Selecting an Ally from Oil Rich Countries

Middle school friends?

History tells us that America's choice of the most strategic ally in the oil-rich middle east in the twentieth century is not far different from choosing a best friend in middle school. All involved are uncomfortable and confused, and often erupt in jealousy and threats when they lose favor.

In August 2018 I published here a long-researched piece called "Within the Netherworld of International Currency Exchange Rates," which helps us understand the financial crisis that haunted Nixon on a daily basis during his time in office, as threats were hurled at him from trade partners and military allies alike. Another piece, "Saudi Arabia: the Nixon Years," gives a broader overview from an historical perspective.

During Nixon's first term, Secretary of State William P. Rogers had negotiated, and "international oil companies" had agreed with six of the ten OPEC countries in Tehran on February 14, 1971, to a five-year oil tax and price agreement. Those six countries of the Persian Gulf did not include Libya, Algeria, Indonesia or Venezuela. The terms gave the six countries (Abu Dhabi, Iran, Iraq, Kuwait, Saudi Arabia, and Qatar) a 30% increase on their price for oil with other increases through 1975. Just prior to that point in time, Nixon and his cabinet officials tried to maintain a balancing act between Iran and Iraq, but the balance began to tilt to Iran after the agreement was signed.

According to Foreign Relations, 1969–1972, Volume E–4, Iran and Iraq, in the Office of Historian Summary:

The Nixon administration’s tilt toward Tehran led to significant shifts in its policy toward Iran and Iraq in 1972. First, the United States abandoned its sporadic efforts to rein in the Shah’s extravagant military spending. During his May 1972 visit to Tehran, Nixon promised to sell the Shah any American arms (short of atomic weapons) that he desired. Second, at the same meeting, the President conceded the Shah’s point that Iraq, now a close Soviet ally, was a security danger to the Gulf region.

To help keep the Ba’athist regime [Iraq] off-balance, the U.S. Government began to support the Iraqi Kurdish rebellion under Mullah Mustafa Barzani in July 1972. Although the Shah had funded Barzani for years, Washington had resisted Kurdish appeals for aid on the principle of non-interference in the internal affairs of other countries. After the Iraqis signed a treaty with the Soviets in April 1972, however, U.S. officials “particularly in the Central Intelligence Agency (CIA)” agreed that the threat from Baghdad warranted U.S. attention.

Rogers resigned as Secretary of State as of September 3, 1973, about ten months after Nixon fired Richard Helms as Director of the CIA. Henry Kissinger replaced Rogers and, only a week after Rogers' departure, King Faisal of Saudi Arabia issued a dire warning to the Nixon administration:

"America's complete support of Zionism against the Arabs makes it extremely difficult for us to continue to supply U.S. petroleum needs and even to maintain friendly relations with America."

In simplest terms, the oil shortage enforced on Americans was caused by the U.S. trying to pick two "best" friends.

It was apparent that King Faisal was speaking not only for Saudi Arabia, but purportedly for all the OPEC countries (Abu Dhabi, Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, Venezuela), which were bound by the terms of the 1971 Persian Gulf Agreement. At the same time, however, a counter-threat came from Israel to boycott U.S. oil companies should the U.S. government demand that Israel return Arab land occupied since 1967. Nixon decided to ignore the warning by Faisal, thus appearing to tilt in favor of Israel and to allow the Shah of Iran to control the balancing scale of Muslims and Christians in the Arab world. Roham Alvandi wrote in 2012 that Mohammad Reza Pahlavi (the Shah of Iran):

had normalized Iran’s relations with the Soviet Union and now sought Iranian primacy in the Persian Gulf in the wake of Britain’s with-drawal from the region in 1971. Mohammad Reza Shah had seen five American presidents  pass  through  the  White  House;  each  in  turn  had  frustrated  and disappointed him in his ambition to make Iran the region’s leading power. But now, under the Nixon Doctrine, the United States would rely on the shah to maintain stability in the Persian Gulf.

Kissinger and Nixon therefore ignored Faisal's warning, possibly believing the Saudis could be kept in line by the Shah of Iran, while they put more value on America's relationship with Israel. That decision, which would prove to be a mistake, was taken during the course of Nixon's desperate determination to be reelected in 1972--leading to the Watergate tragedy.

Richard Helms, Director of the CIA, was also caught up in Watergate by refusing to tell the FBI not to investigate Nixon's imbroglio at Watergate for national security reasons. He was fired shortly after the election, in the second week of November 1972. But because he did not tattle about it, he was allowed to become the next Ambassador to Iran. Thomas Powers would later write in Rolling Stone:

Because the CIA put the shah in power, Iran is an important bulwark in the defense of the Persian Gulf oil states, the U.S. embassy in Tehran is huge, demanding the talents of an administrator, and the CIA runs a number of major programs in Iran such as electronic listening posts and the like. It was a congenial job of importance, in other words, and Helms may also have concluded it would not be a bad idea to get out of Washington.

When Powers published his article and book about Helms in 1976, nobody seemed to know that the Iranians, who had always been so important to British oil interests, were even then in the process of being replaced by the Saudis, with whom the Americans were becoming more and more dependent for oil. Helms probably knew that, when he asked to be posted to Iran where as Ambassador he not only continued to work with the Shah's secret police force, SAVAK, but he secretly monitored and mentored his replacements from his post in Iran.

George Bush, too, must have known. He did not directly succeed Helms as CIA Director, but he was not far behind, appointed by Gerald Ford to replace William Colby, who had just revealed  to Democrat Frank Church's Senate Committee a multitude of evils committed by the intelligence agency.

Between the time Bush, as head of the Republican National Committee, had advised Nixon to resign in August 1974, and Colby's resignation from the CIA, Bush had been very busy recruiting young Saudis to set up CIA-sponsored businesses in the United States, to ensure their oil wealth would be invested here rather than abroad.

Training Saudis to Develop Their Oil

 Ever since 1938, when oil was discovered in Saudi Arabia, American men have recognized a need to control the family who owned the wealth that flowed from that oil. Americans were not the first however. The British had discovered oil in Persia (now Iran) in 1908.

The first American-educated Saudis were scholarship students sent by Saudi Aramco shortly after WWII to study petroleum engineering. They often chose Princeton (near the former headquarters of Standard Oil of New Jersey) or the University of Texas. None of the big universities shunned them, however. California, whose big oil companies owned shares in Aramco, also courted princes such as Ali Abdallah Alireza, who attended UC Berkeley in 1945 and completed a master's degree in geology by 1947. President Gerald Ford would welcome Alireza to U.S. as Saudi Ambassador in 1975.


Another Saudi scholar, Ghaith Pharaon, whose father was an important adviser to King Faisal, had received an MBA from Harvard, as well as having studied at Colorado School of Mines (1958-61) and Stanford (1961-63).

Occidental board chairman Armand Hammer, fighting a corporate takeover by Standard Oil of Indiana,  had at first mentioned unnamed Arab interests as having purchased a million shares of Occidental Petroleum, identifying the individual investors by name in late December that year, the first time Pharaon's name saw print, only a few months after President Nixon's resignation.

In 1975 Pharaon achieved even more recognition when he acquired shares in Detroit's Bank of the Commonwealth -- 80% of the Barnes family's controlling stock in that bank, which resulted in his owning 42.4% of the preferred shares and 31.2% of the common, according to AP reporting.

On May 7, 1975 President Ford signed E.O. 11858 entitled "Foreign investment in the United States," which created the Committee on Foreign Investment in the United States (CFIUS). Only then did  George H. W. Bush officially relinquish his position as head of the Republican National Committee, moving into his office at the Central Intelligence Agency.

Deep Politics and John Connally

The most intriguing reporting about the new Arab wealth appeared in Texas Monthly magazine (April 1975), where an unidentified author indicated that Pharaon, as a foreign national who was forbidden to take a seat on the board of directors of the Detroit Bank of the Commonwealth, would be represented on that board by Frank Van Court, an attorney associated with the Houston law firm of Vinson, Elkins, Searls, Connally & Smith--of which John Connally was senior partner.

Cashing in on Saudis' oil weath

Harold Melvin Hyman, in his book, Craftsmanship and Character: A History of the Vinson & Elkins Law Firm, identified Van Court as one of Connally's close associates (pp.357, 378).

Frank Van Court had been born in San Angelo, Texas, but grew up on a ranch just outside of Crane, Texas. He earned a  place at Rice University, studying economics, before obtaining his law degree at the University of Texas in 1968. Within less than ten years, he left former Governor John Connally's Houston law firm to work for only one client--Saudi Arabia's wealthiest businessman in the United States, Ghaith Pharaon. In 1978 Van Court represented Pharaon in his investment in Dallas' Plaza of the Americas.

Khalid bin Mahfouz

Texas Monthly writer Robert Barnstone reported two and a half years later, in November 1977, that John Connally, former Secretary of Treasury for Nixon (Feb. 1971-June 1972) was entering into a partnership with Saudi businessmen Ghaith Pharaon and Khalid bin Mahfouz, to buy a Houston bank--Main Bank of Houston--along with Frederick Erck of Alice, Texas. Since 1973 Erck had also been Connally's partner in the First City National Bank of Floresville. Main Bank would be mentioned again in 1991when evidence surfaced linking that bank to the Bank for Credit and Commerce International (BCCI) scandal.

Fred Erck was married to Ann McGill Erck and managed his wife's ownership of a one-third interest in La Paloma Ranch, —22,000 acres of land in Kenedy and Kleberg counties (King Ranch country), together with  a 1/3rd of 1/8th non-participating royalty interest in the cotenants' share. Bankruptcy by the McGills in 1990 put the property into the hands of Lee M. Bass, one of the notorious heirs of the Sid Richardson fortune.

The Ercks--in Texas' heyday of oil production--saw more oil and gas income than they knew what to do with, but by 1973 Texas crude production had been supplanted by Saudi Arabia. In September 1973 Fred Erck, then a 33-year-old rancher, expanded his banking portfolio by buying control of the First City National Bank of Floresville with former Texas governor, John B. Connally. A life-long Democrat, Connally had first been appointed Secretary of the Navy and later picked to head the Treasury Department during Nixon's first term, following in the footsteps of his mentor, Robert Bernerd Anderson.

Connally had launched Democrats for Nixon in August 1972, just weeks after burglars were busted in the Watergate offices of the Democratic National Committee. Fortunately for Connally, the burglary, though detected, did not prevent Nixon's re-election. The Texas Democrat, as Secretary of the Treasury, became the man who implemented Nixon's decision to end the Bretton Woods Agreement, originally negotiated by FDR's administration in 1944:

Nixon directed the suspension of the dollar’s convertibility into gold. He also ordered that an extra 10 percent tariff be levied on all dutiable imports; like the suspension of the dollar’s gold convertibility, this measure was intended to induce the United States’ major trading partners to adjust the value of their currencies upward and the level of their trade barriers downward so as to allow for more imports from the United States....

Group of Ten (G–10) industrialized democracies agreed to a new set of fixed exchange rates centered on a devalued dollar in the December 1971 Smithsonian Agreement. Although characterized by Nixon as “the most significant monetary agreement in the history of the world,” the exchange rates established in the Smithsonian Agreement did not last long. Fifteen months later, in February 1973, speculative market pressure led to a further devaluation of the dollar and another set of exchange parities. Several weeks later, the dollar was yet again subjected to heavy pressure in financial markets; however, this time there would be no attempt to shore up Bretton Woods. In March 1973, the G–10 approved an arrangement wherein six members of the European Community tied their currencies together and jointly floated against the U.S. dollar, a decision that effectively signaled the abandonment of the Bretton Woods fixed exchange rate system in favor of the current system of floating exchange rates.

Actually, only the U.S. Dollar would "float," while the other currencies would be pegged to it under an agreed ratio. The U.S. was given the power to set the price of crude oil in dollars, a power that, according to James Norman, the U.S. would exercise in following years as an economic weapon against "enemy" nations, notably China and the U.S.S.R.

John Connally would be forced out of office by the "milk scandal" and tried in Washington, D. C. in April 1975. His indictment, announced in late July 1974 made headlines only two weeks before Nixon's resignation. Texas Monthly also ran an intriguing piece about Connally's trial for accepting two bribes of $5,000 each to influence an increase in milk price supports from an American association of dairy farmers. Those were the days before anyone dreamed foreign money could corrupt our politics.

The link between these seemingly disparate events is another Texan -- President Eisenhower's favorite--Secretary of Treasury Robert Bernard Anderson--who had long been John Connally's business and financial mentor. Anderson taught Connally that oil and money, unlike oil and water, do in fact mix quite well.