Modern Times: The World From the Twenties to the Nineties (131 page)

Gadafy proved extremely adroit in bargaining with the oil companies and the consumer nations, showing that both could successfully be divided and blackmailed separately. When he took power Libyan oil was virtually the cheapest in the world. In a series of negotiations, in 1970, 1971 and again in 1973, he obtained the biggest oil price increases ever granted to an Arab power, with additional upward adjustments to account for the fall in the dollar. The importance of his success was that it was quickly imitated by the Arab-dominated Organization of Petroleum Exporting Countries,
OPEC
had been formed as a defensive body to protect the oil price when it fell. Hitherto it had engaged in no collective action except to agree a royalty formula in 1965. In 1971, following Gadafy’s move, the
OPEC
states of the Gulf bargained together as a group against the oil companies for the first time.
³⁰
At Teheran on 14 February 1971, they secured a 40-cents-on-the-barrel price increase. This was the beginning of the energy price revolution. The new agreement was to hold for five years, ‘a solemn promise’, as Henry Kissinger put it, ‘that must hold a world record in the scale and speed of its violation’.
³¹

The likelihood that the oil weapon would now be used more skilfully was much increased in July 1972 when Nasser’s successor, General Anwar Sadat, threw off the Soviet alliance, expelled his Soviet advisers and technicians, and aligned Egypt with Saudi Arabia and the other oil states of the Gulf. Sadat was not a verbalizer like Nasser. In spirit he was not of the Bandung generation. He was a
realist. He recognized that the Egypt—Israel antagonism was opposed to Egypt’s historic tradition and detrimental to her current interests, especially economic. He wanted to end it. But to have the power to make peace he first needed the prestige of military victory. On Saturday 6 October 1973, on the festival of Yom Kippur or Day of Atonement, the holiest day in the Jewish calendar, he launched a co-ordinated Egyptian—Syrian attack on Israel. The initial success was considerable. The Israeli ‘Bar-Lev line’ in Sinai was pierced. A large part of the Israeli air force was destroyed by Soviet ground-to-air missiles. Golda Meir, the Israeli Prime Minister, appealed in some panic to Washington. Some $2.2 billion of the latest American arms was airlifted to Israel. From 8 October the Israelis began counter-attacking. Before a cease-fire was signed on 24 October, Israel had recovered the lost territory, advanced to within range of Damascus, established a bridgehead on the western side of the Suez Canal, and surrounded a large part of the Egyptian army.
³²
Egypt had demonstrated an unexpected military capacity, and that was enough for Sadat; Israel had shown she could survive initial disaster.

The war brought out the ultimate military dependence of Israel on American will. It also drew attention to the damage inflicted on America’s leadership of the West by the pursuit of the Watergate affair by the American media and the Congressional Democratic majority. When Israel counter-attacked successfully, Sadat appealed for Soviet support and Brezhnev sent a message to Nixon on 24 October warning that Soviet troops might be sent to fight the Israelis without further warning. Though Nixon had earlier ordered full logistical backing for the Israelis and now agreed to an alert of US forces throughout the world, the first on such a scale since the Cuban missile crisis of 1962, he was so cocooned in the Watergate tangle that he felt obliged to hand over control of the crisis to Kissinger, now the Secretary of State. It was Kissinger, not the President, who presided over the White House meeting which responded to the Brezhnev message; and he issued the orders for the alert. To the charge by some of the Watergate witch-hunters that the crisis had been engineered to divert attention from Nixon’s difficulties, Kissinger scornfully replied (press conference, 25 October):

We are attempting to conduct the foreign policy of the United States with regard for what we owe not just to the electorate but to future generations. And it is a symptom of what is happening to our country that it could even be suggested that the United States would alert its forces for domestic reasons.
³³

With the American President paralysed by his domestic enemies, there was no one to lead the West on behalf of the world’s oil consumers when the Arab
OPEC
states responded to Israel’s survival
by employing the oil weapon with brutal violence. Already, on 16 October, they politicized oil exports, cut oil production and (with non-Arab producers) raised the price 70 per cent. On 23 December they again raised the price, this time by 128 per cent. As a result, crude oil prices quadrupled in less than a year. The decision, as Kissinger put it, ‘was one of the pivotal events in the history of this century’.
³⁴
It transformed a general but gradual rise in prices into a price-revolution of a kind the world had never before experienced over so short a period. The worst hit were the poorest countries, most of which had acute debt-burdens and imported all their energy. In countries with
per capita
incomes around or below the $100 a year mark, where a billion people lived, and whose incomes had been rising slowly (about 2 per cent a year) in the 1960s decade, a downturn in growth was already occurring before the oil-price revolution hit them. For them it was a catastrophe.
³⁵
They found themselves worse off at the end of the 1970s than they were when the decade opened, the first such reversal in modern times. At such low levels, such a direct fall in incomes meant malnutrition and related epidemics. The number of Africans and Asians who died in consequence of Arab oil policy in the decade after 1973 must be calculated in tens of millions.

The world as a whole experienced a decline in wealth since the loss of output was worth twice the extra funds transferred to the oil-producing countries. For the industrialized countries, the result was a form of economic malady which Keynesianism had not envisaged: stagflation. From a 5.2 per cent rate of growth with 4.1 per cent average price increases, the world moved in 1974–5 to nil ot minus growth with 10–12 per cent average price increases a year. This was high inflation, and in many countries it accelerated into hyper-inflation. The price revolution, with the oil jump at its heart, spanned the years 1972–6. It was by far the most destructive economic event since 1945. It acted as a fierce brake on the energy-intensive leading sectors responsible for the prolonged expansion in the American, West European and Japanese economies, producing abrupt declines in output and unemployment on a scale unknown since the 1930s.
³⁶
By the early 1980s, the number of unemployed in America and West Europe alone was 25 million.

The disaster might have been still more serious but for the resiliency of the banking system. In November 1973, in the immediate aftermath of the Middle East crisis, a big London fringe bank, the London and County, tottered. The Bank of England hastily launched a ‘lifeboat’, getting the major banks to provide $3 billions support for twenty-six other fringe banks. A bad moment occurred in the following June, when the German Herstatt Bank collapsed, owing
huge sums to British and American banks, and with disturbing echoes of the fall of Credit Anstalt in 1931. But again the support system worked. At the end of 1974, the Comptroller of Currency in Washington was keeping under special observation some 150 US banks, including two of the biggest, which were known to be under strain. In London the property boom foundered, dragging down some glittering companies. The
Financial Times
index, 543 in March 1972, fell to 146 at the beginning of 1975, with shares worth less, in real terms, than at the depths of the war in 1940. In America, New York city finances, long suspect, finally succumbed when the banks refused further loans. The richest city in the world appealed to the White House, but Gerald Ford refused to intervene, an event celebrated in a famous
New York Daily News
headline: ‘Ford to City: Drop Dead’.
³⁷
But by then the worst of the money crisis was over and all the banks and institutions that really mattered were still erect.

Indeed the commercial banks, whose Eurodollar frenzy had contributed to the instability, now used similar methods to produce some kind of order out of the chaos. The problem was as follows. The oil price revolution meant that the
OPEC
countries took an extra $80 billion a year out of the world economy. That was 10 per cent of all world exports. Saudi Arabia and Kuwait alone, with tiny populations, received an extra $37 billion a year, enough over twenty-five years to buy all the major companies on all the world’s stock exchanges. There was real terror that the Arabs would use the new ‘money weapon’ as they used the oil weapon. In any case it was essential to get the cash back into the world’s productive economy quickly. Washington, still paralysed by Watergate, could provide no leadership. Happily, the extra-governmental Eurodollar system, used to responding to pure market needs without bureaucratic help or hindrance, was waiting to be used. Eurodollars were renamed petrodollars. A new term, ‘recycling,’ came into use. The petrodollars were quickly packaged into huge loans for the hard-hit advanced industrial countries and for the still more disturbed developing countries, like Indonesia, Zaïre, Brazil, Turkey and even new competitors for the Arab oil producers, like Mexico.

The Arabs had no wish to help the Third World, except through government loans with strings attached. But once they put their money into the world banking system, they lost sight of it. And they had nowhere else to put it. Like Croesus, they were baffled. They did not like what was happening. But not as yet having a banking system of their own, for Koranic reasons, there was nothing they could do. As a Congressional witness put it: ‘All they have is an iou in a bank account which can be frozen at any time in the United States or in
Germany or wherever it is.’
³⁸
If a nation has more money than it can spend, it has to share the use, willingly or unwillingly. America did so willingly, in the years after 1945, in the form of Marshall Aid, Point Four Aid, and in the military containment of Soviet expansion. The Arabs had no such altruism, but they could not stop the banks lending their money. Walter Wriston of Citibank put the situation neatly:

If Exxon pays Saudi Arabia $50 million, all that happens is that we debit Exxon and credit Saudi Arabia. The balance-sheet of Citibank remains the same. And if they say they don’t like American banks, they’ll put it in Credit Suisse, all we do is charge Saudi Arabia and credit Credit Suisse: our balance sheet remains the same. So when people run around waiting for the sky to fall there isn’t any way that money can leave the system. It’s a closed circuit.
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It would, of course, have been a different matter if the Arabs had possessed a sophisticated banking network, as they belatedly realized. By the time they had begun to build up their own international banks, in the early 1980s, the industrial nations had tapped alternative sources of energy, including non-Arab oil, world oil supplies were in surplus, and the problem of petrodollars was unlikely to recur, at any rate in such an intense form. The point of maximum Arab power had passed. That point came in the years 1974–7, when the Arabs had half the world’s liquidity. Thanks to the commercial banking system, the world’s financial black market, the money vanished into the bottomless pit of the needs of the developing nations. By 1977, they owed the commercial banks $75 billion, more than half of it to American banks. Nearly all of this was Arab money. In global terms it was less efficient than the pre-1973 pattern, which kept the industrial West expanding steadily. Indonesia borrowed over $6 billion, most of which was wasted, before defaulting. One official put $80 million into his own accounts.
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Zaïre, which had borrowed $3 billion by 1979, was an equally bad case of folly and corruption.
⁴¹
The biggest borrowers, Brazil and Mexico, made on the whole productive use of what they received. And much of the money ended up where it started, in the industrial economies. But the huge total of indebtedness led to recurrent fears of a world banking crisis. Hence the Seventies were a period of deepening dismay for the West. The comforting facts of recycling took some time to make themselves felt. In the meantime the recession had a political as well as an economic impact. As we have noted, the Great Depression of the Thirties demoralized the democracies, producing a lack of will to deal with aggression, or of energy to devise collective security against the growth of illegitimate power and the practice of
violence. This time, fortunately,
NATO
and other regional pacts already existed. They continued to function after a fashion. But leadership was lacking to devise responses to new threats or variations on old ones. The relative decline in American power and will was greatly accelerated by the price revolution and the recession. The dollar lost half its value in the later 1970s. The ‘American Century’ seemed to have ended only twenty-five years after it began. From virtual self-sufficiency, America had moved into world-wide dependence. It imported half its oil, from Canada, Venezuela, Mexico, Nigeria and Indonesia as well as the Arab states, and most of its chrome, bauxite, manganese, nickel, tin and zinc, from all over the Western Hemisphere and from Malaysia, Zambia, Australia, Zaïre and South Africa.
⁴²
While reliance on the sea-lanes had grown, the ability to keep them open had declined. Secretary of Defense Donald Rumsfeld, in his budget report for 1977, noted that the ‘current [US] fleet can control the North Atlantic sea-lanes to Europe’ but only after ‘serious losses’ to shipping. The ‘ability to operate in the eastern Mediterranean would be, at best, uncertain’. The Pacific fleet could ‘hold open the sea-lanes to Hawaii and Alaska’ but ‘would have difficulty in protecting our lines of communication into the Western Pacific’. In a global war America, he warned, would be hard put to protect allies like Japan or Israel, or reinforce
NATO
.
⁴³
This was a radical change from the 1950s or even the early 1960s. And waning physical power was further undermined by the collapse of leadership. The 1970s was the nadir of the American presidency. After the spring of 1973, the Nixon presidency was rendered totally ineffectual by the Watergate witch-hunt. His successor, Gerald Ford, had only two years in office, lacking the mandate of election. He spent the first desperately disentangling the Administration from Watergate, the second in a bid to put together a coalition to get himself elected. Behind the orderly façade of the Ford White House there were inconclusive battles for power among rival subordinates, which Ford lacked the authority and the savagery to end. As a colleague put it, ‘Good old Gerry was too damned good for his own good.’
⁴⁴
Ford’s views, on the rare occasions when they emerged, usually turned out to be sensible. But he lacked
gravitas.
In public, he developed an unfortunate tendency to fall over.
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