The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

“Kerosene has, in one sense, increased the length of life among the agricultural population,” he wrote. “Those who, on account of the dearness or inefficiency of whale oil, were accustomed to go to bed soon after the sunset and spend almost half their time in sleep, now occupy a portion of the night in reading and other amusements; and this is more particularly true of the winter seasons.”

In 1869, the Suez Canal was opened, knocking four thousand miles off the journey to the Far East. Steamships were taking over from sail.

In 1870, the direct telegraph cable from England to Bombay was completed, and shortly after, Japan, China, Singapore, and Australia were all brought into the telegraph network. For the first time, the world was knitted together by global communications through the telegraph wire. Swift information now eliminated the months of waiting and suspense. Shipping was no longer a speculative venture, and explicit deals could be made in advance.

The Caucasus—home of the Russian oil industry—was one of the worst-run parts of the ill-run empire. Living and working conditions in the area were deplorable. Most workers were in Baku without their families, and in Batum, the working day was often fourteen hours, with two hours of compulsory overtime.

Here was the home of “Nina”—the name given to the secret, large printing operation into which the mats of Vladimir Ilyich Lenin’s revolutionary paper, Iskra, were smuggled, from Europe via Persia, to be printed for circulation within the country.

Baku and the oil industry also provided the training ground for a host of eventual Bolshevik leaders, including a future Soviet President, Mikhail Kalinin, and a future marshal of the Soviet Union, Klementi Voroshilov. The alumni included a still more important figure, a young Georgian, a former seminarian and son of a shoemaker. His name was Joseph Djugashvili, though he operated in the underground under the name “Koba”—Turkish for “Indomitable.” Only later did he begin to call himself Joseph Stalin. In 1901 and 1902, Stalin became the chief socialist organizer in Batum, masterminding strikes and demonstrations against the local oil industry, including a prolonged strike against the Rothschilds’ interests.

The Czarist regime needed a diversion, and, as so many others have done before and since, it sought its diversion in a foreign adventure, hoping to unite the nation and restore the prestige of its rulers. And, like many others, it chose the wrong opponent—in this case, Japan.

“Russia’s internal situation” required something drastic, said the Minister of Interior. “We need a little victorious war to stem the tide of revolution.” It was obvious that war was only a matter of time. The Russo-Japanese War began in January 1904 with Japan’s successful surprise attack against the Russian fleet at Port Arthur. Thereafter, the Russian forces lurched from one military disaster to the next, culminating in the burial at sea of the entire Russian fleet at the Battle of Tsushima. The war did not stem the tide of revolution, but rather hastened it. In December 1904, the Baku oil workers went out on strike again, and won their first collective labor agreement. A few days after the strike ended, revolutionaries put out a proclamation, “Workers of the Caucasus, the hour of revenge has struck.” Its author was Stalin. The next day, in St. Petersburg, police fired on a group of workers marching on the Winter Palace to submit a petition to their Czar. This was Bloody Sunday, the beginning of the Revolution of 1905—what Lenin called the Great Rehearsal.

at the beginning of January 1968, in response to a balance of payments crisis, Prime Minister Harold Wilson announced that Britain would end its defense commitments east of Suez. It would completely withdraw its military presence from the Persian Gulf by 1971, thus eliminating the last major remnant of the great Pax Britannica of the nineteenth century and of the British Raj.

In the summer of 1972, when Sadat called for the manipulation of oil supplies for political purposes, Faisal was quick to disagree strongly. It was not only useless, he said, but “dangerous even to think of that.” Politics and oil should not be mixed. So Saudi Arabia had discovered for itself during the 1967 war, when it had cut its exports to no avail, except in terms of its own loss of revenues and markets. Faisal believed that the United States was unlikely to be affected by any cutoffs because it would not need Arab Gulf oil before 1985. “Therefore my opinion is that this proposal should be ruled out,” he said emphatically. “I see no profit in discussing it at this time.”

American dependence on the Gulf had come not by the widely predicted 1985, but by 1973. Saudi Arabia had, at last, graduated to the position once held by Texas; the desert kingdom was now the swing producer for the entire world. The United States would no longer be able to increase production to supply its allies in the event of a crisis, and the United States itself was now, finally, vulnerable.

In retaliation for the Israeli aid proposal, Saudi Arabia had gone beyond the rolling cutbacks; it would now cut off all shipments of oil, every last barrel, to the United States. The other Arab states had done or were doing the same. The oil weapon was now fully in battle—a weapon, in Kissinger’s words, “of political blackmail.” The three-decade-old postwar petroleum order had died its final death. The embargo came as an almost complete surprise.

The Shah had found a new role; he was now to be the moralist for world oil. “Really oil is almost a noble product,” he declared. “We were almost careless to use oil for heating houses or even generating electricity, when this could so easily be done by coal. Why finish this noble product in, say, 30 years’ time when thousands of billions of tons of coals remain in the ground.” It was also the Shah’s inclination to become the moralist for world civilization. He had words of advice for the industrial nations. “They will have to realize that the era of their terrific progress and even more terrific income and wealth based on cheap oil is finished. They will have to find new sources of energy. Eventually they will have to tighten their belts; eventually all those children of well-to-do families who have plenty to eat at every meal, who have their cars, and who act almost as terrorists and throw bombs here and there, they will have to rethink all these aspects of the advanced industrial world. And they will have to work harder . . . . Your young boys and young girls who receive so much money from their fathers will also have to think that they must earn their living somehow.” His haughty stance, in the midst of shortages and huge price increases, would cost him dearly only a few years later, when he desperately needed friends.

Once the embargo began, the European allies, led by France, hastened to disassociate themselves from the United States as fast as they could and to assume positions more agreeable to the Arabs,

The French and the British were the most keen to distance themselves from the United States and to court the producers; the Germans, less so; and the Dutch, by contrast, resolute in their commitment to traditional alliances. Some of the Europeans emphasized that they had large and immediate interests to protect.

Seventeen years had passed since the Americans had blatantly undercut France and Britain in the confrontation over the canal with Nasser, hastening the retreat of the two nations from their global roles and giving a great boost to Arab nationalism.

unofficial Japanese emissaries, who had hurriedly been dispatched on secret trips to the Middle East, were reporting back that the Arabs regarded “neutrality” as insufficient and indeed, as opposition to their cause. On November 22, Tokyo issued its own statement endorsing the Arab position. That declaration represented Japan’s first major split on foreign policy with the United States in the postwar era. Such an action was hardly to be undertaken lightly, as the U.S.-Japan alliance was the basis of Japanese foreign policy—or had been.

in the middle 1970s, all that had changed. The international order had been turned upside down. OPEC’s members were courted, flattered, railed against, and denounced. There was good reason. Oil prices were at the heart of world commerce, and those who seemed to control oil prices were regarded as the new masters of the global economy. OPEC’s membership in the mid-1970s was virtually synonymous with all the world’s petroleum exporters, excepting the Soviet Union. And OPEC’s members would determine if there was to be inflation or recession. They would be the world’s new bankers. They would seek to ordain a new international economic order, which would go beyond the redistribution of rents from consumers to producers, to one that established a wholesale redistribution of both economic and political power. They would set an example for the rest of the developing world. The member countries of OPEC would have a significant say over the foreign policies and even the autonomy of some of the most powerful countries in the world.

The exporters built up very large financial surpluses, and the fear that they could not spend all the money created grave concern for the world’s bankers and economic policymakers: The unspent tens of billions, sitting idle in bank accounts, could spell serious contraction and dislocation in the world economy. They need not have worried. The exporters, suddenly wealthy and certainly far richer than they might have dreamed, embarked on a dizzying program of spending: industrialization, infrastructure, subsidies, services, necessities, luxuries, weapons, waste, and corruption.

In total, the massive spending of the exporting countries, combined with the galloping inflation of their overheated economies, ensured that their financial surpluses would soon disappear. And disappear they did, completely—the bankers’ initial fears notwithstanding. In 1974, OPEC had a $67 billion surplus in its balance of payments on goods, services, and such “invisibles” as investment income. By 1978, the surplus had turned into a $2 billion deficit.

For the developed countries of the industrial West, the sudden hike in oil prices brought profound dislocations. The oil rents flooding into the treasuries of the exporters added up to a huge withdrawal of their purchasing power—what became known as the “OPEC tax.” The imposition of this “tax” sent the industrial countries into deep recession.

James Lee of Gulf and John Sutcliffe of BP were quickly summoned to Kuwait City. Sutcliffe told the oil minister, “There should be consideration for the old relationship.” The Kuwaiti reply was emphatic. “No compensation was due.”

Goodman expected, as did the other executives in his party, that Gulf would get some kind of special price or preference, reflecting a relationship almost a half century long, the training of the many young Kuwaitis who had come to Pittsburgh and stayed with Gulf families, all the hospitality, personal relations, and connections. But no, Goodman was told to his surprise that Gulf would be treated just like any other customer. Furthermore, the Kuwaitis said, Gulf would only get enough oil for its own refineries, and not for its third-party customers in Japan and Korea. But those were the markets, Goodman replied, that Gulf had sweated blood to develop. He knew; it was his blood that had been sweated. No, said the Kuwaitis. Those were their own markets, based upon their oil, and they would sell their oil in those markets. The Gulf men could not help but notice how differently they were being treated from past days. “We would go from our hotel to the ministry, day after day, and wait,” said Goodman. “Sometimes, a junior person would come. Sometimes not.” At one point in the discussions, Goodman tried to remind a Kuwaiti official of the history, at least as he understood it, as Gulf understood it, of all that Gulf had done for Kuwait. The Kuwaiti became very angry. “Whatever you did, you got paid for,” he said. “You never did us any favors.” Then he walked out of the meeting. Ultimately, Gulf got a very small discount on oil going into its own system, but none at all on any oi...

The companies’ profits were huge in absolute terms, but their rates of return were, except for 1974, somewhat below the average rate for all American industry.

The public wanted Washington to do “something”—and the something was to return prices to the good old days but at the same time, assure adequate supplies. Markets were confused and distorted, with unforeseen consequences continually arising from each decision.

American policy had been based on the premise that Iran was a reliable ally and would be the Big Pillar in the region. Out of deference to the Shah and because of the desire not to anger him, American officials had kept their distance from the various opponents of his regime, which meant that they lacked channels of communication to the emerging opposition. There was not even any reporting to Washington on what the Ayatollah was actually saying on those by-now-famous tapes.

So companies did not want to hold more inventories than their normal experience suggested they needed. If they thought that prices were going to go down because consumption was sluggish, they reduced inventories, and as quickly as they could, with the idea of buying later when the price would be lower. That was exactly what the industry was doing during the soft market conditions through most of 1978. By contrast, if companies thought that prices were going to go up, they bought more of today’s cheaper barrels so that they would have to buy less of tomorrow’s more expensive oil. And that was what happened, with extraordinary vengeance and fury, in the panic of 1979 and 1980. In fact, the companies bought well in excess of anticipated consumption, not only because of price, but also because they were not sure they would be able to get any oil later on. And that extra buying beyond the real requirements of consumption, combined with hoarding, dizzily drove up the price, which was exactly what companies and customers were struggling to avoid in the first place. In short, the panic of 1979–80 saw self-fulfilling, and ultimately self-defeating, prophecy on a truly colossal scale. The oil companies were not alone in panic buying. Down the consumption chain, industrial users and utilities also furiously built inventories as insurance against rising prices and possible shortages. So did the motorist. Before 1979, the typical motorist in the Western world drove around with his tank...

other OPEC countries had begun to announce cutbacks in their own output. With prices rising, it would be more valuable to keep the oil in the ground and sell it in the future.

What that really meant, Yamani bluntly allowed, was a “free-for-all.” The exporters were abandoning any notion of an official price structure. They would charge whatever the market would bear. And now there would be two games in the world oil market. One was “leapfrog”: the producers vying with each other to raise prices. The other was “scramble”: a bruising competition for supply among purchasers.

“Nobody controlled anything,” said Shell’s supply coordinator. “You just fought for it. At every level, you felt you had to buy now; whatever the price, it was good compared to what it would cost you tomorrow.

Garvin had no trouble when it came to reading the public mood. “The American is a funny person,” he recalled. “He worships the result of things that are big, economies of scale, mass production, but he hates anything that is big and powerful, and the oil industry is seen as the biggest and most powerful industry.”

The market was further churned by the traders, for whom the volatility, disarray, and confusion made this a heyday. Some were from established commodity trading houses, some had entered the business after 1973, and some were johnny-come-latelies who rushed into the fray, their only capital requirement being what was needed to get a telephone and a telex installed. They were everywhere, it seemed, in every transaction, vying with the traditional oil companies for ownership, as cargoes still on the high seas were sold and resold—one cargo, fifty-six times over. The traders’ only interest was the quick sale. Enormous sums were at stake; a single cargo on a supertanker could be worth $50 million. The raison d’être for the traders was the breakdown of the integrated systems of the majors.

The traders did best when they could take advantage of the enormous arbitrage between the lower prices in the term-contract market and the higher, more-volatile prices in the spot market. “The trader could be in a superb position,” observed a senior executive from one of the majors. “All he had to do was manage to get himself a term contract of some sort.” He could then turn around and sell it for eight dollars a barrel more on the spot market, making an enormous fortune for himself on a single cargo. And how did the trader obtain his fantastically lucrative term contract? “What he had to do to get his contract was to pay a ridiculously small commission to the appropriate parties. And sometimes the required brown envelopes would be passed.” By comparison to what the trader in turn could make, this was hardly more than a gratuity.

And while the pockets of the producers and traders swelled with money, consumers were forced to dip ever deeper into their own pockets to pay the price of panic.

over the subsequent two years, the economic outlook changed quickly and drastically. In real terms, the oil price was going down; so was demand. So were forecasts for both.

Forecasts tend to be biased towards current tendencies.

Though often dismissed or even ridiculed, conservation had turned out to have massive impact. Energy conservation in modern industrial society meant, for the most part, not deprivation, not “small is beautiful,” but greater efficiency and technological innovation.

Those three trends—the collapse in demand, the relentless buildup of non-OPEC supply, and the Great Inventory Dump—reduced the call on OPEC by something like 13 million barrels per day, a fall of 43 percent from the levels of 1979!

instead of the feared shortage, there was a large surplus of production capacity over market demand—in short, the makings of a massive glut.

It could cost two or three times more to add a barrel of oil by exploration than by buying the assets of an existing operation. To the management of companies, the obvious implication was that it was cheaper to “explore for oil on the floor of the New York Stock Exchange”—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico.

As the downturn proceeded, it demonstrated how interdependent oil had become with the global financial system. And nowhere was that more clearly established than in Mexico, which by 1982 had run up a huge international debt, in excess of $84 billion, on the basis of its sudden emergence as a world oil power. That year, Jesüs Silva Herzog became Mexico’s Finance Minister. His father, who bore the same name, had been head of the national commission that in 1937 had found the oil companies operating in Mexico guilty of making enormous profits and that had provided the rationale for their nationalization by President Cárdenas. Thereafter, the father had headed part of Pemex, the national oil company, until he quit over a confrontation with the oil workers union about wages. The son had taken the path of Mexico’s modern technocrats, including graduate education in economics in the United States (at Yale), then rose through the government bureaucracy until April 1982, when President López Portillo appointed him Finance Minister. To his shock, Silva Herzog realized that the country was on the edge of a grave economic crisis. It was the result of the weakening oil price, high interest rates, a severely overvalued peso, unrestrained government spending, and the drying up of markets for Mexico’s non-oil exports because of the recession in the United States. On top of everything else, there was immense capital flight. Silva Herzog recognized that Mexico was unable to service its enor...

Silva Herzog began making secret trips to Washington, D.C., leaving Mexico City on Thursday night in order to see Paul Volcker, Chairman of the U.S. Federal Reserve System, on Friday. He would then fly back to Mexico City by Friday night so that he could appear at social events and no one would guess that he had been out of town. He arranged a $900 million emergency loan from the Federal Reserve, but it was dissipated in a week because of the capital flight. On August 12, 1982, Silva Herzog came to the conclusion that improvisation would not work; there was no way that Mexico could pay the interest it owed. It could, of course, default. But that might cause the international financial system to collapse. The loan exposure to Mexico of the nine largest American money center banks was equivalent to 44 percent of their total capital. How many of America’s and the world’s banks would fall in the first wave, and how many more would be pulled down by them in the second? And how could Mexico function in the world economy?

Regan said, “You really have a problem.” “No, Mr. Secretary,” replied Silva Herzog, “we have a problem.” The Mexicans and Americans started working on Friday afternoon and continued virtually nonstop until the early hours of Sunday morning. They put together a multi-billion-dollar package of loans and credits, as well as advance purchases of Mexican oil for the United States Strategic Petroleum Reserve. But then, at around 3:00 A.M. Sunday, it seemed that the negotiations were about to break down. Silva Herzog had discovered a $100 million service fee buried in the agreement and was told by one of the Americans, “Well, when someone is in very serious difficulties, and you lend to them, they have to pay a fee.” Silva Herzog was furious. “This is not a business transaction,” he snapped. “Sorry, I cannot accept this.” He called López Portillo, who angrily said to terminate the discussions and return to Mexico City immediately. Later in the day, Silva Herzog was glumly eating a hamburger at the Mexican embassy, preparing to leave, when a call came from the United States Treasury saying that the $100 million fee had been rescinded. The Americans could not risk a collapse. Who knew what the effects would be on Monday? And, with that, the Mexican Weekend concluded, with the first part of the emergency package now in place. Silva Herzog flew back to find Mexico City in an uproar. He went on television for forty-five minutes with a blackboard but no written speech to explain what w...

it was Iran’s attacks that propelled Kuwait, in November of 1986, to ask the United States to protect its shipping (though the American ambassador to Kuwait later insisted that he had relayed such a request in the summer of 1986).

the Reagan Administration, the Kuwaiti request, in the words of one official, “didn’t linger.” The potential significance of the approach to Moscow provided reason for a quick response. For Russian involvement would have expanded Russian influence in the Gulf— something the Americans had sought to prevent for more than four decades, and the British, for no less than 165 years. But, apart from the East-West rivalries, it was deemed imperative to protect the flow of Middle Eastern oil.

By the spring of 1988, Iraq, making use of chemical weapons, was manifestly winning. And Iran’s ability and will to carry on the war were fading fast.

the American naval presence in the Gulf did, in fact, lead to a major confrontation with Iran, but of an unexpected and tragic kind. In early July 1988, the United States destroyer Vincennes, engaged in an exchange with Iranian warships, mistook an Iranian Airbus, carrying 290 passengers, for a hostile aircraft and shot it down. It was a horrid mistake. To some in the Iranian leadership, however, it was not a mistake, but a sign that the United States was taking off its gloves and preparing to bring its great power to bear in direct military confrontation with Iran in order to destroy the regime in Tehran. Iran, in its weakened state, might not be able to resist. It could no longer afford to go against the United States.

On July 17, Iran informed the United Nations of its willingness to countenance a cease-fire. “Taking this decision was more deadly than taking poison,” Khomeini declared. “I submitted myself to God’s will and drank this drink for his satisfaction.” But vengeance was still his ambition. “God willing,” he said, “we will empty our hearts’ anguish at the appropriate time by taking revenge on the Al Saud and America,” he added.

One month short of eight years after it began, the Iran-Iraq War ended in a stalemate, though one that favored Iraq. As far as Baghdad was concerned, it had won the war, and it now intended to be the dominant political power in the Gulf, and one of the world’s major oil powers.

It was not only the end of the war that pointed to a new era. So did the changing relationship between oil exporting and the consuming countries. The great contentious question of sovereignty had been resolved; the exporters owned the oil. What came to matter for them over the 1980s was sure access to markets. When the producing countries discovered that consumers had more flexibility and wider choices than had been imagined, they came to see that “security of demand” was no less important to them than was “security of supply” to the consumers. Most of the exporters now wanted to establish that they were reliable suppliers and that oil was a secure fuel.

At a discussion in New York City in the late spring of 1989, the oil minister from one of the major exporting countries, a man who had been at the center of all the battles of the 1970s and 1980s, spoke at length about the new realism of producers and consumers and the lessons learned by both. Afterwards, he was asked how long such lessons would be remembered. The question took him a bit by surprise, and he thought for a moment. “About three years, without reminding,” he said. Within a year of that exchange, he himself was no longer minister. And a month later, his country was invaded.