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

by Daniel Yergin

There was a great irony in all this. Wilson was sitting in a room that had been used by Anthony Eden two decades earlier, at the time when Eden struggled over what to do about Suez, Nasser, nationalism, and the threats to Britain’s oil supply.

This particular kind of forecasting, like all economic forecasting, was as much art as science. Judgments and assumptions governed the predictions. Moreover, such forecasting was much affected by the “community” in which it was done; thus, it was also a psychological and sociological phenomenon, reflecting the influences of peers and the way individuals and groups groped for certainty and mutual comfort in an uncertain world. The end result was often a strong tendency toward consensus, even if the consensus completely changed its tune every couple of years.

Another way of putting it was that income was the main determinant of energy and oil consumption.

it was also generally agreed that conditions did not point to any major price increases in the near term. That was a view based upon looking at the economics. Politics, of course, was something else; politics was never easy to fit into models that dealt with economic growth rates and elasticities of demand. Yet it could not be disregarded. And politics was not about to allow anyone the luxury of a long-term strategy.

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.

His hatred of the Shah was matched only by his detestation of the United States, which he regarded as the main prop of the Pahlavi regime. His denunciations from exile in Iraq were cast in the rhetoric of blood and vengeance; he seemed to be driven by an unadulterated anger of extraordinary intensity, and he himself became the rallying point for the growing discontent.

The Shah made it clear that he could not imagine being on the losing side. In the U.S. government, too, hardly anyone could imagine that the Shah might fail. For Washington, any alternative was virtually unthinkable. After all, Iran’s powerful monarch had sat on his throne for thirty-seven years. He was courted throughout the world. He was modernizing his country. Iran was one of the world’s two great oil powers, with wealth far beyond anything it had known only a few years earlier. The Shah was a critical ally, a regional policeman in a crucial area, the “Big Pillar.” How could he possibly be toppled?

Still, the Shah proceeded with his liberalization program. Academic freedom, freedom of the press, freedom of assembly—these were being proffered, but such Western-style rights were of little interest to a population that was rising up against the monarch and his dynasty and the whole process of modernization. At the end of October, the Shah could only say, “We are melting away daily like snow in water.” Strikes immobilized the economy and the government, students were out of control, and demonstrations and riots went on unchecked.

Mossadegh

The impact of the strikes was felt immediately. Iran was the second-largest exporter of oil after Saudi Arabia. Of the upwards of 5.5 million barrels produced daily in Iran, about 4.5 million were exported; the rest were consumed internally. By early November, exports had been reduced to less than a million barrels per day, and thirty tankers were waiting in line at the loading facilities at Kharg Island for oil that was not there at a time when, in the international market, the winter demand surge was beginning. Petroleum companies, responding to the general softness in the market, had been letting their inventories fall. Would there be a shortage on the world market? Moreover, the stability of Iran itself depended upon oil revenues; they were the basis of the country’s entire economy. The head of the National Iranian Oil Company went south to The Fields to seek a dialogue with the striking oil workers—or so he thought. When he got there, he was mobbed by angry strikers. He immediately decided to forgo negotiations and instead fled the country. There seemed to be no way to end the strike.

the expatriates assumed that their exit was only temporary, a matter of weeks or months at the most, until order was restored. Thus, they were strictly limited to only two suitcases. They left their houses intact, with pretty much everything in place, for their return. They faced a quandary similar to that of the oil men who had been forced by Mossadegh to leave Abadan in 1951—what to do with their dogs, which they could not bring with them. Since they did not know how long they would be gone, they did what their predecessors had done: took their dogs out back of their houses and either shot them or clubbed them to death.

On January 8, the British ambassador went to say farewell to the Shah. The monarchy that had survived all sorts of vicissitudes for almost half a century was at its end. The pomp of the celebration at Persepolis of the twenty-five hundredth anniversary of the Persian monarchy was gone. So was the power. Alexander the Great had captured Persepolis in 330 B.C. and burned the royal palace; now the Ayatollah Khomeini was making a mockery of the self-proclaimed heir to Persepolis. Like the Wizard of Oz, Mohammed Pahlavi was revealed to be, after all, but a mere mortal. The show was over. Talking to the ambassador, the Shah was calm and detached. He spoke about events as though they had no relevance to him personally. That made it all the more emotional for the ambassador, who, despite all his years of steeling himself to be a self-disciplined professional, found himself crying. Awkwardly trying to comfort him, the Shah said, “Never mind, I know how you feel.” Considering their relative circumstances, it was a very strange remark. The Shah talked about the conflicting advice he was continuing to receive. Then, in an odd gesture, he looked at his watch. “If it was up to me, I would leave—in ten minutes.” The show was indeed over.

Yet when measured against world demand of 50 million barrels per day, the shortage was no more than 4 to 5 percent. Why should a 4 or 5 percent loss of supplies have resulted in a 150 percent increase in price? The answer was the panic, which was triggered by five circumstances. The first was the apparent growth of oil consumption and the signal that it gave to the market.

The second factor was the disruption of contractual arrangements within the oil industry, resulting from the revolution in Iran.

A third factor was the contradictory and conflicting policies of consumer governments.

Fourth, the upheaval presented the oil exporters with the opportunity to capture additional rents, enormously large rents.

Finally, there was the sheer power of emotion. Uncertainty, anxiety, confusion, fear, pessimism—those were the sentiments that fueled and governed actions during the panic.

And there was the unanswered question of how far the Iranian Revolution would advance. The French Revolution had reached across all of Europe to the very gates of Moscow before it spent its force. Would the Iranian Revolution reach into nearby Kuwait, to Riyadh, and on to Cairo and beyond?

extra buying beyond the real requirements of consumption, combined with hoarding, dizzily drove up the price, which was exactly what companies and customers were struggling to avoid in the first place. In short, the panic of 1979–80 saw self-fulfilling, and ultimately self-defeating, prophecy on a truly colossal scale.

In sum, the panic buying to build inventories more than doubled the actual shortage and further fueled the panic. That was the mechanism that drove the price from thirteen to thirty-four dollars a barrel.

One trading house discovered that an excellent way to get in to see the right officials in ministries and state oil companies was by giving gloves as presents to the secretaries. In order to cultivate the Iraqi oil minister, this same trading house provided him with the services of a world-class acupuncturist.

At the end of March, OPEC met. Spot crude prices had risen by 30 percent; products, by as much as 60 percent. OPEC decided that its members could add to their official prices whatever surcharges and premiums “they deem justifiable in light of their own circumstances.” What that really meant, Yamani bluntly allowed, was a “free-for-all.” The exporters were abandoning any notion of an official price structure. They would charge whatever the market would bear. And now there would be two games in the world oil market. One was “leapfrog”: the producers vying with each other to raise prices. The other was “scramble”: a bruising competition for supply among purchasers. Anxious buyers—companies that had been cut off, refiners, governments, a new breed of traders, and of course the majors—trampled one another in their rush to court the various exporters. None of this fevered, bruising activity brought forth any new supplies; all it did was intensify the competition for the existing supply, driving up the price.

Governments were torn between two fundamental objectives: obtaining relatively low-priced oil and guaranteeing secure supplies at any price. Once they had been able to do both. But now they found that these two objectives were contradictory. Governments talked the first but, when domestic pressures began to be felt, pursued the second. The top priority was to keep domestic consumers, who happened to be voters, supplied. Energy questions had become, explained a European energy minister, “short, short, short-run politics.” The various Western governments became promoters and champions of aggressive worldwide acquisition hunts, either indirectly through companies or directly through state-to-state deals. The result was suspicion, accusation, finger pointing, and anger among those supposedly allied nations. For the consuming countries as well as for the oil companies, it appeared to be every man for himself. Prices continued to climb.

As gas lines spread across the country, the oil companies were once again public enemy number one. The charges flew thick and fast: The companies were withholding oil, tankers were being held offshore to drive up prices, the industry was deliberately hoarding oil and creating shortages to increase prices. Clifton Garvin, the chairman of Exxon, decided to “go public” personally to try to refute the accusations.

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

“All the problems, inflation and energy, were coalescing together. There was a sense of siege and an inability to get on top of the issue.”

The Soviet Union invaded Afghanistan, Iran’s neighbor to the east, rocking both the Gulf States and the West. Russia, it now seemed to many, was still intent on fulfilling its century-and-a-half-old ambitions to drive toward the Gulf, and was taking advantage of the disarray of the West to position itself to capture as many of the spoils of the Middle East as it could. The bear was also becoming bolder; it was the first large-scale use of Soviet military forces beyond the communist bloc since World War II. President Carter responded in January 1980 by enunciating what became known as the Carter Doctrine: “Let our position be absolutely clear. An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.” The Carter Doctrine made more explicit what American presidents had been saying as far back as Harry Truman’s pledge to Ibn Saud in 1950. With even more historical resonance, it also bore striking similarities to the Lansdowne Declaration of 1903, by which the British Foreign Secretary of the day had warned off Russia and Germany from the Persian Gulf.

Shah finally died in July of 1980, a year and a half after his flight from Tehran. No one really cared. By that point, Mohammed Pahlavi, son of an officer from the Cossack brigade, had become irrelevant to the outcome of the hostage crisis, to the panic in the oil market, and to the international game of nations in which he had once played such a prominent role.

The hostage crisis had even wider ramifications. It served to demonstrate the apparent weakness, even nakedness, of the consuming countries—in particular, of the United States, whose power was the basis of the postwar political and economic order. And it seemed to establish that world mastery really did lie in the hands of the oil exporters. At least that was the appearance. But there were forces at work in the oil market even more powerful than governments. And now it was the turn of the exporters to make fatal miscalculations of their own.

Caracas, in those last dying days of the tumultuous year of 1979, was the moment when the exporters lost touch with the reality of the market. Demand was indeed weakening, new supplies were being developed, panic buying was receding, inventories were being built up, spot prices were declining. And the Saudis continued their steady overproduction.

Meanwhile, the twentieth anniversary of OPEC was close at hand. Over two decades, the organization had risen from a nonentity to a colossus in the world economy, and a grand celebration was being planned for an OPEC summit in November. In anticipation, a special committee had been working on a long-term strategy. An official history was commissioned, as was a film, and fifteen hundred journalists were to be invited to the great event, which would be held in Baghdad, where OPEC had been founded in 1960. On the morning of September 22, 1980, the oil, finance, and foreign ministers of the OPEC nations self-confidently assembled in the Hapsburg Palace in Vienna to continue planning for the Baghdad celebration. But within minutes of its opening, the meeting erupted in a babble of confusion, anger, and chaos, and the general conference was hurriedly turned into a closed session. For something else had already been planned in Baghdad.3

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.

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.

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 or convenient to run over.

the top sat members of Hussein’s Talfah family and two other immediately related families, the only people he could trust—to the degree that he could trust anybody. He had already married his cousin, the daughter of his uncle Kahyr Allah Talfah. Now Adnan Khayr Alah Talfah—son of his uncle, brother of his wife, his own cousin—was Minister of Defense (until his death in a mysterious helicopter crash in 1989). Hussein Kamil al-Majid, who happened to be both Hussein’s cousin and son-in-law, became chief weapons buyer, and responsible for the development of nuclear and chemical weapons and missiles. And the influence of Khayr Allah Talfah himself continued to be felt. In 1981, the government printing house distributed a pamphlet by Talfah. Its title gave some idea of the thrust of his political thought: Three Whom God Should Not Have Invented: Persians, Jews, and Flies.

Once asked to list his enemies, Khomeini replied: “First, the Shah, then the American Satan, then Saddam Hussein and his infidel Ba’th Party.”

Khomeini and his circle saw the secular, socialist Ba’thists as implacable enemies of their own creed and attacked Ba’thism as “the racist ideology of Arabism.” As if all that was not bad enough, Khomeini had even worse to say; he denounced Hussein as a “dwarf Pharaoh.”

In its initial stages, the Iran-Iraq war abruptly removed almost 4 million daily barrels of oil from the world market—15 percent of total OPEC output and 8 percent of free world demand. Spot prices quickly jumped again. Arab light reached its highest price ever—forty-two dollars a barrel.

Fear was once again driving the market. Was this the Third Shock, the next stage in the collapse of the Middle East and its oil industry into chaos and militancy? Would Iraq be eliminated from the world oil balance? Would Iran once again disappear as a supplier? Would the battle between Sunni and Shia, between Arab and Persian, destabilize the entire Gulf? Or, perhaps even worse, would Iran, with three times the population of Iraq, prevail and carry its fundamentalist, anti-Western revolution deeper and deeper into the heart of the Middle East? In pondering those questions, one could read the underlying economic indicators in two ways. One reading certainly did point to a new shock; the other in the opposite direction. Which would prove to be correct?

Economic contraction had already begun, the result of the price increases compounded by a new resolve on the part of the Western nations to fight inflation at all costs, even if it meant deep recession. Whatever the reason, it was clear that demand was going down.

The frenetic purchasing by some Japanese trading companies, in particular, had emerged as a sore subject and one that, amid the whiskey and cigars that evening in Lantzke’s office, stirred much debate. Finally, as the hour got close to midnight, the imposing Count Etienne Davignon of Belgium, a prominent and forceful Commissioner of the European Community, lost his patience. He focused on the Japanese representative. “If you don’t get your trading companies under control,” Davignon bluntly said, “you can forget about any more Toyotas and Sonys coming into Europe.” The room went silent. The Japanese official sat there for a moment, taking in the remark and weighing his response. “You are a great international civil servant,” he said at last. And he said no more.

Lol

L. Hunt or the next J. Paul Getty.

These were the years that the doctors and dentists of America put their money into drilling funds. If they did not have oil in their portfolios, they were told, their savings could be devastated by inflation and rising oil prices.

Earlier fears of shortage, at the beginning of the 1920s, in the mid-1940s, had ended in surplus and glut because rising prices had stimulated new technology and the development of new areas. The pattern was to be repeated with thirty-four-dollar-a-barrel oil and the expectation of still-higher prices. Huge new developments were taking place outside OPEC. The major buildup of production in Mexico, Alaska, and the North Sea coincided with the turmoil of the Second Oil Shock. Egypt was also becoming a significant exporter. So were Malaysia, Angola, and China. Many other countries became producers and exporters, minor league in themselves, but significant in the aggregate.

Those three trends—the collapse in demand, the relentless buildup of non-OPEC supply, and the Great Inventory Dump—reduced the call on OPEC by something like 13 million barrels per day, a fall of 43 percent from the levels of 1979! The Iranian Revolution and then the Iran-Iraq War had crippled the exporting capacity of those two countries. Yet suddenly, instead of the feared shortage, there was a large surplus of production capacity over market demand—in short, the makings of a massive glut.1

If OPEC was not going to cut price in order to defend its production level, then it would have to cut production levels in order to defend price. In March 1982 OPEC, which had produced 31 million barrels per day in 1979, just three years earlier, set an output limit for the group of 18 million barrels per day, with individual quotas for each country, except for Saudi Arabia, which would adjust its production to support the system. OPEC had finally done what it had talked about doing at various times in its history. It had taken on the part played in earlier years by the Texas Railroad Commission in managing production to try to preserve price. In the blunt words of one of the leading analysts from the oil-exporting world, it had turned itself into a cartel, managing and allocating production, as well as setting a price.

But OPEC’s new system of price administration depended on the eschewing of cheating on the part of twelve members and on the willingness and ability of the thirteenth, Saudi Arabia, to play that pivotal role of swing producer.

“Oil is a strategic commodity. Oil is too important a commodity to be left to the vagaries of the spot or the futures markets, or any other type of speculative endeavor.”

“I realized that the proponents of further integration were moving in the wrong direction. They were handing over to machines what should be management judgments.”

“For me, there is no strategy that is divorced from profitability,” he explained. Walters became famous for telling managers that “there are no sacred cows in BP” and “you tell us which things make economic sense and which do not, and I’ll tell you which we’ll keep and which we won’t.” Necessity had indeed become a virtue.