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

by Daniel Yergin

The Saudis moved from a defense of price to a defense of volume—their own desired level of output—and chose an ingenious weapon: netback deals with the Aramco partners and with other oil companies strategically located in key markets. Under such deals, Saudi Arabia would not charge a fixed price to the refiner. Rather, it would be paid on the basis of what the refined products earned in the marketplace. The refiner, however, would be guaranteed a predetermined profit off the top—say $2 a barrel. No matter whether the final selling price of the products was $29 or $19 or $9, he would get his $2 and the Saudis would get the rest (minus various costs). The refiner’s profit would be locked in. So he would not have any particular compulsion to strive for a higher rather than a lower price at the point of sale; he would simply want to move as much product as he could. He knew that each additional barrel meant an additional $2 of profit, no matter what the price. But increasing volume and reduced concern about the selling price would add up to a perfect recipe for falling prices. The Saudis, for their part, hoped that what they lost because of lower prices they would make up, and then some, with the higher volumes. But the Saudis were also careful not to be too confrontational; their aim was to regain their quota level, and no more, and they put a cap on the volume that would be covered by their new netback deals. In so doing, they were aiming their new policy as much at other OP...