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

Chapter 21 focuses on the dramatic changes in the oil industry and the global energy landscape immediately after World War II. With the lifting of gasoline rationing in the U.S. in August 1945, Americans quickly resumed their love affair with the automobile, and this trend led to a surge in demand for oil products. By 1950, the number of cars in service increased from 26 million to 40 million, with gasoline sales rising by 42% compared to 1945. Oil began to meet more of America’s energy needs than coal, and this demand was driven by new discoveries and technological advancements in exploration.

The immediate post-war years also saw significant shortages in oil supply which were exacerbated by rapid consumption growth and logistical challenges in adapting refineries to peacetime needs. This development led to rising crude oil prices and accusations of industry manipulation, ultimately triggering over 20 Congressional investigations. However, the shortages were primarily due to increased consumption, the lag in refinery conversion, and global steel shortages affecting tanker and pipeline construction.

In 1947 and 1948, the U.S. shifted from being a net exporter to a net importer of oil. This change highlighted the growing importance of “foreign oil” and of the Middle East’s vast resources. The Middle East became central to U.S. and British energy security strategies, especially amidst the Cold War context. Companies like Aramco (Arabian-American Oil Company) expanded production in Saudi Arabia despite the political and economic risks. Meanwhile, as the primary stakeholders in Aramco, Socal and Texaco sought to build the Trans-Arabian Pipeline (Tapline) to transport oil to the Mediterranean. This endeavor required significant investment and the careful navigation of multiple geopolitical challenges.

The chapter also details the pivotal role of Aramco in securing American oil interests in Saudi Arabia, emphasizing the necessity of spreading economic and political risks by involving other American companies like Standard Oil of New Jersey and Socony-Vacuum. This move aligned with U.S. strategic goals of conserving oil resources in the Western Hemisphere and bolstering Saudi revenues to maintain the concession.

Chapter 22 recounts the transformative changes in the oil industry during the late 1940s and early 1950s, which were driven by demands from oil-producing countries for a greater share of oil revenues. The chapter begins with Saudi Arabia’s demands for increased payments from Aramco, reflecting a broader trend among oil-exporting nations. David Ricardo’s economic theory of “rents” frames the central conflict by distinguishing between normal profits and the additional income derived from owning a resource-rich land. Oil-exporting countries sought to shift more of these rents from foreign oil companies to their own treasuries, asserting national sovereignty and economic rights. This struggle for rents was intertwined with themes of power, nationalism, and economic development.

The chapter also highlights Venezuela’s pioneering role in redefining the oil industry’s financial structure. Following the death of dictator General Gomez in 1935, Venezuela’s new leadership, which included the reformist Generation of ’28, sought to reorganize the oil sector. With support from the U.S. government, they introduced the 50/50 principle, whereby the government and oil companies would equally split the net profits from oil production. This agreement stabilized Venezuela’s relationship with major oil companies and increased the government’s revenues.

Inspired by Venezuela’s example and facing financial pressures, Saudi Arabia demanded similar terms from Aramco. The discovery of a U.S. tax provision allowing foreign tax credits enabled a solution: Aramco could increase its payments to Saudi Arabia while offsetting these as tax credits against its U.S. tax liabilities. This move effectively shifted significant tax revenues from the U.S. Treasury to Saudi Arabia without increasing Aramco’s overall tax burden. By 1950, after intense negotiations involving the U.S. State Department, Aramco, and the Saudi government, the 50/50 agreement was signed. This agreement set a precedent that led other Middle Eastern countries to seek similar deals, fundamentally altering the global oil industry’s financial and political landscape. The 50/50 principle marked a significant shift in the balance of power between oil-producing countries and foreign oil companies, embedding a new standard of equity in international oil contracts.

In 1944, Reza Pahlavi, the former Shah of Iran, died in exile and was deeply mourned by his son, Mohammed Reza Pahlavi, who had idolized his father for modernizing Iran and suppressing the powerful mullahs. However, Mohammed Reza had become Shah in 1941 after the British and Russians deposed his father due to his Nazi sympathies. This action was taken to protect the Abadan refinery and supply lines that were crucial for World War II efforts.

As Shah, Mohammed Reza struggled with his legitimacy and the monarchy’s role in Iran. He faced chronic foreign intervention, Soviet territorial pressures, and a significant British economic presence. Iran’s political landscape was deeply fragmented by class, region, religion, and the tension between modern and traditional values. The Shah had to navigate threats from Islamic fundamentalists, communists, nationalists, and military officers. A significant national issue was the Anglo-Iranian Oil Company (AIOC), which symbolized foreign exploitation. Between 1945 and 1950, AIOC made substantial profits while Iran received significantly lower royalties. The disparity and perceived exploitation fueled national animosity towards AIOC and Britain.

In 1951, an elderly nationalist named Mohammed Mossadegh became Prime Minister with a mandate to nationalize Iran’s oil industry. Known for his anti-foreigner stance and eccentric behavior, Mossadegh quickly nationalized the oil industry, leading to a major political crisis. The nationalization was a blow to AIOC and to the British government, leading to international tensions.

Concerned about Soviet influence, the United States tried to mediate but faced Mossadegh’s unyielding stance. Mossadegh’s nationalization move and his maneuvering within Iran’s chaotic political environment led to his rising popularity and simultaneously heightened tensions with Britain and the U.S. In response, Britain considered military intervention, because of certain logistical and political obstacles, they instead initiated an oil embargo that led to economic hardships in Iran. The Shah, struggling with his authority, supported a CIA- and MI6-backed coup named Operation Ajax in 1953, and this action led to Mossadegh’s ouster and the Shah’s return to power. Operation Ajax was crucial in maintaining Western control over Iranian oil and countering Soviet influence in the region.

The Suez Crisis of 1956 revolved around the Suez Canal, a crucial waterway linking the Red Sea to the Mediterranean. The canal was constructed by the French diplomat and entrepreneur Ferdinand de Lesseps and originally opened in 1869, after which it significantly shortened travel times between Europe and Asia. By the mid-20th century, the Suez Canal had become a vital route for transporting Persian Gulf oil to Europe, and the oil industry accounted for two-thirds of the canal’s traffic.

British control over the canal and Egypt, which had been established through political and economic dominance, now faced opposition from increasing Egyptian nationalism. In 1952, a military coup led by Colonel Gamal Abdel Nasser overthrew King Farouk, signaling a shift toward Egyptian self-determination. By 1954, Nasser became Egypt’s undisputed leader and advocated for unity and independence from Western influence. From this perspective, the canal symbolized colonial oppression, and it was also a significant source of revenue, with its tolls primarily benefiting European shareholders. Nasser sought to nationalize the canal to fund the Aswan Dam project after the U.S. and Britain withdrew financial support. In July 1956, he announced the nationalization of the Suez Canal, leading to heightened tensions.

Britain and France were both heavily reliant on Middle Eastern oil and viewed Nasser’s move as a direct threat. Both nations joined with Israel to devise a military response, and Israel invaded Sinai on October 29, 1956, prompting British and French intervention under the pretext of protecting the canal. However, this tripartite invasion faced strong opposition from the United States and the Soviet Union, escalating Cold War tensions. Prioritizing global stability and fearing the spread of Soviet influence, President Eisenhower pressured Britain, France, and Israel to withdraw. The crisis revealed the declining power of Britain and France and highlighted the United States’ dominant role in international affairs. The eventual withdrawal of foreign troops and the reopening of the canal marked a significant victory for Nasser and underscored the shifting geopolitical landscape of the post-colonial era.

In the 1950s, the discovery of giant oil fields, or “elephants,” in the Middle East transformed the global oil market, leading to substantial increases in oil reserves and production. By 1972, global oil production had soared from 8.7 million barrels per day in 1948 to 42 million barrels per day, and this upsurge in production was significantly driven by Middle Eastern fields. Proven oil reserves in the non-communist world grew from 62 billion barrels in 1948 to 534 billion barrels in 1972.

As Middle Eastern oil production surged, U.S. dominance in the global oil market diminished. Middle Eastern production rose from 1.1 million barrels per day in 1948 to 18.2 million barrels per day in 1972, while the U.S. share of global production fell from 64% to 22%. Proven reserves in the Middle East increased from 28 billion barrels to 367 billion barrels, shifting the center of gravity in the oil industry to the region. The abundance of oil led to intense market competition and frequent price cuts, fueling nationalism in oil-producing countries. These countries sought higher revenues and greater control over their resources, exemplified by the Shah of Iran’s ambitions to increase Iran’s oil income and reduce foreign control.

Enrico Mattei, head of Italy’s state-owned oil company ENI, challenged the dominance of the “Seven Sisters,” the major oil companies. Mattei’s 1957 deal with Iran granted Iran 75% of the profits and therefore broke the 50/50 profit-sharing norm, causing concern among established oil companies and Western governments. Mattei’s success also inspired other countries, such as Japan, to seek their own oil supplies, further eroding the established profit-sharing principles. Additionally, nationalism and the desire for greater control over oil resources increased tensions between oil-producing countries and major oil companies. The Suez Crisis in 1956 highlighted the declining influence of Britain and France in the Middle East, emboldening countries like Egypt, under Nasser, to assert greater control over their own resources. This period marked a significant transformation in the global oil industry, with new players and new arrangements reshaping the landscape.

The surplus of oil continued to grow, driven by aggressive marketing from the Soviet Union, which slashed prices and engaged in barter deals to sell oil in the West. This move was seen as both a commercial venture and a political assault aimed at creating dependency in Western Europe, weakening NATO, and undermining Western oil interests in the Middle East. The Soviets needed hard currencies to buy industrial equipment and agricultural products and therefore made their oil prices highly competitive. Western oil companies feared losing significant sales to the Russians, particularly in Western Europe, their primary market for Middle Eastern oil.

In July 1960, Standard Oil of New Jersey’s board met to address the issue of posted prices. Monroe Rathbone, the new chairman, pushed for a price cut despite internal disagreements. Rathbone’s career was rooted in American oil refining, and he did not fully grasp the sentiments of foreign oil producers. Howard Page, a seasoned negotiator with broad international experience, argued against unilateral price cuts, warning of the explosive force of nationalism in the Middle East. Nonetheless, Rathbone proceeded with the price cut without consulting the governments of oil-producing countries, leading to widespread outrage.

The sudden price cut in August 1960 was announced without prior warning and prompted immediate backlash. Oil-producing countries quickly mobilized, led by figures like Abdullah Tariki and Juan Pablo Perez Alfonzo. Iraq seized the opportunity to establish a new organization composed of oil exporters, leading to the creation of the Organization of Petroleum Exporting Countries (OPEC) on September 14, 1960. OPEC’s goal was to defend and restore oil prices and ensure that member countries were consulted on pricing matters affecting their national revenues. Initially, OPEC primarily ensured that oil companies would be cautious about making unilateral decisions. However, the 1960s saw a proliferation of new oil provinces and a crowded market, which diluted OPEC’s influence. Despite internal political rivalries and varying national interests, OPEC marked the beginning of collective sovereignty for oil-exporting countries, challenging the dominance of major oil companies and setting the stage for future confrontations.

After World War II, oil consumption soared, driving rapid economic growth and transforming societies. This era marked the rise of “Hydrocarbon Man,” with oil becoming essential to everyday life. Between 1949 and 1972, global demand for oil increased dramatically; U.S. consumption tripled, Western Europe’s increased fifteenfold, and Japan’s skyrocketed 137 times. Economic growth and rising incomes fueled this surge and people bought more cars, houses, and electrical appliances and increased demand for oil production. Factories ramped up production to meet consumer demand, often relying on oil as a primary energy source. The burgeoning petrochemical industry also transformed oil into plastics and other chemicals, replacing traditional materials.

Oil’s affordability further boosted consumption, and multiple governments promoted oil use for economic growth and modernization. Oil-exporting countries pressured companies to produce more, creating a cycle of increased supply and demand. New refineries, larger tankers, and advanced refining technologies facilitated the industry’s expansion, supporting the shift to jet planes, diesel locomotives, and oil-heated homes. The rise of oil also challenged coal’s dominance. Historically, coal powered the Industrial Revolution, but oil’s abundance, lower cost, and convenience made it more attractive. Labor strikes in coal fields and oil’s environmental advantages hastened this shift. By the mid-20th century, oil had begun to replace coal as the primary energy source in the U.S. and Europe.

Europe’s transition to oil was accelerated by postwar coal shortages and environmental concerns, particularly in Britain, where pollution from coal burning led to health crises. The Clean Air Act of 1957 favored oil use, and by 1972, oil provided 60% of Western Europe’s energy, compared to coal’s 22%. Japan’s oil transformation was also rapid. Initially dependent on coal, Japan shifted to oil in the 1960s due to falling oil prices and the need to avoid labor unrest in coal mines. By the end of the 1960s, oil supplied 70% of Japan’s energy, fueling its industrial growth and automotive revolution. In Europe, American oil companies sought new markets amid U.S. import quotas. Intense competition led to innovative marketing strategies and infrastructure investments, and companies like Continental Oil expanded operations overseas, establishing refining and distribution networks in Europe. The American consumer also benefited from this oil boom. Gasoline price wars and service station perks made oil more accessible and affordable. The automobile became central to American life, facilitating suburbanization and changing the landscape with highways, shopping centers, and fast-food chains.