Cold War Fears and the USArabian Link

By the eve of World War II, oil had assumed a very important role in modern economies as well as in military strategy. Nonetheless, as an energy source it still lagged far behind coal, which supplied 80 percent of the world's primary energy needs. The United States was the center of gravity for crude production, providing 3.6 million barrels per day, or more than 60 percent of the world output of 5.7 mbd. The whole Middle East was still in its infancy producing about 330,000 barrels per day, less than the Soviet Union and Venezuela, then respectively the second and third largest oil producers in the world.1 World War II and the Cold War upset this panorama and paved the way for oil's rise to the status of the most vital resource of contemporary history. And once again, fears of oil security and scarcity played a crucial part in shaping this role.

On the many fronts of the war, oil proved to be the winning card in ground attacks and occupation, air campaigns, and naval battles. As part of their strategy, the warring powers devoted themselves to seizing oil-rich areas or denying their enemies access to them. That was the case, among many others, with Hitler's strategy to penetrate the Caucasus to control Baku's oil region, the Japanese takeover of oilfields in Borneo and Sumatra, and the Allied bombing of Rumania's Plotesti refinery complex to halt its supplying of Nazi divisions. By the same token, even brilliant military strategists could do nothing when their troops or vessels ran out of oil—as Germany's General Edwin Rommel was rudely shown in the desert lands of North Africa.

All of this carved into the mindset of postwar strategists the notion that no new war could be won without an ample and secure supply of crude. It was in the United States, however, that this awareness dawned first and most dramatically, amplified during the war by a new wave of infaust predictions about the end of domestic crude. The most vocal representative of the new alarmism was none other than Harold Ickes, the Secretary of the Interior who several years before had devoted all his efforts to fighting overproduction.

Already in 1941, Ickes had warned President Roosevelt of the steady decline in the ratio of proven U.S. reserves to production.2 It was the beginning of a mounting alarm over oil scarcity that reached its climax between 1943 and 1945,3 after Ickes—who was by then also the Petroleum Administrator for War—made his views public in an article that would soon obtain very wide diffusion. Entitled "We're Running Out of Oil,'' the article stated:

If there should be a World War III it would have to be fought with someone else's petroleum because the United States wouldn't have it.4

What had happened to completely reverse the situation of oil overabundance in the United States? In retrospect, the answer was relatively simple.

Investment in exploration and production had been hit hard by the Great Depression and the price collapse of the early 1930s, recovering only from 1937 onwards. In addition, the oil glut and sluggish prices eliminated any incentive to spend on developing new oilfields and implementing new technologies. As a consequence, on the eve of World War II many experts and analysts had begun suggesting that increasing oil reserves in the future would be ''more difficult, more limited, and more costly''5—a striking resemblance to today's flawed debate about the supposed scarcity of petroleum and the end of cheap oil! In sum, a new bust phase started the pendulum swinging back the other way. It was a dramatic change.

The United States entered World War II quite unprepared to manage the oil supply necessary to meet its unpredictable requirements. Shortages of critical materials such as steel limited the possibilities of increasing new drilling and building much-needed pipelines. Moreover, oil prices at the well had been frozen by the government in 1942 in an effort to limit the cost of the war, but this measure had the side effect of discouraging new investment, which was already endangered by higher steel prices. The fact that the Allied war effort depended almost entirely on American oil resources created an unprecedented drain on them.

Between 1941 and 1945, the United States supplied 6 out of the 7 billion barrels of oil consumed by the Allies (the United States included) for civilian and military purposes.6

Echoing the verdict of gloom pronounced by the head of the U.S. Geological Survey in 1919, the head of reserves in Ickes's Petroleum Administration for War declared in 1943

The law of diminishing returns is becoming operative. As new oil fields are not being formed and the number is ultimately finite, the time will come sooner or later when the supply is exhausted.7

The proactive petroleum czar did not hesitate to confront his grim prognosis with radical proposals, which met with strong support from the majority of top officials in the Roosevelt administration.8 Among these proposals, Ickes stressed the need to nationalize Chevron's and Texaco's concessions in Saudi Arabia in order to assert direct governmental control over them. He also called for federal financing of a pipeline project that would link the Saudi fields to the Mediterranean, the crucial purpose of which was to accelerate the development of Arabian oil.

Despite the support received by the navy and other military branches, these drastic steps were rejected by the U.S. political and business establishment, as well as the oil companies, which considered them as a dangerous sliding toward some form of socialist-like control of private entrepreneurship. However, Ickes's campaign played a crucial role in convincing President Roosevelt to inaugurate a long-lasting, oil-based alliance with Saudi Arabia. It was a U-turn for American foreign policy, the consequences of which are still the subject of heated debate today.

As we have seen, Chevron and Texaco had entered Saudi Arabia in the early 1930s, and in 1938 they had struck oil in commercial quantities in the eastern province of the country. By that time, both companies had already sought political protection from their government because of their fear of a Nazi penetration of the Persian Gulf, as well as of an ever-looming British will to displace American interests in the Saudi Kingdom, a later attempt to conquer what London had lost for its underestimation of the Saudi oil potential. Moreover, King ibn-Saud was continuously pressing them in order to get much more money and advance payments of future royalties, and their refusal to accept the monarch's claims was giving a chance to their competitors. Yet the Chevron and Texaco appeal met with indifference or even hostility.

Washington refused to open any diplomatic channel with the kingdom and only at the beginning of the 1940s did it charge its ambassador in Egypt with representing American interests there. Thus it came as no surprise that in 1941, when pressed by both Chevron/Texaco and the British government, which by then was alarmed by Nazi moves in the area, President Roosevelt openly dismissed the proposal to lend money to Saudi Arabia, observing that the country was ''a little far afield'' for the United States.9

That position was quite an understatement of a more general mood dominating the administration and Congress, which considered the Arabian Kingdom a primitive state, marked by unacceptable habits like slavery, whipping, the cutting off of hands, and decapitation. But as war advanced and oil supply became shorter, Ickes's campaign had its effect, particularly its insistence that Roosevelt secure the huge oil deposits of Saudi Arabia to the control of the United States.10 Changing his previous position, in 1943 the President informed U.S. Secretary of State Edward Stettinius that Saudi Arabia had become vital to the defense of the United States and authorized the granting of financial support to the kingdom through the Lend-Lease Act. So the first brick in the enduring Saudi-American bridge had been laid, and henceforth its construction went forward quickly.

A further blessing of that alliance came from a technical report prepared by Everett DeGolyer, the brilliant geologist who had masterminded some of the most notable developments in the modern oil industry, including seismic prospecting. After spending a few months in the Persian Gulf on behalf of Ickes's Petroleum Administration for War to assess the extent of the region's oil resources, DeGolyer delivered a verdict that estimated already available reserves at nearly 25 billion barrels, with a high probability of an overall reserve base of 100 billion barrels. Today, we know those figures were far too low. Current estimates put the yet-to-be produced proven reserves of the Persian Gulf area at over 650 billion barrels, without including probable and possible reserves. Yet for the time it was a huge figure, exceeding those for all other known oil regions. And the majority of it was concentrated in Saudi Arabia. This led DeGolyer to conclude:

The center of gravity of world oil production is shifting from the Gulf-Caribbean area to the Middle East—to the Persian Gulf area, and is likely to continue to shift until it is firmly established in that

DeGolyer not only made a fundamental contribution to Washington's recognition of the Middle East's importance with regard to oil. The geologist also suggested two long-term policy goals for ensuring U.S. oil security: first, oil self-sufficiency in the Western hemisphere (the Americas) in order to preserve politically secure resources in case of an international crisis; and second, speeding up Gulf oil development so that it could take the place of American crude on European and other markets.12

In 1945, Roosevelt met for the first time with Saudi Arabia's founder and king, Abdul Aziz ibn-Saud, on the USS Quincy in the Suez Canal Zone. The meeting reinforced the new relationship born of America's quest for control of foreign oil sources—a quest that in the immediate aftermath of World War II appeared to be justified.

The new global insecurity brought about by the Cold War rendered the United States apparently incapable of serving as the long-term oil supplier for the West. In 1948, the country discovered it had become a net importer of oil for the first time in its history, i.e., that its own consumption needs could not be met by domestic production alone. Given the climate of anxiety about a possible impending clash with the Communist world, this discovery affected American collective psychology far more than it would have in a world open to free trade among free nations. To the mind of U.S. strategists, that purely symbolical passage meant that the country had forever lost its energy independence, and was thus also incapable of maintaining its traditional role as supplier of about 80 percent of Europe's oil needs. This last argument added drama to drama. Washington recognized that if Europe were to avoid becoming easy prey to Soviet designs, it would need to undergo a massive and rapid recovery as well as a leap forward in living standards. But only oil could ensure the industrial and economic reengineering of Europe, as Great Britain had forcefully argued during the 1947 meetings with U.S. officials to discuss the Marshall Plan.13 For some time, the latter tried to resist British pressures aimed at setting a target of a doubling of oil consumption for Europe as a whole by 1951 with respect to the level of 1939, considering it impossible given the apparent scarcity of oil. But eventually the risk of leaving Europe economically weak convinced the U.S. officials to give up their resistance and to approve the British plan.

In this framework, DeGolyer's suggestions were adopted as guidelines in the shaping of a new U.S. global oil policy. In approving the Marshall Plan, the U.S. Congress asserted the principle of oil self-sufficiency for the two hemispheres, recommending that European energy supplies ''to the maximum extent practicable, be made from petroleum sources outside the United States.''14 A direct consequence of this choice had already been foreseen by American strategists: because the Middle East's petroleum reserves were the only ones that could guarantee the future energy needs of Europe and the last-resort needs of America, the region, and first and foremost Saudi Arabia, had to become a focal point of U.S. foreign policy.

In 1948, at the urging of the U.S. State Department, Exxon and Mobil joined Chevron and Texaco in their Arabian oil venture—renamed the Arabian American Oil Company, or Aramco, in 1944. While Mobil retained only a 10 percent share of the company, Exxon took a 30 percent stake, as did both Chevron and Texaco. The final configuration of the most successful venture ever in oil history was thus shaped, with no clear consciousness by the partners of the treasure they were sitting on. For sure, they did not realize that a new oil discovery that very year in Saudi Arabia—the Ghawar field—would prove to be by far the largest petroleum deposit on earth. Mobil would long regret its lack of boldness in entering Aramco, while BP would curse forever those years in the 1920s when it refused to step onto the Arabian Peninsula because of the ''high improbability" of finding oil there.

Soon the new American-Saudi partnership moved ahead with construction of the first pipeline linking the kingdom with the Mediterranean Sea, and by the fall of 1949 the Trans-Arabian Pipeline, or Tapline, began transporting Saudi crude to the Lebanese port of Sidon. This important achievement did not placate the ever-growing expectations of King ibn-Saud, which were nurtured by knowledge of a breakthrough contractual formula that oil multinationals had granted to Venezuela in 1948. Known as the ''fifty-fifty profit-sharing contract," or simply ''fifty-fifty,'' this formula represented a major revolution in relations between oil companies and producing countries that was to last for nearly twenty-five years.15 By no means, however, was it a gently won concession.

After the Mexican debacle in 1938, Venezuela had also become a war front for Western oil companies. Nationalist forces started calling for a more equal distribution of the huge profits derived from oil operations, their protests channeled through the voices of two prominent thinkers and leaders: Romulo Betancourt, later Venezuela's president, and Juan Perez Alfonzo, the future ''inventor'' of OPEC.

Radical democrats in their social inspiration as well as uncompromising and shrewd politicians struggling to improve the well-being of the Venezuelan population, both Betancourt and Alfonzo stood in sharp contrast to the corrupt regime of Vicente Gomez. After the death of

Gomez in 1935 and the beginning of a confused period of political transition, Betancourt and Alfonzo began asserting the need to find a new equilibrium between the State and foreign oil companies based on an equal division/sharing of the latter's revenues. In 1945, Betancourt became president of Venezuela and Alfonzo was appointed oil minister. Soon their campaign to revise existing oil contracts intensified, but Exxon, Shell, and Gulf strongly opposed the new government's request. Controlling together around 90 percent of Venezuela's oil production, they were unwilling to hand over the vast amount of money that the "fifty-fifty" principle would cost them; moreover, they feared that any concession would provoke a domino effect in all other producing countries where they had operations.

Oil multinationals were thus relieved temporarily when a coup in 1947 obliged the advocates of Venezuela's oil rights to leave the stage. Yet even the new military government had learned their lesson so that they repeated the very same request to the oil companies. The Mexican scenario was played out once again. The latter sought help from their own government, but the Truman administration rebuffed them on the grounds that America's values were fairness, equality, and anticolo-nialism, notions hardly to be found in Venezuela. The oilmen had no choice but to surrender, and in 1948 a new season for the entire oil industry came into being, shaped by the introduction of the "fifty-fifty" formula into all of Venezuela's oil contracts.

As soon as King ibn-Saud became acquainted with the new formula, he asked Aramco partners to apply it to Saudi Arabia as well. Once again, multinationals tried to resist a concession that might open the way to an endless submission to producing countries' requests. But this time they found themselves entrapped by two different and yet converging factors. On the one hand, the United States government was eager to please the Saudi king in order to cement his pro-American stance. On the other, at the beginning of 1950 a still quite unknown independent American oilman had won an oil concession in the Saudi Neutral Zone* by according the kingdom more than twice the royalty per barrel paid by Aramco.16 His name was Paul Getty, and his Arabian

* The Neutral Zone was a section of territory between Saudi Arabia and Kuwait whose existence depended on an unresolved border dispute. From an economic point of view, sovereignty over its underground resources was divided between the two countries.

venture was to propel him rapidly into the ranks of the richest men in the world. At that time, however, his company had succeeded only in placing in an embarrassing situation giant corporations whose size completely overshadowed his own.

The solution that satisfied all the parties concerned was finally worked out by the U.S. acting secretary of state for the Middle East, George McGhee, a successful oilman himself, who took care of tuning the priorities of American foreign policy to American oil companies' wishes.17 McGhee drafted a bill later passed by Congress that made the oil royalties paid to host governments tax deductible for U.S. companies. Thus every dollar paid to oil-producing countries would be one less dollar in the coffers of the American Treasury.18 In late 1950, therefore, Saudi Arabia was granted the "fifty-fifty" profit-sharing system, which soon was requested by and extended to all other Arab oil producers.

The fiscal escamotage devised by McGhee was, in fact, a major foreign policy decision in disguise. Over the following decades, it would cost the U.S. government hundreds of billions of dollars, but there was no other way to accomplish this end. Congress almost certainly would have never approved direct compensation for the oil companies. Consider, for example, that in 1973 nearly 70 percent of net profits of American oil multinationals were made abroad, thus deemed foreign by the American tax system.19 Twenty-four years later, testifying before a U.S. Senate committee, George McGhee declared that the royalties loophole had been devised in response to a specific recommendation by the U.S. National Security Council, whose target was the consolidation of American control over the most oil-rich countries in the Middle East.20

Together with the new profit-sharing formula, another significant innovation occurred in terms of oil pricing, which would remain in place for more than twenty years: the so-called posted price.

Taking advantage of the companies' habit of posting the price of their oil, producing countries asked for and were granted stable "posted prices" as a reference for profit sharing. Those prices became an artificial instrument to cement companies' and countries' interests, a sort of pact that was irrespective of real market conditions. In fact, for several years companies preferred to swallow the loss when real prices declined rather than jeopardize the posted price they had agreed upon with producing countries in order not to destabilize their relations with them.

A few days after the signing of the Saudi-Aramco "fifty-fifty" agreement, President Truman wrote King ibn-Saud a letter affirming:

I wish to renew to Your Majesty the assurances which have been made to you several times in the past, that the United States is interested in the preservation of the integrity of the independence and territorial integrity of Saudi Arabia. No threat to your Kingdom could occur which would not be a matter of immediate concern to the United States.21

While America was cementing its long-term Arabian link, it also became engaged in another crucial issue that was to mark its foreign affairs for decades to come: support of the newly established state of Israel. Both diplomatic choices represented surprising as well as contradictory novelties. While the American establishment had long viewed Saudi Arabia as a weird and uncivilized country, the Jewish question had been largely ignored until the advent of the Truman administration.22

The leaders of America's postwar foreign policy all strongly opposed the birth of a Jewish state within the boundaries of British-ruled Palestine. Key figures like Secretary of State George Marshall, Secretary of Defense James Forrestal, George Kennan, the head of the State Department's newly created policy planning staff and the architect of the Doctrine of Containment, the Chiefs of Staff, and even the newly created Central Intelligence Agency (CIA) believed that the only American priority in the Middle East should be the special relationship with Saudi Arabia and other Arab oil producers, that required America to reject Jewish demands on Palestine. Actually, the only ''ardent champions'' of the Jewish cause in the administration were Clark Clifford, Truman's legal counsel, and David K. Niles, special assistant for minority affairs to the President.23

King ibn-Saud had also repeatedly warned Chevron and Texaco of his personal opposition to the establishment of a Jewish state in an Arab land, and asked them to urge the American government to avoid becoming involved in the messy issue. Both companies responded by becoming the strongest advocates of the Arab cause, a role they would continue to pursue in the following decades. Thus, by 1947 there was no one in the top ranks of the Truman administration who differed from the view that securing Saudi oil was the most critical imperative of U.S. policy in the Middle East. With one very special exception: President Harry S. Truman himself.

Truman stood up to all his advisers and fought a solitary battle to impose his line about both the approval of the United Nations' plan for the partition of Palestine between Jews and Arabs (November 1947), and the recognition of the newly created state of Israel (May 1948). Outraged by Nazi atrocities against the Jews, Truman had concluded that the United States and the West were morally obligated to make up for their indifference to the Holocaust, as he wrote in his memoirs. At the same time, the president's populist roots had always made him suspicious and hostile toward the oil sector and its protagonists, whom he never loved but grudgingly dealt with for the sake of American national security.

Critics maliciously questioned the president's staunch moral stand, suggesting that his decision to recognize the new state was driven by political opportunism, and particularly by his desire to lock in the Jewish vote in the 1948 presidential elections. A memo by Clark Clifford later became the alleged "smoking-gun" supporting the argument that Truman had used the Jewish question to improve his chances in the coming election, which most pollsters considered very poor. In that memo, Clifford reminded Truman that even though the Jewish vote was important only in New York State, only one presidential candidate since 1876 (Woodrow Wilson in 1916) had won the presidency while losing New York.24 Yet as David McCullough has pointed out:

for Truman unquestionably, humanitarian concerns mattered foremost When his Secretary of Defense, Forrestal, reminded him of the critical need for Saudi Arabian oil, in the event of war, Truman said he would handle the situation in the light of justice, not oil.25

Ethical concerns did not obscure Truman's judgment. Sometimes, his irritation for Jewish propaganda was so high that he once refused to meet the leader of the Zionist movement, Chaim Weizmann. In a letter to Eleanor Roosevelt, he even stated that

The action of some of our United States Zionists will eventually prejudice everyone against what they are trying to get done. I fear very much that the Jews are like underdogs. When they get on top they are just as intolerant and as cruel as the people were to them when they were underneath.26

However, Truman's basic approach never changed, which led to a dramatic clash with George Marshall. During the last White House meeting on the subject of the immediate U.S. recognition of Israel, on May 12,

Marshall vehemently opposed such a move by asserting that, if the president were to take that decision, he would vote against him in the November elections.27 It took a pause of one day before the Secretary of State called Truman, saying that ''while he could not support the position the President wished to take, he would not oppose it publicly.''28 Such a reassurance removed the last obstacle to the de facto recognition of Israel, which the United States announced eleven minutes after its official declaration by the Jews of Palestine, on May 14, 1948.29

This set in motion a new political and military process in the Middle East that was to endure until today. As soon as Israel was born, Egypt, Syria, and Jordan attacked the new country in the first of four wars fought over the next twenty-five years. The war also marked the evolution of Arab nationalism to a militant status after years of quiet incubation, and set off deep changes in the environment that had allowed seven Western oil companies to become the absolute masters of Arabian oil.

America's Middle East policy was thus born out of a contradiction, and evolved for decades without resolution. Moreover, the traditionally unstable region became involved in the tensions of the Cold War, fuelling America's obsession with a perceived Soviet design to penetrate the area and control its oil by exploiting the opportunities offered by Arab nationalism. Yet it was not an Arab country, but Iran, to first test the postwar oil order in the Middle East.

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