by Kai Bird
Within days of Irwin’s capitulation, the companies agreed to hold dual negotiations. They had decided to accept at face value the shah’s pledge that there would be no “leapfrogging” of demands, even though McCloy told his clients that he placed “little faith” in the shah’s word. The first set of talks nevertheless opened in Teheran on January 28, 1971.62 Back in New York, the CEOs of all the companies gathered each day in McCloy’s law offices to monitor the negotiations. After clearing it with the Justice Department, McCloy also arranged to have technical and financial specialists from the companies meet in a “London Policy Group.” These talks were held in British Petroleum’s “Britannic House” headquarters and were monitored daily by McCloy’s law partner Bill Jackson. Over the next two weeks, hundreds of telexes flew back and forth between Teheran, London, and New York. McCloy sat in on most but not all of the meetings in New York. He saw himself not as one of the negotiators, but as “sort of a watchdog, to see that these fellows were moving in the right areas.”63
Despite all this elaborate coordination, things did not go well. It quickly became clear that OPEC was setting the pace. On February 2, 1971, the cartel suspended negotiations and then announced that, if the companies did not settle by February 15, the governments of each of the producing countries would simply legislate new terms. If necessary, OPEC would impose a total embargo. The game was up, for without strong government direction, it became apparent that the companies had no desire to fight the producers. In Teheran, the shah told the BBC that “the all powerful six or seven sisters have got to open their eyes, and see that they’re living in 1971, and not in 1948 or 1949.”64 So, on Valentine’s Day, February 14, 1971, a new agreement was signed in Teheran, giving the Persian Gulf producers an extra 30 cents per barrel with an additional 20 cents by 1975. It would be known in the industry as the “Second Saint Valentine’s Day Massacre.”
Six weeks later, when the second set of talks adjourned in Tripoli, the Libyans achieved a settlement that gave them a 91-cent-per-barrel increase—three times the increase negotiated in Teheran. Both agreements were supposed to last five years, at least providing the industry and Western consumers with a measure of stability. But everyone in the industry knew the agreements could easily unravel. Even McCloy, who told the Justice Department that the agreements were a “milestone in the effort to achieve stabilization in relations with the oil-producing countries,” acknowledged that they were “fragile and delicate. . . .”
The Justice Department was not entirely happy with McCloy’s report on his actions. They had requested copies of any notes, tapes, or other company documents that described the meetings of the oil companies that took place under his supervision. These he had not provided. This was worrisome to the department’s antitrust lawyers, for they only had McCloy’s word that the oil-company executives had confined their discussions to dealing with OPEC. Moreover, McCloy’s own report admitted that he had not attended all the meetings, and that on three occasions the oil executives had met on short notice without the presence of any Milbank, Tweed lawyer. In order to coordinate “technical information,” McCloy explained that an “Economic Evaluation Committee” had been established which researched “exports and imports and related data concerning inflation. . . .”65 As a practical matter, there was probably no way the companies could have negotiated a “common front” against OPEC without exchanging such information. Being a good lawyer, McCloy was now making sure that he covered himself by apprising the Justice Department of what had happened and making it seem that such activities were well within the scope of the department’s original business review letters. Dudley Chapman, the Justice Department lawyer responsible for monitoring McCloy’s activities, complained to his superiors, “. . . there is much in the [McCloy] report that is slanted or self-serving, or just ambiguous.”66
To those experts who were following the oil industry, it seemed only a matter of time before the producers would make another set of price demands. McCloy was unhappy about how quickly things had slipped out of control, and he blamed the government for not stepping in and providing the companies with leadership. The companies, in the meantime, were showing signs of renewed disunity. In the two years after the 1971 concessions, OPEC did everything it could to bind the interests of the oil companies to those of the producing nations. And the companies, no doubt welcoming the opportunity for higher profits, put up little resistance.67 A new oil regime was evolving out of the old private cartel. As the Saudis, the Iranians, and other OPEC members pressed their demands for greater participation, they created fissures in the private cartel. Those companies with major oil concessions in the Middle East were reluctant to risk their exclusive access to these supplies by acting in concert. So they were the first to concede.68 These concessions encouraged further concessions across the industry, and by 1972 some Americans were beginning to brand the companies “agents of a foreign power.”69
OPEC’s strength as a cartel was also growing as a result of oil shortages in America. Whereas the industry had historically always had to grapple with overproduction, by the early 1970s consumer demand in the United States for the first time seemed to be exceeding available supplies. Globally, there was still plenty of oil around, and if there had been a free market in this essential commodity there would still be abundant supplies. But government oil-import restrictions—imposed now for many years to protect domestic oil producers—had encouraged the draining of American reserves and now made it impossible to import enough foreign oil to cover increased consumer demand.70 In combination with the fact that OPEC was increasingly able to dictate production levels abroad, this factor now created the necessary ingredients for an energy crisis. Something could have been done by the government to combat both the domestic and foreign interests driving the country in this direction. But the Nixon administration, its attentions focused elsewhere, never developed a cohesive energy strategy.
McCloy always felt the government could have done much more, both to encourage the companies to act in concert, and to exert pressure on the producing countries to moderate their demands. He recognized what many did not: that maintaining access and control over Middle Eastern oil was a matter of national interest, and that government involvement in the dispute was justified. But he would not acknowledge that the confluence of interests between the producing countries and the oil companies might become such that the companies no longer acted in the American national interest. Instead, they began behaving strictly as multinationals, and the era of relatively cheap oil ended in an abrupt and harsh fashion. Admittedly, the demands by the producing countries for a greater share of the profits derived from their only natural resource could not have been flatly rejected. The oil companies had been cheating the producing countries for years, giving them less than 10 percent of the value of the commodity as charged to the consumer.71 Ironically, for years consuming countries in Europe had earned twice as much from oil taxes as producer countries had received for their only resource. But there is no reason to doubt that closer regulation of the industry and early government intervention in the dispute with the producing nations could have resulted in a more equitable arrangement than was struck by the companies in 197174. This did not happen because no one in Washington wished to take on the oil companies. Even McCloy, who had been telling presidents ever since the formation of OPEC in 1960 that this was a matter of national interest, was ambivalent about involving the government too directly in the affairs of a private cartel.
In 1974, after yet another round of unprecedented oil price rises, Senator Stuart Symington asked McCloy at a U.S. Senate hearing, “Why shouldn’t this [the oil industry] be considered a public utility just as much as other energy, like electricity, is considered a public utility? Why should the Government come in and help these people [the companies] out when they get in trouble in other countries and then allow them to make high profits and benefit from that support?”
“That is a very philosophical question,” McCloy replied.
“The oil companies are a tricky business—are a very risky business. . . . You have to spend so much money and take so many risks that I question whether it can be well regulated like a company that is going to give you so much electricity per day. . . . The fact that it has a political aspect and a very deep economic aspect would lead me to feel that it is something that the Government has to know a lot more about and follow more closely than it has in the past.”72 McCloy’s ambivalence stemmed from the confusion of attempting simultaneously to represent both private and public interest. With such indecisiveness emanating from a major spokesman for the Establishment, it is no wonder that Washington sat more or less paralyzed during the energy crisis of the early seventies.
McCloy continued to represent the companies in the years after the 1971 capitulation. But his agenda shifted—as did the companies’—from the attempt to take a common stand vis-à-vis OPEC, to easing the political strains between Washington and the Arabs. In large measure, this meant lobbying Washington to address a settlement of the Arab-Israeli conflict. The oil companies had never stopped conveying to Washington their views on this subject. Inevitably, growing Arab economic muscle would begin to flex itself in the political arena. To protect their interests, the companies were not averse to using whatever influence they had in Washington to bring about a settlement of the Arab-Israeli conflict.
By the end of 1972, the perceived oil shortages and the upward pressure on oil prices in the spot market gave OPEC additional incentives to exact further concessions from the companies. At the same time, the companies were passing these higher prices directly on to Western consumers and registering record-breaking profits. The new alliance between the companies and the producing countries seemed to be ushering in a new era of high profits and control over production.
The new cartel still had to worry, just as the old cartel did, about the dangers of overproduction. The difference was that now one Arab producing country, Saudi Arabia, could choose to shut in its production enough to create a shortage, or, alternatively, produce so much oil as to create a glut on the market. The Saudis were finding it impossible to spend their growing dollar reserves. In the words of one Foreign Service officer stationed in Jedda, a way had to be found to turn the kingdom into a “spending machine”; otherwise, the Saudis would be accumulating dollar reserves of $100 billion by the early 1990s.73
The kingdom’s wealth and pivotal ability to shut in its oil production without harming its own interests actually placed enormous political pressures on King Faisal. By early 1973, his fellow Arabs were asking him to use this “oil weapon” in the Israeli-Arab conflict. On May 3, 1973, Frank Jungers, the genial head of ARAMCO, was ushered in to see King Faisal for a thirty-minute social call. Faisal was notorious for subjecting his foreign visitors to long-winded sermons on the “Zionist-Communist conspiracy.” But this time, the king quietly warned Jungers that, though American interests in Saudi Arabia were relatively safe, it “would be more and more difficult to hold off the tide of opinion.” Afterward, the king’s intelligence chief, Kamal Adham, told Jungers that Egypt’s Sadat would “have to embark on some sort of hostilities” if U.S. policy didn’t change. Three weeks later, the four directors of ARAMCO met with Faisal, who gave them an even more explicit warning: time was running out, he said, and if America did not repudiate Israeli policies, “you will lose everything.” The oil men had never heard Faisal speak so plainly, and felt ARAMCO’s future in Saudi Arabia was at risk as never before.74
Back in Washington, the ARAMCO directors repeated Faisal’s warnings to high-ranking officials in the State Department and the White House. But everyone claimed their fears were unfounded: the latest CIA estimate concluded that Faisal would resist Sadat’s appeals to join him in another war. And though the CIA had discovered in May that Sadat had ordered his General Staff to develop a coherent plan for launching an attack across the Suez Canal, the Agency’s analysts told Kissinger that these preparations were for psychological purposes only. So, when the oil men asked for an appointment to see Kissinger, the national-security adviser said he was too busy to meet with them.75
While the Egyptian president secretly prepared for his October gamble, McCloy impatiently tried to get Washington to focus on the Middle East. The power vacuum created by the growing Watergate scandal, however, made any dramatic initiatives unlikely. In August, in an effort to shore up his administration, Nixon nominated Kissinger to be his new secretary of state. Early that September, just after Colonel Qaddafi nationalized the remaining foreign oil companies in Libya, Kissinger asked Averell Harriman to pay him a visit. The elderly Democrat spent a leisurely hour at the White House, talking about the state of the world. The Middle East, he said, was going to prove to be Kissinger’s “greatest immediate difficulty.” Harriman was in an aggressive mood, and complained vigorously that “it was tragic that between the British and ourselves we had let this crazy Colonel take over in Libya.” Now he bluntly told Kissinger he “had to get involved in economic matters.” Kissinger, who once had told Harriman that he just didn’t like economics, agreed that it was “part and parcel of his job. . . .” Harriman urged him to support a high gasoline tax, strong conservation policies, and a crash program to develop nonpetroleum energy sources. “We had,” Harriman said, “to get ourselves in the position where the Arabs recognize they better sell their oil now rather than hold us up.”76
It was too late. On the morning of October 6, 1973, Egyptian troops stormed across the Suez Canal while Syria attacked in the Israeli-occupied Golan Heights. Two days later, a delegation of oil-company officers, operating under the authority of McCloy’s “London Administrative Group,” began negotiations with OPEC on the cartel’s new price demands. Once again McCloy had cleared the companies’ collective-bargaining strategy with the Justice Department’s antitrust division. A Milbank, Tweed lawyer monitored the meetings of the London group, and McCloy was consulted on almost a daily basis. Yamani began the negotiations by suggesting doubling the price to $6 per barrel. The companies countered, first with an offer of $3.45, and then $3.75. In the midst of the negotiations, with the newspapers full of news from the battlefronts in the Sinai, the Arab members of OPEC announced they would soon be meeting in Kuwait to discuss using their oil power as a weapon in the war. In this atmosphere, it was clear there could be no bridging of the wide gap between the companies’ position and that of the oil cartel. In short order, the oil-company delegates broke off the talks, and Yamani flew back to Saudi Arabia.
Back in New York, McCloy sat down with a group of ARAMCO officials and drafted an “eyes-only” memo to Nixon, appealing to the president not to side with the Israelis in the current war. The memo warned Nixon that supplying Israel with military assistance at this time would “have a critical and adverse effect on our relations with the moderate Arab producing countries.. . . The whole position of the United States is on the way to being seriously impaired, with Japanese, European, and perhaps Russian interests largely supplanting United States presence in the area. . . . Much more than our commercial interest in the area is now at hazard. The real stakes are both our economy and our security.”77 On October 12, McCloy took the memo—with his own cover letter—and delivered it into the hands of General Alexander Haig, the president’s chief of staff. Haig, however, sat on the memo for three days, and in the meantime Nixon and Kissinger decided to airlift large quantities of military supplies to Israel.
This was the last straw. On October 16, 1973, OPEC announced a 70-percent price increase—to $5.12 per barrel—and a 5-percent cutback in production. Three days later, the Saudis went even further and ordered a unilateral 10-percent cutback. Furthermore, the Saudis imposed an embargo on oil shipments to the United States and the Netherlands. In Riyadh, Yamani sat down with ARAMCO’s Jungers and discussed how the company should implement his embargo orders. Jungers reported to New York that the Saudis were “looking to ARAMCO to police it [the embargo].” ARAMCO’s directors implemented the embargo in the strictest p
ossible manner. The company even went so far as to bar supplies of Saudi oil to U.S. military installations. McCloy’s oil-company clients were now very much partners of the producing nations’ cartel.78 Gradually, the companies shifted their profit centers downstream to the refining-and-distribution end of the business. Though they no longer dictated price decisions, they quickly saw that OPEC’s higher prices could translate into much higher profit margins for themselves. McCloy had failed in his attempt to have the companies stave off OPEC’s challenge, and in the process he had helped to bring about a new oil regime. The companies became richer than ever, and so too did the native producers, while the world economy and consumers everywhere suffered from higher energy prices.
The energy crisis of 1971–74 did not spell the end of McCloy’s active representation of various oil interests. While representing the Seven Sisters in their negotiations with OPEC, he simultaneously provided legal counsel to Occidental’s Armand Hammer. In the spring of 1971, the mercurial independent oil man began what turned out to be a decade-long battle with the SEC, which charged him with filing “false and misleading earnings reports” to Occidental shareholders. McCloy advised Hammer to sign a consent decree, because a protracted and costly legal battle would make it difficult to sell a major Occidental bond offering in Europe. However, once Hammer signed the consent decree, at least twenty class-action suits were filed by disgruntled shareholders. Eventually, Hammer settled out of court for about $11 million. In 1975, when Hammer got into legal trouble again over an illegal campaign contribution to the Nixon presidential campaign, McCloy interceded and wrote a letter to the judge in the case urging “sympathetic consideration of his case.” In March 1976, Hammer was given a suspended one-year sentence and fined $3,000.79
