If you wanted to measure the world’s economic condition by a single number, you might easily settle on the price for a barrel of oil. Into that number go scores of inputs and considerations, and out come more, ranging from the prospects for peace in the Middle East to the flow of trade across the oceans. Every dollar the oil price moves — up or down — causes the microfibers of the global economy to twitch in ways both predictable and violently unforeseen.
The recent fall in prices due to the decision by OPEC+ to keep expanding production has inspired all kinds of speculation about Saudi Arabia’s motives, ranging from a desire to punish Kazakhstan for ignoring production limits, to a throttling back of the kingdom’s exorbitant plans to diversify its economy. These speculations set the mood for US President Donald Trump’s latest visit to the Gulf, where his agenda sprawled from keeping gas prices low for American drivers and investing Saudi Arabia’s billions in US businesses, to lifting sanctions on Syria — a mix of diplomatic cooperation and mutual enrichment particular to this web of relationships. The tighter that web has become, the more that decisions made in the Gulf affect American wallets.
The price of oil has rarely been just a function of supply and demand. This week only confirmed how complex and consequential both its inputs and ripple effects have become. Saudi Arabia sits on around 17% of the world’s proven crude oil reserves, and produces 11% of the oil consumed globally. Time and again, its leaders, their personalities and their particular interests, have been reflected in the price of oil. What began with gratitude and indifference about the exorbitant gift lying beneath the sand turned to the deployment of oil as a political weapon against Israel, and eventually into a destabilizing over-reliance on a single source of wealth, which the current generation is trying to fix.
Oil was first discovered in Saudi Arabia in 1938 and started to flow in serious quantities after World War II. As the world’s economies recovered from war, tankers began lining up on the coast of the Persian Gulf. Production costs were low in a region where the oil was abundant and relatively effortless to extract. In Texas, small landowners scraped, pumped and flushed the last drops of oil from dwindling “stripper” wells. But in the vast new Saudi fields, you drilled down and natural forces did the rest, pushing the oil up and out into the pipelines that traced the desert.
In January 1947, Ibn Saud, the founder of Saudi Arabia, visited the Dhahran headquarters of the Arabian American Oil Company. At the time, a barrel of crude cost around $2.60. The oil companies set the price and paid the Saudis a fee, an opaque system that allowed the companies to earn rates of return of some 200%.
For Ibn Saud and a country with a population of just 3 million people — many of whom were still nomads — every dollar was gravy, and the accounting a bore. Oil had never been his motivation as he assembled his kingdom, conquering and plundering on camels and horseback, and it never interested him much. When the first payments arrived from the American oil companies with drilling rights in Saudi Arabia, they came in chests of gold coins delivered to the home of the finance minister.
When Ibn Saud arrived in Dhahran, he was shown to the Executive House, which was equipped with all the conveniences an American oil executive might want. After taking a nap there, he decided he preferred the traditional tents that had been set up for him and his entourage nearby. His hosts took him on a tour of the machine shop at Ras Tanura, where he perked up when he saw a group of men working a piece of hot metal with a drop hammer. He asked, could they make a horseshoe? He was delighted when they said yes. Finally, something he could relate to.
For the next 25 years, the oil price reflected the king’s lack of interest and barely moved. By 1973, the average price of a barrel had crept up to $3.22. But in 1974 it shot up to $12.52 and stayed just above that range for the next five years. The most frequently cited trigger for this quadrupling was the October 1973 oil embargo imposed by Arab countries — and led by Saudi Arabia — on Israel’s supporters during the Yom Kippur War and its aftermath.
But it wasn’t just the embargo that caused oil prices to spike. Leading up to 1973, the producing countries of the Middle East had been ratcheting up their rhetoric and demands for control. For decades they had broadly delegated that control to the oil majors of the US and Europe. Those companies had found, extracted, refined and sold the oil, setting their own prices. It was a form of economic colonialism, suited for a time when the producing countries lacked the education and sophistication to propose a different model.
But as these countries evolved, a generation of more confident leaders emerged. Muammar Gaddafi, who seized power in Libya in 1969, and Saddam Hussein, who became vice president in Iraq the year before, were young military officers with little formal education, but they made control of their oil industries a priority. They demanded more equity and higher royalties, and implemented nationalizations if they didn’t get them. The Shah of Iran hoped to rival any industrial power in the West and wanted more money from his oil to fund this accelerated transformation. Ibn Saud’s son, King Faisal, inherited his father’s brooding traditionalism but reconciled it with his country’s incredible wealth.
At different speeds, in different ways, they reopened price negotiations. They said that inflation, and the devaluation caused by US President Richard Nixon’s decision to delink the dollar from gold in 1971, meant the value of their receipts kept falling. Crucially, they drew a stronger link between access to their oil and the actions and existence of Israel, which they opposed. They turned what had been commercial negotiations with companies into political dramas, requiring the attention of nations.
From Tehran to Vienna, young Arab economists and geologists appointed to run their state ministries stared down sleek executives from New York and London who could not quite believe what they were seeing. For Henry Kissinger, Nixon’s secretary of State, Riyadh became a regular stopover as he groped for peace in the Middle East. In its thwarted impotence, the Nixon administration even considered military action to seize the Arab oil fields.
As the majors steadily lost control over supply and pricing to the producing countries and their state-run enterprises, more oil began trading on the spot market and prices became less predictable. Even after the Arabs ended the embargo in March 1974, prices never dropped back to their pre-October levels.
Following the end of the embargo, the US developed a deep commercial relationship with Saudi Arabia, involving the return of petrodollars to the West as investments in bonds and contracts for corporations involved in the country’s development. But for all the ensuing financial back and forth, the Arab world never entirely forgot America’s contempt, air-brushed in public but epitomized by Kissinger’s private explosion during a National Security meeting in the White House in November 1973: “It is ridiculous that the civilized world is held up by 8 million savages,” he said.
By the mid-1980s, the Saudi royal family and the oil ministry had significantly diverging views on pricing oil. Sheikh Ahmed Zaki Yamani, who had been oil minister since 1962, believed it was in the best interest of Saudi Arabia for the world to be dependent on oil for as long as possible. That meant sustaining a price that kept supply and demand in reasonable balance. The oil would quietly flow, the uses for it would multiply, and in the meantime Saudi Arabia would have the time and resources to diversify its economy for the distant time when the last well gurgled and ran dry.
In this model, Saudi Arabia would be the swing producer, operating at the lowest cost with the greatest reserves, and able to open or close the spigots at will to keep prices exactly where it wanted. Yamani — fastidious, measured, cool — was the embodiment of this hyper-rational approach.
On the other side was Fahd bin Abdulaziz Al Saud, known as King Fahd, a rollicking, chain-smoking character who had run the country’s national security apparatus long before he took the throne. He carried echoes of Ibn Saud, in his imposing height and girth, and in his use of an astrologer. But he was a much more modern figure, with a more expansive view of Saudi power. As a younger man, he was among the first wave of Saudi princes to arrive in the casinos of the South of France and leave in the early mornings, millions of francs lighter.
Fahd became king in the summer of 1982, when oil was $28 a barrel. Four years later, it was just under $10. The problem was that his reign was contingent on the higher price. He had bought off the religious establishment, was paying to sustain the lifestyles of thousands of his own family, had suppressed domestic and international opposition, and had created a cradle-to-grave welfare state for Saudi citizens. When the price of oil collapsed, he struggled to keep his promises. He ordered Yamani to increase production of Saudi oil and set the price at $18. It was an impossible order; Yamani could only refuse and was duly fired.
Thousands of miles from Riyadh, Houston spun toward the economic void. It was not just the oil industry that suffered. Everyone who had thrived during the boom, from restaurants to real estate agents, were now gasping through a long bust. And Houston did not have Saudi Arabia’s resources to draw upon — it had no life vest to inflate when prices fell. It simply sank. Office buildings, shopping malls and housing developments lay empty.
Once-mighty Houston became one of the cheapest places in America to do business, as Detroit would become after the 2008 financial crisis and the collapse of the car industry. Former Texas governor John Connally, who was badly wounded as he rode in the car with John F. Kennedy on the day the president was killed, was forced to declare bankruptcy, and to sell his homes and possessions to pay creditors who had lent to him so eagerly earlier in the decade. King Fahd had too many problems of his own to worry about bailing out over-extended Texans.
Today, the heaviest finger on oil’s scale is Ibn Saud’s grandson, Crown Prince Mohammed bin Salman, who likewise seems more interested in things besides oil. His gaze is drawn to Saudi Arabia’s future, to diversifying away from a reliance on fossil fuels and toward technology, culture and tourism. But the commitment to spend hundreds of billions of dollars with US businesses resembles compromises and deals past, the closing of an imperfect circle.
Shortly before the Yom Kippur War, Nadim al-Pachachi, an Iraqi who served as secretary general of OPEC from 1971 to 1972, wrote an essay decrying the West’s treatment of the oil-producing states. Arab countries, he said, “are expected, or considered morally obliged, to cater for the growing needs of the United States, which blindly supports and abets the archenemy of the Arabs.” They were then paid in “depreciated and devalued currencies” and, as a final insult, warned that the mountains of cash they were piling up were a threat to the global monetary system and needed to be invested in ways that satisfied the panjandrums of world banking and industry. “This is the pattern of latter-day logic foisted upon us,” he wrote.
After the war and the embargo ended, that logic proved impossible to resist. The West not only wanted Saudi Arabia’s oil at a price and on terms of its choosing, it also wanted to get what it spent on oil to boomerang back in investments. It was a tough bargain in the 1970s, and became even tougher as the producers realized ever more of their power. But as the scenes in Riyadh showed this week, it is a logic still with plenty of life.
