Oil - The origins of u.s. foreign oil policy

Oil The Origins Of U S Foreign Oil Policy 4059
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Access to foreign oil first emerged as an issue in U.S. foreign policy following World War I, because of the growing importance of oil to modern industrial society and modern warfare, fear of exhaustion of U.S. domestic reserves, and the need of U.S. companies with foreign markets for additional sources of supply. Although U.S. oil production quickly rebounded with several new oil finds, culminating in the discovery of the great East Texas oil field in 1930, increasing the presence of U.S. companies in foreign oil fields allowed U.S. companies to supply their foreign markets from overseas sources. Not only was foreign oil usually cheaper to produce and transport, thus boosting company profits, but utilizing over-seas oil to meet foreign demand reduced the potential drain on U.S. reserves.

Rejecting such alternatives as government ownership of oil reserves or the division of the world into exclusive spheres of influence, the United States insisted instead on the Open Door policy of equal opportunity for U.S. oil companies to gain access to foreign oil. A clash with the British over access to Middle East oil was averted when the U.S. government threw its support behind private cooperative arrangements between U.S. and British oil corporations. A multinational consortium, the Iraq Petroleum Company, established in 1928, allowed selected U.S. oil companies access to Iraq's oil along with British and French companies. To ensure that the development of the region's oil took place in a cooperative manner, the consortium agreement contained a self-denying ordinance that prohibited its members from engaging in oil development within the area of the old Ottoman Empire, which was marked on a map with a red line. In addition to the Red Line Agreement, the major British and U.S. oil companies sought to manage the world oil economy through a series of agreements between 1928 and 1934 that allocated markets, fixed prices, eliminated competition, and avoided duplication of facilities.

The U.S. government successfully supported subsequent efforts by other U.S. oil companies to gain concessions in the Middle East. In 1930, Standard Oil of California (SOCAL), which had not been party to the cooperative agreements, obtained a concession on the island of Bahrain, off the coast of Saudi Arabia, and in 1933 obtained extensive concession rights in Saudi Arabia. The Texas Company joined forces with SOCAL in Bahrain and Saudi Arabia in 1936. Meanwhile, Gulf Oil Company, in partnership with Anglo-Persian, had gained access to Kuwait, which was not within the Red Line.

U.S. and British companies also worked together to control Latin American oil. U.S. and British oil companies had been active in Mexico since the turn of the century, drawn by the rich deposits along the Gulf of Mexico coast and the generous terms offered by Mexican dictator Porfirio Díaz. Production continued during the revolution (1910–1920), and Mexico was briefly the world's leading oil exporter during World War I and the early 1920s.

One of the chief goals of the Mexican revolution was to reassert national control over the nation's economic life. The revolutionary constitution of 1917 reserved subsoil rights to the state, leading to almost a decade of conflict with the foreign oil companies, who had convinced Díaz to go against Spanish law and grant them ownership of subsoil rights. Private ownership of subsoil rights would make it difficult for Mexico to share in the profits generated by oil exports since the oil companies, as owners of the oil, would not have to pay royalties to the Mexican government. Although the United States and Mexico were able to work out a compromise that protected the position of companies already operating in Mexico, Mexican oil production declined sharply during the 1920s as the major oil companies remained concerned over the course of the revolution and shifted their investment to Venezuela. By the eve of World War II, Venezuela had become the third leading oil producer in the world and the leading exporter.

In March 1938, a labor dispute between the major oil companies and Mexican oil workers resulted in government intervention and the nationalization of the main U.S. and British oil companies operating in Mexico. Not only did the companies lose their properties, but henceforth foreign capital was denied access to a basic sector of the Mexican economy. Moreover, the resource in question was an exportable commodity in great demand by the developed countries. Thus, the Mexican action challenged not only the position of the international oil companies but also the role of multinational corporations in the economic development of what would become known as the Third World.

The oil companies reacted strongly to nationalization, instituting a boycott of Mexican oil and pressuring oil equipment manufacturers not to sell equipment to Petróleos Mexicanos (Pemex), the state-owned oil company that took over the nationalized properties. Concerned about the impact of nationalization on U.S. investment abroad, the Department of State supported the companies' demands for full and immediate compensation. Although President Franklin D. Roosevelt softened "immediate" compensation to "prompt," Mexico could only raise the funds to pay compensation through the long-term operation of the industry. Since the companies, with the support of the U.S. government, were working to prevent Mexico from selling its oil abroad, the demand for full and prompt compensation amounted to denying Mexico the means of carrying out nationalization.

The Mexicans refused to give in, however, and Pemex turned to Germany, Italy, and Japan for markets and equipment. In addition to oil, U.S. economic interests in Mexico included mining, ranching, and manufacturing firms, and the worsening international situation provided further impetus for a shift in U.S. strategy. In November 1941, with war imminent, the U.S. government reached agreement with Mexico on compensation. Contrary to the views of some scholars, the settlement of the oil controversy did not constitute acceptance of nationalization or abandonment of the oil companies. The U.S. government remained opposed to nationalization and viewed settlement of the compensation issue not only as necessary to ensure Mexico's cooperation in international affairs but also as a way to keep the door open for U.S. companies to return to Mexico in the future. The agreement was limited to the issue of compensation for the expropriated properties and was significantly silent on the question of the future status of foreign participation in the Mexican oil industry. For the rest of the 1940s, the United States sought, albeit unsuccessfully, to convince the Mexican government to reverse nationalization.

Concerned not to repeat the Mexican experience, the U.S. government played a major role in facilitating a settlement between the Venezuelan government and the major oil companies that resulted in a fifty-fifty profit-sharing agreement in early 1943. Although some scholars see the oil settlement as evidence of the subordination of the interests of U.S. corporations to larger foreign policy goals, those goals and the interests of the U.S. oil companies involved did not conflict but were complementary. Both aimed at ensuring the continuation of the companies' control and continued U.S. and British access to Venezuelan oil. In addition to profit sharing, the settlement included confirmation of the companies' existing concession rights, their extension for forty years, and the opening of new areas to the companies. Venezuelan oil production increased substantially, and Venezuelan oil played an important role in fueling the British and U.S. war efforts.

Although the United States was able to fuel its own war effort and that of its allies from domestic oil production during World War II, the increased consumption strained U.S. oil reserves. The possibility of running short of oil led to concerns over the long-term adequacy of U.S. reserves. Policymakers in the U.S. government soon focused their attention on the Middle East, especially on Saudi Arabia. The Middle East not only contained one-third of the world's known reserves; it also offered better geological prospects for the discovery of additional reserves than any other area.

Believing that government ownership was necessary to protect the national interest and to ensure public support for whatever measures might be necessary to secure access to Saudi Arabia's oil, the Roosevelt administration contemplated creating a government-owned national oil company to take over the concession rights in Saudi Arabia held by the Arabian American Oil Company (ARAMCO), a jointly owned subsidiary of Standard Oil of California and the Texas Company. It also proposed having the U.S. government construct and own an oil pipeline stretching from the Persian Gulf to the Mediterranean as a means of demonstrating and securing the U.S. stake in Middle East oil. By war's end, the U.S. government had also worked out the text of an oil agreement with Great Britain that called for guarantees of existing concessions, equality of opportunity to compete for new concessions, and a binational petroleum commission to allocate production among the various producing countries in order to integrate Middle East oil into world markets with minimal disruption. Expansion of Middle East production would enhance U.S. security by reducing the drain on U.S. and other Western Hemisphere reserves.

Divisions within the U.S. oil industry, coupled with the strong ideological opposition of American business and politicians to government involvement in corporate affairs, derailed these initiatives. In the case of the plan to purchase ARAMCO, the company's owners, while willing to accept some government involvement to secure their position and provide capital for further development of their potentially rich concession, were not willing to sell out entirely. The rest of the oil industry, ideologically and pragmatically opposed to government involvement in corporate affairs, vigorously opposed the plan, forcing its abandonment.

Similarly, while the companies that would benefit from the proposed pipeline supported the plan, the other major oil companies opposed it because it would give their competitors significant advantages. Domestic producers, fearing that the pipeline would allow Middle East oil to push Venezuelan oil from European markets into the United States, also opposed the plan. Congress, increasingly conservative and ever receptive to appeals cast in terms of defense of free enterprise, joined the opponents to defeat the pipeline plan.

The Anglo-American Oil Agreement was compatible with the interests of the major U.S. oil companies. All the U.S. majors held concessions in the Middle East, and all initially believed that an international allocation mechanism was needed to assimilate growing Middle East production without disrupting markets. The domestic oil industry, on the other hand, had worked out a system of production control in the 1930s, which protected the interests of smaller companies. Domestic producers feared that the proposed petroleum commission would allow cheap foreign oil to flood the U.S. market. While the U.S. government had no intention of destroying the domestic oil industry, it did intend to use the proposed commission to increase Middle East oil production and conserve U.S. oil supplies for future defense needs. The concerns of the independent oil companies were heard in Congress, and the Anglo-American Oil Agreement never came to a vote.

The only foreign oil policy on which all segments of the industry could agree was that the government should limit its involvement in foreign oil matters to providing and maintaining an international environment in which private enterprise could operate with security and profit. Thus, in the end, the United States, as it had in the 1920s, turned to the major oil companies to secure the national interest in foreign sources of oil. Even though oil industry divisions limited some types of government assistance to the major oil companies, reliance on the major oil companies as vehicles of the national interest in foreign oil enhanced the influence of the oil industry and facilitated control of the world oil economy by the most powerful private interests.

In a series of private deals in 1946 and 1947, the major U.S. oil companies managed to secure their position in the Middle East by joining forces with each other and their British counterparts. The centerpiece of the so-called "great oil deals" was the expansion of ARAMCO's ownership to include Standard Oil of New Jersey and Socony-Vacuum. The result was a private system of worldwide production management that facilitated the development of Middle East oil and its integration into world markets, thus reducing the drain on Western Hemisphere reserves. To help consolidate this system, the U.S. government supported fifty-fifty profit-sharing arrangements between the major oil companies and host governments. Owing to provisions in the U.S. tax code granting U.S. corporations credits for taxes paid overseas, this solution to host-country demands for higher revenues transferred the cost of higher payments from the oil companies to the U.S.

Treasury. Utilizing private oil companies as vehicles of the national interest in foreign oil did not mean that the government had no role to play. On the contrary, the policy required the United States to take an active interest in the security and stability of the Middle East. This was especially the case in Iran, where fear of Soviet expansion and determination to maintain access to the region's resources transformed U.S. policy from relative indifference to deep concern for Iranian independence and territorial integrity. To secure Iran's role as a buffer between the Soviet Union and the oil fields of the Persian Gulf, the United States provided economic and military assistance and gradually assumed Britain's role as a barrier to the expansion of Russian influence in the Middle East. U.S. support came at a price, however. During this period, the United States began looking to the shah of Iran as the main guarantor of Western interests in Iran. U.S. support for the shah and the Iranian military was crucial to the young shah in his struggle with internal rivals for power.

Although mention of oil was deliberately deleted from President Harry Truman's address, the Truman Doctrine (1947), with its call for the global containment of communism, provided a political basis for an active U.S. role in maintaining the security and stability of the Middle East. The Marshall Plan also helped solidify the U.S. position in the region by providing dollars for western Europe to buy oil produced by U.S. companies from their holdings in the Middle East. Fully 10 percent of Marshall Plan aid went to finance oil imports.

U.S. support for a Jewish homeland in Palestine complicated but did not nullify U.S. efforts to maintain access to Middle East oil. The apparent conflict between U.S. economic and strategic interests in Middle East oil on one hand, and its emotional support for a Jewish homeland in Palestine on the other, led the United States to follow a policy of minimal involvement. Although the United States voted for the United Nations resolution calling for the creation of Israel in November 1947 and recognized the new country immediately in May 1948, it refrained from sending troops, arms, or extensive economic assistance to enforce the UN decision for fear of alienating the Arab states and providing an opening for Soviet influence in the Middle East. Ironically, the Palestine problem enhanced the status of the major oil companies as vehicles of the national interest in Middle East oil. While official relations with the Arab states suffered somewhat because of U.S. support for Israel, the oil companies managed to maintain a degree of distance from government policy and thus escaped the burden of Arab displeasure. On the other hand, failure to enforce the UN decision led to the issue being decided through arms, with results that still haunt the region.

The policy of public support for private control of the world's oil reinforced traditional U.S. opposition to economic nationalism, especially when it affected U.S. companies and threatened to reduce oil production for export to world markets. U.S. security interests called for the rapid and extensive development of Mexico's nearby reserves, but U.S. assistance to Mexico to achieve that goal could be seen as a reward for nationalization and thus encourage other nations to take over their oil industries. Unable to convince the Mexican government to reverse nationalization, the United States maintained its policy of providing no assistance to Pemex, and, as it had before the war, focused instead on Venezuela. Although willing to work with the nationalist government that ruled Venezuela between 1945 and 1948 as long as it did not challenge corporate control of the oil industry, the United States stood by when the democratically elected government was ousted in a November 1948 military coup, and worked closely with the brutal dictatorship that ruled Venezuela for the next decade.

The Truman administration also sought a solution to the problem of oil security by under-taking a large-scale program of synthetic fuel production as a way of obtaining oil from domestic sources. Synthetic fuel production required massive amounts of steel, produced millions of tons of waste products, and cost more than natural petroleum. Although a potential boon to the ailing coal industry, the oil industry opposed the development of competition at public expense, and convinced the Eisenhower administration to cancel the government's synthetic fuel program in 1954.

The U.S. response to the nationalization of the Iranian oil industry highlighted the main elements of U.S. foreign oil policy—opposition to economic nationalism, an activist role in maintaining the stability and Western orientation of the Middle East, and public support for and non-intervention in the operations of the major oil industry. The Iranian crisis of 1951–1954 grew out of Iran's nationalization of the British-owned Anglo-Iranian Oil Company (AIOC) in the spring of 1951. AIOC's Iranian operations were Britain's most valuable overseas asset, and the British feared that if Iran succeeded in taking over the company all of Britain's overseas investments would be jeopardized. Although the United States shared British concerns about the impact of nationalization on foreign investment, it also feared that British use of force to reverse nationalization could result in turmoil in Iran that could undercut the position of the shah, boost the prospects of the pro-Soviet Tudeh party, and might even result in intervention by the Soviets at Iranian invitation. The crisis broke out in the midst of the Korean War, making U.S. policymakers extremely reluctant to risk another confrontation. Therefore, the United States urged the British to try to reach a negotiated settlement that preserved as much of their position as possible. The British, however, preferred to stand on their rights and force Iran to give in by organizing an international boycott of Iranian oil and attempting to manipulate Iranian politics.

U.S. efforts to mediate a settlement failed, as did less public attempts to convince the shah to remove nationalist Prime Minister Mohammad Mossadeq. By 1953 the oil boycott had sharply reduced Iran's export earnings and decimated government revenues, and British and U.S. involvement in Iranian internal affairs had exacerbated the polarization of Iranian politics. Moreover, the end of the Korean War and the completion of the U.S. military buildup allowed a more aggressive posture toward Iran. Fearing that Mossadeq might displace the shah and that Tudeh influence was increasing, the United States and Britain organized, financed, and directed a coup that removed Mossadeq and installed a government willing to reach an oil settlement on Western terms.

Following the coup, the United States enlisted the major U.S. oil companies in an international consortium to run Iran's oil industry. Cooperation of all the majors was necessary in order to fit Iranian oil, which had been shut out of world markets during the crisis, back into world markets without disruptive price wars and destabilizing cutbacks in other oil-producing countries. The antitrust exemption required for this strategy undercut efforts by the Department of Justice to challenge the major oil companies' control of the world oil industry on antitrust grounds and strengthened the hand of the major oil companies, whose cooperation was needed to ensure Western access to the region's oil.

The U.S. role in the coup and the subsequent inclusion of U.S. oil companies in the Iranian consortium mark important milestones in the gradual process by which the United States replaced Great Britain as the main guardian of Western interests in the Middle East. The experience also reinforced the U.S. tendency to see the shah as the best guarantor of Western interests in Iran. U.S. security and economic assistance helped the shah establish a royal dictatorship, ending the progress Iran had been making toward more representative government. Iranian nationalism, in turn, veered from liberalism and secularism, laying the groundwork for the fundamental rupture in Iranian-American relations that followed the Iranian revolution of 1978–1979. Finally, the short-term success of the Iranian model of covert intervention influenced subsequent U.S. actions in the Middle East, Latin America, and Asia.

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