The Atlantic and Its Enemies

by Norman Stone

  The Americans had a very strong hand as regards oil. In the first place, their own reserves were very large. If any effort had been made to put up the world price the Americans would just flood the markets and bring the price down. Then again, oil technology was expensive and very demanding; there was a large investment to be made, and there had to be excellent teamwork, with first-rate management, itself of course expensive, and the Anglo-Americans in that respect were irreplaceable. Just how vital such things were was shown in the 1930s. Mexico had oil; she acquired a revolutionary government that was hostile to the USA. It nationalized oil, offering insultingly low compensation to the American owners. Nationalized oil did not thrive. Men were appointed for political reasons, the state invested in misguided and sometimes corrupt ways, and the labour union was spoiled — too many employees, paid too much. The result was that Mexican oil could not easily compete on the world markets, and the employees (inflation having taken its cull of real value) ended up worse off than they had been before nationalization. The example taught Venezuela (for now), the other great Latin American producer, to behave more prudently: the State, there, took just a fifty-fifty share of the profits. In the Middle East, local rulers were persuaded without much difficulty that they should co-operate with British and American oil firms — in Iran, a nationalist who sought more, Mohammad Mossadegh, was expelled by a coup in which the Shah co-operated with the British and the CIA; Anglo-Iranian thereafter held 40 per cent of the oil, and in Saudi Arabia there were no problems at all, as oil installations spread over the desert, and local rulers who had started off with camels and tents suddenly found themselves rich.

  In the later 1950s oil entered a new era. The supply grew from 8.7 million barrels per day in 1948 to 42 million in 1972. American output almost doubled (to 9.2 million barrels) but its share fell from two thirds to one fifth, whereas Middle East output rose from a million barrels to 20 million. Known oil reserves showed the same pattern — the American share falling from one third to 10 per cent (38 million barrels, to the Middle East’s 367 million). The Shah became greedy, and wanted Iran to be a ‘great power’. An ambitious Italian proved willing to take only 25 per cent of the profit, whereas the Anglo-American share had been 50 per cent (the ‘seven sisters’ were Exxon, Chevron, Mobil and Texaco, with the British Gulf, BP and Royal Dutch-Shell). The Japanese also indicated to Saudi Arabia that they would take less than half (though defining ‘profit’ after various expenses was not easy). In 1958 Nasser at least in theory united Egypt and Syria, thus controlling the Suez and Mediterranean pipeline routes for oil; and that year there was a coup in Iraq, when the king was overthrown and his prime minister was lynched, his body hauled through the streets of Baghdad and flattened to a pulp as a car was driven back and forth over it. Arabs began now to talk about what they might do to expand their control, and use it against Israel. At that point, an angry Venezuelan took a hand. He had been embittered by American support for an army dictatorship, had spent years of impoverished exile, and had finally left the USA for Mexico because he did not want his children to be Americanized. In 1959, in charge of oil, he had asked the Americans for preferential treatment: Venezuelan oil cost much more to produce than Middle Eastern oil (80 cents per barrel to 25) but it had a strategic location. This time, the Americans refused — they were protecting their own, and anyway gave preferential treatment to Canada and Mexico. The Venezuelan then went to the Middle East and discovered that the Saudi expert had done his training in Texas, and had been taken for a Mexican and sometimes refused entrance to hotels. At the time, oil prices were naturally falling, as supply grew. The companies had been absorbing the trouble out of their own profits, and not passing any of the load back to the states, through lessened royalties. At this point the USSR entered the field, doubling oil production in the later fifties and displacing Venezuela as second-largest oil producer. Soviet oil was also cheap — at Odessa, one half the Middle Eastern price. The oil companies now said that the states should take some of the load, or allow cutbacks in volume. There was much rage: when Standard Oil high-handedly announced a price cut, Venezuela took up an alliance with the Saudis; the Shah sympathized; and the Iraqis, though they were rivals of Nasser’s Egypt, also came in. In 1960 OPEC was set up, the ‘Organization of Petroleum Exporting Countries’. The five founding members controlled 80 per cent of crude oil exports.

  Sixties prosperity in the West nevertheless went ahead, and oil became cheaper and cheaper — by 36 cents per barrel. From 1960 to 1969 the price fell by one fifth, or, in value, two fifths, because of general inflation in the decade. This was because supply, and variety, greatly increased. There was now a large Algerian field, which the French, when recognizing that country’s independence at Evian in 1962, cornered. Libya turned out to have reserves of high-quality oil that could easily be converted for aircraft and for low-sulphur-content crude oil which suited the now emerging ‘green’ concerns. Libya by 1965 had become the sixth-largest exporter, producing over 3 million barrels per day in 1970. Meanwhile, American policy was in disarray: the companies could probably not cut back production without infringing anti-trust laws, and the government behaved bewilderingly, preventing tankers from importing oil but allowing trucks to do so. The tankers therefore arrived and deposited the oil in trucks, which went over the border and then turned back again over it, to avoid tariffs. This decisively discouraged oil prospecting. The system of protection depended upon oil companies each adhering to a limited quota, as regulated by the government, and such quotas belonged only in a world of potential oil glut. That world had gone.

  But the Western world, America in the lead, deserved such mismanagement, because it was becoming extraordinarily self-indulgent — in Shakespeare’s words, like rats that ravin down their proper bane (‘and so we drink, we die’). From 1948 to 1972 American consumption trebled, to 16.4 million barrels every day. In western Europe it went up fifteen times, to 14.1 million and in Japan to 4.4 million. Housing was put up with hardly a concern for fuel economy: centrally heated, air conditioned and above all dependent on motor cars — of which the USA was the prime example, the 45 million of 1949 becoming the 119 million of 1972. There was also a new petrochemicals industry, which produced plastics of ever greater sophistication (coal had been at the start of this: in the 1890s, a great Belgian industrialist, Ernest Solvay, had made his fortune by using by-products of coal to produce the first plastic, Bakelite, named after its Belgian-born inventor, Leo H. Baekeland). There was a proliferation of gigantic-scale technology, producing larger jet aircraft and ever larger tankers; petrol stations and motels multiplied, turning more and more of the Western world into a huge version of the ‘ribbon development’, the bland snaking of ugly roadsides, of which Orwell had complained in the later 1930s. In Coming Up for Air (1938) he had even foresaw the advertising techniques for junk food — in this case fish sausage, eaten by a smug Brylcreemed man on a large hoarding. The fish sausage more or less predicted McDonald’s.

  It had an indestructible relationship with motor cars; in 1948, in California, two brothers found that food could be produced by the same very simplified assembly line methods that had given the American war economy such triumphs, and after 1954 ‘fast food’ took off. This had feedback effects on agriculture, as cows could now be bred that grew more meat more quickly per hoof — the tower block of beef. Puritans complained that Americans were becoming obese — sitting in motor cars, eating fatty fast food, and then sitting in front of televisions. The Eisenhower years saw a great burst of motorway construction, beginning with the Los Angeles Freeway in 1947; in 1956 came the funding for an interstate network, and the claim was made, with perverse pride, that the concrete involved would have produced eighty enormous dams.

  There was a further problem for energy consumption, with the emergence of Japan as a great economy. By 1960, Japan — where firewood had been more important than oil — had become a major consumer; it went together with an extraordinary exporting drive, with the economy
growing at over 10 per cent per annum. In 1955 the Japanese had made 70,000 cars, but in 1968 the figure was 4.1 million. Huge Japanese tankers, of 300,000 tons, were now being built. There was an alarm in 1967, at the time of the Six Day War between Israel and Egypt, but at the time the Arab countries were desperate for oil money and attempts at an oil embargo on the West failed; in any case, the Shah, now obsequiously courted by the Americans, would not join it, and rivalries between the various producer states meant that no serious co-operation was possible. Still, the hourglass was running out; and one sign that the West would be badly caught out occurred in 1971, when the British withdrew their forces from the Gulf. This saved a small sum — $20m — and opened up Kuwait, especially, to threats from neighbours. It was — with severe competition — the silliest decision made by a British government of that era.

  Various other factors came into play. The first was the weirdness of American policy. Oil had been protected against cheap imports, because it was a strategic commodity, and under Harold Ickes there had been sensible regulation — reserves were created, from the surplus, and in the war crises of 1951, 1956 (Suez) and 1967 the reserves had been used, to offset interruptions in supply and keep prices down. From 1957 to 1963 the surplus had amounted to 4 million barrels per day. However, the artificially high price, through protective tariffs, of imported oil then made it profitable for reserves to be used, and these ran down, falling to one million barrels as against an output of over 11 million. If for whatever reason prices suddenly rose, then there would be no American reserve with which to flood the market and bring prices down again. In March 1971 the Texas authority for oil allowed full-capacity use for the first time. Imports followed. The world was in effect becoming dependent upon Middle Eastern oil — demand had risen to 21 million barrels per day, and the Middle East, producing 13 million barrels more, was therefore in the position of meeting two thirds of the rise in demand — despite the emergence of other fields, in Nigeria and Indonesia. Besides, alternative fuels were either undeveloped, or under attack.

  Various ideas had already appeared for the use of wind or solar power: they involved much trial and error and great expense at a time when oil was cheap. The fact that there were oil reserves in Alaska was known, but by now the environmentalists were at work and the technology, given the geology and climate, was exceedingly difficult and expensive. In 1972 human genius went into a discovery that there were reserves under the oceans — the North Sea, for instance — but, again, there were environmental fears, as an oil slick destroyed thirty miles of Californian beach. In 1972 the Club of Rome — an informal but weighty international group, supposed wise men of the world — issued a warning called The Predicament of Mankind, which took the consumption figures for that year and reckoned that ‘sometime within the next hundred years’ energy and food would run out because the population was growing so fast and ‘the limits to growth on this planet will be reached’. There were also alarms as to the effect of industrialization, in its modern form, on the climate, as carbon dioxide built up in the atmosphere. Nuclear power was in some quarters regarded as an answer — the Soviet Union and France went ahead — but elsewhere there were fears of accidents and in any case, in some countries — Great Britain especially — coal had an almighty presence. There, a mixture of bad conscience (the miners had been chief victims of the British Slump of the 1930s) and misbegotten policy ensured that coal would have a predominance that prevented the development of a nuclear policy such as the French (to Margaret Thatcher’s subsequent admiration) had had. But coal itself was under some threat, because of environmental considerations. There had been a great ‘smog’ in London in the late autumn of 1958, the last of the Dickensian ‘London partiklars’, and a Clean Air Act had followed, inhibiting domestic use of coal. More oil, in other words. As things were, America, through the quota system, had made matters doubly bad. Oil was not produced, in order to keep prices artificially high. The major companies just agreed among themselves, and took the profits without much effort. On the other hand, world prices were low, and this discouraged exploration of, or at any rate investment in, new sources of oil. There already were alarms — power cuts in the harsh winter of 1969-70. By summer 1973 the USA imported 6 million barrels every day, as against 3 million three years before.

  The final element in all of this was financial: the dollar. The Shah, for instance, had embarked upon a colossal attempt to modernize Iran and turn it into something commensurate with the Indo-European (as distinct from Arab or Turkic: ‘Iran’ instead of ‘Persia’ is itself something of an artifice, since it refers to ‘Aryan’, as in blue-eyed, blond, etc.) origins of the Persians, as he understood them. In 1971 he had even staged a great ceremony, inviting anyone interested, at the old capital of Persepolis, complete with Peacock Throne and elaborate use of tiles and gold. His view of the history of Persia was a hard-luck story: on the one side elaborate white clothing, dignified attitudes, elegant and moving poetry, imposing architecture, and on the other side (mainly) Turks, bringing to the work of destruction a glee that civilized Persians could not have been expected to resist, the more so as their potential allies had stabbed them in the back. That the modern-day Turks had made a considerable success of national independence and Westernization was another tiresome element: the Shah would show the Middle East how it could be done. Now, the dollars with which he had been doing his accounts were proving unsafe. Prices per barrel of oil were low enough, in any event — $2 — and inflation was already proceeding in the West at a noticeable pace. The Kuwaiti oil minister said, ‘What is the point of producing more oil and selling it for an unguaranteed paper currency?’ Indeed.

  OPEC was by nature divided. But this time agreement was easy enough, and there was a ready excuse to hand. One thing worked on the surface in the Arab world, advancing the anti-Zionist argument. Israel: the great enemy of the Arabs; seemingly successful only because of American support; oil properly used would create such trouble in the West that it would just stand by and let Israel be crushed. So long as oil-producing Arab countries were ruled by pliant monarchies, such arguments remained largely hot air. However, in Libya there was a coup against one such monarch; an army officer, Muammar al-Gaddafi, came to power, in 1969, with the intention of extracting as much as he could from the oil companies who exploited Libya’s high-quality oil. He could quite easily play one country off against others — particularly, his neighbour and former colonial master, Italy, could be used — and into the whole picture there now crept a malignant figure, Armand Hammer, whose appearance at anything generally meant trouble. He had made money out of revolutionary Russia, and profits from that let him buy up coal and oil in America, when prices were at their lowest in the Depression. His company, Occidental Petroleum, no doubt benefited from advance notice of Soviet sales, as these would affect prices on offer in particular markets; and Hammer in return offered services to the Communist Party. Later on, Robert Maxwell did much the same. Unlike Maxwell, Hammer was not found out: though in reality he, too, had built up a mountain of debt, which was concealed by apparent philanthropic activities (they did not extend to his sister-in-law, who had borrowed $15,000 from him; in his will he gave instructions that every cent was to be re-extracted). Hammer had already built up a Libyan connection, perhaps through his Soviet allies, and Gaddafi wanted to have a better deal. Libyan oil supplied a third of the European market, and Hammer allowed him 55 per cent of the profit — a decisive breach of the fifty-fifty principle that soon had Iranian and Venezuelan feet tapping (September 1970). As the dollar declined, there were further demands for price rises, and the position of OPEC became quite strong, since America was now a net importer, and by April 1973 the surplus capacity within the USA was down to a week’s consumption.

  At this point, the various oil countries began to threaten even a form of nationalization — ‘participation’, i.e. a share of the oil resources previously covered by concessions. The companies resisted but were not supported by their own governmen
ts — the time for gunboats, or even covert operations of the type that had overthrown Mossadegh, was past, and the Americans relied on the Shah. In fact Libya went ahead with nationalization: Hammer was thrown out. It was upon this tense scene that the Israeli-Arab war (Yom Kippur) of October 1973 broke out.

  Nasser himself had died in 1970. His successor, Anwar Sadat, was deeply cunning (and during the Second World War had had a minor role as a German spy against the British). It was now obvious that the Middle Eastern oil producers had a very strong case for raising the oil price. In real money, as against paper dollars, they were getting much less than before, and world demand was pushing hard against capacity. Nasser himself had left Egypt in a calamitous condition. He had detached it from the Western world, led it into a disastrous war with Israel in 1967 (with lesser campaigning thereafter) and, with ‘Arab socialism’, driven out the creative minority of Greeks and many of the Coptic Christians who had allowed trade to flourish. He had also taken up a Soviet alliance, and there were 20,000 Soviet citizens, including advisers, in the country; these advisers were often very robust in saying what they thought of Egyptian ways. In July 1972 Sadat had them expelled, though he continued the close relationship with Moscow. But how could he escape from it? If the USA supported Israel, then, given public opinion in the Arab world (which appeared to believe that everything wrong was the Jews’ fault), there was no chance. He must make the Americans force the Israelis to negotiate seriously as to a settlement of Arab-Israeli problems. How? The answer seemed to be, a war. Won, it would end the existence of Israel. Not won, but sufficiently alarming, it would force some movement. Maybe, talking to Kissinger, he realized that he had an equally devious possible partner. The game was in effect to use Soviet help to make any further Soviet connection unnecessary, and solve the Palestinian problem that bedevilled Israel’s relations with Egypt and so deprived Egypt of the link that she needed in order to become a rival to Iran. In the winter of 1972-3 Sadat came up with a scheme for a surprise attack on Israel, in concert with Syria, and told no-one except King Faisal in Saudi Arabia.