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

On October 6, 1973, during Yom Kippur, Egypt and Syria launched coordinated attacks on Israeli positions, initiating the October War. This conflict was the most intense of the Arab-Israeli wars and introduced the “oil weapon” as a strategic tool. The Arab oil embargo, which included production cutbacks and export restrictions, dramatically altered global dynamics, as articulated by Henry Kissinger. By 1973, oil had become vital to the world’s industrial economies, and any disruption threatened global stability. The tight supply-demand balance made the embargo particularly effective, precipitating a crisis of global proportions. The United States also faced rising oil import concerns. The Nixon administration attempted to replace the quota system with a tariff to manage oil imports. However, this proposal met strong opposition, leading to the retention of quotas. Despite this, domestic production could not keep pace with increasing demand, and by 1973, the U.S. was fully integrated into the global oil market, relying heavily on Middle Eastern oil.

Under King Faisal, Saudi Arabia initially resisted using oil as a political weapon. However, market conditions and political pressure from other nearby states, particularly Egypt under Anwar Sadat, shifted Faisal’s stance. By 1973, Saudi Arabia’s oil production had become crucial globally, and the U.S. was vulnerable to supply disruptions. In August 1973, Sadat informed Faisal of his plans to go to war with Israel and secured Saudi support, including the use of the oil weapon. This coordination between Egypt and Saudi Arabia highlighted the increasing strategic role of oil in geopolitical conflicts. As the war unfolded, the U.S. provided military support to Israel, prompting Middle Eastern states to implement the embargo. This resulted in severe cutbacks in oil production and exports to the U.S. and other allies of Israel, leading to a global energy crisis. The oil weapon’s effectiveness marked a significant shift in the geopolitical landscape, demonstrating the Middle East’s influence over global oil supplies and the resulting economic and political ramifications.

The 1973 oil embargo marked a significant shift in global oil politics. The chapter opens with Henry Kissinger, who, despite initially knowing little about oil, became instrumental in addressing the crisis. The Arab oil embargo comprised two main components: production restraints affecting the entire market and a complete export ban on specific countries, primarily the United States and the Netherlands. The embargo also paradoxically included U.S. military forces in the Eastern Hemisphere, creating significant tensions.

The impact of the embargo was profound, resulting in a gross loss of 5 million barrels per day from the market by December 1973. The U.S., which had previously maintained a spare capacity to buffer against such crises, now lacked this capability, exacerbating the situation. The loss of oil significantly disrupted supply chains and created widespread panic as companies and consumers scrambled to secure oil.

The chapter also details the dramatic increase in oil prices due to panic-buying. The posted price for Iranian oil rose from $5.40 a barrel to over $17 in an auction, and even higher bids were reported. The embargo’s effects extended beyond economics, stirring social and political unrest. In Europe and Japan, the crisis evoked memories of postwar shortages, leading to panic-buying of various commodities, including toilet paper in Japan. In the U.S., the embargo shattered the illusion of endless resources, leading to long gas lines and a 40% increase in retail gasoline prices. President Nixon addressed the nation, proposing measures to counter the crisis, including Project Independence—an initiative aimed at achieving energy self-sufficiency by 1980. He appointed William Simon as the new energy czar, granting him significant authority to manage the crisis.

Chapter 31 recounts the transformation of OPEC into a dominant force in global oil politics during the mid-1970s. The chapter begins with OPEC’s relocation to Vienna, a move that symbolized its newfound significance and influence in the oil industry, as it was previously dominated by international companies. OPEC’s rise marked a dramatic shift in the control over oil resources, as member countries asserted their sovereignty and took control of their own oil production. This shift resulted in the quadrupling of oil prices following the Arab oil embargo of 1973, leading to massive financial surpluses for oil-exporting countries. These countries embarked on extensive spending programs, investing in industrialization, infrastructure, and luxury goods, while also becoming major purchasers of armaments to ensure security and influence in a volatile region.

The chapter highlights the economic impact of the oil price hike on both oil-exporting and oil-importing countries. The exporters enjoyed increased revenues, leading to inflation and financial surpluses. Conversely, the industrialized West faced recession and inflation, with significant economic disruptions. Developing countries, particularly those without oil resources, suffered the most, experiencing economic setbacks and increasing debt burdens.

OPEC’s internal dynamics are also explored, particularly the rivalry between Saudi Arabia and Iran. The Shah of Iran, driven by ambitions for rapid modernization and global influence, pushed for higher oil prices. In contrast, Saudi Arabia, concerned about the long-term stability of oil markets and geopolitical consequences, advocated for moderate price increases. This tension within OPEC reflected broader geopolitical and economic concerns, influencing global oil policies and international relations.

The oil crisis of the 1970s marked a significant turning point for industrialized nations, compelling them to adapt to new economic realities. This chapter explores the multifaceted responses to the oil price hikes and the subsequent shift in global power dynamics. The International Energy Agency (IEA) emerged as a pivotal institution for coordinating Western energy policies. It developed strategies for emergency oil sharing, established strategic reserves, and facilitated research on alternative energy sources. The primary goal was to reduce reliance on imported oil and mitigate the influence of oil-exporting nations.

Japan responded swiftly to the crisis by promoting energy conservation and diversifying its energy sources. Efforts included converting power generation from oil to coal and nuclear power, increasing imports of coal and liquefied natural gas, and diversifying oil imports. The Ministry of International Trade and Industry (MITI) led a successful campaign to promote energy efficiency, significantly enhancing Japan’s industrial competitiveness.

France, under the leadership of President Georges Pompidou and later Valéry Giscard d’Estaing, adopted an aggressive energy policy focused on nuclear power, coal, and conservation. The French government implemented strict regulations, including temperature controls in buildings and bans on advertising that encouraged energy consumption. These measures aimed to restore France’s energy autonomy and reduce dependency on oil.

In the United States, the oil companies faced intense scrutiny and criticism. Senator Henry Jackson’s Senate Permanent Subcommittee on Investigations highlighted oil companies’ perceived greed and manipulation, coining the term “obscene profits.” The hearings reflected public outrage and led to calls for greater government control and regulation of the oil industry. Domestically, the U.S. energy policy was characterized by confusion and conflict. Nixon’s imposition of price controls on oil created a complex regulatory system that was difficult to manage. President Gerald Ford’s ambitious energy plan proposed significant investments in nuclear power, coal, synthetic fuels, and increased fuel efficiency standards for automobiles. These measures aimed to reduce dependency on foreign oil and address the energy crisis.

President Jimmy Carter continued these efforts, emphasizing energy conservation and introducing the National Energy Act. His administration faced significant challenges, including natural gas shortages and the difficulty of building consensus in a divided political environment. Despite these obstacles, Carter’s energy policies marked a critical shift towards greater energy independence and efficiency.

This chapter highlights the dramatic fall of the Shah, the rise of Ayatollah Ruhollah Khomeini, and the global repercussions of Iran’s revolution. In January 1978, a Tehran newspaper published an anonymous article attacking Ayatollah Ruhollah Khomeini, who was then in exile in Iraq. This attack triggered riots in Qom and ignited a new phase in Iran’s struggle between secular forces and the fundamentalist Shia clergy. Khomeini, whose harsh criticisms of the Shah were circulating in clandestine tapes, became the symbol of opposition and gained support amidst Iran’s economic turmoil, which was caused by the Shah’s mismanagement of oil revenues. The Shah’s modernization efforts led to social discontent as rural populations flocked to overcrowded cities amidst soaring inflation and the failure of infrastructure.

Khomeini’s religious and political influence grew as Iranians became disillusioned with the Shah and turned to traditional Islam. The murder of Khomeini’s son in 1977 was attributed to the Shah’s secret police, Savak, and intensified Khomeini’s rhetoric. Riots followed the January 1978 article, escalating into a nationwide cycle of mourning and protests known as “doing the 40-40,” with every 40-day mourning period sparking new demonstrations. The Shah’s attempts at political liberalization did little to quell the unrest, and by late 1978, the government began to collapse.

The U.S., which was reliant on the Shah as a regional ally and oil supplier, was caught off guard. American intelligence failed to grasp the severity of the crisis, and contradictory signals from Washington further confused the Shah. In December 1978, Iran’s oil industry strikes halted exports, exacerbating global oil shortages. The Shah, who was battling cancer and had become increasingly isolated, installed a military government in a last bid to restore order. However, strikes continued, and Iran’s oil production plummeted, causing a spike in global oil prices.

Khomeini, expelled from Iraq and now in France, used modern communication to maintain his influence. As the Shah left Iran in January 1979, jubilant crowds celebrated his departure and marked the end of his regime. Khomeini returned to Iran and established a revolutionary government, which led to a second oil shock, as doubled oil prices triggered economic and political upheaval worldwide.

On November 4, 1979, a crisis erupted at the U.S. embassy in Tehran. Elizabeth Ann Swift, a political officer, reported to the State Department in Washington that a mob of young Iranians had breached the embassy. The invaders set parts of the embassy on fire and took 63 Americans hostage. Swift’s last words, “We’re going down,” marked the beginning of a prolonged crisis known as the Iranian Hostage Crisis. The hostages, later reduced to 50, were held by zealots who became known as “students.” This incident also marked the start of the Second Oil Shock, complicating the geopolitical landscape. The hostage-takers demanded the return of Mohammed Pahlavi, the exiled Shah of Iran, who had sought refuge in several countries and was admitted to the U.S. for medical treatment in October 1979. This admission fueled fears among Iranian revolutionaries of a possible U.S. coup similar to the 1953 intervention that reinstated the Shah.

In response, President Carter imposed an embargo on Iranian oil and froze Iranian assets, further escalating tensions. The crisis intensified market instability, prompting panic buying and price spikes in the oil market. Amidst the hostage crisis, other significant events unfolded in the Middle East. In November 1979, fundamentalists seized the Great Mosque in Mecca, and the Soviet Union invaded Afghanistan in December, heightening fears of regional instability. Carter’s administration attempted a military rescue of the hostages in April 1980, which failed disastrously and exacerbated the situation. The hostage crisis and related geopolitical events underscored the perceived decline of U.S. influence and the shifting power dynamics in the global oil market.

Chapter 35 chronicles the tumultuous period of the late 1970s and early 1980s, which was known as the Second Oil Shock. This era witnessed unprecedented spikes in oil prices to $34 dollars a barrel, and these increases led to significant financial activities and a surge in the oil industry. During this time, oil companies reinvested their earnings into new developments, borrowed extensively, and attracted substantial investments. This period marked the height of independent oil entrepreneurs, who thrived amidst the booming market. The television show “Dallas” epitomized this era, presenting the character J.R. Ewing as the archetype of the aggressive and ambitious American oilman. The rapid expansion in the U.S. oil industry drove up the costs of drilling and fueled the increase of real estate prices in oil-centric cities like Houston, Dallas, and Denver. Even the salaries of geologists were increased. Despite the frenzied activity, there were growing concerns about oil depletion and reliance on OPEC, which maintained high prices due to perceived scarcity.

To address potential shortages, significant investments were made in alternative sources such as shale oil. Companies like Occidental and Unocal advanced shale oil technology, and Exxon invested heavily in the Colony Shale Oil Project, spending one billion dollars to develop this resource. However, the economic outlook soon shifted; oil prices and demand declined, and surplus production capacity grew, leading to the project’s termination in May 1982. The abrupt halt devastated local economies in Colorado, transforming booming towns into ghost towns.

The global oil market faced a massive surplus due to various factors: high interest rates, a deep recession, reduced demand in industrialized nations, and increased production outside OPEC, including new sources in Mexico, Alaska, and the North Sea. Additionally, energy conservation efforts and a shift towards alternative energy sources like coal and nuclear power further reduced oil’s dominance. As demand fell and non-OPEC production rose, OPEC struggled to maintain control. By 1982, non-OPEC production surpassed OPEC’s, forcing the cartel to manage production levels to sustain prices. However, the competition from new producers and the burgeoning spot markets, which allowed for real-time pricing, diminished OPEC’s influence.

In the mid-1980s, the global oil market faced significant instability. The price of oil was a critical variable for economies and governments worldwide. The uncertainty around whether prices would rise, fall, or stagnate was a major concern. High oil prices benefitted exporters like Saudi Arabia, Libya, Mexico, and the Soviet Union, which relied heavily on oil revenues. By contrast, low prices favored importing nations such as Germany and Japan, as well as the U.S., which had interests on both sides.

OPEC’s attempts to stabilize prices through a quota system were failing. Non-OPEC production was increasing, and alternative energy sources like coal, nuclear power, and natural gas were reducing oil demand. Conservation efforts also played a role. Consequently, quota violations within OPEC became rampant as members sought to compensate for lost revenue by increasing their output. OPEC even hired an international accounting firm to enforce quotas, but this effort failed due to non-cooperation from member countries. Some exporters resorted to barter trade, exchanging oil for goods like weapons and planes, further contributing to market oversupply.

The British National Oil Company (BNOC) faced financial losses by buying oil at higher prices and selling at lower prices due to weakening oil prices. This led to the abolishment of BNOC by Prime Minister Margaret Thatcher, who favored free markets over state intervention. Meanwhile, OPEC faced a dilemma: lowering prices could drive them into a price war, but maintaining high prices would allow non-OPEC producers and alternative energy sources to thrive, reducing OPEC’s market share. Saudi Arabia, which had taken on the role of swing producer, experienced a drastic reduction in revenue and market share, prompting it to reconsider its strategy.

In 1985, Saudi Arabia shifted its focus from defending prices to defending its market share through netback deals, which allowed refiners to pay based on the market value of refined products. This move ensured refiners’ profits while incentivizing increased volume over price, and the strategy led to a further decline in oil prices, raising fears of a potential collapse. Despite predictions of a price rebound, the market continued to favor lower prices due to weak demand, growing supply capacity, and the shift to commodity markets. By mid-1985, OPEC’s ministers, including Saudi Oil Minister Yamani, realized that maintaining high prices was unsustainable. Saudi Arabia’s warnings about market share losses and the potential to flood the market added further pressure.