Arabs (75 page)

The oil producing states of the Arab world would gain increasing power by dint of their massive oil reserves. Over the 1950s and 1960s, the Persian Gulf eclipsed the United States as the greatest oil-producing region in the world. Middle Eastern output expanded from 1.1 million to 18.2 million barrels per day between 1948 and 1972.
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Though the oil-producing states now enjoyed an equal share of revenues with the oil companies, the oil companies remained sovereign in all matters relating to production and pricing. In the early days of oil exploration, the Western oil men could rightly claim to have a better understanding of the geology, chemistry, and economics of oil than their Arab interlocutors. But by the 1960s this was no longer the case. The oil states were now sending their best and brightest to study geology, petroleum engineering, and management in leading Western universities. A new generation of Arab technocrats returned with advanced university degrees to government jobs and chafed at the power exercised by the foreign oil companies over their natural resources and national economy.

Abdullah al-Turayqi was one of the first Arab oil experts. Born in Saudi Arabia in 1920, al-Turayqi spent twelve years in school in Nasser’s Egypt, where he also received an education in Arab nationalism. He went on to study chemistry and geology at the University of Texas, returning to Saudi Arabia in 1948. He was placed in charge of the Directorate of Oil and Mining Affairs in 1955, which made him the highest-ranked Saudi in the oil industry. From this position, al-Turayqi had privileged access to the decision makers from other oil-producing states. He pressed his fellow Arab oil men to protect their interests through collective action.
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Most of the other Arab oil ministers were reluctant to rock the boat. They faced an oil glut, as Soviet oil began to flood the market in the 1950s. If the Arab producers put too many demands on the oil companies, the companies might simply extract their oil elsewhere. After all, the major oil companies were global giants with extensive reserves in the Americas and Africa, as well as in the Middle East. Having recently extracted a 50:50 division of oil rents from the oil companies, most Arab oil states remained cautious about pressing for more.

The Arab oil producers were rocked out of their complacency in 1959, when British Petroleum (BP) took the fateful decision to cut the posted price of oil by 10 percent. The glut of Soviet oil had put real pressure on the international price for oil, and BP’s decision simply reflected market realities. The problem with this seemingly rational decision was that BP had failed to give advance notice of its decision to the oil-producing states. Because oil revenues for both companies and producing states were based on the posted price of oil, this unilateral decision meant that the oil company had imposed a cut on the revenues—and thus the national budgets—of the oil-producing states without consultation or obtaining their consent. BP had inadvertently demonstrated how unequal the partnership really was between the companies and the states.

The oil-producing states were furious. In the wake of the cut Abdullah al-Turayqi found his fellow oil ministers more open to the idea of collective action. In April 1959, on the sidelines of the first Arab oil congress, al-Turayqi met in secret with government representatives from Kuwait, Iran, and Iraq at a sailing club in the Cairo suburb of Maadi. The Arab oil men concluded a “gentlemen’s agreement” to form a commission to defend oil prices and establish national oil companies. Their goal was to break through the 50:50 barrier to achieve a 60:40 division of revenues with the Western oil companies, securing the principle of national sovereignty over oil resources.

The resolve of Arab oil producers was stiffened in August 1960, when Standard Oil of New Jersey repeated BP’s mistake and unilaterally cut the posted price of oil by 7 percent. The move provoked outrage among oil states and convinced even the most cautious that the Arabs would be controlled by the oil companies until they asserted control over their own oil resources. Al-Turayqi went to Iraq to suggest making common cause with Venezuela against the oil companies. The Saudi oil minister suggested the creation of a global cartel to protect the rights of oil-producing states from arbitrary action by the oil companies. Muhammad Hadid, then the Iraqi finance minister, recalled al-Turayqi’s visit: “The Iraqi government welcomed the suggestion and convened a meeting of the oil producing states in Baghdad in which they agreed to establish this organization.” On September 14, 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela announced the formation of the Organization of Petroleum Exporting Countries, better known as OPEC.
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By 1960, two new Arab oil states had emerged in North Africa. Oil had only been discovered in commercial quantities in Algeria in 1956 and in Libya in 1959. The advantages of late entry meant that the North African states could learn from the experiences of their Arab colleagues in the Persian Gulf and secure the best terms for exploration and export of their petroleum products.

Libya was a poor and underdeveloped kingdom when oil was first discovered. Under Italian colonial administration until 1943, the Libyan territories passed under
joint British and French rule following the Allied occupation of Italy. The three territories of Tripolitania, Cyrenaica, and Fezzan were consolidated into the United Kingdom of Libya, which gained its independence in 1951. The British rewarded Sayyid Muhammad Idris al-Sanussi (1889–1983), leader of the powerful Sanussi religious brotherhood, with the Libyan throne for his wartime services against Axis forces. He ruled as King Idris I from 1951until 1969 and saw his country pass from poverty to wealth through the discovery of oil.

Even at the prospecting stage before any oil had been discovered, the Libyans were keen to make the most of their petroleum resources. Unlike the other Arab states, which had given concessions over vast expanses of territory to major oil companies, King Idris’s government decided to break up the target exploration areas into numerous small concessions and to favor independent oil companies. The Libyans reasoned that independent companies, with fewer alternative sources of petroleum, would have more incentive to discover and bring Libyan crude to market than the majors with their worldwide operations. Their strategy worked. By 1965, only six years after the discovery of oil, Libya had already emerged as the sixth largest oil exporter in the non-Soviet world, responsible for 10 percent of all petroleum exports. By 1969 the country’s petroleum exports had reached parity with Saudi Arabia.
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While King Idris ruled over a newly prosperous country, he faced strong domestic criticism as a conservative, pro-Western monarch. A group of Arab nationalist officers in the Libyan army, headed by a young captain named Muammar al-Qadhafi (b. 1942), saw the king as a British agent. They believed they needed to overthrow King Idris for Libya to achieve its complete independence from foreign domination. In the early morning hours of September 1, 1969, they toppled the monarchy in a bloodless coup while the elderly king was abroad for medical treatment.

In his first communiqué to the Libyan nation, broadcast by radio at 6:30 that morning, Qadhafi announced the fall of the monarchy and declared the establishment of the Libyan Arab Republic. “People of Libya! Your armed forces have undertaken the overthrow of the corrupt regime, the stench of which has sickened and horrified us all.” His message was replete with historical allusions. “By a single stroke [the army] has lightened the long dark night in which the Turkish domination was followed first by Italian rule, then by this reactionary and decadent regime, which was no more than a hotbed of extortion, faction, treachery and treason.” He promised the Libyan people a new age “where all will be free, brothers within a society in which, with God’s help, prosperity and equality will be seen to rule us all.”
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Libya’s new ruler was a devoted admirer of Gamal Abdel Nasser. Upon seizing leadership of Libya, Qadhafi assumed the rank of colonel (Nasser’s rank at the time of the 1952 revolution in Egypt) and, following the Egyptian model, established a Revolutionary Command Council to oversee the government in the new Libyan Republic.
“Tell President Nasser we made this revolution for him,” Qadhafi told Mohamed Heikal in the immediate aftermath of the coup.
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Upon Nasser’s death in September 1970, Qadhafi declared himself Nasser’s ideological successor. Henceforth, anti-imperialism and Arab unity would be the hallmark of Libyan foreign policy. The new Libyan government promoted the Arabic language (foreign street names were Arabized), imposed Islamic strictures (alcohol was prohibited and churches closed), and advanced the “Libyanization” of the economy by expropriating foreign-owned property in the name of the Libyan people. British and U.S. military bases were closed and all foreign troops expelled. It was in this spirit that the new Libyan regime took on the Western oil companies, believing the control they exercised over petroleum production and marketing to represent the greatest threat to Libyan sovereignty and independence.

For advice on oil policy, Colonel Qadhafi turned to the Arab nationalist oil expert Abdullah al-Turayqi (who had lost his job as Saudi oil minister to a bright new technocrat named Ahmad Zaki al-Yamani upon King Faysal’s succession to the throne in 1962). Al-Turayqi, who argued in 1967 that “it is only just that those oil producing countries who rely on oil as their primary source of revenues have the right to set the fair price for its prime natural resource,” shared Qadhafi’s determination to break the power of oil companies over the Arab oil-producing states.
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In 1970 Qadhafi embarked on a series of policies to assert Libya’s full sovereignty over its oil resources—at the oil companies’ expense.

In January 1970, Qadhafi summoned the heads of the twenty-one oil companies working in Libya to a meeting to renegotiate the terms of their contracts. The Western oil men sat uneasily in their chairs. They were still coming to terms with the new military rulers of Libya. The executives declared their resistance to any change in the way they did business in Libya. Qadhafi rounded on the oil men and made it clear that he would sooner cut oil production altogether than let his country be exploited by Western interests. “People who have lived without oil for 5,000 years,” he warned, “can live without it again for a few years in order to attain their legitimate rights.” The Western oil men shifted uncomfortably under Qadhafi’s baleful gaze.
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Qadhafi decided to force the issue and to impose his price on the oil companies. That April the Libyan government requested an unprecedented 20 percent increase ($0.43) in the price per barrel of oil, which was then trading at $2.20 per barrel. The oil major Esso (the European affiliate of Exxon) responded with an offer of only five cents a barrel and held firm. With all their alternate sources of petroleum, Esso and Exxon were immune to Qadhafi’s threats.

In response, Libyans put the squeeze on the smaller independent companies. As Libyan oil expert Ali Attiga recalled, “The government of Libya learned to use—and to use very well—the independents to raise the price of oil.” The Libyans chose their
target carefully. Occidental Petroleum had emerged from total obscurity to become one of the largest oil firms in the West on the strength of its discoveries in the Libyan desert. The only problem for Occidental was that it had no other source of oil outside Libya and so was entirely reliant on Libyan oil to meet its contracts. The Libyans imposed massive production cuts on Occidental. As the government-imposed reductions began to take effect, Occidental scrambled to find alternate sources to cover its commitments to its European customers. Yet none of the oil majors would extend a helping hand to the vulnerable independent as its daily production was trimmed by the Libyan authorities from 845,000 to 465,000 barrels. Cuts were imposed on the other oil companies as well, but none was so adversely affected as Occidental. “Now the cut in production contributed to two things,” Attiga claimed. “It made the independents accept the increase in price because they had no alternative supply sources from which to meet their commitments, and it contributed to the beginning of a shortage in oil supply,” which exerted an upward pressure on oil prices.
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Libya’s strategy met with full success, and Qadhafi’s young regime could claim victory over the oil companies. In the end, the chairman of Occidental Petroleum, Armand Hammer, was forced to accept Libyan terms in a landmark deal concluded in September 1970. Occidental agreed to raise the posted price of Libyan oil by an unprecedented thirty cents to $2.53 per barrel. More significant yet was Occidental’s agreement to concede a majority of profits to Libya, breaking the 50:50 agreements that had prevailed for the past twenty years and introducing a new ratio of 55 percent profit to the producing state and only 45 percent to the oil companies. For the first time in the history of petroleum, a producing state gained the majority share of its oil revenues.

The Occidental precedent was applied on all of the oil companies working in Libya, and the Libyan precedent was followed by Iran and the Arab oil-producing states. In February 1971 Iran, Iraq, and Saudi Arabia concluded the Tehran Agreement, which secured a minimum 55 percent of profit for the oil states and raised the posted price of oil a further $0.35. On the back of the Tehran Agreement, the Libyans and Algerians negotiated a further hike in oil prices of $0.90 per barrel in Mediterranean markets in April 1971. These agreements set two trends in motion: regular increases by the oil-producing states in the posted price of oil, and regular decreases in the oil companies’ share in profits. It was the end of the era of the Western oil barons and the beginning of the age of the Arab oil shaykhs.

 

The year 1971 marked the last of the Gulf states’ emergence from British protection to full independence. The Trucial States had preserved their special treaty relationship to Great Britain through all the turmoil of decolonization and Arab nationalism. Independence for Bahrain and Qatar and the establishment of the United Arab Emirates
represented the end of the British Empire in the Middle East, which had begun in the Persian Gulf in 1820, finally coming to an end in the same region a century and a half later.