The ‘Fabric of Economic Reality’ – the Development of the Petroleum Industry

John D. Rockefeller, co-founder of the Standard Oil Company
John D. Rockefeller, co-founder of the Standard Oil Company

As the world has economy developed into a more liberal arena, its ‘cogs and wheels’ have become increasingly hidden away from the eye of the individual, and even, to a certain extent, from the public and private actors that move within it. The oil industry, more specifically petroleum, is perhaps the most vital wheel in the global economic engine – and also, unfortunately, the most susceptible to fluctuation, leading, as has happened in the past, to swift economic variability in both positive and negative senses. For example, it can be argued that an increase in oil availability won the Allies WWI, in a similar manner to the claim that increased oil revenue caused the 1979 revolution in Iran. It is therefore crucial that politicians, businessmen and those in between, have a grasp of the economics of the global petroleum industry. Several events in the post-WWII period have altered the dynamic of the system, but it is still vital to analyse its development between 1900 and 1950, as many of the traits and characteristics survive today, in companies, economic diplomacy, international trade law etc. This article draws primarily from economic analysis performed by Charles Issawi and Mohammed Yeganeh in 1962 – some might consider it slightly out-dated, but the historical inquiry remain relevant and useful due to its immunity from opinion on subsequent events involving the oil industry.

The Liquid Gold Rush

The global search for oil began to accelerate in the mid-19th Century, as governments and private investors sought an alternative to coal in the form of liquid fuel. Even at the turn of the 20th Century, production and consumption patterns mirrored trends witnessed today. Issawi and Yeganeh note that there was, and is, a general positive correlation between economic development and energy consumption, but that there is a negative correlation between economic development and energy production – leading to the conclusion that oil importation and exportation have always been a key characteristic of the industry. This is perhaps simply geographical chance. Russia is perhaps the most prominent exception, although its economic history is skewed somewhat by the mass nationalisation of resources after 1917.

In the Middle East, Iran was the first country in which oil was discovered – by William Knox D’Arcy between 1904 and 1912 (see http://wp.me/p3g0mz-3D for a full discussion of British activities in the Iranian oil market). The Gulf States followed, as did Saudi Arabia, the Mesopotamian countries and Arab North Africa. In general, and certainly in the first half of the 20th Century, the dynamic of the industry in the region was defined by transport costs, i.e. companies set up shop as close to the coastline as possible, in order to reduce overheads in getting produce from the Gulf, through the Suez Canal and into Europe. This policy has effectively formed the geopolitical shape of the Gulf as we know it today.

Ownership and Law

There have generally been two forms of claimant to the ownership of oil. The first is apparent almost exclusively in the US, where petroleum resources followed title to the surface land above. A product of the libertarian system of socio-economics, this resulted in inefficient extraction and production, as many private actors sought their own means of access to petroleum resources. It also contributed to the establishment of an industry dictated by enterprise of all shape and size, deeming it very difficult to regulate.

The second form of claim is apparent in most other oil-producing countries, where the immediate state (whether it be a national or local government or an autocratic dictatorship) owns the resources. In these systems, rights to exploration and production can be granted to agencies, national or foreign, and due to the note above that there is a negative correlation between economic development and energy production, one can deem that such concessions were usually granted to foreign enterprises. Britain, Germany and the Netherlands acted quickly in the late 19th and early 20th Centuries to gain these contracts, with the Americans and the French moving into the global market soon afterwards. Russia was there or there abouts until 1917. Many of these concessions have subsequently been deemed exploitative, reminiscent of the neo-colonial tactics of the Western powers in the era of imperialism a century previous.

Market Development

The character of the industry outside of the US therefore perpetuated the rise of several large companies – sometimes with the official backing of their respective governments – to global domination of the petroleum markets. This has been termed the ‘supermajor’ system, and its offspring still dictate the energy markets today – the big 6 are BP (British), Royal Dutch Shell (Anglo-Dutch), ExxonMobil (American, was Standard Oil), Chevron (American), Total (French) and Conoco Phillips (American). All 6 have grown out of the original group of corporations that dominated the global oil market contracts in the interwar period. Their power has led to alliances, in the form of joint production subsidiaries, and the dictation of supply and therefore price in the consumer market.

The dynamic of the petroleum market flows through three distinct periods in the 20th Century. The first, between 1900 and 1950, can be labelled the era of neo-imperialism, in which these international corporations extracted enormous amounts of resources on the basis of concessions and contracts. Between 1950 and 1980, there was much economic confusion as national governments began to reclaim their reserves, and new stocks were discovered all over the world, but most notably in the emirates that now make up the UAE. Finally, from 1980 to today, the oil race has intensified to dictate foreign political policy and ultimately confuse the roles of governments and private corporations entirely.

Conclusion

Issawi and Yeganeh’s analysis is just one interpretation of statistics. But their description of the economic dynamic of the Middle East, and the importance of the oil industry within it, is both sound and fascinating. It is incredible how much impact the market has had on the region, and how much it continues to do so. The pair also highlight, all the way from back in 1962, potential future issues for global energy supply, including the controversy over nuclear power, and oil from tar sands and shale projects. All three continue to provoke much debate in the contemporary global political economy. How they might affect the progression of the world oil industry is uncertain, but what is for sure is that such a market is bound for a bumpy ride as traders, campaigners and foreign offices continue to stamp upon producers worldwide.

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