READ: The Oil Revolution

By Bennett Sherry

Oil is a general term for petroleum liquids which are extracted from underground. It is mainly turned into fuel, but it can be used to make lubricants and even solids like plastics. And it was the most important resource of the twentieth century.

Because it was cheaper and more efficient than other sources of energy, oil accelerated global production and reshaped networks by allowing faster transportation. But oil has had important implications for global politics as well. Colonialism, decolonization, and economic liberalization all shaped the history of oil, and oil shaped all of these histories in return!

The global oil boom really started with the First World War. As Britain and Germany competed to build the world’s best navy, the British began converting their ships from coal to oil power. Oil allowed ships to stay at sea longer and move faster and farther. But Britain did not at the time have a domestic supply of oil. After the war, Secretary of State for Foreign Affairs Lord Curzon commented that, Britain “floated to victory upon a wave of oil.” Most of this oil came from the United States, the world’s first oil producer and the largest consumer of oil for most of the century.

The British weren’t content to rely on their American allies. In 1901, the Shah of Iran and a British entrepreneur signed a deal called the D’Arcy Concession. It gave the Anglo-Persian Oil Company${}^1$‍ the rights to Iran’s oil for the next 60 years. In exchange, the Shah received 40,000 pounds and 16 percent of any profits. In 1914, the British government bought the majority of shares in the company. For the next forty years the British government controlled the extraction, production, distribution, and most of the profits from Iran’s oil.

After the Second World War, seven oil companies known as the “Seven Sisters”${}^2$‍ dominated global oil production and distribution. By 1960, the Seven Sisters controlled 85 percent of the world’s oil. Nations like Iran were at the mercy of these companies, which set oil prices and production. In 1953, the Iranian prime minister Mohammed Mossadegh tried to nationalize his country’s oil. Anglo-Iranian Oil Company—one of the Seven Sisters—organized a global boycott of Iranian oil. The resulting economic crises prompted British and American intelligence agencies to remove Mossadegh from power in a coup. Western nations and oil companies dominated oil production in the Middle East, and the coup showed how eager they were to maintain this dominance.

Over the next twenty years, the Oil Revolution turned this relationship upside-down, taking control from big oil companies and giving it to oil-producing nations. In 1960, Saudi Arabia, Iran, Iraq, Venezuela, and Kuwait formed the Organization of the Petroleum Exporting Countries (OPEC). Their goal was to control their nations’ most important resource—you guessed it: oil. As nations decolonized throughout the 1960s, they sought to nationalize their resources, which—like Iran’s oil—were often controlled by foreign governments or companies. OPEC expanded, and by the 1970s its members controlled half the world’s oil.

As global demand for oil increased, OPEC negotiated better terms. The price of oil increased by 45% and profits for OPEC nations soared by 2,000-3,000%. The key to OPEC’s success was their solidarity. OPEC included nations with different religions and languages, as well as conflicting Cold War allegiances. And yet during the 1970s they successfully collaborated to set oil prices. This shift of power from Western governments and companies to oil producers in the Middle East is known as the Oil Revolution.

The new power of OPEC nations became apparent in 1973. In October, war broke out between Israel and a coalition of Arab nations led by Egypt and Syria.${}^3$‍ The Soviet Union supported the Arab states and the United States backed Israel. Armed with Soviet weapons, the Arab allies nearly defeated the Israeli army, but an emergency shipment of weapons from the United States turned the tide of the war. In retaliation for US support of Israel, the Arab members of OPEC announced an embargo (ban on trade) against the United States and several other countries. In just three months, the price of oil quadrupled.

The United States was able to get oil from other countries, but the panic drove prices up. Gas stations ran out of fuel to sell as cars lined up. Oil prices eventually dropped, but they never returned to pre-1973 levels. In 1979, a second oil crisis erupted after the Iranian Revolution caused oil prices to double.

OPEC gained influence because they acted in solidarity to control oil production and prices. But by the end of the 1970s, this solidarity fractured. The government of the Shia Islamic Republic of Iran soon found itself at odds with the governments of Sunni-majority Iraq and Saudi Arabia. In 1980, Iraq invaded Iran, beginning the bloody Iran-Iraq war (1980-1988). The 1973 OPEC embargo was a short-term success for OPEC. In the long-term, however, it would shift power from Middle Eastern oil producers back toward Western governments and corporations.

The 1970s empowered and enriched oil-producing states all over the world. Even non-OPEC oil-producing states, like Mexico, benefited from increased revenue. Nations in Latin America, Africa, and the Middle East assumed that this was the new normal and began borrowing money to invest in their nations’ industry, infrastructure, and military. They borrowed mostly from American banks. Other countries that were not oil-producers, but which relied on oil imports, also found that they needed to borrow money from American banks to make up for the rising cost of oil.

The spikes in oil prices in the 1970s helped caused a global economic recession from 1980 to 1982. Industrial production slowed, hurting economic growth and causing increased unemployment. During the recession, oil prices plummeted, and revenues for oil-producing nations declined accordingly. Many found themselves in heavy debt, most of it owed to American banks.

This debt gave the US government leverage over these countries. The Americans controlled policy at the International Monetary Fund and the World bank. The United States could provide new loans and forgive old debts but help came with a price. Debtor nations were expected to open their economies to American companies. Policies of free trade and privatization—favoring American companies in particular—spread around the world. The architects of this system promised it would help poor nations. Instead, it ended up hurting economies across Latin America, Africa, and Asia. Local businesses and markets declined as more power was transferred to Western corporations, which extracted profits from the labor resources of those countries.

Meanwhile, the reverberations of the Oil Revolution continued. OPEC remained intact but without the solidarity of the 1970s. This was especially clear in the case of Saddam Hussein’s Iraq. By 1990, low oil prices were hurting Iraq’s economy and threatening Hussein’s hold on power. He blamed fellow OPEC member Kuwait for the decline. Kuwait and several other Gulf states were producing more oil than OPEC had agreed on, driving down prices. Hussein believed that Kuwait was part of an international effort to destroy his regime. Iraq had the world’s fourth-largest military, and he believed that the United States, Saudi Arabia, Israel, and Gulf states like Kuwait were driving down oil prices to force Iraq to shrink their military. Between January and May 1990, the price of oil dropped from $20 to $16 a barrel.

In August 1990, Iraq invaded Kuwait despite warnings from Washington. The United States led a massive counter invasion from Saudi Arabia. Along with a coalition of nations, the Americans drove the Iraqi army from Kuwait and invaded Iraq. The aftermath that became known as the Gulf War lasted well beyond 1991. In 2003, the United States invaded Iraq a second time, with massive repercussions for the region. The presence of American troops in Saudi Arabia in 1990-1991 was one of the factors that led Osama bin Laden to begin targeting Americans in the years leading up to the September 11, 2001 attacks.

Now, in the twenty-first century, we might be facing a second oil revolution. Frightened by the oil shocks of the 1970s, the United States—the world’s largest consumer and once the largest producer of oil—has focused on domestic oil production. New technologies like hydraulic fracking have made America the world’s leading producer once again. But the future is uncertain. For example, in the spring of 2020, the COVID-19 pandemic sent oil prices to historic lows as people stayed home and traveled less. A global recession might follow the pandemic (note that this article was written in May 2020). If we avoid that, we still face the global crisis of climate change, which has been driven by our increased consumption of fossil fuels like oil. International cooperation has created some pressure to change our consumption of fossil fuels and how we produce energy. The future of oil is unclear, but its dramatic impact on the history of the twentieth century still blazes.

Bennett Sherry holds a PhD in history from the University of Pittsburgh and has undergraduate teaching experience in world history, human rights, and the Middle East at the University of Pittsburgh and the University of Maine at Augusta. Additionally, he is a research associate at Pitt's World History Center. Bennett writes about refugees and international organizations in the twentieth century.