Reckoning

by David Halberstam

  The relations between Occidental and Qaddafi grew worse. Qaddafi squeezed Hammer a little more, cutting Occidental’s production another 60,000 barrels a day to a low of 440,000, a figure just above half what it had once been. He had Hammer now and could do what he wanted with him. Isolated from the big boys who might have protected him, unable to share in their solidarity, utterly dependent on the Libyans, Hammer cracked and agreed to pay 30 cents more a barrel and an increase of 2 cents a year for the next five years. In return Hammer won the right to pump 700,000 barrels a day.

  Soon Qaddafi was picking off the other companies taking oil from Libya. It was an immense triumph for him, as much political and psychological as economic. At a meeting of OPEC in December 1970, the new Arab confidence was obvious. No longer could the companies so readily control the price. The oil countries were more confident, more demanding. Not just the leaders of the radical countries but even supposedly moderate leaders like the Shah were behaving in a new way. Now the Shah was openly critical of American practices in Iran. The conditions that once existed in Iran no longer existed, he said. The companies had used the protection of the American government to practice economic imperialism, he went on, and he threatened to kick them out. “The oil-producing countries know they are being cheated,” he declared. “Otherwise you would not have the common front....The all-powerful six or seven sisters [the big international oil companies] have got to open their eyes and see that they are living in 1971 and not in 1948 or 1949.” The negotiations between the companies and the Iranians became intense. The Iranians wanted 54 cents more a barrel, and the Americans offered 15 cents. They finally settled on 30 cents, increasing to 50 by 1975. Although in comparison to what was soon to happen it was a relatively small increase, it was regarded at the time by the companies as ruinous.

  It was in fact ruinous for the oil companies, in that it showed they could no longer control the price. In March of that year the companies doing business with the Libyans agreed on a posted price of $3, an increase of 76 cents. Word of that price, and a sense of the new possibilities it signaled, spread swiftly through the Arab world. The Shah, hearing the news, was furious; he realized how much more he could have gotten. The companies, warned Walter Levy, an authority on oil, faced a “hurricane of change.” Quickly the Arab countries escalated their demands. Sheik Yamani reflected their new confidence. The Americans, he insisted, had to see that their realities had changed and that they now had to accommodate. Soon the Americans began to concede to Yamani on a number of points. Essentially he demanded a real partnership. “The oligopoly of the companies has now been joined by the oligopoly of OPEC,” Anthony Sampson wrote.

  As OPEC’s spokesman, delivering the bad news to the developed world, Yamani was now an international figure. He was a far cry from the greedy sheik into whose hands the Western prospectors once could slip a few gold pieces. He was the symbol of the modern man in a feudal state. Young, educated at New York University and Harvard, he had intended to be a lawyer. Instead he soon became the Saudis’ principal negotiator with the companies. He was intelligent, self-assured, comfortable with Westerners and Arabs alike. He was aware of the delicacy of the Saudi position—the Saudis, as a conservative nation in a radical part of the world, must not offend their radical neighbors but must also remain friends with the West. Yamani played his cards with great skill. His position was made more fascinating by dint of the fact that his country, with the vast deposits at Ghawar, had the world’s largest reserves; thus the other countries could do nothing without the Saudis. Yamani, to the consternation of the companies, kept asking for larger and larger shares of the profits, and the countries grudgingly conceded. At the same time the Saudis, among others, increased their warnings that they would join with other more radical states to use oil as a weapon against American support of Israel.

  In June 1973 there was another OPEC meeting, at which the countries announced an additional 12 percent increase. What they really wanted was complete control of the pricing. Yamani told reporters that this was the last time the countries would negotiate with the companies on price; instead, from now on they would meet among themselves, work out the price, and announce it unilaterally to the companies. That September, for the first time, the market price of oil rose above the posted price. Nothing showed the new power of the countries more than that single fact; it also marked the coming of market forces to a region previously immune to them.

  In early October the leaders of OPEC prepared to leave for a meeting in Geneva. There, on October 8, they intended to meet with the representatives of what were by now extremely nervous oil companies. In effect the companies intended to tell the OPEC people that they had gone too far too quickly. The oil producers intended to explain that the old era was over, and they would now dictate terms. On October 6, even as they were leaving for Geneva, Egypt and Syria invaded Israeli-occupied territory, lending the meeting a special drama. Yamani demanded a doubling of the going price—from just over $3 a barrel to $6. George Piercy of Exxon instead suggested increasing the price 15 percent. Yamani made a gesture: He would accept a $2-a-barrel increase, or a total of $5. Piercy, on behalf of the companies, refused to go above 25 percent—roughly $3.75 a barrel.

  Some of the Westerners negotiating with OPEC knew how fragile their position was—there was a potential now not just for an increase but for something far more threatening, a boycott. They cabled their home offices, suggesting that Yamani might come down somewhat lower than the $5 he was demanding. But the men in the home offices were made of sterner stuff and told their representatives not to budge. The Arabs were incensed, and the next day, without even bothering to notify the representatives of the companies, they flew home. Yamani told the Americans that if they wanted more news “listen to the radio.”

  Now two powerful currents came together—a changing market value for oil and an outraged Arab sensibility over American support of Israel. Four Arab foreign ministers flew to Washington to warn the Americans of the possibility of a boycott. The most important of them was Omar Saqquaf, the foreign minister of Saudi Arabia. On the day that Saqquaf hoped to see President Nixon, the President pleaded too busy a schedule, and that angered the Saudis. At a press conference an American reporter suggested to Saqquaf that the Saudis might have to drink their oil, and Saqquaf retorted, “All right, we will.”

  The Americans assumed that the Arab world was too divided, too faction-ridden, to mount an effective boycott. But on October 21 the boycott, aimed primarily at the Americans, began. The embargo, of course, helped drive the price per barrel of oil skyward, for those allowed to buy. It seemed a particularly cruel irony that only a few weeks earlier the companies had sneered at Yamani’s request for a $5 price. Yamani now spoke of the market price as the only price he believed in. The West was stunned. Unsuccessful efforts were made to pressure Japan, which imported all its oil, to restrain itself in bidding on the open market.

  On December 16, 1973, the Iranian State Oil Company for the first time conducted an auction of its oil. The highest bid was $17 a barrel. Most of the bidders were independents. Shell was said to have bid at $12. Another auction in Algeria produced bids of $22. It was clear that the posted price and the market price no longer had anything to do with each other.

  On December 22, representatives of the six Persian Gulf nations in OPEC met in Teheran to discuss what they should do at so important a moment. The Iranians were the most militant about pushing the price up, for the Shah’s resentment of the West and the way he had been treated by the oil companies was growing all the time. (“Why should I let you waste my oil?” he once said to a group of Westerners.) He wanted a price of $14 a barrel, which, he said, was less than the Arabs could be getting on the free market. Yamani was more cautious. He was wary of setting a price so high that it could cause a worldwide depression. (“I knew,” he said years later, “that if you went down, we would go down as well.”) At the meeting Yamani was getting conflicting advice. Some American oilmen who happened
to be in Teheran at the time, worried about the short-range impact, told him to have the Saudis keep the price low and break with OPEC, but other Americans were worried that if he did, the Saudis would never be forgiven; they would be under siege in their own part of the world, thus endangering the stability of the Arab state richest in oil and friendliest to America. Yamani decided not to break (for which he was later reprimanded by King Feisal). Even as the other ministers were still meeting, the Shah on his own announced that the new price would be $11.65 a barrel. It had been reached, he said, on the basis “of generosity and kindness.” It would be good for the West to economize, he said. “Eventually all those children of well-to-do families who have plenty to eat at every meal, who have their own cars, and who act almost as terrorists and who throw bombs here and there will have to really think of all these privileges of the advanced industrial world, and they will have to work harder.”

  In just two months the price of oil had quadrupled, and the key agents of that stunning change, the Iranians and the Saudis, were moderate or conservative states, perceived as allies of the West.

  The embargo that the Americans had once mocked was surprisingly successful. Before the embargo, the United States had been importing 1.2 million barrels a day; by February that figure had dropped to virtually nothing. The companies had caved in completely; they were now the junior partners of the Arabs—“their marketing experts and their tax agents,” one skeptic said. (They would, however, ironically, become much richer because of the whopping price increase, which they simply passed along. Their profits went skyrocketing.) It had been a truly historic victory for a region that had been suffering under a kind of economic neocolonialism. The victory was as much psychological as it was economic. What had held the oil countries back in the past, the Shah said, was “the mystical power of the companies.” By that he meant the mystical power of the white man—a holdover from colonial days—to make Arabs believe that he knew more, was stronger, and had some sort of divine sanction that had been denied to them. “Until we realized our strength,” said one Saudi official, “we did not have it.”

  The American economy and the American people were completely unprepared for the change. The squandering of oil was built into the very structure of American life. Everyone had become dependent upon cheap energy. Almost all American cars, for example, had automatic transmissions, which used 25 percent more gas than the old manual transmission. With many American brands of car, if a buyer wanted a manual shift, he had to say so in advance so it could be ordered from the factory. By the time of the Yom Kippur War, 85 percent of the job holders in America drove to work every day—and as a result, public transportation had atrophied. Suddenly gas was expensive and scarce. In a short time it went from 36 cents a gallon to 60. People lined up for hours at every service station. There were fights as drivers tried to jump the line, reports of bribes, and even one murder committed in a struggle for gas. In the neurosis created by the boycott there was a new craze called “topping off,” which was an attempt to keep one’s tank perpetually filled. At one service station in Pittsburgh a motorist came in and bought 11 cents worth, and the attendant spit in his face. The Boston police department came up with an interesting statistic: The number of cases of automobile arson went up dramatically, from 149 to 330, in the year when the gas prices jumped; most of those torched cars were gas guzzlers. In the first quarter of 1974 the use of gas dropped 7 percent in the United States instead of rising the normal 7 percent.

  In March 1974, just five months after it began, the boycott was over. The Arabs had flexed their new muscles, had made both their political and economic points, and were now being richly rewarded by the high price of oil. The oil began flowing again, though much more expensively, and many soon came to view the boycott as a brief nightmare, not a serious historical benchmark. In August of that year, five months after the end of the boycott, President Ford cut in half the $20 billion that Congress had appropriated for mass transit. The country had been momentarily jolted, but it soon was back to business as usual.

  28. HENRY FORD BESIEGED

  EVEN BEFORE THE YOM Kippur War, the danger signs were already there. Oil was certainly part of it; almost every credible expert in the energy field was warning of the limits of American domestic oil reserves and the risks in becoming too dependent upon foreign sources. But it went beyond oil. Even as new and formidable competitors like the Japanese were preparing to make major assaults upon the American market, it was clear that the American wage scale, both for managers and workers, was seriously out of synch with the rest of the world. The gap between American and Japanese scale, for example, should have been closing as the Japanese became more prosperous. But the settlements that Detroit kept making with the UAW were as inflated as ever, and the differences, particularly in benefits, remained considerable. Corporate profits too were greater than ever, and so were corporate salaries, in some cases reaching $1 million a year. The companies could not ask the union to discipline itself when their own officers were indulging themselves that way. Discipline had to begin at the top, and no one wanted that much discipline. Besides, each company feared a strike that would shut it down and let its customers go elsewhere.

  The ironic result of this was that it created not an affluent and harmonious company but one devoid of harmony, where management and labor remained suspicious of each other, particularly on the question of quality. The workers thought that management’s talk about quality was essentially a sham and what the company really cared about was pushing as many cars down the line as possible and maximizing the profit. Some junior Ford executives agreed with them. They were especially offended by a program known as PIPs, or Profit Improvement Programs, which began in the late sixties and lasted several years. It was an Iacocca plan, and it showed the increasing accommodation of the product men to the norms set by finance. The purpose of the PIPs was to bring down the costs of making a car by taking them out of an existing budget; an example might be the decision to equip a Mercury with Ford upholstery, which was cheaper. Some traditionalists were convinced that the PIPs systematically reduced quality, that it was automotive sleight of hand, and that the covert philosophy behind the program was that the customer would never know the difference. PIPs quickly became part of the vernacular, turning into a verb.

  “What happened to that hood ornament?” a product man might ask.

  “Oh,” his superior would reply, “it got pipped.”

  It was the same essential theology that led to the disaster of the Pinto, a small car that came out in 1970. With its exploding gas tanks and subsequent law suits, it became a mark of shame for Ford. Years later, there was a serious attempt by the top Ford people to blame the Pinto on Iacocca, and he bears partial responsibility, particularly since he earlier had killed the Cardinal. But the Pinto was not his car; it was the kind of small car Ford was producing during a time when corners were being cut even on luxury cars and when, if a small car was being done, it was imperative to do it on the cheap. Ford was not good at taking weight off a car then, and the testing of cars for safety was underdeveloped compared to what it became later (under pressure from outsiders, all of whom Detroit’s giants scorned).

  There were other problems now. For the first time quality was in doubt. Iacocca was talking more candidly about the difficulties Ford was having making good cars. His people, he said, could design wonderful cars, but they couldn’t count on the work force. “Look,” Iacocca said, “I went out last week to our Wixom plant. We build our Continentals there—our best cars. And I’m looking at the line and I see some young guy who’s going full-time to school at Wayne State, his mind is elsewhere, and he doesn’t give a shit what he builds, he doesn’t care and he isn’t involved in his job, and when that car comes off the line, maybe it’ll be okay and maybe it won’t. We can’t change a man like that anymore; we don’t have the leverage. So what we’re going to do at Ford is create a dealer organization that will fix up the cars and guarantee that they’ll funct
ion right. We’ll give you a dealer who will repair what we produce.” Kurt Luedke, then an editor of the Detroit Free Press, was stunned by what Iacocca was saying. In effect, Luedke thought, he was admitting that Ford could no longer control its work force, and so it was pushing onto the dealers the burden of supplying customers with an acceptable car.

  Still, these signs were small. Those at the top were still confident of what they were doing and confident that they knew the customers. Iacocca was the embodiment of that confidence. He believed he could sell anything. Anything. His spirit was contagious, for as he believed, so did others in the company. In these, the last years of Detroit’s immodesty, American products were the best because they had always been the best. Perhaps, Iacocca might concede, the Italians were better designers, but no one made or marketed cars better than the Americans.

  Iacocca was speaking not just for himself but for the company and the man he worked for as well. “Americans,” Henry Ford once told an interviewer, “like to blast along over interstate highways at eighty miles an hour in big cars with every kind of power attachment, windows up, air conditioning on, radio going, one linger on the wheel. That’s what they want, and that’s what they buy, and that’s what we manufacture. We build the best cars we can to meet the taste of the American people.” Ford felt a contempt for European cars that was almost personal. Small cars were, in his phrase, “little shitboxes.” If a friend drove a small car, no matter whether it was a Volvo or a Fiat or a Renault, it was to Henry Ford “a goddam little Volkswagen.”