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Hardly a day goes by in which oil — whether in terms of its price, its impact on the economy, its role in international relations and in the environment — is not in a major newspaper story or in the television news or a hot topic on the blogs.
The questions are many. How does oil change international politics and the strategies and positions of nations? What are the political and economic risks that come with oil, and how to manage them? Is the world going to run out of oil? Or is demand going to change? How, within a single ten-year period, could oil be as low as $10 a barrel and as high as $147.27, and then within a few months drop to $63 and what is the prospect for prices? There's also the whole question of climate change. What is the future for Hydrocarbon Man?
And yet none of these questions, in their essence, is new. In one form or another, they play out again and again across the pages of The Prize. Indeed, it is hard to make sense of these questions today without understanding where they come from and how oil has come to have such a defining role in the modern world, in everything from daily life to the game of nations. From these pages readers can draw many lessons and insights that are relevant to sound energy policy, to energy security, and — it is hoped — to clear thinking about energy.
The competition for oil and the struggle for energy security seem to never end. And yet, with the swift victory to the Gulf War in February 1991, the strategic struggle over oil did appear to be over. The threat that a hostile power would dominate the Persian Gulf was no more. That, it now seemed, was part of a larger transformation. For the year that began with Operation Desert Storm in Iraq ended in December 1991 with Mikhail Gorbachev, president of the Soviet Union, going on Russian television to deliver a twelve-minute speech in which he announced what would have seemed almost impossible a few years earlier: the dissolution of the Soviet Union. The communist empire had collapsed, the Soviet Union had disintegrated, and the Cold War had ended. The threat of nuclear war that had hung over the planet for four decades was lifted, and a new era of peace was at hand.
Although the Soviet Union had been a significant oil exporter, its industry had been isolated behind the Iron Curtain. No longer. With the breakup of the Soviet Union, the petroleum industry of the Russian Federation and the newly independent states, notably Kazakhstan and Azerbaijan, would be integrated with the global industry. Eventually, after years of wrangling, the Baku-Tbilisi-Ceyhan pipeline would link historic Baku, on the Caspian Sea, to a Turkish port on the Mediterranean — in part, a twenty-first-century parallel to the route pioneered by the Nobels, Rothschilds, and Samuels in the late nineteenth century. This pipeline, by providing an alternative to shipping oil through the Russian pipeline system, would help to underwrite the position of those newly independent states of the former Soviet Union. When the Russian-Georgian confrontation broke out in 2008, it highlighted the security issues surrounding long-distance pipelines that cross international borders. But that would still be some years in the future.
As it was, in the early 1990s, the outcome of the Gulf War and the collapse of the Soviet Union transformed the international system. Some spoke optimistically of a new world order. The focus of the international community shifted from security to economics and growth and to what was coming to be known as globalization. In the years that followed, there was a vast expansion of international trade, as globalization led to a more open and interconnected world economy and to rising incomes in what had heretofore seemed permanently poor countries.
For most of the 1990s, oil receded as a grand strategic issue. Petroleum supplies were abundant, and prices were low. Much attention was given to the "East Asian economic miracle" and to what was beginning to appear behind it, the emerging role of China in the world economy. But, in 1997-98, Asia's economic miracle, stoked by currency flows and real estate speculation, overheated and then, beginning in Thailand, blew up. The result was a lethal contagion — an epidemic of financial panic, bankruptcies, and defaults and a deep economic downturn that spread across much of Asia (though not China and India) and then engulfed other emerging markets, including Russia and Brazil.
The collapse in GDP led to a drop in oil demand even as oil supplies were increasing. As a result, inventory tanks filled to overflowing until there was no place to put the additional oil. Once again, as in 1986, the price of oil collapsed toward $10 a barrel and, in some cases, even lower. Oil exporters were once more thrown into economic disarray, as in 1986. The collapse in oil prices sent Russia, only in its seventh year as an independent country, into default and bankruptcy and into what turned out to be an agonizing reappraisal of its relationship with the rest of the world.
But for the oil-importing nations — both for developed countries such as the United States, Japan and those of Europe, and for many developing countries — the fall in oil prices was like a giant tax cut, a stimulus package that fired up economic growth. It put a lid on inflation, permitting faster growth. At the gasoline pump in the United States, it pushed prices down, in inflation-adjusted terms, to the lowest level they had ever been. This ignited a great new romance — a passion for fuel-inefficient SUVs and other light trucks, which would soon comprise half of the new vehicles sold in the United States.
Low prices put great pressure on the structure of the industry. As revenues fell away, company managements struggled to find survival strategies. Budgets had to be immediately cut, and projects were either postponed or cancelled altogether. There was another way to survive as well. That was by getting bigger, gaining greater scale. The objective: to bring down costs and increase efficiency. The need for corporate scale in this environment was made more urgent because of the bigger and more complex oil and gas projects that lay ahead and the much greater financial resources that would be required to make them happen. In the 1990s, mega-projects, many of them in offshore waters, might have been defined in hundred of millions of dollars, perhaps even a billion. But the term "mega-project" would need redefining, as the industry was beginning to plan for projects in the twenty-first century that would cost $5 or even $10 billion.
All of this created the imperative for what became known as restructuring. That meant reshaping not only individual companies but the industry itself. The oil majors that the Italian tycoon Enrico Mattei had dubbed the Seven Sisters (minus Gulf, which was already gone) would be remade. The majors combined to become supermajors. BP merged with Amoco to become BPAmoco, and then merged with ARCO, and emerged as a much bigger BP. Exxon and Mobil — once Standard Oil of New Jersey and Standard Oil of New York — became ExxonMobil. Chevron and Texaco came together as Chevron. Conoco combined with Phillips to be ConocoPhillips. In Europe, what had once been the two separate French national champions, Total and Elf Aquitaine, plus the Belgian company Petrofina, combined to emerge as Total. Only Royal Dutch Shell, already of supermajor status on its own, remained as it was. Or, rather, it went through a self-merger. It finally did away with the complex system of two separate holding companies, Royal Dutch and Shell, run from the Hague and London, that Henri Deterding and Marcus Samuel had forged in 1907 as their grand bargain. Instead, it became a unitary company in order, among other things, to improve the efficiency of its operations and speed up decision making. With all these mergers, the landscape of the international oil industry changed.
Overall, in the late 1990s, in the minds of the wider public and many policy makers, oil faded away. So did concerns about energy security. People assumed, if they thought about it at all, that petroleum would be cheap and readily available for years to come. Instead, there were new things and "new new" things about which to get excited. Specifically, that meant the Internet, which brought the New Economy and a revolution in communications. The world would be interconnected twenty-four hours a day and distance would disappear. Information technology, start-ups, Silicon Valley, cyberspace — those were the places to be. Few things seemed as old economy as the petroleum industry, and its relevance seemed to decline. Fewer young people were interested in pursuing jobs in the industry, which was just as well, as there were fewer jobs to pursue.
The Return of Oil
But three things in the first half of this decade were to change the picture.
The first was September 11, 2001. What had been unthinkable, and yet had been forewarned in a passing paragraph in a Presidential Daily Brief in August 2001, took place with the crashing of two hijacked airliners into the World Trade Center and a third into the Pentagon and the planned attack with a fourth on the U.S. Capitol that was aborted over Pennsylvania. For the first time since the assault on Pearl Harbor on December 7, 1941, which had taken the United States into World War II, the United States had been attacked, and with great loss of life. The enemy was the jihadist Al-Qaeda movement.
International relations were transformed. In the autumn of 2001 — responding to the September 11 attacks on New York and Washington — the United States and its allies counterattacked in what became known as the war on terror. They carried the war back to Afghanistan, the base from which Al-Qaeda operated. They quickly drove the ruling Taliban, Al-Qaeda's ally, from power, and achieved what at the time seemed to be a swift victory.
Attention turned back to Iraq. The victory in the Gulf War had also been swift. But it had not been complete. Fearful of a quagmire and the risks of an occupation, the American-led coalition had stopped short of Baghdad in 1991. Saddam Hussein had remained in power, though contained by economic sanctions, isolation, inspections, and no-fly zones in the north, over Kurdistan, and in the predominantly Shia south. But now, after 9/11, proponents of striking at Iraq argued that Saddam had links to Al-Qaeda and was still secretly seeking weapons of mass destruction. President George W. Bush determined to launch this war with the advice of some of his father's former top advisers, now in his own administration — but also against the strong warnings of other of his father's advisers. "An attack on Iraq at this time would seriously jeopardize, if not destroy, the global counterterrorist campaign we have undertaken" cautioned his father's national security adviser, Brent Scowcroft, in August 2002. "It would not be a cakewalk.... If we are to achieve our strategic objectives in Iraq, a military campaign in Iraq would likely have to be followed by a large-scale, long-term military occupation." But momentum toward war was very strong.
On March 20, 2003, some twelve years and twenty-one days after the end of the earlier Gulf War, the Iraq War began. Historians may well come to call this the Second Gulf War. This time the coalition was much smaller in terms of the number of participating countries — "the coalition of the willing." Britain was the most important partner. Other of America's key allies, specifically France and Germany, opposed war and did not join the coalition. They thought that the U.S. administration was too optimistic and underestimated the risks and the difficulties that woud be waiting in postwar Iraq.
The clear assumption among the war's proponents was that it would be quick — a "lightning victory." The actual war went pretty much as planned and pretty quickly. Already by April 9, 2003, Iraqi civilians and U.S. marines were joining together to pull down the giant statue of Saddarn Hussein in the center of Baghdad. But virtually nothing that followed went as planned. Saddam disappeared into hiding. No weapons of mass destruction were ever found. Multiple insurgencies developed across the country, as out-and-out civil war developed between Sunnis and Shias. More than half a decade after the war began, U.S. troops were still in Iraq; Iraqi politicians were still arguing over responsibility for the oil resources between the central government and the regions; and the Iraqi oil industry, short of technology and skills and security, was still struggling to regain the levels of production that had preceded the war.
Yet, while violence continued to dominate Iraq, striking changes were happening elsewhere in the Persian Gulf and the wider Middle East. In a dramatic reversal, Libya renounced nuclear weapons in December 2003 and rejoined the international community. With the buildup of oil and natural gas revenues, the emirates of Abu Dhabi, Qatar, and Dubai emerged as key players and new centers of the global economy in the twenty-first century. When a tumultuous credit and banking crisis swept the United States and Europe in 2007 and 2008, some of these emirates were at the forefront in bailing out Western financial institutions.
But the mission the Bush administration had assigned itself — to bring democracy to the region — proved short-lived. Instead, there was widespread apprehension that the ultimate victor from the Iraq War could be Iran, whose Islamic revolution had set off the second oil shock in 1978 and which now saw itself as the regional power in the Gulf — the very role that first the Shah of Iran and then, after him, Saddam Hussein had sought to capture. But it was also clear that neither Saudi Arabia nor the other Gulf countries had any intention of being under such a sway.
The second key feature of this era has been globalization. Between 1990 and 2009, the world economy almost tripled in size. And by 2009, a significant share of the world's GDP was being generated in the developing world, rather than in the traditional grouping of North America, Europe, and Japan.
The New Economy and the Internet notwithstanding, globalization made oil more important again. Of key significance was the period 2003-2007, which saw the best global economic growth in a generation. High economic growth and rising incomes in China, India, the Mideast and other emerging countries meant strong growth in oil demand — to power industry, to generate electricity, and to fuel the rapidly growing fleets of motor cars and trucks.
This surge in oil demand — the third feature — caught by surprise not only consumers but also the global oil industry itself. The preceding decades of slow growth in demand had translated into relatively low levels of investment in new oil and gas supplies. In the late 1990s and first years of the next decade, Wall Street had demanded that the industry be "disciplined" — very cautious and even restrictive in its investment — or face retribution in terms of a lower stock price. Now the industry had to play catch-up in terms of investing in new capacity to produce oil. That effort could not be mustered overnight, or even in a few years. The balance between demand and available supply narrowed dramatically. Geopolitics of one kind or another further constrained supply. At the end of 2002 and in early 2003, strikes and political conflict in Venezuela temporarily shut down its oil production, the first step on the staircase of rising prices. Beginning in 2003, attacks by militias and criminal gangs disrupted output in Nigeria, one of the world's leading suppliers — sometimes cutting production by as much as 40 percent. Over the following years, production capacity declined in both Venezuela, where President Hugo Chávez had placed tight political controls on the national industry, and Mexico, where domestic politics restricted needed investment.
Russia's oil output had plummeted in the 1990s after the collapse of the Soviet Union. But it had begun to recover in the late 1990s and then grew by 50 percent in the first half of the following decade. At times it has been the world's largest producer of oil, ahead of Saudi Arabia. But in the last few years the growth rate of its production has slowed and then flattened out altogether.
A New Oil Shock
A surge in demand, a slow response in supply, and a narrow balance between the two — this mixture would have led to higher prices in any event. But it was amplified by Iran, which was having, as it recurrently had had over four decades, its own sharp impact on world oil. Iran had relaunched an aggressive program of nuclear development, which included the fuel enrichment technology that would enable it to move easily to nuclear weapons. While trumpeting its program, Iran insisted that it was only seeking to develop civilian nuclear power. The European Union and the United States observed that Iran possesses the second-largest natural gas reserves in the world. They had little doubt that Iran's real objective was a nuclear weapons capability. Certainly, the prospect of a nuclear-armed Iran inevitably caused deep apprehension in Israel when the Iranian president repeatedly threatened to "eliminate this disgraceful stain from the Islamic world" and declared that Israel "must be wiped off the map." Moreover, especially among EU countries, Iran's nuclear ambitions were seen as a major risk for proliferation, as a nuclear Iran might trigger a nuclear race in the Middle East. In these circumstances, an "Iranian premium" — concern over whether stalemate and confrontation over Iran's nuclear program would lead to conflict and threaten oil flows through the Strait of Hormuz — became an additional element in a higher oil price.
Two further factors drove prices to unprecedented levels. One was a dramatic increase in the costs of developing new oil and gas fields — more than doubling between 2004 and 2008. This arose because of shortages — of skilled people, equipment, and engineering capabilities — combined with a rapid rise in the price of other commodities, such as steel, that are required to build offshore oil platforms and other equipment.
The other was the growing involvement by financial investors in oil and other commodities. Oil came to be seen as an asset class that provided an alternative to stocks, bonds, and real estate for pension funds, university endowments, and other investors seeking higher returns. At the same time, traditional commodity investors, speculators, and traders also put more money on the table. The complex role of financial players in the oil market became a very contentious question as people argued over the role of investors and the impact of speculation in the oil price. Continuing weakness of the dollar against the euro and Japanese yen further drove up the price of oil and other commodities as investors sought to hedge against the dollar's decline. A strengthening dollar would be accompanied by a reverse in the oil prices.
Expectations became important as oil prices steadily rose from 2003. There was a widespread apprehension, especially within financial markets, that demand from China and India would go through the roof and that an oil shortage was inevitable in the next several years. All these factors — supply and demand, geopolitics, costs, financial markets, and expectations — came together to carry oil prices from $30 at the beginning of the Iraq War through $100 and $120 and then $130 and then over $145 a barrel. By that point, expectations had created a bubble in which the price was increasingly divorced from the fundamentals. For, as prices went up, demand had — inevitably — begun to weaken.
The oil shocks of the 1970s were precipitated by specific events — the 1973 Yom Kippur War and the Arab oil embargo, and the 1978-79 Islamic revolution in Iran. This time was different in that there was no single dramatic event. Yet there was no question but that the extraordinary rise in prices constituted another oil shock of its own. In the United States, the painful economic impact of the oil shock was made much worse by the credit crisis that erupted in mortgage and banking sectors. Moreover, the shock was increasingly felt around the world. It was only when demand growth slowed markedly, in response to high prices, a financial crisis worse than any since the Great Depression, a world economic downturn, that the price came down dramatically.
The half-decade rise in oil prices had brought significant changes in the global economy and dramatic shifts in income. Trillions of dollars flowed from oil-importing countries to the exporters — one of the greatest transfers in income in the history of the world. The accumulation of oil wealth in the savings accounts of the exporters — their sovereign wealth funds — has made them powerful forces in the world economy, putting them in the position, as noted earlier, to step in and help bail out troubled banks in the United States and Europe.
The economic shifts also brought political consequences. One of the major themes of The Prize is the continuing struggle between consumers and producers over the money and power that accrue from petroleum resources. This is a balance that is always shifting. In this era of high prices, what is called resource nationalism has again come to the fore, although in many different forms. Oil wealth enabled Venezuela's President Chávez to expand his influence over Latin America and pursue his agenda of "socialism for the twenty-first century" across the world stage. In 1998 Russia had been bankrupt. A decade later, bolstered with almost $800 billion dollars of foreign reserves and savings in its sovereign wealth funds, Russia was projecting its power and influence around the world. Its position as an oil exporter and as the key natural gas exporter to
Europe — and seven years of strong economic growth — had put it in a new position of primacy. In other countries, the government decision-making that is required for new petroleum development slowed down and stalled, and thus the development of new resources also slowed.
"NOCs" — National Oil Companies
It turned out that the restructuring of the world oil industry that had started with the emergence of the supermajors at the end of the 1990s was only the beginning. One more merger — of Norway's Statoil and Norsk Hydro — created StatoilHydro, a new supermajor, although partly state-owned. But the balance between companies and governments has shifted dramatically. Altogether, all the oil that the supermajors produce for their own account is less than 15 percent of total world supplies. Over 80 percent of world reserves are controlled by governments and their national oil companies. Of the world's twenty largest oil companies, sixteen are state-owned. Thus, much of what happens to oil is the result of decisions of one kind or another made by governments. And overall, the government-owned national oil companies have assumed a preeminent role in the world oil industry.
In these circumstances, the cast of characters in the world has become more complex, with a host of companies joining the ones whose names run through this book. Some of these companies have already appeared in these pages; some are new. Saudi Aramco — the successor to Aramco, now state-owned — remains by far the largest upstream oil company in the world, single-handedly producing about 10 percent or more of the world's entire oil with a massive deployment of technology and coordination. The major Persian Gulf producers control for the most part their production, as do the traditional state companies in Venezuela, Mexico, Algeria, and many other countries. The Chinese companies — partly state-owned, partly owned by shareholders around the world — continue to produce the majority of oil in China but have also become increasingly active and visible in the international arena. So have Indian companies. The Russian industry is led by state-controlled giants Gazprom and Rosneft and as well by privately held companies, such as Lukoil, that are majors in their own right.
Petrobras, the Brazilian national oil company, is 68 percent owned by investors and 32 percent by the Brazilian government, though the government retains the majority of the voting shares. Petrobras had already established itself at the forefront in terms of capabilities in exploring for and developing oil in the challenging deep waters offshore. Beginning with the Tupi find in 2006, potentially very large discoveries are being made in what had heretofore been inaccessible resources in Brazil's deep waters, below salt deposits. These discoveries could make Petrobras — and Brazil — into a new powerhouse of world oil. Malaysia's Petronas had turned itself into a significant international company, operating in 32 countries outside Malaysia. State companies in other countries in the former Soviet Union — KazMunayGas in Kazakhstan and SOCAR in Azerbaijan — have also emerged as important players. While Qatar is an oil exporter, its massive natural gas reserves put it at the forefront of the liquefied natural gas industry (LNG) and, along with Algeria's Sonatrach and other exporters, at the center of growing global trade in natural gas.
China's companies are increasingly prominent in the global industry. For a few years, there was fear that a battle for oil resources between the United States and China was almost inevitable. Despite disagreements between the two countries over specific issues, the overall fear seemed to fade as it became clear that both countries share common interests as oil importers and consumers and that energy is part of a larger framework of economic integration and overlapping interests between the two countries.
The rise in oil prices in the nineties has fueled the fear that the world is running out of oil. This anxiety has taken on a name — "peak oil." Yet such fears are also part of a long tradition in the world. For the current language and apprehensions bear striking resemblance to earlier periods. As described in these pages, there was a widespread conviction in the 1880s that when the wells ran dry in western Pennsylvania, the days of oil would be over. Similar fears were registered in the years right after World War I. Such concerns reappeared in the years after World War II, with memories fresh of the strategic role of oil in the war, and as the locus of world production shifted, in accord with Everette DeGolyer's 1944 prophecy, from the U.S. Gulf of Mexico to the Persian Gulf. And that same conviction about shortage underlay the panic that gripped the oil industry and the world community during the oil crises of the 1970s. In each case, new territories, new horizons, and new technologies banished the fears within a few years; and indeed, in each case, shortage gave way to surplus.
But is this time different? That is a contentious question, which arouses strong passions. It is also a question that appropriately requires thoughtful, careful analysis, for the stakes are very high. Field-by-field analysis suggests that there are ample resources below ground to meet world demand for several years.
But there are three important qualifications. The first is that the aboveground risks — geopolitics, costs, government decision making, complexity, restrictions on access and investments — can hamper development and lead to tight supplies and high prices. It is striking to see the shift toward a focus on these aboveground risks as the key factors. The second is that an increasing share of liquid supplies will be nontraditional oil — whether from such challenging environments as the ultra-deep offshore waters and the Arctic, or Canadian oil sands, or from the associated liquids that are produced with the growing volumes of natural gas. Many of these nontraditionals are more complex and difficult — and expensive — to bring on. The third is the recognition of the sheer scale in the years ahead of demand growth in the new giants, China and India, and other developing economies and the enormous challenge of meeting it.
One further factor critical to the future of oil emerged as a decisive factor only after the turn of the century: climate change. Initially, representatives of eighty-four countries signed the 1997 Kyoto Protocol aimed at reducing CO2 emissions. The European countries later adopted the treaty and made climate change a cornerstone of their policies. But the U.S. Senate rejected the Kyoto treaty by a vote of 95 to 0. There were three main concerns. The first was the impact of CO2 restrictions on the overall economy and economic growth. The second specifically concerned restrictions on coal, from which half of the nation's electricity was generated. And the third was that the treaty would require cutbacks from the industrial countries, but not developing countries.
A decade later, attitudes have changed dramatically in the United States. The climate change issue has been embraced across almost the entire U.S. political spectrum, and it is generally expected that a national climate change regime will be enacted over the next few years. Yet complex questions are still to be addressed. There is a debate as to the costs of moving to a lower-carbon-emissions society as well as the choice between a cap-and-trade system and a carbon tax. Half of U.S. electricity is still generated from coal; and how to move toward a much lower carbon impact for coal has yet to be demonstrated at scale. In the meantime, developments in the world economy have emphasized that third concern cited above — the need to bring the major developing economies into a climate change framework. At the end of 2007, China overtook the United States as the world's number one emitter of CO2. Carbon management is likely to be a contentious focus for international diplomacy in the years ahead.
Oil imports have been a political and strategic concern since the United States moved from being on oil exporter to an oil importer in the late 1940s. Today those concerns have been amplified both because of the outflow of money and because of turbulence and extremism in parts of the Middle East, the recruiting base for Al-Qaeda. But those import numbers do require some clarification. It became common to assert that the U.S. imports 70 percent of its oil. In fact, in 2008, on a net basis, it was importing about 56 percent of its oil — still a very substantial amount. There was also a widespread belief that most or all of U.S. imports came from the Middle East. That is actually not the case. Some 22 percent of imports come from Canada, part of the overall trade flows with the country that is the United States' largest trading partner, and 12 percent from Mexico. Supplies from the Middle East (including Iraq) constitute 22 percent of total imports and about 12 percent of total U.S. oil consumption. Altogether, petroleum — both domestically produced and imported — provides about 40 percent of the total energy on which the United States' $14 trillion economy operates. Nevertheless, a confluence of concerns turned "ending the addiction to oil" into a common phrase of political discourse in the United States, even if the definition of addiction still needed some clarification.
The need for new supplies — conventional, renewables, and alternatives — plus price and security and climate concerns has unleashed a wave of innovation and research all across energy industries. But how fast will change come? Certainly energy will be a major policy focus. Barack Obama described energy as "priority number one." Technology and markets will provide the answer over time. Many renewables, such as wind and photovoltaics, provide electricity and will do little to supplant oil imports, as only 2 percent of U.S. electricity is generated from oil — unless there is a big growth in electricity-powered transportation. Indeed, transportation is critical. Whatever the innovations — and much is in the works — the auto fleet will not change overnight. It can take five or six years, and a billion dollars to bring new models to market. Only about 8 percent of the auto fleet turns over each year, and so it will take years for the impact to be felt.
But in five or ten years the auto fleet will almost certainly change and will look different from today's fleet, in terms of its energy sources and perhaps its engines. Certainly cars will be more efficient. New automobile fuel efficiency standards, passed at the end of December 2007, represent the first mandated increase in thirty-two years. The original fuel efficiency standards in 1975 were one of the two most important energy policy decisions in the 1970s (the other being the approval of the trans-Alaskan oil pipeline). These new standards will likely have similar impact. But what will be the changes? What kind of breakthroughs lie ahead for biofuels beyond corn-based ethanol? One way or the other, there will be more electricity in auto transportation. Hybrids will gain market share. Will plug-in hybrids mean that the electric power industry will be fueling some part of the auto fleet? Will natural gas become a significant motor fuel?
The dramatic changes in world oil are inevitably leading to a renewed focus on the perennial question of energy security. World War I and World War II had so starkly demonstrated the strategic importance of energy, particularly oil. But, as described in these pages, the present international system for energy security emerged only in the 1970s around the International Energy Agency and has evolved in the decades since. But much has changed in recent years. The major new consumers, China and India, need to be brought into the international energy security system, and that will require greater confidence and communication between them and the traditional importing countries. At the same time, there is an urgent need to address the physical security of energy infrastructure — pipelines, power plants, and transmission lines — and the supply chains that carry oil and natural gas from wellheads in the Persian Gulf, West Africa, Central Asia, and other parts of the world, to consumers. The integration of China and India and the focus on infrastructure are both essential for energy security in the twenty-first century.
Greater efficiency in the use of oil and other energy sources is emerging as a major and common policy objective in countries around the world. The industrial world is twice as energy efficient as it was in the 1970s. The potential for future efficiency is still very large. And yet it seems likely that a growing world economy, with rising incomes and increasing population, will require more oil — perhaps 40 percent or more over the next quarter century, at least according to some estimates. Perhaps innovation will lower that number. The answers depend upon policy and markets and on technology and the scale and character of research and development.
And yet for several decades to come — whether the price is high or low or somewhere in between — oil will be a central factor in world politics and the global economy, in the global calculus of power, and in how people live their lives. And that is why this story provides a framework for the issues we face today and why, hopefully, it helps shed much-needed light on the critical choices we face and on the opportunities, risks — and surely the surprises — that lie ahead. As such, The Prize is not only a history of the last 150 years. It is also a starting point for understanding how energy will shape the world of tomorrow.
Epilogue copyright © 2008 by Daniel Yergin
List of Map Prologue PART I THE FOUNDERS Chapter 1 Oil on the Brain: The Beginning Chapter 2 "Our Plan": John D. Rockefeller and the Combination of American Oil Chapter 3 Competitive Commerce Chapter 4 The New Century Chapter 5 The Dragon Slain Chapter 6 The Oil Wars: The Rise of Royal Dutch, the Fall of Imperial Russia Chapter 7 "Beer and Skittles" in Persia Chapter 8 The Fateful Plunge PART II THE GLOBAL STRUGGLE Chapter 9 The Blood of Victory: World War I Chapter 10 Opening the Door on the Middle East: The Turkish Petroleum Company Chapter II From Shortage to Surplus: The Age of Gasoline Chapter 12 "The Fight for New Production"
Chapter 13 The Flood Chapter 14 "Friends" -- and Enemies Chapter 15 The Arabian Concessions: The World That Frank Holmes Made PART III WAR AND STRATEGY Chapter 16 Japan's Road to War Chapter 17 Germany's Formula for War Chapter 18 Japan's Achilles' Heel Chapter 19 The Allies' War PART IV THE HYDROCARBON AGE Chapter 20 The New Center of Gravity Chapter 21 The Postwar Petroleum Order Chapter 22 Fifty-Fifty: The New Deal in Oil Chapter 23 "Old Mossy" and the Struggle for Iran Chapter 24 The Suez Crisis Chapter 25 The Elephants Chapter 26 OPEC and the Surge Pot Chapter 27 Hydrocarbon Man PART V THE BATTLE FOR WORLD MASTERY Chapter 28 The Hinge Years: Countries Versus Companies Chapter 29 The Oil Weapon Chapter 30 "Bidding for Our Life"
Chapter 31 OPEC's Imperium Chapter 32 The Adjustment Chapter 33 ,The Second Shock: The Great Panic Chapter 34 "We're Going Down"
Chapter 35 Just Another Commodity?
Chapter 36 The Good Sweating: How Low Can It Go?
Epilogue Chronology Oil Prices and Production Notes Bibliography Acknowledgments PhotoCredits Index
Oil on the Brain: The Beginning
There was the matter of the missing $526.08.
A professor's salary in the 1850s was hardly generous, and in the quest for extra income, Benjamin Silliman, Jr., the son of a great American chemist and himself a distinguished professor of chemistry at Yale University, had taken on an outside research project for a fee totaling $526.08. He had been retained in 1854 by a group of promoters and businessmen, but, though he had completed the project, the promised fee was not forthcoming. Silliman, his ire rising, wanted to know where the money was. His anger was aimed at the leaders of the investor group, in particular, at George Bissell, a New York lawyer, and James Townsend, president of a bank in New Haven. Townsend, for his part, had sought to keep a low profile, as he feared it would look most inappropriate to his depositors if they learned he was involved in so speculative a venture.
For what Bissell, Townsend, and the other members of the group had in mind was nothing less than hubris, a grandiose vision for the future of a substance that was known as "rock oil" -- so called to distinguish it from vegetable oils and animal fats. Rock oil, they knew, bubbled up in springs or seeped into salt wells in the area around Oil Creek, in the isolated wooded hills of northwestern Pennsylvania. There, in the back of beyond, a few barrels of this dark, smelly substance were gathered by primitive means -- either by skimming it off the surface of springs and creeks or by wringing out rags or blankets that had been soaked in the oily waters. The bulk of this tiny supply was used to make medicine.
The groupthought that the rock oil could be exploited in far larger quantities and processed into a fluid that could be burned as an illuminant in lamps. This new illuminant, they were sure, would be highly competitive with the "coal-oils" that were winning markets in the 1850S. In short, they believed that, if they could obtain it in sufficient quantities, they could bring to market the inexpensive, high-quality illuminant that mid-nineteenth-century man so desperately needed. They were convinced that they could light up the towns and farms of Noah America and Europe. Almost as important, they could use rock oil to lubricate the moving parts of the dawning mechanical age. And, like all entrepreneurs who became persuaded by their own dreams, they were further convinced that by doing all of this they would grow very rich indeed. Many scoffed at them. Yet, persevering, they would succeed in laying the basis for an entirely new era in the history of mankind -- the age of oil.
To "Assuage Our Woes"
The venture had its origins in a series of accidental glimpses -- and in the determination of one man, George Bissell, who, more than anybody else, was responsible for the creation of the oil industry. With his long, towering face and broad forehead, Bissell conveyed an impression of intellectual force. But he was also shrewd and open to business opportunity, as experience had forced him to be. Self-supporting from the age of twelve, Bissell had worked his way through Dartmouth College by teaching and writing articles. For a time after graduation, he was a professor of Latin and Greek, then went to Washington, D.C., to work as a journalist. He finally ended up in New Orleans, where he became principal of a high school and then superintendent of public schools. In his spare time, he studied to become a lawyer and taught himself several more languages. Altogether, he became fluent in French, Spanish, and Portuguese and could read and write Hebrew, Sanskrit, ancient and modern Greek, Latin and German. Ill health forced him to head back north in 1853, and passing through western Pennsylvania on his way home, he saw something of the primitive oil-gathering industry with its skimmings and oil-soaked rags. Soon after, while visiting his mother in Hanover, New Hampshire, he dropped in on his alma mater, Dartmouth College, where in a professor's office he spied a bottle containing a sample of this same Pennsylvania rock oil. It had been brought there a few weeks earlier by another Dartmouth graduate, a physician practicing as a country doctor in western Pennsylvania.
Bissell knew that amounts of rock oil were being used as patent and folk medicines to relieve everything from headaches, toothaches, and deafness to stomach upsets, worms, rheumatism, and dropsy -- and to heal wounds on the backs of horses and mules. It was called "Seneca Oil" after the local Indians and in honor of their chief, Red Jacket, who had supposedly imparted its healing secrets to the white man. One purveyor of Seneca Oil advertised its "wonderful curative powers" in a poem:
The Healthful balm, from Nature's secret spring,
The bloom of health, and life, to man will bring;
As from her depths the magic liquid flows,
To calm our sufferings, and assuage our woes.
Bissell knew that the viscous black liquid was flammable. Seeing the rock oil sample at Dartmouth, he conceived, in a flash, that it could be used not as a medicine but as an illuminant -- and that it might well assuage the woes of his pocketbook. He could put the specter of poverty behind him and become rich from promoting it. That intuition would become his guiding principle and his faith, both of which would be sorely tested during the next six years, as disappointment consistently overwhelmed hope.
The Disappearing Professor
But could the rock oil really be used as an illuminant? Bissell aroused the interest of other investors, and in late 1854 the group engaged Yale's Professor Silliman to analyze the properties of the oil both as an illuminant and lubricant. Perhaps even more important, they wanted Silliman to put his distinguished imprimatur on the project so they could sell stock and raise the capital to carry on. They could not have chosen a better man for their purposes. Heavyset and vigorous, with a "good, jolly face," Silliman carried one of the greatest and most respected names in nineteenth-century science. The son of the founder of American chemistry, he himself was one of the most distinguished scientists of his time, as well as the author of the leading textbooks in physics and chemistry. Yale was the scientific capital of mid-nineteenth-century America, and the Sillimans, father and son, were at the center of it.
But Silliman was less interested in the abstract than in the decidedly practical, which drew him to the world of business. Moreover, while reputation and pure science were grand, Silliman was perennially in need of supplementary income. Academic salaries were low and he had a growing family; so he habitually took on outside consulting jobs, making geological and chemical evaluations for a variety of clients. His taste for the practical would also carry him into direct participation in speculative business ventures, the success of which, he explained, would give him "plenty of sea room...for science." A brother-in-law was more skeptical. Benjamin Silliman, Jr., he said, "is on the constant go in behalf of one thing or another, and alas for Science."
When Silliman undertook his analysis of rock oil, he gave his new clients good reason to think they would get the report they wanted. "I can promise you," he declared early in his research, "that the result will meet your expectations of the value of this material." Three months later, nearing the end of his research, he was even more enthusiastic, reporting "unexpected success in the use of the distillate product of Rock Oil as an illuminator." The investors waited eagerly for the final report. But then came the big hitch. They owed Silliman the $526.08 (the equivalent of about $5,000 today), and he had insisted that they deposit $100 as a down payment into his account in New York City. Sil
Posted May 24, 2011
After buying the print version of this book and finding that it is so big, thick, and unwieldy, I was looking forward to downloading it onto my Nook app. Unfortunately, the Nook version does not contain the 30 pages of pictures contained in the print version. I feel like I have an incomplete version of the book. I'm told that this was the publishers decision rather than B&N. Either way, very disappointing... Otherwise, the book itself, by all accounts, is supposed to be amazing. Hope to read it soon.
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Posted March 28, 2003
This book was a monster! It took me several weeks to finish it. I read it during a flight to DC and several people commented to me on the plane and in the airports that it was a great book. This story is really a story of the twentieth century. It is the story of the rise of the Oil industry. What a mess! What a collection of crooks, crony capitalists, get-rich schemers, and arrogant imperialists! I loved it! Not that I want to be like any of these guys. But it was really engrossing to read. The author really brought the characters alive, and I think he didn¿t really damn them or worship them. He just told us what happened in a lively and very detailed way. The most interesting part for me was the way Oil was at the heart of most of the geo-political issues in all of modern history. I always knew that oil was part of the equation in historical issues, but to have the whole story revolves around it gave new appreciation for its impact on world societies. The treatments of the World Wars were my favorite parts. But the whole book just gave me a new prospective.
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Posted April 4, 2014
This book was purchased as a gift for a grandson who just finished college as a Petroleum Engineer. He was very pleased with it and told me that was one of the books that was used in a quiz that was taken
during his internship for his present employment.
Posted December 30, 2011
Posted September 3, 2011
I am now reading this a second time. The history of oil has greatly effected the world and Yergin explains this successfully. In general this book should be read by everyone to gain a better understanding of how oil fueled the American economy. Enjoy!Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted April 19, 2008
I would have rated this a 5 'or higher' except that the binding is so horrible that the book fell to pieces as I read it. Let's call that one of the ten surprises. The other nine, however are of the 'gee, I never knew that' variety. It is amazing how oil shaped 20th century history, without getting recognized as doing it. We all see oil's impact today, but it has been there over 100 years. Highly documented, and written in a way that will hold your attention. Even though the printer had such low quality standards, I think I'd buy it again knowing that.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted February 26, 2005
The book captures the foundamental element of the oil industry, the risk. It is described as 'oil in the mind'. Those who suceeded in this oil and gas world had that in common. Everyday I can assure you that I rediscover this finding as I consult major and independent oil producers.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted August 29, 2002
This book is an essential in the library of any educated person. It contains invaluable information for the general consumer and provides a deeper understanding of many country-country relationships. Anyone interested in learning more about the historical development of the Middle East during the 20th century and the U.S.'s relationships with Middle Eastern countries should read this book. Though it is long, it is very well written and easy to read.
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Posted November 19, 2001
this is a totally thorough account of Big Oil: its discovery, its progression as the world's premiere energy source and the implications to nations all over the world. Nothing on this planet, save perhaps nuclear weapons, touches so many people on a consistently regular basis as oil. Yurgin knows his subject -- study it is what he does.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted August 15, 2001
I'm reading this book for the second time, and it's just as facinating as the first. The book clearly describes the development of the oil industry, which is definitely the most interesting and exciting example of business growth and capitalism in U.S. history. I wish the PBS version of this book were available for purchase!Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
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