Here we will explore oil discovery in the area that was not supposed to have oil, Arabia (Bahrain, Kuwait, and Saudi), and the problems posed by the troublesome Red Line agreement. The reasons for the economic hardships of the area that made concessions possible in these areas will be discussed. The different objectives of the American and British companies that made it possible for America to beat the British in Arabian oil dominance will also be explored.
Followed by the rise of nationalism and military expansionism in Japan in the 1930s, and the deadly paradox/dilemma Japan faced in choosing food to be a synthetic fuel instead of feeding their citizens. This will lead Japan into the Pearl Harbor attack, its key success elements, objectives, impacts, and the miscalculations of both sides. We will then discuss the innovations in chemistry that helped with synthetic oil production in Germany, and how synthetic oil shaped Hitler’s WWII plans and strategy in Europe. Finally, we conclude with a ponderable comparison to the Iraq War of 2003.
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 15, 16,& 17 (select sections) The Quest: Chapter 7 (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 chapter 15 we encounter much wheeling and dealing in Arabia. In today’s global oil market, not only is the Middle East a key player, but it is also actually influential enough to direct prices, supplies, and overall market responses. But it wasn’t always like that, and in the early days, people were not even sure this area had potential. But like many of the other areas we have explored, an intrepid entrepreneur pursues a rumor or a seep, and the rest is history.
Finding oil is as much about science as it is about agreements and politics. The Red Line Agreement we read about before ended up causing headaches for some companies, while it allowed others to take advantage. The contrasting story of Gulf and Socal demonstrates how such agreements can keep someone out of a market. Ironically, Gulf pivoted and moved to an area where they could work, and it turned out to be quite the strategic maneuver. In addition to the complexities introduced by agreements, there is the issue of nations having to deal with other powers. The interaction of American and British interests, and how they were perceived in this newly evolving oil market was the early manifestations of the conflicts that we face still today. That being the conflict of Western and Eastern cultures that play out on the battlefield of today’s oil markets.
It is interesting that, as we saw in other parts of the world, discoveries of large oil reserves sometimes soften the contempt one country can feel for another, and a greater effort is made to “close the deal.” We see that in this chapter, in regard to how these new oil-rich countries acted with America and Britain, and with each other. Kuwait is a classic example of this, as well as the old adage, “the enemy of my enemy is my friend.” With economic conditions causing problems, Kuwait needed money, but it was sitting on quite a bit of oil. Playing America and Britain off of each other by way of Gulf and Anglo-Persian proved a useful strategy. Conversely, the two companies teaming up also proved to be strategic and prudent.
Having a great agreement means nothing if the oil is uneconomic to develop or if demand is low. This means you have to improvise or temporarily adapt. The Texaco and Socal part of the story, and the birth of CalTex illustrates this well. But in the 1930s, oil was discovered in Kuwait and Saudi Arabia in commercial quantities, and so began the prominence of this area in the global oil market.
Change was once again coming in the form of another war. And like in World War I, although it wasn’t because of oil that the war started, oil did end up playing a major role.
In chapter 16, we return to Asia and learn about Japan’s incentive to engage in a war. Several reasons accounted for this shift in military expansionism: vulnerability due to its lack of natural resources, economic hardship from the Great Depression and the collapse of world trade, dwindling access to international markets, extreme nationalism, moral distress, arrogance, and the mystical belief in the superiority of Japanese culture as well as “The Imperial Way” (Asia under Japanese control).
When Prime Minister Osachi Hamaguchi won a large election victory in February 1930 and favored cooperation with Britain and the United States, he was assassinated by a youth, and that killed any spirit of cooperation. Ultra-nationalism took hold thereafter. After being reprimanded for its actions by the League of Nations (United Nations), Japan left the League, rejected liberalism, capitalism, and democracy as engines of weakness, and embarked on its own destructive course. The Emperor sought to establish a “national defense state” in which all resources, especially oil, were targeted for war based on Germany's failure/defeat in WWI from lack of resources (oil).
Japan was a good example of the desperation that comes from lack of energy security and independence. By the late 1930s, Japan produced only 7% of the oil it consumed. It imported the rest, with 80% coming from the U.S., and 10% from the Dutch East Indies. Japan sought to dominate the oil industry to serve its needs. Up to that time, 60% of its internal market was held by two Western companies (Rising Sun & Stanvac). Rising Sun was the Japanese affiliate of Royal Dutch/Shell, and Stanvac was a joint venture between Standard Oil of New Jersey and Standard Oil of New York. In other words, even in cases driven by national interests, the global companies are ever-present.
As with the Middle East experience we saw in Chapter 15, sometimes national feelings toward another country or culture clashes with the reality of dependence, especially with oil. With Japan’s actions, the United States emerged as Japan’s antagonist in the Pacific, as the U.S. had an “open door” policy which was counter to Japan’s strategy. With the U.S. as Japan’s major oil supplier and likely antagonist, the question was where was Japan going to get its oil in case of war? To help address this, the military won passage in 1934 of the Petroleum Industry Law, which gave the government the power to control imports, set quotas, fix prices, and make compulsory purchases. The underlining objectives of the law were to build up refining industry, reduce the role of foreign companies, and prepare for war. The oil companies, U.S., and Britain all recognized and disapproved of the “squeeze and restrictive oil” policies of Japan.
Japan didn’t want any disruption of its oil supply and passed the Synthetic Oil Industry Law which provided a 7-year plan to produce synthetic fuels from coal by 1943. Japan began to establish industrial self-sufficiency and to break its dependence on the U.S. in anticipation of an oil embargo. But in the meantime, it needed to ensure supply and ironically kept buying gasoline from America. This rings of the current paradox we see with Russian oil and the European countries.
With the increased escalation and tension, an embargo was virtually the only way left, and on July 25, 1941, the U.S. ordered all Japanese financial assets in the U.S. frozen. While it was not an embargo, a lack of assets to buy oil virtually turned it indirectly into an embargo. On July 28, Japan, as expected, invaded Indochina, taking another step towards war. Effectively, by August 1, 1941, there were no more oil exports to Japan from the U.S. Japan’s oil situation was so serious that there were some last-minute diplomatic efforts to avoid the confrontation in addition to intense discussions between the Emperor and his top military generals.
With the Pearl Harbor attack, even though it was not the only reason for the war, Japan, however, made one grave mistake – not sending a third wave to attack the oil supplies and repair facilities on the island of Oahu. All oil on the island had been transported from the mainland. Thus, the destruction of the oil reserves and tanks holding them at Oahu would have immobilized every ship of the U.S. Pacific Fleet not just those destroyed, accomplishing exactly what the Japanese original intention had been. The sparing of the aircraft carriers, the oil, and repair facilities ended up being the only good fortune of the U.S. on that day. “Oil had been central to Japan’s decision to go to war. Yet the Japanese forgot about oil when it came to planning Operation Hawaii.”
Let’s move now back to Europe and examine Germany’s motivations. In chapter 17 we again see how necessity drives innovation. Germany was the world leader in chemistry. One of its scientists, Friedrich Bergius, had, in 1913, invented the hydrogenation method to produce high-grade liquid fuel from coal which Farben patented the rights to in 1926. The hydrogenation process involved heating large amounts of hydrogen with coal at high temperatures and pressure in the presence of a catalyst. The competing technology was the Fischer-Tropsch process. It involved steam reforming of coal to produce Syn-gas (a mixture of hydrogen and carbon monoxide) that was subsequently converted to synthetic oil, but wasn’t as successful. Hydrogenation could also produce aviation fuel, while the Fischer-Tropsch method could not.
The argument was that synthetic fuels from coal could cut Germany’s dependence on foreign oil and also reduce the pressures on foreign exchange. The German government commenced in building the Nazi war machine (bombers, fighter planes, tanks, trucks) that all depended on oil. Thus, an independent oil supply was vital, and the synthetic fuels would become an important strategic source.
Standard Oil of New Jersey (SO of NJ), which had unsuccessfully been exploring alternatives to crude oil as early as 1921 and had acquired acres of shale oil in Colorado with the hope of extracting oil out of the shale, showed interest in the technology. SO of NJ saw the technology as a clear threat to its business. They had no need to produce synthetic fuels because of the oversupply of crude oil, but wanted to ensure that each stayed out of the other’s main fields of activity. SO of NJ would also rather use hydrogenation to increase the gasoline yield and boost octane out of crude oil.
We learn in Chapter 17 that regardless of why one enters war, the access and management of oil can make or break the outcome. Hitler had been convinced that there was absolutely no way Germany could win the war without access to the Russian oil. The grand strategy was to have one attack through southern Russia and another from the southwest via North Africa. The grand strategy failed due to a number of reasons including Allied attacks on German fuel supply lines, the fierce Russian resistance, and Allied code breakers. Clearly, the bitter lesson learned by Rommel is illustrated by his statement, “The bravest men can do nothing without guns, the guns nothing without plenty of ammunition, and neither guns nor ammunition are of much use in mobile warfare unless there are vehicles with sufficient petrol to haul them around.” The Allies, led by General Carl Spaatz, set a new priority target – the German synthetic fuels industry and began bombing oil factories all over Germany. The goal was to deny oil to the enemy armed forces.
The section from the Quest reviews the reasons behind the war the United States engaged with Iraq post 9-11. This allows us to compare the road to war in Japan and Germany, and in the United States, years apart. Some similarities and some differences, but an undeniable fact is that the oil industry was impacted by both. Some could argue that oil caused both wars, some others could argue that both wars highlighted the value of oil. The actual answer is somewhere in the middle, and that any time war occurred since World War I - oil was included in the consideration.
World War II was a delayed reaction to the end of World War I. Similar to how the Iraq War of 2003 could be considered a delayed reaction to the Gulf War of 1991, Japan of WWII underestimated the United States' reaction. Similarly Iraq and Saddam Hussein were only focused on the regional blustering and did not have the United States in focus. The threat of an armed opponent was a guiding fear factor. The attack on 9-11 has been compared to the attack on Pearl Harbor. However, after 9-11, there was not a clear adversary for the United States. Iraq and Afghanistan were ways to prevent war, but was not as clear as when Japan attacked Pearl Harbor.
So, what do these have to do with oil? - WWII, Japan was seeking more oil sources. The United States has a fear of losing oil supplies. But did the individual attacks, Japan on Pearl Harbor and the United States on Iraq, actually increase access to oil? Japan still had to seek out new oil supplies in the East Indies, and the United States had to stabilize and rebuild the oil industry in Iraq. Neither direction increased access to oil quickly, and neither was a stable and secure option.
Instability does not encourage foreign investment. The oil companies wanted to know how the political system would work and impact their investment. They wanted to know about the economic system and contracts. What would guarantee security to their investment? Then and only then would the oil companies invest. But the United States Government could not guarantee any security of the investment or the knowledgeability to build a stable investment environment. Thus, was the war really all focused on the oil industry? The goal of the US Government would be to keep the oil available on the world market in general. The loss of any percentage of oil production is not just a shortage for one country, but a decreased amount of oil available for everyone.
Then, enter the other view that the oil companies were pushing for oil access. Oil companies do have an increased demand for oil resources to fuel the engaged militaries. Would this be a case of application of the “Rule of Capture” - sell as much oil as possible while the war happens? Or would the oil companies have learned from how this principle impacted the industry? Steady gains more profit than quick.
Iraq had been operating under a nationalized oil industry. We know the challenges and corruption that comes with the Petro State. Yet, we can also see the citizens from a nationalized industry receiving the profits and being able to ideally receive benefits from the natural resources they live on. Iraq had long term goals in the 1970s for 6 million barrels a day. This long-term goal was stopped by the Iran/Iraq war of the 1980s, then the Gulf War of the 1990s. Their continual participation in wars have hurt the Iraqis' ability to develop and advance their oil industry.
Upon review of the Iraqi oil industry and infrastructure - the country had stopped developing in the industry approximately 50 years earlier. Any technological advances were not from government coordinated production development, but the individual skill and innovation of the Iraqi oil engineers. We remember when the USSR fell, and the state of the Baku oil fields; well, this is much of the same. These countries did not develop or advance their oil industry but instead relied on the consistent Petro income to finance the rest of the government, leaving the state of the industry a shadow of what once was.
With Saddam removed from power, the focus of the United States military was finally security. This is what the oil companies were focused on from the start, but the military was focused on changing the regime. Look at this way- thinking that the oil companies could speculate the vast income from the Iraq War is like Rockefeller allowing Standard Oil to be split up so he could multiply his wealth, or Japan attacking Pearl Harbor to increase their Gross Domestic Product (GDP).