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

by Daniel Yergin

Yet, amidst the complacency, there were reasons for caution. While vast additions had been made to world oil reserves, they were all concentrated in the five major oil producers of the Persian Gulf, plus Venezuela. There was no large inventory of diversified, non-OPEC oil waiting to come into the system, as had been the case with Alaska, Mexico, and the North Sea at the time of the 1973 crisis.

With low prices and the renewed confidence about the security of supplies, conservation had run out of steam. The effort to develop alternative sources had even become anemic.

Iraq was also suffering considerable financial weakness. The Iran-Iraq War, which Saddam Hussein had launched, had cost the country half a million deaths and serious casualties and had ended in a stalemate. Yet a nation of eighteen million was continuing to support a million-man army. Hussein wanted higher oil prices and very soon;

The troops were seen as pieces in a war of nerves, as tools in Saddam Hussein’s new role as “enforcer,” ensuring that countries like Kuwait and the United Arab Emirates observed their quotas, and forcing up OPEC’s prices.

By mid-July 1990, only one country was cheating, exceeding its OPEC quota, and that was OPEC’s self-appointed enforcer—Iraq.

The Iraqi soldiers were also being used, it was thought, to threaten Kuwait into giving way on a border dispute that involved a large oil field and into handing over two islands to Iraq. Yet Baghdad, all along, had something much more in mind—invasion and annexation of the whole country.

he assumed that he could swiftly absorb Kuwait and confront the world with a fait accompli, which would arouse some complaints but little else. In the meantime, he would have solved his financial problems overnight and would have acquired the wherewithal to finance his grandiose military and political ambitions.

The collapse of communism and the agonies of the Soviet Union had left only one superpower in the world—the United States. The absorption of Kuwait could start Iraq on the path to becoming a new superpower.

Once again, here was a dictator who blatantly lied and dissembled, who was totalitarian in the way he ran his country, who was obsessed with weapons and power and seemed to have no scruples, and whose ambitions appeared to be unlimited.

Iraq would be the planet’s dominant oil power, and the other petroleum producers would bend to his diktats,

He would gain a decisive say over the world economy, and he would be courted by economic and political leaders.

With Vietnam in mind, as well as the swift U.S. withdrawal from Lebanon after the deaths of several hundred U.S. Marines in 1983, he fundamentally doubted American resolve.

In the early morning hours of January 17, Gulf time, 700 coalition aircraft launched a huge assault on Iraq.

Those in Western Europe who had blamed all environmental ills on Western capitalism were forced to rethink their ideology. In both Eastern Europe and the Soviet Union, environmentalism became one of the most important rallying points for opposition to communism, and with good reason. For with the parting of the Iron Curtain, it was revealed that among the leading legacies of cynical communist rule was a frightening pattern of environmental degradation and disasters, some of them perhaps irreversible.

Oil exporters were once more thrown into economic disarray, as in 1986. The collapse in oil prices sent Russia, only in its seventh year as an independent country, into default and bankruptcy and into what turned out to be an agonizing reappraisal of its relationship with the rest of the world.

But for the oil-importing nations—both for developed countries such as the United States, Japan and those of Europe, and for many developing countries— the fall in oil prices was like a giant tax cut, a stimulus package that fired up economic growth. It put a lid on inflation,

Low prices put great pressure on the structure of the industry. As revenues fell away, company managements struggled to find survival strategies.

Budgets had to be immediately cut,

getting bigger, gaining greater scale. The objective: to bring down costs and increase efficiency.

The need for corporate scale in this environment was made more urgent because of the bigger and more complex oil and gas projects that lay ahead and the much greater financial resources that would be required to make them happen.

The New Economy and the Internet notwithstanding, globalization made oil more important again. Of key significance was the period 2003–2007, which saw the best global economic growth in a generation. High economic growth and rising incomes in China, India, the Mideast and other emerging countries

an “Iranian premium”—concern over whether stalemate and confrontation over Iran’s nuclear program would lead to conflict and threaten oil flows through the Strait of Hormuz—became an additional element in a higher oil price. Two further factors drove prices to unprecedented levels. One was a dramatic increase in the costs of developing new oil and gas fields—more than doubling between 2004 and 2008. This arose because of shortages—of skilled people, equipment, and engineering capabilities—combined with a rapid rise in the price of other commodities, such as steel, that are required to build offshore oil platforms and other equipment.6 The other was the growing involvement by financial investors in oil and other commodities. Oil came to be seen as an asset class that provided an alternative to stocks, bonds, and real estate for pension funds, university endowments, and other investors seeking higher returns.

Continuing weakness of the dollar against the euro and Japanese yen further drove up the price of oil and other commodities as investors sought to hedge against the dollar’s decline.7 A strengthening dollar would be accompanied by a reverse in the oil prices.

There was a widespread apprehension, especially within financial markets, that demand from China and India would go through the roof and that an oil shortage was inevitable in the next several years.

In the United States, the painful economic impact of the oil shock was made much worse by the credit crisis that erupted in mortgage and banking sectors.

It was only when demand growth slowed markedly, in response to high prices, a financial crisis worse than any since the Great Depression, a world economic downturn, that the price came down dramatically.

The half-decade rise in oil prices had brought significant changes in the global economy and dramatic shifts in income. Trillions of dollars flowed from oil-importing countries to the exporters—one of the greatest transfers in income in the history of the world. The accumulation of oil wealth in the savings accounts of the exporters—their sovereign wealth funds—has made them powerful forces in the world economy, putting them ...