Iran Announces Nationalization of Foreign Oil Interests Summary

  • Last updated on November 10, 2022

By nullifying a contract with oil companies that was not due to expire until 1979, Iran set the stage for crucial events in the history of world economic relations.

Summary of Event

On March 16, 1973, the shah of Iran, Mohammad Reza Shah Pahlavi, announced that oil companies had handed over operation of the Iranian oil industry. Foreign-owned oil companies were to become customers for rather than producers of oil from Iran. On March 20, the shah announced that the takeover would take effect on that day, and that production and refining facilities would be controlled by the National Iranian Oil Company (NIOC). Oil industry;Iran Iran;nationalization of oil industry National Iranian Oil Company [kw]Iran Announces Nationalization of Foreign Oil Interests (Mar. 20, 1973) [kw]Nationalization of Foreign Oil Interests, Iran Announces (Mar. 20, 1973) [kw]Foreign Oil Interests, Iran Announces Nationalization of (Mar. 20, 1973) [kw]Oil Interests, Iran Announces Nationalization of Foreign (Mar. 20, 1973) Oil industry;Iran Iran;nationalization of oil industry National Iranian Oil Company [g]Middle East;Mar. 20, 1973: Iran Announces Nationalization of Foreign Oil Interests[01110] [g]Iran;Mar. 20, 1973: Iran Announces Nationalization of Foreign Oil Interests[01110] [c]Trade and commerce;Mar. 20, 1973: Iran Announces Nationalization of Foreign Oil Interests[01110] [c]Government and politics;Mar. 20, 1973: Iran Announces Nationalization of Foreign Oil Interests[01110] [c]Economics;Mar. 20, 1973: Iran Announces Nationalization of Foreign Oil Interests[01110] Mohammad Reza Shah Pahlavi Yamani, Ahmad Zaki Faisal Mossadegh, Mohammad

Thus the St. Moritz Agreement St. Moritz Agreement[Saint Moritz Agreement] initially discussed by the shah and senior oil company officials on February 26, 1973, was concluded, replacing the 1954 agreement between Iran and consortium companies. The agreement embodying the new conditions was signed in the middle of July and ratified by the Iranian parliament on July 31. The new deal provided for increased production capacity, assured Iran of a price per barrel no lower than that of the other Persian Gulf producers, and made crude oil available to NIOC for direct exports. NIOC still needed the oil companies’ expertise in exploration and exploitation. Under the new agreement, Iran was committed to long-term oil sales to the consortium companies and received only 4 percent of oil production for independent export and domestic use. The agreement reflected Iran’s lack of expertise to run its own oil industry and a commitment to continued links with the West.

Taking advantage of its increased control, NIOC offered some of its surplus oil to international bidding. This proved to be of far-reaching importance. Given the prevailing concern about a prospective energy shortage and the heavy dependence of Japan on Iranian oil, Japanese companies offered the highest bid at $17.80 a barrel. This relatively high price provided Iran and other Persian Gulf producers with a solid base for negotiations with the oil companies. Negotiations opened, but when the fourth Arab-Israeli war broke out on October 6 and Iraq nationalized U.S. interests in the Basrah Petroleum Company, talks collapsed on October 12. Thus the stage was set for the second oil crisis since World War II, involving tremendous escalation of oil prices.

Mohammad Reza Shah Pahlavi.

The primary actors in the oil trade following World War II were the international oil companies, the consuming-country governments, and the oil-exporting countries. The industry during this period was dominated by seven interlocked firms—Exxon, Mobil, Chevron, Texaco, Gulf, British Petroleum, and Royal Dutch/Shell—collectively known as the majors or the Seven Sisters. These were later joined and challenged by newcomers, both independent private companies and state-backed companies. The United States was by far the most important consuming country. Its political and military power, the fact that five of the majors and as many of the independents were based there, and its status as the largest single oil market gave the United States particular importance. Western Europe, however, provided the largest market for the oil-exporting countries. Of the thirteen members of the Organization of Petroleum Exporting Countries Organization of Petroleum Exporting Countries (OPEC), Saudi Arabia was the most important, followed by Iran, Iraq, Kuwait, Venezuela, and Libya.

The history of world oil following World War II was shaped by three major crises: a shortage of supplies at the close of World War II, the 1973-1974 oil price shocks, and the 1979 price increases. The first postwar energy crisis was resolved by the international system that the United States organized around Middle East oil. Because the system had been organized by the United States in accordance with its own interests, other countries viewed it as not in their best interests. Conflicts led to the second oil crisis, that of 1973-1974. A drive for greater control by OPEC governments over oil-production operations, in the form of participation or nationalization, along with Arab frustration at the lack of progress in securing Israeli withdrawals from the occupied territories, was instrumental in initiating the oil price revolution of the early 1970’s.

The demand for nationalization had a long history. In 1951, Prime Minister Mohammad Mossadegh nationalized the Iranian oil fields, but they were given back three years later. In 1961, Iraq nationalized the unexploited acreage in the Iraq Petroleum Company Iraq Petroleum Company (IPC) concession. In 1967, Algeria nationalized British Petroleum’s Algerian retail network as the first step in a process that led to national control of the country’s oil industry. Algeria’s nationalizations and its success in selling its oil put the other oil-exporting countries under pressure to seize control of their oil industries. Subsequently, in 1971 OPEC announced a demand for effective participation in ownership of the companies’ producing assets. Persian Gulf exporting countries initially sought 20 percent participation.

In October, 1971, representatives of twenty-three international oil companies met in London, armed with an antitrust waiver from the U.S. Department of Justice, to prepare to confront OPEC on participation. Meanwhile, political developments encouraged Libya to nationalize British Petroleum facilities on December 7, 1971. Negotiations between OPEC and the oil companies got under way early in 1972. Ahmad Zaki Yamani pursued the talks on behalf of the Persian Gulf producers. A series of meetings followed. On February 16, King Faisal of Saudi Arabia intervened by issuing a blunt warning to the oil companies, which soon accepted the principle of 20 percent government participation. The two sides were still far apart regarding other terms of the deal. Talks between Yamani and the companies continued from April to June with little progress, accompanied by warnings of impending unilateral action by OPEC.

At this juncture, a number of significant events altered the complexion of the participation talks. On June 1, 1972, negotiations between Iraq and the IPC, which had started in January along with the Persian Gulf participation talks, broke down, and Iraq announced its nationalization of the IPC’s fields in northern Iraq. The Iraqi nationalization put additional pressure on other Persian Gulf countries and the companies. The next shock came less than a month later. On June 28, the shah announced a new program for Iran’s oil industry. He demanded an immediate increase in production and a greater direct role for NIOC in all branches of the industry. The oil companies’ refusal to meet the shah’s demand culminated in the nationalization of March 20, 1973.

Significance

Rivalry between various oil-exporting countries tended to spur OPEC on, leading to a leapfrog process in which one group secured gains only to be outdone by another group. Unprecedented economic growth in the oil-consuming countries encouraged a sharp rise in market prices for petroleum products, as did the fourth Arab-Israeli war and the associated oil embargo and Arab oil-production cutbacks. After 1974, the price of oil stabilized to some extent, but in 1979, as a result of the shutdown of Iranian oil production during the Iranian revolution, the price skyrocketed once again.

These unprecedented price increases represented a fundamental reordering of power relationships as well as the largest nonviolent transfer of wealth in human history. The oil-exporting countries triumphed in asserting the power of nation-states over international companies, in addition to forcing the consuming countries to transfer significant streams of income to the exporting countries.

The rises in oil prices challenged the world economy. Higher prices meant slower rates of growth, since production was more expensive; increased inflation; and serious balance-of-payments problems, as countries had to send more of their currencies to oil exporters. Higher prices also meant, paradoxically, increased availability of adequate energy supplies, as they encouraged conservation and development of new sources. Because of such conflicting effects, response to the crisis was especially difficult, as measures that alleviated one part of the problem aggravated other parts. The United States assumed leadership, urging a collective multilateral reaction to OPEC and discouraging other consuming countries from concluding bilateral agreements with the exporting countries. Western Europe and Japan did not want to antagonize OPEC or to be associated with U.S. support for Israel; thus they were reluctant to follow the U.S. lead.

Though highly significant, the economic consequences of the oil price explosion proved to be manageable. By 1978, the Middle East appeared to be stabilized. Disunity among oil consumers, heavy dependence on Middle East oil, rivalry among oil companies, and the national aspirations and militancy of the Middle Eastern suppliers remained strongly evident. A complex of such factors combined to produce yet another oil crisis in 1979. Consuming countries failed to develop effective energy policies because of their lack of cooperation and the international oil companies’ reluctance to develop new sources of oil and alternative sources of energy.

The dependence of the exporting countries on the international oil companies persisted. The less wealthy exporters looked to the international companies for the capital and the expertise to maintain and expand their oil-producing operations. In addition, the majors were still the only ones capable of performing most secondary and tertiary recovery work and were also the only source of the technology for the liquefaction of petroleum gases. Exporting countries looked to their former concessionaires for aid in moving into downstream operations, such as refineries, and sought their assistance in economic development programs as well as the companies’ political support within the consuming countries. As the exporting countries assumed formal control over their oil-producing assets, as Iran had done, the companies came under widespread attack in the consuming countries.

The most significant impact of the price rise on the oil companies was the greatly increased value of their assets. Prior to 1973, oil company profits lagged behind those in other U.S. industries, but the tightening of the market and the price explosion led to an enormous increase in profits earned outside the United States. Oil production continued to be the most profitable sector, both in the United States and in the OPEC countries. Because of long-term uncertainty and the volatility of their earnings, however, the oil companies intensified their efforts to diversify into other fields.

The oil companies became very active in the coal industry, controlling large portions of U.S. coal resources and production. They also performed a large proportion of the work in synthetic fuels. Oil companies also made major nonenergy acquisitions. In 1974, Mobil began its takeover of Marcor, best known for its Montgomery Ward outlets. Exxon developed a chain of small computer-related companies, and Gulf spent several hundred million dollars to secure control of Kewanee, a company that derived most of its income from sales of chemicals. Aside from Texaco, each of the majors acquired significant holdings outside the traditional oil, gas, and petrochemical fields. In their diversification strategies, the oil companies looked for new growth areas and recognized that they had to dominate new energy sources and technologies. In addition to diversifying, oil companies also began to acquire each other; for example, British Petroleum took over Standard Oil of Ohio.

The diversification schemes accounted for only a small portion of the companies’ total sales. Profits went up greatly in 1973-1974, but costs also rose—particularly for crude oil—and profits soon fell below the average rate of return in other industries. For all the turbulence, the companies survived. The governments of oil-exporting countries were not always able to manage without them even after taking control, as demonstrated by Iran, which succumbed to revolution and the dramatic fall of the shah. Although those events had other causes, economic difficulties and problems in relationships with international companies certainly played a role. Oil industry;Iran Iran;nationalization of oil industry National Iranian Oil Company

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Amirsadeghi, Hossein, ed. Twentieth Century Iran. New York: Holmes & Meier, 1977. A number of American, British, and Iranian specialists provide a useful introduction to the history of Iran in the twentieth century. About thirty pages are devoted to a concise and interesting account of the development of the Iranian oil industry.
  • citation-type="booksimple"

    xlink:type="simple">Farmanfarmaian, Manucher, and Roxane Farmanfarmaian. Blood and Oil: Inside the Shah’s Iran. New York: Random House, 1997. In this insightful memoir, the exiled Iranian prince, former director of the NIOC, and former ambassador to Venezuela relates his experiences of the tumultuous 1970’s.
  • citation-type="booksimple"

    xlink:type="simple">Lenczowski, George, ed. Iran Under the Pahlavis. Stanford, Calif.: Hoover Institution Press, 1978. An excellent detailed summary of achievements of Iran to 1975, written by several authorities in the field. A relatively long chapter describes Iranian oil policy from 1925 to 1975. Other chapters cover social, economic, educational, cultural, and foreign policy.
  • citation-type="booksimple"

    xlink:type="simple">Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Shaped. New York: Viking Press, 1975. Describes how one of the world’s biggest and most critical industries came to be dominated by seven giant companies. Essentially a book about political consequences of oil rather than its economic basis. A highly readable and absorbing account.
  • citation-type="booksimple"

    xlink:type="simple">Schneider, Steven A. The Oil Price Revolution. Baltimore: The Johns Hopkins University Press, 1983. An excellent, detailed, and comprehensive account that seeks to explain the oil crises by examining the interrelationships between governments and companies.
  • citation-type="booksimple"

    xlink:type="simple">Seymour, Ian. OPEC: Instrument of Change. New York: St. Martin’s Press, 1981. Recalls OPEC’s record of achievements and its rise from relative obscurity to world eminence. Detailed and accurate on a technical level. Highlights the broad sweep of events that enabled OPEC members to regain control of their destinies after so many years of subservience.
  • citation-type="booksimple"

    xlink:type="simple">Shwadran, Benjamin. Middle East Oil Crises Since 1973. Boulder, Colo.: Westview Press, 1986. A well-organized, lucid account. Delineates changes in the power equation, the political atmosphere, and the resources of the participants since 1973. Provides persuasive evidence that the absence of strategic planning, narrow vision, and economic forces were major factors in the crises.

Arab Oil Producers Curtail Oil Shipments to Industrial States

United States Plans to Cut Dependence on Foreign Oil

Iranian Revolution

Carter Orders Deregulation of Oil Prices

Saudi Arabia Establishes Gulf Cooperation Council

Categories: History Content