Middle East Oil & WWI

When World War I ended, new countries were born and borders were redrawn in the Middle East. But those changes were marked with missteps that have led to many of the conflicts that have made it one of the most volatile regions in the world.
Here is why.
In order to understand, we have to go back to WWI.
The British, French and Russians had been jockeying for position over the declining Ottoman Empire (modern day Turkey) for decades before World War I.
But as the war unfolded, Germany’s spreading influence in the region brought concern from all parties. Great Britain wanted to protect its interests in the region – mainly oil and mobility via the Suez Canal – so Britain and its most important colony, India, sent troops to the Middle East
On Nov. 5, 1914, France and Britain declared war on the Ottoman Empire who had joined Germany and Austria Hungary.
During the war, Arab rebels who wanted to be free from the Ottoman Empire asked the British for help. The British supported that request, with the help of France.
When the war ended, the two European powers implemented a mandate system in the Treaty of Versailles that split up the former empire’s countries without consulting the people who lived there.
The Ottoman Empire now became Turkey. It’s still the biggest and most powerful country in the region.
Lebanon was created as a state separate from Syria. These were put under French rule and stayed that way until after World War II.
Mesopotamia (Iraq) had been made up of three former Turkish provinces – Mosul in the north (known as Kurdistan), Basra in the south, and Baghdad in the middle. After the war, they were united as one country under British colonial rule.
Palestine was put under British control and divided into two countries, with the western portion of it becoming Jordan.
Britain also took control of Iran.
In 1932, Arabia’s kingdoms and dependencies were combined into one, called Saudi Arabia.
When Iraq was put under British rule after the war, it triggered conflict in the region that continues today:
• British leaders didn’t understand Iraq’s political or social issues and underestimated the popularity of the Arab nationalist movement (which was opposed to British rule).
Iraq’s provinces were each ruled by tribes and sheiks and had their own ethnic, cultural and religious identity. They weren’t used to a centralized government, which now included the voices and protections of minorities like Jews and Christians, so conflict erupted from the start.
• In 1921 a conference was held in Cairo to try and settle the conflicts.
• Agreements made at the conference drastically reduced British troop levels in a region that had little civil order and governmental oversite.
• The British also scrapped their promise to create an independent Kurdistan in Iraq’s north. To this day, Kurds in Turkey and elsewhere continue to defend their desire to become an autonomous region.
• The conference led to the next major point, the appointment of Faisal as king.
• At the conference, Faisal Bin Al Hussein, Faisal, for short – was installed as Iraq’s king since he was key in the success of the Arab revolt against the Ottomans. But as ruler, he rejected British control and wanted to form a single national identity, despite the aforementioned tribes, religions and ethnic groups.
• Since then, mostly Sunni Arabs have had political control over land that was largely populated by Kurds and Shiites, and each group’s grievances have brought about violent confrontations.
The Cairo Conference’s decision to install Faisal as king in Iraq also deeply affected Palestine and Jordan. Faisal’s brother, Abdullah, had been trying to regain Syrian independence from the French. But the British didn’t want to cause conflict with France, so it threatened Faisal, telling him he wouldn’t get to rule Iraq if Abdullah attacked Syria.
To appease Abdullah, the British created Trans-Jordan from Palestinian land and made Abdullah its king. This split set the foundation for the Arab-Israeli conflict we see today, since it split in half the land that would be considered for a future Jewish national homeland.
In Iran, the Anglo-Persian Agreement of 1919 that was formed after World War I would have given Persia (Iran) British money and advisors in exchange for oil access. But that was rejected by the Iranian Parliament in 1921.
Iran’s king, Ahmad Shah Qajar, was removed from power in 1925 by the parliament after his position was weakened in a military coup.
Reza Pahlavi, a former military officer, was named the new king and, in 1935, renamed the nation Iran. He was deposed in 1941 following an invasion by Soviet, British and other commonwealth forces looking to secure oil reserves from possible German seizure. His son, Mohammad Reza Pahlavi, then became king (shah, as they call it).
Unrest due to corruption and the shah’s efforts to westernize the country finally bubbled over in 1979, and the shah was forced to leave Iran.
The Ayatollah Ruhollah Khomeini, who had previously been exiled, returned to become the country’s supreme spiritual leader, and he made Iran a theocracy.
Iranian revolutionaries, angered by American interests and political dealings in their country, also stormed the U.S. Embassy, accusing the U.S. of harboring the exiled shah, who had relied on the U.S. to stay in power. Hostages were taken, ties were severed, and thus began the lack of diplomatic relations between the U.S. and Iran that continue to this day.
The Sykes-Picot Agreement of January 3, 1916 was a secret treaty between Britain and France to carve up the Middle East after WWI.
France would get the territory of modern day Syria, Lebanon, and northern Iraq, while Britain would get the territory of modern day Egypt, Israel, Jordan, and southern Iraq.
In an effort to win the war, the British supported the Arabs in launching a revolt against the Turks during the war.
The British promised Hussein, the King of Mecca, that he would be made king of a unified and independent Arab state after the war if he revolted against the Turks. Hussein agreed. His son Faisal, advised by Lawrence of Arabia, led the Arab revolt against the Turks. The Arab revolt played an important role in the collapse of the Ottoman Empire.
At the peace conference, the British broke their promise to establish a unified and independent Arab state. Instead, they created a handful of new nations in the Middle East that would be dominated by Britain and France.
In 1921, the French created the Kingdom of Syria. The British convinced the French to make Faisal the ruler of Syria, but he had no independence. He was exiled by the French in July 1920. The French created the state of Lebanon in 1920, and transferred territory from Syria to Lebanon. This act of imperialism still irritates Syrians today.
The Sykes-Picot Agreement also led to the creation of Iraq. According to Sykes-Picot, the British would get Baghdad and Basra, while the French would get Mosul in the North.
The British realized the importance of oil much earlier than the French, and the British suspected there was oil in Mosul. In 1918, the British convinced the French to relinquish their claim to Mosul. In this way, the British took control of the entire territory that is now Iraq. The British formed the Kingdom of Iraq in 1921, and Faisal was made king.
Now, British promises to European Jews further complicated the situation in the region. On November 2, 1917, the British government issued the Balfour Declaration — a public statement supporting a homeland for the Jewish people in Palestine.
Sykes-Picot gave the British control of Palestine. In 1921, the British carved Jordan out of Palestine and made Hussein’s son Abdullah king. However, the creation of Jordan infuriated both the Jews and the Arabs. On the one hand, the Jews thought the Balfour Declaration granted them the entire territory of Palestine. On the other hand, the Arabs in Palestine revolted at the idea of a Jewish homeland in their territory. There has been tension between the Jews and Muslims in the region ever since.
So bottom line is, the British broke promises made to both the Arabs and the Jews.

The war and peace treaties resulted in the creation of new and unsustainable nation states in the Middle East. For those living in the Middle East, even the names Iraq, Syria, Lebanon, Jordan, Israel, etc., are constant reminders that Britain and France betrayed the Arabs. In the end, British and French imperialism in the Middle East caused a century of turmoil in the region. So now to the oil:
Before the discovery of oil in the Middle East, Iraq, Iran, Saudi Arabia, and Kuwait were all poor undeveloped countries.The situations in all of these countries were similar. The majority of the population consisted of extremely poor peasants. No middle class existed to curb the power of the few rich families and a person had little chance of improving his status. The countries had few natural resources and for the most part the land was not suitable for farming.
At the beginning of the twentieth century oil was discovered in Iran and later in Saudi Arabia, Kuwait, and Iraq as well. Extraction of the discovered oil reserves in these undeveloped nations was a problem.
Developed countries already had the money, technology, and knowledge of the industry required to mine and market the oil within their borders. Countries like Venezuela and Saudi Arabia did not have many people with the money or knowledge of the industry required to make use of the natural resources their country controlled.
As a result nations with extensive petroleum reserves were unable to mine or market their petroleum. They needed the aid of the large foreign oil corporations in order to realize any profits from their resources.
At the time, the international petroleum industry was almost entirely developed and dominated by seven companies.
Five of the companies were American (Chevron, Exxon, Gulf, Mobil, and Texaco), one was British (British Petroleum), and one was Anglo-Dutch (Royal Dutch/Shell).
These major oil companies saw the opportunity for profit presented by the impoverished petroleum rich countries and decided to take advantage. This led to a series of concession agreements between the seven major oil corporations of the world, and the soon to be oil producing countries in the Middle East, Africa, and South America.
The details of these contracts vary, but they all shared a few common features. The governments gave the companies exclusive rights to explore and develop oil production within a limited area for a limited amount of time. The companies own all the oil they extract. However, the companies take all of the financial and commercial risks involved with the enterprise and they must make payments to the host governments in the form of taxes, royalties, production taxes, etc.
At face value the contracts might seem to be a good deal considering the host nations are profiting from resources that they could not mine themselves without doing any work.
In reality though, the contracts were not at all fair to the developing nations. The contracts were for a finite amount of time and area, but they covered huge expanses of land.
Contracts with three companies covered the whole of Iraq. A single contract covered the entire southern half of Iran, and another one covered all of the United Arab Emirates.
On top of this they were of incredibly long duration. Iran’s initial deal, which was not unusually long, lasted for sixty years. When it expired a new contract was negotiated to last twenty-five years with the option of renewal for up to 15 extra years.
The oil companies, who realized what a good deal this was for them, did not allow the oil possessing countries any means of backing out of their contracts.
The way the contracts were set up, the developing nations were unable to alter their contracts, short of nationalization, without the companies themselves agreeing.
Most of the countries even signed away their right to tax the companies in exchange for one time royalty payments.
For the first few decades the undeveloped nations with oil were happy to have the contracts. The oil deals brought an unprecedented amount of money to the poverty stricken nations. However, it was not long before they began to realize that they were being exploited.
Venezuela, which had the most favorable concession agreement, was the first to act. Since the country still maintained its right to raise taxes on the companies, Venezuela passed legislation in 1943 designed to increase the total royalties and tax paid by oil companies to 50% of their total profits.
The oil companies did not actually have a major problem with this change. They already had to pay income taxes not only to the oil producing countries, but also to their own governments.
Five out of the seven big companies were American. In the United States any tax that the oil companies paid to the oil producing nations was directly deducted from their income tax.
As a result the tax hike did not really reduce the profits seen by the oil companies. More important than the companies power hold on the individual oil producing countries was their grip on the oil market as a whole. They were essentially, though not legally speaking, a cartel.
Since some companies had a surplus of oil and others did not have enough, they worked out an agreement whereby the companies with surpluses would sell their extra oil to the others at a reduced rate. This had the effect of limiting the supply, and increasing prices (The United States government tried for years to catch the oil companies for anti-trust law violations, but was unsuccessful since their actions were technically legal).
The higher prices of oil actually benefited the oil producing countries since their profits were directly tied to the oil companies. However, the same power which allowed the companies to control prices also gave them the ability to control where that extra money went.
The seven major oil companies each had rights in several different producing nations and controlled almost all of the world’s oil supplies.
Since they each had several countries from which they could extract their oil they could easily reduce production in one location and raise it in another giving them a powerful bargaining advantage over individual countries.
At that time the individual governments knew very little about what was going on with their oil. They had no idea where the oil was being extracted from, who it was being sold to, or at what price. All they really knew was how much oil the companies claimed to have sold, and how much money they received for it. There was no communication between countries, so no government knew how much other nations were making from their oil.
However, Saudi Arabia soon became aware that any payments made by the companies to oil producing nations were deducted from their income tax. So, naturally the middle east nations now demanded more money.
The United States government cared more about ensuring access to oil than the extra tax revenue, however, so they allowed the oil companies to consider the increased payments a tax rather than a royalty so that it could still be deducted from their income tax. It was not long before all of the oil producing nations had fifty-fifty profit sharing contracts.
Most of the Middle Eastern countries were content with the fifty-fifty profit sharing. Iran, however, had a more radical idea in mind. The sentiment grew in the Iranian Parliament that nationalization was the way to go. Prime Minister Ali Razmara, who was the main anti-nationalization force, was assassinated in 1951 and a nationalization bill was passed in the Iranian Parliament soon afterward.
British Petroleum (BP) was the only oil company that had a concession agreement in Iran. In the interest of maintaining profits, BP increased production in Iraq and Kuwait while looking to England for support in keeping their interests in Iran after negotiations failed.
Both England and America attempted to work out deals with Iran’s new Prime Minister Mohamed Mossadegh but none were reached and as a result, oil exportation ceased entirely.
After two years without oil income the country was feeling the effects and Mossadegh began to lose support. So in 1953 the CIA (at the request of England) funded a coup which retuned power to the Iranian Shaw and landed Mossadegh in prison.
Consequently, the movement for nationalization in Iran was crushed. After the destabilization of their government and three years without oil revenue Iran ended up with a fifty-fifty deal equivalent to what they had been offered before trying to nationalize.
On top of this, oil interests in Iran were spread among all of the major oil companies, not just BP. This not only helped to increase the oil companies’ hold on the market, it also made negotiations much more complicated for the Iranian government. England and America had made an example of Iran that would not be forgotten by any of the oil producing nations for a long time.
This system worked in favor of the oil companies because they themselves controlled the posted prices. They were able to increase the actual price of oil without changing the posted prices. Thus, an increase in their oil profits did not necessarily mean an increase in taxes they paid. The oil producing nations knew very little about the oil industry beyond what the companies told them, so they were fairly oblivious if posted prices did not increase with actual oil prices.
The developing nations might not have noticed the fact that they were being slighted as prices increased, but they definitely took note when posted prices started to decrease. As the cost of oil dropped in the late fifties Middle Eastern countries began to complain when the oil companies repeatedly reduced their posted prices.
It aggravated them even more that the oil companies would drop the prices without warning them in advance.
With the outcome of Iran’s attempt at nationalization in mind, however, none of them actually did much beyond voicing their discontent, and a few empty threats.
By 1960, however, the oil producing nations had had enough of the companies reducing posted prices without warning. Another price drop in August 1960 pushed Iran, Iraq, Kuwait, and Saudi Arabia over the edge.
The first meeting of OPEC was held on September 10th, 1960.
The five members of the newly formed group drafted a set of resolutions at their first conference.
The OPEC members didn’t even demand the freezing of posted prices, but requested only that they be warned before the prices were lowered. The weak tone of the resolutions suggests that even together the nations were afraid to really stand up to the oil giants.
The oil producing nations had begun to unite, but they were still not able to work together. Iraq attempted to take over Kuwait almost immediately after the founding.
Iran, was basically a puppet for the US government. They reported everything that went on in OPEC meetings directly to the American government, seriously undermining the group’s effectiveness.
Saudi Arabia, realizing that the countries must all work together to if anything were to be accomplished, would not agree to anything that Iran did not back. As a result the weak stance taken in their initial resolutions would continue to characterize the actions of OPEC during its first ten years.
OPEC might not have significantly affected the way the oil industry was run during its early years, but it did have an important effect on its member nations. Before the group was formed there had been very little cooperation between oil producing nations.

Though OPEC could not make all of its members work together right away, it gave them a foundation on which to build. Beyond this, it also helped the member nations better understand the oil industry as a whole.
It was not until OPEC that the oil producing nations really became aware of the details of how the oil companies mined and sold their oil and to whom. This greater knowledge of the oil industry combined with the support that OPEC provided would give the producing nations the edge in negotiations with the oil companies.
The rest, as we say, is history. Callers?