DANIEL YERGIN

B o o k s D a n i e l

b y Y e r g i n

Author
Shattered Peace: Origins of the Cold War

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Coauthor
The Commanding Heights: The Battle for the World Economy Energy Global Future Insecurity

EPIC QUEST FOR O I L , MONEY & POWER

THE

Russia 2010

New York

FREE PRESS London Toronto

Sydney

FREE PRESS A D i v i s i o n o f Simon & Schuster, Inc. 1230 Avenue o f the Americas New York, New York 10020 Copyright © 1991, 1992, 2009 by Daniel Yergin Epilogue copyright © 2009 by Daniel Yergin Title logo copyright © 1992 by W G B H Educational Foundation A l l rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever. For information address Free Press Subsidiary Rights Department, 1230 Avenue of the Americas, New York, N Y 10020. This Free Press trade paperback edition December 2009 F R E E PRESS and colophon are trademarks o f Simon & Schuster, Inc. For information about special discounts for bulk purchases, please contact Simon & Schuster Special Sales at: 1-800-456-6798 or business@simonandschuster.com. Designed by I r v i n g Perkins Associates, Inc. Manufactured i n the United States o f America 7 9 10 8 6

To Angela, Alexander, and Rebecca

The Library o f 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. c m . Includes bibliographical references and index. 1. Petroleum industry and trade—Political 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. W o r l d War, 1914-1918—Causes. 4. W o r l d War, 1939-1945—Causes. 5. W o r l d p o l i t i c s — 2 0 t h 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 r o m The Intellectual Adventure of Ancient Man by H . and H . A . Frankfort, John A . W i l s o n , and T h o r k i l d Jacobsen, page 142, © 1946 The University o f Chicago. Used by permission.

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 s u m mer o f 1911, the y o u n g 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 c r i t i c a l o f the increased m i l i lary spending that was being p r o m o t e d by some to keep ahead i n the A n g l o German naval race. T h a t c o m p e t i t i o n had become the most rancorous element i n the g r o w i n g antagonism between the t w o nations. B u t 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 m o n e y w o u l d be better spent, he insisted, o n doT h e n o n J u l y 1 , 1 9 1 1 , Kaiser W i l h e l m sent a G e r m a n naval vessel, the Panther, steaming i n t o the harbor at A g a d i r , o n the A t l a n t i c coast o f M o r o c c o . H i s aim was to check French influence i n A f r i c a and carve out a p o s i t i o n f o r Germany. W h i l e the Panther was o n l y a gunboat and A g a d i r was a port c i t y o f o n l y secondary importance, the arrival o f the ship i g n i t e d a severe international crisis. The b u i l d u p o f the G e r m a n A r m y was already causing unease among its E u r o pean neighbors; n o w Germany, i n its drive f o r its "place i n the sun," seemed to l>r d i r e c t l y challenging France and B r i t a i n ' s global positions. For several weeks, war fear g r i p p e d 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 b u l l y is c l i m b i n g d o w n . " B u t the crisis had transformed ( ' h u r c h i l l ' s o u t l o o k . Contrary to his earlier assessment o f G e r m a n 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 it. War, he n o w concluded, was v i r t u a l l y inevitable, o n l y a matter ol l i m e . A p p o i n t e d First L o r d o f the A d m i r a l t y i m m e d i a t e l y after A g a d i r , C h u r c h i l l vowed to do everything he c o u l d to prepare B r i t a i n m i l i t a r i l y f o r the inescapable • l.iv ol reckoning. His charge was to ensure that the Royal Navy, the s y m b o l and mestic social programs than on extra battleships.

very e m b o d i m e n t o f B r i t a i n ' s i m p e r i a l power, was ready to meet the G e r m a n 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 f o r the t w e n t i e t h century. T h e issue was whether to convert the B r i t i s h N a v y to o i l f o r its power source, i n place o f coal, w h i c h was the traditional f u e l . M a n y thought that such a conversion was pure f o l l y , f o r i t meant that the N a v y c o u l d no longer r e l y 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 I r a n was then k n o w n . " T o c o m m i t the N a v y irrevocably to o i l was indeed ' t o 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 m o r e 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. H e 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 C h u r c h i l l ' s words, " M a s t e r y 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 o n l y to the conflagration that f o l l o w e d , but to the many decades ahead. For o i l has meant mastery t h r o u g h the years since. A n d that quest f o r mastery is what this b o o k is about. A t the b e g i n n i n g o f the 1 9 9 0 s — a l m o s t 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 p e t r o l e u m , after t w o W o r l d Wars and a l o n g C o l d War, and i n what was supposed to be the b e g i n n i n g o f a new, m o r e peaceful e r a — o i l once again became the focus o f g l o b a l conflict. O n August 2 , 1 9 9 0 , yet another o f the century's dictators, Saddam Hussein o f I r a q , invaded the n e i g h b o r i n g c o u n t r y o f K u w a i t . H i s goal was not o n l y conquest o f a sovereign state, but also the capture o f its riches. T h e prize was enormous. I f successful, I r a q w o u l d have become the w o r l d ' s leading o i l power, and i t w o u l d have d o m i n a t e d b o t h the A r a b w o r l d and the Persian G u l f , where the b u l k o f the planet's o i l reserves is concentrated. Its new strength and w e a l t h and c o n t r o l 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 i n the international balance o f power. I n short, mastery i t self was once m o r e 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, j u s t a few months before the I r a q i invasion, the senior officers o f A m e r i c a ' s Central C o m m a n d , 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 , f o u n d themselves lectured to the effect that o i l had lost its strategic significance. B u t 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 still central to security, prosperity, and the very nature o f c i v i l i z a t i o n . T h i s remains true i n the twenty-first century. T h o u g h the m o d e r n 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 c o m p l e t e l y transformed by the advent o f p e t r o l e u m . The role o f o i l — a n d anxiety about its s u p p l y — i s a p r i m a r y consideration o f the era o f g l o b a l i z a t i o n that characterizes the first decades o f the t w e n t y - f i r s t century. Three great themes underlie the story o f o i l . The first is the rise and development

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 t h o r o u g h l y d o m i n a t e d the A m e r ican petroleum industry by the end o f that century, was a m o n g the w o r l d ' s very first and largest m u l t i n a t i o n a l enterprises. The expansion o f the business thereafter—encompassing everything f r o m w i l d c a t drillers, s m o o t h - t a l k i n g p r o m o t ers, and d o m i n e e r i n g entrepreneurs to h i g h l y trained scientists and engineers, great corporate bureaucracies, and state-owned c o m p a n i e s — e m b o d i e s the evol u t i o n o f business, o f corporate strategy, o f technological change and market development, and indeed of both national and international economies. T h r o u g h o u t 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 m e n , companies, and n a t i o n s — s o m e t i m e s w i t h great calculation and sometimes almost b y accident. N o other business so starkly and extremely defines the meaning o f risk and r e w a r d — a n d the p r o f o u n d i m p a c t o f chance and fate. A s we l o o k f o r w a r d , i t is clear that mastery w i l l certainly come as m u c h f r o m a computer c h i p as f r o m a barrel o f o i l . Yet the petroleum industry c o n t i n ues to have enormous impact. O f the top ten companies i n the Fortune 5 0 0 g l o b a l r a n k i n g i n 2008, six are o i l companies. U n t i l some alternative source o f energy is f o u n d i n sufficient scale, o i l w i l l still have far-reaching effects on the global economy; major price movements can f u e l economic g r o w t h or, contrarily, drive inflation and help kick-start recessions. Today, o i l is the o n l y c o m m o d ity whose doings and controversies are to be f o u n d regularly not o n l y on the business page but also on the front page. A n d , as i n the past, i t is a massive generator o f w e a l t h — f o r i n d i v i d u a l s , companies, and entire nations. I n the words o f one t y c o o n , " O i l is almost l i k e m o n e y . "
2

The second theme is that o f o i l as a c o m m o d i t y i n t i m a t e l y i n t e r t w i n e d w i t h national strategies and global p o l i t i c s and power. The battlefields o f W o r l d War I established the importance o f p e t r o l e u m as an element o f national power w h e n the internal c o m b u s t i o n 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 H a r b o r to protect their flank as they grabbed f o r the p e t r o l e u m resources o f the East Indies. A m o n g Hitler's most i m p o r t a n t 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 i n the Caucasus. B u t A m e r i c a ' s predominance i n o i l proved decisive, and by the end o f the war G e r m a n and Japanese fuel tanks were empty. I n the C o l d War years, the battle f o r c o n t r o l 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 n a t i o n a l i s m . T h e Suez Crisis o f 1956, w h i c h truly m a r k e d the end o f the road f o r the o l d European i m p e r i a l powers, was as m u c h about o i l as about anything else. " O i l p o w e r " l o o m e d very large i n the 1970s, catapulting states heretofore peripheral to international politics i n t o p o s i tions o f great w e a l t h 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 u p o n o i l . O i l was at the heart o f the first p o s t - C o l d War c r i s i s — I r a q ' s 1990 invasion o f K u w a i t . A n d o i l figured m u c h 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 o f China and India in the w o r l d market.

o f canitalism and modern business. O i l is the w o r l d ' s biggest and most per-

Yet o i l has also proved that it can be fool's g o l d . The Shah o f Iran was granted his most fervent w i s h , o i l wealth, and it destroyed h i m . O i l built up M e x ico's economy, o n l y to undermine i t . The Soviet U n i o n — t h e w o r l d ' s secondlargest exporter—squandered its enormous o i l earnings i n the 1970s and 1980s in a m i l i t a r y b u i l d u p 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 w o r l d ' s largest producer and still its largest consumer, must i m p o r t between 55 and 60 percent o f its o i l supply, weakening its overall strategic p o s i t i o n and adding greatly to an already burdensome trade d e f i c i t — a precarious position 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. E c o n o m i c c o m p e t i t i o n , regional struggles, and ethnic religious rivalries replaced t r a d i tional ideology as the focus o f i n t e r n a t i o n a l — a n d n a t i o n a l — c o n f l i c t , aided and abetted by the p r o l i f e r a t i o n o f m o d e r n weaponry. A new k i n d o f i d e o l o g y — religious e x t r e m i s m 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 , c r i t i c a l to national strategies and international politics. A t h i r d theme i n the history o f o i l illuminates h o w ours has become a " H y drocarbon S o c i e t y " and w e , i n the language o f anthropologists, " H y d r o c a r b o n M a n . " I n its first decades, the o i l business provided an i n d u s t r i a l i z i n g 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 " n e w light," w h i c h pushed back the n i g h t 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 m a n i n the U n i t e d States, m o s t l y f r o m the sale o f kerosene. Gasoline was then o n l y an almost useless by-product, w h i c h sometimes managed to be sold for as m u c h as t w o cents a g a l l o n , and, when it c o u l d not be sold at a l l , was run out into rivers at night. B u t j u s t as the invention o f the incandescent l i g h t b u l b 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 c o m b u s t i o n engine powered by gasoline. The o i l industry had a new market, and a new c i v i l i z a t i o n was b o r n . I n the t w e n t i e t h century, o i l , supplemented by natural gas, toppled K i n g Coal f r o m his throne as the p o w e r source for the industrial w o r l d . O i l also became the basis o f the great postwar suburbanization m o v e m e n t that transformed both the contemporary landscape and our m o d e r n w a y o f life. I n the twenty-first century, we are so dependent o n o i l , and o i l is so embedded i n our d a i l y doings, that we h a r d l y stop to comprehend its pervasive significance. I t is o i l that makes possible where w e l i v e , h o w w e l i v e , h o w we c o m m u t e to w o r k , how we t r a v e l — even where w e conduct our courtships. I t is the l i f e b l o o d o f suburban c o m m u n i ties. O i l (and natural gas) are the essential components i n the fertilizer o n w h i c h w o r l d agriculture depends; o i l makes i t possible to transport f o o d to the t o t a l l y 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 m o r t a r o f contemporary c i v i l i z a t i o n , a c i v i l i z a t i o n that w o u l d collapse i f the w o r l d ' s o i l wells suddenly went dry. For most o f the t w e n t i e t h century, g r o w i n g reliance o n petroleum was a l most universally celebrated as a good, a s y m b o l o f h u m a n progress. B u t n o longer i n the twenty-first 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 all its dimensions is at the top o f the list to be scrutinized, c r i t i c i z e d , and opposed. Efforts are m o u n t i n g around the w o r l d to c u r t a i l the combustion o f all

fossil f u e l s — o i l , coal, and natural gas—because o f (he resultant smog and air p o l l u t i o n , acid rain, and ozone depletion, and because o f the specter o f c l i m a t e 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 n o w accused o f f u e l i n g environmental degradation; and the o i l industry, p r o u d o f its technological prowess and its c o n t r i b u t i o n to shaping the m o d e r n 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 o n technological innovations to mitigate the environmental challenges. Yet H y d r o c a r b o n M a n shows l i t t l e i n c l i n a t i o n to give up his cars, his suburban home, and what he takes to be not o n l y the conveniences but the essentials o f his w a y o f life. T h e peoples o f the developing w o r l d give no i n d i c a t i o n that they want to deny themselves the gains o f an oil-powered economy. A n y n o t i o n o f scaling back the w o r l d ' s c o n s u m p t i o n o f o i l w i l l be influenced b y the p o p u l a t i o n g r o w t h a h e a d — w i t h more and more o f the w o r l d ' s people demanding the " r i g h t " to the benefits that come f r o m c o n s u m p t i o n . Total w o r l d o i l c o n s u m p t i o n 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 I n d i a more than doubled and i n China, more than tripled. Thus, the stage has been set for a great balancing between, on the one hand, environmental protection and reduction o f carbon and, o n the other, economic g r o w t h , the benefits o f H y d r o c a r b o n 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 c o m p e t i t i o n that was supposedly decided at the beginn i n g o f the t w e n t i e t h century. These, then, are the three themes that animate the story that unfolds i n these pages. The canvas is g l o b a l . The story is a chronicle o f epic events that have touched a l l our lives. I t concerns itself b o t h w i t h the p o w e r f u l , impersonal forces o f economics and technology and w i t h the strategies and c u n n i n g o f businessm e n and p o l i t i c i a n s . Populating its pages are the tycoons and e n t r e p r e n e u r s — Rockefeller, o f course, but also H e n r i D e t e r d i n g , Calouste G u l b e n k i a n , J. Paul Getty, A r m a n d H a m m e r , T. B o o n e 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 H i t l e r , Joseph Stalin, I b n 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, H e n r y Kissinger, George H . W . B u s h and his son George W . B u s h , and Saddam Hussein. Yet for a l l its conflict and c o m p l e x i t y , there has often been a "oneness" to the story o f o i l , a contemporary feel even to events that happened l o n g ago and, simultaneously, p r o f o u n d 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 p o w e r f u l economic forces, o f technological change, o f p o l i t i c a 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, p o l i t i c a l , and strategic consequences o f our w o r l d ' s reliance on o i l w i l l i l l u m i n a t e the past, enable us better to understand the present, and help to anticipate the future.

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