Trump, Iran, and oil: Lessons from Iran’s Oil History
President Donald Trump wants to prevent Iran from earning any oil revenues. He asked several countries to stop importing Iranian oil. He either wants the Iranian government to yield to pressure and sign a new nuclear deal, or he wants to see a regime change in Tehran.
First, my theory about sanctions: Historically, economic sanctions never worked. Sanctions were imposed because of their “symbolism” and they failed because they invoke “nationalism” in the targeted country. “Symbolism” vs “Nationalism” made sanctions easy to use and easy to fail. But the situation changed since the 1990s. Globalization meant a globalized financial system that is led by the United States. This gave the U.S. additional power that did not have before: Controlling financial transactions, even by foreign central banks. Globalization also enabled more foreign companies to get financing form the US and get listed on US exchanges. By controlling finance, sanctions became a very powerful foreign policy tool, but success remains limited to some weak countries such as Libya.
Second, when talking about President Trump blocking Iran’s oil exports and changing the regime in Tehran, two questions come to mind:
Have Iranian oil exports ever been completely blocked by another nation?
Has the US succeeded in the past in changing the regime in Tehran?
The answer to these two questions is YES and YES!
Below, I am going to highlight the most important events in Iran’s oil history that answer the above two questions. From that history, we will learn what it will take to block Iran’s oil exports and change the Regime in Tehran. Hence, we can assess President Trump’s ability to achieve his objectives of blocking Iran’s oil exports and changing the regime in Tehran, and the resulting impact on the global oil markets. Please note that this is not an exhaustive list, it is just a quick review to answer the questions above.
- First oil discovery In Iran, 1908
- 1901: Start of oil exploration in Persia when William Knox D’Arcy was granted a 60-year concession in exchange for £20,000 in cash, another £20,000 in shares, and 16% of net profit as royalties. The concession included all of Persia except the five provinces bordering Russia. This exclusion becomes important later in the story.
- 1908: After seven years of failure, D’Arcy gave up and sold most of his shares to the British Burma Oil Company.
- 1908: May 26, first commercial oil discovery at Masjed Soleiman, which came in the eleventh hour after a decision was made to end the operations but just before the shutting down the company.
- 1909: April 14, establishment of the Anglo-Persian Oil Company (APOC) as a public company to manage the concession (Now BP) where Iran would continue to get 16% of net profit as determined by the original concession.
- 1912: Decision to switch the British Royal Navy from coal to oil. Note that the British came late to the game, mostly to protect the “coal industry”! Sounds familiar? Who was the First Lord of Admiralty who took the decision to switch to oil? Winston Churchill!
- 1914: In May, the British government’s purchase of the majority of APOC of 51%. This purchase will play a significant role in future events. Control of oil was vital to national security! Now keep in mind this connection between APOC and Churchill. It will play a significant role in the coming decades.
- 1923: APOC hired Churchill as a consultant to lobby the British government to secure the concession in the all of Persia. Remember, the concession excluded five provinces bordering Russia and now the British wants to control them. APOC got what it wanted. There is something about those five provinces that we will discover later.
- 1933: The APOC concession was renegotiated and signed for 60 years. The concession was rejected by many political and religious leaders for several reasons. Chief among them: it striped Iran of any power to control its oil production and exports.
- 1935: APOC name changed to “Anglo-Iranian Oil Company (AIOC) after the Ruler of Iran, Reza Shah, changed the name of the country form Persia to Iran. Therefore, any time you see an article talking about Iran and Iranians before 1935, you know what is wrong!
- 1941: Now we are in WWII. Britain and the Soviet Union invades and occupy Iran. Reza Shah was arrested by the British and exiled. His 22-year old son, Mohammed, was appointed the Shah of Iran.
Remember the five provinces bordering Russia that were excluded from the original concession, then added later, well, now occupied by the Soviets!
- 1950: Iran is boiling with opposition to the British. Talks of nationalization became widespread. Worth noting, for almost 4 decades, Abadan refinery was the largest oil refinery in the world. AIOC was the single largest British assets overseas.
- 1951: Mohammed Mosaddegh became a prime minister after his party won the majority in Parliament (Majlis)
- 1951 oil was NATIONALIZED on March 19, only a few days before the Iranian new year and the Nowruz festivities.
- 1951, the National Iranian Oil Company (NIOC) was founded to replace the AIOC on April 30.
- 1951: Mosaddagh wanted to negotiate. The British refused. Ironically, he wanted a contract similar to the contract the Venezuelans were able to sign in 1948 with an American oil company producing oil in Lake Maracaibo. By this time, Venezuela started losing market share and strategic significance to the Middle East. The 50%-50% they were able to attain was one of the reasons for the loss, which made companies more interested in investing in the Middle East. The Venezuelans thought if they spread the word of 50%-50%, they can soften the competition. Mosaddagh listened, and paid a heavy price!
- 1951: British workers were evacuated in the fall, mostly from Abadan.
- 1952: Blockade by British royal navy and interception of ships carrying Iranian oil. Exports came to a complete halt. So, yes, Iranian crude exports were blocked by another nation!
- 1951-1953: Mosaddagh thought he can replace the Britch engineers and workers, but other European nations and the US refused to help. Only the Italians were willing to import oil from Iran, when they did, their tanker was seized by the British during the blockade. That scared the rest of eth world. No more shipments!
- 1953: On August 19, a military coupe organized by the US CIA overthrew the government of Mosaddagh. Labeled “Operation AJAX”, it restored the Shah, Mohammad Reza Pahlavi to power, since he left his post after the nationalization.
So yes, the US was successful in changing the regime in Tehran! It happened a few months after Dwight D. Eisenhower was elected president of the United States.
Here is one more:
The leader of Operation Ajax was the grandson of the former U.S. President Theodore Roosevelt. He was a CIA agent. His name was Kermit Roosevelt, Jr.
The US provided several justifications for the coup, but here is the most interesting one: remember those five provinces on the border of Russia (now the Soviet Union)? The US considered Iran in general and these provinces in particular of strategic value. Also, the US feared the Iranian communist might take over the government and Iran will become part of eth Soviet block!
- 1954: AIOC became the British Petroleum Company (BP)
- October 1954: Since the US managed the coup, now it wants the British to pay the price! A new company was formed to manage the Iranian oil assets: The Iranian Oil Participants Ltd (IOP). The founding members of IOP included British Petroleum (40%), Royal Dutch Shell 14% (Shell now), French Compagnie Française des Pétroles (CFP) 6% (Total now), Gulf Oil 8% (Now Chevron), and the four American partners of Aramco 32% (8% each).
The Aramco partners were Standard Oil of California (Now Chevron), Standard Oil of New Jersey (now ExxonMobil), Standard Oil Co. of New York (Now ExxonMobil), and Texaco (now Chevron). The agreement would give Iran 50% of the net profit, but sadly the agreement does not allow the Iranians to control oil policy nor to be on the board of directors. In addition, the contract states that Iranians auditors are NOT allowed to see the company’s books. With these terms, the Iranian revolution of 1979 should not have been a surprise. By 1979, most oil countries have already nationalized and fully owned their own oil resources with full control of production and export decisions. The one issue that I cannot explain: How Iran operated within OPEC while it had no control for 19 years (OPEC was established in 1960)
- 1967: Mosaddagh died while under house arrest on March 5
- 1979: The Iranian Revolution. Shah was ousted. Refused entry in the US, but later admitted for a short period for medical emergency in a hospital in San Antonio, TX., despite fear of attack on US embassy in Tehran. The news of the admission led to the Iranian students storming and occupying the embassy. There are many conspiracy theories on the role of the western countries in this 1979 revolution, especially France. (so even here, if you believe in these rumors, another regime change by foreign powers)
- 1979: The new Iranian Regime, led by Ayatollah Khomeini, nationalized all IOP assets and nullified the 1954 agreement. Since then, everything is under the control of the NIOC.
- 1980: Shah dies in Egypt on July 1.
- 1980: Iraq-Iran war started on September 22.
- 1988: Iraq-Iran war ended on August 20.
- Blocking the oil exports of a country requires a strong navy that blocks all shipments and willing to take action against violating ships. Otherwise, there are strong incentives for various parties to take advantage of low-priced Iranian oil.
- Strangling a regime requires cooperation with other countries. If Mosaddagh was able to get engineers, equipment, and spare parts form other European countries, we would have seen different Middle East now.
- Changing a regime requires people on the ground with strong support from local military leaders who are willing to participate.
- The biggest threat to any foreign investment is nationalism
- Nationalization fail when you do not have the human resources needed to replace foreigners.
Short of military blockade, it is impossible to completely stop Iran from exporting oil. Therefore, we will see a decline in Iran’s exports, but they will not go to zero. I still think that the impact of sanctions on oil production will be lower than what most people think. Given the history above, remembers this: President Trump is not Churchill nor Eisenhower
For more information on the 1953 and the US involvement:
64 Years Later, CIA Finally Releases Details of Iranian Coup
CIA admits role in 1953 Iranian coup
For the history of BP