Desert Kingdoms to Global Powers

The Rise of the Arab Gulf

Rory Miller

• Publisher: Yale University Press
• Year: 2016
• ISBN:
  9780300222166
• Topic: History
• Subtopic: Middle Eastern History
• Index: History

An expert in Arab Gulf politics offers a revealing analysis of the region's stunning rise to global power and the challenges it confronts today. Once just sleepy desert sheikdoms, the Arab Gulf states of Saudi Arabia, Oman, the United Arab Emirates, Qatar, Bahrain, and Kuwait now exert unprecedented influence on international affairs—the result of their almost unimaginable riches in oil and gas. In this accessible study, Gulf politics expert Rory Miller examines the achievements of these countries since the 1973 global oil crisis. He also investigates how the shrewd Arab Gulf rulers who have overcome crisis after crisis meet the unpredictable future. The Arab Gulf region has become a global hub for travel, tourism, sports, culture, trade, and finance. But can the autocratic regimes maintain stability at home and influence abroad as they deal with the demands of social and democratic reform? Miller considers an array of factors—Islamism, terrorism, the Arab Spring, volatile oil prices, global power dynamics, and others—to assess the region's future possibilities.

CHAPTER 1

OVER A BARREL

‘I think the entire industrialized world faces a clear and present danger of economic destruction by the Arab oil cartel.’

– Senator Henry ‘Scoop’ Jackson

Chatham House can claim an illustrious history. Located in St James’s in the heart of London’s West End, this listed building has been home to three British prime ministers. Since the 1920s it has housed London’s most distinguished think tank, the Royal Institute of International Affairs, and can boast a long list of big-name speakers, from economist John Maynard Keynes to Indian patriot Mahatma Gandhi to Britain’s very own Winston Churchill. None pulled a bigger crowd than the guest of honour on a windy and rain-swept mid-September day in 1974. The largest audience in the institute’s fifty-year history piled into the main theatre and overflow space to hear one of the most recognizable public figures on the planet, Sheikh Ahmed Zaki Al-Yamani, Saudi Arabia’s oil minister.

Yamani had been the face of Saudi oil for years. He had overseen the country’s rise to become the world’s number-one exporter and number-two producer of black gold. The world’s press had devoted vast amounts of column space to the Harvard-educated Yamani’s impeccable style, rhetorical brilliance and unrivalled negotiating tactics. The New York Times crowned him the ‘mastermind of Arab oil strategy’, going so far as to compare him to Talleyrand, Napoleon’s influential diplomatic troubleshooter.¹ Henry Kissinger, Washington’s key foreign policy player in these years, knew all about diplomacy in the age of Napoleon. Before becoming a legendary statesman himself he had written his PhD thesis on the subject. Perhaps this explains why he held a less romantic view of Yamani than most did. Kissinger acknowledged that the Saudi oil minister was charismatic, ‘extraordinarily intelligent’ and a first-class technical expert. But Kissinger was under no illusions as to Yamani’s place in the pecking order of Saudi power politics. He would later recall that the oil minister was rarely invited to his own meetings with King Faisal. On the odd occasion that he did make an appearance, nobody sought his opinion. The sardonic Kissinger dryly noted that this was fortunate because Yamani was invariably seated so far away from the action that he would not have been heard even if he had spoken up.²

Yamani may have been a technocrat who served at the pleasure of his king, but he was an exceptional one. To outsiders this royal messenger was a powerful, as well as a flamboyant, functionary. His packed-out Chatham House audience of business, political and diplomatic leaders hung on his every word. They had, after all, come to hear him speak on the subject that had preoccupied the world’s policymakers to the exclusion of almost all else for the previous year – the price and politics of oil. Less than one year earlier, on 6 October 1973, the armies of Syria and Egypt had launched a surprise attack on Israel on Yom Kippur, the holiest day of the Jewish calendar. Taken by surprise, Israel was at first unable to stop the Arab offensive. Facing what seemed to be a real threat to its survival only a quarter of a century after its birth, Israeli leaders looked for political and military support from the West. After some high-level debate and low-level bickering, the Nixon administration in Washington agreed to provide a massive arms airlift to Israel. Resupplied with American hardware, Israel regrouped, rolled back Arab advances and threatened total victory in one of the great counter-offensives in modern military history.

On 17 October 1973, eleven days into that eighteen-day war, the oil ministers of the seven Arab member states of OPEC, the oil-producing cartel,³ made an unprecedented and monumental move. In the smoke-filled conference rooms of the Kuwait Sheraton Hotel, Yamani along with his counterparts from Kuwait, Iraq, Abu Dhabi, Qatar, Libya and Algeria launched the oil weapon against the West. The goal was simple: force an oil-deprived world to compel Israel to withdraw from occupied Arab territories and to restore Palestinian rights. The decision to use the oil weapon demonstrated an impressive display of Arab unity few expected or even thought possible. In 1960, the year of OPEC’s birth, US president Dwight D. Eisenhower spoke for many when he dismissed the capacity of oil producers to mount a united front. ‘Anyone could break up the Organization’, the soldier turned statesman told a meeting of the US National Security Council, ‘by offering five cents more per barrel for the oil.’ As late as 1971, a US National Intelligence Estimate was no less certain. ‘We do not believe’, it advised, ‘that cooperation among the producing states would soon reach a point where they would consent to withhold oil for an extended period.’⁴

Little more than two years later, in a move that dispelled the belief that the Arab oil producers were cheaply bought and easily divided, these same states agreed to place a total oil embargo on the United States, the Netherlands and Portugal for their practical and moral support for Israel during the war. A small group of ‘friends’, including France, Spain, the United Kingdom, India and Pakistan, continued to get oil at September 1973 levels. All other states saw a 5 per cent reduction in their oil imports every month. Kuwait and Saudi Arabia went further and threatened an immediate reduction of 10 per cent. Neither the limited embargo nor the more widely applied reduction in supply resulted in a real shortage of petroleum on the international market. A number of non-Arab oil-producing countries, including the Arab Gulf’s neighbour Iran, refused to join the boycott and instead increased production and supply. Such moves did little to stem global panic. Fear drives the price of oil as much as supply and demand. As fear started to spread, eight leading American economists, including all four living US Nobel prize winners in economics, held a press conference at Harvard University to plead with politicians and the public to stay calm. The world, they insisted, was experiencing ‘energy difficulties’ rather than a ‘crisis’.

The Arab states had planned to use the embargo to ‘modify’ Washington’s Middle East policy, as senior Saudi officials explained once oil supplies were halted. It quickly became apparent that Europe was far more vulnerable than the US to a reduction in Arab oil exports. In a frank exchange with Kissinger at the height of the crisis, French president Georges Pompidou explained the entirely different predicaments that Europe and the United States faced on this matter: ‘You only rely on the Arabs for about a tenth of your consumption. We are entirely dependent upon them.’⁵ Pompidou was actually overestimating American reliance on Arab oil at this time.

In the previous decade America had started to import more oil than ever but the Arab world still supplied less than 5 per cent of US oil imports by 1973. Demand for oil across Europe had increased by about 10 per cent per year during the 1960s. Much of this rising demand was satisfied by Arab Gulf suppliers who now hoped that an oil-dependent Europe could be pressured into exerting influence on future US policy in the Middle East. As one Baghdad newspaper explained in May 1975, a key Arab objective was to make Europe ‘use pressure on the USA to stop helping the Zionist entity’.⁶ If that did not work, the hope was that Europe would be forced to break with Washington, isolate the US and place it in an untenable position among the Western states. Either way, the plan was for ‘Europe [to] ease the way for the Americans in due course’,⁷ as Farouk Kaddoumi, a senior figure in the Palestinian liberation movement, diplomatically explained to British officials in the mid-1970s.

Even in energy-dependent Europe, the situation in late 1973 and early 1974 was not desperate. Political posturing and public fears aside, even at the height of the crisis there was plenty of available oil for sale and there was no need to tap European reserves and stockpiles to meet needs. The Dutch, the main European targets of the embargo, could still get significant amounts of oil from outside the Arab world; Italy even managed to buy more oil during the crisis than it had before it started.⁸ Supply levels did not matter nearly as much as price. A day before they announced their embargo, the Arab oil producers meeting in Kuwait City increased the price of crude oil. This was the first time in their history that they had acted unilaterally without bothering to consult with Western oil companies, their traditionally dominant partners. This move resulted in an immediate and massive jump in the price of a barrel of oil from US$3 to over US$5 a barrel. By the end of the year it had doubled to more than US$11.

As a result the bill for an international community dependent on oil skyrocketed. In 1974, the four biggest consumers – the United States, Canada, Europe and Japan – had to find an extra US$40 billion a year just to pay for the same amount of oil. This situation triggered the worst recession in the developed world since the 1930s. As US treasury secretary William E. Simon made clear, ‘High oil prices are central to all our problems.’⁹ Everywhere oil-importing countries, no matter how small, had to deal with enormous balance of payments deficits. Industrial output shrank, tax revenues plummeted, jobs were slashed and consumer confidence was shattered. In Europe voters expressed their anger at the ballot box. Between November 1973 and March 1974 governments fell in Britain, France, Italy, West Germany and Belgium. The European Community, barely a decade old, showed itself completely incapable of acting in a united manner. The Euro-American partnership, the fundamental pillar of the Western Cold War alliance, came under severe strain. Japan’s miraculous economic growth since the late 1940s had been fuelled by cheap oil. When the 1973 crisis started it fell into recession for the first time since the end of the Second World War. Without the strategic oil reserves that provided a cushion of sorts in Europe, the country experienced an even greater, and far more practical, shock than that caused by President Nixon’s surprise visit to China the previous year, when Washington provided Tokyo with just one day’s notice of the historic trip.

In the 1930s the introduction of cheap factory-produced Japanese cultured pearls was responsible for ruining the Arab Gulf’s hugely important natural pearl industry. In an ironic twist, now the tables were turned. The small Sheikhdoms of the Arab Gulf were not the only Arab oil producers to benefit from the rising price. Iraq, Algeria, Libya and even Egypt all produced significant quantities of oil for export. But the Arab Gulf States, home to only one million of the Arab world’s 100 million citizens, received 80 per cent of Arab oil revenues. This made them the biggest beneficiaries of the doubling and then redoubling of oil prices in the last three months of 1973. The sums involved were astronomical. At the beginning of 1973 the combined monetary reserves of the Arab Gulf States were US$13.1 billion. By the end of 1974 they neared US$50 billion. On a per capita basis at least, the smaller Gulf kingdoms had been rich before the 1973 crisis – in 1970 Kuwait and Abu Dhabi had the first and second highest GDP per capita in the world. But the rising oil price of the mid-1970s resulted in one of fastest and largest transfers of wealth in history. ‘We found ourselves in a tidal wave, awash with money,’ recalled one Abu Dhabi official. His oil minister made a similar point. The whole Gulf was covered in ‘heaps of paper money’,¹⁰ explained the precocious Mana Al-Otaiba, only twenty-seven years of age at the time.

Until the 1920s oil explorers and geologists agreed that there was little oil to be found on the Arab side of the Gulf. This was soon shown to be a major mistake as international oil companies hit rich seams across the region over the following two decades. By 1960 the world’s top oil companies, a consortium known as the Seven Sisters,¹¹ controlled most of these oilfields, as well as production levels and price. They were also the biggest beneficiaries by far of the doubling of oil demand from ten million to twenty million barrels per day during the 1950s. OPEC was founded in 1960 with the objective of rebalancing power between oil-producing countries and the international oil companies. It failed to do so dismally during its first decade. The oil companies continued to hold most of the power in the industry and used their advantage to make sure that their priorities – high levels of production and a low price – prevailed over the producing nations’ preference of higher prices. The upshot was that oil prices continued to fall during the 1960s. By the time of the Arab–Israeli war in 1967, a barrel of oil cost just US$1.80, even less than when OPEC was founded at the beginning of the decade.

The kingdom of Saudi Arabia was home to the largest oil reserves in the region. Its founder, Abdul Aziz Ibn Saud, had a special interest in the Palestine Question. In early 1945, the matter had topped the agenda of his historic meeting with US president Franklin D. Roosevelt. This was the Saudi king’s first trip outside of his kingdom and he met Roosevelt on board the USS Quincy on the Suez Canal. The talks lasted several days. Few details of what they discussed or agreed ever became public and Roosevelt died less than two months later. It was, however, widely rumoured that the Saudi king had received guarantees over Palestinian Arab rights from the president. Yet, as long as oil companies controlled both the supply and price of oil, Abdul Aziz ibn Saud opposed the use of oil as a political weapon in the fight for Palestine. In September 1947, as the diplomatic and military battle over Palestine reached its climax, a representative of the Saudi king spoke forcefully on this issue at a special session of the Arab League’s political committee held in Lebanon. Oil sanctions would be divisive, he argued, and worse, the oil-producing countries would end up the biggest losers in such a move.¹²

Two decades later, in May 1967, Middle East war appeared to be inevitable once more. The Arab countries warned that the flow of oil would be interrupted in the event of a new conflict. Following Israel’s pre-emptive military attack on Egypt on 5 June, oil ministers met in Baghdad. As the extent of Israel’s decisive victory on the battlefield became clear over the next few days, Kuwait and Saudi Arabia stopped providing oil for British and US tankers as a token expression of displeasure at Western support for Israel in the war. It was also a symbolic demonstration of their support for Egypt’s president Gamal Abd Al-Nasser, the charismatic local champion of pan-Arabism. Despite the scale of the Israeli victory – it captured the Gaza Strip and Sinai Peninsula from Egypt, the West Bank and East Jerusalem from Jordan and the Golan Heights from Syria – Saudi Arabia, backed by Kuwait and pre-revolutionary Libya, rejected the calls from Syria, Egypt and Iraq to stop all Arab oil production.¹³ King Faisal, who had come to power in Saudi Arabia in 1964 following a long spell as the country’s foreign minister, was as adamant at this time as his father had been in the 1940s that ‘oil and politics should not be mixed’.¹⁴

In 1968 the Arab Gulf oil producers established OAPEC – the Organization of Arab Petroleum Exporting Countries. The original idea for establishing this body came from Yamani. It had two functions. The first was to address the lack of Arab oil power, something made abundantly clear by the outcome of the previous year’s war with Israel. The second was to provide a forum that insulated the oil business from the business of politics in which Arab oil producers could meet to talk to each other free from the interference of Arab countries with no oil.¹⁵ Like OPEC before it, OAPEC was slow to make its mark. America’s paper of record, the New York Times, only mentioned it twice in the two years following its establishment. This Western indifference did not reflect emerging realities on the ground. Two in particular – one political and one economic – made the oil weapon an increasingly viable and politically necessary option for the Arab Gulf States. On the political level, the humiliation of the Arab armies in 1967 had increased the credibility of Palestinian guerrilla warfare against Israel. Seizing on this, the Palestine Liberation Organization (PLO), founded in 1964 u...