The First Oil Shock

All of a sudden, in 1971 oil overproduction and the decline of prices ended. And, all of a sudden, it surfaced that twenty or so years of foolish consumption habits and excess availability of crude had relegated to a no-man's land all security issues that the United States had tried to address in the aftermath of World War II. However, the spiral of events leading to the first oil shock was by no means triggered by the physical scarcity of oil. Rather, it was a sort of perfect storm of diverse circumstances and events that converged to bring on the crisis, or at least generate the collective psychology that would sustain it.

Even today, it is difficult to say to what extent the shock was the self-fulfillment of the prevalent gloom regarding the future. In retrospect, the period of the early 1970s appears like an ancient Greek drama, whose actors, incapable of escaping their fate, precipitated it with their irrational actions.

At the beginning of the decade it became clear that the postwar exploit of oil, based on low prices and an ever-growing supply, depended more and more on the Middle East, the only area in the world capable of continuously expanding production to satisfy global consumption. This was partially due to the huge shift begun in the mid-1950s in exploration and production investment from more politically stable United States and Venezuela to Middle Eastern and North African countries, where production costs were lower. In the United States, for instance, drilling activity fell dramatically from 1955 to 1971: the number of drilling rigs at the end of this period was ''a little more than one third the level of the mid-1950s.''1 In broader terms, the shift in investment and decline in drilling were a general phenomenon provoked by the steady erosion of upstream margins. Because of competitive pressures and overproduction, throughout the 1960s upstream exploration and production capital spending dropped to a mere 25 percent of total investment by the oil industry, which found it far more convenient to allocate its money in its refining and petrochemical operations.2 In the West, all of this had a sharp effect.

In an attempt to meet the ever-climbing demand for oil, in 1971 the de facto arbiter of U.S. crude production, the Texas Railroad Commission, approved putting onstream all available production capacity of the country. This unprecedented decision was the first clear sign that something was wrong with the available supply, and indeed it produced only a useless palliative. By the end of 1970, production in the lower forty-eight states (i.e., without Alaska and Hawaii) had peaked at more than 11 million barrels per day, and subsequently entered a phase of long-term decline. While useless in addressing the real market needs, the TRC decision eliminated the sole disposable spare production capacity in the Western world, depriving industrial countries of the security cushion they had relied upon since the 1950s. It was a remarkable change in the history of oil, one that apparently made the West vulnerable to the use of the ''oil weapon'' by the Arab countries. But this would be a simplistic and incorrect way to deal with the origins of the first oil shock, whose deflagration was the result of many more causes.

A peculiar role in contributing to the degeneration of the oil crisis was played by the economic and regulatory policy introduced in the United States by the Nixon administration. In August 1971, the president announced the unlinking of the dollar from the gold standard in a dramatic move to remedy the overvaluation of the currency. At the same time, he implemented a vast system of price controls intended to relieve the other plague of the U.S. economy—rampant inflation—which was exacerbated by the financing of the Vietnam War without raising taxes.3 Accordingly, price ceilings were imposed on oil at the wellhead and burner tip, which made them artificially low at a time when domestic demand was rising and production was at maximum capacity. The result was two-fold: on the one hand, Nixon's measures provided an incentive to increase domestic oil consumption; on the other hand, it discouraged domestic exploration and development in favor of imports.4

By this time, the notion of the possibility of an energy crisis had already begun to circulate in the United States, particularly after the terrible winter of 1969-1970—the coldest in thirty years—when many utilities supplying electricity had been forced to interrupt service because of oil and natural gas shortages.5 The most prominent figure warning of a looming storm was the State Department's Middle East expert, James Akins.6 A sober and highly erudite Quaker with ''uncompromising principles,''7 Akins repeatedly warned that the world would risk running out of oil in a few years if there was not an immediate shift to other sources of energy; in his view, the latter would be made possible by higher oil prices, which would render investment in oil alternatives attractive.8

Actually, this line of reasoning was wrong in strict economic terms. There were abundant oil resources in the world that could yield double-digit profits if developed even with oil prices below two dollars per barrel,* but that simply were not developed because of the oil companies' persistent fear of overflowing world markets. More than economics, however, Akins grasped the nature of the Arabs' mounting expectations and changing psychology which, right or wrong, were driving the world toward a different oil order.

After Qaddafi's success with Western oil companies, the major producing countries realized that the wind had shifted in their favor, though it was also fanning rivalries among them. In November 1970, Iran's Reza Pahlavi angrily demanded a profit-sharing formula and a posted price in line with those obtained by Libya. In December 1970, OPEC approved a resolution requesting both the application of the 45-55 profit-sharing formula to all its members and separate negotiations with Persian Gulf and Mediterranean/African countries to review price levels. Soon thereafter Libya proclaimed that it would demand higher prices and taxes on its oil should the Gulf countries obtain the same conditions it had won in September.9 Oil companies watched this charade in dismay, and yet had no alternative but to accept negotiations with producing countries, which were held in Teheran and eventually in Tripoli in the first months of 1971.10 It was the beginning of an endless retreat in the face of the new strength of producing countries.

Indeed, while the Teheran and Tripoli agreements gave all producer countries a 55 percent share in oil profits and a higher posted price, the new terms did not placate them. Ignited mainly by the Libyan-Iranian rivalry, new calls for additional price and contractual revisions became the norm of oil producers' behavior in the face of any agreement with oil companies, generating a leapfrogging process that left the latter at the

* As observed in the previous chapter, total production costs (or technical costs, notably capital plus operating costs) in Saudi Arabia were 11 cents per barrel of oil.

mercy of the former. In this case as well, the U.S. policy aggravated the situation.

In his 1972 State of the Union address, President Nixon had formulated the so-called Nixon Doctrine, the key goal of which was preventing direct U.S. involvement in future conflicts that were ''peripheral to the central interests of the great powers.'' A direct consequence of this strategy was the empowering of those allied countries that could withstand regional threats without relying on U.S. troops, a new approach to the containment of Soviet expansion that needed regional ''policemen'' capable of acting as surrogates for an American presence on the ground. As far as the Persian Gulf was concerned, the U.S. strategists had chosen Reza Pahlavi's Iran to perform the role of pro-Western security ''pillar,'' and they were thus favorable to indirectly finance the country's rise to the status of regional superpower through oil price increases. Given this overall picture, the Seven Sisters and their governments were vulnerable as never before. And like a flooding river swells as it rushes toward the sea, this awareness incited the producer countries to play not only for higher prices but also for two recurrently evoked objectives, namely participation or, worse, nationalization of the oil concessions.

In general, proponents of nationalization within OPEC wanted to have complete control of foreign companies' assets, strategies, and operations on their land. To the contrary, supporters of participation had a more cooperative approach to the issue. As explained in 1969 by the father of the concept participation, Saudi Oil Minister Zaki Yamani:

For our part, we don't want the majors to lose their power and be forced to abandon their roles as a buffer element between the consumers and the producers. We want the present set up to continue as long as possible and at all costs to avoid any disastrous clash of interests which would shake the foundations of the whole oil business. That is why we are calling for participation.11

The architect of OPEC's ascent in the 1970s as well as a harsh critic of its eventual follies, Yamani was to become one of the most popular characters in the history of oil.12 Fond of long-term goals, he saw participation as the only way to align the interests of producers and marketers, thereby safeguarding an orderly development of supply and prices; for this reason he also remarked that participation had to remain ''indissoluble, like a Catholic marriage.''13 But while discussions on nationalization and participation were taking place, militant states acted.

After Algeria expropriated 51 percent of all foreign companies' hydrocarbon holdings between 1968 and 1971, it was once again Libya that set the pace for the takeover of Western holdings. In 1971 the Colonel ordered the complete nationalization of BP's Libyan assets. Eventually, Libya applied the same scheme as Algeria, taking over 51 percent of all foreign oil ventures. In 1972, Iraq followed suit by completing the expropriation of Iraq Petroleum Company assets that it had initiated in 1961.

While all Seven Sisters' walls were crumbling down, inflation and the devaluation of the dollar blew another ill wind upon them. Day after day, the downward spiral of the American currency significantly eroded the revenues of crude producers, the dollar being the reference for all oil transactions worldwide; in addition, because their economies were almost exclusively oil-based, they had to rely for the bulk of their purchases on Western imports, which were made more expensive by inflation. This vicious circle gave an additional incentive to oil producers to raise the price of crude and curb in their favor contractual conditions in order to counter the erosion of their wealth. The irrationality of the oil market only made things worse.

In an attempt to secure supplies for their refineries, independent companies engaged in a frantic struggle to buy up every available barrel, nurturing the emergence of a spot market where oil was sold to the highest bidder, outside of the system of posted prices and long-term commitments that regulated the vast majority of oil contracts. Prices of these "spot" transactions reached six dollars per barrel or more for a single cargo, when posted prices were two or three dollars. Even if these transactions amounted to less than 3 percent of all oil traded on the international markets, they had a huge impact on the sellers' psychology.

Romans said res tantum valet quantum vendi potest—a good is worth as much as it can be sold for. For the producers, the emerging spot market proved that consumers were so oil-crazy that they were ready to pay well above official prices, which they consequently raised in a rush to catch up with spot values.

The final blow to market sclerosis was dealt once again by the Nixon administration's changes to its oil policy in 1973. With shortages occurring periodically as a result of the odd price controls imposed in 1971, Nixon's men reacted by devising an oil regulatory system that took complexity and contradiction to the extremes. In April 1973, the U.S. government decided to cancel the oil import quotas fixed by President Eisenhower in 1959. Because Middle Eastern oil was so much cheaper than that from the United States, quota elimination provoked an immediate surge in domestic demand, providing an additional reason for prices to soar. Quotas were replaced by a more complicated system based on tariffs, then by petroleum price freezing. In August 1973, price controls were partially removed according to highly complicated rules;14 eventually, the government launched an ''entitlement system'' in order to guarantee importers or domestic refiners access to cheaper oil.15

Bad regulation always seeks to remedy the damage it has caused by imposing new rules; in most cases this only makes matters worse. Indeed, the regulatory militancy of the Nixon administration made the United States and the world more vulnerable to the eventual oil shock. For some energy experts, like Edward Morse, it even ''made the Arab oil weapon usable.''16

Between December 1970 and September 1973, official oil prices* jumped from $1.21 to $2.90 per barrel, while spot values topped $5.00. These figures, however, do not convey the extraordinary fragmentation and volatility that rendered the market an unreliable source of information. By mid-August 1973, as reported by Petroleum Intelligence Weekly, prices had actually become ''imprintable'' because of schizophrenic differentials among the various qualities of crude, spot transactions, discounts, and so on.17 Surprisingly enough, demand also continued its upward rush, shooting from 46 million barrels per day in 1970 to around 58 million barrels in September 1973, the bulk of that increase concentrated in industrial countries, with the United States at the top of the list. Consumer countries' thirst for oil seemed to be unaffected by rising prices, convincing many that oil demand was impervious to price concerns.

The ''perfect storm'' was already in motion, with all its components raising expectations of a major energy crisis. Yet this was only one part of the story. Actually, one cannot appreciate the collective psychology that shaped the crisis without taking into account the political circumstances in which it unfolded.

After the dramatic ''Black September'' in 1970, the Palestine Liberation Organization began to scale up its head-on confrontation with Israel and its supporters by launching a terror campaign designed to capture the world's attention and focus it on the unresolved Palestinian issue. Among the airplane hijackings, the bombings, the killings of

* Using Arabian Light quality as a reference.

random civilians and prominent figures, the most spectacular act of this strategy occurred in August 1972 during the Munich Olympic Games. Before an astonished world, PLO operatives kidnapped several members of the Israeli Olympic team. The operation ended in tragedy when German special forces attacked, placing in grim new focus the political and military radicalism that gripped the whole Arab world.

Spurred by the Arabs' humiliating defeat in the Six-Day War, antiIsraeli and anti-Western feelings had exploded throughout the Middle East. In part, this was the result of Arab leaders' wielding of the issue of Israel and political maximalism to deflect attention from their own poor performance in securing their people an over-promised brighter future. But it was also an expression of frustration at a world perceived, rightly or wrongly, as dominated by the arcana imperii of an apparently unbreakable American-Israeli alliance. In this climate, Arab governments' support for the PLO's claims and strategy made likely an imminent clash, the dimensions of which were difficult to grasp. And indeed it was this collision between the Arab-Israeli issue and that of oil that ultimately set off the energy crisis many had feared.

In retrospect, the new clash of Arabs and Israelis and its implications for the world oil market were also the consequence of underestimation by the U.S. government of what was brewing in the Middle East. Neither Nixon nor Kissinger believed either that Arab militant propaganda could set off a war or that Arabs could use oil as a weapon to force the West to rein in its support for Israel. Unlike Akins, whom he had no love for, Kissinger had always viewed the Middle East through the lens of the American-Soviet confrontation and thought that the problems that were igniting the Arab political arena could not be resolved except by eliminating Soviet influence in the entire area. He did not judge Arab governments capable of wielding the oil weapon against the West, and was skeptical even of their ability to successfully implement a political strategy—whatever its goal—without Moscow's support. Finally, Kissinger completely misread—by his own admission—the personality of the new Egyptian leader, Anwar el-Sadat, who would prove to be the decisive factor behind the outbreak of a new Arab-Israeli war and the first oil shock.

Sadat had inherited from Nasser a wrecked country, overextended in military spending and patrolled by Soviet advisers and forces. All of the promised achievements of Nasserism had fallen short of expectations, with little or no improvement in the condition of the Egyptian population. In this context, Sadat had decided on a profound de-Nasserization of his country's domestic and foreign policy, which he strenuously pursued. To preempt a possible reaction against this ambitious plan, he needed new friends, and he found them in the Muslim Brotherhood. Harshly persecuted by Nasser, the father of modern Islamic movements began a new life with Sadat: its members were freed from prison, and the government began to support their activities, allowing them to become a significant force in Egyptian universities as well as in the country's social and cultural landscape. In a short time, Sadat acquired the necessary strength to expel Soviet forces and to put the brake on the leftist movements, in this case using the same violent instruments as Nasser. But Sadat's departure from his predecessor's messianic vision risked isolating him from the rest of the Arab world and made him vulnerable domestically, so that only by appearing to the Arabs as a staunch anti-Israeli warrior could he survive. Moreover, Israeli forces still held parts of Egyptian land in the Sinai Peninsula that it had occupied during the Six-Day War, and this outrageous humiliation left him no option other than forcing Israel to leave. Although he was not a pan-Arabist, it thus fell to Sadat the decision to launch a new war against Israel to break the impasse left by the previous war and force the rival country itself to come to terms.

In preparing his war strategy the Egyptian president focused on oil, which he perceived as a key factor in his chances of success. In particular, he was convinced that only if Arab oil producers had used oil as a weapon could he have forced the United States to stay out of the impending war and to refrain from supporting Israel. According to most sources available, Sadat informed King Faisal of his plans in May 1973, after having already obtained a Syrian commitment to share the military burden of the attack against Israel. During his meeting with King Faisal, he also asked for the Saudis' commitment to use oil as a weapon against any Western country eager to help Israel, and reportedly he received the king's blessing.18 It was a Copernican revolution in Saudi Arabia's stance on the issue, and a decisive factor in the degeneration of the crisis.

Since the Six-Day War, the kingdom had consistently maintained a complete separation between oil policy and the Israeli issue, but now things changed radically. After a long competition with Iran, Saudi Arabia had emerged as the Middle East's major oil producer, with an output that by mid-1973 had surpassed 8 million barrels per day, up from less than 5.5 mbd in 1970. Saudi Arabia was soon to become the second largest producer in the world, the largest oil exporter globally, and—above all—it appeared to be quite a virgin territory, with huge possibilities for enhancing its production capacity in a relatively short time frame. Proof of this situation was given by Aramco's approval of a plan (in spring of 1972) to boost Saudi production to 13.4 million barrels per day in 1976 and to 20 mbd in 1983.19 As a consequence, while the Kingdom's importance to the world's oil supply rendered it crucial to Sadat's war strategy, it also made it extremely difficult for the Saudis to invoke a position of neutrality. Simply put, if Saudi Arabia refused support for Egypt, it would be held responsible for any failure in the upcoming war: already under accusation by Arab radical forces for its moderate stance toward Israel and its long-term friendship with the United States, the Saudi monarchy could not afford further isolation within the Arab world. Finally, King Faisal was personally a staunch anti-Zionist, and seemed quite obsessed with a sort of conspiracy theory by which Israel and the Soviet Union were plotting together to subvert the political order of the Middle East.20

American companies knew quite well the Saudi king's position on the disturbing effects provoked by the American-Israeli alliance and had never hesitated to side with Arab claims. But the influence of the apparently mighty oil multinationals over leadership in Washington was negligible. In May 1973, Aramco's top management met King Faisal in Geneva and received a clear message. The Saudis, the king explained, risk ''becoming more isolated in the Arab world, and they cannot permit this to happen, and therefore American interests in the area must be removed.'' Unless the course of American foreign policy changed immediately, there was no escape for U.S. oil companies: ''You will lose everything,'' the king finally warned.21

What followed was a frantic public relations campaign by the oil majors, whose main target was the Nixon administration. Aramco's men reported the king's message to Washington and tried to reinforce it with their own ''on-the-field'' analysis of the dangers they and the United States were facing in Saudi Arabia and the whole Middle East. Once again, they got no result. Frustrated, they reported to Aramco's boss, Frank Jungers, that the U.S. top officials they had met with had showed a general disbelief that the Saudis would act on their threats, and observed, ''some believe that His Majesty is calling wolf where no wolf exists except in his imagination.''22

These months of blindness to the real extent of Arab unrest represented a substantial rupture in the U.S.-Saudi relationship established more than twenty years earlier. In 1953, the United States had officially recognized that the operations of the large Western oil companies in the world were instruments of American foreign policy. But for a long time,

Washington forgot the spirit and the letter of NSC Resolution 138/1, letting companies face the Middle East's conflicts alone, and often actually causing their problems, particularly as far as their position on Israel was concerned.

Thus when the fourth Arab-Israeli conflict in twenty-five years broke out during the Jewish festivity of Yom Kippur (October 1973), it finally precipitated a crisis in the precarious oil situation.

OPEC suspended a meeting in Vienna scheduled to negotiate higher prices with Western companies. For a few days, all stood still. Then, on October 13, Israeli premier Golda Meir wrote President Nixon that her country was on the verge of collapse and faced a severe shortage of arms, making a surprising victory of the Arab forces seem at hand. The United States then authorized a secret night airlift to supply Israel with weapons, and to respond to Soviet entanglement in the conflict. But the covert game was discovered: high winds forced U.S. airplanes to land in Israel in full daylight. The reaction was immediate, and produced two different outcomes.

On October 16, an OPEC delegation from six Persian Gulf countries* met in Kuwait City and decided on a unilateral price increase of benchmark crude Arabian Light from $2.90 to $5.11 per barrel. Then, on October 17, members of the Organization of Arab Petroleum Exporting Countries (OAPEC, a parallel OPEC made up of solely Arab producers)23 announced an immediate oil production cut of 5 percent, to be followed by additional cuts of the same size for each month Israel failed to withdraw from the territories it occupied in 1967. They also declared that ''Arab-friendly states'' would not be affected by that decision, which meant producers pointed to a ''selective embargo'' directed against Israel's supporters. In fact, a parallel but secret target set by OAPEC was to completely shut down oil supplies to the United States, the Netherlands, South Africa, and Portugal in stages; other countries would face a partial supply shutdown depending on their position on Israel; friendly countries would be exempted from any cuts. Iraq left the OAPEC meeting after its proposal for a more severe resolution was rejected by other members; Iran and other producing countries refused to take part in the embargo, and in fact increased production.24

* The countries were: Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, Qatar.

It is said that the perception of reality is itself reality, in spite of the facts. But behind the perceptions, the reality of this crisis was not as ominous as the reactions it provoked. One thing is certain: the effective shortage of oil created by the OAPEC decision was relatively small, for several reasons. As professor Morris Adelman has pointed out:

From October to December, total output lost was about 340 million barrels, which was less than the inventory built-up earlier in the year. Considering as well additional output from other parts of the world, there was never any shortfall in supply. It was not loss of supply, but fear of possible loss that drove up the price.25

Adelman's position was quite extreme, but not far from the truth. Based on figures available today, total Arab production in September 1973 had reached 19.4 million barrels per day; in November, when the cutbacks were the most severe, it dropped to 15.4 million, which meant a loss of 4 million bpd. By that time, production and export increases by other countries had added 900,000 bpd to the picture, leaving the effective shortfall 3.1 million bpd at its apex—around 5.5 percent of world consumption, or 10 percent of oil traded internationally. Such an amount could be largely compensated for by drawing on existing in-ventories.26

Actually, various observers at the time doubted the true extent of the crisis. In the United States, for example, there were heating oil stockpiles higher than a year earlier, while there were many signs that refiners could access oil from different sources, even though oil companies refused to supply information when asked to explain and divulge statistics on runs of crude. Noting the contradictions in market perception, the New York Times wrote that it was a ''dramatic paradox,'' remarking that crude oil flowed ''in huge quantities," but information about it had been cut ''to a murky trickle.''27

Also the so-called selective embargo was largely a myth. The oil market was—and is—like a sea, drawing its water from many rivers, each with its own tributaries, and whatever the course it follows, all water will ultimately find its way into that sea. Accordingly, oil buyers unaffected by Arab cuts could resell their crude, or the products derived from it, to whomever they wanted, as long as they took care not to do so openly, which could hurt their suppliers' dictates. And indeed, Western oil companies did their best to spread the burden of the apparent oil shortfalls among all countries, adopting a policy dubbed ''equal misery.''28

However, at the time no one had access to reliable figures on the impact of cutbacks and their geographical distribution. The issue was further complicated by the relative shortages of specific grades of crude that were essential to a significant proportion of the world's refineries. Thus, although the size of the Arab oil embargo was not great, ignorance and confusion greatly amplified its effects, feeding the panic worldwide.

Between October and December prices went wild, reaching absurd levels at auctions for single cargoes of crude: in mid-December, for instance, Iran obtained a price of $17 per barrel in an auction for 450,000 barrels.29 And there were cases with even higher prices. The companies and countries that were most severely hit by the cuts went looking for crude wherever it could be found, offering prices that a month before would have seemed insane. Finally, in December, OPEC decided to raise the official posted price of benchmark crude—Arabian Light—to $11.65 per barrel, which meant a four-fold increase in less than four months; even more shocking, oil prices had skyrocketed by almost a factor of ten since 1970.30

By early 1974, oil cutbacks were silently ended, with no formal announcement, without satisfaction of any of the conditions Arab countries had imposed, and despite the fact that Israel had finally won the Yom Kippur War. Yet the earthquake they provoked had already shattered postwar economic certainties.

It is hard to find in history a comparable revolution in the price of a strategic resource. And given oil's centrality to industrial economies, this revolution helped bring the curtain down on the most extraordinary period of development ever registered by the advanced countries, opening the door to a severe stagflation that hit the non-oil-rich developing countries as well. At the same time, in the winter of 1973-1974, the endless lines of cars at undersupplied gas stations in the United States, and the various programs intended to limit the use of cars, central heating, and lighting in Europe and Japan shaped the collective psychology of the people of the industrial countries, threatening their already precarious belief in an ever-better future that now appeared to be at the mercy of a group of countries they knew almost nothing about.

This situation offered the prophets of doom an ideal backdrop to stage their grim plays. The list is too long to remember them all. Ideally, it would start with the Club of Rome's report ''The Limits to Growth'' (1972),31 issued one year before the first oil shock, which envisaged the advent of an era of oil scarcity by the mid-1990s. The report's basic assumptions, of course, were wrong. It assessed the world's remaining oil reserves at 550 billion barrels and projected an average yearly compound growth rate of demand of 4 percent for twenty years. In contrast, over that period demand increased at less than half that rate, while between 1972 and 2004 the world produced more than 700 billion barrels of oil—leaving proven reserves that still today exceed 1 trillion barrels.32 However, the report had the ethical merit of focusing the West's attention on the risks entailed in its foolish consumption habits, particularly as far as the environment was concerned.

In 1973, some months before the embargo, the first prophet of the crisis, James Akins, published a seminal article in Foreign Affairs, ''The Oil Crisis: This Time the Wolf Is Here,'' in which he set out his pessimistic view that the inexorable exhaustion of oil would strike humanity within the next few decades.33 There soon followed innumerable books and articles, as well as studies and computer models performed by the top universities, institutions, and companies—all substantiating the inevitability of the destiny that would deprive mankind of its most important source of energy in a few years. Animated by a range of motivations and goals, both liberals and conservatives throughout the world lined up to present their most dire scenarios.

At that time everything in the Western world seemed to corroborate the most pessimistic visions. The United States, in particular, was entangled in the Watergate scandal, which exploded in the middle of the ''selective embargo'' depriving Nixon of the political strength necessary to deal with the Middle Eastern turmoil. The U.S. president tried to figure out something that could placate the worries of the public opinion. On November 7, he broadcast a message to the nation calling for ''energy independence,'' using a highly emphatic tone:

Let us set as our national goal, in the spirit of Apollo, with the determination of the Manhattan Project, that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign energy source.

The goal Nixon indicated, however, was a public relations exercise, rather than a serious response. The very presidential staff had made clear to Nixon that it was simply impossible to achieve that target, both from a technical and from an economic point of view.34 Moreover, American consumers were so addicted to oil that the prospect of their breaking free of it was sheer nonsense; on the other hand, for the government to impose a real cure would have been political suicide. Unequivocally confirming the seriousness of this addiction, U.S. oil consumption rebounded vigorously by the end of 1974 despite high prices, recovering its previous rate of growth and finally peaking at a staggering 18.5 million barrels per day in 1978—entailing the country's highest per capita consumption ever;35 demand rebounded in other industrial countries as well, but it did so far more slowly than at any other time since World War II. Nonetheless, the comforting myth of energy independence would prove to be a useful political slogan throughout the world, a way to publicly address the issue while doing nothing about it. More than twenty years later, in January 2006, another President of the United States, George Bush, Jr., would resort again to that myth in his State of the Union address in the midst of a new oil crisis.

A concrete consequence of the first oil shock was instead the establishment in 1974 of the International Energy Agency (IEA), a governmental association of industrial oil-importing countries based in Paris. Promoted by U.S. Secretary of State Henry Kissinger as an instrument to counter OPEC, and even to break it, in its early years the Agency had to content itself with being a technical forum that gathered data on energy supply and demand, generated studies and scenarios, and proposed policies and measures for its members to adopt. The Arab embargo had so strained relations between Americans and Europeans that it was impossible to find common ground for a more clear-cut and cohesive action. Europe, in particular, tried to inaugurate a new policy of Euro-Arab dialogue aimed at differentiating itself from the United States visa-vis the Arab countries, something that most observers considered an early step of an inevitable day of reckoning for the Atlantic Alliance.

The large oil multinationals also had their day of reckoning. Inhabitants of the no-man's-land between their own countries and the major oil-producing nations, they found themselves under attack from both sides. In the United States, their operations came under intense scrutiny from the press, analysts, and finally the Senate. At the same time, anti-oil-industry sentiment was running high in the country, prompted by public outrage at high oil prices and the widespread suspicion that giant oil companies had secretly plotted the first oil shock in alliance with the Arab countries—a suspicion seemingly corroborated by their apparent compliance with the Arabs' ''selective embargo'' and the windfall profits they made from it. After an initial inquiry conducted in 1973, a new, major investigation of oil companies was begun in 1974 to examine the connections between the ''Multinational Oil Corporations and United

States Foreign Policy'' since World War II.36 Motivating the investigation was the implicit charge that large corporations' policies and their influence on the government had made the United States a hostage to Arab oil.

Contrary to most people's expectations and the leading investigators' negative predisposition against oil companies, however, the final report by the Senate presented another story: what emerged ''was a more intricate and fascinating tale of the interplay of government and companies, with a gaping void of abdication and evasion in the middle.''37 Having backed the Aramco agreement and forged the plot of the Iranian Consortium, the U.S. government had substantially delegated its oil policy to the Seven Sisters for reasons of pragmatism and political expediency. This was partly because of the government's faith in the excellent industrial, financial, and logistical abilities of the multinationals, and partly to sidestep the extremely delicate issue of Palestine with Arab countries while the government maintained its support for Israel. Oil overproduction in the 1950s and 1960s had eased scrutiny of U.S. oil policy. In fact, sometimes the U.S. government left oil companies alone at crucial moments, concerned more about restraining them at others. Most important, the White House had continued to nurture its alliance with Israel while oil companies did their best in Washington to support Arab demands. It was inevitable that these contradictions between the two faces of America's Middle East policy would erupt and so come to light.

The U.S. Senate investigation also showed how oil multinationals had restrained production worldwide to keep from flooding the market, and how they had tried to suppress competition; yet it dismissed the notion of a vast Seven Sisters-led conspiracy behind the events leading up to the oil shock. As a consequence, the latter emerged unscathed from the hearings, albeit with a tarnished image that would endure for a long time.

Beyond any myth, the most concrete and destructive attack on oil multinationals came from the producing countries, and it struck what had been the core of their power since the 1920s and 1930s: the major Middle East oil concessions.

After those in Iraq and Libya, the first concession to fall was that granted in 1934 to the Kuwait Oil Company, established as a BP-Gulf joint venture: between 1974 and 1975, the Kuwaiti government expropriated the entire company. Then it was the turn of Venezuela's oil concessions, which had been concentrated mainly in the hands of Exxon and Shell since the 1930s. In 1971, the country had adopted a ''law of reversion,'' which provided that all concessions would revert to the state once they expired, beginning in 1983. However, the evolution of a new oil order accelerated this process, bringing Venezuela's new leading party, Acion Democratica, to call for an immediate nationalization of all foreign assets. Exxon, Shell, Gulf, and the other companies barely resisted, as they were already resigned to this eventuality and eager to preserve preferential treatment for the future marketing of Venezuelan crude. The nationalization was effective as of January 1, 1976, and gave birth to a state oil company, Petroleos de Venezuela, or PDVSA.

The final curtain on the age of the Seven Sisters came down with the end of the most lucrative and important concession of all, that of Aramco in Saudi Arabia, which alone represented more that a quarter of the proven oil reserves at that time. In June 1974, 60 percent of the company was acquired by the Saudi government; in December of the same year, Riyadh informed Exxon, Chevron, Texaco, and Mobil—which still held 40 percent of Aramco—that it intended to completely nationalize the company. In the midst of the surging Arab turmoil, the four American companies could not but capitulate.38 Once the agreement was worked out, the Saudis allowed Aramco's foreign management to proceed with operations, delaying completion of the company's nationalization until 1981 so as not to damage it.

In many other Middle Eastern and African countries a new contractual formula linking oil companies and producing countries began to gain widespread acceptance, replacing the previously prevalent ''concession'' formula. Called ''Production Sharing Agreement,'' or PSA, it provided that foreign firms did not own the underground reserves, but only have rights to contractually defined shares of current and future production of the fields they operated. One component of this was called ''cost oil,'' and was used to cover the company's costs. Another component, called ''profit oil,'' guaranteed the company a profit over the full term of its contract with the producing country. The ''cost oil'' components were calculated on the basis of crude oil price assumptions, and varied as prices change, providing for preestablished cash flows. Thus, when the price of crude increased significantly, the company would see its share of cost oil drop, and vice versa. The total of current and future production that a company expected to have over the term of a contract—twenty years, for instance—was referred to as its ''equity reserves.'' Naturally, the company bore all the risk and costs incurred in projects that failed to come up with either oil or gas.

All these changes symbolized the end of the Sevens Sisters' era and the emergence of a new one, that of OPEC. What did not change at all was the fundamental oligopolistic command of the oil market. It simply passed from a group of actors—which had inherited it from John D. Rockefeller—to another.

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