Petroleum Industry

Petroleum Industry

THE MODERN PETROLEUM INDUSTRY

THE ERA OF THE SEVEN SISTER COMPANIES, 1911–1980

NATIONALIZATION, 1970–2000

CONCENTRATION AND CENTRALIZATION

THE POLITICAL ECONOMY OF THE PETROLEUM INDUSTRY

BIBLIOGRAPHY

The documentary evidence for the human use of petroleum begins with the Old Testament books of Genesis and Exodus and the works of the ancient Greek historian Herodotus (c. 484–430/420 BCE). In addition archaeologists found pitch in the tombs of the Egyptian kings Tutankhamen (c. 1370–1352 BCE) and Seti II (c. 1200 BCE). The Toltecs of Mexico used bitumen to set tiles as early as 1200 CE, and Native Americans dug oil wells in what are now Pennsylvania, Kentucky, and Ohio.

Still, until the 1850s there was no petroleum mining or production. In that decade oil wells were drilled specifically seeking petroleum in Poland, Canada, and the United States. By 1900 petroleum had been discovered in Baku (in present-day Azerbaijan), Poland, France, Scotland, Italy, Romania, Egypt, Canada, the United States, Mexico, Sumatra, Trinidad, and Peru. In the twentieth century discoveries were made on every continent and in most countries.

THE MODERN PETROLEUM INDUSTRY

The first modern use of petroleum was for kerosene, discovered in 1852. A kerosene lamp was invented in 1857, and the first kerosene factory was built near Baku in 1859. Gasoline was a by-product of kerosene production. After 1901 most petroleum was used for fuel oil to heat and light buildings and for gasoline to power automobiles with internal combustion engines.

From a macroeconomic perspective, petroleum is important because the industrial systems of Western nations and Japan all are based upon its use as a major source of cheap energy and of chemicals for other uses. About 30 percent of the top fifty industrial firms in the United States are petroleum or chemical firms. A similar proportion of the top fifty non-American industrial firms also produce petroleum or chemical products. Petroleum has become essential for fueling production facilities in all industries and for powering, heating, cooling, and lighting buildings and illuminating streets. It thereby makes possible the high-density urban agglomerations so characteristic of western Europe and North America. Without it Western societies would have had to develop either a more efficient energy source or an extensive form of land use rather than the intensive form now practiced. Such a use of land for living space, given a growing population, would threaten food production by depleting the acreage of farmable land. Moreover, because petroleum fuels the vast bulk of industry, virtually all employment in the West depends in the final analysis on its use. Petroleum fuel shortages mean unemployment, and large-scale unemployment can have catastrophic political consequences. Paradoxically, another use of petroleum since the mid-twentieth century has been to encourage decentralization of massive urban agglomerations into the suburbs, requiring the use of petroleum to fuel vehicles. A sustained shortage of petroleum thus would halt this trend toward decentralized land use.

From a macroeconomic perspective, petroleum is an intermediate good, consumed only to produce final consumption items. Despite the emphasis in the mass media on gasoline consumption and prices, the most extensive use of petroleum products since 1949 according to the U.S. Energy Information Administration has been for combined heat and power for homes and industry. Petroleum products thus enter the production functions of every home and industry in the economy. The amount value of petroleum products consumed in the United States in 2005 was 1,836,392 thousand barrels per day.

Industry Structure The modern petroleum industry is structured into four types of organizations: (1) state enterprises, (2) multinational corporations, (3) the Organization of Petroleum Exporting Countries (OPEC), and (4) legally organized commodity exchanges. In most petroleum-producing countries in the early twenty-first century, the state owns a petroleum company with a legal monopoly on the production and distribution of crude petroleum. The largest of these after 1918 was the Soviet state petroleum enterprise.

Most crude petroleum is produced by Western companies. In 1870 the Standard Oil Company was created by the Rockefeller brothers and two other partners. In 1893 the Standard Oil Trust was formed in New Jersey to evade an antitrust suit brought by the state of Ohio. Gulf Oil Corporation was formed in 1901 by the Richard K. Mellon family. Texaco was founded as the Texas Company in 1901 by Joseph S. Cullinan, Walter B. Sharp, and Arnols Shaect. The U.S. Supreme Court in 1911 ordered Standard Oil Trust dissolved. The component companies, still with the plurality of shares owned by the former Rockefeller shareholders, continued to operate as ostensibly separate companies. These companies were Standard Oil of Ohio, Standard Oil of Indiana, Standard Oil of New York, Standard Oil of New Jersey, Standard Oil of California, Standard Oil of Kentucky, Atlantic, and the Ohio Oil Company (later Marathon).

The Royal Dutch Company for the Exploration of Petroleum Sources in the Netherlands Indies was established in 1890. It merged in 1907 with Shell Transport and Trading Company, a British company, to form Royal Dutch Shell. The British government formed the Anglo-Iranian Oil Company in 1914. This company ultimately became British Petroleum. In 1924 the Compagnie Française des Pétroles was established by the French government. ELF began before World War II (1939–1945) with the establishment of three small companies to explore for gas near oil seepages in Aquitaine. Italy in 1926 formed Agencia Generale Italiani Petroli (AGIP). In 1953 ENI was founded as a conglomerate of thirty-six subsidiaries, including AGIP.

These companies all were multinational, multidivisional, and vertically and horizontally integrated firms. Within each company, five major functions were performed—exploration, drilling and production, transportation, refining, and distribution to final consumers. Subsidiaries were responsible for each function. Transfers of product among these subsidiaries and other divisions of the companies were accomplished using shadow pricing or some other form of transfer pricing. Actual payments were made only for transactions with outside firms.

OPEC was established in Baghdad in September 1960 as an intergovernmental organization of five original member states—Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. Its charter required that each member acquire an increasing level of control of production. By 1970 each member state was required to own a minimum of 55 percent of foreign petroleum companies operating within its jurisdiction. Iraqi production has not been part of OPEC quota agreements since March 1998 due to U.S. and United Nations controls. Other OPEC members have included Qatar (joined 1961), Indonesia and Libya (1962), Ecuador (1963–1993), Trucial States of Oman (now United Arab Emirates, 1967), Algeria (1969), Nigeria (1971), Gabon (1975–1995), and Angola (2007). The OPEC cartel was formed to control the world oil supply so as to increase revenue to member states. It operates by assigning members an annual supply quota for crude oil production and export. In 2005 it controlled about 41.7 percent of world production. OPEC also sets prices.

THE ERA OF THE SEVEN SISTER COMPANIES, 1911–1980

The name seven sisters was coined in a 1961 Time magazine article to refer to the dominant firms in the world oil industry: Royal Dutch Shell, Anglo Persian Oil (Anglo-Iranian Oil/British Petroleum/BP), Gulf Oil, Texaco, and three of the Standard Oil companies from the 1911 trust dissolution—Standard Oil of New Jersey (Humble Oil [Esso]/Exxon), Standard Oil of New York (Socony/Socony-Vacuum/Socony-Mobil/Mobil), and Standard Oil of California (Socal/Chevron). With the exception of Royal Dutch Shell, which is British and Dutch, these are all U.S. or British companies. Only the U.S. companies had their own significant domestic supply sources in the founding period of the industry from 1850 to 1950. The British and Dutch thus undertook a worldwide search for sources, beginning with their colonies and extending after World War I (1914–1918) to the League of Nations territories mandated to their administration. The seven sisters and Atlantic Richfield (ARCO), called majors, were vertically integrated, and all had similar structures. They had separate subsidiaries for exploration, production, refining, and distribution and geographic subsidiaries for operations in different areas.

The most important “independent” or nonintegrated companies, which did not operate in at least one of the areas defining the integrated companies, in this period included Getty, Phillips, Signal, Union, Continental, Sun, Amerada Hess, Cities Service, Marathon, Compagnie Française des Pétroles, Occidental, ENI, Tenneco, and Skelly Oil. In 1983 Occidental acquired Cities Service. Texaco acquired Getty in 1984.

Soviet Petroleum Industry The petroleum industry in Russia prior to the Bolshevik Revolution of 1917 was operated largely by U.S., British, and Swedish companies. During the seven sisters period, the Soviet state owned and operated the industry. The industry returned to private hands after 1991. ConocoPhillips acquired 16.8 percent of Lukoil, the largest Russian oil company. BP-Amoco invested in both Lukoil and Sidanko.

NATIONALIZATION, 1970–2000

Around 1912 producing countries began nationalizing or expropriating the ownership of foreign companies. The theoretical basis for expropriation was provided by Marxism-Leninism. The acceleration of this policy after 1970 was due more to nationalism, although the regimes that instituted it were almost always leftist. Majority or full expropriation took place in Argentina (1912), the Soviet Union (Baku, 1918), Mexico (1938), Iran (1951), Indonesia (1950s-1960s), Egypt (1961–1964), Peru (1968), Libya (1971), Nigeria (1971), Iraq (1972), Algeria (1972), and Saudi Arabia (1973).

CONCENTRATION AND CENTRALIZATION

Since the 1980s there has been an acceleration in the rate of concentration and centralization in the world oil industry with the development of what are referred to as supermajors, majors, and independents or jobbers. Supermajors consist of BP-Amoco, Chevron-Texaco, Exxon-Mobil, ConocoPhillips, and Shell. This category of companies is defined as having a capitalization of $100 billion or more. Majors are defined as companies having a capitalization of $30 to $100 billion. Independents and jobbers include those with a capitalization of less than $30 billion. Supermajors have largely abandoned their traditional function of exploration, 80 percent of which now is conducted by independents. They receive most of their profits from the refining and petrochemical industries and also have diversified into alternative sources of energy, including atomic energy.

Simultaneously with this centralization and consolidation, many countries opened up their petroleum industries again to private international companies. Conflicts between source countries and companies extracting crude petroleum have been endemic from the beginning of the modern era, and examples such as the conflict in southeastern Nigeria and the war in Iraq are manifestations of this phenomenon.

Environmental issues in the extraction and transportation phases of the industry’s operation are less visible and perhaps less important than in the consumption phase. For this reason this issue has been the most recent to emerge. However, the environmental impact of the international industry is difficult to measure systematically, for no international statistics on this issue are collected. The number and volume of oil spills are available, but these represent only extraordinary occurrences, not the everyday degradation of the environment due to operations.

THE POLITICAL ECONOMY OF THE PETROLEUM INDUSTRY

During World War I and continuing into the early twenty-first century, Western countries transformed their economies and their military forces to use petroleum as the primary fuel source. As they did so diplomatic and military conflicts arose over control of the known sources of petroleum. Because this transformation was not far advanced until after World War I, that war cannot be characterized as a war over oil.

Most of the known sources at the beginning of this period were in the United States. Elsewhere oil production began in Baku in the 1870s, in the Dutch East Indies in 1883, in Iran in 1908, in Egypt in 1910, in Venezuela in 1914, in Kurdistan (now part of Iraq) around 1915, in Iraq in 1927, in Saudi Arabia in 1935, in Libya in 1959, in Egypt in 1966, in Sudan in 1974, and in Kazakhstan in 2000. These sources were discovered by Western oil companies, which have involved their governments in protecting their exploitation of these resources.

Local and Regional Conflicts Many of the conflicts that arose were local or regional, involving antagonistic political and military forces internal to countries with petroleum reserves, or between neighboring countries with at least one having reserves. These conflicts took the form of rebellions, revolutions, coups d’état, civil wars, and border wars. For example, in the failed 1905 revolution in Russia, the Baku fields were set afire. The Kurds, representing Turkey, massacred millions of Armenians during World War I. In 1929 and 1989 civil wars occurred in Afghanistan. In 1945 a coup in Venezuela gave control of the oil fields to a different power group in the country. Petroleum has been associated with two civil wars (1955–1972 and 1983–2005) and an armed rebellion in Sudan. The Nigeria-Biafra civil war (1967–1970) involved petroleum fields in the Niger Delta. The Angolan civil war (1976–2002) involved petroleum reserves in the Cabinda enclave. And a rebellion that began in Darfur in 2003 involved the South Darfur fields. Local and regional conflicts increased significantly after Britain withdrew its naval forces from the Indian Ocean and the Persian Gulf in 1971.

Multinational and Global Conflicts Other conflicts involved the major European political powers of the day— the large petroleum-consuming countries—in conflicts that were considered to be major set-piece “wars.” Britain and Afghanistan fought three wars (1838–1842, 1878–1881, and 1919), the British attempting to thwart perceived Russian designs on British India, then including Pakistan. At that time petroleum had not been discovered in or near Afghanistan and so played little role in these wars.

After World War I, Turkey captured a part of the territory of the ethnic Kurds. Another part was given to Britain by the League of Nations as part of the Iraq mandate. A section of this territory was given to the French in the Syrian mandate. The Soviet Union captured the Azerbaijan part in 1920. Kurdistan was made a semiautonomous region of Iraq, the only Kurdish political entity internationally recognized. Turkey and the Soviet Union captured parts of the territory of the ethnic Armenians, other parts of which lie in northern Syria, Iraq, and Iran.

During the 1890s the British attempted to expand the border of their colony British Guiana (now Guyana) westward to include parts of Venezuela, where indications of oil had been discovered. This was probably unnecessary, because Guyana is a geologic sink, a lower-than-sea-level basin into which petroleum flows by gravity from Venezuela on the west and Dutch Guiana (now Surinam) on the east, so wells drilled in Guyana would draw from pools shared with Venezuela and Surinam. Nevertheless, British and German warships blockaded the ports of Venezuela until the United States, citing the Monroe Doctrine, forced them to cease. Oil was discovered in 1914, and by 1928 Venezuela was the world’s largest exporter of oil. Thus one sees the hand of Britain in the Afghanistan, Kurdistan, and Venezuela conflicts between the two world wars.

The most important of these major conflicts was World War II, the first war that might be characterized as an “oil war,” with the petroleum resources of the Caspian Sea, the Persian Gulf, the Gulf of Mexico, the Caribbean Sea, Lake Maracaibo, and the Dutch East Indies being strategic targets of all combatants. As part of its strategy to defend the Caribbean Sea and the Gulf of Mexico from German attack, the United States concluded a deal with Britain in 1940 by which the United States gave Britain used destroyers in exchange for the right to use or build bases in the British Caribbean colonies.

North Africa was the location of battles between Italy and Germany on one side and Britain and the United States on the other to secure Persian Gulf oil, even though no oil had yet been discovered in Libya or the Western Desert of Egypt, where most of the battles were fought. On August 1, 1941, before its entrance into the war, the United States imposed an oil embargo on the Axis powers—Germany, Italy, and Japan. The Netherlands and Britain followed suit. The 1941 embargo reduced Germany’s supply from Mexico and Venezuela and reduced Japan’s supply from the Caspian Sea, the Persian Gulf fields, and the Dutch East Indies. The U.S. entrance into the war was largely due to its embargo of petroleum supplies to Japan. After negotiations with the United States, Britain and Holland failed to reverse this decision, and Pearl Harbor was attacked in December 1941 to reduce the U.S. capacity to enforce the embargo. Japan then invaded and occupied the Dutch East Indies (Sumatra, Java, and Borneo) from 1942 to 1946 to secure petroleum to fuel its war effort.

A few months after the war ended in 1945, a military coup took place in Venezuela, with control of revenues from oil production a major motivation for the conflict. The Dutch also fought wars in Indonesia to regain control of its colony but was forced to grant it independence in 1948. The cold war between the United States and the Soviet bloc from 1945 to 1991 involved the same strategic oil issues as World War II but did not rise to the level of open warfare. The Korean War (1950–1953) and the Vietnam War (1954–1975) were proxy wars for the United States and the Soviet Union but were less conspicuously concerned with control of petroleum reserves and their transportation to world markets. Importantly, however, with the exception of World War II, all conflicts over oil, both regional and global, took place in the countries in which the reserves lay, and not in the consuming countries. This changed dramatically with the onset of “terrorism.”

Terrorism The rise of terrorism since the airplane hijackings in 1968—including especially the attacks on New York City in 1993 and 2001 and on the Pentagon in 2001, the bombings of U.S. embassies and ships in 1998 and 2001, and the bombings on Spanish and British trains and buses and other facilities in 2004 and 2005— changed the location of conflicts. Terrorism may be considered a form of guerrilla warfare, in contrast to a set-piece war. In response to this shift in theaters and tactics, Western governments alleged that certain Arab Muslim states were “sponsors” of these acts of terror or gave safe haven to terrorists. Western states directed military and economic sanctions against these states, which included Iran, Libya, Sudan, Somalia, Afghanistan, and Iraq. It is not without significance that all these states either have petroleum reserves or stand athwart transportation routes to world petroleum markets. Somalia, for example, controls the approach to the Red Sea and the Suez Canal.

Since 1980 five major wars have been fought in the region: the Soviet-Afghanistan War (1979–1989), the Iraq-Iran War (1980–1988), the Persian Gulf War (1990–1991), the U.S.-Afghanistan War that began in 2001, and the U.S.-Iraq War that began in 2003. In addition since 1980 U.S. naval ships and aircraft have blockaded and threatened to attack Libya, accusing it of being a state sponsor of terrorism.

In 1991 the former republics of the Soviet Union became independent. Several of them gave concessions to Western companies to explore for petroleum. With these discoveries, proposals were made for pipelines to carry the petroleum to shipping points for export to world markets. Three feasible routes exist for exporting Caspian Sea petroleum to world markets: west through Azerbaijan, Armenia, and Georgia to the Black Sea; south through Iraq and Iran to the Persian Gulf; or southeast through Afghanistan and Pakistan to the Arabian Sea. Overland markets are north into Russia and east into China.

All wars have as an objective the conquest of territory and its resources and assets, a major part since 1900 being petroleum reserves. Thus all wars since 1900 may be considered, to some extent, wars to control oil. This objective has attained the highest priority since World War II, leading to increased military and diplomatic conflict. Petroleum wars may be expected to continue to arise until a different energy source is discovered and widely employed or until an effective international nonviolent conflict resolution method is found and employed.

SEE ALSO Energy Industry; Industry; Iran-Iraq War; Iraq-U.S. War; Nationalization; Organization of Petroleum Exporting Countries (OPEC); Resource Economics; State Enterprise

BIBLIOGRAPHY

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Julian Ellison