Consider the following questions:
- How did American and British government oil policies differ?
- Why is oil often referred to as a prize?
- Where did the Saudi King sleep and why?
- What errors did the British make, and did they really matter?
Everette Lee DeGolyer’s Mission to Saudi Arabia
During WWII, the number of oil men working in Saudi Arabia was reduced to 100. They devoted themselves not to development but to protection of the wells in case they were bombed. They also prepared themselves to destroy the wells in order to deny the Germans, if needed. In 1942-43, the British & American workers actually plugged the wells in Kuwait and Iran in anticipation of the advancing Germans. Interestingly, in late 1943, the 100 oilmen were joined by a respectable man in the oil industry - Everette Lee DeGolyer - who was on a mission.
DeGoyler was born in a sod hut in Kansas and raised in Oklahoma. He attended the University of Oklahoma where he took geology by accident to avoid Latin. He is more responsible than another single person for introducing geophysics into oil exploration & seismography. He pioneered the development of seismographs as a tool in oil exploration, and discovered, even while still an undergraduate, the Portrero del Llano 4 well in Mexico which flowed at 110K bpd. In the 1930s, he established the petroleum consulting firm DeGolyer and McNaughton. By his mid-forties, he was a millionaire earning about $2 million a year, who commanded a huge respect in the oil community. He later became a founder of Texas Instruments. Interestingly, his hobbies included book collection and being a historian of chili.
In 1943, DeGoyler was called to Washington by Harold Ickes to help organize and rationalize production in the U.S. He was given a special foreign mission to appraise the oil potential of Saudi Arabia and other countries of the Persian Gulf. Because of the war, his trip took him to Miami, over the Caribbean to Brazil and then Africa before finally arriving in the Persian Gulf. During the trip, DeGoyler and his team visited oil fields in Iraq, Iran, Kuwait, Bahrain, and Saudi Arabia. They returned to Washington in early 1944 and reported that the conservative probable reserves of the region was about 25 billion barrels and that the center of gravity of world oil production would shift from the Gulf-Caribbean area to the Middle East. In 1940, for example, the Arabian Peninsula produced less than 5% world oil, and the U.S. produced 63%. The report coming from a man with great respect in oil exploration clearly predicted the end of oil domination by the US that had produced nearly 90% of the oil of the Allies in WWII.
America’s Entry into Saudi Arabia
The British sphere of influence in the Arabian Peninsula was huge relative to the US. However, the US knew there were enormous potential oil reserves in the area, and the American orientation to Saudi Arabia and the Middle East was changing. Ibn Saud, because of the collapse in the pilgrimages to Mecca and new financial crisis in Saudi Arabia, once again was strapped for cash and asked for loans from the British and Casoc and its two parent companies, Standard Oil of California and Texaco. In the words of Ibn Saud, “The Arabs have the religion, but the Allies have the money.” And he needed money badly from the British and Americans. The oil companies, who were not willing to make any more loans, thought perhaps the US government might want to help. Roosevelt refused to apply the Lend Lease on the grounds that Saudi Arabia was not democratic. The British, however, came through with the help. The American oil men, however, made sure that Saud knew the US was helping the British, which meant the aid was really and indirectly coming from the Americans.
America’s entry into the war in 1942 and 1943 caused a whole new outlook to be placed upon Middle Eastern oil. Oil was recognized as a critical strategic commodity that was essential for national power and international predominance. The single resource that shaped military strategy and could cause defeat was oil. The U.S. single-handedly fueled the Allies during WWII, which significantly drained its oil reserves. Fear of shortage began to grow, and the explosive growth with discoveries in the 1920s and 1930s had fallen off sharply resulting in additions becoming more difficult, expensive, and limited (i.e., the law of diminishing returns was in effect). This led Harold Ickes, in December 1943, to state, “We’re Running Out of Oil!” and that “if there should be WWIII it would have to be fought with someone else’s petroleum….” These assessments led to the conclusion that the U.S. was destined to become a net importer of oil, with potentially grave security implications. This gave rise to the “conservation theory,” which suggested that the U.S. government had to control and develop foreign oil reserves to reduce the drain on domestic supplies and conserve them for the future and guarantee America’s security. And the foreign reserves had to be the Middle East. In essence, American policy makers had arrived at the same standpoint that Britain had held since WWI, the centrality of Middle East.
Unfortunately, there was mistrust between Britain and the US. The Americans held unnecessary and exaggerated concerns about British intentions, while, in reality, the British actually wanted American involvement for security and financial reasons. On the other hand, the British were fearful that the Americans wanted to cut them off and deny them access to the Middle East oil, including those even under its control. With all the anxieties and mistrust, American had three options: direct government ownership (like the Anglo-Persian model); a negotiated deal with the British; and leaving the whole matter in private hands, which was risky in wartime.
The Attempt at the Policy of Solidification
Socal & Texaco were the only private companies involved in Saudi Arabia, and they knew the size of the Saudi Arabian oil. They were afraid the British, through financing of Ibn Saud, would help get them kicked out of Saudi. Besides, Saudi Arabia was only 20 years old, and they were unsure if the Kingdom and oil concession would survive the King himself. They also realized that it was one thing to throw out private companies and another to take on the most powerful power in the world. Thus, the policy of solidification, or direct involvement by the American government in Saudi Arabia, was an easy argument since it would help reduce the risk of expropriation as happened in Mexico. Socal, Texaco, & Casoc went with hats in hands to ask the federal government for foreign aid to Saudi Arabia to help keep the British at bay. Harold Ickes managed to convince FDR to extend Lend Lease assistance to Saudi Arabia, and on Feb. 18, 1943, the president authorized Lend Lease assistance to Saudi Arabia. The Army projection of oil shortage in 1944 helped to push the US towards Saudi Arabia.
In a surprising move, Harold Ickes wanted to go beyond assistance through the Lend Lease to the acquisition of direct ownership of foreign oil reserves and formed the Petroleum Reserves Corporation. He was supported by the Army and Navy but not the State Department. The target of the new Corporation was Saudi Arabia through Casoc. In the negotiations, Casoc only wanted the US to acquire a fraction of it, but FDR & Ickes wanted 100%. Presidents Rodgers of Texaco & Collier from Socal, the parent companies of Casoc were shocked, as they had only wanted “assistance” and not “assimilation,” leading one of the negotiators to note, “They had gone fishing for a cod & caught a whale.” Finally, in August 1943, they struck a bargain and arrived at 1/3 Casoc for $40 million, with the right to go to 51% in peacetime and 100% in wartime. As expected, there was a huge firestorm from the rest of the oil industry, as they saw the government being an unfair and formidable competitor who might promote foreign oil over domestic oil. They also saw it as a possible step to control and even nationalization of the oil industry. The opposition was so strong from both the independents and the other major oil companies such as Standard Oil of NJ and Socony-Vacuum (Mobil) that Ickes abruptly withdrew his offer in late 1943, blaming Casoc for being too greedy and recalcitrant. Ickes later also dabbled in another plan involving the financing of a foreign pipeline that would carry oil from the Middle East (Saudi and Kuwait) across other desert countries to the Mediterranean for transshipment to Europe. Again, a potent coalition of opponents and critics killed it.
The Anglo-American Petroleum Agreement
If the US was not going into the oil business, there was still another avenue to consider: British Partnership in managing the world oil market. Both the British and Americans saw a coming postwar glut from the Middle East & potential for all-out competition. Also, many in the US feared the exhaustion of US reserves and wanted fundamental transformation in supply arrangements whereby Europe could be supplied primarily from the Middle East and not from the US reserves. The British campaigned hard on negotiations on the Middle East oil. Both sides recognized that after the war the Middle East countries that depended on the oil royalties were going to put incredible pressure on the companies to increase production to increase their royalty revenue. This, in turn, was going to lead to a glut and intense competition, as failure to meet the demands of the countries would result in vulnerability of the oil concessions. Thus, the U.S. government explored partnership with Britain to manage world oil market ahead of the problem. The objective was “not rationing of scarcity, but orderly development and distribution of abundance.” Roosevelt proposed to the British diplomat that they share Iraq and Kuwait, with Persian oil going to the British and the Saudi oil going to the U.S. However, both sides continually disagreed, and negotiations continued on.
Finally, the Anglo-American Petroleum agreement was signed on August 8, 1944 with the objective of ensuring equity to all parties, including the producing countries. It had an 8-member International Petroleum Commission that would prepare estimates for global oil demand, suggest quotas and price, and report to the two governments on how to promote development throughout the world. Thus, the Anglo-American Petroleum Agreement was, in essence, trying to manage oil as had been tried in the 1920s and 1930s by the “As-Is” of Achnacarry and also the Texas Railroad Commission. Both independents and majors were opposed for different reasons and the agreement submitted to the Senate as a treaty was defeated, and, in January 1945, Roosevelt’s Administration withdrew it, essentially killing it by early 1945. Shortly after, Roosevelt left to Yalta in the Soviet Crimea for talks with Stalin and Churchill to lay the basis for the postwar international order.
The Twins: The Meeting between Roosevelt and Ibn Saud
In mid-Feb 1945, on his way back from Yalta; Roosevelt met with King Saud near the Suez Canal on board one of the US ships, USS Quincy, and had five hours of discussions on Jewish homeland in Palestine, oil, and postwar configuration of the Middle East. Ibn Saud primarily wanted to assure continuing American interest to counterbalance British influence that he saw as a threat to his reign. King Saud had been brought in on another US ship, USS Murphy, from Saudi and he refused during the trip to sleep in the commodore’s cabin and instead slept in a tent on the deck. This was, perhaps, only the second trip of Saud outside his Kingdom. The two men got along very well. Roosevelt refrained from smoking in the King’s presence out of respect for his religious beliefs and also gave the King his extra wheelchair as a gift, as well as a DC 3 plane. Roosevelt also met with King Farouk of Egypt and Haile Selassie of Ethiopia during the trip.
Winston Churchill, fearful of the American growing influence in an area of traditional British influence, drove within three days of Roosevelt’s meeting to meet Ibn Saud in a hotel at an oasis. Churchill was not very accommodating and continued to smoke in front of the King. Also, he gave the king a small case of perfumes worth about 100 pounds, while Saud gave him expensive diamonds and pearls and other diamond jeweled swords and other items worth over 3,000 pounds. Embarrassed by the gifts of the King as well as those from Roosevelt, he promised the King to give him a Rolls-Royce later. Again, the British were not very accommodating and had assumed the King sits at the back of the car or Rolls-Royce as done in Britain. Instead, the Rolls-Royce that was delivered had the steering wheel and the driver at the right front where the King sits in Saudi Arabia. Thus, when the king went to sit in his new Roll-Royce and found the driver sitting there, he closed the door and gave it as a gift to his brother! All in all, things did not go well at all for the impromptu visit meeting between Churchill and Saud compared to the meeting with Roosevelt.
On April 12, 1945, Roosevelt died in Warm Springs, WVA, and Harry Truman became president. Several attempts were made to revive the Anglo-American Petroleum agreement by excluding domestic American production to make it domestically acceptable, but all still failed. People like J. Edgar Pew, proclaimed the fear of an American oil shortage were psychological and not based on scientific geological data. Also, with the victory over the Axis Powers, there was no pressing demand on American oil reserves, making the agreement increasingly irrelevant. Worse still, the main driving force of the agreement, Harold Ickes, following a dispute with Truman, tendered his resignation as he had done many times with Roosevelt to get his way. Unfortunately for him, Truman quickly accepted it with delight and gave him two days to clean out his desk, instead of the six weeks Ickes had requested to wind things down. The U.S. was soon finding that it could not sustain itself on its production alone, as it was on its way from being a net exporter to being a net importer. Everything that wartime negotiators sought to prevent was soon found to be coming true: competition, chaos, and instability. In the absence of an International Petroleum Agreement, oil companies moved quickly to work out their own salvation in the Middle East for the postwar world.