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When the Depression Incited an Oil Crisis

By Philip Scranton
December 03, 2012 4:28 PM EST
Persian oil pipeline.
Source: Bakhtiarifamily.com.
Persian oil pipeline.

In late November 1932, Reza Shah Pahlavi, who had seized control of the Persian government in 1925, canceled a petroleum deal that the U.K.'s Anglo-Persian Oil had held for three decades.

Persia, now known as Iran, believed that its royalties since World War I had been two-thirds lower than what they should have been, and it wanted a new deal.

The shah’s foreign minister had negotiated with the British for years to rework a 1913 contract that awarded the government 16 percent of Anglo-Persian Oil’s declared net profits, a revenue stream that collapsed during the Great Depression. Worse, Persian administrators suspected that Anglo-Persian Oil reduced profits by paying subsidiaries generous fees for transportation and maintenance.

For shipments of more than 40 million barrels of oil in 1931, the Persian government had received about $1.5 million. It now sought 25 percent ownership of the corporation, a comparable share of its profits and about 50 cents for each ton of crude oil drawn from wells (about $12 million annually).

When the British stalled, the shah granted an auto import monopoly to General Motors and another to Firestone for tires. Worried that an American oil company could be waiting offstage to complete this trifecta by replacing Anglo-Persian Oil, the U.K. rejected any Persian right to annul the contract. The British Foreign Office raised the idea that the Soviets were behind the action. The USSR had “offered every possible inducement to the Persian authorities to terminate the agreement and to secure the oil wells for themselves,” the Daily Express reported.

The U.K. government commenced planning for military intervention, while Anglo-Persian Oil’s chairman left New York for London to take the crisis in hand. Six new gunboats Persia had purchased from Italian leader Benito Mussolini’s shipyards were now patrolling the Persian Gulf, manned by Italians.

W.E. Beckett, a Foreign Office lawyer, worked to prevent military action. His crucial Dec. 5 report argued that employing force “would be taking a line in Persia very similar to that assumed by Japan in Manchuria.” It would be far better to refer the dispute to the League of Nations than to join Japan and Italy in the ranks of aggressor nations.

Beckett won the policy debate. Britain “by a single stroke has tried to put a sordid quarrel onto a higher plane,” the New York Times reported. Persia contained “all the diplomatic dynamite which exploded in Manchuria a year ago. The spoils are pipelines in Persia and railroads in Manchuria. Though they are 6,000 miles apart, these two danger spots in Asia have been created by similar conditions” -- economic stresses intensified by the Depression.

The Japanese had invaded, Britain went to court and the contrast was noted worldwide.

(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)

Read more from Echoes, Bloomberg View's economic history blog.

To contact the writer of this blog post: Philip Scranton at scranton@camden.rutgers.edu.

To contact the editor responsible for this blog post: Kirsten Salyer at ksalyer@bloomberg.net.

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