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By:

Shoumojit Banerjee

27 August 2024 at 9:57:52 am

Riyadh, 1973: The Great Energy Shock and Unravelling of the West

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 4 With no let-up in the escalating Iran-U.S.-Israel conflict, talk of $200 oil has leapt from fringe alarm to boardroom concern, as disruptions around the Strait of Hormuz - artery to nearly a fifth of global supply – continue to rattle markets. The current scenario...

Riyadh, 1973: The Great Energy Shock and Unravelling of the West

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 4 With no let-up in the escalating Iran-U.S.-Israel conflict, talk of $200 oil has leapt from fringe alarm to boardroom concern, as disruptions around the Strait of Hormuz - artery to nearly a fifth of global supply – continue to rattle markets. The current scenario has a near-mirror reflection in the events of October 1973, when a regional war in the Middle East spiralled into a global energy crisis and profoundly altered the oil hierarchy. Anwar Sadat The decades after the second world war belonged to what historian and energy pundit Daniel Yergin called the ‘Hydrocarbon Man.’ Between 1949 and 1972, while global energy consumption more than tripled, the demand for oil surged over fivefold. Nowhere was this more visible than in the industrial world’s newfound affluence. In America, consumption of oil tripled while Western Europe’s appetite multiplied fifteen times. Japan’s hunger for oil surged by an astonishing 137-fold. Rising prosperity brought with it a revolution in consumption. In his opus ‘The Prize’ (1990), Yergin observes that the number of vehicles in America rose from 45 million in the late 1940s to a staggering 119 million by the early 1970s. King Faisal Cheap oil underwrote it all. It powered not just industry but a way of life - air-conditioned, motorised and increasingly energy-intensive. And because oil was abundant and inexpensive, most Americans took it as a birthright. False Complacency Even geopolitical shocks seemed unable to shake this complacency. The Arab embargo that had followed the Six-Day War of 1967 had proved largely ineffective. In fact, the biggest losers had been the producers themselves, who had forfeited revenues without achieving political gains. For many in the West, this episode reinforced a comforting illusion that oil supply was secure and ultimately apolitical. By the early 1970s, however, this illusion was beginning to fray. Demand was catching up with supply, thus eroding the surplus that had persisted for two decades. The United States, once the world’s swing producer, ran out of spare capacity. At the same time, structural tensions were mounting as oil-exporting countries in the Middle East, becoming increasingly assertive, sought a larger share of rising revenues. Producers, led by more radical members such as Libya and Iraq, pushed to rewrite the rules of the game as nationalisations followed. In September 1973, Libya under Muammar Gaddafi seized majority control of remaining foreign operations, confident that a tight market would absorb its output. The geopolitical backdrop was equally combustible. After the death of Gamal Abdel Nasser, Anwar Sadat had inherited an atrophied Egypt that was economically strained and militarily overextended. Determined to restore national pride and break the deadlock with Israel, Sadat ominously concluded that only force could reset the equation. Having consolidated power at home and expelled Nasser’s Soviet advisers, Sadat prepared, in concert with Syria’s Hafez al-Assad, for war. Crucially, he ensured the backing of Saudi Arabia’s King Faisal, thereby bringing oil into the strategic calculus. And when the joint Egyptian-Syrian attack finally came on Yom Kippur day on October 6, 1973, it was swift and shocking. Egyptian and Syrian forces launched coordinated attacks on Israeli positions, igniting the most intense Arab-Israeli conflict since 1948. Yet the most consequential weapon was deployed on the battlefield. It was oil. Through embargoes and production cuts, Arab producers sought to wield their resource as leverage, thus transforming a regional war into a global economic crisis. As Henry Kissinger later observed, the crisis altered irrevocably the post-war order. The timing was decisive. For the first time in the post-war era, the oil market was tight, vulnerable to disruption and heavily dependent on the Middle East. But even before the 1973 crisis, shortages loomed and prices were rising. America had scrapped import quotas, acknowledging that domestic production could no longer satisfy demand while independent refiners struggled to secure supplies. The system was primed for rupture. The Saudi Calculus Since the 1950s, Arab leaders had toyed with the notion of an ‘oil weapon’ against Israel and its Western backers. But for years, it remained more rhetoric than reality. So long as America held spare capacity, the weapon lacked an edge. By the early 1970s, that equation had reversed. The United States had reached full production and its ability to stabilise markets had vanished. In its place, Saudi Arabia emerged as the new swing producer. Gulf oil, once supplementary, had become indispensable and with it, the long-mooted weaponization of oil acquired real force. Even so, despite Sadat’s importunations, King Faisal was initially reluctant to wield it. While he was deeply hostile to Israel, he nonetheless regarded oil embargoes as both futile and dangerous, a lesson reinforced by the failure of 1967. Furthermore, Saudi Arabia’s security and prosperity were closely tied to the United States. Hence, antagonising Washington seemed imprudent, especially amid the spread of radical, often Marxist, movements across the Arab world that threatened monarchies like his own. What finally changed Faisal’s calculus was a convergence of markets and politics. As oil demand surged, prices rose and Saudi Arabia’s share of exports climbed sharply, enhancing its leverage. Meanwhile, currency devaluations eroded the value of dollar-denominated reserves, and production curbs by others tightened supply further. In short, the market was amplifying Saudi power. At the same time, regional dynamics shifted. Anwar Sadat, unlike his predecessor Nasser, sought not pan-Arab revolution but Egyptian revival. He cultivated ties with Riyadh and pressed Faisal to consider oil as a strategic tool. Without Saudi backing, Egypt risked drifting back into Soviet dependence—an outcome Riyadh was keen to avoid. By 1973, Saudi signalling had grown sharper. Officials warned that production would not expand to meet Western demand unless Washington moderated its support for Israel. When Sadat visited Riyadh in August with plans for a surprise attack, Faisal agreed to support him both financially and strategically. Oil would, if necessary, be deployed. Intelligence Failure As war approached, intelligence hinted at imminent conflict while Soviet evacuations from Egypt and Syria provided further clues. Yet, both Israel and the United States dismissed the likelihood of war, misreading Sadat as a bluffer rather than a strategist. Moreover, earlier false alarms had dulled Israeli vigilance, while carefully staged distractions on part of the Egyptians diverted attention at critical moments. When the attack came on Yom Kippur, it achieved a near-total surprise. Israeli forces, constrained from pre-emption and misled on timing, were initially overwhelmed. For Washington, the initial objective was containment. President Richard Nixon and Secretary of State Henry Kissinger sought a ceasefire that would restore the status quo, avoiding superpower confrontation. But the battlefield told a different story as Israel’s position was more precarious than anticipated. Ammunition was being consumed at a rate that threatened exhaustion within days. Israeli Prime Minister Golda Meir appealed urgently to Washington while war hawk Moshe Dayan warned that “the Third Temple is going under.” As the Soviet Union mounted a vast airlift to Egypt and Syria, the balance threatened to tilt decisively. By October 11, American leaders concluded that without urgent intervention, Israel might lose. The United States launched a massive airlift to aid Israel. To Arab leaders, the message was unmistakable: Washington had aligned itself openly with Israel On the battlefield, Israel stabilised the front and soon counterattacked. At almost the same moment, another drama was unfolding far from the battlefield in Kuwait where Gulf producers, meeting on October 16, unilaterally raised the price of oil by 70 percent, asserting full control over pricing for the first time. The shift was historic: power had passed definitively from the companies to the exporters. American assurances of seeking a ceasefire could not offset the impact of visible military support for Israel. On October 19, President Richard Nixon announced a substantial aid package and within hours, the Gulf producers began targeting the United States directly. By October 20, Saudi Arabia and other Arab exporters imposed a full embargo on oil shipments to America. The oil weapon, once blunted by abundance, was unleashed in a tight market and with it, the three-decade old postwar petroleum order lay dead. Domestic Scandal As war raged in the Middle East and the oil crisis deepened, the United States was distracted by a drama at home. What Nixon had dismissed as a minor burglary had metastasised into the Watergate scandal, consuming his presidency. The effect was surreal: on the very days when Israel teetered on the brink, Washington was preoccupied with the resignation of Vice-President Spiro Agnew and the elevation of Gerald Ford as his replacement. This domestic turmoil hollowed out American leadership at a moment of global crisis. Authority drifted instead to Henry Kissinger, who, combining roles as national-security adviser and secretary of state, became the principal steward of policy. Nixon’s diminished credibility constrained America’s ability to manage allies, adversaries and oil producers alike. To foreign capitals, the spectacle of Watergate was baffling, even as it was shaping the course of the merry-go-round of geopolitics. Meanwhile, though Kissinger professed little understanding of the commodity itself, he well grasped its strategic weight. In the months ahead, he would play a central role in containing the crisis. Worldwide Panic The closing months of 1973 offered a near-perfect recipe for panic brought on by the Yom Kippur War. Companies and consumers alike scrambled to secure oil supplies, not only for immediate use but to hoard against an unknowable future. Panic buying became its own accelerant, driving demand and prices ever higher. The crisis moved swiftly from markets to daily life. Oil that had recently sold for a few dollars a barrel was suddenly fetching three or four times as much. From $5.40 per barrel in October, oil climbed past $17 within weeks. In extreme cases, bids reached over $22 in a sixfold increase. But the shock rippled far beyond the United States. It unsettled the very foundations of post-war prosperity. Policymakers feared a toxic mix of inflation, stagnation and monetary disorder. For developing countries, the outlook darkened sharply. In the United States, the shock was more visceral. ‘Gas lines’ became the defining image of the 1973 crisis with cars stretching for blocks, stations running dry and rationing imposed on a society so accustomed to abundance that it appeared to have a meltdown when suddenly confronted with scarcity. In Europe and Japan, the psychological blow was immediate. Memories of post-war deprivation resurfaced. Governments scrambled to allocate dwindling supplies; industries bombarded ministries with pleas for fuel. In Japan, anxiety tipped into outright panic buying, with households hoarding everyday goods in scenes reminiscent of earlier decades of scarcity. For the industrial world, the crisis raised more existential questions. If cheap energy had been the glue of social stability, what would replace it? Could economic strain revive the political fractures of an earlier age? Half a century later, the ghost of 1973 continues to haunt the world energy order.

Tehran, 1953: The Coup That Changed Oil Politics

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 2

 

The coup that restored the Shah also entrenched a legacy of oil politics and foreign intervention that still shadows Iran today.


Mohammad Mosaddegh
Mohammad Mosaddegh

At the start of the 20th century, Persia was a fading empire ruled by the aging Qajar monarch Mozaffar al-Din Shah Qajar. The country possessed little industry, a weak treasury and a government increasingly dependent on foreign concessions to raise revenue. Beneath its deserts, however, lay one of the world’s largest oil deposits - an asset that would draw the attention of imperial powers and transform Persia into a central arena of global energy politics.


William Knox D’Arcy
William Knox D’Arcy

The story began in 1901 when the Shah granted British financier William Knox D’Arcy an extraordinary concession to explore for oil across most of the country. D’Arcy’s gamble nearly collapsed after years of costly drilling in remote terrain. Only in 1908 did the venture succeed, when oil was finally struck in southwestern Persia. The discovery led to the creation of the Anglo-Persian Oil Company, which would later become Anglo-Iranian and eventually the modern energy giant BP.


Crown Jewel

Its crown jewel was the sprawling refinery at Abadan Refinery, which, by the 1930s it had become the largest refinery on the planet, employing tens of thousands of workers and processing crude that fuelled ships, factories and military aircraft across the British Empire.


The refinery was so vast that it functioned as a company town, complete with segregated quarters that starkly illustrated the inequalities between foreign managers and Iranian labourers.

In 1914, on the eve of the First World War, the British government took a controlling stake in the Anglo-Persian Oil Company to secure fuel for the Royal Navy, which was switching from coal to oil. The decision effectively bound Britain’s imperial power to Persian oil. From that point forward, the fortunes of the company and the geopolitics of the Middle East became inseparable.


Meanwhile, Persia itself was entering a new political era. In 1925 the ambitious military officer Reza Shah Pahlavi seized power, ending the Qajar dynasty and launching a program of modernization that included renegotiating the terms under which foreign companies operated in Iran’s oil fields.


By the early 1950s, Iranian oil accounted for roughly 40 percent of the Middle East’s output. But the prosperity generated by this vast enterprise was unevenly shared. To many Iranians, the Anglo-Iranian Oil Company had become a symbol of foreign domination and economic injustice. Although Iran received royalties and a share of profits, nationalist politicians argued that the country was being exploited while its natural wealth enriched foreign shareholders.


Through the Second World War, Iran had remained largely within Britain’s strategic sphere. But as the Cold War intensified, Washington began to view Iran not merely as a British responsibility but as a critical front in the struggle against Soviet expansion. The Soviet Union had already occupied northern Iran during the war, and American officials worried that a weak and unstable country might eventually fall under Moscow’s influence.


Landmark Agreement

In Washington, officials increasingly believed that Iran deserved a larger share of its petroleum wealth. The American diplomat George McGhee, who was negotiating a landmark fifty-fifty profit-sharing agreement between Saudi Arabia and the American-backed Saudi Aramco consortium, argued that the existing financial arrangements in Iran were outdated and politically dangerous.

In London, however, the mood was far less accommodating. The powerful chairman of the Anglo-Iranian Oil Company, William Fraser, resisted pressure to revise the company’s agreement with Tehran. A tough and uncompromising executive, Fraser believed the existing terms were fair and feared that any concession would only encourage further demands. Within the British government, senior officials such as Foreign Secretary Ernest Bevin and later Anthony Eden struggled to balance diplomatic realities with the strategic importance of Iranian oil to Britain’s fragile post-war economy.


The announcement of the Saudi deal in 1950 detonated expectations across the oil-producing world. If Saudi Arabia could claim half the profits from its oil, Iranian nationalists asked, why should their country accept less? The precedent sent shockwaves through Tehran, where critics of the Anglo-Iranian Oil Company increasingly portrayed the arrangement as a relic of imperial privilege.


In Tehran, the political climate was becoming increasingly combustible. Prime Minister Ali Razmara, a controversial military officer, opposed nationalisation of the oil industry, arguing that Iran lacked the technical expertise to manage such a complex enterprise. His warnings proved politically fatal. In March 1951, as he approached a mosque in Tehran, Razmara was assassinated by a religious extremist. His death removed the last major obstacle to a radical shift in policy.


Within weeks, the Iranian parliament voted to nationalise the oil industry. At its center stood the charismatic and eccentric nationalist leader Mohammad Mossadegh. An aristocrat by birth but a populist by temperament, Mossadegh had long campaigned against foreign influence in Iran and quickly emerged as the political hero of the nationalisation movement.


The nationalisation law soon followed, dealing Britain a severe blow. Abadan was not only the world’s largest refinery but also a cornerstone of Britain’s energy supply and financial stability. Yet London found itself with limited options.


Meanwhile, Mossadegh’s popularity soared at home. To millions of Iranians, he had accomplished a historic act of national liberation. Even as the country’s economic situation deteriorated, oil exports collapsed and government revenues plunged, many supporters saw the sacrifice as necessary to reclaim Iran’s sovereignty. Mossadegh himself declared that the oil could remain underground indefinitely if that was the price of independence.


High Stakes

But the crisis was reshaping Iranian politics in unexpected ways. Mossadegh increasingly relied on mass mobilisation to maintain power, using radio broadcasts to rally supporters into the streets.


The Shah, watching these events unfold, felt increasingly marginalised. Though he remained the country’s monarch, real power seemed to lie with the charismatic Mossadegh and the nationalist movement that surrounded him.


At the same time, the geopolitical stakes were rising sharply. In June 1950, North Korea’s invasion of South Korea transformed the Cold War into an open military confrontation. Western officials now viewed the Middle East’s oil resources as essential to global security. The possibility that Iran might drift toward the Soviet Union or fall under the influence of the communist Tudeh Party deeply alarmed policymakers in Washington and London.


By 1952, the Iranian economy was deteriorating rapidly. Without foreign expertise and markets, the nationalised oil industry could not sell its production. Mossadegh’s political base now began to narrow while conservatives, monarchists and sections of the military began to unite.


In the summer of 1953, the United States and Britain decided to intervene covertly to reshape the political balance in Tehran.


The operation, code-named Ajax, was organised jointly by the CIA and British intelligence. Its field commander was Kermit Roosevelt, a grandson of Theodore Roosevelt, who entered Iran secretly in July 1953.


Roosevelt faced a daunting challenge. The Shah himself was hesitant and fearful. Convinced that Mossadegh had widespread popular support, the monarch doubted the chances of success. Roosevelt eventually managed to meet him secretly in the palace, arriving under a blanket in the back of a car to avoid detection. During the clandestine encounter, he persuaded the Shah to support the plan.


The coup began in mid-August with an order from the Shah dismissing Mossadegh from office. But the initial attempt quickly collapsed when Mossadegh learned of the plot and arrested the officer delivering the decree. Pro-government supporters poured into the streets, while the Shah fled the country, first to Baghdad and then to Rome. From exile, he believed his reign was over.


In Washington, officials briefly assumed the operation had failed. Yet events in Tehran took an unexpected turn. On August 19, a pro-Shah demonstration erupted in the capital. What began as a small gathering rapidly expanded into a vast crowd. Wrestlers, weightlifters, and street performers marched through the bazaars, rallying supporters and denouncing Mossadegh.


As the crowds grew, key military units began to switch sides. Soldiers sent to disperse demonstrators instead joined them. Soon the momentum had shifted decisively. Mossadegh fled his residence, climbing over a garden wall as pro-Shah forces seized control of the capital.


In Rome, the Shah received the news in a hotel suite where he and his wife had been living in anxious exile. A wire news reporter rushed up with the headline announcing Mossadegh’s overthrow. The Shah reportedly turned pale before declaring, “I knew that they loved me.”


Within days he returned to Tehran in triumph. Mossadegh was arrested, and General Fazlollah Zahedi became the new prime minister.


The political drama had profound consequences for the global oil industry. Although the Shah had regained his throne, the old system dominated by the Anglo-Iranian Oil Company could not simply be restored as Iranian nationalism remained too powerful.


Instead, Western governments crafted a new arrangement. A consortium of international oil companies - American, British and European - would jointly operate Iran’s petroleum industry. Anglo-Iranian would remain involved but no longer dominate the enterprise. American companies, which had previously been excluded from Iranian oil, now gained a significant share.


The 1953 coup demonstrated how profoundly oil had become entangled with global power politics. For Iran, the consequences would reverberate for decades. Many Iranians came to view the overthrow of Mossadegh as shorthand for foreign interference in their country’s affairs. The resentment generated by the episode would simmer beneath the surface of Iranian politics for a generation, until it erupted again in the revolution of 1979.

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