The Seven Sisters The Great Oil Companies and the World They Made
Anthony Sampson Hodder and Stoughton, 1975, ISBN 0 340 19427 8 Chapter 12 - Part 2 Embargo 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 communiquŽ 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 communiquŽ 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. [continued: Chapter 13 - The Reckoning] ------------------------ Yahoo! Groups Sponsor ---------------------~--> Buy Stock for $4 and no minimums. 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