About the Author
Andrew Scott Cooper holds advanced degrees from Columbia University, University of Aberdeen, and Victoria University. Dr. Cooper has worked at the United Nations and Human Rights Watch and is a columnist for PBS/Frontline's Tehran Bureau.
Excerpt. © Reprinted by permission. All rights reserved.
The Oil Kings INTRODUCTION
“Why should I plant a tree whose bitter root
Will only serve to nourish poisoned fruit?”
—Abolqasem Ferdowsi, The Persian Book of Kings
On November 25, 2006, U.S. vice president Dick Cheney flew to Riyadh for talks with King Abdullah of Saudi Arabia, the elderly autocrat whose desert kingdom is home to one fifth of the world’s proven oil reserves and is the largest producer within OPEC, the Organization of Petroleum Exporting Countries, the oil producers’ cartel. The king was evidently in need of reassurance from his American allies. Earlier in the month the U.S. war effort in Iraq had been dealt a setback after voters in midterm elections routed Republican incumbents and turned control of the Congress over to Democrats. Almost immediately, President George W. Bush accepted the resignation of Cheney’s partner in power Secretary of Defense Donald Rumsfeld, and offered “to find common ground” with critics of his administration’s handling of the war. For the first time in three and a half years the talk in Washington was not of victory in Iraq but of an orderly withdrawal of coalition forces. The Saudis expressed concern that their neighbor and historic rival Iran would take advantage of the U.S. departure to assert its regional ambitions. Saudi Arabia’s ambassador to Washington, Prince Turki al-Faisal, bluntly reminded the White House that “since America came into Iraq uninvited, it should not leave Iraq uninvited.”
The price of oil also came up in the vice president’s meeting with Saudi officials. Over the summer of 2006 world energy markets had tightened, driving prices to record levels. Soaring fuel prices threatened America’s prosperity and the economies of its trading partners. Oil as high as $78 a barrel also posed a challenge to U.S. foreign policy in the Middle East, where oil producers reaped windfall profits. The Bush White House was especially concerned about what the government of Iran would do with its new billions. “Iran’s profits from oil rose last year to more than $45 billion from $15 billion, surging at a rate not seen since 1974, when the country’s oil revenues tripled,” reported The New York Times. The surge in Iranian oil profits was accompanied by a marked upswing in regional tensions and violence that included a ferocious month-long war fought in Lebanon between Israel and Hezbollah, the Shi’a group whose leaders received political cover and financial and military backing from Tehran. The prospect of President Mahmoud Ahmadinejad using his country’s oil revenues to speed up Iran’s nuclear program, strengthen the Iranian military, and arm Hezbollah in Lebanon, the radical Hamas Islamic group based in Gaza, and pro-Iranian Shi’a militias in Iraq, was anathema to officials in Washington and Riyadh. The Saudi royal family had seen this before. Back in the 1970s Shah Mohammad Reza Pahlavi of Iran had been the driving force behind high oil prices that he hoped would transform Iran into an economic and military powerhouse. Only the 1979 Islamic Revolution had put paid to the Shah’s ambitions to dominate the Persian Gulf, West Asia, and the Indian Ocean.
Although President Ahmadinejad would have never dared admit it, there were striking parallels between his effort to project Iranian petropower under the guise of pan-Islamism, and the Shah’s earlier drive to revive Iran’s long dormant Persian aspirations. Their strategic visions overlapped in ways that suggested some striking continuities. Both leaders saw Iran as the regional hegemon. They identified oil revenues and nuclear power as the keys to attaining international stature and domestic self-reliance. They relished provoking the same Western powers that at one time had treated Iran like a colonial vassal. Perhaps their most obvious shared trait was a King Midas complex. Like the Shah, Ahmadinejad was a big spender who believed that high oil prices freed him from the need to practice fiscal restraint. “Critics said that his plans for generous spending to create jobs and increase salaries were politically motivated and fiscally unsound,” noted one observer. “His budget relied on high oil profits likely to invite inflation.” The Iranian central bank proposed a $40 billion fiscal stimulus that included subsidies for families and newlyweds.
Ahmadinejad’s spendthrift ways presented King Abdullah of Saudi Arabia with a golden opportunity. With petroleum responsible for 80 percent of income from exports, Iran’s economy was perilously exposed to an unexpected price fluctuation in the oil markets. Tehran confidently expected consumer demand for oil to stay high, guaranteeing equally high prices. But what would happen to Iran’s budget assumptions if oil prices suddenly plunged? Oil-producing countries base their spending plans and financial estimates on oil prices not falling below a certain threshold. If prices do suddenly plunge below that level—and if producers have not left themselves with enough of a financial cushion to absorb the blow from lost export receipts—the potential exists for a fiscal meltdown. Billions of dollars in anticipated revenue would disappear. Tehran would be forced to economize and decide whether to spend money on guns or butter—whether to lavish aid on Hezbollah and Hamas or to prop up the complex system of food, fuel, housing, and transportation subsidies that keeps Iran’s middle class in check. Removing the subsidies would increase the potential for protests and clashes between security forces and opposition groups.
Only one country had the means and the motive to engineer a price correction on that scale. With its giant petroleum reserves and untapped production capacity, Saudi Arabia could flood the market by pumping enough surplus crude into the system to break the pricing structure and drive prices back down. The Saudi royal family has always understood that petropower is about more than creating wealth, developing its economy, and preserving power. Oil is also the Saudis’ primary weapon of national self-defense and the key to their security and survival. Flooding the market is economic warfare on a grand scale, the oil industry’s equivalent of dropping the bomb on a rival. A flooded market and lower prices would inevitably result in billions of dollars in lost revenues to the Saudis. However, the threat from Iran was seen as outweighing that loss, and by late 2006 King Abdullah was prepared to tap Saudi oil reserves.
“A member of the Saudi royal family with knowledge of the discussions between Mr. Cheney and King Abdullah said the king had presented Mr. Cheney with a plan to raise oil production to force down the price, in hopes of causing economic turmoil for Iran without becoming directly involved in a confrontation,” reported The New York Times. Flooding the market would “force [Iran] to slow the flow of funds to Hezbollah in Lebanon and to Shiite militias in Iraq without getting directly involved in a confrontation.” The Saudis may also have had in mind a second motive. From past experience they knew that if oil prices stayed too high for too long, the United States would be forced to reduce its consumption of foreign oil and take steps to encourage energy conservation and diversification. Less reliance on Saudi oil would translate into a reduction in Saudi strategic leverage over U.S. policy toward Israel and the Middle East.
On November 29, 2006, four days after Cheney’s return to Washington, The Washington Post published an essay by Nawaf Obaid, a prominent security adviser to the Saudi government and adjunct fellow at Washington’s Center for Strategic and International Studies. Obaid’s article warned that one of the consequences of a sudden U.S. withdrawal from Iraq would be “massive Saudi intervention to stop Iranian-backed Shiite militias from butchering Iraqi Sunnis.” Obaid reminded his readers that “as the economic powerhouse of the Middle East, the birthplace of Islam and the de facto leader of the world’s Sunni community (which comprises 85 percent of Muslims), Saudi Arabia has both the means and religious responsibility to intervene.” Buried in Obaid’s article was a chilling threat that officials back in Tehran could not have failed to miss:
Finally, Abdullah may decide to strangle Iranian funding of the militias through oil policy. If Saudi Arabia boosted production and cut the price of oil in half, the kingdom could still finance its current spending. But it would be devastating to Iran, which is facing economic difficulties even with today’s high prices. The result would be to limit Tehran’s ability to continue funneling hundreds of millions each year to Shiite militias in Iraq and elsewhere.
Obaid’s article drew my attention because for several months I had already been studying the impact of an earlier little known and less understood intervention by the Saudis in the oil market. In 1977, one year before the outbreak of revolutionary unrest in Iran, oil markets had been paralyzed by a bitter split among members of OPEC over how much to charge consumers. The Shah of Iran had proposed a 15 percent price hike for the coming year. King Khalid of Saudi Arabia had resisted the Shah’s entreaties and argued that no price increase was warranted at a time when Western economies were mired in recession. The Shah won the day and persuaded the rest of OPEC to join him in adopting a double-digit price increase for 1977. The Saudi response was swift and ruthless. Riyadh announced it would take drastic steps to ensure that Iran’s new price regime never took effect. It would do this by exceeding its production quota, pumping surplus oil onto the market, and undercutting the higher price offered by its competitors. Overnight, Iran lost billions of dollars in anticipated oil revenue. The Shah’s government, reeling from the blow, was forced to take out a bridge loan from foreign banks. It made deep cuts to domestic spending in an attempt to balance the books and implemented an austerity plan that threw tens of thousands of young Iranian men out of work and into the streets. The economic chaos that ensued helped turn Iranian public opinion against the royal family.
Thirty years later, all the indications were that Saudi Arabia was prepared to replicate its earlier feat. There is still much that we don’t know about U.S.-Saudi efforts to destabilize Iran’s economy during President Bush’s last two years in office. What we do know is that the Saudi government publicly reacted to the uproar over Nawaf Obaid’s article by formally severing its ties with the consultant. Diplomatic observers in Washington understood that this was part of a much bigger game. “[Obaid] is widely expected to return to the government in some capacity,” noted one expert. “The Saudi government disavowed Mr. Obaid’s column, and Prince Turki canceled his contract,” reported The New York Times. “But Arab diplomats said Tuesday that Mr. Obaid’s column reflected the view of the Saudi government, which has made clear its opposition to an American pullout from Iraq.” Then, one week later, Saudi Arabia’s ambassador to Washington, Prince Turki, lost his job and was abruptly summoned home.
What was going on here? What message was King Abdullah trying to send Tehran and Washington? The best way to understand Saudi policy and what happened next is to follow the price of oil over the next two years. Saudi Arabia’s budget for 2007 was reportedly based on oil prices not falling below $42 a barrel and production of 9 million barrels a day. By the summer of 2007, despite efforts to restrain their momentum, prices had returned to their earlier peak from a year before of $78. Publicly at least, OPEC members pledged not to allow oil to surpass $80 a barrel. Yet by the end of November 2007 the price of a barrel of oil had rocketed to $98. In January 2008, President Bush personally appealed to King Abdullah to practice price restraint—the U.S. economy was beginning to show signs of buckling under the strain of high oil prices, mortgage foreclosures, credit defaults, and shaky banks.
The Saudis, eager to reel in Ahmadinejad, opened the spigots and exceeded their OPEC production quota by 250,000 barrels a day. It turned out not to be enough. The Saudis cranked up their production yet again, this time from 9.2 million barrels a day to 9.7 million barrels. The price of a barrel of oil broke the $100 ceiling in April, $118 in May, and finally topped out at $147.27 in July. Prices then fell sharply as Saudi oil flooded the system even as the U.S. economy sharply contracted. By September, when oil had retreated in price to $107 a barrel, it was the turn of President Ahmadinejad to display anxiety. The Iranians had wrongly assumed that the price of oil would not fall below $90 a barrel. They appealed to the Saudis to hold the line on prices. King Abdullah responded by keeping the spigots open and collapsing OPEC’s pricing structure. By December, the price of oil had retreated to $43 a barrel. Satisfied, the Saudis reduced output to 8.5 million barrels a day. When prices plunged to $33 in January 2009, the Saudis cut production still further, this time to 8 million barrels. The Iranian regime entered a crucial presidential election year having sustained a devastating reversal of economic fortune. The fraudulent outcome of its midyear election was accompanied by economic contraction and the worst political unrest since the fall of the Shah three decades earlier.
In the meantime I had located documents that revealed that President Gerald Ford and top White House officials had been closely involved in the first Saudi effort to flood the market in 1977. The documents raised the puzzling question of why the United States would back a covert effort to manipulate oil markets knowing it would damage Iran’s economy and hurt its close ally the Shah. Presidents Richard Nixon and Ford each hosted the Shah at the White House, praised him as a statesman and friend, and furnished him with advanced weapons systems, thousands of military advisers, and even offered to sell Iran nuclear reactors. The documents raised the prospect of a secret crisis in relations at the highest levels, and that previously unknown tensions had led to a high-stakes showdown over oil prices and the long-term future of the OPEC cartel. As I wrote in the October 2008 Middle East Journal:
While much scholarly focus has been on the internal political, cultural, economic and social origins of the revolution, the role of state finances—and oil revenues in particular—has received far less attention. The Iranian revolution shared similarities with two other great revolutions: France in 1789 and Russia in 1917. All three upheavals were preceded by fiscal crises. In Iran’s case the dramatic revenue fluctuations of 1977 were acknowledged and duly noted at the time by Tehran-based foreign correspondents. But the underlying rationale for Saudi Arabia’s decision to torpedo the December 1976 OPEC oil price increase, and particularly the Ford administration’s role in that fateful decision, has not been explained until now.
My search for understanding uncovered a hidden history of U.S.-Iran-Saudi oil diplomacy from 1969 to 1977, the backstory of the crucial eight-year period when the United States went from being the world’s number one oil producer to the biggest importer of petroleum, and when Saudi Arabia’s House of Saud replaced Iran’s Pahlavi king as Washington’s indispensable ally in the Persian Gulf. Here, finally, is the inside story of how two American presidents, Richard Nixon and Gerald Ford, dealt with Iran and Saudi Arabia as they grappled with the challenges of America’s growing dependence on foreign sources of energy, how Nixon’s handling of U.S.-Iran rel...
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