EGEE 120
Oil: International Evolution

The Prize Chapter 23: “Old Mossy” and the Struggle for Iran

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Consider the following questions:

What was the confrontation between commercial and national interests in Iran? How did the cold war play into this struggle? Should we have staged the Iranian coup with the British? What were the interests of US foreign policy regarding Iran and what did they need from the oil companies? What were the oil company concerns? Was isolation a better policy? What were the costs of our policy decisions back then? Do you believe it was right to bring an antitrust case against oil firms that had collaborated together in relief efforts during and after the war?

The Shah and his troubles to maintain power

Reza Pahlavi, former Shah of Iran, was a resolute, towering figure and commander of the Persian Cossacks who seized power in Iran and declared himself Shah during the 1920s. He brought order & subjugated the mullahs (the religious leaders that he described as deadly enemies from the Middle Ages). He was suspected to be a Nazi sympathizer, and during the German advances in Russia and North Africa in late 1941, the Allies deposed and replaced him with his 21 year old son, Mohammed. He died in exile in 1944 in South Africa.

See caption below
1920s photo of Shah Reza Pahlavi (left), and Shah Mohammad Reza Pahlavi, 1942 (right).
Credit: Public Domain on Wikimedia Commons

Mohammad Pahlavi lived in his father’s shadow and was perceived to be weak, indecisive, and inadequate relative to his father. He once admitted in 1948 to a visitor; “My sister Ashraf (twin) asked me yesterday whether I was a man or a mouse.” At age six, he was entrusted to a French governess and at 12 was sent to school in Switzerland. Thus, his experiences distanced him from the Iranian society and experience, and he was viewed as “a little too Westernized for an Oriental country.” To make matter worse, the role of the monarchy was very much in question, and therefore the legitimacy of his reign was problematic. He had to contend with all kinds of divisions—class, regional, religious, and modern vs. traditional. There were also chronic foreign intervention issues with the Mullahs on the right & the communists & Tudeh party on the left, and in between - reformers, nationalists, republicans and the military. Virtually all parts of his domain advocated secessionist drives. The only thing that united the citizens was the hatred for foreigners, especially the British. The English were viewed as supernatural devils and blamed for all ills, with the big target being the Anglo-Iranian Oil Company.

The political culture in Iran was chaotic, and corruption was rampant, leading one British diplomat to indicate “Deputies expect to be bribed.” The battle over rents was an underlying factor for the hatred of Anglo-Iranian. The British government tax revenue between 1949 and 1950 was £250m compared to Iranian royalties of £90m. What drove the mobs were the symbols & emotion. With the poor conditions of the Iranians and the economy, the British & Anglo-Iranian became convenient scapegoats.

The Shah survived an assassination attempt in February 1949 (he dodged 6 shots). He subsequently used the incident to impose martial law, brought back his father’s body for a state funeral, and extended his political & economic power. America had a political interest in Iran, and even though the Russians had withdrawn from Northern Iran in 1946, by 1949, America, based on the poor economic and political state of Iran, was afraid Iran might easily fall into Soviet hands. The US, through George McGhee, Asst Secretary of State, and a geophysicist & unabashed Anglophile, pushed the British and Anglo-Iranian to increase the royalties to Iran. They initially resisted, but Anglo-Iranian eventually conceded and sought re-negotiations with Iran in 1949, which resulted in a Supplemental Agreement to the 1933 concession and which involved a large hike in royalties and a big lump-sum upfront payment. The Iranian government rejected the new concessions, and the Prime Minister resigned. The new Prime Minister nominated by the Shah was General Ali Razmara, the Army’s Chief of Staff and a former military academy student. The situation made Iran more vulnerable to communist subversion and Soviet expansion. To make matters worse, North Korea invaded South Korea in June of 1950, and Iran’s oil took on a new urgency since it accounted for 40% of Middle East oil production and the Abadan refinery was the major source of aviation fuel in the Eastern Hemisphere. McGhee increased pressure on Anglo-Iranian to negotiate a better deal with Iran, but Anglo-Iranian’s leader, Sir William Fraser, refused.

see caption below
Prime Minister Mohammad Mossadegh of Iran (left) and George McGhee at the Egyptian Embassy (right)
Credit: Wikimedia Commons

“Old Mossy” and the Nationalization of Anglo-Iranian Oil

Fraser, in autumn 1950, finally and abruptly gave in and was willing to give more money, subsidize the Iranian economy, and support Iranian education (once be learned of the Saudi 50-50 deal or the “McGhee Bombshell”) but it was too late. In December 1950, Razmara had to withdraw the Supplemental Agreement as soon as the Saudi 50-50 deal with Aramco was announced. Strong sentiment in Iran, led by Mohammed Mossadegh, was for nationalization of the industry and the ouster of Anglo-Iranian. Mossadegh declared to his supporters that “The source of all the misfortunes of this tortured nation is only the oil company.” Razmara opposed nationalization in March 1951 and was assassinated 4 days later. His assassination demoralized those for compromise, weakened the Shah and emboldened the opposition. Mossadegh was selected by the Parliament on April 28, 1951 as Prime Minister with the mandate to nationalize Anglo-Iranian, and on May 1, 1951, the Shah signed the law and Anglo-Iranian was nationalized. (A very bad day for all the sheep sacrificed in celebration of the great event!)

Mossadegh, nicknamed Old Mossy, was fiercely nationalistic, anti-foreigner, and obsessed with opposition to the British, despite having received European education as a lawyer in France and Switzerland. He was 70 years old, looked frail, and wept & wore pajamas in public. He was, interestingly, a great-grandson of a previous Shah. Cold War considerations and fears of communism then shaped US policies and perceptions, and, as such, Mossy was initially favored by the US as an alternative to a communist Iran. He always had two overriding objectives--maintaining his political position and the expulsion of foreigners, especially the British.

The British evaluated all their options following the nationalization. They worried about their most valuable foreign asset (Anglo-Iranian) and drew up plans for military intervention at the most valuable oil site, Abadan. The Americans were against using military force, fearful it would drive Iran to the Soviet side. The US sent Averell Harriman to Iran to help negotiate a peaceful and mutually satisfying solution. But, Mossy was firm in his resistance to negotiations, fearing assassination should he express sentiment against nationalization. What mattered to him most was how the affair would play in domestic politics and how his rivals would respond, as the worse sin was being pro-British. Harriman made his case to Ayatollah Kashani, the leader of the religious right as well, but received only death threats in return. The British were skeptical of a settlement, as they feared it would embolden others to threaten every British foreign investment with expropriation.

The Iranian expropriation was met with economic warfare. The British put an embargo on goods to Iran and refused to ship oil to and from the country. The British again considered military intervention, but decided against it to prevent Iran uniting against the British as well as risking a break in relations with the US. In late September 1951, Mossadegh, who had now become a prisoner of the popular passions he had stirred, ordered all remaining British employees at Abadan to leave within one week. Days later, Ayatollah Kashani declared “a day of hatred against the British Government.” With that, the first great Middle East concession had also been the first to be cancelled/nationalized!

The Initial Reaction to Iran’s Nationalization and the Economic Impact on Iran

The Korean War and British embargo threatened to plunge the world into an oil shortage as the embargo removed a substantial amount of oil from the market at a critical time. Joint efforts of the British and Americans under the Defense Production Act of 1950 helped to avert the shortage. To achieve this, American companies were promised exemption from anti-trust laws as they joined together to increase oil production. With the embargo, by 1952, Iranian production had decreased to 20,000 barrels per day in relation to the 660,000 in 1950, while total world production had risen from 10.9 million barrels per day in 1950 to 13.0 million in 1952. Thus, with the coordinated efforts, the feared shortage never really occurred.

Winston Churchill returned in 1951 as head of the Conservative government. As First Lord of the Admiralty, 37 years earlier, he had led the effort in the British Government purchase of majority shares in Anglo-Persian and would now defend at all cost. The fundamental difference in American and British views became quite clear. Churchill strongly supported overthrowing Mossy as he believed a more agreeable government would evolve with his overthrow. Harry Truman, however, was of the view that overthrowing Mossy would push Iran into the Soviet camp.

Mossadegh arrived in the US in fall of 1951, begging for aid. While the US wanted stability in Iran, it was not prepared to bail Mossy out to achieve that. McGhee and Mossy worked out the equivalent of the 50-50 deal (with Royal Dutch/Shell taking over Abadan), with the exception that no British oil technicians could work in Iran. Anthony Eden, the British Foreign Secretary, refused the deal, finding the exception to be outrageous.

Iran fell further into poverty and economic depression, as it could not sell its oil, was fast running out of money, and economic conditions were deteriorating. Mossadegh however continued to gain power, exerting dictatorial power and influence in politics through brute force. Mossadegh even turned down a requested meeting between Truman, Churchill, and himself, fearing it to be a “trap.” As expected, the Shah, understandably, felt powerless as Mossy’s influence increased.

Operation Ajax: The Coup That Drove out “Old Mossy” and Restored the Shah

The British and Truman administrations planned for a coup to remove Mossadegh who had overplayed his hand by extending martial law, dissolving parliament, silencing the opposition, holding a Soviet style plebiscite that gave him 99.9% of the vote, and moving closer to the Soviet Union. He appeared ready to eliminate the Shah and had aliened the nationalists, reformers, & mullahs who had earlier supported him by his quest to monopolize power. Also, when Time magazine selected him “Man of the Year,” it implied to the Iranians, especially the religious fundamentalists, that he was an American agent and an enemy of Islam. The State Department predicted there might be communist coup, and other areas of the Middle East & oil reserves could come under communist control. Thus, Churchill and Truman both approved of his overthrow.

Kermit Roosevelt
Kermit Roosevelt in 1926

Field control of the planned coup, called Operation Ajax, was delegated to the CIA’s Kermit Roosevelt, grandson of Theodore Roosevelt, with support from the British Intelligence, MI6. The Shah first had to be convinced the plan had a good chance of success before being put in motion. The key characters and their code names were: Mossy was “old bugger” and the Shah was “Boy Scout”). The plan unfolded in August 1953, with the Shah releasing an order dismissing Mossadegh from his post and promoting General Zahedi as his successor. The operation almost failed when Mossadegh was tipped off by one of his supporters or the Soviets, leading to the Shah leaving the country and General Zahedi going into hiding! On August 19, however, things turned around, and General Zahedi announced the Shah’s order dismissing Mossadegh. A pro Shah rally formed, and Mossadegh fled, only to be arrested later. The Shah returned in triumph to Tehran, and by the end of August 1953, the Shah and his new Prime Minister were back in power, and Old Mossy was under arrest.

The New Consortium for Oil Development in Iran after Nationalization

Anglo-Iranian couldn’t return to Iran, as it would simply re-ignite nationalist sentiment. US oil firms also did not want to enter Iran either. Clearly, the US had to lead in an effort to settle the Iranian situation, as there was considerable fear that failure to do so would lead Iran into the Soviet camp and put the Middle East oil concessions at risk. Herbert Hoover, son of the former President, was charged with the task of putting together a consortium of companies with Anglo-Iranian camouflaged in their midst to replace Anglo-Iranian. It was not an easy task, as the American companies had enough oil and were not willing participants to go into Iran and their unstable political situation. It took an incredible amount of pressure and “beating on the head” by US and British governments to get them to agree. The argument of communist threat to Iran and the entire Middle East and its potential impact on world oil also helped to get the American companies to give in. Another big obstacle for the American companies was the US Department of Justice anti-trust suit charging majors with collusion under international petroleum cartel.

Clearly, there seemed to be a contradictory and schizophrenic US oil policy with the State Department urging the oil companies to stabilize the market and promote US strategic interests as with the Iranian situation, while the Department of Justice was leading populist assaults on big oil for alleged greed, monopoly, and “international petroleum cartel.” The Justice Department wanted to, in addition to the US companies, even go after the foreign oil companies as Shell, Anglo-Iranian and CFP. This could not have come at a worse time, as the US was then involved in the Korean War and was trying to get the oil companies to coordinate and cooperate to ensure sufficient oil for the war and also help resolve the crisis in Iran via the consortium. The decision to move or not move forward with the anti-trust suit was President Truman’s in his last few weeks, as Eisenhower had been elected in November 1952. During the Korean War, Harry Truman put his finger on Iran on a globe and said: “Here is where they (the Soviets) will start trouble if we aren’t careful. If we just stand by, they’ll move into Iran, and they’ll take over the whole Middle East.” Also, the National Security Council issued a directive that stated: “The enforcement of the Antitrust laws of the United States against western oil companies operating in the Middle East may be deemed secondary to the national security interest.” Finally, on Jan 12, 1953, less than 2 weeks to the end of his term, Truman decided to call off the Department of Justice investigation, paving the way for the creation of the new consortium to help resolve the Iranian crisis.

The companies had to make room for Iranian oil, and the consortium formed, with Anglo-Iranian being the most prevalent partner, included Anglo-Iranian (40%), Aramco (Jersey, Socony, Texaco, Standard oil of CA, 8% each for 32% total), Gulf (8%), Shell (14%), and CFP (French, 6%). A new deal was struck between the companies and Iran that established the National Iran Oil Company which would own the country’s oil and facilities and sell all its output to the consortium. The agreement was signed by the Shah on October 29, 1954. This clearly was a turning point for the industry, as the concessions previously owned by foreigners had been replaced by negotiation and mutual agreement. To survive the domestic US politics, especially the power and influence of the independents, 1% was surrendered by each US company to an entity called Iricon, a smaller consortium of nine independent American oil companies made up of such companies as Phillips, Richfield, Standard Oil of Ohio, and Ashland. The smaller consortium within the larger consortium was open to all independents with financial capability examined and approved by Price Waterhouse.

With the Iranian consortium, the US was clearly the major player now in the Middle East with all its oil and volatile politics. It should also be noted that Anglo-Iranian came out surprisingly well in the nationalization turmoil. For compensation for the nationalization, Anglo-Iranian received $90 million upfront for the 60% it was giving up. They also received 10 cents a barrel royalty on the total production of the consortium until another $500 million had been paid. As for Mossadegh, he was tried and sent to jail for three years and thereafter lived under house arrest in his estate.