By Ellen Wald

Ahmed Zaki Yamani died this week at age 90. He was a pivotal character in creating the modern oil market and modern oil industry. His actions were also vital to turning Saudi Arabia into the wealthy kingdom we know today. He was the Saudi minister of petroleum from 1962 to 1986, and he was the main actor behind the Saudi government’s rise to become the most influential player in global energy. Yet, he fell out of favor with the Saudi monarchy and found himself in a self-imposed exile in Switzerland for most of the last 35 years of his life.

Yamani was trained as an attorney, educated in Cairo and at New York University and Harvard, but he exhibited his best talents when he negotiated with Westerners, organized petroleum-producing countries and galvanized other producers to support his king’s goals. He did not found the OPEC cartel, but he brought it out of obscurity and turned it into a market force that overpowered the major oil companies of the day and the petroleum-consuming countries.

Famously, in December 1975, he was kidnapped from OPEC headquarters in Vienna by the notorious international terrorist known as Carlos the Jackal, but he was best known for holding the world economy hostage through a series of oil embargoes in the 1970s. He was American-trained and worked easily with the American oilmen in Saudi Arabia, but he had no compunction crushing Americans in negotiations. And while Yamani should be remembered most of all as strong-willed bureaucrat who was able to accomplish great things for Saudi Arabia, he left his homeland behind when he came up against the will of his own king and the corruption endemic in his country.

If the oil industry today takes nothing else from Yamani’s life and career, it should remember these two lessons:

1) Whoever owns the commodity has the power.

By his own admission, Yamani was the architect of the 1970s oil shocks. When the shocks began, in late 1973, four American oil companies still owned 75% of Aramco. The Saudi government had just acquired 25%. Unlike several of their neighbors, such as Iran and Iraq, King Faisal and Yamani refused to use force to nationalize the company. Their goal was to take control of Aramco by purchasing shares so as to avoid production disruptions and the loss of revenue. The trick for Yamani would be first demonstrating control over something more important than the company—the oil itself.

First, Yamani negotiated with the representatives from Exxon and Shell. At the time, oil was sold based on a “posted price.” Yamani and his OPEC colleagues wanted a higher posted price to increase their own revenue. When the negotiations failed to progress, Yamani and his colleagues considered simply raising the taxes they charged to the oil companies operating in their countries. Instead, negotiations ended and Yamani and his counterparts never negotiated with the world’s major oil companies again. From then on, they just set their own prices.

After the breakdown of talks, Yamani and the other Arab members of OPEC chose to embargo oil to the United States, Japan and other U.S.-allied countries. The Arab countries left the world to believe that the embargo was retaliation for support of Israel, but it was really about economics. While Yamani chose to create the embargo, only the Americans who ran Aramco could actually institute it. When Yamani spoke to then-Aramco CEO Frank Jungers about starting the embargo, Yamani merely said, “We’ll be able to do it, because you are going to do it.” In other words, Yamani knew he was in control because his country owned the oil. So, he bullied a weak American CEO to cause harm to America.

The embargo caused the price of oil to spike, which was good for both the OPEC countries and for the global oil companies. Most importantly for Yamani and his king, the outcome of the oil embargo was that, as he said, “we are masters of our own commodity.” From then on, the oil-producing governments—and Saudi Arabia as the most successful of them—were in control. Saudi Arabia made enough money from the 1970s price spikes to buy the remaining shares of Aramco over the rest of the decade. And Aramco was positioned to make the Saudi royal family rich beyond anything that even Yamani could have foreseen.

Control of the oil is what matters. We can see this issue playing out today as American oil producers struggle with the Biden administration’s decision not to approve anymore oil and gas leases on federally owned land. When the federal government owns the land and the subsoil resources, it holds the power in the relationship.

2) A country can only be an effective swing producer in the oil market if the rest of the global spare capacity is limited.

Yamani learned this lesson the hard way when he tried to manage the oil market during the 1980s. He later admitted that the attempt was a failure. “You cannot really manage the price. It was a mismanagement of price, a mismanagement of power,” he said in an interview. At the time, Yamani believed he could regulate the oil market and stabilize the price of oil through the power of Saudi Arabia’s influence. He theorized that Saudi Arabia was such a powerful producer that it could unilaterally influence prices by cutting production. He declared that Saudi Arabia would be a “swing producer.”

The reality of the oil market in the first half of the 1980s foiled Yamani’s plan. Oil from other, non-OPEC producers was coming to the market, meaning that Saudi Arabia was not the only producer with spare capacity. As Saudi Arabia cut production to try and keep oil prices from falling, other producers increased their production. At one point, Aramco was producing only 2 million barrels per day and Saudi Arabia’s revenue dropped precipitously.

This is why no one—not even Saudi Arabia—has been able to push prices back up to triple digits or anywhere near that since they fell in late 2014. There is simply too much spare capacity. The most noticeable weight on prices over the last six years has been the resiliency of U.S. shale production. Every time prices start to rise, U.S. shale producers seem to pump more oil. That means that Saudi Arabia and its OPEC+ partners are not capable of pushing prices significantly higher no matter how much they cut. This may end in the coming years if global spare capacity declines with further production restrictions in the U.S. by the Biden administration and years of decreased exploration budgets. If global spare capacity declines, countries like Saudi Arabia could again see some success as swing producers.

Ultimately, Yamani believed in the sanctity of the oil business and God’s gift to the Kingdom of Saudi Arabia, though in the 1980s he served a monarch who wanted to exploit that oil for other reasons. They disagreed, and this ended Yamani’s career as Saudi oil minister. In anticipation of an approaching dismissal, Yamani preemptively transferred his personal files to an office in London. Yamani learned of his dismissal by King Fahd at the same time as the rest of Saudi Arabia—on the radio. Yamani settled in Switzerland, where he was granted permanent residency. Though he lived abroad for more than thirty years, Yamani’s legacy in Saudi Arabia and on the oil industry cannot be forgotten.

He will be buried in Mecca, the city of his birth.

(You can read more about the history of Saudi Arabia’s oil industry and Zaki Yamani in my book, “Saudi, Inc.” available at most booksellers).

Ellen R. Wald, Ph.D. is a widely cited analyst of the global energy industry. She is the president of Transversal Consulting which provides guidance on energy and geopolitics. Dr. Wald is the author of Saudi, Inc., detailing the history and relevance of the Saudi oil industry and Aramco.

A non-resident senior fellow at the Atlantic Council’s Global Energy Center, Dr. Wald earned a Ph.D. in energy history from Boston University and a Bachelor’s degree with honors from Princeton University. Her past academic appointments include positions at Boston University, the University of Cambridge, The American Heritage Center at the University of Wyoming and the University of Georgia.

She frequently provides analysis for print, television and radio news. Her weekly roundup of timely energy market expectations can be found on Thursday mornings at Investing.com and you can follow her on twitter @EnergzdEconomy