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

by Daniel Yergin

Another significant shift was taking place in the industrial countries. Man’s view of the environment and his relationship to it was also changing, with the paradoxical effect of both increasing the demand for oil and regulating its use. Beginning in the mid-1960s, environmental issues began to compete successfully for their place in the political process, in the United States and elsewhere. Air pollution prompted utilities around the world to shift from coal to less-polluting oil, adding another major stimulus to demand. In 1965, New York’s mayor pledged to banish coal from the city. An air pollution crisis hit New York City on Thanksgiving Day, 1966; smog gripped the city, and coal burning was restricted. Within two years, Consolidated Edison, the utility serving New York City, switched to oil. In 1967, a clean air bill passed the United States Senate by a vote of eighty-eight to three. In 1970, Federal legislation was enacted that established what became known as environmental impact statements: The possible consequences for the environment of major new projects had to be projected and taken into account before a go-ahead would be given. That same year, one hundred thousand people paraded down Fifth Avenue in New York City to mark Earth Day.

For the most part, oil operations outside the United States had been based on the concession system, the history of which reached back to William Knox D’Arcy and his bold and blind venture into Persia in 1901. Under the concession system, the oil company contractually obtained rights from a sovereign to explore for, own, and produce oil in a given territory, be it as large as D’Arcy’s original 480,000 square miles in Persia or Occidental’s 2,000 square miles in Libya. But now, as far as the oil exporters were concerned, concessions were already a thing of the past, holdovers from the defunct age of colonialism and imperialism, wholly inappropriate to the new age of decolonization, self-determination, and nationalism. Those countries did not want to be mere tax collectors. It was not only a question of garnering more of the rents. For the exporters, the greater question was sovereignty over their own natural resources. Everything else would be measured against that objective.

Outright nationalization had been an obvious resort for some exporting regimes—in Russia after the Bolshevik Revolution, in Mexico, in Iran. The concept of “participation,” partial ownership achieved by negotiation, was consciously devised as an alternative to nationalization and full ownership because it satisfied the interests of some of the main oil exporters. Oil was not only a symbol of national pride and power; it was also a business. Outright nationalization would disrupt relations with the international companies and put the oil-producing country directly into the business of selling oil. The country would thus face the same obstacle that bedeviled the independents who had built up large reserves of oil in the Middle East—the problem of disposal. That would lead to a battle royal with other exporters for markets. The oil companies not only would be free to shop around for the cheapest barrel, but also would have strong incentive to do so, since they would now be making their profits on sales in the consuming markets, rather than in production.

JUST MOMENTS BEFORE 2:00 P.M. on October 6, 1973—on what, by that year’s calendar, was Yom Kippur, the holiest of Jewish holidays—222 Egyptian jets roared into the sky. Their targets were Israeli command posts and positions on the eastern bank of the Suez Canal and in the Sinai. Minutes later, more than 3,000 field guns opened fire along the entire front. At almost exactly the same time, Syrian aircraft launched an attack on Israel’s northern border, followed immediately by a barrage from 700 pieces of artillery. Thus began the October War, the fourth of the Arab-Israeli wars—the most destructive and intense of all of them, and the one with the most far-reaching consequences. The armaments on both sides of the conflict had been supplied by the superpowers, the United States and the Soviet Union. But one of the most potent weapons was unique to the Middle East. It was the oil weapon, wielded in the form of an embargo—production cutbacks and restrictions on exports—that, in the words of Henry Kissinger, “altered irrevocably the world as it had grown up in the postwar period.” The embargo, like the war itself, came as a surprise and a shock. Yet the pathway to both in retrospect seemed in some ways unmistakable. By 1973, oil had become the lifeblood of the world’s industrial economies, and it was being pumped and circulated with very little to spare. Never before in the entire post-war period had the supply-demand equation been so tight, while the relationships between the oi...

What was called the “Arab oil embargo” had two elements. The broader one was composed of the rolling production restraints that affected the entire market—the initial cutbacks, then the additional 5 percent each month. The second element was the total ban on export of oil, which was initially imposed on only two countries, the United States and the Netherlands, though subsequently extended to Portugal, South Africa, and Rhodesia. In a bizarre twist, the embargo also extended to United States military forces in the Eastern Hemisphere, including the Sixth Fleet, among whose de facto responsibilities was the protection of some of those states that were imposing the embargo. The oil companies may have thought that they carried out that particular cutoff with a “wink,” implying that the missing oil would be made up from other sources; but, if so, the wink was not seen in the Pentagon, where, in the midst of a major military crisis, which might involve American forces, the reaction was one of fury. Nor was it seen in the Congress, where an amendment was hurriedly passed making it a criminal act to discriminate against the Department of Defense. Meanwhile, supplies were resumed to the U.S. forces.

The oil exporters, in the final analysis, thought in terms of revenues. In 1967, they had pulled back from an embargo because they had found that their total earnings fell. Having learned that lesson, King Faisal had been reluctant, at least through 1972, to resort to the oil weapon. But now, with the price per barrel skyrocketing, the exporters could cut back on volumes and still increase their total income. They could sell less and still earn more. Looking at their earnings, they might decide to make the cuts permanent and never bring the missing barrels back to the market, which could mean a chronic shortage, permanent fear—and even higher prices.1

On the one side there was the intense, deadly serious pressure from the Arab governments. The threat was explicit; the companies could lose their entire position in the Middle East. When the Saudis ordered the first 10 percent cutback on October 18, Aramco responded immediately, and it cut just a little extra for good measure. Here would unfold the anomalous, unpalatable sight of an American company—the most important jewel, some thought, of all American investments abroad—in a position that it had worked to avoid at all costs: actually implementing an embargo against the United States. But what choice did it have? Was it not better to cooperate and move as much oil onto the world market as possible than to be nationalized and thrown out? “The only alternative was not to ship the oil at all,” Chevron’s George Keller, an Aramco director, said afterward. “Obviously it was in the best interests of the United States to move 5, 6, 7 million barrels per day to our friends around the world rather than to have that cut off.” Yet on the other side were the consuming governments, all of which sought the oil their publics needed. The most powerful of them happened to be the United States, not only the home government of five of the seven majors, but also the primary target for the whole exercise. Any action the companies took, they knew, would be subject to the closest scrutiny and after-the-fact evaluation. They did not want to lose markets, nor find themselves shut out, nor invite ...

The massive reallocation posed a very considerable logistical problem. Even under calm and relatively predictable circumstances, managing an integrated oil system was a highly complex matter. Supplies of varying qualities from various sources had to be linked into the transportation system and then moved to refineries that had been designed to handle those specific oils. Free will was not an option when it came to assigning crude oils. The “wrong” crudes could do considerable damage to the innards of a refinery, as well as reducing efficiency and profitability. And once the crude supplies were run through the refinery and turned into a number of products, they then had to be moved into a distribution system and linked with a “market demand” that wanted that particular balance of products—this amount of gasoline, that amount of jet fuel and heating oil.

In a meeting with oil executives, Henry Kissinger did make it a point to ask them “to take care of Holland,” which had been made a particular target by the Arabs because of its traditional friendship for Israel.

At the end of December, Richard Nixon wrote a very strong private letter to the Shah. Outlining “the destabilizing impact” of the price increase and the “catastrophic problems” it could create for the world economy, he asked that it be reconsidered and withdrawn. “This drastic price increase is particularly unreasonable coming as it does when oil supplies are artificially restrained,” said the President. The Shah’s reply was brief and totally ungiving. “We are conscious of the importance of this source of Energy to the prosperity and stability of the international economy,” he said, “but we also know that for us this source of wealth might be finished in thirty years.” 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 t...

In May, Henry Kissinger was able to secure the Syrian-Israeli disengagement, and a peace process seemed to have begun. In June, Richard Nixon made a visit to Israel, Egypt, Syria, and Saudi Arabia. The embargo was now history, albeit very recent history, at least insofar as the United States was concerned. (It was still in place against the Netherlands.) The United States could rightly claim the beginnings of some considerable results in Middle Eastern diplomacy. Watergate, however, was an ever-present reality, and Nixon’s behavior on the trip struck some as stark. Sitting with the Israeli Cabinet in Tel Aviv, he suddenly announced that he knew the best way to deal with terrorists. He sprang to his feet and, with an imaginary submachine gun in his hand, pretended to gun down the entire Cabinet, Chicago style, making a “brrrrr” sound as he did so. The Israelis were perplexed and a little concerned. In Damascus, Nixon told Syria’s Assad that the Israelis should be pushed back until they fell off the cliff, and to underscore the point, he made strange, chopping gestures. Thereafter, in subsequent meetings with other Americans, Assad would insist on recalling Nixon’s exposition. But it was in Egypt that Nixon had his great moment. His days there could only have been called triumphal. Millions of enthusiastic, delirious Egyptians turned out to cheer. It was truly his last hurrah. There was much there for savorers of irony. After all, this was the land of Gamal Abdel Nasser, who...

But as he pushed for further price increases, the Shah collided with his neighbors across the Gulf. The Saudis had never approved of the scale of the December 1973 price increase. They thought it was too large, and too dangerous to their own position. They feared the economic consequences. And they had been alarmed to find themselves losing control over OPEC and over the basic decisions about oil, which was so central to the kingdom’s existence and future. It was not in their interest to perpetuate the cycles of recession and inflation that would be stimulated by further increases in oil prices. Owing to the size of their oil reserves, the Saudis had a decisive stake in the long-term markets for oil, in contrast to Iran. The Saudis feared that higher prices, and the expectation thereof, could set off a move away from oil to conservation and to other fuel sources that would change and contract that long-term market for oil and thus diminish the value of their reserves. From those considerations flowed other concerns. Saudi Arabia was a country large in territory but small in population, not much bigger in terms of numbers than, for instance, the geographically minute Hong Kong. The rapid buildup of oil revenues could create social and political tensions, as well as dangerous expectations, weakening the ties that held the kingdom together. Nor did the Saudis want higher prices to interfere with, complicate, or undermine their objectives in the Arab-Israeli conflict. And they...

While, initially, the oil companies were still linked by supply contracts to their former concessions in Saudi Arabia, Venezuela, and Kuwait, those connections would weaken over time due to diversification policies of both countries and governments, and because of the opportunities and alternative ties that existed in the market. Moreover, at the same time that the “great concessions” were being terminated, a new relationship was emerging between various petroleum exporting countries and international oil companies. Instead of being “concessionaires,” with ownership rights to the oil in the ground, the companies were now becoming mere “contractors,” with “production sharing” contracts that gave them rights to part of any stream of oil they discovered. This new type of relationship was pioneered by Indonesia and Caltex in the late 1960s. The “services” happened to be the familiar ones of exploring for, producing, and marketing oil. But the shift in terminology reflected an all-important political change: The sovereignty of the country was recognized by both parties in a way that was acceptable in the domestic politics of the countries. The lingering aura of a colonial past was banished; after all, the companies were there merely as hired hands. By the mid-1970s, such production sharing contracts were becoming common in many parts of the world. Meanwhile, the amount of oil sold directly by the exporters themselves into the market, without benefit of the companies in their tr...

The Administration was proceeding as though there was a crisis that would rally the nation; the public, however, did not think there was a crisis. And, in the course of pushing his program, Carter received a firsthand education in how special interests operate in the American system, including liberals, conservatives, oil producers, consumer groups, automobile companies, pro- and antinuclear activists, coal producers, utility companies and environmentalists—all with conflicting agendas. To Schlesinger, however, the issue was absolutely clear. The United States faced “a substantial long-run national problem.” He did not think that the world was about to run out of oil, but rather that the high growth rates in consumption that had supported economic development in the 1950s and 1960s could no longer be sustained. “We had to stop depending on crude oil for economic growth,” he would later explain. “We had to wean ourselves away.” Confident in his rigorous analysis of the issue, he was unprepared for the storm of debate and the bitterness of the ensuing battles. Sitting through one Congressional hearing after another, he came to recall a word of advice that an old veteran at the Atomic Energy Commission had given him when he was its chairman: “There are three kinds of lies—lies, damn lies, and energy lies.” Later, Schlesinger would say, “I have a sort of World War II mentality. If the President says something is in the national interest, I had assumed he would get a more suppo...

A WEEK AFTER Jimmy Carter’s departure from Iran, a Tehran newspaper published a savage attack on an implacable opponent of the Shah’s, an elderly Shiite cleric named Ayatollah Ruhollah Khomeini, who was then living in exile in Iraq. The article, though anonymous, appeared to be the work of an official of the Shah’s regime. Perhaps the Carter visit had bolstered flagging confidence. Certainly the article was already in the works, for exasperation was increasing with Khomeini’s own harsh attacks on the Shah’s government, which were being circulated clandestinely in cassettes throughout Iran. Animosity between the royal house of Iran and the fundamentalists of the dominant Shia Islamic sect dated back to Reza Shah’s fierce battle for power with the Shiite clergy in the 1920s and 1930s and was part of a much larger struggle between secular and religious forces. But that newspaper article of January 7, 1978, triggered a wholly new stage in the struggle.

It had become evident in the mid-1970s that Iran simply could not absorb the vast increase in oil revenues that was flooding into the country. The petrodollars, megalomaniacally misspent on extravagant modernization programs or lost to waste and corruption, were generating economic chaos and social and political tension throughout the nation. The rural populace was pouring from the villages into the already-overcrowded towns and cities; agricultural output was declining, while food imports were going up. Inflation had seized control of the country, breeding all the inevitable discontents. A middle manager or a civil servant in Tehran spent up to 70 percent of his salary on rent. Iran’s infrastructure could not cope with the pressure suddenly thrust upon it; the backward railway system was overwhelmed; Tehran’s streets were jammed with traffic. The national electricity grid could not meet demand, and it broke down. Parts of Tehran and other cities were regularly blacked out, sometimes for four or five hours a day, a disaster for industrial production and domestic life and a further source of anger and discontent. Iranians from every sector of national life were losing patience with the Shah’s regime and the pell-mell rush to modernization. Grasping for some certitude in the melee, they increasingly heeded the call of traditional Islam and of an ever more fervent fundamentalism. The beneficiary was the Ayatollah Khomeini, whose religious rectitude and unyielding resistance m...

Rising oil prices had become the object of constant attention by presidents and prime ministers, as well as the fodder of front pages for months. They were also a subject of intense dismay for the leaders of Saudi Arabia. Once again, they were alarmed both by their own loss of control over the market and by the fact that control seemed to have passed into the hands of such militant and uncompromising rivals as Libya and Iran. They thought that the wildly rising prices threatened the world economy with recession, depression, or even ruin, and thus threatened their own well-being. The days in which Saudi Arabia’s economic future was determined by the number of pilgrims who came to Mecca were long since past; now it was the “rates” that mattered to Riyadh—world interest rates, exchange rates, inflation rates, growth rates. The Saudis also feared that their own position would be damaged in another way: that the price increases would destroy consumers’ confidence in oil and, thus, stimulate long-lasting competition to OPEC oil, as well as large-scale development of alternative fuels. That would be particularly threatening to a country with huge oil reserves, the life of which would extend far into the twenty-first century. The Saudis responded to the predicament with jawboning: Yamani became more of a hawk on the need for conservation to blunt price increases than almost any Western leader. The Saudis tried to hold down their own official prices, even if that meant leaving mone...

For much of the year the Saudis had been steadily producing extra oil in order to counter the price increases. In 1979, OPEC production was back up to 31 million barrels per day, even with the Iranian shutdown—3 million barrels per day higher than 1978. Where was the extra oil going? Not into actual consumption, Yamani was sure, but into the inventories of companies fearful that future supplies would be further interrupted. At some point, the extra oil would tumble out of inventories and into the market, depressing prices. “Political decisions cannot permanently negate the divine laws of supply and demand,” Yamani would later explain. “Prices go up, and demand goes down, it’s simple, it’s ABC.” At the Tamanaco, Yamani moved into the top-floor Presidential suite, vacated at his request by the Venezuelan oil minister, and began to campaign for his point of view. The oil ministers met privately in the Saudi’s suite for what turned into a marathon. Yamani warned them of the danger as he saw it: that they were damaging their own interests, that demand was already showing signs of weakening, that the continuing price leapfrogging would bring a “catastrophe in the world economy.” A few of the other ministers agreed with him; the majority did not. When Yamani said that demand for OPEC oil would dramatically plummet and that they would have to cut production to protect prices and then that prices would collapse in any event, they scoffed. One oil minister said Yamani must be joking...

The war had been sparked by a host of rivalries: ethnic and religious, political and economic, ideological and personal; by a struggle for primacy in the Gulf; by the insecurities of national cohesion; and by the arbitrary way in which “nations” had been created and borders in the Middle East overlaid on the map of the defunct Ottoman Empire. Indeed, geography was decidedly at the heart of the conflict. The Shah had been at loggerheads with the secular Ba’thist regime in Baghdad since it first came to power in 1968. One of the most important issues between the two countries was the Shatt-al-Arab, a meandering river and delta created by the confluence of the two Iraqi rivers, the Tigris and Euphrates, with several rivers from Iran. The Shatt-al-Arab served as the boundary for 120 miles between the two countries. It was crucial to Iran as its most important avenue to the Gulf—the Abadan oil refinery was built on a mud flat in the river delta—but certainly not its only one. The Shatt-al-Arab, however, was critical to Iraq as its only avenue to the high seas. Iraq’s entire coastline was only twenty-six miles or so in length, compared to Iran’s fourteen hundred miles of coast. Basra, Iraq’s principal port city, was actually almost fifty miles up the Shatt-al-Arab, which had to be frequently dredged owing to its shallowness and the buildup of silt. Sovereignty over the Shatt-al-Arab had, thus, assumed great symbolic significance. To make matters worse, a considerable part of bot...

Saddam Hussein’s father had died just before his birth in 1937, and as he grew up, he found his identity in extreme nationalism and the violent, conspiratorial world of Ba’thism. The decisive influence on him was his uncle Khayr Allah Talfah, who raised him and became his guardian. A fervent nationalist from the Sunni Arab minority, Talfah hated and despised the European culture. For both uncle and nephew, the lodestar event was the pro-Nazi nationalist Rashid Ali coup of 1941, in the course of which German planes attacked British forces in Iraq. When Iraqi troops threatened to fire on a plane evacuating British women and children, British soldiers attacked them and the coup collapsed. Talfah participated in the coup, and when it failed, he was imprisoned for five years, leaving him with a lasting sense of bitterness, resentment, and hatred that he communicated to his fatherless nephew. The Rashid Ali coup became a central myth for the Ba’thist movement. Saddam Hussein was also shaped by the culture of his hometown of Tikrit, which was remote from the national life of Iraq and oriented instead to the harsh desert. Tikrit’s values of desert survival—suspicion, stealth, surprise, and the unalloyed use of force to achieve one’s objectives—were the ones that Saddam Hussein absorbed.

It was during the tumult and enthusiasm that accompanied Nasser’s victory at Suez in 1956 that Saddam Hussein, while still a teenager, was recruited into the Ba’th party. The Nasserite anti-imperialistic rhetoric of the 1950s remained with him ever after. Shortly after joining the party, it is said, he carried out his first assassination—of a local political figure in Tikrit. His commitment to Ba’thism was sealed and the foundations of his reputation established. In 1959, he had been one of the assailants in the assassination attempt, on Baghdad’s main street, on Iraq’s ruler, Abdul Karim Kassem. The attack failed, and Hussein, wounded in the gunfire and under a death sentence, fled to Egypt. He did not return to Iraq until 1963. Thereafter, he took charge of organizing the Ba’thist party’s underground militia. Though already the strongman for several years in the Ba’thist regime that took power in 1968, he assumed the Presidency—replacing Ahmad Hasan al-Bakr, cousin of his uncle—only in 1979 in the course of a purge in which many members of the Ba’thist party were executed. In order to assure that the imprisoned Ba’thists provided the appropriate confessions before their executions, Saddam Hussein took some of their families hostage. By 1979, he had already long since come to be seen as a shaqawah, an implacable tough, a man to be feared. He was ruthless and emotionless when it came to those he considered as enemies, threats, obstacles to his objectives, or simply useful ...

Not only was petroleum experiencing a declining share of the energy pie, but the pie itself was shrinking, reflecting the profound impact of increased energy efficiency, otherwise known as conservation. 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. The 1975 legislation that mandated a doubling of the average fuel efficiency of new automobile fleets to 27.5 miles per gallon by 1985 would reduce United States oil consumption by 2 million barrels per day from what it would otherwise have been—just about equivalent to the 2 million barrels per day of additional oil production provided by Alaska. Altogether, by 1985, the United States was 25 percent more energy efficient and 32 percent more oil efficient than it had been in 1973. If the United States had stayed at the 1973 levels of efficiency, it would have used the equivalent of 13 million barrels of oil more than it actually did in 1985. The savings were huge. Other countries made their own dramatic savings. Japan over the same period became 31 percent more energy efficient and 51 percent more oil efficient.

When a commodity is largely sold in spot markets, with prices that are very volatile and uncertain, buyers and sellers tend to try to find a mechanism to minimize their risk. That is what gave rise to futures markets, which allow a buyer to acquire the right to buy the commodity at some month in the future at a specific, known price. He is able to lock in his purchase price; he knows his risk. Similarly, a producer can sell his production forward, even before it is produced or, in the case of agricultural products, harvested. He, too, locks in his price. Both buyer and seller are hedgers. Their objective is to minimize their risk and reduce their exposure to volatility. “Liquidity” is provided by speculators, who hope to make a profit by getting themselves on the right side of swings in supply and demand—and market psychology. A number of different commodities, such as grain and pork bellies, have been traded for years on each of the several futures exchanges in the United States. As the world economy became more volatile in the 1970s and regulations fell away, futures emerged for gold, interest rates, currencies, and, finally, oil.

As exchanges go, the New York Mercantile Exchange had not exactly enjoyed the most distinguished career. It had been founded in 1872, the same year that John D. Rockefeller launched “our plan” to take over the American oil industry and squeeze out the competition. The exchange had more modest ambitions, reflecting the interests of sixty-two merchants in New York City who were looking for a place to trade dairy products. Its original name was the Butter and Cheese Exchange. Eggs were soon added to the menu, and in 1880, it became the Butter, Cheese, and Egg Exchange. Two years later, it changed its name again, to the New York Mercantile Exchange. By the 1920s, egg futures had been introduced and were being traded, in addition to the eggs themselves. Then in 1941, a new commodity entered the portals of the exchange—the Maine potato. Later, futures were added for yellow globe onions, apples (McIntosh and Golden Delicious), Idaho potatoes, plywood, and platinum. But the Maine potato was the mainstay of the Mercantile Exchange until, unbeknownst to most of the world, the American supply-demand balance for potatoes began to change dramatically. Maine potatoes were losing market share to potatoes produced elsewhere in the country; moreover, the absolute volume of Maine potatoes produced each year was also dropping. As a result, the Maine potato futures contract was running into trouble. In 1976, and again in 1979, scandals hit the potato contract, including the mortifying failure...

Floor traders took enthusiastically to crude futures in New York. Pushing and elbowing themselves into the seething crowd on the floor of the Nymex, they shouted and furiously waved their arms to register their orders for contracts. The traders were also pushing and elbowing their way into the oil industry, which hardly took kindly to them. The initial reaction to the futures market on the part of the established oil companies was one of skepticism and outright hostility. What did these shouting, wildly gesticulating young people, for whom the long term was perhaps two hours, have to do with an industry in which the engineering and logistics were enormously complex, in which carefully cultivated relationships were supposed to be the basis of everything, and in which investment decisions were made today that would not begin to pay off until a decade hence? A senior executive of one of the majors dismissed oil futures “as a way for dentists to lose money.” But the practice—of futures, not dentistry—moved quickly in terms of acceptability and respectability. Within a few years, most of the major oil companies and some of the exporting countries, as well as many other players, inclu...

Once it had been Standard Oil that had set the price. Then it had been the Texas Railroad Commission system in the United States and the majors in the rest of the world. Then it was OPEC. Now price was being established, every day, instantaneously, on the open market, in the interaction of the floor traders on the Nymex with buyers and sellers glued to computer screens all over the world. It was like the late-nineteenth-century oil exchanges of western Pennsylvania, but reborn with modern technology. All players got the same information at the same moment, and all could act on it in the next. The “divine laws of supply and demand” still prevailed, but now they were revealed differently and far more widely, and with no delay. The benchmark price in all the transactions was that of WTI, West Texas Intermediate, a plentiful crude stream that could be easily traded, and was thus a good proxy for the world oil price, which had heretofore been embodied in Arab light. Two decades earlier, Arab light had supplanted Texas Gulf Coast oil as the world’s marker crude. Now,...

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...

The ministers in attendance all confirmed their support for $17 to $19 a barrel and agreed on the need for a new quota system to go with it. What would have seemed heresy a few months earlier was now becoming the accepted wisdom. For, amid all the confusion and disarray of this latest oil crisis, a new consensus in favor of $18 a barrel was very definitely emerging out of the wreckage of the old. “It was a process of osmosis,” said Alirio Parra. And not only producers, but consumers liked it, too. The Japanese, as importers of more than 99 percent of their oil, might have been expected to prefer the lowest possible price. That was not the case. Two problems would result if prices were too low. First, this would undercut the large and expensive commitment they had made to alternative energy sources, leading, they were sure, back to higher oil dependence and eventually to renewed vulnerability, and setting the stage for another crisis. Second, since oil constituted a substantial part of Japan’s imports, very low prices would enormously swell Japan’s already-huge trade surplus, further accentuating the severe conflicts with American and Western European trading partners. Thus, one found throughout the Japanese oil industry and government a belief in “reasonable prices,” which happened to come out to about $18 a barrel. The new consensus was evident in the United States, as well—in the government, on Wall Street, in banks, among economic forecasters. The gains from falling oil...

In 1980, in launching the war with Iran, Saddam Hussein had made a grave miscalculation, one that had almost cost him his position: He had assumed that it would take only a few weeks to knock off Iran. He was wrong, and Iraq came close to being defeated. A decade later, in 1990, 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. He would be the hero of the Arab world; Iraq would be the number one oil power; and, like it or not, the Western countries would have to bow before him. Once again he had miscalculated. And that was the second surprise. The opposition to his move developed an unprecedented unanimity in the international community and in much of the Arab world. “This will not stand, this aggression against Kuwait,” George H. W. Bush announced a few days after the invasion. And he meant it. The United States, making use of personal connections with other leaders that Bush had developed over twenty years, took the lead in marshaling and coordinating the opposition. Led by Secretary of State James Baker, it proved a far more successful and stunning diplomatic achievement than Saddam Hussein—or indeed many others—could possibly have expected. The Iraqis had failed to recognize how drastically the interests and p...

At the gasoline pump in the United States, it pushed prices down, in inflation-adjusted terms, to the lowest level they had ever been. This ignited a great new romance—a passion for fuel-inefficient SUVs and other light trucks, which would soon comprise half of the new vehicles sold in the United States.

Upstream, Downstream, All Around the Stream All of the oil world is divided into three. The “upstream” comprises exploration and production. The “midstream” are the tankers and pipelines that carry crude oil to refineries. The “downstream” includes refining, marketing, and distribution, right down to the corner gasoline station or convenience store. A company that includes together significant upstream and downstream activities is said to be “integrated.” By generally accepted theory, crude oil is the residue of organic waste—primarily microscopic plankton floating in seas, and also land plants—that accumulated at the bottom of oceans, lakes, and coastal areas. Over millions of years, this organic matter, rich in carbon and hydrogen atoms, was collected beneath succeeding levels of sediments. Pressure and underground heat “cooked” the plant matter, converting it into hydrocarbons—oil and natural gas. The tiny droplets of oil liquid migrated through small pores and fractures in the rocks until they were trapped in permeable rocks, sealed by shale rocks on top and heavier salt water at the bottom. Typically, in such a reservoir, the lightest gas fills the pores of the reservoir rock as a “gas cap” above the oil. When the drill bit penetrates the reservoir, the lower pressure inside the bit allows the oil fluid to flow into the well bore and then to the surface as a flowing well. “Gushers”—or “oil fountains” as they were called in Russia—resulted from failure (or, at the time...