cambridge University Press, 1992). 59 This is an area well developed in political science literature, most notably Terry Lynn Karl, Paradox of Plenty: Oil Booms and Petro-States (Berkeley: University of California Press, 1997). The effects of the shifts in oil regimes as they are monetized and demonetized is brilliantly discussed in Rogers, ‘Petrobarter’. Hints of the political struggle between Kosygin and Brezhnev over the management and political objectives of the growing dollar reserves through the 1970s can be glimpsed in the reminiscences of Kosygin’s former assistant for international affairs Iurii Firsov, ‘Kosygin i ego vremia’, in Aleksei Gvishiani, Fenomen Kosygina: Zapiski Vnuka, Mneniia Sovremennikov (Moscow: Fond kul´tury ‘Ekaterina’, 2004).

10 Nuclear Energy and the Rise of Environmentalism in the United States1 Martin V. Melosi About the time that nuclear-generated electricity became viable in the US in the 1960s, the modern environmental movement was on the rise. One did not offset the other, but their futures were largely intertwined.2 Civilian nuclear power was also a competing technology as a result of the federal government’s passionate interest in nuclear weapons as the Cold War heated up. Yet the signing of the Limited Test Ban Treaty in 1963 and its diplomatic aftermath had positive impacts on the civilian power programme.3 At that moment there was some promise for commercial nuclear power, although all but a very few countries proved inhospitable to it. Promotion of newly constructed reactors and accompanying power plants wriggled through the maze of constraints as the emerging energy source made strides by the late 1960s. The upward trajectory, however, did not last long. From high expectations to utter dejection: the 1960s and 1970s, ultimately, were erratic years for civilian nuclear power. The forces against the burgeoning energy source were much too strong, especially because of economic woes, environmental challenges, accidents

246  Oil Shock and the energy crisis of the early 1970s. The question remains:  which of these forces proved most difficult to overcome? And why, given the shortages of oil in the wake of the 1973 oil shock, did nuclear power fail to emerge as a possible panacea? After a series of fits and starts, the nuclear power industry in the US enjoyed rapid growth by the mid-1960s. It faced tough competition from technologies that had many years’ advantage over it, but some people were optimistic about its chances. Utility executive Philip Sporn called it the ‘great bandwagon market’, with a boom in reactors peaking in 1966–7. In 1966 utilities placed orders for 20 nuclear plants (36 per cent of generating capacity purchased), and in 1967 they bought 31 more (49 per cent of capacity purchased).4 By the end of 1969, 97 nuclear plants had been built, were in operation, or were under construction.5 After a modest slowdown at the end of the decade, the boom picked up again in the early 1970s. By 1974, 37 nuclear plants were producing commercial power or had operating licences, with many more anticipated.6 While economic viability was a high priority for the civilian nuclear programme (along with the worldwide prestige in promoting the peaceful atom), nuclear power in the 1960s and beyond faced its greatest obstacle from unmet environmental challenges. Being able to produce electricity safely entailed layers of concerns that had been modestly addressed, rationalized away or given low priority. These included everything from plant siting to reactor performance, from thermal pollution to a core meltdown, from public health to energy consumption. For years, the government underplayed radiation and fallout (or hid it from the public) in nuclear weapons tests, and defended the building of reactors. In both cases, advocates viewed the promise of the new technology as outweighing the potential risks. In the 1960s, the major financial challenge to nuclear power was the capital costs of building plants. But the biggest environmental debate focused on reactor safety. For nuclear power generation, however, accidents could occur anywhere along the fuel cycle from uranium mining to waste disposal.

Nuclear Energy and Environmentalism in the US 247 More than other parts of the fuel cycle, reactor safety was a central problem related to licensing, siting, performance, and the potential for mishaps and even disasters. Pro-nuclear forces were aware of the dangers of radioactivity, but they were confident that reactors were (or could be) built in such a way as to avert or at least significantly reduce risk as much as possible. Opponents eventually collected their own statistics to refute the claims of the other side, and they pointed to accidents past and present to demonstrate the unpredictability of reactor performance and the potential long-term dangers of radiation. The adversaries waged the battle on several fronts. The established nuclear community faced an array of upstarts from the burgeoning environmental movement, grassroots activists and ‘Not in My Backyard’ (NIMBY) groups who may not have been opposed to nuclear power per se, but wanted nuclear reactors away from their neighbourhoods. And the pro-nukes hoped to fend off, as much as possible, new government regulations or active citizen participation in decision making. The Atomic Energy Commission (AEC), enmeshed in its dual role as promoter and regulator, sometimes found itself between the industry and the opposing forces as it attempted to develop siting guidelines, safety standards and other regulations.7 Critics of nuclear power raised questions about health and safety as early as Hiroshima, but such trepidation in no way upstaged or restrained the momentum of nuclear technology. When commercial nuclear power was introduced in the 1950s, polls suggested that there was widespread support for it.8 Even fallout, which brought the dangers of radiation home to America, was disassociated from commercial nuclear power as quickly as possible. Reactors are not bombs, proponents would argue, but a means to deliver the blessings of electricity to an energy-hungry society. As the conflict over nuclear power accelerated and points of view polarized, the debate became a ‘dialogue of the deaf ’, a comment attributed to Claude Zangger, Switzerland’s deputy energy director in the early 1970s.9 Beginning in the 1960s and then exploding (so to speak) in the 1970s, nuclear power safety took on greater importance as a public issue. Some nuclear accidents received attention in the late 1950s, no matter how hard

248  Oil Shock governments tried to hide them. The serious nuclear fire at England’s Windscale Pile Number One in 1957 was a good example. Other accidents were not so well documented. According to an exiled Russian scientist, radioactive waste buried in the Ural Mountains blew up in 1958, causing hundreds of deaths. In the US, an experimental reactor exploded at the National Reactor Testing Station in Idaho Falls in 1961. Whatever the event, publicly acknowledged accidents took the safety question out of the realm of the abstract and into the real world, where opponents linked them to flaws associated with nuclear technology.10

The Rise of the Anti-Nuclear Movement The anti-nuclear movement began in the late 1940s in opposition to the bomb, and later it focused on atomic testing. The movement soon became a worldwide phenomenon. Protest against civilian nuclear power arose as early as the late 1950s as an admixture of conflicting scientific expertise, local protests, the concerns of labour unions over worker safety and criticism from environmental organizations. By the early 1960s anti-nuclear protests intensified, particularly in industrial countries like the United States and Great Britain. What came to be known generically as the ‘anti-nuclear movement’ was not a coherent body, but a collection of individuals and groups questioning the use of atomic energy in almost any form. Unravelling the various pieces of anti-nuclear protest is complex and somewhat inexact. The movement, however, is intriguing because scientists and engineers conducted the development of the bomb and much of the work on nuclear power technology behind closed doors. Also, civilian nuclear power is a commercial technology purposely developed and promoted by governments in an essentially undemocratic way.11 The binding issue in the US had to be the fallout scare in the 1950s. Hiroshima and Nagasaki were events ‘over there’, as had been the earliest atomic and hydrogen bomb tests in the Pacific. But fallout threatened the air, the water and even the milk supply in America’s backyard. While

Nuclear Energy and Environmentalism in the US 249 national alarm over fallout subsided in the 1960s, memories of radiation as risky business never totally disappeared. Within the AEC, some scientists questioned the legitimacy of the internal safety programme. Protests from outside the commission were directed at proposed nuclear plant sites, and were a blend of wariness about potential accidents and a desire to see some place other than the protestors’ community absorb the risk.12 With a few exceptions, public protests were limited during the nuclear power boom between 1962 and 1966. During that period local citizen groups challenged only 12 per cent of the licence applications, compared with 32 per cent from 1967 to 1971. Between 1970 and 1972, they challenged 73 per cent of the applications.13 The late 1960s brought another issue for nuclear protesters to rally around  – thermal pollution. This was the effects of waste heat generated by nuclear power plants along rivers, lakes and oceans. In the case of both nuclear and fossil-fuel power plants the steam that drove electricity-producing turbines had to be cooled. In order to condense the steam, cool water was circulated through the system from a nearby source. The process heated the cooling water by 10 to 20 degrees Fahrenheit before it was returned to its place of origin. Greatly heated water was not unique to nuclear power plants, but it was a serious problem because plants used cooling water less efficiently than fossil-fuel facilities did. Biologists and ecologists discovered that the major impact of thermal pollution was on aquatic life. The heat killed fish and caused some plants to flourish, to the point of changing the biological balance of a river or stream. Cooling ponds or cooling towers eased many of the problems that thermal pollution caused, but utilities were reluctant to add them because of the cost.14

The Modern Environmental Movement The rise of the modern environmental movement made a difference in challenging nuclear power beyond local site protests. The big question was whether nuclear power should, under any circumstances, be part of

250  Oil Shock the nation’s energy mix. While the modern environmental movement emerged after World War II, not until the late 1960s did environmentalists have the tools to take on supporters of nuclear power. At the heart of modern environmentalism was the emergence of the ‘new ecology’. The basic concept revolved around ‘the relationship between the environment and living organisms’, particularly the reciprocal relationship between the two.15 By the 1960s, ecology changed from a scientific concept to a popular one, questioning traditional notions of progress and economic growth.16 Rachel Carson’s Silent Spring, published in 1962, was a grim warning of the dangers of pesticides, and seemed to best capture the new spirit. Career ecologists were beginning to make it clear that ‘respect for the biosphere, like respect for justice, must continuously have a place in law and government’.17 Ecology was helpful in guiding reformers from the utilitarian conservationism of the past to an era emphasizing environmental quality and personal health and well-being. Although environmental groups had yet to identify a common agenda, the tone and spirit of environmentalism were changing. Quality-of-life issues, pollution control, critique of consumerism, growing interest in the preservation of natural places, and distrust of nuclear power indicated a giant step away from ‘wise use’ of resources and a challenge to traditional faith in economic growth and progress.18 The onset of the 1970s witnessed the most dramatic rise in the modern environmental movement. Major victories like the Wilderness Act in 1964 and several new pieces of environmentally friendly legislation during the Lyndon Johnson administraton helped to set the stage. Also significant were the efforts of preservationist groups such as the Sierra Club (1892) and the National Audubon Society (1905), and newer organizations such as the Conservation Foundation (1948), Resources for the Future (1952) and the Environmental Defense Fund (1967).19 Legislation alone did not guarantee improved environmental conditions. What connected the older movement before World War II with the new one was the faith in using science and technology to solve problems. This was rather schizophrenic, since some reformers had blamed

Nuclear Energy and Environmentalism in the US 251 science and technology for the excesses of the new consumer culture, while at the same time government and other leaders sought the advice of scientists and technical experts to help eradicate pollution and improve quality of life. Nuclear power fell into this category of environmental schizophrenia: that is, criticism of the technology and promotion of science and techology to help solve its problems. For a number of political activists, however, no technological fix could correct the potential harm of a nuclear accident, and they could settle for nothing less than its abandonment. While Earth Day on 22 April 1970 – ‘the largest, cleanest, most peaceful demonstration in America’s history’20 – was good publicity for environmentalism, the tool that changed the anti-nuclear movement in the US from simple public outrage to formidable opposition was the National Environmental Policy Act in 1969 (NEPA).21 NEPA, emerging in the wake of the Santa Barbara oil spill, was not simply a restatement of the need for resource management, but emphasized the application of science and technology in the decision making process and in the search for environmental solutions. The provision mandating action required federal agencies to prepare Environmental Impact Statements (EISs) assessing the environmental effects of proposed projects and legislation. These were to be made public. NEPA provided substantial opportunity for citizen participation, especially through access to information in agency files. While NEPA could be manipulated, it increased accountability for environmental actions. In June 1970, government officials announced that pollution-control programmes and the evaluation of impact statements would be the responsibility of a new body, the Environmental Protection Agency (EPA).22 It was NEPA, and especially the ability to utilize EISs, that gave the anti-nuclear forces leverage. In many respects, the anti-nuclear movement was a precedent-setter for the modern environmental movement as a whole. The anti-nukes of the 1960s and 1970s had their own precursors, including liberal and internationalist scientists who questioned the use of the atomic bomb and/or did not want it under military control;

252  Oil Shock ban-the-bomb groups and pacifists like philosopher Bertrand Russell; and expert critics of the fallout and radiation resulting from nuclear weapons tests, such as chemist Linus Pauling and geneticist Herman Muller. In the 1970s, anti-nuclear groups may have been the first to use non-violent protest in activist politics, and the protests may have been among the largest of the era.23 As protests grew more intense during the 1970s, environmentalists scored some important victories for the anti-nuclear cause. Pro-nuclear groups countered the growing tide of criticism. They strongly asserted that by obstructing the development of nuclear power, opponents were undermining an alternative to expensive foreign oil, and ignoring a clean source of energy that was ‘smog free’.24 The impact of the environmental movement, nevertheless, was felt in the changing role of the AEC and governmental participation in nuclear power development. The commission was vulnerable to the charges of nuclear detractors that it could not be promoter and watchdog at the same time. Limited operating experience on which to base judgments at the very least challenged the regulatory staff.25 Critics also assailed the AEC for not providing sufficient public input into policy decisions and limiting disclosure of information about nuclear power. The dynamic growth of the industry and the emergence of new technologies were probably placing more pressure on the AEC at the time than its critics. It could not keep up with licensing requests, which compounded the need to examine and possibly to rethink the slew of regulatory issues.26

Nuclear Power in the Early 1970s The early 1970s was a contradictory time for nuclear power. The market appeared strong for new and future reactor orders. But the AEC was suffering through a period of heightened criticism as licensing and siting issues ran up against local resistance and environmental challenges. Somewhat contrarily, signs of an energy shortfall in 1969 and 1970 (natural gas and heating oil shortages in the winter and chronic ‘brownouts’

Nuclear Energy and Environmentalism in the US 253 along the electrical grid in the summer) led President Richard Nixon to advocate strongly for the AEC’s breeder reactor programme.27 In his 4 June 1971 ‘Special message to the Congress on energy resources’ he spoke about a rising energy problem and the need to modernize and expand the nation’s uranium enrichment programme, and called for a successful liquid metal breeder reactor by 1980. He stated: Our best hope today for meeting the Nation’s growing demand for economical clean energy lies with the fast breeder reactor. Because of its highly efficient use of nuclear fuel, the breeder reactor could extend the life of our natural uranium fuel supply from decades to centuries, with far less impact on the environment than the power plants which are operating today.28

In January 1973, President Nixon appointed Dr Dixy Lee Ray to head the AEC. A marine biologist from Washington state, she faced the daunting task of reviewing the government’s energy bureaucracy along the lines that the President had outlined in his 1971 speech. In April 1973, Nixon issued his second energy message, which was a strong plea to step up production through natural gas decontrol, leasing of the outer continental shelf, pushing ahead with the Alaska pipeline, a new oil import programme and easing environmental standards. In November, the president announced ‘Project Independence’, a plan for the United States to meet its own energy needs. On 1 December, Ray submitted a report to Congress calling for substantial expansion in energy research and development funding. Energy self-sufficiency was the goal, and nuclear power was a big part of the mix.29

The ‘Energy Crisis’: A Nuclear Opportunity? By this time, a worldwide convulsion which came to be known as the ‘energy crisis’ was underway. The energy reorganization goals of Nixon and Ray were complicated by this most recent impasse. They were stymied

254  Oil Shock as well by intense political debates over controlling inflation at home (as oil prices rose internationally), and as the Nixon administration itself imploded because of the Watergate scandal. Needless to say, framing a coherent energy policy became almost impossible. Furthermore, while the energy crisis seemed to have little to do with nuclear power, it simultaneously raised new hopes about future opportunities, but also aroused further suspicion.30 For nuclear power, the energy crisis first appeared to offer utility companies a real alternative to constricted oil markets and high fuel costs. Few options other than fossil fuels existed at the time, and a substantial energy conservation programme was not politically viable in the US. AEC’s promotional support for nuclear power, even as the bandwagon years were waining, added to a belief among advocates that nuclear power was the answer to immediate oil shock.31 Yet there were substantial constraints which made it harder for nuclear power to take advantage of the shortages. Rising fuel prices encouraged coalitions of anti-nuclear groups, consumer activists and large industrial users of electricity to oppose demands for rate increases. In some states, public utility commissions prohibited utilities from passing on the costs of construction work underway to ratepayers, which particularly hurt nuclear plant projects. Compared to an earlier period, states approved few rate increases for utilities in the 1970s at the point when nuclear power was attempting to fill the gap in current American energy needs. Not only did the energy crisis drive up oil prices for other fuels as well, but it also aggravated the existing problem of inflation, which made money much more expensive to borrow. An economic slump, accompanied by increased unemployment, cut deeply into demand for electricity. Future projections for opportunity in the nuclear power field were dashed as capital costs rose, plans to build new plants were postponed or cancelled and more than 100 ongoing projects were deferred. Between 1975 and 1978, utilities in the US ordered only 11 new nuclear facilities. In essence, the immediate reason for the nuclear power industry’s decline

Nuclear Energy and Environmentalism in the US 255 was an energy crisis that appeared at first to promise a rebound in fortunes, but did not. The wheels on the bandwagon had fallen off.32 If the economic news of the energy crisis had not been bad enough for the nuclear power industry, critics questioned its credibility on several fronts. Pro-nuclear elements were losing control of defining nuclear power issues, and their expert authority was being challenged. Anti-nukes dogged the AEC and the nuclear industry itself by using any delaying tactics possible, through demands for better environmental assessments and through calls for greater accountability and regulatory rigour.33 On another level, the debate over nuclear power during the 1970s was an encounter between advocates of large, centralized systems and those suspicious of high technology and uncontrolled economic growth. The controversy over centralized power was rife with broad societal, political, environmental and institutional import. Advocates proposed larger and more numerous nuclear power plants not only as a hedge against rising oil prices and OPEC control, but also as a way to divert petroleum use from stationary power production to other essential needs like transportation. The technology of light-water reactors, they claimed, had already proven itself. And, turning the environmental debate on its head, they argued that fossil fuels were a much greater pollution risk than nuclear power.34

In Opposition and in Defence of Nuclear Power in the Mid-1970s Opponents were suspicious of centralized power production as represented by large, powerful utilities (including those that employed nuclear systems). Embedded in the anti-growth sentiments of the time was the ‘Small is Beautiful’ mantra of the counterculture. In this context, centralized power production kept energy development in the hands of government and big business, and left consumers vulnerable to their whims. A  move towards decentralized (and passive) systems, especially solar and wind energy, would not only reduce the need for nuclear power, but

256  Oil Shock also weaken the trend towards corporate control of society.35 The work of physicist and Friends of the Earth activist Amory Lovins was particularly popular. In a 1976 article in Foreign Affairs, he focused the anti-growth debate on energy issues, drawing a distinction between ‘soft’ and ‘hard’ energy paths. Soft paths were ‘low-energy, fission-free, decentralized, less electrified’, while hard paths were ‘high-energy, nuclear, centralized, electric’. Lovins was more concerned with the society that used the energy than the source itself, but had grave concerns about a ‘plutonium economy’ that failed to take into account questions of unlimited growth and uncontrolled energy use. In this instance, nuclear power was more than risky technology: it was a symbol of capitalist centralization and bloated consumption.36 The defence of nuclear power took another decided blow in 1974 with the release of the Rasmussen Report. AEC chairman James Schlesinger tried to meet the criticism concerning reactor safety by initiating a new study between 1971 and 1973, with at least the appearance of independence during his tenure. He selected MIT nuclear engineer Dr Norman C.  Rasmussen to direct the work. While not on the AEC payroll, Rasmussen had links to the nuclear industry – almost unavoidable in this field. He had substantial expertise in civilian nuclear power, but little specialized training in reactor safety. The taskforce he headed included about 60 scientists and engineers, and the nine-volume study took two years to complete. Rasmussen was under pressure to produce the report as quickly as possible, indicating the extent to which the AEC wanted to use the results to defend its safety position. The AEC published the final version in 1975. The Reactor Safety Study (WASH-1400) concluded that the risks from nuclear reactors were very small (1 in 5 billion).37 The most vivid, and most quotable, claim was that the chance of one person dying from a nuclear accident was about the same as that of being struck by a meteor.38 The AEC and industry officials broadcast the report’s findings widely and received favourable press attention. But criticism began almost immediately, challenging every aspect of the study from its methodology to its estimates. Critics claimed that the report was too theoretical, did not

Nuclear Energy and Environmentalism in the US 257 account sufficiently for human error and did not look beyond reactor safety per se. In 1979, the Nuclear Regulatory Commission (which had replaced some parts of the AEC) qualified its earlier endorsement of the executive summary of the report.39 Through the mid-1970s at least, nuclear advocates regarded the rather hopeful conclusions of the Rasmussen Report (and the lack of any catastrophic accidents) as confirmation that criticism of the safety programme was alarmist. By taking a defensive position on safety, the nuclear power industry made its credibility vulnerable to any highly publicized accidents to come, which proved to be not very far into the future. The core meltdown at Three Mile Island in Pennsylvania in 1979 pulled the rug out from under the pro-nukes in a serious way. Although the accident was not as disastrous as some feared, it nevertheless ended future nuclear plant production for years to come.40

Conclusion The clash over reactor safety and related issues in the 1970s pitted the government advocates and the nuclear power industry against a loosely organized but increasingly committed anti-nuclear movement. Yet the polar positions do not give an accurate read on the state of nuclear power, at least in the US. While showing declining support, polls indicated no clear majority for one side over the other, and suggest instead some ambivalence in thinking about the revolutionary power source. Even Three Mile Island itself did not lead to outright rejection. By the time of the oil shock in 1973, the ‘great bandwagon market’ of the 1960s seemed to be recovering from the economic woes and environmental challenges near the end of that decade. The energy crisis itself did not stimulate the fortunes of nuclear power but, to the contrary, was an important factor in undermining its recovery. Oil scarcity alone was not enough to boost the fortunes of the promising alternative energy source. The burdensome capital costs of nuclear power, the constant assaults and delaying tactics of opponents, the debate over centralized energy sources and finally the

258  Oil Shock disaster at Three Mile Island coalesced to blunt nuclear power’s future in the US. The oil shock indeed helped to create a nuclear power shock that has yet to lead to anything approaching full recovery. Current debates over nuclear power as a panacea for carbon emissions in the climate change controversy, and the political battles over energy independence, have brought nuclear power once again into the limelight. Will there be a new future for the divisive energy source? Time will tell.

Notes 1 A substantial portion of this chapter’s content was synthesized from Martin V. Melosi, Atomic Age America (Boston: Pearson, 2013). 2 J. Samuel Walker, Containing the Atom:  Nuclear Regulation in a Changing Environment, 1963–1971 (Berkeley: University of California, 1992), p. 18. 3 Alice L. Buck, A History of the Atomic Energy Commission (Washington, DC: US Department of Energy, 1982), p. 5. 4 J. Samuel Walker, Permissable Dose: A History of Radiation Protection in the Twentieth Century (Berkeley: University of California Press, 2000), p. 30. 5 Walker, Containing the Atom, pp. 21–2. 6 Martin V. Melosi, Coping with Abundance:  Energy and Environment in Industrial America (New York: Alfred A. Knopf, 1985), pp. 233–4; James M. Jasper, Nuclear Politics:  Energy and the State in the United States, Sweden, and France (Princeton, NJ:  Princeton University Press, 1990), pp. 47–8; J. Samuel Walker, Three Mile Island: A Nuclear Crisis in Historical Perspective (Berkeley:  University of California Press, 2004), pp. 6–7; Steven L. Del Sesto, Science, Politics, and Controversy: Civilian Nuclear Power in the United States, 1946–1974 (Boulder, CO: Westview Press, 1979), pp. 79–80; Walker, Containing the Atom, pp. 18–19 and 21–2. 7 Robert J. Duffy, Nuclear Politics in America:  A History and Theory of Government Regulation (Lawrence: University Press of Kansas, 1997), p. 49; Walker, Three Mile Island, pp. 10–11. 8 Thomas R. Wellock, Preserving the Nation:  The Conservation and Environ­ mental Movements, 1870–2000 (Wheeling, WV:  Harlan Davidson, Inc., 2007), p. 199; Walker, Three Mile Island, pp. 3–4. 9 Quoted in Duffy, Nuclear Politics in America, p. 79. 10 Melosi, Coping with Abundance, p.  237. See also William McKeown, Idaho Falls:  The Untold Story of America’s First Nuclear Accident (Toronto:  ECW Press, 2003). 11 Christian Joppke, Mobilizing Against Nuclear Energy:  A Comparison of Germany and the United States (Berkeley:  University of California Press, 1993), pp. 21–31; Robert Gottlieb, Forcing the Spring:  The Transformation

Nuclear Energy and Environmentalism in the US 259 of the American Environmental Movement, rev. ed. (Washington, DC: Island Press, 2005), p. 135; Del Sesto, Science, Politics, and Controversy, pp. 144–6. 12 Stephen E. Atkins (ed.), Historical Encyclopedia of Atomic Energy (Westport, CT: Greenwood Press), p. 17. 13 Joppke, Mobilizing Against Nuclear Energy, p. 31. 14 Walker, Containing the Atom, pp. 267–73. 15 Clifford B. Knight, Basic Concepts of Ecology (New York: Macmillan, 1965), p. 2. 16 Donald Worster, Nature’s Economy: A History of Ecological Ideas (New York: Cambridge University Press, 1977), pp. 289, 339–40 and 378. 17 Victor B. Scheffer, The Shaping of Environmentalism in America (Seattle: University of Washington Press, 1991), p.  4; Rachel Carson, Silent Spring (Boston, MA: Houghton Mifflin, 1962). 18 Carolyn Merchant, The Columbia Guide to American Environmental History (New  York:  Columbia University Press, 2002), pp. 177–9; Samuel P. and Barbara D. Hays, Beauty, Health, and Permanence:  Environmental Politics in the United States, 1955–1985 (Cambridge:  Cambridge University Press, 1987), pp. 13–14 and 21–39; Stephen R. Fox, The American Conservation Movement:  John Muir and His Legacy (Madison:  University of Wisconsin Press, 1981), pp. 299, 302 and 311; Hal K. Rothman, The Greening of America? Environmentalism in the United States Since 1945 (New York: Harcourt Brace, 1998), pp. xi and 29–31; Wellock, Preserving the Nation, pp. 135–88; Gottlieb, Forcing the Spring, pp. 34–6. 19 Scheffer, The Shaping of Environmentalism in America, p. 113; Martin V. Melosi, ‘Lyndon Johnson and environmental policy’, in Robert A. Divine (ed.), The Johnson Years, Vol. 2. (Lawrence: University Press of Kansas, 1987), pp. 113–49; Michael Egan, Barry Commoner and the Science of Survival: The Remaking of American Environmentalism (Cambridge, MA: MIT Press, 2007), pp. 1–3. 20 Quoted in Melosi, Coping with Abundance, p. 297. See also Adam Rome, The Genius of Earth Day (New York: Hill and Wang, 2013). 21 Melosi, Coping with Abundance, p. 297. 22 Martin V. Melosi, The Sanitary City:  Urban Infrastructure in America from Colonial Times to the Present (Baltimore, MD:  Johns Hopkins University Press, 2000), pp. 363–4. 23 Jerome Price, The Anti-Nuclear Movement, rev. ed. (Boston:  Twayne Publishers, 1990), pp. 2–6; Wellock, Preserving the Nation, pp.  190–1 and 197; Rothman, The Greening of America?, p. 143; Gottlieb, Forcing the Spring, p. 235; Joppke, Mobilizing Against Nuclear Energy, pp. 30–1. 24 Joppke, Mobilizing Against Nuclear Energy, p. 33. 25 Correspondence from Samuel Walker to Martin Melosi, 4 February 2011. 26 Melosi, Coping with Abundance, p. 305. 27 A breeder reactor produces as well as consumes fissionable material. 28 Richard Nixon, ‘Special message to the Congress on energy resources’, 4 June 1971, The American Presidency Project, available at http://www.presidency. ucsb.edu/ws/?pid=3038#axzz1p1jjuXHD.

260  Oil Shock 29 Jack M. Holl, Roger M. Anders and Alice L. Buck, United States Civilian Nuclear Power Policy, 1954–1984: A Summary History (Washington, DC: US Department of Energy, February 1986), pp. 15 and 17–18; Jasper, Nuclear Politics, pp. 16–17; Buck, A History of the Atomic Energy Commission, pp. 7–8; Walker, Three Mile Island, p. 7; David Howard Davis, Energy Politics, 3rd ed. (New York: St Martin’s Press, 1982), pp. 229–30. 30 Melosi, Coping with Abundance, pp. 282–4. 31 Ibid., p. 282; Del Sesto, Science, Politics, and Controversy, p. 103. 32 Walker, Three Mile Island, pp.  7–8; Duffy, Nuclear Politics in America, pp. 69–71 and 79. 33 Duffy, Nuclear Politics in America, pp.  71–5 and 77; Brian Balogh, Chain Reaction:  Expert Debate and Public Participation in American Commercial Nuclear Power, 1945–1975 (Cambridge: Cambridge University Press, 1991), pp. 306–7. 34 Melosi, Coping with Abundance, pp. 314–16. 35 Ibid. See also E.F. Schumacher, Small is Beautiful:  Economics as if People Mattered (London: Blond & Briggs, 1973). 36 Quotes in Amory B. Lovins, Soft Energy Paths:  Toward A  Durable Peace (Cambridge: Harper Colophon Books, 1977), pp. 3ff. See also Melosi, Coping with Abundance, pp. 316–19; John Opie, Nature’s Nation: An Environmental History of the United States (New  York:  Harcourt Brace, 1998), pp.  472–4; Walker, Three Mile Island, pp. 15–20. 37 ‘Excerpts from the Reactor Safety Study (WASH-1400) (commonly known as the Rasmussen Report) published by the US Nuclear Regulatory Commission 1974’, available at http://www.ccnr.org/rasmussen.html#2.11. 38 Melosi, Coping with Abundance, pp. 306–7. 39 Joseph G. Morone and Edward J. Woodhouse, The Demise of Nuclear Energy? Lessons for Democratic Control of Technology (New Haven, CT: Yale University Press, 1989), pp. 91–2; Davis, Energy Politics, p. 219; Atkins (ed.), Historical Encyclopedia of Atomic Energy, pp.  306–7; correspondence from Samuel Walker to Martin Melosi, 4 February 2011. 40 The best book on the subject is Walker, Three Mile Island.

Further Reading Aissaoui, Ali, Algeria:  The Political Economy of Oil and Gas (Oxford:  Oxford University Press, 2001). Auzanneau, Matthieu, Or noir:  La grande histoire du pétrole (Paris, La Découverte, 2015). Basosi, Duccio, Finanza & Petrolio: Gli Stati Uniti, l’oro nero e l’economia politica internazionale (Milano: Studio LT2, 2012). Ferguson, Niall, Charles S. Maier, Erez Manela and Daniel J. Sargent (eds), The Shock of the Global: The 1970s in Perspective (Cambridge: Harvard University Press, 2010). Gilman, Nils, ‘The New International Economic Order: A Reintroduction’, special issue of Humanity 1 (2015), http://humanityjournal.org/issue6-1/the-newinternational-economic-order-a-reintroduction/. Graf, Rüdiger, ‘Making Use of the “Oil Weapon”:  Western Industrialized Countries and Arab Petropolitics in 1973–1974’, Diplomatic History 1 (2012), pp. 185–208. Graf, Rüdiger and Franz Boesch (eds), ‘The Energy Crises of the 1970s: Anticipations and Reactions in the Industrialized World’, special issue of Historical Social Research 4 (2014). Gurney, Judith, Libya: The Political Economy of Oil (Oxford: Oxford University Press, 1996). Hamilton, Keith and Patrick Salmon (eds), The Year of Europe: America, Europe and the Energy Crisis, 1972–1974 (London: Routledge, 2006). Kapstein, Ethan, The Insecure Alliance: Energy Crises and Western Politics Since 1944 (Oxford: Oxford University Press, 1990). Lifset, Robert (ed.), American Energy Policy in the 1970s (Norman: University of Oklahoma Press, 2014). Lowi, Miriam R., Oil Wealth and the Poverty of Politics:  Algeria Compared (Cambridge: Cambridge University Press, 2009). Möckli, Daniel, ‘The EC-Nine and Transatlantic Conflict during the October War and the Oil Crisis, 1973–4’, in Daniel Möckli and Victor Mauer (eds), European-American Relations and the Middle East:  From Suez to Iraq (London: Routledge, 2010), pp. 77–92.

262  Further Reading Mommer, Bernard, Global Oil and the Nation State (Oxford: Oxford University Press, 2002). Parra, Francisco, Oil Politics: A Modern History of Petroleum (London: I.B.Tauris, 2009). Petrini, Francesco, Imperi del profitto: Multinazionali petrolifere e governi nel XX secolo (Roma: FrancoAngeli, 2016). Sargent, Daniel J., A Superpower Transformed: The Remaking of American Foreign Relations in the 1970s (Oxford: Oxford University Press, 2015). Schneider, Steven A., The Oil Price Revolution (Baltimore:  Johns Hopkins University Press, 1983). Schulz, Matthias and Thomas A.  Schwartz (eds), The Strained Alliance: US– European Relations from Nixon to Carter (Cambridge: Cambridge University Press, 2010). Siniver, Asaf, The October 1973 War: Politics, Diplomacy, Legacy (London: Hurst & Company, 2013). Skeet, Ian, OPEC: Twenty-five Years of Prices and Politics (Cambridge: Cambridge University Press, 1988). Vandewalle, Dirk, Libya Since Independence:  Oil and State-Building (London: I.B.Tauris, 1998). Venn, Fiona, The Oil Crisis (London: Pearson Education Limited, 2002). Vernon, Raymond, Oil Crisis (New York: W.W.Norton and Company, 1976). Victor, David G., Amy M.  Jaffe and Mark H.  Hayes (eds), Natural Gas and Geopolitics: From 1970 to 2040 (Cambridge:  Cambridge University Press, 2006). Yergin, Daniel, The Prize: The Epic Quest for Oil, Money & Power (New York: Free Press, 1991).

Index Ackerman, Diane 202 Adelman, Morris 22–6, 91–3 Adenauer, Konrad, see Federal Republic of Germany and Soviet Union’s trade relations Agnew, Spiro 123 Akins, James 45, 97, 103, 152–3 Algeria 37, 44, 46, 48, 49, 54, 80 Allon, Yigov 36 Amouzegar, Jamshid 49, 102 Aref, Abdul Rahman 88

Charbonnel, Jean 156, 157 Cheney, Dick 207 Choufour, J.H. 150 Claes, Willy 157 Connally, John 55 Cunha, Carlos 130

Baibakov, Nikolai 239 Barran, David 96, 108, 145 al-Bazzaz, Sayyid Abdelrahman 53 Benard, André 149 big international oil companies (IOCS) 19, 26–33 Boardman, Thomas 155 Bombassei, Giorgio 157 Bradley, Paul G. 23 Brazil 128, see oil companies: National Oil Companies: Petrobras Brezhnev, Leonid 222, 238–9 Burin des Roziers, Etienne 159 Bush, George H.W. 42 Bush, George W. 207

Egypt 36, 38, 43, 44, 68, 79, 175, 176, 190, 225–6 Ehrlich, Paul 205 Elslande, Renaat van 154 Erhard, Ludwig 234, 236 European Community 38, 143, 146–7, 154, 155, 160

Cameron, Henry 131 Carrerro Blanco, Luis 42 Carson, Rachel 250 Carstens, Karl 235 Carter, James E. 128, 187, 207

Davidson, Paul 17–18 de Gaulle, Charles, see France: Franco-Iraqi relations Douglas-Home, Alec 96, 97

Faisal, Ibn Abdulaziz Al Saud 37–50, 102 Fallaci, Oriana 44–5 Federal Republic of Germany FRG and Soviet Union’s trade relations 224, 227–30, 234–8 OECD Oil Commitee 147, 151, 153, 155 oil shock 55, 97, 99, 104, 159, 162 petrodollars recycling 173, 175–92 see also 5, 163 Ferri, Mauro 157

264  Index Fiege, Mark 119 Flanigan, Peter 97 Ford, Gerald 42, 128, 186 France Euro-Arab dialogue 177, 179–80 Franco-Iraqi relations 64, 78 French and Saudi agreement (1973) 159 French and Saudi relations 159 Iraq national oil company and Entreprise de recherche pétrolière agreement (1967) 78 OECD Oil Committee 147, 152, 156–8, 163 oil shock 38, 45, 97, 100 petrodollars recycling 180–1, 183–4, 187, 190 Franco, Francisco 42 Fry, Thomas 74 Gaddafi, Muammar 50 Geisel, Ernest 128 Haferkamp, Wilhelm 154 Hakes, Jay 118 Hammer, Armand 96, 101 Heath, Edward (Ted) 43, 100, 160 International Energy Agency (IEA) 26, 143 International Industry Advisory Board (IIAB) 148–53, 161–2 Iran 50/50s 20 embargo 32, 147 ENI and the battle of the oligopoly 231 Iranian revolution 126, 191

petrodollars recycling 174, 181–91 see also 44–51, 70–9, 93, 99–102, 106 Iraq Baghdad Pact 68 Iraqi revolution 64, 69, 71 Iraqi–Libya relations 163 nationalization 63–84 see also 44, 46, 48, 50, 53–4, 93, 99, 102, 104 Irwin, John 39, 47–8, 51, 54, 102, 144, 154–8 Israel Iraq nationalization 76–7 Yom Kippur War 36–44, 89, 117–19, 121–2 see also 68, 89, 160 Italy Italy and Soviet Union relations 231–7 OECD Oil Commitee 147, 153 oil shock 182–7 see also 98, 182–7, 226 Jobert, Michel 45 Johnson, Lyndon 47, 250 Jundt, Thomas 201 Kassem, Abdel Karim 69, 73, 74, 83 Keynes, John Maynard 224–5 Kissinger, Henry 37–55, 109, 121, 143–4, 159–60 Kosygin, Aleksey 84 Kumykin, Pavel N. 227, 229 Kuwait 37, 50, 51, 67, 73–5, 93, 100, 156, 163, 175, 182, 188, 190 LeMenager, Stephanie 209 Lenin (Vladimir Ilyich Ulyanov) 222, 239 Levy, Walter 38, 109, 154–5

Index 265 Libya Libya revolution 94–107 OECD Oil Committee and Libya relations 150–2, 156, 162–3 see also 37–9, 44, 46–51, 54, 73, 80, 89, 90, 92 Lipkowski, Jean de 157 Lord, Winston 40–2 Lovins, Amory 256 Lucas, George 199 al-Mabruk, Izz-al Din 46, 95 MacArthur II, Douglas 102 Maghribi, Mohammed 46 Marx, Karl 14 Mattarella, Bernardo 233 Mattei, Enrico, see Italy and Soviet Union relations Maugeri, Leonardo 92 McCloy, John J. 96, 100 McNeil, John 203 Men’shikov, Mikhail 225 Mitchell, Timothy 205 Mossadegh 43, 73 Nasser, Gamel Abdel 36, 43 Nigeria 80, 130, 174 Nixon, Richard 36–7, 41–4, 47–8, 55–6, 102, 117–18, 121, 123, 127–8, 145, 155, 160, 253–4 non-OPEC 120, 122, 124, 135 Nye, David 203 oil companies concessions Aramco 27, 66–73, 121 Bahrein Petroleum Company (BAPCO) 67 Basrah Petroleum Company (BPC) 69, 72, 77

Iranian Consortium 66–98, 100 Iraqi Petroleum Company (IPC)/Iraq Company for Oil Operations (ICOO) 63–84 Kuwait Oil Company 67 Mosul Petroleum Company (MPC) 68 Near East Development Corporation (NEDC) 63, 67, 70, 71, 74 Yemen Development Corporation 67 International Oil Companies (IOCs) Anglo Iranian Oil Company (AIOC) 71, 73 British Petroleum/AngloPersian Oil Company 26, 49, 63, 67–77, 94–105, 122–4, 149–51 Chevron 29 Compagnie Française des Pétroles (CFP)–Total 63, 67, 76–8, 148 Conoco, see Venezuala: BITS Ente Nazionale Idrocarburi (ENI) 29, 79, 148, 231, 237 ExxonMobil, see Venezuala: BITS Exxon/Standard Oil of New Jersey 40, 49, 55, 95–101, 120, 123, 163, 232 German Deminex 148 Gulf Oil 63, 117, 122 Nelson Bunker Hunt 84, 95, 99 Occidental 95, 96 Phillips Petroleum 123–4 Royal Dutch Shell, see Shell Shell 26, 29, 63, 72, 93, 97, 98, 100, 107, 127, 129, 133, 145, 149, 150

266  Index oil companies (cont.) Standard Oil of New York, see Exxon Standard Oil, see Exxon National Oil Companies (NOCs) China national petroleum corporation (CNPC) 30 Iraq national oil company (INOC) 74–84 Partex 64 Petrobras 128, 129, 130 Petroleos Mexicanos (PEMEX) 126 Seven Sisters 90, 96–7 Statoil 29 International Oil Companies (IOCs) 19, 26–33 oil rents American reference 18–21 British reference 24, 27–31 Ricardian rents, see Ricardo Organization for Economic Cooperation and Development (OECD)/ OEEC 105, 142–62, 226 Organization of the Arab Petroleum Exporting Countries (OAPEC) 24 embargo 37, 38, 40–1, 45, 117, 119, 121, 123, 127, 178, 200, 204, 206 Organization of the Petroleum Exporting Countries (OPEC) Arab members 117, 206 core 19, 22–8, 30–3, 37–8, 73, 120, 122, 145, 154, 159, 163 environmentalism 200, 206, 255 oil shock 89, 91, 93, 98–106, 118, 122, 126, 128, 134, 174 petrodollars recycling 181, 184, 187

Parra, Francisco 52–4 Patolichev, Nikolai 233 Pauling, Linus 252 Penrose, Edith 92 Piercy, George 49, 101, 102, 104, 108 posted prices Teheran and Tripoli Agreements 38, 46–52, 91–107 see also 71–2, 90, 93, 99, 100, 101, 104, 145 Pratt, Joseph 120 Qasem, Anes 51 Ray, Dixy Lee 253 Reagan, Ronald 125, 240 Reinhardt, Frederick 232 Ricardo, David 14–18, 21–30 Rifai, Rashid 82 Roberts, Paul 214 Roger, Doug 223 Rome, Adam 204 Ross, Michael 200–6 Rostow, Eugene 154 Russel, Bertrand 252 Sabin, Paul 119, 205 Sadat, Anwar 36, 41–4 Said, Nouri 69 Sarkis, Nicolas 46, 54 Saudi Arabia embargo 37–51, 54–5 oil shock 93, 95, 99–108 petrodollars recycling 174–6, 181–2, 184, 189–90 see also 24, 27, 67, 70–1, 73–5, 121, 126, 151, 153, 156,159 Schlesinger, James 41, 146, 256 Schmidt, Helmut 159 Schneider, Steven 118 Schuler, Henry 90, 99–105, 107

Index 267 Shah of Iran, Mohammed Reza Pazlavi 44–8, 98–108 Sherrill, Robert 120–1 Simon, Julian 205 Sisco, Joseph 37, 40 Skachkov, Semyon 80 Skeet, Ian 98, 107 Smith, Adam 14–15, 27 Soviet Union energy and economic integration 222–40 Iraqi revolution 64 Soviet–Iraqi relations 68, 80–3 Soviet Union–Federal Republic of Germany agreement (1958) 227 Spaak, Fernand 162 Spain, Stephen 159 Spaulding, Robert 228–9 Spriggs, Dillard 94, 108 Stalin, Josef 222 Steel, David 105 Stockwell, Geoffrey 74 Stork, Joe 91–3 Suez crisis 36, 92, 122, 142, 147, 148 Tanzer, Michael 66 Tariki, Abdullah 46 Thatcher, Margareth 125 Trevelyan, Humphrey 71 United Kingdom anti-nuclear movement 248 anti-Opec mandate/IEA 26–8 Arab oil diplomacy 38 BP 96–7, 100, 124 consumer countries cooperation 151, 155, 159–60, 162–4 Copenhagen summit 179 Libyan nationalization 151–2, 163 OECD Oil Commitee 147

oil policy in Iraq 63–4, 70 oil shock (1973) 43 petrodollar recycling 182–91 URSS energy and economic integration 230 United States environmentalism 199–218, 247–8, 251, 253–4 Kissinger’s diplomacy 39–45, 47, 52, 54–5, 186 OAPEC’s oil embargo 24, 36–8, 117 OECD Oil Commitee 142–55, 159–65 oil Cold War 64–71, 75–6 oil industry 17–21, 24, 27, 29, 32–3 oil shock 119, 120, 122–6 petrodollars recycling 173–4 US and Soviet Union integration 223–7, 230–5, 237 see also 63, 80, 97, 102, 240 Vaillaud, Michel 152 Venezuela 50/50s 19–23 BITS 28–30 see also 33, 46, 48, 52, 73, 92, 99, 102–4, 174, 182 Venn, Fiona 118 Wansink, L.G., 154, 161, 162 White, Harry Dexter 224 Wilson, Dick 124 Yamani, Ahmed Zaki 41–55, 102–8, 154 Yergin, Daniel 208 Zakariya, Hasan 54 Zangger, Claude 247