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Black Gold Rush in the Near East: a Century of Oil Relations Chelsea Cooley

Black Gold Rush in the Near East: a Century of Oil Relations Chelsea Cooley

Black Gold Rush in the : A Century of Oil Relations Chelsea Cooley

Over the course of the twentieth included Socony-Vacuum (later Mobile), century, the discovery of oil in Saudi BP, Royal Dutch/Shell, and the state- Arabia caused the United States and the owned French company Compagnie United Kingdom to make military and Francaise Petrole. All members made a foreign policy decisions based on the pact called the “” need to secure a steady supply. The not to embark on independent States also made political decisions exploration without the express based on the desire to maintain the approval of the other members. This enormous influx of wealth introduced agreement allowed British companies to into the with the discovery of oil. maintain a great deal of control over the Both the US and the UK had stakes in Mideast oil market even with the influx since their countrymen first of new international companies in the discovered it there at the turn of the region. The territory outside of the “Red century. Oil was discovered in in Line” included .3 1908 by the UK’s William D’Arcy and in in 1932 by of In 1932 the American company California.1 The lives of people today in Standard Oil struck oil in Bahrain, and Saudi Arabia, the US and the UK are island only 20 miles from Saudi Arabia, shaped by events resulting from these sparking US interest in the area for the discoveries and the economic and first time. Standard Oil of California military necessity for oil. (Socal) chose to operate outside of the IPC and its strict limitations on Britain needed large amounts of oil exploration. When the IPC required during WWI, when it used the oil-fueled Gulf Oil, another American company, to military tank for the first time. The sell its Red Line concessions, Socal enemy German army still traveled by bought Gulf’s Bahrain concession for railway. The switch to oil-powered $50 thousand. After Socal found oil, tanks eventually helped the Allies win both Socal and the IPC approached King the war, but eighty percent of the Allies’ Abdel Aziz for rights to explore Saudi oil came from Standard Oil of New Arabia and possibly drill for oil. In 1933, Jersey (later ), causing US officials the Saudi king gave the American to fear they’d run out of the precious company the concession rather than the commodity. The government prompted British-controlled IPC because he US oil companies to follow Anglo- thought Americans showed less interest Persian entrepreneur William D’Arcy’s than the British in colonial intervention. lead and turn to the . As payment, Socal gave the king Unfortunately, British companies L30,000 in gold as an interest-free loan already had a in , Iran, followed by L20,000 more in the next and the smaller Gulf States.2 The British eighteen months. The king agreed to Iraq Company (IPC) had the pay back the loan in future oil revenue, most holdings in the , so if it ever materialized, and he secured Standard Oil of New Jersey decided to for himself a yearly payment of L5000.4 join the IPC. Other members of the IPC Unlike all other concessions thus far,

! 57 Americans owned this one exclusively, to the US and the Allies during the its size exceeding the combined states of Second World War by providing Allied Texas, New Mexico and Arizona. Socal forces access to essential strategic air soon formed a subsidiary company routes across the . called the California Arabian Standard President Roosevelt also came to realize Oil Company (Casoc).5 Suddenly, there the importance of Saudi oil for US existed an alliance between at least one success at war. These combined factors major American oil company and the prompted the President to create the emerging oil-rich country of Saudi Petroleum Reserve Corporation (PRC) Arabia. US interest in the region only in 1942 “to acquire petroleum, increased as Saudi oil success continued. petroleum products, and petroleum reserves outside the continental US.”10 More American companies got Furthermore, as a result of its proven involved in the growing market in Saudi economic and military value to the US, Arabia as more oil emerged in the in 1943 Roosevelt qualified Saudi Arabia country. In 1936, the IPC denied Casoc for land-lease assistance. Confidence in access to its consumer markets, so Casoc this decision was strengthened when chose to merge with Texas Oil (later Saudi Arabia provided safe passage for Texaco, now part of Chevron), which war supplies through the Persian Gulf controlled markets in but didn’t waterway from the US and to 6 possess enough oil to service them. The the Soviets.11 Saudis found money from deal allowed Texas Oil 50% interest in land-lease assistance essential, since the 7 the Casoc concession. Saudi oil fields usual income from Muslim pilgrims continued to prove their worth when making the hajj dried up during the the well “-7” at blew war.12 in March 1938, producing more than President Roosevelt wanted the US 8 1500 barrels of oil per day. Saudi government to have a more direct role Arabia quickly became a major oil in Saudi Arabian oil, so he asked player, especially in comparison to the Secretary of the Interior Harold Ickes to US whose wells only produced 100 negotiate a deal with Casoc (which barrels per day. King Abdel Aziz’s first changed its name to Aramco, the Arab royalty check from Casoc exceeded $1.5 American Company, in 1944) allowing million, and he quickly augmented the US government to purchase a Casoc’s exploration space by 80 majority of its shares. With the US thousand square miles. The new area government literally owning stock in gave the company rights to over half of Aramco, the company’s potential for Saudi territory. In 1939, Casoc averaged growth greatly increased. In fact, 11 thousand barrels per day, and within between 1944 and 1950, Aramco’s gross ten years, it averaged 477 thousand production of crude oil increased from barrels, accounting for five percent of 21 thousand to 548 thousand barrels per total world oil production and 35 day. The growth was enormous but 9 percent of Middle-East production. necessary, since the reconstruction of The ongoing oil success in Saudi Europe after WWII depended on this Arabia showed American statesmen oil. Although the US at the time only that companies who depended on imported six percent of its oil, and Saudi American oil alone stood no chance of Arabia provided only eight percent of competing with the emerging market in that amount, depended the Middle-East. Furthermore, Saudi almost entirely on Persian Gulf oil.13 Arabia remained a reliable military ally

! 58 In February of 1945, not only the newly-declared state of , even realizing the importance of Saudi oil for as , , Transjordan, , the war effort but also concerned by the and Iraq invaded the state in full force. dwindling supply of US oil, FDR met By remaining essentially neutral, the with the Saudi King Abdel Aziz ibn Saudi government managed to preserve Saud aboard the USS Quincy on Great its relationship with the US. His Bitter Lake south of the Suez Canal.14 neutrality also caused Aziz to come FDR determined that the “defense of under attack from other Arab leaders, Saudi Arabia is vital to defense of the but the King’s focus lie elsewhere.20 United States.”15 The meeting Aramco struck oil at Ghawar in 1948, an encouraged the Saudi leader, who area soon classified as ’s remained neutral in the war effort, to largest oil deposit, and the company officially support the Allies in March needed more markets to buy its new 1945. The meeting also resulted in the excess of oil. It merged with American President’s first conversation with an companies Standard Oil of New Jersey Arab leader about the escalating and Socony Vacuum, who left their IPC situation in Palestine. Before the contracts. meeting ended, FDR promised not to change policy in Palestine without first The King trusted the American consulting both Jews and . He also companies; his biggest fear was that assured the King that he would never they might one day merge with the likes do anything hostile to Arabs, and put of British imperialists. He remained the promise in writing one week before unaware that in 1949 the US National his death in April.16 This promise soon Security Council secretly approved of a caused tension between the two plan to destroy Saudi oil fields in the countries, putting US oil interests at case of a Soviet attack. The CIA also risk. secretly shipped explosives into the kingdom to prepare for this possibility.21 Relations between the US and Saudi Like most foreign relations during the Arabia became strained for the first time Cold War, US interest in Saudi Arabia in November of 1947, when the UN was linked to US competition with the passed a resolution supporting the USSR, and US intentions in Saudi partition of Palestine.17 This led the way Arabia weren’t always transparent. for the United States to recognize the However, America’s perceived power State of Israel in May of 1948. The over Saudi oil was not absolute for long. Presidential administration in the US initially feared this might negatively Saudi Arabia began taking interest in affect oil relations between the US and garnering more profit from its domestic Saudi Arabia. King Aziz saw the action oil supply. In 1950 the Saudi king as a betrayal, but did not withdraw oil insisted on the “50/50 Agreement,” concessions, realizing that they were demanding an equal share in Aramco vital to Saudi Arabia’s economic revenue. In a clever manipulation of the survival.18 The US gave the country $99 US tax code, Saudi Arabia increased its million in aid between 1940 and 1947, profits by taxing Aramco’s profits. The and it expected only 25% of the loan to code said a company operating in a be repaid.19 Its financial relationship foreign country could deduct the with the US also played a role in Saudi amount of taxes it paid to a host Arabia’s decision to send only a small government from its US taxes. In this battalion into the Arab-initiated fray in way, Saudi Arabia increased its profits

! 59 at no expense to Aramco.22 This seemed consistently brought large amounts of like a mutually beneficial solution to money into the US, adding to concerns Saudi demands, but the trend for Arab for the safety of the region. control of Arab oil continued and Furthermore, in 1968 the Gulf produced became widespread. In 1951, riots in a third of the world’s oil and two thirds Iran caused oil to be nationalized by of the world’s crude reserves. The UK Prime Minister Mossadeq. In September obtained 60% of its oil from the Persian of 1960, the Organization of Petroleum Gulf and the US obtained 85% of its Exporting Countries (OPEC) was military oil from the area.25 created at the Conference, and its founding members were Iraq, US fears came to fruition during the , and Saudi Arabia, and Iran.23 Iranian Oil Crisis of 1973. In October, (one of) the Arab-Israeli War(s) The Iranian government proved commenced. Saudi Arabia responded to itself a threat to independently US support of Israel by instituting an oil controlled oil companies, and by 1967, embargo and production cuts. This the US began to question Iran’s caused inflation in the US and concern intentions concerning oil and its about foreign investment from oil relationship to the rest of the Middle producing countries. Oil companies East. In a conversation with US soon found themselves in a political government officials, the Shah insisted crossfire between Iran and Saudi he found it in Iran’s best interest to Arabia, both Arab countries with remain on good terms with Saudi economic interest in maintaining Arabia. He realized oil companies alliances with the US. Officials from the shared this interest, and US interest US government, including Secretary of paralleled that of the oil companies.24 State Henry Kissinger, met with the However, the situation with Iran heads of oil companies based in the intensified in 1968 when the UK Mideast several times throughout the announced its intention to withdrawal year.26 The US considered seizing Saudi military support from the Persian Gulf oil fields by force, but the two countries within the next three years. Iran eventually patched up their relationship expressed an interest in taking Britain’s through a shared opposition to place in the military control of the Gulf; communism and common economic this interest had a major connection to initiatives. The US eventually made a the oil industry since Britain’s deal to continue its oil business with withdrawal from the region effectively Saudi Arabia.27 ended its commitment to aid Kuwait in case of an attack. Kuwait had large oil The association between the US and reserves and sat in a strategic location Saudi Arabia proved mutually between Saudi Arabia, Iraq and Iran. beneficially for both countries. Saudi The US government admitted in an Arabia’s 1973 acquisition of a 25% internal foreign policy document that participation interest in Aramco the UK withdrawal would end “a increased the country’s interest in 28 system which has played a major reconciliation with the US. The political and security role for the West instability of oil in other countries in the in the Gulf region for a century and a Mid-East increased US confidence in half.” Twenty US oil companies based Saudi Arabia thanks to the stability of their business operations in Iran and its product. In 1979, the Iranian Saudi Arabia, and these companies Revolution led by Ayatollah Khomeini

! 60 caused oil in Iran to be completely In a fateful turn of events for US nationalized, and Saudi Arabia made all involvement in the Middle East, in its excess crude oil available to Aramco August of 1990 Iraq invaded Kuwait (at the expense of other customers) after over an oil dispute. US President George the Revolution caused an oil shortfall in HW Bush, Margaret Thatcher of the UK, the US.29 The US got most of its oil from and the Soviet Union’s Mikhail Saudi Arabia that year (1347 thousand Gorbachev all wanted to remove Iraqi barrels per day).30 The US continued to dictator from power, buy a large portion of its oil from Saudi fearing he planned to target Saudi Arabia even after the latter acquired Arabia. An attack on Saudi Arabia 100% participation interest in Aramco in would put the acquisition of oil at risk 1980, buying out American companies for all three countries, the US especially. completely by purchasing almost all of The UN ordered economic sanctions the company’s assets. (The company against Iraq and also sent forces, led by changed its name to in the US, to protect Saudi oil. The action 1988.)31 was termed operation Desert Shield. After talking to then Secretary of Iraq eventually surfaced as the major Defense , Saudi Arabia threat to Mideast oil stability, for the agreed to host US troops and first time when it entered into a war equipment. Secretary of State James with Iran. Conditions in Iraq directly Baker received UN backing when he affected US foreign policy in the region proposed the UN evict Iraq from because the US considered any Kuwait by force if Iraq didn’t withdraw instability in the area a threat to US from Kuwait peaceably by January 19, interest in Saudi Arabian oil. In 1991. On that date, with UN demands September of 1980, Iraq invaded Iran to unmet by Saddam Hussein, US reclaim Shatt al-Arab at the border Congress approved the use of force in between the two states. In the process, Iraq. President HW Bush announced the Iraq took over oil-rich Iranian beginning of the which Khuzestan. Neither Saudi Arabia nor comprised of a 38-day “Desert Storm” the US showed opposition to this followed by a four-day ground assault development since neither country to quickly evict the from Kuwait. wanted Iran to emerge victorious from This latter leg came to be known as the the conflict – Saudi Arabia for ethnic “100-hour War.” In total, 303 died in the and religious reasons, the US because of Gulf War and fewer than 500 were 32 Iran’s ties to the Soviet Union. wounded.35 The US managed to oust Nonetheless, the 1980-88 Iran- Iraq and its opportunistic dictator from devastated Iraq’s economy, prior to a country very near to its precious which Iraq made $27 billion per year in interests in Saudi Arabia, but US forces 33 oil revenue. In 1984, the “” did not oust the dictator himself. between Iran and Iraq put Persian Gulf Hussein and his imperializing interest oil traffic at risk as Iran targeted Iraqi oil in oil proved to be a torment to the 34 tankers travelling by land. This younger Bush administration 10 years in prompted Reagan to secretly ship 400 the future, a point of significance since Stinger missiles to Saudi Arabia after oil continues to sustain Iraq’s economy. Iran targeted Saudi and Kuwaiti ships in On average, the commodity brings in the Gulf. 95% of the country’s foreign exchange earnings.36

! 61 Saudi Arabia put its safety from Iraq Center for Knowledge and Culture in to good use by increasing its strength in Dhahran.40 the oil market, a move that was beneficial to its economic relationship Saudi Arabia is still a major US oil with the US. Aramco became the most partner. As of 2008, Saudi Arabia led powerful player in the Saudi oil market most other suppliers of oil to the US, 41 in 1993, when it took charge of Saudi second only to Canada. Today Saudi Arabia’s domestic refining, marketing, Arabia owns the world’s largest proven distribution, and joint-venture interests. oil reserves at an estimated 262 billion Soon thereafter, the Kingdom named barrels. In fact, one-fourth of the world’s Aramco president and CEO Ali Al- proven oil resources exist within Saudi Naimi its Minister of Petroleum and Arabia, and the country relies on oil for 42 Mineral Resources. US business interest 90-95% of its total export earnings. became involved in this particular Other oil-rich countries include Iraq, concentration of power in 1998 when Iran, Libya, Venezuela, and Sudan, but Aramco, Texaco, and Shell established they do not enjoy the same partnership Motiva Enterprises LLC, a refining and with the US as Saudi Arabia does. This marketing joint venture, in the US.37 In is due in part to the fact that Saudi 2000, Petroleum Intelligence Weekly Arabia has proven itself a “swing ranked Aramco the number-one oil producer,” putting oil on the market in company in the world for the eleventh times of crisis. It holds 85% of OPEC’s straight year based on crude oil reserves spare capacity. and production. That same year, US dependency on Saudi oil Aramco established Gulf Operations Ltd continued on from the point when to manage governmental petroleum Standard Oil first discovered the interests in the Offshore Neutral Zone commodity there at the beginning of the between Saudi Arabia and Kuwait. twentieth century. US foreign policy Aramco’s success and ties to the US often mirrored US oil dependence, a fact did not help to negate the fact that 15 exemplified by FDR and his successors’ Saudi nationals directly participated in commitment to an alliance with Saudi the terrorist attacks of September 11, Arabia and George HW Bush’s entrance 2001 in New City.38 The event into the first Gulf War. The oil market caused an anti-Saudi outcry among the also directly impacted foreign policy in US citizenry. President Bush quickly Saudi Arabia, a country that did not tried to quell the anger toward Saudis; commit to extensive military action in an administration spokesperson told the Arab-Israeli wars so as to maintain reporters in October that the president its vital oil-trading connection with the was satisfied with the cooperation he US. We see from these examples that the received from Saudi Arabia for the “war world as we know it today is shaped by against terror.”39 Nonetheless, since the political events from the past reflecting September 11 attacks, Aramco went to the global need for oil. great lengths to help assert Saudi ENDNOTES Arabia’s modernity. The company began a program to build the King 1. BP, “Our history,” BP, Abdullah University of Science and http://www.bp.com. , and in 2008 it launched a 2. Rachel Bronson, Thicker Than Oil: project to build the King Abdulaziz American’s Uneasy Partnership with Saudi Arabia (New York:

! 62 Oxford University Press, 2006), 30. Energy Information 15. Administration, “US Imports by 3. Bronson, 16. Country of Origin,” Energy 4. Bronson, 17. Information Administration, 5. Bronson, 18. http://tonto.eia.doe.gov. 6. Bronson, 16. 31. Saudi Aramco 7. Saudi Aramco, “Our Story,” 32. Bronson, 163. Saudi Aramco, 33. Department of State, http://www.saudiaramco.com. “Background Note: Iraq,” US 8. Bronson, 18. Department of State, 9. Bronson, 19. http://www.state.gov 10. Bronson, 39. 34. Bronson, 164. 11. Bronson, 37. 35. Mark Samels, “American 12. Bronson, 40. Experience: The Presidents: 13. Bronson, 20. George HW Bush,” PBS, 14. Bronson, 36. http://video.pbs.org. 15. Bronson, 24. 36. Department of State, 16. Bronson, 40. “Background Note: Iraq,” US 17. Bronson, 52. Department of State, 18. Bronson, 46. http://www.state.gov. 19. Bronson, 40. 37. Aramco 20. Bronson, 54. 38. Christopher M. Blanchard, 21. Bronson, 58. “Saudi Arabia: Background and 22. Bronson, 55. US Relations,” 23. OPEC,“Brief History,” OPEC, http://fpc.state.gov. http://www.opec.org. 39. Alfred B. Prados, “Saudi Arabia: 24. Edward H. Thomas, Post-War Issues and U.S. “Conversation with Shah of Iran Relations,” National Security on OPEC and Oil Matters,” Archive, National Security Archive, http://nsarchive.chadwyck.com. http://nsarchive.chadwyck.com. 40. Aramco 25. Department of State, “Future U.S. 41. Energy Information Policy in the Persian Gulf,” Administration, “US Imports by National Security Archive, Country of Origin,” Energy http://nsarchive.chadwyck.com. Information Administration, 26. Willis C.C. Armstrong, “Iranian http://tonto.eia.doe.gov. Oil Crisis,” National Security 42. Bronson, 21. Archive, http://nsarchive.chadwyck.com. 27. Henry Kissinger, “Oil Agreement

with Saudi Arabia,” National Security Archive, http://nsarchive.chadwyck.com. 28. Saudi Aramco 29. Kingman Brewster, Jr., “Saudi Arabian Oil Production,” National Security Archive,

http://nsarchive.chadwyck.com.

! 63 BIBLIOGRAPHY Energy Information Administration. “US Imports by Country of Origin.” Blanchard, Christopher M. “Saudi Energy Information Administration. Arabia: Background and US Relations.” http://tonto.eia.doe.gov (accessed Department of State. November 1, 2009). http://fpc.state.gov (accessed November 1, 2009). Kissinger, Henry. “Oil Agreement with Saudi Arabia.” National Security BP. “Our history.” BP. Archive. http://www.bp.com (accessed http://nsarchive.chadwyck.com November 1, 2009). (accessed December 18, 2009). Bronson, Rachel. Thicker Than Oil: OPEC.“Brief History.” OPEC. American’s Uneasy Partnership with Saudi http://www.opec.org (accessed Arabia. New York: Oxford University November 1, 2009). Press, 2006. Saudi Aramco. “Our Story.” Saudi Department of State. “Background Note: Aramco. http://www.saudiaramco.com Iraq.” US Department of State. (accessed November 1, 2009). http://www.state.gov (accessed November 1, 2009). Samels, Mark. “American Experience: The Presidents: George HW Bush.” PBS. Department of State. “Conversation http://video.pbs.org (accessed with Shah of Iran on OPEC and Oil November 1, 2009). Matters.” National Security Archive. http://nsarchive.chadwyck.com (accessed December 18, 2009).

Department of State. “Future U.S. Policy in the Persian Gulf.” National Security Archive. http://nsarchive.chadwyck.com (accessed November 1, 2009). Department of State. “Iranian Oil Crisis.” National Security Archive. http://nsarchive.chadwyck.com (accessed December 18, 2009). Department of State. “Saudi Arabian Oil Production.” National Security Archive. http://nsarchive.chadwyck.com (accessed November 1, 2009). Department of State. “Saudi Arabia: Post-War Issues and U.S. Relations.” National Security Archive. http://nsarchive.chadwyck.com (accessed December 18, 2009).

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