The Prize, Chapter 20 Overview

The Prize, Chapter 20 Overview

We will learn in chapter 20 that the general belief was 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% of 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 used by Allies in WWII.

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.

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). 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 policymakers had arrived at the same standpoint that Britain had held since WWI, the centrality of the Middle East.

The focus shift to the Middle East introduced a whole new suite of issues, many rooted in the mutual distrust between America and Britain.

Socal & Texaco were the only private companies involved in Saudi Arabia, and they knew the size of the Saudi Arabian oil reserves. They were afraid the British, through the financing of Ibn Saud, would help get them kicked out of the country. 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. The implementation of the Lend-Lease approach was a mechanism to assure access.

Once again, we see the risk of overproduction and price crashes. If the U.S. 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 and potential for all-out competition. Also, many in the U.S. feared the exhaustion of US reserves and wanted a fundamental transformation in supply arrangements whereby Europe could be supplied primarily from the Middle East and not from the U.S. 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 partnerships with Britain to manage the world oil market ahead of the problem.

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.