The Iranian Revolution and the Second Oil Shock — 1979

In the oil crisis of 1973, the producing nations of the Middle East came into wealth as never before. One of the foremost among them was a great power that prided itself on being heir to Persia: Iran. The Shah, Mohammad Reza Pahlavi, poured the gushing oil money into armaments and modernization, striving to lift his country into “the superpower of the Middle East.”

And yet that supposedly brilliant dynasty crumbled, abruptly, in 1979. The trigger was pulled not by tanks or by a foreign army, but by crowds overflowing the streets and by one aged religious leader whose voice reached them, from distant exile, on tape.

Modernization from above, and the discontent that pooled beneath

What the Pahlavi Shah pursued was a top-down modernization policy called the “White Revolution.” Land reform, women’s suffrage, a literacy campaign — secular reforms modeled on the West. High-rises went up in Tehran, and the wealthy reveled in a Western-style life.

But that prosperity did not reach into every corner of society. The breakneck modernization bred inflation and inequality, and the people who streamed from the countryside into the cities overflowed into impoverished slums. The Shah, moreover, used his secret police, SAVAK, to harshly suppress the opposition and would brook no criticism.

The vessel that caught that discontent was the Shia religious leader Ruhollah Khomeini. He fiercely denounced the Shah’s regime as “a corrupt, apostate government fawning on the West,” and in 1964 he was banished from the country. But from his exile in Iraq, and later from a Paris suburb in France, cassette tapes recording his sermons flowed secretly into Iran, keeping the fire lit in people’s hearts.

What is striking is that the revolution was not carried by religious forces alone. Secular leftists, nationalists, merchants (the bazaar merchants), intellectuals — even people who by rights held differing ideals joined hands on the single point of “bring down the Shah, no matter what.” The anger at the distortions wealth had brought ran that wide and that deep. And the figure pushed to the summit of that motley coalition was Khomeini, who, from exile, had gone on denouncing the Shah more uncompromisingly than anyone.

The king departs, the master returns

In 1978, after a newspaper ran an article slandering Khomeini, protest riots flared across the country. Students, workers, merchants, clergy — people of differing stations bound together on the single point of “down with the monarchy,” and strikes and demonstrations began to paralyze the nation. Even the workers of the oil industry went on strike, and the production of crude, the country’s lifeline, ground to a halt.

At last, in January 1979, the Shah left Iran under the pretext of “medical treatment.” It was, in effect, exile. Then, in February of that year, Khomeini returned from Paris, ending fourteen years of life in exile. Crowds said to number in the millions surged into Tehran’s airport, greeting the master with frenzied joy. On February 11, the revolutionary forces took real power, and the dynasty fell entirely.

That same year, following a national referendum, the country’s name became the “Islamic Republic of Iran.” A nation that had aimed to be a secular modern state was reborn, in little more than a year, into a religious one in which clerics held the highest authority. This was an upheaval in the twentieth-century Middle East that no one had foreseen.

The oil fields fall silent, the price leaps

The chaos of the revolution struck the world economy directly. Iran was, at the time, one of the world’s leading oil producers. The strikes and turmoil around the revolution sharply cut its vast crude exports. The volume lost was, in itself, only a fraction of total world supply — but what ruled the market was not the “numbers” but the “fear.”

“Which country will fall into chaos next?” “Will we no longer be able to get oil cheaply?” — consuming nations and companies, remembering the nightmare of 1973, scrambled to hoard crude ahead of one another. This “panic buying” and “anxiety about the future” tightened supply and demand still further, and crude prices surged once again. This was the Second Oil Shock.

This second price surge, on the heels of the first, dealt a heavy blow to the economies of the advanced nations just as they were beginning to recover. Countries suffered “stagflation,” in which rising prices and stagnant growth advanced at once, and a sense of crisis over relying on the Middle East alone for energy was carved deeply into the world. From this point on, investment in energy-saving technology, the development of oil fields outside the Middle East, and the search for alternatives such as nuclear power began in earnest.

Ironically, through these two crises the world gradually began to change its constitution toward “de-Middle-Easternizing” its dependence. In Japan, fuel-efficient compact cars gained international competitiveness, and the development of non-Middle Eastern oil fields such as the North Sea and Alaska accelerated. The oil crises that brought the producing nations enormous wealth in the short term were, in the long term, also a warning to the producers themselves: that they could not go on selling oil at high prices forever. This thread will rise again in the closing stretch of the series.

The line of rupture is drawn

Another decisive change the revolution brought was the severing of relations with the United States. In November 1979, students enraged that America had admitted the exiled Shah for medical treatment seized the U.S. embassy in Tehran and took its staff hostage. The occupation continued until early 1981.

Iran, until then “America’s most dependable ally in the Middle East,” turned in an instant into the spearhead of anti-Americanism. The honeymoon between the United States and Iran, built up over long years, was over, and diplomatic relations between the two countries were cut off. The map of security America had drawn for the Middle East was forced into a sweeping rewrite.

This rupture became a shackle that would go on binding the Middle East for decades thereafter. For America, Iran became “the keystone that was lost,” and the question of where to seek a foothold in its place began to warp the dynamics of the whole region. Economic sanctions, mutual distrust, and military tension that flares from time to time — when you see the words “U.S.–Iran confrontation” in today’s news, at the very deepest root of it lies this year, 1979.

The birth of revolutionary Iran sent strong tension running through the neighboring producing nations as well. The neighbor that shared a border in particular found itself shaken by both at once: the fear that “the fire of revolution might leap to our own country,” and the ambition that “this chaos may be the chance to seize territory and supremacy.”

The story over the wealth of the oil fields now advances, all at once, to a far bloodier stage. The aftershocks of the revolution will hurl two neighboring great powers into a head-on collision atop the oil fields along their border.