Throughout history, energy has been a key factor in raising the standard of living. To survive in the agrarian era, people burned wood for heat and cooking. In addition to its use as a building material, wood has remained the world's primary fuel for centuries.
The invention of the first modern steam engine in the early 18th century marked the transformation of an agrarian economy into an industrial one. Steam engines could run on wood or coal, but coal quickly became the fuel of choice, which greatly increased the scale of industrialization.
Half a ton of coal produced four times as much energy as the same amount of wood, and was cheaper to produce and, despite its greater mass, easier to distribute. Coal-fired steam locomotives dramatically reduced the time and cost of domestic transportation, while steamboats were able to cross oceans. Coal-fueled machines allowed for breakthroughs in productivity while reducing physical labor. With the advent of the 20th century, environmental concerns and new technologies led to another shift in energy source, from coal to oil. Metallurgy spawned new building materials, railroads connected the country, and the discovery of oil provided a new source of fuel. The discovery of Spindletop Geyser, Texas, in 1901 (the first oil discovery in the United States), led to an enormous growth of the oil industry. Within a year, more than 1,500 oil companies were registered.
Interestingly, although women were not yet allowed to vote, women's societies in the United States were instrumental in lobbying for laws to improve air quality and reduce the thick smoke caused by burning coal.
The New Oil Economy
The first oil was actually discovered by the Chinese in 600 B.C. and was transported in pipelines made of bamboo. However, Colonel Drake's discovery of oil in Pennsylvania in 1859 and Spindletop's discovery in Texas in 1901 laid the foundation for the new oil economy.
Oil was much more technologically advanced and flexible than coal. In addition, kerosene, which was originally refined from oil, 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 breakthrough of the 20th century, oil became the preferred energy source. Key factors in this transformation were the electric light bulb and the automobile. Car ownership and the demand for electricity grew exponentially, and with it the demand for oil.
By 1919, gasoline sales exceeded kerosene sales. Oil ships, trucks and tanks, and warplanes in World War I proved oil's role not only as a strategic energy source, but also as an essential military asset.
Until the 1920s, natural gas, which was extracted along with oil, was burned as a by-product. Over time, gas came to be used as a fuel for industrial and domestic heating and energy. When its value was realized, natural gas became as valuable a product as oil.
The era of big companies
To understand how the oil and gas industry works, it is also important to understand how it has changed over time. A key factor in the development of the industry is who controls the main asset - the oil and gas reserves. The history of the oil industry is one of radical shifts in management and dominance.
Standard Oil, Royal Dutch Shell and British Petroleum: the supercompanies of the industry.
John D. Rockefeller, who began his career in oil refining, became the industry's first "baron" in 1865 when he founded the 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 encompassed exploration, production and marketing. Today ExxonMobil is the successor to Standard Oil. In 1933, Standard Oil received its first contract to drill for oil in Saudi Arabia.When the U.S. Civil War(1861-1865) interrupted the regular flow of kerosene and other petroleum products to the western states, pressure increased to find a better use for the oil found in states like California. But until 1900, Standard Oil had shown little interest in the West Coast oil industry. In that year it acquired the Pacific Coast Oil Company and in 1906 incorporated all its western operations into Pacific Oil, now Chevron.
Edward L. Doheny discovered the first well in Los Angeles in 1892, and five years later there were five hundred and twenty wells and two hundred oil companies in the area. When Standard entered California in 1900, seven integrated oil companies were already flourishing there. The Union Oil Company was the most important of these.
While Rockefeller was building his empire in the United States, the Nobel and Rothschild families were vying for control of the extraction and refining of Russia's oil wealth. In search of a global transportation network to sell their kerosene, the Rothschilds ordered the first oil tankers from British trader Marcus Samuel. The first of these tankers was named Murex, after a seashell, and became the flagship of Shell Transport and Trading, which Samuel formed in 1897.
Royal Dutch Petroleum began operations in the Dutch East Indies in the late 1800s, and by 1892 had consolidated production, pipelines and refineries. 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 former British gold miner and Middle Eastern Shah (*that's the title given to emperors, kings, princes and lords of Iran/Persia) led to the creation of the Anglo-Persian Oil Company. The British government purchased 51% of the company in 1914 to provide enough oil for the Royal Navy in the years leading up to World War I. The company became known as British Petroleum in 1954 and is now also named BP.
Today these three companies - ExxonMobil, Shell and BP - are considered "super-majority" companies.
In the United States, in 1901, the discovery of the Spindletop field in Texas led to the emergence of such companies as Gulf Oil, Texaco and others. The dominance of the United States during this era was illustrated by the fact that no matter where in the world oil was produced, its price was fixed and equal to that of the Gulf of Mexico.
Since World War I, oil has been a strategic source of energy and a huge 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 these discoveries, a cartel of seven companies was formed that controlled the global oil and gas business for most of the twentieth century. Known as the Seven Sisters, they included Exxon (originally Standard Oil), Royal Dutch/Shell, BP, Mobil, Texaco, Gulf and Chevron.
When World War II ended, the United States faced the challenge of stabilizing the world. Over the next forty-five years there were numerous serious crises, in many of which oil played a key role. Immediately after the war, Europe experienced a shortage of coal, the first energy crisis. The United States continues to consume about two-thirds of the world's oil production. Oil should be considered the cornerstone of the standard of living in the United States and much of its rank as a world power.
Part of the post-1940 energy problem arose from the depletion of domestic oil reserves during World War II-about 6 billion barrels. In the Vietnam fight, experts say the United States supplied about 5 billion barrels of oil, although a large amount of this was produced at Middle Eastern facilities owned by American companies. Of course, the total for both wars represents a magnitude larger than that available from the big oil field in East Texas or perhaps the northern slope of Alaska in 1967. After the 1960s, when domestic production declined and demand rose, the oil industry had to import huge quantities from the Middle East and Venezuela.
The OPEC Era
Since the 1950s, there have been numerous shifts that have shifted control of oil and gas production and pricing from the Big Oil and oil-consuming countries to the oil-producing countries.
Many oil-producing governments, particularly in the Middle East and South America, viewed the integrated oil companies/Integrated Oil Companies (IOCs/IOCs) operating there as instruments of their home countries (usually the US or European countries). For both economic and geopolitical reasons, the leaders of producing countries began to assert their power over the control of their countries' oil and gas reserves (and related wealth).
To demonstrate their newfound power, in 1960 the governments of Venezuela, Saudi Arabia, Kuwait, Iraq, and Iran created the Organization of Petroleum Exporting Countries (OPEC) to negotiate with the IOC over oil production, oil prices, and future concession rights.
OPEC had little influence during its first decade of existence. This changed in the early 1970s with the confluence of rising energy demand, Muammar Gaddafi's renegotiation of business conditions in Libya, and the Fourth Arab-Israeli War.
OPEC represents a significant political and economic force. They estimate that 81% of the world's oil reserves belong to their members.
Note that Saudi Arabia holds the majority of OPEC reserves, followed by Iran and Venezuela. There are other major oil owners outside of OPEC, including the North Sea (controlled by Britain, Norway, Denmark, Germany, and the Netherlands), the Canadian oil sands, and deep water reserves outside Brazil and in the Gulf of Mexico.
OPEC, based in Vienna, was created largely in response to efforts by Western oil companies to drive down oil prices. OPEC allows oil-producing countries to guarantee their revenues by coordinating policies and prices. Membership in OPEC gives a country prestige in the eyes of the world community.
Historically, the U.S. has viewed OPEC as a threat to cheap energy supplies because the cartel can set high oil prices on the world market at its own pleasure. In addition, the current U.S. policy of reducing dependence on OPEC-dominated Middle Eastern oil may present diplomatic problems with those countries that are aligned with U.S. interests.
A caveat involving OPEC is that member countries cannot set individual production quotas. This can be problematic because political interests and economic considerations vary widely from country to country.
Today, OPEC members include: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Russia works closely with OPEC.
Ultimately, the power of OPEC not only shifted control of production and pricing from Western IOCs to producing countries, but also marked the beginning of today's National Oil Company (NOC) era.
The era of the National Oil Company
Declining supplies, rising demand, high crude oil and natural gas prices, and a changing geopolitical climate have 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 cooperation with the IOC in Venezuela strengthened the control of current production by PDVSA (Venezuela's National Oil Company) and access to reserves by the government.
The same is largely true of Russia, where the government has strengthened the position of Gazprom, the state-controlled gas conglomerate, to the point where it refuses contracts with IOC.
In 1972, the IOC and the main independent producers accounted for 93% of world production, while the NOCs (National Oil Companies) accounted for only 7%. Today the balance has almost completely changed: the NOCs now control 73% of world oil and gas production.
The unconventional era
Technological breakthroughs in unconventional oil and gas production over the past 15 years have changed the North American energy landscape. These developments have also opened up tremendous new opportunities around the world, complicating global supply dynamics and political regimes, including OPEC dominance.
These major advances occurred in horizontal drilling, subsea engineering (especially deepwater 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 the surrounding shale rocks allow hydrocarbons to escape.
Mitchell Energy introduced the first hydraulic fracturing in 1997. This method significantly reduced the cost of hydraulic fracturing wells, leading to a boom in oil and gas production in North America.
Over the next ten years, the technology was refined and combined with advances in horizontal drilling. The resulting production combined with a slowing global economy at the time led to an 85% decline in domestic natural gas prices, from over $13.00 per million Btu (British thermal unit) in 2008 to less than $2.00 in 2012.
While these prices are problematic for producers, they have created a low-cost competitive advantage in production and chemical processing that has global implications. Other consequences of persistently low natural gas prices include:
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A rapid switch from coal-fired power plants to natural gas-fired power plants (with consequent reductions in emissions)
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Re-evaluation of liquefied natural gas (LNG) flows as the U.S. transitions from importer to exporter.
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Accelerated conversion to natural gas as a transportation fuel for commercial fleets (and passenger vehicles to a much lesser extent)
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Adverse impact on the renewable energy economy as gas-fired power plants are inexpensive and clean compared to coal.
Fracking is not without controversy in the political and environmental arenas. The process is very labor-intensive, and it can take up to 5 million gallons of water to frack a single well.
Some general drilling districts are already facing local water supply problems, resulting in water supply problems and the need to purchase water. In addition, exposure to chemicals in fracking fluids are impacting groundwater supplies, in addition to treating used fracked water, raising environmental concerns for local communities.
These concerns have led to uneven use of this technology from state to state. These changing dynamics are still being evaluated in the global marketplace.
The impact on current political regimes has yet to be fully assessed as countries such as the U.S. strive for energy independence. U.S. oil and gas production has been higher than ever in the past 20 years, and oil-exporting countries are watching these developments closely.
Conclusion
With the technological breakthrough of the 20th century, oil became the preferred source of energy. Key factors in this transformation were the electric light bulb and the automobile. Car ownership and the demand for electricity grew exponentially, and with it the demand for oil.
The power of OPEC not only shifted control of production and pricing from Western IOCs to producing countries, but also marked the beginning of today's National Oil Company (NOC) era. NOCs now control 73% of the world's oil and gas production.
Technological breakthroughs in fracking, horizontal drilling and deepwater production are opening up the potential for huge reserves in new areas.
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