The ongoing Iran war has unleashed one of the most severe energy shocks in decades. Our five-part series explores decisive moments when turmoil in the energy world changed the trajectory of geopolitics. Barrels and Power - Part 3 Enrico Mattei For decades, the world’s most important commodity was governed by a remarkably small club. Oil flowed from the deserts of the Middle East and the plains of Latin America, yet the rules of the trade were written elsewhere in the boardrooms of London, New York and The Hague. The industry was dominated by the so-called ‘Seven Sisters’ which comprised Standard Oil of New Jersey, Royal Dutch Shell, the Anglo-Iranian Oil Company, Standard Oil of California and Gulf Oil. These companies controlled exploration, production, refining and shipping across vast concession areas stretching from the Persian Gulf to Venezuela. Abdullah al-Tariki The arrangement had taken shape gradually after the first Middle Eastern oil boom in the 1930s, and proved remarkably durable through war and reconstruction. By the 1950s cheap oil had become the fuel of global growth. Western Europe rebuilt its economies on it. America powered its highways and suburbs with it. Japan’s post-war industrial miracle depended upon it. Yet, this structure rested on fragile political ground. The oil belonged to sovereign states, many newly independent, increasingly nationalist and often short of revenue. The Milanese Disruptor The first cracks in the post-war oil order came not from the Middle East but from an unlikely source: Italy. Enrico Mattei, the restless and combative head of the Italian state energy group ENI, loathed this ‘petroleum aristocracy’ and would emerge as the first major disruptor of the order imposed by the ‘Seven Sisters.’ A former wartime partisan who rose through Italy’s Christian Democratic establishment, Mattei had originally been tasked in 1945 with dismantling the country’s modest state oil concern, AGIP. Instead, he rebuilt and folded it into a new state champion – the Ente Nazionale Idrocarburi or ENI. Energy-poor Italy industrialising rapidly and Mattei wanted cheap oil and independence from the oligopoly of the ‘Seven Sisters’ which dominated global concessions and pricing. Breaking their rules, Mattei offered producing countries terms that were revolutionary for the time: 75 percent of the profits for the host nation with exploration risks being borne by ENI and joint management of production instead of the standard 50–50 profit-sharing formula adopted across the Middle East. To governments weary of concession agreements written in foreign capitals, the proposal was electrifying. Mattei moved quickly through the oil provinces of the emerging post-colonial world dangling the offer of partnerships before Egypt, Iran, Tunisia and Morocco, rather than concessions. His approach aligned neatly with the political mood of the era. Leaders such as Gamal Abdel Nasser, the nationalist president of Egypt, were eager to assert economic sovereignty after the humiliation of colonial rule. Mattei understood this instinct well, presenting ENI not as another Western oil company but as an ally of newly independent states. His ambitions extended even further. In 1959 he struck a controversial deal to import Soviet crude oil into Italy - an audacious move at the height of the Cold War that alarmed Washington and NATO planners. He also ventured into the turbulent politics of North Africa. During the Algerian war of independence, Mattei quietly cultivated contacts with the nationalist movement fighting French rule, calculating that an independent Algeria might one day grant ENI privileged access to its hydrocarbons. To the ‘Seven Sisters,’ this behaviour looked dangerously subversive. The carefully managed cartel that had governed oil markets since the 1930s depended on companies respecting each other’s territories. Mattei did the opposite by offering governments better terms and undermining the logic of the concession system. By the early 1960s he had made enemies across several capitals. American policymakers viewed him as an irritant to the Western oil order; French officials were furious about his contacts with Algerian nationalists; and rival oil executives saw his pricing model as a direct challenge to their profits. Mattei himself seemed to relish the role of insurgent. He liked to compare Italy to a small cat trying to eat from a pot guarded by large dogs (i.e. the Western oil majors) This confrontation ended abruptly on October 27, 1962 when Mattei’s aircraft crashed near the village of Bascapè in northern Italy, killing him, his pilot Irnerio Bertuzzi and an American journalist who was travelling with him. Given his profile, suspicions about the nature of the crash began almost immediately. Over the decades investigators uncovered evidence suggesting that the aircraft had been brought down by a bomb concealed in the fuselage. Whatever the truth, by the time Mattei died, the damage to the old oil order had already been done. By offering producing nations better terms and demonstrating that the ‘Seven Sisters’ could be challenged, he had emboldened the very governments that would soon take matters into their own hands – a path that would lead to OPEC. The Suez Crisis If Mattei represented the economic challenge to the Western oil order, the geopolitical challenge arrived in form of the 1956 Suez crisis. That July, Nasser stunned Western capitals by nationalising the Suez Canal Company, a waterway through which roughly two-thirds of Europe’s oil shipments then passed. The move provoked an ill-advised military intervention by the United Kingdom, France and Israel in October–November 1956. While Israeli forces got the better of the Egyptian army and the British and French forces engaged in aerial bombing of Egypt which led to several civilian casualties, the invasion ultimately collapsed within weeks under intense diplomatic pressure from both United States and Soviet Union. For Britain and France, the episode marked the twilight of imperial influence in the Middle East. For Arab nationalism it was a triumph. And for the oil industry it was a revelation on how geopolitical shocks could close strategic arteries overnight. With the canal temporarily blocked and pipelines across Syria sabotaged, tankers carrying crude from the Persian Gulf were forced to sail the long route around the Cape of Good Hope, adding thousands of miles to the journey to Europe. Energy security, a phrase barely used before the crisis, suddenly entered the vocabulary of Western policymakers. Importantly, governments from Baghdad to Riyadh took the lesson that if control over a canal could shift the balance of power, control over oil might prove even more consequential. Producer Diplomacy But the most enduring consequence of the crisis was the new thinking it provoked among the oil strategists of the producing world. At its centre was Juan Pablo Pérez Alfonzo, Venezuela’s austere and analytical minister of mines and hydrocarbons, who had spent years in exile in the United States studying the regulatory framework of the Texas Railroad Commission which stabilised American oil prices through production quotas. Pérez Alfonzo became convinced that exporting countries faced a similar dilemma: too much uncoordinated supply could drive prices downward and impoverish producers. Across the Atlantic he found a kindred spirit in Abdullah Tariki, Saudi Arabia’s first formally trained petroleum geologist and an increasingly vocal critic of the multinational oil companies operating in the kingdom under concession agreements like Standard Oil of California and Texaco. Tariki, who had studied geology and chemistry at the University of Texas and Princeton, believed that the producing nations of the Middle East had ceded too much authority to foreign firms. Oil, he argued, was not simply a commercial commodity but the economic foundation of national sovereignty. The two met repeatedly during the late 1950s at international petroleum conferences, gradually sketching the outlines of a permanent organisation of exporting countries capable of coordinating production policy and defending prices. At first the proposal seemed ambitious as oil exporters were scattered across continents, differed widely in political systems and often competed with one another for market share. Yet, events soon provided them with a shared grievance. The Japanese Challenge Another subtle pressure on the established oil order came from Asia. By the late 1950s Japan’s astonishing post-war industrial expansion was transforming it into one of the world’s fastest-growing oil consumers. Japanese trading houses and energy firms, eager to secure supplies independent of the Western majors, began seeking direct deals with producing countries. One of the most significant ventures involved the Japanese consortium Arabian Oil Company, which in 1957 obtained exploration rights in the neutral zone between Saudi Arabia and Kuwait - an arrangement that bypassed the traditional concession holders and signalled that the Seven Sisters no longer monopolised access to Middle Eastern crude. For exporting governments, the implications were obvious: alternative partners were emerging, competition among buyers was increasing and the structure of the oil market was slowly loosening. The old cartel was beginning to look less impregnable and the decisive trigger arrived in 1960. Throughout the late 1950s global oil supply had been expanding rapidly. New discoveries in Libya and Algeria, rising output in the Soviet Union and increased production in the Middle East created downward pressure on prices. The multinational oil companies responded as they had often done before: by adjusting the posted price, the benchmark figure used to calculate government royalties. In August 1960 Standard Oil of New Jersey announced a reduction in the posted price for Middle Eastern crude oil, followed shortly thereafter by similar adjustments from other majors including Royal Dutch Shell and British Petroleum. For the companies the decision was a technical correction designed to maintain competitiveness against Soviet exports. But for producing countries, it was an affront. Since national revenues were tied directly to posted prices, the cut translated immediately into lower government income. Even more galling was the unilateral manner in which it had been imposed without consultation with the governments whose finances depended upon those prices. For Pérez Alfonzo and Tariki, the episode confirmed long-held fears that as oil exporters acted individually, multinational companies would continue to dictate the terms. A collective response was now unavoidable. Baghdad Calling The venue for that response emerged from the shifting politics of the Middle East. In Iraq, the monarchy had been overthrown in a violent coup in 1958, bringing to power the nationalist government of Abdul Karim Qasim. Keen to assert Iraq’s independence from Western influence and to enhance its standing in the Arab world, Qasim’s government offered to host a conference of oil-exporting nations in Baghdad. In September 1960, delegations arrived from Saudi Arabia, Iran, Kuwait and Venezuela with an agenda to create a mechanism that would allow oil exporters to coordinate policy and respond collectively to price changes imposed by the oil majors. The five countries, in a momentous step, formally established the Organization of the Petroleum Exporting Countries (OPEC). At the time the decision attracted almost disdainful attention outside the industry. Early internal assessments within the Central Intelligence Agency suggested that the organisation would struggle to overcome the competing interests of its members and was unlikely to present a serious challenge to the established oil companies. History would prove otherwise. While the creation of OPEC did not immediately overturn the oil order and the Seven Sisters remained powerful, controlling most production infrastructure and tanker fleets, the psychological shift was profound. For the first time the states that owned the oil themselves had created a permanent institution through which they could coordinate strategy. Over the next decade additional exporters including Qatar, Libya and United Arab Emirates, joined the organisation, strengthening its influence. By the early 1970s the balance of power had shifted decisively toward producing nations, culminating in the dramatic price surge of the 1973 oil crisis. More than six decades later the world energy system is far more complex. The United States has become a major producer through shale extraction and Russia plays an outsized role in global supply. Yet, panic over the Strait of Hormuz today shows that the strategic geography that shaped the meeting in Baghdad remains largely intact. Oil politics, it turns out, has a long memory.
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