Lesson 8 pulls together many interesting aspects of the immediate post-war era and the entry into the turbulent 1960s. As we move through history, and we get into more contemporary times, we are starting to see the birth of oil industry aspects we are used to in the present day. This Lesson also introduces us to many cautionary tales which may have fallen on deaf ears, and not learning from them has destined us to be reliving the same issues in today’s world.
For example, in this lesson, we see how unrest and volatility in oil-producing countries can wreak havoc on those countries that depend on those exports. We also once again see the impacts of wild fluctuations in production, causing cycling between shortages and surpluses. These countries are household names now when it comes to global oil markets, but they were only coming into their own in the time period of lesson 8. These countries include Russia, the Middle East, and Africa. Profoundly oil-rich, but politically unstable, places.
OPEC comes into being in this Lesson, a formidable power in the 70s and beyond, but a bit unsure of itself and ineffective in it early days during the 1950s and 60s. OPEC introduced the idea that oil exporting countries had something to gain by working in collaboration, the same lesson the oil companies had learned so many years before, that they could have significant control over the market if they worked together. But the same Catch-22 that plagued the oil companies now faced the exporting countrie; they were producing more oil but getting less for it.
But what is probably the most interesting chapter of this lesson, and probable one of the most telling stories of the entire textbook, is Chapter 27, “Hydrocarbon Man”. After one reads how oil underpinned so many societal changes, it is easier to see why turning away from oil will not occur as easily, or as fast, as is being suggested by the renewable energy and climate change positions.
The reading from The Quest start to introduce us to changes to come, such as the entry of the North Sea oil region and how that impacts the global market. But even before then, Europe and the US domination in the Middle East starts to diminish, and the market is settling into a new profile with shifting influence and new players.
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 25, 26, and 27 - (select sections) The Quest: Chapter 12 and 15 - (select sections) |
No Submission |
Discuss | Participate in the Yellowdig discussion | Canvas |
Complete | Quiz 4 | 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.
A large oil field (reserve) is known as an elephant in the oil industry. Due to the discovery of many elephants, worldwide oil boomed, and oil production in the Middle East in particular grew. Worldwide reserves, the amount of oil technologically and economically recoverable, increased and the reserves of the Middle East- the center of gravity for the oil industry at the time- increased significantly. It should be noted that the amount of oil known to exist that may or may not be technologically and economically recoverable is often referred to as a resource. Thus, resources are greater than reserves and some resources become reserves over time as they become technologically and economically recoverable.
The 1950s not only saw the discovery of big elephants, but also the establishment of the Middle East, and its member countries, into an oil powerhouse. It was not easy considering the competing interests and politics. Iran, Japan, Venezuela, and Egypt become key players. All of this was happening while at the same time market disruptions due to manipulation of posted vs market prices and quotas for imports from specific countries caused more repositioning.
A secret set of meetings launched what is now OPEC. A formidable entity in the 1970s and beyond but which got off to a weak start, as we see in the next chapter.
In chapter 26, we see the further evolution of OPEC and the impact of Russia coming back into the game. Except Russia’s approach was not to restrict oil, but the opposite, flood the market and impact pricing and market share. Russia wanted to create dependency on their oil by making it almost “too easy” to get. More than one expert has stated that the current challenges in Western Europe today are rooted in over-dependency on Russian oil and gas.
It is an interesting approach, and a characteristic of the oil industry, in that providing too much oil can almost be as destabilizing as restricting it. This is why at time embargoes are put in place, but at other times, it is more about quotas. The quota issue is discussed in the context of Middle East oil vs Canada, Venezuela, and Mexico.
This chapter discusses the development of OPEC and the ill-fated approach that the oil companies and importing countries took by discounting and ignoring them. In later chapters, we will learn how OPEC single-handedly drove the energy crisis of the 70s. Although the OPEC countries were influential, during this period, Africa also comes into the picture. North Africa, especially Libya, and other countries such as Nigeria and Algeria become major producers.
On a larger scale, things were surely changing. The powerful consortium of oil companies was losing some of its influence as the exporting countries flexed some muscle. Iran was becoming a force to be reckoned with in its own right, but further compounded by appearances that it may align with Russia. And there was an overall growing dislike and distaste for the West. Ironically, the Persian Gulf area, typically seen as the volatile area, became the “stabilizer” of supply to dampen the effect of problems that were popping up elsewhere.
In their own way, countries and companies were realizing that the oil market was a complex thing that needed care and innovation to work properly. And simple cutthroat competition drives down profits and hurts everyone. They continued to look for ways to work as an integrated machine, while recognizing the differing priorities, cultures, and drivers between countries and regions. Sometimes, this meant setting quotas, which generally aggravated the impacted producing countries.
The conflicts in the Middle East and Africa spawned the growing discussion in the US about energy security and making sure we have enough for ourselves, while at the same encouraging and supporting global trade. The idea of a stockpile came up. Unfortunately, even to this day in the 2020s, balancing energy national energy security with participation in global commerce has proven challenging.
The trend in the rapid increase in the consumption of oil continued in a straight line after WWII. For example, both world and US energy consumption tripled between 1948/49 and 1972. The post-WWII oil use explosion was due to a number of factors including economic and income growth, increased standard of living, huge increases in automobiles, increased use of plastics, decreasing oil prices, and exporting countries demanding more and more production to increase their revenue. Thus, production, reserves, and consumption all pointed in one direction-UP, and the saying “bigger is better” engulfed the consumer and oil industry.
You will see in this chapter how oil is the foundation upon which so many things changed in society. At the surface, you may not think they are related- fast food restaurants, suburbs, motels, drive in movies, the interstate highway system, and more are all are rooted in the growth of the automobile and increased mobility of the average consumer. And this only happened because oil was the catalyst behind the growth of the automobile industry. One can debate the wisdom of this dependency, but the fact is that societies became fully integrated with oil.
This integration of oil was so prevalent that it actually began to unseat “king coal” which had dominated the energy market for over century before. Oil was cleaner (avoiding the “killer fogs”), easier to process, and more efficient than coal so even in cases where coal may have been cheaper overall, oil still won. But coal eventually even lost the cost advantage. The new lifestyle of society would not work with coal as the dominant source of energy and transition was inevitable. This transition was happening not only in the US, but Europe and Japan as well, although for slightly different reasons. Competition shifted from oil vs coal to oil vs oil, as more companies came into the game. And this led to jockeying for position of who has the “best oil.” Enter the additives and special gasolines. When you go to a gas station, note how many variations there are; and think about the early days when it was simply “gasoline”.
Who would have thought that one of the most popular television programs of the time was about the oil industry? In 1962, the number one TV show was the Beverly Hillbillies, with a theme song:
“Come and listen to a story ‘bout a man named Jed, A poor mountaineer, barely kept his family fed, Then one day he was shooting at some food, When up from the ground come a ‘bub-a-lin’ crude, − oil that is, black gold, Texas tea. (The Ballad of Jed Clampett [3])”
And it did not end there, as we will see later in the 1980s a number of oil industry -based television shows. One of the most famous of the 70s was “Dallas” with the fictional Ewing Oil company.
But there were dark clouds on the horizon when conflict broke out in several places, almost at the same time. The Arab-Israeli conflict and conflict in Nigeria threatened to cause major disruption of the global oil market. However, with a little bit more work than during previous energy crises, the Organization for Economic Cooperation and Development (OECD) approved a relief plan that involved the deployment of supertankers. Under American and international coordination, petroleum from non-Arab countries was sent to embargoed countries, and Arab oil was sent to non-embargoed countries.
The system of redistributing supplies by the international oil companies themselves where they were needed worked so well that the emergency joint operations were not even utilized. There was simply plenty of excess production capacity to overcome the oil weapon. Thus, it was clear by then that the embargo had failed, with the major losers being the Arab oil-producing countries, and by September, the embargo on the US, Britain, and Germany had been lifted.
The two lessons the US drew out of the embargo were the importance of diversifying sources of supply and of maintaining a flexible tanker fleet. The worldwide surge after the six-day war, as expected, caused supplies to exceed, at least in the short term, demand, with no worry of availability. Unfortunately, now that the war had demonstrated the importance of security of supply, the hydrocarbon man took oil for granted again and embarked on his old lifestyle, knowing that oil was abundantly available and cheap. This will prove to be a costly mistake.
After reviewing the origins and early years of OPEC, we see the control and worldwide impact this new organization can bring to the oil industry. This portion adds some balance to the swing for oil control. The North Sea adds unconventional petroleum to the world market and counters the percentage control with OPEC. This also highlights the advantages of continuing to advance technology for recovering oil. The North Sea deep oil drilling has its own challenges of cold and harsh weather conditions. This offshore drilling is more expensive than drilling in the Middle East and even more than drilling in Venezuela. Yet, in response to the rise in the price of a barrel of oil, it would cover this increased cost of drilling in the North Sea.
Just as we see today with the increase of hydraulic fracking (HF). HF is more expensive than conventional drilling, but as the price per barrel goes up, so can the investment in unconventional drilling process and recovery. The challenge is to make the recovery of the oil economically profitable. There is a price threshold below which the recovery of this unconventional oil is no longer profitable. The companies can continue drilling at a loss or stop drilling until the price rebounds. There is no point in drilling oil that costs more to produce than the price for which it can be sold.
From The Prize, we saw that the replacement of coal is explained though the general use of petroleum and nuclear energy options. The Quest reading focuses more specifically on the Liquid Natural Gas (LNG) used to replace coal. Here we learn that technology to change it from a gas to a liquid and back again is key to it replacing coal.
The next challenge is the economic considerations of being able to make that transfer economically profitable. The high cost to make natural gas into a liquid, then transport it, then transfer it back adds to the overall cost of the product. The long-term view of the Natural Gas (NG) industry saw the need to lengthen the contracts to guarantee an ability to spread the costs over a longer time frame and have a long-term customer. At the beginning of these long-term contracts, there were limited sources for the NG, mainly being in Louisiana and Algeria. Once
there was an increase in the number of producers around the world, the price of transporting NG dropped.
This section jumps ahead and gives you a glimpse of yet another oil crisis in 1973. We will not go into details about it yet. Beyond that, it spurred the development of more expensive options as a response. This new abundant product, LNG, added stability to the world market by giving a balance to the resources controlled by OPEC, thus reducing their overall influence on the market. Even though LNG is a different product than petroleum, the price was indexed to the oil prices - meaning they were attached, but not the same per barrel. As the price of oil went up, the price of LNG went up the same amount. If the price of a barrel of oil dropped, so did the price of LNG. Hence, this new expensive product was added to the overall world market of petroleum.