Biofuels | Wind | Solar | Hydro
Home | Search | Subscribe
The Seven Sisters
Chapter 13 - The Reckoning
It is time we began the process of demystifying the inner sanctum of this most secret of industries.
-- Senator Church, December 1973
AS SOON as the embargo began, in October 1973, the seven sisters were compelled, at the risk of forfeiting their concessions, to be the instruments of the world-wide cutback in oil. They had to allocate their oil in a way that would not appear to defy the Arabs' boycott, yet would satisfy their customers throughout the world. And the American companies had to enforce an embargo of their own home country. The angry question came up ferociously: where are the oil companies' true loyalties?
To put it another way, it was an abrupt test of the companies' multi-nationality; could they, in this crisis, continue to be all things to all countries? It was not a test the companies wished to face; they preferred not 'to play god'. In the previous months some of them had made it clear to their governments that it should be their job, not the companies', to decide how the oil should be shared. But the consuming governments had no wish to face up to such a divisive responsibility. There had been many discussions within the OECD about forming a common front or an emergency committee to share out supplies -- particularly since the Libya fiasco in 1971. But the consuming governments could not agree. TheJapanese, being the most dependent, wanted the sharing to be on the basis of overall needs of the economy; the United States, having the most internal production, wanted it on the basis of imports. (See Testimony of Professor Robert B. Stobaugh (July 25, 1974) in Multinational Hearings: Part 9.)
Faced with a united OPEC, the consuming governments were thoroughly disunited, and quite unable to agree on a basis of rationing (rather as OPEC had originally been indecisive about pro-rationing). The sisters were thus landed with the job of serving as a kind of temporary world government, for four or five months, to re-allocate the world's oil. Or as one of their executives put it: 'We became the world's slaves, beaten, abused by all and loved by none'.
The companies were very vulnerable to pressures from every side, but specially from the producing governments who were more effectively organised and, more important to their future, able to guarantee or hold back their long-term supplies of crude oil. The companies were now seen by their critics, more than ever, as hostages of foreign powers. The concept of the companies as the instruments of their countries' foreign policy had been rapidly turned upside down.
The companies were able to perform this controversial task through the intricate computer systems by which they regulated the movements of their tankers and cargoes throughout the world. Exxon, of course, had the most elaborate system, on the 25th floor of its Manhattan skyscraper; with the rows of TV screens recording in green letters the movements of the five hundred Exxon tankers between sixty-five different countries. Its masterful computerised system called Logics linked its headquarters from New York, Houston and Tokyo. Now, overnight, Logics faced its ultimate test of rationality: to work out how to supply and cut back every country equally.
As the embargo descended, the staff worked late into the night and into weekends, calculating the effects of the Arab cutback, diverting the movements of the tankers, trying both to obey Arab instructions and to fulfil long-term contracts. 'It became clear to us that it wasn't a business operation, but a political one', as one executive recalled; 'that's why we wanted to stay out of decisions'. Exxon's regional presidents in Europe, Asia or Latin America were watching their headquarters like hawks and bitterly complaining after a discrimination against their part of the world. Sometimes they flew into New York to make their complaints to the board. 'Didn't you feel', I asked one of the New York managers, 'that you were ruling the world?' 'No, the world was ruling us'. It was a lesson in the burdens of a multinational corporation -- in the suspicions, conflicts and sensitivities of their nation-clients.
The American companies' most awkward problem was in supplying their own country, as the main target of the Arab embargo. Before the embargo America was importing 1.2 million barrels of Arab oil a day; by February it was down to 18,000 barrels -- a drop of 98 percent. This cut meant a drop in total U.S. oil supplies of 7.4 percent. In theory, the oil companies should have been able to take oil instead from non-Arab sources, particularly from Venezuela and Iran, which had not joined the boycott. But the imports from Iran went up only from 200,000 to 400,000 barrels a day -- still a fraction of the total Iranian production. (Multinational Hearings: Part 9.) Exxon and the other companies dared not favour the United States at the expense of other countries, and the United States lost a rather greater proportion of its total oil supply than the other countries.
In Europe, the sisters faced a much more perilous political scene. Each country, being desperately dependent on Arab oil, was insisting on having its maximum supplies. The abortive earlier discussions within OECD had only revealed the extreme differences of view. The Embargo, when it struck, provoked the most embarrassing show of European disunity since the Common Market began. The two governments which behaved worst, in the view of the companies, were Britain and France, who were both, having moved towards a more pro-Arab foreign policy, determined to get their reward in the form of undiminished oil. Neither had much sympathy for the predicament of Holland, which alone among the Europeans had been embargoed as punishment for her pro-Israel policies.
Shell, being half-British, half-Dutch, was caught between the two governments. And the Dutch were determined to get their oil -- not least because Rotterdam was the centre of the European oil market. The Shell board insisted that they must apply the principle of 'equal misery'; to do otherwise would make Shell 'the arbiter of the fortunes of nations'. They thus began a massive reallocation of oil to provide Holland with substitutes for Arab oil, trebling deliveries from Nigeria, and doubling them from Iran, so that Holland experienced no shortage beyond the average cutback for all countries. (Paper issued by Shell Nederland BV to Dutch parliament, March 18-20, 1975.) Shell and the other companies had, in effect, protected Holland from the Arabs' pressure. In the words of Professor Stobaugh of Harvard, who later analysed the results in detail, in Holland the companies 'lived up to the letter of the embargo, but frustrated the intent'. (Multinational Hearings: Ibid.) 'We saved the world from being dictated to', one of the chief executives boasted to me: 'it was intolerable that small countries should change the foreign policy of big ones.'
In Britain the Prime Minister Ted Heath -- in the last, months of his Tory government -- had been determined not to suffer from the embargo, the more so when faced with a strike by the coal-miners. On October 21 he went to the lengths of summoning to his country-house, Chequers, Frank McFadzean of Shell and Sir Eric Drake of BP. A stormy interview followed, unreported at the time. Heath insisted that the companies must not cut supplies to Britain. The oilmen insisted that, if they did not treat all their foreign customers fairly, they would risk expropriation. With Sir Eric, Heath was specially angry; he reminded him that BP was half-owned by the government. But Drake, having taken legal advice, said that he could only obey if he were told which other countries should suffer, and that he must have his instructions in writing. At this point Heath retreated: 'It was the first showdown with the government that BP have had', Drake told me afterwards.
Shell also received a battering from Lord Carrington, the newly-appointed Minister for Energy, who was supported by Lord Rothschild, the head of the 'Think Tank', who had previously been a Shell man, but who now argued vehemently against his former employers. Shell still insisted that they would not discriminate. 'If you have to make choices', said Gerry Wagner, the Dutch chairman, on Dutch television later, 'it is a public responsibility, in this case on an international scale, which we, the oil companies, cannot carry.' That brought the issue into the open, and the London Evening Standard carried a headline: 'The Dutch are getting British oil'. The next day Shell publicly defended their attitude: Geoffrey Chandler, their head of government relations in London, was interviewed by the BBC on December 5 and insisted: 'It would be suicide for an international group of companies to take any other course ... in the absence of international agreement the companies are left holding the baby'.
At the beginning of the embargo, the allocation problems were not too acute. Europe could still be supplied with Arab oil, and the United States could still receive Venezuelan oil. Had the cutbacks continued and multiplied, the companies would have faced an agonising question: should they let the Europeans go seriously short, thus incurring intense political resentment, or should they begin to supply Europe from Venezuela, at the expense of their United States markets? But the Arab producers let them off the hook. By the end of the year they had relaxed their restrictions on Europe, and by March 1974 the embargo had been lifted from the United States.
The companies were not slow to point out that they had done a job that only corporations like them could perform. Chandler later insisted that this fair distribution justified the existence of the multinationals: 'if the supply had been in the hands of minor non-integrated and state companies [he maintained in a Presidential address to the Institute of Petroleum] we would have seen acute contention between consumers and direct confrontation between consumers and producers'.
But it also appeared that, if it had not been for the domination of these seven companies, the embargo would have been far more difficult, perhaps impossible, for the Arab countries to enforce. 'It is clear' said Professor Stobaugh (referring to Saudi Arabia) 'that it is easier to have an embargo when you have only four companies to deal with than if you had many companies to deal with. If they were selling oil to a hundred companies and all the tankers were independently owned and each tanker bought oil, it would certainly have been harder for the Saudi Arabians to enforce the embargo.' (Multinational Hearings: Ibid.) The whole machinery of the sisters, which had been so effective for the consumers in the sixties, holding the balance between Saudi Arabia, Iran and Kuwait, had now been turned right around: it now allocated the scarce oil to the consumers, obeying the edicts of the producers.
But this five months' balancing act was only part of the political exposure of the sisters. The smell of oil was everywhere, and in the United States, all the enemies of the companies were now waiting to pounce.
The American public was so shocked by the embargo that they took some time to realise the greater shock of the price and the cartel. The ordinary motorist, accustomed to unlimited ftiel for the past three decades, was astonished to find that he was dependent on Arab oil, on 'six Sheikhs and a Shah'. There had been a temporary shortage of gasoline the previous winter, due to a lack of refining capacity, which had already caused a political row; but this new shortage resulted in far wider impact -- particularly on the East coast where imports were highest. By November the filling-stations were beginning to shut down, with signs saying 'Sorry, No Gas'. Cars had to drive for miles to find gasoline, and then to line up for an hour or more, with their engines running, using up more gasoline as they waited.
People immediately suspected that the companies had deliberately manipulated the crisis, and had joined the side of the Arab cartel to put up the price. The advertising and the giant signs of the companies made them all the more exposed to attack: Exxon had only recently changed its name from Esso, spending $100 million on the new signs and advertising, but everyone knew it was the old Standard Oil company. 'We want you to know', boasted a series of Exxon TV commercials about their heroic explorations. But now the commercials came in between the announcements of new shortages and Congressional attacks, as if to underline Exxon's guilt.
Travelling in America that winter, I found the oilmen bewildered and hurt by the sudden urge of public indignation; they seemed to have no friends left. 'I must admit', said a Gulf man in Pittsburgh, 'that at parties I don't tell people I'm in oil'. In Houston, the company men talked like rejected missionaries: 'We've lifted the burdens off men's backs', said one passionate spokesman: 'we've put food in their bellies, we've achieved the recovery of Europe and Japan. And now Congressmen come to us and say: look, we've got to show our people that we can get tough with the companies: I'm sorry, but we've got to attack you.' The right-wing Texans were confused in their remedies, caught between a traditional Arabophilia and a desire for drastic action: one proposed to me that Israel should be invaded and pacified in order to remove the cause of Arab discontent. 'I see Arab money coming to the fore,' said another Texan oil-man, 'and the companies caught up in anti-semitism'.
It was soon apparent, from opinion polls, that Americans blamed the companies more than the Arabs. As motorists waited in their cars, listening to the radio describing new shortages, they looked up angrily at the giant sign at the head of the line proclaiming Mobil, Texaco or Exxon: the symbols no longer of plenty, but of an infuriating and ill-organised shortage. If the signs had said Saudi oil or Kuwait oil, the reaction would certainly have been fiercer. As it was the companies were buffers in a new sense, protecting the Arabs from the public fury.
Just as the shortage was worst, and the winter coldest, the oil companies began to announce record profits. The figures were staggering: Exxon announced that its profits for the third quarter of 1973 were up 80 percent on the previous year: Gulf was 91 percent up. Exxon's profits for the whole year turned out to be an all-time record for any corporation, anywhere, at any time: a total of $2,500 million. It was true, as the companies hastened to point out, that 1972 had been a bad year for profits. The huge improvement for 1973 was therefore partly due to the low base of the year before, and also to the devaluation of the dollar. But it also came from the far higher value of the companies' stocks, and the higher profit from crude oil, as the price had gone up. The profit figures spotlighted the embarrassing fact that the companies were now -- as Yamani had always intended -- 'married' to the producing countries, while they soon attracted, as we shall see, the interests of their marriage-partners.
The oil companies began frantically advertising to justify their profits: on one February day the New York Times carried three full-page advertisements, from Texaco, Gulf and Shell. They explained that profits had previously been much too low, and that they needed vast new investment to develop energy resources. The Chase Manhattan Bank (the old Rockefeller bank, still specialising in oil statistics) reckoned that $600 billion would be needed for energy development, which made the oil profits look puny. Shell even protested that their profits were too low. Mobil, always the most compulsive advertiser, finally seemed to give up trying to establish their credibility. They put a sad advertisement into the New York Times headed 'Musings of an Oil Person', which caused a small stir in the industry. 'Wonder if oil company advertising isn't risking indecent exposure these days', it began, and complained that in thirty seconds the TV news 'can suggest enough wrong doing that a year of full-page explanations by us won't set straight'.
Mobil insisted that the consumer had to pay for new development: 'we're recycling the money he pays at the pump right back into oil-finding offshore, Alaska, anywhere.' But Mobil's protestations were not very convincing; only a few months later they announced that they had made a bid of $500 million for the Montgomery Ward chain of stores -- suggesting that they were recycling their profits to get out of the energy business. Nor did Gulf add to the public confidence by making an abortive bid, in the middle of the crisis, for the famous circus company, Ringling Brothers, Barnum and Bailey. It hardly fitted in with the image of arduous and complex technology.
During that frosty winter, it seemed for a time that the United States would at last be forced to wean itself away from its dependence on oil. The reign of Big Car seemed to have abruptly ended; in Detroit in the height of the crisis, there was a pervasive gloom about the prospects for the 'gas-guzzlers' on which the city's industry had so long depended. While sales of Volkswagens and Toyotas were booming, the American companies were hectically re-tooling to make small cars.
The value of real-estate in city centres moved up while houses in the outer-suburbs waited unsold. Housewives and commuters formed car-pools, helped by computerised systems. In Manhattan, theatres and cinemas reported record business, as the city-dwellers took more to their feet, and less to their cars. Planners became again concerned with mass-transit, looking towards Canada, Europe, and even to Moscow for models of subway systems. The whole style of modern architecture, with glass skyscrapers exposed to the elements, was called into question.
So long as the embargo was enforced, until March 1974, the trend continued. In the first quarter of 1974 (according to statistics from a sample of States, assembled by the API) consumption of gasoline was down 7.7 percent over the previous year, instead of the expected normal increase of around 7 percent. But once the shortage was over, consumption shot up again, even though the price of gasoline had risen by 40 percent over the year. Big cars came back into vogue; cars drove faster; road deaths went up. In August a bill to spend $20 billion dollars on reviving mass transit in cities was cut down by President Ford to $11 billion; and soon afterwards Ford, speaking in Chicago, clearly identified himself with defending the auto industry: 'I'm a Michigander, and my name is Ford'.
Far from improving the American environment, the energy crisis was now further wrecking it: President Nixon had relaxed the pollution laws, allowing sulphureous fuel to be burnt for heating oil; permitted more strip-mining for coal; and allowed the building of the Alaskan pipeline, against the objections of the environmentalists. In the crisis atmosphere, the ecologists carried little weight.
The Utopian vision quickly dissolved; and the crisis only served to underline the dependence on oil, without providing any alternative. As the British writers Davenport and Cooke had said in 1923: 'does not the American partly live in oil? Certainly he cannot move without it'. (E.H. Davenport and S.R. Cooke: The Oil Trusts and Anglo-American Relations, London, 1923.)
On conservation the oil companies were hopelessly ambivalent. They all now theoretically supported it, preaching the virtues of turning down heating and driving slowly, and many oilmen took the view that only by conservation could the stronghold of OPEC be weakened. But the whole industry had been built up on encouraging consumption, and luring customers away from buses and railways towards the extravagance of big cars and highways. The companies had made no attempt to persuade the auto companies to prepare for a shortage by making smaller cars ('I think we did not do that, and I think we should have', admitted David Donner of Gulf in February 1974). (Interview with Morton Mintz: CBS Face the Nation, February 17, 1974.) And the oilmen were schizophrenic about increasing domestic taxation on gasoline or cars, which was the most obvious way of reducing consumption. Many of them, I found, privately agreed with the need for a higher tax, both to conserve fuel and to provide funds for alternative transport. But publicly, none dared espouse a policy that would injure their profits; and the whole hectic roadside advertising continued to spur the motorist on. The Arabs were carefully watching the effects of higher prices on American habits. The continued consumption encouraged their claim that their huge price-increases were perfectly reasonable, and that for decades the price of oil had been far too low.
In Washington the oil companies were receiving a political battering unparalleled since the Nazi scandals of 1940. Now, as then, they were accused of being traitors, supporting foreign powers at the expense of the United States. And the public anger coincided with the anger about the Watergate scandal, which was still being uncovered. As with the Teapot Dome scandal, fifty years before, oil seemed part of the general corruption of politics by big business: an attitude summed up in the neat slogan 'IMPEACH NIXXON'. Senator Ervin's Committee, enquiring into the secret campaign contributions, found two oil companies, Ashland and Gulf, to have broken the law; and uncovered the first clues in a long trail of evidence, showing how oil companies we're able still to maintain a secret network of bribery. Claude Wild, Gulf s Vice-President for Government Relations in Washington, testified to how he had provided $100,000 to Nixon's presidential campaign, laundered through a subsidiary in the Bahamas; and also $10,000 to SenatorJackson and $15,000 to Congressman Wilbur Mills. (Watergate Hearings. See also chapter 9.)
With this combination of scandals, the American sisters were under fire from all sides. The most opportunist attack came from 'Scoop' Jackson, Democrat senator from the State of Washington, who was now again revealing his Presidential ambitions, and who stood to gain on several fronts. He was a steadfast champion of Israel, and he had strong support from the Labour unions. He knew a great deal about the oil companies and their history, and had close friends among them (witness Gulf's gift of $10,000). But like Harold Ickes thirty years before, he liked to play the game on both sides.
As chairman of the Permanent Subcommittee on Investigations, Jackson sent out questionnaires to the seven biggest American oil companies, who included all the seven sisters except BP, and also the Standard Oil Company of Indiana (Amoco). Jackson then summoned the supply experts of each company to hearings in Washington. Only one of the seven, Shell Oil, perceived the political danger, and sent their chief executive, Harry Bridges. The rest were technical men and they were thus sitting ducks for the Senator. They were lined up in the front row of the hearing room: Roy Baze of Exxon, David Bonner of Gulf, Harry Bridges of Shell, Annon Card of Texaco, R. H. Leet of Amoco, Allen Murray of Mobil, T. M. Powell of Socal. Together they stood up to raise their hands and take the oath in front ofJackson, to provide a front page picture of the sisters In the dock.
Jackson made the most of it, opening with a succession of menacing questions, staring at the TV cameras with his blank eyes and unmoving jowl. 'The American people want to know whether major oil companies are sitting on shut-in wells and hoarding production in hidden tanks and at abandoned service stations. The American people want to know why oil companies are making soaring profits ... The American people want to know if this so-called energy crisis is only a pretext, a cover to eliminate the major source of price competition...' He was soon able to humiliate the company men. Exxon had foolishly insisted that many questions including how many filling stations they owned, involved 'proprietary information'. Jackson lashed back: 'I am just frankly flabbergasted', he repeated three times, until the unhappy Exxon expert, Roy Baze, eventually revealed the number (9,145). When Jackson asked for the company profits for the first nine months of 1973, Baze could not give the answer, and Jackson himself picked up the telephone to ask the stockbrokers.
Jackson's hearings eventually fizzled out, with the questions never properly pursued; he knew well enough that the problem was more complicated, and he now turned to attacking the 'obscene profits' of the oil industry. The oilmen were frustrated and bitter in the face ofJackson's onslaught. David Bonner, the President of Gulf in the U.S., retreated back to his stronghold in Houston to give an angry press conference: 'It made me feel something like I was at a criminal trial.'
Exxon saw this and other attacks as threatening the basis of American democracy. At the annual meeting of Exxon at Los Angeles in May, Ken Jamieson stood up in front of a giant luminous Exxon sign and explained that Exxon's profits were not really high enough, for the company were planning to spend $16 billion in four years to develop new sources of energy. He revealed that Exxon were pressing for a massive educational campaign to make people understand the true facts about oil. Soon afterwards, Michael Wright, the chairman of Exxon U.S.A., produced a pamphlet called 'The Assault on Free Enterprise'. 'Let there be no mistake,' Wright warned, 'an attack is being mounted on the private enterprise system in the U.S. The life of that system is at stake'.
Scores of senators and congressmen rushed to propose new legislation to control the oil companies; according to one count, there were almost 800 bills concerned with the energy crisis. Jackson proposed a bill to enforce the 'Federal chartering' of the international companies, allowing for the appointment of a government nominee on each board, to ensure that they acted in the public interest: a kind of American equivalent of the old BP solution. Senator Adlai Stevenson III proposed a more drastic reform, that the Federal government should form its own oil and gas corporation, called FOGGO, which would have priority in bidding for new offshore concessions, and which could provide a kind of yardstick for the government to check on the profits of other oil companies.
Jackson also put forward a bill to roll back oil prices, on the grounds that the industry's profits were excessive. His charge and others led to an important argument with the Wall Street Journal. The journal maintained in their editorials that big profits were essential to further exploration, and that oil prices should be allowed to rise in the free market to the level where they would reduce demand and stimulate extra production: 'In our view, elasticity of demand is the key to the immediate problem'. Jackson insisted that higher oil prices would not, at least in the short run, produce extra supplies. (See (specially) Wall Street Journal, March 13, 1974.) It was a variant of the old argument between oil economists surveying the history since Rockefeller: was oil a special exception, an industry which was not self-adjusting? In the event, Jackson proved more justified than the journal: the higher prices failed to stimulate much extra production, or to discourage consumption.
But as many oilmen had predicted, by the time the immediate shortage was over, the attack on the companies had lost much of its impetus. By July 1974 only eight bills had actually become law. These included bills to set up the new Federal Energy Agency, to allow the building of the Alaska pipeline, to suspend pollution laws, and to enforce 55 miles an hour on the roads. The other bills had either been lost or defeated. The politicians returned to their apathy, and the oilmen regained some of their confidence. In July Tavoulareas of Mobil was asked: whatever happened to Senator Jackson? And he answered:
Well, let's analyse the situation. We had a crisis. People were disturbed. They had a right to be disturbed. I'm working in the oil industry, so I feel, I guess, defensive to an extent, and I say they wanted to find a whipping boy and blame somebody. My problem is I don't see any additional barrels of reserves coming out of all these investigations ... (CBS TV Network:July 28, 1974.)
But the roots of the crisis went much deeper than the embargo or last year's oil profits. And the task of untangling the longer story fell to a Senate Committee more exhaustive than Jackson's. In 1972 the Foreign Relations Committee had formed a subcommittee to investigate multinational corporations and their influence on foreign policy, prompted by the attempts of the International Telephone and Telegraph Corporation (ITT) to bring down the Allende regime in Chile. After uncovering the seedy background of ITT, the staff had moved on to the oil companies, establishing a body of historical evidence comparable in scale to the FTC report of 1952.
The chairman of the subcommittee, Senator Frank Church, was a persistent critic of the multinationals. His bland style and resonant voice concealed a ruthless mind: coming from Idaho, Church had a built-in suspicion of international big-business and government secrecy, which had been sharpened by his opposition to the Vietnam war. He was supported by a passionate chief counsel, Jerome Levinson, whose scepticism of big companies had been fortified by working for the Alliance for Progress in Latin America, and who was backed up by a team of relentless investigators. They were just preparing for their hearings when the oil crisis had broken on the world.
'We Americans must uncover the trail', Church said in a speech in December 1973 in Iowa, 'that led the United States into dependency on the Arab sheikhdoms for so much of its oil ... Why did our government support and encourage the movement of the huge American-owned oil companies into the Middle East in the first place? ... We must re-examine the premise that what's good for the oil companies is good for the United States'. Opening the hearings on January 30, 1974, Church made clear that his chief subject would be the seven sisters, who were all among the fifteen biggest multinational corporations in the world. 'We are dealing with corporate entities which have many of the characteristics of nations', he asserted: 'thus it should surprise no-one that, when we speak of corporate and Government relationships, the language will be that which is appropriate to dealings between sovereigns'. And Church's questioning was followed by his fellow-senators: Clifford Case, the austere pastor's son from NewJersey, chewing his spectacles through his long philosophical queries; Edmund Muskie, asking with well-timed anger about the companies' tax avoidance; Charles Percy, the elegant Republican who was preparing to stand for President, determined to reassure his business friends with mellifluous tributes: but even he felt obliged to be stern with the oil companies.
The sub-committee soon produced a procession of witnesses, like a historical pageant, to justify the critical decisions over three decades. George McGhee, the Texan oilman who had helped to negotiate the fifty-fifty tax deal in the State Department in 1950; Jim Akins, sternly defending his support of the Libyans in 1970; Jack Irwin, now Ambassador to Paris, who had made the abortive visit to the Middle East in 1971. An army of representatives arrived from the seven sisters, including Howard Page and George Piercy from Exxon, Bill Tavoulareas from Mobil, Otto Miller from Socal. And the Senators subpoenaed and published a succession of past secret documents, including the Iranian producers' agreement of 1954, the Libyan 'safety-net' agreement of 1971, and (after a bitter fight with the State Department) the cables exchanged before the Teheran Agreement of 1971.
The star defence witness was Jack McCloy, with his big head and twinkling eyes: he was still representing all seven sisters, and he had been privy to most of the key decisions since the Second World War. He maintained that the government's interventions had achieved both a bulwark against communism and a guarantee of cheap oil for the West. 'The United States', he protested in a letter to Senator Church, 'has benefited perhaps more than any other nation from the presence and activities of its companies in the Middle East'. The current crisis, he said, had not resulted from the companies' cartel, but quite simply from the October war. Church retorted that the roots of the crisis went back to the 'singular dominance of the majors': if the United States had not encouraged such concentration, the country would find itself in less dire straits.
The story that slowly emerged, from the mountain of memos and testimony, was not one of crude corporate clout, like the story of ITT in Chile. It was a more intricate and fascinating tale of the interplay of government and companies, with a gaping void of abdication and evasion in the middle. It became clear that the State Department, after helping to safeguard Aramco and the Iranian Consortium in the 'fifties, had virtually delegated its responsibility for oil supplies: partly deliberately, because of the embarrassment of the Israeli question; partly through apathy, for the oil seemed to be flowing so freely, and the companies claimed to be able to look after the problem by themselves. As George Piercy of Exxon explained: 'The fact is that up until 1970-71, there was little need for the Government's active involvement or intervention. Oil was flowing in ever-growing quantities at low prices ... " (Multinational Report: 1975, p. 15.)
But the companies, left to themselves, were preoccupied by their short-term profits, and quite unable to reach any long-term accommodation with the producers. After the formation of OPEC they became increasingly dependent on OPEC oil, encouraged by the foreign tax credits, and less able to stand together with independents. When the Libyan crisis broke in 1970 neither they nor the government had any serious counter-strategy. Once OPEC began to realise its strength, with the shortage after 1971, the companies realised their position was weakening, but they never made use of the precious time.
There was now hardly anyone left in Washington who grasped the magnitude of the problem. The experts had thinned out, as McCloy explained, because the country was 'living in a sort of fool's paradise'. (Multinational Report: 1975, p. 15.) There was no energy policy, and no machinery for making one, and the big companies in the meantime were preoccupied with hanging on to their profitable concessions. They were either unaware or unworried that they were becoming the hostages of the producers; and that their cartel was being taken over, and turned against them -- until in late 1973 they suddenly found that (as an Aramco representative vividly admitted) they had no leverage on prices at all.
The whole debate about oil policy had been kept out of sight of the public and Congress. 'In a sense this is the overriding lesson of the petroleum crisis', said the subsequent report of the Church subcommittee: 'in a democracy, important questions of policy with respect to a vital commodity like oil, the life blood of an industrial society, cannot be left to private companies acting in accord with private interests and a closed circle of government officials'. (lbid, pp. 17-18.)
Governments and Companies
From the first moment of the embargo it was once again evident to Washington that oil was too important to be left to oilmen. The old notion of oil companies as the instruments ol foreign policy had been turned on its head, as the companies appeared to be making foreign policy, and the buffers had clearly broken down. The White House and the State Department were confronted with the problems they had so often sought to avoid.
The first attempts at an energy policy were more apparent than real. In November 1973 President Nixon had made a stirring television speech, proposing his Project Independence: the United States must become self-sufficient in energy by 1980, by increasing its drilling and use of other fuels, and by massive spending on nuclear research -- a new kind of Manhattan project. It was certainly in keeping with all the old optimism of the oil pioneers, that just when one source of oil is drying up another one will appear somewhere else. But now, at least within the United States, there was little justification for such confidence. By the end of the year Project Independence was a joke, and self-sufficiency by 1980 inconceivable; by the end of 1974 the United States was more dependent than ever on Arab oil.
The Defence Secretary, James Schlesinger, began hinting that the embargo might lead the government to use force in the Middle East; and hints continued to be dropped from the Pentagon. But there was little sign that the hints were taken seriously in OPEC. In February 1974 Dr. Kissinger convened a conference of thirteen major consuming nations in Washington, to try to establish a common energy policy; but the conference only served to reveal publicly what was already obvious privately, that there were major differences between the Americans and the Europeans, who were too thoroughly dependent on Middle East oil to want a confrontation with the Arabs. The chief outcome of the conference was a theatrical attack on American policy by the French delegate, Michel Jobert; the British and Germans appeared to take the American side, but soon afterwards, to Kissinger's anger, the French summoned another conference of Europeans only to meet with the Arabs.
The European nations at the peak of the energy panic were now each desperately trying to secure their own sources of oil, by-passing the oil companies, to make separate deals with the Arabs. The British conservative government had sent out a special emissary, Lord Aldington, to Saudi Arabia to secure oil supplies, to the annoyance of the oil companies: 'waiting to kiss the hem', as one Shell director put it, 'of any passing galabea.' The French sent out a special mission to Saudi Arabia, seeing a chance to break into the all-American preserve, the chasse gardée, which they had been trying to enter for the past quarter-century. The fact that Saudi Arabia, the critical source of oil for Europe, was in the hands of an all-American consortium, was now more than ever exasperating to the Europeans, who saw their oil dependent on the vagaries of American companies. Kissinger retorted by attacking the bilateral 'beggar my neighbour' policies of the Europeans, and insisting that only by working together could the West be effective.
But in the meantime the Americans, too, were busily fostering their own bilateral relationships; and in June Prince Fahd and Sheikh Yamani from Saudi Arabia were received in great style in Washington, to prepare a new agreement for massive American technical and military aid, to cement the most special of special relationships. With the Shah, too, the Americans were determined to strengthen both their own bonds and to make profitable arms deals: in 1974 Iran bought more than $4 billion worth of arms from the United States. The chaos of Western rivalries now revealed the exact opposite of the position in the early years of OPEC: now it was the Arabs who were united, and the West divided.
Out of this chaos there gradually emerged a new instrument of Western collaboration, which was Kissinger's special brain-child, the International Energy Agency, which was to be the instrument of Western oil collaboration. Before long all the major consuming nations had joined it, except France -- who was still determined not to antagonise the Arabs. By November 1974 the IEA had agreed on a plan for mutual assistance, to ensure that no member would be victimised in a future embargo or other sanctions; but there was great disagreement as to the wider alms of the agency. Dr. Kissinger saw it essentially, though he did not publicly say so, as a counter-cartel, to confront OPEC and break it; and his abrasive assistant, Thomas Enders, later (April 1975) openly stated that his aim was to break the OPEC cartel. But the European members had no wish for such a confrontation, and preferred to meet with OPEC members on a much less provocative basis.
The British government's relations with the oil companies had now taken a curious new turn, due to the discoveries in the North Sea, whose estimated reserves were steadily increasing. By the end of 1974 ministers were privately foreseeing large exports of oil by the 'eighties, so that the quadrupled oil price might in the end prove the salvation for Britain's balance of payments. The exploration, however, was now so expensive that it was only economic with a fairly high price (if the Arabs had not at least doubled the oil price the future of the North Sea would have been much more problematical). Thus, although Britain faced huge oil import costs for the next five years, her long-term interests were coming much closer to OPEC's, and the last thing the government wanted was a permanent drop in the oil-price.
But the North Sea and the energy crisis made the question of controlling the oil companies much more urgent. The parliamentary report of 1973, revealing the past generosity in handing out concessions and giving tax relief, had made politicians on both sides more wary. Both Conservatives and Socialists considered taking closer control over BP, now more than ever the Frankenstein monster, through more serious government representation (particularly after the collapse of the Burmah oil Company in 1975 whose 20 percent holding in BP were then taken over by the Bank of England, giving the government the choice of a more dominating influence); and government relations with BP were icy. But the Foreign Office insisted that intervention would damage BP's relations in other countries, particularly in Alaska (the former head of the Foreign Office, Sir Denis Greenhill, was now a director of BP). Instead, the notion began to take root that the British government, like the Arabs, should engage in 'participation'. Once oil was discovered, the British felt the same need to have control over their own resources, and this applied particularly to the Scots, in whose waters most discoveries were made, and who were talking menacingly about the exploitation of their own oil and threatening secession. Ted Heath was already coming round to the idea of participation before the general election of February 1974: and one of the last acts of the Tory Minister for 0il, Patrick Jenkin, was to recommend it. The arrival of the Labour government and the energy crisis gave a new fillip to participation, and Lord Balogh, the practised critic of the companies who came back into government was convinced that only participation could extract the true facts from the companies and safeguard Britain's oil -- particularly in the context of the Common Market.
The British government therefore proposed to buy 51 percent of the shares of each of the North Sea concessions, and to form its own British National Oil Corporation, BNOC, based on Glasgow, to look after its interests. 'No other government outside the United States', said Eric Varley, the Minister for Energy, 'has thought it wise to be completely dependent on the oil companies'. (House of Commons, April 30, 1975.) The oil majors were furious, particularly BP, to whom the proposal was a clear indication of distrust. Sir Eric Drake had agreed to barbed negotiations with the Labour energy minister Eric Varley, only because, as he explained, he felt obliged to discuss any governmental proposal, 'even if it was to put a Hottentot on the board'. (BBC Radio Interview, May 1, 1975.) But participation was really an updating of Churchill's old insistence that the government 'must become the owners, or at any rate the controllers' of their own oil supply: extending from 51 percent of a company to 51 percent of a sea. The American oilmen now bracketed the British with the Norwegians as being the 'blue-eyed Arabs' and the 'Sheikhs of the North': but the State Department made clear to the British government that they would not interfere.
It was certainly ironic that the British government, having protested against participation so vigorously in the Middle East, and having denied it to the Iraqis over the past fifty years, should so quickly insist on it for themselves. But it was characteristic of oil that once found in anyone's territory, it made the world look very different.
While the Western governments were developing new ways of controlling the oil companies, the trustbusters were trying once again to separate them, or break them up. This time they they were at work not just in Washington but in several Western capitals. The global scandal seemed at last to be provoking a global response, as Rockefeller's scandal had provoked a federal response a century before.
In Washington the new anti-trust chief Thomas Kauper was less obtrusive and more detached than his predecessor McLaren, also quietly persistent. With the new solidarity of the OPEC cartel, however, the trustbusters faced a more difficult problem. The sisters had continued to get anti-trust permission for joint bargaining with OPEC up to the last negotiation in Vienna in October 1973 on the grounds that this was in the consumers' interests. But the new kind of bargaining was not necessarily concerned with keeping prices down. For the companies were now more concerned to keep their access to the 'buyback' oil; and the negotiations with the Saudi Arabian government, for instance, showed some signs of being in restraint of trade. But the task was now much harder, for the participation agreements had bound the companies to the producing governments, and the basic cartel was one of sovereign states. As Kauper put it in June 1974: 'you are also dealing with another party to the transaction, a party which is a sovereign nation, and that makes questions of anti-trust relief in the domestic courts of the United States rather difficult.' (Testimony to Multinational Hearings: Part 9. June 5, 1974.)
The political thrust behind the anti-trust movement was now again very forceful, not only against the oil companies, but against all giant corporations. With the growth of the conglomerates and multinationals, individualism was more than ever threatened, and the 'Age of Combinations' which Rockfeller had proclaimed, had arrived on a global scale. And because it was global, the anti-trust problem was much more difficult. This is how a top anti-trust official put it to me in June 1974:
There have been two major changes; first OPEC are now owners of oil; second, the negotiations are about control over the crude, not about pricing. And at the same time there's been a growing concern about the question of size as such, not so much for sophisticated economic reasons, as for political and social reasons. People feel they have lost their say over their destinies in their communities, because of the giant companies: conglomerates like ITT added to the worry, but the chief concern is just with size.
The difficulty for us is to establish exactly what is objectionable legally: people have an uneasy feeling, but no-one is quite sure why. It may be like the 1880s when there was a powerful popular feeling against the trusts, like Standard 0il; but without a very effective intellectual argument.
And the competition with foreigners always complicates the question. When a foreign company comes in, there's pressure to ease controls at home. The argument that we need big companies abroad to compete with theJapanese is very plausible; but of course you can't have big companies abroad and small companies at home. Anti-trust has become much more an international problem. And it is now often hard to know the genuine nationality of a big company, as it was with the states of the Union in 1880. What nationality is Aramco now? There's some doubt whether it's possible for us to break it up, because it's now part of a sovereign power.
As the groundswell of indignation against the oil companies spread, it set in motion waves of anti-trust cases all over the industrialised world. In May 1974 Japan's anti-monopoly organisation, the Fair Trade Commission, brought its first major case against price-fixing: it charged twelve oil companies including Shell (but no other sisters) with conspiring to fix prices since 1973. (New York Times, May 29, 1974.) But the case would take years to be tried. In West Germany, the cartel office -- perhaps the most effective anti-trust body -- began an investigation into the price rises in 1973, accusing the companies of acting in unison to exploit the crisis. The German activity quickly reacted back in Washington: 'Why is it that the German cartel office has to be in the forefront?' Jerome Levinson, the chief counsel of the multinationals subcommittee, asked Thomas Kauper. Kauper explained that the Germans could act on the basis of 'abuse of economic power', in circumstances where he could not act. But the German cartel office had concluded that there was not much any individual country, at least of the size of West Germany, could do about it. (See Multinational Hearings, Part 9. Also The Economist, May 4, 1974.)
In France the repercussions were specially rough, for the energy crisis appeared to be a humiliating defeat for French government policy which had always been more defined and more interventionist than the rest of the West. The French national assembly in June 1974 appointed a commission of deputies to examine the oil companies operating in France, and their relationships with the State, and five months later they published an outspoken report, written by the conservative deputy Julien Schvartz. Since the French had lost their unique access to Algerian oil in 1970, he complained, they had become still more dependent on cheap Middle East oil, just when OPEC was becoming more effective: 'in this matter technocracy had taken over from politics'. The French policies towards their own companies were now thoroughly muddled: CFP, the French equivalent of BP, had become equally uncontrollable and virtually a multinational company like the others. French oil policy had become merely the result of struggles between different powers, in which the public interest was forgotten. There should henceforth be an autonomous organisation for controlling French oil policy, concluded the Report, accountable to the Assembly, and the French companies must be answerable to the public. (Sur les Sociétés Petrolières Opérant en France: Rapport de la Commission d'Enquête Parlementaire. Paris, November 1974.) In the meantime the public anger had been further stirred up by the public prosecutor in Marseilles, who in February 1974 indicted the chief executives of 43 companies, including the French heads of Exxon, Shell, Mobil and BP, on charges of discriminating against independent distributors.
The European Community also reacted to the oil companies with unaccustomed firmness. They commissioned a full report on the oil companies' behaviour during the crisis, and in November 1974 the Commissioner for Competition, Albert Borschette, sent a complaint to each of the seven sisters in Holland accusing them of having abused their dominant position during the shortage, by cutting back supplies to the smaller Dutch oil companies. (The Economist, November 16, 1974.) This broadside from Brussels provoked very different reactions from the Europeans. While France and Germany were in a radical mood against the sisters, Britain and Holland were much more protective -- both because they were the home ground of two of them, and because they both now had oil and gas of their own. The British oilmen's attitude to the anti-trust suit was fairly contemptuous: 'The independents make their money from surpluses', said one Shell director: 'to save them is like lending a bed to your wife's lover'. But that was what worried the trustbusters everywhere; that the shortage strengthened the hand of the giants.
Anti-trust actions had certainly gained momentum from the oil crisis. But there remained a deep division of attitudes, according to interpretations of the whole history of the companies. Was the crisis for the West so serious that they could not afford the democratic luxury of anti-trust -- as the State Department had decided in encouraging the Iranian consortium twenty years before? Or were the companies now really part of the cartel on the other side, underpinning the new cartel of sovereign states? And if so, how could any committee of lawyers be effective against that combination? Against that line-up, was the only ultimate anti-trust action -- as some hawks were beginning to suggest -- a war?
[continued: Chapter 14, The New Cartel]