A Giant Of The Global Oil Industry Is Gone
“Ahmed Zaki Yamani, the second oil minister of Saudi Arabia, was a giant on the petroleum stage. During his 20-year reign, he helped revamp relations with Aramco, fellow members of OPEC, and oil consumers.”
Two weeks ago, Ahmed Zaki Yamani, the former oil minister of Saudi Arabia, passed away at age 90. He was the kingdom’s second oil minister, having assumed that role in 1962. His service ended when he was summarily dismissed via a television announcement in the fall of 1986 following a leadership change within the Royal family. During his 24-year reign as oil minister, Mr. Yamani, although a commoner who was often referred to as Sheik, was instrumental in reshaping relationships within the global oil industry. Initially, he reshaped the relationship between Saudi Arabia and its Aramco oil partners in the 1960s. However, he was probably more famous for his role in reshaping the role of OPEC in the world’s oil market in the 1970s and again in the 1980s.
Exhibit 4. The Young, Influential Oil Minister Of Saudi Arabia SOURCE: arabianbusiness.com
Although Mr. Yamani had been oil minister for roughly a decade by the early 1970s, his impact had been muted until the global oil industry underwent a dramatic transition. Oil production in the United States peaked in 1971, and the country rapidly shifted from providing the marginal barrel, which kept the world’s oil price down, to a major oil importer. This transition enabled Saudi Arabia to become the supplier of the marginal barrel and handed the oil pricing power to OPEC. At the time, few people, even within the global oil industry, fully appreciated the significance of the shift in oil pricing power.
Our experiences with the oil and gas industry began in 1971. Little did we appreciate the turmoil the industry was about to enter, just as we failed to understand how shaking up the old oil order would reshape global economies around the world.
What was not appreciated by most was that the oil revolution really began in 1968, before the peak in U.S. output, and it happened not in the Middle East, but in a nation in North Africa – Libya. In 1967, the Six Day War between Egypt and Israel had shuttered the Suez Canal, making Libyan oil more valuable since it did not need to travel through the canal to Western European and North American markets. As Libyan oil prices rose, the political problems of a nation ruled by an aging king with disgruntled military factions simmered below the surface. It was not until September 1, 1969, when those tensions exploded in a coup led by a charismatic young military officer named Muammar al-Qaddafi. His coup began 3-4 days before the primary military leaders were about to lead their own coup. Mr. Qaddafi was strongly influenced by the views of Egypt’s Gamal Abdel Nasser, the general who had overthrown that country’s government some years earlier.
After consolidating his power, in 1970, Mr. Qaddafi was ready to take on the oil industry. His first move was to push for an increase in the posted price, which determined both what the government received in income, but also the profitability for the 15 international oil companies operating there. As the story is told, Libya demanded a 43-cent increase in the price, to which the head of Esso-Libya reportedly commented, “Good God! That was out of the world.” Esso-Libya offered 5-cents. Libya was prepared to shut down the oil output. Mr. Qaddafi had said, “People who have lived without oil for 5,000 years can live without it again for a few years in order to attain their legitimate rights.” Few people thought he was serious.
Occidental Petroleum, headed by Dr. Armand Hammer at the time, who held a significant oil concession, and which was heavily dependent on it, was the first company to cave to Libya’s demands for a greater share of the profits. After searching for a multitude of alternative oil supplies, Dr. Hammer agreed to give Libya 55% of the profits. This deal set off a wave of deals, starting with the Shah of Iran, and eventually involving all of OPEC. The countries also wanted the ability to set the oil price. This pricing turmoil forced the oil companies to unite to confront the uncontrollable situation.
The next major event was the Yom Kippur War that began on October 6, 1973. Egypt and Syria attacked Israel. As the battles raged, the oil weapon came into play, after years of being considered, threatened, but never used. Oil embargos were launched against the western powers who had supported Israel, and oil prices jumped as expected for such an essential product to keep the world’s economies running.
As a young analyst struggling to understand both the technical issues of the oil and gas industry, but also the geopolitical environment influencing it, we spent countless hours reading and talking with experts of all pedigrees. We were an early member of the National Association of Petroleum Investment Analysts (NAPIA) that sponsored educational meetings, as we all learned the business together. We watched Mr. Yamani, a U.S. educated lawyer who had helped write Saudi Arabia’s deal with Aramco in the late 1950s, and who regularly held forth on television and with reporters about oil politics, expound on the new realities of oil. To further investor knowledge, investment brokers whose firms’ earned commissions by trading stocks, retained former state department
Exhibit 5. Learning To Understand The New Iran SOURCE: Allen Brooks
officials, as well as former energy policymakers and economists, and even former officials from government spy agencies, to consult with their clients. In 1979, when the Shah of Iran was overthrown and the country came under the leadership of Ruhollah Khomeini, a Shiite cleric, who had previously been exiled by the Shah, the country transitioned into an Islamic state. With that political change came the loss of three million barrels a day of oil, resulting in a tripling of world oil prices. At that time, one investment broker we dealt with employed a former official from Israel’s Mossad to educate us about Iran and the changing Middle East political situation. We still have the book (pictured above) used to help educate us.
As Mr. Yamani was leading Saudi Arabia, who had supplanted the United States as the marginal supplier of oil, he understood the market pressures that had been unleashed by the turmoil of the prior decade. With oil prices jumping from $3 a barrel to $27 during the 1970s, the industry did what it needed to do – explore for new oil supplies outside of OPEC’s grasp. The North Sea came of age, and the late 1960s Alaskan oil discovery began production. The oil price spikes not only crippled economies but forced huge changes in energy consumption patterns and efficiency steps, cutting the growth rate in global oil demand. As reduced oil demand growth was met with surging global oil supplies, OPEC members were happily hauling in huge incomes, little realizing that their world was about to change. The oil market became hugely over-supplied and oil prices began weakening. Mr. Yamani was thrust into the role of trying to manage OPEC’s output to sustain prices at elevated levels to keep its members’ economies functioning. Of course, privileged families from OPEC countries were routinely traveling to London, Paris, and New York to shop, and then loading their private jets with their purchases to fly home.
When the cheating among OPEC members spun out of control and Saudi Arabia’s sacrifice of its oil income by cutting output to support prices pressured the government’s revenues, Mr. Yamani engineered a flooding of the world’s oil market. By dramatically increasing Saudi Arabian oil output and allowing oil prices to drop, Mr. Yamani created the 1986 oil price crash, which radically altered the world of OPEC. That move may have been his undoing as oil minister, but it also coincided with a change in leadership within the Royal Family. Little did we, or nearly anyone else, appreciate how the oil industry would be reshaped by that mid-1980s oil price collapse, something that took more than a decade to recover from.
The mild-mannered and soft-spoken Mr. Yamani was also a party to several violent incidents in 1975. He was present at an official function welcoming the oil minister of Kuwait when King Faisal’s nephew fired the shots that ended the king’s life. Later that year, Mr. Yamani was one of the OPEC officials who was kidnapped from a ministerial meeting in Vienna that saw three people killed. The kidnapped officials, facing death sentences from the terrorists, after flying to Algiers and then to Tripoli and back to Algiers, were released after the death sentences were revoked. These episodes caused Mr. Yamani to become concerned about his safety during travel in fulfilling his official functions.
As we watched Mr. Yamani’s interviews and speeches, and read what he wrote and said, we are always reminded of the quotation attributed to him by New York Times columnist Thomas Friedman that “the Stone Age did not end because the world ran out of stones, and the Oil Age will not end because we run out of oil.” As we contemplate the energy transition currently underway and the predicted demise of the petroleum industry, we are always reminded of that quotation.