With Lesson 7, we are now entering the post-WWII period. This introduces new drivers for the evolution of the oil industry. No longer are we focused on battlefield concerns but now it’s more about national security and economic development. The post-war era also introduces us to what is relatively common in today’s day-the international nature of the oil industry. Company goals and priorities and market stability seem more impactful than national borders when it comes to strategic decision-making. That said, the situation in key oil-producing countries is critical to understand and must be integrated into deals.
We also learn of the focus on the Middle East, a focus prominent to this very day. The lesson discusses the three big deals made in the immediate post-war era. As these relationships mature, we see the evolution of how payments are made. The development and execution of these deals is a fascinating study in reconciling global capitalism drivers with national interests. The story of Iran is a great example of how this played out.
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 21, 22, 23, and 24 - (select sections) The Quest: Chapter 13 - (select sections) |
No Submission |
Discuss | Participate in the Yellowdig discussion | Canvas |
Complete | Yellowdig participation activity Infographic 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.
Gasoline rationing was lifted in August 1945 in the U.S. within 24 hours of Japan’s defeat, and the operative phrase for most motorists at the gas station was “Fill ‘er up!” By 1950, oil was meeting more of America’s total energy needs than coal. While demand was increasing, supply was not decreasing as expected, due to new discoveries in the U.S. and even Canada, near Edmonton in the province of Alberta. Eventually, however, there was a shortage of available oil in 1947-48. Consumption rose with unexpected rapidity, and as it took time, money, and materials to redesign refineries to turn out products consumers wanted, supply could not catch up fast enough. But in 1948, imports of crude oil and products together had exceeded exports for the first time, creating an ominous new phrase, “foreign oil.” The figure below shows the stark difference in trends of domestic production and import. This divergence, especially with imports outpacing domestic production, is a red flag for energy independence, security, and flexibility. To this day, we see the challenges of depending on others for our oil needs.
Hence, energy security was a big issue for the Western Powers. Oil became the convergence point for foreign policy, international economics, national security, and corporate interests, and both Britain and the U.S. were intent on ensuring access to oil based on the lessons learned from WWII, the growing economic significance of oil, and the magnitude of Middle Eastern resources. Taking into consideration all the risks, Socal realized it would be best to pursue a policy of “solidification” and bring in new partners to gain market access & spread the risk.
Here the delicate dance began for American oil companies to have access to the oil of Saudi Arabia. Saudi Arabia had much oil, but it needed the partnership and agreements to leverage that resource. But it was a very volatile area. Clearly, enlarging the participation to more American companies only furthered the fundamental goals of American strategy to increase Middle East production, ensure that the Saudi concessions remained in U.S. hands, and conserve America’s own resources. Even though it is obvious now, as early as the late 40s, the US saw the strategic importance of the Middle East for oil. All of this led to the setting up of three landmark deals that will change the face of the global oil market for the future. Each of these deals involved a specific Middle East region, and had unique attributes, conditions, and drivers. Not all deals were the same.
The first of these deals involved Saudi Arabia and the expansion of Aramco. This deal was driven by a desire to have only American participation within Aramco. The second deal involved Kuwait and was driven by a need to get Kuwaiti oil into the European marketplace. The third deal involved Iran and was focused on ensuring stability in Iran and protection from the Soviet Union. With the completion of the three huge deals (Aramco, Gulf-Shell, and the Iranian contract) things (mechanisms, capital, and marketing systems) were in place to move vast quantities of Middle Eastern oil into European markets.
The US has experienced its share of energy crises. But in the immediate post-war period, it was Europe that was in dire straits. Throughout Europe, destruction and disorganization were everywhere, and food and raw materials were in desperately short supply after the war. Economic disarray from the longest and coldest winter weather in 1947 and the energy crisis increased the shortage of the dollar that also minimized the ability to import goods and caused a chain reaction that crippled the economy throughout Europe.
We see during the reconstruction period in Europe after the war that although the overall goal was to rebuild the economy, it was rooted in the oil industry. Energy was fundamental to any rebirth. The first issue addressed was the energy crisis. For most of the European countries, oil was the largest single item in their dollar budgets. The Marshall Plan made it possible for the European economy to change from coal-based to one based on imported oil. Without oil, especially Middle East oil, the Marshall plan could not have succeeded. There are periods in
history, where fortuitous alignments of conditions act as a catalyst to enact change. Europe’s needs and Middle East oil production around that time made a powerful and timely combination.
It was also interesting to see how oil markets were so important to some countries, that maintaining that stability forced them to make adjustments contrary to other goals and commitments. As a result, construction of the Tapline continued even during the Arab-Israeli War! So concerned were they to not risk losing the American role in transporting Middle East oil to Europe, that they were against us on one front, but in partnership on another front- at the same time.
Britain’s major sources of oil were Iran, Kuwait, and Iraq, and the U.S. was also becoming an ever more petroleum-based society. Therefore, Soviet expansionism, especially towards the Middle East, brought the area to center stage as the Middle Eastern oil fields had to be preserved and protected on the Western side of the Iron Curtain to assure economic survival of the Western world.
Often, and as we saw in earlier years, crisis breeds innovation. Americans were very much aware of energy dependence on the Middle East and how the security of supplies could be assured in a future conflict, and some argued for importing more oil in peacetime in order to preserve domestic resources for wartime. Many also advocated building a synthetic fuels industry by extracting liquids from the oil shale in the Colorado Mountains and developing natural gas.
With the expensive synthetic fuel route and offshore development, the issue was whether there was another alternative to imported oil. The answer was found in natural gas that was considered a useless, inconvenient by-product of oil production and was burned off or flared. Although not a big percentage of fossil fuel use, natural gas did take some of the stress off by reducing US oil demand. As we see today, natural gas has “saved the day” time and again.
In the 1940s and 1950s, the countries hosting American oil companies or subsidiaries wanted more from their foreign visitors and continuously argued about the financial terms of their concessions and “rents.” The central objective of their argument was to shift revenues from the oil companies and the tax receipts on oil in the consuming countries to become income for the exporting countries.
In chapter 22 we see the introduction of the concept of economic rent as the amount of profit above and beyond that amount necessary to keep oil in production. Thus, rent represented the difference between the market price and the cost of production plus an allowance for additional costs (transportation, processing, and distribution). It was viewed as a return from nature’s bounty. Viewed in another way, the question was: If through a tenant’s risk-taking efforts, the tenant made a discovery that increased the landlord’s property, should the tenant continue to pay the same rent, or should the rent be raised? The idea of the fifty-fifty model, and the contrast between how Venezuela handled it vs how Mexico handled it is a great story in capitalism and letting the free market work. Unlike Mexico, Venezuela achieved its national objectives without nationalization. And Venezuela’s model prompted Saudi Arabia to follow suit.
Clearly, a new relationship now existed between the tenants and landlords as the oil companies' position now did not just depend upon compliance with laws & payments to governments, but whether the whole concession is perceived as “fair” by the government & public opinion. It was bound to change if it was not perceived as fair. Interestingly and unfortunately, “fairness” and “unfairness” happen to be concepts of emotion and not fixed & measurable economic standards. The 50-50 principle, however, had the right psychological feel of fairness to it.
Iran was a different story, and one driven by unrest and conflict and the impact it had on the oil industry. Whereas we have seen over the years that companies were not afraid to go into challenging and uncharted areas to explore, Iran’s problems appeared to be almost too much even for the most aggressive companies. Iran presented a mix of almost every type of problem, civil, religious, cultural, and political unrest compounded with challenges setting up agreements with oil companies. Unlike Venezuela, Iran took the nationalization route. And we must not forget the threat of the Soviet takeover of Iran that would seriously destabilize the oil market for Europe. Iran needed bold moves by oil companies, and they were already apprehensive of doing business there, and also had to deal with fears of anit-trust charges. Fortunately, the National Security Council issued a directive that stated: “The enforcement of the Antitrust Laws of the United States against western oil companies operating in the Middle East may be deemed secondary to the national security interest.” With the Iranian consortium, the U.S. was clearly the major player now in the Middle East, with all its oil and volatile politics.
The Suez Canal is an interesting story in its own right, but it had and has important oil industry implications. Like the Nord Stream and Alaskan pipelines, sometimes efficiencies in moving oil changes the dynamic. So much so that markets become dependent on any “new and easier” way to get oil, and if it becomes threatened, it causes much angst. The canal’s significance was strategic, as it served as a lifeline of the British Empire. When, in 1948, India became independent, the canal lost its traditional rationale of being critical for the defense of India or the empire. It subsequently became a highway of oil and not of empire, as it cut the 11,000 mile journey of Persian Gulf Oil to Europe around the Cape of Good Hope to 6,500 miles through the canal.
In this chapter, you will read about the conflict over the canal, and how it nearly brought America, Britain, and France to blows. The Suez crisis taught the Western powers about the volatility of the Middle East and the need to work to achieve long-term peace and prosperity in the area. As a footnote, in 1970, fourteen years after the Suez crisis, at a dinner at 10 Downing Street in honor of Anthony Eden, then Lord Avon, Eden offered a special prayer for the British people to discover “a lake of oil” under the North Sea. Interestingly, that was exactly what they found shortly after. It would have been interesting what the British would have done in 1956 if they had known or even suspected they were sitting on such a lake. This is important because we will learn in later chapters how North Sea oil changed the global market in Europe’s favor. After struggling for so long to get oil from others, Europe would finally have its own treasure.
The Suez Canal crisis and Syria’s interruption of the oil flow through the Iraq Petroleum Company pipelines showed the vulnerability of oil transportation and opened up discussions on alternatives to the Suez Canal and pipelines. The safer alternative was with supertankers going around the Cape of Good Hope. This provided a lower political risk. The Japanese, with advances in diesel engines, and better steel, started to build supertankers capable of carrying a lot more oil.
As we step beyond the Suez Crisis, the world that does not produce oil now has a critical need to find ways to guarantee their access to oil. Not only to their citizens, but also guaranteed access for their militaries. If a country was only receiving oil imports from one location, it was vulnerable to disruption. If a country increased supply locations, then if one location was disrupted, that would only disrupt a portion of its supply.
If countries worked together to coordinate a world trade regulation of the oil supply, then countries would be even less vulnerable to one location disruption. This could be further stretched to include a variety of types of petroleum sources, including unconventional sources also.
Not all disruptions of access to oil revolve around war or country disputes; we know how hurricanes can impact drilling rigs and refineries. In 2005, 2900 oil platforms were in the combined paths of Katrina and Rita Hurricanes according to Interior Secretary Gale Norton. “As a result, 90 percent of crude production and 72 percent of natural gas output is paralyzed,” she stated. This natural disaster regarding the oil access was lessened through the coordination of countries to fill the gap left by the tragic weather.
The challenges facing operating systems are but one element to consider in regard to energy security. Pipelines are another piece of the overall transportation of oil. They have been in the news through the discussion about the Keystone Pipeline and Dakota Access Pipeline. This is not to endorse the use of pipelines, but just consider all the pipelines that the United States has
without the controversy. Here are two maps that allow you to visualize the interconnections and vast land coverage.
Where are pipelines located?:
The Suez Canal also made us more cognizant of the “choke point”. These choke points could be compromised by natural and man-motivated actions. Several points have frequent interactions with pirates, or nonstate actors, trying to seize possession of oil and gain profits from selling it. These points are also no secret; any country could cut off the lanes as a specific way to disrupt the worldwide oil supply. It is in most countries’ best interest to keep these points free from disruption. Several navies add these lanes to their commitment to continual order on the sea.
Links
[1] https://commons.wikimedia.org/wiki/File:US_Oil_Production_and_Imports_1920_to_2005.png
[2] https://en.wikipedia.org/wiki/User:RockyMtnGuy
[3] https://commons.wikimedia.org/
[4] https://creativecommons.org/licenses/by-sa/3.0/deed.en
[5] https://pipeline101.org/topic/where-are-liquid-pipelines-located
[6] https://www.eia.gov/state/maps.cfm