HS-107 Readings

Petroleum Resources

Post World War II
United States becomes a net-importer
Oil embargo
Iran-Iraq war

    The energy source, which made the Industrial Revolution possible in England in the 18th century, was coal. Coal powered the steam engines which drove machinery in the factories, and the steamboats and railroads of the early industrial age. It has continued to power electric generation plants throughout the 19th and 20th centuries. Among the fossil fuels, coal is the most abundant in the earth, but it is also the most polluting. High sulphur and carbon content, and soot, cause coal to be the least desirable of the fossil fuels.

    Oil or petroleum energy applications were first developed in the United States in the 1850,s with the discovery of crude oil in eastern Pennsylvania. After refinement into kerosene, it was used for lighting. The invention of the internal combustion engine in the 1880's, and the refinement of gasoline from crude oil, made possible a revolution in transportation. Gasoline became the fuel which powered the automobile, and the airplane. As new oil reserves were discovered and the fuel became increasingly abundant and inexpensive in the 20th century, it became the preferable alternative to coal for other uses, because it was less polluting and, with the building of pipelines, easier to deliver to the end-user.

    The development of the petroleum industry began in the United States, because there were large reserves of oil, and the automobile and the airplane were invented in the United States. The development of the United States into a great industrial power in the 20th century was built upon the exploitation of oil. When large new reserves were discovered in Texas in the 1930,s, oil became so abundant, that it was cheaper than water. Six major oil corporations, all based in the United States, came to dominate the oil industry. both at home and abroad. The only one of the so-called seven sisters, the  seven leading companies in the international oil industry, which was not based in the United States, was British Petroleum.

    Even larger oil reserves were discovered in the Near East, first in Iraq, in the early years of the century, and then in Saudia Arabia during the 1930,s.  Close cooperation was forged between Saudia Arabia, a major producer of oil, and the United States, the largest consumer of oil. The abundance of oil fueled the war effort of the United States and its allies in World War II. Pipelines extended across the United States during the war protected oil deliveries from the threat of  the German submarine. By the end of the war, oil had replaced coal as the principal source of energy used to fuel the U.S.economy.

    The investment and the technical expertise of the major oil companies gave them a controlling position in determining the rate of production and pricing of oil, both in the United States and abroad.  After World War II, there were two price levels that were maintained by the major oil companies. One was a domestic price in the United States and the other was an international price. Reflecting the fact that the United States economy was the first national economy to widely exploit the use of oil, and the first to mass produce automobiles, and the first to develop a civilian airline industry, the United States was the largest consumer of oil. Meanwhile, as Near Eastern oil reserves were tapped, that area became the largest producer of oil. This resulted in a greater abundance of oil abroad than in the United States, which led to the two different price levels. During the 1950,s, the domestic oil market was separated from the international oil market by an import embargo on foreign oil. The was repealed in the 1960,s as oil reserves in the United States diminished.

    There was such an excess supply over demand in the international market, that it was difficult to prevent prices from dropping. Several of the oil-producing nations, most of whom were located in the Near East, formed an oil cartel known as the Oil Producing Export Countries or OPEC, in order to prevent competition and avoid excessive price drops. Meanwhile, the "Seven Sisters" maintained strict limits on oil production in order to stabilize prices. As the oil industry expanded,  a great number of  "independent" oil companies were formed. As the number of  "independents" increased, it became increasingly difficult to limit production and control pricing.

    In 1964, a further element of instability was created by the discovery of rich new reserves of oil in Libya. This oil field was close to the surface and relatively inexpensive to exploit. It was of high quality, low in sulphur content and, therefore, desirable from an environmental perspective. Furthermore, it was located close to the European market and the northeastern United States, both of which were major consuming areas. As Libyan oil came on line, it threatened the ability of the major oil companies to limit production and prevent a price drop.

    However, the situation changed dramatically when a new leader came to power in Libya. Qaddafi was not willing to abide by the informal rules that governed the relationship between the oil producing governments and the major oil companies. Qaddafi nationalized a majority of the oil properties in Libya, and took control of pricing from the oil companies there. The major companies were not in Libya. It was a large "independent" oil company, Occidental Petroleum, which was primarily affected by the Libyan government action. Occidental might have been able to face down Qaddafi by withdrawing its oil experts from the country and paralyzing oil production. However, to do that, it needed the help of  at least one of the "majors". Occidental informed Exxon, the largest of the "majors" that, if Occidental could obtain oil from Exxon at cost, they could afford to oppose the Libyan action. Significantly, Exxon refused. They recognized that Qaddafi's actions had effectively removed the threat Libyan oil posed to the oil production limits set by the "majors".

    Thus, Qaddafi had asserted control over his nation's oil reserves without retaliation by the oil industry. This set an important precedent.

    In 1970, the United States, which had been steadily increasing its oil consumption as the economy grew, was, for the first time, unable to produce as much as it was consuming. From that time on, the United States became a net importer of oil. Dependence on the international oil market meant that the United States was no longer able to export oil in order to stabilize the price.

    Oil prices were determined by the major international oil companies who were doing their best to limit production by assigning quotas to each producing country. They also met periodically with the representatives of each country to negotiate the price of crude oil. Most of the OPEC members were Near Eastern countries which were opposed to Israel in the ongoing Arab-Israeli cold war. The United States had been a staunch ally of Israel ever since an independent Israeli state was created in 1948. When the Israelis decisively defeated the major Arab states in the 1967 war, the peace settlement created an intolerable situation for Egypt. In October, 1973, shortly after Egypt required the evacuation of United Nations observers from the Egyptian-Israeli border, Egypt attacked Israel in the Sinai peninsula. Equipped with surface to air missiles and armored vehicles provided by the Soviet Union, they were able to throw back the Israeli air attack with heavy losses.The tide of war turned, however, after the Israelis received substantial replacements of aircraft from the United States. As Israeli armor threatened to cross the Suez Canal, the movement of a Soviet fleet into the eastern Mediterranean raised the possibility that the war might bring in the two superpowers. To avoid such a catastrophe, a negotiated settlement compelled the Iraelis and Egyptians to accept a cease fire. This conflict became known as the Yom Kippur war.

    The Arab oil countries were in negotiation with the major oil companies when the war occurred. Because the  war involved extensive U.S. aid to Israel, they broke off negotiations and imposed an oil embargo against the United States and its European allies. This created an artificial shortage of oil. During the four months of the embargo, consumers in the United States and Europe, were compelled to wait in long lines at gasoline stations. The Arab members of OPEC seized the occasion to drive crude oil prices up fourfold. Given the dependence of the entire world upon oil, not only for transportation, but for industry, power plants, and a variety of oil by-products, the international economy was driven into an inflation that would endure until 1982. As the shortage of oil reverberated through the international economy, the costs of production and delivery rose because oil was essential to deliver goods to their intended end-users. In 1974, the international economy experienced the greatest depression since the 1930,s. The period of substantial prosperity, which had followed the recovery from World War II, came to an end.

    In 1979, war broke out between Iraq and Iran, which were two of the major oil producing countries in the Near East. Since Europe imported large amounts of oil from them, a further artificial shortage occurred, and the international price of crude oil doubled again. In 1973, before the Yom Kippur war, the price of oil had been about $3/barrel. After the embargo, it had reached $12/barrel, and after the Iran-Iraq war it was $28/barrel. As inflation worked its way through the international economy, the price of all goods rose substantially. In the United States, there were several years of approximately 10% increases/year in the price index.

    This inflation motivated a major effort at conservation of energy, a beginning of a development of alternative sources of energy, and a search for new reserves of oil. Significant progress was made in improving building construction practices to conserve energy, in producing lighter and more fuel-efficient automobiles, and in developing more efficient lighting fixtures. A limited amount of progress was achieved in harnessing direct solar power sources as well as wind energy. Co-geneneration of electricity was encouraged in the United States by federal legislation. This was the practice of requiring utility companies to buy back surplus electricity generated for industrial use.

    There was an increased investment in nuclear power plants, as projections for future energy needs forecast great increases in energy consumption in the years to come. These forecasts, however, were not realized because conservation was effective in moderating the increase in consumption. Conservation became the most effective and least expensive response to the energy shortage. Nuclear power, on the other hand, became extremely expensive because of the cost of providing safety measures against the hazards of radiation release.

    Aside from conservation, the most decisive response to the oil crisis was the discovery of new reserves of oil in offshore waters in the North Sea, off the coasts of Nigeria and Angola, along the north slope of Alaska, and in Mexico.

    Since the oil crisis had not been the result of a real shortage of oil, but an articificially-contrived shortage for political reasons, when the above-described measures of conservation and increased reserves began to take effect, there would be a large surplus of oil. The increase in supply, and the increased variety of sources of oil made it impossible for OPEC to sustain the high prices that had been achieved. In 1982, prices began to drop substantially and the oil crisis was over. Inflation was brought under control. The international economy enjoyed a substantial recovery, reflected in rising stock prices. The crisis had damaged the interests of all concerned, even the oil producing countries, which also had to deal with the rising cost of all other goods. Upon reflection, it would seem to be in everyone's interest to try to maintain a stable production and price situation.

    The international economy remained dependent upon oil as the main source of energy. Since oil is, among the fossil fuels, the one with the least reserves, there is a reason to turn to natural gas for as many applications as possible. Natural gas is found, almost always, wherever there are reserves of oil. It has the advantage of being the cleanest-burning of all the fossil fuels. In the long term, the development of the renewable sources of energy; direct solar, wind, geothermal, tidal, and water, will postpone the arrival of the time when there will be a real shortage of fossil fuels.