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

by Daniel Yergin

By the end of the 1950s, Getty was the seventh-largest marketeer of gasoline in the United States. Fortune magazine announced in 1957 that he was America’s richest man and its sole billionaire. He was stoic in the face of that news. “My bankers kept telling me,” he said, “that it was so, but I was hoping I wouldn’t be found out.” He added a sensible admonition. “If you can count your money, you don’t have a billion dollars.” He achieved further fame as the Billionaire Miser. He spent his final years as squire of Sutton Place, an exquisite, 72-room Tudor manor house in Surrey, and there, amid the splendors of his priceless collection of art and antiques, he installed a pay phone for guests to use.

Paul Walton, the geologist, had come down with amebic dysentery while negotiating in Saudi Arabia in 1948. It took him three years to recover. Getty gave him a $1200 bonus, and Walton returned to Salt Lake City to work as an independent geologist. In the early 1960s, more than a decade after he had first spotted that small mound in the Neutral Zone from the air, Walton was visiting England. He telephoned Getty from London, and the billionaire invited him to Sutton Place. Getty demonstrated the positive effects of his devotion to physical fitness; well into his seventies, he regularly lifted weights, which he kept in his bedroom. The two men reminisced about how furious Getty had become at the refusal of the Aminoil people to drill in the little mound that Walton had spotted from the air. Finally, they had given way, vindicating Walton—and Getty. The Neutral Zone was by far, Getty said, his largest single asset. “He was very favorably impressed with the whole operation,” Walton recalled. And well he should have been. It was estimated that his company still had more than a billion barrels of recoverable reserves in place there. The Neutral Zone had made him not only the richest American, but also the richest private citizen in the world. As for Walton, the man who had spotted the site, he continued to put together quite ordinary drilling deals back in Salt Lake City. When Getty died in 1976, age eighty-three, the eulogy at his funeral was delivered by the Duke of Bedford. “W...

Finance Minister Abdullah Suleiman had skillfully, with the assistance of “Jack” Philby, negotiated the original Socal concession in 1933. But now, he regularly threatened to close down the entire oil operation unless Saudi Arabia were able to share in what he called “large company profits.” Suleiman’s demands seemed endless: Aramco should pay for construction projects; Aramco should contribute to a Saudi “welfare fund”; Aramco should advance new loans. “Each time the company agreed to one thing,” said Aramco’s general counsel, “there was always just one more.” But what the Saudis really wanted was a renegotiation of the original concession so that the government’s “take,” its share of the rents, would be much increased. Aramco was clearly a very profitable company, and they insisted that they get their rightful share. They wanted what the Venezuelans had already gotten. It was not just word of the deal the Venezuelans had recently struck that had traveled from Caracas. A Venezuelan delegation was promulgating the fifty-fifty concept throughout the Middle East, even going to the trouble of translating its documents into Arabic. The Venezuelans had not taken on these additional expenses sheerly out of altruism. In Caracas, it had become, as Romulo Betancourt observed, “increasingly evident that the competition from low-cost, high-volume production from the Middle East was a grave threat to Venezuela.” Best get those costs up, which would be accomplished if the Middle Easter...

The terms of J. Paul Getty’s new Neutral Zone concession certainly demonstrated to them that oil companies could pay much more. Yet the Saudis did not want to squeeze too hard. There was still a very large investment program to be carried out within the concession. Moreover, having just seen Aramco lose market share, the Saudis did not want to hobble the company with additional costs that might make its oil uncompetitive with that produced by other Persian Gulf countries. Perhaps they could get more money out of Aramco without directly affecting the company’s competitive position. The Saudis did their research; they had even, unbeknownst to Aramco, retained their own adviser on American tax law, and to their delight, they learned about a most interesting and intriguing provision in American tax laws that would leave Aramco whole. It was called the “foreign tax credit.” Under legislation dating back to 1918, an American company operating overseas could deduct from its United States income tax what it paid in foreign taxes. The objective was to avoid penalizing American companies doing business abroad. Royalties and other fixed payments—costs of doing business—could not be deducted, only taxes paid on income. That distinction was all important. For it meant that if Saudi Arabia had collected not only $39 million in royalties in 1949, as it had done, but also another $39 million in taxes, then that $39 million tax bill could have been deducted from the $43 million tax bill th...

In neighboring Iraq, a fifty-fifty deal was also in place by early 1952. Thus, a new foundation had been established for relations between David Ricardo’s landlord and tenant. And the tenant oil companies had to grapple with their significance. Inside Jersey, several departments collaborated on a working paper on the fifty-fifty arrangements, to provide internal guidance for the company. The paper noted that Jersey had gone through a considerable process of education since the Mexican expropriation. “We now know that the safety of our position in any country depends not alone on compliance with laws and contracts, or on the rate or amount of our payments to the government, but on whether our whole relationship is accepted at any given moment by the government and public opinion of the country—and by our own government and public opinion—as ‘fair.’ If it is not so accepted, it will be changed.” Unfortunately, “‘fairness’ and ‘unfairness’ are essentially concepts of the emotions rather than fixed and measurable standards.” However disconcerting and unpalatable it might be to the engineers, businessmen, and buccaneers who ran international oil companies, that was a fact of life. “Experience already shows that there is something inherently satisfying in the ‘50/50’ concept.” Satisfying or not, it was a necessity. But had the battle over rents ended with a lasting peace treaty or was it only a truce? Did the companies now have a position that they could successfully defend agai...

There would always be a way, too, in which the Shah was somehow an outsider. At age six, he was entrusted to a French governess; at age twelve, he was sent off to school in Switzerland. His education and experience engendered a certain distance from Iranian society. “It might, of course, be,” mused the American ambassador in 1950, “that he is a little too Westernized for an Oriental country.” That possibility would dog him for almost four decades. Yet, whatever the Shah’s own anxieties, he had been plunged at a very young age into treacherous circumstances, which would have mightily challenged even the most self-assured and practiced of politicians. The legitimacy of his dynasty was problematic; the role of the monarchy in Iran, a totally unresolved question. He had to contend with chronic intervention by foreign powers, as well as direct Soviet pressure on the country’s territorial integrity and a highly visible British economic presence. He was forced to struggle to assert his authority in a political system riven by every kind of division—class, regional, religious, and modern versus traditional. On one side were the Islamic fundamentalists, led by the fiery Ayatollah Seyed Kashani, who were outraged by every intrusion of the modern world—be it the presence of foreign advisers or the fact that Reza Shah had allowed women to dispense with the veil. On the other side were the communists and the Tudeh, a well-organized leftist party tied to Moscow. In between were reformer...

At last, Anglo-Iranian came forward to offer its own fifty-fifty deal. It was no longer enough. The entire opposition in Iran now focused on the infamous Anglo-Iranian. The leader was an elderly firebrand, Mohammed Mossadegh, who was chairman of the oil committee in the Parliament. “The source of all the misfortunes of this tortured nation is only the oil company,” Mossadegh declared. Another deputy thundered that it would be better for the Iranian oil industry to be destroyed by an atomic bomb than remain in the hands of Anglo-Iranian. All were calling for nationalization of the industry and the ouster of Anglo-Iranian. Prime Minister Razmara did not know what to do. Finally, in a speech to Parliament in March 1951, he came out against nationalization. Four days later, as he was about to enter Tehran’s central mosque, he was assassinated by a young carpenter, who had been entrusted by Islamic terrorists with the “sacred mission” of killing the “British stooge.”

Razmara’s murder demoralized the proponents of compromise, weakened the Shah’s position, and emboldened the broad opposition. A week and a half later, the minister of education was also assassinated. The Majlis proceeded to pass a resolution nationalizing the oil industry, but it was not implemented immediately. Then, on April 28, 1951, the Majlis chose Mohammed Mossadegh, who was by now the number-one foe of Anglo-Iranian, as the new Prime Minister, with the specific and wildly popular mandate to execute the nationalization law. The Shah signed the law, and it went into effect on May 1. Anglo-Iranian’s days seemed finished in Iran, for in the nationalization decree it was designated as the “Former Company.” As the British ambassador reported, Anglo-Iranian, though in business around the world, “has been legally abolished” and Tehran “has taken the line it has no further existence.” Mossadegh dispatched the governor of Khuzistan province to Anglo-Iranian’s headquarters at Khorramshahr. On arrival, the governor sacrificed a sheep in front of the building, and then announced to a delirious crowd that the concession was voided. Anglo-Iranian’s facilities in Iran, as well as the oil they produced, now belonged to the nation of Iran. Mossadegh’s son-in-law followed with an emotional speech in which he declared that the days of colonialism were over and those of prosperity at hand. He fainted from the excitement and had to be carried away. Directors of the newly established stat...

American and British officials who dealt with Mossadegh took to calling him “Mossy.” Anthony Eden remarked that “Old Mossy,” with his pajamas and iron bedstead, was the “first real bit of meat to come the way of the cartoonists since the war.” Even some of those most exasperated by Mossadegh would ever after also remember how charmed they had been by him. The Americans tended, at first, to see Mossadegh as a rational, nationalistic leader, and one with whom business might be done. He could be a bulwark against the Soviet Union and an agent of reform; the alternative to Mossadegh was communism. And, throughout, Cold War considerations and fears shaped American policies and perceptions more than British. In any event, there were, as far as Washington was concerned, good enough grounds to be opposed to old-fashioned British imperialism. No less an authority than President Harry Truman said that Sir William Fraser of Anglo-Iranian looked like a “typical nineteenth-century colonial exploiter.” The Americans understood, better than the British, that Mossadegh’s great problem centered on his rivals within Iran; he was always constrained by the need to keep at bay those who were more nationalistic, more extreme, more fundamentalist, and more antiforeigner than he. In the meantime, he would improvise and play off the great powers and never quite compromise. Eventually, the Americans lost patience with him. When it was all over, Dean Acheson delivered a pungent judgment. Mossadegh, ...

Mossadegh fluttered his hands weakly in greeting when Harriman and Walters entered, then wasted no time in telling Harriman exactly how he felt about the British. “You do not know how crafty they are,” said the Prime Minister. “You do not know how evil they are. You do not know how they sully everything they touch.” Harriman disagreed. He knew them well; he had been ambassador there. “I assure you they are good and bad and most of all in between,” said Harriman. Mossadegh leaned forward, took Harriman’s hand, and merely smiled. It was only in a later talk that Mossadegh happened to mention that his grandson, the apple of his eye, was away at school. “Where?” asked Harriman. “Why, in England, of course,” Mossadegh replied. “Where else?”

Day after day, Harriman, assisted by Levy, would try to educate Mossadegh about the realities of the oil business. “In his dream world,” Harriman cabled Truman and Acheson, “the simple passage of legislation nationalizing the oil industry creates profitable business and everyone is expected to help Iran on terms that he lays down.” Harriman and Levy sought to explain to Mossadegh about the need for marketing outlets, in order to sell oil, but to no avail. That the company was called “Anglo-Iranian,” they said, did not mean that all of its oil was produced in Iran. Revenues were also earned from refining and distribution in many countries. At one point, Mossadegh seemed to be demanding more revenue from a barrel of oil than the total selling price realized on all the different products derived from that barrel. “Dr. Mossadegh,” said Harriman, “if we are going to talk intelligently about these things, we have to agree on certain principles.” Mossadegh peered at Harriman. “Such as what?” “Such as: nothing can be larger than the sum of its parts.” Mossadegh stared straight at Harriman and replied, in French, “That is false.” Harriman, though he did not speak French, thought he had caught Mossadegh’s drift, but he couldn’t believe it. “What do you mean ‘false’?” he asked incredulously. “Well, consider the fox,” said Mossadegh. “His tail is often much longer than he is.” With that salvo fired, the Prime Minister put the pillow over his head and rolled back and forth in the bed, ...

As the crisis dragged on through the early months of 1952, Mossadegh’s government could not sell its oil, it was running out of money, economic conditions were deteriorating. But none of that seemed to count. The important thing was that he was the popular national leader who had achieved the historic objective of throwing the foreigners out and regaining the national heritage. He declared that, as far as he was concerned, the oil could remain in the ground for use by future generations. The U.S. ambassador to Tehran noted Mossadegh’s fundamental antipathy to the Shah, which he attributed to the “secret contempt” of a man of an old aristocratic family toward “the weakling son of an upstart tyrannical imposter.” But Mossadegh the constitutionalist was turning to extraconstitutional means to run the country, including the use of street mobs to manipulate politics. He was also assuming more dictatorial power. “I always considered this man to be unsuitable for high office,” one opposition leader said. “But I never imagined, even in my worst nightmares, that an old man of seventy would turn into a rabble rouser. A man who constantly surrounds the Majlis with thugs is nothing less than a public menace.” Mossadegh was also proving himself a notable political innovator; he was the first Middle Eastern leader to use the radio to arouse his followers. When he called, thousands and thousands—sometimes, it seemed, hundreds of thousands—would rush, frenzied, into the streets, chanting,...

Still, in the final weeks of the Truman Administration and the first of the Eisenhower Administration, the United States launched yet another diplomatic effort to work out an oil settlement between Iran and Britain. After much frustrating discussion, Mossadegh once again said no. Meanwhile, conditions in Iran had deteriorated even further. Before nationalization, oil exports had generated two-thirds of the country’s foreign exchange and half of government revenues. But there had been no oil revenues for two years, inflation was rampant, and the economy was falling apart. The country was much worse off than before nationalization. Law and order were collapsing; the chief of police in Tehran was kidnaped and murdered. Moreover, Mossadegh showed little gift for governing. He conducted his Cabinet meetings from his bed. In the early months of 1953, he tried to bolster his weakening domestic position by taking more power in his own hands—extending martial law, governing by decree, seizing control of military appointments, intimidating and silencing opposition, abolishing the upper house of the parliament and dissolving the lower, and carrying out a Soviet-style plebiscite that gave him a 99 percent victory. Many nationalists and reformers, who had once supported Mossadegh, were antagonized by his efforts to monopolize power and his increasing reliance on “mobocracy” and the Tudeh party. The religious fundamentalists also turned against him as he sought to extend his power. They...

In Washington at a somber meeting of the National Security Council, Secretary of State Dulles predicted that Iran would soon be a dictatorship under Mossadegh, which would be followed by a communist takeover. “Not only would the free world be deprived of the enormous assets represented by Iranian oil production and reserves,” Dulles said, “but the Russians would secure these assets and thus henceforth be free of any anxiety about their petroleum resources. Worse still…if Iran succumbed to the Communists there was little doubt that in short order the other areas of the Middle East, with some 60 percent of the world’s oil reserves, would fall into Communist control.” “Was there any feasible course of action to save the situation?” asked President Eisenhower. There was.

In the years following, there would be much argument about the real significance of the American-British operation. Did it cost less than one hundred thousand dollars, or was it priced in the millions? Did the two Western powers create the countercoup, or did they only lubricate it? Mossadegh’s time was certainly running out; his base of support had greatly narrowed, and he would fall either to the left or to the right. What the CIA and MI6 did was to play the facilitating role, providing the financial and logistical aid, emboldening the opposition and making the critical connections, during uncertain and fluid times. Operation Ajax succeeded because it accorded with increasing popular support for the Shah and the existing regime and growing disillusionment with Mossadegh, who was trying to change the regime into one in which he, rather than the Shah, held final power, and which might, ultimately, come under Soviet control. In the words of one of the operation’s planners, Operation Ajax created “a situation and an atmosphere in Tehran that forced the people to choose between an established institution, the monarchy, and the unknown future offered by Mossadeq.” Even so, success had been by no means certain. On his return to Washington, Kermit Roosevelt reported directly to Eisenhower, who, with admiration, noted in his diary that Operation Ajax “seemed more like a dime novel than an historical fact.”16

In particular, the State Department harped on one theme: If Iranian oil did not move, the country would collapse economically, and it would fall, one way or another, into the Soviet camp. That would, in turn, threaten the rest of the Middle East—specifically, Saudi Arabia, Kuwait, and Iraq—and the concessions therein. It could also mean serious trouble in strictly commercial terms: The Russians might dump Iranian oil onto the world market. The communist threat to Iran warranted participation in the country and there would be one notable benefit. Participation would give the American companies an important vantage point, if not out-and-out control, over Iranian production rates, which would have to be balanced in any event against those in Kuwait and Saudi Arabia.

To extend such an invitation was a humiliating admission of defeat for Fraser. Nor were the American companies thrilled to accept it. Writing to Secretary of State Dulles, a Jersey vice-president said, “From the strictly commercial viewpoint, our Company has no particular interest in entering such a group but we are very conscious of the large national security interests involved. We, therefore, are prepared to make all reasonable efforts.”17 But, before Jersey and the other companies would make such efforts, and indeed before anything further could be done, there was another obstacle to be surmounted. It was a most awkward matter: the U.S. government was bringing a giant antitrust case against the major oil companies—the very same companies that it was seeking to push into the new consortium to bolster Iran. The Justice Department once again was busily gearing up a criminal suit against those companies for belonging to an “international petroleum cartel” and for engaging in exactly the sort of business relationships that the State Department was now promoting for Iran. It was an altogether confusing state of affairs and not one likely to fill the companies with enthusiasm for joining a consortium.

THE SUEZ CANAL—a narrow waterway a hundred miles long, dug through the Egyptian desert to link the Red Sea to the Mediterranean—was one of the grandest achievements of the nineteenth century. It was the handiwork of Ferdinand de Lesseps, a Frenchman ever after celebrated as “the Great Engineer.” In fact, he was no engineer at all, though he was a man of other considerable accomplishments—as a diplomat, entrepreneur, and promoter. And his talents did not end there. At the age of sixty-four, he married a woman of twenty, and then, forthwith, proceeded to father twelve children. Though long discussed, such a waterway was thought to be impossible until de Lesseps floated a private concern, the Suez Canal Company, which won a concession from Egypt to build a canal and began actual construction in 1859. A decade later, in 1869, the canal was finally completed. The British were quick to recognize a good thing when they saw it, especially when it substantially reduced the travel time to India, the jewel of the empire, and they rued their lack of a direct stake in “our highway to India,” as the Prince of Wales dubbed the waterway. Fortunately, in 1875, Egypt’s 44 percent ownership in the canal came on the market, owing to the insolvency of the Khedive, the country’s ruler. With lightning speed and the timely financial assistance of the English branch of the Rothschilds, Britain’s Prime Minister, Benjamin Disraeli, engineered the acquisition of those shares. The Suez Canal Company b...

In 1952, a group of military officers successfully carried out a coup and dispatched the sybaritic King Farouk to exile on the Riviera, where, though unmourned, he acquired new renown both for his many girlfriends and for being enormously fat.

The Suez Canal—with ships guided through it under the hot sun by mostly foreign, mostly French and British pilots garbed in impeccable knee socks, shorts, crisp white shirts, and captain’s hats—was an all-too-evident and embarrassing symbol of the old nineteenth-century colonialism right in the middle of what was to be Nasser’s new Egypt. Symbols, however, were not the only consideration. As with the oil concession in Iran before Mossadegh, most of the canal company’s earnings, derived from tolls, were going to European shareholders, including the largest shareholder of all, the British government. If Egypt could secure complete control over the canal, the tolls would open a major new source of income for a desperately poor country, whose new military leaders were far more experienced at nationalist rhetoric than at economic management.

There was the hope, of course, that the British government could remain on reasonable terms with Egypt, but this hope faded when Nasser attempted to incorporate the separate country of the Sudan into his Greater Egypt.3 Nasser was viewed more tolerantly in Washington, where the Administration and many in Congress tended to adopt an attitude of moral superiority toward the European colonial powers, combined with a desire to see them divest themselves of their empires more quickly. The Americans believed that the relics of colonialism were an enormous handicap for the West in its struggle with communism and the Soviet Union. The Suez Canal Company, despite the economic and strategic significance of the waterway, was one of the most visible of these relics. The chairman of the canal company would later observe bitterly that, to Americans, “the company had a certain musty, nineteenth century odor derived from that lamentable colonial period.”

In April 1956 Standard Oil of New Jersey commissioned its own study of how to move oil westward from the Persian Gulf if the canal was indeed shut. Around this same time, the British Foreign Secretary, Selwyn Lloyd, visited Nasser in Egypt. As far as Britain was concerned, Lloyd made clear, the canal was “an integral part of the Middle East oil complex, which was vital to Britain.” To this, Nasser replied that the oil-producing countries received 50 percent of the profits from their oil—but Egypt did not get 50 percent of the profits from the canal. If the Suez Canal was an integral part of the oil complex, he declared, then Egypt should have the same fifty-fifty terms as the oil producers. Nothing, however, was done to revise the existing arrangement. At the end of 1955, in an effort to placate Nasser and strengthen the Egyptian economy, the Americans and British, in conjunction with the World Bank, had begun considering a loan to Egypt to build a huge dam at Aswan on the Nile. That project appeared to be going forward. And Nasser was further gratified when, on June 13, 1956, the last British troops were withdrawn from the Canal Zone in accordance with the agreement that Eden had negotiated two years earlier. But Nasser’s arms deals with the Soviet bloc had already alarmed and alienated Washington. It was thought that the Egyptians would mortgage their limited resources to pay for Soviet arms instead of making their contribution to the dam. Moreover, the expected economic...

Nasser was angry, humiliated, and eager for revenge. The tolls from the canal, he thought, could be used to finance the Aswan Dam; the hated symbol of colonialism in his midst would be exorcised. On July 26, he gave a speech in the same square in Alexandria where he had, as a boy, for the first time joined a demonstration against the British. Now, as leader of Egypt, he repeatedly heaped calumny on the name of de Lesseps, the builder of the canal. It was no mere history lesson. “De Lesseps” was the code word to the Egyptian military to move; by the time the speech was completed, the army had seized control of the Canal Zone. The Suez Canal had been expropriated. It was a resounding and daring act. Tension rose swiftly and dramatically in the immediate aftermath of the seizure. In England, the Chancellor of the Exchequer, Harold Macmillan, echoing the foreshadowing of his beloved Victorian novels, wrote apprehensively in his diary, “There was last night and through today, the most violent gale I ever remember.” In Cairo, Nasser, deciding that he needed to escape from the mounting tension, slipped off to the Metro movie theater to see Cyd Charisse in Meet Me in Las Vegas. Now followed three months of diplomatic circus and futile efforts to work out a compromise. In mid-September, the British and French pilots who had continued to guide ships through the canal were withdrawn on the instructions of the Suez Canal Company. The job was considered to be at the pinnacle of the mer...

There was another factor. Eisenhower was up for reelection in November 1956; he had ended the fighting in Korea at the beginning of his Administration, he was running as a man of peace, and the last thing he wanted now was a military crisis that might frighten the electorate and threaten his campaign. In an appalling blunder, the British and French never really factored the calendar of the American Presidential election into their calculations. While the public diplomatic show went on, they were also working secretly on a second track. They were making plans for military intervention in the Canal Zone, even though neither was well prepared to take such an action. The British found they had to requisition ocean liners at the height of the tourist season and even had to call on a private moving company, Pickford Removals, to cart around tank units.

The failure of governments to respond in time was etched even more strongly in memory by the events of the 1930s. The year 1956 marked the twentieth anniversary of Hitler’s remilitarization of the Rhineland, in violation of treaty obligations. The British and French could have stopped the German dictator in 1936. Hitler would have lost his momentum and his prestige, he might even have been toppled, and then tens of millions of people would not have died. But the Western powers did not act. Again in 1938, the Western nations failed to back Czechoslovakia, and instead appeased Hitler at Munich. There, too, Hitler might have been stopped and the terrible carnage of the second great war averted.

Eden had courageously resigned as Foreign Secretary in 1938 in protest of the appeasement policies toward Mussolini and Hitler. Now, in the summer and early autumn of 1956, it seemed to him that Nasser was embarked on an all-too-familiar program of aggrandizement. To Eden, Nasser’s Philosophy of Revolution read like Hitler’s Mein Kampf. Nasser, too, wished to carve out a great empire, and in his book, he emphasized that the Arab world should use the power that came with the control over petroleum—“the vital nerve of civilization”—in its struggle against “imperialism.” Without petroleum, Nasser proclaimed, all the machines and tools of the industrial world are “mere pieces of iron, rusty, motionless, and lifeless.” Eden had already attempted compromise. He had invested great personal prestige in the 1954 settlement with Egypt over the withdrawal of British forces from the Canal Zone and had been subjected to considerable attack from a segment of his own Tory party because of it. Now, he felt, he had been personally betrayed by Nasser. As with Hitler, Nasser’s promises were not worth the paper they were written on. Was the seizure of the canal, in violation of international agreements, another Rhineland? Would further attempts to accommodate and appease Nasser merely be another Munich? Eden did not want to go through all that again. Two of his brothers had died in World War I; his eldest son had been killed in World War II. He personally owed it to them and to all the other ...

That same month, with the Suez crisis still brewing, Robert Anderson, a wealthy Texas oil man who was much admired by Eisenhower, made a secret trip to Saudi Arabia as the President’s personal emissary. The objective was to get the Saudis to apply pressure on Nasser to compromise. In Riyadh, Anderson warned King Saud and Prince Faisal, the Foreign Minister, that the United States had made great technical advances that would lead to sources of energy much cheaper and more efficient than oil, potentially rendering Saudi and all Middle Eastern petroleum reserves worthless. The United States might feel constrained to make this technology available to the Europeans if the canal were to be a tool of blackmail. And what might this substitute be, asked King Saud. “Nuclear energy,” replied Anderson. Neither King Saud nor Prince Faisal, who had done some reading on nuclear power, seemed impressed, nor did they show any worry about the ability of Saudi oil to compete in world energy markets. They dismissed Anderson’s warning.

In all the agitated discussion in 1956 about the Suez Canal as the jugular, one point had not been given much attention: If the canal and the Middle Eastern pipelines were vulnerable, there was a safer alternative—the route around the Cape of Good Hope. To be economical and practical, however, supplying Western Europe by that route would require much larger tankers, capable of carrying a great deal more oil. The general view in the industry, however, was that, physically, such tankers could not be constructed. But Japanese shipyards, taking advantage of advances in diesel engines and better steels, were soon proving otherwise. “In 1956, the tanker people were saying larger ships would be too expensive, their fuel costs too high,” recalled John Loudon, senior managing director of Shell. “The amazing thing to me was how quickly these tankers were being manufactured by the Japanese.” Not only would they prove to be eminently economical, they would also provide the requisite security. Thus, supertankers, along with the decline of British influence and prestige and the ascendancy of Gamal Abdel Nasser, were among the consequences of the Suez Crisis. As one British official put it, “Tankers clearly were less subject to political risk.”

During the crisis, the United States had focused on trying to bolster its position with Arab oil producers. Eisenhower himself put great emphasis on “building up King Saud as a major figure in the Middle Eastern area” as an alternative to Nasser and on making clear to Arab oil producers that the United States intended to work to “restore Middle East oil markets in Western Europe.” Beyond that consideration, there was also the thrust to support stable pro-Western governments in the Middle East as a bulwark against Soviet expansionism. Britain and France certainly shared both those strategic objectives. Their differences were over means, not ends.

The oil industry had clearly entered a new era when a billion barrels or so no longer made much difference. From the early 1950s to the end of the 1960s, the world oil market was dominated by extraordinarily rapid growth, a tremendous surge that, like a powerful and somewhat frightening undertow, swept everyone in the industry forward with its seemingly irresistible force. Consumption grew at a pace that simply would not have been conceivable at the beginning of the postwar era. Yet, as rapidly as it grew, the availability of supplies grew even more swiftly.

The increase in free world crude oil production was gargantuan: from 8.7 million barrels per day in 1948 to 42 million barrels per day in 1972. While U.S. production had grown 5.5 to 9.5 million barrels per day, America’s share of total world production had slipped from 64 percent to 22 percent. The reason for the percentage decline was the extraordinary shift to the Middle East, where production had grown from 1.1 million barrels per day to 18.2 million barrels per day—a 1,500 percent increase! Even more dramatic was the shift in proven oil reserves—that is, oil in a particular reservoir that, with some confidence, people knew about and that could be produced economically. Proven world oil reserves in the noncommunist world increased from 62 billion barrels in 1948 to 534 billion barrels in 1972, almost a ninefold rise. American reserves had grown from 21 billion barrels in 1948 to 38 billion barrels by 1972. But their statistical significance had shrunk, from 34 percent of total world reserves to a mere 7 percent. While major growth was being registered in Africa, by far the most staggering part of the increase was in the new center of gravity, the Middle East, whose reserves had increased from 28 billion barrels to 367 billion barrels. Out of every ten barrels added to free world oil reserves between 1948 and 1972, more than seven were found in the Middle East. What these enormous numbers meant was that, as fast as the world was using oil, it was even more quickly addin...

The postwar petroleum order rested on two foundations. One was composed of the great oil deals of the 1940s, which had established the basic relationships among companies operating in the Middle East. These arrangements mobilized the resources required for the rapid development of the petroleum reserves, tied production to the refining and marketing systems required by the scale of reserves, and developed and secured the much larger demand that was required. The second foundation was composed of the concessional and contractual relationships between the companies and the governments of the oil-producing countries, at the heart of which was the hard-won fifty-fifty profit-sharing arrangement. On those two bases, it was hoped, relative stability would be built. Fearing what might otherwise follow, neither major oil companies nor the governments of the consuming nations wanted to budge from the fifty-fifty principle. As the Middle East Oil Committee of the British Cabinet Office said in late 1954, “A reasonable basis has now been reached for a partnership between the oil companies and the Middle East Governments…. Any further encroachment by the Middle East Governments…would seriously damage our oil supply system.” But for the governments of the producing countries, it was quite a different matter. Why not increase their revenues if they could, so long as they did not irrevocably alienate the companies and Washington and London?

Mattei began talking seriously to Iran and to the Shah. If the majors had become expert at corporate intermarriages through their joint ventures, Mattei would go them one better: Thinking dynastically in his quest for Italian access to Iranian oil, he floated the idea of marrying off an Italian princess to the Shah, who was in urgent need of a male heir. The Shah was also in urgent need of a larger share of oil revenues than he obtained from the consortium. One of the legacies of Mossadegh, nationalization, gave the Shah comparative flexibility. In the other oil-producing countries, the concessionaires—the foreign companies—still owned the reserves in the ground. By contrast, the government owned all the oil resources in Iran, and the Shah was no less committed than Mossadegh to control of the country’s petroleum resources. Mattei took advantage of that situation, and over the spring and summer of 1957 he moved to hammer out a wholly unprecedented arrangement with Iran, one that took into account both Iran’s new position and the Shah’s ambitions. The Shah personally championed and pushed the deal through his government, under the terms of which the National Iranian Oil Company would be ENI’s partner as well as its landlord. That meant, in practice, that Iran would get 75 percent of the profits to ENI’s 25 percent—breaking the treasured fifty-fifty arrangement. As J. Paul Getty and others had already found, it cost more to get into the game when you were a latecomer.

In 1958, further adding to Nasser’s laurels, Egypt finally bamboozled a reluctant and skeptical Soviet Union into providing the funding to build the Aswan Dam. In the same year, in a great symbol of Nasser’s appeal, Syria joined Egypt to form the United Arab Republic, seemingly the first step in the realization of his dream of pan-Arabism. The apparent merger, ominously, brought together the two countries which—with the Suez Canal in Egypt and the Saudi and Iraqi pipelines passing through Syria—dominated the transit routes for Middle Eastern petroleum. Nasser was, at least theoretically, in a position to threaten single-handedly or actually even to choke off most of that supply. In order to counter what the British ambassador to Iraq called Nasser’s “stranglehold,” discussions ensued about quickly building Iraqi pipelines to the Persian Gulf as well as an export terminal at Fao, on the Gulf. But then the situation in the region, and in Iraq itself, went from bad to what seemed a total disaster. For three years, Nasser had been conducting a virulent propaganda war against Iraq and the Hashemites, the British-backed Royal Family that had been installed by Great Britain on a newly created throne in Baghdad after World War I. In July 1958, officers plotting a coup told their troops the far-fetched story that they had been ordered to march to Israel and surrender their weapons. That was sufficient to get the soldiers to support a rebellion. The coup that followed set off an exp...

Oil was a central focus of the rising Arab nationalism. Since the early 1950s, a number of meetings and contacts among what were semi-officially called “Arab Oil Experts” had been taking place in the Middle East. Initially, the dominant subject had been economic warfare against Israel: the establishment of an oil blockade against the new state and its enforcement upon the international companies through the threat of blacklist, harassment, and expropriation. Over time, however, the agenda broadened. Though Egypt was not an oil exporter, Nasser used such meetings to involve himself directly in petroleum politics. He sought to arouse and shape public opinion, hammering on the issues of sovereignty and the struggle against “colonialism,” and to assert his influence over the oil, and the countries, of the Gulf. It was a case of a “have not” seeking to better his position with the wherewithal of the “haves.” At a conclave of Arab Oil Experts in Egypt, in the spring of 1957, the delegates proposed the building up of domestic refining capacity and the establishment of an Arab tanker fleet and an Arab pipeline to the Mediterranean. They also discussed creating an Arab “international body” or “international consortium” that would manage Middle Eastern oil production, increase revenues, and counterbalance the power of the petroleum companies. The group emphasized the need to build up Arab expertise and technical skills in order to challenge their mystique. The targets of the strong ...

Pérez Alfonzo had vowed never to allow himself to be seduced by the trappings of power, and once back in office, he kept to a simple, disciplined, and parsimonious life. He carried his own sardine sandwiches to the office for lunch. He also brought to his new office a sophisticated understanding of the structure of the oil industry as well as his own clearly defined objectives. He wanted not only to increase the government’s share of the rents, but also to effect a transfer to the government, and away from the oil companies, of power and authority over production and marketing. To sell oil too cheaply, he argued, was bad for consumers, as the result would be the premature exhaustion of a nonrenewable resource and the discouragement of new development. For the producing countries, oil was a national heritage, the benefits of which belonged to future generations as well as to the present. Neither the resource nor the wealth that flowed from it should be wasted. Instead, the earnings should be used to develop the country more widely. Sovereign governments, rather than foreign corporations, should make the basic decisions about the production and disposition of their petroleum. Human nature should not be allowed to squander the potential of this precious resource.14 Yet Pérez Alfonzo was also motivated by shrewd commercial judgment. He knew that while Venezuela had a kinship with the oil-producing nations of the Middle East, those nations were also dangerous competitors. Venez...

At first, Tariki concentrated on trying to gain control over refining and marketing assets as a means to raise Saudi oil revenues. He wanted to create a Saudi oil company integrated “right down to the service station” in the consuming countries. He would even raise an idea calculated to send a chill down the back of the American majors: the outright nationalization of Aramco. But then, in early 1959, his entire strategy abruptly changed. Control over prices and production, he suddenly decided, was more important than nationalization and integration. The reason for his change of mind was a sudden cut in the price of oil.

While world oil demand was growing during the 1950s, production capacity was growing still more rapidly. Always in search of higher revenues, the exporting countries, for the most part, sought to gain them by increasing the volume sold, rather than by raising prices. More oil was in search of markets than there were markets for oil. As a result, the companies were forced to offer bigger and bigger discounts on the prices at which they in turn sold their Middle Eastern oil. Discounting was leading to a crucial divergence in the world oil industry between the “posted” or official price, which was held constant, and the actual market price at which crude was sold, which was dropping. It was the former, the posted price, against which the producing country’s “take”—taxes and royalties—was computed. The posted price was supposed to more or less match the market price, and originally, it had. But, as discounting spread, a gap between the two had appeared and expanded. The posted price could not easily be lowered because of its importance to the revenues of the producing countries. That meant that they continued to take 50 percent of the profits based upon the posted price. But by the late 1950s, that was a fictional price, existing only as a basis for calculating revenues. In fact, the producing countries were taking a higher percentage—perhaps 60 or 70 percent—of the profit realized from the actual price. In other words, the Middle Eastern governments were being kept whole, whi...

In an effort to educate his fellow directors, Page arranged for the intrepid journalist Wanda Jablonski, just back from the Middle East, to meet with the board of Jersey. She told them, according to a report by a British diplomat who talked to Jablonski afterward, that there was “almost universal adulation for Nasser among all classes, and a hostility towards the west that had deepened markedly. In the field of oil this took the form of a growing outcry against absentee landlordism. She had listened to many a bitter diatribe against those international oil companies who, from foreign capitals, were draining off the wealth of the Arab countries! It was intolerable that, from their remote vastness in London, New York, Pittsburgh etc., top executives of oil companies should control the economic destinies of Middle East oil producing states.” Jablonski even told the Jersey board that the existing structure of the Iraq Petroleum Company and Aramco might prove to be “short-lived,” which was about the last thing in the world they wanted to hear.

Now, as the Jersey board debated cutting the posted price, Page argued against it. Jersey would be cutting the countries’ national revenues. Consult with the governments, he said, compromise with them, but don’t do anything unilateral. Page made a motion that a cut be made, but that it be effected only after some discussion and agreement with the governments. The other directors backed the motion. Jack Rathbone did not, and he was the chairman. He privately dismissed Page as “a know-it-all.” He decided that Jersey would go ahead and cut the price, and that the company would do it the way he wanted it done, which was without first consulting any governments or anyone else. That was that. On August 9, 1960, with no direct warning to the exporters, Jersey announced cuts of up to fourteen cents a barrel in the posted prices of Middle Eastern crudes—about a 7 percent reduction. The other companies followed suit, though without any enthusiasm and, in some cases, with a good deal of alarm. To John Loudon of Shell, it was “the fatal move. You can’t just be guided by market forces in an industry so essential to various governments. You had to take these other things into consideration. You had to be so terribly careful.” BP, which had learned its lesson when it cut the posted price in 1959, complained that it “heard the news with regret.”

The reactions on the part of oil-producing countries went far beyond “regret.” Standard Oil of New Jersey had suddenly made a significant slice in their national revenues. Moreover, that decision, so critical to their fiscal position and their national identity, had been carried out unilaterally, without any consultation. They were outraged. “All hell broke loose,” recalled Howard Page. Another Jersey executive, who had also opposed the cut, was in Baghdad when it was announced. He was, he later said, “glad to get out alive.”

by September 14, the group had completed its work. A new entity had been established with which to confront the international oil companies. It was called the Organization of Petroleum Exporting Countries, and it made its intention clear: to defend the price of oil—more precisely, to restore it to its precut level. From here on, the member countries would insist that the companies consult them on the pricing matters that so centrally affected their national revenues. They also called for a system of “regulation of production,” Tariki’s and Pérez Alfonzo’s dream of a worldwide Texas Railroad Commission. And they committed themselves to solidarity in case the companies sought to impose “sanctions” on one of them.

OPEC could claim only two achievements in its early years. It ensured that the oil companies would be cautious about taking any major step unilaterally, without consultation. And they would not dare cut the posted price again. Beyond that, there were many reasons why OPEC had so little to show for its first decade. In all the member countries, with the exception of Iran, the oil reserves in the ground actually belonged by contract to the concessionaires, the companies, thus limiting the countries’ control. Furthermore, the world oil market was overwhelmed with surplus, and the exporting countries were competitors; they had to worry about holding on to markets in order to maintain revenues. Thus they could not afford to alienate the companies on which they depended for access to those markets.

Thousands of tanks had rolled back and forth over the gravelly rock of Libya during World War II, in the titanic desert struggle between the Germans and the British. And it was there that Rommel’s forces, chronically short of fuel, had ultimately been overwhelmed. Neither side knew that, even as their fuel gauges were falling, they were fighting at times only a hundred miles or so from one of the world’s great reserves of oil.

Libya was a very poor country, plagued by droughts and locusts. Its economic prospects could hardly be called promising; in the years after World War II, its leading exports were two: esparto, a type of grass used to make paper for currency bills, and scrap metal scavenged from the rusting tanks and trucks and weaponry that had been left behind by the Axis and Allied Armies. But by the middle 1950s, there was growing suspicion among geologists that the country might produce oil. To encourage exploration and development, the Libyan Petroleum Law of 1955 provided for a host of much smaller concessions, instead of the very large concession areas characteristic of the Persian Gulf countries. “I did not want Libya to begin as Iraq or as Saudi Arabia or as Kuwait,” explained the Libyan petroleum minister who oversaw the law. “I didn’t want my country to be in the hands of one oil company.” Libya would give many of the concessions to independent companies, which did not have oil production and concessions to protect in other countries in the Eastern Hemisphere, and thus would have no reason to hold back from exploring and producing as much, and as rapidly, as they could in Libya. The law offered another incentive. The government’s take would be pegged to the actual market price for its oil, which was lower than the increasingly fictional posted price. This meant that Libyan oil would be more profitable than oil from other countries, which was an excellent reason for any company t...

Oil import quotas sounded simple, straightforward. These were not. As time went on, their management became more and more Byzantine. Indeed, under the Mandatory Oil Import Program, as it was known, there were continuing fights over allocations, struggles over interpretations, searches for loopholes, and the ever-more-intense hunt for exceptions and exemptions. Over the years, the program became increasingly barnacled and distorted. A brisk market developed, not in oil itself, but in oil import “tickets” or rights to bring in oil. Some parts of the refining industry ended up, in effect, subsidizing others.

Japan was somewhat slower in initiating the shift to oil. Coal was its traditional basic energy source. Before and during World War II, oil had primarily fueled the military, with a small consuming sector in civilian transportation and a continuing use of kerosene for lighting. Refineries and the rest of the oil infrastructure were devastated in the finale of World War II. Not until 1949 did the American Occupation even permit the reestablishment of oil refining in Japan, and then only under the tutelage of Western companies—Jersey, Socony-Vacuum, Shell, and Gulf. With the end of the Occupation, the regaining of political independence, and the Korean War, Japan embarked on its remarkable process of economic growth. So successful was the first phase, based on the rapid development of heavy industry and chemicals, that by 1956, the government was already able to make an epochal declaration: “We are no longer living in the days of postwar reconstruction.” Japan would not be poor forever, and coal, it was expected, would fuel the continuing growth. At the beginning of the 1950s, coal provided more than half of Japan’s total energy, and oil only 7 percent—less than firewood! But oil prices kept falling. By the beginning of the 1960s, there could be no question that the government and Japanese industry would bet on oil. As elsewhere, it would free the economy from the threat of labor unrest among coal miners, and once again, oil was much cheaper than coal.

The British did help set up a federation, the United Arab Emirates, to bind together a number of the small states, which, it was hoped, would afford them some measure of protection. With that accomplished, the British packed up and left the Gulf in November 1971. Their departure marked the most fundamental change in the Gulf since World War II and meant the end of the security system that had operated in the area for over a century. It left behind a dangerous power vacuum in a region that supplied 32 percent of the free world’s petroleum and that, at the time, held 58 percent of the proven oil reserves.

The Shah of Iran, as he had demonstrated the previous month with the great celebration at Persepolis, was eager to fill the vacuum. “The safety of the Persian Gulf had,” he said, “to be guaranteed, and who but Iran could fulfill this function?” The Americans were not happy to see the British go. But if not the British, there was the Shah. This was, after all, the era of the Nixon Doctrine, which attempted to deal with the new political and economic constraints on American power by depending upon strong, friendly local powers as regional policemen. No one seemed better fitted to play that role than the Shah. Nixon himself had developed a high regard for the Shah, whom he first met in 1953, a few months after the Shah had regained his throne. “The Shah is beginning to have more guts,” he had told President Eisenhower then. “If the Shah would lead, things would be better.” When Nixon lost the California gubernatorial election in 1962, he set out on a round-the-world trip. The Shah had been one of the few heads of state to receive him cordially. Nixon never forgot that show of respect when he was down. Now, in the early 1970s, the Shah was intent on leading, not only in Iran but throughout the region, and the Nixon Administration supported him. Though the fact often went unrecognized, there was no other obvious choice. Soviet arms were flowing in large volumes into neighboring Iraq, which had its own long-held ambitions for hegemony over the Gulf and its oil. From here on, a v...

The 1970s also saw a dramatic shift in world oil. Demand was catching up with available supply, and the twenty-year surplus was over. As a result, the world was rapidly becoming more dependent on the Middle East and North Africa for its petroleum. The late 1960s and early 1970s were, for the most part, years of high economic growth for the industrial world and, in some years, outright boom. This growth was fueled by oil. Free world petroleum demand rose from almost 19 million barrels per day in 1960 to more than 44 million barrels per day in 1972. Oil consumption surged beyond expectation around the world, as ever-greater amounts of petroleum products were burned in factories, power plants, homes, and cars. In America, gasoline use increased not only because people were driving more miles but also because cars were getting heavier and were carrying more “extras,” such as air-conditioning. The cheap price of oil in the 1960s and early 1970s meant that there was no incentive for fuel-efficient automobiles.