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May 8, 2020

The Swing Producer: Minister Yamani and the Unique Risks of Oil Gluts

By David Kurlander

Global oil institutions are in crisis. COVID-19 has put ships in their harbor, cars in their garages, and planes on the ground, leading to a supply surplus and a resultant price collapse that two weeks ago briefly left crude oil prices in the literal negative for the first time ever. Matters are further complicated by lingering tensions between the Saudi Arabia-led Organization of Petroleum Exporting Countries (OPEC) and Russia, following President Vladimir Putin’s refusal to honor a Saudi framework for production cuts. Veteran commodities commentator Ron Insana, in a panicked CNBC op-ed, offered one historical referent: the seismic 1986 decision by Saudi Oil Minister Sheikh Ahmed Zaki Yamani to flood global oil markets.

By the time of his fateful choice, the eminently calm and collected Yamani had been in his post for 24 years, surpassed only by Soviet Foreign Minister Andrei Gromyko for the longest postwar cabinet stint. The son of a powerful Islamic scholar, Yamani studied International Law at Harvard in the mid-1950s, returned to open a beloved legal practice in Jeddah, and quickly caught the attention of the intellectual Crown Prince Faisal. Yamani took over the oil ministry in 1962, just as OPEC—an initially flimsy alliance of exporters also including Venezuela, Iran, Iraq, and Kuwait—was gaining influence.

Yamani weathered remarkable storms over his tenure. He chaired the OPEC debates about whether to use oil embargoes to pressure Israel’s allies, and particularly the United States. In 1967, during the Six Day War, Yamani unsuccessfully discouraged his OPEC allies from using this “oil weapon,” which he knew would not intimidate the then-still-quasi-oil-independent Americans. 

But when the Yom Kippur War broke out six years later, Yamani, recognizing the spike in American consumption of Saudi oil, led the charge to cut off supply. During the seismic American gasoline and heating crisis that followed, Yamani, in measured and elegant prose, announced increasingly devastating production cuts and threatened to detonate Saudi oil fields if U.S. troops attempted to take them by force. 

And this was all before things got really crazy. In March 1975, Yamani, by this time one of the ascendant King Faisal’s closest friends, was standing next to Faisal when the monarch was gunned down without clear motive by his own nephew. Nine months later, at OPEC headquarters in Vienna, Yamani—along with 60 fellow members—was taken hostage by Venezuelan Communist terrorist Carlos “The Jackal” Ramirez Sánchez. “The Jackal”—potentially on the orders of the late brutal Libyan dictator Muammar al-Gaddafi—planned to drum up maximal international attention by flying the hostages to Algiers, freeing most of them, and publicly assassinating Yamani for his not being even harder on Israel. Only some impressive tarmac diplomacy by Algerian Foreign Minister Abdelaziz Bouteflika saved Yamani’s life.

Yamani survived all this, but he would not be able to handle the growing supply of oil that emerged in the early 1980s. The culprits for this glut were numerous. The 1979 Iranian Revolution had briefly sparked a radical increase in demand for Saudi Arabian oil, with accompanying 1973-style U.S. gas malaise, cryptic Yamani-announced price increases, and lots of cash flow. Over the following years, however, fears of further shocks led to worldwide deregulation and new drilling. Britain, which produced virtually no domestic oil until 1975, was suddenly pumping out massive quantities from the North Sea. The U.S. industry, spurred on by maverick oil raiders like Texan T. Boone Pickens, was starting to diversify. China and Angola, non-players in the 1970s, were rapidly ramping up.

Yamani cautioned the other OPEC nations to limit their production. In 1983, he even convinced most of the group to reduce prices to further jog demand, a first in the history of OPEC. To make the deal sweeter, Yamani agreed that Saudi Arabia would be the official “swing producer,” modulating its own output to balance the rest of the group.  

Iran, however, refused to follow Saudi Arabia’s lead. The post-revolutionary state had entered into a brutal conflict with Iraq and needed oil profits to keep fighting. Iran rallied Libya, Algeria, and Nigeria to join in resisting Yamani’s production limits, preferring to set aflame Kuwaiti tankers to manipulate global supply. Throughout 1985, Yamani pleaded with them to reconsider. Back in Riyadh, the glitzy Saudi King Fahd was livid about the low market share.

In December 1985, Yamani’s patience ran out. He declared that Saudi Arabia would abandon its “swing producer” role and raise production by 50%, sending global oil prices through the floor. Within months, oil had gone from $27 a barrel to around $9.

In most of the U.S., the decision was viewed as a regional squabble. Nixon speechwriter and New York Times columnist William Safire speculated—in an irreverent first-person narration from within Yamani’s mind—that the strategy was “to produce and produce until the low prices bankrupt Iran.” Thinking beyond geopolitics, most Americans were happy for cheap gas. Down in Texas, however, where high global oil pricing still translated to big business, a remarkable bust took hold. 

In September 1986, near what turned out to be the nadir of the crisis, David Rockefeller hosted Yamani at Harvard’s 350th Anniversary Celebration. The under-fire Minister gave a magisterial hour-long speech at the Kennedy School. Yamani decried the state of negotiations, opined that his warnings about the glut had gone unheeded, and—in a meta-moment—even suggested that his OPEC allies would be angry at him for his comments. The remarkable oration turned out to be Yamani’s swan song. After one last round of failed OPEC talks in Geneva, Yamani returned to Saudi Arabia and—during a round of the French card game belote—saw on television that King Fahd had fired him.

Yamani’s fall tells us that oil gluts, just as much as shortages, can cause profound political turmoil and economic convulsion. As global oil forces try to dig out from this collapse, we must hope that OPEC, Russia, and American interlocutors remember that surpluses can end even the most vaunted of runs.

Jeffrey Robinson’s dishy Yamani: The Inside Story and Daniel Yergin’s less dishy but truly masterful The Prize: The Epic Quest for Oil, Money, and Power were crucial in writing this piece.

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