We are used to hearing about important oil producing areas around the world. But they did not all come online at the same time. Oil exploration evolved over time, with certain periods of history focusing on specific geographies. In Lesson 2, we studied the development of the markets in Russia, Europe, and the Far East. In Lesson 3, we start to see the expansion into what we now know as the Middle East oil region, one of the most important, and prolific, oil markets in the world. We will discuss the beginnings of oil discovery in the Middle East, specifically in Persia, the clash of British and Persian cultures, and the emergence of Anglo-Persian Oil Company.
This lesson also covers the changes in the markets as well. Recall changes in Lesson 1 when more uses for oil products were being developed. Then in Lesson 2 was the automobile. Lesson 3 will introduce us to the role of the internal combustion engine and the need for gasoline. It was not that long before where gasoline as a by-product was seen almost as a nuisance, and now it is evolving into its own product in demand.
Lesson 3 also reminds that even as new concepts crystallize; some old habits die hard. We still see the up and down aspects of the market with companies oscillating between doing quite well and experiencing imminent collapse. We also still see squabbling among companies, distrust, and cutthroat competition, punctuated with moments of cooperation for the greater good. But we must realize that the “greater good” in many cases meant to ensure their own survival.
As important as all of that is, one of the most impactful elements of Lesson 3 content is the emergence of oil as a strategic commodity- becoming central to global crisis and military positioning. The uptake of the internal combustion engine and its use of gasoline, combined with the transition from coal to oil, completely changed the face of military readiness and national security. As you will read, it is safe to say that the use and availability of oil drove the progress, and ultimate outcome, of World War I. The transitioning of the Navy from coal to oil is one thing but imagine the rest of the military equipment if they didn’t run on oil and had to use coal!
By the end of this lesson, you should be able to:
This lesson will take us one week to complete. Please refer to the Course Syllabus for specific time frames and due dates. Specific directions for the assignment below can be found within this lesson.
Activity | Location | Submitting Your Work |
---|---|---|
Read | The Prize: Chapters 7, 8, 9, & 10 (select sections) The Quest: Chapters 2 & 13 (select sections) |
No Submission |
Discuss | Participate in the Yellowdig discussion | Canvas |
Complete | Complete the "Analyze a Quiz Question" assignment | Canvas |
Each week an announcement is sent out in which you will have the opportunity to contribute questions about the topics you are learning about in this course. You are encouraged to engage in these discussions. The more we talk about these ideas and share our thoughts, the more we can learn from each other.
In the early days of the oil industry, we saw the emergence of powerful companies- Standard Oil in America, Royal-Dutch Shell in Europe, and the Far East, and in this chapter, we are introduced to Anglo Persian Oil Company. Anglo Persian was born from a syndicate of other companies, an arrangement necessary to deal with the logistical challenges of this new area, as well as managing competing interests from nearby countries, not the least of which was Russia. There was little to no transportation network in Persia at the time of initial oil exploration. Among the many challenges were difficult terrain and weather (workers' quarters could get to 120 degrees), hostile culture towards the outside world, lack of technical skills, and feuds between tribes.
What makes the oil picture in this part of the world so volatile is that the history of the area is volatile. During the days covered in this chapter we speak of Persia, in 1935 it became what we know today as Iran. We all know from the news that Iran is not only a challenge politically, it is also gifted with incredible amounts of oil reserves. Control of these oil reserves would be pivotal in geopolitics from then to the present. We shall see in future chapters that this marriage of political turmoil and oil riches are characteristic of many of these Middle East countries.
Chapter 8 is best characterized by the statement “oil is an instrument of national policy, a strategic commodity”. The British Royal Navy pioneered the connection between oil and military advantage. Prior to this period, the Royal Navy was powered by coal, as most other Navy’s were, including Germany’s. But the Royal Navy had the foresight to switch from coal to oil. The advantages were obvious, both logistically as well as tactically. The Navy would be more mobile, maneuverable, and reliable. And it would operate without having to cart around tons and tons of bulky coal. But with this decision came the negative aspect of needing to ensure a reliable supply. For Britain, access to coal was not a problem, they had an incredible amount within their national borders. Oil on the other hand, was for the most part, sourced from elsewhere. Resolving that conflict took some time and persuasion, but eventually the Navy pivoted to oil. With this decision, the support and pressure from the government, and specifically the military, fell on the oil industry to produce.
It was clear that the government was not effective or positioned to manage their own oil operations, they had to look to and actually depend on what the big private companies were doing. But being passive observers was not prudent, and we see the beginnings of these public-private partnerships between government and the private sector.
As mentioned before in prior lessons, similarities between the early days of the oil industry, and the situation today are remarkably similar. And it makes you wonder if we learn anything from history. The concept of needing to be energy independent and reducing dependency on outside sources that one cannot always control was the leading issue of the day. And pressure to control and ensure supply led to the rapid development of these new reserves in Persia, in spite of the logistical challenges.
Another similarity is the conflict between the government’s military spending and social spending. Social unrest in the early 1900s characterized the conflict between sharing limited budgets between the military and the people. But a great global conflict of a scale not seen since the oil industry started to take off in the mid 1800s was just around the corner- a world war was coming. Eleven days after Churchill's bill, on June 28th, 1914, Archduke Franz Ferdinand of Austria was assassinated at Sarajevo. Russia mobilized its forces on July 30th and on August 1st, 1914, Germany declared war on Russia. Churchill flashed the order to the entire British fleet to "Commence hostilities against Germany" starting the First World War!
While previous wars depended on men and horses, WWI depended on men and machines powered by oil intensifying the extent of damage and destruction. It is interesting that in wars with horses, planning required one horse for every three men and 10 times the food of each man for every horse! WWI was characterized by oil and the internal combustion engine. And to have the oil required rapid development and exploitation of Persia, and as we shall see, what is now Iraq.
For a period of more than two years, the battle lines hardly moved more than 10 miles in either direction until the British turned to technology to break the stalemate by designing, developing and building a new vehicle funded by Churchill’s Navy under the codename “tank”. With the tanks and motorized transport, suddenly speed and mobility became possible as the tanks moved on traction, impervious to machine guns and barbed wires, and amplified the devastation. Towards the end of the war, the British had 56,000 trucks, 23,000 motorcars and 34,000 motorcycles. The US entered the war in 1917 with another 50,000 vehicles to France—all powered by gasoline! Eventually more than 13 million died during World War I, and victory of the truck over the locomotive was demonstrated.
Aviation technology also advanced during the war and provided strategic importance and advantages of the air with a bird’s eye view of the battlefield (reconnaissance and observation) and the ability to bomb enemy positions and airplanes. The planes powered by oil as fuel provided another reason to maintain access to petroleum products. The advanced aviation technology yielded fighter planes that had greater lethality and were much faster. The Germans actually took the lead in strategic bombing with the use of Zeppelins and Strategic Bombers. The war constantly pushed innovation for larger numbers, faster, and better planes. In fact, by 1915, all machines that had been in the air at the beginning of the war were obsolete. The war proved Churchill and Fisher right in their conversion of the British fleet to oil as it provided advantages over the German fleet powered by coal--greater range and speed and faster refueling. Oil also proved useful not only for transportation fuel to power all of these new pieces of equipment, but as a new, better source of toluene- needed to make TNT.
The more things change, the more they stay the same. During this period we see more inter-company squabbling and the desire by companies to be more integrated, leading Anglo Persian to acquire British Petroleum.
Many military aspects of WWI are actually rooted in oil. The German U-boat attacks were meant in large part to disrupt the access to oil for the allies. In return, many battles were fought with the intent to disrupt oil fields and transportation routes. Dealing with this supply challenge led to the entry of the United States into the fray, and it was the lack of a secure oil supply that eventually led Germany to surrender. By October 1918, the situation of Germany with respect to oil was desperate as Germany was anticipating a crisis in the coming winter and spring, and within a month a worn-down Germany surrendered. The Armistice or Peace treaty was signed at 5 AM on Nov 11, 1918, and went into effect 6 hours later, ending the war. The impact of oil in the war is eloquently summed up by Lord Curzon of Britain, “The Allied cause had floated to victory upon a wave of oil,” and by Senator Bérenger of France, “Oil-the blood of the earth was the blood of victory. Germany had boasted too much of its superiority in iron and coal, but it had not taken sufficient account of our superiority in oil. As oil had been the blood of war, so it would be the blood of the peace.”
It must be noted that while it was the governments who wanted this secure supply, it was the private companies that made it happen. It was a mutually beneficial engagement- the companies had a secure demand, and the government was able to leverage the reach and know-how of the oil giants.
The supply shortage and high demand resulted in rapid increases in the price of oil. The price changes clearly had no negative effect on the demand as the demand remained strong even with the increasing prices. Thus, the demand for oil had become relatively inelastic, or oil was exhibiting inelastic demand in economic terms.
Fast forward to the end of the Cold War and we see a somewhat similar scenario to pre-WWI. Like the fall of the Ottoman Empire into many smaller new nations looking for a foothold in the world order, the dissolution of the Soviet Union also led to new nations. And like with the Ottoman Empire-derived new countries, the post-Soviet Era countries had a wealth of oil; they only needed to find a way to play in the global marketplace. Hence the Caspian oil region was born, and these new places were now dealing with the likes of Russia, Great Britain, the United States, Turkey, Iran, and at one point China.
The new opening up of the Caspian region would bring up recurring rivals, most notably Russia and Britain, and continual competition and striving for control and influence. But the situation would take on new characteristics in the 20th Century, revolving around oil transportation. The oil in Baku was essentially landlocked. The advances in tanker technology would do nothing for transporting this oil. It would require a network of pipelines to get the crude from the drill point to the consumer. The many countries surrounding the Baku Oil Region would all want their piece of the pie. Each country would want to negotiate individual terms for oil to travel through a pipeline over their land.
Chapter 10 highlights the breakup of the Ottoman Empire, and the entry of what is now Iraq into the world oil market. We also see in this chapter various arrangements such as the Sykes-Picot Agreement. The growing complexity of who was in charge of what required some degree of collaboration and to an extent, “sacrifice” for the greater good. The British, German, and Royal Dutch/Shell common goal was to get as much access as possible to the speculated petroleum. Under the agreement, the Turkish Petroleum Company (TPC) became the only entity with access to concessions in the area within the Ottoman Empire, and all oil production had to be done jointly as all parties had to agree to the "self-denying clause." This clause required all parties included in the agreement to work together or not at all. The investment would be shared, and the profits would be shared. The only areas of the Ottoman Empire exempted from the clause were Egypt, Kuwait, and territories on the Turco-Persian border.
America, fearing the exhaustion of petroleum under their own land and the return of "Gasolineless Sundays" sought access to the brightest prospects – the Middle East. To add to the fears, demand for oil in America increased by 90% from 1911-1918 and the number of registered cars went from 1.8 to 9.2 million from 1914-1920. George Otis Smith, the director of the U.S. Geological Survey, warned that the known American reserves would be gone in exactly nine years and three months-which would have been before 1930. This influenced the price of oil to increase and encouraged the government to support the oil companies in their quest for foreign supplies. Thus, the fear of shortage and competition helped to push American companies to now explore for oil wherever they could find it with support of the US government - and that meant the Middle East.
Britain had much economic and strategic collaboration with the US and was not willing to jeopardize its relationship with America and reconsidered. Besides, they also realized that entry of American capital and technology would accelerate the development, and the presence of America would also improve the political climate and strengthen the position of the companies in any political conflict. In the words of the Permanent Undersecretary of the British Foreign Office, according to the Prize, "it would be better to have the Americans inside than outside competing and challenging the concessions."
In the ultimate irony when viewed against the early days of trust busting and the downfall of Standard Oil, Herbert Hoover, the Secretary of Commerce, suggested that a syndicate of companies should be formed to operate in Mesopotamia. It felt remarkably like the dragon that had been slain by the Supreme Court was back to life… and Standard Oil of NJ sat at the top! A few years back, the group would have been a target of the government for antitrust and restraint of trade, but now they were being cheered on as the champions for promoting the Open Door policy!
The US constantly refused to recognize the 1914 granting of concessions to the TPC. Eventually, however, a new concession agreement was signed on March 14, 1925, between the TPC and the Iraqi government that satisfied the Open Door policy after lengthy and contentious negotiations. Despite all the controversy between the oil companies, ethnic groups, and the British appointed king, a joint geological expedition in Iraq started drilling in April 1927. Six months later in October 1927 at Baba Gurgur, six miles northwest of Kirkuk, oil was gushing 50 feet above the derrick into the air. The oil flowed until capped at 95,000 BPD.
With the availability of oil in the area proved, the final settlement of the negotiations that was to bring the American companies into the TPC had to be completed with urgency. This happened on July 31, 1928, with Royal Dutch/Shell, Anglo-Persian, the CFP (French), and the Near East Development Company (which held the interests of the American companies) each receiving 23.75% with the remaining 5% going to Gulbenkian.
The "self-denying" clause still remained, and at one of the negotiation meetings a red line was drawn around the old Ottoman (Turkish) Empire on a map, and the "self-denying" clause became known as the "Red Line Agreement." Within the Red Line that included the entire Middle East, except Kuwait and Persia, the group was bound to operate together. As expected, the Red Line Agreement continued to be a focus of tension and bitter conflicts for many years to come, as it constrained exploration and development by requiring all the partners to work together in all oil production.
Note that the events in this chapter were between the two world wars, when countries had found out in WWI that access to oil was of critical strategic importance to national security and strategies. Also, note that Kuwait and Iran were the only parts of the Middle East not included within the Red Line.
The story from The Prize chapter 7-10 is a cautionary tale that we face even today. Nmely, that there are dimensions to energy security. Simply finding oil is not enough. In this part of The Quest, we learn about the other dimensions. An argument can be made that some current policy decisions are not being true to the importance of these principles. It is important to note that we as a country are not anywhere near a position to halt fossil fuel production and still remain functional and secure. Therefore, for the time being, we will be dependent on oil from other places, as we will surely need it for the foreseeable future, regardless of green energy policies. It is simply the practical nature of where we are.
If we relate to the present-day argument for no fossil fuels to the early 1900s situation, you see how pivotal the US being a potential exporter actually was. We also see the dire straits Britain found itself in as they had no oil of their own, but sorely needed it for their national security. And it was not just military needs, the shortages meant no transportation or heat for the general public. Are we learning from history in setting modern day energy policy?
The dimensions of energy are:
Many non-oil related situations can impact this teamwork and thus impact the supply of oil. A non-oil related situation could be a religious difference between two countries that want to have a pipeline connection. What happens when that religious difference becomes more important than the oil profit or oil-related products? A disruption in the oil supply.