Here’s Why Oil Is the Cause of a Century of Pain: Part 2 — ‘A Stupendous Source of Strategic Power’

On Wednesday, I wrote about the 100th anniversary of the Sykes-Picot agreement. Most people missed it. Not here at Money Morning, though. This agreement was the catalyst for 100 years of turmoil and war in the Middle East.

It kicked off colonial claims to oil across the Arab World. It led to the British and French carving up the region — mainly to supply their oil-hungry war machines.

The British always took an approach of occupation. As the empire expanded — India, Hong Kong, Australia — it was all about possession and occupation.

This form of ‘sterling patronism’ was a very British approach to world domination. It was not the same approach the US took to reach the same end goal in their bid for world domination.

After the ‘San Remo Agreement’ in 1920, the British got a decent supply of oil from Iraq. They also looked after the French. The US, however, got nothing. This did not amuse them.

According to Walter Reid in his book, ‘Empire of the Sand: How Britain Made the Middle East’:

The United States were fiercely hostile. While they did not want any political responsibility for the Middle East, they very much did want to exploit the economic opportunities.

Through the implementation of the Treaty of Sevres, and the subsequent Treaty of Lausanne, the Ottoman Empire was left for the British and the French.

At the time, the US had good reason to absolve itself of political responsibility. They formed a view that it was far more powerful to establish economic reliance. If they were reliant on the US for economic prosperity, the US would have the upper hand.

They would get their oil, but in a different way.

Meanwhile, the German economy was in dire straits following defeat in the First World War. As such, they had to repay billions in reparations. But they couldn’t. Hyperinflation beset the country.

The ‘Dawes Plan’ enabled loans to Germany. This was so they could repay their European and US debts. The loans came from the US… Go figure…

The German economy became extremely reliant on the US economy.

The only problem was the US was about to go through the longest economic downturn in history. It would drag down Germany, and the whole world, with it.

At the time, the US had no choice but to call in all their loans. They stuffed an already ruined Germany and Europe.

This period of horrific economic times enabled the Nazi Party to grow in strength — a precursor to the Second World War.

What to do when the well runs dry

By this stage, every military in the world was dependent on oil. It was the energy for tanks, planes, trucks and boats. It was the lifeblood of the war machine.

In Michael Klare’s book, ‘Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum’, he writes:

…a typical armored battalion required seventeen thousand gallons of oil to travel only one hundred miles; the U.S. Fifth Fleet alone consumed 630 million gallons of fuel oil during a single two-month period.

With such reliance on oil, the US had a problem. They were, by now, the largest oil producer in the world. They also had substantial reserves. But they needed a backup plan in case the well ran dry.

Without oil, the US had no military might.

They were draining supplies at an alarming rate. So in much the same way as the British did in 1914, the US decided to investigate their own supply of oil.

Their findings showed that they were in serious trouble. Their focus turned to shoring up supplies. It was here that the Middle East became a focus for the US.

The US had been involved in the region prior to the Second World War. The Standard Oil Company of California (SoCal) obtained a 60-year lease in 1933. By 1939, they were producing oil.

They also created a subsidiary, the California-Arabian Standard Oil Company (CASOC). CASOC would also exploit the oil rich region.

Today, you’ll know SoCal as Chevron [NYSE:CVX].

CASOC went through ownership by Texaco and ExxonMobil [NYSE:XOM] (at the time, separate companies). But today, you’ll know them as the Saudi-owned Saudi Aramco.

Saudi Aramco is the world’s single most valuable company. Estimates on its size range from US$1.25 trillion to US$10 trillion.

Vital to the defence of the US

However, with domestic supplies threatened during the Second World War, the US took far greater interest in the Saudi area.

In 1943, the US established an Embassy in Saudi Arabia.

The American Mission to Saudi Arabia began as a legation in Jeddah in 1943. Full diplomatic relations commenced in 1948 and the U.S Mission, located in a traditional house in the old city center, was upgraded to the status of an Embassy.’ ­­

— US Embassy, Saudi Arabia website

The US wasn’t keen on political intervention. But it was happy to establish an embassy, and provide economic relief. It was also around this period that President Roosevelt said, ‘the defense of Saudi Arabia is vital to the defense of the United States.

This allowed the US to give support to the Saudis via the Lend-Lease Act of 1941.

This Act allowed the US to provide extensive military provisions to the British, Soviets (and other Allies) during the Second World War. The Lend-Lease Act itself was ‘An Act to Promote the Defense of the United States.’

Roosevelt successfully argued that the defence of Saudi Arabia was the defence of the United States too. After all, they had to protect the oil.

Then, on 11 April, 1994, the US State Department published the ‘Foreign Petroleum Policy of the United States’.

Part 3(a) states:

Facilitation, by international agreement and otherwise, of substantial and orderly expansion of production in Eastern Hemisphere sources of supply, principally in the Middle East, to meet increasing requirements of post-war markets.

Part 5 states:

This Government should endeavor to assure maximum economic benefits to the foreign areas in which petroleum is located.

This, my friends, is dollar diplomacy.

Occupation, empty promises and exploitation

The tie up between the US and Saudi Arabia throughout the 1930s, 40s and 50s was economically huge. It set up some of the world’s most powerful companies — most of them oil companies.

It entrenched the US in the Middle East. They had a strong economic and strategic position.

British colonialism was dwindling. With their withdrawal ‘East of Suez’, the British left a gaping hole. The US happily stepped in.

Oil became the single most important commodity on Earth. The US was in pole position to exploit it.

The importance of the US intervention in the Middle East is common throughout the 20th century. Dollar democracy, the so-called ‘petrodemocracy’, has been the cornerstone of US global power.

The protection of ‘assets’ in the Middle East is just as significant.

Remember, in the 1980s, the US supported Iraq and Saddam Hussein in the Iran-Iraq war. But Hussein was adamant about nationalising Iraq’s oil reserves. This didn’t sit well with the US.

In 1990, Iraq decided to invade Kuwait. This was an opportunity. The US could protect their oil assets from nationalisation. They could also dethrone a madman. It was good reason for the US to ‘promote the defence of the United States.’

You can trace almost every US intervention since then as a response to economic interests. Most of the time, it boils down to oil.

But things are starting to turn. The relationship with the Saudis in under strain. The recent ‘Justice Against Sponsors of Terrorism Act’ that Callum wrote about on Thursday is evidence of this.

The weakening relationship seems to be concurrent with less reliance on oil. Perhaps, in the 21st century, the battle for energy will fall from government hands into the hands of society.

Except it won’t be a battle.

The years roll on, and new tech brings new energy sources to the world. Green energies, battery power and storage — these are the future of energy. These are energies that war can’t control, and that takes power away from governments.

The century of oil however has done its damage. Claiming and dividing up the Middle East has left scars on the whole region. Generations impacted by occupation, empty promises and exploitation. It started with the British, and it’s ending with the US.

Of course, there’s always far more to the story. Far too much for a couple of Money Morning essays.

But at least you have some idea of how, some 100 years ago, a secret agreement sparked a century-long battle. A battle for the supply of oil…leaving a century of pain in its wake.


Sam Volkering,

Editor, Australian Small-Cap Investigator

Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

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