7

HOW OPEC STARTED, AND GREW, AND ENGINEERED THE GREATEST TRANSFER OF WEALTH IN WORLD HISTORY

W a n d a J a b l o n s k i a n d I a r e b e n t o v e r t h e cof fee t ab le i n

h e r a p a r t m e n t . W a n d a i s a l ady o f c o n s i d e r a b l e k n o w l e d g e

a n d i n f l u e n c e i n t h e oil t r a d e , a s t h e p r o p r i e t o r a n d p u b ­

l i she r of t h e Petroleum Intelligence Weekly. S h e is a lso a l ady

o f s o m e g u m p t i o n , a s s h e s t a r t e d a n d bu i l t u p t h a t p u b l i ­

c a t i o n a l o n e , b e f o r e t h e t o p b u s i n e s s schoo ls let i n w o m e n

a n d t h e c u r r e n t b a t c h o f w o m e n e n t r e p r e n e u r s was

t r a i n e d . W a n d a a n d I a r e a b o u t t o r u n , j o i n t l y , a col lo­

q u i u m ca l led " T h e I m p a c t o f O P E C P r i c i n g o n W e s t e r n

E c o n o m i e s , " u n d e r t h e s p o n s o r s h i p o f a f o u n d a t i o n . Ser i ­

o u s n u m b e r s c r u n c h e r s f r o m all o v e r will b e a r r i v i n g : t h e

c h i e f e c o n o m i s t s o f E x x o n a n d Mobi l , s o m e e x p e r t s o n t h e

1 4 4

P A P E R M O N E Y 1 4 5

M i d d l e Eas t , p e o p l e f r o m t h e i n t e r n a t i o n a l b a n k s a n d t h e

F e d a n d s m a l l e r oil c o m p a n i e s , a n d e v e n a d a s h o f E u r o ­

p e a n s .

I t s e e m s to me s o m e t i m e s t h a t all I do i s to w o r r y a b o u t

t h e I m p a c t o f O P E C P r i c i n g o n W e s t e r n E c o n o m i e s . I c an

r e m e m b e r w h e n t h e d o l l a r was K i n g C u r r e n c y a n d S a u d i

A r a b i a was w h e r e t h e y h a d c a m e l r a c e s . A few s h o r t y e a r s

l a t e r , fifty m e n i n R i y a d h , m a y b e n o t e v e n fifty, c a n d e c i d e

w h e t h e r w e will b e i n a d e p r e s s i o n o r n o t ; t h e b a n k i n g

sys t em i s i n j e o p a r d y , m o n e y h a s g o n e f r o m solid t o l iqu id

to gas , s o v e r e i g n c o u n t r i e s a r e f l i r t i ng wi th b a n k r u p t c y , a

c h e a p h o u s e cos ts $ 1 0 0 , 0 0 0 , a n d M i l t o n F r i e d m a n i s h o p ­

i n g t h a t e v e r y b o d y will f o r g e t t h a t h e sa id , i n 1974 , t h a t

O P E C w o u l d co l l apse a n d oil w o u l d n e v e r ge t u p t o $ 1 0 a

b a r r e l . W e h a v e s e e n t h e g r e a t e s t t r a n s f e r o f w e a l t h i n t h e

h i s t o r y o f t h e w o r l d , p rac t i ca l ly w i t h o u t a s h o t b e i n g f i red .

I f w e k n o w w h e r e t h e p r i c e o f oil i s g o i n g , w e h a v e s o m e

c lues a s t o w h e t h e r t h e b a n k i n g s y s t e m will s u r v i v e , a n d

w h e t h e r t h e $ 1 0 0 , 0 0 0 h o u s e i s g o i n g t o cost $ 5 0 0 , 0 0 0 o r

$ 5 , 0 0 0 , a n d w h a t h a p p e n s t o t h e s tock m a r k e t a n d c e n t r a l

h e a t i n g a n d W e s t e r n c iv i l iza t ion .

S o I a m g o i n g t o ask o u r c o n f e r e n c e m y u s u a l q u e s t i o n s :

C a n O P E C h o l d t o g e t h e r ? C a n t h e y m a n a g e t h e p r i ce?

W h e r e d o y o u t h i n k t h e p r i c e will go? T e n y e a r s a g o i t was

$ 1 . 8 0 a b a r r e l , a n d t h e n t h e y q u a d r u p l e d it, a n d t h e n i t

was a t $ 1 2 . 7 0 fo r a wh i l e , a n d a t c o n f e r e n c e t i m e it's $ 2 8 .

W h e r e n e x t ? Fifty d o l l a r s a b a r r e l ? A h u n d r e d ? W h a t

a b o u t M e x i c o a n d C a n a d a a n d t h e oil o u t s i d e O P E C ?

W o n ' t t h a t h e l p ? A n d s o o n . T h e n o u r p l a n i s t o b o u n c e

all t h e oil n u m b e r s i n t o t h e f i nanc i a l g r o u p , t o see i f t h e

w o r l d ' s b a n k i n g sys tem c a n s u r v i v e O P E C .

W a n d a b r u s h e s a b l o n d lock f r o m h e r f o r e h e a d .

" D o y o u k n o w w h e r e O P E C s t a r t e d ? " s h e says. I say

B a g h d a d , 1 9 6 0 , b e c a u s e i n m y f i l e s a r e all t h e O P E C u t t e r ­

a n c e s a n d t h a t i s w h e n t h e y s t a r t .

" N o , i n m y su i te o u t a t t h e Ni le H i l t o n i n 1 9 5 9 , b e c a u s e

1 4 6 Adam Smith

t h a t was w h e r e I i n t r o d u c e d P e r e z A l f o n s o t o A b d u l l a h

T a r i k i . "

" D i d y o u h a v e t o ? " I a s k e d , b e c a u s e i t s e e m s to me t h a t

th i s i s a bit l ike s ay ing t h a t y o u w e r e t h e o n e w h o gave

A d m i r a l Y a m a m o t o t h e g u i d e d t o u r o f P e a r l H a r b o r back

b e f o r e he h a d that i dea .

" O h , i t w o u l d h a v e h a p p e n e d a n y w a y , " W a n d a sa id .

The Man Who Invented OPEC

I n d e e d i t w o u l d . F o r O P E C d i d n o t rea l ly b e g i n i n t h e

M i d d l e Eas t , a n d i t was n o t rea l ly i n v e n t e d by t h e A r a b s .

T h e O P E C s to ry i s a l m o s t u n k n o w n i n th is c o u n t r y , a n d i t

i s full of i r o n i e s , n o t t h e least of w h i c h is t h e way i t was

m o d e l e d o n o n e o f o u r o w n i n s t i t u t i o n s .

T h e m a n w h o i n v e n t e d O P E C was a p r ec i s e , scho la r ly

V e n e z u e l a n l awye r ca l led J u a n Pab lo P e r e z A l f o n s o . T h e

f o u r n a m e s d o n o t s o u n d a s f o u r i n S p a n i s h ; J u a n Pab lo i s

J o h n - P a u l , a n d i n t h e S p a n i s h f o r m P e r e z i s t h e p a t r o ­

n y m i c a n d A l f o n s o t h e m a t r o n y m i c . J u a n P a b l o P e r e z Al­

f o n s o was b o r n in C a r a c a s in 1 9 0 3 , t h e g r a n d s o n of a

p r o s p e r o u s cof fee g r o w e r a n d i m p o r t e r . B y t h e t i m e h e

was i n his t e e n s , h o w e v e r , h is f a t h e r was h a v i n g t r o u b l e

wi th t h e i m p o r t i n g f i rm, a n d J u a n Pab lo h a d t o l eave t h e

u n i v e r s i t y fo r severa l t e r m s t o h e l p i n t h e family b u s i n e s s .

A s t h e o l d e s t son , h e also h a d t o t a k e t h e r e spons ib i l i t y fo r

his e l e v e n b r o t h e r s a n d s i s te rs . Respons ib i l i ty a t a n ea r ly

a g e , a n d l imi t ed r e s o u r c e s , p r o d u c e d a c a r e f u l a t t i t u d e i n

J u a n Pab lo t o w a r d t h o s e r e s o u r c e s .

P e r e z A l f o n s o w e n t back t o t h e C e n t r a l U n i v e r s i t y i n

C a r a c a s a n d g r a d u a t e d wi th a law d e g r e e , o l d e r , b e c a u s e

o f t h e i n t e r r u p t i o n s , t h a n a n y o t h e r m e m b e r o f his class.

He t a u g h t civil law, b e c a m e a city c o u n c i l m a n a n d , in 1938 ,

a c o n g r e s s m a n . He a p p e a r s , in ea r ly p i c t u r e s , as a s l im,

h a n d s o m e m a n , his h a i r l i n e a l r e a d y r e c e d i n g . L a t e r h e

P A P E R M O N E Y 1 4 7

was t o g r o w t h e p r o t o t y p i c a l L a t i n p e n c i l m u s t a c h e a n d t o

w e a r t h e h o r n - r i m m e d glasses f a v o r e d b y L a t i n A m e r i c a n

in t e l l ec tua l s .

I t was n a t u r a l fo r V e n e z u e l a n s t o be c o n c e r n e d w i t h oil .

V e n e z u e l a w a s t h e w o r l d ' s l e a d i n g oil e x p o r t e r , a n d oil

p r o v i d e d t h e b u l k o f t h e g o v e r n m e n t ' s r e v e n u e s . T h e first

m a j o r oil s t r i ke h a d b e e n in 1 9 2 2 , so oil h a d b e e n a p r e s ­

e n c e for n e a r l y t w o d e c a d e s b y t h e t i m e P e r e z A l f o n s o g o t

t o C o n g r e s s . P e r e z A l f o n s o was a l e a d i n g m e m b e r o f t h e

Accion Democratica, a n e w o p p o s i t i o n p a r t y , a n d he m a d e

h i m s e l f his p a r t y ' s oil e x p e r t , a s well a s s o m e o n e w h o c o u l d

t u r n o u t a c losely r e a s o n e d j u r i d i c a l t he s i s .

P e r e z A l f o n s o h a d a h a n d i n f r a m i n g t h e 1 9 4 3 V e n e z u e ­

l an oil law, w h i c h V e n e z u e l a n s c o n s i d e r a l a n d m a r k . W h e n

t h e Accion Democratica w o n t h e e l e c t i o n in 1 9 4 5 , t h e r e ­

f o r m e r R o m u l o B e t a n c o u r t b e c a m e p r e s i d e n t , a n d P e r e z

A l f o n s o b e c a m e M i n i s t e r o f M i n e s a n d H y d r o c a r b o n s , t h e

oil m i n i s t e r . P e r e z A l fonso ' s first a c t i o n was to c u t his o w n

sa la ry 2 0 p e r c e n t a n d t o s u g g e s t t h a t t h e o t h e r m i n i s t e r s

c u t t h e i r s , s o t h a t t h e p e o p l e w o u l d k n o w t h e r e f o r m p a r t y

was s e r i o u s .

P e r e z A l f o n s o ' s n e x t a c t i o n was t o s e n d for t h e c h i e f

e n g i n e e r o f t h e T e x a s R a i l r o a d C o m m i s s i o n . E v e n i n 1945

P e r e z A l f o n s o saw oil a s a f in i t e r e s o u r c e , a n d he w a n t e d

t o a p p l y t h e c o n s e r v a t i o n t e c h n i q u e s o f t h e T e x a s R a i l r o a d

C o m m i s s i o n wi th r e g a r d t o gas f l a r i n g , h o w m u c h oil t o

t a k e o u t o f a r e s e r v o i r , a n d t h e safes t p r o c e d u r e for a b a n ­

d o n i n g a wel l .

I t s o u n d s s t r a n g e t o h a v e a n a g e n c y ca l led t h e T e x a s

Railroad C o m m i s s i o n c o m e i n t o th i s s to ry , un t i l y o u rea l i ze

t h a t i t i s a l so t h e oil c o m m i s s i o n . In t h e 1930s t h e r e was so

m u c h oil b e i n g p r o d u c e d i n T e x a s t h a t t h e m a r k e t was

c h a o t i c , t h e p r i c e s o m e t i m e s as low as 10 c e n t s a b a r r e l . In

t h e c o m p e t i t i v e f e r v o r , oil m e n d r i l l e d i n t o e a c h o t h e r ' s

l eases , t h e l egs o f t h e d e r r i c k s s o m e t i m e s o v e r l a p p e d , a n d

t h e e n g i n e e r s c o m p l a i n e d a b o u t d e p l e t i o n a n d w a s t a g e .

1 4 8 Adam Smith

T h e T e x a s oil i n d u s t r y t u r n e d t o t h e s ta te g o v e r n m e n t

fo r h e l p a n d s u p p o r t e d a m o v e t o give t h e T e x a s R a i l r o a d

C o m m i s s i o n — w h o s e b u s i n e s s h a d b e e n , obv ious ly , ra i l ­

r o a d r e g u l a t i o n — t h e p o w e r t o r e g u l a t e d r i l l i n g a n d p r o ­

d u c t i o n . T h e r a t i o n a l e for t h e act ivi t ies o f t h e c o m m i s s i o n

was c o n s e r v a t i o n , a n d t h e c o m m i s s i o n d i d e n f o r c e r u l e s t o

p r o l o n g t h e life o f t h e wells . T h e e x i s t e n c e o f t h e c o m m i s ­

s ion was a t r i b u t e to t h e pol i t ica l p o w e r o f t h e i n d e p e n d e n t

oil m e n .

T h e r e w e r e , i n T e x a s , m a j o r oil c o m p a n i e s t h a t n o t on ly

d r i l l e d fo r oil b u t r e f i n e d i t a n d m a r k e t e d i t t h r o u g h t h e i r

o w n g a s o l i n e s t a t ions a n d sales a g e n t s . T h e r e w e r e also

i n d e p e n d e n t oil m e n w h o o n l y d r i l l ed , a n d t h e n sold oil i n

t h e m a r k e t p l a c e . S o m e t i m e s t h e i n d e p e n d e n t s a n d t h e

m a j o r s w o u l d h a v e wells t a p p e d i n t o t h e s a m e p o o l o f oil ,

l ike two s t r aws in a d r i n k , s ince t h e u n d e r g r o u n d oil n a t ­

u r a l l y d i d n o t follow t h e c o n t o u r s o f t h e s u r f a c e o w n e r ­

s h i p . I f t h e d e m a n d s l u m p e d , t h e m a j o r oil c o m p a n y c o u l d

k e e p l i f t ing oil , b e c a u s e i t h a d its o w n o u t l e t s to sell

t h r o u g h . T h e i n d e p e n d e n t s , i f t h e y h a d t o s t o p d r i l l i n g

b e c a u s e t h e r e was n o m a r k e t , w o u l d t h e n c o m p l a i n t h a t

t h e m a j o r was s u c k i n g u p t h e i r oil .

T h e i n d e p e n d e n t s w e r e m u c h s m a l l e r t h a n t h e m a j o r s ,

b u t , a s i n d i v i d u a l s , s o m e o f t h e m w e r e m u l t i m i l l i o n a i r e s ,

m u c h r i c h e r t h a n a n y oil c o m p a n y e x e c u t i v e , a n d h e n c e

ab le t o s p e n d well i n pol i t ical c o n t r i b u t i o n s . H . L . H u n t

a n d J o h n M e c o m w e r e a m o n g t h e i n d e p e n d e n t s , a n d t hey

w e r e t o b e a m o n g t h e r i ches t p e o p l e i n t h e c o u n t r y . S o t h e

i n d e p e n d e n t s c o u l d ge t t h e i r c a u s e t o b e h e a r d .

T h e T e x a s R a i l r o a d C o m m i s s i o n d i d n o t set a p r i c e for

oil, b u t i t d e t e r m i n e d w h a t c o u l d b e p r o d u c e d . T h e ea r ly

a p p o i n t m e n t s to its b o a r d d e v e l o p e d a r e p u t a t i o n for fair­

nes s , f r o m t h e p o i n t o f view o f t h e p r o d u c e r s . W h e n t h e

d e m a n d d r o p p e d , t h e T e x a s R a i l r o a d C o m m i s s i o n g a t h ­

e r e d t h e i n d u s t r y a n d po l l ed i t a s t o w h a t t h e r ea l d e m a n d

m i g h t b e . I t t h e n set a n a l lowable r a t e o f p r o d u c t i o n , s o

P A P E R M O N E Y 1 4 9

m a n y d a y s p e r m o n t h , t h a t oil c o u l d b e p r o d u c e d . T h u s

c o n s e r v a t i o n p r o d u c e d a m e c h a n i s m fo r s tab i l i z ing t h e

m a r k e t .

I f t h e p r i c e o f oil s t a r t e d t o sag , t h e T e x a s R a i l r o a d

C o m m i s s i o n w o u l d r e d u c e t h e n u m b e r o f d a y s p e r m o n t h

t h a t oil c o u l d b e p r o d u c e d . " I t b e c a m e t h e pol icy o f t h e

C o m m i s s i o n , " Fortune w r o t e in 1959 , " to k e e p oil p r i c e s

h i g h e n o u g h fo r t h e ' l i t t le m a n ' — t h e m a r g i n a l T e x a s p r o ­

d u c e r — t o m a k e m o n e y . T h i s o f c o u r s e w a s a w o n d e r f u l

a r r a n g e m e n t fo r t h e n o n m a r g i n a l ( i .e. , t h e m a j o r ) U . S .

p r o d u c e r s . I t e n a b l e d t h e m t o c l e a r a s m u c h a s 5 0 p e r c e n t

p e r a n n u m . A n d i t w a s e v e n m o r e w o n d e r f u l fo r t h e

m a j o r c o m p a n i e s o v e r s e a s . "

I t was w o n d e r f u l f o r t h e c o m p a n i e s o v e r s e a s b e c a u s e

t h e T e x a s p r i c e was t h e A m e r i c a n p r i c e , ca l l ed t h e "Gu l f "

p r i c e , ba c k w h e n t h e G u l f m e a n t t h e G u l f o f M e x i c o , n o t

t h e P e r s i a n G u l f o r t h e A r a b i a n Gulf . A n d t h e T e x a s p r i c e

b e c a m e t h e w o r l d p r i c e , s o oil was l e a v i n g t h e o t h e r Gulf,

t h e P e r s i a n Gulf , i n t h e t a n k e r s o f E x x o n ( t h e oil c o m p a ­

n ies , t o p r e v e n t c o n f u s i o n , a r e h e r e ca l l ed b y t h e i r c u r r e n t

n a m e s ) a n d Gulf , a t $ 1 . 8 0 a b a r r e l — t h e T e x a s p r i c e —

w h e n i t cos t o n l y 10 c e n t s a b a r r e l .

T h e t r o u b l e was t h a t s o m u c h oil w a s b e i n g f o u n d i n t h e

w o r l d t h a t t h e "Gul f " p r i c e , o u t o f T e x a s , w a s n ' t a lways

s t i ck ing . S o m e b o d y was a lways t r y i n g t o c u t t h e p r i c e . T h e

T e x a s R a i l r o a d C o m m i s s i o n c o u l d k e e p t h e A m e r i c a n

p r i c e up by o r d e r i n g a c u t b a c k i n p r o d u c t i o n , b u t oil c o u l d

still l a n d i n t h e U n i t e d S ta tes f r o m a b r o a d , a n d m o v e

c h e a p l y . T h e A m e r i c a n oil c o m p a n i e s t h e n l im i t ed im­

p o r t s , b y v o l u n t a r y a g r e e m e n t , w h i c h l a t e r b e c a m e m a n ­

d a t o r y b y o r d e r o f t h e U . S . g o v e r n m e n t . T h e y

c o n s t r u c t e d , sa id t h e Br i t i sh e c o n o m i s t P a u l F r a n k e l , " a n

invis ible d i k e a g a i n s t t h e o u t s i d e w o r l d . "

I n 1 9 4 8 t h e mi l i t a ry d i c t a t o r s h i p o f P e r e z J i m i n e z t o o k

o v e r i n V e n e z u e l a , a n d J u a n P a b l o P e r e z A l f o n s o w e n t

15 0 Adam Smith

i n to ex i le , first i n W a s h i n g t o n , D . C . , a n d t h e n i n M e x i c o

Ci ty . H e l ived m o d e s t l y , w r i t i n g t r ac t s a n d ar t ic les , s o m e ­

t i m e s r e c e i v i n g c h e c k s f r o m his r ea l e s t a t e i n C a r a c a s . His

c h i l d r e n r e m e m b e r h i m p r o w l i n g t h e h o u s e , s n a p p i n g of f

t h e te lev is ion set , a n d t e l l ing t h e m t o d o s o m e t h i n g use fu l .

P e r e z A l f o n s o was i n exi le for t e n y e a r s , r e a d i n g , w r i t i n g ,

a n d s t u d y i n g t h e act ivi t ies o f t h e T e x a s R a i l r o a d C o m m i s ­

s ion . T h i s i s a p a r a p h r a s e o f w h a t he w r o t e :

V e n e z u e l a i s n o t i n c o n t r o l o f its o w n d e s t i n y . I t o u g h t

t o b e . W e m a y b e t h e r i ches t c o u n t r y i n La t in A m e r i c a , b u t

we still h a v e p o o r p e o p l e , a n d t h e oil will n o t last f o r e v e r .

L a k e M a r a c a i b o d r o p s a foot a y e a r , w i th all t h a t oil p u l l e d

f r o m u n d e r it. T h e n t h e m o n e y c o m e s back t o u s a t levels

w e d o n ' t c o n t r o l , d e p e n d i n g o n t h e w o r l d oil m a r k e t .

S o m e t i m e s t h e r e isn ' t e n o u g h , a n d s o m e t i m e s t h e r e ' s t o o

m u c h all a t o n c e a n d i t spills i n t o h i g h l iv ing in C a r a c a s .

E v e r y t h i n g s h o u l d m a t c h n e a t l y : t h e s u p p l y , t h e d e m a n d ,

a n d t h e m o n e y for social n e e d s .

I f V e n e z u e l a was n o t i n c o n t r o l o f its o w n d e s t i n y , w h o

was? T h e I n t e r n a t i o n a l Oi l C a r t e l ; i f t h e V e n e z u e l a n s gave

i t a n y t r o u b l e , t h e c a r t e l s imply c u t b a c k i n V e n e z u e l a a n d

t o o k t h e oil f r o m s o m e w h e r e e lse i n its vast e m p i r e . F o r

m o s t o f V e n e z u e l a n h i s to ry , t h o u g h , t h e r e l a t i o n s h i p s b e ­

t w e e n t h e oil c o m p a n i e s a n d t h e V e n e z u e l a n g o v e r n m e n t

h a d b e e n s o cozy t h a t n o s u c h a c t i o n w a s n e c e s s a r y . T h e

c a r t e l m e m b e r s o p e r a t i n g i n V e n e z u e l a w e r e E x x o n , Gulf,

T e x a c o , Roya l D u t c h , a n d Mob i l .

T h e ca r t e l h a d b e e n f o r m e d i n S e p t e m b e r 1 9 2 8 , w h e n

Sir H e n r i D e t e r d i n g , t h e c h a i r m a n o f Roya l D u t c h / S h e l l ,

i nv i t ed t h e h e a d s o f E x x o n ( t h e n S t a n d a r d Oi l o f N e w

J e r s e y ) a n d Br i t i sh P e t r o l e u m t o his e s t a t e i n A c h n a c a r r y ,

S c o t l a n d , os t ens ib ly f o r s o m e g r o u s e s h o o t i n g . W h a t t h e

g r o u s e s h o o t e r s d i d , h o w e v e r , was t o a g r e e o n a n u n s i g n e d

d o c u m e n t t h a t specif ied p r i n c i p l e s fo r e l i m i n a t i n g " d e ­

s t ruc t i ve c o m p e t i t i o n . " T h e t h r e e o r i g i n a l m e m b e r s l a t e r

a d m i t t e d T e x a c o , Gulf, Mob i l , a n d S o c a l — S t a n d a r d o f

P A P E R M O N E Y 1 5 1

C a l i f o r n i a — t o m a k e u p w h a t E n r i c o M a t t e i , t h e I t a l i an oil

m a n w h o c o u l d n o t b r e a k t h e i r g r i p , ca l l ed t h e " S e v e n

S i s t e r s . "

I n 1952 t h e U n i t e d S ta t e s F e d e r a l T r a d e C o m m i s s i o n

r e p o r t e d t h a t t h e c a r t e l " c o n t r o l l e d all t h e p r i n c i p a l oil

p r o d u c i n g a r e a s o u t s i d e t h e U n i t e d S t a t e s , all f o r e i g n r e ­

f i n e r i e s , p a t e n t s , a n d r e f i n e r y t e c h n o l o g y , a n d d i v i d e d

w o r l d m a r k e t s b e t w e e n [sic] t h e m . " T h e c o m m i t t e e s o f t h e

c a r t e l , i n L o n d o n a n d N e w Y o r k , set p r o d u c t i o n q u o t a s

a n d c o o r d i n a t e d d i s t r i b u t i o n o f t h e w o r l d ' s oil. A D e p a r t ­

m e n t o f J u s t i c e l a w y e r ca l l ed t h e c a r t e l a g r e e m e n t " a

g r a n d pol icy b l u e p r i n t fo r a c o r p o r a t e w o r l d g o v e r n m e n t

o f t h e p e t r o l e u m i n d u s t r y . " T h e D e p a r t m e n t o f J u s t i c e

c r i m i n a l a n t i t r u s t case a g a i n s t t h e f i v e A m e r i c a n m e m b e r s ,

in 1 9 5 2 , w a s l a t e r d o w n g r a d e d to a civil c o m p l a i n t a n d

se t t l ed b y c o n s e n t . W h e n t h e S h a h , w i t h C I A ass i s t ance ,

d e p o s e d I r a n ' s P r i m e M i n i s t e r M o s s a d e g h i n 1 9 5 3 , t h e

U n i t e d S t a t e s N a t i o n a l S e c u r i t y C o u n c i l , A c t i o n M e m o r a n ­

d u m 8 7 5 b , o r d e r e d " a s o l u t i o n w h i c h w o u l d p r o t e c t t h e

i n t e r e s t s o f t h e f ree w o r l d i n t h e N e a r E a s t " a n d , i n effect ,

g o t t h e D e p a r t m e n t o f J u s t i c e t o d r o p its a n t i t r u s t a c t i ons

so t h a t t h e oil c o m p a n i e s c o u l d act i n c o n c e r t i n I r a n .

N o n e o f th i s was lost o n J u a n P a b l o P e r e z A l f o n s o ; h e

s t u d i e d i t i n t e n t l y f r o m his ex i l e h o u s e s in W a s h i n g t o n

a n d M e x i c o . S o m e o f t h e h i s t o r y was n o t m a d e p u b l i c u n t i l

t h e m i d - 1 9 7 0 s , w h e n t h e S e n a t e S u b c o m m i t t e e o n Mul t i ­

n a t i o n a l C o r p o r a t i o n s , c h a i r e d b y S e n a t o r F r a n k C h u r c h ,

h e l d its h e a r i n g s . B y 1959 t h e V e n e z u e l a n mi l i t a ry j u n t a

h a d fled t h e c o u n t r y , its su i t cases s t u f f e d wi th c a s h , a n d

R o m u l o B e t a n c o u r t was back a s E l P r e s i d e n t e , a n d J u a n

P a b l o P e r e z A l f o n s o was back a s his oil m i n i s t e r . ( B e t a n ­

c o u r t , h is a d m i r e r s l a t e r sa id , was t h e o n l y V e n e z u e l a n

e v e r t o l eave t h e p r e s i d e n c y wi th a n e t w o r t h o f $ 3 8 3 . )

J u a n P a b l o P e r e z A l f o n s o g o t o n t h e p h o n e t o A u s t i n ,

T e x a s , a n d i nv i t ed o n e o f t h e m e m b e r s o f t h e T e x a s Rai l ­

r o a d C o m m i s s i o n to c o m e for a visit, t o d i s p e n s e a d v i c e

15 2 Adam Smith

a n d c o u n s e l . T h e n h e b e g a n t o i ssue d i r ec t ives i n his

c r a m p e d , c a r e f u l h a n d .

Fi rs t , he p a i d his r e s p e c t s t o c o n s e r v a t i o n , i n t h e style o f

t h e T e x a s R a i l r o a d C o m m i s s i o n .

N e x t , h e said t h a t h e w a n t e d , o n b e h a l f o f V e n e z u e l a ,

" to avo id m o n e t a r y losses d u e t o un jus t i f i ed p r i c e r e d u c ­

t i o n s . " T h a t m e a n s j u s t w h a t i t s o u n d s l ike: w e d o n ' t w a n t

t h e p r i c e t o g o d o w n , b e c a u s e t h e n w e ge t less m o n e y .

T h e n h e said t h a t i n t h e U n i t e d S ta tes t h e p r i c e o f oil

was s h o r e d u p b y s ta te a n d g o v e r n m e n t c o n t r o l s t h a t a l ­

l o w e d all t h e p r o d u c e r s a s h a r e o f t h e m a r k e t , a n d t h a t i s

w h a t V e n e z u e l a s h o u l d d o , t o o .

So V e n e z u e l a go t s o m e n e w oil laws. B u t i t still f aced t h e

o ld I n t e r n a t i o n a l C a r t e l . A n d i t was still u t t e r l y d e p e n d e n t

o n oil r e v e n u e s , a n d t h e p o p u l a t i o n was g r o w i n g , a n d i t

c o u l d n ' t a lways ge t its oil into t h e U n i t e d S ta t e s , t h e b igges t

m a r k e t , t h e b igges t c o n s u m e r , b e c a u s e o f t h a t d a m n e d

invis ible d i k e . A n d i f t h e V e n e z u e l a n p r o d u c e r s , espec ia l ly

t h e i n d e p e n d e n t s , c o u l d n ' t ge t t h e oil o v e r t h e d a m n e d

invis ible d i k e , t h e y h a d t o d u m p t h e oil s o m e w h e r e else i n

t h e w o r l d m a r k e t , w h i c h m e a n t less m o n e y f o r V e n e z u e l a .

P e r e z A l f o n s o d i d n o t s m o k e o r d r i n k , a n d h e s u f f e r e d

f r o m i n s o m n i a . H e k e p t a p a d a n d penc i l b y his b e d s i d e ,

s o t h a t h e c o u l d w o r k o n p r o b l e m s w h e n h e c o u l d n o t

s l e e p , a n d h e s o m e t i m e s r e a d t h r o u g h t h e n i g h t a n d go t

u p a t d a w n . J o t t i n g o n his n o t e p a d , P e r e z A l f o n s o h a t c h e d

a g r a n d s c h e m e o f a b s o l u t e l y b r e a t h t a k i n g a u d a c i t y . I t

w o u l d b e a n i n t e r n a t i o n a l T e x a s R a i l r o a d C o m m i s s i o n ,

w i t h o u t t h e T e x a n s ! A T e x a s R a i l r o a d C o m m i s s i o n for t h e

w h o l e w o r l d ! I f t h e p r i c e o f oil s t a r t e d t o go d o w n , all t h e

m e m b e r s w o u l d h o l d back t h e i r p r o d u c t i o n un t i l t h e p r i c e

w e n t u p a g a i n . A n d t o g e t h e r , u n i t e d , t h e producers o f t h e

o i l — b y w h i c h P e r e z A l f o n s o m e a n t t h e c o u n t r i e s i n w h i c h

t h e oil was l o c a t e d — t o g e t h e r c o u l d s t a n d u p t o t h e g r e a t

i n d u s t r i a l n a t i o n s wi th t h e i r g r e a t oil c o m p a n i e s .

V e n e z u e l a h a d , a t t h a t t i m e , 7 p e r c e n t o f t h e w o r l d ' s oil

P A P E R M O N E Y 1 5 3

r e s e r v e s , a n d t h e M i d d l e Eas t h a d 7 0 p e r c e n t . V e n e z u e l a

c o u l d c u t b a c k un t i l i t was b l u e in t h e face a n d i t w o u l d n ' t

m a t t e r ; i t w o u l d b e l ike P e n n s y l v a n i a s t a r t i n g t h e T e x a s

R a i l r o a d C o m m i s s i o n .

J u a n P a b l o P e r e z A l f o n s o h a d his p l a n s a n d his t r ac t s

a n d V e n e z u e l a ' s n e w oil laws all t r a n s l a t e d i n t o A r a b i c .

A n d wh i l e J u a n P a b l o P e r e z A l f o n s o was g e t t i n g all t h e

m a t e r i a l s t r a n s l a t e d i n t o A r a b i c , A b d u l l a h T a r i k i was f u m ­

i n g .

The Odd Couple

A b d u l l a h T a r i k i was i n t h e f i r s t w a v e o f S a u d i oil t e ch ­

n o c r a t s w h o w e n t t o t h e W e s t t o s t u d y . H e h a d b e e n t o t h e

U n i v e r s i t y o f T e x a s , h a d b e e n br ief ly m a r r i e d t o a n A m e r ­

ican g i r l , a n d h a d , fo r o n e b i t t e r p e r i o d , e v e n b e e n a T e x ­

aco t r a i n e e . T a r i k i h a d a b s o r b e d all t h e a r g u m e n t s a b o u t

t h e oil c o m p a n i e s i n t h e 1952 r e p o r t o f t h e F e d e r a l T r a d e

C o m m i s s i o n . N o w , i n 1 9 5 9 , h e was d i r e c t o r o f t h e Office

o f P e t r o l e u m Affa i r s fo r S a u d i A r a b i a , a n d h e was , fo r

t h a t t i m e a n d t h a t c o u n t r y , a r a d i c a l . H e w a n t e d S a u d i

A r a b i a t o h a v e a n i n t e g r a t e d oil c o m p a n y o f its o w n , a n d

n o t j u s t t o let A r a m c o b r i n g u p t h e oil a n d t a k e i t away .

A r a m c o was t h e p a r t n e r s h i p o f E x x o n , M o b i l , Socal , a n d

T e x a c o .

T a r i k i was f u m i n g b e c a u s e t h e oil c o m p a n i e s h a d j u s t

reduced t h e i r p r i ce s . S a u d i A r a b i a d i d n o t h a v e v e r y s o p h i s ­

t i c a t ed m a n a g e m e n t , t o say t h e least . K i n g S a u d m a r r i e d

a t leas t 125 t i m e s , a n d e a c h wife g o t a h o u s e a n d an a l low­

a n c e . W h e n t h e k i n g n e e d e d m o n e y , a c o u r t i e r w o u l d call

u p A r a m c o a n d ask fo r a n a d v a n c e . S a u d i A r a b i a was p e r ­

i lously c lose t o b e i n g o u t o f c a s h , a n d T a r i k i was g e t t i n g

t h e p h o n e cal ls , a n d t h e oil c o m p a n i e s w e r e cutting t h e i r

p r i c e s , w h i c h was g o i n g t o cos t S a u d i A r a b i a $ 3 4 mi l l ion .

P e r e z A l f o n s o g a t h e r e d t h i r t e e n a i d e s a n d t h e m u l t i l i n -

1 5 4 Adam Smith

g u a l t r a n s l a t i o n s o f t h e V e n e z u e l a n oil laws a n d go t e v e r y ­

b o d y o n t o a p l a n e for C a i r o — t o u r i s t class, o f c o u r s e — t o

a t t e n d t h e v e r y first A r a b Oi l C o n g r e s s .

A b d u l l a h T a r i k i , still s m o l d e r i n g , g o t o n t o a p l a n e fo r

C a i r o wi th s o m e S a u d i oil t e c h n o c r a t s .

A n d so, o n A p r i l 16, 1959 , W a n d a sa id , "By t h e way,

A b d u l l a h T a r i k i , d o y o u k n o w J u a n P a b l o P e r e z A l f o n s o ? "

B u t i t was c lear ly g o i n g t o h a p p e n a n y w a y , s ince o n c e

t h e two oil m i n i s t e r s h a d t r a d e d a few p l e a s a n t r i e s a b o u t

T e x a s , P e r e z A l fonso ' s a ides b e g a n h a n d i n g o u t d o c u ­

m e n t s i n A r a b i c t o A b d u l l a h T a r i k i ' s a i de s . T w o o f P e r e z

A l fons o ' s a i d e s h a d b e e n t o t h e Un ive r s i t y o f T e x a s wi th

A b d u l l a h T a r i k i .

J u a n Pab lo P e r e z A l f o n s o b e g a n to de ta i l his p l a n for a

w o r l d w i d e T e x a s R a i l r o a d C o m m i s s i o n . C o n s e r v e a n d c u t

back , u n i t e a n d c o n t r o l . I f y o u w a n t m o r e m o n e y , d o n o t

sell m o r e oil ; sell less.

A b d u l l a h T a r i k i l i s t ened i n t e n t l y . H o w w o u l d i t w o r k ?

W h o w o u l d d e c i d e h o w m u c h e a c h c o u n t r y w o u l d c u t

back? H o w c o u l d t h e c u t b a c k s b e e n f o r c e d ?

I t was d e c i d e d t h a t T a r i k i w o u l d g o o u t a n d p r e a c h th is

p l a n t o t h e I r a q i s a n d t h e K u w a i t i s a n d t h e B a h r a i n i s a n d

all t h e o t h e r t r ibes wi th oil. T h e s e t r ibes w e r e m o r e u s e d

t o q u a r r e l i n g t h a n c o o p e r a t i n g , a n d t h e y w e r e u s e d t o

ca l l ing up t h e a w e s o m e oil c o m p a n i e s a s o n e w o u l d a p a r ­

e n t . K u w a i t was a smal l c i ty-s ta te , a n d t h e E m i r a t e s w e r e

r i g h t o u t o f t h e M i d d l e A g e s — m u d pa laces a n d goa t s .

T h e U n i o n J a c k h u n g f r o m t h e f l a g p o l e a t A d e n , a n d

Br i t i sh d e s t r o y e r s slid t h r o u g h t h e w a t e r s o f t h e Gulf. S o

i t was a r ad i ca l idea to go o u t a n d p r e a c h u n i t y a n d c o o p ­

e r a t i o n a n d s h u t t i n g t h e oil in .

B u t T a r i k i was a r ad i ca l . " I t h i n k i t c o u l d w o r k , " he said,

a n d h e w e n t o u t t o p r e a c h .

T a r i k i w e n t t h r o u g h t h e A r a b s ta tes , a n d P e r e z A l fonso

w e n t t o I r a n , w h e r e h e h e l d a p r e s s c o n f e r e n c e e v e n b e ­

fo re h e g o t t o see t h e S h a h . L a t e r h e w e n t e v e n t o M o s c o w .

P A P E R M O N E Y 1 5 5

T h e R u s s i a n s w e r e a s hos t i l e a s t h e m a j o r oil c o m p a n i e s .

P e r e z A l f o n s o h a d t o e x p l a i n t h a t O P E C was n o t a f r o n t

fo r t h e oil c a r t e l .

I n A u g u s t 1959 Fortune m a g a z i n e n o t i c e d t h e i t i n e r a n t

p r e a c h i n g s o f t h e O d d C o u p l e . I t s t o n e was o n e o f a m u s e ­

m e n t a n d s k e p t i c i s m , its p o i n t o f v iew, a s u s u a l , t h a t o f b i g

b u s i n e s s . T o r e a d i t i s t o e n t e r a n a s t o n i s h i n g t i m e w a r p .

T h e p r o b l e m , Fortune sa id , i s t h e G l u t . T o o m u c h oil .

F u r t h e r m o r e , said Fortune, " t h e g l u t is c e r t a i n to last a l o n g

t i m e . " T h e r e a s o n : " t o o m u c h oil u n d e r g r o u n d t o o easy t o

ge t a t , r e a d y t o f l o w a t v e r y l i t t le a d d i t i o n a l e x p e n s e . " T h e

r a t i o o f r e s e r v e s t o c o n s u m p t i o n h a d f o r m e r l y b e e n t w e n t y

t o o n e ; t h a t is, fo r e v e r y b a r r e l s h i p p e d t h e r e w e r e t w e n t y

b a r r e l s u n d e r g r o u n d . N o w i t was for ty t o o n e ; i n t h e M i d ­

d l e Eas t i t w a s o n e h u n d r e d t o o n e . E v e n i f n o b o d y e v e r

d r i l l e d a n o t h e r well , t h e r e w a s s o m u c h oil t h a t t h e r a t i o

o f r e s e r v e s t o c o n s u m p t i o n w o u l d n ' t g o b a c k t o t w e n t y t o

o n e fo r a n o t h e r d e c a d e .

" T h e i n t e r n a t i o n a l oil c o m p a n i e s d o n o t p r o p o s e t o t a k e

a b e a t i n g l y i n g d o w n , " sa id Fortune. " T h e y a r e r e d o u b l i n g

t h e i r e f fo r t s t o i n c r e a s e t h e u s e o f p e t r o l e u m p r o d u c t s . "

G e n e r a l M o t o r s a n d Socal h a d a l r e a d y b o u g h t t h e Los

A n g e l e s m a s s t r a n s i t ra i l s y s t e m a n d s h u t i t d o w n . E x x o n

p r o m i s e d a t i g e r in a t a n k . E v e r y w h e r e t h e r e w e r e c a m ­

p a i g n s t o i n c r e a s e d r i v i n g a n d h e a t i n g . " G l u t w i t h o u t

e n d ? " r e a d t h e Fortune s u b h e a d . " T o d a y , fo r t h e f i r s t t i m e

i n y e a r s , t h e c o m p a n i e s a r e c r a c k i n g d o w n o n sa la r i es ,

e x p e n s e a c c o u n t s a n d office o v e r h e a d . " T h e H i g h w a y

T r u s t F u n d h e l p e d b y b u i l d i n g t h e i n t e r s t a t e h i g h w a y sys­

t e m . F a r t h e r o u t , s u b u r b s w e r e s p r i n g i n g u p , r e q u i r i n g

m o r e d r i v i n g .

" A S t r a n g e N e w P l a n fo r W o r l d O i l , " Fortune h e a d l i n e d

its a r t i c l e :

T h e proposi t ion, baldly stated, is that the great oil-pro­duc ing countr ies outside the U.S. should get toge ther

1 5 6 Adam Smith

to limit product ion and maintain prices. T h e rationale of this proposal is clear e n o u g h . Crude oil prices out­side the U.S. have been falling like overr ipe fruit. In­side the U.S., however, prices have been holding relatively high and steady because the mighty Texas Railroad Commission, suppor t ed by o ther state and federal bodies, in effect adjusts the supply of U.S. oil to the market . . . . An internat ional Texas Railroad Com­mission could keep c rude oil product ion in line with d e m a n d , allocate product ion equitably a m o n g produc­ing countries and companies , and so maintain prices at or close to the elegant level maintained in the U.S. T h e high irony of the proposit ion is e n o u g h to raise a guf­faw from even the sourest oilman . . . such a global scheme, grant ing it is at all feasible, obviously runs against jus t about every principle of free enterpr ise economics in the book . . . the basic interest of the con­sumer in cheaper oil, made possible by the discovery of ever larger reserves, would be thrown to the winds.

" T a k i n g e v e r y t h i n g t o g e t h e r , " Fortune sa id , " t h e p r o ­

posa l o f M e s s r s . P e r e z A l f o n s o a n d T a r i k i i s n o t o n l y im­

p rac t i ca l b u t b a d e c o n o m i c s . " W h a t Fortune p r o p o s e d was

t h a t t h e U n i t e d S ta tes import more oil . T h a t w o u l d t a k e t h e

p r e s s u r e o f f w o r l d p r i ce s , a n d t h e y c o u l d f i n d a m o r e r e ­

alistic level .

Fortune m a y h a v e b e e n in a t i m e w a r p , b u t its s u g g e s t i o n ,

i n 1959 , t o i m p o r t oil m a d e s o m e s e n s e . T h e d o l l a r was

s t r o n g , oil c o u l d h a v e b e e n i m p o r t e d a t less t h a n $ 1 . 8 0 a

b a r r e l , t h e w o r l d m a r k e t m i g h t h a v e b e e n h e l p e d , a n d a

f i n i t e r e s o u r c e m i g h t h a v e b e e n p r e s e r v e d . T o d a y w e pay

o u t $ 3 0 a b a r r e l t o i m p o r t oil, a n d w e e v e n p u m p s o m e o f

t h a t oil i n to t h e salt d o m e s of L o u i s i a n a as a r e s e r v e .

T w e n t y y e a r s a g o w e t o o k i t o u t o f t h e g r o u n d h e r e a n d

b u r n e d i t u p ; n o w we b r i n g i t in a t a n k e r , a t t w e n t y t imes

t h e 1959 cost , a n d p u t i t b a c k i n t o t h e g r o u n d .

B u t t h e d o m e s t i c A m e r i c a n oil i n d e p e n d e n t s d i d n o t

P A P E R M O N E Y 1 5 7

w a n t t o i m p o r t m o r e oil i n 1 9 5 9 . T h e y w a n t e d t h e p r o t e c ­

t ion o f t h e " invis ib le d i k e . " I n d e p e n d e n t s o p e r a t i n g

a b r o a d , i n L ibya a n d V e n e z u e l a , w e r e f i n d i n g oil , a n d s o

w e r e t h e S e v e n Sis ters .

Fortune's " g l u t " n u m b e r s obv ious ly c a m e f r o m t h e oil

c o m p a n i e s , a n d t h e vis ion o f its w r i t e r was a p p r o p r i a t e l y

l i m i t e d . B u t i t was c e r t a i n l y r i g h t i n o n e r e s p e c t . T h e

" s t r a n g e n e w p l a n " o f P e r e z A l f o n s o a n d T a r i k i d i d n o t

w o r r y a b o u t t h e oil c o n s u m e r , a n d i t r a n a g a i n s t e v e r y

p r i n c i p l e o f f ree e n t e r p r i s e i n t h e b o o k . B u t i f i t r a n

a g a i n s t e v e r y p r i n c i p l e o f f ree e n t e r p r i s e , w h a t a b o u t t h e

m o d e l o n w h i c h i t was b a s e d ? T h a t was t h e i r o n y , b e c a u s e

t h e oil c o m p a n i e s w e r e t h e s o u r c e o f s o m u c h r h e t o r i c

a b o u t f r ee e n t e r p r i s e .

O n e o t h e r n o t e f r o m t h e t i m e w a r p . T h e p r i c e c u t t h a t

so a n g e r e d A b d u l l a h T a r i k i cos t $ 3 4 mi l l i on a . year. S a u d i

A r a b i a n o w t akes in $ 1 6 6 mi l l i on a . day. K e e p i n g t h a t scale

i n m i n d will h e l p t o e x p l a i n t h e a g e o f p a p e r m o n e y .

T h e y w e r e a n o d d c o u p l e , P e r e z A l f o n s o a n d T a r i k i ,

b u t t h e y go t a l o n g . H e r e was th i s p r e c i s e , b r i l l i an t , b a l d i n g

L a t i n wi th h is h o r n - r i m m e d glasses a n d his p e n c i l m u s ­

t a c h e , i n t e n s e , n e r v o u s , his b e d s i d e p a d a lways r e a d y t o

r ece ive his t h o u g h t s w h e n h e c o u l d n o t s l e e p ; a n d h e r e

was his A r a b s idek ick , s o m e w h a t s w a r t h y — h e h a d s o m e ­

t i m e s b e e n t a k e n for a M e x i c a n i n T e x a s r e s t a u r a n t s —

wi th th ick h a i r a n d a g e n e r o u s n o s e . T a r i k i was a s ca re l e s s

a s P e r e z A l f o n s o was p r ec i s e . H e l o v e d s p e a k i n g t o c r o w d s ,

t h o u g h h e w a s p e r s o n a l l y shy; a n d w h e n h e was s p e a k i n g ,

h e w o u l d d r u m o u t , " A r a m c o — i s — s t e a l i n g , A r a m c o — i s

— s t e a l i n g , " a n d t h e n w o u l d r a t t l e o f f s tat is t ics . T h e s ta t is ­

tics b o r e n o p a r t i c u l a r r e l a t i o n s h i p t o r ea l i ty . " T h e y s o u n d

g o o d , n o ? " h e sa id . "So w h a t ? T h e oil i s o u r s . " T a r i k i l ived

a l o n e in J i d d a , in a h o u s e wi th a w a l l e d g a r d e n t h a t c o n ­

t a i n e d gaze l l e s , c h i c k e n s , t u r k e y s , a n d v a r i o u s l a m e a n i ­

m a l s w h i c h h e n u r s e d . H i s Sa luk i d o g s h a d t h e r u n o f t h e

1 5 8 Adam Smith

h o u s e , a n d t h e Sa luk i s r e m a i n e d i n t h e i r c h a i r s e v e n w h e n

vis i tors e n t e r e d . T a r i k i was also a v io len t A r a b na t iona l i s t .

" I a m a n A r a b , n o t a S a u d i , " h e sa id .

T h e O d d C o u p l e f l e w t o g e t h e r f r o m c o u n t r y t o c o u n t r y ,

p r e a c h i n g , " U n i t e a n d c o n t r o l , c o n s e r v e a n d c u t back , "

a n d t h e y spe l l ed o u t t h e i r p l a n in, o f all p l aces , T y l e r ,

T e x a s , i n t h e s p r i n g o f 1960 . T h e T e x a s I n d e p e n d e n t

P r o d u c e r s c o n v e n t i o n l i s t ened w i t h a t t e n t i o n a n d skep t i ­

c i sm.

S i t t i ng i n his e l e g a n t b o a r d r o o m in Rocke fe l l e r C e n t e r

i n N e w Y o r k , M o n r o e R a t h b o n e m u s t h a v e h e a r d t h e

s o u n d s o f t h e O d d C o u p l e a s t h a t o f two a n n o y i n g m o s ­

q u i t o e s . " J a c k " R a t h b o n e was t h e h e a d o f E x x o n — E s s o , a s

i t was t h e n c a l l e d — a n d all h e c o u l d see , t h a t s u m m e r o f

1960 , was t h e G lu t . T h e R u s s i a n s w e r e se l l ing oil ; t h e I ta l ­

i ans w e r e se l l ing oil; o d d t a n k e r s e v e r y w h e r e w e r e d u m p ­

i n g t h e s tu f f for w h a t e v e r i t w o u l d b r i n g .

Petroleum Week, w h e r e W a n d a t h e n w o r k e d as a s e n i o r

e d i t o r , s m e l l e d a p r i c e c u t c o m i n g a n d said t h e r e w o u l d b e

a n u p r o a r .

A c o u p l e o f E x x o n d i r e c t o r s , H o w a r d P a g e a n d Wi l l i am

Sto t t , w a r n e d t h a t t h e b u d g e t s o f a lot o f c o u n t r i e s w e r e

b a s e d on t h e oil p r i ce .

J a c k R a t h b o n e was a c h e m i c a l e n g i n e e r , l ike m o s t o f t h e

E x x o n b o a r d , n o t a d i p l o m a t . T h e t o p r a n k s o f E x x o n

c a m e f r o m t h e " E x x o n A c a d e m y , " t h e g r e a t r e f i ne ry a t

B a t o n R o u g e .

E x x o n c u t t h e p r i c e , w i t h o u t ca l l ing u p a n y o f t h e p r o ­

d u c i n g c o u n t r i e s , a s was t h e t r a d i t i o n i n t h o s e d a y s . T h e

o t h e r oil c o m p a n i e s fo l lowed .

T h e b u d g e t s o f t h e M i d d l e E a s t e r n c o u n t r i e s w e n t o u t

t h e w i n d o w s , wi th a c l a m o r f r o m t h o s e c o u n t r i e s . T h e e n ­

t i re a t m o s p h e r e i n t h e M i d d l e Eas t was t r a n s f o r m e d . T h e

O d d C o u p l e ' s p r e a c h i n g s w e r e r eca l l ed . T a r i k i cal led a

m e e t i n g i n B a g h d a d for S e p t e m b e r 9 , 1960 .

P A P E R M O N E Y 1 5 9

T h e p r i c e c u t was s e r i o u s for I r a n , w i t h its g r o w i n g p o p ­

u l a t i o n , a n d for S a u d i A r a b i a , w h i c h was p l a n n i n g a

m a j o r p r o g r a m o f social se rv ices .

F i f t een y e a r s l a te r , t h e S h a h o f I r a n r e c a l l e d t h e m o ­

m e n t t o t h e Br i t i sh j o u r n a l i s t A n t h o n y S a m p s o n . " E v e n i f

t h e p r i c e c u t was basical ly s o u n d , " h e sa id , "it c o u l d n o t b e

a c c e p t a b l e t o u s a s l o n g a s i t was t a k e n w i t h o u t o u r c o n ­

s e n t . " H e h a d b e e n a n g r y , a n d n o t a t all c o n f i d e n t o f t h e

p o w e r o f t h e oil p r o d u c e r s . " W e w e r e j u s t w a l k i n g i n t h e

mis t . N o t in t h e d a r k , b u t i t was a lit t le mis ty . T h e r e was

still t h a t c o m p l e x o f t h e b ig p o w e r s , a n d t h e mys t ica l

p o w e r a n d all t h e m a g i c b e h i n d t h e n a m e o f all t h e s e b i g

c o u n t r i e s . "

W i t h t h e O d d C o u p l e a s m i l i t a n t h o s t s , f i v e n a t i o n s —

S a u d i A r a b i a , I r a n , I r a q , K u w a i t , a n d V e n e z u e l a — m e t i n

B a g h d a d a n d d e c l a r e d t h e b i r t h o f O P E C , t h e O r g a n i z a ­

t i on o f P e t r o l e u m E x p o r t i n g C o u n t r i e s , " a c a r t e l t o c o n ­

f r o n t t h e c a r t e l , " sa id o n e d e l e g a t e .

" W e h a v e f o r m e d a v e r y exc lus ive c l u b , " said J u a n P a b l o

P e r e z A l f o n s o . " B e t w e e n u s w e c o n t r o l n i n e t y p e r c e n t o f

c r u d e e x p o r t s t o w o r l d m a r k e t s , a n d w e a r e n o w u n i t e d .

W e a r e m a k i n g h i s t o r y . "

T h a t was c o n s i d e r e d s o i m p o r t a n t b y t h e p r e s s o f t h e

w o r l d t h a t i t was b a r e l y r e p o r t e d a t all. F o r t h e g r e a t e v e n t

o f S e p t e m b e r 9 , R e u t e r s m u s t e r e d u p a d i s p a t c h o n S e p ­

t e m b e r 2 4 . The New York Times p u b l i s h e d a b a c k - p a g e s q u i b

o n S e p t e m b e r 2 5 .

T h e O P E C d e c l a r a t i o n o f i n d e p e n d e n c e r i n g s wi th t h e

i n d i g n a t i o n o f t h e co lon i s t s d u m p i n g t h e t ea i n t o t h e h a r ­

b o r , b u t h e r e t h e excesses o f M a d K i n g G e o r g e a r e t h o s e

o f t h e oil c o m p a n i e s . O P E C , says its f i r s t w o r d s , c a n n o

l o n g e r " r e m a i n i n d i f f e r e n t t o t h e a t t i t u d e h e r e t o f o r e

a d o p t e d b y t h e oil c o m p a n i e s . " I t d e m a n d e d t h a t t h e c o m ­

p a n i e s " m a i n t a i n t h e i r p r i ce s s t e a d y , " i n fact, " r e s t o r e

p r i ces t o t h e levels p r e v a i l i n g b e f o r e t h e r e d u c t i o n s . "

T h o s e r e d u c t i o n s w e r e 9 c e n t s a b a r r e l , an a m o u n t t h a t

1 6 0 Adam Smith

w o u l d l a t e r s e e m l u d i c r o u s l y sma l l . B u t s o was t h e t a x o n

t h e tea a t B o s t o n h a r b o r .

Oi l , sa id t h e newly b o r n c a r t e l , was n e e d e d t o f i n a n c e

d e v e l o p m e n t a n d b a l a n c e b u d g e t s ; i t was a d e p l e t i n g asset

a n d h a d t o b e r e p l a c e d b y o t h e r asse ts .

L a t e r t h e r h e t o r i c was t o g e t m o r e s t r i d e n t , w i t h m o r e

ta lk o f co lon ia l i sm a n d g r i e v a n c e s a n d t h e T h i r d W o r l d

a n d i n d e p e n d e n c e . I n t h e b e g i n n i n g O P E C w a n t e d t h e

p r i c e t o g o back t o w h e r e i t h a d b e e n b e f o r e t h e E x x o n

b o a r d cu t it.

I f t h e A m e r i c a n pub l i c s l u m b e r e d t h r o u g h th is m o m e n ­

t o u s b e g i n n i n g , i t c a n h a r d l y be b l a m e d for its lack o f

a w a r e n e s s . I ts p r e s i d e n t i a l c a n d i d a t e s , R i c h a r d N i x o n a n d

J o h n F . K e n n e d y , w e r e v i g o r o u s l y d e b a t i n g t h e s t a tus o f

t w o t iny i s l ands off t h e coas t o f C h i n a , ca l led Q u e m o y a n d

M a t s u .

T h e oil c o m p a n i e s w e r e t r y i n g t o t h i n k u p m o r e ways t o

sell p e t r o l e u m p r o d u c t s , t o b u r n off w h a t Fortune h a d

ca l led t h e G l u t W i t h o u t E n d .

"We Have Formed a Very Exclusive Club"

" W e h a v e f o r m e d a ve ry exc lus ive c l u b , " said J u a n Pab lo

P e r e z A l f o n s o . T h a t i s exac t ly w h a t O P E C was , a n d is: a

C l u b .

W h a t w e r e t h e qua l i f i ca t ions for m e m b e r s h i p ? O b ­

vious ly , t o b e i n t h e O r g a n i z a t i o n o f P e t r o l e u m E x p o r t i n g

C o u n t r i e s , y o u h a d t o b e a P e t r o l e u m E x p o r t i n g C o u n t r y .

T h e o r i g i n a l l a n g u a g e said a c o u n t r y wi th "a subs t an t i a l

n e t e x p o r t " o f oil. T h e s e c o n d c r i t e r i o n was t h a t t h e a p p l i ­

c a n t h a v e " f u n d a m e n t a l l y s imi l a r i n t e r e s t s " t o t h o s e o f t h e

m e m b e r s . So i t was n o t j u s t any P e t r o l e u m E x p o r t i n g

C o u n t r y t h a t c o u l d b e c o m e a m e m b e r . C a n a d a a n d t h e

Sovie t U n i o n w o u l d n o t d o , f o r d i f f e r e n t r e a s o n s . B o t h

l a c k e d " s imi l a r i n t e r e s t s " t o t h e m e m b e r s .

P A P E R M O N E Y 1 6 1

O P E C ' s r u l e s w e r e t ha t a n a p p l i c a n t h a d t o b e a c c e p t e d

by t h r e e - q u a r t e r s o f t h e Ful l M e m b e r s , b u t a b lackba l l by

a n y F o u n d i n g M e m b e r w o u l d k e e p h i m o u t .

L ike a n y rea l ly exc lus ive c l u b , " f u n d a m e n t a l l y s imi la r

i n t e r e s t s " l a t e r b e g a n t o m e a n m o r e t h a n t h e c h a r t e r t i t le ,

" p e t r o l e u m e x p o r t i n g . " T h e s h e i k h d o m o f Q a t a r , n o t a

" s u b s t a n t i a l n e t e x p o r t e r , " was t o b e a d m i t t e d , a s was t h e

smal l W e s t A f r i c a n c o u n t r y o f G a b o n , a lso n o t a s u b s t a n ­

tial e x p o r t e r . B u t t h e W e s t e r n H e m i s p h e r e i s l a n d s o f

T r i n i d a d a n d T o b a g o w e r e b l a c k b a l l e d ; t h e y d i d n o t h a v e

" f u n d a m e n t a l l y s imi la r i n t e r e s t s . "

O P E C b e g a n wi th a n office i n G e n e v a . T h e Swiss t r e a t e d

i t a s a C l u b a n d n o t a s an i n t e r n a t i o n a l o r g a n i z a t i o n : " t h e

Swiss g o v e r n m e n t , " O P E C ' s s e c r e t a r y , A b d u l A m i r K u b -

b a h p r o t e s t e d , " c o n s i d e r e d t h a t O P E C ' s objec t ive was t o

d e f e n d t h e p r i v a t e a n d sole i n t e r e s t s o f its M e m b e r C o u n ­

t r ies a n d t h a t i t h a d n o i n t e r n a t i o n a l i n t e r e s t . " O P E C

w a n t e d t h e s t a tu s o f a n e m b a s s y : e x t r a t e r r i t o r i a l i t y , im­

m u n i t y f r o m legal p r o c e s s , f r e e d o m f r o m c u s t o m s a n d

t a x e s , t h e r i g h t t o h a v e c o d e s a n d c o u r i e r s a n d c o m m i s s a r ­

ies. T h e A u s t r i a n s g r a n t e d th i s , a n d i n 1965 t h e C l u b

m o v e d t o V i e n n a , t o a b u i l d i n g ca l led T e x a c o H a u s , a f t e r

its p r i n c i p a l t e n a n t .

T h r e e o f t h e f i v e F o u n d i n g M e m b e r s — t h o s e wi th t h e

c h a r t e r p r i v i l e g e o f b l a c k b a l l — w e r e A r a b s t a t e s , a s w e r e ,

e v e n t u a l l y , s e v e n o f t h e twe lve Ful l M e m b e r s . A n d whi le

t h e A r a b s ta tes l a t e r f o r m e d O A P E C , t h e O r g a n i z a t i o n o f

A r a b P e t r o l e u m E x p o r t i n g C o u n t r i e s , a s a n a d j u n c t t o

O P E C , t h e r e h a s n e v e r b e e n m u c h q u e s t i o n o f s o m e as­

pec t s o f w h a t " f u n d a m e n t a l l y s imi l a r i n t e r e s t s " m e a n s .

T o s h o w t h a t i t was a g o o d m e m b e r , w i th " f u n d a m e n ­

tally s imi l a r i n t e r e s t s , " V e n e z u e l a a n n o u n c e d r i g h t away

t h a t i t w o u l d n o t sell oil to I s r ae l .

O P E C h a d an office, a s t r u c t u r e , a p r o c e d u r e fo r m e e t ­

i ngs . I t c o m m i s s i o n e d a s t u d y on p r i c i n g by t h e c o n s u l t i n g

1 6 2 Adam Smith

f i r m o f A r t h u r D . Li t t le . I n 1962 A b d u l l a h T a r i k i was

f i r e d a n d to ld t o leave S a u d i A r a b i a . T h e S a u d i roya l f am­

ily d i d n o t a p p r e c i a t e his a d m i r a t i o n for E g y p t ' s G a m a l

N a s s e r , o r his r ad i ca l i sm . H e was r e p l a c e d b y S h e i k h

A h m e d Zaki Y a m a n i , w h o was o n l y t h i r t y - t w o a t t h e t i m e .

T a r i k i w e n t t o C a i r o a n d b e c a m e a c o n s u l t a n t .

Y a m a n i was less r ad ica l , less a b r a s i v e , m u c h m o r e t o t h e

l ik ing o f t h e W e s t e r n i n t e r e s t s . T h e son o f a j u d g e i n

Mecca , h e h a d b e e n e d u c a t e d i n C a i r o , a n d a t N e w Y o r k

U n i v e r s i t y a n d H a r v a r d . H i s n e a t , p o i n t e d b e a r d was like

t h a t o f a n o p e r a s ta r . H e was t o b e c o m e t h e f i r s t g r e a t

i n t e r n a t i o n a l c o n t e m p o r a r y oil ce lebr i ty .

J u a n P a b l o P e r e z A l f o n s o s t e p p e d d o w n a s oil m i n i s t e r

w h e n B e t a n c o u r t left office in V e n e z u e l a , b u t his s taff r e ­

m a i n e d in p l ace , a n d P e r e z A l f o n s o b e c a m e t h e eminence

grise o f V e n e z u e l a n oil pol icy. He c o n t i n u e d to h o l d p r e s s

c o n f e r e n c e s , t o scold t h e g o v e r n m e n t fo r b e i n g t oo lax

wi th t h e oil c o m p a n i e s , a n d t o l ead t h e n e x t wave o f t ax

r e f o r m .

B u t a s fo r O P E C , i t was n o T e x a s R a i l r o a d C o m m i s s i o n .

P r o d u c t i o n p r o g r a m m i n g i n oil i s an e n o r m o u s l y c o m p l e x

p r o c e s s , r e q u i r i n g s o p h i s t i c a t e d m a r k e t analys is a n d a will­

i n g n e s s t o c o m p r o m i s e . T h e O P E C S e c r e t a r i a t t r i ed two

p l a n s o f p r o r a t i o n i n g — c u t b a c k a n d c o n t r o l — a n d got n o ­

w h e r e . T h e S a u d i s , i n p a r t i c u l a r , said a n y s u c h s c h e m e

v io la ted t h e i r s o v e r e i g n t y . T h e c l e rk s i n V i e n n a , t h e y sa id ,

c o u l d d o w h a t t h e y w a n t e d ; c l e rk s d i d n o t d i c t a t e t o t h e

roya l family. T h e I r a q i s q u a r r e l e d wi th t h e I r a n i a n s , t h e

I r a n i a n s wi th t h e S a u d i s . T h e Kuwai t i s w e r e su sp i c ious o f

t h e I r a q i s , w h o c l a i m e d , i n fact, o w n e r s h i p o f K u w a i t . T h e

I r a n i a n s a n d t h e S a u d i s p a s s e d V e n e z u e l a a s t h e w o r l d ' s

l e a d i n g oil e x p o r t e r s .

J u a n P a b l o P e r e z A l f o n s o c o m p l a i n e d t h a t V e n e z u e l a n

l e a d e r s h i p a n d in f luence i n O P E C was d e c l i n i n g , a n d t h a t

t h e A r a b s w e r e c o n t e m p t u o u s o f V e n e z u e l a . Oi l , h e in­

s is ted , h a d a n in t r ins ic v a l u e , a n d t h e i n d u s t r i a l n a t i o n s

w o u l d s o o n rea l ize it.

P A P E R M O N E Y 1 6 3

B u t t h e p r i c e o f oil d i d n o t go u p ; in fact, i t d e c l i n e d , all

t h r o u g h t h e 1960s . T h e " p o s t e d p r i c e " o f $ 1 . 8 0 a b a r r e l i n

t h e P e r s i a n G u l f was fo r t a x p u r p o s e s ; s o m e t i m e s t h e oil

was d i s c o u n t e d to as low as $1 a b a r r e l . B e h i n d t h e " invis­

ible d i k e , " i n T e x a s , oil so ld , a t t h e e n d o f t h e d e c a d e , fo r

$ 3 . 4 5 a b a r r e l .

A c o n t r i b u t i n g fac to r t o t h e d e c l i n i n g p r i c e o f M i d d l e

E a s t e r n oil was t h e i m p r o v e d ways o f c a r r y i n g it. T h e t a n k ­

e r s i n t h e m i d d l e 1950s h a d b e e n p e r h a p s 2 0 , 0 0 0 t o n s .

J a p a n e s e s h i p y a r d s t h e n d e v e l o p e d t h e j u m b o t a n k e r , a n d

t h e n t h e V L C C s u p e r t a n k e r , 2 5 0 , 0 0 0 t o n s , w h i c h s h a r p l y

r e d u c e d t h e cost o f oil a s i t l a n d e d a t t h e r e f i n e r i e s .

I t t o o k t w o w a r s , a g r a d u a l c h a n g e i n e n e r g y h a b i t s , a n d

a F r e n c h b u l l d o z e r t o b r i n g a b o u t t h e c o n t r o l f i r s t env i s ­

a g e d b y P e r e z A l f o n s o .

T h e c h a n g e i n e n e r g y h a b i t s was f r o m coal t o oil, a n d

n o w o n d e r . Coa l was b u l k y , h a r d t o t r a n s p o r t , a n d left

i r r i t a n t s i n t h e a t m o s p h e r e w h e n b u r n e d . M i n i n g i t was a n

u n p l e a s a n t a n d h a z a r d o u s task , w h e t h e r i n P e n n s y l v a n i a

o r W a l e s o r L o r r a i n e , a n d t h e r e was a lways t r o u b l e wi th

t h e m i n e r s .

T h e a u t o m o b i l e p o p u l a t i o n o f t h e w o r l d was i n c r e a s i n g

g e o m e t r i c a l l y , a s i f t h e i d e a o f b i g g e r fami l ies h a d also

s p r e a d t o veh ic le s .

I n 1940 coa l a c c o u n t e d fo r t w o - t h i r d s o f t h e w o r l d ' s

e n e r g y . In 1 9 7 0 i t p r o v i d e d less t h a n a t h i r d . In t h e U n i t e d

S ta tes coal a s a p e r c e n t a g e o f to ta l e n e r g y c o n s u m p t i o n

d r o p p e d f r o m 4 7 . 2 p e r c e n t t o 18.6 p e r c e n t i n t h e s a m e

p e r i o d .

All d u r i n g t h e 1960s , O P E C a n d t h e s even g r e a t oil

c o m p a n i e s s q u a b b l e d o v e r a few c e n t s a b a r r e l . T h e S h a h

d e v e l o p e d a m a j o r s p e n d i n g p r o g r a m a n d n e e d e d m o r e

r e v e n u e t o s u p p o r t it. T h e S a u d i s e y e d his p r o g r a m n e r ­

vous ly . D u r i n g t h e Six Day W a r , i n 1 9 6 7 , t h e A r a b s set u p

a boyco t t , a n d t h e S u e z C a n a l was c lo sed . T h e b o y c o t t was

re la t ive ly ine f fec t ive . T h e e n d o f t h e Six D ay W a r left

O P E C s t a n d i n g , b u t i n t a t t e r s ; t h e I r a n i a n s a n d t h e V e n e -

1 6 4 Adam Smith

z u e l a n s h a d i n c r e a s e d t h e i r e x p o r t s a t t h e e x p e n s e o f t h e

A r a b s .

I n t h e U n i t e d S ta tes , i n t h e e a r l y 1960s , t h e r a t e o f infla­

t ion was a b o u t 1 p e r c e n t a y e a r .

The Balance Tips

I f t h e w o r l d ' s oil p r o d u c e r s w e r e s q u a b b l i n g , t h e U n i t e d

S ta t e s h a d a c u s h i o n : t h e e x t r a d a y s p e r m o n t h t h a t t h e

T e x a s R a i l r o a d C o m m i s s i o n sa id n o t t o p u m p . T h e n oil

was d i s c o v e r e d i n t h e N o r t h Sea , a n d t h e i n d e p e n d e n t oil

p r o d u c e r s w h o h a d f o u n d oil i n L ibya m a d e f u r t h e r h a n d ­

s o m e d i s cove r i e s t h e r e . Slowly, l ike t h e f i r s t t r e m o r s o f a n

e a r t h q u a k e , t h e b a l a n c e b e g a n t o c h a n g e . T h e r e w e r e

s t r ay fac to rs n o t easily i n t e g r a t e d : m o r e wells t h a t c a m e u p

d r y . A m e r i c a n oil p r o d u c t i o n was p e a k i n g . T h e r e w e r e

m o r e d r y h o l e s — o r less prol i f ic o n e s — i n Libya a n d Al­

g e r i a . T h o s e c o u n t r i e s b e g a n t o c o n s i d e r t h e w a s t i n g asset

m o r e se r ious ly .

T h e S u e z C a n a l was c lo sed , b u t t h e r e was a p i p e l i n e

f r o m t h e g r e a t S a u d i f i e l d s t o t h e L e b a n e s e t o w n o f S i d o n

as well as t h e s u p e r t a n k e r s l i f t ing oil in t h e P e r s i a n Gulf.

A n d t h e r e was Libya, r i g h t a c r o s s t h e M e d i t e r r a n e a n f r o m

E u r o p e — n o c a n a l n e c e s s a r y , n o s u p e r t a n k e r s n e c e s s a r y .

L ibya was s u p p l y i n g a q u a r t e r o f E u r o p e ' s oil.

T h e U n i t e d S ta tes was p r e o c c u p i e d wi th V i e t n a m .

W i t h i n a t w e l v e - m o n t h p e r i o d t h e b a l a n c e h a d t i p p e d ,

a n d yet v e r y few n o t i c e d .

On S e p t e m b e r 1 , 1969 , a r ad i ca l c o l o n e l in Libya ,

M u a m m a r e l - Q a d d a f i , se ized p o w e r f r o m K i n g I d r i s , w h o

h a d g r a n t e d t h e c o n c e s s i o n s t o t h e oil c o m p a n i e s . Libya

h a d a l a r g e f o r e i g n - e x c h a n g e s u r p l u s f r o m se l l ing its oil .

I t was u n d e r n o f i n a n c i a l p r e s s u r e . T h e n e w p r i m e m i n i s ­

t e r , S u l e i m a n M a g h r e b i , h a d a P h . D . f r o m G e o r g e W a s h ­

i n g t o n U n i v e r s i t y , h a d w o r k e d a t o n e t i m e a s a l a w y e r fo r

P A P E R M O N E Y 1 6 5

E x x o n , a n d h a d e v e n b e e n i n j a i l f o r o r g a n i z i n g a n oil

w o r k e r s ' s t r i ke . C o l o n e l Q a d d a f i d e c i d e d t o t a k e o n t h e

W e s t e r n oil c o m p a n i e s , b o t h a s a n i deo log ica l m o v e a n d a s

a f i nanc i a l o n e . He m a d e no i s e s a b o u t a d e a l wi th t h e

R u s s i a n s .

In M a y 1 9 7 0 a F r e n c h b u l l d o z e r on a j o b in Syr ia acci­

d e n t a l l y b r o k e t h e " T a p l i n e , " t h e T r a n s - A r a b i a n P i p e l i n e

r u n n i n g t o t h e M e d i t e r r a n e a n . T h e S y r i a n s r e f u s e d t o r e ­

p a i r i t u n t i l t h e y g o t h i g h e r t r a n s m i s s i o n fees . T h e N i g e ­

r i a n s w e r e in a civil w a r , w i t h t h e i r o w n oil p r o v i n c e o f

B ia f r a t h e c h i e f b a t t l e g r o u n d , a n d N i g e r i a n p r o d u c t i o n

was off. S u d d e n l y — o r w h a t s e e m e d s u d d e n l y — t h e c u s h ­

ion was g o n e . T h e r e was still n o s h o r t a g e o f oil i n t h e

w o r l d , b u t pol i t ica l e v e n t s h a d i n t e r r u p t e d t h e d e l i v e r y o f

oil .

T h e n e w r e g i m e o f C o l o n e l Q a d d a f i c o n f r o n t e d t h e oil

c o m p a n i e s : i t w a n t e d a n e x t r a 4 0 c e n t s a b a r r e l , t o m a k e

u p fo r t h e c o n v e n i e n c e o f d e l i v e r y t o E u r o p e t h e c o m p a ­

n ies e n j o y e d f r o m Libya . T h e oil c o m p a n i e s o f f e r e d 5

c e n t s . T h e L i b y a n s l o o k e d o v e r t h e c o m p a n i e s t o w h i c h

t h e y h a d g i v e n oil c o n c e s s i o n s ; t h e m o s t success fu l o f t h e

i n d e p e n d e n t s was O c c i d e n t a l , w h o s e s t r ikes h a d m a d e i t

t h e b i g g e s t p r o d u c e r i n L ibya . M o s t o f O c c i d e n t a l ' s oil

w e n t t o E u r o p e , i n c o m p e t i t i o n wi th t h e S e v e n S i s te r s . T h e

L i b y a n s d e c i d e d t o p ick of f t h e c o m p a n i e s o n e b y o n e . I n

t h e f a m i l i a r n a m e o f c o n s e r v a t i o n , C o l o n e l Q a d d a f i o r ­

d e r e d O c c i d e n t a l ' s p r o d u c t i o n c u t b a c k . O c c i d e n t a l w e n t

t o E x x o n a n d a s k e d w h e t h e r E x x o n w o u l d s u p p l y it,

r o u g h l y a t cos t , f r o m e l s e w h e r e i n t h e w o r l d i f O c c i d e n t a l

r e s i s t ed t h e L i b y a n d e m a n d s . E x x o n o f f e r e d a h i g h e r ,

t h i r d - p a r t y p r i c e , b u t t u r n e d O c c i d e n t a l d o w n o n t h e d e a l

i t p r o p o s e d . O c c i d e n t a l h a d n o o t h e r m a j o r s o u r c e o f

c r u d e , a n d i t t h e n c a p i t u l a t e d t o t h e L i b y a n s .

W e k n o w th i s h i s t o r y b e t t e r t h a n w e n o r m a l l y w o u l d

b e c a u s e o f t h e e x t r a o r d i n a r y h e a r i n g s c o n d u c t e d i n 1974

b y t h e s u b c o m m i t t e e o f t h e S e n a t e F o r e i g n R e l a t i o n s C o m -

1 6 6 Adam Smith

m i t t e e c h a i r e d b y S e n a t o r F r a n k C h u r c h . Shel l r e s i s t ed t h e

L i b y a n s ; its p r o d u c t i o n was c u t off. Shel l ' s c h a i r m a n was a

p rec i se ly a r t i c u l a t e , m o n o c l e - w e a r i n g Br i t i sh a r i s t o c r a t , Sir

D a v i d B a r r a n . " O u r c o n c l u s i o n , " h e w r o t e l a t e r t o S e n a t o r

C h u r c h , "was t h a t s o o n e r o r l a t e r we , b o t h oil c o m p a n y

a n d c o n s u m e r , w o u l d h a v e t o face a n a v a l a n c h e o f esca la t ­

i n g d e m a n d s f r o m p r o d u c e r g o v e r n m e n t s , a n d t h a t w e

s h o u l d a t least t ry to s t e m t h e a v a l a n c h e . "

T h e oil c o m p a n i e s m e t a t t h e S ta t e D e p a r t m e n t i n

W a s h i n g t o n t o see w h a t s u p p o r t t h e y c o u l d m u s t e r . T h e

c o m p a n i e s w e r e a s t o n i s h e d t o f i n d t h e S ta te D e p a r t m e n t

o p e n i n g t h e d i scuss ion b y b r i n g i n g u p t h e p l i gh t o f t h e

Pa l e s t i n i ans , w h i c h s e e m e d i r r e l e v a n t , b u t w h i c h was p a r t

o f t h e r ad i ca l L ibyan r h e t o r i c . T h e S ta t e D e p a r t m e n t was

n o t e a g e r t o s u p p o r t t h e oil c o m p a n i e s . I t was t r y i n g t o

r e e s t ab l i sh r e l a t i o n s wi th t h e A l g e r i a n s , n e x t d o o r t o

Libya , a n d t o o b t a i n a s u p p l y o f A l g e r i a n n a t u r a l gas . T h e

L i b y a n s , said J a m e s A k i n s , t h e S ta t e D e p a r t m e n t ' s oil e x ­

p e r t , w e r e " c o m p e t e n t m e n i n a s t r o n g pos i t i on , w h o

p l a y e d t h e i r h a n d s t r a i g h t , a n d f o u n d i t a w i n n i n g o n e . "

T h e i r d e m a n d s , said A k i n s , w e r e r e a s o n a b l e . O n e b y o n e

t h e oil c o m p a n i e s c a p i t u l a t e d . T h e f i r s t r o l l i n g rocks o f t h e

a v a l a n c h e w e r e i n m o t i o n . T h e g a m e o f L e a p f r o g i n oil

p r i ce s , w h i c h i s still g o i n g o n , b e g a n .

" T h e L i b y a n success was a n e m b a r r a s s m e n t t o o t h e r

O P E C c o u n t r i e s , " w r o t e A b d u l A m i r K u b b a h . O P E C , said

K u b b a h , h a d b e e n t o o m o d e r a t e . " W e w a s t e d t e n y e a r s ,

n o t fo l lowing w h a t o u r V e n e z u e l a n f r i e n d s h a d to ld u s , "

said K u b b a h . " N o w C o l o n e l Q a d d a f i h a d s h o c k e d u s i n t o

ac t i on . "

T h e S h a h o f I r a n was m i f f e d a t t h e L ibyan in i t ia t ive .

A m o n g his o w n sel f -given ti t les w e r e S h a h a n s h a h , K i n g o f

K i n g s , S h a d o w o f G o d o n E a r t h ; a n d h e r e was a n u p s t a r t

co lone l l e a d i n g t h e C l u b . H i s p o w e r i n t h e a r e a , h e sa id ,

was t en t i m e s , n o , t w e n t y t i m e s a s g r e a t a s t h a t o f t h e

Br i t i sh h a d e v e r b e e n . H e w a r n e d t h e c o n s u m i n g c o u n -

P A P E R M O N E Y 1 6 7

t r i es n o t t o ge t t o g e t h e r b e h i n d t h e i r oil c o m p a n i e s ; h e

w a r n e d t h e oil c o m p a n i e s n o t t o ge t t o g e t h e r t o d e f e a t t h e

l e g i t i m a t e d e m a n d s o f t h e p r o d u c e r s . T h e c o m p a n i e s , h e

sa id , w o u l d n o w n e g o t i a t e w i th t h e P e r s i a n G u l f s t a tes .

T h a t way h e , t h e S h a h a n s h a h , c o u l d r e s t r a i n t h e "wi ld

m e n " o f O P E C . T h e "wild m e n , " I r a q a n d A l g e r i a a m o n g

t h e m , w e r e a l r e a d y l e a p f r o g g i n g t h e i r p r i c e s t o m a t c h

t h o s e o f t h e L i b y a n s . W h e n O P E C m e t i n C a r a c a s i n D e ­

c e m b e r , t h o u g h , t h e r e was lit t le d i f f e r e n c e b e t w e e n t h e

"wi ld m e n " a n d t h e " m o d e r a t e s . " A m o n t h l a t e r t h e oil

c o m p a n i e s m e t t h e P e r s i a n G u l f s t a tes i n T e h r a n .

T h e S h a h c o u l d see t h a t t h e Br i t i sh a n d A m e r i c a n gov­

e r n m e n t s h a d left t h e oil c o m p a n i e s w i t h o u t d i p l o m a t i c

s u p p o r t , a n d h e was a g r i m l y d e t e r m i n e d hos t . T h e Lib­

yans h a d f o u n d t h e way t o t r a n s f e r t h e w e a l t h o f t h e

w o r l d ; t h e y h a d u s e d a temporary m a r k e t c o n d i t i o n to kick

u p t h e p r i c e s . T h e o r e t i c a l l y , t h e T a p l i n e b r e a k was t e m ­

p o r a r y , t h e N i g e r i a n civil w a r was t e m p o r a r y , t h e S u e z

C a n a l c l o s i n g was t e m p o r a r y , a n d e v e n t h e E u r o p e a n d e ­

m a n d i n t h e s u m m e r o f 1970 s e e m e d t e m p o r a r i l y a b o v e

n o r m a l . T h e A m e r i c a n s c o u l d b e c o m p l a c e n t , e v e n s h o r t ­

s i g h t e d , b e c a u s e a l m o s t all o f t h e i r oil a t t h a t t i m e c a m e

f r o m t h e W e s t e r n H e m i s p h e r e : f r o m t h e i r o w n oil s ta tes ,

a n d f r o m C a n a d a a n d V e n e z u e l a . O n l y 3 p e r c e n t c a m e

f r o m t h e M i d d l e Eas t . T h e L i b y a n s h a d also s h o w n t h a t a

" n e g o t i a t i o n " b e t w e e n s t r o n g p r o d u c e r s a n d d i v i d e d c o n ­

s u m e r s sca rce ly h a d to be a n e g o t i a t i o n a t all; i t was t h e

exac t r e v e r s e o f t h e oil s i t ua t i on P e r e z A l f o n s o h a d f o u n d

w h e n h e first go t e l e c t e d t o C o n g r e s s i n V e n e z u e l a , w h e n

t h e oil c a r t e l d i c t a t e d t h e p r i c e s . T h e S h a h said t h a t t h e

p r o p e r p r i c e fo r oil was p e r h a p s ten times t h e c u r r e n t p r i c e ,

w h i c h w o u l d b r i n g i t t o t h e level o f t h e p r i c e o f a l t e r n a t i v e

fuels .

T h e oil c o m p a n i e s qu i e t l y g o t t o g e t h e r i n N e w Y o r k t o

r e h e a r s e s o m e s t r a t e g y , t o g e t h e r w i th t h e i r r ivals , t h e in­

d e p e n d e n t s , a n d t h e G e r m a n , S p a n i s h , J a p a n e s e , F r e n c h ,

1 6 8 Adam Smith

a n d B e l g i a n oil c o m p a n i e s . T h e tex t s en t t o O P E C b y t h e

oil c o m p a n i e s h a d , c o n s i d e r i n g t h e o ld h i s to ry o f t h e oil

c a r t e l , an i r o n i c twist: i t sa id t h a t t h e oil c o n s u m e r s a n d

p r o d u c e r s b o t h n e e d e d stabil i ty, a n d th is b u s i n e s s o f L e a p ­

f r o g was v e r y u n s t a b l e ; O P E C s h o u l d act t o g e t h e r a n d

b i n d its m e m b e r s ! T h e c o m p a n i e s d i d n o t w a n t t o h a v e

two sets o f n e g o t i a t i o n s a s t h e S h a h s u g g e s t e d ; t h e y f e a r e d

a n o t h e r r o u n d o f L e a p f r o g . A S ta t e D e p a r t m e n t s p o k e s ­

m a n , J o h n I r w i n , was s e n t t o T e h r a n t o e x p l a i n w h y t h e

oil c o m p a n i e s w e r e g e t t i n g t o g e t h e r a n d w h y t h e y s h o u l d

h a v e o n l y a s ing le n e g o t i a t i o n . T h e S h a h t a l k e d I r w i n o u t

o f it; t h e c o m p a n i e s h a d n o c h o i c e t h e n b u t t o follow t h e

S h a h ' s p l a n .

T h e oil c o m p a n i e s w e r e n o t u s e d t o a c t i n g i n c o n c e r t ,

e v e n t h o u g h t h e y h a d o n c e b e e n a p o w e r f u l ca r t e l . T h e y

h a d t o o b t a i n a J u s t i c e D e p a r t m e n t a n t i t r u s t w a i v e r j u s t t o

b e ab le t o talk t o o n e a n o t h e r . T e n t a t i v e l y t h e y d i s cus sed

c o o p e r a t i o n a n d a "safe ty n e t . " S o t h e y r a n g e d a l o n g o n e

s ide o f t h e tab le i n T e h r a n , t h e S e v e n Sis ters , l ed b y L o r d

S t r a t h a l m o n d , m o r e fami l ia r ly k n o w n i n t h e oil i n d u s t r y

a s Billy F r a s e r , t h e p o p u l a r , g r e g a r i o u s d i r e c t o r o f Br i t i sh

P e t r o l e u m , w h o s e f a t h e r h a d m a d e a n oil f o r t u n e i n I r a n .

O n t h e o t h e r s ide o f t h e t ab le was a f o r m i d a b l e n e g o t i a t i n g

t e a m r e p r e s e n t i n g c o u n t r i e s , n o t c o m p a n i e s : S h e i k h Zaki

Y a m a n i , N e w Y o r k U n i v e r s i t y a n d H a r v a r d , s m o o t h a n d

p o i s e d ; J a m s h i d A m o u z e g a r , a l e a n , c r a g g y , i r o n i c I r a n i a n

wi th B .A . a n d P h . D . d e g r e e s f r o m C o r n e l l ; a n d S a a d o u n

H a m m a d i , a n u n s m i l i n g , a u s t e r e I r a q i wi th a P h . D . f r o m

t h e U n i v e r s i t y o f W i s c o n s i n . T h e A m e r i c a n - e d u c a t e d

m e m b e r s o f t h e O P E C t e a m w e r e t h e i r r e s p e c t i v e c o u n ­

t r i es ' oil m i n i s t e r s .

T h e n e g o t i a t i o n s w e n t o n for t h i r t y - t h r e e d a y s . T h e oil

c o m p a n i e s m a d e t h e i r h e a d q u a r t e r s i n L o n d o n , i n Br i t i sh

P e t r o l e u m ' s s k y s c r a p e r , wi th m e s s a g e s g o i n g t o a n d f r o m

t h e i r f i e l d t e a m i n T e h r a n . A n d whi le t h e d i s cus s ions w e n t

bac k a n d f o r t h , O P E C h a d a t h r e a t t h a t its d e l e g a t e s w e r e

P A P E R M O N E Y 1 6 9

n o t a f r a i d to p u t f o r t h : i f i t d i d n o t ge t w h a t i t w a n t e d , i t

w o u l d s h u t o f f t h e oil . I t p r o m i s e d " c o n c e r t e d a n d s i m u l ­

t a n e o u s a c t i o n b y all m e m b e r c o u n t r i e s . "

"That was a s u r p r i s e , " said a Br i t i sh o b s e r v e r . " W e w e r e

u s e d t o t h e s e c h a p s a lways q u a r r e l i n g a m o n g t h e m s e l v e s ,

t h e I r a q i h o t h e a d s a n d t h e c o n s e r v a t i v e S a u d i s . T h e Wes t ­

e r n c o u n t r i e s w e r e n o t p r e p a r e d a t all fo r e c o n o m i c b lack­

m a i l . W e k n e w t h e I r a n i a n s w e r e s p e n d i n g t w e n t y p e r c e n t

m o r e t h a n t h e i r i n c o m e , s o t h e y h a d t o ge t a r a i s e , b u t w e

w e r e s u r p r i s e d a t h o w ve ry t o u g h all o f t h e m h a d b e ­

c o m e . "

T h o u g h t h e p a r l e y w e n t o n for t h i r t y - t h r e e d a y s , t h e

O P E C m e m b e r s ac tua l ly c a m e o u t w i t h a h i g h e r p r i c e p e r

b a r r e l t h a n t h e y h a d a s k e d fo r t h e f i r s t d a y . O P E C w o u l d

ge t a n o t h e r 5 0 c e n t s a b a r r e l . T h e c o m p a n i e s h o p e d t h e y

h a d w o n f i v e y e a r s o f p e a c e . B u t e v e n t h a t was f rag i le ; a

d o z e n y e a r s b e f o r e , a n A m e r i c a n l a w y e r , F r a n k H e n d r y x ,

h a d b e e n lega l a d v i s e r t o A b d u l l a h T a r i k i ' s d e p a r t m e n t

a n d h a d b r o u g h t u p t h e c o n c e p t i n W e s t e r n law t h a t sov­

e r e i g n g o v e r n m e n t s h a v e t h e r i g h t t o a b r o g a t e c o m m e r c i a l

c o n t r a c t s t h a t r u n c o u n t e r t o t h e l e g i t i m a t e i n t e r e s t s o f

t h e i r c i t i zens . E v e n a t t h a t t i m e t h e A r a b g o v e r n m e n t s

w e r e well a w a r e o f t h e p r i n c i p l e .

T h e a g r e e m e n t w a s s i g n e d o n F e b r u a r y 14, 1 9 7 1 . I t

m i g h t h a v e b e e n ca l led t h e St. V a l e n t i n e ' s Day M a s s a c r e .

T h e i m p o r t a n c e was n o t i n t h e 50 c e n t s a b a r r e l ; i t was

t h a t O P E C n o w d i c t a t e d t h e t e r m s .

T h e oil c o m p a n y t e a m s , w h o h a d felt , i n T e h r a n , t h a t

t h e y w e r e " b a r g a i n i n g i n f r o n t o f a l o a d e d g u n , " n o w h a d

t o g o t o L ibya for a n o t h e r r o u n d o f n e g o t i a t i o n s ; T e h r a n

h a d c o v e r e d o n l y t h e P e r s i a n G u l f n a t i o n s . T h e L i b y a n s

t h o u g h t t h a t O P E C h a d b e e n fa r t oo g e n t l e a t t h e St. Val ­

e n t i n e ' s D a y M a s s a c r e . E v e r y d a y t h e L i b y a n oil m i n i s t e r ,

E z z e d i n E l - M a b r u k , b e g a n wi th a n h o u r ' s h a r a n g u e o n t h e

s ins o f t h e W Test, its s u p p o r t f o r I s r a e l , its y e a r s o f e x p l o i ­

t a t i o n . W i t h t h e T a p l i n e w r e c k e d , E u r o p e was m o r e t h a n

1 7 0 Adam Smith

e v e r d e p e n d e n t o n Libya . M a b r u k said h e was a b o u t t o

t u r n of f t h e oil . " W e l ived f i v e t h o u s a n d y e a r s w i t h o u t it,

a n d we can c o n t i n u e to live w i t h o u t it," he sa id .

O n l y t h e o t h e r O P E C m e m b e r s s t o p p e d h i m f r o m ask­

i n g fo r an i n c r e a s e three times t h a t o f t h e o n e a g r e e d u p o n

i n T e h r a n . H e go t a b i g g e r o n e t h a n t h e G u l f s t a t e s , e v e n

so. T h e oil c o m p a n i e s w e n t h o m e . T h e y still h a d t h e t a n k ­

e r s , t h e r e f i ne r i e s , t h e p e t r o c h e m i c a l p l a n t s , a n d t h e f i l l i n g

s t a t i ons .

B u t t hey h a d lost c o n t r o l o f t h e oil.

Unite and control, c o n s e r v e a n d t h r e a t e n to c u t back . I t

w o r k e d ! I n C a r a c a s , P e r e z A l f o n s o r e a d t h e O P E C ac­

c o u n t s wi th s o m e sa t i s fac t ion .

I h a v e a r e a s o n for r e c i t i n g t h e a d v a n c e d d e g r e e s of

O P E C ' s n e g o t i a t o r s . T h e i m a g e o f t h e A r a b i n t h e W e s t

was t h a t o f t h e " r a g h e a d , " w a t e r i n g his c a m e l a n d l u s t i n g

a f t e r smal l boys . T h e Six Day W a r h a d p r o d u c e d t h e te le ­

vis ion i m a g e o f E g y p t i a n so ld i e r s r u n n i n g b ack t o E g y p t

b a r e f o o t t h r o u g h t h e s a n d . " E x x o n s e e m e d c e r t a i n t h e

A r a b s c o u l d n e v e r ge t t o g e t h e r , " a f o r m e r E x x o n e x e c u ­

tive r e c a l l e d . " T h e i r i m a g e o f t h e A r a b s s e e m e d a s t h o u g h

it was t a k e n f r o m t h e m o v i e Lawrence of Arabia."

B u t o n t h e o t h e r s ide o f t h e t ab l e , a t T e h r a n , w e r e t h e s e

t h r e e r a g h e a d s w h o h a d g o t t e n P h . D . ' s a n d o t h e r a d ­

v a n c e d d e g r e e s f r o m A m e r i c a n un ive r s i t i e s in a f o r e i g n

l a n g u a g e , w h i c h i s t o say, E n g l i s h . N o t t h a t a d v a n c e d d e ­

g r e e s in a s e c o n d l a n g u a g e a r e neces sa ry s igns o f g r e a t

n e g o t i a t i n g skills, b u t i n th is case t h e g e n t l e m e n w e r e for­

m i d a b l e a n d k n e w t h e c a r d s t h e y h e l d . " I t was n o t un t i l w e

r ea l i zed o u r s t r e n g t h t h a t we had o u r s t r e n g t h , " a S a u d i

a i d e sa id l a te r .

S h e i k h Y a m a n i h a d to ld a n E x x o n d i r e c t o r , G e o r g e

P ie rcy , " Y o u k n o w y o u c a n n o t t a k e a s h u t d o w n . " B u t t h e

Wes t c o u l d h a v e t a k e n a s h u t d o w n fa r b e t t e r i n t h a t w i n t e r

o f 1971 t h a n i t c o u l d e v e r t a k e a g a i n .

T h e A t l a n t i c Richfield C o m p a n y h a d n o t b e e n a p a r t y

P A P E R M O N E Y 1 7 1

t o t h e n e g o t i a t i o n s . T h e A r c o d i r e c t o r s m e t i n t h e i r M a n ­

h a t t a n b o a r d r o o m t o h e a r a n a c c o u n t o f w h a t h a d h a p ­

p e n e d o n V a l e n t i n e ' s D a y . O n e d i r e c t o r t r a c e d o n his

n o t e p a d a n a b s t r a c t p a t t e r n , l ike t h e a b s t r a c t i o n i n t h e

J a m e s B e y e r t a p e s t r y o n t h e wal l . W h e n t h e r e c i t a t i o n was

f in i shed , h e sa id , sarcas t ica l ly , "Wel l , w e rea l ly h e l d t h e

A r a b s t o t h e i r o w n t e r m s . "

T h e p r i c e r ise o f t h e St. V a l e n t i n e ' s D a y M a s s a c r e d i d

n o t d a m p e n d e m a n d ; i n d e e d , t h a t d e m a n d w e n t u p a n d

u p , all o v e r t h e w o r l d . B e h i n d t h e " invis ib le d i k e " t h e p r i c e

o f T e x a s oil was $ 3 . 4 5 a b a r r e l , f r o z e n by t h e p r i c e a n d

w a g e c o n t r o l s i m p o s e d b y t h e N i x o n a d m i n i s t r a t i o n . T h e

U n i t e d S t a t e s was n o w i m p o r t i n g 2 3 p e r c e n t o f its oil , b u t

m o s t o f t h a t still c a m e f r o m C a n a d a a n d V e n e z u e l a . T h e

M i d d l e E a s t e r n oil was $ 2 . 2 0 a b a r r e l a t Ras T a n u r a in

S a u d i A r a b i a , still c h e a p e r t h a n t h e T e x a s oil .

All t h r o u g h t h e 1960s t h e oil c o m p a n i e s h a d w o r r i e d

a b o u t t h e E n d l e s s G l u t . M i c h a e l H a i d e r , c h a i r m a n o f

E x x o n , sa id a t its a n n u a l m e e t i n g i n H o u s t o n , i n M a y

1 9 6 7 , "I w i s h I c o u l d say I will be a r o u n d w h e n t h e r e is a

s h o r t a g e o f c r u d e oil o u t s i d e t h e U n i t e d S t a t e s . " A m e m o

f r o m S t a n d a r d o f C a l i f o r n i a i n D e c e m b e r o f 1968 w a r n e d

t h a t Arc t i c oil w o u l d k e e p t h e G l u t g o i n g .

B y 1972 t h e G l u t was g o n e . T h e T e x a s R a i l r o a d C o m ­

mis s ion d i d n o t h a v e t o w o r r y a b o u t h o w m a n y d a y s a

m o n t h t h e wells c o u l d p u m p ; t h e y w e r e g o i n g flat o u t ,

e v e r y d a y . T h e d e m a n d was r i g h t a c r o s s t h e b o a r d : g a s o ­

l ine f o r a u t o m o b i l e s , k e r o s e n e fo r j e t s , c h e m i c a l s , w e e d

s p r a y s , fe r t i l i ze rs , p las t ics .

R i c h a r d N i x o n was r e e l e c t e d b y f o r t y - n i n e o f f i f t y s t a t e s .

H i s e n e r g y task fo rce , h e a d e d b y G e o r g e S h u l t z , h a d r e ­

p o r t e d t h e r e was li t t le d a n g e r o f a n A r a b b o y c o t t a n d t h a t

i m p o r t r e s t r i c t i o n s s h o u l d b e l i b e r a l i z e d .

I t i s a c u r i o u s e x p e r i e n c e to r ev i ew t h e t e c h n i c a l l i t e ra ­

t u r e o f t h e e a r l y 1970s . T h e spec i a l i z ed oil j o u r n a l s a r e

p r e o c c u p i e d wi th t h e d a y - t o - d a y b u s i n e s s o f c o n c e s s i o n s ,

1 7 2 Adam Smith

a n d t a x r a t e s , a n d p a r t i c i p a t i o n s . N o t m u c h a b o u t t h e days

o f d i r e a h e a d . A w h o l e g e n e r a t i o n o f oil m e n h a d g r o w n

u p wi th t h e G l u t .

T h e w a r n i n g s a p p e a r i n t h a t d r y E s t a b l i s h m e n t q u a r ­

te r ly , Foreign Affairs. T h e oil c o n s u l t a n t W a l t e r Levy

w a r n e d , i n 1 9 7 1 , t h a t t h e governments o f c o n s u m i n g c o u n ­

t r i e s — n o t j u s t t h e companies—must p a y a t t e n t i o n to t h o s e

c h a n g i n g r a t io s . J a m e s A k i n s , t h e c a r e e r S ta te D e p a r t m e n t

official w h o h a d c o u n s e l e d t h e c o m p a n i e s t o m a k e t h e i r

p e a c e wi th Libya , d e f e n d e d t h e S ta te D e p a r t m e n t pos i ­

t i on , a lso in Foreign Affairs. W o r l d oil c o n s u m p t i o n , he

sa id , i n A p r i l 1 9 7 3 , w o u l d be a s g r e a t i n t h e n e x t twelve

y e a r s a s w o r l d oil c o n s u m p t i o n t h r o u g h all o f p r e v i o u s

history. T h e loss o f p r o d u c t i o n f r o m a n y two M i d d l e Eas t ­

e r n c o u n t r i e s w o u l d c a u s e a p a n i c , a n d t h e p r i c e o f oil

c o u l d go to $5 a b a r r e l .

A k i n s ' s cr i t ics said h e was a n A r a b o p h i l e . H e h a d to ld

a n O P E C m e e t i n g , " I d o n ' t t h i n k y o u h a v e a n y r e a s o n t o

b e a s h a m e d o f y o u r success s o f a r " a n d t h e n c o u n s e l e d t h e

oil p r o d u c e r s " t o c o n t i n u e t o b e n d , n o t t o b r e a k , th is steel

r o d [ t he oil c o m p a n i e s ] . " A k i n s ' s cr i t ics said he was g iv ing

t h e A r a b s a b l u e p r i n t for b l a c k m a i l .

T h e a r t i c le was c e r t a i n l y r e a d all o v e r t h e w o r l d . J u a n

P a b l o P e r e z A l f o n s o p a s s e d i t o u t all o v e r C a r a c a s . B u t t h e

oil c o u n t r i e s scarcely n e e d e d an A m e r i c a n ar t ic le t o tell

t h e m w h a t was g o i n g o n . T h e v o l u m e o f oil i n i n t e r n a ­

t iona l t r a d e h a d g o n e u p like t h i s :

1950 3.7 million barrels a day 1960 9.0 million barrels a day 1970 25.6 million barrels a day 1973 34.2 million barrels a day

T h e " invis ib le d i k e " a r o u n d t h e A m e r i c a n oil b e g a n t o

s h u d d e r a n d s h a k e . I t h a d b e e n bui l t t o k e e p t h e c h e a p

P A P E R M O N E Y 1 7 3

f o r e i g n oil f r o m c o m i n g in. N o w i t b l e w away , n o t f r o m

t h e s u p p l y p r e s s u r e outside, b u t f r o m t h e demand inside.

T h e i m p o r t r e s t r i c t i o n s w e r e l i f ted , a n d w h a t w e n t r o a r i n g

o u t , o f c o u r s e , was d o l l a r s . T h o s e d o l l a r s w e n t o u t a n d

c o m p e t e d f o r oil s u p p l i e s t h a t w e r e a l r e a d y t igh t . T h e a d ­

m i n i s t r a t i o n i n W a s h i n g t o n d i d n o t h i n g t o c o n t r o l t h e

s c r a m b l e . I t h a d o t h e r p r o b l e m s o n its m i n d . I t w a s a b o u t

t o g o o n t r i a l .

T h e c h a i r m a n o f Br i t i sh She l l to ld a H a r v a r d s e m i n a r

t h a t t h e e n e r g y p r o b l e m was n o w a pol i t i ca l p r o b l e m , a n d

t h a t t h e c o n s u m i n g g o v e r n m e n t s s h o u l d ge t t o g e t h e r . T h e

S ta t e D e p a r t m e n t i n W a s h i n g t o n h a d b e e n t r y i n g t o a r ­

r a n g e ta lks w i th t h e E u r o p e a n s , a n d i n d e e d , i n J u n e 1 9 7 3 ,

t h e O E C D , t h e W e s t e r n o r g a n i z a t i o n wi th t h e t i t le O r g a ­

n i z a t i o n f o r E c o n o m i c C o o p e r a t i o n a n d D e v e l o p m e n t , set

u p a g r o u p t o d i s cus s e n e r g e n c y oil po l icy , t o r e p o r t b a c k

i n N o v e m b e r .

I t was t o o la te .

T h e d e m a n d for oil was r u n n i n g a h e a d o f t h e m o s t

e x t r e m e p r e d i c t i o n s . I n d e p e n d e n t oil c o m p a n i e s t r i e d t o

b e a t t h e s e v e n g r e a t oil c o m p a n i e s t o t h e w e l l h e a d s . J a p a ­

n e s e t r a d i n g c o m p a n i e s t r i e d t o b e a t t h e i n d e p e n d e n t oil

c o m p a n i e s . O n l y A r a m c o , i n S a u d i A r a b i a , h a d s p a r e ca­

pac i ty , a n d i t h a d l i t t le . B y S e p t e m b e r 1 9 7 3 t h e m a r k e t

p r i c e h a d f o r t h e first t i m e o v e r t a k e n t h e official " p o s t e d "

p r i c e . O P E C c o u l d easily r e a d w h a t th i s m e a n t pol i t ical ly .

I t s f o r m e r s e c r e t a r y - g e n e r a l , N a d i m a l - P a c h a c i , t o ld a c o n ­

f e r e n c e , " T h e A r a b s n o w h o l d t h e keys t o t h e e n e r g y a n d

m o n e t a r y cr is is . T h e y will k n o w h o w t o u s e b o t h a s a pol i t ­

ical w e a p o n . "

A n w a r a l - S a d a t o f E g y p t f l e w t o S a u d i A r a b i a t o d i scuss

his m i l i t a r y p l a n s wi th K i n g Faisa l . T h e r u l e r o f K u w a i t ,

S h e i k h S a b a h ibn Sa l im a l - S a b a h , a lso vis i ted Faisal , t h e n

w e n t o n t o C a i r o t o p r o m i s e K u w a i t ' s oil w e a p o n i n t h e

f o r t h c o m i n g ba t t l e wi th I s r ae l .

I n O c t o b e r t h e E g y p t i a n s t u r n e d t h e i r h i g h - p r e s s u r e

1 7 4 Adam Smith

W e s t G e r m a n fire h o s e s o n t h e s a n d e m b a n k m e n t s o f t h e

I s rae l i s ' B a r - L e v l ine , l i teral ly d i s so lved t h e s a n d f o u n d a ­

t i ons , a n d c r o s s e d t h e S u e z C a n a l . T h e U n i t e d S ta tes ' r e -

s u p p l y o f I s r ae l was d o n e i n t h e face o f w a r n i n g s o f

e m b a r g o . O P E C m e t i n K u w a i t a n d a n n o u n c e d a c u t b a c k

of 5 p e r c e n t a n d a p r i c e r i se . S a u d i A r a b i a a n n o u n c e d a

still b i g g e r c u t b a c k .

F o r t h e first t i m e i n h i s to ry , t h e O P E C b u r e a u c r a t s m e t

wi th n o b o d y o n t h e o t h e r s ide o f t h e t ab le . N o E x x o n , n o

Mobi l , n o T e x a c o , n o B P , n o She l l . T h e y w e r e n o t i nv i t ed .

T h e r e w e r e n o n e g o t i a t i o n s . T h e p r i c e o f oil w o u l d b e ,

sa id O P E C , $ 5 . 1 2 a b a r r e l . By u k a s e , by fiat, by o r d e r o f

t h e h i g h c o m m a n d . T h e p r e s s r e l e a s e was p r e p a r e d o n l y

in A r a b i c .

T h e r e was , i n K u w a i t , a t t h a t m o m e n t , a Br i t i sh o b ­

s e r v e r w h o was a f r i end o f m i n e . He i s so u n d e r s t a t e d t h a t

his g r a c e s s e e m to h a v e d e s c e n d e d u p o n h i m , b u t th is i s a

p o s e . " I t h o u g h t i t m i g h t be u s e f u l to l e a r n a s p o t o f A r a ­

b ic , " h e says, b u t w h a t h e m e a n s i s t h a t h e w e n t t o t h e

Br i t i sh A r a b i c t r a i n i n g s choo l i n L e b a n o n for e i g h t e e n

m o n t h s , s i x t e e n h o u r s a d a y , s e v e n d a y s a w e e k . My Br i t i sh

f r i e n d sat a f t e r w a r d wi th a n A r a b f r i e n d f r o m O P E C , w h o

d e s c r i b e d th is m o m e n t : " W e d e c l a r e d t h e n e w p r i c e o f oil .

I t was a lit t le s t r a n g e , b e c a u s e t h e c o m p a n i e s w e r e n o t

t h e r e . W e k n e w this was t h e b i g g e s t r ise t h a t t h e p r i ce o f

oil h a d e v e r t a k e n . N o w r e m e m b e r w e h a v e g r o w n u p wi th

t h e Br i t i sh f l e e t o n o u r d o o r s t e p , w e h a v e b e e n t o schoo ls

i n B r i t a i n o r A m e r i c a , w e a r e f r o m smal l c o u n t r i e s , wi th ­

o u t a r m i e s a n d hosp i t a l s . A n d n o w w e h a v e n e a r l y d o u ­

b l e d t h e p r i c e o f oil.

" A n d we sit t h e r e fo r a m o m e n t , a n d unconsciously we are

listening for the whine of jets overhead, as if we will be p u n ­

i s h e d .

" O f c o u r s e n o t h i n g h a p p e n e d . B u t I r e m e m b e r t h a t m o ­

m e n t . T h o s e g i a n t c o u n t r i e s ! N o w w e will n e v e r b e a f ra id

a g a i n . "

P A P E R M O N E Y 1 7 5

" V i e t n a m , " said m y Br i t i sh f r i e n d l a t e r , " t o o k t h e e d g e

off, t h e g r e a t g i a n t b r o u g h t d o w n b y a n a r m y i n s n e a k e r s . "

W i t h i n a few w e e k s O P E C h a d d o u b l e d t h e p r i c e a g a i n .

I t was easy . T h e A r a b s h a d e m b a r g o e d oil d e s t i n e d for t h e

U n i t e d S ta tes a n d t h e N e t h e r l a n d s , t o p u n i s h t h e i r s u p ­

p o r t o f I s r a e l , i n a d d i t i o n t o t h e c u t b a c k s . T h o u g h t h e

c u t b a c k s a m o u n t e d t o less t h a n 1 0 p e r c e n t o f w o r l d s u p ­

pl ies , f r a n t i c b u y e r s w e r e b i d d i n g wild p r i c e s . T h e I r a n i a n

oil c o m p a n y h a d a u c t i o n e d oil a s h i g h a s $ 1 7 a b a r r e l . T h e

J a p a n e s e t r a d i n g c o m p a n i e s h a d s lep t o n t h e d o o r s t e p t h e

n i g h t b e f o r e t h e a u c t i o n .

T h e O P E C m e e t i n g i n T e h r a n , i n D e c e m b e r 1 9 7 3 , a few

w e e k s l a t e r , was l ike t h e t r i u m p h a l m a r c h i n a n o p e r a .

T h e g r e a t b l ack l i m o u s i n e s p u r r e d t o t h e f r o n t d o o r , t o

d i s c h a r g e t h e e l e g a n t S h e i k h Zaki Y a m a n i i n his b l u e ta i ­

l o r e d r a i n c o a t a n d t h e c r a g g y J a m s h i d A m o u z e g a r . T h e

W e s t e r n d i p l o m a t s a n d o b s e r v e r s s c r a m b l e d t h r o u g h t h e

s ide d o o r s , t r y i n g t o f i n d o u t w h o was s a y i n g w h a t t o w h o m

a n d w h a t was h a p p e n i n g . A s for t h e p r e s s , i t was n o t j u s t

Piatt's Oilgram a n d t h e Middle East Economic Survey a n d

W a n d a a n y m o r e , i t was e v e r y b o d y — C B S , t h e B B C , Main-

ichi, O Globo.

T h e S h a h , sa id J a m s h i d A m o u z e g a r , h a d o r d e r e d a

s t u d y o f a l t e r n a t i v e fue ls . " W e w e r e s t r u c k , " said t h e e m i ­

n e n t C o r n e l l a l u m n u s , "by t h e fact t h a t i n 1951 coa l was

f i f t y - o n e p e r c e n t o f t h e fuel i n t h e U n i t e d S t a t e s , a n d n o w

i t i s n i n e t e e n p e r c e n t . B e c a u s e o f c h e a p oil , a l t e r n a t i v e

s o u r c e s a r e b e i n g n e g l e c t e d . N o o n e i n t h e W e s t i s w o r r y ­

i n g a b o u t w h a t h a p p e n s w h e n t h e oil r u n s o u t . " T h e e m ­

b a r g o h a d s h o w e d t h e w e a k n e s s o f t h e W e s t . O P E C ' s

e c o n o m i c c o m m i s s i o n h a d d e t e r m i n e d t h a t t h e p r i c e

s h o u l d be $ 1 7 a b a r r e l .

S h e i k h Y a m a n i was a p p r e h e n s i v e a t so l a r g e a boos t . " I

was a f r a id t h e effects w o u l d b e e v e n m o r e h a r m f u l t h a n

t h e y w e r e , t h a t t h e y w o u l d c r e a t e a m a j o r d e p r e s s i o n i n

t h e W e s t . I k n e w t h a t i f y o u w e n t d o w n , we w o u l d go

1 7 6 Adam Smith

d o w n , " h e sa id . Y a m a n i t r i e d t o ge t i n t o u c h wi th K i n g

Faisal , b u t was u n a b l e to . I f h e k e p t t h e p r i c e d o w n , i t

m i g h t b r e a k O P E C b u t leave t h e S a u d i s i so la ted . Y a m a n i

r e m a i n e d w i t h i n O P E C , i n s i s t i ng on a s m a l l e r p r i ce in­

c r e a s e , a n d was l a t e r r e p r i m a n d e d b y Faisal . B u t Y a m a n i

was s t u n n e d w h e n , whi le t h e O P E C m i n i s t e r s w e r e still

m e e t i n g , t h e S h a h ca l led a p r e s s c o n f e r e n c e .

T h e p r i c e o f oil, t h e S h a h sa id , w o u l d be $ 1 1 . 6 5 a b a r r e l .

T h a t was e v e n m o r e t h a n Y a m a n i h a d a g r e e d to . T h e

S h a h ' s a r r o g a n c e a s t o u n d e d t h e a s s e m b l e d d i p l o m a t s a n d

r e p o r t e r s . T h e n e w p r i ce o f oil , h e sa id , was ve ry low a n d

"was r e a c h e d o n t h e basis o f g e n e r o s i t y a n d k i n d n e s s . " A s

fo r t h e W e s t e r n c o n s u m e r s , i t w o u l d d o t h e m g o o d t o

e c o n o m i z e : "All t h o s e c h i l d r e n o f we l l - to -do famil ies w h o

h a v e p l e n t y t o ea t a t e v e r y m e a l , w h o h a v e t h e i r o w n ca r s ,

w h o act a l m o s t a s t e r r o r i s t s a n d t h r o w b o m b s h e r e a n d

t h e r e , will h a v e to r e t h i n k all t h e s e p r iv i l eges . . . t h e y will

h a v e t o w o r k h a r d e r . "

" W e w e r e a m a z e d t o f i n d o u r s e l v e s t h e objec ts o f s o

m u c h a t t e n t i o n , " said A b d u l La t i f a l - H a m a d , a f o r m e r s tu­

d e n t o f a f r i e n d o f m i n e a t C l a r e m o n t Co l l eges , Ca l i fo rn i a ,

a n d t h e d i r e c t o r o f t h e K u w a i t F u n d . " W e go t a s g r e a t a

s h o c k a s y o u d i d . W e t h o u g h t w e w e r e p y g m i e s , fac ing

g i a n t s , a n d n o w w e f o u n d t h a t t h e g i an t s a r e o r d i n a r y

p e o p l e a n d t h e Rock o f G i b r a l t a r i s p a p i e r - m a c h e . A n d w e

h a d b e e n p r o t e c t e d b y t h e oil c o m p a n i e s f r o m t h e w o r l d ;

n o w t h e y w e r e g o n e , a n d w e h a d t o d e c i d e e v e r y t h i n g

o u r s e l v e s . I t was like b e i n g a r i c h o r p h a n . "

T h e r e w e r e s t u n n e d r e a c t i o n s all o v e r t h e w o r l d . O n e

was r e c a l l e d t o m e s o m e y e a r s l a t e r b y J a n o s F e k e t e , d e p ­

u ty d i r e c t o r o f t h e N a t i o n a l B a n k o f H u n g a r y , a n ex ­

t r e m e l y s h r e w d b a n k e r , a g o o d C o m m u n i s t , a m a n wi th a

p u c k i s h s ense o f h u m o r .

" I w e n t to my office," he sa id , " a n d I said to my staff,

'Now we will see t h e m i g h t y W e s t r ise u p ! T h e y c a n n o t

l e n d t h e m s e l v e s to this fraud, w h e r e t h e p r i ce i s so far f r o m

t h e cost! It is a h o a x ! ' I was e x c i t e d .

P A P E R M O N E Y 1 7 7

" M y s taff was m u c h m o r e s o b e r . T h e y sa id , ' J a n o s , n o w

w e h a v e t o d o t h e b u d g e t s all o v e r , w e a r e i n defici t . ' A n d

I sa id , 'A fene egye meg!' Of c o u r s e we a r e ! D a m n ! B e c a u s e

w e i m p o r t oil f r o m t h e R u s s i a n s , a n d t h e y u se t h e O P E C

p r i c e ! N o w w e m u s t pay t h e R u s s i a n s f o u r t i m e s a s m u c h

for o u r oil! A fene egye meg!"

I n t h e T h i r d W o r l d , F e k e t e ' s e x p e r i e n c e was d u p l i c a t e d ,

w i th v a r i a t i o n s . F i rs t , a f e e l i n g of j u b i l a t i o n in all t h o s e

c o u n t r i e s o f As ia a n d Af r i ca . W h a t a n u p s e t ! R a g h e a d s ,

6 6 ; G i a n t s , 0 ! W a h o o ! S o m u c h for t h e b l u e - e y e d devi ls i n

t h e c o l d - w e a t h e r c o u n t r i e s ! S o m u c h f o r t h e a r r o g a n t

l o n g - n o s e d b a s t a r d s ! S o m u c h fo r t h e i m p e r i a l i s t e x ­

p l o i t e r s w h o w a n t e d u s t o b e a n a t i o n o f b u s b o y s !

A n d t h e n s o m e b o d y — m a y b e t h e f i n a n c i a l p e o p l e , l ike

F e k e t e — w o u l d say, " B u t n o w w e h a v e t o p a y f o u r t i m e s a s

m u c h for t h e oil, a n d w e h a v e n o oil. W h e r e d o w e ge t t h e

m o n e y ? "

A n e x e r c i s e j u s t l ike t h a t was t h e g e n e s i s o f th i s b o o k .

T h e p r i c e a t H o w a r d ' s Mob i l s t a t ion h a d n o t q u a d r u p l e d ,

b u t H o w a r d wasn ' t g e t t i n g m u c h gas t h a t f ros ty w i n t e r .

T h e r e was a l ine t h r e e b locks l o n g l e a d i n g u p t o H o w a r d ' s

Mobi l . H o w a r d h i m s e l f was b l e a r y - e y e d f r o m d e a l i n g wi th

a n g r y c u s t o m e r s . Firs t I d r o v e by , t o see h o w l o n g H o w a r d

w o u l d b e o p e n , b e c a u s e I d i d n ' t w a n t t o s p e n d two h o u r s

in a gas l ine a n d t h e n f ind a s ign t h a t sa id " N o G a s . "

H o w a r d s a id , " G o t o t h e e n d o f t h e l i n e ; w e c a n m a k e i t

t o d a y . "

T h e gas l ine sat a n d c r e p t , sat a n d c r e p t , a n d t h e s n o w

c a m e d o w n a r o u n d u s . I f i n i s h e d r e a d i n g all t h e b a n k

l e t t e r s . I finished The Wall Street fournal, The New York

Times, a n d The Economist. T h e r e was still a b lock a n d a ha l f

t o g o .

Fi rs t I t h o u g h t , T h i s gas l ine i s b u r n i n g up a lot of gas

j u s t t r y i n g t o ge t m o r e . T h e n : H o w d o w e p a y fo r t h e oil

q u a d r u p l e ? T h a t is, we , t h e U n i t e d S ta tes? Wel l , w e c o u l d

sell s o m e t h i n g t o t h e A r a b s . W h a t a r e w e g o o d a t g r o w i n g

1 7 8 Adam Smith

o r m a k i n g a n d sel l ing? A i r c r a f t , w h e a t , s o y b e a n s , m a y b e

s o m e h i g h - t e c h n o l o g y e q u i p m e n t . N o w , w h a t a r e t h e y

b u y i n g ? W h o ' s i n O P E C ? W e c a n fo rge t G a b o n a n d E c u a ­

d o r a n d Q a t a r — n o t s igni f icant . W h o a r e w e t a l k i n g a b o u t ?

I r a q : c ross off, no r e l a t i o n s wi th t h e m . Libya , K u w a i t ,

S a u d i A r a b i a , I r a n . L ibya : f e w e r t h a n 2 mi l l ion p e o p l e .

K u w a i t : f e w e r t h a n 3 0 0 , 0 0 0 . S a u d i A r a b i a : 6 mi l l ion .

Smal l c o u n t r i e s . D o n ' t h a v e b i g a i r l ines . Sell a c o u p l e o f

7 2 7 s , a 747 o r t w o ; t ha t ' s a b o u t e n o u g h oil for t en m i n u t e s

o f gas l ines . W h e a t , s o y b e a n s — s m a l l c o u n t r i e s d o n ' t e a t

m u c h ; we h a v e 120 mi l l ion c a r s , e a c h c a r i s s i t t ing in a gas

l ine wi th its m o t o r r u n n i n g ; y o u c o u l d sell all t h e w h e a t

a n d s o y b e a n s Libya , Kuwa i t , a n d S a u d i A r a b i a c o u l d e a t

a n d on ly m o v e t h e w h o l e n a t i o n a l gas l ine o n e b lock . Less .

M a y b e t h i r t y feet . O f c o u r s e , I r a n . . . 3 3 mi l l ion p e o p l e

. . . S h a h — a i r c r a f t ? A c o u p l e m o r e a i r p l a n e s , a little m o r e

w h e a t — a i r c r a f t , arms. We c o u l d sell a r m s to t h e S h a h .

B u t n o t e n o u g h t o t h e o t h e r folks. N o , w h a t w e will b u y

t h e oil wi th i s d o l l a r s , b e c a u s e t h e w o r l d t a k e s d o l l a r s ,

t r a d e s i n d o l l a r s . A n d t h e oil folk will h a v e t h e d o l l a r s , a n d

t h e n t hey c a n c o m e a n d b u y w h a t t h e y w a n t . B u t n o b o d y

rea l izes the scale. Let ' s j u s t say we p a y t h e i m p o r t p r i c e for

h a l f o f t h e oil n e e d s , a t let 's say, $ 1 0 a b a r r e l , c a r r y t h e 3 ,

t i m e s 3 6 5 d a y s i n t h e yea r ; m y g o o d n e s s , i n o n e y e a r

O P E C c o u l d h a v e $ 1 0 0 bi l l ion e x t r a , m a y b e $ 2 0 0 bi l l ion

s o o n , t h e n t h e y c o u l d c o m e a n d b u y ha l f o f t h e s tocks o n

t h e N e w Y o r k Stock E x c h a n g e , a l m o s t half. A n d tha t ' s

o n l y o n e yea r . T h e n e x t y e a r t h e 120 mi l l ion ca r s a r e back

a t t h e gas p u m p , a n d O P E C h a s another $ 1 0 0 bi l l ion, a n d

t h e y k e e p p i l i ng u p t h o s e c l a im checks un t i l t h e y can b u y

t h e w h o l e N e w Y o r k Stock E x c h a n g e . T h e y k e e p t h e c la im

c h e c k , a n d we m o v e t h e ca r s a r o u n d . We are going to sell

America for a product that burns up hi the atmosphere. We will

be a c o l o n y .

N o , t h a t c a n ' t b e r i g h t . S o m e t h i n g else h a s t o h a p p e n .

I was u p t o t h e gas p u m p .

P A P E R M O N E Y

" J u s t d o n ' t s w e a r a t m e , " H o w a r d sa id . " I o n l y r u n a

f i l l i n g s t a t i o n . "

I d i d n ' t s w e a r a t H o w a r d . I was t r y i n g to f igu re o u t w h a t

was w r o n g w i t h t h a t i d e a : We are issuing claim checks on our

country for something that burns up in the atmosphere.

A s i t t u r n s o u t , u n h a p p i l y , ve ry u n h a p p i l y , y e a r s l a t e r ,

c o l u m n s l a t e r , e c o n o m i s t s l a t e r , c o n g r e s s m e n l a t e r , D e ­

p a r t m e n t o f E n e r g y officials l a t e r , s h e i k h s a n d oil m e n a n d

b a n k e r s l a t e r , t h e i d e a was n o t w r o n g . N o r was i t u n i q u e

t o m e , n e e d l e s s t o say.

T h e t r i u m p h o f t h e C l u b i s s o m e t h i n g q u i t e u n p a r a l ­

le led in h i s t o r y . W h e n else was t h e r e s u c h a t r a n s f e r o f

w e a l t h ? W h e n t h e S p a n i a r d s b r o u g h t b a c k t h e g o l d a n d

si lver o f P e r u ? W h e n t h e Br i t i sh raj r u l e d I n d i a ?

T h o s e w e r e t r a n s f e r s o f w e a l t h , b u t n o n e h a p p e n e d s o

qu i ck ly . F r o m t h e d a y t h e O d d C o u p l e m e t a t t h e Ni le

H i l t o n t o t h e d a y t h e F r e n c h b u l l d o z e r b r o k e t h e T a p l i n e

was less t h a n e l e v e n y e a r s . F r o m t h a t t o t h e St. V a l e n t i n e ' s

Day M a s s a c r e was less t h a n t w o , a n d i n less t h a n a n o t h e r

t h r e e t h e t r i u m p h was c o m p l e t e . I t w a s t h e g r e a t e s t t r a n s ­

fe r o f w e a l t h i n t h e h i s t o r y o f t h e w o r l d . A n d i t i s h a r d t o

c o m m u n i c a t e . I f y o u say oil w e n t f r o m $ 1 . 8 0 a b a r r e l t o

$ 1 1 . 6 5 a b a r r e l , t ha t ' s a b ig p e r c e n t a g e , b u t it 's still j u s t t e n

b u c k s . A n d i f y o u say th i s y e a r we will s e n d o u t $ 9 0 bi l l ion

f o r oil , t h a t ' s a n a b s t r a c t i o n ; y o u c a n ' t d i v i d e $ 9 0 bi l l ion

i n t o o r a n g e j u i c e a n d c o m e o u t s o u n d i n g a n y t h i n g b u t

silly.

U n i t e a n d c o n t r o l , c o n s e r v e a n d c u t b a c k — t h e p r e a c h ­

ings o f t h e O d d C o u p l e — w e r e s c r a t c h e d o u t f i r s t b y t h e

t idy V e n e z u e l a n l awyer w h o a d m i r e d t h e T e x a s R a i l r o a d

C o m m i s s i o n . B u t y o u will n o t i c e , b y t h e i r a b s e n c e , m i s s i n g

e l e m e n t s i n th i s s t acca to l i t t le c a p s u l e h i s t o r y . T h o s e e le ­

m e n t s a r e t h e g o v e r n m e n t s o f t h e W e s t . T h e c o n v e n t i o n a l

w i s d o m i s t h a t t h e y w e r e o u t t o l u n c h , t h a t t h e y h a d d e l e ­

g a t e d t h e i r r o l e t o t h e oil c o m p a n i e s . I n C h u r c h i l l ' s

p h r a s e , t h e y p r e s i d e d o v e r t h e l i q u i d a t i o n o f a n e m p i r e .

1 8 0 Adam Smith

O r t h e y d i d n o t p r e s i d e a t all. T h e y w e r e w e a k a n d d i ­

v i d e d .

" T h e F r e n c h w e r e t oo a n t i - A m e r i c a n , " said o n e o f

Mobi l ' s v e t e r a n n e g o t i a t o r s , " t h e Br i t i sh t o o b e m u s e d b y

t h e i r d e b t t o P o m p i d o u , t h e I t a l i a n s t oo g o v e r n e d b y Mat ­

tel 's legacy o f dis l ike for t h e S e v e n Sis ters , t h e J a p a n e s e

t o o s c a r e d of O P E C . . . t h e A m e r i c a n s , Br i t i sh , G e r m a n s ,

a n d D u t c h p r e f e r r e d t o h o p e t h a t t h e h u r r i c a n e w o u l d

pass . . . n o n e saw t h a t w h a t was rea l ly n e e d e d was so l ida r ­

ity a m o n g all o f t h e m . " U n i t e a n d c o n t r o l , c o n s e r v e a n d

cu t back , m a y h a v e b e g u n in t h e Wes t , b u t i t was f o r g o t t e n .

T h e r e i s a lso an u n c o n v e n t i o n a l view, w h i c h i s t h a t a t

least s o m e e l e m e n t s i n t h e W e s t w e r e q u i t e h a p p y t o see

t h e p r i c e o f oil go u p . T h e thes i s o f th is view i s t h a t Rich­

a r d N i x o n a n d H e n r y K i s s i n g e r m a d e a d e a l wi th t h e S h a h

o f I r a n . I t was d e v e l o p e d f i r s t b y t h e c o l u m n i s t J a c k A n ­

d e r s o n , a n d t h e n b y t h e C B S te lev is ion s h o w " 6 0 M i n u t e s . "

A t least o n e o f t h e s o u r c e s , i f n o t t h e p r i n c i p a l s o u r c e , was

J a m e s A k i n s , t h e f o r e i g n - s e r v i c e off icer , A r a b i s t , a n d oil

specia l is t , w h o h a d w r i t t e n " T h i s T i m e t h e W o l f I s H e r e "

in Foreign Affairs. A k i n s h a d b e c o m e a m b a s s a d o r to S a u d i

A r a b i a a n d t h e n , i n 1 9 7 5 , was f i r ed by K i s s inge r .

N i x o n a n d K i s s inge r s t o p p e d off i n I r a n o n t h e way

h o m e f r o m t h e M o s c o w s u m m i t i n 1 9 7 2 . W h a t t h e y saw

was a d a n g e r o u s s i t ua t i on . T h e Br i t i sh h a d w i t h d r a w n

f r o m t h e P e r s i a n G u l f a t t h e e n d o f 1 9 7 1 ; t h e U n i t e d

S ta tes was still i nvo lved in V i e t n a m . T h e r e was a p o w e r

v a c u u m i n t h e s t r a t eg ic M i d d l e Eas t . T h e S h a h c o u l d t ake

i t o v e r a n d w o u l d ge t t h e a r m s t o d o so.

H o w w o u l d t h e S h a h p a y fo r t h e a r m s ? B y r a i s i n g t h e

p r i c e o f oil . N o A m e r i c a n C o n g r e s s w o u l d h a v e v o t e d bil­

l ions to a r m I r a n , i t was t h o u g h t , whi le t r o o p s w e r e still i n

V i e t n a m . J a m e s A k i n s r e p o r t e d t h a t t h e S a u d i s w e r e wor ­

r i e d b o t h b y t h e I r a n i a n b u i l d u p a n d b y t h e p r o s p e c t o f a

h i g h p r i c e for oil, w h i c h t h e y t h o u g h t w o u l d d a m a g e t h e

stabil i ty o f t h e Wes t , o n w h i c h t h e i r b a n k a c c o u n t s a n d

su rv iva l d e p e n d e d .

P A P E R M O N E Y 1 8 1

Wi l l i am S i m o n , S e c r e t a r y o f t h e T r e a s u r y a t t h a t t i m e ,

said l a te r , o f t h e o i l - p r i c e - f o r - w e a p o n s i d e a : " T h e r e c o u l d

b e s o m e t r u t h i n t h a t . W e w e r e heav i ly i n v o l v e d i n Vie t ­

n a m . W e w e r e t r y i n g t o e x t r i c a t e o u r s e l v e s . W e h a d a P r e s ­

i d e n t w h o was b e i n g b e s i e g e d i n t h e c lo s ing d a y s o f

W a t e r g a t e . W e d i d n ' t n e e d a n y t r o u b l e i n o t h e r p a r t s o f

t h e w o r l d a n d w e h a d t o m a k e s u r e o u r allies w e r e i n

s t r o n g p o s i t i o n s , s o t h a t t h e R u s s i a n s c o u l d n o t t a k e a d v a n ­

t a g e o f o u r d o m e s t i c p r o b l e m s , o u r V i e t n a m p r o b l e m s ,

a n d b e c o m e m i s c h i e v o u s a s t h e y ' r e p r o n e t o d o i n o t h e r

p a r t s o f t h e w o r l d . "

O f S i m o n , a s taf f m e m b e r a t t h e C o u n c i l o f E c o n o m i c

A d v i s e r s s a id : "Bil l i s no i n t e l l e c tua l a n d he is a lso a fer ­

v e n t f r ee e n t e r p r i s e r . H e t h o u g h t a h i g h e r oil p r i c e m i g h t

b r i n g u p m o r e oil , a n d t h a t w o u l d h e l p t o b r e a k t h e c a r t e l .

W e w o u l d ge t t h e m o n e y w e p a i d fo r oil b ac k t h r o u g h

se l l ing a r m s , a n d t h e oil s u r p l u s e s w o u l d g o t o o u r b a n k s

a n d d r i v e i n t e r e s t r a t e s d o w n t o f o u r p e r c e n t . Bill says ,

' W e all m a k e m i s t a k e s ; H e n r y rea l ly b l e w t h a t o n e . ' B u t s o

d i d h e . "

K i s s i n g e r a n d S i m o n d i d p u s h f o r w a r d t h e I n t e r n a ­

t i o n a l E n e r g y A g e n c y , a g r o u p o f t w e n t y W e s t e r n c o u n ­

t r i es , h o p i n g t o c u t j o i n t c o n s u m p t i o n a n d t h u s c o n f r o n t

t h e C l u b . B u t its e f fo r t s w e r e f eeb le .

I f a q u a d r u p l e d oil p r i c e was t h e cos t o f a r m i n g t h e

S h a h , i t w a s o n e o f t h e m o s t e x p e n s i v e b l u n d e r s i n h i s t o r y .

T h e scale o f t h e t r a n s f e r o f w e a l t h i s h a r d t o c o m p r e h e n d ,

a n d i n th is i n s t a n c e t h e a r i t h m e t i c m a k e s n o s e n s e . I f $ 9 0

bi l l ion a y e a r s o u n d s silly d i v i d e d i n t o o r a n g e j u i c e , i t

d o e s n o t m a k e m u c h m o r e s e n s e d i v i d e d i n t o F-14s .

I f y o u r a i se t h e p r i c e o f oil $ 1 0 a b a r r e l , t i m e s t h e O P E C

p r o d u c t i o n o f r o u g h l y 3 0 mi l l i on b a r r e l s a d a y , y o u h a v e

r a i s e d O P E C ' s r e v e n u e s b y $ 1 0 9 . 5 b i l l ion i n o n e y e a r .

G r a n t e d , O P E C i s a w h o l e g r o u p o f c o u n t r i e s , b o t h h i g h

a n d low a b s o r b e r s .

N o w g o t o t h e G r u m m a n p l a n t o n L o n g I s l a n d . W a l k

a r o u n d an F -14 , kick t h e t i r e s ; t h e r e i t is, c o m p l e t e l y

1 8 2 Adam Smith

e q u i p p e d , t i n t e d glass , w h i t e s idewal l s , A M - F M , avionics ,

r a d a r . I n 1974 t h e f l y a w a y cos t o f a n F-14 was j u s t u n d e r

$ 9 mi l l ion , a i r - to -a i r missi les n o t i n c l u d e d . G r u m m a n

c o u l d t u r n o u t e i g h t y F-14s a y e a r . B r i n g pi lo ts a n d f ly a

yea r ' s w o r t h away . T h a t ' s $ 7 2 0 mi l l ion .

N o w g o t o M c D o n n e l l D o u g l a s i n St. L o u i s . B r i n g m o r e

p i lo t s , M c D o n n e l l D o u g l a s c a n t u r n o u t m o r e a i rc ra f t t h a n

G r u m m a n ; b r i n g m o r e m o n e y , an F-15 i s a ve ry h o t a i r ­

p l a n e , costs $ 1 2 mi l l ion in 1974 , r e a d y to f ly away . Pr ice

t a g for a f l ee t o f o n e h u n d r e d F-15s : $ 1 . 2 bi l l ion. Y o u ' v e

s p e n t a s h a d e less t h a n $2 bi l l ion on a i r p l a n e s , b u t r o u n d

i t o u t ; y o u n e e d s p a r e p a r t s a n d e x t r a t i r es .

W h a t else? H o w a b o u t t h e b igges t t icket i n d e f e n s e , a

n u c l e a r - p o w e r e d a i rc ra f t c a r r i e r ? T h a t re ta i l s , i n 1974 , fo r

$ 7 7 1 mi l l ion t o $ 1 , 3 5 4 b i l l ion , d e p e n d i n g o n t h e m o d e l

a n d t h e o p t i o n s . T a k e two . T a k e s o m e d e s t r o y e r escor t s

fo r t h e n u c l e a r c a r r i e r s , t a k e a c o u p l e o f missi le c r u i s e r s .

H a v e s o m e s u b m a r i n e s .

G u e s s w h a t : y o u h a v e a v e r y h o t a i r fo rce , a s leek f lee t ,

a n d y o u still h a v e a r o u n d $ 1 0 0 bil l ion left. T h i s yea r .

S o m e o f t h o s e a i r p l a n e s a r e g o i n g t o last m o r e t h a n a yea r ,

a n d n e x t y e a r y o u h a v e a n o t h e r $ 1 0 0 bil l ion extra.

S o t h e W e s t c o u l d t r a n s f e r t o O P E C o n e a i r fo rce , o n e

navy , a n d still o w e $ 1 0 0 bil l ion every year.

I be l ieve t h e K i s s i n g e r - S h a h s to ry h a s an e l e m e n t o f

t r u t h b u t i s t oo s i m p l e . I h a v e g o n e back s o m e d i s t a n c e to

s h o w h o w t h e g r o w t h i n oil d e m a n d c r e a t e d t h e o p p o r t u ­

n i ty for P e r e z Al fonso ' s C l u b . G iven t h a t d e m a n d , a n d

g iven t h e b e l l i g e r e n c e o f m a n y m e m b e r s o f t h e C l u b , t h e

p r i c e o f oil was b o u n d t o g o u p , b u t n o t h i n g like a s m u c h

a s i t d i d . T h e r e i s no q u e s t i o n t h a t t h e N i x o n a d m i n i s t r a ­

t i on set t h e S h a h u p a s t h e mi l i t a ry p o w e r o f t h e M i d d l e

Eas t , a n d o n c e t h e S h a h was set u p , h e c o u l d n o t b e nea t ly

c o n t r o l l e d , s o h e was ab le , w i th t h e o t h e r O P E C p r i ce

h a w k s , t o d i c t a t e t h e p r i c e o f oil . T h e r e w e r e p e o p l e w h o

w e r e n o t s o r r y t o see t h e p r i c e o f oil go u p , b e c a u s e i t

P A P E R M O N E Y 1 8 3

m i g h t , t h e y t h o u g h t , i n t h e l o n g r u n , c r e a t e a l t e r n a t i v e s t o

O P E C oil . O r m a y b e t h e y h a d o t h e r m o t i v e s .

B u t t h e oil p r i c e q u a d r u p l e was a s h o c k , a n d few ex ­

p e c t e d i t t o st ick. S u r e l y O P E C w o u l d b r e a k u p , a s Mi l ton

F r i e d m a n s o c o n f i d e n t l y p r e d i c t e d . T h e h u r r i c a n e w o u l d

pass . T h e a n s w e r t o t h e q u e s t i o n a b o u t t h e a r i t h m e t i c i s

t h a t n o o n e w o r k e d o u t t h e a r i t h m e t i c .

" C o n s u m i n g g o v e r n m e n t s p r e f e r r e d t o w r i n g t h e i r

h a n d s , " sa id t h e Mobi l o b s e r v e r , " . . . to b i c k e r a m o n g

t h e m s e l v e s . . . to c o n t e m p l a t e sauve qui peut in i t ia t ives

a g a i n s t o n e a n o t h e r . . . [ they] h a d no c o n c e p t i o n of t h e

scale o f t h e d i s a s t e r t o w h i c h t h e i r lack o f in i t ia t ive a n d

so l ida r i ty was e x p o s i n g t h e m . "

T h e W e s t e r n i n d u s t r i a l e c o n o m i e s n o w h a d t h e w o r s t o f

b o t h inf la t ion a n d r e c e s s i o n .

T h e h i g h e r oil p r i ces a c t e d as a f i sca l d r a g , a t ax . H i g h e r

p r i ce s fo r oil m e a n t h i g h e r p r i c e s fo r fe r t i l i ze r a n d plast ics

a s well a s g a s o l i n e a n d h e a t . I f y o u r g a s o l i n e bill a n d y o u r

h e a t i n g bill a n d y o u r food bill w e n t u p , y o u m i g h t d e f e r

b u y i n g a c a r ; t h e n t h e a u t o m o b i l e m a n u f a c t u r e r laid of f

s o m e w o r k e r s , w h o i n t u r n c u t b a c k o n t h e i r o w n p u r ­

c h a s e s . T h e r ecess ion o f 1 9 7 4 - 7 5 was t h e w o r s t s ince t h e

D e p r e s s i o n o f t h e 1930s .

A n d a t t h a t s a m e t i m e , in f la t ion w e n t u p s h a r p l y . I n t h e

U n i t e d S ta t e s d i r e c t a n d i n d i r e c t e n e r g y costs a m o u n t t o

10 p e r c e n t o f p r e t a x h o u s e h o l d i n c o m e . A 1 0 0 - p e r c e n t

r i se in e n e r g y costs m e a n t 1 0 - p e r c e n t in f la t ion , all by itself.

N o t all t h e e n e r g y was oil, a n d n o t all oil c a m e f r o m t h e

M i d d l e Eas t ; b u t t h e p r i c e o f O P E C oil h a d j u s t g o n e u p

4 0 0 p e r c e n t , a n d t h e O P E C p r i c e b e c a m e t h e w o r l d p r i c e .

E x c e p t i n t h e U n i t e d S ta t e s . T h e " invis ib le d i k e " h a d

b e e n b l o w n away , b u t t h e T e x a s p r i c e s w e r e n o w lower

t h a n t h e w o r l d p r i c e . R e g u l a t i o n f r o m W a s h i n g t o n p e r ­

m i t t e d t h e T e x a s p r i c e t o r i se o n l y g r a d u a l l y . S o m e sec­

t i ons o f t h e U n i t e d S ta tes u s e d d o m e s t i c oil a n d gas , s o m e

1 8 4 Adam Smith

u s e d i m p o r t e d oil, a n d W a s h i n g t o n t r i e d to f i nd a p r i c e

a n d s t r u c t u r e t h a t w o u l d s p r e a d t h e cost ac ros s t h e w h o l e

c o u n t r y , a n d i t d i d n o t w a n t t h e oil p r o d u c e r s to h a v e a

s u d d e n b o n a n z a .

"Just Go in There and Take it"

S u d d e n l y , i t s e e m e d , t h a t co ld w i n t e r o f 1 9 7 5 , t h e Wes t

d i s c o v e r e d t h a t ha l f t h e oil i t u s e d d i d n ' t b e l o n g to it, a n d

t h a t d i s c o v e r y led to an o u t b u r s t o f j i n g o i s m . (Jingo c a m e

f r o m a n i n e t e e n t h - c e n t u r y Br i t i sh mus i c -ha l l s o n g : we

d o n ' t w a n t to f ight , b u t by j i n g o i f we do . . . ) By j i n g o , i f

t h e y w o u l d n ' t g ive us t h e oil, m a y b e we w o u l d j u s t take it.

" I a m n o t s a y i n g t h e r e a r e n o c i r c u m s t a n c e s i n w h i c h t h e

U n i t e d S ta tes m i g h t r e s o r t t o f o r c e , " sa id H e n r y Ki s s inge r ,

i n c a r e f u l d o u b l e n e g a t i v e s .

H a w k s go t t o p lay w a r r o o m . T h e focus o f t h e w a r g a m e

was t h e P e r s i a n Gulf.

" T h e m a i n o p e r a t i o n , " w r o t e The Economist o f L o n d o n ,

" w o u l d p r o b a b l y be c a r r i e d o u t by a n a v a l task fo rce wi th

t h r e e or f o u r a i r c r a f t c a r r i e r s . . . h e l i c o p t e r - b o r n e m a ­

r i n e s f r o m assau l t sh ip s . . . o c c u p y se lec ted pos i t i ons in

t h e G h a w a r oilf ield, t a k e posses s ion o f t h e Ras T a n u r a

r e f i n e r y a n d t e r m i n a l . " W r i t i n g i n Harper's u n d e r t h e

p s e u d o n y m Miles I g n o t u s ( " U n k n o w n So ld i e r " ) , d e f e n s e

ana lys t a n d J o h n s H o p k i n s p r o f e s s o r E d w a r d L u t t w a k also

p i c k e d t h e Ras T a n u r a r e f i n e r y a n d t h e G h a w a r f i e l d .

" B r i t i s h L e y l a n d M o t o r s , t h e l a r g e s t i n d u s t r i a l c o m b i n e i n

B r i t a i n , " h e w r o t e , i n "Se i z ing A r a b Oi l , " "was bu i l t u p

t h r o u g h t h e w o r k o f t e n s o f t h o u s a n d s o f E n g l i s h w o r k e r s

o v e r a p e r i o d o f m o r e t h a n s e v e n t y y e a r s . [I t c o u l d be ]

a c q u i r e d by a s ing le family in K u w a i t wi th o n l y six d a y s '

w o r t h o f oil p r o d u c t i o n . W h y s h o u l d w e c o u n t e n a n c e t h e

t r a n s f e r o f h u n d r e d s o f b i l l ions o f d o l l a r s ' w o r t h o f r ea l

P A P E R M O N E Y 1 8 5

e s t a t e a n d i n d u s t r y t o t h e o w n e r s h i p o f r e v e r s e co lon ia l ­

is ts?"

A n d s o t h e U n k n o w n S o l d i e r w r o t e o f m a r i n e s , t h e

E i g h t y - s e c o n d A i r b o r n e , f i r e - f igh t ing t e a m s t o p u t o u t t h e

f i r e s i n t h e oil wel ls , a n d a n I n t e r n a t i o n a l Oi l a n d A i d

O r g a n i z a t i o n to lift t h e oil, a l loca te f u n d s for i n v e s t m e n t ,

d i s t r i b u t e m o n e y t o p o o r c o u n t r i e s , a n d "g ive s o m e m o n e y

to t h e S a u d i s e t al. t o p a y fo r e s sen t i a l i m p o r t s . " A n d i f we

c o u l d n o t d o th i s , w h a t w e r e t h e a r m e d fo rces g o o d for?

W h y p a y $ 8 5 bi l l ion a y e a r fo r i m p o t e n c e ? I ron i ca l l y , t h e

f an ta sy m i l i t a r y - o p e r a t i o n s c h e m e s w e r e d i r e c t e d a g a i n s t

t h e p r i c e " d o v e , " S a u d i A r a b i a , w h i c h i n c r e a s e d its p r o ­

d u c t i o n t o m e e t t h e d e m a n d , w h i c h p u t its s u r p l u s e s

p r o m p t l y i n t o W e s t e r n b a n k s , a n d w h i c h s e e m e d t o w o r r y

m o r e a b o u t t h e stabil i ty o f t h e W e s t t h a n t h e W e s t d i d

itself.

T h e success o f t h e C l u b n o t o n l y i n s p i r e d t h e mi l i t a ry -

f an t a sy s p a s m s , i t i n s p i r e d i m i t a t i o n . T h e u r a n i u m p r o ­

d u c e r s a l r e a d y h a d a p l a n fo r a c a r t e l . T h e c o p p e r p r o ­

d u c e r s b e g a n t a l k i n g t o o n e a n o t h e r . I n t h e m o s t

u n g e n t l e m a n l y m o v e o f all, t h e B o r d e a u x w i n e g r o w e r s ,

t h e C o n s e i l I n t e r p r o f e s s i o n e l d u V i n d e B o r d e a u x , go t

t o g e t h e r t o d o s o m e t h i n g a b o u t a g o o d v i n t a g e i n B o r ­

d e a u x . M . J e a n M i c h e l C o u r t e a u , its d i r e c t o r , a n n o u n c e d

t h a t t h e a s soc ia t ion , w h i c h c o u n t e d a m o n g its m e m b e r s

C h a t e a u L a f i t e - R o t h s c h i l d a n d C h a t e a u M o u t o n - R o t h s -

ch i ld a n d C h a t e a u L a t o u r , was t a k i n g " c e r t a i n s t eps t o

r e g u l a t e t h e m a r k e t a n d s tabi l ize p r i c e s . " W i n e g lu t ! T h e

g r o w e r s w e r e t o c o n s e r v e a n d c u t b a c k .

O P E C c a n n o t b e b l a m e d for th is o n e . T e n o f its t h i r t e e n

m e m b e r s w e r e M u s l i m c o u n t r i e s w h e r e w i n e d r i n k i n g was

officially p r o s c r i b e d .

W a s O P E C rea l ly s u c h a m o n o l i t h i c , a l l - p o w e r f u l ca r t e l ?

I t e x i s t e d for t e n y e a r s a n d w a s n o t ef fec t ive a t all, un t i l ,

1 8 6 Adam Smith

wi th t h e S u e z C a n a l c losed , t h e F r e n c h b u l l d o z e r w r e c k e d

t h e T a p l i n e . O n c e s u p p l i e s w e r e t igh t , t h e o r g a n i z a t i o n

a n d t h e i d e a w e r e r e a d y for t h e c i r c u m s t a n c e s . T h e cu t ­

b a c k s n e c e s s a r y for c o n t r o l d i d n o t c o m e f r o m cool , p r e ­

h e n s i l e f inge r s r e a c h i n g for a m a r k e t p l a c e ; t h e y c a m e f i r s t

f r o m t h e pas s ions o f pol i t ics , w h a t t h e A r a b s cal led t h e

R a m a d a n W a r — t h e Y o m K i p p u r W a r . T h e oil p r i c e

q u a d r u p l e was such a shock to t h e W e s t e r n e c o n o m i e s t h a t

d e m a n d fell, a n d b y A p r i l 1975 O P E C was p r o d u c i n g a t

35 p e r c e n t less t h a n its to ta l capac i ty .

O n e can s e e — m a y b e — w h y Mi l ton F r i e d m a n t h o u g h t i t

was a b o u t t o b r e a k u p . T h e r e w e r e two smal l p r o d u c e r s ,

E c u a d o r a n d G a b o n , t h a t n e e d e d all t h e m o n e y t h e y c o u l d

ge t . T h e n t h e r e w e r e t h e m e d i u m - s i z e p r o d u c e r s , a t a b o u t

2 mi l l ion b a r r e l s a d a y — A l g e r i a , I n d o n e s i a , V e n e z u e l a ,

N i g e r i a — a l l wi th g r o w i n g p o p u l a t i o n s , all w a n t i n g t o c o n ­

s e r v e oil, b u t n e e d i n g m o n e y . I f t h e d e m a n d d r o p p e d ,

w o u l d n ' t t h e y cu t in to o n e a n o t h e r ' s m a r k e t s ?

I t wasn ' t n e c e s s a r y . K u w a i t a n d S a u d i A r a b i a c u t back .

S a u d i A r a b i a , a l o n e , was a t h i r d o f O P E C . T h e i n t e r n a ­

t i ona l T e x a s R a i l r o a d C o m m i s s i o n h a d f o u n d its T e x a s ,

b u t i t d i d n o t w o r k n e a r l y a s nea t ly , d e t e r m i n i n g t h e p r o -

r a t i o n i n g a n d t h e m a r k e t s . T h e oil c o m p a n i e s s o u g h t o u t

t h e m a r k e t s , d e l i v e r e d a n d r e f i n e d t h e oil. " W h y s h o u l d

w e abo l i sh t h e oil c o m p a n i e s , " said I r a n ' s J a m s h i d A m o u ­

z e g a r , " w h e n t h e y can f i n d t h e m a r k e t s for u s a n d r e g u l a t e

t h e m ? W e c a n j u s t sit back a n d let t h e m d o i t for u s . "

E v e n wi th a n excess capac i ty o f 3 5 p e r c e n t , O P E C h e l d

t h e p r i c e u p . A n d O P E C ' s S e c r e t a r i a t i n V i e n n a n o w h a d

seve ra l e c o n o m i c s t ud i e s i n p r o g r e s s . T h e C a r a c a s f i r m o f

P a r r a , R a m o s 8c P a r r a , was l o o k i n g i n to O P E C ' s oil a n d

o t h e r e n e r g y s o u r c e s , a s was C h e m Sys t ems I n t e r n a t i o n a l

o f N e w Y o r k . T h e H o c h s c h u l e fu r W e l t h a n d e l a n d t h e

Ba t t e l l e R e s e a r c h I n s t i t u t e o f G e n e v a h a d a c o n t r a c t , fo r

2 8 mi l l ion A u s t r i a n schi l l ings , t o c o n s t r u c t O P E C ' s W o r l d

E n e r g y M o d e l .

P A P E R M O N E Y 1 8 7

The Receiving End

T h e o w n e r s o f t h e oil, e v e r y w h e r e i n t h e w o r l d , w e r e

f o u r t i m e s a s r i ch a f t e r T e h r a n ; s o o n t h e y w o u l d b e t e n

t i m e s a s r i c h . S o m e t i m e s th i s m a d e a d r a m a t i c d i f f e r e n c e

in l i fe-style.

T a k e S h e i k h R a s h i d o f D u b a i . D u b a i i s o n e o f w h a t t h e

Br i t i sh ca l l ed t h e T r u c i a l S t a t e s w h e n , i n t h e n i n e t e e n t h

c e n t u r y , t h e y e s t a b l i s h e d a m i l i t a r y p r e s e n c e in th is l ight ly

p o p u l a t e d a r e a o f d e s e r t a n d salt m a r s h e s o n t h e P e r s i a n

Gulf . S h e i k h R a s h i d , b e f o r e t h e oil , h a d d e r i v e d his in­

c o m e f r o m t h e dhows, t h e w o o d e n sa i l ing s h i p s t h a t ca l led

a t h is c u s t o m s h o u s e , o n t h e way t o " r e e x p o r t " — s o m e said

s m u g g l e — g o l d a n d s i lver t o I n d i a . B e f o r e t h e o i l — t h e

f i r s t s t r i ke was n o t u n t i l 1 9 5 7 — S h e i k h R a s h i d f e u d e d wi th

D e i r a , t h e r iva l vi l lage a c r o s s t h e c r e e k . T h e w e a p o n s u s e d

i n th i s f e u d w e r e t h e c a n n o n s f r o m o ld s h i p s , s o m e o f

t h e m h u n d r e d s o f y e a r s o l d . T h e c a n n o n s w e r e s tu f f ed

wi th r a g s a n d p i s t ons f r o m h i j a c k e d ca r s , a n d s ince c a n -

n o n b a l l s w e r e i n s h o r t s u p p l y , a n i g h t l y t r u c e a f t e r s u n s e t

p r a y e r s p e r m i t t e d t h e c o m b a t a n t s t o c o m b t h e ba t t l e f ie lds

a n d r e t r i e v e t h e c a n n o n b a l l s .

O n e d a y , i n t h e p r e -o i l e r a , S h e i k h R a s h i d a c c e p t e d a

d i n n e r i n v i t a t i o n ac ros s t h e c r e e k , a n d t h e n h a d his m e n

kill o f f his hos t s . I n t h e bes t M i d d l e E a s t e r n t r a d i t i o n —

a n d n o t u n l i k e R i c h a r d I I I — h e c o n s o l i d a t e d his v ic tory

b y m a r r y i n g t h e t h i r t e e n - y e a r - o l d d a u g h t e r o f t h e v a n ­

q u i s h e d r u l e r o f D e i r a t o his b r o t h e r . T h e S h e i k h a S a n a ,

as s h e i s ca l l ed , i s a h i g h - s p i r i t e d w o m a n w h o o n c e s h o t

h e r h u s b a n d ' s f o u r t h wife . S h e says, o f h e r e a r l y y e a r s ,

t h a t h e r e x p e r i e n c e s m a d e h e r s t r o n g , a n d s h e h a s n o w

bu i l t up a t h r i v i n g t ax i fleet. S h e i k h R a s h i d m a r r i e d his

d a u g h t e r , M i r i a m , t o t h e n e i g h b o r i n g S h e i k h o f Q a t a r ,

w h o l en t h i m t h e m o n e y fo r a b r i d g e ac ro s s t h e c r e e k .

1 8 8 Adam Smith

E v e n b e f o r e t h e oil, S h e i k h R a s h i d was c o n s i d e r e d a wise

r u l e r .

A m a n of s o m e c h a r m , S h e i k h R a s h i d i s access ible to his

p e o p l e . H e lists h i m s e l f i n t h e D u b a i t e l e p h o n e d i r e c t o r y ,

w i t h n u m b e r s for l iv ing r o o m , b e d r o o m , yach t , a n d ga r ­

d e n . On his d e s k i s a little p l a q u e t h a t says, " I t ' s NICE to be

I M P O R T A N T , b u t it's I M P O R T A N T to be N I C E . " F o r his p e o p l e

S h e i k h R a s h i d h a s bu i l t t w o h a r b o r s , two i n t e r n a t i o n a l a i r ­

p o r t s , a c e m e n t fac tory , a n d a n a l u m i n u m s m e l t e r .

S h e i k h R a s h i d ' s i n c o m e i s n o w a b o u t $1 bi l l ion a yea r ,

a n d n o o n e h u n t s for c a n n o n b a l l s a n y m o r e i n D u b a i . His

in - law, t h e S h e i k h o f Q a t a r , p r o d u c e s m o r e oil a n d i s e v e n

r i c h e r . I n t h e n i n e t e e n t h c e n t u r y t h e Br i t i sh navy sai led

t h e P e r s i a n G u l f t o p r o t e c t t h e r o u t e s t o I n d i a ; n o w t h e i r

f o r m e r P e r s i a n G u l f w a r d s c o m e t o L o n d o n . S h e i k h

R a s h i d ' s a m b a s s a d o r , M o h a m m e d M a h d i a l -Ta j i r , d r o v e

t h e Br i t i sh p r e s s t o x e n o p h o b i c f r enzy b y p u r c h a s i n g $ 6 0

mi l l ion in E n g l i s h rea l e s t a t e in two y e a r s : t o w n h o u s e s ,

c o u n t r y h o u s e s , a n d t h e c e n t u r i e s - o l d cas t les o f d u k e s .

" A r a b s l ike b e a u t i f u l t h i n g s , " h e said s imply . T h e Br i t i sh

p r e s s s h u d d e r e d de l ic ious ly a t t h e n e w , M e p h i s t o p h e l i a n

i m a g e of its v is i tors . T h e Daily Mirror w a r n e d of " schoo l ­

g i r l s m i s s i n g a f t e r d a t i n g A r a b s , " w h i s k e d of f t o "exc lus ive

r e s t a u r a n t s in Rolls Royces . "

T h i s m y t h o l o g y — t h e A r a b a s M e p h i s t o p h e l e s — w a s n o t

l im i t ed to B r i t a i n . In t h e p o p u l a r f i lm Network t h e S a u d i s

b o u g h t a n A m e r i c a n T V n e t w o r k . A n d t h e i n v e s t i g a t o r s

w h o o f f e r e d b r i b e s t o c o n g r e s s m e n a n d v i d e o t a p e d t h e

b r i b e s i n " A b s c a m " w e r e d e c k e d o u t a s " A r a b s h e i k h s . "

W h i l e t h e p o p u l a r Br i t i sh p r e s s d e t a i l e d " O r d e a l o f

S h e i k h ' s L o v e Slave ," t h e Br i t i sh i n t h e a g g r e g a t e b e n e ­

f i t ed f r o m t h e n e w oil p r i c e , b e c a u s e i t h a d cost so m u c h

to e s t ab l i sh t h o s e o f f s h o r e p l a t f o r m s in t h e icy w a t e r s o f

t h e N o r t h Sea . F o r t h e m o m e n t t h e y w e r e p a y i n g m o r e

for i m p o r t e d oil, b u t a t $ 1 1 . 6 5 a b a r r e l , t h e N o r t h Sea oil

w a s n o w a solid i n v e s t m e n t ; i t m e a n t self-suff iciency a n d a

P A P E R M O N E Y 1 8 9

s t r o n g p o u n d . T h e N o r w e g i a n s , t o o , w e r e h a p p y , b e c a u s e

t h e y o w n e d t h e o t h e r ha l f o f t h e N o r t h Sea f i e l d .

Y o u w o u l d c o u n t , a s h a p p y , all t h e o t h e r oil-field o w n ­

e r s . M e x i c o m i g h t b e ab le t o h a n d l e its e x p l o d i n g p o p u l a ­

t i o n , L o u i s i a n a c o u l d r e d u c e its i n c o m e t ax , A l a s k a w o u l d

abo l i sh its i n c o m e t ax , a n d u n d e r T e x a s t h e r e w e r e 1 2

bi l l ion b a r r e l s o f oil r i s i n g t o w a r d t h e O P E C p r i c e a s fast

a s W a s h i n g t o n w o u l d let t h e m .

Y o u w o u l d h a v e t o c o u n t , a s h a p p y , t h e oil c o m p a n i e s .

I n t h e m i d - 1 9 7 0 s t h e y a i r e d t h e i r u n h a p p i n e s s i n fu l l -page

a d s ; t h e y c o n s t r u c t e d c h a r t s t o s h o w t h e y w e r e m a k i n g

o n l y p e n n i e s o n t h e d o l l a r . B u t t h e y w e r e still c a r r y i n g a n d

r e f i n i n g t h e O P E C oil , a n d t h e y o w n e d , t h e m s e l v e s , a lot

o f oil o u t s i d e O P E C . T h e y w e r e t h e b i g g e s t c o r p o r a t i o n s

i n t h e w o r l d , a n d t h e i r g r o s s v o l u m e was g o i n g u p , b e c a u s e

t h e r a w m a t e r i a l was g o i n g u p .

W i t h t h e i r e n o r m o u s c a s h flow, t h e oil c o m p a n i e s w e r e

a lso b u y i n g o t h e r r e s o u r c e s — c o a l , u r a n i u m , oil s h a l e , a n d

t i m b e r l a n d — a s s e t s " w h o s e p o t e n t i a l p ro f i t i n c r e a s e s i n e x ­

o r a b l y w i t h t h e r i s i n g v a l u e o f t h e r e s e r v e s , " said t h e N a ­

t i o n a l B u r e a u o f E c o n o m i c R e s e a r c h .

C o u n t , a s h a p p y , t h e i n v e s t m e n t b a n k e r s w h o sold t h e

b o n d s for t h e p i p e l i n e s , a n d t h e m a k e r s o f d r i l l i n g r igs

a n d d r i l l i n g m u d a n d l o g g i n g i n s t r u m e n t s a n d o f f s h o r e

p l a t f o r m s .

C o u n t , a s h a p p y , t h e a r m o r e r s a n d s u t l e r s t o t h e M i d d l e

Eas t . I r a n s i g n e d u p for $ 1 9 bi l l ion i n a r m s o v e r s e v e r a l

y e a r s , S a u d i A r a b i a fo r $ 1 5 b i l l ion ; a n d a l t h o u g h t h a t d i d

n o t w i p e o u t e v e n ha l f o f o n e y e a r ' s s u r p l u s fo r O P E C , t h e

p h o n e s r a n g a t t h e a r m o r e r s .

C o u n t , a s h a p p y , t h e t h i r t y b igges t b a n k s i n t h e w o r l d .

T h e S a u d i s a n d Kuwa i t i s , b e i n g c o n s e r v a t i v e , w a n t e d t i m e

t o t h i n k , a n d t h e y p u t m o n e y i n t o t h e b a n k s . S ince b i g g e r ,

t h e y t h o u g h t , i s b e t t e r , t h e b i g g e r b a n k s c o u l d u s e t h e

p e t r o d o l l a r d e p o s i t s t o s t r e n g t h e n t h e i r pos i t i on i n b a n k ­

i n g . T h e b a n k s h a d t h e m o n e y o n s h o r t - t e r m d e p o s i t a n d

1 9 0 Adam Smith

w e r e l e n d i n g i t l o n g - t e r m , w h i c h p o s e d a p o t e n t i a l p r o b ­

l e m .

C o u n t , a s h a p p y , t h e b u i l d e r s w h o go t t h e mul t ib i l l i on -

d o l l a r c o n s t r u c t i o n c o n t r a c t s : B e c h t e l o f S a n F r a n c i s c o ;

F l u o r o f I r v i n e , C a l i f o r n i a ; a n d R a l p h P a r s o n s , I n c . , o f

P a s a d e n a .

C o u n t , a s h a p p y , t h e a g e n t s a n d c o n t a c t m e n w h o m a d e

t h e d e a l s . A B o m b a y Pars i w i t h t h e u n u s u a l n a m e o f S h a -

p o o r R e p o r t e r was s o use fu l t o t h e Br i t i sh i n g e t t i n g c o n ­

t r ac t s f r o m t h e S h a h ' s I r a n t h a t h e was k n i g h t e d a n d

b e c a m e Sir S h a p o o r R e p o r t e r . T h e fees w e r e ve ry h i g h .

T h e S e n a t e S u b c o m m i t t e e o n M u l t i n a t i o n a l C o r p o r a t i o n s

f o u n d t h a t L o c k h e e d h a d p a i d o n e S a u d i , A d n a n Ka-

s h o g g i , $ 1 0 6 mi l l ion for a s s i s t ance . K a s h o g g i ' s f o r m e r wife

said i n h e r d i v o r c e sui t t h a t h e r f o r m e r h u s b a n d h a d bu i l t

u p a n e t w o r t h o f $ 2 . 4 b i l l ion , w h i c h w o u l d h a v e m a d e

h i m easily t h e m o s t p r o s p e r o u s m e m b e r o f his S t a n f o r d

class . H i s $44 -mi l l i on yach t h a d a h e l i c o p t e r l a n d i n g p a d ,

a n d his $3 -mi l l i on a p a r t m e n t i n M a n h a t t a n ' s O l y m p i c

T o w e r b o a s t e d a s w i m m i n g p o o l . H e h a d a K o r e a n b o d y ­

g u a r d a n d a valet w h o s h a v e d h i m e v e r y m o r n i n g in a

spec ia l c h a i r , r ep l i cas o f w h i c h w e r e in e a c h o f his twelve

h o u s e s .

W h e n T e x a s oil m a n N e l s o n B u n k e r H u n t e m b a r k e d

on his s c h e m e to invest heavi ly i n t h e w o r l d ' s s i lver m a r k e t ,

s o m e said t o c o r n e r it, f o r m e r T e x a s g o v e r n o r J o h n C o n -

nal ly a r r a n g e d a m e e t i n g wi th a n o t h e r S a u d i , S h e i k h

K h a l e d Bin M a h f o u z , w h o t o o k o v e r a f loor o f W a s h i n g ­

t o n ' s M a y f l o w e r H o t e l fo r his fo r ty b o d y g u a r d s .

O n a m o r e m o d e s t s c a l e — p e r h a p s seven f i g u r e s i n s t e a d

o f n i n e — w e r e t h e N e w Y o r k a n d W a s h i n g t o n a n d L o n ­

d o n law f i r m s t h a t s o m e t i m e s m a t c h e d b u y e r s a n d se l lers

a n d s o m e t i m e s d r e w u p t h e c o n t r a c t s . T h e b i g o n e s s t ayed

invis ib le ; a m o n g t h e visible w e r e F r e d D u t t o n , K e n n e d y

a i d e t u r n e d W a s h i n g t o n l awye r , a n d G e r a l d P a r s k y , Assis­

t a n t S e c r e t a r y o f t h e T r e a s u r y t u r n e d W a s h i n g t o n l awyer ;

P A P E R M O N E Y 1 9 1

a n d w h o i s th i s , p a c i n g t h e f l o o r o f t h e I n t e r c o n t i n e n t a l

in R i y a d h , w a i t i n g for his c o n t a c t ? I s it, c a n i t b e — S p i r o

A g n e w ?

Y o u w o u l d h a v e t o c o u n t a s c o n t e n t , i f n o t h a p p y , t h e

e n e r g y a n d oil e x p e r t s , a n d t h e f o u n d a t i o n s , for t h e y s o o n

t u r n e d o u t m o r e t h a n 120 fu l l - l eng th s t u d i e s o f t h e oil

s i t u a t i o n , o f w h i c h on ly t h e first 36 w e r e co l l ec t ed for th is

b o o k .

E v e r y g a m e h a s w i n n e r s a n d lose r s . T h e lose r s w e r e all

o f u s w i t h o u t a s t ake i n e n e r g y . We p a i d h i g h e r g a s o l i n e

p r i ce s a n d h i g h e r h e a t i n g a n d a i r - c o n d i t i o n i n g bills,

h i g h e r a i r l i ne fa res , h i g h e r p r i c e s fo r t h e d e r i v a t i v e s o f oil.

O u r s t a n d a r d o f l iv ing w e n t d o w n . T h e w i n n e r s w e r e n o t

j u s t t h o s e w h o h a d t h e oil , b u t t h o s e w h o c o u l d se rv ice t h e

o w n e r s o f t h e oil.

T h e y w e r e n o t j u s t A m e r i c a n s ; i n fact , A m e r i c a n s d i d

n o t d o ve ry wel l . F e w e r t h a n 2 p e r c e n t o f t h e c o n s t r u c t i o n

c o n t r a c t s i n f o u r t e e n M i d d l e E a s t e r n c o u n t r i e s w e r e w o n

b y A m e r i c a n f i r m s — f e w e r t h a n f i rms f r o m Braz i l a n d Y u ­

gos lavia , a n d far b e h i n d S o u t h K o r e a .

T h e p r e s i d e n t o f F r a n c e , V a l e r y G i s c a r d d ' E s t a i n g ,

m a d e a t r i u m p h a n t t o u r t h r o u g h t h e A r a b s ta tes , p l u g g i n g

t h e P a l e s t i n i a n c a u s e a n d w i n n i n g fac to ry o r d e r s ; i n t h e

1960s F r a n c e h a d h a d a spec ia l r e l a t i o n s h i p wi th I s r ae l . A

S c a n d i n a v i a n f l o a t i n g e x h i b i t i o n s t e a m e d i n t o e i g h t A r a b

p o r t s , d i s p l a y i n g p r o d u c t s t o 1 0 0 , 0 0 0 v is i tors .

M u h a m m a d Ali , t h e b o x e r M u h a m m a d Ali , b a r n ­

s t o r m e d t h r o u g h S a u d i A r a b i a , p r o m o t i n g T o y o t a ca r s .

W i t h e v e r y p a s s i n g d a y , s o m e o n e else h a d a n i n v e s t m e n t

i n t h e s t a t u s q u o .

"I Feel Like Renouncing My Offspring"

T h e r e i s o n e c h a r a c t e r i n t h e s to ry w h o was n o t pa r t i c ­

u la r ly h a p p y . T h a t was J u a n P a b l o P e r e z A l f o n s o . W h e n

1 9 2 Adam Smith

h e left t h e g o v e r n m e n t , h e r e t i r e d b e h i n d t h e walls o f his

e s t a t e in Los C h o r o s , in C a r a c a s , t h e e s t a t e i tself a smal l

f a r m h e h a d b o u g h t i n 1 9 4 1 . T h e oil b o o m h a d b r o u g h t

t h e e x p a n d i n g city o u t t o a n d b e y o n d his f a r m . H e still

k e p t his a u s t e r e hab i t s , r e a d i n g t h r o u g h t h e n i g h t a n d

r i s i n g a t d a w n . He was a r e c o g n i z a b l e f igure on t h e s t r ee t s

o f C a r a c a s , b e c a u s e h e h a d s h a v e d of f his t h i n n i n g

h a i r a n d l o o k e d like a V e n e z u e l a n Yul B r y n n e r , o r Kojak .

W h e n his p a r t y o f f e r e d t o r u n h i m for p r e s i d e n t , h e r e ­

fu sed . H o w , he a s k e d , c o u l d V e n e z u e l a h a v e a p r e s i d e n t

w h o d i d n o t o w n a d i n n e r j a c k e t , w h o l ived s o s imp ly , w h o

w o u l d n o t c u t a r i b b o n or go to a cockta i l p a r t y ?

H e h a d a d m i r e d t h e T e x a s R a i l r o a d C o m m i s s i o n , h e

sa id , for its c o n s e r v a t i o n p r ac t i c e s , a n d h e w a n t e d O P E C

to be a c l u b t h a t w o u l d give oil its p r o p e r va lue a n d e x t e n d

its life. I t was i n t e n d e d to w r e s t t h e p o w e r f r o m t h e g r e a t

oil c o m p a n i e s , a n d t o s h o w t h e i n d u s t r i a l n a t i o n s h o w t h e y

w a s t e d r e s o u r c e s .

" T h e n a t i o n s o f O P E C , " h e sa id , " s h o u l d b e a n e x a m p l e

to t h e r e s t o f t h e w o r l d in t h e way t h e y l ive."

B u t O P E C was n o t a p r o p e r e x a m p l e . I t was s e t t i n g

itself u p i n t h e m o d e o f t h e was te fu l i n d u s t r i a l w o r l d . I t

b u r n e d oil i tself a t a f e r o c i o u s r a t e , an a f f r o n t to t h e c a r e ­

ful, c o n s e r v a t i v e P e r e z A l f o n s o . H e s c o l d e d t h e V e n e z u e ­

l ans .

T h e Norteamericanos w e r e s i t t i ng in gas l ines , t h e i r cities

h a d b r o w n o u t s , t h e y w e r e finally l e a r n i n g a b o u t oil a s a

r e s o u r c e , a n d w h a t was C a r a c a s d o i n g ? I t was k e e p i n g t h e

l igh ts o n all n i g h t ! Big A m e r i c a n ca r s w e r e s p e e d i n g o n

t h e h i g h w a y s ! A n d w h a t o f V e n e z u e l a ' s l e a d e r s h i p o f

O P E C ? I t was d i s a p p e a r i n g ! L e a d e r s h i p s h o u l d n o t c o m e

f r o m t h e n u m b e r o f b a r r e l s o f oil p u m p e d e v e r y d a y ; i t

s h o u l d c o m e f r o m moral f i b e r . W a s O P E C t o b e j u s t A r a b s ?

T o w a r d P e r e z A l f o n s o t h e V e n e z u e l a n s felt r ea l a f fec­

t i on , b u t i t was t h e af fec t ion A m e r i c a n s feel w h e n t h e y

r e a d o f B o s t o n B r a h m i n g r a n d d a m e s r i s i ng t o l e a r n

P A P E R M O N E Y 1 9 3

G r e e k a n d H e b r e w a t six o 'c lock i n t h e m o r n i n g , o r walk­

i n g f r o m B o s t o n to P r o v i d e n c e in m i d w i n t e r , b e c a u s e i t i s

g o o d fo r t h e m . Pla in l iv ing a n d h i g h t h i n k i n g w e r e a d m i ­

r a b l e , b u t u n - L a t i n , n o ? A n d P e r e z A l f o n s o w a s a little

e c c e n t r i c , w i t h his b a l d h e a d a n d all t h i s s c o l d i n g a b o u t

r e s o u r c e s a n d s a v i n g e v e r y t h i n g , a n d w a l k i n g a r o u n d Ca ­

r a c a s i n Boy S c o u t s h o r t s . A n d g e t t i n g u p a t d a w n — w e l l ,

wi th oil b r i n g i n g i n f o u r t i m e s a s m u c h , t h a t w a s w h e n y o u

w e r e g o i n g to b e d , C a r a c a s was a p a r t y , t h e tropicales w e r e

d a n c i n g o n t h e t a b l e t o p s , H . S t e r n a n d G u c c i w e r e d o i n g

a t h r i v i n g b u s i n e s s , l u x u r y a p a r t m e n t s w i t h d a z z l i n g views

o f t h e sea w e r e s p r i n g i n g u p , m o n e y w a s e v e r y w h e r e . A

V e n e z u e l a n n e w s m a g a z i n e p u t t h a t s e r i o u s b a l d h e a d o n

its c o v e r ; n o sub t i t l e , j u s t " P e r e z A l f o n s o " — y o u k n e w w h a t

y o u w o u l d g e t i n s i d e , s o b e r t h i n k i n g , w o r r y i n g a b o u t t h e

f u t u r e — w a s n ' t t h a t g o o d , f o r V e n e z u e l a t o h a v e its o w n

R a l p h W a l d o E m e r s o n ? W h a t a n i r o n y fo r t h e m a n w h o

b e g a n t h e g r e a t t r a n s f e r o f w e a l t h t o b e s o s p a r t a n .

P e r e z A l f o n s o d i d n o t l ike t h e S h a h , o r S h e i k h Y a m a n i .

" I h a v e n o t a s t e fo r e m p e r o r s , " h e sa id . T h e y w e r e n o t

p r e s e r v i n g t h e r e s o u r c e , a n d t h e y w e r e s q u a n d e r i n g its

p r o c e e d s . H e w o r r i e d a b o u t t h e in f lux o f w e a l t h i n t o V e n ­

e z u e l a . " W e a l t h d i s t o r t s t h e v a l u e s o f p e o p l e w h o d o n o t

w o r k fo r i t ," h e sa id .

A n d a s f o r O P E C , i t s e e m e d d e v o t e d t o m a x i m i z i n g its

p r i c e s , i t was n e g l e c t i n g w h a t was d o n e wi th t h e r e v e n u e s

r e c e i v e d , i t was n o t c o n s e r v a t i o n i s t e n o u g h .

" I m a y b e t h e f a t h e r o f O P E C , " h e sa id , " b u t n o w s o m e ­

t i m e s I feel l ike r e n o u n c i n g my o f f s p r i n g . "

J u a n P a b l o P e r e z A l f o n s o d i e d o f c a n c e r i n 1 9 7 9 , leav­

i n g a wife a n d f i v e g r o w n c h i l d r e n . T h a t u p r i g h t , u n -

L a t i n , a u s t e r e P u r i t a n c o n s c i e n c e was e v i d e n t e v e n i n his

last i n s t r u c t i o n s .

H e was t o b e c r e m a t e d i n t h e U n i t e d S ta t e s , t o avo id a n y

p u b l i c e x p r e s s i o n o f s o r r o w i n V e n e z u e l a . H i s h o u s e was

t o g o t o a s m a l l f o u n d a t i o n , t h e C e n t e r fo r P e r m a n e n t

1 9 4 Adam Smith

L e a r n i n g . P e o p l e w e r e t o c o m e a n d en joy t h e g a r d e n a n d

n o t i c e t h e b e a u t i e s o f n a t u r e ; f r o m t h e r e t h e y c o u l d look

o u t a t t h e s m o g o v e r C a r a c a s .

A b d u l l a h T a r i k i , t h e o t h e r h a l f o f t h e O d d C o u p l e , c o n ­

t i n u e d his c o n s u l t i n g b u s i n e s s . T h e S a u d i g o v e r n m e n t ,

w i th B e d o u i n g e n e r o s i t y , c o n t i n u e d t o p a y his o ld sa la ry ,

e v e n wh i l e h e was i n ex i le . S a a d o u n H a m m a d i , t h e u n ­

s m i l i n g I r a q i oil m i n i s t e r . U n i v e r s i t y o f W i s c o n s i n P h . D . ,

b e c a m e his c o u n t r y ' s f o r e i g n m i n i s t e r a n d l a t e r w a r n e d

t h e U n i t e d S ta tes a g a i n s t h e l p i n g I r a n . S h e i k h Y a m a n i ' s

b a l a n c i n g ins t inc t s s e r v e d h i m well , a n d h e s u r v i v e d e v e n

his w o r l d w i d e ce lebr i ty . J a m s h i d A m o u z e g a r , t h e C o r n e l l -

t r a i n e d I r a n i a n w h o h o s t e d t h e St. V a l e n t i n e ' s D ay M a s ­

s a c r e , fled I r a n w h e n t h e S h a h fell. T h e p r e s e n t I r a n i a n

U N e m b a s s y d i d n o t k n o w w h e r e h e w a s — s o m e w h e r e i n

t h e U n i t e d S ta tes . " T h e s w i n e i s h i d i n g , " said t h e K h o ­

m e i n i r e p r e s e n t a t i v e s .

T h e e x e c u t i v e s o f t h e S e v e n Sis ters a r e still i n p l ace , o r

a r e i n p r o s p e r o u s r e t i r e m e n t . H o w a r d ' s Mobi l d i d n o t s u r ­

vive. H o w a r d was ve ry b i t t e r a b o u t his t r e a t m e n t by th i s

p a r t i c u l a r Sis ter ; t h e y h a d c a n c e l e d his c o n t r a c t , h e sa id ,

b e c a u s e h e h a d n o t sold e n o u g h gas .

The Second Oil Crisis

I t was a mi l i t a ry fana t ic , C o l o n e l M u a m m a r e l - Q a d d a f i

o f L ibya , w h o set up t h e Firs t Oil Cris is o f t h e 1970s . A

d e v o u t M u s l i m w h o s o m e t i m e s w e n t t o t h e d e s e r t for a

m o n t h t o m e d i t a t e , h e h o r r i f i e d t h e W e s t e r n d e m o c r a c i e s

b y his s u p p o r t o f t h e i n c r e d i b l e U g a n d a n d i c t a t o r I d i

A m i n a n d b y his s u p p o r t o f t e r r o r i s t g r o u p s e v e r y w h e r e .

H i s mi l i t ancy h a d g o a d e d t h e O P E C n a t i o n s i n t o t h e i r

t r i u m p h a t t h e St. V a l e n t i n e ' s D a y M a s s a c r e , w h i c h t a u g h t

t h e m t h e i r s t r e n g t h a n d g a v e t h e m t h e c o h e s i o n for t h e i r

a c t i ons i n t h e 1973 A r a b - I s r a e l i w a r .

P A P E R M O N E Y 1 9 5

I t was a r e l i g i o u s f ana t i c , t h e A y a t o l l a h R u h o l l a h K h o ­

m e i n i , w h o p r e c i p i t a t e d t h e S e c o n d Oi l Cr is is o f t h e la te

1970s a n d w h o s e r e g i m e , in a way i t d i d n o t p a r t i c u l a r l y

i n t e n d , r e i t e r a t e d t h e p r e a c h i n g s o f t h e O d d C o u p l e .

O P E C m e e t i n g s d u r i n g t h e 1970s f e a t u r e d d e b a t e s b e ­

t w e e n t h e h a w k s , w h o w a n t e d t h e p r i c e t o g o u p r i g h t

a w a y , a n d t h e d o v e s , w h o w a n t e d t o k e e p i t d o w n . T h e

L i b y a n s a n d I r a q i s , r e v o l u t i o n a r y mi l i t a ry r e g i m e s , c o n ­

t e s t e d t h e l e a d e r s h i p o f t h e S a u d i s , a t r a d i t i o n a l m o n a r c h y

w i t h a n e n o r m o u s i n c o m e a n d a s t a k e i n t h e s tabi l i ty o f

t h e W e s t .

U n t i l t h e S h a h fell, t h e r e was a m o d e s t s u r p l u s o f oil i n

t h e c h a n n e l s o f t h e w o r l d . H i g h e r p r i c e s h a d f o r c e d s o m e

c u t b a c k i n d e m a n d , a n d t h e r e was a d d i t i o n a l oil f r o m

A l a s k a a n d t h e N o r t h Sea . O P E C w a t c h e r s n o t e d t h a t t h e

c a r t e l was g e t t i n g less r e a l m o n e y , b e c a u s e t h e W e s t e r n

c u r r e n c i e s w e r e d e p r e c i a t i n g f a s t e r t h a n t h e oil p r i c e was

g o i n g u p .

B u t I r a n w a s a m o n g t h e l a r g e p r o d u c e r s , a t 6 mi l l ion

b a r r e l s a d a y , a n d w h e n t h e S h a h was d e p o s e d , p r o d u c t i o n

f r o m I r a n ' s oil f i e ld s d r o p p e d to a f r ac t ion o f t h e p r e v i o u s

to ta l s . T h a t m i s s i n g 6 mi l l ion b a r r e l s a d a y was e n o u g h to

c r e a t e a s h o r t a g e a g a i n , a n d t h e s c r a m b l e r e s u m e d .

M o s t w o r l d oil , i n t h e 1970s , was sold t h r o u g h t h e S e v e n

S is te rs , t h e g r e a t oil c o m p a n i e s , a n d o n l o n g - t e r m c o n ­

t r a c t s . T h e Br i t i sh e c o n o m i s t P a u l F r a n k e l , w h o h a d g iven

u s t h e p h r a s e " t h e invis ible d i k e , " c a m e u p wi th a m e t a ­

p h o r fo r t h e s i t u a t i o n o f t h e oil c o m p a n i e s . " T h e y h a d lost

t h e h e i g h t s , " h e sa id , " b u t t h e y still c o n t r o l l e d t h e p l a i n s . "

B u t t h e A y a t o l l a h K h o m e i n i ' s r e v o l u t i o n a f f ec t ed t h e

c o n t r o l o f t h e p l a in s . Poli t ical ly, i t s o u g h t t o d i s t u r b t h e

t r a d i t i o n a l r e g i m e s i n S a u d i A r a b i a a n d K u w a i t . A n d i t

m a d e oil d e a l s , n o t w i t h t h e S e v e n S i s t e r s , b u t wi th t h e

n a t i o n s t h a t s c r a m b l e d t o T e h r a n a n d t o t h e " s p o t " m a r ­

ke t .

I n t h e oil t r a d e t h e " s p o t " m a r k e t i s ca l l ed " R o t t e r d a m , "

b e c a u s e oil c a n be b o u g h t , on a da i ly bas is , f r o m t h e h u g e

1 9 6 Adam Smith

t a n k e r s a n c h o r e d i n t h e R o t t e r d a m h a r b o r . T h e " R o t t e r ­

d a m " m a r k e t , t h o u g h , i s all o v e r t h e w o r l d . I t i s rea l ly t h e

T e l e x , t h r o u g h w h i c h t h e t r a d e s a r e m a d e . A m o n g t h e

m a j o r t r a d e r s a r e Mi t sub i sh i , t h e e n o r m o u s J a p a n e s e c o m ­

b i n e , a n d P h i l i p p B r o t h e r s , t h e c o m m o d i t y a r m o f t h e

i n t e r n a t i o n a l f i r m o f E n g e l h a r d ; b u t t h e r e a r e m a n y o t h ­

e r s .

T h e I r a n i a n s h u t d o w n h a d m a d e s u p p l i e s t i gh t . T h e

I s rae l i s a n d t h e S o u t h A f r i c a n s c o u l d n o l o n g e r b u y I r a ­

n i a n oil, a n d t h e y w e r e l o o k i n g for oil w h e r e v e r t h e y c o u l d

f i n d it. T h e I t a l i ans h a d o n l y two w e e k s ' w o r t h o f s u p p l y

i n t h e t a n k s , a n d t h e S p a n i a r d s a n d t h e S w e d e s w e r e also

low.

T h e n e w I r a n i a n r e g i m e , wi th n o loyalty t o t h e o ld c o n ­

t r ac t s wi th t h e Seven Sis ters , b e g a n to sell t o t h e " s p o t "

m a r k e t . O n M o n d a y , M a y 14, 1979 , t h e I r a n i a n s sold oil

a t $ 2 3 a b a r r e l , a b o v e t h e p o s t e d O P E C p r i c e o f $ 1 3 . 3 4 .

O n T u e s d a y i t was $ 2 8 . O n T h u r s d a y i t was $ 3 4 . I r o n i ­

cally, t h e S e v e n Sis ters w e r e a m o n g t h e b i d d e r s ; a subs id ­

ia ry of T e x a c o secre t ly m a d e a d e a l fo r 2 mi l l ion b a r r e l s a t

$ 3 2 . A t K h a r g I s l a n d i n t h e P e r s i a n Gulf, t h e r e was t h e

u s u a l l o n g l ine o f t a n k e r s w a i t i n g t o t a k e o n I r a n i a n oil .

T h e t a n k e r s wi th l o n g - t e r m c o n t r a c t s w e r e to ld t o stay

a n c h o r e d . ( T h e y w e r e p a y i n g , i nc iden ta l l y , $ 3 5 , 0 0 0 a d a y

i n p a r k i n g fees.) T h e t a n k e r s wi th " s p o t " c o n t r a c t s w e n t

r i g h t t o t h e h e a d o f t h e l ine .

N o t s u r p r i s i n g l y , t h e " s p o t " m a r k e t b e g a n t o a t t r a c t t h e

oil . A m e r i c a n oil c o m p a n i e s w i th r e f i ned oil in t h e C a r i b ­

b e a n b e g a n s e n d i n g i t t o t h e " s p o t " m a r k e t , s e e k i n g t o

m a x i m i z e prof i t s . T h e p r i c e i n t h e " s p o t " m a r k e t w e n t a s

h i g h as $ 4 2 a b a r r e l .

T h e C a r t e r a d m i n i s t r a t i o n , k n o w i n g t h a t A m e r i c a n s ge t

i r r i t a t e d w h e n t h e r e a r e gas l ines , a b r u p t l y o f f e r e d a s u b ­

sidy o f $5 a b a r r e l to ge t t h e C a r i b b e a n oil b ack a g a i n ; t h e

oil i t s o u g h t was h e a t i n g oil , fo r t h e n e x t w i n t e r , b u t i t d i d

n o t w a n t t h e s u m m e r g a s o l i n e s u p p l i e s h u r t b y r e f i n e r s

P A P E R M O N E Y 1 9 7

w h o h a d t o swi tch t h e i r m i x b e c a u s e o f t h e h e a t i n g - o i l

d i v e r s i o n .

T h e I n t e r n a t i o n a l E n e r g y A g e n c y m i g h t a s well h a v e

p a s s e d o u t b o x i n g g loves , o r h o c k e y s t icks . J a n o s F e k e t e ,

t h e H u n g a r i a n b a n k e r , h a d o n c e g o n e t o t h e office ex ­

p e c t i n g t o h e a r r e p o r t s o f t h e M i g h t y W e s t r i s i n g u p . T h e

M i g h t y W e s t r o s e u p n o w , i n t o a n i n t e r n a l d o n n y b r o o k .

T h e G e r m a n s , tota l ly d e p e n d e n t o n f o r e i g n oil , sa id t h a t

t h e A m e r i c a n subs idy was j u s t h e l p i n g t o d r i v e u p t h e

p r i c e a n d h i n t e d t h a t m a y b e t h e A m e r i c a n s w a n t e d t h e

p r i c e u p b e c a u s e i t h e l p e d t h e A m e r i c a n oil p r o d u c e r s a n d

h u r t G e r m a n i n d u s t r y . T h e y o f f e r e d t h e Br i t i sh i n d u s t r i a l

i n v e s t m e n t f o r a c u t o f t h e N o r t h Sea oil . T h e Br i t i sh

r e f u s e d . A c c u s i n g f i n g e r s w e r e p o i n t e d i n all d i r e c t i o n s .

O t h e r O P E C n a t i o n s p u l l e d s o m e oil f r o m l o n g - t e r m

c o n t r a c t s a n d sold i t i n t h e " s p o t " m a r k e t . S o m e o f t h e

O P E C n a t i o n s saw t h e d a n g e r s . O P E C was l o s ing c o n t r o l !

L ibya a n d A l g e r i a b r o k e t h e $ 2 3 . 5 0 - a - b a r r e l ceiling set by

t h e c a r t e l . " P r i c e s a r e o u t o f c o n t r o l , " w a r n e d Ali Kha l i f a

a l - S a b a h , t h e oil m i n i s t e r o f K u w a i t . O P E C was b r e a k i n g

a p a r t , b u t o n t h e u p s i de . N o o n e h a d t h o u g h t o f t h a t .

A t t h e D e p a r t m e n t o f E n e r g y i n W a s h i n g t o n , officials

t o t t e d u p s u p p l y a n d d e m a n d . T h e r e s h o u l d h a v e b e e n a n

excess of a mi l l i on b a r r e l s a d a y , so w h y w e r e p r i c e s g o i n g

u p ? " T h e s p o t p r i c e ref lec ts u n c e r t a i n t y , n o t s h o r t a g e , "

sa id o n e a n a l y s t t h e r e .

T h e w o r l d was o n a b i n g e o f t a n k t o p p i n g . T h e J a p a ­

n e s e b o u g h t t w e n t y o c e a n g o i n g t a n k e r s a n d p u m p e d t h e m

full. E v e r y r e t i r e d t a n k e r o f d u b i o u s a n c e s t r y f o u n d s o m e ­

o n e wi l l ing t o t a k e i t h o m e . I n d e p e n d e n t oil c o m p a n i e s

f o u n d t h e m s e l v e s c u t back b y t h e S e v e n S is te rs , w h o w e r e

i n t u r n g e t t i n g c u t back , a n d t h e y h a d t o h u s t l e u p t h e i r

o w n s o u r c e s .

E v e n t u a l l y t h e b i n g e lost its m o m e n t u m , b e c a u s e t h e r e

w e r e n o m o r e t a n k s t o t o p . T h e O P E C m i n i s t e r s m e t a n d

r a i s e d t h e p r i c e a g a i n . T h e " s p o t " m a r k e t was s u p p o s e d t o

1 9 8 Adam Smith

be o n l y for d a y - t o - d a y p u r c h a s e s , b u t i t was d e t e r m i n i n g

t h e p r i c e o f oil.

T h e b i n g e o f t h e S e c o n d Oi l Cr is i s , y o u will n o w see , i s

v e r y r e l e v a n t t o this d i s cus s ion o f p a p e r m o n e y . R e m e m ­

b e r Sir T h o m a s G r e s h a m , w h o s e law said b a d m o n e y

d r i v e s o u t g o o d , m e a n i n g b a d m o n e y d r i v e s g o o d m o n e y

o u t o f c i r cu l a t i on a n d in to s av ings . T h e b a d m o n e y i s

s p e n t . In t h e S e c o n d Oil Cris is w h a t was saved was oil, a n d

w h a t was s p e n t was money. The store of value had become oil.

T h e y e n , t h e m a r k s , t h e d o l l a r s , t h e f r ancs , w e r e s p e n t ;

t h e oil was saved .

T h e lesson was n o t lost . Oi l was t h e g o o d c u r r e n c y ,

m o n e y t h e b a d . W h e n t h e I r a n i a n s r e s t o r e d p r o d u c t i o n ,

t h e y m a d e m o r e m o n e y p r o d u c i n g a t 3 mi l l ion b a r r e l s a

d a y t h a n t h e y w o u l d h a v e m a d e a t t h e i r f o r m e r r a t e o f 6

mi l l ion b a r r e l s a d a y . T h e K u w a i t i s said t h e y m i g h t c u t

bac k by 5 0 0 , 0 0 0 b a r r e l s a d a y , t h e N i g e r i a n s said t h e y

w o u l d cu t back 2 0 0 , 0 0 0 b a r r e l s a d a y , t h e V e n e z u e l a n s

1 5 0 , 0 0 0 b a r r e l s a d a y .

Oi l d o e s n o t m a k e ve ry g o o d m o n e y . I t d o e s n o t sit

n e a t l y in b a n k vaul t s . Y o u c a n n o t t r a d e a q u a r t of i t for a

t u n a s a n d w i c h , or a b a r r e l fo r a p a i r of s h o e s . On a ve ry

l a r g e scale y o u m i g h t be ab le to t r a d e i t fo r a mi l l ion p a i r s

o f s h o e s , b u t t h e t r a d e w o u l d b e c u m b e r s o m e . G o l d b e ­

c a m e m o n e y b e c a u s e i t was s o d e s t r u c t i b l e a n d f i n i t e ; t h e

d e s t i n y of oil i s to b u r n . I ron ica l ly , m o n e t i z i n g t h e oil

h e l p e d t o p r o d u c e t h e a g e o f p a p e r m o n e y , a n d t h e d e s ­

t iny o f p a p e r m o n e y i s a lso t o b u r n , e x c e p t t h a t p a p e r

m o n e y is rea l ly a m i s n o m e r , b e c a u s e t h e m o n e y is rea l ly

b l ips i n a c o m p u t e r , a n d b l ips do n o t b u r n . N o t l i teral ly.

B u t let us see w h a t y o u t h i n k i s a s t o r e of v a l u e . Y o u c a n

h a v e $ 1 , 0 0 0 in do l l a r s , a n d we will p a y y o u 10 p e r c e n t in

i n t e r e s t . I f y o u t ake t h e $ 1 , 0 0 0 in s t e r l i ng , we will pay y o u

14 p e r c e n t . F o r yen , a n d m a r k s , a n d Swiss f r ancs , we will

p a y y o u t h e a p p r o p r i a t e i n t e r e s t r a t e . O r w e will let y o u

h a v e $ 1 , 0 0 0 w o r t h o f oil, s t o r e d a n y w h e r e y o u w a n t .

P A P E R M O N E Y 1 9 9

I f y o u c h o o s e t h e oil , y o u ge t n o i n t e r e s t , a n d i n t e r e s t

c o m p o u n d s . K n o w i n g w h a t y o u d o , w o u l d y o u r a t h e r h a v e

t h e m o n e y o r t h e oil?

T h e Fi rs t Oi l Cr is i s , i n 1 9 7 3 - 7 4 , t o o k oil f r o m $ 2 . 6 9 t o

$ 1 1 . 6 5 a b a r r e l , a b o u t a q u a d r u p l e . T h e S e c o n d Oi l Cr is i s ,

fo l lowing t h e a r r i v a l o f t h e A y a t o l l a h K h o m e i n i , p r o d u c e d

r o u g h l y a d o u b l e , to a b o u t $ 2 8 a b a r r e l in 1 9 7 9 .

T h e C l u b was k e e p i n g u p t h e g a m e t h a t w o r k e d s o wel l :

L e a p f r o g . C u t ba c k t h e p r o d u c t i o n , a n d s u p p l i e s will b e

t i g h t . C u t b a c k t h e d e l i v e r i e s , a n d t h e oil c o n s u m e r s w h o

c a n ' t ge t oil will go to t h e " s p o t " m a r k e t , w h i c h i s re la t ive ly

sma l l c o m p a r e d t o t h e v o l u m e o f w o r l d oil . T h e p r i c e i n

t h e " s p o t " m a r k e t p o p s u p . T h e n y o u say, well , t ha t ' s t h e

t r u e v a l u e o f oil , a n d y o u call a m e e t i n g o f t h e oil m i n i s t e r s

a n d m o v e t h e O P E C p r i c e o f oil u p t o w a r d t h e " s p o t "

m a r k e t p r i c e . B u t i f t h e " s p o t " m a r k e t m o v e s d o w n a g a i n ,

y o u d o n ' t m o v e t h e official p r i c e b a c k d o w n , b e c a u s e n o w

y o u h a v e a n e w l o n g - t e r m O P E C p r i c e . A n d y o u h a v e

r o o m t o d o th i s b e c a u s e , t a k i n g O P E C a s a w h o l e , y o u

n e e d o n l y 22 mi l l ion o f y o u r 30 mi l l i on b a r r e l s a d a y t o

p a y y o u r bills. T h e o t h e r 8 mi l l i on b a r r e l s a r e " d i s c r e t i o n ­

a r y , " a n d y o u c a n m e s s a r o u n d w i t h t h e m , s h u t i n s o m e o f

t h e m i f n e c e s s a r y . Yet L e a p f r o g w a s n o t d e s i g n e d b y

O P E C m i n i s t e r s ; t h e y m e r e l y fo l lowed pol i t ica l e v e n t s a n d

t o o k a d v a n t a g e .

T h e g r e a t oil c o m p a n i e s a r e i n a c u r i o u s a n d a m b i g u o u s

p o s i t i o n . O n t h e o n e h a n d , t h e y a r e g e t t i n g b i g g e r a n d

b i g g e r , i n d o l l a r t e r m s , b e c a u s e t h e cos t o f t h e i r basic m a ­

t e r i a l i s g o i n g u p . E v e r y O P E C boos t m a k e s t h e i r n o n -

O P E C oil , w h i c h t h e y still o w n , m o r e v a l u a b l e . B u t O P E C

i s n o w g o i n g " d o w n s t r e a m , " i n t o t a n k e r s a n d r e f i ne r i e s

a n d p e t r o l e u m p r o d u c t s . O P E C c o n t r o l s t h e h e i g h t s , a n d

h a s , s ince t h e St. V a l e n t i n e ' s Day M a s s a c r e . N o w , s k i r m i s h

by s k i r m i s h , i t i s m o v i n g i n t o t h e p l a in s . I t c a n say, " W e

2 0 0 Adam Smith

w a n t y o u to c h a r t e r t a n k e r s fo r u s , we w a n t y o u to b u i l d a

r e f i n e r y for us , w e w a n t y o u t o b u y o u r r e f i ne ry p r o d u c t s

a n d l iquef ied p e t r o l e u m gases , a n d w e will tell y o u t h e

p r i c e . "

T h e g r e a t oil c o m p a n i e s c o n t r o l l e d , i n 1974 , 7 8 p e r c e n t

o f t h e oil i n i n t e r n a t i o n a l t r a d e . By 1979 t h e y c o n t r o l l e d

on ly 4 4 p e r c e n t , a n d t h e i r c o n t r o l was fast f a d i n g . " W e ' r e

n o t e v e n s u r e we can g u a r a n t e e a s u p p l y t o o u r o w n affil­

i a t es , " said a v i c e - p r e s i d e n t o f She l l , " o u r o w n re f ine r i e s ,

o u r o w n f i l l i n g s t a t i ons . "

W h o b o u g h t t h e oil t h e m a j o r s d i d n o t b u y ? T h e Wes t ­

e r n g o v e r n m e n t s t h e m s e l v e s , a n d t h e i r t r a d i n g c o m p a ­

n ies . T h e F r e n c h s i g n e d a t e n - y e a r c o n t r a c t wi th I r a q , a n d

t h e n h u s t l e d off t o S a u d i A r a b i a a n d V e n e z u e l a . T h e

S w e d e s , t h e G e r m a n s , a n d t h e J a p a n e s e w e r e o n t h e s a m e

c i rcu i t . W h e n t h e I r a n i a n m i l i t a n t s se ized A m e r i c a n h o s ­

t a g e s , t h e U n i t e d S ta tes cu t o f f t r a d e wi th I r a n . J a p a n

b o u g h t t h e I r a n i a n oil, wi th w h a t t h e C a r t e r a d m i n i s t r a ­

t ion c h a r g e d was " u n s e e m l y h a s t e . " J a p a n , t h e J a p a n e s e

Min i s t ry o f T r a d e a n d I n d u s t r y p o i n t e d o u t , de fens ive ly ,

uses 80 p e r c e n t of its oil fo r i n d u s t r y , its ve ry life; in t h e

U n i t e d S ta tes on ly 2 0 p e r c e n t i s u s e d for i n d u s t r y . J a p a n ' s

u se o f e n e r g y , said t h e M T I , was q u i t e s p a r i n g .

W h e n t h e o t h e r i n d u s t r i a l c o u n t r i e s l o o k e d a t t h e

U n i t e d S ta tes , t hey felt ve ry i n s e c u r e .

O n e o u t o f e v e r y e i g h t b a r r e l s o f oil p r o d u c e d i n t h e

f ree w o r l d b u r n e d u p o n A m e r i c a n h i g h w a y s .

T h e A m e r i c a n s p a i d fo r t h e i r i m p o r t e d oil b y p r i n t i n g

d o l l a r s a n d s e n d i n g t h e m o u t . T h a t was w e a k e n i n g t h e

i n t e r n a t i o n a l m o n e t a r y sys t em.

T h e A m e r i c a n s h a d n o r ea l e n e r g y pol icy, c o u l d n ' t ge t

i t t h r o u g h t h e i r C o n g r e s s ; a n d wi th A m e r i c a n d e m a n d s o

h i g h , O P E C c o u l d k e e p p o p p i n g t h e p r i c e .

T h e A m e r i c a n s w e r e less v u l n e r a b l e t h a n t h e r e s t o f t h e

w o r l d , b e c a u s e t h e i r o w n oil m e t h a l f t h e i r n e e d s . J a p a n

P A P E R M O N E Y 2 0 1

h a d n o e n e r g y a t all; G e r m a n y i m p o r t e d t w o - t h i r d s o f its

e n e r g y , all its oil . E a c h p o p o f t h e O P E C p r i c e m a d e s o m e

A m e r i c a n s r i c h e r ; i n fact, t h e A m e r i c a n s w h o o w n e d t h o s e

d o m e s t i c oil wells w e r e n o w $ 4 0 0 bi l l ion r i c h e r t h a n w h e n

t h e p r i c e o f oil b e g a n t o m o v e .

T h e A m e r i c a n s o w n e d f i v e o f t h e S e v e n S is te rs : E x x o n ,

T e x a c o , Gulf , Mobi l , a n d S t a n d a r d o f C a l i f o r n i a . W i t h

A r a m c o t h e y h a d s o m e access t o O P E C oil . T h e Br i t i sh

o w n e d all o f o n e Sis ter , B P , a n d h a l f o f Roya l D u t c h / S h e l l .

T h e D u t c h o w n e d t h e o t h e r h a l f o f Roya l D u t c h / S h e l l , a n d

t h e Br i t i sh h a d t h e N o r t h Sea oil a n d t h e D u t c h s o m e

N o r t h Sea g a s . T h e d a m n A n g l o s h a d i t m a d e .

Will American oil greed doom the world? a s k e d The Economist

o f L o n d o n . Q u i t e p r o p e r l y , i t a n s w e r e d t h e q u e s t i o n b y

w a r n i n g its r e a d e r s t h a t t h e A m e r i c a n e c o n o m y g r e w a n d

b o u g h t t h e w o r l d ' s g o o d s a n d n e e d e d oil t o d o so , a n d t h a t

d o m e s t i c A m e r i c a n oil p r o d u c t i o n w a s d e c l i n i n g , s o t h e

A m e r i c a n s n e e d e d m o r e f r o m a b r o a d .

B u t t h e image o f A m e r i c a was t h a t o f a ca re l e s s g i a n t in

a t e n - g a l l o n h a t d r i v i n g a s i x t e e n - c y l i n d e r Cad i l l ac at

n i n e t y mi les a n h o u r , a n d g e t t i n g r i c h e r i n t h e p r o c e s s .

T h e i n t e r n a t i o n a l i n s t i t u t i o n s o f t h e M i g h t y W e s t , t h e

O E C D a n d its I n t e r n a t i o n a l E n e r g y A g e n c y , t h u s b e c a m e

e v e n w e a k e r . I ts m e m b e r s felt t h e y d i d n o t h a v e t h e d e l e ­

g a t e d p o w e r s t o d e a l wi th t h e s i t u a t i o n . T h e I n t e r n a t i o n a l

E n e r g y A g e n c y was w o r k i n g o n p l a n s fo r t h e W e s t t o c u t

its i m p o r t s a n d t o a l loca te s u p p l i e s , a n d t h e W e s t e r n gov­

e r n m e n t s a l l o w e d t h e i r d e l e g a t e s t o g o t o Pa r i s o r G e n e v a

o r B r u s s e l s , c h e c k i n to h o t e l r o o m s , g o t o m e e t i n g s , ta lk t o

e a c h o t h e r , a n d p u t t h e s u m m a r i z e d d i s c u s s i o n s i n plast ic

b i n d e r s . B u t m e a n w h i l e t h e g o v e r n m e n t s w e n t o u t a n d

s i g n e d up oil on a c o u n t r y - t o - c o u n t r y bas is .

W h e n t h e I n t e r n a t i o n a l E n e r g y A g e n c y m e t , i t p r e ­

s u m e d s o m e f l e x i b i l i t y i n t h e d i s t r i b u t i o n o f w o r l d oil . I t

c o u l d say, " L e t ' s all a g r e e n o w , w e c u t b a c k h e r e a n d h e r e ,

2 0 2 Adam Smith

J a p a n ge t s a little m o r e , t h e U n i t e d S ta tes ge t s a li t t le less ,"

a n d e a c h p o i n t c o u l d be d e b a t e d . B u t a s 5 a n d 6 mi l l ion

b a r r e l s a d a y w e r e s i g n e d up on a c o u n t r y - t o - c o u n t r y bas is ,

t h a t f l e x i b i l i t y d i m i n i s h e d . L o n g - t e r m d e a l s w e r e i n p lace .

W h e n t h e S e v e n Sis ters r a n t h e w o r l d , t h e y w e r e ab le t o

a l loca te t h e oil . B u t t h e S e v e n Sis ters n o l o n g e r r a n t h e

w o r l d .

W i t h t h e Wes t s o d i v i d e d , t h e m e m b e r s o f t h e C l u b

c o u l d d o t h e fo l lowing :

T h e y c o u l d d e t e r m i n e h o w m u c h oil t o give t h e i r for­

m e r m a s t e r s , t h e Seven S is te rs .

T h e y c o u l d d e c i d e h o w m u c h t o c o m p e t e wi th t h e Seven

Sis te rs in r e f i n i n g a n d m a r k e t i n g , a n d t a k e i t o r leave it.

T h e y c o u l d ask for t e c h n i c a l a s s i s t ance , f i n a n c i n g , a n d

a n y t h i n g else on a s h o p p i n g list.

T h e y c o u l d t e a r u p a n y c o n t r a c t t h e y d i d n o t l ike, e v e n

i f t h e c o n t r a c t was on ly a m o n t h o ld a n d was s u p p o s e d to

r u n for t e n y e a r s , o n t h e g r o u n d s t h a t i t n o l o n g e r

m a t c h e d t h e n e e d s o f a s o v e r e i g n p e o p l e . T h e y c o u l d

c h a n g e t h e t e r m s o f c o n t r a c t s retroactively; t h e y c o u l d say,

" W e h a v e d e c i d e d y o u o w e us a bi l l ion d o l l a r s m o r e for

1 9 7 7 , " a n d t h e r e w o u l d b e n o a p p e a l .

T h e y c o u l d d e t e r m i n e h o w m u c h n e w oil t o e x p l o r e for ,

a n d in s o m e p laces n o b o d y i s i n a n y h u r r y t o e x p l o r e fo r

n e w oil , b e c a u s e t h e g a m e i s g o i n g j u s t f ine t h e way i t is.

T h e y c o u l d say, " T h e p r i c e o f oil i s g o i n g t o g o u p b y

t h e r a t e o f in f la t ion , plus s o m e m o r e , b e c a u s e we w a n t a

r ea l r e t u r n fo r o u r asse t . "

A n d t h e y c o u l d also g r a n t f avor s fo r t h e c o r r e c t o p i n ­

ions o u t s i d e t h e oil t r a d e : W h a t d o y o u t h i n k o f n u c l e a r

p o w e r ? W h a t d o y o u t h i n k o f t h e c u r r e n t s i t u a t i o n i n t h e

M i d d l e Eas t? H o w d o y o u feel a b o u t Yas i r A r a f a t a n d t h e

P a l e s t i n e L i b e r a t i o n O r g a n i z a t i o n ?

W e ask, C a n O P E C h o l d t o g e t h e r ? T h e e c o n o m i s t s h a v e

said n o , i t c an ' t , it's a c a r t e l , c a r t e l s d o n ' t su rv ive , i t says so

P A P E R M O N E Y 2 0 3

r i g h t h e r e i n th is b o o k . B u t t h e e c o n o m i s t s k n e w o n l y

n u m b e r s , n o t asibaya, n o t a n A r a b s e n s e o f c o m m u n i t y ,

n o t t h e T h i r d W o r l d f l ex ing its m u s c l e s . W e ask, W h e r e

will t h e p r i c e go? T e n y e a r s a g o n o t a s ing le e c o n o m i s t

c o u l d f o r e s e e a t e n f o l d i n c r e a s e in p r i c e . O P E C is a C l u b ,

n o t q u i t e a c a r t e l , n o t a s well o r g a n i z e d as t h e T e x a s Rai l ­

r o a d C o m m i s s i o n , s o m e t i m e s m o r e l ike a b u n c h o f e i g h ­

t e e n t h - c e n t u r y p r i v a t e e r s w a i t i n g fo r t h e fat S p a n i s h

g a l l e o n s t o pa s s . I t h a s s u r v i v e d a 3 5 - p e r c e n t d r o p in d e ­

m a n d for its oil , in 1 9 7 5 ; i t h a s s u r v i v e d l a t e - n i g h t s c r e a m ­

i n g a m o n g its m e m b e r s a t m e e t i n g s ; i t h a s s u r v i v e d e v e n a

r ea l s h o o t i n g w a r b e t w e e n t w o o f its m a j o r p r o d u c e r s . F o r

all its q u a r r e l s , i t h a s h e l d t o g e t h e r b e t t e r t h a n t h e M i g h t y

W e s t . I t will su rv ive un t i l t h e oil c o n s u m e r s d e v e l o p e n ­

e r g y i n d e p e n d e n c e a n d t h e d i p l o m a t i c c o h e s i o n a n d skills

t h a t a r e a p p r o p r i a t e t o m a j o r p o w e r s .

I n t h e n e x t c h a p t e r w e will see w h e t h e r w e a r e c lose t o

s u c h i n d e p e n d e n c e , a n d w h a t w e c o u l d d o i f w e w e r e .

M e a n w h i l e , t h e p r i c e will g o n o t o n l y w h e r e e c o n o m i c d e ­

m a n d t a k e s it, fo r t h e rea l i ty o f t h e w o r l d i s m o r e r a g g e d

t h a n t h e w o r l d o f e c o n o m i s t s . T h e p r i c e will g o w h e r e

O P E C t a k e s it, a n d t h a t p r i c e i s d e t e r m i n e d n o t o n l y b y

e c o n o m i c d e m a n d b u t b y pol i t ica l o p p o r t u n i t y . T h e p r e s ­

e n t s e c r e t a r y - g e n e r a l o f O P E C says h e h a s l o o k e d o v e r t h e

n u m b e r s , a n d h e t h i n k s m a y b e $ 6 0 a b a r r e l w o u l d b e fair ,

a n d , l ike t h e e c o n o m i s t s ' , his g u e s s i s a s g o o d a s a n y b o d y

else 's .

O P E C b r i n g s t o m i n d a r a t h e r m o n o l i t h i c i m a g e n o w .

B u t O P E C i s p e o p l e , j u s t a s t h e S e v e n S is te rs w e r e .

A b d u l Aziz , t h e oil m i n i s t e r , d r i v e s his c a r to his office.

M a y b e h e ge t s d r i v e n t o his off ice, b e c a u s e t h e s t r e e t s a r e

c r o w d e d , a n d h e c a n d o s o m e r e a d i n g . H e i s p a r t o f t h e

e d u c a t e d e l i te o f his c o u n t r y . H e m a y t h i n k s o m e t h i n g l ike

th i s , w h i c h h a p p e n s t o b e exac t ly w h a t o n e s u c h m i n i s t e r

sa id : " M y m o t h e r d i e d o f t y p h o i d b e c a u s e t h e r e was n o

d o c t o r in t o w n . S h e was o n l y t w e n t y - e i g h t . I a l m o s t lost my

2 0 4 Adam Smith

s igh t b e c a u s e t h e r e was n o eye d o c t o r . T h e r e w e r e scor­

p i o n s i n o u r h o u s e : I was s t u n g m o r e t h a n o n c e . T h e

i n f a n t m o r t a l i t y r a t e was sixty to s e v e n t y p e r c e n t . A family

h a d six o r s even c h i l d r e n i n o r d e r t o e n d u p k e e p i n g o n e

o f t h e m . W e h a d n o e lec t r ic i ty . U n l e s s y o u b e a r i n m i n d

th is y e a r n i n g o f o u r p e o p l e for a b e t t e r life, y o u will n o t

u n d e r s t a n d w h a t i s g o i n g o n . "

T h e n h e ge t s t o his office a n d his m a l e s e c r e t a r y says,

" M r . I c h i b a n o f J a p a n , M r . L u n d q u i s t o f S w e d e n , M r . C o s -

t a n z o o f Braz i l , a n d M r . M u n c h a u s e n o f G e r m a n y a r e all

w a i t i n g to see y o u . "

A b d u l Aziz looks i n to his o u t e r office, w h e r e e a c h o f t h e

g e n t s i s s i t t ing wi th a b lack b r i e f ca se . T h e y a r e all e y e i n g

e a c h o t h e r n e r v o u s l y . T h e y a r e well s c r u b b e d a n d well

d r e s s e d . A b d u l Aziz k n o w s t h a t e a c h o n e i s g o i n g t o say,

" I j u s t r e a d a b o u t t h e n e w I s rae l i s e t t l e m e n t s i n t h e W e s t

B a n k . T e r r i b l e , t e r r i b l e . " T h e n h e will o p e n his b r i e fcase ,

th is w e l l - s c r u b b e d , nea t ly s u i t e d W e s t e r n e r , a n d m a k e a

p i t ch . T h e o t h e r s will still b e i n t h e w a i t i n g r o o m . A b d u l

Aziz i s a l r e a d y an h o u r la te , b e c a u s e t i m e h a s a d i f f e r e n t

i m p o r t a n c e i n t h e M i d d l e Eas t . N o m a t t e r ; A b d u l Aziz

r a t h e r l ikes k e e p i n g all t h e W e s t e r n e r s i n t h e w a i t i n g

r o o m . H e k n o w s t h a t e a c h o f t h e b u y e r s h a s b e e n to ld ,

" S e c u r e t h e oil n o w , w e d o n ' t w a n t a n y gas l ines , w e m u s t

k e e p o u r i n d u s t r y g o i n g , pol i t ical ly we c a n ' t r isk a co ld

w i n t e r . " A b d u l Aziz looks o u t t h e w i n d o w a n d en joys t h e

m o m e n t . T w e n t y y e a r s a g o t h e Seven Sis ters w o u l d h a v e

to ld his c o u n t r y h o w m u c h oil i t c o u l d p r o d u c e .

O n l y t w e n t y yea r s ! h e t h i n k s . H o w m u c h h a s h a p p e n e d

in t w e n t y y e a r s !