The Prize: The Epic Quest for Oil, Money, and Power

After World War I, French Premier Georges Clemenceau and British Prime Minister David Lloyd George discussed the future of Mesopotamia, a region under the defunct Ottoman Empire, now seen as a potential oil-rich area. Britain aimed to dominate Mesopotamia, including Mosul, despite the fact that France had claims there. The nations agreed that France would control Syria in exchange for a share of Mosul’s oil, and these negotiations initiated a larger, multinational struggle for Middle Eastern oil.

Before the war, the Turkish Petroleum Company (TPC) was formed with shares held by Deutsche Bank, Royal Dutch/Shell, and the British-controlled Turkish National Bank. The key architect of this deal was Calouste Gulbenkian, an Armenian businessman with a deep understanding of the region’s oil potential. Known as “Mr. Five Percent,” Gulbenkian held a significant silent stake in TPC, earning his nickname for his persistent demand for a 5% share in all dealings.

The war halted Anglo-German cooperation in Mesopotamia and temporarily buried TPC. Post-war, the Sykes-Picot Agreement assigned Mosul to the French, but British officials immediately worked to undermine this arrangement, especially as British forces captured Baghdad in 1917. Control over Mesopotamian oil was deemed crucial for British interests, with oil’s strategic importance underscored by the wartime shortages of 1917 and 1918. In December 1918, Clemenceau and Lloyd George tentatively settled the Mosul issue, with France getting a share of the oil in return for British control of the region. However, this agreement sparked prolonged negotiations filled with disputes. The San Remo Agreement in 1920 eventually granted France 25% of Mesopotamian oil, with Britain retaining control under a League of Nations mandate. The TPC was the vehicle for this development, with the French acquiring the former German share.

Meanwhile, the French aimed to bolster their oil position by creating a national champion, the Compagnie Française des Pétroles (CFP), headed by Ernest Mercier. CFP was to be the instrument of French liberation in oil, taking up the French shares in TPC and representing French interests in the oil-rich Middle East. Negotiations over TPC continued into the 1920s, complicated by the geopolitical dynamics and Gulbenkian’s steadfast demand for his 5% share. Ultimately, the final agreement—known as the Red Line Agreement—was signed in 1928, establishing the framework for future Middle Eastern oil development and binding all partners to joint operations within the boundaries of the former Ottoman Empire. This agreement highlighted the persistent and often contentious efforts to control and develop the region’s vast oil resources.

In 1919, U.S. Army Captain Dwight D. Eisenhower joined a cross-country motor convoy to demonstrate the potential of motor transportation. This journey was fraught with mechanical failures and poor roads and therefore highlighted the need for better highways. This realization would later influence Eisenhower’s push for the interstate highway system during his presidency. This event marked the beginning of America’s transition into a motorized society.

Henri Deterding, a senior executive at Shell, predicted that the post-World War I restlessness would increase the desire for travel. His foresight was evident as the number of registered cars in the U.S. skyrocketed from 3.4 million in 1916 to 23.1 million by the end of the 1920s. This boom in automobile ownership transformed American life, creating a new demand for gasoline and leading to a fourfold increase in gasoline production. The rise of the automobile culture led to the creation of drive-in gasoline stations, which replaced the old, inefficient methods of fuel distribution. The first such station was reportedly opened by the Automobile Gasoline Company in St. Louis in 1907. By 1929, the number of gas stations had grown to 143,000. With standardized structures featuring large signs and additional services, gas stations became icons of the new automotive era. This era also saw the proliferation of branded gasoline, with companies like Texaco, Shell, and Gulf establishing recognizable trademarks to assure customers of product purity. The sale of gasoline at retail outlets became highly competitive, transforming the oil industry.

World War I demonstrated that oil equaled power, solidifying the critical role of oil in global geopolitics. This realization led to heightened competition between oil companies and nation-states over control and ownership of oil resources, as exemplified by Mexico and Venezuela.

Yergin describes the development of Mexico’s Golden Lane oil fields. In early 20th-century Mexico, oil exploration was dominated by Pan American Petroleum, which was led by Edward L. Doheny, and Mexican Eagle, which was led by Englishman Sir Weetman Pearson and later Lord Cowdray. Pearson was an accomplished engineer whom President Porfirio Diaz invited to Mexico to undertake major infrastructure projects. Pearson soon ventured into oil, and despite initial setbacks, his persistence paid off in 1910 with significant oil strikes, leading to a boom and making Mexico a major oil producer by 1921. However, the Mexican Revolution of 1911 disrupted stability, leading to nationalization conflicts under the 1917 Constitution, which reasserted national ownership of subsoil resources. Facing violence and instability, foreign companies reduced investment, leading to a decline in Mexican oil production.

Unlike Mexico, Venezuela offered a favorable environment for oil exploration under General Juan Vicente Gomez, who centralized power and attracted foreign capital. Royal Dutch/Shell and Jersey Standard were among the early explorers. Despite initial skepticism and challenges such as disease and difficult terrain, major discoveries confirmed Venezuela’s potential. A prime example was Shell’s Barroso well, which was discovered in 1922. Through manipulation and kickbacks, Gomez’s regime facilitated rapid development, making Venezuela the world’s second-largest oil producer by 1929. Major companies like Royal Dutch/Shell, Gulf, and Pan American dominated production, and concerns about future stability led companies to build offshore refineries in places like Aruba and Curaçao.

In the Eastern Hemisphere, the Bolshevik Revolution placed Russian oil under Soviet control, challenging foreign oil interests. Royal Dutch/Shell and Standard Oil of New Jersey sought to negotiate with the Nobels for Russian oil assets, despite the Bolsheviks’ nationalization. Leonid Krasin, the Soviet Commissar for Foreign Trade, skillfully negotiated with Western companies, leveraging the New Economic Policy to attract foreign investment. Despite initial resistance, companies like Jersey and Shell formed alliances to manage the Soviet threat, but internal disagreements and geopolitical complexities hindered cooperation. By the late 1920s, companies shifted focus to new sources like the Middle East, with Soviet oil continuing to impact global markets.

In 1930, Columbus “Dad” Joiner, a struggling oil promoter, discovered oil in East Texas, sparking a massive boom during the Great Depression. Despite his limited education and his struggles with rheumatic fever, Joiner leveraged his optimism and persuasive skills to persevere in his drilling efforts on Daisy Bradford’s farm in Rusk County, Texas. His endeavors were based on dubious geological advice from “Doc Lloyd.” After three years, Joiner’s Daisy Bradford Number 3 well struck oil in October 1930, revealing the vast East Texas Oil Field, which later became known as the “Black Giant.” Spanning 140,000 acres, this became the largest oil field in the U.S. Initially met with disbelief, the discovery quickly led to a frenzy as subsequent wells confirmed its potential.

The oil rush brought thousands to East Texas, resulting in the creation of makeshift camps. Oil prices dropped dramatically from $1.85 per barrel in 1926 to two cents by mid-1931. Despite the effects of the Great Depression, East Texas saw a temporary economic boom with unprecedented drilling activity. However, when unregulated production led to an oversupply, prices plummeted and threatened the industry’s viability. In response, Texas Governor Ross Sterling declared martial law in August 1931, deploying the National Guard and Texas Rangers to enforce a shutdown, and this move helped to stabilize prices. To address the ongoing crisis, Harold Ickes, Secretary of the Interior under President Franklin D. Roosevelt, implemented measures to control production and further stabilize prices. The National Industrial Recovery Act and the Connally Hot Oil Act aimed to curb excess production and illegal trading. Implementing these acts involved federal-state cooperation and necessitated setting production quotas and imposing tariffs on foreign oil imports. By 1934, a regulatory framework brought stability to the industry through prorationing, whereby states allocated production quotas to match demand, thus preventing overproduction. Despite resistance and legal challenges, cooperation between federal and state authorities combined with advances in petroleum engineering to manage the industry’s output and prices.

In 1928, Henri Deterding, head of Royal Dutch/Shell, rented Achnacarry Castle in Scotland and invited key oil executives to a secretive meeting. The participants included Walter Teagle of Standard Oil of New Jersey, Heinrich Riedemann, Sir John Cadman of Anglo-Persian, and others. The purpose was to address overproduction and overcapacity in the oil industry. The executives sought a formal agreement to stabilize markets, ensure profitability, and avoid destructive competition. The meeting resulted in the “Pool Association” or “As-Is Agreement.” This document outlined the industry’s problems and proposed solutions. Companies agreed to maintain their market shares based on 1928 levels, thus preventing overproduction and wasteful duplication of facilities. They also agreed to share facilities and limit new infrastructure to drive down costs. Key to the agreement was setting uniform prices based on the nearest geographical supply point, thereby ensuring that no price wars would arise among members.

However, the agreement faced several challenges. The Soviet Union, a major oil player, was initially left out of the discussion. However, despite the companies’ distaste for doing business with the Soviets, they reached an understanding with Russia in 1929, guaranteeing the Soviet Union a share in the British market. Notably, the “As-Is” Agreement excluded the U.S. domestic market in order to avoid American antitrust violations. Despite the agreement, many “fringe” players outside the consortium nibbled away at the majors’ market shares. The U.S. companies formed the Export Petroleum Association under the Webb-Pomerene Act to manage exports and negotiate with the European Group. However, internal disagreements and competition from outside producers led to the collapse of this effort.

Efforts to reformulate alliances continued. In 1930, the Big Three—Jersey, Shell, and Anglo-Persian—tried to revise the “As-Is” understanding for European markets. However, rising volumes of American, Russian, and Romanian oil undermined these attempts. By 1932, a new Heads of Agreement for Distribution was created, managed by committees in New York and London.

The Great Depression exacerbated industry problems, leading to the 1934 Draft Memorandum of Principles, which called for reduced competitive expenditures, including cuts in advertising and promotional gifts. Despite these measures, distrust and rivalry persisted among the companies. The geopolitical landscape further complicated matters as governments imposed quotas, set prices, and restricted foreign exchange, forcing companies to blend domestic products and invest locally. In Mexico, President Lázaro Cárdenas’s nationalistic policies culminated in the 1938 expropriation of foreign oil companies’ assets, leading to prolonged legal battles and compensation disputes.

Major Frank Holmes plays a pivotal role in the search for oil in the Arabian Peninsula. Born in New Zealand in 1874, Holmes had a diverse career as a mining engineer before turning his attention to the Middle East during and after World War I. His interest in oil was sparked in 1918 when he heard about oil seepages on the Arabian coast of the Persian Gulf. Holmes was a determined and charismatic figure who earned the Arabic nickname “Abu al-Naft,” or “Father of Oil.” He tirelessly pursued oil concessions from various impoverished rulers along the Arabian coast, despite skepticism and opposition from British officials. His persistence led to the formation of the Eastern and General Syndicate, which secured several oil rights, including a significant concession in Bahrain in 1925.

Despite financial difficulties and the skepticism of companies like Anglo-Persian Oil, Holmes continued his quest. He eventually caught the interest of Gulf Oil, which took over the rights to his Arabian concessions in 1927. However, geopolitical complications arose with the Red Line Agreement, which restricted independent operations in the region by the major oil companies. This led Gulf Oil to pass the Bahrain concession to Standard Oil of California (Socal), which was not bound by the agreement.

Socal, keen to develop foreign oil supplies, established the Bahrain Petroleum Company and began drilling in Bahrain, eventually discovering oil in 1932. This success prompted further interest in the Arabian Peninsula, particularly in Saudi Arabia. Socal negotiated a concession with Saudi Arabia in 1933 despite the challenges posed by the British government’s opposition and the complex political landscape. Holmes’s vision and relentless efforts laid the groundwork for the eventual discovery of vast oil reserves in the region, transforming the geopolitical and economic landscape of the Middle East. His story underscores the blend of ambition, perseverance, and strategic maneuvering that characterized the early years of the oil industry in this region.