The Oil Issue in Iran

The following is an excerpt from The Struggle for Iran: Oil, Autocracy, and the Cold War, 1951–1954, by David S. Painter and Gregory Brew, available wherever books are sold.

Beginning with the nationalization of the Iranian oil industry in spring 1951 and ending with its reversal following the overthrow of Prime Minister Mohammad Mosaddeq in August 1953, the Iranian oil crisis was a crucial turning point in the global Cold War. The nationalization challenged Great Britain’s preeminence in the Middle East and threatened Western oil concessions everywhere. Fearing the loss of Iran and possibly the entire Middle East and its oil to communist control, the United States and Great Britain played a key role in the ouster of Mosaddeq, a constitutional nationalist opposed to communism and Western imperialism. U.S. intervention helped entrench monarchical power, and the reversal of Iran’s nationalization confirmed the dominance of Western corporations over the resources of the Global South for the next twenty years.

Drawing on years of research in American, British, and Iranian sources, David S. Painter and Gregory Brew provide a concise and accessible account of Cold War competition, Anglo-American imperialism, covert intervention, the political economy of global oil, and Iran’s struggle against autocratic government. The Struggle for Iran dispels myths and misconceptions that have hindered understanding this pivotal chapter in the history of the post–World War II world.

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The Oil Issue in Iran

Though not a formal colony of the British Empire, the oil fields of Khuzestan in southern Iran and the refinery town of Abadan bore the unmistakable signs of colonialism. British staff lived comfortably, with access to amenities including swimming pools, squash and tennis courts, and a cinema. Conditions for Iranian workers were often very poor. In 1950, 80 percent of the company’s non-skilled workers remained without company housing, according to a report from the International Labour Office. Although company executives touted their achievements in bringing industrialization and modernization to Iran, many contemporary observers felt the company men were living in a bygone age. According to U.S. Ambassador John C. Wiley, “they have continued to celebrate Queen Victoria’s Diamond Jubilee and time in its flight has passed them by.” The company ensured its position through a system of patronage, bribing Majlis deputies and newspaper editors and distributing propaganda advertising the benefits of its operations for the Iranian people.

Resentment of AIOC was closely connected to the development of Iranian nationalism in the late nineteenth and early twentieth centuries. Educated Iranians questioned the legality of the company’s concession in the 1930s, arguing that it violated Iranian sovereignty. As a sovereign landlord that owned the oil in the ground, the Iranian state should benefit from its production and sale, yet instead it struggled “with the blackest misery and hunger,” according to one article in 1931. Anger toward the company also reflected widespread animosity toward the British, who had interfered repeatedly in Iran’s politics since the nineteenth century. These criticisms carried forward into the war years when Iran’s press—liberated after years of suppression by Reza Shah—took stridently anti-British positions.

Galvanized by the oil concession scramble of 1944 and the Azerbaijan crisis of 1946–47, Iran’s small group of middle-class nationalists articulated new arguments based around the reduction, or possible elimination, of AIOC’s dominance of Iranian oil. This movement grew alongside (but was separate from) similar anti-British rhetoric emanating from the Tudeh Party. In January 1949, a Majlis deputy accused Reza Shah’s former finance minister of colluding with the British in 1933, prompting the aged minister to publicly disavow the agreement. Nationalists in the assembly led by orator and journalist Hossein Makki denounced the 1933 agreement as illegitimate, arguing it had stemmed from Reza Shah’s secret collusion with the British. In time, the “oil issue” became the single most important concern in the country’s political discourse, until it grew into a force for popular mobilization without precedent in Iran’s modern history.

Cash-strapped and anxious to secure funding for his development program and military mobilization scheme, the shah urged his negotiators to secure more favorable terms from AIOC. In addition to the company’s alleged abuse of its workers, the government was especially interested in the gap between what it received for its oil and what AIOC and the British government received. According to published statistics, AIOC’s net profits from 1933 through 1948 totaled £115,246,000; British government taxes on AIOC for the same period were £118,320,000, largely due to steep increases in taxes during World War II; and AIOC payments to Iran for the period were £69,402,000. Finance Minister Abbasqoli Golsha’ian pushed for a deal that would split profits from oil “fifty-fifty,” an idea modeled after an agreement between oil companies and the government of Venezuela in 1948.

The British government encouraged the company to offer more generous terms while preserving the basic aspects of the 1933 concession agreement. AIOC felt its track record in Iran was sound and saw little reason to satisfy Iranian demands. Fifty-fifty would have been more costly for the company and exposed it to higher British taxes as well as increased payments to Iran because, unlike the U.S. tax code, British tax laws did not allow companies to take a credit for taxes paid to foreign governments. AIOC’s leadership, particularly Chairman Sir William Fraser, regarded the Iranians with condescension and disdain, dismissing Golsha’ian as “nothing but a trader” who could be bought off just as Reza Shah had been in 1933. Fraser’s negotiator Neville Gass offered Golsha’ian a deal whereby Iran’s annual royalty would increase from 4s/ton to 6s/ton, retroactive to 1948, plus an increased contribution from the company’s general reserve and annual dividend. Total payments covering 1948 and 1949 would increase from £22,662,000 to £41,558,000. Other than more money, the deal offered Iran little else as AIOC ignored most of Iran’s other demands. The terms of the 1933 concession, which was set to expire in 1993, remained the same. Facing a mounting budget deficit, the shah forced Golsha’ian to accept AIOC’s terms on 17 July 1949. Known as the Supplemental Agreement, the terms would require Majlis ratification before becoming law.

 In time, the ‘oil issue’ became the single most important concern in the country’s political discourse, until it grew into a force for popular mobilization without precedent in Iran’s modern history.

Although the shah and his allies hoped a new oil agreement would provide financial support for the Seven Year Plan, public opposition to AIOC had grown into a groundswell of nationalist anger, and the opposition was better organized than the British or royalists had supposed. When the Supplemental Agreement came before the Majlis in late July, a small group of deputies led by Makki blocked the deal from proceeding to a vote. Those who dared speak out against the agreement, said Makki, did so “at the point of the bayonet.… On this sacred religious night, I pray God to set all those who have betrayed this country on the flames of oil.” Other deputies, fearful of appearing overly friendly to British interests, declined to challenge Makki. The assembly adjourned on 28 July without ratifying the agreement.

The British embassy blamed the failure on internal divisions within the Iranian government and the “irresponsible self-seekers” inside the Majlis. Both AIOC and the Foreign Office believed that the shah would force the agreement through the Majlis once elections for a new assembly were complete. The failure to ratify the Supplemental Agreement proved to be a crucial turning point, however. Nationalist animus toward AIOC and the British government developed into an organized political movement, one that challenged the status quo in a way the Pahlavi government and its foreign allies proved incapable of managing. Hossein ‘Ala, the shah’s minister of court and a reliably pro-Western fixture in Iranian politics, warned the U.S. State Department in early 1950 that unless AIOC quickly agreed to better terms, Iran’s government might be forced to nationalize its assets. Though initially discounted by AIOC, the movement to nationalize Iran’s oil industry was quickly developing into a powerful political force. At its head was Mohammed Mosaddeq, Iran’s most renowned and respected political figure.

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David S. Painter is associate professor emeritus of international history at Georgetown University. He is the author of The Cold War: An International History and Oil and the American Century: The Political Economy of U.S. Foreign Oil Policy, 1941–1954.  

Gregory Brew is a Henry A. Kissinger Postdoctoral Fellow at International Security Studies and the Jackson Institute for Global Affairs at Yale University.