The Seven Sisters
The Great Oil Companies and the World They Made
Anthony Sampson
Hodder and Stoughton, 1975, ISBN 0 340 19427 8
Chapter 11 - Part 2
The Crunch
But to the radical critics the new arrangement was at least as
sinister as the old one. Professor John Blair, the compiler of the
original FTC report on the Petroleum Cartel, suspected that the
industry was now entering a new phase of 'bilateral monopoly', with
the producing countries as sellers and the companies as buyers: so
long as the companies kept the exclusive right to buy the oil, he
believed, they could control the supply, 'which is the heart of the
control of the price'. Professor Adelman saw the whole situation
after the Teheran agreement as a take-over of the old cartel by the
new one: 'The producing countries now have a cartel tolerated by the
consuming countries and actively supported by the United States.'
'OPEC,' he warned, 'has come not to expel, but to exploit.'
Certainly, as Levy, had warned, the companies' role was now much more
awkward, much harder to separate from politics. As Jim Akins warned
them from the State Department, they might find themselves as
minority partners of both producer and consumer governments, with a
more circumscribed role in negotiating. 'How the companies react to
these pressures,' wrote Akins, 'and what they offer as alternatives,
will to a large extent determine their future form and their future
activities'. In fact, they did not react. Pressed on both sides, they
hoped for the best, and for the time being they seemed to co-exist
peacefully with the producers.
But even as the Aramco agreement was being prepared a new crisis was
brewing up in the Middle East; and before it was signed, Yamani had
left the U.S. in a hurry. A chain of events had been started which
was to mix up the question of prices inextricably with the question
of politics, a mixture made more dangerous by the growing world
shortage of oil.
Shortage
Up till the late 'sixties, the sisters were worried about having too
much oil, not too little. In May 1967 Michael Haider, then chairman
of Exxon, answered a shareholder's question at the annual meeting in
Houston with the words: 'I wish I could say I will be around when
there is a shortage of crude oil outside the United States.' A year
later Socal in California was specially worried about the Alaska
discoveries, in which they had no share. A Socal company memo in
December 1968 warned that 'within five to ten years there may be
large new crude supplies from the Arctic regions of the world seeking
markets and thereby extending and magnifying the surplus supply
problems.' (Multinational Hearings: 1974, Part 7, p. 360.)
In 1969 George Piercy of Exxon was fairly confident that his
company's future supplies would meet demands. On the one side he
expected that the boom in Japan -- the biggest single importer of oil
-- would begin to slow down. On the other hand there were the huge
new expected sources of oil, including Alaska, Libya and eventually
the North Sea. But already there was an ominous turn-down in Exxon's
master-graph, showing spare capacity compared to world demand. By
1970 the trend was much more serious.
The world's demand for oil was ahead of all the predictions; a memo
from Gulf in March 1970 pointed out that their estimates of two years
earlier were 8 percent lower than the actual consumption: 'if once
again our estimates of future free world demand prove low, then a
strain on productive capacity may be approached before 1980'. Was
this consistent underestimation always a genuine statistical error,
or was it sometimes inspired by the companies' instinctive fear of a
glut?
Within the United States, production of oil was no longer going up,
and after 1970 it went down. For the first time the optimism of the
early drillers that there would always be oil somewhere else was now
unfounded. Already by 1970 28 percent of the oil used in the U.S. was
imported. The possible danger of this to national security prompted
President Nixon to appoint a special Cabinet task force, headed by
George Schultz, which reported in 1970 with historic complacency,
against the advice of the oil companies (see submissions by Exxon,
Texaco, Mobil and Socal: Investigations Subcommittee, Jan. 21, 1974,
p. 184-194), that there was little danger of an Arab boycott, and
that existing import controls should be liberalised. The president
did not accept the report, but import quotas were nevertheless
relaxed, and the imports of Middle East oil went up and up.
The oil-producers had already begun to realise that their bargaining
position was stronger, as Yamani had warned Piercy in February 1971
('George, you know you cannot take a shutdown'). By 1972 many experts
reckoned that the world was heading for an acute oil shortage in a
few years, and Shell was sending out serious warnings. In October
1971, Barran of Shell warned that the days of cheap oil were over,
and that by the end of the century oil consumers would be 'looking
down the muzzle of a gun'. There was a new danger sign when Kuwait
decided in 1972 to conserve its resources and to keep its production
below 3 million barrels a day.
For BP and Gulf, the two partners in Kuwait, this was menacing news.
But Exxon, like the other American partners in Aramco, was not
seriously worried, for they were confident that Saudi Arabia could
supply all the extra required. By early 1973 the Saudis were
producing 61 million barrels a day, and the prospects were even more
dazzling. As other parts of the world became more uncertain, so Saudi
Arabia became more crucial.
After the companies had agreed to Yamani's participation terms, it
soon emerged that they would push up prices. For there was now great
demand for the relatively small amount of oil that the producing
countries were selling on the free market. And by the beginning of
1973 the price in the free market was rapidly rising. ('The rise in
the market price,' commented Petroleum Press Services in November
1973, 'is partly accounted for by the disruption of normal trading
relations following the participation agreements. It was the high
prices obtainable by state companies for participation crude --
equivalent to only about 21 percent of the Middle East market -- that
whetted the appetites of host governments.')
In April 1973 a new warning appeared in the august pages of Foreign
Affairs, much more alarming than Levy's two years before, from none
other than Jim Akins, now increasingly outspoken. He presented the
ominous statistic that world consumption of oil for the next twelve
years was expected to be greater than the total world consumption of
oil throughout history up till 1973. The loss of production from any
two Middle East countries could cause a panic among consumers. The
price of oil was likely to go up to $5 a barrel well before 1980. The
Arabs could use oil as a political weapon, for the advanced countries
were obviously now vulnerable to boycott.
Akins' warnings were prophetic, but some of his critics insisted that
they were self-fulfilling. The State Department was virtually
advising the Arabs to put up prices, and advertising the West's
weakness. Adelman, writing in the fall of 1972, had insisted that the
talk of shortage merely reflected the interests of the big oil
companies, in cahoots with the Arabs. There was 'absolutely no basis
to fear an acute oil scarcity over the next fifteen years'. (Foreign
Policy, New York, Fall 1972.) Adelman, like many other oil experts at
the time, was confident that an Arab embargo could not be sustained,
as the fiasco of 1967 had suggested.
But the Arabs hardly needed Akins' advice. For the signs of a
shortage were now visible everywhere. The summer of 1973 was an eerie
one for the oil companies. The demand for oil was going up above the
wildest predictions -- in Europe, in Japan, and most of all in the
United States. Imports from the Middle East to the U.S. were still
racing up: production inside the United States was still falling. In
April President Nixon had again lifted restrictions on imports of
oil, so that Middle East oil flowed in still faster; and the
administration did nothing to control a scramble for oil. While the
majors were trying to establish their safe sources of supply, the
independents were bidding frantically for the 'participation oil'
from the producers, thus pushing the price up and up. (See testimony
of Dillard Spriggs, Multinational Hearings 1974, Part 4, p. 61.)
In the gathering crisis, some oil companies tried to involve the
consumer governments. Sir Eric Drake in the BP annual report of 1972
said there was an urgent need for consuming governments 'to adopt
coherent, balanced and co-ordinated energy policies'. And in June
1973 Frank McFadzean of Shell told a seminar at Harvard that the
energy problem was now a question of political power which required
government intervention. (Petroleum Intelligence Weekly: April 23,
1973.) The State Department, urged by Jim Akins, had tried
periodically since 1971 to arrange joint talks with the Europeans,
without success, but it was not till June 1973 that OECD set up a
group to discuss emergency oil policy, to report in November: and it
was too late. The prospects of serious coordination across the
Atlantic and Pacific were anyway slender: each continent had a
different dependence on oil, and a different attitude to the Arabs
and Israel. The more political the oil, the more it divided the West.
Yamani and the other oil ministers soon became aware of their new
opportunity. InJune 1973, as prices were zooming up, OPEC summoned
another meeting in Geneva, to insist on a further increase because of
the further devaluation of the dollar. The militants -- Algeria,
Libya and Iraq -- were now pressing for unilateral control of price,
but eventually OPEC agreed on a new formula which put up prices by
another 12 percent. One evening after midnight Yamani went on a jog
through Geneva with three correspondents, and predicted that this
would be the last time prices would be negotiated with the companies.
In early August Yamani warned Aramco that the Teheran agreement would
have to be renegotiated well before its time limit of 1975. The next
change would be a very large one and there would be no real
negotiation: 'there will be discussion within OPEC,' Yamani told
them, 'with the wild ones insisting on a very high level. And there
will be a compromise within OPEC, but then the companies will have no
choice.' (Company cable to New York: Multinational Report, p. 148.)
By September 1973, for the first time since OPEC's beginning, market
price of oil had risen above the posted price. It was a sure sign
that OPEC were now in a very strong bargaining position. The glut
that had weakened and divided them since 1960 was now emphatically
over. Armed with this knowledge, OPEC invited the companies to meet
them in Vienna on October 8 to discuss 'substantial increases' in the
price of oil.
The King's Message
While the shortage loomed, the Arabs were at last achieving closer
unity. They were determined to use oil as a weapon against Israel,
and by 1973 the militants were being joined by the country on which
the four American sisters had pinned all their expectations for
increase. The very fact that Saudi Arabia was now far the biggest oil
exporter made King Feisal more vulnerable in the face of his Arab
colleagues, and the danger of an embargo more likely; for he could
not afford to be seen as a blackleg.
The oil companies became well aware of Feisal's worsening predicament
but their attempts to warn Washington were met with scepticism. As
with the shortage, it was a case of Wolf, Wolf. The oil lobby, which
had always been so ready to invoke the national interest to protect
profits, were now really dealing with the national interest -- but it
was disbelieved or ignored. It was an ironic consequence of the State
Department's policy, proclaimed twenty years before, that 'American
oil operations should be the instruments of foreign policy in the
Middle East'. They had now delegated that policy so completely that
when the warnings came, the bells did not ring.
Ever since the Six-Day War, the Aramcons in their compound in Saudi
Arabia had become alarmed by King Feisal's growing concern over
Israel. Frank Jungers and his colleagues carefully briefed all
visitors to the camp, ranging from Senator Gravel to General
Goodpaster, about the depth of Arab feelings and the dangers of the
U.S. foreign policy. 'The story of the senseless dissipation of the
goodwill we used to have among the Arabs,' said one of many such
briefings, 'constitutes one of the saddest chapters in the history of
our foreign relations.' (Multinational Hearings: 1974, Part 7, p.
524.)
At the beginning of 1973 the King was taking some trouble to
influence Washington, both through Aramco and through Akins, who
provided the chief link between the Arabs and Washington. But Akins
had to go to extreme lengths to convey the Saudis' views: in January
1973 John Ehrlichman, President Nixon's aide at the time, was
preparing a visit to Saudi Arabia. Akins asked Aramco to arrange for
Sheikh Yamani to 'take Ehrlichman under his wing and see to it that
Ehrlichman was given the message: we Saudis love you people but your
American policy is hurting us.'
On May 3, 1973 Jungers paid a courtesy call on King Feisal, for half
an hour. The King was cordial but his tone was quite different to
that of earlier meetings. The King touched only briefly on his usual
hobby-horse of the Zionist-Communist conspiracy, but he warned
Jungers that Zionists and Communists 'were on the verge of having
American interests thrown out of the area'. Only in Saudi Arabia, the
King stressed, were American interests relatively safe; but even in
his kingdom it 'would be more and more difficult to hold off the tide
of opinion'. The King was amazed that Washington failed to perceive
its own interests: 'it was almost inconceivable in any democratic
state' (he told Jungers) 'for a government to be so far away from the
interests of its people'. But it was easily put right, he went on: 'a
simple disavowal of Israeli policies and actions by the U.S.
Government would go a long way ...' (Multinational Hearings: Part 7,
p. 506 ff.)
Jungers then went on to see Kamal Adham, the King's chamberlain and
close adviser, who gave a more ominous message. The Saudis he said,
in spite of their problems with the Egyptians, could not stand alone
when hostilities broke out. Adham was sure that Sadat, a courageous
and far-sighted man, would have to 'embark on some sort of
hostilities' in order to marshal American opinion to press for a
Middle East settlement. It was a very specific and accurate warning
on top of the King's audience: 'I knew he meant war', said Jungers
later, 'the King liked to give signals, first subtly and then
explicitly. It was quite different from his earlier warnings.'
(Interview with author, February 1975.) Jungers quickly passed on the
warning to Exxon and Co. in New York and California.
Three weeks later the four Middle East directors of the parent
companies -- Hedlund of Exxon, Moses of Mobil, Decrane of Texaco and
McQuinn of Socal -- were at the Geneva International Hotel for a
meeting with Yamani to negotiate about participation. Yamani
suggested that they might pay a courtesy call on the King, who had
just been to Paris and Cairo, where Sadat had given him 'a bad time'
(as Yamani put it) pressing him to step up his political support. The
King, after a few pleasantries, was much more curt and abrupt than
usual. He warned the four directors that time was running out. He
would not allow his kingdom to become isolated, because of America's
failure to support him, and he used the phrase 'you will lose
everything' -- which to the visitors could only mean that their oil
concession was at risk. The King asked them to make sure that the
American public were told where their true interests lay, instead of
being 'misled by controlled news media'.
The Aramco men lost no time, and a week later they were all four of
them in Washington to lobby top government officials. To each they
repeated the King's message, that unless action was taken urgently,
'everything would be lost'. On May 30 they called first on the State
Department, to see a team led by Joseph Sisco, in charge of Middle
Eastern affairs. But Sisco had heard such warnings before, and he
assured them that his information was otherwise. The CIA had
reported, through its own contacts including close relatives of the
King, that Feisal was only bluffing: he had resisted pressure from
Nasser in the past, and could resist pressure from Sadat now.
They then went to the White House, hoping to see Kissinger; but they
were fobbed off with General Scowcroft, and other advisers including
Charles Debono, then the energy expert. Finally they went to the
Pentagon to see Bill Clements, who was then acting Secretary of
Defence, while James Schlesinger was awaiting confirmation. Clements
had been an oil man himself, with his own drilling company, and was
widely regarded in Washington as a key figure in the oil lobby. But
he made clear to his visitors that he had his own information and
views about the Arabs: they would never unite, the companies' fears
were unfounded, and King Feisal was dependent on America. At the end
of their day in Washington, the Aramco men cabled sadly back to
Jungers in Saudi Arabia that there was 'a large degree of disbelief'
that any drastic action was imminent. 'Some believe that His Majesty
is calling wolf where no wolf exists except in his imagination.'
(Multinational Hearings: Part 7, p. 509.)
But the four companies still wanted to show the King that they were
trying to influence American opinion. Each wanted to protect their
future share of the concession, and they soon vied with each other to
show their helpfulness. Bill Tavoulareas, the president of Mobil, was
a close friend of Yamani, and he personally lobbied Sisco at the
State Department; but Sisco again was sceptical. Mobil also prepared
an advertisement for the New York Times on June 21. It was very
cautiously worded: it explained how America was becoming increasingly
dependent on imports from Saudi Arabia, how relations were
deteriorating and how 'political considerations may become the
critical element in Saudi Arabia's decisions'. It concluded that it
was 'time now for the world to insist on a settlement in the Middle
East.' But the New York Times thought it too inflammatory for the
usual position for Mobil's advertisements, opposite the editorial
page. In Saudi Arabia, nevertheless, the advertisement had the
required effect: Yamani wrote a letter to Mobil recognising this
'positive step'.
Exxon was rather more discreet in their support. They decided against
advertising, but Ken Jamieson pressed their case in Washington, and
Howard Page gave a speech in New York to alumni of the American
University in Beirut, about the need to relieve the strained
political relationships between the United States and the Arab
countries. In California, Socal now became worried that they were
slipping behind, and their Foreign Review Committee was concerned
that 'Socal will be conspicuous in our absence'. Consequently Socal's
very conservative chairman, Otto Miller, wrote a letter to
shareholders on July 26, urging that the U.S. should work more
closely with the Arab governments, and 'acknowledge the legitimate
interests of all the peoples of the Middle East...' The letter was
well-publicised, and caused a small furore among Jewish communities,
especially in San Francisco.
There was also plenty of activity from old Jack McCloy, now
seventy-nine, and still representing all seven of the sisters. He
talked to his friends in Washington: he warned Sisco that the Saudis
meant what they said, and he urged Kissinger to try to mediate. 'I
kept jumping on him,' he told me, 'to say that it was an imperative
of statesmanship to get the Middle East settled; that the
administration mustn't just think in terms of the next New York
election'.
The companies were certainly persistent enough. Why, then, did they
have no discernible effect? Had not the oil companies given at least
$2.7 million to President Nixon's campaign? Had not Gulf Oil been
contributing millions of dollars, including a secret gift of $100,000
in 1971, with the express understanding that they would be 'on the
inside track'? Yet, when four huge global companies, with billions of
assets behind them, wanted to pass a critical message from King
Feisal they apparently had no influence whatever.
There were several explanations. The Israeli lobby was undoubtedly
far stronger, and American intelligence about the embargo and the war
was heavily influenced by the Israelis. Secondly the administration,
having for so long separated the two strands of Middle East foreign
policy, still kept them in different compartments. But thirdly, the
American oilmen -- as some of them wryly admit -- had lost nearly all
their credibility. When the companies did have something serious to
say, hardly anyone believed them.
------------
In the meantime the oil weapon was gathering support among the other
Arab states. In May, Dr. Nadim Pachachi, the ingenious Iraqi in exile
who had been secretary of OPEC, put forward a new political proposal
which took advantage of the shortage: he suggested that the supply of
crude oil to the West should be frozen to enforce Israel's withdrawal
from the cease-fire lines of 1967. The next month the Libyans set a
new pace of militancy. Colonel Qadaffi nationalised Bunker Hunt's
concession, saying that the United States deserved 'a good hard slap
on its cool and insolent face'.
President Sadat of Egypt, instead of moving closer to the Libyans,
now significantly altered his alignment. At the end of August 1973 he
flew to Saudi Arabia for a secret visit to King Feisal. The meeting
was momentous. Feisal promised Sadat that, if American policy in the
Middle East did not change, he would restrict the increases of oil
production to 10 percent a year -- far short of Aramco's
requirements. Thus Egypt, for the first time, had oil pressure behind
her diplomacy.
Just after the visit, Qadaffi, celebrating the fourth anniversary of
the Libyan revolution, announced that he would nationalise 51 percent
of all the oil companies operating in Libya, including the
subsidiaries of Exxon, Mobil, Texaco, Socal and Shell. Two days later
the Libyans announced that the price of Libyan oil would go up to $6
a barrel -- nearly twice the Persian Gulf price -- and threatened to
cut off all exports to America if Washington continued to support
Israel. Soon afterwards all ten foreign ministers of the Arab oil
exporting countries (OAPEC) met to discuss the possible use of oil as
a weapon to change American policy. A fortnight later Sheikh Yamani
formally warned the United States that there could be a cutback of
Saudi Arabian oil.
President Nixon appeared on television to warn the Libyans of the
dangers of a boycott of oil, reminding them of the experience of
Mossadeq in Iran twenty years before. But oil experts knew that the
threat was hollow. As Ian Seymour asked in the New York Times: 'could
it really be that the President of the U.S. had not yet grasped the
predominant fact of life in the energy picture over the coming
decade, that the problem is not whether oil will find markets, but
whether markets will find Oil?' (New York Times, October 7, 1973.)
[continued: Chapter 12 - Embargo]
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