The Seven Sisters
The Great Oil Companies and the World They Made
Anthony Sampson
Hodder and Stoughton, 1975, ISBN 0 340 19427 8
Chapter 14 - Part 2
The New Cartel
Shah v. Sheikh
By 1974 the long rivalry between Iran and Saudi Arabia, which had
preoccupied the oil companies through the 'sixties, was the most
critical question within OPEC, as the most likely source of its
disunity. The most fundamental difference between the OPEC countries
was not so much between African, Asian and Latin American, as between
the countries with large populations, which urgently needed money,
and those with small populations who could afford to take a more
relaxed view about their oil. Algeria, Nigeria and Venezuela were
among the former; the Gulf Sheikhdoms most spectacular among the
latter.
The contrast between the two biggest oil-producers pointed up the
division. Iran with its reserves of sixty billion barrels, and Saudi
Arabia with its reserves of 130 billion (and perhaps far more) with
only a fifth of the population. These figures alone ensured that Iran
would be much more aggressive in maintaining a high oil-price. But
there was no question that a key factor was the Shah himself. Having
now reigned for thirty-three years, he had seen the Middle East
transformed by oil revenues. After his dependence on BP and his
humiliation by Mossadeq and the CIA, he had developed into a far more
confident ruler, himself now one of the Oil Kings of whom he had once
been in awe.
I talked with him in February 1975 in St. Moritz, in the luxury hotel
close to his chalet where he skis every winter. It is a turretted
palace, with a strong flavour of the 'thirties, a setting which
reinforced the earlier image of the Shah as a kind of comic-opera
Ruritanian monarch, but the luxury Swiss hotel had now become a
waiting-place for bankers and finance ministers seeking deals from
the Shah. As I waited with a courtier in the cavernous lobby, there
was a flurry at the entrance where a figure appeared in a
red-white-and-blue plastic ski jacket, sleeves wrapped over the
shoulders, still wet from the skislopes. He walked briskly through
the lobby followed by a plastic procession, which I was motioned to
join, marching up to a hotel-room where we were left miraculously
alone. His face was hard, with sharp-looking teeth, but occasionally
transformed with a quick smile.
In conversation he emerged not so much as a megalomaniac, but as a
man still dazed by his own sudden success. As he recalled the anxious
uncertainty of his first years as Shah, when the oil company seemed
to be all-powerful, he sounded again like that uncertain young man.
He was puzzled by the American hints of possible invasion of the
oilfields, which had been recently emanating from Washington, and
clearly worried by American public opinion. But he was still
insistent that the price of oil was too low, and he would keep it up,
he blandly explained, for the West's own sake: 'it would really be
weak and short-sighted, and it would not help the world at large:
because you will start to go again into a false euphoria of cheap
oil, and forget about extracting your coal and searching for new
sources of energy. It would be the biggest mistake which would be
made to our civilisation, I won't be part of that mistake'.
He saw himself as essentially performing a necessary task, both for
the West and the Third World: 'The West made their fantastic fortune
and their lavish spending on very cheap oil, without paying attention
to oil producing countries, and even doing nothing for the poor
countries of the world. We have had twelve years of UNCTAD now --
what have they done in those twelve years for the poor countries of
the world? (The United Nations Conference on Trade and Development
was set up in 1964 as a permanent body.) Nothing at all'. As for the
oil companies, he saw them as having no real power, as they revealed
at the time of the embargo: 'the companies were the first to say: "I
serve and obey the orders of the countries" '.
In this anonymous hotel room,, he could have been just another
athletic banker; but in Teheran where I arrived a few days later, the
image was very different. The face of the Shah looked down sternly in
full regalia from photographs in every government office and shop,
and His Majesty was talked about with almost religious veneration. It
was an awe with a very practical basis: there had recently been still
more allegations of torture by the Shah's secret police, Savak; and
soon afterwards he abolished all rival political parties. But the
veneration had a positive side too. Not even the Shah's opponents
denied that he had in one single decision in 1973 transformed the
whole economy of the country. The burden of debt was lifted
overnight, and instead the world queued up to borrow money.
The Shah had always been distrustful of the Saudis, but now, at the
beginning of 1975 his suspicions were much more pervasive. For he and
his oil minister, Dr. Amouzegar, were convinced that the Saudis had
made a private deal with the Americans, by which Saudi oil would be
favoured to Iranian oil, and OPEC effectively broken. Although the
Shah talked contemptuously about the seven sisters, he clearly
suspected that, if oil consumption went down further, they might
regain the power to divide and rule, particularly between Iran and
Saudi Arabia. The Shah's suspicions centred not so much round King
Feisal r round his subsequent successor King Khaled -- as round the
upstart commoner who was rivalling him as the spokesman for Middle
East oil on the world's stage, Sheikh Zaki Yamani. The rivalry
between the Shah and the Sheikh had become a global drama played out
on TV screens. (The title Sheikh in Saudi Arabia is merely a courtesy
title and does not, as in the neighbouring Sheikhdoms, indicate royal
blood.)
-----------
Yamani, too, was revelling in the new publicity, touring the Western
capitals to present his case. His relationship with the royal family
in Riyadh was the subject of constant speculation, and there were
frequent rumours that he would resign. In December 1973, as we have
seen, King Feisal disagreed with him about quadrupling the price, and
in September 1974 there was another internal crisis when Yamani
wanted to conduct an auction of Saudi oil which, it was widely hoped
in Washington, would help to bring down the oil price. But there was
opposition to the auction both from within the royal circle, notably
from Prince Fahd, and more importantly from other members of OPEC,
led by Iran and Kuwait. They eventually persuaded Yamani to drop the
plan in return for other favours. Yamani, it seemed, was losing
influence; and he faced a new crisis in March 1975 when King Feisal
was assassinated. The key man in the cabinet became his son, Prince
Fahd, who had often disagreed with Yamani. But Yamani still survived,
as the man who knew more than anyone about the problems of oil.
Yamani had always appeared, even more than most Westernised Arabs, to
be caught between two worlds, in robes and burnoose one moment, and
in a dark suit the next. In his office in Riyadh he has all the
trappings of Arab pomp, sitting behind a two-tier brown plastic desk,
surrounded by chrome-and-glass furniture and plastic armchairs,
holding court while anxious petitioners and oilmen come and go. He
dictates to a team of male secretaries, talking in fast Arabic
interspersed with a few English words -- liquefaction, gathering
station, crude. He seems to be acting all the time, rubbing his nose
or fingering his little beard, or joking with a dart of his tongue,
enveloped in an Oriental sense of power. Yet talking to him in
English alone, he seems a complete cosmopolitan, rattling off
statistics for barrels and buy-back, as attuned to every nuance of
Washington politics as an international lobbyist.
Yamani's duality was distrusted by both sides. To fellow-members of
OPEC, and most of all to the Shah, he appeared in cahoots with
Washington. But to Americans, he was always promising to drop the
price of oil, while it still went up. His ambiguity was part of the
predicament of his country -- torn between its special dependence on
the United States, and the growing pressures from fellow-Arabs and
OPEC. Yamani, as he had so often warned the oil companies, could not
afford to stick out against OPEC.
Yet he was confident of his long-term relations with other members of
OPEC: he knew that Saudi Arabia would emerge as the key piece in the
jig-saw of oil. At the moment of extreme shortage during the embargo,
Iran had been able to win the day. But as the shortage receded it was
the Saudis -- with their far bigger reserves -- who were bound to
carry most weight. They were like the Texans in the 'thirties:
without their support there could be no control of the market, no
guarantee that there would not be a flood of cheap oil which would
undermine the world market and the other producers.
Yamani was in a position to be able to tell OPEC: only if they agree
to keep the price at a reasonable level would Saudi Arabia agree to
control its production. He was confident that he could both control
and safeguard the cartel. As he put it to me: 'Usually any cartel
will break up, because the stronger members will not hold up the
market to protect the weaker members. But with OPEC, the strong
members do not have an interest to lower the price and sell more'.
Third World
The members of OPEC had very different views of the world, and
particularly of their relationship towards the poorer countries of
the Third World. It was clear from the beginning of the
price-increase that the nations which would suffer most would not be
the industrialised countries, however bitterly they complained, but
the developing countries in Africa and Asia. For they were dependent
on oil not only for fuel but for fertilisers, and they had no
lucrative exports to compensate for their higher import bill. The
OPEC countries, the nouveaux riches of the Third World, were very
vulnerable to the charge of exploiting their weaker brothers. But at
the same time the success of OPEC provided a stirring example to all
those countries who complained of low prices for their commodities,
and a challenge to take the initiative into their own hands. The more
radical members of OPEC now depicted themselves as the advance guard
of a new age of economic redress.
The chief spokesman of this movement was the President of Algeria,
Colonel Houari Boum仕ienne. His country at the top of Africa, with
its own oil but with much poverty, was well placed to be the bridge
between rich and poor. Boum仕ienne himself, with his mixture of
demagogy and well-ordered French argument, was in a good position to
present the case. Four months after the price had been quadrupled, he
convened a special session of the United Nations in New York to
discuss the problems of raw materials, deliberately timed to coincide
with Kissinger's initiatives. He delivered a marathon address in
which he presented OPEC as the new leaders of the Third World. 'For
the first time in history', he declared, 'developing countries have
been able to take the liberty of fixing the prices of their raw
materials themselves.' The example, he said, must be followed by
producers of other commodities, including copper, iron ore, bauxite,
rubber, coffee, cocoa and peanuts.
OPEC's success, Boum仕ienne explained, depended on taking control of
its own resources, and no recovery was possible while the
multinational corporations remained in control, 'those past masters
at the art of making concessions in order to safeguard the
essentials'. Nationalisation could tear down the barrier which
foreign companies erected between producers and clients, and could
bring the developing nations face to face with the realities of world
industry. It was a stirring speech and it brought a new scent of
power into the UN. In the delegates' lounge, I sensed an awakening
from a long torpor: the Third World was no longer petitioning for
favours, but organising to insist on them. And the participants at
the conference duly approved a declaration of principles to achieve
what Boum仕ienne grandly called 'a new international economic order'.
Western diplomats and politicians, not surprisingly, were ambivalent
towards Boum仕ienne's initiative. On the one hand, the prospect of a
succession of mini-OPEC's, progressively cartelising the commodities
on which the West depended, presented a nightmare of inflation and
recession. On the other hand, the Western liberals had a well-founded
sense of guilt towards the Third World, having miserably failed to
meet their own targets for aid. Oil was the subject of special
remorse. For the substance that was burnt up by gas-guzzling cars was
also now the basis of petrochemicals, and fertilisers which could
transform the agriculture of the poorer countries. The inherent
wastage of burning this noble fluid had been first noted by the
Russian chemist Mendeleyev in 1872, after visiting Pennsylvania. (See
Tugendhat and Hamilton: Oil, the Biggest Business, Revised edition,
London 1975, p. 120.) But the wastage was not the subject of major
concern until the sixties, when the world's oil was being rapidly
used up, at a time when its uses were constantly increasing. It was a
theme that the oil producers eagerly took up; they were conscious of
the West's sense of guilt. The use of oil to feed the starving
millions added to the case for redistributing wealth and resources.
But it was one thing for Western liberals to advocate voluntary aid
and improved terms of trade: quite another to have such a
redistribution forced on them.
Boum仕ienne's vision of OPEC concealed a good deal of hypocrisy, for
the high price of oil continued to be the cause of great hardship to
poorer countries, and his proposals for a new economic order were not
backed by any great generosity from Algeria. But other OPEC members,
in the year after the price rise, did give very large sums in aid to
the developing world, and went to some pains to make new links,
particularly with India.
Boum仕ienne's rhetoric and statesmanship helped to give a sense of
moral confidence and panache to OPEC, which reached a climax at the
meeting of Heads of States in Algiers in March 1975. Here, OPEC
presented itself not as a grasping cartel, but as the standard bearer
of the new world order, bringing a new sense of justice and
redistribution of the world's wealth, and a unity of purpose among
its members -- symbolised by the spectacular reconciliation between
Iran and Iraq. And at the subsequent meeting with the consuming
countries in Paris in April the OPEC delegates insisted on regarding
themselves as representing the whole Third World, to discuss the
whole range of problems. But the central theme of Boum仕ienne's
original initiative, that OPEC must be followed by other 'Pecs', met
with little success. OPEC members helped to finance other commodity
organisations, and producers of some, notably bauxite and sugar,
drastically pushed up prices. But by 1975 the prices of most raw
materials were tumbling down; and OPEC was less keen to associate oil
with them.
It was again clear that oil was a unique commodity, for all kinds of
reasons. It was by far the most important, with a world trade of four
times as much as the next most valuable commodity, copper. It could
not be stockpiled or stored for longterm supplies, except under the
ground where it originated. Its whole history had shown, since the
Pennsylvania days, an alternation between shortage and glut, which
was not easily subject to the rules of the market; and this tendency
was now increased by the fact that several countries with the most
oil, like Saudi Arabia and Kuwait, had the least need for money.
('High prices prevailing in the markets for grain, cocoa, coffee,
cotton, sugar and others almost inevitably lead to an extension of
production,' commented Paul Frankel after the UN Conference,
re-stating his theory of oil cartels, 'which by its own weight
provides for a downward correction; in today's oil set-up the
opposite is the case, because of the limited absorptive capacities of
some of the main producer countries for the inward flow of funds.')
And the oil business had already been in the hands of the partial
cartel of the seven sisters who provided a world marketing and
allocation system, so that the formation of a producers' cartel was
made very much easier. As the Economist commented (March 8, 1975),
'many poor primary producers would give their eyeteeth if big foreign
capitalists would kindly arrange a semi-monopolistic distribution
network for their products in the West, down to tied filling
stations'. In the public speeches at the UN conference, the
multinational corporations were the favourite scapegoat, the engines
of oppression and exploitation. But in private, I noticed, the
attitude of some delegates from producing countries was somewhat
different. As one of them put it, 'you make the cartel, and we'll
take it over'. And they looked with real envy at the unique oil
cartel, which seemed to be able to defy all the laws of the market.
[End of scan, though there's one more chapter in the book - "The
Seduction". The book is available from second-hand book dealers and
is well worth reading in full.]
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