No Blood for Oil: How the 1990 Gulf War Doubled Oil Prices

August 2, 1990. One hundred thousand Iraqi soldiers cross the border into Kuwait. Within hours, the small oil-rich country is occupied. Within three months, oil prices double. Chapter 14 of Torsten Dennin’s “From Tulips to Bitcoins” tells the story of how a debt dispute between neighbors turned into the biggest oil shock since the 1970s.

The Backstory: Iraq Comes Out of One War and Walks Into Another

To understand why Saddam Hussein invaded Kuwait, you have to go back to the 1980s. Iraq fought an eight-year war with Iran from 1980 to 1988. The West supported Iraq in that war because Iran under Ayatollah Khomeini was seen as the bigger threat.

The scale of that conflict matters. Iraq produced about 6 million barrels of oil per day. Iran produced about 5 million. Combined, that was roughly 20% of the world’s supply. Eight years of fighting killed about one million people and left Iraq deeply in debt to Saudi Arabia and Kuwait.

When the war ended, Iraq expected gratitude. Maybe debt forgiveness. Instead, Iraq got bills it could not pay.

The Oil Dispute That Lit the Fuse

Iraq had always questioned whether Kuwait was even a real country. In the Iraqi view, Kuwait was Iraqi territory that the British had carved off. That was the background noise. But the immediate trigger was oil prices.

After the Iran war, Iraq desperately needed money. Saddam’s strategy was to push OPEC to lower production quotas so that oil prices would rise. Higher prices would mean more revenue to pay off Iraq’s war debts and rebuild the country.

Kuwait did the opposite. It increased its production beyond OPEC quotas and lowered its export price. For Iraq, this was a direct financial attack. On July 17, 1990, Saddam publicly accused his neighbors of overproducing and causing Iraq 14 billion dollars in losses. He also accused Kuwait of stealing oil from Iraqi border fields using horizontal drilling techniques.

Negotiations happened at the end of July. They went nowhere. And then came a moment that Dennin highlights as critical. The US ambassador to Iraq, April Glaspie, told Saddam that the United States had “no opinion on Arab-Arab conflicts like your border disagreement with Kuwait.” Whether this was a diplomatic blunder or deliberate ambiguity, Saddam read it as a green light.

Two days after negotiations collapsed, on August 2, Iraqi troops rolled into Kuwait.

Oil Prices Go Vertical

The price chart from this period looks like a staircase going straight up.

In June 1990, oil was sitting around $15 per barrel. By the end of July, as tensions built, it had crept up to $20. The day after the invasion, August 3, it jumped to $25. By the end of August it was above $30. End of September, $40. In October 1990, oil broke above $40 and set new highs.

That is a doubling in roughly three months. From $20 to $40. And it happened not because any oil infrastructure was destroyed yet. It happened because of fear. Fear of what came next.

And the fear was rational. Iraq controlled about 10% of the world’s known oil reserves. Kuwait controlled another 10%. Together, that is 20% of global reserves in the hands of Saddam Hussein. As Dick Cheney pointed out at the time, Iraqi troops were “only a few hundred kilometers from another 25% of reserves in Saudi Arabia.” If Saddam kept going south, he would control nearly half the planet’s oil.

The World Responds

The international response was fast. The United Nations passed Resolution 660 demanding Iraqi withdrawal, then Resolution 661 imposing a full economic embargo.

The United States assembled a 34-country military coalition under General Norman Schwarzkopf. Over 900,000 soldiers deployed to the region, about 75% American. The first phase, Operation Desert Shield, was about protecting Saudi Arabia from a possible Iraqi advance south. Kuwait was taken. Saudi Arabia would not be.

For months, the coalition built up forces while diplomacy tried to pressure Saddam into leaving voluntarily. He did not leave.

Desert Storm: Six Weeks and Done

On January 17, 1991, Operation Desert Storm began. Over 1,300 air strikes in the first 24 hours alone. Coalition forces had complete air superiority from day one. For five weeks, they bombed Iraqi military positions, infrastructure, and supply lines.

On February 24, the ground war started. By February 26, it was essentially over. The Iraqi military collapsed against the coalition’s technological superiority.

But retreating Iraqi forces did one last thing. They set fire to Kuwaiti oil fields and opened oil terminals to let crude flow directly into the Persian Gulf. About 950 oil fields were set on fire or mined. Black smoke blocking out the sun. Lakes of burning oil stretching to the horizon. It took until November 1991 to extinguish the last fires.

The war was quick. The environmental damage lasted years.

What Stays With Me

A few things from this chapter hit hard.

First, the pattern. If you read Chapter 11 about the 1970s oil crisis, the setup is familiar. Geopolitical conflict in the Middle East, oil supply under threat, prices doubling or tripling in months. But this time it was not OPEC using oil as a weapon. It was one country grabbing another country’s oil by military force. Same result for consumers at the gas pump, completely different mechanism.

Second, the role of miscommunication. Dennin highlights that conversation between the US ambassador and Saddam. “No opinion on Arab-Arab conflicts.” Whether Glaspie was following State Department instructions or freelancing, Saddam believed Washington would look the other way. It did not. But by the time that became clear, Kuwait was already occupied.

Third, the destruction of those oil fields. Saddam could not keep Kuwait, so he tried to make sure nobody else could benefit from it either. Nearly a thousand oil fields burning for months. That is not military strategy. That is spite on an industrial scale. It reminds you that oil is not just a number on a trading screen. It is a physical thing in the ground, and it can be destroyed by anyone willing to strike a match.

It took another Gulf War in 2003 to finally remove Saddam from power. But 1990 showed the world, again, how quickly oil markets move when someone puts troops next to the oil fields. The lesson from the 1970s was that cartels can weaponize supply. The lesson from 1990 was that a single dictator with a large enough army can do even more damage.

Previous: Chapter 13: Silver Thursday

Next: Chapter 15: Metallgesellschaft

This is part of my From Tulips to Bitcoins book retelling series.