My memorandum concluded with the following warning: “However, all of the activity so far is completely tactical and reactive. I have therefore called for a quick study of our basic objectives in the situation, and an analysis of what role we should be playing in trying to help solve it.”
Before the questions could be answered or the studies completed, the negotiations had run their course. Irwin had been sent off after a talk between Nixon and Secretary of State William Rogers in which I did not participate. I do not know if any specific instructions were given to him; the probability is that they were general. In the absence of a political directive to force a showdown, the first instinct of American negotiators is to reassure their opposite numbers about our intentions on the theory that a show of goodwill improves the general atmosphere. Not surprisingly, Irwin proudly reported to the President on January 25 that in the three countries he had visited (Iran, Saudi Arabia, and Kuwait), he had stressed that we would follow our tradition of not becoming involved in the details of commercial negotiations — neatly removing the one fear that might have moderated producer demands: the threat of United States governmental intervention. If confrontation was to be avoided and if our government would not involve itself in the details, the preordained outcome was that the companies must yield.
In these circumstances, the leaders receiving Irwin turned the tables on him. They argued that the insistence on OPEC-wide negotiations was a maneuver by the companies to play the producers off against each other. Against all recent experience, they maintained that separate negotiations by the Persian Gulf and the Mediterranean producers were the most effective road to moderation. The Persian Gulf producers wanted to proceed on their own, they said, because if they were part of the same delegation as the Libyans, Qaddafi would veto their proposals. They argued (quite correctly) that the real price of oil had fallen over a five-year period — that is, discounting for inflation — while the cost of goods they imported had risen.
It was a negotiating tactic that the next decade would see refined into an art form: Whatever group within OPEC happened to be doing the talking blamed the oil price rise on someone else. There were elaborate Saudi theories putting the entire responsibility on the Shah and equally complicated Iranian arguments proving that the Arab Gulf producers, notably the Saudis, were the driving force. One could not help wondering how any group of leaders could ever have produced a result so contrary to their professed preferences. The truth was, of course, that all producers favored higher prices; none was prepared to break the cartel. In practice, they were all supporting a strategy that would have only one outcome: a sharp rise in prices sustained over a decade.
Irwin’s conclusion was that the companies would have to seek the best possible terms. In his report to the President, he stated:
They [the OPEC countries] stress readiness to stand up to the oil companies in the negotiations, even to the extent of reducing or halting production. Consequently, although I believe my trip gained a little time and impressed on the three governments a certain perspective heretofore lacking, I am not at all sanguine as to their final action unless the company negotiators can convince the producing countries that they are negotiating seriously and within the terms of reference and time frame of OPEC’s Caracas resolutions.
Our hands-off policy ordained the result; the companies yielded. They accepted “separate” but “concurrent” negotiations, an elegant phrase for falling in with the leapfrog tactics of the producers. The upshot was the Tehran agreement of February 14, 1971, which amounted to an increase of around 40 cents a barrel for the Persian Gulf; and the Tripoli agreement of April 2, which not unexpectedly led to an even larger price rise for Libya. Both producing groups agreed to maintain this level for five years — a solemn promise that must hold a world record in the scale and speed of its violation.
For a few months, stability seemed to have returned to the oil market. King Faisal visited Washington in May 1971. Oil appears not to have been mentioned. The Mideast price rises had still not begun to have any serious effect on the economies of the industrial democracies, least of all the United States. It is therefore a measure of Nixon’s instinct for anticipating looming problems and seeking to shape events that on June 4, 1971, he sent a message to Congress urging an expansion of alternative energy sources. In his oral briefings, Nixon proudly emphasized that “this is the first time that a message on energy of a comprehensive nature has been sent to the Congress by a President.” Preparation of the message had been in the hands of domestic agencies. I was not involved. There was no sense of urgency, much less of international crisis. Extended interruptions of supply were still considered inconceivable. Nixon’s program addressed a problem of the more or less distant future.
The OPEC Governments Take Control
THE future had, in fact, arrived. The fundamental change in bargaining positions was underlined by the speed and insistence with which OPEC returned to the fray. Only a few months after the February and April 1971 agreements that were supposed to stabilize prices for five years, an OPEC meeting in Beirut in September came forward with new demands. Rather disingenuously, it asked for compensation for the devaluation of the dollar during the summer. This resulted in another increase in oil prices of nearly 9 percent, plus the prospect of quarterly adjustments. More important, OPEC put forth a demand for “equity participation” in the companies. This was creeping nationalization, and it had, of course, the practical effect of increasing the revenues of the host countries further. The companies had the choice of raising prices or absorbing the decline in their earnings resulting from the partial government ownership.
Negotiations on “participation” began in March 1972 between the companies and an OPEC team headed by Sheikh Ahmed Zaki Yamani of Saudi Arabia.V OPEC’s initial demand was for 20 percent equity; under heavy Saudi pressure, the companies agreed. Immediately, the terms went up. The Saudis would accept 20 percent as the initial figure but (like the radical states and perhaps driven by them) they wanted 51 percent after a fixed period of time. This galloping nationalization would reduce the major oil companies to marketing and management organizations; the oil price in these circumstances would no longer be negotiated but established by the producer governments.
Quickly, the negotiations on participation turned into a mirror image of the talks on price. An initial concession produced not agreement but escalating demands. The market seemed to provide no ceiling to producer exactions.
In the summer of 1972, negotiations between Yamani and the companies reached an impasse over the issue of financial compensation to the companies, amidst OPEC threats of unilateral action. For the first time the Saudis felt strong enough to request direct United States government intervention against the companies, invoking Faisal’s friendship with Nixon. The oil companies also appealed to the White House; they cited the established principle of governmental help in cases of expropriation without adequate compensation. The Saudi offer for compensation in fact grossly underestimated the value of the property.
As it happened, Prince Saud Faisal, then Deputy Oil Minister of Saudi Arabia, was visiting Washington in early August 1972. I had not been involved in the negotiation but at the request of the companies I had a long talk with him (as did, separately, Flanigan and senior State Department officials). I was more concerned about the principle of takeover than the level of compensation. What the Saudis sought ran the risk of turning American companies into instruments of foreign countries while escalating every disagreement into a government-to-government confrontation. With Saud, I followed the line that while it was against our policy to intervene in negotiations involving private companies, in this case the low compensation offered and the high equity participation sought raised the specter of expropriation. Our relations with Saudi Arabia were not based on purely commercial considerations. However, if we were driven against the wall on economic issues, it could affect political relations as well.
Saud, a man of intelligence and subtlety,
could not have listened with greater courtesy and understanding. Saudi Arabia did not seek conflict with the United States, he said. It would do its utmost to reach an equitable solution. It was open-minded on compensation. It would be interested in hearing our views on participation. For their guidance the Saudis would appreciate some indication of what terms the United States government considered fair with respect to both issues.
I thought we were well on the way to a compromise. But when I reported Saud’s reaction to the companies, a surprise was waiting for me. They had been eager enough to invoke the United States government for general pressure. But they did not want us to conduct the negotiations on their behalf; they refused my offer to pass on, with governmental endorsement, suggestions on fair compensation or participation. They were clearly much more interested in raising the compensation than in diminishing Saudi participation. Compensation would show up in the balance sheet; reducing Saudi participation may have seemed to the companies as simply delaying the inevitable. They may also have been gun-shy after their experience with the Irwin mission. They could never be sure when what had started as government pressure on their behalf would switch to the other side.
The upshot was that over the next few months Saudi Arabia proved forthcoming on compensation. The companies in turn agreed to Saudi participation starting at 25 percent and rising to 51 percent by 1982. The one intercession of the United States government had improved the immediate financial return to the companies. But the companies — in my opinion shortsightedly, at least from the national point of view — had yielded on what turned out to be the key issue. With the producer countries owning 51 percent of the equity, the companies would become instruments of nations whose interests did not necessarily parallel our own.
So long as supplies were ample and costs relatively low, the companies had effectively performed their role of exploration, technological development, and marketing, fueling generations of global economic growth. But nothing in the organization or philosophy of the companies equipped them to address the issues raised by ever more expensive oil, whose price and production would be controlled by a cartel of governments. The companies dreaded confrontation with the producers because they believed — from their perspective, quite accurately — that they would lose in goodwill what they might gain in any showdown. They had specialized in getting along with the countries in the area; they were emotionally unprepared for a siege. The day was rapidly approaching when the supply and price of oil would be determined by the unilateral decisions of producer governments, and no longer needed to be negotiated with the companies.
But established categories of thought have a way of lingering on. This was reflected in the American attitude when Nixon visited Iran in May 1972. Far from seeking to turn Iran into a major alternative source of supply as a hedge against excessive demands from the Arab members of OPEC, the recommendation was to vindicate existing policy. Peter Flanigan followed the orthodox view in a memorandum for the President that, as I summed up for Nixon, urged that
the Shah, during your discussions in Tehran, not be encouraged in his desire for access to the US market for Iranian oil. His [Flanigan’s] point is that such access would make our relations with other Persian Gulf countries as well as with Venezuela extraordinarily difficult and would make impossible the already difficult task of managing the mandatory oil import program.
In transmitting Flanigan’s view to Nixon, I noted that I agreed in the short run but that I was concerned with a long-range problem: how to make our import program less dependent on potentially hostile suppliers:
The one general issue that this raises in my mind, however, is that of the criteria we should use for deciding from which countries we import oil and other energy products as our needs for imported energy increase over the next decade. It would be possible, for instance, to establish criteria which would make it possible to select friendly countries and to import from them rather than from less friendly ones.
Nixon ignored the analysis. He and the Shah barely discussed oil. The Shah made a brief and prescient comment that since the industrial countries would be importing ever more of their energy needs, the strategic importance of the Middle East was growing. But neither leader explored the practical consequences of their theoretical propositions.
A few weeks after Nixon’s visit, the Shah acted to translate his improving bargaining position into increasing revenues. As noted, Iran had not involved itself in the participation negotiations because its industry had a different structure from that of the Arab countries in the Persian Gulf. Instead, the Shah now insisted on his proposal of two years earlier. He imposed on the consortium a variety of measures to step up Iran’s oil production, to boost Iran’s overall oil income, and to increase Iran’s direct involvement in petroleum operations. In return, the companies’ role in Iran was to be extended for another fifteen years beyond 1979. The agreement was treated by our government as if it could somehow stand alone; the leapfrogging tactics of the producers had not yet been adequately analyzed. Thus Nixon, on the recommendation of the interested agencies, sent a telegram to the Shah congratulating him on his moderation.
The message was premature. The oil negotiations seemed destined never to achieve equilibrium. Saudi Arabia, having obtained agreement to 51 percent participation, soon began explicitly to link its oil policy to progress toward a solution of the Arab-Israeli conflict. And the Shah, once he understood the extent of participation conceded to Saudi Arabia, thought better of his recently proposed fifteen-year agreement. He decided that his domestic position did not permit him to be outnegotiated by Yamani. In early 1973 he reopened the bidding, in effect reneging on the agreement of the previous year. He put forward a scheme that pressed the implication of the OPEC negotiation to its ultimate conclusion: In effect, it insisted on transforming the companies into sales agents for Iran. The immediate impact on the oil price was negligible. But implicit in this, as in Yamani’s formula, was a revolution permitting OPEC governments to establish prices unilaterally.
By late 1972 the price and ownership talks produced a growing awareness that the surge in American oil imports was creating a long-term vulnerability. There were hearings on Capitol Hill, and a proliferation of energy committees in the United States government. In early 1973 Nixon asked John Ehrlichman (soon to depart the scene), George Shultz, and me to study the relationship between energy policies and foreign and security concerns. Before the study could be completed, events supplied the answer.
I was increasingly alarmed by the escalating demands of the producers. And I did not think the United States alone could solve the problem. Cooperation with other consuming nations was essential. On January 16, 1973, I spoke in this sense to Sir Burke Trend, British Cabinet Secretary:
I could see an interruption to the oil supply. Certainly if the consumer nations stay as divided as they are. A comprehensive approach to the energy problem we should discuss. . . . The first thing to define is what we are trying to accomplish; what the needs are, what the sources are, and how to prevent the producer nations from playing off the consumer nations against each other. How does one do this? Alternate sources of supply for some countries, or a united stance, or both.
On March 8 I conveyed to the agencies that the President “has directed a study of the national security implications of world energy supply and distribution.” On April 18, 1973, Nixon sent a major energy proposal to the Congress with initiatives to conserve energy, expand domestic production, and reorganize the government for dealing with the problem. The quota system was replaced by a simpler system of licensing (with fees charged for imports higher than the 1973 level); rationing was ruled out. The message frankly acknowledged that in the meantime “it will be necessary for us to increase fuel imports.” Nixon followed up with another energy message, including further reorganization, on June 29. The Governor of Colorado, John A. Love, was appointed director of an expanded Energy Policy Office in the Executive Office of the President.
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p; On April 19 I cited our own efforts in an appeal to Burke Trend once again for cooperation among the consumers:
If all the oil consuming nations are going to wait for the debacle of one of the others, so they can jump in and increase their own reserves, then sooner or later we have a prescription for breaking whatever exists in [the] industrial nations. We need some idea on how to cooperate to avoid these dangers. We are prepared to do it.
On April 23, in the Year of Europe address, I urged a concerted response by the industrial democracies to the growing energy problem. Later in the summer, in an interagency discussion of policy toward Libya, I stressed once more the imperative of consumer cooperation:
I know the mythology is that any attempt by the consumer countries to get together will produce a confrontation with the producer countries. That’s a shibboleth and we should consider whether it is really true.
Another school of thought considered consumer solidarity a lower priority. Its view was that the oil issue was essentially a bilateral problem with Saudi Arabia; therefore we should strengthen our political and defense ties with the Kingdom. Deputy Defense Secretary William Clements urged that we strengthen defense cooperation; Deputy Treasury Secretary William Simon (soon to be named administrator of the Federal Energy Office) wanted an economic partnership. More and more experts were arguing that the level of Saudi oil production would be heavily influenced by our attitude toward Israel.6
I strongly favored expanding our bilateral ties with Saudi Arabia; within the year we had made major progress in the direction advocated by Clements and Simon. As for linking oil policy to the Arab-Israeli conflict, I thought it unwise for us and dangerous for Saudi Arabia. The Kingdom’s already delicate position would be even more complicated if it had to take responsibility for Arab-Israeli negotiations. Either it risked being drawn into confrontation with Arab radicals or, if it supported them, it risked conflict with us and demonstration of its inability to produce progress. For there was no possibility, even if we desired it, that we could “deliver what the Saudis require” — as the saying went — in the weakened state of the Presidency.
Years of Upheaval Page 128