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

by Daniel Yergin

The four Aramco partners—Exxon, Mobil, Texaco, and Chevron—though somewhat cutting back, had continued to take large volumes of oil from Saudi Arabia even as they found themselves buying oil at “official prices” and thus at costs much higher than competitive crudes. The fundamental precept had always been to preserve access to Saudi oil, and the companies resisted sundering those links. But in 1983 and 1984, they had to acknowledge reluctantly that the price for access was too high. “Those of us in Chevron always viewed Aramco as our operation,” said George Keller. “It’s something we started, developed, and in which we played a key role. So it was more of a problem. But we couldn’t keep pouring money down a hole. We had to back away, and ultimately we had to tell Yamani that we couldn’t continue to do this.” Though the Aramco links were not broken, they were significantly reduced. Saudi Arabia was no longer the special provider. The alteration in the commercial relationship between the four companies and Saudi Arabia was one of the great symbols of how the oil industry was being transformed. The shift toward the commodity market was facilitated by a major structural change in the industry. With the decontrol of oil prices and the elimination of various other controls, the United States was no longer insulated from the world oil market. Indeed, it now became tightly tied into the rest of the market. The United States was not only the largest single consuming country; as a r...

introduced a futures contract in crude oil.

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.

At its heart, however, the restructuring of the oil industry was based on what was called the “value gap,” the term used when the value of a company’s shares did not fully reflect what its oil and gas reserves would fetch in the marketplace. Those companies with the greatest gap between stock price and asset value were the most vulnerable. In such cases, the obvious implication was that a new management might be able to increase the price of the stock and so enhance that noble cause, “shareholders’ value,” in a way that the old management had failed to do. There was a further twist: It could cost two or three times more to add a barrel of oil by exploration than by buying the assets of an existing operation. To the management of companies, the obvious implication was that it was cheaper to “explore for oil on the floor of the New York Stock Exchange”—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico.

He was an only child, who turned into a brash, self-confident, independent-minded, sharp-tongued, and outspoken young man. He did not readily accept the established order but rather would make things happen his way. He was also intensely competitive. He hated to lose.

His style—game-planned, attentive to detail, but also highly improvisational—would make him a tough rival for the big bureaucratic companies he took on.

The result, in 1984, was the largest bank run in the history of the world. All around the globe, other banks and companies yanked their money out. Continental Illinois’ credit was no good. The integrity of the entire interconnected banking system was now in jeopardy. The Federal government intervened, with a huge bail-out—$5.5 billion of new capital, $8 billion in emergency loans, and, of course, new management.

With the collapse of Continental Illinois, energy lending instantaneously went out of fashion. Any banks still willing or able to lend to energy companies rewrote their guidelines so restrictively that getting an oil and gas loan was now not much easier than passing through the proverbial eye of the needle. And without capital, there was no fuel for exploration and development, let alone a boom.

Not only economics and geology drove the restructuring of the oil industry. So did the hatreds, resentments, and feuds that fester inside families. A war among the heirs to the Keck family fortune resulted in Mobil’s acquiring Superior Oil, the nation’s largest independent, for $5.7 billion. But the most prominent family troubles were those that fastened on Getty Oil, the great and rich integrated company that J. Paul Getty had begun building in the 1930s and then turned into a world company in the 1950s with the discoveries in the Neutral Zone between Saudi Arabia and Kuwait. Getty, the firm believer in value, had died in 1976. Now, in the 1980s, Getty Oil was not replacing its reserves, and its stock was selling at a very low price relative to the value of the company’s holdings in the ground. One of J. Paul Getty’s sons, Gordon, was more interested in making music than in searching for oil—he had just composed a song cycle based on the poems of Emily Dickinson—but he wondered where all the value had gone. That put him at odds with the professional managers running Getty. They may have thought they controlled the levers of power, but Gordon Getty and his allies controlled the stock. J. Paul Getty had treated all his sons poorly, including Gordon, and the younger Getty had no great reason to be loyal to the memory, or the handiwork, of his father. When opportunity came knocking, he was ready to open the door.

Texaco-Pennzoil-Getty saga,

Exxon had, in the words of CEO Clifton Garvin, “a phobia about acquisition.”

Mesa’s board in Amarillo gratefully voted Pickens an $18.6 million deferred bonus for the takeover maneuver with Gulf that had netted Mesa some $300 million. That year Pickens was the highest-paid corporate executive in America.

The issues on the agenda at the 1985 Bonn economic summit thus revealed how the world had changed; they primarily concerned trade relations among the industrial countries—protectionism, the dollar, accommodating Japan’s economic challenge. They were “West-West” issues. Oil and energy, the preeminent “North-South” issue, was not on the table at all. As in the 1960s, oil and energy were now available in abundance and, thus, they were not a constraint on economic growth. Supplies were safe again.

In short, the Western leaders no longer needed to include energy among the limited number of major questions on which they, as heads of state, could focus at any given moment.

Oil had often been the dominating, and most acrimonious, issue at previous summits. But now, in 1985, for the first time since those summits had been instituted a decade earlier, the leaders issued a communiqué in which there was nothing about oil and energy. Not a single word.

shade from the past was rising again—John D. Rockefeller and the prospect of an all-out price war. In the late nineteenth and early twentieth centuries, Rockefeller and his colleagues had often instituted a “good sweating” against their competitors by flooding the market and cutting the price. Competitors were forced to make a truce according to the rules of Standard Oil, or, lacking the staying power of Standard Oil, they would be driven out of business or taken over. Circumstances were, of course, wholly different in the mid-1980s; yet they were not so different, after all. Once again, a “good sweating” was at hand.

Was the price now posed for a great fall? Most of the exporters thought so, but they expected no more than a drop to $18 or $20 a barrel, below which, they thought, production in the North Sea would not be economical. On that, they were mistaken. The tax rates on the North Sea were so high that, for instance, in one field, called Ninian, a drop in the oil price from $20 to $10 would cost the companies only 85 cents. The big loser would be the British Treasury, which was taking most of the rents. Actual operating costs in Ninian—the cash costs to extract oil—were only $6 per barrel, so there would be no reason to shut-in production at any price above that.

Now OPEC as a group, including Saudi Arabia, announced its intention to battle non-OPEC to regain lost markets. The communiqué from the conference contained the new formula: OPEC was no longer protecting price; now its objective was to “secure and defend for OPEC a fair share in the world oil market consistent with the necessary income for member countries’ development.”

1973–74 and 1979–81.

OPEC’s output in the first four months of 1986 averaged about 17.8 million barrels per day—only about 9 percent higher than 1985 production, and in fact, at about the same level as the 1983 quota. Overall, the additional production meant not much more than a 3 percent increase in total free world oil supply! Yet that, combined with the commitment to market share, was enough to drive prices down to levels so low as to have been virtually unimaginable only months earlier. It was, indeed, the Third Oil Shock, but all the consequences ran in the opposite direction. Now, the exporters were scrambling for markets, rather than buyers for supplies.

Consumers were, of course, jubilant. All their fears about a permanent oil shortage were now laid to rest. Their standard of living and lifestyles were no longer at risk. After the years of huffing and puffing, oil was cheap again. The prophecies of doom had been a mirage, it seemed, and oil power was a harmless and empty threat.

For the last question, a tall, thoughtful professor stood up to observe how hard and contentious it was to make energy policy in the United States: the Congress fought with the President, the Senate with the House, various agencies with one another, everybody fought with everybody else. Was it any less contentious in Saudi Arabia? Would Yamani, he asked, describe the process by which oil policy was made inside Saudi Arabia? Smoothly and without even a moment’s hesitation, the oil minister replied, “We play it by ear.” The audience roared with laughter. It was an amusing answer, which captured the truth of improvisation in policymaking, whatever the government. Still, it was a little odd, coming from the self-proclaimed disciple of long-term thinking, who had been at the center of world oil decision making for a quarter of a century. Unbeknownst at the time to those in the audience, those words would be among the last of Yamani’s official utterances.

The new oil prices, reconstituted in a lower range, completely wiped out the increases of the Second Oil Shock of 1979–81. The economic benefits to consumers were enormous. If the two oil price shocks of the 1970s constituted the “OPEC tax,” an immense transfer of wealth from consumers to producers, then the price collapse was the “OPEC tax cut,” a transfer of $50 billion in 1986 alone back to the consuming countries. This tax cut served to stimulate and prolong the economic growth in the industrial world that had begun four years earlier, while at the same time driving down inflation. In economic terms, the long crisis was certainly over.

The potential significance of the approach to Moscow provided reason for a quick response. For Russian involvement would have expanded Russian influence in the Gulf— something the Americans had sought to prevent for more than four decades, and the British, for no less than 165 years. But, apart from the East-West rivalries, it was deemed imperative to protect the flow of Middle Eastern oil.

in March 1987, the Reagan Administration, intent on excluding the Russians, told the Kuwaitis that the United States would take on the whole job of reflagging or nothing at all. It would not go “halvsies” with the Russians. Thus, eleven Kuwaiti tankers were reflagged with the Stars and Stripes, qualifying the ships for American naval escorts. A few months later, U.S. naval vessels were patrolling the Gulf.

All that was left to the Russians was to charter some of their own tankers on the run to Kuwait. British and French naval units, along with ships from Italy, Belgium, and the Netherlands, also entered the Gulf to help protect freedom of navigation. The Japanese, forbidden by their constitution from sending ships but highly dependent on oil from the Gulf, chipped in by increasing the funds that they provided to offset the cost of maintaining American forces in Japan and by investing in a precision locator system in the Strait of Hormuz. West Germany shifted some of its naval vessels from the North Sea to the Mediterranean, freeing, it said, United States ships for duty in and around the Gulf. But, with the United States taking the lead, there was now the possibility of a major military confrontation between the U.S. and Iran.

Iran-Iraq War was much more far-reaching. It appeared that the threat to the free flow of Middle Eastern oil had at last been removed; and with the silencing of the guns along the shores of the Persian Gulf, the era of continuing crisis in the world of oil that had begun with the October War fifteen years earlier along the banks of another waterway, the Suez Canal, finally seemed to be at an end.

It was not only the end of the war that pointed to a new era. So did the changing relationship between oil exporting and the consuming countries. The great contentious question of sovereignty had been resolved; the exporters owned the oil. What came to matter for them over the 1980s was sure access to markets. When the producing countries discovered that consumers had more flexibility and wider choices than had been imagined, they came to see that “security of demand” was no less important to them than was “security of supply” to the consumers. Most of the exporters now wanted to establish that they were reliable suppliers and that oil was a secure fuel. With the sovereignty issue settled, with socialism in bad repute, and with the North-South confrontation a fading memory, the exporters could act more on economic than political concerns. In a quest for capital, some were reopening the doors to exploration by private companies within their borders—doors that had been slammed shut in the 1970s. Others went further, as the logic of integration—so powerful a theme in the history of the industry—reasserted itself, seeking to rejoin the reserves to the markets. The state-owned companies of some of the exporters, following in the historic wake of private companies, went downstream to acquire outlets. Petróleos de Venezuela built up a large refining and marketing system in the United States and Western Europe. Kuwait turned itself into an integrated oil company, with refineries i...

Important ending thoughts

President Mubarak of Egypt and King Hussein of Jordan,

state. This was the real significance of the “oil factor,” the way that oil would be translated into money and power: political, economic—and military. Saddam Hussein knew what it would mean to acquire an additional 10 percent of world oil reserves, especially as not much in the way of population came with them. If he kept the grip on Kuwait, Iraq would be the planet’s dominant oil power, and the other petroleum producers would bend to his diktats, just as they had begun to do in the summer of 1990, before the invasion. He would gain a decisive say over the world economy, and he would be courted by economic and political leaders. His aggressive arms procurement effort would be much enhanced, and suppliers of every kind of technology, eager to tap into the biggest market for weaponry and related technology, would in due course be at his door offering him the very latest. It would not take Saddam Hussein, equipped with nuclear and chemical weapons know-how, long to turn Iraq into a regional power and perhaps, as Hussein extended his reach, into a global superpower. At a certain point, it would become too costly and too dangerous to try to check him. And the post-Cold War order would turn out to be different and much less benign than was generally imagined—and hoped—at the beginning of 1990. In short, oil was fundamental to the crisis, not “cheap oil,” but rather oil as a critical element in the global balance of power, as it had been ever since the First World War. Such is o...

Hussein was convinced that he could wear down and outlast the unwieldy coalition arrayed against him. He had been 19 at the time of the 1956 Suez Crisis, and he had observed how Nasser had succeeded in splitting the Western alliance. Surely, he would find opportunities to do so with this much larger and ungainly coalition of nations.

Yet the course of the six major disruptions from the early 1950s through 1991 has revealed that the logistical and supply system can adapt to such an extent that the shortages ended up being less dire than had been expected. Indeed, the real problem in the 1970s turned out not to be an absolute shortage, but the disruption of the supply system and the confusion over ownership of oil, with the consequent rush to reorder the system under conditions of high uncertainty. And in 1990 and 1991, the lessons of previous crises, along with the mechanisms developed since the 1970s and improved information, made the impact of the disruption that came with the Gulf Crisis less serious than it might otherwise have been.

The oil majors that the Italian tycoon Enrico Mattei had dubbed the Seven Sisters (minus Gulf, which was already gone) would be remade. The majors combined to become supermajors. BP merged with Amoco to become BPAmoco, and then merged with ARCO, and emerged as a much bigger BP. Exxon and Mobil— once Standard Oil of New Jersey and Standard Oil of New York—became ExxonMobil. Chevron and Texaco came together as Chevron. Conoco combined with Phillips to be ConocoPhillips. In Europe, what had once been the two separate French national champions, Total and Elf Aquitaine, plus the Belgian company Petrofina, combined to emerge as Total.

With the buildup of oil and natural gas revenues, the emirates of Abu Dhabi, Qatar, and Dubai emerged as key players and new centers of the global economy in the twenty-first century. When a tumultuous credit and banking crisis swept the United States and Europe in 2007 and 2008, some of these emirates were at the forefront in bailing out Western financial institutions.

Between 1990 and 2009, the world economy almost tripled in size.

Expectations became important as oil prices steadily rose from 2003. There was a widespread apprehension, especially within financial markets, that demand from China and India would go through the roof and that an oil shortage was inevitable in the next several years. All these factors—supply and demand, geopolitics, costs, financial markets, and expectations—came together to carry oil prices from $30 at the beginning of the Iraq War through $100 and $120 and then $130 and then over $145 a barrel. By that point, expectations had created a bubble in which the price was increasingly divorced from the fundamentals. For, as prices went up, demand had—inevitably—begun to weaken. The oil shocks of the 1970s were precipitated by specific events—the 1973 Yom Kippur War and the Arab oil embargo, and the 1978–79 Islamic revolution in Iran. This time was different in that there was no single dramatic event. Yet there was no question but that the extraordinary rise in prices constituted another oil shock of its own. In the United States, the painful economic impact of the oil shock was made much worse by the credit crisis that erupted in mortgage and banking sectors. Moreover, the shock was increasingly felt around the world. It was only when demand growth slowed markedly, in response to high prices, a financial crisis worse than any since the Great Depression, a world economic downturn, that the price came down dramatically. The half-decade rise in oil prices had brought significant ...

Altogether, all the oil that the supermajors produce for their own account is less than 15 percent of total world supplies. Over 80 percent of world reserves are controlled by governments and their national oil companies. Of the world’s twenty largest oil companies, sixteen are state-owned.8 Thus, much of what happens to oil is the result of decisions of one kind or another made by governments. And overall, the government-owned national oil companies have assumed a preeminent role in the world oil industry. In these circumstances, the cast of characters in the world has become more complex, with a host of companies joining the ones whose names run through this book. Some of these companies have already appeared in these pages; some are new. Saudi Aramco—the successor to Aramco, now state-owned—remains by far the largest upstream oil company in the world, single-handedly producing about 10 percent or more of the world’s entire oil with a massive deployment of technology and coordination. The major Persian Gulf producers control for the most part their production, as do the traditional state companies in Venezuela, Mexico, Algeria, and many other countries. The Chinese companies—partly state-owned, partly owned by shareholders around the world—continue to produce the majority of oil in China but have also become increasingly active and visible in the international arena. So have Indian companies. The Russian industry is led by state-controlled giants Gazprom and Rosneft and ...

Technology and markets will provide the answer over time. Many renewables, such as wind and photovoltaics, provide electricity and will do little to supplant oil imports, as only 2 percent of U.S. electricity is generated from oil—unless there is a big growth in electricity-powered transportation.