The United States in the World

Middle East Petrodollars and the Transformation of US Empire, 1967 – 1988

David M. Wight

• Publisher: Cornell University Press
• Year: 2021
• ISBN:
  9781501715730
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

In Oil Money, David M. Wight offers a new framework for understanding the course of Middle East–US relations during the 1970s and 1980s: the transformation of the US global empire by Middle East petrodollars. During these two decades, American, Arab, and Iranian elites reconstituted the primary role of the Middle East within the global system of US power from a supplier of cheap crude oil to a source of abundant petrodollars, the revenues earned from the export of oil.

In the 1970s, the United States and allied monarchies, including the House of Pahlavi in Iran and the House of Saud in Saudi Arabia, utilized petrodollars to undertake myriad joint initiatives for mutual economic and geopolitical benefit. These petrodollar projects were often unprecedented in scope and included multibillion-dollar development projects, arms sales, purchases of US Treasury securities, and funds for the mujahedin in Afghanistan. Although petrodollar ties often augmented the power of the United States and its Middle East allies, Wight argues they also fostered economic disruptions and state-sponsored violence that drove many Americans, Arabs, and Iranians to resist Middle East–US interdependence, most dramatically during the Iranian Revolution of 1979.

Deftly integrating diplomatic, transnational, economic, and cultural analysis, Wight utilizes extensive declassified records from the Nixon, Ford, Carter, and Reagan administrations, the IMF, the World Bank, Saddam Hussein's regime, and private collections to make plain the political economy of US power. Oil Money is an expansive yet judicious investigation of the wide-ranging and contradictory effects of petrodollars on Middle East–US relations and the geopolitics of globalization.

Chapter 1

Oil, US Empire, and the Middle East

In March 1965 Abdullah al-Tariqi addressed the fifth Arab Petroleum Congress of the Arab League in Cairo. Tariqi had previously served as Saudi Arabia’s oil minister, where he had tirelessly called for the renegotiation of oil concessions to the Western multinational petroleum companies on terms more favorable to Arab countries. Now speaking as a private citizen, Tariqi declared that “the present status of the oil industry in the Arab countries is a perfect example of the economic colonialism” of Western powers; indeed, it was “colonialism in its worst form.” Western colonialism, he argued, was driven by a desire to control the natural resources of Africa, Asia, and Latin America and use them for the benefit of Western development at the expense of colonized peoples. While the West had largely been forced to abandon direct rule over its colonies in recent years, it had merely “substitute[d] its old form of domination by a new one.… Military occupation was thus replaced by alliances, of defense treaties, and economic agreements, and hence guaranteed the control over the resources of the countries colonized.” As an example, Tariqi explained that the US oil consortium Arabian-American Oil Company (Aramco) had taken advantage of Saudi Arabia through agreements that kept Saudi oil revenues artificially low, minimized the investment of US capital in the country to impede Saudi industrialization, and excluded Saudis from high-level positions in order to prevent them from acquiring the skills needed to control their nation’s most important industry. Given the colonial nature of US and European oil companies, Tariqi concluded that the “nationalization of oil production in the Arab countries is a necessity dictated by the national interests of these countries.”¹

Tariqi provided a critical summation of US international empire in the MENA since the 1920s. Constructed by both US multinational oil companies (MNOCs) and the US government, US empire in the MENA sought to ensure the cheap, plentiful flow of oil from the region to Western consumers. Initially, the United States primarily secured its influence over the MENA and its oil through the empires of its British and French allies, international empire in the second degree. Starting with Saudi Arabia, however, an increasing number of MENA countries became direct client states of the United States from the 1930s to the 1960s. Whether primarily clients of the United States or European powers, however, a similar logic of cooperative empire operated for oil-rich MENA countries, in which friendly elites received Western military support, aid, revenues, and expertise to assist state building projects and secure their regimes in exchange for their commitment to fight communism and supply cheap oil. The United States pursued a similar dynamic with the oil-poor MENA countries for related ends.

US and European empires in the MENA generated popular local resistance to client regimes and their Western backers, however. This resistance to the US-led order developed in part due to poor labor and human rights conditions, cultural and religious alienation toward encroaching foreign social systems (including capitalism), and nationalist aspirations. US support for Israel further inflamed Arab and Iranian opinion. Tied to all these issues was the tendency of Western client regimes to deny their populations genuine opportunities for political participation and use security forces, Western trained and supplied, to suppress dissent. Notably, Iran and most Arab polities in the aftermath of World War II were monarchies, and all of these monarchs served as Western clients. During the 1950s and 1960s some of these Arab monarchies were overthrown by leftist nationalist movements far less accommodating to the United States and more closely aligned with the Soviet Union. The most powerful of these was Egypt, which would increasingly challenge US allies like Saudi Arabia up to the 1967 Arab-Israeli War.

The leftist challenge reinforced for the United States and the MENA monarchies the sense of need for a political alliance wherein the former strengthened the latter with developmental and military assistance. At the same time, however, the monarchies regularly clashed with the MNOCs and Washington over the control of petroleum. The monarchies sought greater petrodollar revenues to develop their countries’ economies, enlarge their regional geopolitical influence, and increase their autonomy from the West. While US actors accommodated such demands to a point, they ultimately worked in opposition to this goal, as cheap, US-controlled oil remained a primary objective. This situation increasingly led oil-rich US allies in the MENA to collaborate with each other and additional oil-rich countries to challenge the US-dictated terms of the global petroleum economy. Growing US support for Israel would likewise increasingly push US-allied oil-rich Arab governments to join Arab countries more hostile to Washington in challenging the United States. In sum, cooperative US empire in the two decades after World War II provided benefits to both the United States and its MENA allies, but it also contained tensions that challenged its longevity.

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In 1928 a consortium of US oil companies, including Gulf Oil and the predecessors of Exxon and Mobil, acquired from the European firms of British Petroleum, Shell, and Compagnie Française Pétrole a 23.75 percent share in their Iraq Petroleum Company (IPC). The European firms in part acceded to the agreement because of diplomatic pressure from Washington, which sought to secure US strategic and commercial access to foreign oil supplies via US MNOCs. The union created the first US presence in the Middle East oil industry. It also established the corporatist partnership that would largely structure US relations in the MENA until the 1970s, wherein the MNOCs secured US national security interests related to oil on behalf of Washington in exchange for the diplomatic and legal support of the US government.²

The deal marked the dawn of a new era in MENA-US relations. While the two regions had previous transnational ties such as trade, missionary work, and immigration, US corporations had largely eschewed direct investment in the region and Washington had considered the area of little strategic concern. By the 1920s the entire Arab world had fallen under the direct or indirect control of European powers, primarily France and the United Kingdom. This included Iraq, where the British imposed a new monarchy, the Hashemite dynasty, which remained subservient to London even after Iraq acquired de jure sovereignty in 1932. Iran, nominally sovereign under the monarchy of the new Pahlavi dynasty, was similarly dominated by the British. This enabled Europeans to control the earliest two oil industries in the MENA, with the British monopolizing Iran under the Anglo-Iranian Oil Company (AIOC) and the British, Dutch, and French sharing power in Iraq under the IPC. The inclusion of US companies in the IPC marked the beginning of the end of Europe’s hegemony over the MENA’s petroleum and political affairs. Increasingly, US corporations and the US government would dominate the MENA, driven by the desire to control the region’s oil, eventually establishing an empire.

The United States employed multiple forms of empire in the course of its history. In the nineteenth century it established itself as a territorial empire, securing the length of the North American continent by subjugating the American Indians and defeating Mexico. In 1898 the United States established an empire of overseas colonies in the Caribbean and Pacific that included Puerto Rico and the Philippines. In the twentieth century, however, the United States increasingly adopted cooperative international empire over other sovereign but weaker states. Under this model, the United States promoted the formal sovereignty of other nations, but the US government and/or US corporations also leveraged their economic, technological, and military superiority as inducements to foreign governments to accept US oversight and management over key aspects of their domestic and foreign policies.³ International empire offered distinct benefits to both the United States and cooperating states. Though forgoing direct control, the United States exerted powerful influence abroad while reducing military and administrative costs and domestic and international opposition. In cooperating with the United States, weaker countries obtained US aid, expertise, commerce, and/or military protection that could strengthen their economies and state institutions. In joining the IPC, which dominated Iraq’s economic and political system, US oil companies extended US empire to the MENA for the first time.

Gulf Oil would follow up on its entry into the IPC in 1933 by striking a fifty-fifty joint venture with British Petroleum in the British protectorate of Kuwait. It would strike oil in February 1938, significantly expanding US influence over that country and MENA oil reserves generally. The first country in the oil-rich MENA to come under predominantly US influence would be Saudi Arabia. Declared a kingdom in 1932, Saudi Arabia had been established in the previous three decades through the conquests of Ibn Saud. The Saudi monarch secured the support of Wahhabi religious leaders, members of a conservative tradition within Sunni Islam, by granting them theocratic oversight of social customs. Ibn Saud also accepted a formal British protectorate over his domains in return for military aid in 1915; and even after obtaining British recognition of his government’s full sovereignty in 1927, he remained dependent on British support, his country a de facto part of the United Kingdom’s empire of special treaty states in the Middle East. In 1933, however, King Ibn Saud opted to grant an oil concession to a US company, the predecessor of Chevron, beginning a decades-long US monopoly over foreign influence in Saudi oil affairs. Another US company, Texas Oil (later Texaco), joined the venture three years later, and their joint subsidiary, soon to be named Aramco, struck oil at Dammam in March 1938, initiating the Saudi oil industry.

The critical role of petroleum to military success during World War II solidified the view of the US government that Middle East oil constituted a vital strategic interest. During the war, Washington provided lend-lease aid to Saudi Arabia to ensure the stability of Ibn Saud’s rule, further supplanting British influence in the country. In Iran and Iraq, by contrast, the United States opted to uphold British preeminence. This support extended to London’s decision to depose and exile the neutralist Iranian monarch Reza Shah Pahlavi in 1941 and replace him with his son, Mohammed Reza Shah Pahlavi, a bright but insecure young man. The United States would provide lend-lease aid to these countries as well, however, to help keep them in the allied camp. During the war US leaders also began to discuss Iran as an important barrier to a possible Soviet challenge to Western control over Arab oil.⁴

At the end of World War II, the Soviet Union and the United States emerged as the two remaining global superpowers. The war convinced most US foreign policymakers that the vital security and economic interests of the United States required the reconstruction of a regulated global capitalist economy, the prevention of any single power from dominating Eurasia, and a policy of nonappeasement toward hostile dictatorships. Conversely, the war imbued Soviet leaders with a renewed conviction to gradually spread communism across the globe and, more immediately, to establish the security of the Union of the Soviet Socialist Republics (USSR) by dominating neighboring polities. Pursuing competing ideological and strategic visions, the Soviet Union and the United States proved unable to transcend their differences, and by 1947 had entered into an adversarial contest for global supremacy, the Cold War, in which most of the world, including the MENA, bifurcated into Soviet and US spheres of influence.⁵

The administration of US president Harry Truman made Western access to Middle East oil a top priority in its Cold War strategy of restoring global capitalism and countering the Soviet Union. While the United States produced two-thirds of the world’s oil and was a major petroleum exporter in 1945, it was becoming clear that the MENA held unparalleled reserves of oil, which meant that the region would play an important role in the development of the global energy market.⁶ At the same time, Aramco sought to begin the large-scale export of Saudi oil to realize the profit-making potential of its investment. The US military and the State Department supported Aramco’s goal, as they sought to expand oil production in the Eastern Hemisphere to ensure ample supplies of petroleum would be available to it there while also helping to conserve deposits of oil in the Western Hemisphere that constituted a more easily defended strategic reserve. In 1948 Aramco admitted Exxon and Mobil as partners, both to acquire additional capital for the infrastructure needed to reach European markets and to enlist their support in avoiding a costly price war with the IPC and the AIOC. The expansion of Aramco created an interlocking set of partnerships among Chevron, Exxon, Gulf Oil, Mobil, Texaco, British Petroleum, Compagnie Française Pétrole, and Shell through their joint ventures in Iraq, Kuwait, and Saudi Arabia. Collectively controlling the vast majority of exported oil in the world, the eight MNOCs joined forces to create a producer cartel that regulated oil output and pricing to avoid costly competition with each other. The MNOCs also steadily increased the export of Middle East oil, which facilitated the economic growth of the United States and the reconstruction of its major allies. As early as 1948 a US government study determined that the loss of Arab and Iranian oil production, estimated at 11 percent of the noncommunist world’s total, would force the United States to either adopt strict domestic energy rationing or risk the failure of Western Europe’s recovery under the Marshall Plan.⁷

Over the next two decades the Western economies built themselves up on cheap and plentiful oil. From 1949 to 1970 US oil consumption grew by 180 percent, Western European consumption by 1,350 percent, and Japanese consumption from a few thousand to 4.4 million barrels a day. The rapid growth in oil use played a key role in the phenomenal economic recovery of the Western countries after World War II. From 1948 to 1973 the combined GDP per capita of the more developed countries (MDCs) of Western Europe, North America, Japan, Australia, and New Zealand more than tripled.⁸ Oil also constituted the largest internationally traded good in terms of value and volume. In the decades after World War II the vast majority of internationally traded oil (and exports generally) was sold in dollars, linking the value of oil and the dollar together, and the reason why most revenues were petrodollars as opposed to a different petro-currency (such as the distant second petro-pound).⁹

While the Truman administration looked to the MNOCs to export oil from the Middle East, it primarily looked to the British, and to a lesser degree the French, to respond to local political challenges and keep the Soviets shut out of the MENA. Whereas Moscow lacked any allied states in the region in 1945, the British and French retained formal or informal control over most MENA states. The British also fielded significant military forces in the region; in 1952 the British maintained over sixty-four thousand troops and a string of military air and naval bases from Libya to Iraq to South Yemen.¹⁰ While the Truman administration did keep Saudi Arabia under the US aegis and began a military training program in Tehran, for the most part it was content to leave the defense of the Middle East to the British as a cost-saving division of labor.

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Yet while the Truman administration looked to the British and French to defend the MENA, the Europeans were weakened by World War II and faced emboldened anti-imperialist movements in the region fighting for two interrelated goals: an end to formal and informal Western rule and an improvement in their standard of living. In Iran political factions challenging British political and economic influence in the country grew in strength. In March 1945, Egypt, Iraq, Jordan, Lebanon, Saudi Arabia, and Syria formed the Arab League, with the goal of achieving closer relations between Arab countries and advancing the cause of their independence and welfare. France and the United Kingdom in turn made selective tactical retreats from formal empire in the hope of maintaining informal influence. In 1945 Lebanon and Syria obtained independence from France, and Jordan and Libya gained independence from the Unit...

Table of contents

• Acknowledgments
• List of Abbreviations
• Introduction
• 1. Oil, US Empire, and the Middle East
• 2. The Road to the Oil Shock
• 3. Pursuing Petrodollar Interdependence
• 4. The Triangle to the Nile
• 5. The Petrodollar Economy
• 6. Visions of Petrodollar Promise and Peril
• 7. Reform and Revolt
• 8. Revolution and Invasions
• 9. Recoveries and Crises
• 10. End of an Era
• Conclusion
• Notes
• Bibliography
• Index