Rogue Nation: American Unilateralism and the Failure of Good Intentions (2003) (14 page)

That it was an American company that found the oil in Saudi Arabia later turned out to be very significant, although at the time the U.S. government dismissed as unnecessary Socal’s suggestion of U.S. diplomatic representation in the kingdom. By the beginning of World War II, everyone knew there was a lot of oil in the Middle East and especially in the Arabian peninsula. In the course of the war, the United States did, after initially dismissing the proposition as unimportant, use Lend Lease funding to support maintenance of the Saudi oil fields. Still, Middle Eastern production was of only marginal significance during the war.

That changed rapidly as the 1940
s
became the 1950
s
. In 1946, three-fourths of Europe’s oil came from America. By 1951, more than half came from the Middle East.
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The shift toward Middle East production, the end of colonialism, the rise of nationalism in the region, and the establishment of the state of Israel created a complex pudding with two major themes. One was a continuing struggle (destined to be successful) by the governments of the producing countries to wrest control of the oil and its pricing away from the oil companies. The other (still unsuccessful) was to erase or severely constrict Israel.

The first oil crisis arose in 1951 when Iran (formerly Persia) nationalized the Anglo-Persian Oil Company. This gave rise to much turmoil and an actual embargo by Britain against the newly nationalized company, which greatly curtailed the flow of Middle East oil to world markets. The still significant surge capacity of the Texas Railroad Commission filled the gap easily, however, and consumers were not hurt. The second crisis arose in 1956, when Egyptian leader Gamal Abdel Nasser moved to nationalize the British- and French-owned Suez Canal Company and take control of movement on the waterway. In response, Britain and France, in league with Israel, landed troops in an attempt to seize the canal zone.

This, of course, closed the canal and again halted the flow of oil from the Middle East to Europe. The British and French had counted on U.S. support for their action, but a surprised President Eisenhower was convinced it would only push the Arabs toward the Soviets. He not only told the Brits and the French to get out but refused to make U.S. surge capacity available unless they did. That was a decisive threat, and once the invaders left Egypt, the Texas Railroad Commission again saved Europe’s bacon.

The third crisis arose as a result of the Six-Day War that began on June 5, 1967, when Israel launched a pre-emptive strike against threatening Egyptian and Syrian forces. Talk of the ‘oil weapon’ had circulated in Arab circles for some time, and now it was unsheathed. On June 6, the oil ministers of the Arab countries announced an embargo, and by June 8, shipments had already been cut by 60 percent.
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With Europe now getting three-fourths of its rapidly growing oil needs from the Middle East, the situation was critical. Again, however, the Railroad Commission rode to the rescue, unleashing a million barrels a day of surge capacity. By July it was clear that the ‘oil weapon’ was a rubber sword.

By 1973, however, the world oil market had changed decisively. The United States was no longer the supplier of last resort. Saudi Arabia was, and even the United States depended on it for that last barrel of oil. OPEC, having been formed in 1960 as part of the exporting countries’ struggle to wrest revenue and control away from the oil companies, was not yet a household name. While it had had some successes, the market condition of excess supply and the U.S. surge capacity continually undermined its efforts. The new circumstances, however, encouraged it to take a hard line at its annual negotiating meeting with the companies, scheduled for October 8, 1973, in Vienna. On October 6, Yom Kippur in Israel, Egyptian leader Anwar Sadat launched a surprise attack on Israeli forces occupying the Sinai and Gaza. At the negotiating table in Vienna, the companies offered a 15-percent price increase, to about $3.45 a barrel.
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The OPEC oil ministers laughed. Double or nothing was their response. Meanwhile, in an effort to put pressure on the U.S and Europe to force Israel to retreat, Sadat was begging his Arab brethren to try the ‘oil weapon’ one more time. Saudi Arabia, torn between reluctance to alienate the United States and the sense of injustice it shared with other Arabs over the creation of Israel, hesitated but then agreed On October 17 the embargo was announced. This time the ‘oil weapon’ proved to be a sword of Toledo steel.

In Belgium, where I was living at the time, people actually hitched horses and oxen to their cars for lack of gas. During a trip to my company’s Philadelphia headquarters, I stocked my rental car with books and magazines for whiling away the time in gas lines. On October 16 the price of crude oil had been $5.40 per barrel. By mid-December it was $ 17 a barrel. At the pump in the United States, prices soared by 40 percent.
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Eventually, Henry Kissinger negotiated an end to the hostilities, and Sadat, now looking to establish new ties to the United States, called on the Arabs to sheathe the sword, which they did on March 18.

But although the embargo was over, the new power structure stayed. It was the beginning of OPEC’s golden age. For the next five years, stability returned to the markets, though at much higher prices than anyone had envisioned. Then came the overthrow of the Shah of Iran, the rise of Ayatollah Khomeini, and the closure of the Iranian oil fields at the end of 1978. Again, prices soared and panic ensued. The impact on the global economy was enormous. The industrial countries went into deep recession, with U.S. GDP falling by 6 percent and unemployment doubling to 9 percent.
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Japans economy stopped growing for the first time since the end of World War II. Even worse was the plight of the developing countries that didn’t produce oil and had little ability to carry the burden of the higher prices. As the global economy stagnated, torrents of money flowed into OPEC coffers, to be recycled largely through U.S. and European banks in the form of loans to increasingly indebted developing countries. The global public demanded to know if there was a better way.

SHOCK THERAPY

T
he question had actually been asked almost thirty years before. As it was becoming clear in the mid-1940
s
that U.S. oil reserves might have limits, there was much discussion of alternatives to ensure security of supply. Some advocated increasing imports in peacetime so as to preserve domestic reserves for emergencies. Not only was this idea discarded, but quotas were actually imposed on imports in an effort to keep domestic producers profitable and theoretically drilling for more. With vast amounts of coal and oil shale in the Rocky Mountains, the United States seemed ideally positioned to develop a synthetic oil industry that could guarantee supplies indefinitely. In 1947 the Interior Department had proposed a $10-billion Manhattan-style project to develop a synthetic fuel industry over the next four or five years. Eventually, $85 million was authorized for research, but the program died as it became clear that synthetic oil would cost substantially more than the inexpensive foreign oil that was then readily available.
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Over the next two decades, the success in handling the early oil crises created a sense of security that prevented the ‘better way’ question from being asked. Certainly none of the nation’s national security advisors asked it when Eisenhower, in what must be one of history’s great ironies, sold the Interstate Highway project that would greatly exacerbate America’s vulnerability to foreign oil suppliers, in the name of national security.
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Writing his memoir,
Present At The Creation
, after the Six Day War, former Secretary of State Dean Acheson did comment that if ‘a fraction of our investment in the space program had been put into the development of a practical electric automobile and of nuclear power plants here and in Europe, we could have done much to solve our air pollution problems and free Europe from dependence on the Middle East and the Soviet Union from its motive in penetrating it.’
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No one paid attention. But now the question was back, and more urgent than ever.

In Tokyo and Europe, the response to the 1978 crisis was immediate and drastic. Japan’s powerful Ministry of International Trade and Industry (MITI) took elevators out of service at its headquarters building and reduced both the heat in the winter and air-conditioning in the summer. I remember literally sweating through negotiating sessions in those days or alternatively shivering in the presence of my comfortably sweatered Japanese colleagues. These measures were symbolic, of course, but they set the tone that enabled Japan to adopt tough new policies. On the supply side, Japan committed to a major program of construction of nuclear power plants, development of liquid natural gas supplies from Southeast Asia and Russia, and shifting from oil to coal wherever possible. Even more significant, however, were the country’s efforts to cut demand by conserving energy. High efficiency standards were set for new appliances. Gasoline taxes and electricity prices were hiked. Government and industry worked to create more efficient processes and equipment. Perhaps most importantly, the Japanese government convinced its public that the future of Japan depended upon conserving energy and thereby enlisted the legendary ability of the Japanese to get just a little bit more out of nothing. It was at this time that MITI began to draw up plans for shifting the structure of Japanese industry from energy-intensive to the knowledge-intensive high technology sectors in which Japan would dramatically challenge the United States in the 1980
s
. Naohiro Amaya, MITI’s vice minister at the time, once told me the whole experience had been a blessing in disguise. Certainly, the policies to reduce oil use and increase energy efficiency worked better than anyone had expected. By 1985, Japan was using 31 percent less energy to produce one dollar of GDP and fully 51 percent less oil.
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Nor did it stop there. By imposing heavy fuel and vehicle taxes that are partially rebated for energy efficient models, Japanese authorities have introduced enormous efficiency in their auto and truck fleet. Almost all Japanese taxis, for example, run on liquid natural gas. Toyota and Honda sold a combined 36,000 hybrid gas-electric vehicles, which get more than 50 miles per gallon, in the United States in 2002.
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Their global competitors, meanwhile, have sold none. Since 1985, Japan has reduced its dependency on oil for overall energy needs from nearly 60 percent to about 50 percent, and its energy use per dollar of GDP is by far the lowest among major industrialized countries. Moreover, it has a long-term energy policy that puts it on track to improve energy efficiency by another 30 percent by 2010.
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Europe, led by France, imitated Japan, by raising its already high gasoline taxes and electricity prices. Even more than Japan it committed to nuclear power, with France adopting an extremely aggressive policy. The Europeans also imitated Japan’s emphasis on conservation. Again, France led the way. Buildings were to be heated to no more than 20 degrees centigrade and inspectors would make unannounced visits to assure compliance. The French even banned any advertising that might be seen as encouraging more energy use.
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High energy prices as well as government programs also spurred discovery and development of the North Sea oil fields and efforts (bitterly opposed by the United States) to bring natural gas from the Soviet Union into northern Europe. As in Japan, the policies proved more effective than expected. Whereas 63 percent of France’s electricity in 1973 was supplied by oil, natural gas, and coal combined, today 75 percent of electricity is nuclear, while oil accounts for less than 1 percent.
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Europe shifted most cars from gasoline to diesel power and thus raised its already high fleet fuel economy for new models from 28 mpg to about 35 mpg.
 45 
Europe’s already comparatively low energy consumption of 8400 BTU per dollar of GDP was steadily cut to 7400 BTU by 2002, and Europe’s per capita electricity consumption has been held at less than half that of the United States.
 46 
Like Japan, Europe also has a clear plan for further energy diversification and conservation, a plan that also puts great emphasis on development of alternative energy sources.

The American response, on the other hand, was fitful, confused, and often divided. In 1973, President Nixon announced Project Independence: In the spirit of the Manhattan and Apollo projects, the U.S. would achieve energy independence by 1980.
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But Nixon soon disappeared in the Watergate scandal, and the project never even got to the planning stage. In any case, it had little popular support. The public saw the American way of life being threatened, and congressional hearings at the time convinced many that the shortages were created by the big oil companies. People wanted Washington to do something, but ‘something’ seemed to mean getting rid of gas lines and bringing back the good old prices while making the companies pay. Following Nixon, President Ford proposed a ten-year plan to build 200 nuclear plants, 250 major coal mines, 150 coal-fired power plants, and 20 synthetic oil plants.
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Vice President Nelson Rockefeller, grandson of the founder of the modern oil industry, upped the ante with a proposal for a $ 100 billion program to underwrite synthetic fuels and other economically uncompetitive energy sources.
 49 
Opponents of all kinds saw to it that none of this even got onto the drawing boards.

Amid all the controversy, however, two important steps were taken. The Trans-Alaskan Pipeline was authorized to enable development of the Alaskan oil fields, and fuel efficiency legislation was passed that required new cars to average 27.5 miles per gallon by 1985.
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President Carter made energy his number-one issue upon taking office in 1977 and introduced his policies as ‘the moral equivalent of war.’
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Some wags pointed out that the acronym for this is MEOW, and certainly the debate occasionally sounded like the whining of cats. Aside from the auto fuel efficiency requirements there had been little emphasis on conservation. Oil, in fact, was still under price controls that kept it artificially cheap in order to please the public. Carter made it a priority to let domestic oil rise to world market prices, only to find that the public didn’t think there was a crisis. He eventually won on this but paid a high political price. Other Carter proposals included a ‘gas guzzler’ tax on very fuel inefficient cars, a tax rebate for high mileage cars, an increase in the gasoline tax, a series of tax incentives and regulations aimed at forcing conversion to coal-fired generating plants, a plan to double the number of nuclear power plants in operation, tax credits for investment in solar energy equipment and insulation, a change from voluntary to mandatory standards for appliance efficiency, mandatory performance standards for new buildings, a big increase in R & D funding and incentives for development of energy from renewable sources, removal of barriers to use of industrially generated electricity in the public grid, formation of a Strategic Petroleum Reserve to hold ninety days of oil supply, and, that old standby, a $20 billion synthetic fuel project to produce eventually 2.5 million barrels a day of oil from Rocky Mountain shale.
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