“Big Brother” may end up being very, very small

[Jim Hackett II]

The Middle East Cauldron
[by L. Fletcher Prouty]


Eretz-Israel, birthplace of the Jewish people, was proclaimed the independent State of Israel on May 14,1948. On the next day war broke out between Israel and it's Arab neighbors. During that same year Israel closed the mammoth Iraqi oil pipeline at it's Meriterrarean terminus in Haifa. This shut off the oil being exported from the enormous oil fields of Kirkuk, in Iraq. This was an omen of enormous significance of things to happen in years to come. In fact, this may be true reason for the origin of this barrier nation at that crucial time.
Because this most important oil pipeline from Iraq transited territory claimed by the new State, Israel could claim the option to charge Iraq for transit fees; or to dent the right of passage altogether. Israel choose the latter and demonstrated to the world the power of the strategies barrier role of the non-producing states among those that do. This action was not without precedent in the Middle East, for the same commercial reasons, and with somewhat similar earth-shaking results.
The Turkish army, under Mohammed II, captured Contstantinople and ended the East Roman Empire in 1463. Within a few years the victorious Turks had virtually closed the vital spice trade routes between the merchants of Europe and the Far East. The transit costs charged by the Turks for caravan passage were so exorbitant that European merchants banded together to finance such voyages as that of Christopher Columbus in 1492. They had to discover an alternative route to the Far East sources of spices. Without refrigeration, spices were a necessity to the Europeans for the preservation of food. Israel's action in closing the pipeline along the paths of those ancient trade routes in 1948 forced the oil producers to turn to super-tankers for the transport of oil from sites in the Persian Gulf region around the Cape of Good Hope to their principal markets in Europe... extra thousands of miles.
The significance of this politically inspired dynamite was not overlooked in the Board Rooms of the "Seven Sisters" oil companies and the oil producing nations. From that day on, the pipeline networks of the Middle East were vulnerable to Israeli attacks, and the new State of Israel had become a willing pawn in the biggest game of all... the battle for money and power. This action proved that a closed pipeline almost always meant immediate higher prices for oil. That was 1948.
On his way home from the Yalta Conference in Feb. 1945, at the height of World War II action, President Franklin D. Roosevelt met with King `Abdal-`Aziz al Sa'ud (Ibn Saud) aboard the US Navy cruiser "Quincy" in the Red Sea. Earlier, Roosevelt had directed construction of a 50,000 barrel per day refinery at Ras Tanura in 1943... during the Cairo Conference... to assure Saudi Arabian oil availability during World War II. Although the pursuit of victory was uppermost in the President's mind in 1943, he knew only too well that the Allies could not win the war, and the peace thereafter, without oil, and Saudia Arabia meant oil in boundless amounts.
During 1945, before the end of WWII, Texaco and Socal (Standard Oil of California), working on a war-time accelerated basis, had organized the Trans-Arabian Pipeline Company known as TAPLINE. It was said at that time that the planning of the route of this strategic pipeline involved difficult diplomacy because of the mounting tension between Arabs and Jews. The pipeline planners feared Jewish interference with the vital operation of that crucial pipeline if it's route was designed to cross on, or near, potential Jewish territory... even in 1945. (Source: "The Seven Sisters" by Anthony Samson). This was a grave threat in time of war from a source that ought to have been cooperative.
Actually, construction of TAPLINE was halted by the first Arab-Israeli war in 1948, until an alternative route avoiding Israel could be found. Finally, in 1948, Syria and Lebanon permitted the line to run from Saudia Arabia via Jordan, Syria and Lebanon to Sidon on to the Mediterranean coast of Lebanon. It should be noted that this route, and it's necessity, increased Syria's leverage for transit fees.
The enormous potential value of Saudia Arabian oil was well known in the highest echelons of the government of the United States. Although the kingdom of Saudia Arabia had not been created until September, 1932, a New Zealander, Major Frank Holmes, had obtained a concession for more than 30,000 square miles in the Al-Hsa Province of eastern Arabia in 1923 from King Ibn Saud - the dominant tribal ahaykh. This concession and a later one, 1925, were consolidated in the name of the Eastern and General Syndicate. This syndicate eventually turned into the syndicate in 1927. Because of an internal oil industry problem, Gulf was required to re-assign its option to Socal in 1928.
Jurisdictional problems with the British oil interests in the Middle East, delayed until November 1932, only two months after the creation of that country, Socal's first step in approaching the new Saudi Arabian government. The establishment of that government was essential to American interests. It is entirely possible that the creation of the State of Saudia Arabia, only a few short months before was brought about by American interest in the petroleum prospects of that valuable spread of sand. Finally, the Concession Agreement was signed in Jiddah, on May 29, 1933, by the Minister of Finance for the Kingdom and by a Socal representative, Lloyd N. Hamilton. This agreement was ratified by the Saudi Arabian government by Royal Decree issued on July 7, 1933. In November 1933 this concession was assigned to the California Arabian Standard Oil Company (CASOC). This company name was changed on January 31, 1944, to it's more appropriate title... Arabian American Oil Company (ARAMCO); the most profitable corporation ever created by man. It was this series of steps that led to the potential danger of the Arab-Israel hostilities... years before the creation of the state of Israel in 1948.
The safety of Middle Eastern oil fields was not a new concern. The British army had occupied what is now Iraq, on Nov.6,1914, "to assure the safety of the oil fields at Mosual and Kirkuk" and the safety of the great refinery of the Anglo-Persian Oil Company at Abadan. Not many years later, May 1918, the British occupied Kirkuk and later that year they took over the oil facilities at Masul.
An Anglo-German group had formed the Turkish Petroleum Company in 1914.After WW I, following the defeat of Germany and the removal of Turkey from the region now called Iraq. British, Dutch, French, and American interests formed the Iraq Petroleum Company, better known as IPC. One of the largest oil strikes of all time occurred at Baba Gurgar in Kirkuk in 1927. The natural market for that oil was Europe. In 1931, the IPC ordered the construction of a massive pipeline complex from these fields to the Mediterranean. The original pipeline runs to Rutba, in the far western region of Iraq, to a fork. One system goes to Tripoli on the north Lebanon coast; and the other system goes to Haifa in what was then Palestine. This latter was the first pipeline closed by Israel in 1948. It was not the last.
In 1952 the IPC opened a new 30 inch pipeline across Syria to Baniyas on the Syrian Mediterranean coast. This line avoided Israel and was planned to make up for the loss of the Hiafa terminus. They opened a shorter pipeline, in 1951, from Zubair to Fao on the Persian Gulf to give them, what they hoped would be, an unthreatened outlet over their own land. All told, Iraq had exported twenty nine million tons of oil in 1954 when oil was selling for somewhere around $1.70 per 42 gallon barrel. By 1956 Iraq was producing 633,000 barrels a day.
Oil is mentioned briefly in Genesis, and throughout the Old Testament. Noah smeared his ark with "pitch" or "bitumen", "within and without". It was produced by the ancient Chinese from wells drilled with bamboo "pipes". Ancient peoples used petroleum as mortar, for waterproofing, as medicine and in some cases as fuel for lamps. It was not until 1857 that the first commercial well was drilled in Romania.
The first American well was drilled, for the specific purpose of finding oil, near seepages along Oil Creek, Venango County, Pennsylvania under the supervision of "Colonel" Edwin L. Drake The Drake well struck oil at a depth of sixty nine feet. This well launched an industry... one of the worlds largest and certainly its most lucrative, powerful and dominant.
On September 22nd 1932, the land known as the al-Hasa Province became a part of the new nation of Saudia Arabia. The first American oil prospectors stepped ashore at Jubail, on the eastern shore just north of Ras Tanura, on Sept 23rd 1933. From a low hill just south of Jubail they could see the island of Bahrain some twenty-five miles to the east, in the Gulf.
With the aid of camel transport they traveled south to the domal geologic structure that could mean oil. They called this the Damman Dome. The most prominent hill in the area is Jabal Dhahran, a name that now means petroleum in abundance. By the end of 1933 there were eight oil-men on site working a 320,000 square mile concession. By the summer of 1934 it had been decided to test the Damman Dome. One of the petroleum engineers at Dhahran at that time was Floyd Ohliger, a man I met there in November 1943 and again in 1952.
Six test wells were drilled with modest results. Enough to whet the appetite of any oil man. Finally well No.7 was drilled to 4,727 feet. This was the well that turned the fortunes of the company, and the world. It encountered large quantities of oil; and was completed in March 1938. Without delay that bleak site at Dhahran was turned from a camp into a community.
A six-inch pipeline began carrying oil to the coast at al-Khobar from where it was taken by barge to the refinery of the Bahrain Petroleum Company ( BAPCO). In this modest way the export of Saudi Arabian crude oil made its beginning.
The marine terminal site was chosen at Ras Tanura - a narrow spit of land running along the eastern shore of the Gulf. This site required causeway construction far out into the gulf because the coastal water is very shallow. By the spring of 1939 a ten inch pipeline ran between Damman field and Ras Tanura and thence to an anchorage 3,000 feet off-shore.
The arrival of the first tanker was the occasion of the first visit to these installation by King Ibn Saud. Two thousand persons accompanied the king on this 870 mile trip in some 400 automobiles. A camp of 350 tents was established near Dhahran and the celebration lasted several days. The king turned the valve to begin the first tanker to bear a cargo of Saudi Arabian crude oil. The date was May 1st. 1939, precisely four months before the outbreak of WWII.
With the outbreak of the war, operations at Dhahran gradually came to a halt. Enemy action made European markets inaccessible and on October 19th 1940, bombers of the Italian Air Force flying from Ethiopia hit Dhahran doing slight damage. The wives and children of the oil company personnel departed during May 1941.
The remaining employees continued production of 12,000 to 15,000 barrels per day and shipped that oil to Bahrain. A new well at Abqaiq, discovered in November 1941, remained shut-down, and the original 3,000 barrel per day "tea kettle" refinery at Ras Tanura was shut down before the end of 1941.
Despite the attack on Pearl Harbour and the all-out involvement of the United States in WW II in Europe, the Africa-Middle East theater, Asia and the Pacific Ocean, Washington kept a keen eye on these petroleum developments in far away "neutral" Saudia Arabia. By the autumn of 1943, the United States government had become concerned about the enormous drain upon American oil fields due to the requirements of this massive war. Dhahran and its vast oil potential was needed and could not be overlooked.
Early in November 1943, President Roosevelt directed that an American "Geological Survey Team" headed by General Cyrus R. "C. R." Smith, founder and president of American Airlines, be sent to Africa and thence on to Dhahran not only to investigate the oil fields and their immediate potential; but to bolster the moral of that small stand-by group of oil-men who were riding out the war by holding that franchise at Ras Tanura.
This author was directed to fly General Smith's party, in a special V.I.P. Lockheed Lodestar of the Air Transport Command, from Casablanca, on Nov. 10, 1943 and flew to Teheran via Tunis and Cairo. We arrived on the island of Bahrain on Nov. 16, 1943.
Because of Saudi Arabia's "neutrality", Gen. Smith had made special, secret arrangements for our flight from Bahrain to Dhahran. We arrived at 11:05 AM on the 17th and were met by Floyd Ohliger, an oil engineer and three other CASOC people.
General Smith was impressed with the neutral, flat landing ground near Dhahran and made an offer to Ohliger to have it moved to Chicago for use by American Airlines. Ohliger countered by challenging Smith to move a refinery to Ras Tanura, in return. We visited many places where big pipes stuck out of the ground about one foot. Ohliger would unscrew the cap and oil would bubble out... no pumping, no end to it. The Geological Survey party was impressed with what they saw and what they knew was there under the sands for future exploitation.
Because of the shortage of food on Ras Tanura, we went out in a work-boat and caught fish for lunch. By 4:15 PM we were back in the air on the way to Bahrain, Sharjah and Karachi.
I have always thought about that visit to Dhahran in 1943... how tragic it was that while we were engaged in the greatest war in history, a war that ran on oil, these men of CASOC had to delay their plans for the building of an essential pipeline from Dhahran to the Mediterranean Sea, before the end of the war, because of the threat of Jewish hostility.
We did know at the time, because of extreme secrecy, that the President and a large staff were already traveling to Cairo for a conference with Churchill and Chiang Kai Shek later that month. Upon arrival, the President was given a briefing on the subject of General Smith's Arabian visit. During that crucial wartime conference, the President authorized the allocation of vital materials required for the construction of a 50,000 barrel per day refinery at Ras Tanura. This was a direct result of the visit with CASCO and approval of General Smith's proposal that a refinery be built on that strategic site.
The wartime lull at Ras Tanura was over. The project included the refinery, storage tanks, a T-shaped pier with tanker berths and a submarine pipeline to the BAPCO refinery on Bahrain. The pandemonium of a large construction project far from a base of supply was intensified by wartime shortages and government control of all materials and transport. Despite all this, the refinery was placed in partial operation as early as September 1945 - the very same month that saw the surrender of the Japanese and the end of World War II.
The enormous importance of the wartime build-up of the CASOC facilities at Ras Tanura, of General Smith's visit to Saudi Arabia in Nov. 1943, of the President's decision made at Cairo to construct a refinery there, and of his visit with the Saudi King in Feb. 1945... only two months before the President died... has been generally over-looked by historians. It has not been given the place in history that it deserves. It was the only time during WW II that President Roosevelt met with the leader of any neutral nation, and he did that for one product... oil. This underscores the extreme importance he placed upon the American development of the Arabian oil fields, both in time of war and for the expansion of American post-war interests.
The vast majority of Middle East oil is sold in Europe. The oil production of the Middle East is, and has been, almost irrelevant to the United States, other than the collateral fact that its price influences the "world" price. Thus the efficient operation of the great network of pipelines from the oil-fields of Iraq, Kuwait, Saudi Arabia and Iran is essential to the economy of Europe. Also, the "world" price of oil generally rises and falls with the tide flowing from the Middle East. This was borne out when, in June of 1947, the ARAMCO partners agreed to put up the price of oil from $1.02 to $1.43 per barrel. Effectively, this became a "world" price. By 1948, this had reached $2.20 per barrel.
The closure of the Hafia terminal of the IPC pipeline from Kirkuk in 1948 was followed by the sabotage of the other branch of that major pipeline system by Syria in 1957. This cut off more than 500,000 barrels of oil per day from Iraq. Shortly before that, in 1956, the Suez Crisis had cut off 1,500,000 barrels a day bound for Europe via the Suez Canal.
As a result of theses overt events the price of crude oil increased again in 1957. By the end of 1957 oil shipments through the Canal were back to normal and the pipeline from Iraq through Syria had been put back in full operation. This caused a glut on the market that caused the price to settle back to 1.80 per barrel in 1960. By 1971 the price had risen to $2.40, and rose to $3.01 before the landmark Arab-Israeli war of 1973.
Despite these visible posted prices, by the late 60's, the actual cost of producing a barrel of oil and pouring it into the hold of a tanker at Ras Tanura, including all depreciation and capital investment, was 15 cents. This great difference between the "cost " and the "price" of oil is a most important point to be made as we observe the oil business approaching the period of the "Energy Crisis" as a result of the "Arab Oil Embargo". By 1973 this total cost for ARMACO had reached 34 cents per barrel, whereas Iranian oil cost 19.2 cents per barrel.
At this crucial point in the world-wide rise of oil prices, a new factor reared its head. Syria closed TAPLINE, the largest pipeline system in the Middle East, in May 1970. Tanker roles were greatly influenced by this act as prices for Saudi Arabian and Kuwaiti oil rose from $2.30 to $3.33 per barrel.
At about the same time the ARAMCO Group informed President Nixon and his advisor, Henry Kissinger, that, "Any increase in American military aid to Israel will have a critical and adverse effect on our relationship with the moderate Arabian oil producing countries." The record of the Jewish "threat" before the end of WW II, and of the acts of the state of Israel in closing the Iraqi pipeline and causing the strategic realignment of TAPLINE could no be overlooked.
At about the same time, Jan. 1971, Jack Irwin, a lawyer formerly with the large New York law firm of Sullivan & Cromwell and then with the Department of State, was sent to the Middle East. He stated, "My mission was to stress to the leaders of those countries the concern the United States would feel if the flow of oil products was to be cut or halted." Something was in the air. Or he may have planted a potent idea for other purposes.
Many have believed that there has been some sort of conspiracy among the oil companies, over and above the public manipulations of OPEC, that has caused the price of oil to rise so drastically without evident reason. Others have suspected a role for Henry Kissinger, oilman Rockerfeller's boy, in his attempt to sell United States made arms and ammunition to the rich oil nations, and to drum up business for his "client" bank Chase Manhattan.
What most people overlook is that the price of oil is never a result of the function of cost to produce and is rarely, if ever, influenced directly by either "supply" or "demand". In fact, oil prices are set via the OPEC scenario and by other intricate maneuvers such as pipeline closings by Israel. Oil men, since the time of the willy John D. Rockefeller, have always wanted us to believe that petroleum has a special intrinsic value that is not related to it's market value. They also would like to have us believe that it is of organic/biological origin (which it most certainly is not), and therefore that it is being depleted at a rapid pace.
The real sleeper in all of these controls is that the world price of oil can be arranged at any level as a result of the availability or non availability of transport. A barrel of oil on the pier at Ras Tanura is not worth much, intrinsically or otherwise; but its value increases... to $20.00 we'll say in 1989... when transported to Rotterdam, or other key destinations.
Transportation makes the economy: not the other way around. And transportation barons can create prices at the gas pump that have little to do with the cost of the product at the well-head.
This is as true in the oil business as it is in any other, and perhaps even more so. Because it is so true, the oil producers like to have more than one economically reasonable method of transport avaliable to them for the purpose of keeping transport prices under control by competitive means.
The modern oil barons learned this game from John D. Rockerfeller and his Standard Oil Company when they fought the railroads over freight rates in the later decades of the nineteenth Century.
The price of an essential commodity, such as oil, is cut from cloth of many colors. The old Middle East expert, Christopher Rand, who has worked for Standard Oil of California and for Occidental Petroleum, has written, in the Washington Post, 1974, at the peak of the "Energy Crisis":
"... that while the "posted price" on which their (Opec producers) revenues from the companies are calculated have risen from $1.80 to $3.01 a barrel in Saudi Arabia and from $2.23 to $4.60 a barrel in Libya, the cost of producing this oil had gone up not a whit in either case and remained at 4.6 cents ( per 42 gallon barrel ) from the former and 15 cents ( per barrel ) from the latter ".
At this same time the average "posted price" for Saudi Arabian crude was $11.45. In fact, many oilmen were saying, "Gasoline is selling for $3.00/gallon in Europe. That is $126.00 per barrel. What's wrong with $40.00 oil." It is a necessity. They knew that they could get away with it. Most people have to have oil.
Little can be learned from an analysis of such a figure i.e. $11.45. No one knows how much of that $11.45 went to the actual producer, to the oil company, to the transport owners, to the refiners, brokers, and all others along the line.
It is known... from experience with the American Railroad systems, that the carrier is able to treat the product on board as captive for which the ransom, i.e. rate, can be placed at whatever the market will bear. In other words, never count out the control of the transport factor in the movement of oil or any other essential commodity as a key ingredient of price.
As we have said above, when the Suez Crisis of 1956 closed that canal to tanker traffic the price of oil rose precipitously, and did not fall back afterwards. Again, in 1970, when Syria closed the TAPLINE system prices rose from $2.30 to $3.33 per barrel, nearly fifty percent, as Saudi Arabia and Kuwait were forced to do business with the tanker consortium. This is particularly true when its movement is limited solely to super-tanker fleets with no alternative competition. For the tanker impressarios to control the cost of the movement of oil they have to be sure that the pipelines are going to be closed and remain closed.
This is always feasible with such willing helpers as Israel and Syria; and is within their control. We have seen plenty of evidence of this since 1948 when Israel closed Haifa.