Petroleum

As early as 4000 bce, petroleum recovered from oil seeps was traded in the Middle East. The Babylonians collected bitumen (asphalt), and, according to Greek observers, used it for caulking, mortar, torches, and medicine. Oil seeps in the Jordan Valley yielded bitumen traded as far away as Egypt. Romans and medieval Europeans used petroleum medicinally. By the eighteenth century, in some parts of Eastern Europe oil was obtained by mining it from shallow shafts; in the 1850s this limited production allowed small-scale kerosene refining in Galicia.

Successful drilling of the first well at Titusville, Pennsylvania, in 1859 revolutionized petroleum recovery and launched the U.S. petroleum industry. Most Pennsylvania production was refined into kerosene. In 1861 the first cargo of barreled kerosene was shipped from Philadelphia to London, beginning the transatlantic oil trade. Kerosene was the largest manufactured export of the United States into the 1880s, with John D. Rockefeller's (1839–1937) Standard Oil dominating manufacture and export. Standard's main market was Europe, but its kerosene also went to Canada, Mexico, India, and the Levant. Usually kerosene was shipped in barrels, but that shipped to the tropics was often canned, since consumers recycled cans as containers and roofing material.

In the 1880s overseas competitors challenged Standard Oil's dominance of world oil trade. Oil-well drilling technology allowed Russian producers to develop fields at Baku and brought Robert (1829–1896) and Ludwig Nobel (1831–1888) to refine kerosene there in the 1870s. Wishing to market their kerosene beyond Russia led them to build the first oil tankers. Railroad and pipeline construction linking Baku to the Black Sea port of Batum in the 1880s made Batum a major oil port. In 1888 both the Nobels and the Rothschilds, who had invested in Russian oil, set up kerosene importing and distributing organizations in the United Kingdom. Standard responded by creating European affiliates and building its own tanker fleet; tankers meant far cheaper, more efficient marine transport of petroleum. Fierce price competition for European markets followed.

To expand beyond Europe, the Rothschilds turned to the Samuel brothers, London merchants who did business throughout the Far East. Marcus Samuel (1853–1927) began sending tankers of Rothschilds's kerosene through the Suez Canal to Asian distributors. Aiming for access to Dutch East Indies oil and broader Asian markets, Samuel joined forces with the Royal Dutch Company in 1901, founding Shell Transport Royal Dutch Company, later Royal Dutch/Shell. A large volume of Asian oil reached world markets and gave Standard aggressive Asian competition. When the Spindletop gusher of 1901 opened huge Texas Gulf Coast production, Samuel was one of the European purchasers launching a lively oil export trade from that region.

After 1900 crude oil and gasoline outstripped kerosene in importance in world markets. Oil for naval use assumed importance in military strategy and added impetus to the search for new reserves. Major arenas opened up in Latin America and the Middle East. In Mexico, President Porfirio Díaz (1830–1915) gave Sir Weetman Pearson (1856–1927) a concession which led to the fabulous Golden Lane discoveries near Tampico in 1910, making Mexico a major producing nation and encouraging exploration in Venezuela. In Iran/Persia, William Knox D'Arcy (1849–1917) received a concession from the shah leading to oil discovery in 1908 and subsequent investment by the British government in the Anglo-Persian Oil Company, the forerunner of British Petroleum. In 1912 Calouste Gulbenkian (1869–1955) organized a group of investors including Royal Dutch/Shell into the Turkish Petroleum Company, which obtained a concession to look for petroleum in what is now Iraq; for his work, Gulbenkian would receive 5 percent of profits. Upon the discovery of oil near Kirkuk in 1927, Gulbenkian became fabulously wealthy.

World War I demonstrated the strategic importance of oil, with U.S. oil a critical element in Allied victory. Postwar fear that U.S. oil was running out encouraged major U.S. companies to move into exploration overseas. Political tension in Mexico discouraged foreign investment there, and in 1938 Mexico nationalized their oil, creating Petroleos Mexicanos (PEMEX). However, during the 1920s Standard Oil of New Jersey and Standard Oil of Indiana joined Royal Dutch/Shell in developing Venezuelan production, and the United States imported an increasing amount of Venezuelan oil. In the Middle East, a consortium of U.S. majors joined Gulbenkian's group to work jointly in the former Ottoman Empire, in an area designated by Gulbenkian drawing a red line on a map—the Red Line Agreement of 1928. During the 1930s Standard Oil of California joined with the Texas Company (Texaco) to start work on an oil concession in Arabia from King Ibn SaEud (1880–1953), a venture which evolved into the Arab-American Oil Company (ARAMCO).

Advances in geology, the application of geophysics to prospecting, and the development of well-logging technology like that introduced by Conrad Schlumberger (1878–1936) helped prospectors bring in tremendous additions to reserves both in the United States and overseas during the 1920s and 1930s, giving multinational oil companies the problem of how to market a flood of oil without cutthroat price wars. A group of major companies attempted to divide up world markets, limit production, and agree on a uniform pricing formula at Achna-carry in Scotland in 1928. Companies agreed to stay with market shares based on 1928 sales and on crude oil prices defined by the U.S. Gulf Coast price plus the prevailing freight rate from the Gulf to specific market destinations. However, because both U.S. and U.S.S.R. production and markets were outside the agreement, Achnacarry did not do what major companies had hoped it would—stabilize market conditions. During the later 1930s, many countries imposed barriers to trade in the form of import quotas, price controls, new product regulations, and higher taxes.

Oil was vital in military strategy in World War II. Acquiring Dutch East Indies production was a major objective of the Japanese Empire; the vulnerability of its tankers to U.S. attack starved Japan of oil and was a major element in its defeat. Similarly, the German campaign in North Africa broke down for want of gasoline. Intense demand for petroleum created by the war continued in postwar years, spurred by tremendous growth in petrochemicals and refining, as well as skyrocketing use of fuel oil, gasoline, and natural gas. To meet soaring demand, oil companies began to draw heavily on the enormous reserves of the Persian Gulf. Independents such as J. Paul Getty (1892–1976) and Armand Hammer (1898–1990) obtained concessions in the Saudi Arabian Neutral Zone and Libya respectively, bringing in giant production. Exploration in sub-Saharan Africa made Nigeria and Angola producer nations. As a result, throughout the 1950s and 1960s cheap oil poured into world markets, fueling economic growth in many countries. However, low oil prices combined with growing nationalism to foster discontent in producer countries over concessions and low oil revenues. Their desire for a common front against oil companies led to the founding of the Organization of Petroleum Exporting Countries (OPEC) in 1960, whose objectives included control of world oil prices and levels of production.

After 1950 Arab-Israeli enmity complicated world oil trade. Closure of the Suez Canal in the crisis of 1956 prompted oil companies to use supertankers to ship Persian Gulf crude to Atlantic destinations. An Arab oil embargo in 1967 was largely unsuccessful, but the Arab embargo of 1973 directed against the United States and several other nations was combined with production cutbacks, resulting in a quadrupling of crude oil prices in six months. Even after the embargo ended, opinion shapers forecast prolonged energy crisis, which encouraged panic buying of oil for storage, in turn further tightening supply and driving prices higher. Not content with higher oil prices swelling revenues, many producer nations moved to nationalize their oil, leaving foreign companies to operate as contractors. With national vendors ready to sell oil to the highest bidder, increasing volumes of oil were traded on the spot market (the market for oil ready for immediate delivery) in oil ports such as Rotterdam, rather than through long-term contracts. In 1983 crude oil futures began trading on the New York Mercantile Exchange (NYMEX), by which time over half world trade in oil was on the spot market. Gone were the days when most world crude stayed within the integrated systems of multinational oil companies and long-term contracts stabilized prices.

Ironically, a decade of high oil prices worked to undermine OPEC and the control of producer nations over world oil. Higher oil prices led to economic recession in the United States and many other countries, decreasing demand. Higher prices also encouraged both conservation and successful exploration and development in high-cost areas such as the North Sea, the U.S. Gulf of Mexico, and the Alaskan Slope. Non-OPEC producers such as Norway, the United Kingdom, and Mexico stepped up their production, undercutting OPEC power over supply. When OPEC tried to prop up prices through production quotas, members often cheated. Oil prices slid downward in 1982 and crashed in 1986, falling from over $30 a barrel to $10 or less, a disaster for both oil companies and producer nations. Since then military action in the Middle East has produced price spikes on the world oil market, but OPEC has not been able to exert much control over prices or production. Nor have conservation efforts made much headway; world demand continues high, and world petroleum prices continue to be volatile.

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Diana Davids Hinton