The Price of Oil is Both Personal and Political

As Saudi power grows, decisions made in the Gulf will increasingly affect wallets in the US.

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Episode Transcript

Speaker 1 (00:00):
The Price of Oil is both Personal and Political by
Philip Delves Broughton read by Marafinerty. If you wanted to
measure the world's economic condition by a single number, you
might easily settle on the price for a barrel of oil.
Into that number goes scores of inputs and considerations, and

(00:21):
out come more, ranging from the prospects for peace in
the Middle East to the flow of trade across the oceans.
Every dollar the oil price moves up or down causes
the microfibers of the global economy to twitch in ways
both predictable and violently unforeseen. The recent fallen prices due
to the decision by opek Plus to keep expanding production

(00:45):
has inspired all kinds of speculation about Saudi Arabia's motives,
ranging from a desire to punish Kazakhstan for ignoring production
limits to a throttling back of the kingdom's exorbitant plans
to diversify its economy. These speculations set the mood for
President Donald Trump's latest visit to the Gulf, where his

(01:05):
agenda sprawled from keeping gas prices low for American drivers
and investing Saudi Arabia's billions in US businesses to lifting
sanctions on Syria, a mix of diplomatic cooperation and mutual
enrichment particular to this web of relationships. The tighter that
web has become, the more the decisions made in the

(01:27):
Gulf affect American wallets. The price of oil has rarely
been just a function of supply and demand. This week
only confirmed how complex and consequential both its inputs and
ripple effects have become. Saudi Arabia sits on around seventeen
per cent of the world's proven crude oil reserves and

(01:48):
produces eleven per cent of the oil consumed globally. Time
and again, its leaders, their personalities, and their particular interests
have been reflected in the price of oil. Agan with
gratitude and indifference about the exorbitant gift lying beneath the sand,
turned to the deployment of oil as a political weapon
against Israel, and eventually into a destabilizing over reliance on

(02:13):
a single source of wealth which the current generation is
trying to fix. Oil was first discovered in Saudi Arabia
in nineteen thirty eight and started to flow in serious
quantities after World War II, as the world's economies recovered
from war tankers began lining up on the coast of
the Persian Gulf. Production costs were low in a region

(02:35):
where the oil was abundant and relatively effortless to extract.
In Texas, small landowners scraped, pumped, and flushed the last
drops of oil from dwindling stripper wells. In the vast
new Saudi fields, you drilled down and natural forces did
the rest, pushing the oil up and out into the
pipelines which traced the desert. In January nineteen forty seven, Ibensaud,

(03:01):
the founder of Saudi Arabia, visited the headquarters of the
Arabian American Oil Company in Daharan. At the time, a
barrel of crude cost around two dollars and sixty cents.
The oil companies set the price and paid the Saudis
a fee. For the companies, the system was delightfully opaque,
allowing them to earn rates of return of some two

(03:23):
hundred percent. For Eben Saoud and a country with a
population of three million, many of whom were still nomads,
every dollar was gravy, and the accounting a bore oil
had never been his motivation as he assembled his kingdom,
conquering and plundering on camels and horseback, and it never
interested him much. When the first payments arrived from the

(03:47):
American oil companies with drilling rights in Saudi Arabia, they
came in chests of gold coins delivered to the home
of the finance Minister. When Eben Saoud arrived in Daharan,
he was shown to the Exacscutive House, which was equipped
with all the conveniences an American oil executive might want.
After taking a nap there, he decided he preferred the

(04:09):
traditional tents that had been set up for him and
his entourage near by. His host took him on a
tour of the machine shop at Rostonura, where he perked
up when he saw a group of men working a
piece of hot metal with a drop hammer. He asked,
could they make a horseshoe? He was delighted when they
said yes, finally something he could relate to. For the

(04:32):
next twenty five years, the oil price reflected the king's
lack of interest and barely moved. By nineteen seventy three,
the average price of a barrel had crept up to
three dollars and twenty two cents, but in nineteen seventy four,
it shot up to twelve dollars and fifty two cents
and stayed just above that range for the next five years.

(04:53):
The most frequently cited trigger for this quadrupling was the
October nineteen seventy three oil embargo in pos used by
Arab countries led by Saudi Arabia on Israel's supporters during
the Yom Kapur War and its aftermath. But it was
not just the embargo that caused oil prices to spike.
Leading up to nineteen seventy three, the producing countries of

(05:15):
the Middle East had been ratcheting up their rhetoric and
demands for control for decades. They had broadly delegated that
control to the western oil majors of the US and Europe.
Those companies had found, extracted, refined, and sold the oil,
setting their own prices. It was a form of economic
colonialism suited for a time when the producing countries lacked

(05:38):
the education and sophistication to propose a different model. But
as these countries evolved, a generation of more confident leaders emerged.
Moore Margadafi, who seized power in Libya in nineteen sixty nine,
and Sodom Hussein, who became vice president in Iraq the
year before were young military officers with hardly any formal education,

(06:01):
but they made control of their oil industries a priority.
They demanded more equity and higher royalties, and implemented nationalizations
if they didn't get them. The Shah of Iran hoped
to rival any industrial power in the West and wanted
more money from his oil to fund this accelerated transformation.
Ibn Sad's son, King Faisal, inherited his father's brooding traditionalism,

(06:25):
but reconciled it with his country's extraordinary wealth at different
speeds in different ways. They reopened price negotiations. They said
that inflation and the devaluation caused by President Richard Nixon's
decision to delink the dollar from gold in nineteen seventy
one meant the value of their receipts kept falling. Crucially,

(06:47):
they drew a stronger link between access to their oil
and the actions and existence of Israel, which they opposed.
They turned what had been commercial negotiations with companies into
political dramas, requiring the attention of nations from Tehran to Vienna.
Young Arab economists and geologists appointed to run their state

(07:08):
ministries stared down sleek executives flown in from New York
in London who could not quite believe what they were seeing.
For Henry Kissinger, Nixon's Secretary of State, Riod now became
a regular stopover as he groped for peace in the
Middle East. In its thwarted impotence, the Nixon administration even

(07:29):
considered military action to seize the Arab oil fields. As
the majors steadily lost control over supply and pricing to
the producing countries and their state run enterprises, more oil
began trading on the spot market, and prices became less predictable.
Even after the Arabs ended the embargo in March nineteen

(07:49):
seventy four, prices never dropped back to their pre October levels.
Following the end of the embargo, the US developed a
deep commercial relationship with Saudi Array, involving the return of
petro dollars to the West as investments in bonds and
contracts for corporations involved in the country's development. But for

(08:09):
all the ensuing financial back and forth, the Arab world
never entirely forgot America's contempt. Airbrushed in public but epitomized
by Henry Kessinger's private explosion during a national security meeting
in the White House in November nineteen seventy three. It
is ridiculous that the civilized world is held up by
eight million savages, he said. By the mid nineteen eighties,

(08:34):
the Saudi royal family and the oil ministry had significantly
diverging views on pricing oil. Sheikh Ahmed Zaki Yamani, who
had been Oil Minister since nineteen sixty two, believed it
was in the best interest of Saudi Arabia for the
world to be dependent on oil for as long as possible.
That meant sustaining a price that kept supply and demand

(08:56):
in reasonable balance. The oil would quietly flow, the uses
for it would multiply, and in the meantime, Saudi Arabia
would have the time and resources to diversify its economy
for the distant time when the last well gurgled and
ran dry. In this model, Saudi Arabia would be the
swing producer, operating at the lowest cost, with the greatest reserves,

(09:19):
and able to open or close the spigots at will
to keep prices exactly where it wanted. Yamani fastidious measured
cool was the embodiment of this hyper rational approach. On
the other side was fad Bin Abdulaziz al Saud, known
as King Fod, a rollicking, chainsmooking character who had run

(09:42):
the country's national security apparatus long before he took the throne.
He carried echoes of Ebn Saut in his imposing height
and girth and his use of an astrologer, but he
was a much more modern figure with a more expansive
view of Saudi power. As a young unger Man, he
was among the first wave of Saudi princes to arrive

(10:03):
in the casinos of the south of France and leave
in the early mornings millions of francs lighter. Faud became
king in the summer of nineteen eighty two when oil
was twenty eight dollars a barrow. Four years later it
was just under ten dollars. The problem was that his
reign was contingent on the higher price he had bought

(10:25):
off the religious establishment was paying to sustain the lifestyles
of thousands of His own family had suppressed domestic and
international opposition and created a cradle to grave welfare state
for Saudi citizens. When the price of oil collapsed, he
struggled to keep his promises. He ordered Yamani to increase
production of Saudi oil and set the price at eighteen dollars.

(10:49):
It was an impossible order Yamani could only refuse and
was duly fired. Thousands of miles from Riad, Houston spun
toward the economic void. It was not just the oil
industry that suffered. Everyone who had thrived during the boom,
from French restaurants to real estate agents, were now gasping

(11:11):
through a long bust, and Houston did not have Saudi
Arabia's resources to draw upon. It had no life vest
to inflate. When prices fell, it simply sank. Office buildings,
shopping malls, and housing developments lay empty once Mighty, Houston
became one of the cheapest places in America to do business,

(11:32):
as Detroit would become after the two thousand and eight
financial crisis and the collapse of the car industry. Former
Texas Governor John Connolly, who was badly wounded as he
rode in the car with John F. Kennedy on the
day the President was killed, was forced to declare bankruptcy
and to sell his homes and possessions to pay creditors
who had lent to him. So eagerly. Earlier in the decade,

(11:55):
King Fod had enough problems of his own to worry
about bailing out over extended Texans. Today, the heaviest finger
on oil scale is Ibensaud's grandson, Crown Prince Mohammed bin Salman,
who like his grandfather, seems more interested in things besides oil.
His gaze is constantly drawn to Saudi Arabia's future, to

(12:18):
diversifying away from a reliance on fossil fuels toward technology,
culture and tourism. But the commitment to spend hundreds of
billions of dollars with US businesses resembles compromises and deals
past the closing of an imperfect circle. Shortly before the
yam Kapur War, Nadim Albadiji an Iraqi, who served as

(12:40):
Secretary General of OPEK from nineteen seventy one to nineteen
seventy two, wrote an essay decrying the West treatment of
the oil producing states. Arab countries, he said, are expected
or considered morally obliged to cater for the growing needs
of the United States, which blindly supports and abets the
arch enemy of the Arabs. They were then paid in

(13:04):
depreciated and devalued currencies, and, as a final insult, warned
that the mountains of cash they were piling up were
a threat to the global monetary system and needed to
be invested in ways that satisfied the panjandrums of world
banking and industry. This is the pattern of latter day
logic foisted upon us, he wrote after the war in

(13:26):
the embargo ended, that logic proved impossible to resist. The
West not only wanted Saudi Arabia's oil at a price
and on terms of its choosing, it also wanted to
get what it spent on oil to boomerang back in investments.
It was a tough bargain in the nineteen seventies and
became even tougher as the producers realized ever more of

(13:50):
their power. But as the scenes in Riad showed this week,
it is a logic still with plenty of life,