Oil and the Energy Crisis of the 1970s: A Reanalysis

The basic facts of the crisis are well known. World oil prices escalated relentlessly through the early 1970s, and these price increases were led by OPEC, which was composed mostly (though not exclusively) of Arab- and Moslem-majority states. The main triggering event was the October 1973 Arab-Israeli War, when OPEC implemented a series of sudden, massive price increases. Initially, Arab states led by Saudi Arabia used oil as a political weapon designed to punish the United States with an oil embargo for its support of Israel during the October war. After several months, however, the anti-Israel initiative evolved into a generalized effort to raise global oil prices as much as possible, with the new objective of simply maximizing revenues. These secondary price increases attracted much broader participation, including oil exporters such as Iran, which had no strong interest in the Arab-Israeli dispute; it simply wanted to make money. For the United States, the energy crisis became an all-encompassing obsession of policymakers, as described in the memoirs of Herbert Stein, who served as chairman of the Council of Economic Advisers. Stein observed that “we all became energy experts” during this period. He added, dryly, “An energy expert was a person who knew that Abu Dhabi was a place and [Muammar] Gaddafi was a person.”

The energy crisis of the mid-1970s has long been presented as a fortuitous event, a matter of bad luck from the U.S. standpoint. Officials in the Nixon administration sought to cope with the crisis as well as they could. To the extent that the crisis was orchestrated, the orchestration emanated from the OPEC states themselves, not from the U.S. government. In this section, we will see that this benign interpretation of American policy amounts to a myth. In reality, the Nixon administration actively encouraged oil price increases, thus establishing a measure of complicity with the OPEC states. The complicity of the U.S. government in the crisis constitutes a disturbing topic, given that the crisis devastated large sectors of the economy. But the official complicity is well established, based on multiple sources of information.

One of the central players in the energy crisis was the government of Iran, led by Shah Mohammed Reza Pahlavi, who ruled until his overthrow in 1979; he was a key U.S. ally, backed by both President Nixon and Secretary of State Henry Kissinger. While the shah played no major role in orchestrating the initial oil embargo against the United States of October 1973, he proved a central figure in the second-phase price increases. Indeed, Iran was a “ringleader” among the states that sought higher prices, in the view of William Simon, who became Treasury secretary in 1974. In seeking price increases, the shah had been encouraged by President Nixon himself. In a 1970 meeting, for example, Nixon stated to the Iranian Foreign Minister Ardeshir Zahedi, “Tell the Shah you can push [us] as much as you want [on oil prices],” as Zahedi recalled in a later interview. Support for the shah’s oil policy formed a consistent theme throughout the Nixon presidency; this support extended into the presidency of Gerald Ford. One dissenter was Treasury Secretary Simon, who favored pressuring the shah to lower prices. But on this issue, Simon received little encouragement from Nixon, as noted in the following conversation from July 1974:

Secretary Simon: Is it possible to put pressure on the Shah [to lower oil prices]?

President Nixon: You are not going there… . He is our best friend. Any pressure probably would have to come from me.

Nixon never applied significant pressure on the shah. Simon would lament, “To my knowledge … the US has never indicated to any member of OPEC that their relations with the US would be affected by their behavior with respect to oil prices.” In a 1974 meeting with the president, Simon stated candidly, “The Shah has us. No one will confront him.”

President Nixon effectively blocked efforts to lower prices, which had emanated from the government of Saudi Arabia in 1974. The Saudis offered to restrain OPEC price increases and communicated this to the Nixon administration—which rebuffed the offer. Writing in the Washington Post, Jack Anderson described the situation: “In secret messages to Washington, the Saudis offered to block the price rise, if the Nixon administration would bring pressure on the Shah to hold oil prices down. They [the Saudis] pleaded that they couldn’t stand alone against their fellow oil producers… . But Nixon and Kissinger did nothing.” The lack of U.S. interest in this proposal evidently surprised the Saudi petroleum minister, Ahmed Zaki Yamani, who later wrote a delicately worded letter to Simon: “There are those amongst us [Saudi officials] who think that the U.S. administration does not really object to an increase in oil prices. There are even those who think that you encourage it.”

U.S. support for price increases was widely noted by informed observers both inside and outside the administration. A contemporary investigation published in Foreign Policy concluded, “The United States has encouraged Middle East oil-producing states to raise the price of oil and keep it up.” The article was based on interviews with U.S. officials, including the former ambassador to Saudi Arabia, James Akins, and it was piquantly subtitled “We Pushed Them.”

At the level of motive, American support for higher oil prices stemmed from the perception that the shah was a critically important ally, designated by the Nixon administration as the guardian of Western interests in the Persian Gulf region. Another factor was the shah’s formidable political clout, carefully cultivated over an extended period. From Washington, the Iranian Embassy curried favor with the U.S. press corps. Iranian diplomats dispensed tins of top-quality caviar and other expensive gifts to hundreds of journalists and media executives, which included Barbara Walters and Joseph Kraft, who in turn produced positive, often fawning, coverage of the shah and his government. The Iranians hired as a publicist Marian Javits, the wife of Senator Jacob Javits, who served as a senior member of the Senate Foreign Relations Committee.

In addition, the U.S. corporate sector profited from the shah’s policies, and this further cemented the U.S.-Iranian partnership. Iranian arms purchases proved a special bonanza for Northrop, Grumman, and Bell Helicopter, which gained lucrative sales contracts; these benefits were made possible by the energy crisis, which fueled Iranian imports. The major oil companies also benefited from the energy crisis, which elevated their profits. And from Tehran in 1974, U.S. Ambassador Richard Helms noted with pleasure, “The number of American businessmen not to mention those of other nations keeps the hotels full to overflowing and keeps this Embassy hopping to help as best we can… . U.S. business is getting more than its share of the action here, I am glad to say.” The partnership was further bolstered by corporate social networks, including the influential Rockefeller family, who had long been friendly with the Pahlavis. These connections advanced the cause of U.S.-Iranian alliance, as well as discreet American support for oil price augmentations—favored by the Iranians.

The turmoil that resulted from this state of affairs destabilized the world economy, exacerbating inequalities between oil-exporting and oil-importing countries. Non-oil-producing Third World countries were most severely affected, and they suffered from widespread trade imbalances and financial predicaments, erasing years of social progress in some cases. Several countries secured loans on international capital markets to alleviate distress, producing multiple rounds of debt crises when countries were unable to repay the loans. In the post–Bretton Woods era, the IMF developed a new function: to impose and manage austerity programs in countries that were negatively affected by the growing instability. In time, numerous countries would undergo IMF-directed “structural adjustment” programs, often conducted in close cooperation with private finance. Even among oil exporters, which were beneficiaries of the new economic order, many states wasted their revenues on arms purchases, prestige projects, and generalized corruption. This was especially true of Iran, where official misuse of oil funds was a major factor in the Iranian Revolution of 1979.

In the United States, the energy crisis generated nationwide gas shortages, with long lines at service stations, leading to mass protests and public anger. The Nixonian policy of supporting the shah’s oil price hike was costly to the domestic economy, since it lowered living standards for most people, but Nixon was determined to pursue this policy and did not waver.

While Nixon and Kissinger focused on their geostrategic maneuvering, the problem of foreign debt festered due to a continuing deficit on America’s trade balance and overspending on worldwide military adventures.The United States was moving into the category of a permanent debtor state. Administration officials used the energy crisis as a means of financing this debt by drawing Middle Eastern “petrodollars” into U.S. Treasury bonds. Oil and finance would become integrated to some degree, and both would emerge as leading sectors of a new economic order—undergirded by the Saudi monarchy. America’s relationship with Saudi Arabia would also impact the domestic economy by elevating the financial sector.

Saudi Arabia Underwrites the Dollar

In the story of international oil politics, the Kingdom of Saudi Arabia was a central player as the world’s largest producer, holding huge reserves. It also sustained a long-standing association with the United States beginning with the formation of the Arabian American Oil Company (ARAMCO) in 1933, led by Standard Oil of California, which forged a state-to-state bond that endured across multiple presidencies. Despite this history, the Nixon administration initially experienced a tense relationship with the Saudi monarchy. A point of contention was Nixon’s support for Israel, thus colliding with the Saudis’ rejection of Zionism and the whole idea of a Jewish state in the Middle East. As a result, Saudi Arabia helped engineer the 1973 oil embargo against international supporters of Israel, especially the United States. While Nixon and Kissinger favored high oil prices in general, they deeply resented the Saudi-led embargo. The Saudi government also established adversarial relationships with the major oil companies, the “Seven Sisters,” which dominated the world market; five of these were American owned.

Notwithstanding this rocky start, the Nixon administration eventually settled its differences with Saudi Arabia, and, by 1974, the two governments had established a close alliance, which benefited both countries. From the U.S. standpoint, the Saudis’ stores of financial reserves were very attractive, and they would be used to restore confidence in the dollar. The figure most responsible for forging the U.S.-Saudi collaboration was Treasury Secretary William Simon.

At first glance, Simon’s role may seem surprising, since he was not a Middle East specialist or even a foreign policy specialist. His background was in finance; before entering the Nixon administration, he had worked as a bond trader with Salomon Brothers, rising to become president of the firm. Simon approached Middle East policy from the standpoint of an investment banker. He also was an enthusiastic advocate for free markets, widely considered the most ideological member in the cabinet. At Treasury, he began as a protégé of George Shultz, who in turn connected Simon with his conservative network in the Mont Pèlerin Society.

The MPS economists were once again playing behind-the-scenes roles in shaping policy, as they did throughout the 1970s. Shultz later recalled, “One of the most important things I did for Bill [Simon] was to introduce him to Milton Friedman,” of whom Simon became an admirer. In addition, he enjoyed close connections with Citibank’s Wriston—on his way to becoming America’s leading financier—who had recommended Simon’s appointment to the Treasury Department. As Treasury secretary, Simon would prove a worthy understudy to the trio of Shultz, Friedman, and Wriston, and he would build on their initial accomplishment of deregulating exchange rates. He went on to play a key role in financializing the domestic economy and weakening the industrial base, thus establishing himself as a central figure in overturning the class compromise.

In July 1974, Simon flew to Jeddah, along the Red Sea coast, and achieved a far-reaching agreement with Saudi officials entailing their purchase of Treasury bonds in large quantities. The idea was for the Treasury to establish a surplus on its capital account—made possible by Saudi money—thus compensating for weak exports and a deficit on the merchandise trade balance. The consequence of this arrangement was a strengthened dollar. In return for their funds, the Saudi royal family gained U.S. military and political support, a coveted goal. The decision to bolster the dollar was no doubt made easier by the fact that the Saudis’ oil exports were priced mostly in dollars, and they had a vested interest in protecting its value. As part of the deal, the Saudi monarchy was expected to set aside its long-standing hostility toward the administration’s pro-Israel policy, a sacrifice it was evidently willing to make.

At the bureaucratic level, Simon established a close connection between the Treasury Department and the Saudi Arabian Monetary Authority. While the U.S. pivot toward Saudi Arabia took place during the end of the Nixon presidency, it carried over to Nixon’s successor, Gerald Ford. The Jeddah agreement was sufficiently sensitive that the details were classified for an extended period and have only recently come to light.

In essence, Simon persuaded the Saudis to underwrite U.S. financial hegemony. Other OPEC states quickly followed the Saudi lead, and by 1978, the bulk of OPEC surpluses had been invested in Treasury bonds and other dollar-denominated assets. From a U.S. standpoint, the prospect of Saudi and other OPEC funding was viewed as beneficial. Shortly after the Jeddah deal was concluded, the investment banker Robert Roosa noted, “We can pay for [imports] without straining our balance of payments … because more and more of the OPEC money is flowing in here.” Saudi funds generated additional benefits. The fact that the world’s leading oil producer was investing in America’s future signaled to central bankers and private investors around the world that the United States remained a safe haven for their surplus funds; this signal would stimulate mass flows of funds into the United States, as a supplement to the Saudi and OPEC petrodollars, further shoring up America’s financial position for the long term.

Following the Jeddah agreement, American officials accepted Saudi Arabia as a strategic partner, as a supplement to Iran, in protecting the Gulf, and both countries became the “twin pillars” of Western security in the region. After the shah was overthrown in 1979, U.S. policy relied to an even greater extent on the Saudis. For its part, the United States helped modernize the Saudi air force through the sale of fighter planes and advanced electronic equipment, while Saudi intelligence was encouraged to intervene throughout the Middle East and Africa, acting as a proxy for U.S. power. The arrangement clearly satisfied the Saudi royals’ desire for influence and prestige, made possible by their growing alliance with the United States. Over time, they would build up a formidable lobbying and public relations presence within the United States, thus ensuring that the U.S.-Saudi alliance would be long lasting. Any moralistic concerns regarding political repression and human rights violations in the kingdom were dismissed.

From a commercial standpoint, the U.S. alliance with Saudi Arabia generated lucrative opportunities for arms merchants, who gained a new market, as well as heavy engineering companies such as the Bechtel Group, which gained contracts for megaprojects, including the King Khalid International Airport in Riyadh. These deals were advanced by high-level political connections. In the Bechtel case, for example, a senior company executive was George Shultz, who had recently served as Treasury secretary. His successor, William Simon, joined Olayan Investments, “a Liechtenstein-based company belonging to the Olayan family in Saudi Arabia.”

When assessing the U.S.-Saudi alliance, we should not overlook old-fashioned moneymaking as a significant motive, and such private sector baksheesh forms a long-standing tradition in U.S. diplomacy. But the most important feature of the alliance remained simple: The Saudis would prop up the dollar.

How the Saudi Deal Fortified American Hegemony

The deal presented major benefits in promoting the United States as a superpower, even though it produced negative consequences for the domestic economy and working classes. But first, let us consider the benefits. Within the Nixon and Ford administrations, the Saudi agreement to purchase Treasury bonds helped resolve dilemmas on how to retain the dollar as the world’s primary currency at a time when the United States was gradually becoming a permanent debtor country with a deficit on its trade balance. Clearly, officials placed a high priority on remaining the issuer of the top currency, and the 1974 Saudi deal ensured that these advantages would endure. As a result, the U.S. government influenced every facet of international economic activity. A 1975 report presented to the elite Bilderberg forum observed that “world monetary liquidity was determined very largely by the monetary and exchange policies of the United States,” mainly due to “the predominant role of the U.S. dollar.” The central importance of the dollar thus contributed to America’s global clout, especially control over the IMF and the other international institutions. In addition, the influx of funds associated with the Saudi deal helped offset the vast expense of maintaining hundreds of overseas U.S. bases in allied states, further contributing to—and prolonging—the American Century.

On the negative side of the ledger, the strategy of strengthening the dollar with Saudi funds undermined the industrial base, along with industrial work forces. Stated simply, the strong dollar policy artificially increased the importation of foreign-manufactured products while reducing exports, thus generating deterioration of the U.S. industrial sector. It is important to emphasize that this policy reflected an intentional choice among various options.

An alternative policy would have been to favor industry, which was a viable possibility. In 1973, Under-Secretary of State for Economic Affairs William Casey observed that the United States might solve its problems through an “export-oriented business strategy, a devalued dollar, and U.S. government pressure on other countries to open their markets.” Continued devaluations would have risked undermining confidence in the dollar as the world’s currency, but this was not an insuperable barrier. From the Council of Economic Advisers, Marina Whitman advocated simply abandoning the dollar’s key currency status altogether. Even so mainstream a figure as David Rockefeller contemplated a new international currency as a replacement for the dollar, possibly based on an expansion of the IMF’s program of special drawing rights. Secretary Simon disregarded these alternatives, as he opted for a strategy of bolstering the dollar with foreign funds.

From Simon’s standpoint, the influx of petrodollars accomplished two goals: while enhancing American power, the petrodollar inflow also supercharged the financial sector in which Simon had worked throughout his adult life. The inflow enabled the “financial sector to unleash itself,” in the colorful phrase of one official. The strategy of drawing in foreign capital would play out well into the twenty-first century, attracting investors from all over the world, who would be lured into Treasury bonds and private-sector capital markets, further strengthening the dollar.

Through multiple presidencies, the Treasury Department facilitated this influx of foreign funds, pressuring governments around the world to deregulate their own financial systems to make more funds available to finance the U.S. debt. As a result of this external funding, the United States was able to maintain its superpower status long after the 1974 Jeddah agreement. While American officials clearly appreciated the prestige that was associated with governing a superpower, this prestige was achieved at high cost to the domestic economy.

Excerpted from Revolt of the Rich by David N. Gibbs Copyright (c) 2024 Columbia University Press. Used by arrangement with the Publisher. All rights reserved. For notes, references, and citations see the full text there.