The history of oil: From Seven Sisters to OPEC (1946-1974)

Mr Robert Garrott, cashier at Hopfields Service station on the O
Petrol shortage in the 1973 oil shock.

America’s growing involvement in Middle East affairs after the Second World War came to a head with the establishment of Israel in 1948, despite the distaste of the US’s new oil partner Saudi Arabia. President Harry Truman fought against his own administration and the oil companies to recognise the new country as American policy in the region was mired in contradiction. Meanwhile the British overthrow of Reza Shah in Iran (as Persia renamed itself in 1935), set in motion more nationalism and hatred of BP’s dominance of their economy and their refusal to accept the “fifty fifty” arrangements of other world oil producers.

Veteran Iranian politician Mohammed Mossadegh led the opposition to foreign manoeuvring and in 1951 his parliament approved his proposal to nationalise BP’s assets. Labour prime minister Clement Attlee labelled the Iranians “thieves” and “paranoics” though they were doing exactly what Attlee was doing in Britain: nationalising major institutions. Britain led a world oil blockade and Iran lurched towards economic collapse. Britain’s position hardened when Churchill returned as prime minister in 1951. His hopes of a coup d’etat were raised after Republican Dwight Eisenhower won the US presidential election a year later and Iran was seen as a potential Soviet pawn, threatening the oil reserves of the Persian Gulf. The successful coup was engineered in 1953 but Britain did not get the result it wanted. An international consortium replaced BP’s monopoly with British and American interests getting 40% each. The oil companies were at the forefront of American foreign policy and strategic objectives.

The golden age of oil was between the Marshall Plan of 1948 and the first oil shock of 1973, with world consumption growing sixfold and the number of cars growing fivefold. Europe and Japan led the way with car production, while aeroplanes became mass transportation. Petrochemical plants had inexhaustible demand for oil to make plastics and the Gulf countries rose to the challenge. The combined production of Saudi Arabia, Iran, Kuwait, Iraq and the Emirates went from 1.7 mbd in 1950 to 13.3 mbd in 1970, skyrocketing to 20.5 mbd by 1973. Cheap oil underpinned the postwar economic miracle, with Europe tapping into growing Soviet reserves whenever the Seven Sisters became too demanding.

Other countries looked at how they could best use their oil. In September 1960 ministers from Venezuela, Saudi Arabia, Iran, Iraq and Kuwait met in Baghdad to form the Organisation of Petroleum Exporting Countries. OPEC would be an instrument for collective bargaining and self-defence. Change was coming, led by an Iraqi coup in 1958 that swept away the pro-British administration. In 1961 Iraq nationalised its oil industry as it looked to the pan-Arab vision of Egypt’s Gamal Abdel Nasser. The days of “fifty fifty” were numbered.

Nasser used oil as a weapon to end western domination. In his Philosophy of a Revolution, Nasser called oil one of the three fundamental pillars of Arab power (with unity and socialism). From 1955 Arab nationalist strikes hit oilfields across the region and fearful America decided not to finance Nasser’s Aswan Dam. In retaliation Nasser nationalised the Suez Canal, which provided half of Europe’s oil needs (1.3 mbd) and a lucrative income to owners Britain and France.

Britain and France secretly planned to reclaim the canal, with Israel set to gain the Sinai Peninsula. The plan fell apart when the US refused to support it and the USSR threatened to intervene. It was Nasser’s biggest triumph and was followed by ructions in the short-lived merger with Syria and the more profound rise of the Baathists in Iraq. Saudi king Faud considered an alliance with the seemingly unstoppable Nasser, despite Egyptian propaganda portraying the Saudis as corrupt servants of the Americans. Washington looked at ways to reduce dependence on Arab oil but were helped by Nasser’s overreach in a long and bloody war in Yemen and a surprise attack by Israel in 1967 which routed Egyptian, Syrian and Jordanian forces and set today’s Middle Eastern borders.

In response, Arab oil producers placed an embargo on the US, Europe and Japan. Despite supplying 80% of Europe and Japan’s oil, the embargo was unsuccessful. The US ramped up domestic production to meet the shortfall as did Iran and Venezuela and the embargo ended in a damp squib after a couple of months. Nasser died of a heart attack in 1970 and his pan-Arab mantle passed to new Libyan dictator Muhammad al-Qaddafi. Qaddafi immediately overturned the “fifty fifty” formula to a new 55-45 arrangement in favour of Libya and a 30% increase in its posted price for oil. It set the scene for a world oil shock in the 1970s.

Decades of overproduction and low prices came to a shattering end in a perfect storm of adverse circumstances. The world was reliant on Middle East oil with the US at full capacity by 1971 (ending the Texas Railroad Commission’s role as swing producer). The Nixon administration unlinked the dollar from the gold standard to devalue the currency while trying to introduce price controls to tame inflation caused by financing the Vietnam war without raising taxes. The artificially low oil price discouraged further investment.

A freezing 1969-70 US winter brought energy shortages while Iran and Algeria emulated Libya’s oil pricing arrangements. Despite rising prices, western demand went from 46 mbd in 1970 to 58 mbd in 1973. Nasser’s successor Anwar el-Sadat received Saudi blessing for his 1973 attack on Israel, backed with a huge OPEC price rise from $2.90 to $5.11 a barrel, with production cuts for each month Israel failed to withdraw from its 1967 territories. While the Saudi embargo was a failure and the Israelis won the Yom Kippur war, the perception of a crisis sent prices wild, rising tenfold since 1970. By June 1974 Saudi Arabia acquired 60 percent of Aramco as the Seven Sisters era came to an end. However the fundamental oligopolistic command of the oil market remained unchanged. The power the Seven Sisters inherited from John D. Rockefeller was now in the hands of OPEC.

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