The Significance of Oil

Peter R. Odell

Journal of Contemporary History, Vol. 3, No. 3, The Middle East. (Jul., 1968), pp. 93-110.

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The Significance of Oil

Peter R. Odell

The Middle East without oil would be a very different region.

In addition to changing the face of large parts of the area, oil has
helped shape the policies and alignments of all the countries of the
Middle East - not only with each other but also with the world's
great powers. These outside powers, in their turn, have found their
oil interests and their oil ambitions in the Middle East spilling
over into their more general relationships with each other, thus
helping a process which has made the region a centre of
international tension over long periods of time.
Early British oil interests in the area merely reflected late
nineteenth-century British interests of a more general nature.
These arose out of imperial connections with India and the Far
East which demanded the establishment of coaling stations and of
territorial enclaves to protect both them and routeways such as the
Suez Canal. As a result of these imperial developments, Britain
then took an earlier interest than any other outside power in the
possibilities of oil from the Middle East. Even so, the region was
well behind other parts of the world in the development of oil
resources. By the time the Anglo-Persian company finally dis-
covered oil in Persia in 1908, and started to work the discoveries
under the stimulus of participation by the British government,
which sought British owned and controlled oil for its navy, the oil
industry elsewhere in the world had almost half a century of history
behind it. Britain's strategic and military domination of all areas
of the Middle East outside Turkish control acted as a restraint
on oil activities, other than those blessed officially by Britain, and
thus from 1908 to 1919, apart from the steady development of
resources in Persia, little in the oil sector took place to disturb the
traditional economies of the Middle East.
After the first World War, the division of the former Turkish
empire into British and French spheres of control led to an under-
standing between the two countries to divide the spoils as far as oil
93
 CONTEMPORARY HISTORY
was concerned. Thus, although Persia remained wholly British in
its oil development, neighbouring Iraq, where the possibilities of
oil appeared good, lay on the border of British and French in-
fluence and hence necessitated the participation of both British and
French capital in a consortium created to initiate oil exploitation.
Those parts of the Middle East wholly within the French sphere
turned out to offer little by way of oil possibilities - given the
technology of the period - and hence French oil interests were
limited to a share of Iraqi operations and, at a later period, to
participation in the crude oil pipelines that were built from Iraq
to the Mediterranean. On the other hand, Britain gradually ex-
tended its oil interests to other parts of the Persian Gulf where its
earlier informal political authority was formally confirmed in 1919.
In the inter-war period British firms discovered oil resources along
this coast, particularly in Kuwait. The demand for oil at that time,
however, was not great enough to give a strong incentive to develop
these facilities, for Iran and Iraq were quite capable of producing
whatever oil could be sold out of the Middle East.
The world oil-pricing system, dominated by the United States,
and the existence, informally before 1928 and formally after that,
of an international oil cartel, effectively inhibited the potential
producing areas of the Middle East. The USA, Mexico, and to a
lesser degree Venezuela and the Dutch East Indies, maintained
their dominant role in world oil markets and expansion of known
Middle East oil resources was thus restrained, But attempts to
make Middle East oil more important in an international context
also turned on the political and commercial efforts of Washington
and of American companies to win access to the oil wealth of the
region. Eventually, as a result of both political and commercial
pressure, the US secured an entry to Middle East producing areas,
and although the British government managed to keep American
interests clear of its most important producing and refining facili-
ties in Persia, it was forced to allow them into Iraq and the Persian
Gulf states. In Iraq the consortium, in which British and French
companies retained an interest, came to be dominated by a group
of U S oil companies. In Kuwait, the concessionary company
became 50150 British and American. Thus by the outbreak of war
in 1939 the United States had won for itself a position of virtual
parity with British interests, and one potentially stronger than that
of the longer-standing French oil influence in the region.
94
 THE SIGNIFICANCE OF OIL

In this period up to 1939 one can view the structure of the Middle
East oil industry as lying wholly within the framework of a classical
colonial situation. The countries there were not colonies like
British or French possessions elsewhere in the world, but British
and French political control over virtually all the territories con-
cerned was practically complete. In addition, oil wealth provided
the basis for economic colonialism, while the power of the United
States in general and of its oil industry in particular brought in a
third outside power as an economic force of significance. As shown
already, however, one should not overstress the significance of oil
in this period. Middle East oil remained relatively unimportant in
world markets, and even by 1939 it was contributing only 5 per
cent of total world oil production and its exports were limited to
countries within the immediate region and, via the Suez Canal, in
western Europe. But even in western Europe oil from the Middle
East accounted only for under 20 per cent of total imports, which
remained dominated by those from the United States and Mexico.
The real significance of pre-1939 developments in the Middle
East, however, is that they established the framework for the post-
1945 expansion of oil activities in the region. With the cessation of
hostilities, British, French, and United States oil companies
rushed in to take advantage of the concession areas which they had
tied up for themselves before 1939.
All companies concerned participated in the rush to expand
Middle East oil production and exports. The post-war world was
short of energy; U S oil was in demand at home; Mexican oil was
required to service the increasing demands of Mexico itself under
the process of industrialization; Venezuelan production had ex-
panded rapidly towards the end of the war but it was physically
unable to meet the demands of both the Americas and western
Europe; whilst in the Far East, in the formerly important oil-
exporting areas of the Dutch East Indies and Burma, the industry
had been destroyed in the war. War-time oil development in the
Middle East had been limited, but there had been sufficient
work to demonstrate that the area was potentially prolific, and
there was little hesitation in investing capital in Iran, Iraq,
Kuwait, and Saudi Arabia, because of the virtual certainty of
discovering new oil resources and finding an outlet in world
markets. The rush to invest was not limited to the development
of producing facilities but was accompanied by expansion of the
 CONTEMPORARY HISTORY
area's refining facilities and, more significantly, by arrangements
for more effective transport facilities for crude oil to the markets of
western Europe. Investment here included expenditure on the
Suez Canal to ensure its usefulness for larger tankers which were
now being built as a result of war-time design developments, and
also on the construction of pipelines from the producing areas of
Iraq and the Gulf to Mediterranean ports in the Lebanon and
Palestine - pipelines which in the period before the advent of large
tankers reduced the cost of getting the oil to western Europe and
hence improved the profitability of the companies concerned.
Thus, looking at the Middle East as a whole, one notes that pro-
duction increased from under 50 million tons in 1945 to almost
IOO million tons by 1950 and 250 million tons ten years later. At
the same time the declared reserves discovered by the drill rose
from the estimated 3000 million tons in 1945 to nearly ten times
this level by 1960, and it is well known that these declarations of
reserves by the companies concerned represent only a percentage
of the total, for some of them have been and, in fact, still are under
no obligation to reveal the extent of the resources they have dis-
covered. From providing only about 10 per cent of the world's
total oil production in 1945, the Middle East's importance in-
creased steadily throughout the 1940s and 1950s; by 1960 it was
responsible for no less than 25 per cent of the world's total. This
breathtaking expansion of the physical facilities to produce and
transport Middle East oil fell almost entirely within the framework
of the operations of the seven major international oil companies
which before 1939 had constituted an international cartel and
which in the post-war period 'understood' each other so well that
they could be relied upon not to take decisions which might
operate against the best interests of their fellow oil companies.
The Middle East thus achieved a significant status in the rapidly
growing international oil industry. The economies of western
European countries and of many countries in other parts of the
world became dependent upon Middle East oil resources. The
investment of the companies grew by hundreds of millions of
dollars every year, but this increasing involvement in the Middle
East, on the pan both of consuming nations and of international
companies, occurred at a time when changing circumstances were
bringing to an end the political stability of the inter-war period.
The defeat of the French in 1940 lost them their influence and
96
 THE SIGNIFICANCE OF O I L
prestige, and Syria and Lebanon quickly claimed their inde-
pendence in the immediate post-war period. I n the rest of the
region there was significant Anglo-American pressure to keep the
area under political control. As oil became more important, so ran
the British and American argument, so greater control became
more necessary. But control could not always be maintained. Cer-
tain territories declared notional independence to be effective
independence. In Iran this declaration took the form of the
nationalization of the Anglo-Iranian Oil Company's facilities. The
international oil industry - wholeheartedly backed by Washington
and London - retaliated by isolating Iranian oil from world markets
and for three years little crude oil from the producing fields and
few products from the massive refinery at Abadan moved on to
world markets. The cessation of Iran's exports did not cause the
world supply difficulties that had been anticipated, for they were
quickly made up by additional production and exports from
neighbouring countries whose oil development thus received a
considerable stimulus. Iran was thus obliged to accept a compro-
mise whereby the Anglo-Iranian Oil Company, later renamed
British Petroleum, along with American and other interests, were
allowed back to work the prolific Iranian fields on behalf of the
National Iranian Oil Company. The formula appeared to concede
the national ownership of resources that Iran claimed, but in
reality the work of the Consortium at first differed little in essen-
tials from the earlier situation.

Anglo-American efforts to secure a degree of direct or indirect

political control over Middle East countries were only partly
motivated by their desire to ensure the 'rights' of their companies
to explore for and develop oil. In part they were dictated by the
constant fear that the Middle East might become increasingly sus-
ceptible to external political intervention by other nations. It was
thought that the U S S R had not only a political but also an
economic interest in securing control over the Middle East oil
producing countries. Observers noted the rapidly increasing
demand for energy within the Soviet Union and assumed that this
would require more energy than the Soviet Union could produce
within its own boundaries. From this assumption observers
predicted that the U S S R would seek access to Middle East
oil not on commercial terms through purchases from the producing
 CONTEMPORARY HISTORY
companies, but within the framework of a political attempt to
capture the growing nationalist movement in these countries. Given
the international situation at that time, the coupling of Soviet
interest in Middle East oil with a more general view of Moscow's
expansionist tendencies led to a real fear of the Soviet Union's
intentions in the region. Contemplating this 'threat', the U S and
U K governments forgot their earlier differences on the sharing
of the Middle East's oil wealth and, emphasizing the need to pre-
sent a united front in the area to meet the external enemy,
attempted to sell to the Middle East countries the idea of the
peripheral anti-Soviet alliance as developed in western Europe
through N A T 0. It was from these efforts that C E N T 0 emerged,
in which one of the most important oil producing countries of the
Middle East - Iran - decided to participate. Behind this screen
provided by Turkey, Iran, and Pakistan, Anglo-American in-
fluence in the Middle East was felt to be more secure, and both
diplomats and oil investors breathed a little more freely once the
treaty had been signed.
In retrospect, one can see that this concern about Soviet in-
tentions in the Middle East was exaggerated, at least on the oil
side. The U S S R proved to have more than enough oil and gas
within its own borders to satisfy its own requirements. The rapid
development of the Soviet oil industry enabled the country not
only to change from a coal-based to an oil- and gas-based economy,
but also, by the mid-rgsos, to become a potential rival to the
Middle East in terms of oil exports. Middle East oil now faced a
new competitor, particularly in western Europe, and the Soviet
oil export agency, in order to break into the markets controlled in
the main by the companies producing oil in the Middle East, cut
prices where necessary. The U S S R also sought oil outlets in the
developing countries such as Brazil, Guinea, India, Ceylon, etc.
The steady growth of both Soviet production and oil export
potential quickly dispelled the idea that the U S S R needed the
Middle East to provide fuel and power for its economic develop-
ment. Its recent decision to purchase large quantities of natural gas
from Iran confirms this view, for the gas can be used in the Soviet
Union to replace domestic oil, which will then be available for
export, thus giving the U S SR a net gain in hard currencies.
Defence of Anglo-American oil interests in the Middle East,
however, was not restricted to warding off the 'threat' from the
 THE SIGNIFICANCE OF OIL
U S SR. Elsewhere in the world, countries and companies looked
enviously at the oil wealth of the region and viewed with disfavour
the control exercised by a limited number of Anglo-American
companies which, although producing oil cheaply, were able to sell
it expensively because of their control over transport, refining, and
marketing facilities. As a reaction against this, French, Italian,
Japanese and other outside interests attempted to secure influence
in the Middle East. Companies from these countries, both state
and private, started to tender for the right to explore for oil in
areas offered for exploration by the Middle East governments.
The degree of profit-sharing, state participation, and guarantees
of various other kinds they were prepared to concede, was greater
than that made by the international companies, which had not
bargained for being outbid by these outsiders. The defence against
them rested not only on the technical and commercial expertise of
the Anglo-American companies; it was backed by diplomatic and
political pressure by the American and British governments. In
certain instances the pressure was successful, but the growing
hostility of some of the nationalist groups in the Middle East
(encouraged by diplomatic counter-offensives by the French,
the Japanese, and the Italians), coupled with the greater commercial
and economic attractiveness of the newcomers' proposals for oil
acreage, eventually secured rights in the area for oil interests other
than those of the United States and the United Kingdom.

The first move in this direction emerged out of Iran's expropria-

tion of the Anglo-Iranian Oil Company's interests in 1951. The
1954 agreement negotiated with the Consortium limited the latter's
right to produce and explore for oil to those areas in which some
work had already been done. The rest of the country's oil areas
was vested in the National Iranian Oil Company, which since 1957
has signed contracts with several other foreign companies and
other (sometimes state) entities for exploration and development
work. In particular, the Italian state oil organisation, ENI, has
secured acreage in areas formerly conceded to Anglo-Iranian.
More recently, Kuwait has insisted that the Kuwait Oil Company
(owned 50 per cent by BP and 50 per cent by Gulf Oil) give up its
'rights' in almost half the country. The acreage relinquished is now
being allocated to other companies. Most recently, Iraq has taken
the most extreme action in this respect by unilaterally declaring
 CONTEMPORARY HISTORY
that the rights of the Iraq Petroleum Company - which had the
whole of the country under concession - extend only to the areas
it actually worked. As these amount to only about one per cent of
the country's area, the remaining gg per cent of Iraq is now 'on
offer' to other parties. And in spite of the IPC's claim that the
Iraqi government's action is illegal and that no other party has any
right to work oil in the country, Iraq has not been unsuccessful in
interesting other potential oil seekers. Though it is reported that
strong diplomatic pressure from Britain and the US (whose oil
companies are dominant in IPC) secured the withdrawal of an
offer from E N I to develop acreage in Iraq, this has not prevented
a French state oil company from concluding an arrangement to
develop some of Iraq's oil resources hitherto controlled by IPC.
Most recently, even Saudi Arabia had ended the monopoly rights
of the original concession holder - A R A M C 0 - and has accepted
tenders for oil exploration and development from other com-
panies. Thus by 1968- in spite of the considerable commercial
power of the traditional companies and the diplomatic pressure of
their governments - the former simple pattern of oil concession
arrangements in the Middle East, essentially countrywide arrange-
ments within the hands of eight companies working either alone
or, more frequently, in alliance with each other, had been replaced
by a complex jig-saw pattern in which over 50 companies and
institutions are involved.
These new concessions are important not only because they
have brought in companies and interests other than British and
American (even India now has an interest in Iran), but also be-
cause the Middle East governments have taken the opportunity,
when agreeing to new concession arrangements, to insist on some
degree of national control over the eventual exploitation of any
resources discovered. Typically, the new-style agreements involve
initial obligations by the companies concerned to undertake a rapid
explorationof their areas, and to move equally rapidly into develop-
ing any fields discovered. The state then claims a share in the
development on payment only of an appropriate share of the
development costs. Governments thus secure the right not only
to share in the profits but also to participate in deciding how the
field shall be operated: not an unimportant right in respect of
decisions on the speed at which production shall be built up and
off-take increased - for an international company can restrict
I00

 THE SIGNIFICANCE OF O I L
development in order to protect its investments elsewhere. Through
this approach to direct participation in oil ventures, state invest-
ment becomes virtually riskless, for it makes no contribution to the
risky exploration expenditure. The new-style agreements often
also insist on the companies agreeing to build a local refinery to
process part of the crude oil produced and also on their own
tanker fleets (another recent development by some of the produc-
ing countries) being given first option on the transportation of some
of the oil. All this, of course, adds up to much more than merely
sharing the profits of an operation run entirely by the oil company;
it represents the achievement of significantly enhanced economic
status by the countries concerned, not only vis-A-vis the com-
panies but also in relation to the outside powers to which the com-
panies owe their allegiance.
T o date, however, the increasing number of concession arrange-
ments and the establishment of new terms for newly negotiated
agreements have been less significant than the changes which the
Middle East governments have been able to secure in the terms
of the old concessions, from which some 75 per cent of Middle
East oil is still produced. The pre-1950 concession arrangements
merely reflected the semi-colonial status of the area. Supported
by their governments, the companies sought concessions, offering
a royalty of modest size on any oil that might eventually be pro-
duced, and receiving in return the exclusive right to search for oil
- usually over an area covering the whole of the national territory
concerned.
By 1950 the international oil companies elsewhere in the world
were already having to accept a changed status as a result of
nationalist pressure. In 1938, Shell and Esso interests in Mexico
had been nationalized because the companies had been unwilling
to renegotiate their concession agreements on terms acceptable to
the government. In 1943 the Venezuelan government passed new
oil legislation that marked a turning point in government-company
relationships. It introduced the concept of profit-sharing between
government and companies, and of company participation in the
domestic economy over and above that demanded by the mere
production of petroleum. Given political change and awareness in
the Middle East in the immediate post-war period, it was only a
matter of time before similar nationalist reaction to the companies
began to make itself felt. Nationalization in Iran in 1931 was the
I01
 CONTEMPORARY HISTORY
most obvious manifestation of this, but the crunch effectively
came a year earlier, in 1950, in Saudi Arabia, which by then had
become a very successful producing area with an even greater
potential remaining to be developed.
Given the low-cost nature of Saudi Arabia operations - due not
only to favourable geological conditions but also to the proximity
of the fields to the coast and hence to ocean transportation facilities
- and the value of this crude to the American companies concerned
in serving their rapidly growing markets of the Eastern hemisphere,
the joint concessionary company, A R A M C 0, was not unwilling
to accede to the government's demand that the recently intro-
duced 'posted price' for Saudi Arabian oil should be used for
calculating total profits (= posted price per barrel x number of
barrels produced minus the costs of producing the oil and getting
it to the export terminal). Total profits thus determined would
then be divided equally between company and government. In
this way Saudi Arabia achieved a profit-sharing status similar to
that won by Venezuela some years earlier, and in addition estab-
lished the principle of their 50: 50 split between government and
company. Once ARAMCO had accepted this new form of rela-
tionship with Saudi Arabia, there was nothing that oil companies
elsewhere in the Middle East could do to prevent their own con-
cession terms being renegotiated. They accepted the inevitable and
sought only delay. Delays proved to be very short, for by 1954 all
major producing countries in the area were on a 50:50 profit-
sharing basis.
Although profits to the companies remained high under the new
formula - by virtue of low production costs and high posted prices
- the effect of the agreements was to reduce significantly the gross
returns made by the oil companies in their producing operations.
This fundamental change in government/company relationships
might not have been achieved so easily had it not been for deci-
sions by the United States - and later Britain - to allow their oil
companies to offset all tax payments to the governments of the
producing countries against their tax obligations to the U S and
British treasuries. Thus the net additional tax burden on the oil
companies was greatly reduced and it was, in effect, the taxpayers
of the U S and Britain who suffered the main consequences of the
new financial arrangements between producing countries and
companies.
I02

 THE SIGNIFICANCE OF OIL

Since the Middle East countries took this action to secure a
greater and more direct interest in oil operations in their territories,
government/company relationships have become a more or less
continuing dialogue in which first one government and then another
has sought to improve the terms of the oil concession arrange-
ments. The manoeuvres have been mainly concerned with ways in
which pricing and profit-sharing should be carried out.
Profit-sharing based on posted prices had guaranteed Middle
East countries rising revenues from oil whilst the demand for oil
continued to rise and whilst posted prices remained high. After
1957, however, the world energy situation changed, bringing in-
creasing competition between energy sources. In their search for
markets, oil companies started to cut prices. At first price cutting
was achieved by shaving profit margins, but soon companies pro-
ducing oil in the Middle East started to offer crude to independent
and state-owned refineries at less than the officially posted prices,
As this practice grew, it produced an incentive for the companies
to bring down the posted prices in order to reduce their tax obli-
gations to host governments. The companies had certainly expected
full freedom to change prices, as they had done for a quarter of a
century in the U S and the Caribbean, and indeed in the Middle
East from time to time in the 1950s; then, however, the price
changes had been essentially upwards in sympathy with changes
in the western hemisphere. Small reductions in posted prices in
1958 and 1959 produced some indications of disapproval from
certain Middle East governments, but it was not until major cuts
- of the order of 10 to 15 per cent - were announced in 1960 that a
storm broke over the heads of the companies whose decisions
would reduce the oil revenues of the countries concerned by 5 to
74 per cent. The companies at first insisted on their right to take
such action when necessitated by commercial considerations, but
they were eventually obliged to reappraise their position under the
combined onslaught of all the oil producing countries, where the
strident nationalist reaction threatened not only the interests of the
companies but also the standing of Britain and the U S in the
difficult post-Suez period. The posted price issue was, indeed, a
sufficient spur to the producing countries for them to act collec-
tively and form the Organization of Petroleum Exporting Coun-
tries. One of its aims was to cancel the price reductions, and
although this has not been achieved, OPEC's stand made it quite
 CONTEMPORARY HISTORY

clear to the companies that future unilateral action in this direction

was impossible. Since 1960, therefore, posted price levels have
been sacrosanct, and governments have retained their revenue per
barrel in spite of a continued fall in the actual price levels at which
crude oil has been sold. Thus the division of profits between
Middle East governments and companies has moved from the
agreed 50 :50 basis towards an effective 70 :30 split in favour of the
former. This development has effectively removed most of the
'fat' from oil company profits, which on a world-wide basis no
longer provide a return on capital out of line with other industries.

Thus by 1968 the way in which the oil industry is organized in the
Middle East has little in common, politically or economically, with
the position up to the early years after the second World War.
Vestiges of economic and political colonialism still remain in the
traditional concession arrangements with international companies,
but the days of these seem to be numbered as they are certain to
be converted to more acceptable forms of agreement within the
next few years. Change has been achieved as a result of the con-
stant pressures brought to bear on the companies by the in-
creasing number of Arab oil professionals in government service
rather than from the political calls for the nationalization of oil
resources emerging from time to time from the Arab League and
other organizations. The most recent outstanding example of
'professional pressure' is seen in the continuing negotiations be-
tween the Iranian government and the Iranian oil consortium
whereby the former is attempting to secure the right to a voice
in decisions on the future planning of the latter's business - and,
in particular, on the volume of future production levels. Hitherto
such decisions have been a function of secret agreements between
the member companies of the consortium - in spite of the fact that
such decisions are the main determinants of Iranian government
revenues from oil operations and thus crucial to economic plan-
ning of the country. The pressure will almost certainly succeed and
few companies now operating in the Middle East would expect
anything other than moves in this direction in the future. They
will not like the changes : but they will acquiesce in them not only
because the alternative is expropriation - enthusiasm for this can
always be whipped up at short notice in most countries - but also
because they recognize that such changes do, in fact, make com-
 THE SIGNIFICANCE OF O I L
mercial sense by guaranteeing the continuity of oil operations that
would otherwise be interrupted by occasional, but recurrent,
political crises, as in the last 15 years. The participation by
governments in decision making will reduce their propensity
to use oil as a political weapon: hence the flow is likely to be
smoother and more regular, thus ensuring continuing returns on
company investment, albeit at a lower rate of profit per barrel of
oil produced.
If the changing relationship between governments and com-
panies succeeds, as suggested, in diminishing the significance of
Middle East oil as a direct political weapon, then one of the main
potentials for creating instability in the region will have been
removed. In the 1956 crisis, the dangers in the situation were
exacerbated by the knowledge of all parties that a decision to close
down oil production and oil tranport facilities would affect the
consuming countries, owning countries, and international com-
panies more seriously than it would the producing countries. But
with the changes in the organization and control of the industry, this
interpretation no longer holds good, for the producing countries
are now moving into a position in which their own benefits from
oil far exceed those of any other party, and in which their immedi-
ate and longer-term economic (and political) viability depends
increasingly on keeping their oil flowing: consumers of Middle
East oil, on the other hand, decreasingly depend on keeping this
particular oil flowing, for they have not been content merely to
await the next unilateral decision by the 'oil shaikhs' to turn off
their essential energy requirements, but have sought means of
reducing their dependence on Middle East oil. In 1959 the United
States introduced mandatory quotas on crude oil imports, res-
tricting them to some 12 per cent of the country's total needs.
Part of the reason for this decision was concern for security of
supplies from the Middle East whose crude oils were moving to
the U S in increasing quantities by the late 1950s. In Japan -
currently more dependent for energy on Middle East oil than any
other major industrial nation - companies are being persuaded to
develop oil resources elsewhere, notably in the Far East and
especially in Indonesia, whose oil potential has remained unde-
veloped as a result of post-war difficulties with the previous con-
cession holders, some of the international oil companies. Japan is
also looking to the possibility of investing in oil developments in
105
 CONTEMPORARY HISTORY
Australia and Alaska, and is also about to look for oil in its own
backyard - the Sea of Japan. Even countries in the developing
world have advanced the insecurity-of-oil-supplies-from-the-
Middle-East argument as one reason for spending scarce domestic
capital on initiating an oil search at home. In the meantime, the
countries of west Europe, which collectively still take the bulk of
Middle East oil and which at the time of Suez depended on it for
75 per cent of their total supplies, noted the dangers to their
economic progress in risking too rapid a change to imported oil as
the basis of their energy economies. Without the fear of interrup-
tions to these supplies, most countries in west Europe would have
had fewer inhibitions in pursuing cheap energy policies based on
imported Middle East oil. Instead indigenous coal has been given
a greater degree of protection whilst alternative supplies of imported
energy - including coal from the U S and oil from the U S S R -
have not been unwelcome as a means of reducing the risks. Euro-
pean attitudes towards the dangers of excessive dependence on
Middle East oil have also helped to accelerate interest in the con-
tinent's own natural gas potential. The discovery of resources
of gas under the North Sea - revealed by the discovery of the
world's largest gasfield at Groningen in North Holland - was
quickly followed by an international agreement on its exploitation
by all the nations bordering on it. As a result very large quantities
of natural gas have already been located in the British section and
the search is underway in Norwegian, Danish, German, and Dutch
waters. The great potential of North Sea gas (plus possibilities
of similar developments in the Adriatic and Baltic Seas), coupled
with the 120 million tons of oil equivalent per year from the
Groningen field, seem likely to eliminate much of the annual rate of
growth in the market for oil in west Europe within the next five to
seven years.
These reactions by major consumers of Middle East oil to the
threats and realities of supply dislocation arising from political
action have, moreover, been accompanied by action on the part of
the oil companies themselves to limit their own degree of depen-
dence on the Middle East. Iranian nationalization of the Abadan
refinery in 1951 finally persuaded the companies that refineries
were best located away from the Middle East. There were already
increasingly significant economic reasons for doing this, and
nationalization clearly demonstrated that capital in refineries
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should not be put at risk in the Middle East when the refineries
could be located in consuming countries. No major refinery has
since been built in the Middle East producing countries. The Suez
crisis of 1956-7 had a serious effect on the international oil busi-
ness and the companies concerned were stimulated to further
diversify their areas of production, particularly into those areas,
such as Nigeria and North Africa, which could serve the west
European market without depending on the Suez Canal. Simul-
taneously, the tanker situation was reappraised and decisions taken
to enlarge company fleets - particularly in respect of tankers of
80,000 tons upwards, which can use the Cape route to Europe
without much of a cost disadvantage over the Suez Canal route.
It is already apparent that the closure of the Canal since the Arab-
Israel war has acted as a h a 1 consideration in persuading the
companies to switch their crude oil transport to Europe to 250,000
to 300,000 ton tankers, which cannot use the Suez route even in
ballast. These tankers - the first orders for which have already been
placed - will eventually realign a significant part of the main flow
of oil from the Middle East to Europe (and America) around the
Cape of Good Hope to the detriment not only of Egypt, but also
of Lebanon, Jordan, and Syria, all of which secure revenues from
the movement of oil by pipelines to the eastern Mediterranean.
The giant tankers will also undercut the cost of moving oil by
these pipelines.

These developments have not gone unnoticed in the Middle East,

even though in public opinion media they receive little attention
compared with references to the industrialized world's dependence
on Middle East oil. The fact that realists are now largely in con-
trol, however, is demonstrated by the relatively limited support,
in terms of oil sanctions, given to the Arab cause in the recent
crisis. It is surely not coincidental that only two new producers -
Libya and Algeria, less sophisticated in the oil business than the
longer-term producers of the Middle East proper - persisted for
more than a few days in boycotting certain markets. For Iran, the
dislocations of the crisis presented an opportunity for expanding
production immediately and for pursuing with renewed vigour its
claim to participation in decisions on future levels of oil off-take
by the Consortium. For Saudi Arabia, Kuwait, and Iraq, the
choice was more difficult, but in 1967, in contrast to the des-
 CONTEMPORARY HISTORY
truction of pipelines that took place in 1956, nothing was per-
mitted to occur which would have meant a long-term interruption
of supplies. The boycott was restricted to certain destinations and/
or certain ships (depending on nationality); nor do any serious
steps appear to have been taken to ensure that the companies did
not get away merely with observing the letter but not the spirit
of the boycott decisions. The companies reorganized their supply
arrangements so that all bans on particular oils to particular
destinations could be observed, but switched tankers and cargoes
so that no nation went short of oil. In other words, the Middle
East oil producing nations finally made up their minds that, in
both the short and the longer term, only they would suffer from
'holding the West to ransom'.
Since the war, however, at the series of Arab conferences held to
determine future policy, a new philosophy towards the use of oil as
a means of achieving desired ends has begun to emerge. In brief,
the idea is to make deliberate use of revenues from exported oil to
assist in the achievement of Arab political aims. In this, some
support can be expected from the Soviet Union which, as a first
step, has already agreed to offer finance and technical help in in-
creasing Iraq's oil export potential. The scope for such an idea is
clear and it has, of course, emerged not only from the growth in
total exports but also from the growth in per barrel revenue that
has been secured, from 30 cents in 1946 to 80 cents in 1966. In
1966 Middle East countries (including Libya and Algeria but
excluding Iran) exported about 3500 million barrels of oil and thus
earned over 962500 million. The monthly payments of $5 million
being made to Egypt while the Canal is closed, and to Jordan for an
indefinite period, by the major Arab oil producing nations is an
indication of the possibilities which exist in using oil revenues for
political ends - and one notes that these payments amount to only
about 3 per cent of total monthly oil revenues received by the
Arab states. Whether or not there is a reasonable chance that oil
revenues will be used to achieve both political and economic aims
in a regional context (and it should also be remembered that
Kuwait is using oil revenues to finance a Development Bank
which underwrites economic development projects in the Arab
world), rather than in a series of separate national contexts as in
the past twenty years, is beyond the competence of an observer of
the oil scene to judge. However, if the chance is taken, then it will
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 T H E SIGNIFICANCE OF O I L
be somewhat ironic to find the commodity which originally
helped to divide the region into the spheres of influence of
different outside powers, and which later emphasized national
rivalries within the region and created 'have' and 'have not' nations
in the Arab world, now providing the means whereby greater
regional cohesion can be achieved - albeit through the use of an
unfriendly, but commercially necessary, outside world. In aiming
to sell as much oil as possible, under arrangements which give the
overwhelming part of the profits to the producing nations, through
international companies which started off as 'agents of imperialism'
and which will soon be little more than brokers and transportation
agents matching up supply with demand, the Middle East oil
producing nations, carrying their less fortunate neighbours along
with them, would seem intent on guaranteeing the future availa-
bility of all oil that can be sold out of the area (in competition with
increasingly significant developments elsewhere). In return, the
economic and political advantages that the oil revenues can buy,
could produce an Arab Middle East with much greater internal
cohesion and a more significant power potential amongst the blocs
of the world in the latter part of the twentieth century.

BIBLIOGRAPHY

There are a large number of books and other publications on oil

in the Middle East. The following selection provides more de-
tailed description and analyses of points made in this
essay.

H. Cotton, The Evolution of Oil Concessions in the Middle East and

North Africa, New York, 1967.
J. Hartshorn, Oil Companies and Governments, London, 2nd ed.
1967.
D. Hirst, Oil and Public Opinion in the Middle East, London, 1966.
C. Issawi and M. Yeganeh, The Economics of Middle Eastern Oil,
London, 1962.
W. A, Leeman, The Price of Middle Eastern Oil, Cornell University
Press, 1962.
G. Lenczowski, Oil and State in the Middle East, Cornell University
Press, 1960.
 CONTEMPORARY HISTORY

S. H . Longrigg, Oil in the Middle East, Oxford University Press,

3rd ed. 1967.
H. Lubell, Middle East Oil Crises and Western Europe's Energy
Supplies, Baltimore, 1963.
M. A. Mughraby, Permanent Sovereignty over Oil Resources,
Beirut, 1966.
P. R. Odell, An Economic Geography of Oil,London, 1963.
E. Penrose, The Large International Firm in Developing Countries:
a Case Study of the International Petroleum Industry, London,
1968.
B. Shwadran, The Middle East, Oil and the Ofeat Powers, New
York, 1959.