Years of Upheaval

by Henry Kissinger

  The oil producers had scheduled two important meetings: The Persian Gulf members of OPEC were to assemble in Tehran on December 22–23 to consider oil prices, after which the Arab members of OPEC were convening in Kuwait on December 24–25 to consider the embargo and production restrictions. On December 21, just as Yamani was leaving for Tehran, he told Akins that Faisal and his ministers had reassessed the situation. They had been too ebullient in recent days. A complete end of the embargo would risk the opposition of all radical Arabs and perhaps even of Sadat. Saudi Arabia could therefore work only for an easing of the embargo and a limited restoration of production.

  More astonishing, Yamani suddenly — the day before the Tehran meeting — raised the prospect of another rise in oil prices, though claiming that Saudi Arabia did not favor it. No one had mentioned this prospect previously; when I had visited Riyadh the week before, all our discussions had concerned the lifting of the embargo. Yamani claimed that Saudi Arabia was an innocent bystander, that the Shah of Iran was the villain. Akins urged that we use our influence for moderation with all the OPEC nations. I received Akins’s reporting telegram while in Geneva on December 21. The very next day I dispatched messages to Iran and to all other OPEC governments warning strongly against another rise in prices. What is more, I appealed to the governments of all the industrial nations in the West and Japan to weigh in with OPEC against a price increase. There is no record that they did so, certainly not with any emphasis.

  Our effort proved useless, if indeed anything could have been done at this late stage. The OPEC ministers in Tehran on December 22–23 boosted the oil price from $5.12 a barrel to $11.65 a barrel — a hike of 128 percent, on top of the 70 percent increase in October, amounting to a 387 percent increase in the price of oil in the space of two months.

  It is now obvious that this decision was one of the pivotal events in the history of this century. The statistics were staggering enough. Within forty-eight hours the oil bill for the United States, Canada, Western Europe, and Japan had increased by $40 billion a year; it was a colossal blow to their balance of payments, economic growth, employment, price stability, and social cohesion. The Tehran decision also cost the developing countries more than the entire foreign aid programs extended to them by the industrial democracies, re-creating the desperate conditions that foreign assistance was supposed to cure. But the long-term impact was more grave still. All the countries involved, even the producers themselves, faced seismic changes in their domestic structures.

  The relatively benign domestic politics of the industrial democracies had been nurtured by two decades of nearly uninterrupted growth. Welfare programs had been financed from a steadily increasing Gross National Product. It was possible to benefit one group without depriving another; the civil rights revolution in America, for example, both reflected the growing economic strength of black Americans since 1945 and spurred it further. The happy idea developed that all social groups would be able to gain simultaneously and indefinitely. And indeed it was largely true. To be sure, student unrest in almost all industrial countries in the Sixties had been a warning that materialism was not enough to sustain a society, that economic growth would not provide emotional sustenance automatically to a new generation searching for a deeper meaning to life. But there was reason to hope that once recognized, these problems would find their solution.

  The economic crisis that started in the Seventies — and continues in the Eighties — has devastated these prospects. Conflict rather than cohesion has been fostered within countries and between them. The oil price exactions were price-inflationary but demand-deflationary. The purchasing power removed from the world’s economies — represented in the billions of unspent OPEC dollars — could not be replaced by governments trying to overcome inflation as the oil price explosions reverberated through their economies and workers tried to keep pace through wage increases. Restrictive monetary policies and trade protectionism were the order of the day — and still are. The middle classes everywhere, whose savings had helped to sustain growth and whose moderation had laid the basis for reconciliation in politics, were squeezed and squeezed again. The bitterness of social conflict in the middle and late 1970s in some European countries — Britain, Italy, Spain, Portugal, France, even West Germany — was the legacy of the oil price explosion.

  Even now, the domestic political implications are still working themselves out. The political dilemma of democracy is that the time span needed for solutions to contemporary economic problems is far longer than the electoral cycle by which leaders’ performance is judged at the polls. How many politicians dare to risk their offices in proclaiming that the good times are over? Who is willing to tell his constituents that a wise policy will bring with it a decline in the standard of living, at least for a while? And what happens in the inevitable period of disillusion when young men and women leave school and college to find their skills rejected and join the millions thrown out of work since the oil crisis? The way is open for demagoguery, political polarization, and violence.

  As for the developing nations, if it was ever true that economic aid was necessary to prevent the division of our planet into the few who were rich and the many who were poor, if the maintenance of peace required us to try to close the gap, then the oil price rise worked marvelously to defeat these objectives. Most developing countries are wholly dependent on imported oil for industrial or agricultural development, and all depend on expanding world trade and investment as well as development aid. Their hopes for progress were shattered by the oil price explosion. They entered a new dark age of debt and deprivation — which posed the added horror that their financial default could even undermine the banking system of the advanced countries that has extended them credit for decades. One’s compassion is perhaps tempered with impatience at the quiescence with which they accepted the exactions of the oil producers and railed instead against their fellow victims in the West. This reflects either helplessness or decrepit ideology. The truth is, as I pointed out in a UN address in September 1975, that “the most devastating blow to economic development in this decade came not from ‘imperialist rapacity’ but from an arbitrary, monopolistic price increase by the cartel of oil exporters.” Nevertheless, the poor countries yielded up sympathetic noises from time to time for the political purposes of the radical oil states. This subservience, of course, did them very little good: a crumb here and a crumb there, aid funds promised and rarely delivered.

  Never before in history has a group of such relatively weak nations been able to impose with so little protest such a dramatic change in the way of life of the overwhelming majority of the rest of mankind. The poetic justice, if such it is, is that this “achievement” threatens their own stability, a perception that may be gradually dawning. Few political structures can sustain the accelerated rate of growth made possible by such an enormous transfer of wealth. Dislocations are bound to occur, which even more established political systems and traditions would find it difficult to handle. The institutions in most oil countries are not in that category.

  The upheaval in Iran in the late 1970s was at once a caricature and a warning. The overheated economic development made possible by the price increases provoked an elemental reaction that rejected the very materialistic values that gave rise to the rapid growth; the end result was, ironically, the systematic impoverishment of the country. Nor is internal convulsion the only threat to producing nations. The economic enfeeblement of the industrial democracies may yet cause much of the oil states’ material acquisitions to evaporate like a mirage. For a financial crisis in the West would destroy also the producers’ investments in those countries. Or if the West proves economically unable to sustain the role of military protector in the Persian Gulf — or loses its incentive to do so on behalf of nations systematically undermining the world economy — then many of the oil producers may become easy pickings for foreign predators.

  Thus the producers’ dilemma approaches a joke played by history on those
who would seek to force its pace. If they spend their exactions too rapidly, they risk domestic upheaval; if they hoard them, they court a weakening of the international economic system to a point where they too become victims.

  Everybody lost from the oil crisis. And an event of such historic proportions merits more serious analysis than the self-serving excuses of some oil producers or demagogic scapegoating by others. The most absurd example, perhaps, is the widely circulated claim that we were repeatedly warned of the danger of higher prices and turned it aside because Washington welcomed high oil revenues to finance Iranian rearmament.8 The record sketched in these pages leaves no doubt that neither we nor our industrial allies were informed of the plan for a colossal price increase until it was nearly upon us — too late to affect it — and that we then resisted strenuously. The United States never saw the price rises as anything but a disaster, and no one welcomed them as a means to finance Iranian military purchases or for any other purpose. The record on this particular canard is clear. On December 29, 1973, I sent a message in Nixon’s name to the Shah protesting in the strongest terms:

  The President is greatly concerned over the destabilizing impact that the price increases agreed to at Tehran for Persian Gulf crudes will have on the world’s economy and the catastrophic problems it could pose for the international monetary system. Not only will it result in raising the prices of manufactured products, but it will have [a] severe repressive effect on the economies of oil consumers which could cause a worldwide recession and which eventually would benefit no one including oil exporters.

  We believe this drastic price increase is particularly unreasonable coming as it does when oil supplies are being artificially restrained. . . . We strongly urge that (1) the recent decisions made in Tehran be reconsidered; (2) steps be initiated to hold the kind of consultations that we believe most consumer and producer countries endorse; and (3) the oil producer countries seriously examine the deleterious effect of these increases on the balance of payments positions of practically all nations in the free world and the effect this will have on world trade in general and on the international monetary system in particular.

  While the argument that Washington encouraged or colluded in the price rise is demagogic ignorance, it is less easy to fix the responsibility among the members of OPEC. Over the three previous years of first gradual and then rapidly escalating exactions, OPEC had developed to a fine art the shifting of responsibility from one member to the other. Iran and Saudi Arabia, the two great rivals for Persian Gulf preeminence, were specially dexterous. Whoever we approached made a convincing case that the other one was the culprit. If one listened to our interlocutors, one was left wondering how prices could ever rise in the face of so much reluctance. The truth was that higher prices were supported by all key members of OPEC. The Shah had the more elaborate bureaucratic machinery and staff to formulate a sophisticated, Western-style rationale relating oil prices to the marginal cost of alternative fuels. But he never sought to influence the market by cutting production. Among other reasons, Iran’s capacity was too small and its domestic needs too great to permit a reduction that would affect the world price of oil.

  Advancing complex theories is not the Saudi style. The Kingdom simply announced production decisions with major price implications that were left to others to make explicit. Metaphysicians can argue forever which was more influential, theory without action or action without theory. Both were necessary conditions for what followed.

  Serious analysts agree that Iran threw its weight behind the December price rise not because of collusion with the United States but because at an auction for Iranian oil in mid-December — on the so-called spot, or free, market — bids had reached an unprecedented $i6-to-$i7 a barrel.9 The Shah concluded that this proved the official fixed price — then $5.12 — was too low. He suggested that OPEC elevate its price to $11.65 — and all his OPEC partners readily agreed. The Shah’s sudden activism was itself surprising; he had not in the past taken a leading role in pricing decisions.10 Indeed, his production was not large enough to put him in a position to do so. Iran had not participated in either the Arab embargo or production cutbacks in October that were the real foundation of the price rises. When the Arabs imposed these measures, the Shah in fact stressed that he was producing oil at Iran’s maximum capacity in order to help mitigate the shortages. He did this not as a favor to us but to increase his own revenues; nevertheless, the impact was to help stabilize the market. The Shah surely sought to maximize his income; he was relentless in seeking what the traffic would bear. But he did not create the conditions he was exploiting. Those came about through the expansion of world demand, the end of American surplus capacity, and the Arab production cuts.

  The Shah wound up as the villain of the piece partly because of the prominent role he played in announcing the price rise, which was in fact a unanimous OPEC decision. Ego was surely a factor. Possibly he was tempted into the lead role because at the Tehran meeting he was technically the host. Perhaps he wanted to earn nationalist spurs at home. Very likely he welcomed an opportunity to show solidarity with his Arab neighbors after separating from them during the Mideast war by supplying oil to Israel, fueling our fleet, and denouncing the embargo and production cuts as late as the very day before the Tehran conference opened. Whatever his motives, the Shah later had to suffer the opprobrium of public identification with the oil price explosion that changed economic and political history, though his role in creating the conditions for it was smaller than that of many others and though there is no evidence that any of his colleagues seriously objected (except in secret whispers to their victims). The Shah paid a high price for the vanity of a moment in the limelight.

  All the OPEC nations quickly demonstrated that they had learned how to take advantage of the political disunity of the industrial democracies. Partly to deter a united consumers’ front, partly to reward those who had broken ranks with the United States, the Arab oil ministers met in Kuwait on December 24–25 to consider the embargo and production cutbacks. The results were strikingly different from what we had been led to expect. The embargo against the United States was neither lifted nor eased. By contrast, oil curbs on Europe (except the Netherlands) and Japan were mitigated; the 5 percent production cutback scheduled for January was canceled in favor of a 10 percent increase. Yamani announced the decision. He justified the discrimination against us on the basis of “a very apparent distinction between those who stand beside the Arabs and those who stand beside the enemy and those who are in between.” While “gradual changes” were noted in the American position, the ministers had nonetheless decided to continue the embargo on America until, as Yamani said, more “fruitful results” were obtained.

  We reacted to these decisions with less than the controlled rationality that textbooks ascribe to statesmen. We felt misled by weeks of exchanges with various Arab leaders. The huge rise in prices was made doubly wounding by being so totally unexpected and accompanied by a reaffirmation of the discriminatory practices against the United States.

  In fact, the subtle Yamani and his complicated government had not been as unhelpful as the rhetoric implied. The expansion in oil production, ostensibly confined to the rest of the world, increased total supplies in the world market. The companies allocating the various quantities among consumers had more oil in the common pool; scarcity was eased. In these circumstances, the continuation of the embargo was an inconvenience and an insult; it did not hurt us significantly. But it did not appear that way at the moment. The symbolism of continued discrimination against the country that was carrying the burden of the peace effort was hard to take. Nor were there any extenuating circumstances to ease the devastating economic impact of the price rise.

  Yamani, in conversations with Akins, predictably blamed Kuwait, Abu Dhabi, and Iraq for this debacle, as he had blamed Iran for the previous one, but it made no difference. On December 28 Nixon sent an unusually stiff message to Faisal, warning that these actions wer
e risking the entire American relationship:

  You know the great stress I place on close relations with the Arab world and with Saudi Arabia in particular. However, the clearly discriminatory action of the oil producers can vitiate totally the effective contribution the United States is determined to make in the days ahead. Therefore, I must tell you in candor that it is absolutely essential that the oil embargo and oil production restrictions against the United States be ended immediately.

  That day I wrote in the same vein to Saqqaf, protesting as well the “drastic and unjustifiable price increases” announced in Tehran: “I want your Government to know that their predictable and disastrously destabilizing effect on the free world’s economic and monetary system is of the deepest concern to us.” We used the same double-barreled approach in Egypt. Nixon and I wrote letters to Sadat on December 28 stressing that the United States insisted on an end to the embargo and production restrictions “at once” and warning that the United States would not continue its peace role under embargo conditions. And I have quoted earlier our message to the Shah of December 29, vigorously protesting the price increase.

  The price explosion was further proof that disunity among the consuming nations was leaving us all vulnerable. Consumer solidarity was essential. On December 29 I appealed to Sir Alec Douglas-Home:

  The decisions were taken, of course, unilaterally, without even the semblance of negotiation with the international companies or consumer nations. Moreover, a further round of substantial increases seems probable next spring unless we move promptly to attempt to bring the whole process into a more rational framework.

  It was the probability of just the scenario that is unfolding which prompted my suggestion for the formation of an Energy Action Group. We are in the process of developing a suggested program for implementing such a group, but before coming back to you with a plan, I did want to indicate my deep concern with the recent producer country actions. It seems inconceivable that the consumer nations would be paralyzed in the face of such situations.