Yergin - The Prize(1)

B o o k s b y D a n i e l Y e r g i n

Author Shattered Peace: Origins of the Cold War

Coauthor The Commanding Heights:

The Battle for the World Economy

Energy Future

Global Insecurity

Russia 2010

DANIEL YERGIN 71 E P' Rl " y // Ì '

: //• A J :

T H E E P I C Q U E S T F O R O I L ,

M O N E Y & P O W E R

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Copyright © 1991, 1992, 2009 by Daniel Yergin Epilogue copyright © 2009 by Daniel Yergin

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The Library of Congress has cataloged the Simon & Schuster edition as follows: Yergin, Daniel.

The prize: the epic quest for o i l , money, and power / Daniel Yergin. p. cm.

Includes bibliographical references and index. 1. Petroleum industry and trade—Polit ical aspects—History—20th century. 2. Petroleum industry and t r a d e — M i l i t a r y aspects—History—20th century. 3. World War, 1914-1918—Causes. 4. World War, 1939-1945—Causes.

5. World pol i t ics—20th century. I . Title.

HD9560.6.Y47 1990 338.2'782'o904—dc20 90-47575

CIP

ISBN-13: 978-1-4391-1012-6 ISBN-10: 1-4391-1012-3

Lyrics on page 536 © 1962 Carolintone Music Company, Inc. Renewed 1990. Used by permission.

Poem on pages 688-689 f rom The Intellectual Adventure of Ancient Man by H . and H . A . Frankfort, John A . Wilson, and Thorki ld Jacobsen, page 142, © 1946

The University o f Chicago. Used by permission.

To Angela, Alexander, and Rebecca

Prologue

W I N S T O N C H U R C H I L L C H A N G E D his m i n d almost overnight. U n t i l the sum­mer o f 1911, the young C h u r c h i l l , H o m e Secretary, was one o f the leaders o f the "economists," the members o f the B r i t i s h Cabinet cr i t ical o f the increased m i l i -lary spending that was being promoted by some to keep ahead i n the A n g l o -German naval race. That competi t ion had become the most rancorous element i n the g r o w i n g antagonism between the t w o nations. But C h u r c h i l l argued emphat­ically that war w i t h Germany was not inevitable, that Germany's intentions were not necessarily aggressive. The money w o u l d be better spent, he insisted, on do­mestic social programs than on extra battleships.

Then on July 1 ,1911, Kaiser W i l h e l m sent a German naval vessel, the Pan­ther, steaming into the harbor at Agadir , on the At lant ic coast o f M o r o c c o . His aim was to check French influence i n A f r i c a and carve out a posi t ion for Ger­many. W h i l e the Panther was only a gunboat and A g a d i r was a port c i ty o f only secondary importance, the arrival o f the ship ignited a severe international crisis. The bui ldup o f the German A r m y was already causing unease among its Euro­pean neighbors; n o w Germany, i n its drive for its "place i n the sun," seemed to l>r direct ly challenging France and Br i ta in 's global positions. For several weeks, war fear gripped Europe. B y the end o f July, however, the tension had eased—as ( l u i t c h i l l declared, "the bul ly is c l i m b i n g d o w n . " B u t the crisis had transformed ( 'hurchi l l ' s out look. Contrary to his earlier assessment o f German intentions, he was now convinced that Germany sought hegemony and w o u l d exert its m i l i t a r y muscle to gain i t . War, he now concluded, was v i r t u a l l y inevitable, only a matter ol l ime.

Appointed First L o r d o f the A d m i r a l t y immediately after Agadir , C h u r c h i l l vowed to do everything he could to prepare B r i t a i n m i l i t a r i l y for the inescapable • l . i v ol reckoning. His charge was to ensure that the Royal Navy, the symbol and

very embodiment o f Britain's imperial power, was ready to meet the German challenge on the h i g h seas. One o f the most important and contentious questions he faced was seemingly technical i n nature, but w o u l d i n fact have vast i m p l i c a ­tions for the twentieth century. The issue was whether to convert the B r i t i s h Navy to o i l for its power source, i n place o f coal, w h i c h was the tradit ional fuel . M a n y thought that such a conversion was pure fo l ly , for i t meant that the N a v y could no longer rely on safe, secure Welsh coal, but rather w o u l d have to depend on distant and insecure o i l supplies f r o m Persia, as Iran was then k n o w n . "To c o m m i t the N a v y irrevocably to o i l was indeed ' to take arms against a sea o f troubles,' " said C h u r c h i l l . B u t the strategic benefits—greater speed and more efficient use o f m a n p o w e r — w e r e so obvious to h i m that he d i d not dally. He decided that B r i t a i n w o u l d have to base its "naval supremacy upon o i l " and, thereupon, c o m m i t t e d himself , w i t h a l l his d r i v i n g energy and enthusiasm, to achieving that objective.

There was no c h o i c e — i n Churchi l l ' s words, "Mastery itself was the prize o f the venture. '"

W i t h that, C h u r c h i l l , on the eve o f W o r l d War I , had captured a fundamental truth, and one applicable not only to the conflagration that fo l lowed, but to the many decades ahead. For o i l has meant mastery through the years since. A n d that quest for mastery is what this book is about.

A t the beginning of the 1990s—almost eighty years after C h u r c h i l l made the c o m m i t m e n t to petroleum, after t w o W o r l d Wars and a long C o l d War, and i n what was supposed to be the beginning o f a new, more peaceful e r a — o i l once again became the focus o f global confl ict . O n August 2 ,1990, yet another o f the century's dictators, Saddam Hussein o f I raq , invaded the neighboring country o f Kuwai t . His goal was not only conquest o f a sovereign state, but also the capture o f its riches. The prize was enormous. I f successful, I raq w o u l d have become the world 's leading o i l power, and i t w o u l d have dominated both the A r a b w o r l d and the Persian Gul f , where the bulk o f the planet's o i l reserves is concentrated. Its new strength and wealth and control o f o i l w o u l d have forced the rest o f the w o r l d to pay court to the ambitions o f Saddam Hussein. The result w o u l d have been a dramatic shift in the international balance o f power. I n short, mastery i t ­self was once more the prize.

Over the previous several years, it had become almost fashionable to say that o i l was no longer " i m p o r t a n t . " Indeed, in the spring o f 1990, just a few months before the Iraqi invasion, the senior officers o f America 's Central C o m ­mand, w h i c h w o u l d be the l i n c h p i n o f the U.S. m o b i l i z a t i o n , found themselves lectured to the effect that o i l had lost its strategic significance. But the invasion o f K u w a i t stripped away the i l l u s i o n . O i l was st i l l central to security, prosperity, and the very nature o f c iv i l i zat ion. This remains true i n the twenty-first century.

T h o u g h the modern history o f o i l begins i n the latter h a l f o f the nineteenth century, i t was the twentieth century that was completely transformed by the ad­vent o f petroleum. The role o f o i l — a n d anxiety about its s u p p l y — i s a pr imary consideration o f the era o f g lobal izat ion that characterizes the first decades o f the twenty-f irst century.

Three great themes underlie the story o f o i l . The first is the rise and develop­m e n t o f canital ism and modern business. O i l is the wor ld 's biggest and most per­

vasive business, the greatest o f the great industries that arose in the last decades o f the nineteenth century. Standard O i l , w h i c h thoroughly dominated the A m e r ­ican petroleum industry by the end o f that century, was among the wor ld 's very first and largest mult inat ional enterprises. The expansion o f the business there­after—encompassing everything f r o m wi ldcat dri l lers , smooth-talking promot­ers, and domineering entrepreneurs to h i g h l y trained scientists and engineers, great corporate bureaucracies, and state-owned companies—embodies the evo­lut ion o f business, o f corporate strategy, o f technological change and market de­velopment, and indeed o f both national and international economies. Throughout the history o f o i l , deals have been done and momentous decisions have been m a d e — a m o n g men, companies, and nations—sometimes w i t h great calculation and sometimes almost by accident. N o other business so starkly and extremely defines the meaning o f r isk and r e w a r d — a n d the profound impact o f chance and fate.

A s we look forward, i t is clear that mastery w i l l certainly come as m u c h from a computer chip as f r o m a barrel o f o i l . Yet the petroleum industry cont in­ues to have enormous impact. O f the top ten companies in the Fortune 500 global ranking i n 2008, six are o i l companies. U n t i l some alternative source o f energy is fo un d i n sufficient scale, o i l w i l l s t i l l have far-reaching effects on the global economy; major price movements can fuel economic g r o w t h or, contrar-ily, drive inf lat ion and help kick-start recessions. Today, o i l is the only c o m m o d ­ity whose doings and controversies are to be found regularly not only on the business page but also on the front page. A n d , as in the past, i t is a massive gen­erator o f w e a l t h — f o r individuals , companies, and entire nations. I n the words o f one tycoon, " O i l is almost l ike money." 2

The second theme is that o f o i l as a c o m m o d i t y int imately intertwined w i t h national strategies and global pol i t ics and power. The battlefields o f W o r l d War I established the importance o f petroleum as an element o f national power when the internal combustion machine overtook the horse and the coal-powered loco­motive. Petroleum was central to the course and outcome o f W o r l d War I I i n both the Far East and Europe. The Japanese attacked Pearl Harbor to protect their flank as they grabbed for the petroleum resources o f the East Indies. A m o n g Hit ler 's most important strategic objectives i n the invasion o f the Soviet U n i o n was the capture o f the o i l fields in the Caucasus. But America 's predominance i n o i l proved decisive, and by the end o f the war German and Japanese fuel tanks were empty. I n the C o l d War years, the battle for control o f o i l between interna­tional companies and developing countries was a major part o f the great drama o f decolonization and emergent national ism. The Suez Crisis o f 1956, w h i c h truly marked the end o f the road for the o l d European imper ia l powers, was as m u c h about o i l as about anything else. " O i l power" loomed very large i n the 1970s, catapulting states heretofore peripheral to international polit ics into posi­tions o f great wealth and influence, and creating a deep crisis o f confidence i n the industrial nations that had based their economic g r o w t h upon o i l . O i l was at the heart o f the first p o s t - C o l d War cr i s i s—Iraq 's 1990 invasion o f K u w a i t . A n d o i l figured much in the reconfiguration o f international relations that came w i t h the dramatic petroleum price increase, 2 0 0 4 - 2 0 0 8 , the return o f resource p o l i ­tics, and the new importance of China and India in the w o r l d market.

Yet o i l has also proved that it can be fool's gold . The Shah o f Iran was granted his most fervent wish , o i l wealth, and it destroyed h i m . O i l built up Mex­ico's economy, only to undermine i t . The Soviet U n i o n — t h e world 's second-largest exporter—squandered its enormous o i l earnings i n the 1970s and 1980s in a m i l i t a r y bui ldup and a series o f useless and, i n some cases, disastrous inter­national adventures. A n d the U n i t e d States, once the wor ld 's largest producer and st i l l its largest consumer, must import between 55 and 60 percent o f its o i l supply, weakening its overall strategic posit ion and adding greatly to an already burdensome trade d e f i c i t — a precarious posit ion for a great power.

W i t h the end o f the C o l d War, a new w o r l d order took shape. Economic compet i t ion, regional struggles, and ethnic rel igious rivalries replaced tradi ­t ional ideology as the focus o f in ternat ional—and n a t i o n a l — c o n f l i c t , aided and abetted by the prol i ferat ion o f modern weaponry. A new k i n d o f i d e o l o g y — religious extremism and j i h a d i s m — c a m e to the fore. Yet o i l remained the strate­gic c o m m o d i t y , cr i t ical to national strategies and international polit ics.

A t h i r d theme in the history o f o i l i l luminates how ours has become a " H y ­drocarbon Society" and we, i n the language o f anthropologists, "Hydrocarbon M a n . " I n its first decades, the o i l business provided an industr ia l iz ing w o r l d w i t h a product called by the made-up name o f "kerosene" and k n o w n as the "new l ight ," w h i c h pushed back the night and extended the w o r k i n g day. A t the end o f the nineteenth century, John D. Rockefeller had become the richest man i n the United States, most ly f r o m the sale o f kerosene. Gasoline was then only an al­most useless by-product, w h i c h sometimes managed to be sold for as m u c h as two cents a gal lon, and, when it could not be sold at a l l , was run out into rivers at night. But just as the invention o f the incandescent l ight bulb seemed to signal the obsolescence o f the o i l industry, a new era opened w i t h the development o f the internal combustion engine powered by gasoline. The o i l industry had a new market, and a new c iv i l i zat ion was born.

I n the twentieth century, o i l , supplemented by natural gas, toppled K i n g Coal f r o m his throne as the power source for the industrial w o r l d . O i l also be­came the basis o f the great postwar suburbanization movement that transformed both the contemporary landscape and our modern way o f l i fe . I n the twenty-f irst century, we are so dependent on o i l , and o i l is so embedded i n our dai ly doings, that we hardly stop to comprehend its pervasive significance. I t is o i l that makes possible where w e l ive , how we l ive , how we commute to w o r k , how we t r a v e l — even where we conduct our courtships. I t is the l i feb lood o f suburban c o m m u n i ­ties. O i l (and natural gas) are the essential components in the ferti l izer on w h i c h w o r l d agriculture depends; o i l makes i t possible to transport food to the total ly non-self-sufficient megacities o f the w o r l d . O i l also provides the plastics and chemicals that are the bricks and mortar o f contemporary c iv i l i za t ion , a c iv i l i za­t ion that w o u l d collapse i f the wor ld ' s o i l wells suddenly went dry.

For most o f the twentieth century, g r o w i n g reliance on petroleum was a l ­most universally celebrated as a good, a symbol o f human progress. B u t no longer i n the twenty-f irst century. W i t h the rise o f the environmental movement, the basic tenets o f industrial society are being challenged; and the o i l industry i n al l its dimensions is at the top o f the l ist to be scrutinized, cr i t ic ized, and op­posed. Efforts are mount ing around the w o r l d to curtai l the combustion o f al l

fossil f u e l s — o i l , coal, and natural gas—because of (he resultant smog and air pol lut ion, acid rain, and ozone depletion, and because o f the specter o f c l imate change. The last has now become a central focus o f national policies and inter­national negotiation. O i l , so central a feature o f the w o r l d as we k n o w i t , is now accused o f fue l ing environmental degradation; and the o i l industry, proud o f its technological prowess and its contr ibut ion to shaping the modern w o r l d , finds i t ­self on the defensive, charged w i t h being a threat to present and future genera­tions. This puts a new imperative on technological innovations to mitigate the environmental challenges.

Yet Hydrocarbon M a n shows l i t t le inc l inat ion to give up his cars, his subur­ban home, and what he takes to be not only the conveniences but the essentials o f his way o f l i fe . The peoples o f the developing w o r l d give no indicat ion that they want to deny themselves the gains o f an oi l-powered economy. A n y n o t i o n o f scaling back the wor ld ' s consumption o f o i l w i l l be influenced by the populat ion growth a h e a d — w i t h more and more o f the wor ld ' s people demanding the " r i g h t " to the benefits that come f r o m consumption. Total w o r l d o i l consumption grew almost 30 percent between 1990 and 2 0 0 8 — f r o m 67 m i l l i o n to 86 m i l l i o n barrels per day. O i l demand i n India more than doubled and i n China, more than tr ipled. Thus, the stage has been set for a great balancing between, on the one hand, environmental protection and reduction o f carbon and, on the other, eco­nomic growth , the benefits o f Hydrocarbon Society, and energy security. Today, this is evident i n the restarting o f the race between the internal combustion en­gine and the electric car, a compet i t ion that was supposedly decided at the begin­ning o f the twentieth century.

These, then, are the three themes that animate the story that unfolds i n these pages. The canvas is g lobal . The story is a chronicle o f epic events that have touched a l l our lives. I t concerns itself both w i t h the powerfu l , impersonal forces o f economics and technology and w i t h the strategies and cunning o f business­men and pol i t ic ians. Populating its pages are the tycoons and entrepreneurs— Rockefeller, o f course, but also H e n r i Deterding, Calouste Gulbenkian, J. Paul Getty, A r m a n d Hammer, T. Boone Pickens, and many others. Yet no less i m p o r ­tant to the story are the likes o f C h u r c h i l l , A d o l f Hi t ler , Joseph Stalin, Ibn Saud, M o h a m m e d Mossadegh, D w i g h t Eisenhower, A n t h o n y Eden, Henry Kissinger, George H . W. Bush and his son George W. Bush, and Saddam Hussein.

Yet for a l l its conflict and complexity , there has often been a "oneness" to the story o f o i l , a contemporary feel even to events that happened long ago and, simultaneously, profound echoes o f the past i n recent and current events. A t one and the same t i m e , this is a story o f i n d i v i d u a l people, o f powerful economic forces, o f technological change, o f pol i t i ca l struggles, o f international conflict and, indeed, o f epic change. I t is the author's hope that this exploration o f the economic, social, po l i t i ca l , and strategic consequences o f our wor ld 's reliance on o i l w i l l i l luminate the past, enable us better to understand the present, and help to anticipate the future.