Overview

Here we will explore oil discovery in the area that was not supposed to have oil, Arabia (Bahrain, Kuwait, and Saudi), and the problems posed by the troublesome Red Line agreement. The reasons for the economic hardships of the area that made concessions possible in these areas will be discussed. The different objectives of the American and British companies that made it possible for America to beat the British in Arabian oil dominance will also be explored.

Followed by the rise of nationalism and military expansionism in Japan in the 1930s and the deadly paradox/dilemma Japan faced. This will lead us into the Pearl Harbor attack, its key success elements, objective, impact, and the miscalculations of both sides. We will then discuss the innovations in chemistry that helped with synthetic oil production in Germany, and how synthetic oil shaped Hitler’s WWII plans and strategy in Europe. We will also discuss the role of the chemical giant I. G. Farben and the objectives of Hitler’s Blitzkrieg and grand strategies and why they failed. Finally, we conclude with a ponderable comparison to the Iraq War of 2003.

Major Lesson Themes

• Efforts to expropriate & renegotiate concessions or contracts
• Americans beat the Brits to Saudi oil
• Increasing ties between Saudi Arabia & United States
• Economics & oil
• Cultural differences can be profound
• The host countries wanted the companies in just as much as we wanted their oil
• Oil as a central element in strategy, but not really the cause of the war
• Other motivations for the war
• Poor economic conditions opening the door to despots
• Lessons from history for today
• Access to oil is important
• But sea lanes can be blocked easily
• Access to oil was critical
• Logistics & FUEL were critical
• Synthetic oil production

Learning Outcomes for Lesson 5:

By the end of this lesson you should be able to:

• chronicle the nationalistic events in Persia and Mexico and their eventual outcomes;
• provide a historical perspective of oil discovery in Arabia and the problems posed by the Red Line Agreement of Gulbenkian and the IPC;
• explain the causes of the economic hardships in Saudi and Kuwait before oil discovery;
• explain the different objectives of the American and British oil companies as well as Britain’s dilemma in having America in the Middle East;
• explain the reasons for the military expansionism of Japan;
• articulate the deadly paradox/dilemma Japan faced with respect to the US;
• explain the underlying objectives of the Petroleum and Synthetic Oil Industry Laws;
• detail the propaganda campaign of the Japanese government to its citizens;
• provide the objective, key success elements, and impact of the Pearl Harbor attack;
• explain the miscalculations and mistakes of both sides;
• explain why destruction of the Pearl Harbor oil tanks would have been problematic;
• explain why freezing the assets of Japan was essentially the equivalent of an oil embargo;
• explain the hydrogenation and Fischer-Tropsch methods of making synthetic oil;
• distinguish between the objectives of Standard Oil and I. G. Farben in their agreement;
• explain how I.G. Farben became an arm of Nazi Germany;
• account for why mobility and long supply lines create vulnerability;
• explain why the grand strategy failed to get the grand prize.

What is due for Lesson 5?

This lesson will take us one week to complete. Please refer to the Course Syllabus for specific time frames and due dates. Specific directions for the assignment below can be found within this lesson.

Questions?

Each week an announcement is sent out in which you will have the opportunity to contribute questions about the topics you are learning about in this course. You are encouraged to engage in these discussions. The more we talk about these ideas and share our thoughts, the more we can learn from each other.

"Abu Naft", the "Father of Oil", Major Frank Holmes

Major Frank Holmes, who was born in New Zealand and had worked as a mining engineer in South Africa and other mines around the world, was on a beef-buying expedition in Ethiopia in 1918 when he first heard about oil seepages in Arabian coast on the Persian Gulf. After the war, he set up a company – the Eastern and General Syndicate – to develop business opportunities in the Middle East in the 1920s. He was convinced the Arabian coast would be a fabulous source of petroleum. The Arabs called him "Abu Naft", the "Father of Oil." He referred to his nose and its ability to sniff out oil as his geologist.

Holmes set up headquarters on the small island of Bahrain where the Sheikh wanted drilling for fresh water. Holmes drilled for water, struck it, and was rewarded an oil concession in 1925 in appreciation of his work. Holmes, by then, already had other oil rights, as in 1923 he had won an option to a concession in Al-Hasa in the eastern province of Saudi Arabia and in 1924 to the Neutral Zone between Saudi Arabia and Kuwait. Anglo-Persian was alarmed by Holmes’ activities, even though it was convinced there was no oil in the region. The Eastern and General Syndicate was in deep financial trouble, particularly after a report by a Swiss geologist it had hired declared the region had no promise of oil. The Syndicate tried to sell all its concessions to Anglo-Persian but Anglo-Persian said no as the area was not supposed to have oil! After getting rejected from Britain, Holmes turned to the U.S. for financial backing.

The Troublesome Red Line

After more rejection in America by Standard Oil of NJ, Gulf Oil showed a small interest in Holmes’s expedition. Gulf took over the rights claimed by the Eastern and General Syndicate to the Arabian concessions and agreed to help secure a concession in Kuwait. But then, since Gulf was part of the 1928 Turkish Petroleum Company (TPC) and signatory to the Red Line Agreement, it could not search for oil in Saudi Arabia or Bahrain which were in the Red Line. It could, however, pursue oil in Kuwait which was outside the Red Line. Gulf brought the Bahrain concession to the attention of Standard Oil of CA, Socal, which, unlike Gulf, was not bound by the TPC and the Red Line agreement. Socal aggressively committed to developing foreign oil supplies and set up a Canadian subsidiary, the Bahrain Petroleum Co., to hold the concession in Bahrain. Both Socal in Bahrain and Gulf in Kuwait, however, met British opposition to the entry of American companies in the Middle East as the local Sheikhs in the area had made agreements with Britain before World War I that oil development in the area would be done by British interests. This set up nasty negotiations between the British and American governments, and in 1929, the British government reconsidered its position because it viewed positively that the flow of American capital into the area would encourage widespread development of the area. In Oct 1931, the Bahrain Petroleum Co. began drilling, and in May 1932, it hit oil, vindicating the vision and instincts of Major Frank Holmes.

The Red Line Agreement - (drawn freehand).

Credit: Ferraro, Mt. Holyoke College [1]

Standard Oil of California (Socal) and the Saudi Oil Concession

King Ibn Saud of Saudi Arabia.

Credit: Public Domain

Ibn Saud, King of Saudi Arabia, had a very imposing physical appearance and had built and created the nation of Saudi Arabia through conquest. During 1913 and 1914, he brought eastern Arabia under his control and the last critical territories of Saudi Arabia were added after WWI. In 1922, the British High Commissioner, tired of disputes between Saudi and Kuwait, took a red pencil and fixed their borders. In Dec 1925, Ibn Saud captured the Hejaz, the holy land of Islam, and in 1932, the collective area under his conquest and control, the Kingdom of Hejaz and Nejd and Its Dependencies was renamed Saudi Arabia.

During the Great Depression, the major source of the King’s revenues – pilgrimages to Mecca - slowed to a trickle, and the kingdom’s finances fell to a desperate level. Worse still, Ibn Saud had just embarked on major development programs and desperately needed money. While King Ibn Saud was on a car ride with his English friend, Harry St. John Bridger Philby, known as Jack, Jack suggested the possibility the kingdom was rich in petroleum to the King.

Jack Philby.

Credit: Amazon

Jack Philby, an Englishman, was a former official of the Indian Civil Service who quit in 1925 because he was angered by British policy in the Middle East. He remained at odds with Britain and British policy, which he saw as "traditional western dominance in the eastern world". He set himself up as a merchant in Jidda and had converted to Islam, with the Islamic name Abdullah. He was the father of Harold "Kim" Philby, one of the most notorious British double-agents in the 20th century.

Philby had an American acquaintance, Charles Crane, a plumbing tycoon and philanthropist. Crane was invited through Philby to meet with the king about drilling for water and oil in Arabia. Crane made available an American mining engineer, Karl Twitchell, who was working on one of his projects in Yemen. Twitchell investigated the water potential for the kingdom and reported that there were no prospects for artesian wells but that there were some promising oil prospects in the eastern part of the country. The King was hesitant to grant concessions to foreigners, but after Socal hit oil in 1932 in Bahrain, he became much less averse to foreign capital in his kingdom. The King used Karl Twitchell to be his promoter for capital in the U.S. Twitchell returned to Saudi Arabia in Feb 1933 with Lloyd Hamilton, a lawyer for Socal to initiate negotiations with Ibn Saud’s minister of finance, Abdullah Suleiman. Suleiman was a cunning and masterful opponent. He was one of the most important men outside the Saudi royal family. Suleiman wanted a large sum of money and very quickly.

The Iraq (Turkish) Petroleum Co. was also interested in Arabia concession. Philby signed on as an adviser to Socal but kept the arrangement secret. He took pleasure in helping an American company succeed over British interests in the area. For his services to Socal, he was paid $1000/month for 6 months plus bonuses for a contract for a concession & oil discovery. The interests of the competing companies were completely different: Socal needed oil concessions while IPC simply wanted to keep all competitors out of the area. Socal was therefore willing to offer a great deal more money than IPC and on May 29, 1933, an agreement was signed with Socal that provided the King with 35,000 pounds ($175,000) up front (30,00 pounds in loan and 5,000 pounds as the first year’s royalty paid in advance). In addition, a second loan of 20,000 pounds was to be given after 18 months and another loan of 100,000 pounds was to be made after the discovery of oil - all payments made in gold. The concession was good for 60 years and covered about 360,000 square miles. Britain’s loss was definitely America’s gain, though it was slow to be realized at first.

Kuwait Oil Company: The joint venture of Gulf Oil and Anglo-Persian

Kuwait was a small state trying to assure its independence and freedom of action among larger powers as Iraq, Saudi Arabia, and Iran. Britain assumed responsibilities for Kuwait’s foreign affairs after the war and later established a protectorate over the empire. Sheikh Ahmad, the Amir of Kuwait, was upset when exploration effort occurred in Bahrain and not in Kuwait. He was courted by Anglo-Persian and Gulf. Anglo-Persian was skeptical about oil in Kuwait, but didn’t want to take the chance of any other company receiving concessions. Thus, Anglo-Persian’s concession interest in Kuwait was also a defensive strategy.

Sheikh Ahmad, like the other rulers in the Middle East, desperately needed money because Kuwait was suffering severe economic hardship. Its economy had depended on natural pearl, and the development of techniques for cultivating pearls artificially (cultured pearls) by the Japanese had destroyed the demand for natural pearls, which was Kuwait’s #1 industry and principal source of foreign earnings. The Great Depression also crippled the Kuwaiti economy:

The Sheikh was upset with Britain over diplomatic measures involving various controversies with Saudi Arabia and Iraq and believed that an American oil company would bring American political interest, which would bolster his position against Britain and other rivals. On the other hand, he also saw the practical significance of having the Royal Navy in the area. The competition between Gulf and Anglo-Persian for Kuwaiti oil concession continued to increase as the Sheikh played one against the other. A possible alternative to the continuing bidding war was cooperation. While Britain entertained the fear of losing influence and position to America in the area, the last thing it wanted was to have an oil war with the United States. The British also deep down believed American capital could contribute to political stability and economic interests in the area. When, in May 1932, Socal struck oil in Bahrain, it forced Anglo-Persian to quickly change its mind and its interests were no longer defensive but commercial. The bidding war between Gulf and Anglo-Persian in which the Sheikh played the two against each other continued. To the Sheikh, it did not matter what nationality was involved, as long as the stipulated payments in any agreement were made.

Anglo-Persian saw positively America’s wealth and political clout in the area, and Gulf also saw positively the entrenched British power in the region, and they both realized it was in their best interest to reduce the number of buyers from two to one to avoid the Sheikh continuing to play one against the other. By December 1933, the two companies established a 50-50 joint venture called the Kuwait Oil Company. An agreement between the British government and Kuwait Oil Company in March 1934 assured British dominance over development despite the 50-50 arrangement. Sheikh Ahmad proved to be a tough negotiator. Although he was upset with the decision of British dominance, on December 23, 1934, he finally signed an agreement which granted a 75 year concession to Kuwait Oil Co. In return, the Sheikh received an immense amount of royalties in the form of an upfront payment of 35,700 pounds ($179,000) plus 7,150 pounds per year until oil is found, then a minimum of 18,800 pounds per year once oil was found. The Sheikh appointed Frank Holmes to be his representative to the company in London until Holmes’ death in 1947.

The California-Texas Company (Caltex) of Socal and Texaco

Standard Oil of California, Socal, set up California-Arabian Standard Oil Company (Casoc) as its branch in Saudi Arabia with administrative headquarters in Jeddah. The exploration and production experienced many difficulties including extreme daily temperatures (up to 115 degrees during the day and bitter cold at night) and severe sandstorms. Their geologists identified the Dammam Dome and believed it to have been a sure bet for oil, but it ended up being a failure. Socal became increasingly anxious about its Arabian project. Even if it found oil, it had no distribution facilities in the area. Due to oversupply and the Depression, it really didn’t have a market even if it discovered oil. Thus, the question was, what would Socal do if it actually found oil in the Arabian Desert?

Socal actually had to cut back on its production in Bahrain in the second half of 1935 due to the lack of market access. Also, the Bahraini crude had undesirable high sulfur content. While Socal had the crude and no marketing network, Texaco had extensive marketing network in Africa and Asia, but no crude in the Eastern Hemisphere. Thus, a marriage of the two in the form of a joint venture made sense. Caltex – the California-Texas company which was the joint venture formed between Socal and Texaco provided the outlet for both Bahrain production and any oil eventually found in Saudi Arabia. Socal and Texaco delineated their consolidated area by what they called the "Blue Line" in reference to the Red Line.

Oil Discovery in Kuwait and Saudi

Exploration in Kuwait begun in 1935, and it was not till 1936 that seismic work was undertaken. On Feb 23, 1938, petroleum was struck, unexpectedly and with a surprising large flow in Kuwait. Then, in March 1938, large quantities of oil were also struck in Well #7 in the Arab Zone (Dammam #7) in Saudi Arabia at 4727 feet. Immediately after the well was tapped, a pipeline was constructed to link the oilfields to the Saudi coastal and marine terminal at Ras Tanura. King Ibn Saud himself turned the valve through which the first trickle of oil flowed through the pipeline out of Saudi Arabia amid dancing and a joyous celebration. Jack "Abdullah" Philby prospered in Saudi Arabia through the 1930s and continued many other explorations. He died in 1960 in Beirut, Lebanon.

There is no video section that corresponds with chapter 15 in Yergin's The Prize for this lesson.

The Rise of Nationalism and Military Expansionism in Japan

Based on military victories over China in 1895 and Russia in 1905, Japan had gained rights to Manchuria, and in the late 1920s, there was a push in Japan to gain complete control of the area which some described as “Japan’s lifeline” from the raw material supply, accommodation, and security viewpoints. Through the early 1920s, Japan had a functioning parliamentary system. However, in the early 1930s, Japan’s military came to dominate the government, and Japan embarked on a course of imperial expansion in East Asia. On September 18, 1931, for example, Japan provoked China with a bomb attack that caused minimum damage to the South Manchurian Railway, and turned around and blamed it on China. They then proceeded to attack China without delay for it. They wished to block other Western powers from the area that they called Japan’s “Greater East Asia Co-Prosperity Sphere.” Several reasons accounted for this shift in military expansionism: vulnerability due to its lack of natural resources, economic hardship from the Great Depression and the collapse of world trade, dwindling access to international markets, extreme nationalism, moral distress, arrogance, and the mystical belief in the superiority of Japanese culture as well as “The Imperial Way” (Asia under Japanese control).

When Prime Minister Osachi Hamaguchi won a large election victory in February 1930 and favored cooperation with Britain and the United States, he was assassinated by a youth, and that killed any spirit of cooperation. Ultra-nationalism took hold thereafter. Japan organized a new puppet state in Manchuria – Manchukuo (“Japan’s lifeline”) and installed deposed Chinese emperor, Pu Yi, as its figurehead. After being reprimanded for its actions by the League of Nations (United Nations), Japan left the League, rejected liberalism, capitalism, and democracy as engines of weakness, and embarked on its own destructive course. They believed that there was nothing more noble than to die in battle for the Emperor and sought to establish a “national defense state” in which all resources, especially oil, were targeted for war based on Germany's failure/defeat in WWI from lack of resources (oil). The Army focused on Manchuria, North China, Inner Mongolia, and the Soviet Union, while the Navy focused on the Dutch East Indies, Malaya, Indochina, and islands in the Pacific for access to natural resources.

By the late 1930s, Japan produced only 7% of the oil it consumed. It imported the rest, with 80% coming from the U.S., and 10% from the Dutch East Indies. After the Manchurian Affair, Japan sought to dominate the oil industry to serve its needs. Up to that time, 60% of its internal market was held by two Western companies (Rising Sun & Stanvac). Rising Sun was the Japanese affiliate of Royal Dutch/Shell, and Stanvac was a joint venture between Standard Oil of New Jersey and Standard Oil of New York.

With Japan’s actions, the United States emerged as Japan’s antagonist in the Pacific, as the US had an “open door” policy which was counter to Japan’s strategy. With the US as Japan’s major oil supplier and likely antagonist, the question was where was Japan going to get its oil in case of war? To help address this, the military won passage in 1934 of the Petroleum Industry Law which gave the government the power to control imports, set quotas, fix prices, and make compulsory purchases. The underlining objectives of the law were to build up refining industry, reduce the role of foreign companies, and prepare for war. The oil companies, US, and Britain all recognized and disapproved of the “squeeze and restrictive oil” policies of Japan, but could not agree on an embargo or what to do in response.

Following the Sept 18, 1931 South Manchurian Railway attack and several other obscure clashes, on August 14, 1937, Japan went to war with China after China bombed the Japanese naval station in Shanghai. Japan didn’t want any disruption of its oil supply and passed the Synthetic Oil Industry Law which provided a 7-year plan to produce synthetic fuels from coal by 1943. During the Sino-Japanese war, official American policy and public opinion supported China as the victim of aggression. Franklin D. Roosevelt (FDR) supported a “quarantine” (economic sanctions without declaring war) against Japan, and the American public was opposed to continued export of military material to Japan. Washington was also surprised by the growing ties between Japan and Nazi Germany. Japan’s deadly paradox clearly involved its strong reliance on US oil while at the same time embarking on a path of potential war with the US! When, in May 1939, Japanese aggression in China increased and it bombed Chinese civilian centers, it shocked and aroused the American public, as a Gallup poll indicated 72% of public support for an embargo on the export of war materials to Japan. Stanvac in the East Indies in September 1938 was convinced war was inevitable in Europe (with Germany) and Asia (with Japan) and began to plan for a Japanese invasion of the Dutch East Indies. They prepared for both an embargo on Japan and the invasion by Japan, and by early 1940 had evacuation plans in place.

Map of The Pacific and Adjacent Theaters 1942.

Credit: Public Domain

The Slide to War

Japan began to establish industrial self-sufficiency and to break its dependence on the US in anticipation of an oil embargo. It also began a propaganda campaign of its citizens on how the ABCD powers (America, Britain, China,and Dutch) were conspiring to deny resources to and strangle the Japanese empire. America, fearing British withdrawal from East Indies, transferred its fleet from its base in Southern California to Pearl Harbor on the island of Oahu in Hawaii. The move was both to stiffen British resolve and also serve as a deterrent to Tokyo. The National Defense Act which gave the president power to control exports was passed and signed by FDR on July 2, 1940 after the Nazi invasion of Western Europe. The Japanese cabinet was reconstructed under the new Prime Minister, Prince Konoye, who appointed the militant general, Hideki Tojo, “the Razor,” as War Minister. It was clear that Japanese leaders who were in favor of cooperation and avoiding collision with Western powers had lost ground.

Japan strengthened its commitment to go into Southeast Asia and sought to import far larger amounts of gasoline from the U.S. in July 1940 which set off an alarm in Washington. FDR authorized building a 2-ocean Navy - one in the Atlantic to confront German aggression and the other in the Pacific to deal with the Japanese. On September 26, 1940, the US banned export of iron and steel but not oil to Japan in response to Japan’s moves in Indochina (Vietnam). Japan formally signed the Tripartite Pact with Hitler and Mussolini the next day, September 27, 1940. Still, FDR remained committed to a “Europe first” strategy that provided protection to Europe/Britain first with all the resources (oil). Besides, FDR was also running for an unprecedented 3rd term election in about a month and wanted to avoid any risk that could derail his chances.

Quiet diplomatic talks began between Secretary of State Cordell Hull and the Japanese ambassador, Admiral Kichisaburo Nomura to avoid the escalating conflict. Unknown to the Japanese, the U.S. and Britain had broken the Japanese top-secret code, “Purple”, through operation “Magic” and were already aware of the Japanese position each time the Secretary and Ambassador met. The Germans informed Japan in May 1941 that the Americans had broken their codes, but the information was discounted as the Japanese thought Americans were not capable of doing so. Even with “Magic,” the US had no clue of the intentions and concerns Japan had on the US fleet in Hawaii. Japan realized that if left undestroyed, the US could readily launch a counterattack to any planned invasion of the East Indies and Singapore.

General Tojo (left) and Admiral Yamamoto (right).

Credit: Public Domain

The Pearl Harbor Attack

The Commander in Chief of Japan’s Combined Fleets, Admiral Yamamoto, devised the plan for attacking Pearl Harbor. He continued to challenge the notion of war with the U.S. even while devising his plan. Yet, he was a fervent nationalist to his core and devoted to the Emperor and his country even though he was educated in the US at Harvard. The code for his surprise attack on Pearl Harbor was “Operation Hawaii” and the key elements were secrecy, intelligence, superb coordination, high technical skills, technological innovations, aerial torpedoes, refueling at sea, devotion to the cause, and good weather. His objective was a quick knock out of the US to affect the fate of the war and also destroy the morale of the American public. In early 1941, there were rumors in the diplomatic circles about Japan attacking Pearl Harbor, but that was discounted by the US that such an “audacious assault” was not possible.

On July 24, 1941, a radio reported Japanese warships were off Camranh Bay headed to Indochina. With Japan in South East Asia and Nazi Germany's surprise sweep into Russia in June 1941, US faced both Europe and Asia dominated by Axis with the US the last island left between two unsafe seas! With the increased escalation and tension, an embargo was virtually the only way left and on July 25, 1941, the U.S. ordered all Japanese financial assets in the U.S. frozen. While it was not an embargo, lack of assets to buy oil virtually turned it indirectly into an embargo. On July 28, Japan, as expected, invaded Indochina taking another step towards war. Effectively, by August 1, 1941, there were no more oil exports to Japan from the U.S. Japan’s oil situation was so serious that there were some last minute diplomatic efforts to avoid the confrontation in addition to intense discussions between the Emperor and his top military generals.

On October 2, US rejected a meeting between Prime Minister Konoye and President Roosevelt. Unable to find another alternative to war, Konoye was shortly after replaced by Hideki Tojo, the war minister, as Prime Minister on October 18. Tojo dismissed diplomacy as useless and opposed any compromise with the U.S., and on Nov 26, Japanese naval task forces secretly set sail for Hawaii under radio silence. There was intelligence report indicating a large Japanese expeditionary force was moving from Shanghai toward Southeast Asia. Leading up to the meeting, Japan and the US had been negotiating intensely for an entire truce/withdrawal. Following all the quiet conversations, President Franklin D. Roosevelt finally concluded that Japan could not be trusted, and Secretary of State Hull gave up on further negotiations with Japan.

The special and secret Japanese task force crossed the international dateline on December 1, still undetected, and moving towards Hawaii. At about 7:55 AM on Dec 7, 1941, bombs began to fall on American fleet in Pearl Harbor. The attack was completely unexpected as everyone had expected it to be in Southeast Asia. Two waves of Japanese aircraft destroyed 8 battleships, 3 cruisers, 4 destroyers, and 4 auxiliary craft and killed 2,335 American servicemen and 68 civilians. The American aircraft carriers survived only because they were out on a mission at sea. Japan lost only 29 planes as Admiral Yamamoto’s gamble had paid off.

Japan, however, made one grave mistake – not sending a third wave to attack the oil supplies and repair facilities on the island of Oahu. All oil on the island had been transported from the mainland. Thus, a destruction of the oil reserves and tanks holding them at Oahu would have immobilized every ship of the US Pacific Fleet not just those destroyed, accomplishing exactly what the Japanese original intention had been. The sparing of the aircraft carriers, the oil, and repair facilities ended up being the only good fortune of the US on that day. “Oil had been central to Japan’s decision to go to war. Yet the Japanese forgot about oil when it came to planning Operation Hawaii.” Admiral Chester Nimitz indicated later that if Japan had destroyed the oil, the war would have been prolonged at least another two years.

In a way, each side underestimated the other. Americans could not believe Japan would be so daring and reckless (and we were wrong). Likewise the Japanese counted on Pearl Harbor to shatter American morale (and that was a much greater error in judgment, as we will later see).

Explosion of the USS Shaw, Pearl Harbor.

Credit: Public Domain

By this time, you have now read chapter 16 in Yergin's The Prize for this lesson and you have read through online notes that accompany the chapter on this website.

Now, it's time to watch the episodes of the video documentary related to this chapter. Use the documentary to help you review the major themes and the driving questions that were posed for each chapter.  Use the play head to advance to the chapter segments listed below.

Innovations in chemistry and synthetic oil production in national strategy

In June 1932, when Hitler was leader of the National Socialist party before becoming Chancellor he met with I.G. Farben, the German chemical giant. The topic of the meeting was about the continuing Nazi press attacks against the company as a tool of “international financial lords” and “money-mighty Jews” for the fact that Jews were in some senior positions. The Nazis also had been criticizing the company for its expensive project to manufacture synthetic oil from coal. At that time, Germany, and, in fact, Farben, was the world leader in chemistry. One of its scientists, Friedrich Bergius, had, in 1913, invented the hydrogenation method to produce high-grade liquid fuel from coal which Farben patented the rights to in 1926. The hydrogenation process involved heating large amounts of hydrogen with coal at high temperatures and pressure in the presence of a catalyst. The competing technology was the Fischer-Tropsch process. It involved steam reforming of coal to produce Syn gas (mixture of hydrogen and carbon monoxide) that was subsequently converted to synthetic oil, but wasn’t as successful. Hydrogenation could also produce aviation fuel while the Fischer-Tropsch method could not. Hydrogenation received the highest accolade when, in 1931, Bergius (the inventor) and Bosch (the Chairman of I. G. Farben) shared the Nobel Prize in chemistry.

I.G. Farben had argued that synthetic fuels from coal could cut Germany’s dependence on foreign oil and also reduce the pressures on foreign exchange. Hitler became engrossed at the meeting with Farben in the synthetic oil discussion and endorsed the idea. When Hitler became Chancellor in Jan 1933, his vision of the new Germany involved the autobahns, the limited-access highways without speed limits and the Volkswagen – “the people’s car”. He wished to make all of Europe subordinate to the Nazi Reich and himself.  The German government commenced in building the Nazi war machine (bombers, fighter planes, tanks, trucks) that all depended on oil. Thus, independent oil supply was vital, and the synthetic fuels from I. G. Farben would become an important strategic source.

SO of New Jersey (SO of NJ) , which had unsuccessfully been exploring alternatives to crude oil as early as 1921 and had acquired acres of shale oil in Colorado with the hope of extracting oil out of the shale, showed interest in the I.G. Farben technology. SO of NJ saw the technology as a clear threat to its business and went into an agreement with I.G. Farben. They had no need to produce synthetic fuels because of the oversupply of crude oil but wanted to ensure that each stayed out of the other’s main fields of activity. SO of NJ would also rather use hydrogenation to increase the gasoline yield and boost octane out of crude oil. In 1929, the two companies made an agreement whereby SO of NJ had patent rights outside of Germany and, in exchange, I.G. Farben would receive 2% of SO of NJ’s stock, or 546,000 shares valued at $35 million.

Pictures of 1931 Nobel Chemistry winners Carl Bosch (left) and Friedrich Bergius (right) for hydrogenation.

Credit: Wikimedia Commons

I.G. Farben had made a large commitment to synthetic fuels, but the oil surplus with the discovery of East Texas and the Great Depression made the synthetic oil production uneconomical. The cost of producing the synthetic oil was, for example, about 10 times the price per gallon of oil from the Gulf of Mexico. The only hope of saving the synthetic oil business was some sort of state support or bail out as tariff protection was not enough. The aviation fuel potential of hydrogenation won I.G Farben the support from the German Air Force, the Luftwaffe. The German Army also lobbied on behalf of Farben that Germany’s oil supply would not be adequate for its warfare plans. To put things in perspective, coal supplied 90% of Germany’s energy, while oil only accounted for 5%.

Germany’s “blitzkrieg” attacks and strategy on Europe: Beginning of WWII

Two things demonstrated the danger of foreign oil dependence in the mid 1930s to Hitler: 1) in Oct 1935, when Italy invaded Ethiopia, Mussolini almost faced an oil embargo; 2) the “hated” Bolsheviks/Soviets , who owned a large chain of gasoline stations throughout Germany. In Feb 1936, they abruptly stopped its deliveries of gasoline to Germany. In March 1936, Hitler re-militarized the Rhineland on the border of France in violation of international treaty agreement. When he was not challenged, he prepared for war by 1940 by inaugurating a four-year plan which aimed to reduce foreign oil dependence through new technology and chemistry. Thus, synthetic fuels industry was to become a central part of the overall war plan.

Hitler (left) pictured with some of his generals, 1942.

Credit: Wikimedia Commons

By 1938, I. G. Farben was no longer an independent company but an arm of Nazi Germany. The company was “Nazified” and all Jewish officials and the anti-Nazi chairman, Carl Bosch, who had signed the agreement with Standard Oil, had been removed. By the time Germany started WWII in Europe with the invasion of Poland on September 1, 1939, 14 hydrogenation plants were in operation. By 1940 synthetic oil output was 72,000 barrels per day or 46% of total oil supply. In terms of military operation, the Bergius process accounted for 95% of the total aviation gasoline. Hitler never forgot about the importance of oil in war and, in fact, his strategic approach to war fierce but short based on the blitzkrieg. This "lightening war" was meant to lead to quick decisive victory before one runs out of petroleum. The blitzkrieg strategy worked surprisingly well not only in Poland in 1939 but also in spring 1940 when Hitler’s forces overran Norway, the Low Countries, and France with ease.

In fall of 1940, Germany waged massive aerial bombardment of the British Isles and seemed on the verge of dominance in Europe. Thinking that blitzkrieg was leading to easy victories, it turned its attention to target the Soviet Union. Among the factors for targeting the Soviets were Hitler’s deep-seated hatred of Bolshevism, Stalin, and the Slavs. He also wanted to dominate Eurasia, as he saw nothing but “living space” for his new German empire when he looked east. He even suspected the British and Soviets had a secret deal when the British refused to give in to the 1940 massive aerial bombardment. In addition, he also sought not only his personal glory but the oil in Baku and other Caspian oilfields.

Germany attacked Russia on June 22, 1941 in Operation Barbarossa. Three million German men strong, with 600,000 motor vehicles and 625,000 horses, struck along a wide front. Stalin resolutely refused to believe the prior warnings from the British, American, and even his own spies. Stalin was caught off guard. The Germans believed it would be another blitzkrieg of less than 10 weeks, but they seriously miscalculated. The Nazi's underestimated their supply needs, the vast size of Russia, and the Soviet manpower & tenacity.  Between 6-8 million Russians were killed or captured in the 1st year, and still, new men joined the fight.

In August, most of Hitler’s generals sought to make Moscow the prime target, but Hitler refused and declared his usual line, “My generals know nothing about the economic aspects of war.” Hitler made his prime target Baku. Later, Hitler changed his mind, but critical time had been lost pursuing Baku.  The Germans were now stalemated in the mud and snow of the fast approaching winter, just 20 miles from the Kremlin. General Yuri Zhukhov, on December 5 and 6, counter-attacked successfully to prevent further advance to Moscow and tying the German Army down for the winter. The Germans were also stalemated in their advance towards the Caucasus as they had completely underestimated how far their supply lines would stretch. Thus, the war that was to take less than 10 weeks turned to months, resulting in severe shortages of oil and other supplies facing a Russian Winter.

Map of the World War II theatre/area in Europe.

Credit: Wikimedia Commons

The Grand Prize and Strategy

In early 1942, Berlin made plans for Operation Blau with the objective to take the oil of the Caucasus and to march onwards for the oil in Iran and Iraq, then on to India. Hitler had been convinced that there was absolutely no way Germany could win the war without access to the Russian oil. He was determined to have it. The grand strategy was to have one attack through southern Russia and another from the southwest via North Africa. The Germans seemed on their way to achieving that goal in July 1942, and in mid-August reached the highest point in the Caucasus and in Europe. They required large amounts of petroleum.  However, they had outrun their supply lines and lost their advantage of speed and surprise. Thus, although Operation Blau was the quest for oil, the Germans ran short of it.

General Erwin Rommel.

Credit: Wikimedia Commons

The North Africa military struggle took place almost totally on the new “principle of complete mobility” created by General Erwin Rommel & his Afrika Korps. Mobility, however, created a dangerous vulnerability in supply lines. Rommel was an imaginative master of both tank warfare and the mobile campaign. He was also a risk taker in strategy tactics and established a reputation on the battlefield during WWI. General Rommel was committed to a war of movement and boldness. In addition to his talent for tactics, he could also improvise. One thing he could not do, however, was fake the fact that mobile warfare was absolutely dependent upon ample supplies of fuel. Fuel supplies had to be delivered along very long supply lines. Rommel pushed ahead, and, at first, won stunning victories in North Africa against British forces. At one point, 85% of his fuel was provided by captured British and American vehicles. Towards the end of May 1942, Rommel launched a major offensive on the British that went very well, and he pushed until his advance was halted in June near El Alamein, less than 60 miles from Alexandria, with Cairo and the Suez not far beyond.

The Axis powers felt they were on the verge of victory. Rommel’s grand goal was to push through Cairo, Palestine, Iraq, and Iran, en route to Baku and its oilfields. The convergence of the German forces in the Caucasus and Rommel’s forces at Baku would have achieved the grand prize and Hitler's objectives. It did not quite go as planned.  While the Soviets held on in the Caucasus, the Allies successfully fended off the German attacks in North Africa. The Allies also intercepted the German and Italian codes that further helped in attacking the Axis supply lines. General Bernard Montgomery ("Monte"), a cousin of H. St John B. Philby, of the British forces was Rommel’s adversary who capitalized on Rommel’s very long and highly vulnerable supply lines. He caused Rommel to essentially run out of gas. In the weeks following the end of the Battle of Alam Halfa near El Alamein in September 1942, Rommel begged Hitler for more oil supplies at all cost. On September 23, he went to see first Mussolini in Rome and then Hitler on the Russian front. Instead of oil, he was awarded a Field Marshall’s baton by Hitler. Montgomery mounted a counter offensive on October 23 known as the Second Battle of El Alamein, and the Royal Navy and Royal Air Force destroyed the German aircraft and ships that were to provide the Germans with new supplies.

General Bernard Montgomery.

Credit: Public Domain

The winter of 1942-43 also saw a titanic struggle in Stalingrad. When Field Marshall Manstein begged Hitler to send the forces in the Caucasus to help in the fight at Stalingrad, Hitler refused and indicated, “Unless we get the Baku oil, the war is lost.” At the beginning of February 1943, the encircled Germans at Stalingrad surrendered, serving as Germany's first major defeat in Europe and sending Hitler into an uncontrollable rage. To make matters worse for the retreating Rommel Afrika Korps, too, the Allies also invaded Morocco and Algeria in the path of their retreat, leading eventually to the surrender of the last German and Italian troops in North Africa in May 1943.

The grand strategy failed due to a number of reasons including, Allied attacks on German fuel supply lines, the fierce Russian resistance, and Allied code breakers. Clearly, the bitter lesson learned by Rommel is illustrated by his statement, “The bravest men can do nothing without guns, the guns nothing without plenty of ammunition, and neither guns nor ammunition are of much use in mobile warfare unless there are vehicles with sufficient petrol to haul them around.”

The fallback on synthetic oil and the human cost

With German defeat in North Africa and Russia, by mid 1943, the dream of Hitler of convergence on the Baku Oilfield was now a fantasy.  Germany faced a huge fuel crisis and turned to coal-based synthetic oil production which was based on the great technological ingenuity of Bergius. Germany was in a state of moral bankruptcy. Albert Speer was commissioned to rebuild Berlin and given sweeping powers of the German economy. After 2 ½ years, he had managed a threefold increase in aircraft, weapons, and ammunition production, and nearly had sixfold increase in tanks, even at a time when the Allied forces were successfully bombing German targets such as the aviation industry, railway depots, and ball-bearing factories. Between 1940 and 1943, synthetic fuel production almost doubled from 72,000 to 124,000 barrels per day, and in the first quarter of 1944, the synthetic fuel plants provided 57% of total supply and 92% of aviation gasoline. The table below provides figures on German oil supply (bbl/day) over the period 1939 to 1944.

The Nazi war economy and synthetic fuel industry was based on slave labor.  By 1944, slave labor made up 1/3 of the total work force in the German synthetic fuels industry. The synthetic fuel and rubber plants were placed adjacent to the Auschwitz concentration camp in Poland..   I.G. Farben, which had become deeply involved and an enthusiastic partner in the venture with the SS at Auschwitz, built its own “branch” concentration camp, Monowitz, because too many prisoners were dying or being debilitated from the other camps. Monowitz was a death camp and industry factory.

The noose tightens, Nazi German runs out of oil and is defeated

General Carl Spaatz.

Credit: Public Domain

The Allies, led by General Carl Spaatz, set a new priority target – the German synthetic fuels industry and began bombing oil factories all over Germany. The goal was to deny oil to the enemy armed forces. On May 12, 1944, 935 bombers and fighter escorts bombed many synthetic factories including the giant I.G. Farben plant at Leuna. On May 28-29, the Allied forces attacked again. On D-Day, June 6, 1944, the Allies gained a foothold on Normandy, enabling regular bombing of the synthetic fuel plants. Before the attacks in May, synthetic fuel averaged 92,000 barrels per day, and by September output was 5,000 barrels per day. The Russians also captured the Romanian oilfield, depriving Hitler of that crude oil. By autumn of 1944, the Luftwaffe was operating at 10% of the minimum required gasoline, and even breweries were converted to making fuel! Without fighter planes to protect the fuel plants, the destructive impact of the Allied raids grew. By fall 1944, the D-Day invasion had widened and driven the Germans out of France, and the Soviets were also pushing the Germans from the east. On December 16, Hitler threw in everything in, launching his last counter offensive in the Battle of the Bulge. Although the Germans had the advantage of surprise, they did not have enough resources, and on Christmas Day 1944, the German offensive was finally stopped and pushed back.

Interestingly, on December 17, a German unit under Jochen Peiper was within a thousand feet or so of a grand prize, the Stavelot supply dump, when the Allies set some fuel ablaze to create a wall of fire. Because the map Peiper had was dated, it failed to show him the correct location and magnitude of the dump, and they missed the bounty when Peiper had his forces go round the thin wall of fire instead of through it. The oil at the Stavelot dump would have enabled the German forces to push through to Antwerp and to the English Channel at a time when the Allies were disorganized and confused.

Rommel, who had been reassigned, was wounded shortly after the Normandy invasion when his car was hit by an Allied bomb.  Three days later, a group of army officers failed to assassinate Hitler.  Hitler suspected Rommel had something to do with it and plotted to kill him, but because of Rommel’s popularity he could not carry it out publicly. In October 1944, two SS officers came to Rommel's house and gave him an ultimatum to either commit suicide or subject his entire family to danger. Rommel was given a poison pill that he swallowed a few yards away from his home; his death was attributed to brain hemorrhage, and he was given a state funeral.

By February 1945, German production of aviation fuel was down to a trickle-about 0.5% of the first four months of 1944, and German Army trucks had to be pulled by oxen as they had no fuel. To the end, Hitler still hoped for some magical deliverance, and it was not until the Russians were right on top of his underground bunker that he committed suicide with instructions for those around him to pour gasoline and burn his body. For his insane, violent vision, at least 35 million died!

By this time, you have now read chapter 17 in Yergin's The Prize for this lesson and you have read through online notes that accompany the chapter on this website.

Now, it's time to watch the episodes of the video documentary related to this chapter. Use the documentary to help you review the major themes and the driving questions that were posed for each chapter. Use the play head to advance to the chapter segments listed below.

Why the War, Oil, The Oil Industry: “Dilapidated and Deplorable”

The section from the Quest reviews the reasons behind the war the United States engaged with Iraq post 9-11. This allows us to compare the road to war in Japan and Germany, and in the United States years apart. Some similarity and some differences, but an undeniable fact is that the oil industry was impacted by both. Some could argue that oil caused both wars, some others could argue that both wars highlighted the value of oil. I hope to bring out that the reality I see is somewhere in the middle, and that any time war occurred since World War I - oil was included in the consideration.

World War II was a delayed reaction to the end of World War I. Similar to how Iraq War of 2003 could be considered a delayed reaction to the Gulf War of 1991, Japan of WWII underestimated the United States' reaction. Similarly to how Iraq & Saddam Hussein were only focused on the regional blustering, did not have the United States in focus, but Iran, Hussein is thought to have said, “The better part of war was deceiving,” thus showing his focus on Iran and boasting about weapons available. The threat of a armed opponent was a guiding fear factor. 9-11 attack has been compared to the attack on Pearl Harbor. However, after 9-11, there was not a clear adversary for the United States. Iraq and Afghanistan were ways to prevent war, but nothing was as clear as when Japan attacked Pearl Harbor. Pearl Harbor attack was specifically planned by a military, with a country backing it. 9-11, the adversary was more vague, and the shadows of intelligence gathered about terrorist organizations loomed large and menacing.

So, what do these have to do with oil? - WWII, Japan was seeking more oil sources. The United States has fear of losing oil supplies, also. But did the individual attacks, Japan on Pearl Harbor and the United States on Iraq, actually increase access to oil? Japan still had to seek out new oil supplies in the East Indies, and the United States had to stabilize and rebuild the oil industry in Iraq. Neither direction increased access to oil quickly, and neither was a stable and secure option.

View from the International Oil Companies' Perspective:

International Oil Company Fears

K Jensen, May 2017

Lacking stability does not encourage foreign investment. The oil companies wanted to know about how the political system would work and impact their investment. They wanted to know about the economic system, and contracts… What would guarantee security to their investment? Then and only then would the oil companies invest. But the United States Government could not guarantee any security of the investment or the knowledgeability to build a stable investment environment. Thus, was the war really all focused on the oil industry? The goal of the US Government would be to keep the oil available on the world market in general. The loss of any percentage of oil production is not just shortage for one country but a decreased amount of oil available for everyone.

Comparison between Oil Market with Iraq in the World Market vs Without Iraq Oil 

K. Jensen, May 2017

Then, enter the other view that the oil companies were pushing for oil access. Oil companies do have increased demand on oil resources to fuel the engaged militaries. Would this be a case of application of the “Rule of Capture” - sell as much oil as possible while the war happens? Or would the oil companies have learned from how this principle impacted the industry? Steady gains more profit than quick.

Iraq had been operating under a nationalized oil industry. We know the challenges and corruption that comes with the Petro State. Yet, we can also see the citizens from a nationalized industry receiving the profits and being able to ideally receive benefit from the natural resources they live on. Iraq had long term goals in the 1970s for 6 million barrels a day. This long term goal was stopped by Iran/Iraq war of 1980s, then the Gulf War of the 1990s. Their continual participation in wars have hurt Iraqis' ability to develop and advance their oil industry.

Upon review of the Iraqi oil industry and infrastructure - the country had stopped developing in the industry approximately 50 years earlier. Any technological advances were not from government coordinated production development, but the individual skill and innovation of the Iraqi oil engineers. We remember when the USSR fell, and the state of the Baku oil fields; well, this is much of the same. These countries did not develop or advance their oil industry but relied on the consistent Petro income to finance the rest of the government, leaving the state of the industry a shadow of what once was. To give perspective - the developing stopped with foreign investment before the country nationalized their oil industry, we will cover more about Iraq later, but this is an interesting comparison: Oil field maps [3].

With Saddam removed from power, the focus of the United States military was finally security. This is what the oil companies were focused on from the start, but the military were focused on changing the regime. Comparison to ponder: Thinking that the oil companies could speculate the vast income from the Iraq War is like Rockefeller allowing Standard Oil to be split up so he could multiply his wealth, or Japan attacking Pearl Harbor to increase their Gross Domestic Product (GDP).

Here is a chart showing the Oil Imports to the United States from 1996 - 2016 US Imports from Iraq.

Credit: EIA [4]

Your Participation Assignment is in the Lesson 5 Module

For Participation Assignments there are several different formats.  Please see review the specific instructions in the participation assignments for details on how to complete the assignments.

Grading criteria

You will be graded on the quality of your participation. See the grading rubric in Canvas for specific details that will be used to help differentiate between unsatisfactory, satisfactory, and excellent contributions.

We started this lesson with the discovery of East Texas oil and how overproduction and hot oil led to the fall in crude prices and the unsuccessful actions taken by the states of Texas and Oklahoma to stabilize the market. We followed that up with a review of how the federal government eventually had to step in and work with the states to regulate production through the so-called unitization and pro-rationing. We then discussed the Achnacarry quail hunt and the “As-Is” agreement to address the global overproduction and overcapacity. Note that this was even two years before the East Texas oil! The emergence of nationalism in Persia and Mexico and the Mexican expropriation that sent considerable fear through the oil industry were discussed. Finally, we introduced how oil was discovered in Arabia (Bahrain, Kuwait, and Saudi) and the difficulties posed by Calouste Gulbenkian and the Red Line agreement before that happened. The different objectives of the American and British companies that made America eventually win the fight for oil domination in the Middle East becomes evident after this lesson.