It was the first real vacation he’d taken in 16 years.
In April 1976, Zaki and Tammam Yamani chartered a yacht in the Caribbean. It was going to be a sort of belated honeymoon. He promised Tammam he wasn’t going to work. He even took off his wrist watch.
The boat had been arranged for them in Saudi Arabia And he knew nothing about it besides the fact that it was big. But when they arrived at the dock he was told it was Adnan Khashoggi’s yacht. Yamani was not pleased. He didn’t want to look as if he was Khashoggi’s guest. Nor did he particularly want Khashoggi to think that.
However, it was either sail as planned or go home.
They boarded the yacht and for the next five weeks Zaki and Tammam took the time to be alone with each other.
He also took some time to think about his real estate holdings in Saudi Arabia. And the more he thought about all the money he’d made in real estate over the past few years, the more he concluded that boomtime was an abnormal time.
A few weeks into the cruise he radioed to a friend in Saudi Arabia, “Sell everything I’m holding.”
Before the year was out, Saudi real estate crashed.
By then Yamani was long gone from the market.
*****
Where oil was concerned, the Shah had his own ideas.
He warned the West, don’t depend on oil. He claimed that oil was precious. He claimed that the West’s standard of living had been entirely built upon oil. He warned the West to look for other sources of energy as oil was not a replenishing asset and the oil-producing nations would one day run out of it. He said oil could be the basis of future developments in petrochemicals but that as an energy source it should not be depended upon.
He told the West he was going to teach them a lesson.
Until this point, most oil producers sang the same sad song when it came to crying that prices were traditionally too low. For 24 years, they harmonized, the price of oil has remained well below the level that could have been fetched if the forces of supply and demand had been allowed to interact freely. Oil prices did not rise between 1947 and 1971. In the same 24-year period, however, the price of industrial goods and foodstuffs tripled.
Now the Shah took a more novel approach. To illustrate that oil was underpriced, he suggested a comparison with Coca-Cola. It turns out that when the price of oil rose to $11.65 a barrel - which is 42 gallons - a 12-ounce can of Coke sold out of vending machines for 20 cents. That comes to just a shade over $2.13 a gallon. Multiply that by 42 and you get $89.52.
See, the Shah said, oil is simply too much of a bargain!
“The Shah actually said to me”, claims Mahdi al-Tajir, “that $100 oil was not unreasonable.”
As far as Sheikh Yamani was concerned, it was absolutely unthinkable.
“You must put the situation into context,” he says. “We, and I’m referring to Saudi Arabia, were very concerned at the time about the economic situation in the West. We were uneasy about the possibility of a new recession and also uneasy about the political situation in countries such as France and Italy where we did not want the communists to come to power. The situation in Spain and Portugal also worried us. And we were right to be concerned. We wanted to see an economic recovery take place because that had great political significance for Saudi Arabia.”
But not everybody shared his concerns.
When OPEC met in May 1976, eight members of the cartel, not surprisingly led by Iran, pointed out that the cost of goods imported into OPEC countries had increased over the past year by nearly 20 percent. They wanted to do the logical thing and up the price of oil by 20 percent.
Yamani preferred a six-month price freeze.
This was the point where the Iraqis so strenuously attacked the Saudis for their constant pro-western concern that Yamani walked out of the meeting.
It caused an enormous stir within OPEC. Yet it won the Saudis some sympathy and a price freeze.
Six months later, with double-digit inflation running wild in the West, the cartel regrouped in Doha and Yamani found the Shah’s team dug in for a fight.
Iran wasn’t going to accept less than a 15 percent rise. Dr. Amouzegar pointed out to the other members that Saudi Arabia’s reluctance to increase prices was solely because they’d taken it upon themselves to protect American investments. The remark did not go down well with Yamani then.
Nor does it now. “My main worry was that if we increased the price of oil too much we would merely reduce demand for it in the future. I have always felt price increases should come in small doses. After all, the economic stability and the political stability of the West is very important for us. Politically, if we have a high price of oil, the Russians will be very strong, while Europe, Japan and the United States will in turn become very weak. But then you must also understand that it is not necessarily how high you raise prices as much as it is how fast you increase them. Sudden and sharp increases disturb the economy of a country. Gradual increases can be absorbed. It’s very dangerous for everyone involved when price increases come as a shock.”
Even now he worries that certain ministers from other oil-producing states are not aware of that. “I really don’t know. It seems obvious to me and I think it should be just as obvious to many others. But there are times when their decisions are, well, let me call them, surprising.”
He claims that whenever he formulated oil policy, he tried to take many elements into consideration. “But you must not forget that we are well off. We have huge reserves. We have a comfortable income. We could always afford to sit down and think objectively. Not every oil producer has that privilege. The Algerians, for instance, are badly in need of revenue. So are the Nigerians. So are the Indonesians. As for the Iraqis and the Iranians, what can I say? if you have a political motivation, even if you can afford to take the time to think, your perceptions change. I honestly believe that Saudi Arabia always acted as internationalists when it came to oil policy. But that’s obviously not true of many others.”
Cynics, particularly in the West, wouldn’t always agree with him. There are plenty who would seriously question the Saudis’ record as internationalists. Most of them, especially Americans, would happily cite dozens of instances, starting with the Aramco takeover and the oil embargo, where Saudi Arabia has obviously put its own interests before anything else.
“Yes,” he admits, “of course we have always considered our own interests. It’s only natural that we would. But we’ve only ever looked after our own interests on a long-term basis. I know I am repeating myself when I tell you again that I am not a short-term thinker in any way. In my public life, in my personal life, in everything I do, I think long term. Once you start thinking short term, you are in trouble because short-term thinking is only a tactic for immediate benefit.”
And here he does not hesitate to add that, in the West, the tendency is to think short term. “For you, it’s only natural. It’s one of the results of democracy. A politician is elected to serve for four years. So he sees problems and solutions as defined by the time-span of his own term of office. He never goes beyond that. We, on the other hand, can afford to think long term. What the West has never understood is that, whenever there is a contradiction between short-term interests and long-term interests, you must go long term.”
As true as that may be, no matter how hard he tried, Yamani couldn’t convince the men who faced him that upping the price by 10-20 percent was short-term thinking.
The Shah was going to get his way no matter what.
Seeing no immediate solution at hand, Yamani flew to Riyadh for a talk with Fahd. He came back to Doha that night with permission to agree to an increase of 7 percent. But no more.
Less experienced negotiators might have put that card on the table right away. As it was, Yamani never played it at all.
Amouzegar had rallied enough support for a plan to increase prices as of January 1, 1977 by an immediate 10 percent - from $11.51 to $12.70 - and 5 percent more six months later, taking the price up to $13.30.
Only Saudi Arabia and the United Arab Emirates held out. Together, they declared they’d only increase crude by 5 percent, taking the price to $12.09.
Two-tier pricing was born.
“At Doha,” Ian Seymour reported, “it looked as though OPEC, usually so adept at brinkmanship, had finally missed its footing and tumbled over the edge. The majority had finally got fed up with the perpetual tug-of-war on prices and decided to cut themselves loose from Saudi tutelage, while Saudi Arabia was now determined to demonstrate that its views could not go thus unheeded with impunity.”
The split between OPEC’s moderates and OPEC’s extremists deepened. If the Shah was merely annoyed that Saudi Arabia was not going along with his demands for higher prices, then he was outright furious when he learned the next day that Saudi Arabia now planned to up production from 8.6 mbd to as much as 11.6 mbd.
It meant that Saudi and UAE oil would account for nearly 40 percent of OPEC’s total output. It also meant that if any of the other OPEC members tried to fight the Saudis by raising their quota, those newly increased prices would tumble.
The Shah directed his vengeance directly at Yamani. He called Yamani’s actions a blatant act of aggression.
Odd as this sounds, there are some people who contend that the United States might have quietly agreed with the Shah. The suggestion is that higher oil prices in the mid-1970s were a good move for America.
To begin with, the argument goes, this surplus money was funneled back into US banks. Next, it put the Japanese and the West Germans under pressure. Totally dependent on imported oil, their economies slowed down, which in turn made America more competitive. At the same time, increased prices provided funds for all the western oil companies to finance further exploration.
As importantly, there was the matter of arming Iran.
The Shah became obsessed with becoming a major world power. Concurrently, the Americans wanted to see the Shah secure in his role as policeman to the Gulf. Obviously, the best way for Iran to afford more planes and more guns was by increasing oil prices. Armed to the teeth, the Shah would not only be doing America’s bidding in the Gulf, but he’d be buying his hardware in the States where the money would recirculate into American industry.
Finally, the argument concludes, the big American oil companies had an interest in all of this too. Their balance sheets flourish with price jumps. They represent both a powerful economic force and an equally powerful lobby with friends in high places. Don’t forget, say the exponents of this theory, Kissinger was the Rockefellers’ boy and the Rockefeller fortune was made in oil.
Here Yamani endorses the concept that America did not want to see prices come down. “Yes. The real interest of the United States was in higher oil prices. I do not recall that Dr. Kissinger ever mentioned the subject of oil prices with us. Their whole interest was in raising the price of oil.”
In February 1975 Henry Kissinger met with the Shah of Iran in St Moritz, where he told the Iranian leader, The United States understands Tehran’s desire to secure higher oil prices.”
To be fair, that’s a vague enough statement. It does not in any way imply an agreement to cooperate with Tehran.
But it confused Yamani when he heard about it. “On the one hand the United States said the price of oil was too high and that they could not tolerate the present levels. On the other they imposed new taxes and new domestic measures geared to raise the price of crude on the domestic market. They were contradicting themselves. We would have been willing to cooperate with the United States if we’d been able to discover what their policy really was.”
A few months after Kissinger’s meeting with the Shah, Yamani sent a classified letter to Treasury Secretary William Simon. In it he said that Saudi Arabia could not be convinced that America seriously objected to higher oil prices. “There are even those who think that you encourage it for obvious political reasons and that any official position taken to the contrary is merely to cover up this fact.”
Mention of Yamani’s name to Simon these days initially gets you a long string of accolades. “I think back to my dealings with Zaki with enormous fondness. He was one of the great statesmen of the world. The fact that he was in power in such a critically sensitive post for what, 24 or 25 years? Well, that attests to the statement. You know, he stayed at my home in McLean (Virginia). He even did my horoscope for me. I don’t know where it is. I’m afraid I’ve lost it. But some of the best memories that I have of a very exciting time in the four and a half years that I spent in government, in all the posts that I held, well, the relationship I had with Zaki ranks right at the top.”
He remembers that particular letter from Yamani. “We used to correspond quite regularly as far as confidential messages were concerned. We used what we call ‘back channel’ messages. They didn’t go through the State Department. It was more private that way.”
And he does agree that America didn’t necessarily appear to want lower oil prices. “There was a rumor going around at the time that the State Department made a deal with the Shah of Iran. We helped send the oil prices higher to give Iran the wherewithal to build her military so that she could defend the Persian Gulf against the Soviet Union. That was the story. It was never proven but often rumored.”
At the same time, he says, the United States had various government programs that depended on investments in alternative sources of energy. “The thinking there was that people wouldn’t make the investment if the oil price came down, which to me was absolutely ridiculous. That’s talking out of both sides of your mouth at the same time. Never mind the alternative energy, let’s talk about bringing the price down and what’s good for the world economy.”
In other words, Simon agrees with Yamani that during the Nixon and Ford years there was a serious contradiction in US government policy where oil prices were concerned. “In this instance, the contradictions were in how they were trying to protect the domestic oil industry at the expense of the consumer. Oh sure. That’s part of the hypocrisy of politics, isn’t it? Don’t look for a politician to do what’s right. You know, they do what’s right as far as getting re-elected, that’s all.”
What he’s saying is that, in spite of public statements to the contrary, both the Nixon and Ford administrations were indeed in favor of higher oil prices.
He confirms, “That would be absolutely correct.”
But was William Simon, Energy Czar and Treasury Secretary, one of them? He insists, “No. As the man leading the energy side, I was four square in favor of a reduced oil price. Four square.”
Was Henry Kissinger one of them?
“Well,” Simon, says, “that’s the question. Was he or wasn’t he? He said he wanted lower oil prices but there were parts of his bureaucracy that clearly favored higher prices. They had all those price support programs. That’s a fact. But then you often find bureaucrats who are working at cross-purposes with the bosses.”
*****
Jimmy Carter moved into the White House in January 1977, his election being yet another event in what has turned out to be a long series of over-reactions by a frustrated nation to be done with the Watergate days once and for all.
“I found Carter to be an honest man,” says Yamani. “Maybe even too honest for a politician. In many ways he was more like a man of religion than a politician or a statesman.”
Under Carter, America took an initiative towards finding a peace in the Middle East. But the Camp David Agreements were not to the liking of most Arabs.
In the beginning the Saudis made some secret overtures to help the Egyptians find favor in the Arab world. But when the other Arab nations closed ranks to condemn Camp David because the Palestinians were not included, the Saudis were forced to line up with the rest of the Arabs against Egypt. From the day the agreements were signed in 1979, for a period of just over five years, no Saudi minister “officially” set foot on Egyptian soil.
The first post-Camp David “publicized” visit by a Saudi minister to Egypt came in October 1984. The man to make that visit was Zaki Yamani.
“Camp David isolated Egypt from the Arab camp,” Yamani continues to assert. “It did not solve the question of the Palestinians. It never would have happened had Faisal lived.”
While Jimmy Carter tried to build a foreign policy program around the issue of human rights, coincidentally the price of oil appeared to stabilize. Because it did, two-tier pricing officially ended in July 1977 when OPEC met in Stockholm.
Yamani was categorically refusing to return to Vienna. The Carlos incident had shaken him so badly that he now travelled only by private aircraft and was constantly surrounded by half a dozen bodyguards. In deference to him, OPEC vagabonded around the world, changing sites for each meeting.
It wasn’t until 1979 that Yamani showed his face in Vienna again. The Austrian government bribed him back with an honorary doctorate from it’s primary school for mining, metallurgy and materials, the University of Loeben. And, just to prove that their security forces were no longer as lax as they had been in December 1975, Chancellor Bruno Kreisky provided Yamani with a specially trained commando squad known as “Cobra” to mind him while he was in the country.
In Sweden, the group agreed not to implement their planned 5 percent increase, in exchange for a 5 percent rise in prices by Saudi Arabia and the UAE.
Five months later, OPEC met in Caracas. Ironically they chose Carlos’ home town to “celebrate” the second anniversary of the Vienna siege.
Predictably, rumors spread that Carlos had been spotted on several occasions inside the city limits and that various members of his group were gathering somewhere in the Caribbean.
Those rumors merely served to step up the vigil.
There were heavily armed troops everywhere. Army units, fully equipped for battle, plus helicopters and naval patrol boats kept watch on the beachside hotel where OPEC was meeting, and at the airport, and on all the roads and access points connecting the two.
Supposedly they were guaranteeing the safety of all the OPEC ministers. In reality they were there to protect one man in particular.
Yamani recalls, “When our plane landed I noticed armored vehicles taxiing to the parking spot with us. When the plane’s door opened, I could see soldiers lying prone on the ground with machine guns facing in every direction. The military attaché who came to greet us said we were in great-danger and he wanted Tammam to fly in a different helicopter from me. He said they were expecting terrorists in the bushes to fire a SAM-7 missile at one of the helicopters and, if we flew separately, at least one of us would survive. Tammam didn’t like that at all. She insisted on flying with me. Frankly, I think they might have overreacted just a bit.”
But the Venezuelans didn’t think so. Sheikh Yamani was in town and, because of that, for those few days in December 1977 Caracas was perhaps the most heavily fortified city in the world.
During the OPEC meeting, Yamani announced that Saudi Arabia was seeking a price freeze which could last throughout 1978.
“There was a surplus in the market,” he says. “It was caused by Saudi Arabia’s willingness to produce more than its financial needs.”
It was also caused by a substantial amount of non-OPEC crude pouring onto the market.
Before too long, even the Shah had reversed his position and was willing to agree to a price freeze. He met with President Carter in Washington in November 1977. The result was what the Shah termed “sympathy and comprehension” for the American stance that the world economy was still too fragile for further oil price rises.
So Yamani and the Saudis got another price freeze.
In May 1978, Yamani announced there was now a 50-50 chance that prices would start to rise again. “I was predicting that there would be a balance of supply and demand until about 1985 at which time there would be an oil shortage. That’s when supply and demand considerations would determine the price of oil instead of OPEC. So I suggested that it was important for OPEC to come up with a long-term strategy. The result was that we formed a committee made up of Saudi Arabia, Iran, Iraq, Kuwait, Venezuela and Algeria. The job of the committee was to write a report which would serve as the basis for policy recommendations which we planned to put before the OPEC Summit Conference in Baghdad in 1980.”
Yamani was appointed chairman and they called themselves OPEC’s Long-Term Strategy Committee. As soon as the project was announced, a rumor took hold in the oil community that Yamani would present the committee’s report at Baghdad and then retire.
It would have been a most graceful exit for a 50 year old who had reached the very top.
But it wasn’t to be, because all of this was happening against the backdrop of two very important political problems.
The first was the continued weakness of the US dollar.
Yamani, Fahd and the US Treasury Secretary Michael Blumenthal all promised at various times throughout 1978 that the dollar was on the road to recovery. There was even talk among some OPEC members of abandoning the policy of pricing oil in dollars, although Yamani as OPEC’s senior statesman easily convinced everyone that such a policy would merely serve both to hasten the dollar’s decline and push up inflation.
The second drama was unfolding simultaneously in Paris and Tehran. The Ayatollah Khomeini had been living in political exile in a Parisian suburb. Now he wanted to come home.
A lot of people in the Gulf, especially those who didn’t always have time for the Shah, were saying to each other, better the devil you know than the devil you don’t.
The Ayatollah’s return and his fire-brand fundamentalism were not suited to everyone’s taste. Especially the Saudis. But then, they reassured themselves, the Americans will never let anything happen to the Shah.
And they weren’t alone in thinking that way.
The Shah not only believed the Americans would always take care of him, he bet his Peacock Throne on it. That turned out to be a fatal misreading of Jimmy Carter’s ability to manage world affairs.
OPEC was scheduled to meet in Abu Dhabi in December. The price freeze had held, although once again there was pressure mounting for another increase. Yamani hoped to keep it to 5 percent. But on the way to Abu Dhabi someone put a match to Iran.
On October 13, 1978, workers at the world’s largest oil refinery, in Abadan, Iran, suddenly went on strike. Within a week the movement had spread throughout most of the country and Iran was, to all intents and purposes, out of the oil business. The Shah tried sending in troops alongside retired oil executives to get the wells flowing again. But Khomeini in France announced, “To strike in the oil sector is to do the will of God.”
When OPEC convened as planned on December 16, the situation in Iran had thrown the market into such an unusual situation that there was simply no way Yamani could hold the cartel to a 5 percent increase.
“Wouldn’t it be appropriate,” asked the Algerian oil minister, “if, to celebrate OPEC’s 20th year, we put the price at $20.”
Yamani answered him flatly, “I thought you were a realist.”
OPEC finally agreed to a 10 percent rise.
On December 26, Khomeini declared, “As long as the Shah has not left the country there will be no oil exports.”
Five days later, John Lichtblau, director of the independent and influential New York based study group, the Petroleum Industry Research Foundation, announced, “We are completely pessimistic about the present regime’s ability to get Iranian oil production going again.”
In other words, the Shah was finished.
Sixteen days into the new year, the Shah and his family left Tehran on what he claimed was just an extended holiday. He vowed to return. Unlike MacArthur, he never made it.
One week to the day after the Pahlavi dynasty had crumbled, Khomeini landed in Tehran.
The politics of the Gulf will never be the same.
Mahdi al-Tajir says he was one of those who knew the Shah could not last. “Maybe I saw it coming but not in the way it happened. I was a great admirer of the Shah. I thought he was going to make the necessary changes to stay in power. I never thought he would leave it as late as he did. I didn’t think he could be so blind. But maybe he was taken by surprise, you know, by the speed of what happened. Also, I don’t believe for a minute that anyone outside Iran wanted him to stay. He had become too dangerous. He’d started to think about what Iran could do. What role the country could play. He’d started talking about becoming a member of the superpower club. He’d wanted a military to equal the five greatest powers on earth. He’d started to use oil to dictate his wishes. I don’t think there was anyone outside Iran, including and especially the United States, who wanted him to stay much longer.”
Yamani agrees that the handwriting was on the wall several years before it happened, there to see if anybody had taken the time to look for it. “It’s easy with hindsight for anyone to say that he knew the Shah would fall. But some time around the end of 1977 or the beginning of 1978 I started believing that he had to fall. All the signs were there. You could see he was in danger because of his arrogance and his isolation from his people. You could see problems developing with his drive to make fast changes in his society. You could see real trouble brewing- in his strong campaign against religion and religious people. He was trying to extract himself from the Islamic roots of his society. All these things put together led me to think he would not last much longer. I didn’t know exactly when it would happen but I felt it was only a matter of time.”
What nobody could have possibly seen coming was the astronomical rise in oil prices that followed the Shah’s abdication. Everything went haywire. One day, Iran was producing six million barrels. The next, they were producing nearly nothing.
The Ayatollah said something like, we don’t need to export crude because we’ve got enough money. Then he spoke with his Exchequer and found out he didn’t have a dime, so they started pumping again. But they couldn’t get production back to prerevolutionary levels because the Ayatollah and his gang had the brilliant foresight to throw out all the western companies that worked the Iranian oilfields. Almost universally those fields lost gas pressure and all forms of maintenance. The Iranians had no in-house capabilities themselves.
They’d pulled the carpet right out from under the market. And the world panicked.
Where crude started 1978 at under $13, by the end of 1980 prices were reaching $38, $39, $40.
The oil-producing nations under the OPEC umbrella continued throughout that period to set an official price. But with so much action in the market, everything was open to negotiation. Every standing contract or term supply came under discussion, revision or renegotiation when one of the partners smelled a better deal somewhere else.
Prices for refined petroleum products are determined minute by minute in five major world markets: Rotterdam, Houston, New York, Singapore and Tokyo. A supertanker riding across the seas carries as many as 2 million barrels. As the price of a basket of refined crude products totals more than the cost of the crude plus, the various taxes and surcharges the Arab producers add on top, and as the cargo of crude might change hands several times before it gets to wherever it’s going, those sudden price shocks in 1978-1979-1980 meant per-cargo profits for a slick enough independent trader could be in the $1-4 million range.
Colossal fortunes were made in oil.
The trick in 1979 was to buy a cargo just before the spot price went up a few cents per barrel and then unload it right away. The danger was that while you were holding on to ownership of the oil the price could drop a few cents per barrel. The game was all about taking a few small percentage points of a huge sum. And because the sums were so enormous, you didn’t have to do that very often to amass a fortune.
With such easy money to be made, the greed factor immediately set in and independents by the hundreds lined up to buy and sell paper cargoes. It was this artificially exaggerated demand chasing those few cargoes that ran prices sky high.
However, the euphoria ended almost as quickly as it began.
The oil-consuming nations got wise and all sorts of conservation measures went into effect. The fall was orchestrated by the governments. They decided that the situation had got out of hand and finally moved to right it. Within two years the market was back under control.
Independent oil trader David Thieme is one of those who made a fortune trading spot oil during those years.
And he says he saw first hand that, while prices were heading for the sky, it was Yamani who tried to be the stabilizing force. “His role was that of arbiter and mediator. He was very visibly trying to keep the Saudis on top. They’ve always been the swing producers, the ones who’d pump or cut back when they needed to stabilize prices. And he did what he could to put the skids on prices. Don’t forget, if the Saudis had a radical government they could have gone one way or the other strictly for political purposes.”
Thieme goes on, “They certainly didn’t need the money at that point. If they’d been radical, say leftist, they could have cut the oil off and let the prices go crazy. After all, more than two-thirds of all OPEC oil comes out of the Persian Gulf and the Saudis are the biggest producers. There was no one down there to equal Yamani in presence, ability and intelligence in those days. And there still is. He was a one man band. In that 1978-1979-1980-surge, without Yamani there, prices certainly could have gone upwards of $50, easily.”
Ian Seymour at the Middle East Economic Survey figures that’s about right. “Even Saudi Arabia at full stretch was not able to bring down the price very much. It’s rather difficult to determine where oil prices could have gone to. In a sense, if you have some shortage or even a perceived shortage, that can be enough to send the market right up. It doesn’t necessarily increase that much more as you increase the shortage. Yamani was very active in trying to stop the price rise and certainly slowed it down. In retrospect, a lot of the shortage simply wasn’t there. It was that people were panicky. A lot of that oil went into stock and of course that made the downturn in prices all the sharper when it came. But if the Saudis hadn’t produced as much as they did, I think yes, oil prices could have gone up near the $50 level.”
“A large part of the problem,” Thieme says, “was that nobody believed crude spot prices would stay as high as they did. Whenever they went up, everyone figured it was just a burp and they’d come right back down again. Except they didn’t. There was total panic in the markets. It was extremely volatile. Believe me, the oil business in the days just after the Iranian Revolution was the last frontier.”
So much so that it critically affected the thinking of everyone who had anything to do with oil.
Says Yamani, “It had to influence your thinking. This was a major political event. It caused oil consumers to panic, but it did not change the pattern of consumption. And that’s what made the price chaos so dangerous.”
Even the French, the only people in the world who had their bets hedged, were caught short by the Iranian Revolution. They’d harbored the Ayatollah in the obvious hope that one day, if he ever returned to power, he’d remember them kindly with a favorable oil policy.
“I’m afraid they were disappointed,” Yamani comments.
By mid-February 1979, with the official OPEC price for Saudi Arabian Light - the marker crude - at $13.33, the spot price in Rotterdam was over $20. In April, by the time OPEC raised the marker crude to $14.55, the spot price was already up to $21.50.
The Japanese had been largely dependent on Iranian oil and, as the crisis deepened, they came unglued. It was Japan that led the panic buying, and by May spot crude leapt up more than 50 percent to $34.50. The next big move in the market came in October when spot prices nudged up towards $38.
Then, in early November, 90 people, including 63 Americans, were taken hostage at the US Embassy in Tehran. The Carter presidency was doomed. An international crisis with grave military overtones captured the headlines. Spot crude hit $40.
“Throughout 1979,” Yamani says, “continued high demand in the West and the peak prices being paid on the spot markets were creating chaos. Oil companies were rushing in to buy. But this wasn’t oil they needed. It was for storage. I asked myself why and the only possible answer was that they thought there could be a total cutoff in oil exports from Iran. If that happened, the United States and other consuming countries would be forced to impose rationing as an immediate first measure. So there was all this panic buying.”
Willing to concede that the Gulf is a politically volatile region - “Anything can happen in our part of the world. It’s a boiling area with a lot of problems pending and one crisis can easily lead to another” - Yamani feels now, as he did then, that the panic which led to higher prices could have been avoided. “There was a solution. Prices could have been held in check. The panic would have ended the moment the oil companies were stopped from trading in the spot market. The US government should have forbidden it. So should have the other governments. After all, oil companies came knocking on our door saying, ‘Give us oil and we’ll pay you $40 a barrel on the spot market.’ To resist that temptation you would have had to be an angel, or a Saudi!”
Doing whatever he could to get prices down, Yamani had promised, in late June 1979, that Saudi Arabia would not yield to pressure from other oil producers to limit production and let spot prices soar.
He repeated often that Saudi Arabia would stick to its policy of “moderation and wisdom.” So in the midst of all this price chaos, the Saudis honored their long-term contracts at the OPEC marker price and sold whatever they produced above that at the OPEC price as well. Yamani points out that Saudi Arabia was not playing the spot market game and its refusal to do so cost Saudi Arabia literally billions of dollars in revenue. But it was a sacrifice it willingly made in the short term to arrive at the long-term goal of getting oil prices down.
Because he could attract so much publicity, and because so many reporters hung on his every word, Yamani was now being described in the press as “the man who holds the key to the oil crisis in the West.”
True or not, while spot market traders like David Thieme and John Latsis were only two of hundreds who made fortunes in what has since come to be known as “the second oil crisis”, Yamani saw the Iranian Revolution and the subsequent rise in oil prices as a unique opportunity to warn the western industrialized nations that the worst was yet to come.
He says, “I began speaking about the real oil crisis which I saw coming in ten years’ time. The supply and demand situation was very clear to me. When the revolution erupted in Tehran and demand increased, it was obviously not for consumption because once we increased our prices demand did not come down. It should have. That’s basic economics. But it didn’t. OPEC’s share in the market was 28 mbd in 1978. In 1979, with a higher price of oil, it should have been less than 28 mbd. But what happened was the opposite. It went above 31 mbd. So it was very clear that the additional oil which came from OPEC and the additional oil which came from non-OPEC producers did not go for consumption. Even though we kept increasing oil prices, demand did not subside. This greatly alarmed me because I knew for sure that the oil held in stock would eventually have to come back onto the market as a source of supply.”
In other words, the panic buying of 1979-80 would become the glut of 1981-86. Prices would tumble.
But these things are cyclical. Yamani says now that, unless the West does something about consumption, unless there is investment in alternative sources of energy, unless serious efforts are made towards conservation, the glut of the mid-1980s will undoubtedly lead to the third oil shock of the mid-1990s.
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