THE OIL AGE ARRIVES39THE OBSOLESCING BARGAINIn the long run, the Arabian oil concessions were too generous to sur-
vive. The initial agreements gave single firms or small consortia exclu-
sive rights to a significant portion of the planet’s oil reserves for most of
a century. The problem lay in the inflexible contractual terms. Host gov-
ernments had an incentive to grant favorable conditions to IOCs when
their primary goal was to attract foreign investors. Host governments
wanted to lure Western firms to bet on oil exploration on their territory,
rather than on someone else’s. But once production had started— and
the risk of alternate offers and dry holes was overcome— the initial con-
cession terms looked extremely favorable for investing companies.
Prior to the mid- 1940s, oil companies typically paid host governments
yearly royalties of less than 15 percent of gross revenues. Early conces-
sion agreements put royalties under 3 percent.^27 For the heads of state,
these stingy terms acted as a tourniquet that constrained the flow of
rents, the lifeblood of patronage- based politics. Worse, with terms locked
in for multiple decades, there was no improvement in sight.
There was Socal’s original concession, which gave it sixty years of con-
trol over Saudi reserves worth $1 trillion or more, in return for about
$775,000 in advance and initial annual payments.^28 Kuwait’s 1934 con-
cession with Gulf Oil and Anglo- Persian (later BP) was a similar give-
away. The Kuwaiti emir handed the companies a seventy- five- year lock
on Kuwait’s vast reserves— about a third as large as the Saudi reserves—
for an advance of $180,000 and yearly payments of $100,000.^29
These lopsided bargains were untenable. As host governments came
to understand the scale of the national wealth they had consigned to
foreign control, the concession terms became an embarrassment. Over
time, producer states began to exploit their trump card— the threat of
nationalization— to improve the arrangements. The prodigious diplo-
matic talents of men like Col. Eddy would only delay expropriation.
Rulers of oil states harbored further grievances. They often urged IOC
executives to find and produce more oil, in order to increase the flow of