Monday, October 4, 2010

The World on Oil

Being a person from the oil industry, I thought this is the best place to begin my search. This search will take us back by 150 years, a time when the most powerful industry of all times was about to take birth. It will take you through the first drop of oil that came out of Drake’s well, through to the drops of oil that came out of the BP well in Gulf of Mexico. The former one came as a pleasant surprise, while the later also did surprise many, but not in a pleasant way. The search will also show us how this new industry grew in power rapidly to decide the fate of nations and changed the history of humanity forever. The industry suffered many setbacks, but it always came back stronger. The industry learned how to self-sustain by controlling the game of demand and supply. The supply was maintained by advancing technologies, moving into challenging areas and by conspiracies to capture big oilfields in the name of war. The demand, on the other hand, was maintained by making people more and more dependent on oil, making them so used to it, that they can never come out of it. And as long as this fine balance between the demand and supply was maintained, the industry could only grow from strength to strength. 




The Rise of Oil Power
Even though George Bissell is credited for the creation of the oil industry in the mid 1850’s, the importance of oil has been realized for centuries. The history of oil dates back to 450BC when Herodotus described oil pits near Babylon. For ages oil has been collected from seeps and used as medicine and for the purpose of lighting. The first oil well has already been drilled years before Col. Edwin Drake struck ‘liquid gold’ in 1959. In 347AD Chinese have drilled holes in ground using bamboo to extract oil. In 1803 the first offshore wells were hand-dug 18 and 30 meters away from the shoreline in Bibi-Heybat Bay of the Caspian Sea (Azerbaijan). One of the first wells (meant for salt water) that produced oil and marketed was drilled near Marietta, Ohio, in 1814. In 1846, 13 years before Drake’s discovery, the first ever well was drilled with percussion tools to a depth of 21 metres for oil exploration in Baku [1]. However, it was Drake’s find that marked the beginning of a new industry, an industry to dominate all others.


Bissell had an idea that an industry can be made out of the ‘rock oil’, when he saw oil seeping out of a Pennsylvanian spring, which was used by Indians to cure disease. But even he didn’t realize the true potential of what he was about to make. He hired a chemistry professor named Benjamin Silliman to study this oil and give a report on its economic benefit. The reports were promising, and once the news spread in the market Bissell got his capital. Along with Jonathan Greenleaf Eveleth, Bissell founded the Pennsylvanian Oil Company in 1954. Drake was hired to investigate the seeps in Titusville and drill a well. However, most of his efforts seemed to go in vain. It was taking too long and the investors became restless, they stopped investing. However, determined and ever optimistic Drake kept drilling. Running short of money, Drake was officially sent a letter in August of 1859 to immediately stop the drilling campaign. Drake was yet to receive the letter when the drilling was halted due to a problem 27th August. The next day morning, driller’s spotted a dark fluid floating on top of the water, in the well. The news spread, “The Yankee has struck oil” [2]. Had the letter arrived few days before, the modern world as we know it, wouldn’t have existed.
The year 1860 saw the first oil boom. But the industry was not yet stable. Six years into its life, unplanned drilling and overproduction led to the first depression. Years later the oil industry will gain strength and become so powerful that it will decide the rise and fall of superpowers, it will change the course of our history forever. But that was yet to come, and for the time being in this crazy race for money, some poor men became rich, some rich men became richer and many poor and rich men lost all they invested.


The first real politics for oil and money began in 1870 when Standard Oil Company was established by a group of five men led by the ‘wise old owl’ John D. Rockefeller. With his shrewd tactics, he took over most of his competitors. Seven years down the line he controlled 90% of American oil refining. Standard Oil ruled the arena of oil for over 40 years before ‘the dragon was finally slain’ in 1911, 16 years after Rockefeller retired. His huge empire was broken up by court order to create: Standard Oil of New Jersey (EXXON), Standard Oil of New York (MOBIL), Standard Oil of California (CHEVRON), Standard Oil of Ohio (later taken over by BP), Standard of Indiana (AMOCO), Continental Oil (CONOCO), Atlantic Oil (ARCO, now part of BP) [2]. In the mean time there were three other companies taking shape in the east that will soon rise to compete against the ‘Dragon’. In 1885 oil was discovered in Sumatra by a small company named Royal Dutch. In 1897, son of a shell merchant formed an oil transport and trading company named Shell. These two companies merged together in 1907 to form Royal Dutch Shell, one of the current largest energy companies in the world. Year later, on 26th May, 1908 oil was discovered in Persia, marking the beginning of Middle East oil legacy, by a minor oil company named Anglo Persian Oil. It will later become BP. In 1924, after World War I, the French Prime Minister Raymond PoincarĂ© rejected the idea of forming a partnership with Royal Dutch Shell in favor of creating an entirely French oil company named Total. Exxon and Mobil will later merge to become Exxon Mobil which along with Chevron, Shell, BP, Conoco Phillips and Total will dominate the world oil arena for decades to come and will be dubbed as ‘Big Oil’.
19th century saw the birth of the most powerful industry in the world. An industry that generated so much wealth, that it soon became synonymous with the word ‘money’. But that was not enough. In 20th century this industry will rise to new heights. It will soon become intertwined with national strategies and global politics. From being synonymous to ‘money’ it will become synonymous to ‘power’, the power to rule the world. For the first time in the history of mankind an industry will become so powerful that wars will be fought over it, it will govern the rise and fall of nations, and will shape the future of mankind.

The Bloody War

One of the most deadly battles in history was fought between the summer of 1914 and late 1918. It was fight for ultimate glory, a war that saw the rise of new superpowers, a war that ended a kingdom that dominated the world for over six centuries, and the fate of this bloody war was not decided by people, money or ammunitions, but by oil.
Most historians inform us that the assassination of Archduke Franz Ferdinand of Austria, the heir to the throne of Austria-Hungary, was the main trigger of the World War I (WWI). But the seed of the war had been planted long before. It was the battle amongst the Great Powers to decide who will have the ultimate glory. Apart from Great Britain that dominated the world in 19th century, France, the Austro-Hungarian Empire and Czarist Russia were the other Great Powers in contention. German joined the ranks later in 1871 after the defeat of France. The walls of the Great Ottoman Empire that ruled for over 600 years were tiring, and the Great Powers had an eye on it anticipating their fall. Until 1892 United States was not even considered a contender. The oil industry has powered US into the league of the Greats, and in the years to come, it will make her the greatest. But she has to wait because, now, it was Britain that was the pre-eminent political, military and economic power in the world. British controlled the sea, and with it, the world shipping trade. However, from 1950s their economy started to decline. The 1873 depression lead to further decline in their industrial competitiveness. At the same time the German industry was gaining power. They started to lead the steel and chemical industry, and grew considerably in the coal. German now looked to challenge British supremacy over sea. England felt threatened. But what threatened them the most was the German plan to build a railway track from Berlin through the Austro-Hungarian Empire and Bulgaria, into Baghdad belonging to the Ottoman Empire. If it was achieved, it would generate enormous wealth for the Germans, and it would be inaccessible by sea-power held by Britain. It would cut-off the Russians, the new ‘friend’ of the British Empire from Great Britain and France. It would also bring Germany within striking distance of their Egyptian interest, and from Persian Gulf, into the Indian Empire. For the survival of the British Empire it was critical to stop the Germans from building the railway tract, and their only hope lay on a small little strip of land. That small but defiant country was named Serbia. The tracts was not yet build when on 28 June 1914, the Austro-Hungarian Archduke was assassinated by Gavrilo Princip, a member of Serbian Black Hand secret society. The war now, was inevitable [3].

The war broke out between the Allies and the Central Powers. The Allies originally included United Kingdom, France, and the Russian Empire, joined later by Belgium, Serbia, Italy, Japan, Greece, Romania, and Portugal. The Central Powers consisted of the German Empire, the Austro-Hungarian Empire, the Ottoman Empire, and the Kingdom of Bulgaria. United States joined the war much later as an "associated power", rather than a formal ally of France and Great Britain, because it had not declared war on the Ottoman Empire like those two countries [4]. Some historians believe that there was a hidden conspiracy that brought America into the war and it started in 1909, long before the actual assassination of the Archduke. The American involvement in the war was in the interest of few very wealthy Americans, which included several bankers and the big people of the oil industry. To them it meant money, and to President Wilson it meant the power to rule the world. All that was needed was an event that would stir the public sentiment and drag the American civilians to war. The impetus was finally given by "the foulest act of willful murder ever committed on the seas." Even before the American ship Lusitania, sailed for England, its fate was already decided. Ignoring German warning Lusitania took the sea. On May 7, 1915, the Lusitania was sunk off the coast of County Cork, Ireland by a German U-boat [5]. It gave the Americans enough reason to join the war against the Central Powers.

The war was fought between men and machines, and the machines were powered by oil. Men, munitions and money had little value without oil, and that is where the Allies had a distinctive advantage [2]. With the big oil companies, including Standard Oil of New Jersey, Royal Dutch Shell and Anglo-Persian Oil Company, on their side, their ships and automobiles became more agile, new killer machines like tanks and war planes came into existence, and the weapons became more powerful than ever before. It also meant a huge increase in the demand for oil, just what the industry wanted. Allies, with their newfound mobility and efficiency, came out victorious. It was the oil industry that decided the final outcome of the bloody war as the Germany agreed to a cease fire on Armistice Day, November 11, 1918. In 28 June 1919 the peace treaty was signed, named Treaty of Versailles. It was a controversial and unfair treaty that laid impetus for another war in years to come. However, by the end of WWI, four major imperial powers—the German, Russian, Austro-Hungarian and The Great Ottoman Empires that ruled for over 600 years—had been militarily and politically defeated. The last two ceased to exist [3]. Over 13 million people died, millions more injured. With the rising demand for oil and a depleting supply the oil prices soared. The post war ‘oil famine’ created minor hurdles for the industry, but soon they will face a problem from another end of the spectrum - ‘oil flood’.

The Great Depression

Since 1920 the technology for finding oil improved. A new science, called geophysics, was born. With torsion balance to measure gravity, magnetometer to measure earth’s magnetic field, and reflection seismograph, oil men, now, can see through the earth. Geology itself became advanced with introduction of aerial photography for quick broad overview of surface geology and micropaleontology to decipher the type and relative age of sediments. The technology of drilling has also improved. With the new found eye, oil explorers began to discover new fields. The competition amongst the oil companies increased in America not only in upstream, but also downstream with the opening of gasoline retail outlets. With the increase in oil supply the industry now needed a market with enough demand. The place where it can come from was the automobile industry. The automobiles were marketed heavily. Long interstate highways were build. Fast and luxurious cars were made. Henry Ford became the king of the automobile industry. With the demand increasing people started exploring for more oils. Baba Gurgur Number 1 well in Iraq, belonging to the Turkish (later Iraq) Petroleum Company, struck oil in 15th October 1927. It marks the beginning of Iraq’s oil journey. The Turkish Petroleum Company was restructured as a consortium of several companies including the Anglo-Persian, Royal Dutch-Shell, Total, the American group, and "Mr. Five Percent" Calouste Gulbenkian - an Armenian-Turkish-British businessman who had brought all these companies together. During a meeting in 1928, Gulbenkian drew a red line on a map of the Middle East showing the boundaries of the former Ottoman Empire, and according to this Red Line Agreement, no member of the Iraq Petroleum consortium would operate independently within the thus defined territory [8]. With increase in discovered fields the supply increased exponentially (oil flood) and it out paced the demand. The inevitable happened, the oil prices fell drastically. The American companies were already facing huge competition within themselves, and to worsen their problems they soon started facing competition from international market. Their old competitor, the Russians, were back in business and their oil was cheaper.

US economy flourished under President Coolidge in the ‘roaring twenties’. However the ‘Coolidge prosperity’ was not shared equally amongst all Americans. From 1923 to 1929 the average output per worker increased 32% in manufacturing, while their wages increased only by 8% [6]. Supported by Coolidge’s policies, the rich became richer, while the middle class remained poor. To maintain the growing economy US banks started giving credits to the ‘poors’ so that they can spend lavishly on thinks that they cannot afford. The middle class were now able to by cars for which they can pay latter, just what the oil industry wanted. The investments were good for the economy, but the overconfidence of people in the US economy made them over-invest. However, the high confidence did not last long. The stock prices started to fall beginning September 3, 1929. The stock market finally crashed in October 29, the ‘Black Tuesday’. The rising inequality meant that the US economy was already unstable. To protect the nation's businesses the U.S. government imposed higher trade barriers. Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew rapidly. The country spiraled quickly into catastrophe. The Great Depression had begun [6]. In 1930 the estimated unemployment rate in US was 8.9%. This was before the 1931 Austria Creditanstalt collapse triggered the German crisis, and led to the Pound Sterling’s abandoning of the gold standard, all of which sent heavy new financial and banking shocks to New York institutions and led to a severe second wave of crisis, just as the US was beginning to come out of the stock market crisis of 1929[7]. Economies of many countries, including UK, were unhealthy after WWI. They were still struggling to pay their war debts to America. With the American markets crashed, they wanted their money back. With cash flowing from these countries to America, their economy fell apart. The Great Depression quickly spread to almost every country in the world.  It meant an end to the growing demand for oil. 3rd October 1930 The Black Giant was discovered in East Texas. It was the biggest oil discovery in America at that time. It increased the supply gigantically. Oil prices fell even further. Production was not economic any more. The government had to interfere. It imposed laws to control the oil production and the oil price for the first time in history. To protect national interest it imposed tax on foreign oil. This in turn affected the foreign companies badly, especially Venezuela that depended heavily on American market. It only prolonged the Depression.

Amidst The Great Depression interesting developments were taking place in an area which, in years to come, will lead the world in terms of oil reserves and production. Oil was first struck in Middle East (Iran) in 1908. Kirkuk oil field was discovered in Iraq in 1927. However, it was in 1930’s when the true potential of Middle East was realized because of the persistence of one man named “Abu Naft”, the father of oil. His original name was Major Frank Holmes, a New Zealand born British geologist. He heard about oil seepages in Arabian Coast of the Persian Gulf from Arab traders. Holmes set up a company, the Eastern and General Syndicate to explore in the area. He also pushed to get concession from Ibn Saud of Arabia. Holmes plans alarmed the British Government which tried to oppose. However, Ibn Saud was running short of money due to the Depression. To solve his financial woes, in 1923, he awarded a concession to Holmes to explore for oil in the eastern Al-Hasa region in return for a rental payment of £2,500 a year. Geologists were appointed to survey the area; they declared that drilling here will be a pure gamble. All activities were stopped. Holmes then moved to a small island in Persian Gulf, named Bahrain. The Eastern and General Syndicate were already in financial trouble after their last failure. Holmes went to UK for financial support, his plea was rejected. Still an optimist, Holmes went to US for support. He found support from Gulf Oil. However, the moment Gulf started exploration it faced another barrier. Bahrain was inside the Red Line Agreement, and Gulf Oil was part of the consortium (American Group). Since the other members were not interested to explore in Bahrain, even Gulf couldn’t. Gulf than sold its Barhain Concession to another interested company named Socal, which formed a Canadian subsidy Bahrain Petroleum Company (Bapco). Bapco, along with Holmes, started drilling in October 1931 over a structural anticline called Jabal Dukhan, "Mountain of Smoke". The well hit oil on 31st May, 1932. Three years later exploration began in Kuwait. A huge field was discovered in 23rd February, 1938. Weeks later, in March, oil was struck in Well no 7 in Saudi Arabia. In 1939, a 63- km long pipeline was laid from the Dammam field to the port of Ras Tanura. Ibn Saud and Saudi Arabia seemed to be on the road to fortune when, in October 1940, the Italians bombed Dhahran. World War II has intruded Middle East.

That's how the industry came into being. Soon it will become the most powerful industry in the world. A new era of civilization, controlled by the oil industry, will be born. Oil, along with natural gas, will govern how we live, how we work, how we travel. Oil will be embedded in our civilization in such a way the civilization will fall if suddenly all the wells in the world go dry. 

Reference
[2] Yergin, D., The Prize - The Epic Quest for Oil, Money and Power, 1992
[3] Engdahl, F.W., Oil and the origins of the ‘War to make the world safe for Democracy’, 2007
[7] Engdahl, F.W., Some unconventional reflections on the Great Depression and the New Deal, 2002

You React:

3 comments:

  1. Welcome to the blogdom. And good luk with the journey. I sure hope to learn about this journey from an oil man :) I like how researched the first post is. Will be back for more in the future ::)

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  2. Interesting..had an oil background too..very well researched post

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  3. @ Maitreyee Bhattacharjee Chowdhury....
    thanks :-)

    Reading your post "Memory loss and college ke woh din" i guessed u r from Assam? if i am right then being close to Digboi u must know a lot about oil!!!

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