This is
a book about the history of oil: how they got it, what they did with it, and
how much money they sold it for. It was gifted to me by one of my best friends and
it was a very good recommendation. It’s thick at nearly 800 pages, but it does
an excellent job of explaining the oil politics, which are basically all
politics, of the later 19th and 20th centuries.
The book
begins with the first independent drillers discovering useful oil for kerosene,
a home heating product, but the first section is quickly dominated, much like
the oil markets of the day, by Standard Oil. John D. Rockefeller and Henry Flagler
are the big names and they were the ones who consolidated about 90% of the
American industry into their hands. They used rebates (special freight costs
given to high-use clients) and drawbacks (kickbacks from railroads to the oil
companies to get their freight) to beat their competitors. They also built trusts,
which were basically secret combinations of companies that would drive their
rivals out of business. At one point, they were able to drive prices down to
forty-eight cents a barrel, making oil cheaper than water in the Oil Regions.
Standard’s typical way of operating was to enter a region and politely offer to
purchase oil companies there. That often worked on many companies when Rockefeller
showed them his profits. Then, if it didn’t work, he would “give them a good sweating”
and cut regional prices to operate at a loss subsidized by his other regions.
Out of this era four “oil giants” emerged. They were Standard Oil in the USA, the
Rothschilds in Asia and Western Europe, the Nobels (of Nobel prize fame) in
Central Asia, and various Russian producers. However, in 1909, Standard oil was
dissolved by the government to form Standard Oil of New Jersey (Exxon),
Standard Oil of New York (Mobil), Standard Oil California (Chevron), Standard
Oil of Ohio (later an arm of BP), and others.
World War
One was sort of the baptism in blood and fire that oil needed to become the
world’s most important commodity. Up until then, the most valuable product
gotten from the crude was kerosene, used for heating lamps in wintry areas.
Gasoline, however, formerly a waste product with little value, became crucial when
its use was discovered in powering combustion engines. In WWI these uses were
finally taken advantage of. Beginning the war, the UK had just 827 motor cars
and 15 motor cycles. By the end they had “56,000 trucks, 23,000 motorcars, and
34,000 motorcycles and motor bicycles.” The United States become very rich
selling oil to the combatants. The USA satisfied 80% of allied oil needs during
the war, increasing output from 266 million barrels per year to 335 million barrels
between 1914 and 1917. The USA was also using plenty of that oil itself. “By
1929, 78 percent of the world’s autos were in America. “In that year, there
were five people for each motor vehicle in the United States, compared to 30
people per vehicle in England and 33 in France, 10 per vehicle in Germany, 702
in Japan, and 6,130 people per vehicle in the Soviet Union. The technology
continued to develop and inventions like synthetic gasoline made the industry
more efficient while the seismograph and airplanes made the drilling process more
targeted.
In 1928,
the first truly worldwide collusion occurred as a response to massive Russian
production. The “As-Is” agreement between oil companies allocated quotas of
markets to different oil companies, allowing companies to not have to worry
about price competition from other adherents. These agreement between private companies
was a predecessor to the agreement made decades later between oil-producing countries to control the market—OPEC. This
transition would continue starting in Mexico in 1938, as the balance of power
started to shift from oil companies to oil-producing countries. It was then that
Mexico nationalized its oil industry and the United States government accepted
it (despite protestations from the British) for a small fee paid to the companies.
In the future more and more countries would nationalize or threaten
nationalization as a means to get a bigger cut of the oil profits.
In World
War Two, oil was even more critical than in the First World War. In 1941,
during the German invasion of Russia, Hitler considered oil so important that
he had his troops head for Baku, Azerbaijan, a major oil region, instead of
Moscow. The end of the same year, the Japanese attacked the USA at Pearl Harbor
because the USA had cut off oil supplies to Japan, which was entirely dependent
on imports. Their reaction was to punch the US in the nose to slow us down at
Pearl Harbor while they headed south to Indonesia, where the Shell oil company
had major assets drilling in those reserves. Then, through 1943, German U-boats
(submarines) became one of the most deadly naval forces of the war, sinking 108
ships in March 1943 alone. They were aided by (milk-cows), submarines that
carried oil for refueling, extending the range of the U-boats significantly.
Finally, in 1943 the Allies broke their codes and introduced long-range
aircraft, turning the tide in Spring and Summer of 1943 and clearing the way
for an Allied invasion of Europe, which would be known as Operation Overlord in
June 1944. When they did invade Europe, American divisions would use 100 times
more horsepower in WWII than in WWI.
After
the war, big changes came in the European oil supply. While in 1946, 77 percent
of European oil came from the United States, it was expected that by 1951, 80
percent would come from the Middle East, where discoveries were being made in
Iran, Kuwait, and Saudi Arabia. Even the United States started importing large
amounts of oil from the Middle East to fuel massive and massively growing
demand in the domestic market. The Middle East would be the major oil supplier
of the Western world until more supplies were found in the North Sea, Texas,
and Alaska. But until then, the shift kept on going from oil companies to oil
countries. Venezuela managed to achieve a 50-50 deal, which became the gold
standard in how an oil company should split its profits with its host country.
Iran would also cut a better deal. Meanwhile in the United States, companies
faced two types of government action, often at the same time. On the one hand,
they would be pressured to cooperate to form strategic reserves in case of war,
yet on the other, they would be subjected to populist, “anti-trust” lawsuits by
the Justice Department.
From
World War Two until the 1970s, the United States increased oil production from 5.5
to 9.5 million barrels a day, but America’s share of global production slipped
from 64 to 22 percent. This was because the Middle East had increased
production 1,500 percent, from 1.1 million barrels a day to 18.2 million barrels
a day. After the 6-Day War, the Arab states tried to place an oil embargo on
the West but it failed. However, they would be successful after the October War,
triggering massive shortages in the United States in 1973-4 and again in 1979-80.
During these shocks, the Europeans, much more dependent on MidEast oil, were generally
much more willing to negotiate than the Americans. These shocks devastated Western
countries. For example, US Gross Domestic Product SHRANK 6 percent between 1973
and 1975, while unemployment reached 9 percent. Thankfully for the USA, more
supplies were found in Alaska and Mexico later on, but those shocks would be enough
to topple governments.
The book
continues into the Iraqi invasion of Kuwait, but the same themes abound (though
the OPEC alliance declines with time). There are a lot of names to remember, but I tried to focus more on bigger themes, but anyone who likes to read about swashbuckling capitalists will enjoy this. In sum, the world became utterly dependent on
oil in the 20th century and on the countries that had it. This
weakened everyone else. Europe faced serious problems as a result of its
dependence and so did the United States to a lesser extent. To me, the book
shows the importance of having diverse energy sources that free you from
independence on any one source. No powerful country can depend on any other for
its energy because energy is everything.
Miscellaneous Facts:
- Standard Oil was named from the “Standard” quality of its oil. At the time, people couldn’t be sure of the quality of what they got and many thousands died or were burned in explosions.
- Jews were the largest single group of inhabitants in Baghdad at the end of WWI.
- The modern “jerry can” as we know it is an invention of World War 2. Americans found the standard ten-gallon can too heavy and often chose to use salvaged five-gallon German “blitz cans” to refill cars and tanks. However, the Americans opted to add a spout to the can instead of using a funnel (which allowed dirt and mud to enter the engine) creating the red, spouted “jerry can” that we use today, named for the “Jerries” (Germans) who used it.
- In 1956, when the UK and France invaded the Suez Canal Zone with an Israeli invasion as a pretext, it was viewed by many at the time as a way of stopping a proto-Hitler. French and UK leaders saw in Gamel Abdel Nasser a populist demagogue who could do what Hitler did and they were determined not to appease him. It seems ridiculous now, but PM Anthony Eden staked his career on it and lost, primarily thanks to American opposition from President Eisenhower. At that moment the Cold War was especially “hot” as the USSR invaded Hungary.
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