Book Review: The Prize

The Prize is a history of the 20th century disguised as a book about oil.

Spanning nearly 1,000 pages, this tome took Yergin a decade to write. Beginning at the start of the first oil boom in western Pennsylvania, The Prize follows the growth of an industry and the increasing dependence of modern civilization on a single strategic commodity.

A [...] theme in the history of oil illuminates how ours has become a “Hydrocarbon Society” and we, in the language of anthropologists, “Hydrocarbon Man.”

It's filled with facts and figures that would make an accountant's head swim. Impressively well researched, Yergin routinely dives deep into specific prices, dates, and minor figures in the oil industry. It's filled with useful quotes and anecdotes about the oft-messy reality of corporate governance and nation building.

It's not an easy read and the length provides a significant opportunity cost. But the depth of context it provides about the grand sweep of history driven by the availability and distribution of oil is worth the investment.

A few points stand out:

• Markets, even ones with the capacity to become extremely large, still take time and effort to develop. The history of the oil industry is filled with an underestimation of demand. Often, the increased demand came from the invention of new products, like kerosene for lamps, gasoline for cars, and diesel for industrial uses.
• You can't fight supply and demand. Many governments have failed to learn this lesson, usually with painful consequences.
• Supply shocks, even temporary ones, can have long-term effects on the psychology of a market, especially those in their formative years.
• War usually drives step function changes in the adoption of new transportation technology.
• Oil wealth can prevent the development of robust and functional governments due to the surplus profit it generates. You can operate a badly broken regime for a long-time if the cost of capital is 0.

Selected Passages

Below are passages that I found particularly insightful:

“Oh Townsend, oil coming out of the ground, pumping oil out of the earth as you pump water? Nonsense! You’re crazy.” But the investors were intent on going ahead. They were convinced of the need and the opportunity.

It had taken Bissell six years to get to this point, and the ups and downs of his journey gave him reason to reflect. “I am quite well, but very much worn down. We have had a hard time of it, very. Our prospects are most brilliant that’s certain . . . . We ought to make an immense fortune.”

“The oil and land excitement in this section has already become a sort of epidemic,” wrote a local editor in 1865. “It embraces all classes and ages and conditions of men. They neither talk, nor look, nor act as they did six months ago. Land, leases, contracts, refusals, deeds, agreements, interests, and all that sort of talk is all they can comprehend. Strange faces meet us at every turn, and half our inhabitants can be more readily found in New York or Philadelphia than at home . . . . The court is at a standstill; the bar is demoralized; the social circle is broken; the sanctuary is forsaken; and all our habits, and notions, and associations for half a century are turned topsy-turvy in the headlong rush for riches. Some poor men become rich; some rich men become richer; some poor men and some rich men lose all they invest. So we go.”

But Rockefeller had absolutely no doubts about what he was doing. “It is easy to write newspaper articles but we have other business,” he told his wife during the Oil War. “We will do right and not be nervous or troubled by what the papers say.” At another point in the battle, in a letter to his wife he set down one of his lasting principles: “It is not the business of the public to change our private contracts.”

Reading his own premature obituaries, Alfred was distressed to find himself condemned as a munitions maker, the “dynamite king,” a merchant of death who had made a huge fortune by finding new ways to maim and kill. He brooded over these obituaries and their condemnations, and eventually rewrote his will, leaving his money for the establishment of the prizes that would perpetuate his name in a way that would seem to honor the best in human endeavor.

Then, one of the most eminent firms of solicitors in the City of London, Russell and Arnholz, launched a strong lobbying campaign against granting permission to Samuel, including a lengthy correspondence with the Foreign Secretary himself. The solicitors were very concerned, ever so concerned, about safety in the canal. What might happen to ships, what might happen on hot days, what might happen during sandstorms? There were so many things to worry about, one hardly knew where to begin. They refused to reveal who their client was, even when the Foreign Secretary inquired what British interest they were representing. But there was hardly any question that the client was Standard Oil. Soon, Russell and Arnholz was hastily alerting the British government to a new danger: If British merchants were permitted to put tankers into the canal, Russian shipping concerns would surely also win the same right.

Mark had already made progress in the Far East. He acquired an excellent site in Hong Kong, and he hurried to buy a site in Shanghai before the Chinese New Year since “it can be got cheaper because the Chinese have to pay all their debts contracted during the past year & they are requiring money.”

In the quickness and ingenuity of his response to the crisis, Marcus proved his entrepreneurial genius. He sent out a chartered ship, filled with tinplate, to the Far East, and simply instructed his partners in Asia to begin manufacturing tin receptacles for the kerosene. No matter that no one knew how to do so; no matter that no one had the facilities. Marcus persuaded them they could do it. “How do you stick on the wire handles?” the agent in Singapore wrote to Samuel’s representative in Japan. Instructions were sent. “What color do you suggest?” cabled the agent in Shanghai. Mark gave the answer—“Red!” All the trading houses in the Far East quickly established local factories to make the tin containers, and throughout Asia, Samuel’s bright and shiny red receptacles, fresh from the factory, were soon competing with Standard’s blue ones, battered and chipped after the long voyage halfway around the world. Perhaps some customers were buying Samuel’s kerosene more for the useful red can than for its contents. In any case, red roofs and red birdcages—as well as red opium cups, hibachis, tea strainers, and egg beaters—began to replace the blue.

Moreover, as a result of the efforts of these powerful sponsors, the Dutch king himself, William III, was willing to grant the use of the title “Royal” in the name of this speculative enterprise, a license normally reserved for established, proven companies. That imprimatur was to have lasting value.

Still, Royal Dutch did not feel secure. Its directors and management knew how Standard Oil had operated in America—buying up shares in offending competitors quietly, and then putting them out of action. To forestall such a stratagem, the directors of Royal Dutch created a special class of preference stock, the holders of which controlled the board. To make acquisition even more difficult, admission to this exclusive rank was by invitation only.

Still, there were doubts about the ruggedness and reliability of the car. Those questions were laid to rest, once and for all, by the San Francisco earthquake of 1906. Two hundred private cars were pressed into service for rescue and relief, fueled by fifteen thousand gallons of gasoline donated by Standard Oil. “I was skeptical about the automobile previous to the disaster,” said the acting chief of the San Francisco fire department, who commanded three cars for round-the-clock work, “but now give it my hearty endorsement.”

William knew he was caught up in a fever. “For a great many” of the oil men, he was to recall, “the oil business was more like an epic card game, in which the excitement was worth more than great stacks of chips . . . . None of us was disposed to stop, take his money out of the wells, and go home. Each well, whether successful or unsuccessful, provided the stimulus to drill another.”

Further protection was necessary in response to continuing pressures and in order to put the company on a firmer legal foundation. They found the solution to their problems in New Jersey. That state had revised its laws to permit the establishment of holding companies—corporations that could own stock in other corporations. It was a decisive break with traditional business law in the United States. New Jersey also sought to make its business environment hospitable to this new form of combination.

It was nothing less than devastating. Samuel’s old friend and partner was resigning from the board of Shell. It was not just the press of activities consequent on his having become deputy managing director of Asiatic. Lane launched into a bitter critique of the way Marcus Samuel ran his company. “You are, and have always been, too much occupied to be at the head of such a business,” he wrote. “There seems only one idea: sink capital, create a great bluster, and trust to providence. Such a happy-go-lucky frame of mind in business I have never seen before . . . . Business like this cannot be conducted by an occasional glance in one’s spare time, or by some brilliant coup from time to time. It is steady, treadmill work.” Unless “some very radical change is made,” Lane prophesied, “the bubble will burst” and then nothing “will be sufficient to save the company.”

“I have spent a fortnight upon Oil Company business, mediating between Englishmen who cannot always say what they mean and Persians who do not always mean what they say. The English idea of an agreement is a document in English which will stand attack by lawyers in a Court of Justice: the Persian idea is a declaration of general intentions on both sides, with a substantial sum in cash, annually or in a lump sum.”

Fisher threw himself into the job, working, he said, as hard as he had ever worked. His urgency increased when he learned that the German Navy was going forward with oil propulsion. “They have killed 15 men in experiments with oil engines and we have not killed one! And a d——d fool of an English politician told me the other day that he thinks this creditable to us.”

Indeed, years before, Marcus Samuel had actually asked the government to place a director on the board of Shell. And while Churchill had taken a dislike to Marcus Samuel, who had been Lord Mayor of London, he had developed a most favorable opinion of Deterding, who was, after all, the foreigner. Here, in the matter of Deterding, Churchill was following Admiral Fisher’s lead. Fisher wrote to Churchill that Deterding, “is Napoleon and Cromwell rolled into one. He is the greatest man I ever met . . . Napoleonic in his audacity: Cromwellian in his thoroughness! . . . Placate him, don’t threaten him! Make a contract with him for his fleet of 64 oil tankers in case of war. Don’t abuse the Shell Company . . . . [Deterding] has a son at Rugby or Eton and has bought a big property in Norfolk and [is] building a castle! Bind him to the land of his adoption!” Churchill did exactly that. Despite the new agreement, Anglo-Persian was not to be the sole supplier to the Admiralty, and in the spring of 1914, he took over personally in negotiating with Deterding on Shell’s fuel oil contract with the Navy. Deterding was responsive to Churchill’s attention. “I have just received a most patriotic letter from Deterding,” Fisher wrote to Churchill on July 31, 1914, “to say he means you shan’t want for oil or tankers in case of war— Good Old Deterding!"

Gallieni ordered that every one of the three thousand available taxis be sought out and commandeered. Policemen and soldiers immediately began to stop cabs, demanded that they disgorge their paying passengers on the spot, and directed them to drive to the Invalides. “How will we be paid?” one driver asked the lieutenant who had flagged him down. “By the meter or on a flat rate?” “By the meter,” the lieutenant said. “All right, let’s go,” replied the driver, making sure to put down his flag before starting off.

The impact of the automobile revolution was far greater on the United States than anywhere else. By 1929, 78 percent of the world’s autos were in America. In that year, there were five people for each motor vehicle in the United States, compared to 30 people per vehicle in England and 33 in France, 102 people per vehicle in Germany, 702 in Japan, and 6,130 people per vehicle in the Soviet Union. America was, indubitably, the leading land of gasoline.

Gas stations were also the source for what one expert described as “uniquely American contributions to the development and growth of cartography”—the oil company road map. The first road map specifically directed toward the automobile was probably the one that appeared in the Chicago Times Herald in 1895 for a fifty-four-mile race that the newspaper was sponsoring. But it was only in 1914, when Gulf was opening its first gasoline station in Pittsburgh, that a local advertising man suggested handing out free maps of the region at the facility. The idea caught on rapidly as Americans took to the road in the 1920s, and the maps soon became staples.

More than a bit eccentric, he was a prolific writer of success epigrams: “Never give orders—give instructions . . . . Make a game out of your work . . . . The greatest dividend in human life is happiness.”

The “Pearson touch”—his knack for success on a grand scale—was much admired. But he had few illusions about how it worked. To his daughter, he wrote: “Dame Fortune is very elusive; the only way is to sketch a fortune which you think you can realize and then go for it baldheaded.” To his son, he added, “Do not hesitate for one second to be in opposition to your colleagues or in overriding their decisions. No business can be a permanent success unless its head is an autocrat—of course the more disguised by the silken glove the better.”

Yet, once other American companies began to purchase more Russian oil and used it to compete directly with Jersey, opposition within the company to doing business with the Russians gave way. A joint Jersey-Shell buying organization was finally established in November 1924, and the two companies began exploring the options for doing business with the Soviets. Privately, Teagle was bitter about how the whole matter had been handled. It was the classic business problem of not enough time, of the day never being long enough for long-term thinking. “As I look back over what we have done during the past six or eight months, I am rather impressed with the fact that a matter so important as this Russian purchase situation should have been handled by us without really giving the subject the consideration which its importance justified,” he wrote to Riedemann. “It is certainly to be regretted that we have so many things to do and our business day is so fully occupied that somehow or other we seem to make mistakes which could have been avoided if we had really spent the time necessary to think the matter through to a logical conclusion.”

In time, he became professor of mining at Birmingham University, where he had shocked the academic establishment by introducing a new course in “petroleum engineering,” so novel that an academic opponent denounced it as “flagrantly advertised” and “a blind alley” with “a freak title.”

Petroleum had been discovered on the Arab side of the Gulf. Though only modest in production, the Bahrain discovery was a momentous event, with far wider implications. The established companies were quite shaken by the news. Over the course of a decade, Major Holmes, with his obsession about oil, had become a figure of condescension and ridicule. But now his instincts, and his vision, had been vindicated, at least to some small degree. Was he to be proved right on a much grander scale? After all, the tiny island of Bahrain was only twenty miles away from the mainland of the Arabian Peninsula where, to all outward appearances, the geology was exactly the same.

The only remaining problem was how to obtain that much gold. Because America had just gone off the gold standard, Socal’s efforts to dispatch the gold directly from the United States were turned down by Assistant Secretary of the Treasury Dean Acheson. But finally, the Guaranty Trust’s London office, acting on behalf of Socal, obtained thirty-five thousand gold sovereigns from the Royal Mint, and they were transported to Saudi Arabia in seven boxes on a ship belonging to the P&O line. Care had been taken that all the coins bore the likeness of a male English monarch, and not Queen Victoria, which, it was feared, would have devalued them in the male-dominated society of Saudi Arabia.

The second theme is that of oil as a commodity intimately intertwined with national strategies and global politics and power.

The Japanese attacked Pearl Harbor to protect their flank as they grabbed for the petroleum resources of the East Indies.

Senior American officials had fully expected a Japanese attack, and imminently. But they expected it to be in Southeast Asia. Virtually no one, whether in Washington or Hawaii, seriously considered, or even comprehended, that Japan could—or would—launch a surprise assault against the American fleet in its home base. They believed, as General Marshall had told President Roosevelt in May of 1941, that the island of Oahu, where Pearl Harbor was located, was “the strongest fortress in the world.” Most of the American officials seemed to have forgotten—or never knew—that Japan’s great victory in the Russo-Japanese War had begun with a surprise attack on the Russian fleet at Port Arthur.

But they also served a very practical purpose for a country extremely short of oil, planes, and skilled pilots. The Japanese had methodically calculated that, whereas eight bombers and sixteen fighters were required to sink an American aircraft carrier or battleship, the same effect could be achieved by one to three suicide planes. Not only was the pilot sure to cause more damage if he crashed his plane, not only would his commitment and willingness to die unnerve an enemy who could not comprehend the mentality of such an act, but—since he was not going to return—his fuel requirement was cut in half.

In Britain itself, practical problems of supply had to be quickly dealt with. Rationing was imposed almost at once. The “basic ration” for motorists was first set at eighteen hundred miles a year. It was progressively tightened, as military needs increased and stocks declined, and then it was eliminated altogether. The authorities wanted to see the family car up on blocks in the garage, and not on the road. As a result, there was a great boom in bicycling.

Construction finally began in August 1942, and what followed was one of the extraordinary feats of engineering in World War II. Nothing like it had ever been done before. The oil transportation and construction industries were mobilized to build a pipeline that would carry five times as much oil as a conventional one, a conduit that would stretch halfway across the country and require a plethora of newly designed equipment. Within a year and a half, by the end of 1943, Big Inch, 1,254 miles long, was carrying one-half of all the crude oil moving to the East Coast. Meanwhile, Little Inch—an even longer line, 1,475 miles—was built between April 1943 and March 1944 to carry gasoline and other refined products from the Southwest to the East Coast. At the beginning of 1942, just 4 percent of total supplies had arrived on the East Coast by pipeline; by the end of 1944, with Big Inch and Little Inch both completed and in operation, pipelines were carrying 42 percent of all oil.

This unexpected shortfall of energy drove home the extent to which Britain had been impoverished by the war. Its imperial role had become an insupportable burden. During those few bleak, freezing, and pivotal weeks of February 1947, the Labour government of Clement Attlee referred its intractable Palestine problem to the United Nations and announced that it would grant independence to India. And on February 21 it told the United States that it could no longer afford to prop up the Greek economy. It asked that the United States take over that responsibility and, by implication, broader responsibilities throughout the Near and Middle East. Still, the situation worsened. Throughout Europe, the economic disarray brought on by the weather and the energy crisis in the winter of 1947 accentuated the shortfall of U.S. dollars, which constrained Europe’s ability to import vital goods and paralyzed its economy.11

Another obstacle was the stubbornness of the countries the pipeline had to cross, particularly Syria, all of which were demanding what seemed to be exorbitant transit fees. It was also the time when the partition of Palestine and the establishment of the state of Israel were aggravating American relations with the Arab countries. But the emergence of a Jewish state, along with the American recognition that followed, threatened more than transit rights for the pipeline. Ibn Saud was as outspoken and adamant against Zionism and Israel as any Arab leader. He said that Jews had been the enemies of Arabs since the seventh century. American support of a Jewish state, he told Truman, would be a death blow to American interests in the Arab world, and should a Jewish state come into existence, the Arabs “will lay siege to it until it dies of famine.”

In October 1950 President Harry Truman wrote a letter to King Ibn Saud. “I wish to renew to Your Majesty the assurances which have been made to you several times in the past, that the United States is interested in the preservation of the independence and territorial integrity of Saudi Arabia. No threat to your Kingdom could occur which would not be a matter of immediate concern to the United States.” That sounded very much like a guarantee.

“Practical men, who believe themselves to be quite exempt from any intellectual influences,” John Maynard Keynes once said, “are usually the slaves of some defunct economist.”

The Neutral Zone was the two thousand or so square miles of barren desert that had been carved out by the British in 1922 in the course of drawing a border between Kuwait and Saudi Arabia. In order to accommodate the Bedouins, who wandered back and forth between Kuwait and Saudi Arabia and for whom nationality was a hazy concept, it was agreed that the two countries would share sovereignty over the area. If every system has within it the seeds of its own destruction, then it was in the Neutral Zone—and in the way its oil rights were parceled out—that the erosion began that would eventually lead to the end of the postwar petroleum order.

The Saudi-Aramco fifty-fifty agreement of December 1950 was, with justification, described as a “revolution” by one historian of the decline and fall of the British empire—“an economic and political watershed no less significant for the Middle East than the transfer of power for India and Pakistan.” As for the American government, it satisfied the urgent and critical need to increase the income to Saudi Arabia and other governments in order to maintain the postwar petroleum order and to help keep those “friendly” regimes in power. The stakes and risks were enormous. At a time when every dollar of Truman Doctrine and Marshall Plan aid was a battle in Congress, an arrangement that enabled Middle Eastern governments to tax the profits of the oil companies was more efficient than trying to get additional foreign aid out of the Congress. Moreover, the fifty-fifty principle had the right psychological feel. Both politically and symbolically, it did the job that needed to be done.

In retrospect, some would see the public threat to use force in the first months of the crisis, and then not doing so, as the real beginning of the end of Britain’s credibility and position in the Middle East.

Two contradictory, even schizophrenic, strands of public policy toward the major oil companies have appeared and reappeared in the United States. On occasion, Washington would champion the companies and their expansion in order to promote America’s political and economic interests, protect its strategic objectives, and enhance the nation’s well-being. At other times, these same companies were subjected to populist assaults against “big oil” for their allegedly greedy, monopolistic ways and indeed for being arrogant and secretive. Never before, however, had those two policies come together in such sharp and potentially paralyzing collision, with an outcome that could have momentous economic and political consequences.

In 1949, the Federal Trade Commission used its power of subpoena to obtain company documents, and in due course it produced the most extensive, detailed historical analysis of the international relationships among the companies that had ever seen the light of day. It was a landmark study, used by students of the industry down to the present day. It also had a decidedly pronounced point of view, as evidenced by the title—The International Petroleum Cartel.

The establishment of the consortium marked one of the great turning points for the oil industry. The concept of the concession owned by foreigners was for the first time replaced by negotiation and mutual agreement. The Mexican experience had been a dictated expropriation. But now, in Iran, all parties acknowledged, again for the first time, that the oil assets belonged, in principle, to Iran. Under this new deal, Iran’s National Iranian Oil Company would own the country’s oil resources and facilities. But, in practice, it could not tell the consortium what to do. The consortium would, as a contract agent, manage the Iranian industry and buy all the output, with each company in the consortium disposing of its share of the oil through its own independent marketing system.

Though long discussed, such a waterway was thought to be impossible until de Lesseps floated a private concern, the Suez Canal Company, which won a concession from Egypt to build a canal and began actual construction in 1859. A decade later, in 1869, the canal was finally completed. The British were quick to recognize a good thing when they saw it, especially when it substantially reduced the travel time to India, the jewel of the empire, and they rued their lack of a direct stake in “our highway to India,” as the Prince of Wales dubbed the waterway. Fortunately, in 1875, Egypt’s 44 percent ownership in the canal came on the market, owing to the insolvency of the Khedive, the country’s ruler. With lightning speed and the timely financial assistance of the English branch of the Rothschilds, Britain’s Prime Minister, Benjamin Disraeli, engineered the acquisition of those shares. The Suez Canal Company became an Anglo-French concern, and Disraeli capped his efforts with a pithy and immortal note to Queen Victoria: “You have it, Madam.”1

To all of them, Nasser was a resurrected Mussolini, even a nascent Hitler. Just a decade after the Axis defeat, they thought, another conspirator turned demagogue dictator had emerged to strut on the world stage and inflame the masses, promoting violence and war in pursuit of vast ambitions. The central experience of the Western leaders had been the two world wars. For Eden, the failure of diplomacy to head off tragedy had begun in 1914. “We are all marked to some extent by the stamp of our generation, mine is that of the assassination in Sarajevo and all that flowed from it,” he later wrote.

Suez was a watershed for Britain. It was to cause as severe a rupture in British culture as in that nation’s politics and its international position. Yet Suez did not presage Britain’s decline; rather, it made obvious what had already come to pass. Britain no longer belonged to the top echelon of world powers. The bleeding of two world wars and the divisions at home had heavily drained not only its exchequer, but also its confidence and political will. Eden had no doubt that he had done the right thing at Suez. Years later, the Times of London said of Anthony Eden, “He was the last prime minister to believe Britain was a great power and the first to confront a crisis which proved she was not.” It was as much an epitaph for an empire and a state of mind as for a man.19

Mattei himself became a popular hero, the most visible man in the country. He embodied great visions for postwar Italy: antifascism, the resurrection and rebuilding of the nation, and the emergence of the “new man” who had made it himself, without the old boy network.

Throughout the Middle East, nationalism was building to a crescendo, and Nasser was its driving force. Suez had been a great victory for him, proving that a Middle Eastern country could triumph not only against “imperialistic” companies but also against the might of Western governments.

For the producing countries, oil was a national heritage, the benefits of which belonged to future generations as well as to the present. Neither the resource nor the wealth that flowed from it should be wasted. Instead, the earnings should be used to develop the country more widely. Sovereign governments, rather than foreign corporations, should make the basic decisions about the production and disposition of their petroleum. Human nature should not be allowed to squander the potential of this precious resource.

The inexorable flow of oil transformed anything in its path. Nowhere was that transformation more dramatic than in the American landscape. The abundance of oil begat the proliferation of the automobile, which begat a completely new way of life. This was indeed the era of Hydrocarbon Man. The bands of public transportation, primarily rail, which had bound Americans to the relatively high-density central city, snapped in the face of the automotive onslaught, and a great wave of suburbanization spread across the land.

“Over and over, the lesson in this business is that if you can’t take disappointment, you ought not to be in this business, since 90 percent of what you drill are failures. You really have to take defeat regularly.” Still, the other 10 percent would prove very good to Anderson, not only making him very wealthy but also, among other things, enabling him to end up the largest individual landowner in the United States.

As oil demand continued to surge in the first months of 1973, independent refiners were having trouble acquiring supplies, and a gasoline shortage was looming for the summer driving season. In April, Nixon delivered the first ever Presidential address on energy, in which he made a far-reaching announcement: He was abolishing the quota system. Domestic production, even with the protection of quotas, could no longer keep up with America’s voracious appetite.

With the timely publication of Small is Beautiful in 1973, he had found, after decades of anonymity, his metier as spokesman for those who challenged the tenets of unbridled growth and the “bigger is better” philosophy that had dominated the 1950s and 1960s. Now, in his later years, the erstwhile coal champion and energy Cassandra had become a man for his time. The title of his book and its interpretation—“less is more”—became catch phrases of the environmental movement following the embargo, and Schumacher was lionized around the world.

In the United States, the shortfall struck at fundamental beliefs in the endless abundance of resources, convictions so deeply rooted in the American character and experience that a large part of the public did not even know, up until October 1973, that the United States imported any oil at all. But, inexorably, in a matter of months, American motorists saw retail gasoline prices climb by 40 percent—and for reasons that they did not understand. No other price change had such visible, immediate, and visceral effects as that of gasoline.

Yet no other effort was more concentrated nor more immediately significant than the concerted government-business drive to promote energy conservation in industry and, in particular, to reduce oil use. The campaign’s success far exceeded what was anticipated, and was of key importance to the renewed international competitiveness of Japanese business. The response, in fact, set the standard for the rest of the industrial world. “Both workers and business leaders were very apprehensive after 1973,” recalled Naohiro Amaya, then a ViceMinister of MITI. “They feared for the survival of their companies, and so everybody worked together.” In 1971, MITI had conducted a study on the need to move from “energy-intensive” to “knowledge-intensive” industry, based upon the premise that Japanese oil demand was growing so fast that it would put undue pressure on the world oil market.

“After 1973 and nationalization, you had to go hunt your rabbits in a different field,” recalled an Exxon executive, “and we went to places where we could still obtain equity interests, ownership, in oil.”

One peculiar result of the price shock of 1973 was the rise of a new line of work—oil price forecasting. Before 1973, it had not really been necessary. Price changes had been measured in cents, not dollars, and for many years prices were more-or-less flat. After 1973, however, forecasting blossomed. After all, oil price movements were now decisive not only for the energy industries, but also for consumers, for a multitude of businesses from airlines to banks to agricultural cooperatives, for national governments, and for the international economy. Everybody now seemed to be in the forecasting business. Oil companies did it, governments did it, central banks did it, international organizations did it, brokerage houses and banks did it. Indeed, one might have been reminded of the Cole Porter refrain: “Birds do it, bees do it, even educated fleas do it.” This particular kind of forecasting, like all economic forecasting, was as much art as science. Judgments and assumptions governed the predictions. Moreover, such forecasting was much affected by the “community” in which it was done; thus, it was also a psychological and sociological phenomenon, reflecting the influences of peers and the way individuals and groups groped for certainty and mutual comfort in an uncertain world. The end result was often a strong tendency toward consensus, even if the consensus completely changed its tune every couple of years.

The Iraqis were unprepared for the “human wave” assaults they encountered on the battlefield. Hundreds of thousands of young people, drawn by the Shiite vision of martyrdom, and with little thought for their own lives, advanced on Iraqi positions in front of regular Iranian troops. Some of the young people arrived at the front carrying their own coffins, exhorted as they had been by Khomeini that “the purest joy in Islam is to kill and be killed for God.” They were given plastic keys to heaven to wear around their necks. Children were even used to clear minefields for the far more valuable and much rarer tanks, and thousands of them died.

The boom on Colorado’s Western Slope ended literally in hours, as work came to an instant stop. The towns of Rifle, Battlement Mesa, and Parachute fell prey to the great tradition established at Pithole, in western Pennsylvania, which in just two years, 1865 and 1866, went from dense forest, to boom town of fifteen thousand people, to eerie ghost town, whose deserted shops and homes were raided for wood to build elsewhere in the Oil Regions. Now, in the three towns in Colorado, newly built homes were empty; weeds quickly covered landscaped lots; half the apartments went unrented; construction workers from the Midwest packed up and headed home; traffic evaporated from the roads; and teenagers with nothing else to do took to vandalizing the partly built homes and office buildings. “My business just died,” said the owner of an office supply shop in Rifle. And so did the town. The boom to end all booms could not last.

The move to the commodity style of trading would be resisted in many companies by traditionalists who saw this direction as an uncouth, immoral, and inappropriate way to conduct the oil business—almost against the laws of nature. They took a lot of persuading, but in due course they were persuaded. What it came down to in most of the companies was the establishment of trading as a separate profit center, a way to make money on its own terms, and not merely as a method for assuring that supply and demand were balanced within the parent company’s own operations.

A senior executive of one of the majors dismissed oil futures “as a way for dentists to lose money.” But the practice—of futures, not dentistry—moved quickly in terms of acceptability and respectability. Within a few years, most of the major oil companies and some of the exporting countries, as well as many other players, including large financial houses, were participating in crude futures on the Nymex.

World financial markets teetered on panic in August 1982, but the hasty improvisation of the Mexican Weekend and the days that followed managed to stabilize the global financial system. The Mexican debt drama brought home, however, the reality that the global oil boom was over, and the fact that “oil power” was less powerful than assumed. Oil could mean not only wealth but also weakness for a nation. Moreover, a transition was at hand. The world oil crisis was now giving way to the international debt crisis and many of the world-class international debtors would turn out to be oil nations, which had borrowed heavily on the premise that there would always be markets for their oil, and at a high price.

Nationally, the most aggressive major bank when it came to energy lending had been Continental Illinois, largest bank in the Midwest, and seventh largest in the nation. Overall, it was the fastest-growing lender in the country, it was winning awards for good management, and its chairman had been chosen “Banker of the Year.” As an energy lender, Continental Illinois was, as a competitor put it, “eating our lunch.” It was rapidly increasing its market share in oil and gas loans, as well as in other sectors. The Wall Street Journal tagged Continental Illinois as “the bank to beat.” When oil prices started to weaken, it became clear that Continental Illinois, with its huge portfolio of energy loans from Penn Square and other sources, was walking on nothing more solid than thin air. The result, in 1984, was the largest bank run in the history of the world. All around the globe, other banks and companies yanked their money out. Continental Illinois’ credit was no good. The integrity of the entire interconnected banking system was now in jeopardy. The Federal government intervened, with a huge bail-out—$5.5 billion of new capital, $8 billion in emergency loans, and, of course, new management. Though the word was hardly ever used in the United States, Continental Illinois had, at least temporarily, been nationalized. The dangers of not responding on such a scale were, however, too frightening to risk.

They wanted a name that would be memorable; another partner suggested that it should start either with an A or Z so it would be first or last in the phone book—but not get lost in the middle. The film Viva Zapata!, with Marlon Brando in the role of the Mexican revolutionary, was playing in Midland, so they called their company Zapata.

At the end of his discourse, Yamani agreed to accept questions. For the last question, a tall, thoughtful professor stood up to observe how hard and contentious it was to make energy policy in the United States: the Congress fought with the President, the Senate with the House, various agencies with one another, everybody fought with everybody else. Was it any less contentious in Saudi Arabia? Would Yamani, he asked, describe the process by which oil policy was made inside Saudi Arabia? Smoothly and without even a moment’s hesitation, the oil minister replied, “We play it by ear.” The audience roared with laughter. It was an amusing answer, which captured the truth of improvisation in policymaking, whatever the government. Still, it was a little odd, coming from the self-proclaimed disciple of long-term thinking, who had been at the center of world oil decision making for a quarter of a century. Unbeknownst at the time to those in the audience, those words would be among the last of Yamani’s official utterances.

While George Bush himself was determined to avoid “another Vietnam,” he was a product of his generation and his experience, and he thought back to the late 1930s, Adolf Hitler, and the origins of the Second World War. Fifty million lives had been lost in that conflict. Had Hitler been stopped at the Rhineland in 1936 or in Czechoslovakia in 1938—when Czechoslovakia had more tanks than Germany—those lives might well have been spared. Once again, here was a dictator who blatantly lied and dissembled, who was totalitarian in the way he ran his country, who was obsessed with weapons and power and seemed to have no scruples, and whose ambitions appeared to be unlimited.

At a certain point, it would become too costly and too dangerous to try to check him. And the post-Cold War order would turn out to be different and much less benign than was generally imagined—and hoped—at the beginning of 1990. In short, oil was fundamental to the crisis, not “cheap oil,” but rather oil as a critical element in the global balance of power, as it had been ever since the First World War. Such is one of the great lessons of the last hundred years.