Category Archives: “The Prize” Yergin

Yergin, D. “The Prize” Chapter 35

Second oil shock (79) led to see oil business as one of the most lucrative businesses out there.

Geology students hired for $50,000 after school.

Real estates in oil producing states skyrocketed.

Shale Oil Development pursued by different companies in the United States

However, after two years, price and demand of oil dropped.

Exon decided to abandon the Colony Project (Shale Oil Development) in 1982 as a result.

The oil boom that was promised by oil US companies died fast.

How Oil Prices Dropped

  1. Federal Reserve applied restrictive monetary policy that increased interest rates to 21.5%
  2. Many other countries outside OPEC begun producing more oil like Alaska, Mexico and North Sea. Also, Egypt, Malaysia, Angola, China begun producing oil.
  3. Technology improved and the flow of new producing countries increased (i.e. Alaska). US oil production increased in the first half of 1980.
  4. Many governments that were heavy oil consumers turned to various policy programs to avoid oil-dependence. Conserve energy, nuclear energy, coal came back, liquid gas…
  5. 1975 legislation that mandated doubling the fuel efficiency in vehicles. US became 25% more energy efficient and Japan 31% by 1983. So, Demand dropped and output from OPEC increased.
  6. US hit recession in 1980 and 1982.

The Cartel

In 1982, non-OPEC overtook OPEC production. Russia dominated with its production and The Spot market was the place where countries competed to get best prices. Prices in Spot Market this time were $8 cheaper than in the contract deals between states.

OPEC was in trouble and was faced with two options to weather the storm. Either cut Price or reduce Production

Cut Price Option

  1. They didn’t want to reduce prices because many countries depended on oil income and lose economic and political structure at home.
  2. Also, they would not reduce prices because they feared industrial countries would profit from higher taxes and excise in their market.

Cut Production Option

  1. (Production) OPEC decided to reduce production. From 31 million barrels a day in 1979, cut its production in 18 million barrels a day in March 1982. They were trying to manage production to try to preserve Price.

Various Circumstances that occurred in 1982:

a)    Iran was gaining the upper hand against Iraqis, b) Israel intervened in Lebanon c) and King Khalid in S. Arabia died in June 1982.

Þ   The fear that Yamani was projecting, not to run after high prices because it might backfire, came true when he stated in 1982, “our price is too high in relation to the world market.”

Þ   British North Seal oil cut process even further to $30 a barrel in 1983 and that hurt Nigeria enormously since they over-depended on oil revenues.

Þ   OPEC met in London in March 1983 and decided to slash prices from 34 to $29 a barrel.

Þ   OPEC also agreed on 17.5 million barrel a day production quota

Þ   Saudis, however, refused to set a quota

OIL JUST ANOTHER COMMODITY

Þ   Oil begun to be viewed just another commodity since the price dropped and it was not viewed as a major security isue. This happened because:

1. Countries increased the inventories that turned to be a major surplus &

  1. 2.  The market shifted from long-term contracts to Spot market. In 1982 – half of oil was sold in the Spot Market

Eggs to Oil Exchange

Þ   1983 Establishment of NYMEX (NY Mercantile Exchange)

–       Gave right buyers to lock in the future prices (buyer lock in purchase price)

–       Producers could sell their production forward (seller lock in selling price)

Þ   Objective for such market was: a) minimize risk & b) reduce exposure to volatility

Þ   Within few years, most of the major oil companies and some of the exporting countries, and large financial houses were participating in crude futures in the NYMEX.

Þ   Price Set History before NYMEX

  1. First, Standard Oil set the price
  2. Texas Railroad Commission
  3. Then OPEC
  4. Now it was open market – NYMEX

The Merging of Oil Companies begin to happen  – T. Boone Pickens being a major player.

Mexican Weekend

1984 – Mexico was in huge debts. Couldn’t achieve to meet its interest, forget about the principal. Many banks in the U.S. owned Mexico’s stocks. When Mexico stocks became worthless, one bank Continental Illinois failed and the Federal Reserve walked in to bail them out.

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Yergin Chapter 34 Summary

November 4, 1979 mobs entered US Embassy by force. Few hours later, they set a part of Embassy on fire. Originally, 63 Americans were held hostage, but soon some were released and 50 remained.

Iranian Hostage Crisis had begun.

Only in Oct. 79, months after the Shah was forced to leave Iran, that US official learned about his cancer.

Oct. 23 Shah was admitted in NY Hospital, despite Carter initial refusal to let him enter the country.

Iran didn’t trust the Shah’s staying in the US and suspected that they were planning another plot against them. They insisted that Iranian doctors see him to confirm his illness and this resonated well with iranians since it reminded them of Mosadegh coup.

The Iranian hostage crisis lasted for 444 days. Khomeini knew and perhaps encouraged them in order to gain momentum and broaden his political base at home.

Nov. 1979, some 700 armed men seized the Great Mosque in Mecca in opposing S. Arabia’s link to the West. Things were getting worse for Carter.

December 1979, another shock. USSR invaded Afghanistan.

One year and a half after his departure, the Shah died in July 1980 in Egypt.

These entire crisis sent prices soaring again, and there were cargos selling at $50 a barrel.

Saudis again pushed to keep prices down from long-term economic fears, but others didn’t agree. In the OPEC meeting in 1980, Saudi wanted a stable price and called for 24 a barrel, but Iranians pushed for 5 more. This again showed the competition between the two oil powers.

April 1980, Carter mounted a military operation rescue with 8 helicopters and C-130’s in order to retake the US Embassy.

Two helicopters broke down on the way there. Another helicopter collided with  C-130.

Iranians passing by in a bus initially saw this and it spread throughout Iran very fast.

Carter called the mission off because the mission required minimum six choppers. Iran took hostages in the street in order to stop further rescue attempts.

This panic soared oil prices again.

June 1980, OPEC met again and Saudis again pushed for stabilized prices. Again, no one listened and average price for oil of barrel was $33

1980, countries were close to celebrate the OPEC 20th anniversary in Baghdad, but things turned sour because Baghdad had smth else in mind.

IRAN v. IRAQ War

The same day of OPEC meeting, Iraq attacked many targets in Iran

This animosity ran over a long time between them. 5000 yrs ago, when Mesopotamia (Iraq) and Elam (Iran) slaughtered each other. There is a poem that describes the event of the city of Ur, destroyed by the soldiers of Elam.

Shah also had an issue with Baathist over Shat-al-Arab – river, that was agreed in 1975 – Algiers agreement.

1975 agreement was reached about Shat-al-Arab. Iraq recognized Iranian demands about the river and Iran (Shah) agreed not to support Iraqi Kurds that were seeking autonomy in Baathist infancy regime. Iraq immediately after the agreement took an offense at the Kurds (20% of Iraqi population). However, they agreed to expel Khomeini in shah’s request.

Saddam Hussein was beginning to take power in Iraq. He was ruthless when he took presidency in 1979 and destroyed anyone in its way. He employed only Tikritis, close family members where he came from, in the government and had only few people who he could trust.

1981, his views were obvious in his printed pamphlets “Three who God should have not invented: Persians, Jews and Flies.”

In 1978, Khomeini was expelled and he held Saddam responsible.

Saddam also feared Iran bc Iraq has a Shia majority and most sacred shrines are in Iraq.

1980, Saddam ordered the killing of a high Shia cleric and his sister. This incident worsened the two country relations.

Khuzistan was Saddams main objective to turn them against Khomeini (who were mainly Shia), and Khuzistan was where 90% of iran oil cam from. This however did not work since the people there saw Iraq as an invader, not savior.

Both countries attacked each other’s oil refineries and despite Iran’s shortcut in damages, Iraq’s almost halted. A major miscalculation by Saddam.

This sent prices soaring, yet again at $42 a barrel.

December 1980 another OPEC meeting sent prices $36 a barrel.

However, by the end of 1980, west had major stocks and demand was falling. IEA also planned on releasing oil stocks and discouraged panic buying. Saudis were also boosting production again to keep prices low.

As a result, OPEC oil demand fell drastically and their output was 27% lower than the year before. In the end, Saudi (Yamani) fears became true and OPEC countries saw another reality.

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Yergin Chaper 33 Outline

Yergin – Chapter 33 “The Second Schock: The Great Panic”

– Anonymous newspaper article against Ayatollah Ruhollah Khomeini sparked great animosity towards Mohammed Shah’s regime

– Animosity between two parties dated back to 1920s during struggle for power between Shiite clergy and Reza Shah

– After millions of dollars were lost in failed attempts of modernization, Iran was in the midst of economic chaos and social and political tension

– People were moving into overcrowded cities, agricultural output was down and food imports were rising; Inflation was fueling discontent of  Shah’s regime

– Electricity demand outweighed supply causing periodic blackouts throughout the country

– Khomeini embodied opposition to and discontent of the Shah, becoming political voice against the “White Revolution”, a reform program

– Under Jimmy Carter, Human Rights became an issue leading to organizations to target Iran and the Shah, while he was focused on the political liberalization of Iranian Government.

Human Rights record began to mount against him where the United States openly criticized his handling of his government crackdown (through SAVAK – secret police) and many other abuse of power. Inside frustration also increased and this brought intense pressure on the Shah after Carter’s election.

– Another article ridiculing Khomeini was printed on January 7, 1978 and sparked riots in holy city of Qom; many demonstrators were killed leading to a 40-day mourning period after which more demonstrations led to more killings; known as “doing the 40-40.”  This article aimed at killing Khomeini’s credibility, but this fired back at the Shah when riots were set of in the city of Qom.

– Mohammed Shah was focused on his liberalization, joining British and American ranks in not believing that his regime was in trouble

– In the meantime, US intelligence on Iran was not important and not on the forefront of policy; as a analyst said “ You couldn’t give away intelligence on Iran”

– By September 28, 1978 the Defense Intelligence Agency predicted that the Shah will weather the storm and remain in power for another 10 years.

– At the same time, fundamentalists set movie theaters on fire, opposing “sinful movies”; by early September demonstrations had reached Teheran

– Signs of the Shah having leukemia became noticed by British ambassador in mid-September, as he had previously been diagnosed by French doctors in 1974

– Seeing the collapse of his regime, the Shah begins to admit when he stated “we are melting like snow in the water.”

– Khomeini who had been exiled to Iraq gets expelled from there as well and established himself in France in October 1978

– Global impact of oil strikes following discontent of Iranian regime as exports of 4.5 million barrels per day were reduced to just one million per day

– In order to quell demonstrations, the Shah installed military government, yet the General in charge suffered a heart attack, weakening any authority

– Carter Administration in wake of lack of intelligence was in shock with incidents as they were more focused on Camp David Accords, SALT negotiations with Soviets and Chinese relations

–  The US did not send clear signals to the Shah on how to deal with the situation and some articles published in respected papers in the US predicted Khomeini to be a progressive ideologue who would be seen as a stabilizing factor in Iran.

– In December 1978, Khomeini called for blood, vengeance and more martyrs

– Shah refused to crush major demonstrations and humiliated by prank phone call

– Christmas day, Iranian oil exports came to a halt, spiking spot prices on oil 10-20%

– Osco, decided to evacuate its Western employees with the last man leaving at the end of January following an “epic” journey home

– Second Oil Shock started in December 1978 when Iran ceased its exports

– Lack of oil was offset by other companies

– Saudi Arabia increased oil production but then cut back early 1979

–  Jan. 16, the Shah went to the airport and said that he was tired and needed rest. The show was over.

–  Feb. 1, Khomeini was back in Tehran

– Lack of Iranian oil only represented 4-5% loss of supplies, but caused price increases of 150% caused by panic explained by five circumstances

– Apparent growth of oil consumption and the signal that it gave to the market

– Disruption of contractual arrangements within the oil industry, resulting from revolution in iran

– Contradictory and conflicting policies of consumer governments

– Upheaval presented the oil exporters with the opportunity to capture additional rents, pushing the price up

– Uncertainty, anxiety, confusion, fear and pessimism fueling actions during the panic

– Many governments and buyers bought as much oil as possible while prices were low on any given day, increasing their reserves, continuously driving up prices through hoarding

– As Britain was more dependent on Iran for their oil imports, BP was forced to invoke “force majeure” (act of God) to cut back on third party contracts to buyers

– created a domino effect down the line, as more suppliers cancelled contracts and shipments

– spot crude prices spiked more early in 1979 with OPEC countries deciding they can charge whatever the market could provide for oil; “Free-for-all” in setting prices

– Leap frogging: producers vying with each other to raise prices

– Scramble: bruising competition for supply among purchasers

– Iran slowly began exports at the beginning of 1979, but spot crude prices had risen by 30%

– Saudis opposed the leap frogging of prices and issued “Yamani Edict” stating they would stick to the official prices, yet cut production again sending spot prices even higher

– Carter Administration started pursuing synthetic oils and other means of energy

– Three Mile Island nuclear plant incident stalled progress and raised doubts about nuclear energy

– Fears of running out, consumers stockpiled oil spiking prices and creating gas lines as before in 1973

– Spot prices finally eased off during the Summer of 1979, but some OPEC countries continued the decrease in production

– So, the combination of so many factors -oil crisis in 1979-80, the Iranian political collapse, and the Three Mile Island nuclear plant leak and the inflation was also moving up in the U.S. – were clear signals for the beginning of the end for Carter administration, who came to power in 1977.

–  Carter, in aim to boost his administration, asked for every member of his cabinet to submit resignation to send a signal to Americans that he was to begin fresh. This had a boomerang effect and Washington Post editor soon reported that US Central government collapsed.

– Egypt was embargoed by Iraq for the signing of the Camp David peace accords

– Nigeria nationalized its BP fields and then auctioned them off for a higher price

– Iran’s internal struggles caused a state of anarchy by the fall of 1979

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