History Of The Worldwide Oil Industry

D. Yergin. The Prize: The Epic Quest for Oil, Money & Power. Simon and Schuster, 2011, Chapters 1, 2 and 15.

I found the reading very interesting to read and easy to understand since the author presents the history of oil throughout the lens of life stories of the key actors. George Bissell was one of the most responsible men for the creation of the oil industry who knew that amounts of rock oil could be used in medicine to treat everything from headaches, toothaches, to worms and rheumatism. The main question was if the rock oil could be used as an illuminant and is there enough rock oil available? Burgeoning populations and the spreading economic development of the industrial revolution had increased the demand for artificial illumination.

There was that second need and use as well, lubrication. The advances in mechanical production had led to such machines as power looms and the steam printing press, which created too much friction for such common lubricants as lard. While drilling had been developed more than fifteen hundred years earlier in China, with wells going down as deep as three thousand feet, it was only around 1830, that Europeans copied the method.

It could be said that John D. Rockefeller was the most important figure in shaping the oil industry. His lasting legacy would be strongly felt, in terms of his profound influence on the petroleum industry and on capitalism itself. In 1859, he formed his own partnership with Maurice Clark to trade produce. The firm prospered from demand generated both by the Civil War and by the opening of the West. The firm dealt in Ohio wheat, Michigan salt, and Illinois pork. Within a couple of years, Clark and Rockefeller were also dealing in and making money from Pennsylvania oil. Oil and the stories of instant wealth had already captured the imagination of entrepreneurial men to start competing in the business. Yet, while the markets for kerosene and lubricants had grown, they were not growing fast enough to match the growth in refinery capacity, and simply too many companies were competing for the same customers. In 1867, Rockefeller was joined by Henry Flagler in the creation of Standard Oil.

While the market for oil was growing at an extraordinary rate, the amount of oil seeking markets was growing even more rapidly, resulting in wild price fluctuations and frequent collapses. Moreover, the reason was simply too many wells and too much oil. Around the 1870s, storage tanks overflowed, covering the land with black scum. The gluts became so large and prices fell so low that crude oil was run out into streams and onto farms because there was nowhere else to put it.

The legal concept of the 'trust' was refined and formalized in the Standard Oil Trust Agreement, which was signed in 1882. It was a response to the judicial and political attacks of the late 1870s and early 1880s. It would be very interesting to know how it was possible to integrate into the new trust so many independent entrepreneurs and so many enterprises producing so many products, mainly kerosene and fuel oil? The low-cost producer was a basic strategy that had governed Standard Oil in the 1870s and 1880s. Great attention was devoted both to the quality of the product and to the neatness and cleanliness of the operations, from refinery to the local distributor. In larger urban areas, kerosene still faced competition from manufactured or 'town' gas, now extracted from coal or naphtha, another fraction of crude oil. But kerosene still had a considerable cost advantage. However, not surprisingly, there was always the fear that the oil would run out, while at the same time, new individuals and new companies would rise up to present themselves as persistent competitors.

Saudi Arabia was not the only country on the Arabian Peninsula in which oil interest was persistent. Amir of Kuwait, Sheikh Ahmad gained interest in concessionaires due to the financial needs. Like all the other sheikhdoms down the coast of the Persian Gulf, Kuwait was suffering severe economic hardship. The local pearling trade had been Kuwait's main industry and principal source of foreign earnings. By 1930, large volumes of Japanese cultured pearls were beginning to appear on the world's jewelry markets, practically destroying the demand for the natural pearls that divers brought up from the waters of Kuwait and elsewhere in the Persian Gulf which ruined Kuwait's economy. The conditions become that bad that slaveowners along the Arab coast were selling off their African slaves at a loss, to avoid the maintenance costs. However, the operations in Kuwait and Saudi Arabia were suspended because of the WWI. However, as people began to assimilate what Saudi Arabia's oil potential might be, and what it might mean, the country's petroleum reserves became the object of political plays much more intense.

Oil and the Middle East (Monday, September 30th)

- A. Vassiliev. The History of Saudi Arabia. New York University Press, 2000, Chapters 14 and 19

The hajj was the main source of Saudi Arabia's kingdom revenue and the sharp reduction in the number of pilgrims due to the world economic crisis of 1930s that had left the Saudi finances in a desperate situation. The main forces behind the changes were caused by the global switch of the 20th century due to oil as a new source of power. what was surprising was the fact that the American companies had either been indifferent to oil deposits abroad or had failed to receive concessions in the eastern hemisphere because of the restrictive national and colonial policies of the European powers and the private oil companies. The main reason for the 1920's interest was the fear of being excluded from the exploitation of cheap oil deposits that were located close to the major international markets.

Standard Oil of California (SOCAL) was among the American oil companies which undertook serious oil exploration activities abroad after the WWI. Although it was among the biggest American corporations, its efforts were pretty unsuccessful in the 1920s. However, having failed to interest British oil companies due to their belief that there was no oil, Bahrain contacted the American company, Gulf Oil Corporation. According to the 1924 agreement, the ruler of Bahrain had pledged himself to grant concessions in his territory or to accept any proposal to that effect, without Britain’s consent. Soon after the oil concession agreement was concluded, the Anglo-American Group received a concession for the exploitation of gold mines in Saudi Arabia.

The terms of the agreement were undoubtedly extremely advantageous to the company and disadvantageous to the county itself, but they reflected the balance of forces between the partners. At the time the Saudi government signed the agreement, it had no experience in oil affairs and badly needed money. Both the kingdom's international positions and the development of its society were to be influenced by this powerful new factor.

In the 1940s and 50s Saudi Arabia spent the great number of its oil revenues on domestic consumption, owing to the country's poverty and its traditional socio-political structure. Most of the money went to members of the ruling group while the ordinary people mostly received nothing. Dominated by US capital, international organizations guided the country's financial and economic policy. However, the government was compelled to take some measures to protect the national economy, impose controls on currency operations, restrict imports and try to balance the budget. The state allocated considerable sums for urban construction, electrification and the setting up of modern utilities in towns. As in many underdeveloped countries, the Saudi government needed to attract foreign capital for the national industry.

Nonetheless, the economic problems were caused by the underdeveloped infrastructure, unreliable statistics and the corruption in the state machinery. In the early 70s, life and the normal functioning of country's economy and society depended mostly on all kinds of imports. Their main trading partner was the US followed by western Europe and Japan. A bourgeoisie was also created, deriving its wealth from real-estate operations. I would really like to know how the growth of oil revenues influenced the traditional branches of the economy, such as agriculture, in which the majority of the population was still employed?

The creation of a Saudi working class was prevented by both socio-political conditions and the narrow market of hired labor. Surprisingly, what led to a temporary increase in the demand for slaves in 40s and 50s was the emergence of the capitalist sector and a working-class, the development of the oil industry and the dramatic increase in the incomes of the ruling elite, which also resulted in the expansion of the domestic market.

The Labor Code of 1969 included requirements concerning safety arrangement and provisions for compensation for occupational injuries system was outlined and made compulsory. In 1954 the ministry of education was set up and a uniform school system was introduced on the lines of those in the more developed Arab countries. The first Saudi higher educational institution, the College of Islamic Law, was opened in Mecca in 1949.

The reason why the government started paying more attention to education was due to society's need for specialists. The collision between conservative views and the striving for modernization and social transformation under the impact of education led to tensions within Saudi society. Therefore, more and more Saudis began to question the legitimacy of the old political system and traditional social values.