Modern history


Just Another Commodity?

NONE OF THE PREVIOUS booms, in an industry characterized by booms, could begin to rival the magnitude and madness of the fever that came at the end of the 1970s with the Second Oil Shock. It was the greatest boom of them all. With the leap in price to thirty-four dollars a barrel, sums of money were involved that dwarfed anything that had ever before been earned or spent in the business. Oil companies plowed their earnings back into new development. Some borrowed from banks, raised more money from eager investors, and leveraged themselves to the hilt so they could play in the wild game. It was the golden age of the independent oil men. They slapped backs, they wheeled and dealed, hired more drilling rigs and explored at greater depths, and they spent and spent. To celebrate it all, at the very end of the 1970s, the television show Dallas went on the air, introducing the rapacious J. R. Ewing—in place of the lovable Clampetts of The Beverly Hillbillies—to viewers in the United States and around the world, and fashioning for many of them the image of the independent American oil man for years to come.

In the United States, the industry surged to a dizzy and unprecedented level of activity. The frenetic pace meant, inevitably, that costs went out of control. The price of everything connected to oil shot up. Acreage—land on which to drill—skyrocketed. So did real estate in the oil cities—Houston, Dallas, and Denver. The cost of a drilling crew multiplied many times over. Young graduates in geology were wined and dined and courted, and paid fifty thousand dollars a year for their first job out of school. Geologists with twenty years of experience were quitting the majors to put together deals and keep a piece for themselves, dreaming that they might become a new H. L. Hunt or the next J. Paul Getty. These were the years that the doctors and dentists of America put their moneyinto drilling funds. If they did not have oil in their portfolios, they were told, their savings could be devastated by inflation and rising oil prices.

The industry, it was thought, was standing at the perilous edge of what some called the “oil mountain.” As from a cliff, supplies would begin precipitously and rapidly to fall away. And depletion, combined with OPEC militancy, would guarantee high and rising prices for an increasingly scarce commodity. As a result, among other things, technology and engineering would have to create alternatives to oil, which in turn would set a ceiling price for oil. What this meant was that at last, after seven decades, the shale oil locked in the rock formations of the Western Slope of the Rockies in Colorado and Utah would be liberated and brought to market, as had been promised each time world oil appeared to be in perilously short supply. It was exactly what President Carter had proposed in 1979 as the solution to the country’s energy problems.

Some companies, like Occidental and Unocal, were already working on shale oil technology. In 1980, Exxon, the world’s largest oil company, looking ahead to what seemed the inevitable shortage, hastily bought its way into the Colony Shale Oil Project on the Western Slope. Sixty years before, in another period of shortage, the company had acquired acreage in the same area to develop shale oil as a fuel. Nothing had come of it then. Now Exxon became, by far, the leader, spending fully a billion dollars on shale oil development, getting ready for the “new era” of energy. “Exxon had had a love affair with shale oil for a long time,” recalled Clifton Garvin, the company’s chairman. “It was a huge challenge, technically, and certainly economically.” Nevertheless, the country seemed committed to developing secure sources of liquid fuels. And the technology seemed available.

But over the subsequent two years, the economic outlook changed quickly and drastically. In real terms, the oil price was going down; so was demand. So were forecasts for both. Surplus production capacity was building in the oil-exporting countries. And, all along, the cost estimates for the Colony Project kept going up. “We were looking at $6 or $8 billion for 50,000 barrels per day,” recalled Garvin. “And there was no expectation that that was the end of it. One night I said to myself, ‘I can’t spend shareholders’ money that way.’” The next day, Garvin assembled a senior management team and asked what would be the consequences of stopping. “It was a tough decision. I rode that decision.”

On May 2, 1982, Exxon announced tersely that it was terminating the Colony Project. Nothing that the company now saw in the economic outlook could make the shale oil project viable.

The boom on Colorado’s Western Slope ended literally in hours, as work came to an instant stop. The towns of Rifle, Battlement Mesa, and Parachute fell prey to the great tradition established at Pithole, in western Pennsylvania, which in just two years, 1865 and 1866, went from dense forest, to boom town of fifteen thousand people, to eerie ghost town, whose deserted shops and homes were raided for wood to build elsewhere in the Oil Regions. Now, in the three towns in Colorado, newly built homes were empty; weeds quickly covered landscaped lots; half the apartments went unrented; construction workers from the Midwest packed up and headed home; traffic evaporated from the roads; and teenagers with nothing else to do took to vandalizing the partly built homes and office buildings. “My business just died,” said the owner of an office supply shop in Rifle. And so did the town. The boom to end all booms could not last.

The Fundamentals

What had happened to the world oil market and to oil prices themselves? Virulent inflation was threatening not only economic performance but the whole social fabric of the Western world. The United States Federal Reserve responded by instituting an exceedingly restrictive monetary policy that resulted in a sharp rise in interest rates, with prime, at one point, reaching the sky-high level of 21.5 percent. Tight money came on top of the drain of spending power from the industrial world because of the oil price increases. The combined consequence was the deepest recession since the Great Depression, with two bottoms, the first in 1980 and the second, and more severe, in 1982. The stalling of economic activity substantially reduced the demand for oil in the industrial nations. The developing world was supposed to be a major source of new oil demand, which would buoy prices. Instead, many developing countries—debt-laden, the markets for their raw materials hit by recession in the industrial world—went into steep economic decline, choking off their oil demand.

Moreover, fundamental changes were taking place in the energy economy itself. Earlier fears of shortage, at the beginning of the 1920s, in the mid-1940s, had ended in surplus and glut because rising prices had stimulated new technology and the development of new areas. The pattern was to be repeated with thirty-four-dollar-a-barrel oil and the expectation of still-higher prices. Huge new developments were taking place outside OPEC. The major buildup of production in Mexico, Alaska, and the North Sea coincided with the turmoil of the Second Oil Shock. Egypt was also becoming a significant exporter. So were Malaysia, Angola, and China. Many other countries became producers and exporters, minor league in themselves, but significant in the aggregate. Major innovations were also improving exploration, production, and transportation technologies. The initial capacity of the Alaskan pipeline was 1.7 million barrels per day. With the addition of a chemical nicknamed “slickem,” which reduced drag within the pipeline and thus improved the ease of flow, the pipeline’s capacity was boosted to 2.1 million barrels per day. Many things in exploration and production could be done at thirty-four dollars a barrel that were not economical at thirteen dollars a barrel, and output in the “Lower Forty-eight” of the United States continued at higher levels than anticipated. That, along with the stepped-up flow out of Alaska, meant that American oil production actually increased in the first half of the 1980s.

Significant changes were also taking place in demand. The massive twentieth-century march toward higher and higher dependence on oil within the total energy mix was reversed by higher prices, security considerations, and government policies. Coal staged a massive comeback in electricity generation and industry. Nuclear power also made a rapid entry into electricity generation. In Japan, liquefied natural gas increased its share in the energy economy and in electricity generation. All this meant, around the world, that oil was being ejected from some of its most important markets and was rapidly losing ground. Its share of the market for total energy in the industrial countries declined from 53 percent in 1978 to 43 percent by 1985.

Not only was petroleum experiencing a declining share of the energy pie, but the pie itself was shrinking, reflecting the profound impact of increased energy efficiency, otherwise known as conservation. Though often dismissed or even ridiculed, conservation had turned out to have massive impact. Energy conservation in modern industrial society meant, for the most part, not deprivation, not “small is beautiful,” but greater efficiency and technological innovation. The 1975 legislation that mandated a doubling of the average fuel efficiency of new automobile fleets to 27.5 miles per gallon by 1985 would reduce United States oil consumption by 2 million barrels per day from what it would otherwise have been—just about equivalent to the 2 million barrels per day of additional oil production provided by Alaska. Altogether, by 1985, the United States was 25 percent more energy efficient and 32 percent more oil efficient than it had been in 1973. If the United States had stayed at the 1973 levels of efficiency, it would have used the equivalent of 13 million barrels of oil more than it actually did in 1985. The savings were huge. Other countries made their own dramatic savings. Japan over the same period became 31 percent more energy efficient and 51 percent more oil efficient.

By 1983, the first year of economic recovery, the impact of conservation and fuel switching was clear. Oil consumption in the noncommunist world was 45.7 million barrels per day, about 6 million barrels less than the 51.6-million-barrel-per-day level of 1979, which had been the high point. So, while demand had fallen 6 million barrels per day between 1979 and 1983, non-OPEC production had increased by 4 million barrels per day. On top of that, the oil companies eagerly sought to dispose of the tremendous inventories they had built up in anticipation of a demand level that never materialized.

Those three trends—the collapse in demand, the relentless buildup of non-OPEC supply, and the Great Inventory Dump—reduced the call on OPEC by something like 13 million barrels per day, a fall of 43 percent from the levels of 1979! The Iranian Revolution and then the Iran-Iraq War had crippled the exporting capacity of those two countries. Yet suddenly, instead of the feared shortage, there was a large surplus of production capacity over market demand—in short, the makings of a massive glut.1

Finally—the Cartel

For OPEC, the day of reckoning was close at hand. As late as 1977, OPEC had produced two-thirds of total free world crude oil. In 1982, for the first time, non-OPEC overtook OPEC production, and indeed was a million barrels per day higher, and still rising. Even Soviet oil exports to the West were substantially increasing, as the USSR sought to take advantage of rising prices to augment its hard currency earnings from the West.

Much of the new oil, particularly that from the North Sea, was sold on spot markets, which made it very responsive to overall market conditions. Only a year or two earlier, spot prices had soared above official prices; now they dropped far below. Many companies paying official prices were losing large amounts of money on their refining and marketing. Spot prices for a particular quality oil could be as much as eight dollars a barrel lower than term contract prices. That gap, as the chief executive of Mobil’s German affiliate put it, was the difference between having “a profit margin” and experiencing “formidable losses.” In such circumstances, any buyer who could do the simplest arithmetic was going to “go spot” and shop around, seeking the cheapest barrel. The new non-OPEC producers who were trying to enter the market as sellers would have to offer the most “market-responsive,” that is, the cheapest, prices in order to win market share.

OPEC was in trouble. The market confronted it with an unpalatable choice: cut prices to regain markets, or cut production to maintain price. But the OPEC countries did not want to reduce prices, for fear that they would undermine their whole pricing structure, lose their great economic and political gains, and so diminish their newly acquired power and influence. Moreover, if they did reduce their prices, they feared, industrial countries would take it as an opportunity to raise excise and gasoline taxes, and transfer the oil rents from OPEC’s treasuries back to their own, which was where their battle over rents had begun more than three decades earlier.

But reality had to be faced. If OPEC was not going to cut price in order to defend its production level, then it would have to cut production levels in order to defend price. In March 1982 OPEC, which had produced 31 million barrels per day in 1979, just three years earlier, set an output limit for the group of 18 million barrels per day, with individual quotas for each country, except for Saudi Arabia, which would adjust its production to support the system. OPEC had finally done what it had talked about doing at various times in its history. It had taken on the part played in earlier years by the Texas Railroad Commission in managing production to try to preserve price. In the blunt words of one of the leading analysts from the oil-exporting world, it had turned itself into a cartel, managing and allocating production, as well as setting a price.

In the months after the establishment of the quota, new factors added to the uncertainties of the oil market. Iran was gaining the upper hand in the war with Iraq and becoming more belligerent in its attitude and rhetoric toward Saudi Arabia and the other conservative Gulf countries. That was not the only war in the Middle East. In June 1982 Israel intervened directly in Lebanon. At one meeting of the Organization of Arab Petroleum Exporting Countries, there was some discussion of instituting another embargo against the United States as “punishment.” But the distressed condition of the oil market, combined with the immediate geopolitical risks for the Gulf exporters from Iran, was such as to make it an incredible proposal, and one that was quickly scotched as irrelevant, dangerous, and likely to be highly damaging to the interests of the exporters. Meanwhile, in June 1982, King Khalid of Saudi Arabia, an interim figure who had suffered from chronic heart disease, died. He was succeeded by Prince Fahd, who had already been the country’s chief administrator and who, among other things, was the Royal Family’s oil expert.

The new quotas were meant to be a temporary expedient. But by the autumn of 1982, several things were clear: Demand was not recovering, non-OPEC production was still on the rise, and spot prices were plunging again. Even with production quotas, OPEC oil was still overabundant and overpriced.2

“Our Price Is Too High …”

In 1983, competition continued to mount rapidly in the oil market. The British sector of the North Sea alone, which had not even started producing until 1975, was now producing more than Algeria, Libya, and Nigeria combined, and still more North Sea oil would be coming on stream. To counter the competition, unofficial discounting and price cutting became the norm among the OPEC countries. Again, the one exception was Saudi Arabia; it maintained the thirty-four-dollar marker that many others were observing only in the breach. Buyers were soon forsaking Saudi Arabia in favor of discounted oil, even including the Aramco partners. They could not easily force more expensive oil on affiliates and customers that were trying to compete with other companies with access to cheaper oil. Saudi production fell to its lowest level since 1970.

Early in 1983, Yamani offered a philosophical disquisition on the origins of what was now, very evidently, an OPEC crisis. “Please excuse the comparison,” he said, “but the history of the crisis is similar to that of a pregnant wife…. The crisis started just like a normal pregnancy—with passion and joy. At this moment other members wanted us to raise the price of oil even higher despite our warnings of the negative consequences. Moreover, everyone was getting massive financial revenues and rushing into development projects as if this financial revenue would continue to rise forever…. We were consumed with our moments of pleasure.” But now the consequences had to be faced. “Our price is too high in relation to the world market,” Yamani said.

By the end of February 1983 a complete collapse seemed at hand. The British National Oil Company cut the price on North Sea oil by three dollars, to thirty dollars a barrel. That was devastating to Nigeria, a member of OPEC and a country of 100 million people whose economy had become dangerously overdependent on oil. Nigerian oil competed directly in quality with North Sea crudes, and Nigeria’s normal buyers, now able to get cheaper oil from the North Sea, deserted the African country. Almost devoid of customers, Nigeria virtually stopped exporting oil. The internal politics of the country, recently returned to civilian rule, shuddered. Nigeria made clear that it would reply in kind. “We are ready for a price war,” Yahaya Dikko, the Nigerian oil minister, firmly said.

In early March 1983 the oil ministers and their retinues hurriedly convened, ironically in London, the home court of their leading non-OPEC competitor, Great Britain. They met at the Intercontinental Hotel at Hyde Park Corner, for what turned out to be twelve interminable, frustrating days—an experience that would leave some of them with an allergic reaction whenever, in future years, they set foot inside the hotel. But whatever the ideological and symbolic opposition to a price cut, whatever the ire and frustration, the reality could no longer be resisted. OPEC slashed its prices by about 15 percent—from thirty-four to twenty-nine dollars a barrel. It was the first time in OPEC’s history that it had ever done such a thing. The exporters also agreed on a 17.5-million-barrel-perday quota for the whole group.

But who was going to get what share of the quotas? Billions of dollars were at stake in the division of the quota. Country by country, they wrangled their way through to the allocations. The twelve-day oil marathon in London had averted a price collapse, at least for the time being. OPEC had reset its price to meet the market price, not a rising market price as in the past, but a falling one. It had also established new quotas, without the tentativeness of the preceding year.

One country, to be sure, had no official quota at all. That was Saudi Arabia. If it had been given a quota, Yamani insisted, the number would have been well below the six million barrels per day that he had been instructed was the minimum that was acceptable to Riyadh. Instead, in the words of the communiqué, Saudi Arabia would “act as the swing producer to supply the balancing quantities to meet market requirements.” For the first time, Saudi Arabia, with one-third of total Free World reserves, was explicitly charged with the responsibility of raising and lowering its output to balance the market and maintain the price. But OPEC’s new system of price administration depended on the eschewing of cheating on the part of twelve members and on the willingness and ability of the thirteenth, Saudi Arabia, to play that pivotal role of swing producer.3

The Commodity Market

Behind the evident drama of OPEC’s marathon session and its mutation into a true cartel was a far-reaching transformation of the oil industry itself. No longer would it be dominated by large, highly integrated oil companies. Instead, it would turn into a free-for-all, a clanging world of multitudinous buyers and sellers. As was said, sometimes with approval and sometimes with horror, oil was becoming “just another commodity.”

Oil, of course, had always been a commodity, from its earliest commercial days in the 1860s and 1870s, when prices fluctuated wildly in western Pennsylvania. But one result of the constant thrust toward integration was to internalize the volatilities of price within the workings of a company tied together from the wellhead to the gasoline pump. Moreover, oil was seen as different from other commodities. “It should be remembered that oil is not an ordinary commodity like tea or coffee,” intoned Yamani. “Oil is a strategic commodity. Oil is too important a commodity to be left to the vagaries of the spot or the futures markets, or any other type of speculative endeavor.” But that was exactly what began to occur. One reason was the buildup of a huge surplus in the world market. In a complete reversal of the 1970s, producers now had to worry about their access to markets, rather than consumers about their access to supplies. Buyers expected discounts; they would never think of paying security premiums of the sort they had been forced to pay in the late 1970s and early 1980s—premiums that, as one oil man would remark, were “often light on security and heavy on premia!” Security was hardly an issue anymore. What mattered was to be competitive in a glutted market.

The second reason was the changing structure of the industry itself. On grounds of nationalism and in search of rents, the governments of the exporting countries had assumed ownership over the oil resources in their countries and, increasingly, over the international marketing of their oil as well. By so doing, they had broken the links that had tied their reserves to particular companies, refineries, and markets overseas. Shorn of direct access to supplies in many parts of the world, the companies sought to develop new resources elsewhere. But also, it was clear, they would have to find a new identity or they would perish, because they would become obsolete. If they could not be integrated companies anymore, they would become buyers and traders. Thus, their focus shifted from long-term contracts to the spot market. Until the end of the 1970s, no more than 10 percent of internationally traded oil was to be found in spot markets, which were little more than a fringe activity of the main businesses, a way of sopping up excess output of refineries. By the end of 1982, after the upheaval of the Second Oil Shock, more than half of internationally traded crude oil was either in the spot market or sold at prices that were keyed to the spot market.

By no choice of its own, BP led the way. As a result of the upheaval in Iran and nationalization in Nigeria, it lost 40 percent of its supply—on top of nationalizations in Kuwait, Iraq, and Libya. Desperately exposed and acting in its own defense, it went out into spot markets and began buying oil and trading it on a larger and larger scale. With the emergence of the short-term spot markets, the virtues of “old-style” integration were no longer so evident. The new BP could shop around for the cheapest crude; it could push efficiency throughout its operating units; it could beat the competition; it could be more entrepreneurial. The company became much more decentralized, with individual units responsible for their own profitability. The corporate culture changed from that of the 1970s, dominated by the supply planner, to one dominated by traders and commercial people. The company, once seen as a kind of quasigovernmental bureaucracy, adapted what one executive called a “nimble trading-oriented approach.” But what about the historic virtues of integration? “It is nice to have some integration, obviously, but it is not something we would pay a premium for,” BP’s new chairman, P. I. Walters, said at one point. “We see ourselves as being much more opportunistic.”

Walters himself led the charge. He had long before concluded that the traditional integration, increasingly governed by computer models, did not make sense. The revelation had come to him when he was mowing the lawn at his home in Highgate in North London one Saturday morning in June 1967, a couple of days after the outbreak of the Six-Day War. He was called into the house to take an urgent call from BP’s head of chartering, who told him that tanker tycoon Aristotle Onassis had abruptly canceled all existing chartering arrangements and was offering BP his entire fleet, but at rates double what they had been the day before. BP had until noon to give an answer, and it was up to Walters, who had just been put in charge of BP’s worldwide logistics, to give it. Tens of millions of dollars were riding on the decision. With a sudden sinking feeling, he realized that no computer program could help him now, only commercial judgment. He phoned back. Yes, take the offer, he said, and returned to mowing his lawn. Events quickly proved the decision right; by Monday, tanker rates were four times what they had been on the previous Friday.

From that day on, Walters became a campaigner for deintegrating BP’s operations. “That set me to thinking about the whole way we did business,” he said. “I realized that the proponents of further integration were moving in the wrong direction. They were handing over to machines what should be management judgments.” At one point, it seemed that Walters’s evangelism might cost him his job, but he held on, and by 1981 had become chairman of BP, at a time when its entire business was in disruption. “So many firm hypotheses about the business were laid to ruin,” said Walters. The Iranians had partly deintegrated BP; he would finish the job. “For me, there is no strategy that is divorced from profitability,” he explained. Walters became famous for telling managers that “there are no sacred cows in BP” and “you tell us which things make economic sense and which do not, and I’ll tell you which we’ll keep and which we won’t.” Necessity had indeed become a virtue.

The other companies were being pushed in the same direction by the same forces. In virtually every company, the result was a struggle between those accustomed to and conditioned by the integrated oil industry of the 1950s and 1960s and those who thought that a new trading world had arrived. Not only established modes of operation, but fundamental, deeply held beliefs were being challenged. “The concept I was taught was that you moved your own crude through your own refining and downstream system,” said George Keller, the chairman of Chevron. “It was so obvious that it was a truism.” The move to the commodity style of trading would be resisted in many companies by traditionalists who saw this direction as an uncouth, immoral, and inappropriate way to conduct the oil business—almost against the laws of nature. They took a lot of persuading, but in due course they were persuaded. What it came down to in most of the companies was the establishment of trading as a separate profit center, a way to make money on its own terms, and not merely as a method for assuring that supply and demand were balanced within the parent company’s own operations. If there had been no loyalty on the part of exporters toward companies when supplies were tight, then, in time of surplus, there would be no loyalty on the part of companies toward the exporters. Buyers would shop for the cheapest barrel anywhere in the world, whether to use it themselves or to turn around and trade it again—all in order to be as competitive as possible.

The four Aramco partners—Exxon, Mobil, Texaco, and Chevron—though somewhat cutting back, had continued to take large volumes of oil from Saudi Arabia even as they found themselves buying oil at “official prices” and thus at costs much higher than competitive crudes. The fundamental precept had always been to preserve access to Saudi oil, and the companies resisted sundering those links. But in 1983 and 1984, they had to acknowledge reluctantly that the price for access was too high. “Those of us in Chevron always viewed Aramco as our operation,” said George Keller. “It’s something we started, developed, and in which we played a key role. So it was more of a problem. But we couldn’t keep pouring money down a hole. We had to back away, and ultimately we had to tell Yamani that we couldn’t continue to do this.” Though the Aramco links were not broken, they were significantly reduced. Saudi Arabia was no longer the special provider. The alteration in the commercial relationship between the four companies and Saudi Arabia was one of the great symbols of how the oil industry was being transformed.

The shift toward the commodity market was facilitated by a major structural change in the industry. With the decontrol of oil prices and the elimination of various other controls, the United States was no longer insulated from the world oil market. Indeed, it now became tightly tied into the rest of the market. The United States was not only the largest single consuming country; as a result of the fall in production worldwide, American output accounted for almost a quarter of total free world production. It was also a very market-oriented production, which could make its influence felt on the rest of the world. And one particular stream of American crude would even become the new bellwether for the global industry.4

From Eggs to Oil

The emergence of this crude stream, West Texas Intermediate, reflected yet another momentous innovation in the operations of the oil industry. It also took place in the turning-point year of 1983, though not in Vienna or Riyadh or Houston, but in Lower Manhattan on the eighth floor of the World Trade Center where the New York Mercantile Exchange, known as the Nymex, introduced a futures contract in crude oil.

When a commodity is largely sold in spot markets, with prices that are very volatile and uncertain, buyers and sellers tend to try to find a mechanism to minimize their risk. That is what gave rise to futures markets, which allow a buyer to acquire the right to buy the commodity at some month in the future at a specific, known price. He is able to lock in his purchase price; he knows his risk. Similarly, a producer can sell his production forward, even before it is produced or, in the case of agricultural products, harvested. He, too, locks in his price. Both buyer and seller are hedgers. Their objective is to minimize their risk and reduce their exposure to volatility. “Liquidity” is provided by speculators, who hope to make a profit by getting themselves on the right side of swings in supply and demand—and market psychology. A number of different commodities, such as grain and pork bellies, have been traded for years on each of the several futures exchanges in the United States. As the world economy became more volatile in the 1970s and regulations fell away, futures emerged for gold, interest rates, currencies, and, finally, oil.

As exchanges go, the New York Mercantile Exchange had not exactly enjoyed the most distinguished career. It had been founded in 1872, the same year that John D. Rockefeller launched “our plan” to take over the American oil industry and squeeze out the competition. The exchange had more modest ambitions, reflecting the interests of sixty-two merchants in New York City who were looking for a place to trade dairy products. Its original name was the Butter and Cheese Exchange. Eggs were soon added to the menu, and in 1880, it became the Butter, Cheese, and Egg Exchange. Two years later, it changed its name again, to the New York Mercantile Exchange. By the 1920s, egg futures had been introduced and were being traded, in addition to the eggs themselves.

Then in 1941, a new commodity entered the portals of the exchange—the Maine potato. Later, futures were added for yellow globe onions, apples (McIntosh and Golden Delicious), Idaho potatoes, plywood, and platinum. But the Maine potato was the mainstay of the Mercantile Exchange until, unbeknownst to most of the world, the American supply-demand balance for potatoes began to change dramatically. Maine potatoes were losing market share to potatoes produced elsewhere in the country; moreover, the absolute volume of Maine potatoes produced each year was also dropping. As a result, the Maine potato futures contract was running into trouble. In 1976, and again in 1979, scandals hit the potato contract, including the mortifying failure of delivered stocks of potatoes to pass inspection in New York City. The exchange, under pressure, abruptly terminated trading in Maine potatoes and was itself threatened with extinction.

Just in time, however, the Nymex had introduced a new product, a home heating oil contract, which local heating oil distributors found useful. Then in 1981, it started trading futures in gasoline. But the major innovation came on March 30, 1983. On that day, the exchange introduced futures in crude oil, just two weeks after OPEC concluded its marathon meeting at the Intercontinental Hotel in London. The juxtaposition was ironic, for the crude oil futures contract would resolutely undermine OPEC’s price-setting powers. And the rights to a single barrel of oil could now be bought and sold many times over, with the profits, sometimes immense, going to the traders and speculators.

Floor traders took enthusiastically to crude futures in New York. Pushing and elbowing themselves into the seething crowd on the floor of the Nymex, they shouted and furiously waved their arms to register their orders for contracts. The traders were also pushing and elbowing their way into the oil industry, which hardly took kindly to them. The initial reaction to the futures market on the part of the established oil companies was one of skepticism and outright hostility. What did these shouting, wildly gesticulating young people, for whom the long term was perhaps two hours, have to do with an industry in which the engineering and logistics were enormously complex, in which carefully cultivated relationships were supposed to be the basis of everything, and in which investment decisions were made today that would not begin to pay off until a decade hence? A senior executive of one of the majors dismissed oil futures “as a way for dentists to lose money.” But the practice—of futures, not dentistry—moved quickly in terms of acceptability and respectability. Within a few years, most of the major oil companies and some of the exporting countries, as well as many other players, including large financial houses, were participating in crude futures on the Nymex. Price risk being what it was, none of them could afford to stay out. As the volume of transactions built up astronomically, Maine potatoes became a distant, quaint, and embarrassing memory on the fourth floor of the World Trade Center.

Once it had been Standard Oil that had set the price. Then it had been the Texas Railroad Commission system in the United States and the majors in the rest of the world. Then it was OPEC. Now price was being established, every day, instantaneously, on the open market, in the interaction of the floor traders on the Nymex with buyers and sellers glued to computer screens all over the world. It was like the late-nineteenth-century oil exchanges of western Pennsylvania, but reborn with modern technology. All players got the same information at the same moment, and all could act on it in the next. The “divine laws of supply and demand” still prevailed, but now they were revealed differently and far more widely, and with no delay. The benchmark price in all the transactions was that of WTI, West Texas Intermediate, a plentiful crude stream that could be easily traded, and was thus a good proxy for the world oil price, which had heretofore been embodied in Arab light. Two decades earlier, Arab light had supplanted Texas Gulf Coast oil as the world’s marker crude. Now, in almost full circle, it was back to Texas. And with the rapid rise of oil futures, the price of WTI joined the gold price, interest rates, and the Dow Jones Industrial Average among the most vital and carefully monitored measures of the daily beat of the world economy.5

New Oil Wars: The Shootout at Value Gap

With the major restructuring of global markets, the oil industry itself also went through a wholesale corporate reorganization from which no major company was immune. Deregulation of an industry removes protection and increases competitive pressure and, thus, typically results in consolidations, spinoffs, takeovers, and a variety of other corporate changes. Oil, completely deregulated in the United States by 1981, was no exception. Overcapacity and weakening prices also encouraged consolidation and shrinking, which would mean greater efficiency—and greater profit. At the same time, institutional investors—the pension, mutual fund, and money managers who typically controlled three-quarters of the stock of major American corporations—were becoming more aggressive and were insisting on higher returns for their investments. Under pressure to show good quarterly performance, they were not willing to wait around for the long term. And, in their eyes, the oil industry was losing its luster in the aftermath of the boom.

At its heart, however, the restructuring of the oil industry was based on what was called the “value gap,” the term used when the value of a company’s shares did not fully reflect what its oil and gas reserves would fetch in the marketplace. Those companies with the greatest gap between stock price and asset value were the most vulnerable. In such cases, the obvious implication was that a new management might be able to increase the price of the stock and so enhance that noble cause, “shareholders’ value,” in a way that the old management had failed to do. There was a further twist: It could cost two or three times more to add a barrel of oil by exploration than by buying the assets of an existing operation. To the management of companies, the obvious implication was that it was cheaper to “explore for oil on the floor of the New York Stock Exchange”—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico. Here, again, shareholders’ value was a driving force. Many companies had taken the huge cash flows that poured out of the two oil shocks and put them right back into exploration in the United States, seeking secure alternatives to OPEC. The results were very disappointing; reserves were still declining. The expenditure of so much money had proved to be inefficient and wasteful. Rather than continue spending at so helter-skelter a rate, why not give more of the money back to the shareholders through higher dividends or stock buy-backs, and let them decide how to invest it? Or, perhaps even better, why not acquire or merge with other companies of known value and so get reserves on the cheap?

Thus, the value gap, like a geological fault, facilitated a great upheaval throughout the oil industry. The result was a series of great corporate battles, pitting company against company, with a variety of Wall Street warriors mixed in and sometimes in command. It was an entirely new kind of oil war.

The Trigger

Though the industry was ripe for change on the back end of the Second Oil Shock, a trigger would be required. It was to be found in Amarillo, a town of 150,000 on the high, flat, dry plateau of the Panhandle of northwestern Texas—an isolated, arid, wind-swirled region closer to Denver than to Houston. Oil and gas was the biggest business in Amarillo, but it was run mostly by small independents. Cattle was another major business in and around Amarillo. So was nuclear weaponry. Amarillo was the nation’s only center for the final fabrication of nuclear bombs, producing by one estimate four warheads a day. It was also the home of an independent oil man with the name of T. Boone Pickens, who, more than anyone else, detonated the explosions that remade the corporate landscape of oil, obliterating in the process some of the best-known landmarks.

Boone Pickens became a celebrity of sorts, expert at turning aside reporters with a dry laugh when they solemnly asked if he were the “real life” J. R. Ewing of the Dallas television series. In the financial community, Pickens was widely applauded among investors; he made things happen, he enhanced shareholders’ value. In the oil industry, however, while he was admired by some, he was loathed by others. Placing himself strategically at the junction of the oil industry and Wall Street, he said that he was pushing the oil industry back to basics, fighting its self-indulgent waste, saving it from its own excesses and illusions and arrogance, and serving the often-ignored interests of the heretofore-disenfranchised shareholders. His adversaries said that he was merely a clever opportunist, with a gift for salesmanship, who wrapped old-fashioned greed in the mantle of shareholders’ rights. One thing was clear all around: Pickens saw the vulnerabilities and weaknesses of the oil industry on the backside of the Second Oil Shock earlier and with more clarity than most. And he not only figured out something to do about it, but even came up with an ideology to explain it. On one level, his campaign, for that was what it was, represented the revenge of the independent oil man on the hated majors.

Born in 1928, Pickens grew up in the oil patch, not far from Seminole, site of one of the greatest Oklahoma discoveries of the 1920s. His father was a land-man, who acquired leases from farmers and packaged and sold them to oil companies. His mother was in charge of gasoline rationing for three counties during World War II. He was an only child, who turned into a brash, self-confident, independent-minded, sharp-tongued, and outspoken young man. He did not readily accept the established order but rather would make things happen his way. He was also intensely competitive. He hated to lose.

When his father’s luck turned sour, the family moved to Amarillo, where the senior Pickens took a job working for Phillips. Young Boone, after studying geology in college, also went to work for Phillips. He could not stand it. He did not like bureaucracy or hierarchy. And he surely did not like it when one of his bosses told him, “If you’re ever going to make it big with this company, you’ve got to learn to keep your mouth shut.” In 1954, after three and a half years, he quit Phillips to set himself up as an independent oil man, consulting, putting together deals to sell to moneyed folk around Amarillo. He traveled the Southwest, getting accustomed to the hot winds and the constant dirt that worked its way into his mouth and nose, and living the gritty, itinerant side of the American dream. He did his shaving in the restrooms of roadside gas stations that carried the names of the big oil companies for which he had already formed a considerable dislike. That was in the dog-eared days of the mid-1950s, during one of the cyclical downturns in the industry. Pickens was one of thousands driving around the oil states, using public phone booths as their offices, hustling, looking at deals, selling them, getting a crew together and a well drilled and, if lucky, hitting oil or gas, dreaming all the while of making it big, really big.

Pickens got farther than most. He was smart and shrewd, with an ability to analyze and think through a problem, step by step. In due course, he went to New York to raise money and later launched a successful operation in Canada. By 1964, he had rolled up his various drilling deals into a single company, Mesa Petroleum. After Mesa went public, he became fascinated by the gap between stock value and the value of the underlying oil and gas assets. Pickens fastened his eyes on Hugoton Production, a sleepy but considerably larger company that had extensive gas reserves in the Hugoton, in southwestern Kansas, then the nation’s largest gas field. Its stock price was much lower than its gas reserves would have fetched if sold off. Shareholders could be won over by promising a more generous return, based upon raising the stock price and managing the company differently. Here was the simple concept that would have such vast impact a decade and a half later. In 1969, he completed a hostile takeover of Hugoton and merged the much-larger enterprise into Mesa, creating a significant independent oil company.

Caught up along with almost everybody else in the post-1973 oil fever, Pickens hired as many drilling rigs as he could in the United States, and he went abroad to look for oil, to the North Sea and to Australia. He was still an inveterate trader, and he was a veteran of futures long before almost anybody else in the oil industry had even heard of them. His early speciality had been cattle futures. At one point he even took Mesa into the cattle-feeding business, making the smallish oil company into, as a sideline, the second-largest cattle feeder in the nation. That venture ended poorly, and he turned around and took the company out of the feedlots. Yet even at the height of the oil wars of the mid-1980s, with billions of dollars at stake, Pickens would look out the window as his plane came down over the Texas range and start counting cattle, to see if the herds were big or not, to help him decide whether to go long or short on cattle futures. It was sport.

Pickens had been an intense basketball then racketball player, which meant speed, fast breaks, unexpected moves, quick reflexes, and constant improvisation. That was the way he did business, too. “We used to crowd into Boone’s office every Saturday morning, some of us sitting on the floor,” said one of his managers, recollecting the 1970s, “and Boone would ask us how we were going to make money the next week.” Pickens was proud to be known as the only oil man in Amarillo who still worked Saturdays. His style—game-planned, attentive to detail, but also highly improvisational—would make him a tough rival for the big bureaucratic companies he took on. And he would not shirk from a fight. When his staff brought him word that a competitor or a natural gas pipeline had done something he did not like, Pickens would come back with his standard retort: “Tell them to go kiss a fat man’s ass.”

By the early 1980s, Pickens was seeing the weaknesses in the oil business. The United States was a declining producer, with increasingly poor prospects and a continually disappointing discovery record. Meanwhile, the stock prices of oil companies did not reflect the sale value of their proven oil and gas reserves. Here was a way for Mesa to make money. It was like Hugoton Production all over.

His initial target, in 1982, was Cities Service, the progeny of Henry Doherty, the oil and utilities tycoon who in the 1920s had first preached the virtues of conservation in oil and gas production to a hostile industry. Cities Service was the nineteenth largest oil company in America; the thirty-eighth largest industrial corporation in the Fortune 500. And it was three times the size of Mesa. But its stock was selling for only a third of the appraised value of its oil and gas reserves, which was not exactly a great service to shareholders. Mesa acquired a block of stock in the larger company. While Mesa was considering acquisition plans, Cities Service tendered for Mesa, which in turn counter-tendered. Gulf intervened with an offer for Cities almost double what its stock had been selling for before the brouhaha, but then backed out. Finally, Armand Hammer’s Occidental acquired all of Cities’ stock. Mesa made a $30 million profit on its shares. That was the first move.

By this point, restructuring and megamergers were already spreading throughout the oil industry. The starting point was actually 1979, when Shell acquired Belridge, a California heavy oil producer. In the early 1920s, Shell had made a run at Belridge, offering on the order of $8 million, but then pulled back. Now, in 1979, it paid just a tad more, a total of $3.6 billion, in what was the largest corporate acquisition up to that point. In 1981, Conoco escaped a takeover attempt from Canada’s Dome Petroleum by falling into the arms of DuPont for $7.8 billion. Mobil took a run at Marathon, a former Standard Oil production company and part owner of the Yates field, one of the nation’s great oil fields in the Permian Basin of Texas. Looking for an alternative to Mobil, Marathon sold itself for $5.9 billion to U.S. Steel, which for its part was seeking a way to diversify out of the disaster of the American steel industry. Mesa made a bid for General American, a large crude producer, but Phillips picked it up for $1.1 billion. Deprived of that quarry, Pickens bided his time. Another target would appear.6

The Mexican Weekend

All the while, the global oil boom was turning sour. Exploration in the United States fell away. The number of refinancings and bankruptcies among smaller companies jumped. The major companies started the first round of belt-tightening—cutbacks, hiring freezes, and early retirements. Investors, no longer worrying about inflation, began to forsake the oil patch in favor of the stock market; mutual funds and red-hot money managers were becoming a more interesting topic of dinner discussion than oil, drilling programs, and geologists.

As the downturn proceeded, it demonstrated how interdependent oil had become with the global financial system. And nowhere was that more clearly established than in Mexico, which by 1982 had run up a huge international debt, in excess of $84 billion, on the basis of its sudden emergence as a world oil power. That year, Jesüs Silva Herzog became Mexico’s Finance Minister. His father, who bore the same name, had been head of the national commission that in 1937 had found the oil companies operating in Mexico guilty of making enormous profits and that had provided the rationale for their nationalization by President Cárdenas. Thereafter, the father had headed part of Pemex, the national oil company, until he quit over a confrontation with the oil workers union about wages. The son had taken the path of Mexico’s modern technocrats, including graduate education in economics in the United States (at Yale), then rose through the government bureaucracy until April 1982, when President López Portillo appointed him Finance Minister.

To his shock, Silva Herzog realized that the country was on the edge of a grave economic crisis. It was the result of the weakening oil price, high interest rates, a severely overvalued peso, unrestrained government spending, and the drying up of markets for Mexico’s non-oil exports because of the recession in the United States. On top of everything else, there was immense capital flight. Silva Herzog recognized that Mexico was unable to service its enormous debt. It could not pay the interest, let alone repay any of the principal. But President López Portillo, who was being told by those around him that he was the most wonderful president in Mexico’s history, did not want to listen. “It was,” Silva Herzog later said, “a horrible experience.”

Silva Herzog began making secret trips to Washington, D.C., leaving Mexico City on Thursday night in order to see Paul Volcker, Chairman of the U.S. Federal Reserve System, on Friday. He would then fly back to Mexico City by Friday night so that he could appear at social events and no one would guess that he had been out of town. He arranged a $900 million emergency loan from the Federal Reserve, but it was dissipated in a week because of the capital flight. On August 12, 1982, Silva Herzog came to the conclusion that improvisation would not work; there was no way that Mexico could pay the interest it owed. It could, of course, default. But that might cause the international financial system to collapse. The loan exposure to Mexico of the nine largest American money center banks was equivalent to 44 percent of their total capital. How many of America’s and the world’s banks would fall in the first wave, and how many more would be pulled down by them in the second? And how could Mexico function in the world economy?

On August 13, Silva Herzog again flew to Washington, D.C. Those few days would be remembered afterward as “the Mexican Weekend.” At his first meeting with Treasury Secretary Donald Regan, Silva Herzog explained that he had run out of foreign exchange. “We have to organize something,” he said, “or otherwise there will be very serious international consequences.”

At the end of that discussion, Regan said, “You really have a problem.”

“No, Mr. Secretary,” replied Silva Herzog, “we have a problem.”

The Mexicans and Americans started working on Friday afternoon and continued virtually nonstop until the early hours of Sunday morning. They put together a multi-billion-dollar package of loans and credits, as well as advance purchases of Mexican oil for the United States Strategic Petroleum Reserve. But then, at around 3:00 A.M. Sunday, it seemed that the negotiations were about to break down. Silva Herzog had discovered a $100 million service fee buried in the agreement and was told by one of the Americans, “Well, when someone is in very serious difficulties, and you lend to them, they have to pay a fee.” Silva Herzog was furious. “This is not a business transaction,” he snapped. “Sorry, I cannot accept this.” He called López Portillo, who angrily said to terminate the discussions and return to Mexico City immediately.

Later in the day, Silva Herzog was glumly eating a hamburger at the Mexican embassy, preparing to leave, when a call came from the United States Treasury saying that the $100 million fee had been rescinded. The Americans could not risk a collapse. Who knew what the effects would be on Monday? And, with that, the Mexican Weekend concluded, with the first part of the emergency package now in place.

Silva Herzog flew back to find Mexico City in an uproar. He went on television for forty-five minutes with a blackboard but no written speech to explain what was happening, and then came up to New York City the following Friday to meet with the Federal Reserve and representatives of terrified banks to work out a restructuring of Mexico’s debt. What had been devised was a debt moratorium. But nobody wanted to call it that; instead, they called it a “rollover.” It was a polite way to say that, at least in part, Mexico had defaulted.

An exhausted Silva Herzog flew back yet again to Mexico. As soon as he landed, he headed for a small village in the mountains beyond Mexico City. “I needed to separate from all we had gone through. I thought of my father and the role he played in the oil expropriation. I was three years old at the time. In the years after, Father would often talk to me about it. It was one of his favorite themes. And now here I was in Mexico’s worst crisis since the one of 1938, and it was also a crisis involving oil. We had just committed terrible mistakes on the basis of oil. But there had been this great mood of victory in Mexico. We had been in the largest boom in Mexican history. And for the first time in our history, in those years 1978 through 1981, we were being courted by the most important people in the world. We thought we were rich. We had oil.”

World financial markets teetered on panic in August 1982, but the hasty improvisation of the Mexican Weekend and the days that followed managed to stabilize the global financial system. The Mexican debt drama brought home, however, the reality that the global oil boom was over, and the fact that “oil power” was less powerful than assumed. Oil could mean not only wealth but also weakness for a nation. Moreover, a transition was at hand. The world oil crisis was now giving way to the international debt crisis and many of the world-class international debtors would turn out to be oil nations, which had borrowed heavily on the premise that there would always be markets for their oil, and at a high price.

At the same time that Mexico was balancing on the brink of bankruptcy, a tiny bank with the grand name of Penn Square, located in a nondescript shopping center in Oklahoma City, was also on the edge of insolvency. It had been a go-go energy lender, whose standards of prudence were suggested by one habit favored by its senior energy lending officer—he liked to drink Amaretto and soda out of his Gucci loafers. Penn Square became the focus of intensive deliberation among the Federal Reserve and other regulatory agencies. Why was so much attention being given to a bank in a suburban shopping center, just at the time when Mexico was poised to go under? The reason was that Penn Square had generated a huge volume of oil and gas loans, many of them highly questionable, and then sold them, some two billion dollars worth, “upstream,” to major money center banks, like Continental Illinois, Bank of America, and Chase Manhattan. The loan portfolio that Penn Square had retained was worthless, the bank was insolvent, and the regulators closed it down. But that was not the end of the story.

Nationally, the most aggressive major bank when it came to energy lending had been Continental Illinois, largest bank in the Midwest, and seventh largest in the nation. Overall, it was the fastest-growing lender in the country, it was winning awards for good management, and its chairman had been chosen “Banker of the Year.” As an energy lender, Continental Illinois was, as a competitor put it, “eating our lunch.” It was rapidly increasing its market share in oil and gas loans, as well as in other sectors. The Wall Street Journal tagged Continental Illinois as “the bank to beat.”

When oil prices started to weaken, it became clear that Continental Illinois, with its huge portfolio of energy loans from Penn Square and other sources, was walking on nothing more solid than thin air. The result, in 1984, was the largest bank run in the history of the world. All around the globe, other banks and companies yanked their money out. Continental Illinois’ credit was no good. The integrity of the entire interconnected banking system was now in jeopardy. The Federal government intervened, with a huge bail-out—$5.5 billion of new capital, $8 billion in emergency loans, and, of course, new management. Though the word was hardly ever used in the United States, Continental Illinois had, at least temporarily, been nationalized. The dangers of not responding on such a scale were, however, too frightening to risk.

With the collapse of Continental Illinois, energy lending instantaneously went out of fashion. Any banks still willing or able to lend to energy companies rewrote their guidelines so restrictively that getting an oil and gas loan was now not much easier than passing through the proverbial eye of the needle. And without capital, there was no fuel for exploration and development, let alone a boom.7

Dr. Drill

Another drama with lasting repercussions for the oil industry was being played out in remote waters off Alaska. Half of the undiscovered oil and gas in the United States was thought to be in Alaska itself or in adjacent waters, and eyes focused on one place—Mukluk, named for the Eskimo word for sealskin boot. This Mukluk was a vast underground structure, fourteen miles off the north coast of Alaska, where the Beaufort Sea gives way to the Arctic Ocean—some sixty-five miles to the northwest of the prolific North Slope reserves at Prudhoe Bay. Mukluk aroused enormous excitement throughout the oil industry. The many companies that joined to co-venture a wildcat well, led by the BP affiliate, Sohio, and Diamond Shamrock, were hoping for another elephant, another East Texas, another Prudhoe Bay, perhaps even a discovery in the class of one of the preeminent Saudi fields. It was billed as the most exciting prospect to come around for a generation. “It’s what you dream about,” said the president of Diamond Shamrock’s exploration company. BP geologists said it was one of the lowest-risk wildcat wells the company had ever participated in—the odds were one in three instead of the normal one in eight. However, the effort to pierce the riches of Mukluk would prove expensive—over $2 billion. In the daunting physical environment, the companies had to build their own gravel island from which to drill into the frigid waters. That work could only be carried out in the brief summer, before the ocean froze. In the winter, the temperature could fall to eighty degrees below zero.

As the actual drilling proceeded through the summer and fall of 1983, the Mukluk wildcat captured the imagination of the oil industry and the financial community. Stock prices of the companies involved bounded up. If successful, Mukluk would change everything: the position of the companies, the perspective on United States prospects, the world oil balance, even the relation of the industrial world to the oil-exporting countries. But as the great nineteenth-century wildcatter John Galey had said, only Dr. Drill knows for sure. And in the first week of December 1983, Dr. Drill spoke, and word was flashed around the world. At eight thousand feet below the seabed, where the pay sands were supposed to begin, the drill had struck salt water. Mukluk was dry of oil.

There was clear evidence that oil had once been trapped in Mukluk. But either the structure was breached and the oil leaked to the surface—an oil spill of gigantic proportions, though with no environmental gauging of it—or perhaps regional tilting caused the oil to migrate, in one of the jokes of nature, into the Prudhoe Bay structure. “We drilled in the right place,” said Richard Bray, the president of Sohio’s production company. “We were simply 30 million years too late.”

The wildcat at Mukluk was not only the most expensive dry hole in history, it was also the turning point for exploration in the United States. The dry hole seemed to announce that the United States was, after all, a poor prospect. Betting so heavily on exploration was too risky and too expensive. Managements would, in the future, be made to pay a penalty if they continued risking, and losing, money on such a scale. In the minds of many senior oil company executives, Mukluk sent a bracing message; they ought to shift from exploring for oil to acquiring proven reserves, in the form of either individual properties or entire companies. After Mukluk, they were much more in a buying mood.8

Family Matters

Not only economics and geology drove the restructuring of the oil industry. So did the hatreds, resentments, and feuds that fester inside families. A war among the heirs to the Keck family fortune resulted in Mobil’s acquiring Superior Oil, the nation’s largest independent, for $5.7 billion. But the most prominent family troubles were those that fastened on Getty Oil, the great and rich integrated company that J. Paul Getty had begun building in the 1930s and then turned into a world company in the 1950s with the discoveries in the Neutral Zone between Saudi Arabia and Kuwait. Getty, the firm believer in value, had died in 1976. Now, in the 1980s, Getty Oil was not replacing its reserves, and its stock was selling at a very low price relative to the value of the company’s holdings in the ground. One of J. Paul Getty’s sons, Gordon, was more interested in making music than in searching for oil—he had just composed a song cycle based on the poems of Emily Dickinson—but he wondered where all the value had gone. That put him at odds with the professional managers running Getty. They may have thought they controlled the levers of power, but Gordon Getty and his allies controlled the stock. J. Paul Getty had treated all his sons poorly, including Gordon, and the younger Getty had no great reason to be loyal to the memory, or the handiwork, of his father. When opportunity came knocking, he was ready to open the door.

As events turned out, however, there were two knocks, and Gordon Getty, unfortunately in terms of later complications, apparently answered both. The first was from Pennzoil, a large independent run by a tycoon named Hugh Liedtke, an early partner of George H. W. Bush in the oil industry and a friend of Boone Pickens. In some manner, Getty assented to the Pennzoil offer, though in exactly what manner would become the center of very considerable and critical dispute. The second knock came from Texaco, whose chairman appeared at the Pierre Hotel, once owned by the elder Getty, late one evening to make a counteroffer to young Getty, who definitely accepted that offer. So Texaco got Getty Oil for $10.2 billion. It also got sued by Pennzoil.9

The Death of a Major

Early on in the Texaco-Pennzoil-Getty saga, Boone Pickens made a cameo appearance, giving Gordon Getty a personal tutorial on how to assess value in the oil industry. More than once, Pickens also bought Texaco stock. But he had his sights fixed elsewhere. Mesa was suffering from a large problem, one that afflicted almost the entire oil industry. With boom turning into bust, Mesa was committed to spending $300 million on an exploration program. It had fifty-one drilling rigs working, including five very expensive ones in the Gulf of Mexico, supported by a veritable navy and army of workers, boats, and helicopters, all of which were devouring money at an incredible rate. “Boys,” Pickens announced at a board meeting in Amarillo in July 1983, “this is it. We’ve got to figure out a way to make $300 million, and we’ve got to make it fast. We’ve lost too much money in the Gulf of Mexico. We can’t drill our way out of this one. A field goal won’t do it—we need a touchdown.”

The place to make that kind of money, quickly, was in the major oil companies, whose stocks sold at only a fraction of the value of their assets. And Pickens’ eyes fastened onto the quarry—Gulf Oil, one of the Seven Sisters. It had been built by the Mellon family on the basis of Guffey and Galey’s discovery at Spindletop in 1901, and had grown into a major American institution and a global company. It had firmly planted the American flag in Kuwait. The Mellons had long since stepped aside from active management; the family had fragmented and had sold off much of its holdings. As Pickens saw it, Gulf was the most vulnerable of the major oil companies—its stock was selling at little more than a third of its appraised value.

Pickens had already had a close-in view of the Gulf management during the struggle over Cities Service, and he had decided that it was ineffective and indecisive, and that Gulf’s heavy bureaucratic structure would make it slow in responding. The company had suffered from ten years of internal problems and deep splits at the top. Illegal political contributions in the United States, some tied to Watergate, and controversial foreign payments had led to an internal upheaval, including a purge of some of the most senior management and their replacement by managers for whom the appearance of probity was among their most important qualifications.

The chairman who took over in the second half of the 1970s was variously nicknamed “Mr. Clean” and “the Boy Scout.” Gulf was certainly the only major oil company that placed a nun on its board of directors. “These problems had meant six years of no decision,” recalled one Gulf executive. “That was during a crucial time in the oil industry, during the OPEC turmoil, and at a time when everything was up in the air in the Far East, and we were losing our ass in Europe.”

Gulf’s list of woes was long. In 1975, its concession in Kuwait, responsible for a substantial part of the company’s earnings, had been nationalized. The company lost a costly antitrust case related to uranium marketing. Despite the vast sums it had spent since the middle 1970s searching for politically secure sources of oil in the United States and elsewhere, Gulf had little to show in terms of new reserves. Its domestic reserve base was falling away rapidly, declining by 40 percent between 1978 and 1982 alone. It had to distort its exploration spending to try to find hundreds of millions of dollars worth of natural gas in order to meet a disastrous contract it had signed years earlier. With the loss of Kuwait in 1975, Gulf was not well-positioned to be highly competitive; it also lost a great deal of its old raison d’être as a global company undertaking a massive international exploration and production effort. It had not yet found a new one.

The current management was just beginning to tackle the question of making the company leaner, more competitive, and more efficient. The new chairman, who had come in as the successor to “Mr. Clean,” was Jimmy Lee. As much as Boone Pickens embodied the independent, so Jimmy Lee’s career reflected the evolution of the major oil companies. He had been working in Gulf’s refinery in Philadelphia in the late 1940s, when the first shipments of Kuwaiti oil arrived. Thereafter, in the great age of industry expansion, he made his career abroad. He built refineries and marketing systems in the Philippines and Korea; he headed the entire Far Eastern operation; he was Gulf’s man in Kuwait at a time when the Middle Eastern producers battled among themselves and pressured the companies to increase their respective outputs. Eventually, he had run, from London, Gulf’s entire Eastern Hemisphere operations, which meant that he was in charge of everything from winning the allegiance of European motorists to getting drilling rigs into Angola. But now he was back in Pittsburgh to rebuild the battered company. But he wouldn’t have much time.

In August 1983, Mesa started to accumulate Gulf stock through numbered bank accounts scattered around the country, with transfer codes known only to one or two people. In October, Mesa formed a Gulf Investors Group, GIG, providing it with the partners and, thus, the necessary financial clout with which to move on the offensive. Later in the month, the Mesa group turned up the heat. Its objective, it said, was to push Gulf into transferring half of its U.S. oil and gas reserves into a royalty trust, which would be owned directly by the stockholders, giving them the cash flow and eliminating the double taxation on dividends.

Gulf initiated a counterattack. The target was its four hundred thousand shareholders, who would vote either with management or with Pickens. But Gulf had a big problem; its senior management was sharply divided on how to proceed, which hindered Gulf’s response to Pickens and made it seem indecisive and ineffective, just as he had predicted. In contrast, Pickens himself was quick, flexible, continually improvising, and imaginative. He knew how to court the institutional shareholders who held the large blocks of Gulf stock. He knew how to play to the public. And he was much more effective with the press than the engineers who ran Gulf. He presented himself as the champion of shareholders, an authentic oil man, a populist, not a faceless bureaucrat from “the good ol’ boys club” of “Big Oil.”

“I’d never expected to have a proxy fight in my career,” said Lee. “I’d never prepared for that.” But Gulf did fight back, and hard. Lee and his colleagues wooed the institutional investors, and Gulf managed to squeak to victory in the proxy vote in December 1983, by a bare 52 percent to 48 percent. It was only a reprieve. Pickens continued to move up and down the court. He submitted a written proposal to the Gulf board to spin off oil and gas reserves directly to shareholders. The board turned him down flat. Pickens then went to see the junk bond king, Michael Milken, at Drexel Burnham in Beverly Hills to explore raising the additional money through such bonds to make an outright takeover bid.

Jimmy Lee knew that time was short. He had to get the stock price up. He looked at spinning off refining and marketing and the chemical operations into separate companies. There was one piece of good news; Gulf replaced 95 percent of its reserves in 1983. Still, the company was vulnerable. Very vulnerable. In late January 1984 Lee took a phone call from Robert O. Anderson, chairman of ARCO, who said he wanted to talk about things of “material interest.” They met for dinner in Denver, in a private dining room at the Brown Palace Hotel, each accompanied by a single colleague. Anderson knew exactly what he wanted—Gulf’s foreign production. He had no interest in its service stations or refineries. He believed that the future of the major oil companies lay in overseasreserves, and that their overall success or failure would depend on the extent to which they got into what he called “the international circuit.” As he saw it, a company would have a very hard time developing a major position in international oil—unless it was one of the Seven Sisters and already there. Gulf would provide the shortcut that ARCO needed. “When Gulf lost Kuwait, they lost a great deal,” Anderson later said, “but they still had the critical mass.” At the dinner, Anderson said he was willing to pay $62 a share for Gulf, a big increase over the $41 it had been selling at a half a year earlier. Lee replied by suggesting that their two companies merge their United States oil operations, which would have given Gulf half of ARCO’s immensely valuable North Slope reserves. It hardly took Anderson any time at all to say “no thank you.”

Subsequently, Lee received a second phone call from Anderson. “I think I should tell you that I had dinner last night in Denver with Boone Pickens,” said Anderson. “I told him that we were prepared to pay $62 a share for Gulf.”

“Thanks for telling me this,” said Lee, restraining his sarcasm. Anderson’s objective in meeting with Pickens was to understand what “Pickens was trying to do and to ascertain to our satisfaction that he would not block any deal.” But that certainly was not how Lee saw it. As soon as he hung up on Anderson’s call, he summoned his crisis team. “Well,” he said, “Bob Anderson has just cut our legs out from under us. For all practical purposes, we’re in play.”

Anderson’s second call ended whatever hopes Lee had that Gulf could remain independent. “The game was up,” he later said. There had been a long-observed aversion among major oil companies against making hostile offers for one another. But Anderson’s proposition, following on Mobil’s recent run at Marathon, made clear that the rule was no longer valid, and the majors had the huge financial resources to go after one another. And now there was a price on Gulf’s head, the word would soon be out, and it was just a matter of time before someone bought the company. The only question was who. That being the case, Lee decided to go for the best price. He telephoned the CEOs of the other large companies. It was a most unpleasant task, but the changed circumstances created by Anderson left him no choice. He had the same message for each CEO: “We’re vulnerable, and I have indications that someone’s going to make a run at us. If you’re interested in taking a look, start doing your financials.”

Pickens played the next card, topping ARCO’s $62 offer with his own $65 tender offer. “I knew that $65 was a low ball,” said Lee. “If someone’s going to take your company, you might as well get the most you can.” He once again went back to the CEOs of the other majors. He was blunt this time. Gulf was for sale.

Among those he called was George Keller, the chairman of Chevron, who had already become interested in Gulf. Descended from the Standard Oil Trust’s western operations, Chevron maintained its headquarters in San Francisco, far from the oil patch and an unlikely setting for a major oil company. The company did have an admirable record in taking risks and finding oil, including, of course, in Saudi Arabia in the 1930s. Keller had earlier denounced oil industry takeovers, at least when they were hostile. Companies, he had said, could better spend their money searching for new reserves. But like other top executives in the industry, Keller had been shaken by the enormity of the failure at Mukluk. “After that,” he said, “almost everybody decided to put more money into better bets.”

On New Year’s Eve of 1984, the chairman of Getty Oil had called Keller and asked him if Chevron would like to take a look at Getty, then in the midst of its own takeover struggle. As soon as he got back to San Francisco, Keller put an analytic team to work, determining how Getty stacked up against other companies: Superior, Unocal, Sun—and Gulf. Getty was soon gone, acquired by Texaco, but Chevron was still looking closely at Gulf. After Jimmy Lee’s second phone call, Keller put the Chevron staff to work furiously on the problem, using both published work and material provided by Gulf, under a hastily signed confidentiality agreement. With hardly a week to figure out how much one of the world’s largest companies was worth, Chevron frantically set about the business of trying to value Gulf. On February 29, Chevron had reached one valuation; on March 2, another; on March 3 at 4:00 P.M., still another. At the most pessimistic end, Gulf was worth $62 a share; at the most optimistic, $105—that is, anywhere from $10.2 to $17.3 billion. “It was a hell of a range,” said Keller. Chevron’s board initially accepted management’s recommendation and authorized Keller to go up to $78 a share in making an offer, recognizing that the actual proposal might depend on the bidding ground rules. One board member suggested that the board impose no cap at all, but leave the price to Keller’s discretion. “For God’s sake, put a ceiling on it,” begged Keller, unnerved at the thought of sole responsibility. “Every dollar higher on the stock means another $135 million.”

On March 5, the Gulf board met at its Pittsburgh headquarters, an ornate structure built in the Depression. The building was virtually deserted; most of Gulfs operations were conducted in Houston, and the Chevron group was given its own floor. The Gulf board was certainly not going to surrender to Pickens’s junk bond bid. But there were three other offers on the table. One was Chevron’s. Some of the senior executives had come up with an alternative offer, a leveraged buyout by management using junk bonds, to be arranged by the firm of Kohlberg, Kravis, and Roberts. ARCO would also make an offer. So the Gulf board had three serious suitors to consider.

Before the meeting, Lee laid down the ground rules to the bidders: “You have only one chance—no second chances. Make your pitch all at one time.” ARCO’s president, William Kieschnick, went first, presenting a $72-a-share offer. Kohlberg, Kravis went next, making an offer to the board that was worth $87.50 a share. It was 56 percent in cash—$48.75. The rest—$38.75—was to be in newly issued securities.

Waiting his turn, Keller of Chevron had an offer letter with him, with just one blank spot—the price. He knew there were two great risks: that crude prices would go down and that interest rates would go up. But he didn’t think it likely that both would occur at the same time. The Chevron board had insisted that the final offer be at his discretion. Keller wrestled with the problem, knowing so well that each dollar per share of his offer would add another $135 million. But he didn’t want to lose Gulf; an opportunity like that would not easily reappear. He picked up his pen and filled in the blank—$80 a share. The offer added up to $13.2 billion, all cash. He presented the letter to the Gulf board and made the case for his offer to the best of his ability. In his four decades with Chevron he had never before been in such a position. The reception seemed chilly.

With no clear clue to the outcome, Keller returned to the Chevron floor, to await the Gulf board’s decision. All that he knew for sure was that he had just made the largest cash offer in history. ARCO’s Kieschnick waited as well. Robert O. Anderson had convened an ARCO board meeting in Dallas, and he and the other directors conducted the regular business but anxiously waited too, with a phone line open to Pittsburgh. Sometimes they talked to Kieschnick.

Altogether, the Gulf board was in session seven hours that day. It debated the three offers. ARCO’s could be summarily dismissed; it was too low. The Kohlberg, Kravis offer could not. It was more money, in theory, but it was more risky, since half would be in the form of securities, and Gulfs financial advisers, Merrill Lynch and Salomon Brothers, could not figure out how much the “paper” in the KKR offer would really be worth. It had the great advantage that the current management would remain in place, but some of the outside directors worried that acceptance of the offer would, for that reason, appear self-serving. Moreover, KKR had not yet secured its financing. “If it did not get the financing together,” said Lee, “Boone had a valid tender offer, and he’d be looking down our throats with more shares than he needed” to renew his takeover attempt.

The hours stretched on. Keller was still waiting, reflecting on the risks of his offer, when the phone rang. It was Jimmy Lee. He tried to sound nonchalant. “Hello, George,” he said. He paused. “You just bought yourself an oil company.” All that Keller could think was that he felt like someone who had, for the first time in his life, bid on a house, and discovered, to his shock, that he now owned it. It was a $13.2 billion house. The Gulf board had decided that the prudent course was to accept Chevron’s all-cash offer. The shareholders would be better off. And that was the end of Gulf Oil. Spindletop, Guffey and Galey, the Mellons, Kuwait and Major Holmes—it was all over. It was history.

Anderson was philosophical about ARCO’s losing. He had simply never believed that Chevron would go to $80. His absolute limit was $75. “We thought we’d be hanging in there together. But, at least if you lose a merger, you like to lose by a wide margin rather than by a narrow one. You hate to lose by a dollar a share.”

As far as Pickens was concerned, it was a great victory for the stockholders; because of his efforts, an ineffective management had been prevented from continuing to waste money in vain pursuit of glory. During the months since he had launched his campaign, Gulf’s stock price had gone from about $41 a share to $80 a share, and its total market capitalization had been raised from $6.8 billion to $13.2 billion, giving the Gulf stockholders a profit of $6.5 billion. “That was $6.5 billion that would have never been made if Mesa and GIG hadn’t come on the scene,” said Pickens. Shareholder rights had been vindicated. Whether Pickens was after a quick profit or actually hoped along the way to become CEO of a major international oil company, his Gulf Investors Group made a $760 million profit, of which about $500 million went to Mesa. After tax, that came out just about to the $300 million that Mesa had so desperately craved in the summer of 1983. As Pickens had said, Mesa needed the money, badly.

Jimmy Lee’s first reaction was relief. It was over, and the board had come out with a unified vote, which greatly lessened the likelihood of shareholders’ suits. He immediately set out to talk to employees around the country, to try to reassure them about the future. Over the next several days, exhaustion took over. So did sadness, and he sometimes broke into tears. “I never had any intention but that Gulf would be here for ever and ever,” he said. “It had been my whole life, my whole career. To think that it wasn’t going to be there any more really got to me.”

Gulf was fully merged into Chevron, and George Keller never had any reason to regret the $80 offer he had written down at the last moment. Chevron had not overvalued the company. “It was a good buy,” he said half a decade later. “We were able to acquire assets on a scale that would never be available otherwise.” Then why was Gulf in trouble? “It had ignored its solid existing position,” Keller said. “It had decided it had to have one great big elephant. It was as though, instead of risking its future in the town in which it lived, it decided to go to Las Vegas. It missed everywhere.” That, of course, could have happened to any of the major oil companies in the feverish climate that followed the oil shocks of the 1970s. But Gulf paid the ultimate price.10

Shareholders’ Value

Pickens was not yet through. In rapid fire, he made bids for both Phillips, in Bartlesville, Oklahoma, and Unocal, in Los Angeles. On Phillips, he was trailed by an aggressive Wall Street financier, Carl Icahn, who had already bagged Trans World Airlines. Both companies, however, successfully fought off the takeover attempts through the courts and by assuming a great deal of debt, which enabled them to buy back stock at a much higher price than had been the case before the attacks, thus increasing the payout to shareholders. In both cases, however, Mesa made significant profits. Yet the clamor of “shareholders’ value” seemed to be losing its populist appeal. After Unocal emerged intact from the assault, Fred Hartley, the company’s chairman, received a call from Armand Hammer of Occidental, who told him that he deserved a Nobel Prize for his valor. Another of the large integrated companies, ARCO itself, saw that it, too, might well be vulnerable to a Pickens, or to the Pickens, in the financial environment of the mid-1980s. “We were a sitting duck,” said Robert O. Anderson, “unless we got our share values up more closely to the values of our company.” Thus, ARCO carried out a sort of self-acquisition, leveraging to buy back its stock at a higher price and, at the same time, sharply consolidating its own activities and employment.

The restructuring of even the giants of the industry through mergers and acquisitions continued over the next several years. Royal Dutch/Shell paid $5.7 billion for the 31 percent of Shell Oil U.S.A. that it did not already own. To the senior executives of Royal Dutch/Shell in The Hague and in London, that looked like the best bet among all the investment opportunities available to them. BP had teamed up with Standard Oil of Ohio—John D. Rockefeller’s original company, and the basis of the Standard Oil Trust—to assure itself downstream outlets in the United States for Alaskan oil. As part of the Alaska transaction, BP came to own 53 percent of Sohio, while Sohio became BP’s American arm. But disillusioned with Sohio’s management as a result of its dismal but very expensive exploration program, including the Mukluk fiasco, BP forked over $7.6 billion to Sohio’s other shareholders so that it would own the company completely and be able to control directly the huge cash flow from Alaska.

One company had, at least until the beginning of the 1990s, stayed away from the high-visibility arena of mergers and acquisitions. This was Exxon, which had been badly stung by its poor acquisitions record; when Fortune celebrated the five worst acquisitions of the 1970s, two of them belonged to Exxon. The billion dollars spent and lost in two years on the Colorado shale oil project was also sobering. Exxon came to the conclusion that there was no way it could adequately spend all of its cash flow on exploration and acquisition or in new businesses. Moreover, the senior management of Exxon believed, as a political judgment and almost as an article of faith, that it could not take over other large oil companies. Exxon had, in the words of CEO Clifton Garvin, “a phobia about acquisition.”

All this sharply curtailed the company’s options. “We had a huge cash flow and not that many good investments to put it into,” Garvin elaborated. Better to take the money it could not spend efficiently and return it to the shareholders, letting them do whatever they wanted with it. This Exxon did through a share buy-back, on which it spent $16 billion between 1983 and mid-1990, guaranteeing the stockholders a rising stock price and a good yield, and in the process ensuring that neither Boone Pickens nor anyone else could claim that shareholders in Exxon were getting the short end of the stick. The $16 billion was much more than Texaco paid for Getty, or even than Chevron paid for Gulf. Exxon did spend a good deal of money on acquisitions, perhaps a billion dollars or so a year, but it was interested in specific properties, not in entire companies, and it went about its work quietly, as far from the headlines as possible. It also cut the number of its employees by 40 percent. As a result, it was a smaller company, both in absolute terms and in relative terms, as measured in reserves and revenues, against its historic competitor and archrival, Royal Dutch/Shell. Marcus Samuel and Henri Deterding would have been proud.

Restructuring meant, overall, a smaller and more consolidated petroleum industry. Beginning geologists were no longer being hired at fifty thousand dollars a year; indeed, they were not being hired at all. Others, supposedly at the height of their careers, suddenly found themselves forced into early retirement. The biggest losers were the people whose jobs were wiped out. “I thought I was working for a great social institution,” said one executive whose job disappeared in Chevron’s acquisition of Gulf. “I didn’t think I was giving 25 years of my life, with all the costs for my family, for some pieces of paper.” The great beneficiaries of the industry’s restructurings were the shareholders. All the activity—the major mergers and acquisitions, the recapitalizations, and the stock buy-backs—propelled well over $100 billion into the pockets of institutional and individual investors, pension funds, arbitrageurs, and the rest. The shareholders did, eventually, win out.

When management was a shareholder, it won, too. Gulf’s chairman, Jimmy Lee, lost his job but made about $11 million on his stock options. But Boone Pickens was not to be outdone. In 1985, Mesa’s board in Amarillo gratefully voted Pickens an $18.6 million deferred bonus for the takeover maneuver with Gulf that had netted Mesa some $300 million. That year Pickens was the highest-paid corporate executive in America.11

The New Security

In May of 1985, the leaders of the seven major Western powers met for their annual economic summit, this one in Bonn. The themes were free market politics, deregulation, and privatization. Promising a “new morning” in America, Ronald Reagan had recently been reelected by an enormous margin. His Administration had seen the passing of the defeatism and pessimism that had been so characteristic of the 1970s and that had, to a considerable degree, been the direct and indirect effect of the oil crisis. Instead of the malaise of inflation and recession, the United States was now enjoying a booming economy and bull market. Margaret Thatcher was well embarked on her reconstruction of British society; commerce, hard work, and breakfast meetings had become positive values in Thatcherite England. Even François Mitterrand, the socialist President of France and the most extraordinary survivor in world politics, had jettisoned nationalization and classic French étatisme in favor of free markets. The Western world was in the third year of relatively vibrant economic growth. But this economic recovery was fundamentally different from previous periods of postwar growth; it was not being fueled by a rise in oil demand. The economies of the industrial nations had adapted quickly to high oil prices, and oil use was flat.

The only serious question about energy that the leaders had had to grapple with during the previous few years was a divisive battle in the early 1980s over plans by the Western Europeans to increase substantially their purchases of Soviet gas. The Europeans wanted to use the gas as part of their energy diversification strategies and to reduce their dependence on oil. They also hoped to stimulate employment in the engineering and steel industries. The Reagan Administration opposed the plan because they feared that the expanded imports would give the Soviets political leverage over Europe and they did not want to see the Russians gaining additional hard currency earnings, which would strengthen the Soviet economy and military machine. As the controversy mounted, Washington banned the export of American equipment for the project and then sought to prohibit the export of European equipment that contained American technology.

This debatable application of extraterritoriality set off an uproar. The result was the most severe European-American conflict since the October War and the embargo in 1973. Two different views of security were at stake: the European emphasis on jobs and domestic economic stability versus the American focus on the Soviet military threat. The American ban threatened employment in a number of European industries, and it was such a severe setback for the big British engineering firm John Brown that Margaret Thatcher herself called Reagan about it. “John Brown is going under, Ron,” she said firmly. And, to drive home her point, she flew to Scotland to be present when John Brown began exporting some of the equipment for the gas deal in explicit defiance of the American ban.

After many angry statements and accusations, a compromise had finally been worked out: The Europeans would restrict their imports from the Soviet Union to 30 percent of total gas, and the development of Norway’s huge Troll field would be promoted as an alternative gas source safely within the NATO alliance. With that, the gas pipeline controversy had been brought to an end, and thereafter questions of energy security could be put aside by the Western leaders.

The issues on the agenda at the 1985 Bonn economic summit thus revealed how the world had changed; they primarily concerned trade relations among the industrial countries—protectionism, the dollar, accommodating Japan’s economic challenge. They were “West-West” issues. Oil and energy, the preeminent “North-South” issue, was not on the table at all. As in the 1960s, oil and energy were now available in abundance and, thus, they were not a constraint on economic growth. Supplies were safe again. Excess oil capacity around the world exceeded demand by 10 million barrels per day, equivalent to 20 percent of the free world’s consumption. In addition, the United States, Germany, and Japan were putting significant amounts of oil into their strategic petroleum reserves. The “security margin” that had been absent during the 1970s was being restored.

Meanwhile, in the Middle East, Iran and Iraq were breaking all the supposed “taboos” in their continuing conflict; they were attacking not only each other’s cities, but each other’s refineries, oil fields, and tankers, as well as tankers bearing the flags of many other nations. The bombing of a tanker would earlier have been enough to send the price of oil shooting up. Now, however, if a ship were hit, the price of oil could just as easily go down as up on the spot and futures markets. In short, the Western leaders no longer needed to include energy among the limited number of major questions on which they, as heads of state, could focus at any given moment. Oil had often been the dominating, and most acrimonious, issue at previous summits. But now, in 1985, for the first time since those summits had been instituted a decade earlier, the leaders issued a communiqué in which there was nothing about oil and energy. Not a single word.

The omission itself was a powerful statement about the degree to which the world economy had adjusted and accommodated itself to the extraordinary economic and political upheavals of the 1970s that had been related to oil. Now oil did not seem to need any special tending; it was indeed just another commodity. Half of the equation that had contributed to ebullient economic growth in the 1960s—secure oil supplies—appeared to be coming back into place. The other half, however, was not there. Oil was still not cheap—not yet.12

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