INTRODUCTION

“Why should I plant a tree whose bitter root
Will only serve to nourish poisoned fruit?”

—Abolqasem Ferdowsi, The Persian Book of Kings

On November 25, 2006, U.S. vice president Dick Cheney flew to Riyadh for talks with King Abdullah of Saudi Arabia, the elderly autocrat whose desert kingdom is home to one fifth of the world’s proven oil reserves and is the largest producer within OPEC, the Organization of Petroleum Exporting Countries, the oil producers’ cartel. The king was evidently in need of reassurance from his American allies. Earlier in the month the U.S. war effort in Iraq had been dealt a setback after voters in midterm elections routed Republican incumbents and turned control of the Congress over to Democrats. Almost immediately, President George W. Bush accepted the resignation of Cheney’s partner in power Secretary of Defense Donald Rumsfeld, and offered “to find common ground” with critics of his administration’s handling of the war. For the first time in six and a half years the talk in Washington was not of victory in Iraq but of an orderly withdrawal of coalition forces. The Saudis expressed concern that their neighbor and historic rival Iran would take advantage of the U.S. departure to assert its regional ambitions. Saudi Arabia’s ambassador to Washington, Prince Turki al-Faisal, bluntly reminded the White House that “since America came into Iraq uninvited, it should not leave Iraq uninvited.”

The price of oil also came up in the vice president’s meeting with Saudi officials. Over the summer of 2006 world energy markets had tightened, driving prices to record levels. Soaring fuel prices threatened America’s prosperity and the economies of its trading partners. Oil as high as $78 a barrel also posed a challenge to U.S. foreign policy in the Middle East, where oil producers reaped windfall profits. The Bush White House was especially concerned about what the government of Iran would do with its new billions. “Iran’s profits from oil rose last year to more than $45 billion from $15 billion, surging at a rate not seen since 1974, when the country’s oil revenues tripled,” reported The New York Times. The surge in Iranian oil profits was accompanied by a marked upswing in regional tensions and violence that included a ferocious month-long war fought in Lebanon between Israel and Hezbollah, the Shi’a group whose leaders received political cover and financial and military backing from Tehran. The prospect of President Mahmoud Ahmadinejad using his country’s oil revenues to speed up Iran’s nuclear program, strengthen the Iranian military, and arm Hezbollah in Lebanon, the radical Hamas Islamic group based in Gaza, and pro-Iranian Shi’a militias in Iraq, was anathema to officials in Washington and Riyadh. The Saudi royal family had seen this before. Back in the 1970s Shah Mohammad Reza Pahlavi of Iran had been the driving force behind high oil prices that he hoped would transform Iran into an economic and military powerhouse. Only the 1979 Islamic Revolution had put paid to the Shah’s ambitions to dominate the Persian Gulf, West Asia, and the Indian Ocean.

Although President Ahmadinejad would have never dared admit it, there were striking parallels between his effort to project Iranian petropower under the guise of pan-Islamism, and the Shah’s earlier drive to revive Iran’s long dormant Persian aspirations. Their strategic visions overlapped in ways that suggested some striking continuities. Both leaders saw Iran as the regional hegemon. They identified oil revenues and nuclear power as the keys to attaining international stature and domestic self-reliance. They relished provoking the same Western powers that at one time had treated Iran like a colonial vassal. Perhaps their most obvious shared trait was a King Midas complex. Like the Shah, Ahmadinejad was a big spender who believed that high oil prices freed him from the need to practice fiscal restraint. “Critics said that his plans for generous spending to create jobs and increase salaries were politically motivated and fiscally unsound,” noted one observer. “His budget relied on high oil profits likely to invite inflation.” The Iranian central bank proposed a $40 billion fiscal stimulus that included subsidies for families and newlyweds.

Ahmadinejad’s spendthrift ways presented King Abdullah of Saudi Arabia with a golden opportunity. With petroleum responsible for 80 percent of income from exports, Iran’s economy was perilously exposed to an unexpected price fluctuation in the oil markets. Tehran confidently expected consumer demand for oil to stay high, guaranteeing equally high prices. But what would happen to Iran’s budget assumptions if oil prices suddenly plunged? Oil-producing countries base their spending plans and financial estimates on oil prices not falling below a certain threshold. If prices do suddenly plunge below that level—and if producers have not left themselves with enough of a financial cushion to absorb the blow from lost export receipts—the potential exists for a fiscal meltdown. Billions of dollars in anticipated revenue would disappear. Tehran would be forced to economize and decide whether to spend money on guns or butter—whether to lavish aid on Hezbollah and Hamas or to prop up the complex system of food, fuel, housing, and transportation subsidies that keeps Iran’s middle class in check. Removing the subsidies would increase the potential for protests and clashes between security forces and opposition groups.

Only one country had the means and the motive to engineer a price correction on that scale. With its giant petroleum reserves and untapped production capacity, Saudi Arabia could flood the market by pumping enough surplus crude into the system to break the pricing structure and drive prices back down. The Saudi royal family has always understood that petropower is about more than creating wealth, developing its economy, and preserving power. Oil is also the Saudis’ primary weapon of national self-defense and the key to their security and survival. Flooding the market is economic warfare on a grand scale, the oil industry’s equivalent of dropping the bomb on a rival. A flooded market and lower prices would inevitably result in billions of dollars in lost revenues to the Saudis. However, the threat from Iran was seen as outweighing that loss, and by late 2006 King Abdullah was prepared to tap Saudi oil reserves.

“A member of the Saudi royal family with knowledge of the discussions between Mr. Cheney and King Abdullah said the king had presented Mr. Cheney with a plan to raise oil production to force down the price, in hopes of causing economic turmoil for Iran without becoming directly involved in a confrontation,” reported The New York Times. Flooding the market would “force [Iran] to slow the flow of funds to Hezbollah in Lebanon and to Shiite militias in Iraq without getting directly involved in a confrontation.” The Saudis may also have had in mind a second motive. From past experience they knew that if oil prices stayed too high for too long, the United States would be forced to reduce its consumption of foreign oil and take steps to encourage energy conservation and diversification. Less reliance on Saudi oil would translate into a reduction in Saudi strategic leverage over U.S. policy toward Israel and the Middle East.

On November 29, 2006, four days after Cheney’s return to Washington, The Washington Post published an essay by Nawaf Obaid, a prominent security adviser to the Saudi government and adjunct fellow at Washington’s Center for Strategic and International Studies. Obaid’s article warned that one of the consequences of a sudden U.S. withdrawal from Iraq would be “massive Saudi intervention to stop Iranian-backed Shiite militias from butchering Iraqi Sunnis.” Obaid reminded his readers that “as the economic powerhouse of the Middle East, the birthplace of Islam and the de facto leader of the world’s Sunni community (which comprises 85 percent of Muslims), Saudi Arabia has both the means and religious responsibility to intervene.” Buried in Obaid’s article was a chilling threat that officials back in Tehran could not have failed to miss:

Finally, Abdullah may decide to strangle Iranian funding of the militias through oil policy. If Saudi Arabia boosted production and cut the price of oil in half, the kingdom could still finance its current spending. But it would be devastating to Iran, which is facing economic difficulties even with today’s high prices. The result would be to limit Tehran’s ability to continue funneling hundreds of millions each year to Shiite militias in Iraq and elsewhere.

Obaid’s article drew my attention because for several months I had already been studying the impact of an earlier little known and less understood intervention by the Saudis in the oil market. In 1977, one year before the outbreak of revolutionary unrest in Iran, oil markets had been paralyzed by a bitter split among members of OPEC over how much to charge consumers. The Shah of Iran had proposed a 15 percent price hike for the coming year. King Khalid of Saudi Arabia had resisted the Shah’s entreaties and argued that no price increase was warranted at a time when Western economies were mired in recession. The Shah won the day and persuaded the rest of OPEC to join him in adopting a double-digit price increase for 1977. The Saudi response was swift and ruthless. Riyadh announced it would take drastic steps to ensure that Iran’s new price regime never took effect. It would do this by exceeding its production quota, pumping surplus oil onto the market, and undercutting the higher price offered by its competitors. Overnight, Iran lost billions of dollars in anticipated oil revenue. The Shah’s government, reeling from the blow, was forced to take out a bridge loan from foreign banks. It made deep cuts to domestic spending in an attempt to balance the books and implemented an austerity plan that threw tens of thousands of young Iranian men out of work and into the streets. The economic chaos that ensued helped turn Iranian public opinion against the royal family.

Thirty years later, all the indications were that Saudi Arabia was prepared to replicate its earlier feat. There is still much that we don’t know about U.S.-Saudi efforts to destabilize Iran’s economy during President Bush’s last two years in office. What we do know is that the Saudi government publicly reacted to the uproar over Nawaf Obaid’s article by formally severing its ties with the consultant. Diplomatic observers in Washington understood that this was part of a much bigger game. “[Obaid] is widely expected to return to the government in some capacity,” noted one expert. “The Saudi government disavowed Mr. Obaid’s column, and Prince Turki canceled his contract,” reported The New York Times. “But Arab diplomats said Tuesday that Mr. Obaid’s column reflected the view of the Saudi government, which has made clear its opposition to an American pullout from Iraq.” Then, one week later, Saudi Arabia’s ambassador to Washington, Prince Turki, lost his job and was abruptly summoned home.

What was going on here? What message was King Abdullah trying to send Tehran and Washington? The best way to understand Saudi policy and what happened next is to follow the price of oil over the next two years. Saudi Arabia’s budget for 2007 was reportedly based on oil prices not falling below $42 a barrel and production of 9 million barrels a day. By the summer of 2007, despite efforts to restrain their momentum, prices had returned to their earlier peak from a year before of $78. Publicly at least, OPEC members pledged not to allow oil to surpass $80 a barrel. Yet by the end of November 2007 the price of a barrel of oil had rocketed to $98. In January 2008, President Bush personally appealed to King Abdullah to practice price restraint—the U.S. economy was beginning to show signs of buckling under the strain of high oil prices, mortgage foreclosures, credit defaults, and shaky banks.

The Saudis, eager to reel in Ahmadinejad, opened the spigots and exceeded their OPEC production quota by 250,000 barrels a day. It turned out not to be enough. The Saudis cranked up their production yet again, this time from 9.2 million barrels a day to 9.7 million barrels. The price of a barrel of oil broke the $100 ceiling in April, $118 in May, and finally topped out at $147.27 in July. Prices then fell sharply as Saudi oil flooded the system even as the U.S. economy sharply contracted. By September, when oil had retreated in price to $107 a barrel, it was the turn of President Ahmadinejad to display anxiety. The Iranians had wrongly assumed that the price of oil would not fall below $90 a barrel. They appealed to the Saudis to hold the line on prices. King Abdullah responded by keeping the spigots open and collapsing OPEC’s pricing structure. By December, the price of oil had retreated to $43 a barrel. Satisfied, the Saudis reduced output to 8.5 million barrels a day. When prices plunged to $33 in January 2009, the Saudis cut production still further, this time to 8 million barrels. The Iranian regime entered a crucial presidential election year having sustained a devastating reversal of economic fortune. The fraudulent outcome of its midyear election was accompanied by economic contraction and the worst political unrest since the fall of the Shah three decades earlier.

In the meantime I had located documents that revealed that President Gerald Ford and top White House officials had been closely involved in the first Saudi effort to flood the market in 1977. The documents raised the puzzling question of why the United States would back a covert effort to manipulate oil markets knowing it would damage Iran’s economy and hurt its close ally the Shah. Presidents Richard Nixon and Ford each hosted the Shah at the White House, praised him as a statesman and friend, and furnished him with advanced weapons systems, thousands of military advisers, and even offered to sell Iran nuclear reactors. The documents raised the prospect of a secret crisis in relations at the highest levels, and that previously unknown tensions had led to a high-stakes showdown over oil prices and the long-term future of the OPEC cartel. As I wrote in the October 2008 Middle East Journal:

While much scholarly focus has been on the internal political, cultural, economic and social origins of the revolution, the role of state finances—and oil revenues in particular—has received far less attention. The Iranian revolution shared similarities with two other great revolutions: France in 1789 and Russia in 1917. All three upheavals were preceded by fiscal crises. In Iran’s case the dramatic revenue fluctuations of 1977 were acknowledged and duly noted at the time by Tehran-based foreign correspondents. But the underlying rationale for Saudi Arabia’s decision to torpedo the December 1976 OPEC oil price increase, and particularly the Ford administration’s role in that fateful decision, has not been explained until now.

My search for understanding uncovered a hidden history of U.S.-Iran-Saudi oil diplomacy from 1969 to 1977, the backstory of the crucial eight-year period when the United States went from being the world’s number one oil producer to the biggest importer of petroleum, and when Saudi Arabia’s House of Saud replaced Iran’s Pahlavi king as Washington’s indispensable ally in the Persian Gulf. Here, finally, is the inside story of how two American presidents, Richard Nixon and Gerald Ford, dealt with Iran and Saudi Arabia as they grappled with the challenges of America’s growing dependence on foreign sources of energy, how Nixon’s handling of U.S.-Iran relations in particular during the energy crisis of the early 1970s set the scene for a potentially catastrophic financial crisis in the waning days of Ford’s administration, and why Ford eventually felt he had no choice but to throw his support behind a remarkable plan to break the power of OPEC with the help of the Saudis.

My book makes clear that the U.S.-Saudi oil coup directed against the Shah’s leadership of OPEC was not a conspiracy intended to topple him from Iran’s Peacock Throne. Revolutions are highly complex phenomena that cannot be simplified in conspiratorial terms or explained simply by one or two trigger causes. Yet there is no denying that the U.S. decision to break OPEC caused significant problems for the Shah, and at the worst possible time. It dealt a severe psychological blow to him by undermining his stature as OPEC’s leader and creating a perception of political weakness at home and abroad. It signaled a loss of control by the Shah over Iran’s primary source of state revenue. And it shook the foundations of Iran’s troubled economy just as domestic unrest against the Shah was beginning to crest. U.S.-Saudi collusion to break OPEC from the inside and deliver it into Saudi hands turned out to be a disaster for U.S. interests. Although not wholly to blame for the economic chaos that engulfed Iran on the eve of the revolution, the U.S.-Saudi oil coup against OPEC intensified and accelerated the process of collapse in Iran.

The Oil Kings is a multilayered narrative written through the prism of U.S. oil policy. The book can be interpreted in different ways: as a parable on the corrupting influence of oil on America’s national security policy; as a lesson in the limits of American power in the wake of the retreat from Vietnam, the Watergate scandal, and the energy crisis of the 1970s; as a contest of personalities such as Nixon, the Shah, Sheikh Ahmed Zaki al-Yamani of Saudi Arabia, Secretary of State Henry Kissinger, Secretary of Treasury William E. Simon, and defense secretaries James Schlesinger and Donald Rumsfeld; as an autopsy on empire, in this case Iran’s Pahlavi dynasty, and how the fortunes of the Persian crown rose and fell with the oil market; as the triumph of nationalism in settling scores between old rivals Iran and Saudi Arabia; and as a cautionary tale of what happened between friends of long standing and to old alliances when the geopolitics of the Cold War collided with the reality of the oil market and the global economy, whose rough outline was only just beginning to take shape in the mid-1970s. It is a narrative that internationalizes U.S.-Iran relations and Iran’s revolution by placing bilateral and internal events in a strategic and geopolitical context outside the boundaries of the Persian Gulf. I found it impossible to address tensions between the United States and Iran over oil prices without also taking into consideration events in faraway Great Britain, France, Portugal, Italy, Spain, and Canada. How these events affected bilateral relations between Washington and Tehran will no doubt be debated for a long time to come by scholars in the field.

The narrative includes stories told for the first time, that, for example, illustrate the extraordinary degree of Iranian involvement—not to mention outright manipulation—in U.S. politics and foreign policy in the 1970s, and the extent to which the tentacles of the oil states of the Middle East reached right into the Oval Office to influence presidential decision making to an astonishing degree on domestic and foreign policy. We now know that the U.S. response to the 1971 India-Pakistan War, the 1972 U.S. presidential election, the Arab-Israeli War of 1973, the 1973–74 Arab oil embargo, the 1974–75 oil shock, the 1975 Middle East peace shuttle, and the 1976 U.S. presidential election all had an Iranian component. This book provides answers to long-standing questions about U.S.-Iran military contingency planning, the Ibex spy project, Iran’s nascent nuclear program, and the mysterious dealings of Colonel Richard Hallock. It settles debates over the nature of the secret deals worked out between President Nixon and the Shah regarding oil prices and arms sales, the extent to which White House officials were aware of the terrorist threat to U.S. nationals in Iran, awareness of the rising opposition to the Shah from his own people, and whether anyone in the White House had any prior knowledge of the Shah’s secret treatments for the cancer that eventually took his life.

Secretary of State Henry Kissinger once famously described the Shah of Iran as “that rarest of leaders, an unconditional ally, and one whose understanding of the world enhanced our own.” For thirty years, we have had to take Kissinger’s word for it. In the 1970s he concluded an array of highly secret deals with the Shah worth billions of dollars involving the transfer of men, money, and machinery on a scale that even today is almost unimaginable. Where exactly did all that national treasure go? How was it expended? In three volumes of memoirs totaling 3,955 pages and including 193 photographs of the former secretary of state with every world leader, foreign minister, and ambassador of note except the Shah of Iran in the 1970s, one wonders why Kissinger was photographed with a flock of geese in China but not pictured in the company of the man he claimed to so admire?

His books tell us nothing of substance about the intimate workings of his remarkable relationship with Shah Mohammad Reza Pahlavi. As an example, Kissinger devotes only three sentences to a secret bilateral oil deal that is a major focus of the second half of my book. British author William Shawcross once observed that “readers who seek understanding of the [U.S.-Iran] debacle will not find it in Kissinger’s memoirs any more than in Nixon’s before him. Indeed, the way in which the two men treat Iran shows how terribly inadequate autobiographies can be as points of reference, let alone accounts of history. . . . This skimpy treatment can be explained only by a desire to conceal.” Kissinger was not alone. As Shawcross notes, Nixon made only two brief references to the Shah in his autobiography, precisely two more than his successor, Gerald Ford, in his autobiography. Richard Helms, the man who represented their interests as U.S. ambassador in Tehran, wrote a memoir that is a masterpiece of dissembling and obfuscation. I wondered: if the Shah was worth defending, why was he not worth talking about?

My book utilizes the declassified meeting notes of General Brent Scowcroft, Kissinger’s deputy and eventual successor to the post of national security adviser. Scowcroft attended every meeting of importance in the White House that pertained to oil, Iran, and Saudi Arabia during the period from late 1973 to the end of January 1977. I also drew on the declassified transcripts of Kissinger’s White House telephone conversations; the translated diaries of the Shah’s senior adviser, Imperial Court Minister Amir Asadollah Alam; the diaries of former chairman of the U.S. Federal Reserve Arthur Burns; thousands of pages of declassified cables, policy briefs, and memoranda from the State Department, the Defense Department, the CIA, the National Security Council, and the Federal Energy Administration; Nixon’s and Ford’s personal correspondence with foreign heads of state including the Iranian and Saudi monarchs; approximately sixty bound volumes containing more than one thousand newspaper and magazine articles and primary and secondary source materials; oral history interviews; and interviews I conducted with the few surviving officials on either side who had some knowledge of the diplomacy of the time and were willing to talk about it: General Scowcroft, former Secretary of Defense James Schlesinger, former head of the Federal Energy Administration Frank Zarb, former Iranian foreign minister and ambassador Ardeshir Zahedi, and retired American diplomats. As it turned out, even they had been kept in the dark about the full extent of many of the deals revealed in these pages.

A feature of the Kissinger-Shah relationship was its emphasis on oral agreements and the absence of a paper trail. Kissinger compartmentalized their dealings, cut his colleagues out of his back channels to the palace, and was not averse to engaging in elaborate deceptions to throw them off his trail. Frank Zarb did not know that Kissinger sabotaged his negotiating stance during oil talks with the Iranian government. It was only in the course of our interview that former Secretary of Defense Schlesinger learned the rationale behind a $500 million U.S. arms deal to Iran that he had vigorously opposed but nonetheless was required to implement. During my investigation I did not turn up a single document that spelled out in specific detail the terms of each of the secret deals brokered between Kissinger and the Shah. There might be references here and there, sometimes spoken, sometimes written, but never in one place and often mentioned over a period of months, if not years.

Throughout the book I have tried to place the reader in the position of government officials in the United States, Europe, and the Middle East as they struggled to deal with the dangerous new world unleashed by the 1970s revolution in oil pricing. They faced a series of painful policy choices. In the wake of the pullout from Vietnam, the Watergate affair, and the energy crisis, the United States confronted a resurgent Soviet Union, oil shortages, and economic recession. Oval Office transcripts confirm that U.S. officials, including Nixon, Ford, and Kissinger, were convinced that the West was in crisis and that the fraught political and economic conditions of the 1930s were reasserting themselves. The decisions they made were based on the lessons of history from that earlier frightening period. This mind-set—that catastrophe was just around the corner—culminated in what I like to think of as the story of the greatest financial crisis never told, when in 1976 Treasury Secretary Bill Simon, Chairman of the Council of Economic Advisers Alan Greenspan, and Chairman of the Federal Reserve Arthur Burns warned President Ford that banks on Wall Street were at risk of collapse if OPEC raised the price of oil. The U.S. economy teetered on the edge of a double-dip recession as governments in Europe slid toward insolvency. It is a scenario that may sound familiar today.

To paraphrase the great historian Barbara Tuchman, America’s tortured relations with the oil producers of the Persian Gulf have to date been one long march of folly. As we enter the second decade of the twenty-first century, more and more it is a march that is beginning to feel forced. The United States now imports almost two thirds of its oil from overseas and has gone to war twice in less than fifteen years to secure its Persian Gulf oil lifeline. “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the war in Iraq is about oil,” Alan Greenspan wrote with admirable frankness in his memoir. He continued:

Thus, projections of world oil supply and demand that do not note the highly precarious environment of the Middle East are avoiding the eight-hundred-pound gorilla that could bring world economic growth to a halt. I do not pretend to know how or whether the turmoil in the Middle East will be resolved. I do know that the future of the Middle East is a most important consideration in any long-term energy forecast. . . . Until industrial economies disengage themselves from, as President George W. Bush put it, “our addiction to oil,” the stability of the industrial economies and hence the global economy will remain at risk.

The American economy’s chronic addiction to cheap oil is obvious. Less well known is the story of when that addiction began and why the United States became so reliant in particular on Saudi Arabia for its continued goodwill and cooperation. The same is true of America’s toxic relationship with Iran. The two countries have been at each other’s throats for so long now that it seems hard to believe they were ever allies—let alone partners in a secret contingency plan to invade Saudi Arabia and seize its oil wealth. Until these tensions are resolved, and until both countries come to terms with their complicated shared history, it seems inevitable that the tree of American-Iranian relations will bear poisoned fruit for many years to come.

The proud man at the center of the events in this book still looms large in our collective conscience. More than thirty years have passed since Shah Mohammad Reza Pahlavi of Iran left the world stage as a stateless refugee. The story of his triumphant rise and equally spectacular fall is a cautionary tale for other statesmen seeking to emulate his achievements. The question is often asked: Where did it all go wrong for the Shah? There is no single turning point in his fortune, though a good place to start may be in the spring of 1969, when the Iranian king traveled to Washington to attend the funeral of former U.S. president Dwight Eisenhower. It was a trip that did not at the time appear to hold any great significance, either for the Shah or for his host, Richard Nixon, who had been president for just two months. Only now can we see that the Shah’s trip was an important early signpost on the road leading to revolution.

A.S.C.
Piraeus, Greece, 2010

Author's Note	p. ix
Introduction	p. 1
A Note on the Use of Iranian Imperial Tides	p. 13
Gladiator
A Kind of Super Man	p. 17
Guardian of the Gulf	p. 51
Marital Vows	p. 79
Contingencies	p. 107
Oil Shock	p. 137
Cruel Summer	p. 169
Showdown
Screaming Eagle	p. 199
Potomac Scheherazade	p. 229
Henry's Wars	p. 259
The Spirit of '76	p. 291
Royal Flush	p. 319
Oil War	p. 353
Epilogue: The Last Hurrah	p. 388
Acknowledgments	p. 395
Notes	p. 398
Bibliography	p. 501
Index	p. 513
Table of Contents provided by Ingram. All Rights Reserved.

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The Oil Kings How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East

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