We Fight for Oil

Ludwell Denny

CHAPTER TWO
The Oil War Begins


OIL is “as necessary as blood in the battles of tomorrow.”  That was Premier Clemenceau’s appeal to President Wilson for American petroleum in the winter of 1917.  “The safety of the Allied nations is in the balance.”[7]  After the war was won, Lord Curzon told the story:  “The Allies floated to victory on a wave of oil.”[8]

Then the peace conferences—and the fight of the victors over the oil spoils.  When Great Britain and France in 1919 were getting ready to divide the Near East between themselves in mandate form, M. Henri Berenger prepared a memorandum for his Government.  M. Berenger, a French industrialist and senator, had been war-time Oil Commissioner and was to be Ambassador to Washington.  The memorandum contained this warning:

“He who owns the oil will own the world, for he will rule the sea by means of the heavy oils, the air by means of the ultra refined oils, and the land by means of petrol and the illuminating oils.  And in addition to these he will rule his fellow men in an economic sense, by reason of the fantastic wealth he will derive from oil—the wonderful substance which is more sought after and more precious today than gold itself.”[9]

How natural that this life blood of nations in war and peace should determine diplomacy.  These years since the Armistice are described as the period of “the oil war.”  The crisis is ahead.  Here are some of the reasons:

Every large nation must look outside its own territories for an essential reserve.  The United States has less than 12 per cent of world reserves.  Great Britain within the Empire has six per cent.  Others have less.

About 70 per cent is in countries whose weakness invites economic and political encroachment by major Powers.  This applies especially to the Mexican Gulf-Caribbean region, the Near and Middle East, and Russia.

In self-defence many of these oil-bearing countries have passed laws vesting subsoil rights in the native governments, and laid down restrictive regulations, royalties and duties.  This defiance of claimed property rights of foreign nationals is used by the Powers to justify diplomatic pressure and, in extreme cases, military intervention.

Large capital investment, often such as only American or British companies can provide, is necessary for successful exploration and production.  Unusually large expenditure is required in most of these countries.  Their resources can be tapped only by long pipe-lines across mountains, desert, or jungle to the sea.  That is the situation in Persia, Mosul, Colombia, and less important fields.

Often a second weak country or territory is the only practicable outlet for otherwise inaccessible deposits;  as the outlet for the south Persian field through the Baktiari tribe region, the Russian Caucasus gateway for the north Persian field, the projected pipe-lines across Syria or Palestine to tap Mosul in Iraq, and the Venezuelan passage out of the east Colombian pool.  Thus the battle of foreigners for one field may extend from the producing territory to the transit country.

There is a larger international issue.  An approximate balance between several Powers in an oil war might result in an armistice, so the strong could divide the riches of the weak.  But two Powers have gained control of most of the world reserves.  Great Britain and the United States are fighting for supremacy.  The United States is losing.  Great Britain has grabbed three-quarters of the Earth’s known supply.  Let a Briton describe the situation.

“America has recklessly and in 60 years run through a legacy that, properly conserved, should have lasted her for at least a century and a half,” according to Sir Edward Mackay Edgar, British petroleum banker.[10]  “Just when Americans have become accustomed to use 20 times as much oil per head as is used in Great Britain;  just when invention has indefinitely expanded the need for oil in industry;  just when it has grown to be as common and as true a saying that ‘oil is king’ as it was 20 years ago that steel was king;  just when the point has been reached where oil controls money instead of money controlling oil—the United States finds her chief source of domestic supply beginning to dry up and a time approaching when instead of ruling the oil market of the world she will have to compete with other countries for her share of the crude product. ... The British position is impregnable.  All the known oil fields, all the likely or probable oil fields, outside of the United States itself, are in British hands or under British management or control, or financed by British capital.”

Sir Edward’s apparent desire to crow over a defeated America led him to exaggerate in that now famous and regretted article in 1919.  Nine years later the British boast is nearer the truth.

Sir Edward’s statement leaves out the vital factor.  That is the British Government.  The struggle is not alone between American and British capital.  It is between American capital and the London Government.  Of the two dominant British companies, the London Government has close unofficial relations with one and has direct controlling ownership of the other.  That makes oil an international explosive.

To equalize the contending forces American petroleum princes have sought State Department support.  “The only thing needed now is an aggressive foreign policy on the part of the United States,” was the plea of Mr. A.C. Bedford, late chairman of Standard Oil of New Jersey.  “All proper diplomatic support in obtaining and operating oil-producing property” abroad was recommended by the Federal Trade Commission in 1923.[11]

Such prodding was not needed by the State Department.  Since 1902 its consuls had been active in behalf of Standard and other American companies abroad.[12]  As the Anglo-American competition intensified, the Department from time to time had reminded its foreign representatives of their duties in this connexion.  Specific instructions were sent by the Department to all United States diplomatic and consular officers on August 16, 1919, as follows:

“Gentlemen:  The vital importance of securing adequate supplies of mineral oil both for present and future needs of the United States has been forcibly brought to the attention of the Department.  The development of proven fields and exploration of new areas is being aggressively conducted in many parts of the world by nationals of various countries, and concessions for mineral oil rights are being actively sought.  It is desired to have the most complete and recent information regarding such activities either by United States citizens or by others.

“You are accordingly instructed to obtain and forward promptly from time to time information regarding mineral oil concessions either proposed or granted, sale or transfer of such concessions, change of ownership of oil property or important changes in ownership or control of corporate companies concerned with oil production or distribution.  Information regarding development of new oil fields or increased output of producing areas should also be forwarded.  Comprehensive data are desired and reports should not be limited to points specifically mentioned above, but should include information regarding all matters of interest affecting the mineral oil industry which may arise from time to time.

“You are also instructed to lend all legitimate aid to reliable and responsible United States citizens or interests which are seeking mineral oil concessions or rights.  Care should be taken, however, to distinguish between United States citizens representing United States capital and United States citizens representing foreign capital;  also between companies incorporated in the United States and actually controlled by United States capital and those companies which are merely incorporated under United States laws but dominated by foreign capital.”[13]

Mr. Charles Evans Hughes testified before the Coolidge Federal Oil Conservation Board:  “The foreign policy of the Government, which is expressed in the phrase ‘Open Door,’ consistently prosecuted by the Department of State, has made it possible for our American interests abroad to be intelligently fostered and the needs of our people, to no slight extent, to be appropriately safeguarded.”[14]  The former Secretary of State and present counsel of the American Petroleum Institute and Standard Oil speaks with the authority of experience.

If the British Government by company ownership and direct participation in the struggle for foreign reserves has transformed oil into an international explosive, the Washington Government in challenging British supremacy may touch off that explosive.  The most provocative activities of the State Department since the Great War have been in the service of oil.

With the Washington Government in the fight, how does it happen that American oil magnates, once world dictators of supply, have let Great Britain capture three-fourths of all reserves? The answer is a tale of melodrama such as even scenario writers have not conjured for the films.  This “thriller” of course has a hero, and a villain.  But which is hero, and which is villain, depends upon the nationality of the audience.  One is Mr. John D. Rockefeller, called “the Oil King.”  The other is Sir Henri W.A. Deterding, who prefers the name “Napoleon.”


The prologue of the international oil melodrama begins in that part of the world better known as the birthplace of Christianity.  There in the Near East at the turn of the century appeared two gentlemen from afar.  One was an American, Rear-Admiral Colby M. Chester.  The other was a Briton of the more adventurous sort, an Australian, Mr. William K. D’Arcy.  While on a diplomatic mission to Turkey in 1899 to obtain redress for American losses in Armenian massacres, the Admiral scented oil.  He hurried home, resigned his naval commission, and returned to the Sublime Porte.  The American wanted railway, mining and petroleum concessions in Anatolia and Iraq, or Mesopotamia as it was then named.  Meanwhile the mysterious Mr. D’Arcy was prospecting somewhere in the interior of Persia.

American Indians in western Pennsylvania almost three centuries earlier had led Father Joseph de la Roche D’Allion, a French Franciscan missionary, to a pool of black waters.  Since then this miracle-working fluid had been used increasingly, first as a medicament and later as an illuminant.  Out in Cleveland a Mr. Rockefeller had the happy idea of dominating the growing industry by pipe-line control, railroad rebates, legislative manipulation and unscrupulous competition.[15]  Control of American production gave Mr. Rockefeller the premier position as world distributor.  British and Dutch companies were springing up in the Far East, French and Russian capital was beginning to develop the Caucasus, but America was the largest producer and Standard the chief seller in foreign markets.  Then in 1898 new gushers in the Caucasus sent Russian production upward till it surpassed American output for a time.[16]  In other countries a few industrial dreamers were becoming oil conscious.

Hence the presence in the Near East of Admiral Chester and of Mr. D’Arcy.  Unexpectedly, the latter’s dream came true.  He obtained in 1901 from the Shah a 60-year monopoly oil concession covering five-sixths of the Persian Empire, all except five northern Caspian provinces beyond the mountains.  For these half-million square miles and their petroleum riches he paid $20,000 cash, pledged the same amount and 16 per cent royalty.

Sultan Abdul Hamid of Turkey was less obliging than the Persian Shah.  Admiral Chester got only promises from the Turk.  Mr. D’Arcy had gone to London, organized what was later the Anglo-Persian Company to exploit his new concession, and was soon back in the Near East with his eyes on the Mesopotamian vilayets of Bagdad and Mosul.  These were the areas sought by the Admiral.  Then Germans appeared.  Concession-hunters were crowding each other.  At this point Abdul Hamid discerned that oil was a commodity not unworthy of the personal attention of Allah’s anointed.  He transferred the Bagdad-Mosul rights from his Government to his private account—and let it be known he was now ready to talk business with the foreign infidels.

The American Admiral lost.  The Germans obtained the Anatolian Railway Company concession, with an option to drill the Bagdad-Mosul fields on shares with Abdul.  Then for some unexplained reason the Sultan changed his mind, he was not sure about this German concession after all.  Enter Mr. D’Arcy and Anglo-Persian.  But before the British could close their deal, Abdul was swept out by revolution and the Young Turks were in power.

Again the American pushed forward.  This time he got his concession promises in writing.  But before his contract could be ratified the British and Germans had combined against him.  They formed in 1912 the Turkish Petroleum Company, consisting of the British Dutch-Shell oil group, the Deutsche Bank of Berlin, and the Turkish National Bank in which there was much British capital.[17]  The new organization revived the 1904 German claim.  Within a year the Turkish Bank’s 50 per cent stock interest in the joint company was transferred to Anglo-Persian.  Then it was apparent that no less a power than the British Government had played and won—from the American holder of the concession.

The London Government now came into the open.  With the aid of the Berlin Foreign Office it forced Turkey to confirm the old German claim in the form of a Turkish Petroleum Company concession to the Bagdad-Mosul fields.  That was in 1914.  It was the last bit of Anglo-German co-operation for some time.  Indeed the Kaiser’s Government had certain ambitious plans for more than a quarter share in the Turkish Petroleum Company—a “Drang nach Osten” for political power, the Berlin-Bagdad railway and all the oil.

Intervention by the British Government to form the new company was opposed by some British oil men.  This opposition was explained at the time by Sir Robert Waley Cohen, Shell Oil Company director:  “These arrangements [reconstitution of the Turkish Petroleum Company] were entered into at the instance of the British Government.  We do not believe in mixing up politics with business:  it leads sometimes to corruption, always to inefficiency, and tends to convert what should be mere commercial rivalries into national animosities—a very serious disadvantage.”[18]

But the London Ministry apparently was less concerned with preventing national animosities than with preparedness to win any war provoked 6y such animosities.  Consciously and deliberately London had made a momentous decision.  The British Government was going into the oil business as a direct participant in the struggle for foreign concessions and markets.  This decision, which appeared a sudden one, had been maturing since 1905.  In that year Mr. D’Arcy, after unsuccessful efforts to interest British capital in his Persian concession, was on the point of selling to foreigners.  To prevent this Mr. E.G. Pretyman, Civil Lord of the Admiralty, and other officials secretly arranged for British private capital to operate the Anglo-Persian Company until it could be taken over openly by the British Government.

Why? Where had the British Government picked up so early the lesson of international oil power, which the rest of the world did not learn until the Great War? The London Government learned from that rare type of genius, a professional military man with imagination and without fear of bureaucratic superiors.

“The use of fuel oil adds 50 per cent to the value of any fleet that uses it.”  That is orthodox doctrine now.  It was revolutionary heresy when Admiral Lord Fisher began to preach it to the British Government in 1882.  Nevertheless it alarmed the London politicians to be told that Standard then controlled 30,000,000 of the world’s 35,000,000 barrels of production of this stuff over which some “fool” naval officer was getting so excited.

“The use of oil fuel [would] increase the strength of the British navy 33 per cent because it can re-fuel at sea off the enemy’s harbours,” the Admiral reported later.  “Coal necessitates about one-third of the fleet being absent refueling at a base. ... With two similar dreadnoughts oil gives three knots more speed—and speed is everything.  Oil for steam-raising reduces the [coal] engine and boiler-room personnel over 60 per cent. [Engineers now say an equal amount of oil will produce twice as much steam-power as coal]. ... At any moment during refueling the oil-engine ship can fight—the coal-burning ship cannot. ... Oil does not deteriorate by keeping.  Coal does. ... It is a criminal folly to allow another pound of coal on board a fighting ship.”[19]

Lord Fisher not only discovered the method.  He found the man.  The man was a Holland clerk.  He was rising as an official in the Royal Dutch Petroleum Company.  The Admiral described this gentleman to the British Government as “Napoleonic in his audacity and Cromwellian in his thoroughness.”

Henri W.A. Deterding was the name of this new Napoleon.  He lived up to Lord Fisher’s description.  He extended the oil holdings of Royal Dutch into a dozen countries.  He arranged for increased British capital control of this international trust.  He merged the British Shell oil group with it, making of the two largest European organizations a united Dutch-Shell combine, the strongest in the world.  He became a British citizen.[20]  The British Government made him Sir Henri.  And then he began to make British foreign policy.

By 1913, according to Lord Fisher’s Memorandum at the time, Sir Henri was “confessing” to the British Royal Commission on oil that:  “He possesses in Roumania, in Russia, in California, in Trinidad, in the Dutch Indies, and shortly in Mexico, the controlling interest in oil.  The Anglo-Persian Company also says he is getting Mesopotamia and squeezing Persia, which are practically untouched areas of immense size reeking with oil. ... Sir Thomas Browning says in his evidence that the Royal Dutch-Shell combination is more powerful and aggressive than ever was the great Standard Oil Trust of America.  Let us therefore listen with deep attention to the words of a man [Deterding] who has the sole executive control of the most powerful organization on earth for the production of a source of power which almost doubles the power of our navy whilst our potential enemies remain normal in the strength of their fleets.”[21]  This British Commission, “listening with deep attention” to the Oil Napoleon, was getting ready for the war which Lord Fisher a decade before had predicted to the very year.

To the Fisher-Deterding team was added the political power of Mr. Winston Churchill, then First Lord of the Admiralty.  Just a year before the outbreak of the Great War, the First Lord revealed to the House of Commons the policy which has since made history.

“Our ultimate policy is that the Admiralty should become the independent owner and producer of its own supplies of liquid fuel,” he explained.  “First, by building up an oil reserve in this country sufficient to make us safe in war and able to over-ride price fluctuations in peace;  secondly, by acquiring the power to deal in crude oils as they come cheaply into the market. ... The third aspect of the ultimate policy is that we must become the owners, or, at any rate, the controllers at the source, of at least a proportion of the supply of natural oil which we require.”[22]

To carry out this policy the London Government moved rapidly.  It reached for Mosul.  The British had one-quarter interest with Germans and Turks in the Turkish Petroleum Company’s unrecognized German claim.  Within a few months the London Cabinet had increased British ownership in that company to three-quarters, left the Germans with only one-quarter interest in their own claim, shut out completely the Turks who controlled the territory and the Kurds who owned the oil land, and taken the concession from the American who held it.

That was only a beginning.  The British Government bought for $11,000,000 controlling interest in the Anglo-Persian Company.  With this contract went 48 years of monopoly over most of the Persian Empire, with the then richest oil fields of the Eastern Hemisphere.

Then August 1914.  Mr. Churchill’s preparedness was “vindicated”—at least there was war.  Lord Fisher was Vindicated—oil was the decisive weapon on sea, land, air.  But out of the war strode a larger figure.  It was he who had quietly guided them both in driving forward this British policy, Sir Henri.

The war, however, made demands which even this great Napoleon could not meet.  “With the commencement of the war, oil and its products began to rank as among the principal agents by which they [the Allies] would conduct it and by which they could win it,” Foreign Minister Curzon said.[23]  “Without oil how could they have procured the mobility of the fleet, the transport of their troops, or the manufacture of several explosives?” Governments appointed Oil Ministers with Cabinet rank, and finally the Inter-Allied Petroleum Council was organized to ration the precious fluid.  A famine was soon in sight.  The Fisher British navy had 45 per cent of its ships burning oil.  On the land fronts motor trucks and the new tanks and planes were consuming gasoline at an accelerating rate.

Germany, cut off from adequate oil supplies and forced to seek substitutes, was trying to reduce her enemies to the same crippled condition.  She directed her submarine campaign especially against the Allies’s sea train of tankers.  As a result Great Britain was close to a naval oil shortage and capitulation by the end of 1917.  At the same time Premier Clemenceau sent his famous appeal to President Wilson.

“A failure in the supply of petrol would cause the immediate paralysis of our armies, and might compel us to a peace unfavourable to the Allies,” the old Tiger wrote.[24]  “Now the minimum stock of petrol computed for the French armies by their Commander-in-Chief must be 44,000 tons, and the monthly consumption is 35,000 tons.  This indispensable stock has fallen today to 28,000 tons, and threatens to fall almost to nothing if immediate and exceptional measures are not undertaken and carried out by the United States.  These measures must be taken without a day’s delay for the common safety of the Allies, the essential condition being that President Wilson shall obtain permanently from American oil companies tank steamers with a supplementary tonnage of 100,000 tons. ... The safety of the Allied nations is in the balance.  If the Allies do not wish to lose the war, then, at the moment of the great German offensive, they must not let France lack the petrol which is as necessary as blood in the battles of tomorrow.”

This testimony of the British Admiralty and the French Premier on petroleum shortage in the last war, when oil-burning navies, motor artillery, trucks, tanks and planes were not fully developed, demonstrates the even greater importance of control of oil reserves and sea transport in the next war.  The British navy with half of its fleet using oil consumed 9,100,000 tons, the American Petroleum Institute estimated.[25]  The British army used an additional 1,219,000 tons, and the French army 1,855,000 tons more.

America answered the Allies’s call for help.  Standard and other companies, with tanker convoys of the United States navy, succeeded where Napoleon Deterding had failed.  When the war was over, Foreign Minister Curzon said the United States had furnished “over 80 per cent of the Allied requirements of petroleum products.”[26]

Oil was more than a major weapon of the military and naval campaigns.  Often it was the objective of those campaigns.  This is apparent in most of the war memoirs, especially those of Admirals Fisher and Jellicoe, Mr. Churchill, and General Ludendorff.  Effort to obtain oil reserves for the successful prosecution of hostilities and for commercial strength after the war explained to a large extent British military operations in Iraq, the Turkish drive toward Baku, and the German campaigns in Galicia, Roumania and the Caucasus.



 

7. Note of Dec. 15, 1917.

8. Address to Inter-Allied Petroleum Council, London, Nov. 21, 1928.

9. Quoted from Pierre l’Espagnol de la Tramerye, The World Struggle for Oil. 1923.

10. London Sperling’s Journal, September 1919.

11. Federal Trade Commission, Report on Foreign Ownership in the Petroleum Industry, 1923, p. x.

12. Ibid., p. 39.

13. 66th Congress, 2nd Session, Senate Document No. 272, p. 17.

14. Federal Oil Conservation Board, Public Hearing, May, 27, 1926, p. 7.

15. For a briefer account of Standard than Ida Tarbell, History of the Standard Oil Company, and the Government Printing Office index on anti-trust hearings and reports, cf., John Ise, The United States Oil Policy, pp. 46-51, 225-273. 1926.

16. Cf., Appendix B.

17. Cf., Political Science Quarterly, Vol. xxxix, No. 2, Edward Mead Earle, “The Turkish Petroleum Company—A Study in Oleaginous Diplomacy.”  Earle, Turkey, the Great Powers and the Bagdad Railway. 1923.

18. Quoted from E.H. Davenport and S.R. Cooke, The Oil Trusts and Anglo-American Relations, p. 27. 1923.

19. Ibid., p. 5.

20. The New York Wall Street Journal, March 27, 1928, published the following:  “Because of statements recently in various publications that Sir Henri Deterding, managing director of Royal Dutch-Shell Group, had changed from Dutch to British citizenship, Richard Airey, president of Asiatic Petroleum Co., a Royal Dutch subsidiary, states that Sir Henri has never changed his nationality.  ‘He was born a native Dutch subject, is, and in my opinion, will remain so until his death,’ Mr. Airey states.  He further points out Royal Dutch Co. charter requires all officers and directors be Dutch subjects. ... He further points out 60 per cent of the operating subsidiaries are owned by Royal Dutch Co. and 40 per cent by Shell Transport.  Also that the British Government has repeatedly denied it owns any Royal Dutch stock.”  Although not directly stated, this apparently is intended to convey the impression that Dutch capital, rather than British capital, has majority control of Dutch-Shell.
    The British Embassy, when questioned March 27, 1925, by the author, said to the best of its knowledge it believed Sir Henri was a naturalized British citizen, and added that the British title borne by him was not usually bestowed on an alien.  The British Who’s Who states he was knighted in 1920.
    The British authors Davenport and Cooke, supra, p. 41, say:  “The personality which engaged the attention of the P.I.P. Committee [British Petroleum Imperial Policy Committee of 1915] was Sir Henri Deterding, the Napoleon of the Royal Dutch-Shell combine.  Even before the war his Napoleonism had given way to love of England in the affair of the Turkish Petroleum Company, and in December 1915 he had been naturalized.  He now lent a willing ear to the Committee.  What could be arranged? The objective would be most simply attained if the British interests in the Royal Dutch Company could increase their share holdings and obtain a majority stock control.  How could this be effected? Obviously there might be a transfer of a block of shares to Sir Henri Deterding, and from him thence to British nominees.  Sir Harry McGowan, as the civilian member of the Committee, was instructed to make the financial arrangements with Sir Henri Deterding.  That something like the desired control was obtained is obvious from unguarded references in a speech made by Mr. Pretyman on a great oil occasion, the laying of the foundation-stone of the Anglo-Persian Oil Company’s refinery on May 7, 1919. ... It was, however, quite wrongly taken for granted that the British Government, directly or indirectly, was interested in the Royal Dutch-Shell combination.  The Foreign Office has more than once given an unqualified denial to this report.  The British State was not officially interested at all.  But British citizens had quietly carried out a coup d’état.  Without a British share control of the Royal Dutch Petroleum Company, which then held the majority control in the Royal Dutch-Shell group of companies, how else could the British Empire have been said [by Mr. Pretyman—L.D.] to be near controlling one half of the available supplies of petroleum in the world? Yet it was not the British Government, but British nationals, who effected the desired result. ... It will be remembered that the British Government had already, during the course of the war, taken over its nationals’ holdings in the Royal Dutch in order to stabilize the exchange.  In the next war it might do likewise.  And in that event it would take over shares amounting to majority control, thanks to the P.I.P. Committee.  That, as Sir Henri Deterding must have argued, was the most effective and least objectionable way of making Royal Dutch-Shell another Anglo-Persian.”
    For official discussions of British capital in Dutch-Shell, see 68th Congress, 1st Session, Senate Document No. 97, Oil Concessions in Foreign Countries, especially the British note of April 10, 1921, and United States reply of June 10, 1921.  The latter quotes from a Memorandum of the Secretary of the Interior, the following (p. 17):  “It will readily be seen that intentionally, or otherwise, the controlling interest in the ‘Royal Dutch-Shell’ combine, and its constituent or subsidiary corporations, is so inextricably confused that it would require weeks or more, and access to the minute books, as well as the Articles of Incorporation of the original, constituent, and subsidiary companies to ascertain exactly the controlling financial interest and the controlling direction in any given instance.”

21. Davenport and Cooke, supra, p. 15.

22. Statement to House of Commons, July 17, 1923.

23. Address to Inter-Allied Petroleum Council, Nov. 21, 1918.

24. Note of Dec. 15, 1917.

25. Cf., L.M. Fanning, Oil in the World War. 1922.

26. Address to Inter-Allied Petroleum Council, Nov. 21, 1918.