Global Policy Forum

The Limits of Power:


By Joyce and Gabriel Kolko

The following text is an excerpt from The Limits of Power: The World and United States Foreign Policy, 1945-1954
(New York: Harper & Row, 1972), pp. 413-420.

Oil: The Rewards of Power

The basic United States objective in the Middle East was that British power emerge neither too weak nor too strong from the monumental struggles under way in that region. In a precarious and intricate diplomatic context, the United States sought to manipulate and control moderate Arab nationalism to serve the attainment of this delicate but utilitarian balance of power in the region. But Washington understood that excessive British weakness would open a power vacuum into which Soviet influence or radical nationalism might rush, and the United States intended the Truman Doctrine to be an effort to balance and restructure the emergent forces of change in the larger area. Yet a Britain that was too strong could deny the United States what it coveted most in the Middle East: oil.

Even as the United States acted to strengthen the conservative forces that England had abandoned, it moved to reap the rewards of its rising power and role in the region, thereby further removing the British incentive to dissipate their strength by holding all their existing commitments. The English regarded the American intervention in Greece and Turkey as nothing new, and motivated mainly by self-interest. "The truth is that the United States has been involved up to the hilt in the Middle East," the Economist of London could bitterly comment immediately after Truman's speech. (14) Officially, the State Department denied that the Truman Doctrine impinged on United States oil policy; yet its own domino theory belied the assertion, and in reality most congressmen treated the oil matter as an integral part of the picture. That the major American oil firms chose this time in the shifting regional balance of political power to pursue aggressively the smashing of the traditional Red Line division of Middle East oil made full sense, and by November 1948, they arranged a laborious, complex new agreement after innumerable Anglo-American court battles. Now the way was clear for American firms to establish their mastery over the Middle East oil that had been one of the major rewards of British imperialism.

Given the de facto opening of the Middle East's oil resources to United States interests, there was scarcely any need after mid-1947 for the painfully negotiated and still unratified Anglo-American petroleum agreement that had been submitted to the Senate in the fall of 1945. Moreover, the Texas- based opposition to the treaty was vigorous and pointed, and included key Republican fund raisers who detailed their past services to the party while insisting that "[t]he oil men want this proposed treaty killed. . . ." (15) These domestic producers lived with the fear that someday a treaty might open the American oil market to true world competition of the sort Washington advocated for other nations, at which point Bahrein oil, costing 25 cents a barrel in 1947 including royalties-or a small fraction of the American cost -might squeeze them out of business. Despite the nominal support for the treaty from the national petroleum organizations, the presence of Tom Connally of Texas in the Senate Foreign Relations Committee, and flagging interest from a State Department that saw it would successfully break into the Middle East with or without a treaty, were sufficient to freeze the proposal. The British hope that they might appease and contain the Americans, who had strenuously insisted on the treaty in the first place, proved vain.

During the months that the United States was moving into the Middle East via Greece and Turkey, an interdepartmental committee from the State, Interior, Commerce, Army, and Navy departments hammered out a confidential recommendation which reached advanced form by November 1947 and was effectively to guide "United States Petroleum Policy" globally. In essence it updated and expanded the ambitious oil policy that had been formulated at the end of 1944.

As Washington still saw it, its basic purpose was to " . . . seek the removal or modification of existent barriers (legal, contractual or otherwise) to the expansion of American foreign oil operations and facilitate the entry or reentry of private foreign capital into countries where the absence of such capital inhibits oil development." Such "capital" meant American capital, and this explicitly required diplomatic undertakings to open the way for United States firms: "That the policies and techniques of diplomatic and other support heretofore employed by the United States Government be continued, and be strengthened where appropriate and possible," and that Washington " . . . should promote, by advice and assistance . . . the entry of additional American firms into all phases of foreign oil operations." This would require closer coordination with United States firms, but also with foreign governments, which would be encouraged to adopt laws " . . . properly safeguarding the legitimate interests of all parties concerned." And that, in turn, meant "[t]he Committee agreed that although a country has a sovereign right to nationalize its industries, it does not follow that a country should exercise this right and was of the opinion that all feasible methods of persuasion should be used to induce a country considering nationalization of its petroleum industry to refrain from such nationalization . . . ." (16) Tangibly, the policy spelled out, the United States would loan no public funds to help develop nationalized oil industries, and would continue diplomatic interventions as a matter of course.

This policy reflected the perpetuation rather than a growth of the geopolitical and profit-oriented sophistication of the leading American decision-makers, and it explained much of America's future interventionist responses to not only Middle Eastern crises but Latin American as well. Forrestal, who was always ready to stress the vast stakes involved in the control of the world's oil supply, was scarcely alone at this time. Indeed, the November 1947 statement was global in its scope, but focused specifically on the reentry of United States firms into the Mexican and Bolivian oil fields, both of which had been nationalized for a decade. As in 1944, it was still American policy to obtain a larger share of Middle East output, but to retain the hemisphere as a monopoly against all possible competitors and internal changes.

The United States decided at the end of 1947, therefore, to even more energetically " . . . seek the reentry of private foreign capital" into Mexico and Bolivia, as it would more aggressively several years later in Iran. (17) In Mexico, only several months after the war's end, the State Department had already begun to seek openings for new United States penetration on terms that would neutralize nationalization, and over the following year its enthusiasm far exceeded that of the oil companies. Washington informed the Mexicans not only that nationalization violated the spirit of the Act of Chapultepec but also that they could expect no aid to the nationalized industry until United States firms were readmitted. By January 1948 the matter was before the cabinet, where Forrestal argued for " . . . the appointment of ambassadors with some business experience and background . . . who would vigorously and continuously push the interests of American business," and Mexico was his best justification of the need for such men. (18) Not only had Mexico nationalized its oil industry, but it was inefficient and useless in providing the United States with the precious fluid. A month later, Willard L. Thorp, assistant secretary of state, publicly outlined America's opposition to all nationalization as being confiscatory, along with its intention of continuing to win more concessions for American firms in the Middle East and to get back into Mexico.

The Mexicans wanted United States technical help for their petroleum industry, and they also wished loans. To complicate the matter, as well as sharpen the screws, there was still pending, among others, an outstanding claim of at least $200 million against Mexico for the oil of a nationalized American firm, the Sabalo Transportation Company, which wisely had engaged the law firm of Sullivan & Cromwell. There Allen Dulles had worked on the matter until handing it over to an associate, Edward G. Miller, Jr., who in May 1949 was designated assistant secretary of state for inter-American affairs. At the beginning of July the Mexicans received an aide-mémoire suggesting that a United States loan was contingent on Mexico's indication of a favorable attitude toward the reentry of private American firms in oil exploration, development, and production, as well as the settlement of various claims. At that point the United States would be ready to assist Mexico on the refining, transportation, and technical end of the industry. The Mexicans rejected the proposal categorically.

In Bolivia, however, the United States reentry appeared to go better for a time. On December 28, 1950, Ambassador Irving Florman could triumphantly report to Washington, "Since my arrival here, I have worked diligently on the project of throwing Bolivia's petroleum industry wide open to American private enterprise . . . the whole land is now wide open for free American enterprise. Bolivia is, therefore, the world's first country to denationalize . . ." (19) Yet before the agreeable Bolivian President could perform his end of the bargain he was out of office, and the prospect of American success lasted only as long as the frail personalities on whom it was based. Ultimately the prize was gained-only to be lost again later- when a bankrupt and dependent Bolivia was compelled to revert to private foreign penetration or lose the United States' entangling aid.

Meanwhile, the new division of the Middle East finally worked out by the British, their allies, and the American firms did not last long. Upsetting matters was the desire of oil-producing nations to obtain a larger share of the profits on the oil foreign firms were removing from their soil, and in 1948 Venezuela passed a 50-50 law that soon had global repercussions. The Iranian government, still unhappy with British predominance over its wealth, also began pressuring for a greater share from the Anglo-Iranian Oil Company, which had no intention of voluntarily conceding on its immense profits by altering miserable working conditions and discrimination in its fields. Despite eventual financial concessions, in part the result of pressures from the American government, Anglo-Iranian moved too reluctantly, and in December 1950, when the United States-owned Aramco firm agreed to 50-50 for Saudi Arabia, the Iran crisis reemerged in full bloom. The American firm was aware of the intense dispute in Iran between the nationalists in the Majlis, led by Mohammed Mossadegh, and Anglo- Iranian-and the Iranian threat of nationalization if they could not reach a satisfactory arrangement. It was well known that the new American offer, which exceeded the more favorable terms Anglo-Iranian was already giving Iran, would have ramifications throughout the Middle East, and that it was a kind of bidding for the favor of the Arab nations. Whether intended or not, the act accelerated the dispute between Britain and Iran, as did the intimation from the American ambassador in Iran that the United States would be a probable source of economic aid for the advancement of Iran's general economic plans. What is certain, however, is that American public and private actions egged the Iranians on, as American diplomats on the scene openly proclaimed their neutrality, and in May 1951, Iran, under Mossadegh's leadership, nationalized the oil industry and threw the English out.

Iran owned its oil industry and refineries, but the United States and England now collaborated to cut off all its markets and drive it back into the Western-controlled oil economy. To the United States, which initially refused to support the British even on nationalization - thereby filling the British with the reasonable suspicion that the Americans were encouraging Mossadegh - the question, now that the British were out, was for the United States to carve out a share of the oil of a nation whose wealth it had unsuccessfully coveted since 1944. In principle, Mossadegh, who was now Premier, favored compensation to Anglo-Iranian, but the Americans saw the need to prevent genuine nationalization, however temporarily useful it was to be. Truman was unsympathetic to the British cause, but also feared that Iran's total success would set a dangerous precedent for Venezuela and nations where American oil interests were more direct. Mossadegh, whom Acheson regarded as a reactionary nationalist, was still less dangerous than a decisive British victory that might also bring on a Communist coup. "Perhaps the Iranians and the British will agree to have an international management group run the oil industry," Henry F. Grady, the recently retired United States ambassador to Teheran, suggested at the end of 1951. (20)

The British themselves, it soon became clear, had less power in the situation than the much more cautious Americans, who were the only ones able to supply them with desperately needed oil, and they permitted the United States to take the initiative as mediators, quite convinced the Americans had concocted the crisis in the first place to attain their long-standing goal of penetrating Iran. The British, in any event, abandoned their contemplated invasion of Iran. During November, Mossadegh visited Washington and received royal treatment, and for a brief period it appeared possible that America would aid him and exclude the British. But on November 7, Sir Anthony Eden formally assured Acheson and Harriman that London would welcome American participation in a reorganized oil consortium - an offer Harriman berated him for being long overdue, its delay having been a major source of the trouble. Under the new circumstances, the Americans would find a new way to handle Mossadegh. Washington now moved toward closer cooperation with the British, cutting off all military and most economic aid to Teheran at the same time. By mid-1952, however, British patience was running thin, and the presence of American oilmen in Teheran aroused their suspicions, despite State Department disavowals of approval. During the fall, Washington feared once more that British intransigence on the Iranian share of oil might open the door to a Tudeh Party coup, and in November the United States secretly decided to buy Iranian oil to buoy up the bankrupt Iranian economy, publicly authorizing United States firms to do so the following month. But the British wanted Mossadegh out of office, and United States efforts to drag them along on a new compromise - one that would have allocated American firms half of Iran's oil output - failed. (21)

To look ahead, soon after Eisenhower came to office Dulles reevaluated the tacit Anglo-American united front and toyed with the possibility of making Mossadegh the United States' anti-British and anti-Russian ploy. But Washington rejected the alternative and instead warned Mossadegh that he would not receive any further American aid; the United States would continue to boycott his oil, and compensation would have to go well beyond Anglo-Iranian's loss of physical assets-and presumably include compensation for the immense fortune of oil still in the ground for which it was patently obvious Iran could never pay. Otherwise, Eisenhower threatened at the end of June, . . . the present dangerous situation" would only be aggravated. (22) In effect, Iran could solve its problems only by denationalizing, but since Mossadegh would not, the following August a CIA-directed coup overthrew the government and replaced it with one under General Fazollah Zahedi, a former Nazi collaborator. And having engineered the victory, the United States would now help divide the spoils. For a time the State Department considered a total American takeover of Iranian oil, but strong British protests and perhaps some reluctance on the part of United States oil firms caused Washington to lower its sights.

Three years without oil income had further impoverished Iran to the point, as Zahedi put it, that "…there is hardly anything for anyone to steal nowadays…." (23) The State Department assigned the responsibility of working out a new formula for the Iran oil industry to Herbert Hoover, Jr., who had often served as consultant to major American oil firms. To help it protect national interests, the Zahedi regime took Torkild Rieber as its special adviser. Rieber, who had been chairman of the board of the Texas Company until forced to resign in 1940 for alleged pro-German sympathies, was an American citizen. For political reasons it was decided not to denationalize what was once Anglo-Iranian, but rather to give a new western company exclusive management and full rights to the output on commercial terms until 1994. The final contract involved one critical new dimension: a 40 percent interest in the new firm went to the five American majors, among which Texas was one. No longer could the American firms be excluded, for Washington had egged them on and by this time they had also taken over many of Anglo-American's traditional markets. Anglo-Iranian ultimately received $510 million in compensation, mainly from the American participants who were now buying into the once-European firm. The British did not resist the scheme, and perhaps were grateful to be left even 40 percent of the new company for Anglo-Iranian and another 14 percent for Royal Dutch Shell. Ten years of unsuccessful struggle with the Americans had unquestionably chastised them into recognizing that the British Empire in the Middle East had given way to the American. (24)


14. The Economist, March 15, 1947, 377-78.

15. Marrs McLean to Arthur H. Vandenberg, June 21, 1947, AHV Mss. See also OSB, May 4, 1947, supplement, 894; Time, March 24, 1947,83-84; Congressional Record, vol. 93, 4632; Federal Trade Commission, The International Petroleum Cartel, August 22, 1952 (Washington, 1952),104-{}5; Business Week, November 20, 1948, 124; Beauford H. Jester to Tom Connally, June 2, 1947, TC Mss, box 101.

16. OS, Technical Committee on Petroleum, "U.S. Petroleum Policy," November 10, 1947,2-3,8, JAK Mss, box 66. See also Benjamin Shwadran, The Middle East, Oil and the Great Powers (New York, 1955), 382.

17. OS, "U.S. Petroleum Policy," 8. See also Forrestal Diaries. 367; U.S. House, Committee on Armed Services, Hearings: Petroleum for National Defense. 80:2, January-March 1948 (Washington, 1948), 9.

18. Forrestal Diaries. 358. See also FR (1945), IX, 1161-62; FR (1946), XI, 1006-16.

19. Irving Florman to Donald Dawson, December 28, 1950, HST Mss, OF 56. See also House Committee on Armed Services, Petroleum for National Defense. 307-15; U.S. House, Committee on Interstate and Foreign Commerce, Hearings: Petroleum Study. 81:2, February-May 1950 (Washington, 1950), 231-43; DSB, August 1, 1949, 153; C. V. Whitney to Lawrence Morris, May 17, 1949, DC Mss, file 71744; for Standard Oil of New Jersey's desire to enter Brazil, see R. T. Haslam to John R. Steelman, July 7, 1949, HST Mss, OF 56-A.

20. Henry F. Grady, "Oil and the Middle East," Foreign Policy Bulletin, 31 (December IS, 195 I), 2. See also Leonard M. Fanning, Foreign Oil and the Free World (New York, 1954), III-IS; Kirk, The Middle East. 102-04; Dean Acheson, Present at the Creation (New York, 1969), 501-{)8; Shwadran, The Middle East. 110-16, 136ff.; Business Week. May 19,1951,152; May 26,1951,155; July 21,1951, 119; July 28, 195 I, 135; Anthony Eden, Full Circle (Boston, 1960), 219; Harold Macmillan, Tides of Fortune. 1945-55 (London, 1969), 343; Royal Institute of International Affairs, Documents on International Affairs, 1951 (London, 1954), 498ff.; Arthur Krock, Memoirs (New York, 1968), 262.

21. Macmillan, Tides of Fortune, 344-46; Acheson, Present at the Creation, 506-10, 600, 679-85; Eden, Full Circle. 221-24; Shwadran, The Middle East, 147-48; Royal Institute of International Affairs, Documents on International Affairs. 1952 (London, 1955), 337-53.

22. Royal Institute of International Affairs, Documents on International Affairs. 1953 (London, 1956), 353. See also Dwight D. Eisenhower, Mandate for Change. 1953-1956 (New York, 1963), 162; Eden, Full Circle, 232-37.

23. Quoted in Fanning, Foreign Oil and the Free World. 301. See also David Wise and Thomas B. Ross, The Invisible Government (New York, 1964), 110-13; Shwadran, The Middle East. 59; Eisenhower, Mandate for Change. 163-64; Fitzroy Ma- clean, Eastern Approaches (London, 1949), 266-74; Eden, Full Circle. 237.

24. Shwadran, The Middle East. 179-89; Fanning, Foreign Oil and the Free World. chap. XXIV; Macmillan, Tides of Fortune. 501- 02. Throughout this period, United States and British interests were also locked in conflict for control of the oil-rich protectorate of Buraimi on the Persian Gulf, which spilled over to neighboring Oman. During 1949, Saudi Arabia for the first time claimed jurisdiction over much of the region, and Aramco provided it with its legal case. By mid-1953, Saudi troops had moved into the region, and Aramco blocked arbitration efforts. Since the State Department claimed neutrality in the matter, the British began arming and leading local tribesmen to resist the Saudi invaders, and by the summer of 1957 they were forced to send in their own troops to put down dissident local tribesmen whose connection with Saudi Arabia, and Aramco, is still a mystery. By mid-1956 Dulles regarded British behavior in the region as an "act of aggression," and fully expressed this view. See Eden, Full Circle. 373. Also see Bushrod Howard, Jr., "Buraimi: A Study in Diplomacy by Default," The Reporter. January 23, 1958, 13-16.

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