The Seven Sisters

The Great Oil Companies and the World They Made

by Anthony Sampson

12
Embargo

With the possible exception of Croesus, the world will never have seen anything like the wealth which is flowing and will continue to flow into the Persian Gulf.
-- James Akins, April 1973

IN THIS atmosphere of crisis, the stolid oil company delegates prepared to confront OPEC in Vienna on October 8. The companies were represented by a team of five, led by George Piercy, the Exxon engineer, and André Bénard, the French director of Shell, a former resistance hero who had only recently become involved with the Middle East. They had all been briefed beforehand by their own boards, and by a special meeting of the London Policy Group -- once again with antitrust clearance. Governments were kept informed, but in spite of the growing tension, no diplomats went to Vienna. The negotiation was still between countries and companies. The buffer was still assumed to be working.

And then, just as they were leaving for Vienna, Egypt and Syria invaded Israeli-occupied territory. There was war. It was now all too clear why King Feisal's warnings had been so emphatic: his lonely loyalty to the United States was now untenable.

OPEC was represented only by the Persian Gulf countries, six of the thirteen (the original five had been gradually augmented, and by 1973 the members were: Algeria, Ecuador, Gabon [associate], Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela), was led by the oil ministers of the two biggest producers: Yamani from Saudi Arabia and Amouzegar from Iran. They were in a strong position. The 'house of cards' of the Teheran agreement had now clearly collapsed. Firstly, inflation had galloped ahead, so that the increase of 2-1/2 percent a year was now obviously inadequate: the price of other commodities which the OPEC countries had to import (as the Shah never ceased to point out) was far outstripping the oil price. Secondly the shortage had transformed OPEC's bargaining position: some independents were already offering $5 a barrel for 'participation' oil. Thirdly, the whole psychological balance of power was changing in the face of the shortage. As Dr. Amouzegar put it: 'we became so disgusted by their mercenary approach, bickering over a penny. But we realised that they were in a different position after two wars and the closing of the canal. All these things made them get a little panicky about not getting oil for their customers; we began to feel they were losing their strength.' (Interview with author, December, 1974.) On top of these factors, there was now the war. The company delegates arrived to find the Arabs in a state of excitement, passing round newspaper articles and photographs of American supplies to Israel.

The negotiations opened ominously. Yamani began by demanding increases in the government 'take' which would, in effect, double the posted price to $6 a barrel. Piercy replied by offering an extra 15 percent. The oilmen talked strictly commercially, in terms of the market as they saw it: 'we argued very effectively,' as one team put it to me, 'perhaps too effectively. We left them with no resort to logic -- only to power.' But the OPEC delegates were convinced that, with the shortage, the market was on their side. Yamani made a few concessions, taking the posted price to around $5 a barrel; but Piercy, in terms of his brief from his masters, could not go beyond 25 percent.

In the meantime the war was raging, the Egyptians had crossed the Suez Canal, and the Arab states had been forged into a new unity. The Arab members of OPEC, through their own Organisation OAPEC, announced that they would meet in Kuwait to discuss the use of oil as a weapon of war.

The question of the price was now in imminent danger of being confused with the question of an embargo. It was feared not only by the company delegates, but by Yamani, at least by his account: in Geneva four months earlier he had said he would not negotiate again, but now apparently he wanted to avoid a breakdown. 'I wanted to keep the companies with us, while we went into this political period,' he told me later, 'I didn't want to mix prices with politics'. Amouzegar claimed afterwards that he had genuinely wanted to settle: 'we asked for a dollar a barrel of government take, knowing that they would be mercenary as usual, expecting to settle for forty or forty-five cents. They made a terrible mistake. They flatly. refused, saying the oil market didn't justify it. But we knew that the low price was due to the world being divided between rich and poor.'

The company delegates cabled to their principals in London and New York and received their replies: they could not agree to such huge increases without consulting the consumer governments. Some of the company delegates regretted their instructions, believing that it was still possible to negotiate an agreement which might otherwise be forced on them. After midnight, Piercy and Bénard paid their momentous call on Yamani at the Intercontinental Hotel, to tell him that they must adjourn for two weeks to consult governments. (See Chapter 1, pp. 14-15.) Yamani made clear his regrets. The delegates could not budge. The next morning some of the other OPEC delegates arrived at the offices to find that Yamani and the company delegates had already flown home. The news of this historic breakdown, which was to transfer the economy of the West, was buried in the war news. It was delegated to the business pages, and even in the Financial Times it could only reach page 13.

In New York the Aramco delegates were now desperate about their companies' survival, and they turned once again to Jack McCloy to press their case. McCloy promised to get a letter to the President, and wrote to General Haig at the White House on October 12 by special messenger, enclosing a memorandum to be passed on to both Nixon and Kiss-- Jamieson, Granville, Miller, and Warner. They emphasised that any increased American military aid to Israel 'will have a critical and adverse effect on our relations with the moderate Arab producing countries'. The Europeans could not face a serious shut-in, and 'may be forced to expand their Middle East supply positions at our expense'. Japanese, European, and perhaps Russian interest might well supplant United States presence in the area, 'to the detriment of both our economy and our security.' (Multinational Hearings: Part 7, pp. 546-7.) It was a characteristic mixture of military and commercial arguments: American oil must be protected from both European competition, and a Russian invasion.

General Haig took his time in dealing with the letter; three days after its delivery, he replied to McCloy ('Dear John') saying 'I will see that the letter is forwarded to the, President and to Secretary Kissinger'. But in the intervening weekend Kissinger and Nixon, alarmed by reports of Soviet shipments to the Arabs and the Israeli predicament, had authorised the immediate airlift of military supplies to Israel.

The next week, on October 16, four Arab foreign ministers arrived in Washington, led by the most crucial, Omar Saqqaf, then Foreign Minister of Saudi Arabia. Saqqaf was in a very bad mood: Nixon had not been able to see him that day, and at a press conference one American reporter said that the Saudis could drink their oil: Saqqaf replied bitterly, 'all right, we will'. The next day, after a last-minute warning from Aramco, Nixon and Kissinger agreed to see Saqqaf and the other three foreign ministers. Saqqaf gave Nixon a letter from King Feisal, stating that if the United States did not stop supplying Israel within two days, there would be an embargo. But Nixon explained that he was committed to supporting Israel; and on the same day the Senate voted, two to one, to send reinforcements.

In Kuwait in the meantime the members of OPEC had assembled for a double-barrelled attack on the West. On the first day they decided unilaterally to raise the oil price to $5.12 a barrel -- 70 percent more than the figure of $3.00 agreed at Teheran, and an increase that made all others look tiny. On the second day the Arabs met by themselves, for the meeting of OAPEC. They agreed on an immediate cutback in oil production of 5 percent, and warned in their communiqué (which was issued only in Arabic) 'that the same percentage will be applied in each month compared with the previous one, until the Israeli withdrawal is completed from the whole Arab territories occupied in June 1967 and the legal rights of the Palestinian people restored'.

The two cuts together -- the price-hike and the embargo -- proved a deadly combination to the West. But the coincidence, surprisingly enough, was accidental. The embargo had been conceived solely in the context of the Arab-Israel conflict: 'It had nothing to do with wanting to increase the price of oil,' the Secretary of OPEC, Ali Atiga, insisted later: 'or with increasing the power of the oil producers. It was meant simply to attract the notice of the public in the West to the Israeli question; to get them to ask questions about why we did it.' (Interview with author, February, 1975.) But the embargo turned out to be the most effective possible device to jack up the price still further. It made not only the Arab producers, but the Iranians and Venezuelans who had no hand in it, aware of their true position of strength.

Three days later, after Saqqaf had returned angrily from America, came the bombshell. Saudi Arabia, far from distancing herself from OPEC, announced a cut-back of l0 percent, plus an embargo of all oil to the United States and the Netherlands. The OPEC ring had now closed tightly and the country which Americans had regarded as the safest was now the most extreme. The next day, the Saudis cut back production by more than 20 percent, and in Riyadh Yamani summoned Jungers to discuss the implementation of the embargo.

The Saudis had already worked out the embargo in some detail. They insisted that on top of the 10 percent cutback, Aramco must subtract all shipments to the U.S. including the military. Aramco would have to police the whole complex operation, and any deviations from the ground rules would be harshly dealt with. Jungers pointed out some of the effects of the rules; for instance that Italy and Japan would be specially hard hit. Yamani remarked that this was deliberate, implying that they were being punished for pro-Israeli attitudes. If this embargo didn't change American policy, Yamani explained, the next step would 'not just be more of the same': Jungers had no doubt that he meant complete nationalisation, if not a break in diplomatic relations. (Multinational Hearings: Part 7, p. 517.)

The Aramcons now found a real crisis of identity; for where was their ultimate loyalty? At the height of a war, with American public opinion highly-charged, they were required to be the agents of an Arab government in enforcing an embargo, including a military embargo, designed openly to change United States foreign policy. The whole past justification for Washington's diplomatic support of the companies in the Middle East -- that they were essential to national security -- was undermined, just when the U.S. Sixth Fleet was being held in readiness.

By October 21, when the embargo was proclaimed, the Israelis had agreed to a cease-fire. The next day in New York the Security Council unanimously adopted the call for a cease-fire by the two superpowers. The Aramco directors heaved sighs of relief. 'No question that Saudi Arabian Government mood now more relaxed', Jungers cabled to Socal on October 24, 'but one of cautious anticipation.' But, he warned, the King was still radical on the point of Jerusalem -- 'always the most sensitive and uncompromising issue with His Majesty' -- and there was 'absolutely no question that the oil cutback would remain in effect until the entire implementation was worked out.' One Saudi contact told Jungers that there was 'great satisfaction' with Aramco for its pro-Arab stand, and remarked 'we hope to reward you' -- which Jungers interpreted as a promise to allow future growth. (Ibid: p. 513.) The vast project for Aramco's expansion was now a multi-billion political hostage.

Aramco was now closely in touch with Jim Akins, who had just become the Ambassador to Saudi Arabia. On October 25 Akins sent a confidential message to Aramco, to ask the oil tycoons in America to hammer home to their friends in government that oil restrictions would not be lifted 'unless the political struggle is settled in a manner satisfactory to the Arabs'. There were some communications problems', Akins pointed out, with considerable understatement, between the industry and the government. The oil companies must put their views in an unequivocal way. Akins' message was duly transmitted the next day to the four Aramco partners in New York and San Francisco. It was an odd reversal of the diplomatic process. Was it the companies who were the instruments of the State Department, or vice-versa?

The Aramco directors still had to carry out the King's orders, even if they were directly against their own country's interests. The Saudis asked for details, within two days, of all their crude oil used to supply the American military bases throughout the world. In New York officials from Mobil and Texaco were reluctant to release it. But Exxon consulted with the Defence Department (though in a very peremptory fashion: Admiral Oller, in charge of Defence Fuel, did not hear about it until it was a fait accompli). (U.S. Senate: Permanent Subcommittee on Investigations, April 22, 1974.) The details were provided, and the Saudis duly instructed Aramco to stop the supplies to the military. The position was serious enough for a managing director of BP in London to receive a phone call from Washington asking whether BP could supply the Sixth Fleet. Exxon and the others were now wide open to the charge that had so often been made against them in the past -- that they put profits before patriotism.

In New York, it was all too evident that Aramco was carrying out the instructions of a foreign government, and however much they insisted that they had no alternative, they had few public figures on their side. In the midst of the most Jewish city, they stood out as a pro-Arab enclave. The topography seemed symbolic: on one side of Sixth Avenue in Manhattan stood the three skyscrapers of the three TV networks -- CBS, NBC, ABC -- all of them sympathetic to the Israelis, and deeply critical of the oil companies. On the other side stood the headquarters of the two key companies: Exxon's new skyscraper and the two floors of Aramco, at Fifty-Fourth Street. It was as if the Avenue was an impassable frontier, like the River Jordan itself. Inside the Aramco offices there were young Arab trainees, pictures of King Feisal, engravings of Arabia, and rows of those bleak colour photogrraphs of pipelines in the desert, so much favoured by oilmen.

To the media, across the avenue, Aramco appeared an all-powerful supra-government, a consortium of four of the richest companies in the world in league with an alien sovereign state. But the Aramco men in New York saw themselves as persecuted and encircled; anonymous telephone callers rang up with bomb scares to make them troop out of the building, and with threats and insults against the oil traitors. There was little middle ground: each side had its own view of the priorities of foreign policy, and each had a profound distrust of the other. The opposite interests had now come together in an explosion.

The Price

The embargo, having originated quite separately, was now rapidly exacerbating the shortage, and thus affecting the price. The oil producers, through their participation, now had oil to sell for themselves on the market, which enabled them very soon to get still higher prices. The oil companies had often in the past exploited a political crisis to push up their prices; the American companies had done so seventeen years earlier, after Suez. But OPEC, being now a more effective cartel, was better able to take effective advantage.

The companies, surveying the situation with alarm and confusion, asked to meet again with OPEC, and on November 17 they assembled in Vienna -- this time not to negotiate, but to discuss. There followed a bewildered discussion about the state of the market, for neither side altogether understood what was happening. Yamani insisted that the market was the only thing that he believed in: why should the oil companies say that the market worked when prices were depressed over the previous decade, and now reject the market at a time of shortage? Was it not a paradox that the oil companies should now ask for a substitute for the market price? The companies insisted that the embargo was not letting the free market work. Dr. Amouzegar of Iran, however, was already insisting that the posted price was too low, pointing to the huge excise taxes that the consuming countries continued to levy on oil.

OPEC then held its own conference in Vienna, to discuss how to determine on oil prices. They decided that their Economic Commission should report on the question in December. The companies, their communiqué said, had failed to make a constructive proposal, and the statement continued in OPEC's most reproving style: 'The companies' representatives dwelt vaguely on ideas for pricing of petroleum on the basis of a rigid and arbitrarily pre-determined procedure divorced from normal market forces. The conference is not in agreement with such an approach and believes that the pricing of petroleum, like the pricing of other internationally-traded manufacturered goods, commodities and raw materials, should be market-orientated.' It was a comic reversal of roles: OPEC, having discovered its monopoly power, had become the champion of the marketplace: the producers had not only stolen the companies' cartel, they had stolen their humbug.

In the panic and shortage caused by the embargo, the majors were now terrified that the independents -- who were much the most desperate for oil, not having their secure supplies -- would bid up the price to ridiculous levels. In London, the companies tried to get Peter Walker, the Minister for Trade and Industry, to refuse foreign currency to bids above $6 a barrel, but he would not agree. The companies were specially worried by Japan, who was most dependent on oil: Frank McFadzean of Shell asked the Japanese prime minister, Kakeui Tanaka, to try to restrain bids, but without success.

In Iran on December 16, the Iranian State Oil Company, NIOC, for the first time conducted an auction of some of its oil, with horrific results for the West. The highest bid came to seventeen dollars a barrel. Most of the high bidders were independents, but one bid of twelve dollars (according to Amouzeaar) was put in by a Shell affiliate. The majors could not stop the bidding, and the results supported the Iranian argument, that the posted price was far too low.

The climax came just before Christmas. On December 22 the six Persian Gulf members of OPEC met again, this time in Teheran, an ominous setting. For this was the Shah's home ground and the Shah had come to realise that the embargo, though he had played no part in it, was giving him the chance of a lifetime to overcome all his economic problems. Ever since the Teheran agreement of 1971, he had realised that the power of the oil kings was waning; but (as he candidly admitted to me) it was not till the embargo that he understood the real weakness of the companies.

The Shah had already prepared the ground. In October he had sent out a team to investigate the cost of alternative fuels, to try to establish a fair price for oil: they looked particularly at the United States, West Germany and South Africa (with its extensive oil-from-coal operations). The experts' report gave the Iranians more powerful arguments for conservation or, in other words, higher prices. As Dr. Amouzegar recalled it, 'we were specially struck by the fact that in 1951 coal accounted for 51 percent of fuel in the United States, while in 1973 it was 19 percent. Because of cheap oil, all alternative sources were being neglected. We realised that no-one in the West was worrying about what would happen when the oil ran out, and the communists could easily take advantage'. (Interview with author, December 1974.) The Iranians could thus smoothly argue that expensive oil was really in the best possible interests of the West. And the Iranian arguments were supported by the findings of OPEC's economic commission, whose report just before the conference indicated that the price should be around seventeen dollars. The prices at auctions encouraged the claim; on the very day of the OPEC meeting an auction in Nigeria had produced a new record bid of $22.60 a barrel -- though it was never actually paid.

When the OPEC ministers met, the Iranians and the Saudi Arabians were at loggerheads. The Shah wanted a price of fourteen dollars a barrel which was, he insisted, less than the demands of some others. Sheikh Yamani, on the other hand, was seriously worried by the effects of another big price increase on the world economy. How seriously he was (or is) worried is much disputed by oilmen; many argue that it was his insistence on participation and a high buy-back price which began the whole price escalation. But both Yamani and his master, King Feisal, showed signs at the time of being apprehensive: and Yamani said afterwards: 'I was afraid the effects would be even more harmful than they were, that they would create a major depression in the West. I knew that if you went down, we would go down.' (Interview with author.)

Yamani knew that the Shah would demand a high price, with the backing of the OPEC militants. The Saudis, as he saw it, were faced with a simple choice: either stick out for a lower price and effectively break up OPEC; or else go along with the majority, and try by all possible means to bring the price down, then and later. 'It was,' he recalled afterwards, 'one of the critical moments of my life; one of the few decisions I took reluctantly.' He could not get in touch with King Feisal, and had to take the decision alone. He encountered two friends in the lobby of the Intercontinental Hotel, and sought their advice. One of them, Bill Tavoulareas of Mobil, advised him to keep the price down, and if necessary break OPEC. The other, an independent oil expert, advised him to fight as hard as he could for a low price within OPEC, but not to break with the majority -- a decision to which Yamani was already tending. But it was not, as he discovered later, the King's view and on his return to Riyadh Feisal reprimanded Yamani for not having insisted on a lower price. What would have happened if Yamani had got through to the King that night in Teheran? OPEC would probably have been broken, and the price would have stayed down; but the political isolation of the Saudis would have been increasingly perilous, and it was unlikely that they would have been able to hold out alone.

The next morning the OPEC ministers were still formally meeting when the Shah gave a press conference, to leave no doubt that it was he who was in charge. He announced the shattering increase to $11.65 a barrel, more than doubling the posted price of oil. His assurance was breathtaking: the price, he explained, was very low compared to the going market price, and was reached 'on the basis of generosity and kindness'. The companies, he explained, were making excessive profits of at least a dollar a barrel, for no reason at all. As for the Western consumers, it would do them good to have to economise: 'eventually all those children of well-to-do families who have plenty to eat at every meal, who have their own cars, and who act almost as terrorists and throw bombs here and there, will have to rethink all these privileges of the advanced industrial world. And they will have to work harder... ' (Middle East Economic Survey: December 28, 1973; Petroleum Intelligence Weekly: December 31, 1973.)

The OPEC communiqué calmly concluded by saying that, considering that the increase was moderate, 'the Ministers hope that the consuming countries will refrain from further increase in their export prices'.

The price of oil had now quadrupled in just over two months. With incredible suddenness, the whole oil cartel had apparently fallen into the hands, not of seven companies, but of eleven countries. All the converging trends of 1973 -- the movement towards participation, the shortage, the Arab-Israel war -- had come together to clinch the cartel. The Middle East leaders, in private, expressed their gratitude to the sisters for making it possible. 'We just took a leaf out of our masters' book,' as one Kuwaiti put it. Or as the Shah said afterwards: 'with the sisters controlling everything, once they accepted, everything went smoothly.' (Interview with author: February, 1974.) The Western nations now found themselves, to their bewilderment, confronted with a cartel, not of companies, but of sovereign states.


Next: 13 - The Reckoning

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