Brilliant, MUST READ! The Poisoned Well of Arab Oil

The New York Times | October 17, 2003 | Fouad Ajami

[the_greatest_country_ever]

The Poisoned Well By FOUAD AJAMI

It was not so much the guns of Oct. 6, 1973, and the assault of the Egyptian and Syrian armies against Israel, that changed contemporary history and remade our world. It was the use 11 days later of the "oil weapon," and the price increases that followed, which tipped the scales of history. By the time OPEC unsheathed the oil weapon, 30 years ago today, the tide of battle had turned. Israel had regained the initiative: its soldiers had crossed to the western side of the Suez Canal, and were within striking distance of Damascus as well.

It was then, on the edge of yet another Arab calamity, that the Saudi monarch, King Faisal, broke with his American protectors and began what turned into a frontal assault on the very bases of the post-World War II international order.

On Oct. 17, 1973, the Organization of Petroleum Exporting Countries raised the price of oil to more than $5 a barrel from $3 a barrel; a day later it cut production by 5 percent a month; three days later, it imposed an embargo on petroleum exports to the United States. Then the shah of Iran struck with a rebellion of his own.

In Tehran, just before Christmas, he secured the consent of the other oil-producing nations for yet another price increase, to $11.65 a barrel.

In the "Thousand and One Nights," the recurring theme is of the beggar becoming king and the king a beggar. So it was when OPEC imposed its embargo. It was an attempt to turn the stuff of fantasy into reality, to make the largest transfer of wealth in the annals of nations.

Secretary of State Henry A. Kissinger was among those who realized this. "Never before in history," he wrote in his memoirs, "has a group of such relatively weak nations been able to impose with so little protest such a dramatic change in the way of life of the overwhelming majority of the rest of mankind."

No tears were shed, though, for the old order of things in those countries rich with oil, or in the large stretches of the Arab-Muslim world on their periphery. The peoples of those lands had long dreamt of just such a moment. They hadn't quite foreseen how the dream would play out.

Still, the modern nationalisms of the Arabs and the Iranians had always revolved around the use of oil; the grievances of these nationalisms were tales of how Western prospectors and explorers, and their powerful world-spanning companies, had worked their way on the politics of the Arab Middle East and brought about its subjugation.

These lands, it seemed, were now done with that history. Everywhere in the Arab world there was a palpable sense of excitement, of defeats avenged. Nothing was out of reach.

New wealth would bring the latest technology and training and secure the withdrawal of Israel from the lands it occupied in 1967. Modern history itself could be short-circuited; poor, unskilled societies would be able to join the era of technology and industry.

For a historically minded people, this new wealth signaled the return of history, the bestowing of a second baraka (blessing) on the Arabian Peninsula. The first, of course, had been the rise of Islam in the first half of the seventh century. But Islam's power, and its center of gravity, then shifted to other lands — to Damascus, Baghdad, Córdoba, Cairo, Istanbul.

When the balance of power tilted back to the Arabian Peninsula, it was said to be piety's vindication. Lands hitherto left to pestilence and anarchy — in the desert domains, locusts were a common source of protein before the age of oil made possible more lavish meals — were given a sign of divine favor and its material rewards.

In the days of scarcity, Kuwaitis had led a harsh, simple existence: they were pearl divers and fishermen who sailed their dhows to ports in India and the Arabian Sea. They had known hunger and need.

Now the world came calling on Kuwait. The cities of the Levant and the Fertile Crescent, which had brokered the meeting of the civilization of the West with their own, were reduced to begging for a share of the new wealth.

There was a diminishment of Beirut, Damascus, Cairo, Tunis, and a new ascendancy of the oil states. Hucksters and peddlers of every kind and contraption descended on the oil states.

The wealth worked its way into these societies with astounding velocity. A world that had been whole, where people had little but shared more, was bulldozed. The social balance was ruptured.

A fault line opened between those who fell into riches and those left behind. The ditch was even deeper if measured by cultural pretensions; there were those who succumbed to the ways of the glamorous foreign world and those who watched and lamented as their world and its verities spun out of control.

This second group soon fell back on an aggrieved nativism. The new wealth had a new nemesis: Americanization was overtaken by a fierce anti-Americanism, a mighty wind of wrath and resentment.

A Pied Piper rose in Iran: a turbaned mullah, Ayatollah Ruhollah Khomeini, who summoned his people back to the safety of tradition. A middle class created by the oil wealth, educated men and women who would live to regret their new religious zeal, rallied to him.

The shah of Iran, Muhammad Reza Pahlavi, had been one of the chief architects of OPEC's policy; he had wanted to turn his country into an Asian Germany, to extirpate the role of the religious class and to herd his people into the modern age. He was the first victim of oil's curse. A bare five years after he engineered the big price hike, he gathered a handful of soil, left his country, and started roaming the world in search of a place of exile.

From the distance of three decades, we can see oil's curse — and its ambiguous gift.

It wasn't just Iran that was undone by sudden wealth. On the shores of the Mediterranean, Algeria succumbed to barbarous slaughter; a war erupted between that country's rulers and insurgents who draped their wrath, and the fury of their dispossession, in Islam's banners: Hezbollah (the Party of God) on one side, Hizb Fransa (the Party of France) on the other. For nearly 15 years, the slaughter went on in the cities of the country, while the work of oil continued uninterrupted in the Sahara.

The killer squads of the regime and the merciless insurgents both fought for oil's bounty.

In Iraq, the ruin had a different story line: here oil was tethered to state terrorism, and a displaced peasant thug from the town of Tikrit, fired up by the dreams of money and oil, set out to wreck his country and to plunge the world into endless discord.

We are still in the grip of that historical moment. That wayward son of Arabia, Osama bin Laden, is a child of the oil revolution. He came of age amid the new wealth; it was petromoney that he took to the impoverished mountainous land of Afghanistan.

And it was petromoney that brought about the demographic explosion that has swamped and unsettled Arabia. Thirty years ago, less than 7 million people lived in Saudi Arabia; today the estimate is about 17 million. For every member of the lucky generation that came into its own in the years of plenty, there are several more younger claimants now choking on failure and disappointment.

The mind plays tricks here: as the wealth of 1973 was evidence of divine favor, so the retrenchment is a sign of divine disfavor, and a call on the faithful to rectify the course of history. Belligerent piety now fills the void, gives order and meaning to the capricious cycle of history, its boom and bust.

Men and women are not given the gift of foresight. If they were, would the crowds that thrilled to what October 1973 represented have been so triumphant, knowing the heartbreak and ruin that lay in store for them, and for us all?

Fouad Ajami, professor of Middle Eastern studies at Johns Hopkins University, is author of "Dream Palace of the Arabs: A Generation's Odyssey."

[Iris7]

I like your opinion of economists. "Certurus parabus" (boy, my Latin stinks!), that is "all else being equal", is so dumb I am still amazed. What imaginary world do they live in?

They think they are being "scientific" because they try to model using Calculus. I keep thinking about how to make a mathematical proof that they are inheirently wrong, but no success yet!!!

(Lately been banging away at finite but very large number of dimensions vector spaces, and am way over my head!!) (Just now, talking with you, had an idea about logs to get around floating point exponent limits limits without writing in C, which I have resisted learning for years!! Like I said, over my head!!)

[Iris7]

There is a rational and concerted effort by many central banks to increase liquidity throughout the first and second worlds in a very major, but hopefully managed way. The highish Euro is putting great pressure on German exports, and liquidity increase is seen there as the only way out. Gotta preserve that good old "safety net"!!!

This "liquidity" increase is the same as inflation, conducted on a world wide basis. The central banks are using the CPI and equally erroneous representations of reality as a surrogate for inflation, and so are hoping the inflation they are causing will not have unbearable political consequences. The idea is to leave no safe investor haven, and so control international cash flows, while inflating like crazy. (You wouldn't believe what is going on in East Asia!!!)

[Iris7]

As the used to say in the idiotic '60s and '70s, Right On!!!!

[Iris7]

Agreed.

"Now look at the mess you've got us into, Olly!) - Hardy of "Oliver and Hardy".

[SAJ]

Yes, indeed -- arguably the most unpopular national tax measure of the 20th century. As I recall (sorry, had I more time, I'd look it up), the surcharge only lasted for 4/5 years. A huge political albatross.

[BabsC]

You're two administrations too late. LBJ's insistence on prosecuting the Vietnam war WITHOUT a corresponding tax increase

Didn't he also open up ths social security funds to the general accounts to pay for the escalation?

[DoctorMichael]

Interesting-insight Bump.

[neverdem]

"You're two administrations too late. LBJ's insistence on prosecuting the Vietnam war WITHOUT a corresponding tax increase (1st time in history, btw) AND fund his idiotic Great Society scheme (''...we can have both guns and butter...'') was the ignition to both the US breaking off the Bretton Woods quasi-gold standard in 1971 and to the subsequent grotesque inflation of the 1970s. The oil sheikhs early on made the sensible ECONOMIC decision to raise the dollar-denominated price of oil because, when gold and dollars became infungible by Nixon's decree (effectively), they saw the handwriting on the wall that the dollar would begin a rapid decline."

Pardon me, but my response was not intended to generate hostility. Personally, I detest LBJ because from the facts it seems to me he commited an army of a half of a million not to victory but as a cover so that he could get his Great Society legislation through Congress. I was just trying to check my memory. IIRC, the Viet-Nam war was assessed as costing $150 billion in the dollars of the time. How much his surcharge ultimately cost, paid for hostilities and how much it hurt the economy are subjects for doctoral dissertations.

[neverdem]

"You're two administrations too late. LBJ's insistence on prosecuting the Vietnam war WITHOUT a corresponding tax increase (1st time in history, btw) AND fund his idiotic Great Society scheme (''...we can have both guns and butter...'') was the ignition to both the US breaking off the Bretton Woods quasi-gold standard in 1971 and to the subsequent grotesque inflation of the 1970s. The oil sheikhs early on made the sensible ECONOMIC decision to raise the dollar-denominated price of oil because, when gold and dollars became infungible by Nixon's decree (effectively), they saw the handwriting on the wall that the dollar would begin a rapid decline."

Pardon me, but my response was not intended to generate hostility. Personally, I detest LBJ because from the facts it seems to me he commited an army of a half of a million not to victory but as a cover so that he could get his Great Society legislation through Congress. I was just trying to check my memory. IIRC, the Viet-Nam war was assessed as costing $150 billion in the dollars of the time. How much his surcharge ultimately cost, paid for hostilities and how much it hurt the economy are subjects for doctoral dissertations.

[neverdem]

"Didn't he also open up ths social security funds to the general accounts to pay for the escalation?"

He most certainly did so. And currently the gov't can do nothing more than invest those funds in Treasury IOUs, lest they influence the market.

Just consider what would happen if the gov't invested in the free market selectively.

[neverdem]

"Didn't he also open up ths social security funds to the general accounts to pay for the escalation?"

He most certainly did so. And currently the gov't can do nothing more than invest those funds in Treasury IOUs, lest they influence the market.

Just consider what would happen if the gov't invested in the free market selectively.

[okie01]

"LBJ's insistence on prosecuting the Vietnam war WITHOUT a corresponding tax increase (1st time in history, btw) AND fund his idiotic Great Society scheme (''...we can have both guns and butter...'') was the ignition to both the US breaking off the Bretton Woods quasi-gold standard in 1971 and to the subsequent grotesque inflation of the 1970s."

Add another adverse effect attributable to LBJ. According to him, "currently, the federal government receives tax money and pays it into two pots. But, if we put all the money that's coming into the government into one pot, we can afford to wage both wars -- in Viet Nam and on Poverty. See? When we consolidate these accounts, the deficit in this one goes away".

And, thus was the federal government's operating budget and the Social Security Fund consolidated...into "one pot".

So, who was the worst of last three Democrat presidents? Clinton, Carter or LBJ? It is the stuff of great arguments.

[St.Chuck]

Very interesting read. Thanks for posting it.

[Orangedog]

Just consider what would happen if the gov't invested in the free market selectively.

Possibly the worst outcome imaginable. Imagine congress being able buy controlling interest, RJ Reynolds of Phillip Moris and all other publicly traded tobacco companies and dismantle them. Then they move on to other politically incorrect industries. It's better that they don't have enough money to do any of that, or the retirement Ponzi scheme.

[Orangedog]

My question is this: Which currency is going to be more stable in the long term?

There is 6000 years of recorded history showing that whenever paper currencies get into trouble, the masses run to gold. For the purpose of disclosure, I do classify myself as a "gold bug" but I do not see gold as an investment. I see it as insurance against the major nations of the world engaging in competitive currency devaluations, which we appear to be on the brink of.

We have been through dollar devaluation before, as noted in this thread. I was just a kid during the 1970's, but I do remember that it really blew. Take a look at the percentages of the price increases of gasoline that occured. Think about what would happen today of the price of oil went up over 100% within a relatively short period of time. It took several years until the economy to get back on track, and we didn't have a national debt of over $7 trillion dollars to service then.

[Southack]

"Putin is no fool, which is why I think he might actually be serious about switching to euro-based oil sales. Think about it...the dollar has lost 20% against the euro in the past several months. That means that the $30 they were getting for a barrel of Rusky crude only has $24 of purchasing power."

...Only in Europe.

Yes, the Dollar has dropped 20% versus the Euro recently, and yes, the Russians get paid in Dollars for each of their barrels of oil exports, and yes, that Dollar has dropped versus the Euro...but that Dollar still buys the same amount in the U.S.

So the Russians can either use those Dollars to purchase fewer European goods, or else they can use them to purchase the same amount of U.S. goods.

They're smart people over there. They'll figure out how and where to get the most value for their Dollars.

[Happy2BMe]

You Ain't Seen Nuthin! Yet!

The Sauduction of Washington

http://www.sauduction.com

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The Newsletter the Saud family and their Washington retainers love to hate.

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"I summon my blue-eyed slaves anytime it pleases me. I command the Americans to send me their bravest soldiers to die for me. Anytime I clap my hands a stupid genie called the American ambassador appears to do my bidding. When the Americans die in my service their bodies are frozen in metal boxes by the US Embassy and American airplanes carry them away, as if they never existed. Truly, America is my favorite slave."

King Fahd Bin Abdul-Aziz, Jeddeh 1993

E-Mail Address - sauduction@sauduction.com

[Happy2BMe]

"So the Russians can either use those Dollars to purchase fewer European goods, or else they can use them to purchase the same amount of U.S. goods."

Wish I could back you up on this one, but America produces fewer domestic goods now than ever before in our entire history (those produced and used here or exported).

The Chinese are the ones laughing all the way to the bank!

[Southack]

"Wish I could back you up on this one, but America produces fewer domestic goods now than ever before in our entire history (those produced and used here or exported)."

Don't speak gibberish, boy.

General Motors alone produces more in a single month today than the whole U.S. produced in 1866.

In fact, GM makes more cars than all the combined auto manufacturers of any other nation.

And behind GM, the world's second leading producer of automobiles is Ford.

Nor does anyone build more aircraft than Boeing and Lockheed, much less more than Piper, Gulfstream, Lear, Bonanza, Cessna, and Mooney.

The U.S. produces roughly 30% of the world's goods and services even though we only have 4% of the world's population.

In fact, about the only area in which the U.S. is outproduced is in consumer trinkets of the types sold at Wal-Mart and such.

[Happy2BMe]

(AP) The U.S. trade deficit widened in March to $43.5 billion, the second highest on record, as imports of foreign-made industrial supplies, including crude oil, rose to an all-time monthly high.

The Commerce Department reported Tuesday that the trade gap grew by 7.6 percent in March from February's deficit of $40.4 billion.

Although exports went up for the third month in a row in March, imports rose nearly five times faster, leading to a bloated trade deficit that was second only to the record deficit of $44.9 billion produced in December.

Economists were expecting the deficit to get bigger in March but not as much as it did. Economists were forecasting the trade imbalance to reach $41 billion.

To combat the trade deficit, the Bush administration says the United States should seek to boost American exports by attacking foreign trade barriers, rather than raising barriers to imports coming into the country.

Trade critics, including labor unions, say the deficit is evidence that President Bush's free-trade policies are not working and are contributing to hefty job losses in manufacturing.

In March, imports of goods and services increased by 2.9 percent from the previous month, to $126.3 billion, the second-highest level of imports ever recorded for a month.

Imports of a wide variety of industrial supplies, including crude oil and plastics, rose to a record $28.3 billion in March.

America's bill for imported crude oil hit a record of $9.1 billion in March. That reflected an increase in the amount of imported crude oil. The price of crude oil dipped to $30.27 a barrel in March, from $30.46 in February, which marked a 20-year high.

Although the United States economy is struggling to get back to full speed, its economic health is still better than many other countries' that have been mired in a worldwide economic slump.

Exports of goods and services grew by 0.6 percent in March from the previous month to $82.8 billion. Private economists say the weaker U.S. dollar, which has lost altitude over the past year, is helping out exports at a time of lackluster global demand. Weak growth abroad, however, will continue to be a challenge for U.S. exporters, economists say.

In March, exports of industrial supplies, including cotton and chemicals, rose to $14.3 billion, the highest level since February 2001.

A weaker dollar makes U.S.-made products more competitive on foreign markets and less expensive for overseas buyers.

The U.S. dollar fell to a new four-year low against the euro Monday. The decline came one day after Treasury Secretary John Snow said a weaker dollar would help U.S. exports a view that private economists and U.S. manufacturers share.

However, traders viewed the remarks as signaling a retreat from the long-standing position of the Bush administration and the previous Clinton administration in support of a strong dollar.

Treasury Department spokesman Rob Nichols on Monday said Snow's remarks on Sunday were not meant to signal a shift away from a strong dollar policy.

Nichols pointed out that in another TV appearance, on “Fox News Sunday,” Snow expressed his support for a strong dollar. “We have a well articulated and long-held view on the dollar that I've articulated a number of times,” Snow said on Fox. “We believe in a strong dollar.”

Tuesday's trade report also showed that the United States' deficit with Mexico reached a record of $3.9 billion in March. The U.S. trade shortfall with Canada widened to $5.2 billion in March, the highest level since January 2001.

The U.S. deficit with oil-producing nations, including Saudi Arabia and Venezuela, grew to an all-time monthly high of $5 billion in March.

The United States' politically sensitive trade deficit with China grew to $7.7 billion in March, from $7.6 billion in February. In a bright spot, though, exports to the country rose to a record $2.4 billion in March.

The United States' trade gap with Japan widened to $5.8 billion in March, from $5.3 billion in February.