History of Oil: The Modern Oil Industry
Throughout human history, energy has been a key enabler of living standards. To survive in the agrarian era, people burned wood for warmth and cooking. In addition to use as a building material, wood remained the chief global fuel for centuries.
The invention of the first modern steam engine, at the beginning of the 18th century, heralded the transformation from an agrarian to an industrial economy. Steam engines could be powered by either wood or coal, but coal quickly became the preferred fuel and it enabled massive growth in the scale of industrialization.
A half-ton of coal produced four times as much energy as the same amount of wood and was cheaper to produce and, despite its bulk, easier to distribute. Coal-fired steam locomotives dramatically reduced the time and cost of inland transportation, while steamships traversed oceans. Machines powered by coal enabled breakthroughs in productivity while reducing physical toil.
With the dawn of the 20th century, environmental concerns and new technologies led another energy source shift from coal to oil. Interestingly, although women were not yet allowed to vote, ladies’ societies in the United States were instrumental in lobbying for laws to improve air quality and reduce the dense smoke caused by burning coal.
History of Oil: The New Oil Economy
The first oil had actually been discovered by the Chinese in 600 B.C. and transported in pipelines made from bamboo. However, Colonel Drake’s heralded discovery of oil in Pennsylvania in 1859 and the Spindletop discovery in Texas in 1901 set the stage for the new oil economy.
Petroleum was much more adaptable and flexible than coal. Additionally, the kerosene that was refined originally from crude provided a reliable and relatively inexpensive alternative to “coal-oils” and whale oil for fueling lamps. Most of the other products were discarded.
With the technological breakthroughs of the 20th century, oil emerged as the preferred energy source. The key drivers of that transformation were the electric light bulb and the automobile. Automobile ownership and demand for electricity grew exponentially and, with them, the demand for oil.
By 1919, gasoline sales exceeded those of kerosene. Oil-powered ships, trucks and tanks, and military airplanes in World War I proved the role of oil as not only a strategic energy source, but also a critical military asset.
Prior to the 1920s, the natural gas that was produced along with oil was burned (or flared) as a waste by-product. Eventually, gas began to be used as fuel for industrial and residential heating and power. As its value was realized, natural gas became a prized product in its own right.
History of Oil: The Major Companies Era
To understand how the oil and gas industry works, it is also important to understand how it has changed over time. The key factor in the industry development is who controls the key asset, the oil and gas reserves. The history of the oil industry is one of radical shifts in control and dominance.
Standard Oil, Royal Dutch Shell, and British Petroleum: The Original Super-Majors
John D. Rockefeller, who began his career in refining, became the industry’s first “baron” in 1865, when he formed Standard Oil Company. By 1879, Standard Oil controlled not only 90% of America’s refining capacity, but also its pipelines and gathering systems. By the end of the 19th century, Standard Oil’s dominance had grown to include exploration, production, and marketing. Today ExxonMobil is the successor company to Standard Oil.
While Rockefeller was building his U.S. empire, the Nobel and Rothschild families were competing for control of production and refining of Russia’s oil riches. In search of a global transportation network to market their kerosene, the Rothschilds commissioned the first oil tankers from a British trader, Marcus Samuel. The first of these tankers was named the Murex, after a type of seashell, and became the flagship of Shell Transport and Trading, which Samuel formed in 1897.
Royal Dutch Petroleum got its start in the Dutch East Indies in the late 1800s, and by 1892 had integrated production, pipelining, and refining operations. In 1907, Royal Dutch and Shell Transport and Trading agreed to form the Royal Dutch Shell Group.
Also in 1907, the discovery of oil in Iran by a British former gold miner and a Middle Eastern shah led to the incorporation of the Anglo-Persian Oil Company. The British government purchased 51% of the company in 1914 to ensure sufficient oil for the Royal Navy in the years leading up to World War I. The company became British Petroleum in 1954 and is now BP.
Today, these three companies—ExxonMobil, Shell, and BP—are considered the original “super majors.”
In the United States, the 1901 discovery of the Spindletop field in Texas eventually spawned companies such as Gulf Oil, Texaco, and others. The dominance of the United States during this era was illustrated by the fact that regardless of where oil was produced in the world, its price was fixed at that of the Gulf of Mexico.
Beginning with World War I, oil became a strategic energy source and a tremendous geopolitical prize. In the 1930s, Gulf Oil, BP, Texaco, and Chevron were involved in concessions that made major discoveries in Kuwait, Saudi Arabia, and Libya.
Based on those discoveries, a cartel of seven companies was formed that controlled the world’s oil and gas business for much of the twentieth century. Known as the Seven Sisters, they included: Exxon (originally Standard Oil), Royal Dutch/Shell, BP, Mobil, Texaco, Gulf, and Chevron.
History of Oil: The OPEC Era
Beginning in the 1950s, numerous shifts occurred that transferred control over oil and gas production and pricing from “Big Oil” and oil-consuming countries to oil-producing countries.
The governments of many oil-producing nations, particularly in the Middle East and South America, saw the Integrated Oil Companies (IOCs) operating there as instruments of their countries of origin (usually the U.S. or European countries). For both economical and geopolitical reasons, the leaders of the producing countries began asserting their authority for control of their countries’ oil and gas resources (and associated wealth).
To signify their newfound authority, in 1960 the governments of Venezuela, Saudi Arabia, Kuwait, Iraq, and Iran founded the Organization of the Petroleum Exporting Countries (OPEC) for the purpose of negotiating with IOCs on matters of oil production, oil prices, and future concession rights.
OPEC had little impact during its first decade of existence. The tide turned in the early 1970s with the confluence of rising energy demand, re-negotiation of terms of business in Libya by Muammar al-Qaddafi, and the fourth Arab-Israeli war.
This chart, OPEC Share of World Crude Reserves, illustrates the breadth and distribution of OPEC oil reserves. OPEC represents a considerable political and economical force. According to their estimates, 81% of the oil reserves in the world belong to their members.
Note that Saudi Arabia has the majority of OPEC reserves, followed closely by Iran and Venezuela. Outside OPEC there are other large oil reserves, including the North Sea (controlled by the UK, Norway, Denmark, Germany, the Netherlands), Canada’s oil sands and deepwater reserves off of Brazil and in the Gulf of Mexico.
OPEC, based in Vienna, was created primarily in response to the efforts of Western oil companies to drive oil prices down. OPEC allows oil-producing countries to guarantee their income by coordinating policies and prices. Membership in OPEC gives a country prestige in the eyes of the global community.
The U.S. historically has seen OPEC as a threat to its supply of cheap energy, as the cartel is able to set high world market oil prices at its pleasure. Additionally, the current U.S. policy of lowering dependence on OPEC-dominated Middle East oil can present diplomatic problems with those countries tied to the U.S. interests.
The caveat with OPEC participation is that the member countries cannot set individual production quotas. This can be troublesome, because political interests and economic considerations vary widely from country to country.
Today, members of OPEC are: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.
Ultimately, the strength of OPEC not only shifted control of production and pricing from Western IOCs to producing countries, but also signified the beginning of today’s National Oil Company (NOC) era.
History of Oil: The National Oil Company Era
Tightening supplies, growing demand, high crude oil and natural gas prices, and a changing geopolitical climate contributed to the growing dominance of national oil companies. This new world has become increasingly complex and political, with Venezuela and Russia as representative examples.
Hugo Chavez’s decision in 2007 to abandon production agreements and other forms of collaboration with IOCs in Venezuela has tightened control of PDVSA’s (The National Oil Company of Venezuela) current production and access to reserves by the government.
The same is essentially true in Russia, where the government has strengthened the position of Gazprom, the state-controlled gas conglomerate, to the point of reneging on contracts with IOCs.
The dramatic change in the balance of control over the global oil and gas business is illustrated by the two pie charts, The New Leadership – NOCs. In 1972, IOCs and major independents accounted for 93% of the world’s production, while NOCs accounted for 7%. Today the balance is all but reversed, with NOCs now controlling 73% of a much larger pie of world oil and gas production.
History of Oil: The Unconventional Era
Technological breakthroughs in unconventional oil and gas production in the last 15 years have altered the North American energy landscape. These developments have also opened vast new opportunities around the globe, complicating global supply dynamics and political regimes including the dominance of OPEC.
These major breakthroughs have come in the fields of horizontal drilling, subsea engineering (especially deep water production), and hydraulic fracturing.
North American Gas Boom
Hydraulic fracturing, or fracking, is the process of injecting water, chemicals, and sand into wells. The resulting fractures in surrounding shale rock formations allows for hydrocarbons to escape.
In 1997, Mitchell Energy performed the first slickwater frack. This method substantially lowered the cost of hydraulically fracturing wells, leading to a boom in North American oil and gas production.
Over the next ten years this technique was perfected and coupled with advancements in horizontal drilling. The resulting production, combined with the global economic slowdown at that time, led to an 85% drop in domestic natural gas prices – from over $13.00 per mmBtu in 2008 to under $2.00 in 2012.
While these prices are problematic for producers, they have created a low-cost competitive advantage in manufacturing and chemical refining that is having global implications. Other effects of persistently low natural gas prices include:
- A rapid switch away from coal to gas-fired power plants (with lower emissions as a further result)
- Re-assessment of Liquefied Natural Gas (LNG) flows as the US switches from an importer to an exporter
- Accelerated conversion to natural gas as a transportation fuel for commercial fleets (and passenger vehicles to a far lower degree)
- Adverse effect on the economics of renewable energy as gas fired plants operate inexpensively and cleanly relative to coal
The EIA data above depicts how swiftly these technologies are evolving and effecting global oil and gas reserve calculations.
Hydraulic fracturing has not been without its controversy in the political and environmental arenas. The process is very water intensive and fracking a single well can take up to 5 million gallons of water.
Some common drilling areas already face localized water supply issues leading to concerns of straining water supplies and necessitating water purchases. Additionally, the effect of chemicals in fracking fluid on groundwater reserves, in addition to treatment of used frack water, has been a concern to local communities from an environmental standpoint.
These concerns have led to an uneven use of this technology from state-to-state and country-to-country as politicians weigh conflicting constituencies. These shifting dynamics are still being assessed in the global marketplace.
The effect on current political regimes has yet to be fully seen as countries like the US pursue the possibility of energy independence. US oil and gas production is higher than anytime in the last 20 years, and petroleum exporting countries are keeping a close eye on these developments.
Summary of the History of Oil
With the technological breakthroughs of the 20th century, oil emerged as the preferred energy source. The key drivers of that transformation were the electric light bulb and the automobile. Automobile ownership and demand for electricity grew exponentially and, with them, the demand for oil.
The strength of OPEC has not only shifted control of production and pricing from Western IOCs to producing countries, but also signified the beginning of today’s National Oil Company (NOC) era. NOCs now control 77% of a much larger pie of world oil and gas production than the formerly dominant IOCs.
The new era of unconventional oil and gas is shifting power away from OPEC and other exporters as countries look toward domestic production and energy independence. Technological breakthroughs in hydraulic fracturing, horizontal drilling and deepwater production open the potential for vast reserves in new areas.
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