Tuesday 2 September 2014

Thoughts on a Book: The Oil Kings.

Very good read. Read like a political novel. Knowing how things ended for Nixon and The Shah seemed to add intrigue to the story rather then taking it away. Essentially this is a story of geopolitics in the 1970's. The lack of any rigorous economic narrative between the key actors kind of makes this a story of economics as well.

A brief summary of the events covered: Nixon has alot on his plate globally. His (and Kissingers) lens of evaluation is geopolitical coloured mostly by the communist/not communist(?), arming the not communist regimes was seen as logical. Oil was dirt cheap. The Shah of Iran, a legacy monarch that was brought to power in 1953 with the help of a CIA coup (overthrowing what arguably might have been one of the regions best chances to establish a viable democracy, had that been a priority), appears to be Nixon's best bet to be 'his man' in the region. The Shah had oil and wanted a shitload of weapons and to 'modernize'. Nixon thought he was buying an ally. Hijinks ensued...

So with that summary out of the way let's get to what I found were the two most interesting take-away's from the book: looking at politics involving markets without a rigorous economics focus is dangerous and the question: how did Nixon/Kissinger get the geopolitics so so wrong?

On the first topic: Economics

I'll simplify this book into two main characters and a third key player. The two main characters were The Shah of Iran and the US government, Nixon/Kissinger. The key player was Saudi Arabia, mainly King Faisal, later King Khalid, through oil minister Yamani.

Economics as a basis for conversation, negotiations, or contemplation is useful because of it's vagueness (to me, admittedly some people probably give too much weight to predictions by "economists"). It forces you to make assumptions and necessitates careful consideration of your assumptions. It forces you to consider the actions of others. It also forces you to consider their assumptions, and weigh differing scenarios assuming different assumptions about how the other actors assumptions and assume the other actors assumptions about your assumption in order to analyze how they will strategize to maximize their return, so you can try to maximize your return. Of course, that is for time period 1, next to consider how these preferences and strategies change over time....

The Saudi's were the only ones who really considered this as they sought stable prices during the economic upheavals of the 70s. They didn't want above market pricing to prematurely force a regime change of alternative fuel source. They knew they were sitting on a gold mine and wanted to ensure it maintained it's value. They were, and arguably are still, playing the long game. They must have been baffled by the Iranian and Americans.

The Shah, who (based on my read of this book) seems to have been considered a true expert on all things oil, failed to grasp the basic principals of the price mechanism and the interplay between supply and demand. At the margin, increases in the price of oil would lead to either a reduction in oil consumption, or a reduction on the consumption of other items. Reducing the consumption of other items would lead to slowing economies since imported oil didn't add alot of value to the economy and the supply side inflation it produced also helped nobody domestically. While he seemed to grasp the more complex notion of substitutability and opportunity cost to justify his pricing schemes (oil should be priced at what alternative fuel sources cost), his inability (or perhaps it was just indifference?) to consider the multi-tiered impact of price increases seems odd. Ahh, you are rich, what's another 70% per barrel? Capitalism lives and dies on the margin. The world's reliance on oil was made pretty clear.

At some level the '73 price increase and subsequent oil crisis was understandable. After Nixon authorized an American exit from the Bretton Woods system which broke the USD peg to gold, oil producers effectively saw their barrels of oil peg broken from gold (since oil was, and remains largely traded in USD). Since many of these oil exporting nations did not have diversified economics and relied to a large extent on the import of almost everything, the diminishing value of the USD they were receiving would have been troubling. If such and such country is now getting x+200% for their iron. We want x+200% for our oil!!!

But the Shah's actions, an economic gamble at best, are more understandable then the Nixon/Kissinger oversight. Kissinger seemed to actually have a certain contempt for even considering the global picture from an economic point of view. Long a proponent of the Realpolotik framework, how could the economy be so far from Kissinger's mind? What could be more realpolitik then the movement of money, credit, and goods internally and externally. Selling The Shah more arms then he could afford without an increase in the price of the only thing he had to sell necessitated a price increase or failure to pay. This wasn't even considered. Fool me once, shame on you, fool me twice.... Until The Shah surprised them again and again with his price increases and the American (and all importing) economies got hit again and again. Had Nixon/Kissinger bothered to inject an economic framework into the discussion at the start it would have been much easier to curtail The Shah once he got going.

On the second topic: American Failure

The big mis-items: Thinking that The Shah would be a reliable ally, thinking that the Shah and his regime was stable and in control, that the Saudi's were duplicitous, thinking that the possibility of an OPEC increase were minimal, and failure to consider the ultimate vulnerability of political parties in developed countries to economic performance.

Was it arrogance, over confidence or just a mis-read that led the Kissinger/Nixon team to overestimate the Shah's willingness to aid them in achieving their foreign policy aims? After The Shah aided the South Vietnamese build up prior to it's peace agreement (Kissinger playing in a grey area that probably wouldn't be allowed in the good faith of negotiations) they seem to extrapolated that to mean that as long as long as The Shah's military build up needs were met, the partnership would hold. This mistake might be understandable, but their inability to move off this hypothesis as The Shah clearly acted solely for his own interest (as a man of Kissinger's 'realpolitik' genius (as reputation would suggest) would have recognized) is incomprehensible.

Either way, having read a fair bit about Kissinger (both Issacson's Kissinger: A Biography , and the always entertaining Christopher Hitchen's The Trial of Henry Kissinger, as well as his part in various histories) I have mixed feelings about the man's moral calculus that seemed a bit cavalier with human life in his pursuit (I assume) of political goals aimed at stability(?!?).

The context of the time is certainly lost me, I can't go back and really get a sense of the geopolitical mood. Or the prevailing wisdom of the day. Only then can you really judge actions. But it's hard not to assume they should have done alot better.

Watershed Moments

As the 70's closed with the Iranian Revolution, the Saudi's moved quickly to the center of the oil producing world and American Middle East policy (well, a distant second to Israel now). A new thug in Iraq was armed (we know how that turned out), and Iran, once a young democracy with exciting potential (in the Mosaddegh era) is still clawing itself in that direction. What might have been won't ever be.

But it's interesting to wonder what a few different decisions might have yielded. The Shah, talked into arms purchases that wouldn't have destabilized his economy. The Saudi's deciding to stick it to the US. The US not spreading weapons around the region to pretty much every country at some point in time.

Who knows, things could have turned out worse some how. Or perhaps, we'd have been off oil decades ago. Instead, we're kind of right back to where we started. The real winner in all this, and whose actions seemed to have been on purpose, were the Saudi's who's oil revenues are at all time highs and who's regime remains steady for the foreseeable future.

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