|
The Weapondollar-Petrodollar Coalition
The Global Political Economy of Israel, Chapter 5
by Jonathan Nitzan
and Shimshon Bichler
|
"I warn you, that when the princes of this world start loving you, it means
they're going to grind you up into battle sausage."
- Louis-Ferdinand Céline, Journey to the End of the Night
|
Although economically isolated from its neighbours in terms of trade and
investment, Israel's political economy has nevertheless been deeply embedded
in the larger saga of the Middle East. The twentieth century, with its endless
thirst for energy, made the region crucial for its oil exports. Since the 1960s,
however, oil outflows have been complemented by the newer and more
precarious movement of arms imports. And as the 'petrodollar' earnings from
oil and 'weapondollar' profits from arms grew increasingly intertwined, there
emerged in the region a pattern of 'energy conflicts', a series of oil-related wars
and revolutions which again and again rocked the Middle East, sending shock
waves throughout the world.
Enigmas
Unfortunately, most of those who tried to understand this link between oil
and arms have willingly put themselves into the familiar straitjacket of
aggregates. The theories are numerous, but their story is almost always about
'states', 'policy makers' and the 'national interest'. Economists writing in this
vein, such as Chan (1980) and Snider (1984), for instance, tend to concentrate
on the issue of 'recycling'. The problem, as they see it, concerns the balance
of payment. Energy crises jack up the cost of imports for oil-consuming
countries, while creating trade surpluses and accumulated reserves for the oilproducing
ones. A relatively efficient way to 're-balance' these imbalances, they
continue, is for oil importers, mostly developed countries, to sell weapons to
oil exporters. Politically, this is easy to do. Consumers in the arms-exporting
countries don't care much since the shipments do not require new taxes,
whereas rulers in the oil-exporting countries like the trade since it boosts their
self-image and sense of security. The resulting arms race is perhaps unpleasant,
but largely unavoidable; unless, of course, the producing countries agree to
lower their oil prices.
The same universal language dominates the 'realist' literature of international
relations. The underlying political anthropology here portrays a menacing
Hobbesian environment, with each nation seeking to endure in a largely
anarchic world. Survival and security in this context hinge on economic
prosperity, national preponderance and military prowess, which are in turn
critically dependent on the differential access to advanced technology, raw
materials, and of course energy. According to the 'materialist' strand of this
literature, such as Nordlinger (1981) and Waltz (1979), this dependency explains
both why central decision makers insist on handling raw material and oil
themselves, rather than leaving the matter to private business, and also why
they seem almost trigger-happy whenever access to such resources is threatened.
True, many conflicts cannot be easily explained by material interests. And yet
even on such occasions, argue the realists, the national interest is usually
paramount. One reason, they explain, is that the national interest could be
'ideal' as well as 'material'. And indeed, according to Krasner (1978a: Ch. 1),
after the Second World War, U.S. state goals have become more 'ideological',
emphasising broad aims such as 'competition' and 'communist containment'
over strict access to resources (see also Lipschutz 1989). The other reason is that
state officials can be wrong, misunderstand the true nature of the situation, or
they can simply miscalculate the costs and benefits. But here too, even when
policy seems 'nonlogical', the driving force is still - as always - the national
interest (Krasner 1978a: Ch. 1).
Naturally, this type of theory can explain almost everything. The process is
simple. Take any policy, and begin by looking for materialist explanations. If
you find none, don't dismay. Look for ideal ones. And if that too fails, there
are always errors, so you can never go wrong. Moreover, the national interest
itself is a very strange concept. Since society is full of conflict, adherents of this
concept argue it represents not the sum of individual interests, but rather the
overall interest of the nation. In the language of Stephen Krasner, it is not the
'utility of the community'
which matters, but rather the
'utility for the community', as determined by its central decision
makers (1978a: 12, original
emphases). However, since the decision makers themselves rarely agree on the
matter, it is usually the researcher who ends up deciding the national interest
for them (or for the reader). And the way this interest is phrased is often so
loose, that it can be made consistent with virtually any line of action.
Now, to be fair, other grand narratives are also vulnerable to such ambiguities.
Take the
'interest of the capitalist system', a notion often invoked by functionalist
Marxism to rationalise developments which, on surface at least, appear
contrary to the immediate interests of individual capitalists. A typical example
for this is the welfare state. On the face of it, this institution undermines
capitalist power. Yet, if we were to push this to the 'final analysis', the
conclusion would be the opposite: by making life more bearable for the workers,
the welfare state ends up keeping capitalism as a whole viable. But is this really
true? Or rather, can we prove it is true? Another example is green-field
investment. Many Marxists consider such investment as synonymous with
accumulation, and therefore good for capitalism. But if so, is the century long
shift from building new capacity to mergers and acquisitions, illustrated in
Chapter 2, bad for capitalism? And what about a high price of oil? Or war in
the Middle East? Are they good or bad for capitalism 'as a whole'? The truth is
that these questions cannot be answered, and for a simple reason. The 'capitalist
system', much like the 'state', is an encompassing myth. It provides the broader
framework for the discussion, and therefore cannot be simultaneously used for
validating or refuting a specific hypothesis within that discussion.
The problem is illustrated in Bromley's otherwise insightful analysis of world
oil. His conclusion in that study is that the post-war order, and particularly the
emergence of OPEC and higher prices, have in fact helped strengthened the
'general preconditions of capitalist production' under the overall auspices of
U.S. hegemony (1991: 59). But what exactly are these 'general preconditions'?
And if OPEC and the oil crisis have indeed boosted the system of U.S.-
dominated capitalism during the 1970s and 1980s, why haven't the cartel's
disintegration and lower oil prices undermined this system during the 1990s?
Or have they? Surely, the world has changed in the interim. But then, it always
does, so how could we ever know?
The international flows of oil and arms have been examined also from the
more disaggragate perspective of the underlying industries, but here, too, there
is a considerable lack of unanimity, even on substantive issues. Writing from
an implicit 'instrumentalist' view, Blair (1976) and Engler (1977), for example,
contend that, intentionally or not, the energy policies of parent governments
(particularly the United States, Great Britain and the Netherlands) have had
the effect of assisting the international oligopoly of world oil. An almost
opposite view is expressed by Turner (1983) and Yergin (1991), who, in line
with a more realist perspective, argue that there was a gradual but systematic
erosion in the primacy of international oil companies, and that, since the 1970s,
these firms were in fact acting as 'agents', or intermediaries between their host
and parent governments. Studies on the international arms trade have been
equally controversial. According to Sampson (1977), the absence of any international
consensus on disarmament created a void, which was then filled by
the persistent sales effort of the large weapon makers. And since arms exports
become particularly significant in peacetime as domestic defence budgets tend
to drop, the end of U.S. involvement in Vietnam during the early 1970s
redirected attention to the Middle East, causing military shipments into the
region to rise. Other writers, however, such as Krause (1992), reject this interpretation.
The impact of private producers on arms sales policies, he claims,
should not be overstated, at least not in the case of the United States, where the
volume of arms exports is small relative to domestic military procurement and
the contractors' civilian sales.
Whatever their insight, though, most writers tend to treat Middle East
conflicts and energy crises as related though distinct phenomena. Wars are
commonly seen as arising from a combination of local conflicts complicated
by superpower interactions. Energy crises, on the other hand, are generally
perceived as a consequence of changing global market conditions and institutional
arrangements (such as OPEC). Some conflicts - for instance, the 1990-91
war between Iraq and the U.S.-led coalition - have been partly attributed to a
struggle over the control of crude reserves, whereas others - specifically the
Arab-Israeli wars of 1967 and 1973, and the Iran-Iraq conflict of 1980-88 -
were seen as having aggravated ongoing energy crises. Yet, no one has so far
offered a general explanation of 'energy conflicts' - that is, a framework which
would integrate militarisation and conflict on the one hand, with global energy
flows and oil prices on the other. Most significantly, existing writings on both
oil and war in the region tend to deal rather inadequately, and often not at all,
with the process which matters the most, namely the accumulation of capital.
As outlined in Chapter 2, during the 1970s and early 1980s the pendulum
of differential accumulation swung from breadth to depth. While economic
growth and corporate amalgamation receded, stagflation rose to fill the gap,
contributing massively to the differential profit of dominant capital (Figures
2.6 and 2.9). A central facet of this new regime was the cycle of militarisation
and energy conflicts in the Middle East, which helped both fuel inflation and
aggravate stagnation the world over (Figure 2.10). Stated in this way, our
argument may sound reminiscent of supply-shock theory, but the similarity is
only superficial. For one, stagflation started to pick up in the early 1970s, before
the increase in the price of oil. The oil boom certainly fuelled the process, but
as a mechanism, not a cause. Second, and more importantly, to argue that oil
prices were somehow a shock coming from 'outside' the system is to miss the
point altogether. On the contrary, if there was indeed any 'system' here, it was
one of differential accumulation. And at that particular historical junction, its
engine was running in depth mode fuelled by an atmosphere of crisis
emanating from the Middle East. In other words, the region was very much an
integral part of the 'system'.
The purpose in this chapter is to examine the global political economy of this
process. In a nutshell, our argument is that, during the 1970s, there was a
growing convergence of interests between the world's leading petroleum and
armament corporations. Following rising nationalism and heightened industry
competition during the 1950s and 1960s, the major international oil companies
lost some of their earlier autonomy in the Middle East. At the same time, the
region was penetrated by large U.S. and European-based manufacturing
companies which, faced with mounting global competition in civilian markets,
increased their reliance on military contracts and arms exports. The attendant
politicisation of oil, together with the parallel commercialisation of arms exports,
helped shape an uneasy Weapondollar-Petrodollar Coalition between these
companies, making their differential profitability increasingly dependent on
Middle East energy conflicts. Interestingly, when we look at the history of the
region from this particular perspective, the lines separating state from capital,
foreign policy from corporate strategy, and territorial conquest from differential
profit, no longer seem very solid. Many conventional wisdoms are put on
their head. State policies, ostensibly aimed at advancing the national interest,
often appear to undermine it; company officers and government officials,
moving through a perpetually revolving door, sometimes simultaneously cater
to several masters; arms races are fuelled for the sake of 'stability'; and peace is
avoided for being 'too expensive'. In contrast to these anomalies, the logic of
differential accumulation seems remarkably robust. It helps us make sense of
corporate strategies, of foreign policies and of the link between them - and all
of that within the broader context of 'energy conflicts'.
The Military Bias
The first half of the nineteenth century in Europe was marked by rising hopes
for progress. The Industrial Revolution was helping humanity harness nature.
The French Revolution brought new ideas of freedom. Nationalism, liberalism
and socialism were breaking new ground. And absolutism was on its way out.
With these changes all taking place at once, many were tempted to believe that
society was on its way to a better future, one in which military conflict and
war were to be rooted out. The theoretical justification for these hopes owed
much to the technological determinism of French philosopher Auguste Comte.
War he argued, was mainly the consequence of scarcity. Scarcity, however, was
alleviated by industrialisation and technical progress, and since these were
expected to continue their forward march, conflict and war were bound for
extinction. And initially, he seemed vindicated. The 'bellicosity index', devised
by Pitirum Sorokin and charted in Figure 5.1, shows the intensity of European
military conflicts, measured by a weighted average of various indicators, as it
evolved since the twelfth century (Sorokin 1962, reported in Wright 1964: 56).
This intensity roughly doubled every hundred years until the seventeenth
century. During the eighteenth and nineteenth centuries, however, with
technical change and industrialisation picking up speed, bellicosity fell sharply,
much along the lines suggested by Comte.
And yet, the drop proved a false start. By the second half of the nineteenth
century, with the European powers scrambling to complete their colonial acquisitions,
conflict again flared up in and outside the Continent. Sorokin's
bellicosity index came back with a vengeance, soaring to record highs in the
twentieth century, even without counting the Second World War and beyond.
Comte was wrong. Industrialisation in general and capitalism in particular were
compatible with war after all. And indeed, by the early twentieth century, a
growing number of writers, mostly Marxist, started pondering the link between
capitalism and imperialism.
Figure 5.1 European Bellicosity Index *
- * Number of wars weighted by duration, size of fighting force, number of
casualties, number of countries involved, and proportion of combatants to total
population
SOURCE: Sorokin (1962) reported in Wright (1964: 56).
Imperialism
The seminal study on the issue, titled Imperialism, was written by a British left
liberal, John Hobson (1902). Many of his themes have resurfaced again and
again in subsequent works, so the argument is worth presenting, if only briefly.
During the latter part of the nineteenth century, capitalism in the leading
countries was moving from atomistic competition toward concentration and
monopoly. According to Hobson, this transition tended to redistribute income
from wages to profits, thus creating a chronic problem of 'oversavings' and
'underconsumption'. Monopoly profit, like any profit, was earmarked for greenfield
investment. With workers having less to spend, however, the need for
such investment was much reduced. In order to avoid stagnation and crisis,
the excess savings therefore had to find outlets outside the home country, hence
the tendency toward imperialist expansion. The scramble for colonies was
intense, and Africa, which in 1875 had only 10% of its territory
colonised, lost another 80% to European powers within the next quarter
of a century. And, yet, this was only ironic, since, according to Hobson,
imperialism was in fact a net loss to society, and even to its capitalist class. A
more sensible route would have been to redistribute income back from
monopoly profit to wages, thereby reversing the entire causal chain from
monopolisation to stagnation. So why had imperialism prevailed over redistribution?
For Hobson, the reason was that state policy was conducted not by
society at large, and not even by the capitalist class, but rather by a fairly narrow
coalition for whom imperialism was indeed hugely profitable. The main
profiteers were the arms producers, trading houses, the military and imperial
apparatus, and above all, the financiers, whose foreign investments appreciated
greatly from reduced risk premiums brought by imperial rule. The financiers,
leading the pro-imperial coalition, were able to harness key politicians to their
cause, enlist the possessing classes on threat of redistribution at home, and
have the newspapers inflame for them the necessary atmosphere of nationalism
and racism.
Marxists writers were greatly influenced by Hobson, although most tended
to reject his belief that capitalism could be 'reformed'. According to Rosa
Luxemburg, territorial expansion and takeover - in quest for both new markets
and cheaper inputs - was in fact inherent in capitalism, 'the first mode of
economy which is unable to exist by itself, which needs other economic systems
as a medium and soil' (1913: 467). Moreover, the expansion was necessarily
violent.
'Force is the only solution open to capital: the accumulation of capital,
seen as a historical process, employs force as a permanent weapon, not only as
its genesis, but further on down to the present day' (p. 371).
And indeed, according to Rudulf Hilferding (1910), imperialism projected
its violence inward as much as outward, working to transform the economic,
political and ideological face of the imperial countries themselves. In contrast
to the classical stage, in which the various fractions of capital were politically
divided, during the monopoly stage the leading elements among these fractions
were fused into 'Finance Capital', an amalgamate of industry and finance
controlled by the big banks. This newly welded power, argued Hilferding, drove
finance capital into seeking an ever growing territory for its operations, but
such expansion was meaningless unless protected by tariffs against outside
competition. It was here, then, in the dual quest for territory and protection,
that private capital discovered it actually needed a strong state:
"The demand for an expansionary policy revolutionizes the whole world view
of the bourgeoisie, which ceases to be peace-loving and humanitarian. The
old free traders believed in free trade not only as the best economic policy
but also as the beginning of an era of peace. Finance capital abandoned this
belief long ago. It has no faith in the harmony of capitalist interests, and
knows well that competition is becoming increasingly a political power
struggle. The ideal of peace has lost its luster, and in place of the idea of
humanity there emerges the glorification of the greatness of and power of
the state... The ideal now is to secure for one's own nation the domination
of the world, an aspiration which is as unbounded as the capitalist lust for
profit from which it springs.... Since the subjection of foreign nations takes
place by force - that is, in a perfectly natural way - it appears to the ruling
nation that this domination is due to some special natural qualities, in short
to its racial characteristics. Thus there emerges a racist ideology, cloaked in
the garb of natural science, a justification for finance capital's lust for power,
which is thus shown to have the specificity and necessity of a natural
phenomenon. An oligarchic ideal of domination has replaced the democratic
ideal of equality" (Hilferding 1910: 335)
For Karl Kautsky, a Marxist contemporary of Hilferding, this portrayal was far
too bleak. The conflict between industrial and financial capital, he argued, had
not been decisively won by finance capital as Hilferding claimed. In fact, there
was scope for labour opposition, in both the developed and periphery countries,
to strengthen the hands of the industrial fraction. Such opposition, if successful,
could redirect capitalism toward a more benign alternative, which Kautsky
called 'ultra-imperialism' (1970; originally published in 1914). Exploitation
would surely continue, but the exploiters, instead of locking horns in imperial
destruction and inter-capitalist war, would vie for a common front.
'Hence,
from a purely economic standpoint', he wrote,
'it is not impossible that
capitalism may still live through another phase, the translation of cartelisation
into foreign policy: a phase of ultra-imperialism, which of course we must
struggle against as energetically as we do against imperialism, but whose perils
lie in another direction, not in that of the arms race and the threat to world
peace' (p. 46, original emphasis).
With hindsight, we can read here an early anticipation of the transnational
corporation, of decolonisation, and of the shifting emphasis of imperialism
from inter-capitalist rivalry to core-periphery struggles. But when Kautsky first
articulated this view, before the First World War, he was greeted by great
hostility from Lenin and Bukharin. Lenin in particular, having thrown his
hopes on an imminent revolution, refused to see capitalism as culminating in
anything less than Armageddon. Unequal development among the different
capitalist powers, he argued, prevented any mutual cooperation among them:
"Finance capital and the trusts do not diminish but increase the differences in
the rate of growth of the various parts of the world economy. Once the relation
of forces is changed, what other solution of the contradictions can be found
under capitalism than that of force?" (Lenin 1917: 243-4; cited from Marxist
Archives).
Furthermore, if workers were sufficiently
powerful to bend finance capital as Kautsky suggested, what was to prevent
them from moving all the way to socialism?
Military Spending
After the Second World War, things changed drastically. In the periphery,
colonialismcam e to an end, while in the developed core countries real wages
soared and unemployment fell sharply. Was this a fundamental change, asked
the Marxists? Was capitalismfinally able, perhaps with the aid of government
intervention, to resolve its earlier contradictions? And if so, was socialism
irrelevant? According to contemporary adherents of the 'monopoly capital
school', led by Baran and Sweezy, the answer to all three questions was
negative. The post-war prosperity was certainly real; but it wasn't because of
capitalism, but despite capitalism. The shift from small-scale production to big
business, they argued, altered the functioning of the economy in two important
respects. On the production side, large-scale undertakings, heavy R&D
spending, and the incessant introduction of new technologies enabled the big
oligopolies to cut cost as never before. At the same time, the strong oligopoly
bias against price competition not only prevented these cost savings from
being translated into lower prices, but actually introduced persistent inflation.
And so, contrary to the view of classical Marxism, monopoly capitalism, by
lowering cost and raising prices, created a tendency for the surplus to rise. For
Marx, the chief menace to capitalism came from a rising organic composition
of capital, leading to a tendency for the rate of profit to fall; here, on the other
hand, the key issue was the rising rate of exploitation, or 'surplus' in the new
terminology. But if so, what was the problem? Indeed, shouldn't a rising
surplus bring higher profit, thus boosting capitalismeven further? Not
necessarily, argued Baran and Sweezy:
"According to our model, the growth of monopoly generates a strong
tendency for surplus to rise without at the same time providing adequate
mechanisms of surplus absorption. But surplus that is not absorbed is also
surplus that is not produced: it is merely potential surplus, and it leaves its
statistical trace not in the figures of profits and investment but rather in the
figures of unemployment and unutilised productive capacity" (Baran and
Sweezy 1966: 218)
In short, Hobson's curse was still with us. Monopoly bred redistribution, underconsumption,
and therefore falling surplus - that is, unless absorbed by external
offsets to savings. Contrary to the early writings on the subject, however, the
most potent offsets according to Baran and Sweezy were created not by colonial
expansion, but through the 'institutionalised waste' of state spending, a process
first identified by Thorstein Veblen.
For external offsets to savings to be effective, the two writers argued, they
needed, first, to absorb more surplus than they generated, and, second, to be
available in large doses. Investment was no good here, since it usually generated
more surplus than it absorbed, while exports were limited by foreign demand.
Government expenditures, on the other hand, and particularly military spending,
faced neither limitation. They were commonly 'wasteful' in the sense of
absorbing but not generating surplus, and they could be extended almost at
will. Technically speaking, civilian government spending could work in much
the same way. Politically, though, it was unwelcome. The main reason was that
such spending, as it pushed the economy toward full employment, undermined
the social hegemony of business. According to Michal Kalecki,
"'discipline in the factories' and 'political stability' are more appreciated by the
business leaders than profits. Their class instinct tells themthat lasting full
employment is unsound from their point of view and that unemployment
is an integral part of the normal capitalist system.... The workers would 'get
out of hand,' and the 'captains of industry' would be anxious to 'teach them
a lesson'.... In this situation a powerful block is likely to be formed between
big business and the rentier interests, and they would probably find more
than one economist to declare that the situation was manifestly unsound.
The pressure of all these forces, and in particular of big business would most
probably induce the Government to return to the orthodox policy of cutting
down the budget deficit. A slump would follow in which Government
spending policy would come again into its own" (Kalecki 1943b: 141, 144)
Military spending did not pose a similar threat. It did not compete directly
with private interests, and while it might have lessened the disciplinary impact
of unemployment, the 'shortfall' was more than compensated for by the direct
use of force and violence in the name national security. And so, capitalism,
according to Kalecki, tended to oscillate between two ideal types. One extreme
was a democratic model in which the government, torn between supporting
and legitimising accumulation, ended up creating a 'political business cycle'
by its stop-go policies. The other extreme was the fascist model, in which full
employment was sustained by military spending in preparation for war, and
where the concentration camp substituted for unemployment as a way of
pacifying workers.
Since the Second World War, argued Baran and Sweezy, the United States
used armaments to write its own ticket to prosperity. According to Gold (1977),
the arrangement was supported by a powerful 'Keynesian Coalition' between
big business and the large unions, which, since the 1950s, consistently preferred
'military Keynesianism' and aggressive foreign policy to the more benign use
of civilian spending. And the policy was not without consequences. Ten years
before the publication of Baran and Sweezy's Monopoly Capital, Shigeto Tsuru,
a Japanese political economist, wrote an article entitled 'Has Capitalism
Changed' (Tsuru 1956). Having examined the sources and offsets of U.S. savings,
his conclusion was that in order to maintain its prevailing growth rate, the
country needed military spending equivalent to roughly 10% of its GDP.
However, if this proportion was to be maintained, he continued, the absolute
level of military expenditures ten years down the road would become far too
high to justify for a country in peace. And indeed, a decade later, in 1966, the
United States was deeply involved in the Vietnam War, with military spending
kept at close to 9% of GDP.
The U.S. Arma-Core
The 'Angry Elements'
During the 1970s, other writers, such as O'Connor (1973) and Griffin, Devine
and Wallace (1982), have taken the argument a step further, suggesting that
government involvement, and particularly military spending, were affected
not by overall macroeconomic needs or the interest of capitalists in general, but
rather by the specific requirements of dominant economic groups. More significantly,
however, the Korean and Vietnam conflicts of the 1950s and 1960s
indicated that military spending was not only a consequence of economic
structure, but also an important force shaping that structure. One of the first
writers to recognise this double-sided relationship was Michal Kalecki. Much
of his early writings from the 1930s and 1940s were concerned with the effect
on macroeconomic performance of the 'degree of monopoly' in the underlying
industries. Toward the end of his life, during the 1960s, he closed the circle,
pointing to the way in which macroeconomic policy, primarily military
spending, could affect the economic and social structure. In his articles 'The
Fascism of Our Times' (1964) and 'Vietnam and U.S. Big Business' (1967),
Kalecki claimed that continued U.S. involvement in Vietnam would increase
the dichotomy between the 'old', largely civilian industries located mainly on
the East Coast, and the 'new' business groups, primarily the arms producers of
the West Coast. The rise in military budgets, he predicted, would effect a redistribution
of income from the old to the new groups. The 'angry elements'
within the U.S. ruling class would be significantly strengthened, pushing for a
more aggressive foreign policy, and propagating further what Melman (1974)
would later call the
'permanent war economy'.
Was Kalecki right? Had the epicentre of the U.S. 'big economy', or dominant
capital in our language, indeed shifted from 'civilian' to 'military' oriented corporations?
Unfortunately, the question is not easy to answer. Corporate power,
we argue in this book, is a matter of differential profit. And, yet, the link
between profit and production is elusive at best. If military contractors were
producing only armaments and civilian firms only non-military items, the
problem would have been less serious. But that is not the case in practice. Since
the 1960s, most large U.S. firms have become conglomerates to a greater or
lesser extent, with military contractors diversifying into civilian business and
vice versa. The difficulty for our purpose is that conglomerate finance is
inherently 'contaminated' by intra-firm transfer pricing, so although we may
know how much a firm gets from the Pentagon in sales revenues, we cannot
know for sure the impact this has on its profit.
The problem, though, is not insurmountable. In what follows, we identify
the leading 'Arma-Core' of the U.S. economy, defined as the inner corporate
cluster which appropriated the lion's share of defence-related contracts, and
which was highly dependent on such contracts. Having identified the
members of this 'Arma-Core', we then proceed to examine their combined
profit relative to U.S. dominant capital as a whole. Now, although both groups
derived their earnings fromm ilitary as well as civilian business, and although
the impact on their profit of each line of business cannot be determined with
accuracy, it is safe to assume that the Arma-Core's profitability was much
more sensitive to military contracts than that of dominant capital as a whole.
A rise in the profit share of the Arma-Core would then indicate that Kalecki
was right, and that the 'military bias' of the United States indeed enhanced
the power of 'military oriented' firms. A decline in the ratio would of course
suggest the opposite.
Who then was in the Arma-Core? A first approximation could be derived
from data published by the U.S. Department of Defense (DoD), in its annual
listing for the 100 Companies Receiving the Largest Dollar Volume of Prime Contract
Awards [1 footnote]. From this publication we can learn that military procurement was
fairly concentrated, such that, over the period between 1966 and 1991, the
largest 100 contractors accounted for between 62 and 72% of the DoD's
total prime contract awards. However, it is probably inappropriate to consider
all of the leading 100 firms as members of the Arma-Core. Our tentative
criterion for inclusion in this core is for the firm to be large enough to exercise
political leverage, as well as significantly dependent on defence contracts, and
not all of the leading 100 companies fit both characteristics. Some corporations
- such as AT&T, IBM, ITT, Eastman Kodak, Ford, Chrysler, Exxon, Mobil and
Texaco - were very large but depended only marginally on military contracts.
Others, like Singer, Teledyne, E-Systems, Loral, FMC, Harsco and Gencorp,
relied more heavily on defence sales, but were probably not big enough to
exercise political leverage. Thus, concentrating only on large, defence-dependent
contractors, we end up with a more limited group of about 20 to 25 firms,
which for our purpose here comprise the U.S. Arma-Core.
The precise choice of boundary between the Arma-Core and the remaining
contractors is of course arbitrary to some extent, a problem which is further
exacerbated by periodic changes in the ranking of firms. Given the attendant
uncertainty and ambiguity, we focus on a more limited sample of only 16 corporations.
These include, in alphabetical order: Boeing, General Dynamics,
General Electric, Grumman, Honeywell, Litton Industries, Lockheed,
McDonnell Douglas, Martin Marietta, Northrop, Raytheon, Rockwell
International, Texas Instruments, Textron, United Technologies, and
Westinghouse. This group is representative of the Arma-Core in that it consists
of only large firms and, with only minor exceptions, it included the top ten DoD
contractors in every year between 1966 and 1991.[2 footnote] During the 1966-91 period,
these 16 firms received more domestic military contracts than any other
comparable group of American corporations. On average, they accounted for
36% of the DoD's total prime contract awards, with a floor of 30 per
cent (in 1966) and a ceiling of 41% (in 1985). As a group, the Arma-Core
proved much more dependent on sales to the Pentagon than dominant capital
as whole. For the latter, denoted here by the Fortune 500, military contracts
ranged between 5 and 10% of total sales. The comparable figure for the
Arma-Core was 20 to 40% (Nitzan and Bichler 1995: 460-1).
Turning to the crucial question of differential profitability, Figure 5.2 presents
the net profit share of the Arma-Core within dominant capital. The data show
that, following the Vietnam War, this share had doubled to 10% by the
mid-1980s, up from 5% in the mid-1960s. In other words, if our interpretation
here is correct, the 'permanent war economy' which existed in the
United States pretty much until the end of Reagan's second presidency, seems
to have indeed created an ongoing 'military bias' within the U.S. corporate
sector, strengthening the relative power of military contractors. Kalecki was
certainly prescient.
Figure 5.2 The Rise of the U.S. Arma-Core
SOURCE: Fortune; Standard & Poor's Compustat.
Corporate Restructuring and 'Military Keynesianism'
To a certain extent, this interaction between military expenditures and business
realignment was also part of a broader, worldwide transformation affecting
the relationships between nation states and transnational corporations.
Following the Second World War, the global economic significance of the
United States began to wane. The decline is evident in various indicators. For
instance, whereas during the 1960s U.S. GDP measured one and half times
the combined total for the EEC's 12 countries plus Japan, by the early 1990s
the ratio was only half as large. Also, as the country grew more economically
open, its trade balance moved from surplus to deficit, requiring increasing
doses of capital inflows to cover the shortfall. Under these circumstances, with
the local market becoming relatively less important as well as increasingly
contested by foreign competitors, U.S.-based firms naturally looked for further
opportunities abroad. And indeed, by the early 1990s, roughly 25% of
their profits came from outside the country, up from less than 10% in
the 1960s. The foreign challenge, however, remained gruelling, and Americanbased
firms continued their slide down the global rankings. In contrast to
1960, when the United States was home to 114 of the world's 174 largest firms,
by the 1990 the number dropped to a mere 56 (figures in this paragraph are
calculated from U.S. Department of Commerce through McGraw-Hill Online,
and from Franko 1991).
These major transformations affected the choice of both corporate strategy
and economic policy. Faced with mounting competitive pressures in civilian
markets, many large U.S.-based firms found themselves increasingly drawn into
the shelter of high-profit government contracts, particularly in areas such as
defence, nuclear energy, space, and medical technology.[3 footnote] On the policy side,
this dependency got the U.S. administration entangled in a commitment to
'military Keynesianism', which, paradoxically, grew deeper as the big corporations
became more global in scope. The reason was that, with a rising share
of corporate profits coming from abroad, domestic government policies affected
a diminishing portion of corporate earnings. Or to put it somewhat differently,
all other things being equal, a given increase in the companies' overall profit
required a larger increment of domestic military contracts. Under these circumstances,
any attempt to eliminate the 'military bias' spelled a major blow
to the credibility of macroeconomic policy, and of course serious injury to
some of the country's most powerful firms.
Relying on domestic military spending, however, was always a tricky
business. The main problem is the mismatch existing between the requirements
of arms making and the reality of arms selling. From an industrial
standpoint, the technology-intensive nature of weapon making requires
continuous research and development and open production lines. Furthermore,
military production is highly specialised, so it cannot be easily converted into
civilian use when demand for weapons slackens. These industrial considerations
call for a stable growth in demand for arms - and yet, that is not what
usually happens in the armament business. Perceived as a drain on the country's
resources, military expenditures need to be legitimised by external threats, and
these tend to fluctuate with the ups and downs of international politics and the
frequency of armed conflicts. The consequence is to make domestic weapon
procurement inherently unstable, which is of course a serious headache for the
large armament producers. Clearly, if these firms are to keep their production
lines open, they can never rely solely on domestic procurement, and must
constantly look for 'counter-cyclical' export markets.
Arms Exports
The perils of restricted demand are hardly new, of course. For example, during
the Seven-Year War Frederick the Great found himself forced to import 32,000
rifles from abroad, and that because only a few years earlier he decided to cut
down production capacity for lack of domestic demand (Frederick the Great
1979: 18). The simplest solution for this dilemma would have been to
supplement the home market with foreign sales, but, initially, that was not at
all obvious and for a very simple reason: weapons were usually produced by
the state whose officials were hardly keen on selling them to potential enemies.
Industrial advancement, however, increasingly shifted armament production
into private hands, and it was this privatisation which eventually enabled the
business to become truly international. The imperative of combining private
ownership and foreign sales was succinctly elucidated in 1913, when, on the
eve of the First World War, Krupp, the German weapon maker, got entangled
in a corruption scandal. Answering his critics in the Reichstag, the Minister of
War, Josias von Heeringen, defended this new system, arguing that in order to
maintain sufficient capacity for wartime, military producers had to export in
peacetime. This, he insisted, could be achieved only by private firms which
were free from the patriotic scruples of state companies (Sampson 1977: 43).
And indeed, by the end of the nineteenth century, the large armament firms
- such as Krupp, Nobel, Armstrong, Vickers, Du-Pont, Electric Boat and Carnegie
- were all privately owned, highly dependent on foreign markets, and most
importantly, unregulated (ibid., Chs 2-4).
This structure of the military industry first came under scrutiny during the
1920s and 1930s. After the First World War, the League of Nations accused the
arms companies of fermenting international conflict, causing a flurry of official
investigations into the arms business. Following the Nye Committee hearings
in the United States, the isolationist congress passed the 1935 Neutrality Bill,
with special provision for a National Munitions Control Board to supervise
American arms exports. A few years later, the 1941 Lend Lease Act brought the
U.S. government further into the centre-stage of the arms trade, and by the
end of the Second World War it was commonly accepted that the export of
weapons was no longer a private affair, but rather a matter of foreign policy.
After the war, the 'Truman Doctrine' conceived military exports, particularly
to Europe, as part of the larger effort to contain communism, a goal which
would be later extended to legitimise arms shipments to South East Asia. Yet
this new emphasis on broader policy goals did little to resolve the problem of
unstable demand. The continued military Keynesianism of the 1950s and 1960s
created the basis for an Arma-Core of large military-dependent firms, and by
the late 1960s, toward the end of the United States' direct involvement in
Vietnam, these corporations appeared just as vulnerable to budget cuts as the
Carnegies and Du-Ponts half a century earlier. Despite several decades of change,
the weapon business remained predominantly private, and with the war effort
now receding, its owners were once again seeking to counteract excess capacity
with foreign military sales.
Arms Exports and Corporate Profit
Interestingly, until the late 1980s most observers tended to doubt this
'economic' rationale for U.S. military exports. Such exports, they argued, were
simply too small to make a difference (for instance, Krause 1992: 106). And on
the surface they seemed to have a point. Domestic procurements, measured in
constant 1995 prices, ranged from $61 billion in 1974, after the end of the
Vietnam conflict, to $136 billion in 1987, at the peak of the Reagan build-up.
The comparable figures for foreign military sales were much smaller: between
$5 billion in 1963, just before the Vietnam conflict started to pick up, and $23
billion in 1987, at the height of the Iran-Iraq War (data sources in Figure 5.3).
And yet the comparison is deceiving. The arms makers, like any other capitalist,
are concerned not with sales but with profits, and these tend to be far higher
in export sales. The basic reason is simple enough. The production of weapons,
particularly major platforms such as tanks, aircraft and ships, involves very
high research and development outlays. This fixed component is typically
recovered through domestic sales, so by the time the company starts exporting,
its average unit cost is far lower, and the profit per unit correspondingly higher.
And indeed, an internal DoD study cited in Brzoska and Ohlson (1987: 120)
estimated foreign military sales to be 2.5 times more profitable that those made
to the U.S. government, while similar ratios - ranging from 2 to 2.3 - emerged
from other industry sources (U.S. Congress 1991: 53).
Using these profitability indicators in conjunction with sales data, Figure 5.3
reassesses the relative importance of arms exports. The top series in the chart
traces the value of domestic military shipments, measured in constant prices.
The bottom series imputes the relative contribution of foreign military sales to
overall military-related profit (domestic as well as foreign). The later
computation is based on the conservative assumption that the export markup
was twice as high as the local one, and that the ratio between the two markups
remained stable over time.[4 footnote] Now, since actual markups do change over time,
the ratio plotted in the chart is necessarily imprecise. Nevertheless, its overall
magnitude and broad trajectory are telling. All in all, the chart suggests, first,
that arms exports were probably far more important for U.S. military contractors
than is commonly assumed, and, second, that this dependency has grown over
time. Export first became significant during the military build-down of the late
1960s and early 1970s. The United States was scaling back its direct involvement
in Vietnam, and with military exports to the region continuing to rise, the
ratio of export profit to total profit soared. Based on our imputation, in 1973,
at the cyclical peak of the process, foreign sales accounted for up to one-third
of all military-related profit. Subsequently, with President Carter reversing the
spending downtrend, and with the Reagan Administration embarking on the
country's largest military build-up in peacetime, arms exports became relatively
less important. And yet, even in the late 1980s, when domestic spending
reached record highs, exports still accounted for a sizeable one-quarter of all
military-related profit. Ominously, during the 1990s, with military spending
dropping and 'peace dividends' mushrooming the world over, foreign military
sales have become the profit life-line of U.S.-based contractors, accounting for
an estimated 45% of their total military-related earnings.
This focus on profit rather than sales helps explain why a single export deal
can sometimes make or break even a large contractor. Grumman, for example,
was saved fromnear-bankruptcy in 1974 by the sale of F-14 Tomcat fighter
planes to Iran (Sampson 1977: 249-56). Similarly, during the early 1990s, the
sale of 72 F-15 Eagle fighters to Saudi Arabia gave financially troubled McDonnell
Douglas a temporary lease on life (Business Week, 16 March 1992; Fortune, 22
February 1993). Northrop, on the other hand, was seriously hampered by its F-
20 debacle, a dedicated 'fighter for export' which the company spent $1.4 billion
to develop but never managed to sell (Ferrari et al. 1987: 27).
Contrary to received wisdom, then, the evidence, however tentative, suggests
that the Arma-Core was in fact very much affected by U.S. military exports. And
given the growing political leverage of this core, it should be hardly surprising
that foreign policy has become increasingly bound up with private profit.
Figure 5.3 U.S. Military Business: Domestic and Foreign
SOURCE: U.S. Arms Controls and Disarmament Agency (Annual); U.S. Department
of Commerce through McGraw-Hill (Online).
Commercialising Arms Exports: From Aid to Sales
The growing interaction between trade and the flag in this area was facilitated
by two related developments. The first of these developments was the commercialisation
of arms exports. During the 1950s, when arms exports were still
seen as a matter of foreign policy, up to 95% of U.S. foreign military
deliveries were financed by government aid. Over time, though, with the line
separating state from capital becoming less and less clear, the proportions
changed, and by the 1990s only 30% were given as aid. The rest, up to
70%, were now paid for directly by the buyer (figures computed from
U.S. Defense Security Assistance Agency 1989; 1992; and U.S. Department of
Commerce. Bureau of the Census Annual).
The second development, which greatly facilitated this commercialisation,
was the emergence of the Middle East as the world's prime destination for
exported arms. The process, illustrated in Table 5.1, shows the level of arms
imports from all sources (expressed in 1987 prices), as well as their regional
distribution during four distinct periods. During the first period, between 1963
and 1964, global arms imports amounted to $11.7 billion annually, with about
half going to Europe (earlier data are unavailable). In the aftermath of the
Second World War, the Continent was still perceived as potentially unstable,
and so until the mid-1960s, the United States sent most of its military assistance
to its NATO allies primarily in the form of surplus stockpile grants. Since 1965,
however, the emphasis began to change. The 'hot spot' of the West-East conflict
moved to South East Asia, and with it came a rapid escalation in the global
armament trade. Over the 1965-73 period, world arms import rose by 65 per
cent, to an annual average of $19.4 billion - with over one-third now going to
East Asia. In the United States, the shift of focus from Europe to the outlying
areas of the Third World brought a redefinition of arms-export policies. Weapon
deliveries to Vietnam and other South East Asian countries were still financed
by aid, but the European countries were now increasingly requested to pay for
their U.S.-made hardware.
Table 5.1 Arms Imports by Region (annual averages)
SOURCE: Original current-price data are from U.S. Arms Control and Disarmament Agency (Annual).
[Because of repeated updates, data are from the last annual publication in which they appear.] Implicit GDP Deflator is from Economic Report of the President (Annual).
This change, which signalled a return to the pre-war commercial pattern of
weapon sales, was to some extent inescapable. The post-war policy of containing
communism through military aid was feasible as long as U.S. arms shipments
were small and U.S. government finances solid. But as the arms race started
picking up and the federal deficit ballooned, successive American administrations
began to preach the merits of commercial sales. During the Eisenhower,
Kennedy and Johnson governments, the trend was limited mainly to transactions
with NATO, but the late-1960s entanglement in Vietnam hastened the
final policy reversal. By 1969, the new 'Nixon Doctrine' stipulated that all
transfers of weapons - including those going to the Third World - should,
whenever possible, depend not on direct U.S. military involvement, but on the
buyer's ability to pay.
Global Redistribution and the Rise of the Middle East
The single most important factor enabling this shift from aid to sales was the
global income redistribution triggered by the 1973 oil crisis. The explosive
growth of OPEC's revenues made the cartel's members ideal clients for
weaponry, and in 1974, after the U.S. exit from Vietnam, the Middle East
became the world's largest importer of armaments. As Table 5.1 shows, over
the 1974-84 period, the annual arms trade rose to nearly $46 billion, up 136
% from the previous period, with roughly 53% of the total going
to the Middle East and Africa (mainly Libya and Egypt). The pivotal role here
of global redistribution can hardly be overstated. Indeed, as oil revenues
dropped during the latter half of the 1980s, the rapid rise in arms transfers was
arrested. During 1985-89, world military imports rose only marginally, to an
average annual level of $51 billion, with much of the stagnation taking place
in the Middle East and Africa, whose combined share dropped to 42%.
(During the 1990s, the global redistribution of income has taken a new turn
with the rapid growth of 'emerging markets' in Latin America, South Asia and
South East Asia. Interestingly, this shift has been accompanied by a 'mini-boom'
of military imports flowing into their regions, with the initial takeoff already
evident in the increasing share of 'Others' recorded in Table 5.1)
To sum up, the post-war era was marked by several important changes
affecting the nature of arms production and trade. In the United States, there
emerged an Arma-Core of large defence contractors, whose rising power, particularly
since the Vietnam conflict, enabled it to appropriate a growing share
of the profit of dominant capital. The relative growth of these companies was
influenced by the continuous 'military bias' of the U.S. economy, which was
itself partly the consequence of mounting global competition in civilian
markets. The consolidation of this powerful group of firms strengthened their
political leverage - mostly in matters affecting the domestic budget, but increasingly
also in the choice of foreign policy. This latter significance stemmed
primarily from the intrinsic dependence of arms production on flexible foreign
demand. After the Second World War, the U.S. Administration made military
exports a tool of foreign policy; but, over time, the very menu of policy options
became intertwined with the development of the Arma-Core. Initially, the need
for foreign markets was both limited and easily financed by U.S. military aid.
However, the continuous ascent of defence-dependent corporations eventually
raised arms exports up to a level which could no longer be backed solely by
U.S.-government grants. The dilemma was solved by a gradual return to the
pre-war pattern of commercial trade in weaponry, and what made this
transition feasible was the global redistribution of income triggered by the
Middle East oil crisis.
With this latter development, the U.S. Arma-Core found itself entering the
centre-stage of Middle Eastern 'energy conflicts'. The consequences of this
entry were far reaching. The large defence contractors which earlier depended
mainly on the level of domestic military spending and foreign military aid,
now found their financial fate increasingly correlated with the boomand bust
of the oil business. And they were not alone. With themon the same stage
were also the newly empowered OPEC governments, the governments of the
imperilled Western countries, and the major petroleum companies whose
dominant position in the oil world was now called into question. The
emergence of the Middle East as the 'hot spot' of world conflict and the leading
arms-importing region has altered the delicate relationships between these
transnational corporations and both their parent and host governments.
Furthermore, the seemingly circular sequence of regional wars and oil crises
brought the petroleumcom panies into a new, and in some way unexpected
alliance with the arms makers. Before we can turn to examine this alliance,
however, we must look more closely at the changing circumstances affecting
the petroleumindustry.
Middle East Oil and the Petro-Core
The 'Demise Thesis'
The dominant view among students of the subject, is that the oil crisis of the
1970s signalled the final stage in a fundamental transformation, a transformation
which started in the 1950s, and which eventually altered the
structure of the oil industry. The first aspect of this transformation was the
relative decline of the major oil companies vis-à-vis a growing number of lesser
firms. After the Second World War, the 'Seven Sisters' - notably Exxon (then
Standard Oil of New Jersey), Royal Dutch/Shell, British Petroleum (previously
Anglo-Iranian), Texaco, Mobil, Chevron (then Socal) and Gulf - still dominated
the relatively concentrated international oil arena. Gradually, however, the
entrance of smaller independent companies, the growth of existing firms other
than the seven largest, and the re-entry of the Soviet Union into Western energy
markets, made the sector less concentrated, eroding the leading position of the
oil majors. In just two decades, between 1953 and 1972, the share of the 'Seven
Sisters' in the oil industry outside the United States fell from 64% to 24
% of all concession areas; from 92 to 67% of proven reserves; from
87 to 71% of production; from 73 to 49% of refining capacity;
from 29 to 19% of tanker capacity; and from 72 to 54% in product
marketing (Jacoby 1974: Table 9.12, p. 211).
A second and perhaps more important facet of this transformation was that
the locus of control, which previously rested with the owners and officers of
the large petroleum companies, had now apparently shifted into the hands of
government officials, monarchs and dictators. At the 'upstream' part of the
industry, the oil companies succumbed to the relentless nationalistic pressure
of their host countries, and after a quarter-century of eroding autonomy
eventually surrendered most of their crude oil concessions. Once begun, the
transition was swift and decisive. The transnational companies, which as late
as 1970 still owned about 90% of all crude petroleum produced in the
non-communist world, found their equity share drop sharply to only 37 per
cent by 1982, most of it now concentrated in North America (figures cited in
Penrose 1987: 15). A similar change occurred at the 'downstream' segment of
the industry, particularly in the Western industrial countries. With the oil crisis,
the cost of energy and its very availability became major policy issues with
wide-ranging domestic and foreign implications; so that here, too, the firms
found they had to comply with political dictates - in this case, those coming
from their own parent governments. Energy in general and petroleum in
particular became political questions, and just
'as war was too important to be
left for the generals', wrote Yergin (1991: 613),
'so oil was clearly too important
to be left to the oil men'.
And so emerged the 'demise thesis'. According to Turner (1983: 118-24),
after the Second World War the major oil companies have come to assume
various roles, acting as 'governmental agents', as 'transmission belts' between
host and parent governments, as occasional 'instigators', or simply as a 'complicating
factor' - but, in his opinion, all of these roles have merely added some
colour to the sphere of international political economy. In the final analysis,
he argues, it was the diplomats who were making the crucial decisions. The
multinational petroleum companies - particularly after the oil crisis - have
been pushed aside, reduced to a status of 'interested bystanders' in the high
politics of world oil (pp. 147-8).
Whither the Oil Companies?
At the time, the 'demise thesis' seemed persuasive, even fashionable. It was
certainly the next logical step in a long theoretical sequence, which began with
the 'bureaucratic revolution' of the 1930s, continued through the 'managerial
revolution' of the 1940s, and from there led to the 'technostructure' of the
1950s and 1960s, and to 'statism' in the 1970s. There was only one little
problem. The evidence used to support this thesis was strangely silent on the
issue which mattered most, namely the accumulation of capital. In the final
analysis, capitalism emerged and expanded not because it offered a new ethos,
but because that ethos helped the rising bourgeoisie alter the distribution of
income from landed rent to business profit. For that reason, those who argue
in favour of bureaucratic-statist determinism, or believe in the demise of big
business, must go to the essence of capitalism and demonstrate that these developments
have fundamentally altered the distribution of income and the
mechanism of accumulation.
In this particular case, if we are to conclude that the oil majors have indeed
declined, we need to be first shown not only that they lost market shares and
became dependent on government policies, but also that these structural and
institutional changes affected their business performance, and, specifically,
their profits. Assuming that the large petroleum companies were squeezed
between rising competition and more demanding governments, the combined
pressure must have caused their net earnings to wither - either absolutely, or
at least relative to some broader aggregates. And yet, this has never been demonstrated
in the literature. Most studies pertaining to the 'multinational debate'
in the energy sector either gloss over the issue, or simply ignore it altogether;
and even where profits are referred to, the data are often incomplete and rarely
analysed in a wider historical context. [5 footnote] Unfortunately, this neglect helps distort
the overall picture, for while the institutional and structural indicators may
imply that the major oil companies have indeed declined, the profit data seem
to suggest the exact opposite!
Table 5.2 The Petro-Core: Differential Profitability Indicators (annual averages, %)
SOURCE: Net profit and rate of return on equity of the Petro-Core are from O'Connor (1962), Fortune
directories and Standard & Poor's Compustat. Net profit of all U.S. corporations is from U.S. Department of Commerce through McGraw-Hill (Online), and from U.S. Department of Commerce, Bureau of
Economic Analysis, Statistical Abstract of the United States (1992), Table 871, p. 542. Net profit and rate of return on equity for the Fortune 500 are from various 'The Fortune 500' listings. Net profits and rate of return on equity for the world's 40-42 leading petroleum firms are from Carl H. Pforzheimer & Co., Comparative Oil Company Statements, reported in the Statistical Abstract of the United States (Annual).
Table 5.2 provides some long-term summary indices for the profit
performance of the world's six largest petroleum companies in the early 1990s.
This group - which we label here the 'Petro-Core' - consists of the original
'Seven Sisters', with the exception of Gulf which was acquired by Chevron in
1984. The comparison includes various differential accumulation indicators,
relating the profit performance of the Petro-Core to corresponding figures for
larger corporate groupings, including a wider international composite of
petroleum firms, the Fortune 500, and the U.S. corporate sector as a whole.
The first column gives the average net rate of return for the Petro-Core (ratio
of net profit to owners' equity). The overall impression from these data is that
the oil crises of the 1970s and early 1980s in fact helped boost the profitability
of the large oil companies, a notion to which we return later in the chapter. For
our purpose here, though, the more interesting results are those obtained from
the differential indices. In the second column, we present the rate-of-return
ratio between the Petro-Core and the 'Petroleum 40-42' group of companies.
This ratio is calculated by dividing the net rate of profit on equity obtained in
the Petro-Core, by the matching rate attained by the Petroleum 40-42 - the
latter being a broader cluster of the world's 40-42 largest non-governmental
petroleum companies (including the Petro-Core firms). The results show that,
during the late 1960s and 1970s, despite the competitive assaults from new
entrants, the Petro-Core was able to maintain its net rate of return more or less
in line with the other oil companies, and that during the 1980s it actually
succeeded in surpassing them. A similar result is obtained in the third column,
where we compare the net rate of return for the Petro-Core with that of U.S.
dominant capital as a whole, approximated by the Fortune 500. Here, too, the
large Petro-Core firms exhibit a remarkable staying power, even after the 'OPEC
revolution' and the politicisation of oil in the industrialised countries. Indeed,
despite the wholesale surrendering of concessions, the revoking of preferential
U.S. foreign tax-credits, and a list of other adverse consequences of the new
oil order, the Petro-Core's rates of return in the 1970s, 1980s and early 1990s
were higher than the comparable averages for U.S. dominant capital as a whole.
Another way to assess the differential earning power of the large oil
companies is by looking at their relative share in the profit of a wider aggregate
of companies. This we do in the last three columns, where we compute the
share of the Petro-Core in the net profits of the Petroleum40-42 group, the
'Fortune 502' (as defined below), and all U.S.-based corporations. Beginning
with the first of these net-profit ratios (fourth column), we can see that despite
the Core's relative decline in terms of economic activity (such as concessions,
reserves, production, refining, transportation and marketing), its distributive
share of the industry's net profit did not decrease at all. If we consider the
world's largest 40-42 petroleum companies as a reasonable proxy for the international
non-governmental petroleum industry, then it appears that the share
of the Petro-Core in global oil profit in fact rose - from around three-fifths
during the late 1960 and 1970s, to almost three-quarters by the 1980s, and
then further, reaching close to four-fifths by the early 1990s. A similar picture
emerges when we examine the share of the Petro-Core in the net profit of U.S.
dominant capital (fifth column). Taking the Fortune 500 group again as our
tentative proxy for U.S. dominant capital, and adding to its ranks the
European-based British Petroleum and Royal Dutch/Shell, we can see that the
profit position of the large Petro-Core firms within this modified 'Fortune 502'
group has remained surprisingly unassailable. Here we have a longer time series,
extending from 1954 to 1991, so the comparison is even more telling. During
the late 1950s, when the oil majors were still the undisputed leaders of the
international oil industry, the Petro-Core accounted for nearly one-fifth of the
net profits earned by the Fortune 502 group, but that has hardly changed in the
subsequent period when these firms presumably lost their pre-eminence to
new entrants and politicians. The final indication for the enduring power of the
Petro-Core is given by their net-profit ratio with the U.S. corporate sector as a
whole - an index for which data are available since 1930 (sixth column).
Following the Achnacarry and Red Line agreements of 1928, in which the large
international oil companies divided the world and the Middle East between
them, the Petro-Core became so powerful that, even with the Great Depression
and collapsing raw material prices, it still managed to appropriate over 9 per
cent of all net profits earned by U.S. corporations. The economic revival of the
Second World War raised overall corporate profits, thus causing this net-profit
ratio to drop significantly. However, during the 1950s, the ratio began to climb
again, rising more or less continuously until, in the 1980s, it topped 10 per
cent - more than the earlier record of the 1930s.
Clearly, then, as we move from means to end - that is, from economic
activity to differential profitability - the historical picture seems to change,
and rather significantly. What appears as the Petro-Core's relative decline from
the viewpoint of exploration, production, refining and marketing, is not at all
what we see when we reach the 'bottom line'. On the contrary, once we focus
on the ultimate business criteria of differential accumulation, the oil crisis
seems to turn from a menace to a blessing. The Petro-Core, far from losing
ground, has actually held and even consolidated its leading position - relative
to other international oil firms, relative to the U.S. big economy, and relative
to the U.S. corporate sector as a whole.
Now, these findings are admittedly puzzling. After all, competitive pressures
from new entrants and demands from governments did increase since the
1950s, so how did the Petro-Core manage to nevertheless come on top with
such a feat of differential accumulation? Alternatively, given the Petro-Core's
remarkable staying power, why did it give up so much control to governments?
The paradox, though, is only apparent, and disappears quickly once we shift
our attention from the industry's formal institutions to its effective power
structure. The 1970s indeed altered the formal control of oil. But following the
line of analysis first anticipated in the wake of the crisis by Blair (1976), and
recently summarised by Bromley (1991), one may argue that the ultimate
consequence of this transformation was to consolidate rather than undermine
the relative earning power of the large petroleum companies.
Politicising Oil: From 'Free Flow' to 'Limited Flow'
Perhaps the most fundamental aspect of this transformation was the progressive
politicisation of the oil business. [6 footnote] While this process was to a large extent
continuous, it is nevertheless possible to distinguish between two qualitatively
different phases. The first period, roughly until the early 1970s, could be labelled
the 'free-flow' era in world oil - this in the sense that the control of oil was
exercised through private ownership with state 'interference' assuming only a
secondary role (Turner 1983: Chs 2-3). During the 1920s and 1930s, the international
petroleum arena was practically run by the large companies,
particularly British Petroleum, Royal Dutch/Shell and Exxon. In 1928, the three
companies, meeting in the Scottish castle of Achnacarry, divided the world
between them. In that year, the same firms also signed, together with other
companies, the Red Line Agreement to coordinate their activities in the Middle
East. [7 footnote] Over the following three decades, explicit collusion slowly evolved into
a broader system of complex arrangements and understandings, partly overt but
mostly tacit, which together enabled the large oil companies to maintain their
control of production, transportation, refining and marketing around the world
(cf. Blair 1976: Ch. 5). However, the Second World War and the ensuing
economic boom made things more complicated. First, the substitution of the
United States for Britain as the leading Western power shifted the internal
balance among the Seven Sisters in favour of the U.S.-based companies,
undermining to some extent the group's previous cohesion. And second, the
growing number of independent producers exerted downward pressure on
prices, precisely at a time when rising nationalism in the Middle East and Latin
America called for higher royalties. Threatened with loss of control, the large
oil companies resorted to classic predatory market practices against the independents,
but that wasn't enough. And as the problem continued, the
companies turned to their governments for help.
Government assistance, particularly in the United States, assumed a variety
of forms, including foreign tax-credits to offset royalty payments, restrictions
on the importation of cheap oil into the United States, exemptions from
antitrust prosecution, and a CIA-backed coup against the Mossadeq government
in Iran, to name a few. The fact that the large petroleum companies were able
to secure such services is of course not entirely surprising, given their 'special
relations' with successive U.S. administrations (cf. Tanzer 1969; Engler 1977).
Part of this capital-state symbiosis was surely rooted in the strategic nature of
oil. And yet that could by no means be the whole story. The reason, on which
we shall elaborate later in the chapter, is that, on many occasions, U.S.
government actions in favour of the large oil companies were patently contradictory
to the nation's material interest. [8 footnote] Staunch realists like Stephen Krasner
solved the anomaly by blaming such policies on 'nonlogical' behaviour and
the 'misconceptions' of policy makers (1978a: 13-17). But there could be a
much simpler explanation, namely that the oil companies, along with other
dominant capital groups, were increasingly seen as synonymous with the
national interest. Perhaps the best summary of this union was given by U.S.
Major-General Smedley Butler:
"I spent thirty-three years and four months in active service as a member of
our country's most agile military force - the Marine Corps.... And during
that period I spent most of my time being a high-class muscle man for Big
Business, for Wall Street, and for the bankers. In short, I was a racketeer for
capitalism.... Thus, I helped make Mexico and especially Tampico safe for
American oil interests in 1914. I helped make Haiti and Cuba a decent place
for the National City Bank boys to collect revenues in.... I helped purify
Nicaragua for the international banking house of Brown Brothers in
1909-1912. I brought light to the Dominican Republic for American sugar
interests in 1916. I helped make Honduras 'right' for American fruit
companies in 1903. In China in 1927 I helped see to it that Standard Oil
went its way unmolested. During those years, I had, as the boys in the back
room would say, a swell racket. I was rewarded with honors, medals,
promotion. Looking back on it, I feel I might have given Al Capone a few
hints. The best he could do was to operate his racket in three city districts.
We Marines operated on three continents". (cited in Huberman 1936: 265-6,
original emphases)
Such blunt services, however, were too crude and certainly insufficient for the
post-colonial era. They were unsuited for the more subtle 'new imperialism' of
transnational companies, and wholly inadequate for dealing with new problems
such as business competition and the management of technical change. Since
the 1960s, therefore, there emerged an urgent need for some 'external' force,
a qualitatively new institutional arrangement which would bring crude
production back to what the 'market can bear' - yet without implicating the
oil companies as 'monopolies' and the Western governments as 'imperialists'.
Historically, this institutional arrangement appeared in the form of OPEC and
the upstream nationalisation of crude oil.
The broad causes for this transition have long been debated in the literature,
but at least one of its consequences seems fairly clear. As Adelman (1987) rightly
pointed out, the cartel achieved something which, for political reasons, the oil
companies could never have pulled off on their own: a dramatic increase in
prices. The eighteen-fold rise in the price of crude oil between 1972 and 1982
would have been inconceivable under the 'free-flow' system of private
ownership. Rapid increases of such magnitude required not only a tight institutional
framework, but also that oil appeared to be in short supply. The
problem, though, was that oil was hardly scarce. In fact, it was abundant. The
industry was plagued by chronic excess capacity (from the perspective of profit,
that is), and the only way to bring this back to what the market could 'bear' was
through an exogenously imposed 'crisis'. Such crisis, though, necessitates a
new political realignment, and that is precisely what happened. With the nationalisation
of crude oil, production decisions now moved to the offices of OPEC,
opening the way to a new, 'limited-flow' regime.
The 'limited-flow' era worked wonders for OPEC. There can be little doubt
about that. But the bonanza hardly came at the expense of the Petro-Core. On
the contrary, OPEC, by working closely if tacitly with the companies, was instrumental
in boosting their relative performance. The converging interests of these
two groups is clearly illustrated in Figure 5.4, which shows a tight positive
correlation between the value of OPEC's crude oil exports on the one hand,
and the net profit of the Petro-Core on the other. A simple linear regression
between the two series suggests that for every one dollar increase or decrease
in export, there was a corresponding 6.7 cents change in the companies' net
profit, and, moreover, that changes in the value of exports accounted for almost
three-quarters of the squared variations in profits. Causality, however, was also
running in the other direction, from the companies to the oil-producing
countries. Although OPEC was providing the pretext for the crisis, there was still
the need to coordinate output - and that it couldn't do on its own. As Blair
(1976: 289-93) and Turner (1983: 90-7) correctly indicated, managing the
immense complexity of the oil arena required an overall knowledge which
OPEC lacked, and which could be supplied only by the oil majors. The latter,
of course, were no longer controlling output directly as producers, but they
were now doing so indirectly, as the largest buyers, or 'offtakers' of crude
petroleum. Interestingly, the rationale for this new alliance was delineated
already in 1969 by the Saudi petroleum minister, Sheik Yamani.
'For our part',
he stated,
'we do not want the majors to lose their power and be forced to
abandon their role as a buffer element between the producers and the
consumers. We want the present setup to continue as long as possible and at
all costs to avoid any disastrous clash of interests which would shake the
foundations of the whole oil industry' (cited in Barnet 1980: 61). There emerged,
then, a new and more sophisticated realignment. The oil companies have
indeed relinquished formal control, but that was largely in return for higher
profits. Perhaps the most striking expression of this new 'trade-off' was provided
by British Petroleum. The 1979 revolution in Iran deprived BP from access to
40% of its global crude supplies; yet in that very year its profits soared
by 296% - more than those of any other major company (Turner 1983:
204; Yergin 1991: 684-7; and Fortune, 'The Fortune 500' 1978, 1979).
Figure 5.4 OPEC and the Petro-Core: Conflict or Convergence?
SOURCE: OPEC (Annual); Fortune
The convergence between OPEC and Western interests has long been
suspected. On the eve of the first oil crisis, for example, Dan Smith suggested
in The Economist's survey titled 'The Phony Oil Crisis' (7 July 1973), that the U.S.
Administration may have supported OPEC's drive for higher prices as a way of
slowing down the Japanese economy (see also Anderson and Boyd 1984: Chs
9-11; and Terzian 1985: 188-202). Another possible reason why the U.S.
government 'capitulated' and accepted separate negotiations leading to the
Tehran and Tripoli Agreements of 1971, was that the large oil firms saw this as
a means of checking the ominous rise of independent companies (Blair 1976:
Ch. 9). In the words of Odell (1979: 216), the 1970s brought an 'unholy alliance'
between the large international oil companies, the United States, and OPEC,
which together sought to use higher prices as a way of boosting company
profits, undermining the growth of Japan and Europe, and fortifying the
American position in the Middle East. To these, Sampson (1977: 307) also added
the eventual support of the British government, the Texas oil lobby, the independents,
investors in alternative sources of energy, and the conservationists
- all with a clear stake in more expensive oil.
In a way, then, the oil arena has evolved in a direction opposite to that of
the armament industry. While the military sphere of domestic spending and
arms exports has been increasingly commercialised, the petroleum industry has
grown more politicised. This politicisation, however, has by no means spelled
the demise of the large oil companies. On the contrary, it became a prerequisite
for their survival. The relentless search for new reserves, along with the incessant
proliferation of new technology created a constant menace of excess capacity
and falling prices. At the same time, with the number of actors on the scene
growing rapidly, counteracting this threat solely through corporate collusion
was impractical. For the large companies, the way to overcome these challenges
was to integrate their private interests into a broader political framework.
The Weapondollar-Petrodollar Coalition and Middle East 'Energy Conflicts'
And so, toward the beginning of the 1970s, several groups of large U.S.-based
firms saw their interests converging in the Middle East. To recap, the first of
these groups included the large weapon makers of the Arma-Core which turned
to the region in search of export markets. The second cluster comprised the
leading oil companies of the Petro-Core, including those based in Europe, which
were now driven toward a broader alliance with OPEC. These were also joined
by a second tier of interested parties, including engineering companies such
as Bechtel and Fluor with big construction projects in the oil regions, as well
as large financial institutions with an appetite for petrodollars. Each of these
groups stood to benefit from higher oil prices; and yet none could have done
so on its own. To push up the price of oil, they needed to act in concert, and
this is how a 'Weapondollar-Petrodollar Coalition' between them came into
being. In this section, we argue that, deliberately or not, the actions of these
groups helped perpetuate an almost stylised interaction between energy crises
and military conflicts. In this process of 'energy conflicts', the ongoing militarisation
of the Middle East and periodical outbreaks of hostilities contributed
toward an atmosphere of 'oil crisis', leading to higher prices and rising oil
exports. Revenues from these exports then helped finance new weapon imports,
thereby inducing a renewed cycle of tension, hostilities, and, again, rising
energy prices.
From Crisis to Prices
Let's begin with prices. The common perception is that, one way or another,
the price of crude oil depends on its underlying 'scarcity'. From this viewpoint,
OPEC's early success is usually attributed to rapid Western growth during the
1960s and 1970s. This growth, it is argued, created 'excess demand' for oil,
which in turn pushed up prices and made the cartel easy to manage. The same
process, only in reverse, is said to have worked since the early 1980s. Lower
industrial growth and improved energy efficiency, goes the argument, created
'excess supply', causing prices to fall and OPEC to disintegrate. Despite its
popularity, however, this framework is vulnerable to both logic and fact.
From a long-term perspective, the relevant proxy for scarcity is the ratio of
proven reserves to current production. Over the past three decades, due to
extensive exploration, this ratio rose by a quarter - from about 30 production
years in the mid-1960s, to over 40 production years during the 1990s (data
from British Petroleum Annual). Now, according to the scarcity thesis, the
increase should have brought crude oil prices down. And yet the exact opposite
has happened. As Figure 5.5 shows, during the 1990s the real price of oil was
not lower than in the 1960s, but twice as high. Whatever the cause for the longterm
price appreciation, it was certainly not scarcity. And the concept is not
much more useful in the short term. As we explained in Chapter 2, the
argument that prices are affected by scarcity is meaningful only when such
scarcity is set by natural or technical limitations. But that is by no means the
case in the oil industry, which commonly operates well below its technical
capacity. In this context, the impact on price of a 'shortfall' in supply is
therefore a matter of sellers' collusion, not 'scarcity'.
Figure 5.5 'Scarcity' and the Real Price of Oil
SOURCE: British Petroleum (Annual); IMF and U.S. Department of Commerce
through McGraw-Hill (Online).
The second problem with the scarcity thesis is that 'excess supply' and 'excess
demand' reflect the difference between the desires of sellers and buyers; and
desires, as we all know, cannot be directly observed, let alone quantified. A
common way to bypass the problem, if only provisionally, is to use changes in
inventories as a proxy for excess or shortage. But then the evidence from such
exercise is often more embarrassing than revealing. The difficulty is illustrated
in Figure 5.5, where we contrast the real price of crude oil (denominated in
constant 1995 dollars), with the excess of global consumption over global
production (measured as a% of the average of the two). The latter variable
reflects changes in inventories, with negative values representing build-up and
positive ones denoting depletion. Now, if excess consumption indicates a
'shortage' (caused for example by unexpected rise in demand), and excess
production represents a 'glut' (triggered for instance by the unforeseen arrival
of 'distress oil'), then we should expect prices to rise in the former case and fall
in the latter. The facts, however, tell a much more confused story. During the
glut-plagued 1960s, the scarcity thesis seemed to be working, with inventories
building up and prices falling. But then things started to go wrong. Although
the inventory build-up continued through much of the early 1970s, the real
price of oil soared, rising by 16% in 1971, 4% in 1972, 6%
in 1973, and 228% in 1974. And indeed, according to Blair (1976: 266-8),
the 1973/74 oil crisis had nothing to do with the 'oil shortage', simply because
there wasn't any such shortage to begin with. Early in 1973, the ARAMCO
partners (Exxon, Mobil, Chevron and Texaco) were explicitly warned by the
Saudis, both of the pending Egyptian attack on Israel, and of the possibility
that oil would be used as a political weapon (see also Sampson 1975: 244-5).
Anticipating the consequences, the companies raised production in the first
three-quarters of the year, an increase which fully compensated for the eventual
drop in the last quarter. All in all, OPEC production for 1973 amounted to 11.0
billion barrels, slightly higher than the 10.8 billion it should have been based
on long-term growth projections (Blair 1976: 266fn). And the law of scarcity
didn't seem to work much better in subsequent years. Between 1975 and 1980,
inventories continued to accumulate, but the real price of oil, instead of
remaining the same or falling, soared by a cumulative 135%. During the
first half of the 1980s, excess production gave way to excess consumption, and
yet the real price of oil again refused to cooperate. Instead of rising, it fell by
71% between 1980 and 1986. Even over the past 15 years, with the oil
market presumably becoming more 'competitive' (notwithstanding the Gulf
War of 1990-91), it is hard to see any clear relationship between excess demand
and real price movements.
Last but not least, there is the issue of relative magnitudes. Indeed, even if
we could ignore the direction of price movements, their amplitude seems
completely out of line with the underlying mismatch between production and
consumption. Over the past 40 years, world consumption was usually 2-3 per
cent above or below world output. But then could such relatively insignificant
discrepancies explain dramatic real-price fluctuations of tens or sometimes
hundreds of% a year? And why are prices sometimes hyper sensitive to
the mismatch, while at other times they hardly budge?
The solution for these perplexities is to broaden the notion of 'scarcity'.
As a speculative commodity, the price of crude petroleum depends not only
on the relationship between current production and consumption, but also -
and often much more so - on future expectations. The prices buyers are willing
to pay relate not only to present energy needs and the cost of alternative
sources, but also to expected future prices. Similarly, sellers, both individually
and as a group, are constantly weighing the trade-off between present incomes
and anticipated but unknown future revenues. Moreover, these factors are
not independent of each other. Indeed, buyers' willingness to pay is often
affected by the apparent resolve of sellers; which is in turn influenced by the
extent of consumers' anxiety. Once acknowledged, such intricacies imply that
any given consumption/production ratio can be associated with a host of
different prices, depending in a rather complex way on the nature of future
expectations.
The significance of these considerations could hardly be overstated. To
illustrate, consider the fact that after the emergence of OPEC, the number of
primary industry players has grown appreciably - from less than a dozen in
the 1960s to over 150 by the late 1970s, according to one estimate - and that
still without counting governments (Odell 1979: 182). Such multiplicity should
have undermined the industry's ability to coordinate output, but that is not
what the facts tell us. Indeed, if we were to judge on the basis of OPEC's
revenues and the companies' profits as illustrated in Table 5.2 and Figure 5.4,
it would appear that collective action was indeed more effective with hundreds
of participants during the 1970s and 1980s, than with only a handful before
the onset of the crisis! The reason for this apparent anomaly is that, in the final
analysis, the price of oil - on the open market, but also between long-term
partners - depends not only on the ability to limit current output to
'what the
market can bear', but also on the nature of perceived scarcity associated with
'external' circumstances. And in our view, since the early 1970s, the single most
important factor shaping these perceptions was the vulnerability of Middle
East supplies.
The global importance of Middle East oil is of course hardly new, but its significance
has increased substantially since the Second World War, and
particularly since the 1960s. In 1972, on the eve of the first oil crisis, the region
accounted for as much as 36% of the world's total production and 62
% of its proven reserves, up from 12% and 42%, respectively,
in 1948 (computed from Jacoby 1974: Table 5.1, pp. 68-9; Table 5.2,
pp. 74-5). But as they became more crucial, the region's oil supplies were also
growing more vulnerable. The oil 'prize' acted like a magnet, turning the Middle
East into an arena of superpower confrontation. And this confrontation,
combined with rising nationalism, growing class inequalities, and the ancient
tensions of ethnicity and religion, helped stir up instability and armed conflict.
The consequences for oil were twofold. First, the region's ongoing militarisation
since the late 1960s created a constant threat for future energy supplies,
helping maintain high prices even in the absence of tight producer coordination.
Second, the occasional outbreak of a major conflict tended to trigger an
atmosphere of immediate 'energy crisis', pushing confident sellers to charge
higher prices and anxious buyers to foot up the bill. And, indeed, since the
early 1970s it was regional wars which perhaps more than anything affected the
course of oil prices. Despite the absence of any real shortage, the onset of such
hostilities - the 1973 Israeli-Arab conflict, the 1979 Islamic Revolution in Iran,
the 1980 launch of the Iran-Iraq War, and the 1990/91 Gulf War - invariably
generated an atmosphere of 'crisis' and 'shortage', sending prices higher.
Similarly, once the crisis atmosphere dissipated - either at the end of a war, or
when conflict no longer seemed threatening to the flow of oil - prices began
to stagnate and then fall. The importance of these features is attested by their
incorporation into common jargon. The industry's 'price consensus', for
example, now customarily incorporates, in addition to its 'peacetime' base,
also such items as 'embargo effects' and 'war premiums' (Fortune, 5 November
1990). The precise magnitude of such 'premiums' and 'effects' cannot be
determined, of course, but their significance seems beyond dispute.
From Oil Revenues to Arms Imports
The weapondollar-petrodollar link was also running in the other direction,
with rising oil exports helping finance military imports to fuel the regional
arms race. This side of the arms-oil interaction is examined in Figure 5.6, where
we contrast the annual value of foreign arms deliveries to the Middle East, with
the corresponding value of the region's oil production three years earlier (both
in constant dollars). The reason for the lag is that current oil revenues bear on
the value of current military contracts, but the delivery of weapons, which is
what we display in the chart, usually takes place later, with a lag of roughly
three years. [9 footnote] We also express both the vertical and horizontal axes as
logarithmic scales, in order to show the 'responsiveness' of arms imports to oil
revenues. In this presentation, the slope of a trend line passing through the
data indicates the% change of arms imports corresponding, on average,
to a 1% change in oil revenues three years earlier.
Figure 5.6 Middle East Oil Income and Arms Imports
SOURCE: British Petroleum (Annual); U.S. Arms Controls and Disarmament
Agency (Annual); U.S. Department of Commerce through McGraw-Hill (Online).
The first thing evident from the chart is the sharp 'structural change' affecting
the relationship between the two variables. Around the early 1970s, as the oil
regime shifted from 'free flow' to 'limited flow', the slope of the relationship
tilted from a fairly steep position to a much flatter one. During the 1964-73
period, the trend line going through the observations had a slope of 3.3,
indicating that for every 1% change in oil revenues there was, three
years later, a 3.3% increase in arms imports. Despite this high 'responsiveness',
though, the magnitudes involved were fairly small. Both superpowers
were preoccupied with Europe and subsequently with East Asia, and since oil
revenues increased only moderately, weapon shipments into the region,
although responding eagerly, remained limited in size. By the early 1970s,
however, things changed, and rather drastically. The slope of the trend line
going through the 1973-97 data fell to 0.4, meaning that a 1% rise in
oil revenues during that period generated only 0.4% increase in arms
imports. And, indeed, in contrast to the 1960s, when the region's export
revenues were earmarked largely for weapon purchases, now they were allocated
also to a range of civilian imports, as well as being accumulated as reserves in
Western banks. But, then, with the flow of oil having been 'limited' by the
high politics of government and companies, and with arms exports becoming
increasingly commercialised, the dollar value of both oil income and military
imports soared to unprecedented levels toward the early 1980s - only to drop,
again in tandem, when this order started to disintegrate since the mid-1980s.
The second, and perhaps more remarkable thing about Figure 5.6, is the
extremely tight fit between the two series. Based on this chart, it appears that
knowing the oil revenues of Middle Eastern countries was practically all that
one needed in order to predict the overall value of arms deliveries three years
later! Arms deliveries into the region were of course affected by numerous factors,
including domestic tensions and inter-country conflicts, superpower policies
to protect and enhance their sphere of influence, and the evolution of domestic
arms production, to name a few. Furthermore, some arms deliveries were
financed by aid or loans, so their import was not directly dependent on oil
revenues. Yet, based on the chart, it would seemthat these factors were either
marginal, or themselves corollaries of the ebb and flow of the 'great prize' - oil.
From Differential Accumulation to 'Energy Conflicts'
We have now reached the final step of our brief statistical journey, ready to
move from means to ends. Our method in this exploration was to progressively
distil the interaction between oil and arms, moving from production, to sales,
to profit, and, eventually, to the differential accumulation of the
Weapondollar-Petrodollar Coalition. The task now is to identify the hidden
links between this differential accumulation on the one hand, and Middle
Eastern 'energy conflicts' on the other. Leaving the state and foreign policy for
later in the chapter, and concentrating solely on the companies involved, our
question is twofold. First, supposing that these firms acted in unison, how
would their quest for differential accumulation relate to militarisation and
conflict in the region? And, second, is this hypothetical relationship consistent
with the facts?
Although the broader regime of tension and crisis was generally beneficial
for the Weapondollar-Petrodollar Coalition, there were nevertheless certain
differences between the interests of its armament and oil members. For the
former, arms exports constituted a net addition to sales, so their gain from
Middle Eastern militarisation and armed conflict was practically open ended.
For the latter, however, the consequences of tension and hostilities were
beneficial only up to a point, for two reasons. First, excessively high oil prices
tended to encourage energy substitution, weaken profits in downstream
operations, and lure entry from potential competitors. And, second, regional
instability, if spun out of control, could undermine the close cooperation
between the companies and oil-producing countries.
Hypothetically, then, we should expect the armament companies to have
had little objection to ever-growing militarisation and conflict - this in contrast
to the more qualified stance of the oil companies. Specifically, we speculate
that as long as the Petro-Core companies managed to beat the 'big economy'
average - that is, as long as they accumulated differentially relative to dominant
capital as a whole - they judged their performance as satisfactory, and were
generally content with having
'tension but not war'. However, when their rate
of profit fell below that average, their position turned hawkish, seeking open
hostilities in order to push up prices and boost their sagging performance. When
that happened, the more aggressive stance of the large oil companies brought
them into a temporary consensus with the leading armament firms. And it was
at this point, we argue, when the Weapondollar-Petrodollar Coalition became
united, that a Middle East 'energy conflict' was prone to erupt.
Figure 5.7 Return on Equity: The Petro-Core vs. the Fortune 500
SOURCE: Fortune; Standard & Poor's Compustat.
To see how well this hypothesis sits with the facts, consider Figures 5.7 and
5.8. The first of these charts contrasts the rate of return for the Petro-Core with
the comparable rate for dominant capital as a whole, approximated here by
the Fortune 500 group of companies. The second chart plots the difference
between the two rates, expressed in percentage points. In both diagrams, dark
areas denote a 'danger zone': a period of negative differential accumulation for
the Petro-Core, and a consequent risk of a new 'energy conflict'. The eruption
of each such conflict is indicated in Figure 5.8 with a little explosion sign.
The evidence arising from these charts is rather remarkable. First, until the
early 1990s, every single one of these 'danger zones' was followed by the outbreak
of an 'energy conflict' - the 1967 Arab-Israeli War, the 1973 Arab-Israeli War,
the 1979 Islamic Revolution in Iran and the outbreak of the 1980-88 Iran-Iraq
War and, recently, the 1990/91 Gulf War. Second, the onset of each of these
crises was followed by a reversal of fortune, with the Petro-Core's rate of return
rising above the comparable big-economy average. And finally, none of these
'energy conflicts' erupted without the Petro-Core first falling into the 'danger
zone'. (The figures also make clear that the mechanism was by no means
eternal. Indeed, after the 1990/91 Gulf War, a new 'danger zone' opened up -
and yet this time there was no 'energy conflict' to close it. Even the 2001 war
in Afghanistan has done little to prop up prices. The reasons for this change are
dealt with at the end of the chapter.)
Given the complexity of Middle Eastern affairs, these three regularities seem
almost too systematic to be true. Indeed, is it possible that the differential rate
of return of six oil companies was all that we needed in order to predict such
major upheavals as the June 1967 War, the Iran-Iraq conflict, or the Iraqi
invasion to Kuwait? And what should we make of the notion that Middle East
conflicts were the main factor 'regulating' the differential accumulation of the
Petro-Core? Finally, are lower-than-normal earnings for the oil majors indeed
a necessary condition for Middle East energy wars? Maybe the process pictured
in Figures 5.7 and 5.8 is a statistical mirage? Perhaps the real causes of energy
conflicts are totally different, only that by historical fluke they happened to
coincide with differential profitability?
Figure 5.8 Petro-Core's Differential Accumulation and Middle East 'Energy Conflicts'
SOURCE: Fortune; Standard & Poor's Compustat.
For instance, one simple alternative, still in the realm of business explanations,
is that energy conflicts were triggered by movements in profitability
rather than differential profitability. This, however, does not seem to be the
case here. The figures show that the rate of profit of the Petro-Core fell in
1969-70, 1972, 1975, 1977-78, 1980-82, 1985-87 and 1991. Energy conflicts,
on the other hand, erupted only in 1967 (after the Core's profits were rising),
in 1973 and 1979-80 (after they were falling) and in 1990 (after they were
rising). Furthermore, despite falling profitability, no new energy conflict broke
out in 1969-70, 1976, 1983 or 1988. Clearly, then, there is no straightforward
connection between movements in the simple rate of profit for the Petro-Core
and the occurrence of conflicts.
Another possible explanation is that energy conflicts were triggered not by
setbacks for the Petro-Core, but by declining exports for the oil-producing
countries. According to this argument, the destabilising impact of lower oil
revenues would make governments more willing to engage in conflict in order
to raise them up. The facts, however, don't seem to support this explanation
either. For instance, Egyptian oil exports rose from $35 million in 1970, to $47
million in 1972, and to $93 million in 1973 (United Nations Annual). If wars
were indeed contingent on falling state revenues, this should have worked
against the Arab-Israeli conflict in 1973. Similarly with the Iran-Iraq War. The
conflict erupted in 1980, after oil revenues for the two countries were climbing
rapidly, reaching $18.4 billion for Iran and an all time high of $26.9 for Iraq;
and it ended in 1988, after revenues fell sharply to $12.7 billion for Iran and to
$15.9 for Iraq, exactly the opposite of what we would expect based on the
export logic (U.S. Department of Energy Annual). Finally, the 1990 Iraqi
invasion of Kuwait occurred after several years of stable oil revenues, with Iraqi
revenues during 1987-90 hovering around $15 billion annually (ibid.). Of
course, prior to his invasion to Kuwait, Saddam Hussain was under a growing
financial strain accumulated during his years of fighting against Iran, so he
needed much more than stable oil earnings to resolve his problems.
Nevertheless, as we shall argue below, this rationale was hardly sufficient to
outweigh a clear threat of forceful U.S. intervention - had there been one. Now,
of course, every one of these conflicts could be explained by its own particular
circumstances, many of which are related neither to oil nor arms. But recall
that our purpose is to see if there was perhaps a broader logic to tie these
conflicts together, and from this viewpoint, regional and local factors alone,
although crucial, do not provide a picture nearly as consistent as the one offered
by the Weapondollar-Petrodollar Coalition.
The corporate members of this Coalition, we argue, were not 'free riders' on
the roller coaster of Middle East conflicts. Indeed, the evidence indicates not
only that these companies eventually gained from militarisation and oil crises,
but more fundamentally, that adverse drops in their differential profits have
been a most effective leading indicator for upcoming 'energy conflicts'. This
evidence cannot easily be dismissed as a chance occurrence. By the standards
of empirical research, the links between differential accumulation on the one
hand, and militarisation, 'energy conflicts' and oil crises on the other, are far
too systematic and encompassing to be ignored. Clearly, there is need here for
further exploration. How, for instance, was the weapon trade commercialised?
What politicised the oil business? What role did the superpowers play in the
process? How did Middle East governments, including Israel's, fit into the bigger
picture? Did the large corporations shape 'foreign policy' in the region, or were
they themselves instruments of such policy? Can we actually draw a line
between state and capital here? Should we? Let's turn then to look more closely
at the actual history of the process.
The 1967 Arab-Israeli War
Analyses of the June 1967 War are usually cast in terms of three regional
processes, none of which is directly related to oil. The first process is of course
the ethnic and cultural antagonism between Arabs and Jews, which began at
the turn of the century, and which developed after 1948 into a nationalist clash
between Israel on the one hand, and the Palestinians and the Arab states on the
other (Safran 1978). The second process concerns the barriers on rapidly
growing population imposed by an acute shortage of water. According to many
writers this is the root cause of the conflict between Israel and its immediate
neighbours, Jordan, Syria and Lebanon (Kelly 1986; Naff and Matson 1984;
Rabinovitch 1983; and Sexton 1990). The third process, which received considerable
attention in recent years, is the development since the 1950s of
nuclear weapons by Israel (Hersh 1991). Some, such as Aronson (1992;
1994-95), see this development as crucial in determining Israel's foreign and
security policies, and as a major force steering the region's recent history.
Making America 'Aware of the Issue'
Yet, the conflict was also related, even at that early stage, to the broader, global
significance of the Middle East. The 'free-flow' era after the Second World War
was marked by U.S. concerns regarding access to the region's oil fields. During
the late 1940s and early 1950s, many at the State Department saw Israel as a
destabilising factor. Military support to that country, argued the CIA, could
provoke anti-American sentiments, weaken the U.S. position in Iran, Turkey and
Greece, and possibly lead to a loss of control over the oil routes (Gazit, 1983a:
14). The Israelis, although formally non-aligned, were displeased with these
negative attitudes, particularly since they had so much to offer. The sentiment
of the country's elite in this matter was echoed by Gershom Schocken, editor
of the daily Ha'aretz:
"Israel had proven its military might in the War of Independence, so making
it somewhat stronger could help the West keep the political balance in the
Middle East. According to this view, Israel would act as a watchdog. It
wouldn't become aggressive against the explicit wishes of America and
Britain. But, if, for whatever reason, the latter were to turn a blind eye, Israel
could be counted on to punish those neighbours whose attitude towards the
West had become a little too disrespectful..." (Ha'aretz, 30 September 1951,
cited in Orr and Machover 1961: 158)
Until the mid-1950s, however, Britain still seemed to be doing a good job
protecting the oil routes, and with its various positions in Iraq, the oil emirates,
and the Suez Canal looking secure, the Israeli overtures were politely ignored.
Ben-Gurion, though, was persistent.
'It's about time to make the defence of
Israel part and parcel of defending the free world', he wrote to U.S. Secretary
of State John Foster-Dulles (cited in Bar Zohar 1975: 1320). To demonstrate his
commitment, he offered in 1951 to secretly dispatch an Israeli battalion in
order to assist the U.S. war effort in Korea, while on another occasion he
proposed that Washington finance a 250,000-strong Israeli military force,
dedicated to defending the region against Soviet intrusions (Gazit 1983a:
16-19).
'There was something pathetic and shameful', wrote his biographer,
'in these repeated attempts to hold on to the U.S. skirt, particularly when the
latter was trying, again and again, to get rid of the embarrassing nuisance...'
(Bar Zohar 1975: 1320). And yet the efforts continued. Pinchas Lavon, who
replaced Ben-Gurion as Defence Minister in 1953, tried a new, bolder direction.
His intention was to set up a terrorist network in the Arab countries, with the
purpose of attacking U.S. embassies and cultural centres. This, he hoped, would
alienate the Americans against their Arab hosts, helping them realise that their
only true ally in the region was Israel (Sharet 1978: Vols. II-III). The hasty plot
was uncovered, and although the affair was never thoroughly investigated,
Lavon had to resign, and eventually so did Ben-Gurion. The Israeli military,
though, continued the escalation, using massive 'retaliations' against Palestinian
guerrillas in the hope of warming up the conflict and pulling the United States
into the fold (Sharet 1978: Vol. III; Cafcafi 1994: 73).
The crowning achievement of this strategy was Israel's 1956 invasion of the
Sinai peninsula, followed by Britain and France's attempt to take over the Suez
Canal. U.S. News and World Report was quick to summarise the obvious:
'Why
did Britain and France go to war against Egypt? In order to topple Nasser, to
control the Suez Canal and save their oil' (9 November 1956, cited in Orr and
Machover 1961: 297). The Israeli elite, on the other hand, denied any
conspiracy. According to the official version, Ben-Gurion never went to France
on the eve of the war to sign the Sèvres Treaty between the conspirators; there
was no prior plan for France and Britain to take over the Canal in order to
'separate' the warring factions; and there was no intention to topple Nasser.
The whole thing was an act of self-defence, pure and simple. Israel was
threatened with annihilation, and so took a pre-emptive strike. Thirty years
later, though, Shimon Peres, who participated in orchestrating the operation,
presented a rather different version:
"If it were not for the Suez Operation, the danger was that Britain and France
would leave the Middle East before the Americans became aware of the issue,
therefore allowing the Russians to penetrate and shape the region without
the U.S.A. Following the Suez Operation, the Americans became committed
to a regional balance. It was this commitment which shaped the U.S. stance
toward the Six Day War..." (cited in Evron 1986: 164)
In other words, Ben-Gurion and his clique managed to trick their allies as well
as foes. Not only was there no threat of 'annihilation', but the
'eternal Franco-
Israeli friendship', which Peres always took credit for cementing, was itself
merely a temporary move. The real goal was to make the Americans
'aware of
the issue'.
Subcontracting
And aware they became. Following the Suez debacle, the 'free flow' of oil no
longer looked secure. The emergence of Pan-Arabism and increasing Soviet
intrusion into the region presented a growing threat to the feudal regimes of
Saudi Arabia and surrounding sheikdoms. In 1958, Faisal, the pro-American
king of Iraq was assassinated, and the 1954 Baghdad Pact erected by the British
fell apart. In that same year, Syria and Egypt merged into the United Arab
Republic, prompting King Hussein of Jordan to request American aid and British
paratroops for his protection, and the Maronite government in Beirut to invite
the U.S. marines. These developments gave rise to the new 'Eisenhower
Doctrine'. According to this doctrine, the United States itself would assume
military responsibility for the Persian Gulf and the Arab Peninsula (Gold 1993:
35). However, the new realignment also required to fortify the perimeter
surrounding the oil region, and here Israel came in handy. Valued for its
stability, pro-Western characteristics and logistical potential, it was declared a
'strategic asset' for the West (Safran 1978: Ch. 20). With persistence and a dose
of good luck, the dream had finally come true.
Initially, the State Department was careful to not openly support the Jewish
state. The CIA, however, having fewer inhibitions, quickly started fashioning
covert liaisons with local politicians and security officials. Many of these
relations were built around a proposal by Ben-Gurion that Israel create a
peripheral, pro-American alliance with non-Arab countries, such as Turkey,
Iran and Ethiopia, in order to contain Arab radicalism. A central feature of this
'peripheral alliance' was a secret agreement, code-named KK Mountain.
According to the agreement, the Israeli Mossad would become a permanent
paid 'subcontractor' for the CIA, carrying out delicate operations which the
U.S. legislator and judiciary would otherwise find difficult to stomach. Since
the region's 'bastion of democracy' was much more lenient in these matters, the
deal seemed only fair, and theMossad quickly found itself involved in numerous
proxy undertakings around the world. In the Middle East and Africa, these
included military assistance to various groups and regimes, such as the royal
forces in Ethiopia and Yemen, the Kurds in Iraq, the army and secret service of
the Iranian Shah, the secret police in Morocco, the security forces and military
of South Africa, and the rulers of Uganda, Zaire and Nigeria. Later, the Israelis
would also diversify into Latin America, providing their ware and knowledge
to pro-American dictatorships such as Panama, Chile, Nicaragua, Honduras, El
Salvador and Guatemala (Cockburn and Cockburn 1991: Chs 5, 9, 10).
Some of these operations were allegedly part of the CIA's effort to have the
new Kennedy Administration pay more attention to the Middle East. The role
of the CIA is especially noteworthy, because, after the Second World War, and
particularly since the early 1950s, the Agency's Middle Eastern activities were
almost exclusively handled by the ARAMCO partners and Bechtel (McCartney
1989: Ch. 10). Kennedy wasn't swayed. Despite his favourable attitude toward
the petroleumindustry and the close oil connections of some his top officials, [10 footnote]
he continued pursuing his policy of appeasement toward Nasser. However, his
'New Look' doctrine also permitted, for the first time, American military
shipments to Israel. Contrary to the 'nuclear-containment' policy of his predecessors,
Kennedy emphasised the use of conventional weapons and direct
involvement against Soviet subversion. In 1960, he announced that he was not
opposed to a 'military balance' between Israel and the Arab countries, and that
in global matters the United States had 'special relations' with Israel, comparable
only to its relations with Britain (Safran 1978: 581; and Gazit 1983a: 33).
Breaking Nasser's Bones Asunder
Initially, the change may have been partly motivated by Kennedy's desire to
check Israel's nuclear development programme, and to prevent an
out-of-control nuclear arms race between Israel and Egypt (Gazit 1983b: 49-56).
Another possibility is that Kennedy was simply paying off the Jewish Lobby
for financing his election campaign (Hersh 1991: Ch. 8). But toward the mid-
1960s, when attempts to appease Nasser seemed to go nowhere, his successor,
President Johnson, put Kennedy's 'special relations' into practice, and began
sending Israel large military shipments. Despite his preoccupation with the
intensifying conflict in Vietnam, Johnson was nevertheless worried about the
fighting in Yemen, where Egyptian troops had on a number of occasions crossed
the border into Saudi Arabia. After the end of its involvement in Libya and in
the Congo, the United States ceased its economic support to Egypt altogether,
and instead switched to overtly assisting the Jewish state. In 1966, at the height
of its entanglement in Vietnam, Washington began giving Israel, for the first
time, heavy assault weapons, including tanks, aircraft and missiles.
In that year, Soviet involvement in the region seemed more menacing than
ever. First, Britain announced it would soon be leaving Aden, notwithstanding
the ongoing Soviet-backed war in neighbouring Yemen, just south of the
world's richest oil fields; then, the pro-Soviet Ba'ath party staged a coup in
Syria; and finally, the Kremlin began to promote a socialist union between
Egypt, Syria, Algeria and Iraq, threatening to engulf Saudi Arabia from the west
and north. Given its difficulties in Vietnam, the United States was not prepared
to counteract these developments directly, but Israel certainly was and did.
Toward the end of 1966, the Arab-Israeli dispute was again heating up. In
November, Israel staged a massive raid into the Jordanian town of Samoa,
officially in retaliation for guerrilla attacks. Then, in April 1967, an Israeli
tractor, sent to cultivate a demilitarised zone just beneath the Golan Heights,
sparked a border skirmish which ended with humiliating Syrian losses. Adding
insult to injury, the Israelis went on to announce their intentions of forcibly
dethroning the Damascus regime. Faced with mounting challenges to his
Pan-Arab leadership, Nasser was more or less compelled to respond, moving
two army divisions into the Sinai desert and closing the Straits of Tiran. There
are, of course, other explanations. Aronson (1994-95), for instance, argues that
the escalation was in fact an unintended consequence of Nasser trying to stop
the development of nuclear weapons by Israel. One way or the other, it is clear
that the Americans (like the French and British before them) hoped that Israel
would use the opportunity to topple Nasser, and the closing of the Tiran Straits
now offered the pretext for a pre-emptive strike.
Contrary to popular belief, the Israeli and American leaderships had little
doubt about the outcome of the looming war. The certainty of Arab defeat was
also known to Nasser - as well as to the other Arab participants - but given
their internal disputes, they found it politically impossible to ignore Israeli
provocations, and were thus increasingly drawn toward a point of no return. [11 footnote]
Following the closure of the Straits of Tiran, Israel scheduled its attack for 25
May, but had to wait until 6 June, after Meir Amit, head of the Israeli Mossad,
returned from an emergency trip to Washington with the 'green light' to 'break
Nasser's bones asunder' (Haber 1987: 214-16). And so, by maintaining its
loyalty to U.S. strategic interests in the region, Israel had finally succeeded in
joining the U.S. orbit as an official satellite, a process which would further
intensify during the 1970s and 1980s.
Preoccupied with the 'free flow' of oil, the Petro-Core may have viewed the
war's outcome as highly favourable: Soviet aspirations were undermined and
the cause of Pan-Arabism suffered a serious blow. However, the companies must
have also noticed the positive effect the war had on their differential profitability
(see Figures 5.7 and 5.8) - an ominous sign that their 'free-flow' system
was itself coming to an end. [12 footnote] And as if to hasten the process, the aftermath of
the war was marked by increasing arms exports. Rewarded for its victory, Israel
began receiving F-4 Phantom aircraft made by McDonnell Douglas, which were
previously sold only to Britain and Germany. With this, the door was now
open for an arms race of sophisticated weapons, a race which would eventually
help 'limit' the flow of oil and introduce the petroleum business into the new
era of 'crisis'.
The 1973 Arab-Israeli War
The 1968 U.S. presidential elections brought in an administration highly
attuned to the coinciding interests of oil and arms. Nixon's campaigns were
supported heavily, and sometimes illegally, by contributions from both defence
contractors and oil companies, while his Secretary of State Kissinger enjoyed
close connections with the Rockefellers, and proposed an aggressive realpolitik
which on more than one occasion entertained the feasibility of 'limited' nuclear
war. [13 footnote] In the eyes of this new administration, the 1967 War did little to secure
U.S. interests in the Middle East. Qaddafi's 1969 showdown with the oil
companies in Libya and the attempted coup in Saudi Arabia were disconcerting
reminders of pending regional hazards. Washington, so it seemed, must
pay more attention, not less, to this troubled area.
The Realist View
And yet, that was easier said than done. In 1969, the United States began
withdrawing its troops from Vietnam, and with warmer relations with China
and the declaration of Détente, the new 'Nixon Doctrine' called for a lower
defence budget. Instead of Kennedy's strategy to prepare for
'2½ wars', Nixon
and Kissinger offered resources for only
'1½ wars'.
In 1969, the policy kicked in,
and domestic military spending started to fall. From a statist viewpoint, the
result was to weaken U.S. capabilities in the Middle East, this precisely when
the region emerged as one of the world's most sensitive (Gold 1993: 40).
Moreover, Britain's withdrawal from its last stronghold in the Persian Gulf,
together with the United States losing its last strategic air base in Libya, created
a military vacuum. The solution, stipulated by Kissinger, was for the United
States to concentrate only on 'core conflicts', leaving 'peripheral conflicts' to
be handled by local pro-American forces. The consequences for the region were
twofold. First, Washington embarked on massive arms exports, initially to Israel
and the 'twin pillars', Iran and Saudi Arabia, but later also to Egypt and other
countries. Second, State Department attempts at settling the Arab-Israeli conflict
were now frustrated by White House support for Israel (Safran 1978: Ch. 23).
With Middle Eastern affairs increasingly handled by the Nixon-Kissinger duo
rather than State Secretary Rogers, Israel was now used as a threat against anti-
American Arab countries (Kissinger 1979: 1285, 1289). Kissinger was particularly
intimidated by what he regarded as deliberate Soviet challenges, and in 1970
worked out, together with Yitzhak Rabin, then Israel's ambassador to
Washington, a joint plan for military intervention in case Syria or Iraq attacked
King Hussein of Jordan.
These observations do not sit well with the realist perspective. First, given the
split between the conciliatory position of the State Department and the
aggressive stance of the President, it is not clear what 'national interest'
American policy makers were trying to achieve. Second, the type of cannon
diplomacy entertained by Kissinger did not look particularly conducive to his
goal of regional stability. Indeed, according to Safran (1978: Ch. 23), the United
States continued to send arms to the region, this despite its own fears that an
Israeli victory against Arab aggression would cause chaos and seriously disturb
the flow of oil.
The Coalition's View
From the viewpoint of the Weapondollar-Petrodollar Coalition, however, U.S.
foreign policy here seems pretty consistent. Declining military spending at
home hurt the large defence contractors badly (Sampson 1977: 214-21), and
with pressures from these contractors coinciding with his own strategic outlook,
Nixon moved to further commercialise arms exports. His new doctrine
stipulated that the burden of defending U.S. allies - financially as well as in
manpower - should now be borne by those allies themselves (Ferrari et al. 1987:
21). In order to do that, explained military contractor David Packard (then
acting as Deputy Secretary of Defense), the United States was ready to
'give or
sell [to these allies] the tools they need for this bigger load we are urging them
to assume' (quoted in Sampson 1977: 243). In the Middle East, the Nixon
Doctrine elevated the arms race to a new level. Commercialisation, to be sure,
was not strictly enforced. Israel, for instance, was unable to pay for its rapidly
rising military imports; and, yet, to its great surprise, Washington was willing
to give them for free (Rabin 1979: Ch. 4). [14 footnote] Officials in Jerusalem celebrated
this as a 'huge achievement' (Gazit, 1983a: 53), only that they failed to notice
the even greater achievement of other states, who, unlike Israel, were both able
and willing to pay.
The most 'successful' of the lot was Iran. On their visit to Tehran in 1972,
Nixon and Kissinger reputedly agreed to sell Iran
'virtually any conventional
arms it wanted' (cited in Sampson 1977: 252). And with this newly acquired
freedom to sell, U.S. armament companies quickly started courting the country's
Shah, whom Washington now appointed as
'policeman of the Gulf'. At the
time, domestic sales to the Pentagon were hitting rock bottom, so military
exports to Iran provided a much needed lifeline for many contractors (Figure
5.3). The extent of these exports, however, depended crucially on the petroleum
revenues of the Peacock Throne, an important detail which both Nixon and
Kissinger were most surely aware of. [15 footnote] And, indeed, the oil industry, too, was
undergoing a profound transformation. With weakening prices and falling
profitability, as illustrated in Figures 5.5 and 5.7, the large petroleum companies
came to realise the potential benefit of a stronger OPEC. The cartel's apparent
resolve to control output impressed the oil majors, and their London Oil Policy
Group was now ready to accept a new revenue-sharing agreement (Odell 1979:
105, 215). But although the price of oil started to rise in 1971, the Petro-Core's
rate of profit continued to linger and, in 1972, fell dangerously below the
Fortune 500 'normal' (Figures 5.7 and 5.8).
And then came the October 1973 'energy conflict'. The war brought a sharp
increase in prices, restoring the oil companies' differential profitability high
above the big-economy's average. At the same time, it also generated dramatic
increases in the oil revenues of Arab countries, with immediate consequences
for the arms trade. In 1974, a year after the war, the Middle East surpassed
South East Asia to become the world's largest market for imported weapons,
with over one-third of the global trade.
While there is no evidence to implicate the U.S. Administration as instigator
in the conflict, there is also little to indicate it keenly tried to prevent it. To be
sure, the war didn't catch the Nixon government by surprise. Warned by King
Faisal of Saudi Arabia already in the beginning of 1973, the ARAMCO partners
were aware of what was coming, and they passed on the information to
Washington (Blair 1976: 266-8; Sampson 1975: 243-8; and Yergin 1991: 593-7).
A similar message came from a CIA study (incidentally co-authored by the same
analyst who anticipated that the 1967 War would last only six days), which
concluded that the Egyptians were planning to attack Israel (Cockburn and
Cockburn 1991: 171). Indeed, Kissinger was directly informed of the pending
assault, both by Jordan's King Hussein (who between 1957 and 1977 was a paid
CIA agent), and by sources close to President Sadat of Egypt (Neff 1988: 105).
The U.S. 'National Interest': What Price Stability?
These observations seem perplexing. If Nixon and Kissinger were indeed
concerned with maintaining regional stability as stipulated in the realist
literature, why didn't they heed Saudi requests that Washington softened its
support for Israel? To suggest that this was because the Administration was by
then irrevocably committed to the Israeli cause is not persuasive; for if that
was the case, why did it fail to warn the Israelis of the pending calamity? Indeed,
why did Kissinger caution Israel not to fire the first shot when the latter finally
realised that Egypt and Syria were about to attack? One common interpretation
is that Kissinger wanted the Arabs to win their self-respect and some territory,
which would then be traded for peace through his own mediation (Hersh 1991:
227). However, from a statist viewpoint, Kissinger was walking on a tightrope
here. The problem, according to his own admission, was how to achieve a
'balanced' outcome - one in which the war would end after Israel had recovered
some of its earlier losses, but before it had the chance to destroy its opponents.
For Kissinger, this must have been a real problem. He had absolute confidence
in Israel's military ability and feared that an Israeli victory would be devastating
for U.S. regional interests (possibly by inciting leftist coups and encouraging
Soviet intervention). Yet despite the obvious danger, he stuck to his plan,
moving to broker a ceasefire only at the last moment, after Israel had threatened
to use nuclear weapons (Safran 1978: Ch. 23).
Clearly, then, realist calculations alone do not tell the whole story. Attuned
to the plight of the oil and armament companies, Kissinger must have also
pondered how an oil crisis might boost their coinciding interests. And indeed,
after the war, with petrodollars and weapondollars locked in an upward spiral,
peace between Israel and the Arabs was put on the backburner. The more urgent
task now was to keep the 'balance of power'; and sure enough, instead of
preaching reconciliation, we find the U.S. ambassador to Cairo recommending
military shipments to Egypt, while his colleagues in Kuwait and Saudi Arabia
explain the merit of American-made aircraft to local rulers (New York Times, 21
July 1975, cited in Frenkel 1991: 76). Working now for the new Ford
Administration but still pursuing his original plan, Kissinger helped establish
an 'interim agreement' between the warring factions. This time, though, the
United States held the carrot as well as the stick; it could use Israel as a threat
against pro-Soviet Arab regimes, but it could also force it to return occupied
Arab land to those who promised to leave the Soviet orbit and cross the floor
onto the American side (Safran 1978: Ch. 25). However, the U.S. Administration
was also careful to insist that any interim agreement should not evolve into a
comprehensive settlement. When in July of 1975 the Israeli government
appeared willing to go to a peace conference in Geneva, President Ford
threatened to withdraw American assistance (New York Times, 3 July 1975). The
imperative of maintaining tension was spelled out clearly less than a year later.
Appearing before the Jewish-American Congress in April of 1976, Henry
Kissinger effectively asserted that a comprehensive Middle East peace depended
not so much on the warring factions, but rather on the superpowers first
agreeing on their respective spheres of influence (reported in Meyer 1976: 157).
These pursuits on the armament front also help shed some light on the
Administration's energy policy. On the surface, Washington's view on the
subject seemed confused, even contradictory. Based on his analysis of over one
thousand State Department cables and papers obtained under the Freedom of
Information Act, Yergin (1991: 84) concluded that, between 1974 and 1981, the
U.S. government in fact objected to higher oil prices. But then he simultaneously
inferred that the government didn't want to see those prices lowered
either (p. 643). This indecisiveness, Yergin argued, was rooted in a conflicting
quest for lower energy cost at home, coupled with a richer and thus more stable
Middle East. And yet, if the goal was indeed stability, why send so much
armament to the region, particularly when Washington itself doubted their
contribution to peace? And what about the support of Kissinger and the
International Energy Agency for a
'minimum safeguard price' as a means of
protecting Western interests? (Sampson 1975: 306; and Turner 1983: 184).
Perhaps the Administration, despite its declarations to the contrary, was in fact
interested in neither lower oil prices nor regional stability? After all, representatives
of the Weapondollar-Petrodollar Coalition were now increasingly involved
in 'state policy', so couldn't they have pushed things in that direction?
The realist failure to square the circle around oil prices is only understandable.
The basic reason is that, by the 1970s, while the world was already well
into the 'limited flow' era, realist theories were still stuck in the 'free flow' logic.
Stephen Krasner, for example, claimed that there was a negative trade-off
between the level and variability of petroleum prices (1978b: 39-40). The
consequence, he concluded, was that policy makers had to choose between
low but variable prices, or stable but high ones. Yet, when those lines were
written, this menu had already become irrelevant, and in fact misleading. From
the late 1960s onward, with oil shifting to a 'limited flow' footing, the relationship between the level and variability of prices became positive. The choice
now was not between low and variable oil prices as opposed to high and stable
ones, but rather between low and stable prices against high and volatile ones.
Obviously, this transition fundamentally altered the relationship between the
oil companies and the so-called 'national interest'. During the early period,
when the companies were concerned mainly with concessions, the
Administration's willingness to have higher prices in order to secure stability
and access seemed sensible. It helped the companies, as well as the broader
U.S. 'national interest'. Since the late 1960s, however, harmony gave way to
discord. The United States could no longer pay higher prices in order to achieve
access and price stability; it couldn't, simply because access was no longer
negotiable, whereas higher prices were clearly causing greater instability. The
oil companies, on the other hand, were now interested not in access but in
higher prices. Contrary to the earlier situation, therefore, there was now clear
conflict between the companies and the 'national interest', and the
Administration's pursuit of both instability and higher prices only indicates
where its allegiances lay.
Initially, the coinciding interests of the Arma-Core and Petro-Core in regional
turmoil were blurred by the imaginative use of language, which insisted on
equating arms shipments with 'stabilisation'. For example, Secretary of State
Rogers, who would later become a retainer for the Iranian Shah and board
member of the oil company Sohio, characterised U.S. military sales as having
a 'stabilising influence'
- this in contrast to the
'invitation for trouble' posed
by similar Soviet shipments (Engler 1977: 242). Similarly, Kissinger (1981: 182),
using a more academic lingo, explained that the
'balance of power is a kind of
policeman, whose responsibility is to prevent peaceful countries from feeling
impotent and aggressors from becoming reckless'. Eventually, however, as the
Orwellian identity of weapons and peace began to dissipate, the true forces at
play came into focus.
The rising influence of the Weapondollar-Petrodollar Coalition coincided
with the new policies of Jimmy Carter. Unlike Nixon's, the 'Carter Doctrine'
moved from emphasising loyal proxies - chiefly Israel and the 'twin pillars',
Iran and Saudi Arabia - to direct military intervention. With growing
nervousness on the part of the Saudi pillar - first in response to Soviet
involvement in the Horn of Africa, and later as a consequence of Soviet participation
in the Yemen conflict - Carter and his national security adviser,
Zbigniew Brzezinski, decided to build a 'Rapid Deployment Joint Task Force',
or RDJTF (Long 1985: 62). As they saw it, the lesson from Iran was that the
United States should not count on local proxies, and must use its own forces
to protect its own interests (Quandt 1979: 543). This fitted well with the broader
strategic rethinking in Washington. According to Brzezinski (1983: 454), events
and decisions in 1979-80 had fundamentally altered the U.S. global strategic
position. The Middle East - which was previously seen as semi-neutral and
protected from Soviet power by a defence belt comprising Turkey, Iran, Pakistan
and Afghanistan - no longer seemed invincible. As a consequence, U.S. dual
commitments in Europe and the Far East were supplemented by a third strategic
commitment toward what was now known as 'West Asia'. The resources needed
to support this new pledge, however, were unavailable, and so in order to bypass
congressional objection, part of the military deployment was financed by Saudi
petrodollars (Gold 1993: 51).
Thus, notwithstanding his desire to promote world peace, President Carter
was subject to considerable pressures to act otherwise. At home, his was the
first administration to raise domestic military spending after almost a decade
of decline (Figure 5.3). On the international arena, Carter indeed announced
a policy of restraints on arms exports, which, in its first 15 months, led to the
cancellation of 614 requests from 92 countries, worth over $1 billion (Ferrari
et al. 1987: 25). Yet, despite these limitations, and contrary to the new statist
stand on the principle of American 'self-defence', total U.S. arms exports
continued to increase (albeit still slowly), particularly to the Middle East.
Somewhat paradoxically, Carter, who was often perceived as a peacemaker and
promoter of regional reconciliation, was also the president who contributed
the most toward opening the Arab market to U.S. weaponry. In 1978, toward
the Camp David Accord, he initiated the first 'combination deal', whereby U.S.
armament producers simultaneously equipped several warring factions - a
pattern which was then promptly institutionalised by other arms-exporting
countries as a means of promoting peace through arms sales. [16 footnote]
The 1979 Iranian Revolution and the 1980-88 Iran-Iraq War
The Hostage Crisis
Yet the ongoing rearmament during the mid-1970s was merely sufficient to
keep oil prices from falling, and in the absence of a serious upheaval, the
Petro-Core's profitability in 1977 and 1978 again dropped into the 'danger
zone', below the big-economy's average (Figures 5.7 and 5.8). Fortunately for
the Coalition, though, help was on the way, with turmoil again starting to
build up. The Islamic Revolution which began in 1978 failed to have a
significant effect on the oil market, although the potential was clearly there.
In this light, the involvement of the U.S. Administration in the onset of the
1979 oil crisis is noteworthy. Despite the delicate situation in Iran, President
Carter quickly granted asylum to the ousted Shah, thus triggering the hostage
crisis. When Iran threatened to withdraw its U.S. banking deposits, the President
immediately retaliated by seizing Iranian assets.
The background leading to the seizure was outlined by journalist Anthony
Sampson (1981: Ch. 17; Ha'aretz, 2 January 1981). During the period from 1976
to 1978, Iran borrowed $3.8 billion to finance arms purchases. On the eve of
the Iranian Revolution, an outstanding debt of $500 million was owed to a
consortium headed by Chase Manhattan, which also held $433 million in
Iranian deposits. In theory, these deposits could have been withheld as a forced
collateral, only that Chase had no legal right to do so - that is, unless instructed
by the U.S. government for reasons of 'national security'. And as it turns out,
this is precisely what happened - although not without help from David
Rockefeller, the bank's chairman and one of its principal owners. Sampson
reveals how Henry Kissinger, acting as a special adviser to Chase Manhattan
at the time, and Jack McCloy, a former chairman of the bank, courted President
Carter, who was himself closely associated with the Rockefellers through the
Trilateral Commission, so that he granted asylum to the Shah despite the fragile
political atmosphere. Kissinger later told Sampson that there was nothing
subversive in these activities, arguing it was inconceivable that
'a few private
citizens' could affect state policy. The Islamic government, in any event, was
deeply offended. Turmoil ensued, and as the script unfolded, Tehran threatened
to withdraw its U.S. deposits, to which Carter immediately retaliated by freezing
them. The official justification was that the freeze was necessary to defend the
integrity of the American banking system, although the real risk couldn't be that
serious. Iran had roughly $8 billion dollars worth of deposits, but of these only
$1 billion were 'call money' available on demand - less than 1% of the
U.S. system's outstanding cash balance. Moreover, most of these deposits were
held in London, so even if drawn out, the only place for them to go was back
into the Euro market. Clearly, the financial system as whole was not at threat.
Certain institutions, however, particularly Chase and Citibank of the Rockefeller
group, were vulnerable, and had much to gain by the freeze.
The 'Sting'
The hostage crisis in Iran sparked panic, and the price of oil finally began to
rise. Adding to the turmoil, the Soviet Union invaded Afghanistan in late 1979,
and in 1980 the Iraqis attacked Iran. Oil prices were now climbing beyond $35
per barrel, pulling the Petro-Core's profitability safely out of the 'danger zone'.
And with Middle East oil revenues on the rise, the flow of imported weapons
was also growing rapidly. To some extent, both the invasion of Afghanistan
and Iraq's assault on Iran were rooted in the rising threat of Islamic fundamentalism.
Yet the U.S. government, although happy to see this threat being
checked, was not entirely antagonistic to the Khomeini regime. According to
several sources analysed in Cockburn and Cockburn (1991: 317-18), during
the last year of his administration, Carter embarked on a 'sting operation'
which, if successful, would have both helped his re-election and caused Iran to
renew its demand for American weapons. The underpinnings of his strategy
were relatively straightforward. With much of their sophisticated arsenal made
in the United States, the Iranians were crucially dependent on U.S. spare parts
and ammunition. In this context, a major conflict, preferably starting before
the 1980 elections, could convince Iran to release the embassy hostages in
return for American military re-supply. The unsuspecting carrier of that plan
was Iraq's Saddam Hussein. With blessing from Jordan and Kuwait, promises
of Saudi finances and, most importantly, a warm endorsement from Zbigniew
Brzezinski, whose declared aim was to see Iran 'punished from all sides', Hussein
swallowed the bait, and began advancing his forces into Iran (Cockburn and
Cockburn 1991: 392). Unfortunately for Carter, the timing of the 'sting' was out
of sync. Once Iraq launched its attack, his administration condemned it and
began soliciting the Iranians to trade hostages for spare parts. But that was too
late. Apparently, Iran already had a secret agreement with the U.S. Republican
Party, according to which the hostages would be released only after the
elections. And so although the weapons were ready to flow, Carter was no
longer there to benefit from the deal. [17 footnote] For the Weapondollar-Petrodollar
Coalition, of course, the deal was manna from heaven, regardless of who won
the election - although naturally, it much preferred having Reagan on its side
than Carter.
During Reagan's presidency, the Middle East was defined - in some sense
paradoxically - as being increasingly important for the U.S. 'national interest'.
In 1983, Reagan created a new military central command, or CENTCOM, to
include the entire area of 'West Asia' from India to the Horn of Africa.
CENTCOM's mandate emphasised active defence over deterrence. Its capabilities,
however, were very limited. It wasn't able, for example, to counter a Soviet
challenge against the oil zone in southern Iran, and certainly not to embark on
a larger operation (Gold 1993: 69). Moreover, with funding being tight, the
new focus on West Asia had to come at the expense of American military
commitments in Europe and East Asia - this at a time when the significance to
the U.S. of Middle East oil, as well as of the Soviet danger, were in fact declining,
as we describe later in the chapter.
The Network
While the importance of oil and Soviet power were apparently waning under
Reagan, the political leverage of the Weapondollar-Petrodollar Coalition was
soaring to new highs. Vice-President George Bush - a former Director of the
CIA and an oil millionaire in his own right - had close acquaintance with the
petroleum industry, and strong ties to ultra right-wing groups. As his first
Secretary of State, the President nominated Alexander Haig, previously a director
of Chase Manhattan and President and Chief Executive Officer of United
Technology. [18 footnote] Reagan also nominated Donald Regan, a partner and chairman
of Merrill Lynch, as his Treasury Secretary. Merrill Lynch, much like Chase
Manhattan and United Technology, also had special links to the Middle East.
In 1978, the company acquired White Weld, an international investment firm
that advised the Saudi Arabian Monetary Agency (SAMA) on how to manage
its $100 billion portfolio and guided the investment of a daily inflow of about
450 million petrodollars. As his Assistant Secretary for International Affairs,
Regan chose David Mulford, who until then was running White Weld's
operations in Saudi Arabia (Business Week, 22 July 1985). Other oil-related
appointments included the nomination of Paul Volker as chairman of the
Federal Reserve Board, who was then succeeded by Alan Greenspan; the former
was linked to the Rockefeller group, whereas the latter, besides being a groupie
of Ayn Rand, was a director at both Mobil Oil and J.P. Morgan prior to his
appointment.
However, the most important representatives of the Weapondollar-
Petrodollar Coalition who found their way into the Reagan Administration
were the veterans of Bechtel Corporation, the world's largest contractor of
military installations and energy-related projects. [19 footnote] Bechtel has had a long
history of building political ties at home and abroad (cf. McCartney 1989).
Among other things, the company was the driving force behind the election
campaigns of Presidents Edgar Hoover, Dwight Eisenhower and Ronald Reagan;
it had close associates in the CIA, including Agency Directors William Casey,
Richard Helms and John McCone; [20 footnote] it courted special relations with the Dulles
brothers; and it has dominated decision-making at the Atomic Energy
Commission and the Export-Import Bank. On the international scene, Bechtel
acted simultaneously as an arm of the CIA, as well as the unofficial representative
of foreign governments, particularly Saudi Arabia, in the United States.
These and numerous other connections, often supplemented by substantial
bribes and clandestine operations, helped win Bechtel some of the world's
largest construction projects. [21 footnote] But what made these projects so valuable to
begin with was the unfolding 'energy crisis' since the early 1970s.
Bechtel entered the Middle East after the Second World War as a major
contractor for the ARAMCO partners, but until the consolidation of OPEC its
activities in the region were relatively limited. It was only with the oil price
explosion of the early 1970s, that the contracts began piling up. Among others,
these included the construction of natural gas projects in Algeria and Abu
Dhabi, power stations in Cairo, and refineries, airports and entire petrochemical
cities in Saudi Arabia. In addition, many of the company's other
energy-related projects - such as Quebec's hydroelectric James Bay complex,
the Alaska oil pipeline, Indonesia's liquefied natural gas facilities, and nuclear
reactor plants in the United States and elsewhere - were themselves partly the
consequence of rising oil prices. The company also became a major constructor
of military installations - mainly for U.S. forces, but also for other sovereigns,
particularly in cash-rich Arab countries.
By the early 1980s, Bechtel's international operations had risen to over onehalf
of its business, and the person who guided this transition since the
mid-1970s was the company's president, George Shultz. Toward the 1980
election, Shultz grew worried about candidate Ronald Reagan, whose fixation
on laissez faire and small government threatened Bechtel's lifeline. However,
after a series of re-educational meetings with Bechtel executives and associates
of the Rockefeller group, the presidential hopeful came back to his senses, at
least enough to make Shultz an avid supporter. Once in office, Reagan began
drawing on the talent of Bechtel officials. As his initial Defense Secretary he
chose Casper Weinberger, who until then was a Bechtel vice-president, and in
1982, he asked Shultz to replace Haig as Secretary of State. Other Bechtel
veterans with key positions in the new administration included, National
Security Adviser Richard Allen; Deputy Secretary of Energy Kenneth Davis; and
Philip Habib, whom Reagan sent as his Special Envoy to the Middle East while
still on Bechtel's payroll.
The convergence of oil and armament interests in the Reagan Administration
was paralleled to some extent in their own corporate boardrooms, mainly
through interlocking directorships which provide an informal setting for
exchanging ideas and coordinating collective action. For example, during the
1980s, the chairman and chief executive officer of Standard Oil of Indiana
(Swearingen) was a director of both Chase Manhattan and Lockheed; the board
of directors of McDonnell Douglas included a director of Phillips Petroleum
(Chetkovich) and a director of Shell Canada (McDonald); the chairman and
president of United Technologies (Gray) was a director of both Exxon and
Citibank; Boeing shared one director with Mobil and three with Chevron,
including the latter's chairman (Keller); and the Chevron board included a
director from Allied Signal (Hills), as well as the president and chief executive
of Hewlett Packard (Yound) (based on Moody's Annual; Adams 1982).
Nourishing the Conflict
Whether the oil and armament companies indeed colluded to advance their
common interests remains an open question, but the policies of the Reagan
Administration certainly worked on their behalf. At home, Reagan helped
consolidate the Weapondollar-Petrodollar Coalition by embarking on the
largest defence build-up in peacetime, while simultaneously reducing corporate
taxes. The obvious result was a rapidly rising budget deficit, which horrified
the economists but delighted the arms contractors and oil companies. [22 footnote] And
in the Middle East, the new Administration continued the policies of its predecessors,
though apparently with much greater vigour. Whereas for Carter
arms exports were an
'exceptional foreign policy implement', Reagan took the
view that they were
'an essential element of [U.S.] global defense posture and
an indispensable component of its foreign policy', moving to eliminate many
of their previously imposed restrictions (U.S. Congress 1991: 20). Of course, in
order to enable buyers to pay for the outgoing weapons, Middle East 'energy
conflicts' had to be continuously nourished, a task to which the new
Administration turned with little delay.
Building on their earlier success, Washington and Tehran were now trading
regularly in exotic commodities. The United States secretly supplied weapons
to the Ayatollah Khomeini, for which the latter paid with released hostages
held by Iranian-backed forces in Lebanon, plus hard cash which the Americans
then used to finance the Contra rebels in Nicaragua. The elaborate scheme,
popularly known as the 'Iran-Contra Affair', was conceived and approved at
the highest echelons, including President Reagan, Vice-President Bush, Secretary
of State Shultz, Secretary of Defense Weinberger, CIA Director William Casey,
and National Security Advisers Robert McFarlane and John Poindexter (New
York Times, 19 January 1994). The purpose of the scheme, though, involved
more than hostages and rebels. Its other goal, less publicised though certainly
no less important, was to enable Iran to hold out against Iraq - but just barely,
so that the war could continue for as long as possible. According to retired IDF
general Avraham Tamir, Defense Secretary Haig explained to his Israeli
counterpart Sharon that
'it was U.S. policy to prevent either side from winning'
(Cockburn and Cockburn 1991: 328). And indeed, as journalists Waas and
Unger describe in their colourful language, the Administration
'"tilted" back and
forth between support for Iran and support for Iraq, sometimes helping both
countries simultaneously, sometimes covertly arming one side as a corrective
to unanticipated consequences of having helped the other' (1992: 65). Arms
shipments to sustain the Iranian war effort - ranging from $500 million to $1
billion annually, depending on the source - were handled by Israel. At the same
time, the Americans also kept promoting the Iraqi cause. This was done in a
variety of ways: by renewing diplomatic relations; by providing military intelligence;
by granting low-interest loans; by encouraging Saudi financial
assistance; by asking the Gulf states and Egypt to deliver more than $1.5 billion
worth of arms and ammunition; and, finally, by allowing over $5 billion of
U.S. credit - partly guaranteed by the Agriculture Department - to be covertly
(and possibly fraudulently) used for Iraqi purchases of U.S. machinery and
technology with military and nuclear applications (Business Week, 13 July 1992;
Waas and Unger 1992). To facilitate payments for the war effort, it was suggested
in 1984 that Bechtel construct a multibillion dollar pipeline from Kirkuk to the
Jordanian port of Aqaba, so that Iraqi oil exports could bypass the hazards of
the Gulf. The undertaking was endorsed by CIA Director William Casey, but
apparently that wasn't enough. The main risk was Israel, whose war planes
could have easily blown the project out of operation. And so Bechtel lined up
an impressive battery of friends, including Swiss oil magnate Bruce Rappoport,
U.S. Attorney General Edwin Meese, and National Security Adviser Robert
McFarlane, whose role was to make sure such an attack wouldn't happen.
Rappoport, with his reputed CIA connections and long-termfriendship with
Israeli Prime Minister Shimon Peres, managed to obtain a written promise,
signed by Peres, that Israel wouldn't mess with the pipeline; this in return for
an overall premium of about $650 million, payable in ten equal annual
instalments, which would then be partly diverted to Peres' Labour Party. To
further secure the arrangement, Peres was willing to freeze in a 'salvage fund'
$400 million out of the U.S. military aid to Israel, and Meese and McFarlane
laboured to arrange that the scheme be approved by the Overseas Private
Investment Corporation (Business Week, 22 February 1988; Frenkel 1991: 30-4).
The Oil-Arms Bust
The project, however, never took off, perhaps because the flows of petrodollars
and weapondollars were themselves beginning to recede. In 1980, the volume
of Middle East oil production started to decline, and in 1982 prices followed suit.
The combined result was a steep drop in the region's oil revenues - from $197
billion in 1980 to a mere $52 billion by 1986, according to UN data. And given
the intimate link from oil exports to arms imports, the consequences for the
weapon makers were dire.
'We're all down now to nibbling crumbs', professed
a frustrated U.S. defence executive during the 1985 Paris air show:
'The damn
oil boom has gone and there is not much money around any more' (cited in
Ferrari et al. 1987: 4-5). As of themselves, these developments are not entirely
surprising. First, high oil prices induced greater energy efficiency, substitution
to alternative sources, and further exploration and output by non-OPEC
producers. Second, diversification by Saudi Arabia and Kuwait into downstream
operations brought them into conflict with the companies. And finally, the
Iran-Iraq War, previously a major source of 'risk' and 'scarcity', was no longer
viewed as a threat for Western oil supplies.
Indeed, in this sense, the situation during the early 1980s differed from the
one prevailing after the 1973 Arab-Israeli War. In the earlier conflict, the
anti-Israel alliance of the Arab countries lent credibility to their 'oil weapon' and
the threat of future shortages. By the 1980s, however, the OPEC front was no
longer united and two important members of the cartel were themselves
military foes. The disturbances occurring in the Persian Gulf, particularly the
so-called 'tanker war' and attacks on oil installations, made the oil market
nervous and perhaps exerted a positive influence on prices. Yet rivalry prevailed
instead of cooperation, and with no end in sight to the hostilities, the likelihood
of restoring OPEC's earlier cohesion seemed remote. In this respect, the
overriding need of both Iran and Iraq for new weapons and ammunition only
made things worse, since it forced both to stretch production to the limit,
creating a gushing flow of 'distress oil'. [23 footnote] And so, from a certain point onward,
the Iran-Iraq War turned from a blessing to a curse. Instead of boosting prices,
it now caused them to fall, creating a rather taxing environment for both OPEC
and the Weapondollar-Petrodollar Coalition.
Given the gravity of the situation, Saudi Arabia agreed to provide a 'cushion'
for OPEC's other members, selling its oil at the cartel's official price and
absorbing the demand shortfall. The cost, though, mounted quickly. The
kingdom had to reduce its output from 9.8 million barrels a day in 1981, to
6.5 million in 1982 and, finally, to a mere 3.2 million in 1985, but even that
failed to stabilise spot prices (OPEC Annual). Eventually, the Saudis bailed out,
and as their production rose, panic ensued and the price collapsed even further.
In 1986, with the price of crude oil heading below $10 a barrel for the first
time since 1973, the Petro-Core's rate of return once again dropped below the
big economy's average (Figures 5.7 and 5.8). And as the Middle East found
itself entering a new 'danger zone', Vice-President Bush found himself on a
mission to Riyadh, with the task of openly asking the Saudis to reconsider their
actions and reinstate lower levels of production. Bush insisted that the
government of the United States was
'fundamentally, irrevocably committed'to maintaining the free flow of oil, and that
'the interest in the United States
is bound to be cheap energy prices'. However, the Vice-President also
emphasised that '[there] is some point at which the national security interests
of the United States say, "Hey, we must have a strong, viable domestic interest"'
(New York Times, 7 April 1986).
The other reason for the Administration's concern for oil was the armament
market. Defence procurement at home started to level off after having soared
for a decade. And yet, military shipments to the Middle East, which could have
partly compensated for the shortfall, were now drying up for lack of petrodollars.
Worse still, as Table 5.3 shows, competitors from other countries were
now winning market share from American companies. In contrast to the period
until the late 1970s, when the market was more or less under the thumb of the
two superpowers, since the early 1980s suppliers from Europe and the
developing world were making significant headway. By the end of the 1980s,
these contenders saw their combined market share rise to more than 50 per
cent, double its level a decade earlier; the share of U.S. suppliers, on the other
hand, dropped to 18%, down from 48%. [24 footnote] A large part of this
decline was due to the fact that U.S. arms shipments, despite considerable
deregulation under Reagan, were still partly subjugated to 'foreign policy' considerations,
whereas in other countries they were by now completely
commercialised. And so, with the Iranian market having been lost to scandal,
and with sales to Iraq forbidden by government decree, U.S.-based firms could
only watch and see their competitors stepping in to fill the void. The lost
opportunity was immense. The Iran-Iraq War, which dragged on for much of
the 1980s, turned out to be the most expensive conflict since Vietnam, with the
belligerent countries spending over $400 billion to fight each other. And yet,
save for covert shipments, the profits from this gold mine were going not to U.S.
firms, but to their rivals. [25 footnote]
Table 5.3 Arms Exports to the Middle East
SOURCE: U.S. Arms Control and Disarmament Agency (1975 Edition, p. 70; 1980 Edition, p. 160;
1985 Edition, p. 134; 1998 Edition, p. 174); U.S. Department of Commerce, Bureau of Economic
Analysis, Statistical Abstract of the United States, 1991, Table 550, p. 340.
The 1990-91 Gulf War
With so much at stake, it was once again time for the U.S. Administration to
hype the Persian Gulf as a
'vital national interest'. In a speech given in 1987,
Secretary of Defense Weinberger reminded his audience that the Middle East
still contained 70% of the world's proven reserves. The role of the United
States, he said, was to assure the region was secure, stable and, above all, free
from Soviet influence and intervention. According to Weinberger's strict
guidelines, the American military was practically prevented from intervening
in any conflict short of a world war. The only exception was the Middle East,
where direct military intrusion was deemed warranted (Gold 1993: 76). From
a realist perspective, though, this new emphasis sounded a bit odd. Indeed,
according to the analysis laid out in Gold (1993: 75), during Reagan's second
term in office the region had become strategically less important to the U.S.
'national interest'. For one, the Soviet Union, locked into a losing war of
attrition in Afghanistan, was no longer perceived as marching toward the Strait
of Hormuz. Furthermore, although the Middle East still contained much of the
world's reserves, the expansion of non-OPEC output, greater conservation, and
new energy-saving technologies, have together made this oil less important
than before. And, finally, the experience of the Iran-Iraq War suggested that
regional conflicts could go on with oil supplies remaining cheap and plentiful.
But then, these very developments, which from the viewpoint of the U.S.
'national interest' were supposedly all good, spelled serious trouble for the
Weapondollar-Petrodollar Coalition. And so the escalation began.
Warming Up
Attempts to bolster U.S. military presence in the region began in 1984, when
Washington tried to persuade the Persian Gulf emirates to allow the installation
of American bases on their soil. The latter refused, but in 1986, when an
Iraqi Mirage fighter hit an American frigate, Washington responded by sending
aircraft carriers into the region. The Iranians retaliated by littering the Gulf
with naval mines, to which the United States answered with mine sweepers.
And, so, in 1986, when Vice-President Bush was on his mission to Saudi Arabia
in an effort to raise oil prices by peaceful means, the U.S. military was already
well on its way toward direct involvement in the region, a trajectory which
would four years later culminate in Operation Desert Storm.
The first direct target was Libya's ruler, Muammar Qaddafi, who was increasingly
blamed for fostering international terrorism. A Sixth Fleet armada of more
than 45 warships, including three aircraft carriers with over 200 planes, was
dispatched in March 1986 toward the renegade state. The official reason was
to
'enforce the principle of freedom of the seas' against Qaddafi's unwarranted
extension of Libya's territorial waters to the 32nd parallel. But as U.S. administration
officials later acknowledged, the real purpose of the operation,
code-named Prairie Fire, was rather different. The plan was to provoke a military
response by Libya, against which U.S. forces would retaliate with escalating
counter-strikes, including the destruction of the Libyan air force and bombing
raids on the country's oil fields. Qaddafi, however, failed to pick up the bait and
did not respond in any meaningful way (Montreal Gazette, 29 March 1986; Time,
7 April 1986). A new opportunity arose a month later, after a terrorist attack on
a West Berlin discotheque ended with numerous injuries and one dead
American soldier. The blame for the attack was immediately put on Libya and
the fleet was sent once again toward Qaddafi's 'line of death'. But the Libyan
ruler, to whom Reagan referred as the 'mad dog of the Middle East', held his
fire and the military exchange was limited (Time, 21 April 1986). Incidentally,
the Syrians, who were also blamed for being involved in the West German
bombing, came out against 'U.S. aggression' in Libya, and there were increasing
reports about heightening Israeli-Syrian tensions (Time, 26 May 1986). The
attempted escalation continued, when in August, information leaked by the
Administration to the Wall Street Journal suggested that the United States and
Libya were again 'on a collision course' (Time, 13 October 1986).
This policy of confrontation was presented as part of a new, stronger U.S.
stand against radical Middle East regimes. In 1987, however, Reagan abruptly
abandoned the Libyan cause, shifting his focus back to the Persian Gulf. The
official reason was again the Soviets. The 'tanker war' in the Gulf, which since
1980 had already accounted for over 300 damaged oil vessels, was suddenly
made into a top priority after the Kuwaitis requested U.S. protection for their
tankers. Initially, the Administration appeared reluctant, but then quickly
reversed its stance once the Kuwaitis turned to the Kremlin (Gold 1993: 79-104;
Darwish and Alexander 1991: 244-5). The real story, however, was more
complicated. Since the beginning of 1986, the Administration was voicing open
concerns that Iran was getting the upper hand in its six-year war with Iraq.
But, then, in November of that year, the Iran-Contra Affair began to unravel,
suggesting that part of the credit for Iran's success must go to the U.S.
Administration itself. Revelations that Reagan was both condemning and
supplying Tehran forced Washington to reiterate its anti-Khomeini stance, and
the Kuwaiti request provided the right pretext. The Seventh Fleet assumed the
role of protecting Kuwaiti tankers, and before long found itself attacking Iranian
oil installations and exchanging fire with Iranian forces.
The intensified conflict and growing U.S. involvement drew the more
moderate Gulf states deeper into the militarisation process. Countries such as
Saudi Arabia, Kuwait, Oman and the United Arab Emirates were now looking
to buy more U.S.-made weapons, which the White House was only too happy
to supply. [26 footnote] The Congress, though, being far less forthcoming than the
Administration, managed to block several large deals, forcing the Gulf states to
look for alternative sources. [27 footnote] The biggest setback for the U.S. companies was
the 1988 'deal of the century', in which the United Kingdomagreed to supply
Saudi Arabia with $25 billion worth of military hardware, construction and
technical support over the next two decades (Business Week, 12 September 1988).
The end of the Iran-Iraq War in 1988 opened new business opportunities for
companies which could help rebuild the war-shattered infrastructures of the
two countries. The scope of the work was substantial - estimated at the time in
excess of $200 billion - but then here too U.S. corporations found themselves
facing stiff competition from non-U.S. rivals (Business Week, 29 August 1988).
'Danger Zone'
The Bush presidency, which began in 1989, provided continuity for the
Weapondollar-Petrodollar Coalition in Washington. Some of the Coalition's
representatives were by now gone, but their successors were in most cases
equally aware of the oil and armament interests at stake. These included, in
addition to oil millionaire George Bush, people such as Nicolas Brady, who
previously ran Dillon, Read & Company when it was controlled by Bechtel,
and who was now nominated Treasury Secretary; Robert Mosbacher, an oil
businessman who now became Secretary of Commerce; and James Baker, a
lawyer with deep ties to the oil business, who previously served under Ford
and Reagan, and was now made Secretary of State (during the 1990s, Mosbacher
and Baker returned to the private sector as special consultants to the energy
giant Enron). Bush also wanted John Tower to become Secretary of Defense,
but the former senator, who acted as retainer for five defence contractors, failed
the conformation hearings. Eventually, the post went to Richard Cheney, a
strong supporter of 'Star Wars' and the Contra rebels, who would later become
Vice President under George Bush's son.
The Middle East situation, however, remained precarious for the Coalition.
Despite the Administration's loyalty and its greater military involvement in
the region, the price of oil did not recover significantly, the Petro-Core's rate
of return was still in the 'danger zone', and demand for foreign weapons was
stuck in the doldrums. The gravity of the situation was succinctly summarised
in February 1990 by the head of CENTCOM, General Norman Schwarzkopf.
Appearing in front of the Senate Armed-Forces Committee, Schwarzkopf, whose
father had previously set up the dreaded Iranian SAVAK, explained the crucial
and growing significance of Middle East oil. The region, he warned his audience,
had 13 ongoing conflicts, and if any one of them were to develop into a fullfledged
war, the consequences for the West could be dire. Despite this danger,
though, he strongly recommended that the United States increase its military
exports to the region in order to match disturbing advances made by foreign
competitors. On the day of Schwarzkopf's speech, a
'prime Pentagon source'
suggested to the Wall Street Journal that the Administration, now that the
East-West conflict was over, should divert funds from defending Europe to
protecting Saudi Arabia (cited in Frenkel 1991: 9-13). The background for these
pressures was succinctly summarised two months later by an unnamed
Pentagon official:
"No one knows what to do over here. The [Soviet] threat has melted down on
us, and what else do we have? The navy's been going to the Hill to talk about
the threat of the Indian navy in the Indian Ocean. Some people are talking
about the threat of the Colombian drug cartels. But we can't keep a $300
billion budget afloat on that stuff. There is only one place that will do us as
a threat: Iraq." (cited in Cockburn and Cockburn 1991: 354-5)
And, indeed, a month later Saddam Hussein finally made his move, beginning
to threaten his Gulf neighbours with the dire consequences of their oil policies.
After the end of the Iran-Iraq War, Hussein found himself between a rock and
a hard place. His country was devastated, overburdened by $80 billion in foreign
debt, and deprived of petrodollars. In order to rebuild his economy and army,
he demanded that the Gulf states, which in his view benefited from Iraq
fighting the fundamentalist threat for them, should now foot up the bill,
forgiving their Iraqi loans and providing him with even more funds (Darwish
and Alexander 1991: Chs 9-11). In parallel, he also insisted that OPEC should
get its act together by reducing output and raising prices. Needless to say,
neither policy sat well with his neighbours. First, they had no desire to help refortify
Iraq only to see its claws eventually turned against them (Darwish and
Alexander 1991: 256-65; Frenkel 1991: 15-18). And, second, some of the Gulf
states, particularly Saudi Arabia and Kuwait, were by now sufficiently diversified
into downstream operations to benefit from more moderate prices (Business
Week, 3 July 1988, 21 January 1991). Seeing that the differences could not be
settled peacefully, Hussein eventually decided to take Kuwait over. On paper
at least, this would have helped him kill two birds with one stone - enlarging
his own fiefdom while simultaneously limiting overproduction by 'merger'.
The only problem was that there was a much bigger picture to consider, and
here Hussein's calculations proved fatally wrong.
By July, with the build-up of Iraqi forces along the Kuwaiti border becoming
all too evident, the United States deployed several combat ships on joint
manoeuvres with the United Arab Emirates. But except for these drills its
message to Iraq was ambiguous and, at times, even encouraging. To learn more
on the American position, Hussein summoned the U.S. ambassador, April
Glaspie. In the interview which was held on 25 July, a week before the invasion,
Hussein explained his grievances against Kuwait, noting quite explicitly that
Iraq intended to
'take one by one' its disregarded rights. Glaspie replied that the
dispute was an internal Arab matter on which the United States had
'no
position', and that she had a
'direct instruction from the President to seek better
relations with Iraq'. When Hussein mentioned his demand that OPEC push
the price of oil over $25 per barrel, Glaspie chose to respond that there were
also many Americans who would like to see the price go above that level. On
28 July, Bush reportedly sent a message to Hussein that the use of force against
Kuwait was unacceptable, but three days later his Under-Secretary of State Kelly
said to reporters that the United States had
'no defence treaties with any Gulf
countries'. On 1 August, despite the CIA's conclusion that an Iraqi attack was
imminent, the United States still failed to voice any explicit warning (Darwish
and Alexander 1991: 267-75).
Back on Top
The American stance changed drastically, however, once the Iraqis began
crossing the Kuwaiti border on 2 August. Three days after the invasion, Defense
Secretary Cheney and General Schwarzkopf convinced the Saudi royal family
that their kingdom was Hussein's next target - a most implausible presumption
by all counts as U.S. officials later admitted - persuading them to invite the
deployment of 'infidel' forces on their land, something which until then the
Saudis always managed to avoid (Woodward 1991: Ch. 19). During the
following months, Hussein apparently attempted to seek a face-saving
diplomatic solution, but to no avail. For the Americans, the opportunities
offered by open confrontation were simply too great to give up.
And, indeed, the consequences of the war were highly beneficial for the
Weapondollar-Petrodollar Coalition. The initial rise in the price of crude oil -
from around $14 per barrel in 1990 to near $40 just before the onset of
Operation Desert Storm - helped pull the Petro-Core's profitability above the
big economy's average (see Figures 5.7 and 5.8). In 1991, the price per barrel
declined to an average of $22 (which, incidentally, was not much below what
Hussein demanded on the eve of his invasion), but that was still sufficient to
keep the Petro-Core out of the 'danger zone'. [28 footnote] The price revival raised Middle
East oil revenues, and although their level was still far below that of the early
1980s, the anxiety created by the war, particularly in Saudi Arabia and the
adjacent sheikdoms, caused them to nervously convert more of their petrodollars
into weapondollars.
And this time, the main beneficiaries were U.S. firms, whose exports to the
region in the two years following the war jumped by 45%, according to
the U.S. Department of Commerce. Part of the increase was in the export of
civilian goods and services, mainly to Kuwait. During its short occupation, the
Iraqi army engaged in systematic plunder, stealing according to some estimates
$20-50 billion worth of Kuwaiti property. In addition, it also left behind war
damages whose repair cost was projected at $100 billion. Perhaps not surprisingly,
some of the largest reconstruction contracts went to Bechtel, beginning
with a $1 billion task of extinguishing the 650 oil fires ignited by the retreating
Iraqi army, and continuing with the multibillion-dollar job of restoring oil
production, repairing refineries and rebuilding damaged infrastructure (Business
Week, 18 February 1991, 6 March 1991, 11 March 1991, 17 February 1992;
Fortune, 25 March 1991). Most of the export increase, however, was in the
category of military goods and services, which rose dramatically to reinstate
the United States once again as the region's prime supplier (see Table 5.3).
On 6 March 1991, while addressing a joint session of Congress after the Iraqi
surrender, George Bush exclaimed that
'it would be tragic if the nations of the
Middle East and Persian Gulf were now, in the wake of the war, to embark on
a new arms race' (New York Times, 7 March 1991). Then, on 30 May, he went
further, calling the major arms-exporting countries to establish guidelines
'for
restraints on destabilizing transfers of conventional arms' to the Middle East
(New York Times, 30 March 1991). In parallel, however, the President also
insisted it was
'time to put an end to micro-management of foreign and security
assistance programs, micro-management that humiliates our friends and allies
and hamstrings our diplomacy' (New York Times, 7 March 1991). To help erase
some of the traces of such 'micro-management', in which both he and Ronald
Reagan were explicitly implicated, Bush granted pardon in 1992 to six key
figures in the Iran-Contra Affair, including a pre-emptive one to former Defense
Secretary Casper Weinberger whose trial was just about to begin. Then, in line
with the eternal principles of free enterprise, the Administration instructed
American embassies to expand their assistance to U.S.-based military
contractors, and even proposed to alter the 1968 Arms Exports Control Act, so
that the Export-Import Bank could guarantee $1 billion in loan-financing for
U.S. arms exports (U.S. Congress 1991: 21; New York Times 18 March 1991). [29 footnote]
True to the time-honoured strategy of 'stabilisation through military exports',
Bush proposed in January of 1991, while the Gulf War was still going, that the
United States sell Saudi Arabia over $20 billion worth of armament - a deal so
large that the Administration eventually had to 'slice' it into smaller pieces,
for easier Congressional digestion (U.S. Congress 1991: 21).
And, so, by 1990, after a decade of losing ground to rival sellers, the United
States, helped by falling exports fromthe former Soviet Union, was oncemore
the largest weapon exporter to developing countries. The American comeback
was especially pronounced in the Middle East - so much so that it prompted
British officials to openly complain that the United States was 'monopolizing'
the region's arms trade (The Independent, 13 December 1992). The Gulf War
also helped reinstate the primacy of petroleum companies vis-à-vis their host
countries. The previous political arrangement, with OPEC in the spotlight and
the oil in the background, no longer seemed to work. Despite the region's
militarisation, producing countries were increasingly acting at cross purposes,
with Saudi Arabia, the companies' principal ally, unable to bring them back
into line. And so, here too the war helped put things back in order. The region's
most important suppliers - notably Saudi Arabia, Kuwait and surrounding
sheikdoms - were now signatories to defence treaties with the United States and
Britain, which effectively subordinated their oil policies to U.S. dictates. Iraq
was put out of circulation by UN sanctions, and with Iran still isolated, the
risk of glut was significantly limited. On the surface, then, the
Weapondollar-Petrodollar Coalition looked ready to roll. But in fact, this was
to be its last victory, at least for the time being. After the Gulf War, the 'danger
zone' opened up once more, with oil profits falling below the average. And
yet, this time around there was no new energy conflict to pull these profits
back up.
The Demise of the Weapondollar-Petrodollar Coalition
The New Breadth Order
Compared with the 1970s and 1980s, the 1990s were far less hospitable to
weapon dealers and oil profiteers. During the earlier period, dominant capital
in the developed countries found itself well extended within its respective
envelopes, its breadth potential being restricted by the post-war legacy of
statism, by antitrust policies, and by capital controls. Given these barriers, differential
accumulation concentrated mainly on stagflationary depth, whose
main promulgators and principal beneficiaries were members of the
Weapondollar-Petrodollar Coalition. But this constellation was inherently
temporary. For most large firms, stagflation was a stopgap measure, to be
abandoned once the pendulum swung back to breadth.
The basic conditions for renewed breadth were laid down in the late 1980s.
Soviet economic liberalisation, the abandonment of import substitutions in
much of the developing world, and the retreat of statism in the industrialised
countries, worked to dismantle barriers on capital mobility and ease antitrust
sentiments. And with controls falling apart, large firms were now more than
eager to break their last, national 'envelope', moving toward integrated global
ownership. [30 footnote] The differential prize was substantial. For the winners, gains from
cross-border mergers and acquisitions, bolstered and replenished by green-field
prospects in the developing countries, were far greater than the increasingly
risky benefits from war profits and stagflationary redistribution. And as the
world began shifting back to breadth, the symptoms of depth receded rapidly:
world inflation fell to less than 5% in 1999, down from over 30%
at the beginning of the decade; international hostilities were actively curtailed,
with the number of major conflicts falling to 25 in 1997, down from 36 in
1989; and military budgets the world over came under the axe, dropping by
over one-third in real terms from their peak in the late 1980s. [31 footnote]
The Middle East, an epicentre for conflict and stagflation during the global
depth phase, was greatly affected by this renewed breadth. The disintegration
of the Soviet Union and the end of the Cold War robbed local wars of their
international raison d'être. In parallel, the petrodollar boom, which earlier fuelled
the region's military arsenals, turned into bust, making conflict difficult to
sustain. The decline in oil prices and revenues also had dramatic domestic
implications. Until the early 1980s, the oil bonanza helped local rulers tranquillise
their domestic populations with a cocktail of large public spending and
extensive internal security budgets. But with the peace blitz pulling the rug
from under oil prices, the technique became expensive. According to World
Bank data, GNP per capita in the Middle East and North Africa, measured in
constant U.S. dollars, fell to 35% of the world's average in 1998, down
from 42% in 1979, with the predicament being particularly severe in
the Gulf countries, where per capita income, again measured in constant dollars,
dropped by as much as 50-80%. Starved of revenues, governments were
forced to cut their budgets, and as spending declined, internal opposition, particularly
from 'Islamic fundamentalism', intensified. The region's autocratic
rulers were of course willing to fight such opposition nail and tooth, even with
less resources. And yet, here too, global circumstances, particularly the
ideological shift from statism to liberalism, put them on the defensive,
weakening their self-confidence and compromising their resolve. And so, before
long, many of them found themselves between a rock and a hard place. No
longer awash with petrodollars, unable to pit one superpower against the other,
and bogged down by domestic instability, their only way to survive was to
accept U.S. protection. Those who refused, such as Libya and Iran, were doomed
to isolation, whereas those opting for independent 'initiatives', such as Iraq
with its invasion of Kuwait, risked severe punishment.
Israel, too, was caught largely off guard. Although its dominant capital was
not directly dependent on oil, its domestic depth regime of militarised
stagflation was intimately linked to the regional cycle of energy conflicts. Until
the late 1980s, the local ruling class was still struggling to retain this regime,
although its resolve, like that of other elites in the region, was severely
weakened. The immediate reasons were the Palestinian Intifida, the collapse of
the world market for arms exports, and increasing domestic macroeconomic
instability, which, as we saw in Chapter 4, have together contributed to a
massive differential accumulation crisis. The more fundamental reason, though,
was the growing realisation that depth had come to an end. Global conditions
now required a new mechanism of accumulation, and possibly the restructuring
of dominant capital itself.
The most important change in mechanism was a shift away from military
conflict. On the surface, the transition seemed perplexing, even surreal. George
Bush, a Weapondollar-Petrodollar loyalist, who only a few years earlier was
busy promoting the Iran-Iraq conflict, and who had just completed a classic
sting operation against Iraq, was now announcing in great fanfare the onset of
a
'new world order' built on Middle East peace. Israeli and Arab leaders
responded quickly, switching from bullets to business as if they had no
animosity to overcome. And before the world could catch its breath, Prime
Minister Rabin and Chairman Arafat were shaking hands on the White House
lawn, celebrating the mutual recognition of their embattled nations.
The basic preconditions for this transition, though, were taking shape far
from the troubled sands of the region, in the boardrooms of the world's largest
corporations. Much like during the earlier transition from breadth to depth,
the current swing from depth back to breadth was also accompanied by a
fundamental power shift within dominant capital. Whereas earlier, the
transition strengthened the 'angry elements' of the Weapondollar-Petrodollar
Coalition, this time, it was civilian business which took the lead.
The Last Supper (Almost)
The Weapondollar-Petrodollar Coalition of course didn't give up easily. During
the 1990s, it spent much time and effort trying to regroup and consolidate
through corporate amalgamation, usually with full government backing. The
consequence of this process was a massive centralisation in both the armament
and oil sectors, culminating in the emergence of huge corporate 'clusters',
illustrated in Table 5.4.
Table 5.4 The World's Largest Weaponry and Oil Companies, 1999 (with major acquisitions/mergers during the 1990s)
SOURCE: Defense News (various issues); Financial Times Survey of Aerospace, 24 July 2000; Fortune; Moody's (Online); Charles Grant, 'A Survey of the Global Defence Industry',
The Economist, 14 June 1997; newspaper clippings.
In the armament sector, amalgamation was kick-started
in 1993 when U.S. Defense Secretary Les Aspin invited the CEOs of the country's
leading contractors to their 'Last Supper'. Military spending, he said, was poised
for further declines, and with less orders to go around, the Clinton
Administration wished to see its suppliers start merging. To speed up the
process, the government relaxed its antitrust stance, and even reimbursed the
merged firms for their amalgamation costs. It also declared that, when it came
to military exports, foreign policy objectives would from now on take a back
seat to profit considerations (Grant 1997). And so, over the next few years, the
companies were busy buying each other out, until, in 2000, there emerged a
clear pack of five leaders: Lockheed Martin (which now combined Lockheed,
Martin Marietta, Loral, and much of the military lines of General Dynamics
and General Electric); Boeing (which acquired McDonnell Douglas and
Rockwell's aerospace defence electronics); Raytheon (which added E-Systems
and the military arms of Texas Instruments and Hughes); General Dynamics
(which sold many of its original military lines only to buy others from Teledyne,
Lucent, GTE and Gulfstream); and Northrop Grumman (which combined
Northrop and Grumman, along with the military lines of LTV and
Westinghouse). Of the 16 companies which we used as a proxy for the Arma-
Core, only 8 remained as independent contractors; the rest were either taken
over or divested of defence holdings altogether.
And once centralisation had run its course in the U.S., the focus shifted to
Europe, where in a matter of three years it gave rise to three Pan-European
giants: BAE, EADS and Thomson. The European process was particularly
noteworthy, since it involved cross-border amalgamation and significant privatisation
in countries with strong statist traditions. The biggest amalgamate
was created by UK-based British Aerospace (BAE), which took over Marconi
from GEC plc., bought AES from U.S.-based Lockheed Martin, and acquired a
minority stake in the Swedish-based Saab. In parallel, BAE also entered into
various joint ventures with the newly formed European Aeronautic Defence
and Space Company, or EADS. The latter conglomerate was created in 2000, by
pooling together the various defence interests of DASA (formerly
DaimlerChrysler Aerospace), France's Aerospaciale and Lagardère, and Spain's
Arianespace. When EADS was formed, its largest shareholders were
DaimlerChrysler, Lagardère, and the governments of France and Spain, but
over 27% of its stock were already publicly listed, with further privatisation
to come. The third European giant, Thomson-CSF, was owned jointly
by the French government, Alcatel, and Dassault Industries, with another onethird
of the stocks trading freely on the market and additional privatisation in
the pipeline.
The global oil sector went through similar centralisation. Unlike in defence,
the process here was not openly promoted by governments, although few of
the mergers faced any serious antitrust opposition. The major deals of the 1990s,
listed in Table 5.4, included the acquisition of Mobil by Exxon to create Exxon-
Mobil, of Amoco and Atlantic Richfield by BP, now named BP-Amoco, and of
Fina and Elf Aquitaine by Total, now called Total Fina Elf. [32 footnote]
The differential financial consequences of these mergers were dramatic. The
world's six largest oil firms listed in Table 5.4 had 1999 sales of $513 billion,
25% more than the six companies making the Petro-Core in its peak
year of 1990; and $27 billion in net profit, 24% above the Petro-Core's
record of 1980. In the armament sector the picture was more mixed. In 1999,
the world's seven largest defence contractors listed in the table had $84.4 billion
in defence revenues, compared with $61.3 billion for the 16 Arma-Core firms
in their peak year of 1985. Their net profit, however, was only $2.5 billion,
compared with the Arma-Core's record of $9.9 billion in 1989.
The problem for the large oil and armament companies here was that, by
now, they controlled much of their universe, and that this universe was either
growing slowly (as in the case of oil), or contracting (in the case of defence).
Under these circumstances, internal breadth through amalgamation was
inherently self-limiting, so that in this sense, government encouragement of
greater centralisation merely pushed the Weapondollar-Petrodollar Coalition
further toward its sectoral envelope. Beyond that point, continued differential
accumulation for the Coalition depended on renewed conflict and stagflation
boosting up overall profits. And yet, from the viewpoint of dominant capital
as a whole, that route was unattractive, and in fact dangerous. By the early
1990s, civilian business offered much better ways to beat the average.
Furthermore, the new civilian avenues required relative openness and stability,
the very opposite of the conflict and stagflation with which the
Weapondollar-Petrodollar Coalition fuelled the earlier depth regime.
Figure 5.9 Share of Standard & Poor's 500 Market Capitalisation
SOURCE: McGraw-Hill (Online). DRI codes: SPAEROMV, SPOILDMV, SPOILIMV for
Weaponry and Oil, SPHTECHMV for 'High-Tech'.
The greater lure of civilian business is illustrated in Figure 5.9. The chart
contrasts two series, each measuring the market capitalisation of a given
corporate cluster, expressed as a share of the Standard & Poor's 500 (S&P 500),
a widely used index for the largest firms listed in the United States. [33 footnote] The first
series denotes the proportionate share of 26 leading aerospace and petroleum
companies, a proxy for what earlier constituted the Weapondollar-Petrodollar
Coalition. The second series, focusing on civilian business, measures the
comparable share of 54 leading 'high-technology' companies. The focus on
relative market capitalisation is indicative of how global investors view the
future course of differential accumulation, and where profit growth is expected
to be the fastest. From this perspective, the inverse movement of the two series
points to a dramatic change occurring during the 1990s. Until the late 1980s,
dominant capital was still under the fading eclipse of the Weapondollar-
Petrodollar Coalition, with its representatives included in the chart accounting
for close to 11% of the S&P 500 total capitalisation. The 'hightechnology'
sector was relatively small, with less than 8% of the total.
Over the next decade, however, the situation has totally reversed. The
armament and oil firms saw their relative share drop to about 5% of the
S&P 500, whereas that of the 'high-technology' companies soared to a peak of
nearly 34%. In 2000, 'high-technology' stocks collapsed, but even after
the calamity, the sector's capitalisation was still three times larger than that of
armament and oil combined. This picture is of course somewhat skewed by
the much richer valuation of 'high-technology' companies, whose relative
earning growth has so far lagged behind their differential capitalisation.
Nonetheless, it seems evident that the Weapondollar-Petrodollar Coalition has
lost its earlier primacy, and that the centre of gravity, at least for now, has
shifted back to civilian business.
The fading power of the Weapondollar-Petrodollar Coalition was mirrored
in the Middle East. During the 1990s, attempts to kick-start a new 'energy
conflict' seemed to go nowhere. Every summer, tensions in the region would
rise, sometimes pulling oil prices up with them, but never enough to build up
momentum. During the early part of the decade, the main excuse were Iraqi
ceasefire violations, to which the United States and Britain eagerly retaliated
with aircraft and missile attacks. The situation again looked on the brink of
war, when in September 1994, Washington announced that Saddam Hussein
had dispatched an 80,000-strong force toward the Kuwaiti border, prompting
President Clinton to send 60,000 soldiers and 600 aircraft back to the Gulf. But
like Muammar Qaddafi before him, the Iraqi ruler preferred to ignore the 'smart'
missiles and held his fire. Since then, numerous other enemies have appeared
on the scene, from a nuclear Iran, to the Lebanese Shiites, to Islamic terrorism.
And yet, despite the hyped rhetoric and ongoing hostilities - including the
recent U.S.-led attack on Afghanistan - none of this has so far managed to significantly
affect the price of oil.
The Gulf War was the Last Supper of the Weapondollar-Petrodollar Coalition,
at least for the time being. During the 1990s, dominant capital as a whole was
increasingly seeking cross-border expansion, a process which required tranquillity,
not turmoil. Given that military conflict endangered such expansion,
and that high energy prices threatened to choke the green-field potential of
'emerging markets', the Weapondollar-Petrodollar Coalition found itself
increasingly isolated. And with depth giving way to breadth, it is perhaps not
surprising that the 'national interest' itself was conveniently modified. As
Business Week put it,
'The President has recognised that, in the post-cold-war
era, getting global contracts for U.S. business is a matter of national security'
(23 April 1994).
This neoliberal version of the national interest was eventually challenged by
the 2001 attack on the Twin Towers and the Pentagon. Before turning to the
present crossroad, however, we need to first travel through the transnational
breadth phase of the 1990s.
- – Jonathan Nitzan & Shimshon Bichler
The Global Political Economy of Israel
by Jonathan Nitzan and Shimshon Bichler
Pluto Press
LONDON • STERLING, VIRGINIA
First published 2002 by Pluto Press
345 Archway Road, London N6 5AA
and 22883 Quicksilver Drive, Sterling, VA 20166-2012, USA
www.plutobooks.com
Copyright © Jonathan Nitzan and Shimshon Bichler 2002
The right of Jonathan Nitzan and Shimshon Bichler to be identified as
the authors of this work has been asserted by them in accordance
with the Copyright, Designs and Patents Act 1988.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0 7453 1676 X hardback
ISBN 0 7453 1675 1 paperback
See review, at Monthly Review
Please note:
All books referred to are listed in the Bibliography of The Global Political Economy of Israel.
Footnotes:
- We ignore here parallel listings of subcontracting, foreign military sales, and contracts
awarded by NASA and the Department of Energy. These contracts are significant, but
their recipients tended to be the same as the DoD's prime contractors
- Excluded from the sample is Hughes Aircraft which, as a privately held firm until 1986,
did not publish financial reports. Also omitted are General Motors, which entered the
Arma-Core only in 1986 after acquiring Hughes Aircraft; LTV, which filed for bankruptcy
protection in 1986; and Tenneco, whose annual contract awards fluctuated widely
- In the electronics industry, for instance, General Electric embarked on a major restructuring
programme which, over the 1981-87 period, saw the company acquire some
338 business and product lines, while divesting 232 others (Business Week, 16 March
1987). The process, whose main goal was to move away from markets dominated by
the Japanese, included the 1985 acquisition of RCA, particularly for its defence business,
and the 1986 swap of GE's consumer electronic lines for Thomson's medical equipment
unit (Time, 23 December 1985; 3 August 1987). In 1992, General Electric sold its
defence electronics unit to Martin Marietta, but in turn became a major shareholder
of the latter company (Business Week, 7 December 1992). In the aircraft industry,
Lockheed left commercial aviation altogether, after its entanglement with the L-1011
airliner brought it to near bankruptcy. Similarly, McDonnell Douglas, which was
initially created in 1967 when McDonnell absorbed Douglas as a means of diversifying
into non-defence activity, never made any money from civilian aircraft, and, in
1991, entered into a tentative agreement to sell 40% of its civilian unit to Taiwan
Aerospace (Business Week, 14 February 1983; 23 May 1988; 2 December 1991). The deal
failed to go through, and McDonnell Douglas was eventually absorbed by Boeing, which
sought to bolster its position against Europe's Airbus consortium. Similar retreats
plagued the automobile industry, where pressures from Japanese competition pushed
U.S.-based firms back into defence-related activity. The most publicised move here was
General Motors' acquisition of EDS and Hughes Aircraft, which during the 1980s turned
the 'car company' into one of the country's top ten defence contractors
- Symbolically, if (MS) is overall military sales, (MSd) is domestic sales, (MSe) is export
sales, and (v) is the ratio between the export and domestic markups, then the relative
contribution of military exports to military-related profit (RC) is given by the following
expression:
RC = (v · MSe) / (v · MSe + MSd)
- Earlier pre-crisis studies are also not without fault.
For example, in his work Multinational
Oil, Jacoby (1974: 245-7) showed that the large oil companies suffered a significant
decline in their foreign profitability, which he attributed to increased competition since
the mid-1950s. Jacoby's methodology and implications are questionable, however. First,
much of the decline of international profits in the 1950s was rooted not in more intense
competition, but in higher royalties to host countries. Second, since the royalties were
debited as foreign taxes against the oil companies' domestic operations, focusing
only on foreign operations serves to conceal the compensating increase in domestic
after-tax earnings. Indeed, as Blair (1976: 193-203, 294-320) demonstrated, the
decrease in the companies' global rate of return was far smaller than the one recorded
in their operations abroad. Furthermore, global profitability started to rise again in
the early 1960s and, by the early 1970s, was already far higher than in the early 1950s
- Our own notion of 'politicisation' here is completely different from the realist concept
of
'petro-political cycles' developed by Wilson (1987). According to the latter, during
a sellers' market, producing countries are able to politicise the market in order to raise
prices. During a buyers' market, on the other hand, Western countries are content letting
competition reign, so as to bring prices down. Clearly, this focus on states does not allow
for a transnational political coalition between the U.S. government, OPEC, the oil
majors and the large armament contractors, along the lines developed in this chapter
- The extent of the companies' control during that time is well illustrated by their ability
to contain the threat of oil glut throughout the Great Depression. During the 1930s,
the Iraqi Petroleum Company - a joint venture between British Petroleum, Royal
Dutch/Shell, CFP, Exxon, Mobil, and 'Mr 5%', Calouste Gulbenkian - exercised
a Veblenian policy of 'watchful waiting' throughout much of its 1928 Red Line
Agreement regions. In Iraq, for example, the company actively utilised only 1%
of its concession; in Qatar it delayed production until 1950, some 18 years after the
first exploration; and in Syria, it drilled shallow holes in order to fulfil its concession
charter without producing any output (Blair 1976: 80-6)
- Indeed, many policy initiatives were cancelled solely due to opposition from the large
companies. For example, during the Second World War, the large firms objected to
the Petroleum Reserve Corporation taking control over their joint Saudi holdings, much
as they opposed the Anglo-American Oil Agreement and the Saudi Arabian Pipeline.
The big companies also refused to allow independent companies more than a symbolic
share in the 1953 Iranian Consortium; they objected the 1970 Shultz Report which
suggested to substitute tariffs for the dated system of import quotas; and they ignored
the Administration's request to accommodate Libyan demands for a higher price. As
a result, none of these policies and suggestions came to fruition (see Blair 1976:
220-30; Krasner 1978a: 190-205; and Turner 1983: 40-7, 152-4)
- Conceptually, we should have contrasted arms imports with the region's net income
from oil exports, rather than with the overall value of its oil output. The latter measure
is broader, including, in addition to net export income, also production costs and the
value of domestically consumed oil. Furthermore, our own measure here is imputed
as the product of physical output multiplied by the average spot price, rather than
measuring the actual revenues received. We use this proxy nonetheless because it is
available consistently for the entire period, and since it correlates very closely with
various net income series which are unfortunately available for only shorter sub-periods
- Some of these connections involved the Texas oil associations of Vice-President
Johnson, the southwestern and international oil affiliations of Secretary of the Navy
Connally, the Rockefeller links of Secretary of State Dillon, and the long-term
business partnership between CIA director McCone and the Bechtel family (Engler
1977: 57-8; McCartney 1989)
- According to former Israeli ambassador to the United States, Abba Eban, many in
the State Department were convinced of Israel's military superiority and ability to
win a 'crushing victory' already in the 1950s (Eban 1977: 185). After the 1967 War,
IDF generals such as Ezer Weitzman, Benjamin Peled and Yitzhak Rabin, admitted
quite openly that Nasser had presented no real danger. Ten days before the war, a
secret CIA report delivered to Johnson accurately predicted an Israeli victory within
six days. Some U.S. officials who hoped to avert a war communicated these assessments
directly to Jordan and Egypt and, indeed, until the last moment, Nasser still
hoped for a diplomatic resolution (Cockburn and Cockburn 1991: 140-54)
- While official crude prices had not changed, fuel prices for Western consumers rose,
thus boosting the profits of the oil companies while undermining them elsewhere
in the economy
- On Nixon's campaigns, see Sampson (1975: 205-6) and Sampson (1977: 151-2,
195). On Kissinger, see Barnet (1983: 178-9). Representatives of Rockefeller's Chase
Manhattan were involved in the network of activists around Nixon's career, and some
of them accepted key posts in his administration. Paul Volker, for example, was made
Under Secretary of the Treasury for Monetary Affairs; John Letty became Assistant
Secretary of the Treasury; and Charles Fiero became Director of the Office of Foreign
Direct Investment in the Commerce Department (Barnet and Müller 1974: 251;
Turner 1983: 105)
- During the 1962-66 period, Israel's annual weapon imports averaged $107 million.
After the 1967 War, with the United States replacing France as the main supplier,
the average almost tripled to $290 during 1967-69, and in 1970-72, with the Nixon
Doctrine starting to kick in, it rose further to $550 (unpublished data from Israel Central
Bureau of Statistics, courtesy of Reuven Graff)
- Allegations that the U.S. government was promoting higher prices as a primary
means of funding U.S. arms deliveries to the Shah were put forward on the CBS
programme Sixty Minutes (3 May 1980). Kissinger, though, declined to comment (Chan
1980: 244). Kissinger was also closely associated with Rockefeller's Chase Manhattan,
and it is not far fetched to assume he also contemplated the benefit for the bank
from higher petrodollar deposits (Ha'aretz, 2 January 1981)
- Israel was compensated for its withdrawal from the Sinai peninsula with two new
airfields in the Negev desert worth $2.2 billion, and a 'reorganisation' package of 15
F-15 and 75 F-16 aircraft valued at $1.9 billion. The Egyptians were allowed to
purchase 50 F-5 fighter aircraft worth $400 billion (with an option to buy more
advanced ones later), and the Saudis bought another 60 F-15s worth $2.5 billion
(Ha'aretz, 3 April 1983). Cyrus Vance, who participated in the negotiations as Carter's
Secretary of State, was later nominated a director of General Dynamics, one of the
deal's principal winners
- The allegations about a deal between Iran and the
Reagan campaign headquarters were first made by Gary Sick and others
(New York Times, 15 April 1991; Sick 1991)
- Earlier, Haig served as Nixon's Deputy Assistant for National Security Affairs, as well
as the White House Chief of Staff, but his leverage was now much stronger. Shiff
and Yaari (1984) allege that it was he who gave Israel's Defence Minister Sharon the
'green light' to invade Lebanon in 1982. United Technology, to which Haig later
returned as a special consultant, exported helicopters and aircraft engines to the Middle
East. Haig was able to persuade the Israeli government to install United Technology's
engines in its proposed Lavi aircraft - although the IDF preferred the alternative engines
made by General Electric. Eventually General Electric came out on top. While the
Lavi got cancelled, the Israeli air force, with the help of hefty bribes to IDF Brigadier
General Rami Dotan, decided to equip its F-16 fighters with GE engines
- During the 1980s, the Bechtel family owned about two-fifths of the company's
shares, with the remainder spread among the firm's senior managers. The company
had to be excluded from our statistical analysis due to lack of publicly available data
- Supplying arms and equipment to the U.S. army during the Second World War, John
McCone and his partner Steven Bechtel Sr. managed to earn in only a few years over
$100 million on an investment of less than $400,000; certainly a remarkable achievement,
even by the loose standards of war profiteering (McCartney 1989: 70)
- Perhaps the largest bribe was the $200 million paid to Saudi officials in return for
the $3.4 billion contract to build the new airport in Riyadh. The earliest covert operation
involved the Syrian coup of 1949, after the Syrian government raised obstacles to
the construction by Bechtel of a Saudi-Syrian pipeline
- The petroleum sector was a double winner under Reagan. Whereas over the 1960-80
period its effective tax rate rose from 11 to 29% on an average annual profit
of less than $7 billion, during the next five years earnings rose to $27 billion
annually, while effective taxation dropped to 18% (computed from the U.S.
Department of Commerce through McGraw-Hill Online)
- Spending on the war was partly financed by foreign assistance, with Khomeini
supported by both Syria and Libya, and Iraq allegedly receiving $30-60 billion in
cash and replacement oil from Saudi Arabia and other Gulf states (Business Week, 4
June 1985; Stockholm International Peace Research Institute 1987: 303). This aid,
however, was hardly sufficient for the task at hand, leaving the two countries no
choice but to prime the pump
- During the 1990s, U.S. producers recovered the lost ground, although according to
realist thinking they should have done far better. Indeed, with their country being
the world's sole hegemon now that the Soviet Union was no more, what was to prevent
them from kicking their competitors completely out of the picture? But then, the
question itself is misguided. By now, U.S., European and Japanese contractors have
grown increasingly intertwined through complicated supply chains and transnational
cross-ownership, so that their 'state' allegiance was not always obvious. Also, and as
we shall see at the end of the chapter, the U.S. 'national interest' was itself starting
to shift from weaponry to other business, making competition over Middle East arms
contracts seem less important
- Some estimates suggest that Iraq imported about $40 billion worth of arms during
the period from 1980 to 1986, while Iran's foreign purchases amounted to $30
billion. The overall stake of covert U.S. shipments in these totals must have been
limited. The prime suppliers for the war were based in France, the United Kingdom,
West Germany, Italy, South Africa, the Soviet Union, China, North and South Korea,
Vietnam, Israel, Taiwan and Brazil (Business Week, 29 December 1986; for a full list
of the 52 known participating countries, see Stockholm International Peace Research
Institute 1987: Table 7.8, pp. 204-5). According to Jane's Defence Weekly, Iraq even
supplied Iran, reselling to the latter through private dealers heavy weapons previously
captured in the fighting (reported in Stockholm International Peace Research Institute
1987: 307). For detailed accounts of the arming of Iraq during and after the Iran-Iraq
War, see Darwish and Alexander (1991: Chs 4-6) and Timmerman (1991)
- In 1988, the Administration suggested increasing U.S. arms exports by $3.3 billion,
to a level exceeding $15 billion - with proposed shipments worth $3.6 billion to Israel,
$2.7 billion to Egypt, $950 million to Saudi Arabia, and $1.3 billion to other Middle
Eastern countries (New York Times, 2 May 1988). This proposal did not prevent
Secretary of State Shultz from declaring in front of the U.N. General Assembly only
a few weeks later that
'developing countries must help reduce the international tension
and ease the arms race' (New York Times, 14 May 1988)
- In 1985, the Congress refused to approve the sale to Saudi Arabia of 40 advanced
McDonnell Douglas F-15 aircraft and, in 1986, blocked the sale of 800 General
Dynamics Stinger missiles. In 1988, the U.S. Senate voted to deny a Kuwaiti request
for Hughes (GM) Maverick missiles and also forbade the sale of Stinger missiles to
Oman (New York Times, 13 May 1988; Time, 25 July 1988)
- Many oil executives actually felt relieved by the more moderate prices, which were
high enough for differential profitability but not for 'conspiracy theory'. Just to be
on the safe side, though, some oil companies decided during the last quarter of 1990
to write off part of their higher profits against the cost of
'future environmental
regulations' (Business Week, 11 February 1991)
- Government support was not limited to defence contracts, of course. For example,
both President Bush and his Secretary of State Mosbacher did not hesitate to intervene
personally on behalf of AT&T, when Saudi Arabia appeared to prefer European contractors
for its $8.1 billion plan to expand the kingdom's telephone network (Business
Week, 18 February 1991). The new Clinton Administration kept up the pressure and
AT&T eventually won the contract
- For instance, of the 599 regulatory changes recorded by the
World Investment Report
during the first half of the 1990s, 95% were aimed at liberalising capital controls.
Similarly, the number of bilateral investment treaties had risen to 1,330 by 1996,
up from fewer than 400 in the early 1990s, with 88% of the changes aimed
at increased liberalisation and incentives for foreign investment (United Nations
Conference on Trade and Development 1997: 18-19)
- Data are calculated from International Monetary Fund (Annual), the Stockholm
International Peace Research Institute (Annual), and the U.S. Arms Control and
Disarmament Agency (Annual)
- As these lines were written, Chevron and Texaco announced their intention to
merge, a union which would create the world's fifth largest oil company in terms
of sales
- The index comprises leading companies listed on the New York Stock Exchange,
American Stock Exchange and Nasdaq. Companies are usually leaders in their field
and their contribution to the index are weighed by market value. In contrast to Fortune
500 companies whose 'home base' must be the United States, S&P 500 firms could
be based anywhere, provided their shares are listed in the United States
|
|
