chapter 33 & 34 Yergin notes attached

Chapter 33: The Second Shock and the Great Panic

·         Animosity between the royal house of Iran and the fundamentalist of the dominant Shi’a Islamic sect dated back to Reza Shah’s fierce battle for power with the Shiite clergy in the 1920’s and 1930’s (pg. 656)

·         Economic trouble in Iran – couldn’t handle vast increase in petro-dollars

·         Iranians from every sector of national life were losing patience with the Shah’s regime and the pell-mell rush to modernization

·         Ayatollah Khomeini – “religious rectitude and unyielding resistance made him the embodiment of opposition to the Shah” (pg. 657).

o   Khomeini had regarded the Pahlavi regime as both corrupt and illegitimate – did not become politically active until about the age 60

o   His hatred of the shah was matched only by his detestation of the US, which he regarded as the main prop of the Pahlavi regime

o   Denunciations from Iraq were cast in the rhetoric of blood and vengeance

o   Became a rallying point for discontent (pg. 657)

·         Human rights become focal point of US FP (pg. 657).

·         40-40:  “relentless cycle” of protests and death

o   The riots and demonstrations spread across the country, with futher dramatic clashes, more people killed, more people martyred” (pg 658).

·         US doesn’t want/can’t imagine any alternative to the Shah – saw the Shah as a critical ally, “ a regional policeman” in a crucial area (658)

·         Difficulty of getting intelligence on Iran

·         Fires in movie theaters – killing hundreds

·         Shah is sick with cancer – very few know at time (659)

·         Increase in strikes – including in the oil industry (660)

·         Khomeini is expelled from Iraq in 1978 – goes to France which gives him more access to communication channels (660)

·         Shah continues to proceed with modernization efforts/liberalization

o   “such western-styled rights were of little interest to a population that was rising up against the monarch and his dynasty and the whole process of modernization”

o   “strikes immobilized the economy and the government, students were out of control, and demonstrations and riots went on unchecked” (pg 660)

·         Oil field chaos

o   Decrease in oil exports: “The impact of strikes was felt immediately. Iran was the second-largest exporter of oil after S. Arabia. Of the upwards of 5.5 million barrels produced daily in Iran, about 4.5 million were exported; the rest were consumed internally. By early Nov, exports had been reduced to less than a million barrels/day, and thirty tankers were waiting in line at the loading facilities at Kharg Island for oil that was not there at a time…” when international winter demand was beginning to surge. (660-661)

·         world market and stability of Iran in question: “ the stability of Iran depended on oil revenues; they were the basis of the country’s entire economy” (pg 661)

·         US gives no consistent policy toward Iran – sending contradictory signals (661-62)

o   “US faced the situation in Iran ‘with no policy whatsoever’

·         Continued deterioration of condition in Iran

o   New martyrs called for

o   Evacuation of “the Fields”

o   Continued decline in exports: “by Dec 25, Iranian petroleum exports had ceased altogether

§  Spot markets in Europe surged 10-20% above official prices

§  Iran also deprived of domestic oil supplies (663)

·         Military unable to mobilize

·         End of the Pahlavi dynasty (664)

·         Khomeini arrives in Iran and eventually establishes a government – short time of uncertainty with 2 governments (666)

·         2^nd oil shock: prices go from$13 to $34/barrel

o   Production output boosted in other OPEC countries – still below ’78 levels (667)

·         3 stages:

o   1. Shortage – panic triggers increased loss of supplies

o   2. Disruption of contractual agreements within the oil industry

o   3. Contradictory and conflicting policies of consumer governments (aspects of WEC – IEA – still being developed

o   4. Oil exporters once again gain large rents – giving them significant power and influence on the world stage

o   5. Emotion: uncertainty, fear etc. (667-68)

·         Question as to how far the revolution would reach

·         Spot markets become center (667)

·         Buyers, once again, “inadvertently made the shortage worse by building up inventories – as they had done in 1973” (668) – expensive to hold inventories

·         Loss of barrels – where it came from/why it happened (669)

·         “In sum, the panic buying to build inventories more than doubled the actual shortage and further fueled the panic. That was the mechanism that drove the rpcie from 13 to 34 a barrel” (669)

·         Effects on BP (669)

·         Japan hit hard once again – it had been very dependent on Iran (670)

·         Role of the spot markets (670)

o   “Suddenly all of the action was on the spot markets, which had, until then, been a kind of sideshow, comprising , in terms of both crude and products, no more than 8% of total supplies”

o   By Feb 1980: spot prices were double official prices

·         Actions of the exporters (670)

o   Responded to the crisis in two ways:

§  “they began adding premiums to their official prices, with new monthly terms clattering out from telexes around the world”

§  “began shifting as many supplies as possible, and as rapidly as possible, from long-term contracts to the much-more-lucrative spot markets” (670)

·         Return of some Iranian oil – continued worry about the future

·         “leap frog” – the producers vying with each other to raise prices

·         “scramble” – a bruising competition for supply among purchasers

·         But now mentality – things would be worse tomorrow (671)

·         Saudi Arabia is cautious about prices again

o   “objected to the leapfrog because it feared that short-term winnings, however great, would be followed by large and perhaps ruinous losses for the exporters” (672)

o   Yamani Edict: stated that S. Arabia would keep to official prices, no surcharges

·         In the 2^nd quarter of 1979, the Saudis cut production, bringing it back to the pre-crisis “ceiling” of 8.5 million barrels/day

·         3-mile island incident raises question about nuclear power (673)

·         “governments were torn between two fundamental objectives: obtaining relatively low-priced oil and guaranteeing secure supplies at any price” (673)

·         Domestic climate in US (673)

o   “the nation through its own political immobilism, was rationing gasoline through the mechanism of gas lines” (674)

o   Carter becomes a victim

o   Strikes in the US: “truckers were conducting a rowdy, violent nationwide strike, now three weeks old, to protest fuel shortages and rising prices” (676)

·         Attention toward synthetic once again

o   Push for a synthetic fuel program to reduce American dependence on imported oil

o   Program undertaken (677)

·         Continued actions of OPEC & continued disarray in the oil market (678-9)

Chapter 34: “We’re going down”

·         Beginning of Iranian hostage crisis (p 681)

·         Shah finally admitted into the US for cancer treatment – had been denied most countries, including the US at first (682)

·         Iran increasingly theocratic as crisis continues

o   Crisis would last about fifteen months (444 days)

·         Crisis indicates west decline? (683)

·         Carter Doctrine: “Let our position be absolutely clear. An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the USA, and as such an assault will be repelled by any means necessary, including military force” (683-84).

·         Carter responds to crisis by placing an embargo on the importing of Iranian oil into the US and by freezing Iranian assets (684)

·         Saudi concerns about the oil market (once again)

o   Fear that “price increases would destroy consumers’ confidence in oil and, thus, stimulate long-lasting competition to OPEC oil, as well as large-scale development of alternative fuels” (685)

o   Saudi efforts are in vain – objective was straightforward: “Use the growing weight of excess supply to force prices down” (685)

·         Exporters don’t believe demand will eventually fall: “most of the exporters assumed demand was so inflexible that they could dictate whatever prices they wanted to consumers” (pg. 686).

·         Attempt at hostage rescue mission – failure

o   “the very fact of the hostage rescue mission and its ignominious failure greatly increased the tension in the market. In addition, Iranian out-put had fallen once more, all of which set off a new round of panic buying” (687)

·         Outbreak of Iraq-Iran War

o   “the outbreak of the war shook the Persian Gulf yet again and threw oil supply system into jeopardy, threatening a third oil shock” (688)

o   Long-time hostility between Iraq and Iran

o   War sparked a host of rivalries: ethnic and religious, political and economic, ideological and personal; by a struggle for primacy in the Gulf (689)

o   Brief background on Iran-Iraq conflict pg 689

§  Saddam and the Ba’th party (renaissance party)

·         “it was a military pan-Arabic, aiming to create a single Arab nation and fervent in its denunciations of the West and imperialism” (690).

o   Khomeini toward Saddam: “held Hussein personally responsible for his troubles and ranked him among his preeminent opponents” (pg 691).

§  List of enemies: 1. Shah 2. American Satan 3. Saddam and the Ba’th party

o   Why Iraq/Hussein wanted to attack Iran – objectives pg 692

§  Hussein targeted his attack on the heart of the Iranian oil industry

o   “…the Iraqi strategy proved to be based upon grave miscalculation, for the Iranians withstood the first blow and struck back immediately, and no less hard, at Iraqi targets. The assault enabled Ayatollah Khomeini to further consolidate his power, silence his critics, dispose of the non-clerics in his government, and proceed in the fashioning of the Islamic Republic – meanwhile mobilizing the population to resist” (pg 692)

o   Iranian oil exports were reduced by the war, Iraq’s almost ceased – something Hussein hadn’t counted on

o   Oil: The initial stages of the Iran-Iraq war removed almost 4 million daily barrels of oil from the world market – 15% of total OPEC output and 8% of free world demand (693)

o   IEA – concerted their efforts to persuade companies not to buy into panic, not to scramble for supplies, not to drive up prices – but, rather, to draw down their inventories” (pg. 693).

o   OPEC meeting in Bali (awkward because of Iran and Iraq) – similar meeting of IEA in Paris

§  Saudis try to maintain price controls/oil output (695)

·         Demand for oil eventually falls

o   As a result: OPEC’s output in 1981 was 27% lower than the 1979 output – in fact was the lowest since 1970 (pg 696)

o   October 1981 represented the last time that OPEC price would go up – for at least a decade (696).