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How America and Saudi Arabia Solved The Oil Supply Problem and How We Can Work With Them Again

The Saudi view of religion is an important element of politics and economics. It contributed to the oil embargo that shook the Western World in the early 1970s. The reason I know about this is because I sat in those gas station lines for six months, thinking how could a bunch of second-rate nations, OPEC, do this to us, the richest and most powerful country in the world?

On October 6, 1973 (Yom Kippur, the holiest of Jewish holidays), Egypt and Syria launched simultaneous attacks on Israel. It was the beginning of the October War–the fourth and most destructive of the Arab-Israeli wars, and the one that would have the greatest impact on the world.

Egypt’s President Sadat pressured Saudi Arabia’s King Faisal to retaliate against the United States’ complicity with Israel by employing what Sadat referred to as “the oil weapon.” On October 16, Iran and the five Arab Gulf states, including Saudi Arabia, announced a 70 percent increase in the posted price of oil.

Meeting in Kuwait City, Arab oil ministers pondered further options. The Iraqi representative was vehemently in favor of targeting the U.S. He called on the other delegates to nationalize American businesses in the Arab world, to impose a total oil embargo on the United States and on all other nations friendly to Israel, and to withdraw Arab funds from every American bank. He pointed out that Arab bank accounts were substantial and that this action could result in a panic not unlike that of 1929.

Other Arab ministers were reluctant to agree to such a radical plan, but on October 17 they did decide to move forward with a more limited embargo, which would begin with a 5 percent cut in production and then impose an additional 5 percent reduction every month until their political objectives were met. They agreed that the U.S. should be punished for its pro-Israeli stance and should therefore have the most severe embargo levied against it.

Several of the countries attending the meeting announced that they would implement cutbacks of 10 percent, rather than 5 percent.

On October 19, President Nixon asked Congress for $2.2 billion in aid to Israel. The next day, Saudi Arabia and other Arab producers imposed a total embargo on oil shipments to the United States. The oil embargo ended on March 18, 1974. Its duration was short, its impact immense. The selling price of Saudi oil leaped from $1.39 a barrel on January 1, 1970 to $8.32 on January 1, 1974. Politicians and future administrations would never forget the lessons learned during the early-to mid-1970s. In the long run, the trauma of those few months served to strengthen the country’s planning; it’s three pillars–big corporations, international banks, and government–bonded as never before. That bond would endure even until today.

The embargo also resulted in significant attitude and policy changes. It convinced Wall Street and Washington that such an embargo could never again be tolerated. Protecting our oil supplies had always been a priority; after 1973, it became an obsession. The embargo elevated Saudi Arabia’s status as a player in world politics and forced Washington to recognize the kingdom’s strategic importance to our own economy. It encouraged U.S. corporatocracy leaders to search desperately for methods to funnel petrodollars back to America, and to ponder the fact that the Saudi government lacked the administrative and institutional frameworks to properly manage its mushrooming wealth.

The additional oil income resulting from the price hikes was a mixed blessing for Saudi Arabia. It filled the national coffers with billions of dollars; however, it also served to undermine some of the strict religious beliefs of the Wahhabis. Wealthy Saudis traveled around the world. They attended schools and universities in Europe and the United States. They bought fancy cars and furnished their houses with Western-style goods. Conservative religious beliefs were replaced by a new form of materialism—and it was this materialism that presented a solution to fears of future oil crises.

Almost immediately after the embargo ended, Washington began negotiating with the Saudis, offering them technical support, military hardware and training, and an opportunity to bring their nation into the twentieth century, in exchange for petrodollars and, most importantly, assurances that there would never again be another oil embargo. The negotiations resulted in the creation of a most extraordinary, the United States-Saudi Arabian Joint Economic Commission. Known as JECOR, it embodied an innovative concept that was the opposite to traditional foreign aid programs; it relied on Saudi money to hire American firms to build up Saudi Arabia.

Although overall management and fiscal responsibility were delegated to the U.S. Department of Treasury, this commission was independent to the extreme. Ultimately it would spend billions of dollars over a period of twenty-five years, with virtually no congressional oversight. Because no U.S. funding was involved, Congress had no authority in the matter, despite Treasury’s role. After studying JECOR extensively, David Holden and Richard Johns concluded: “It was the most far-reaching agreement of its kind concluded by the U.S. with a developing country. It had the potential to entrench the U.S. deeply within the kingdom, fortifying the concept of mutual interdependence. (David Holden and Richard Johns. The House of Saud: The Rise and Fall of The Most Powerful Dynasty in The Arab World (New York: Holt Rinehart and Winston, 1981, p. 358.)

The above, excerpted from John Perkins’ book, Confessions of An Economic Hit Man, is an effort to teach our readers how presidents clear back to Roosevelt have dealt with energy and how we must deal with it in the future until we become energy independent.

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