The Color of Oil
Authors: Michael Economides and Ronald Oligney
Publisher: Round Oak Publishing, Date of Publication: 2000, ISBN: 0-9677248-0-5, Number of Pages: 203
Editorialized Executive Book Summary
A Member Service
from CARE: Citizens
The color of oil is green, and even if money throughout the world has all the colors of the rainbow and then some, it is the greenback, both literally and figuratively, that has defined the value of oil.
Corruption thrived through the days of abundance and was
even more pervasive in the lean days following and still thrives today. Oil
producing countries generally comprise the top three on everybody’s list
of corrupt countries in the world. This should not be surprising in nations
that have no democratic institutions or economic infrastructure, and are
geographically and culturally far from the egalitarian notions of the
“With all thy getting, get understanding.”
Understanding the Big Picture
At the time of the writing of this book (2000), the world consumes 200 million barrels of oil per day equivalent. Of this, 40 percent is oil, 22 percent is gas, 24 percent is coal, 6 percent is nuclear, and 8 percent comprises all other energy forms, mostly hydroelectric. (The renewables, wind, solar and the rest combined, comprise less than 0.5 percent.) Contrary to popular notions, there was never really an oil glut at the end of the millennium. For a decade, world energy demand increased at 1.5 to 2 percent per year. In 1998, with many economies in recession, energy demand still increased, albeit only by 0.5 percent. Demand started to increase again in 1999, back in the range of 1 to 2 percent. In fact, oil consumption increased almost monotonically ever since the original Col. Drake well in 1859, with exceptions in 1974-75 and 1980-81. The supply side of the equation is widely, and inappropriately, characterized by the Saudi cheap-oil-forever myth. This myth was firmly ensconced in the public discourse by a March 6,1999 cover story in The Economist titled, “Drowning In Oil.” The article was laced with warnings that the Saudis may “throw open the taps,” and “herald an era of $5 oil.” The specter of oil selling for $2 or $3 per barrel was even raised.
The up-front costs associated with activating these fields
are some of the highest in the world. Developments costs range from $3,500 per
barrel per day of new production in
Investing in the Petroleum Industry
A repeatable 25-percent annual return on investment, built
on an understanding of the physical, financial and political aspects of the
petroleum business, is clearly a get-rich-slowly recipe. A tremendous
investment opportunity underlies the dramatic, ongoing shift from oil to
natural gas as the basic fuel of the
Oil is black because it is a mixture of many compounds with various light-absorbing properties. The blackness contrasts the transparency of water, also mined from the earth, and contributes to the great mystery of oil. All gases, liquids and solids are compounds consisting of smaller parts, or elements. Crude oil consists primarily of two elements, carbon and hydrogen. Oil is a derivation of petroleum (rock oil), named from the ancient Greek observation of black liquid coming from the ground to the surface. The greatest portion of oil found on the surface of the earth still seeps naturally from the ground.
Refineries separate crude petroleum into individual or groups of components of similar properties and uses such as butane, jet fuel, automobile gasoline and heating fuel. Refiners "reform" smaller molecules or "crack" larger molecules yielding more valuable and useful compounds. Refined petroleum is supplied to the petrochemical industry to create synthetic materials such as polymers, plastics and fibers which exist in virtually every modern industry, from food packaging to thread for clothing to computer casings and parts and everything in-between. The most commonly understood everyday use for petroleum is energy conversion—powering transportation, generating electricity, and providing direct heating of spaces.
The Origin and Migration of Petroleum
Petroleum is derived from organic (originally living) matter that has been deposited and buried for tens-to hundreds-of-millions of years. One of these geologic eras is the Jurassic. Because petroleum generally has a lower density than the present water the migration is always upward, with oil sitting on top of water. If gas is present, it will be at the very top, above oil. There are no pools, caverns or underground rivers of oil, although the popular press often alludes to them. Petroleum inhabits the interconnected pore spaces of the rock. If the rock's porosity (a measurable quantity denoting the portion of the rock that consists of pores) is not large enough, the volume of petroleum present is not commercially interesting. Although petroleum tends to move upward, floating on water and finding its way through layers of porous rock: it normally gets trapped en route by a layer of rock with no porosity called a cap rock, whose weight causes the buried fluids to be under pressure. This is the nature of a petroleum reservoir, a porous rock containing fluid under pressure, awaiting discovery.
Technology is still inexact and its results uncertain. A good modern geoscientist is a rare individual, an almost mystical combination of intuition, education and good fortune. Not all petroleum reservoirs have obvious surface manifestations, so geologists use a lot of inferences and conjectures, often quite intelligently and sometimes not. Until the 1980s, drilling was a hit-or-miss operation. Few technologies in the history of the petroleum industry can match the importance of seismic measurements and their impact on exploration and, eventually, production. A seismic wave migrates into the ground, traversing layers (strata) to depths of 3 kilometers or more. The signal en route reflects from certain layers and bounces back, undergoing refraction. Its wave responses detected by a line of receivers and collected, visualized and analyzed as a 3-D image to provide new insights, such as the detection of gas and the movement of fluids within the reservoir. Future production is more likely to come through the use of new technology and re-exploration techniques in exploiting known petroleum provinces to locate bypassed oil or oil that was previously considered marginally economic.
Drilling and Well Construction
Today rotary drilling is an involved operation with
heavy-duty equipment, a variety of fluids and sophisticated instrumentation.
Oil production formations are typically found at depths of 0.5 to 2.5 miles (1
to 4 kilometers); gas reservoirs are often 3.5 miles (6 kilometers) deep or
deeper. The size and technology of modern drilling operations are greatly
advanced compared to the original Drake well in 1859. Because of repeated oil
boom-and-bust cycles, the number of wells drilled annually fluctuates
wildly—between 40,000 and 80,000 per year since 1980. About half of these
wells are drilled in
Production and Decline
The well production rate is reservoir pressure driving fluids into the well and permeability dictating how fast the well can produce the fluid. Because fluid converges from a large drainage area into a well, the condition of the near-well zone becomes crucial. The permeability of this zone is frequently damaged during drilling and well construction limiting production from the well. Hydraulic fracturing—injecting highly pressurized fluids at a very high rate to create a crack in the reservoir propping fractures open with millions of pounds of clean, uniform sand, results in a permeability that is larger than the surrounding reservoir. All production becomes self-defeating as time advances as underground fluid withdrawal brings decline in the reservoir pressure and “empties” the well. A fully developed field will reach a maximum output level marking the beginning of reservoir maturity or “old age”, and then begin its varying rate of decline. In the oil field means any or all of three things: reservoir pressure depletion, the existence of a much larger water fraction in the production, and production from lower-permeability reservoirs. In all cases, maturity is marked by lower petroleum production rates and higher lifting costs per barrel of oil produced. The life of each reservoir and even entire petroleum provinces is predictable, from young and prolific to old and difficult.
Chapter 3~Red, White & Blue
American Red, White and Blue is the color of oil. With roots in northwest Pennsylvania in the 1860's, returning Civil War soldiers the original oilfield workers, to today, with Texans and Okies scattered all around the globe, their “can do” attitude practiced under particularly hostile conditions, no other industry better exemplifies certain traits that define the American character.
A proclamation made in 1943 by U.S. Interior Secretary
Harlod Ikes, implying that the
In 1943, the
The implications could have been enormous:
As it happened, while not owning reserves directly, the
It was only 80 years earlier that the creative psychology and dynamics of the post-Civil war industrial boom gave rise to a man named Rockefeller.
His huge imprint on Exxon and the modern U.S. Corporation is manifest by contemporary business concepts such as standardization, distribution, vertical integration, research and technology, waste minimization, and even corporate public relations. Way beyond oil, Rockefeller created American-style capitalism.
By mid-1863, 20 refineries were operating in the
Within a year, refining had replaced produce as the most profitable part of the business.
Thus, Rockefeller, at age 25, certain that petroleum was and
would be the basis of an enduring economic revolution, gained control of
Cleveland's largest refinery. Bolstered by the
In early 1872, Standard Oil's market share was 25 percent and Rockefeller felt he could easily collect up the rest.
At age 38, in 1877, Rockefeller controlled 90 percent of the
oil refined in the
Few realize that the Standard Oil Trust was not established until 1882, five years after his dominance was established.
By the end of the decade, Standard's stranglehold on world
It wasn't until almost 10 years into his retirement that Ida Tarbell used the emerging mass communication media to incite public sentiment against Rockefeller. Rockefeller became somewhat of a master of public relations, and eventually won considerable favor with the public. But much of the damage had already been done; the government had already seized on the public sentiment and the antitrust wheels were set irreversibly into motion. Among the many industrial trusts of the day, Standard Oil was ultimately singled out by President Theodore Roosevelt as emblematic of the dark side of trusts.
On November 18, 1906 the federal government filed suit against Standard Oil under the previously toothless Sherman Antitrust Act (1890), naming as defendants: Standard Oil, 65 subsidiary companies and a host of Standard executives, starting with John D. Rockefeller. They were charged with monopolizing the oil industry and restraining trade by use of railroad rebates, abuse of their pipeline monopoly, predatory pricing, industrial espionage, and secret ownership of ostensible competitors. The suit called for dissolving the trust, breaking it up into its component companies. The final judgment was handed down on May 15, 1911 by Supreme Court Chief Justice Edward White.
Standard Oil was given six months to spin off its subsidiaries.
It is ironic that by the time the verdict was handed down,
The breakup did have the enduring effect of strengthening
the government's hand, providing a necessary balance in dealing with the
The Modern Manifestations
The modern recombination of Exxon has conjured images of the
old Standard Oil, but the comparison is simply not credible. Together Exxon and
Mobil today would hold less than 15 percent share of
The Debate for the World
The role that petroleum plays in promoting personal and national wealth puts it squarely at the center of great sociopolitical issues.
Standard Oil became both the symbol and the real standard-bearer of a political and social system, ideologically contrasted to the doctrines of fairness of other systems, such as communism and socialism, nurtured primarily among European intellectual elites.
Although communism and similar systems have clearly failed in their applications, and while free enterprise has clearly prevailed, i.e. "we won," the sentiments that carried their debate still linger today and may re-emerge. Almost all petroleum exporting countries are unraveling.
Large petroleum companies, "Big Oil," the descendents of Standard Oil (which after modern mega-mergers is just Exxon) and the two other post-colonial companies, Shell and BP, are now, and will certainly be in the future, in the center of not just the production and retailing of petroleum, but also in the political events spawned by it.
The frustration felt by some politicians and the educated elites of petroleum producing countries is plainly seen.
Here is where the dark side of Big Oil becomes woven with its bright side. Technology, market savvy and management are their forte.
Red is the color of oil—as red as the blood of the millions who died in two great world wars and many other conflicts in this century. Access to oil was central to the causes and prosecution of the wars.
If there is one thing that characterizes the modern era it is the wide separation from public pronouncements in the media and what is really happening.
Governments have mastered the art of public deception, found in its most unabashed admission by Josef Goebbels, Hitler’s Minister of Propaganda “a lie, often repeated, becomes reality.” The trouble is that often those who make the public pronouncements also come to believe their own created reality.
Natural Resources, Oil and War
The search of natural resources and the coveting or defending of wealth is the clear connection that has most often precipitated war. In the twentieth century, oil has led to world domination which brought about ideological and international supremacy. The search for oil during a shortage precipitated war.
Chaos, capriciousness, a disdain for the Empire’s non-Russian nationalities, and contempt for its own peasants characterized the rule of Czar Nicholas II. The entire country was sinking into desperation. Petroleum production, and the “sellout” to foreign capitalists (the Rothschilds’ Jewish-ness was always in the background) became the lightning rod for labor unrest and the underground proletariat movement.
One of the main labor agitators in
At the same time, the managing
director of Royal Dutch, Henri Deterding, won over Marcus Samuel’s Shell
trading company in
The triumphs of Royal
Dutch/Shell—a group masterminded by a Dutchman, resident of
In 1911, Winston Churchill, became
convinced: a petroleum-powered navy provided better flexibility, strength and
speed than coal. The challenger was
World War I
A war that everybody expected, but no one predicted to last as long as it did, broke out in 1914.
World War I became a watershed event in human history; in the course of the war, the internal combustion engine, using petroleum exclusively, was pitted against horses and men. There was no contest.
Before the end of the war, armored vehicles provided a devastating punch and aircraft brought in a new and formidable dimension.
The petroleum-driven war also
destroyed a social upper class and replaced it with a lower class, while in
New petroleum-run technological
advances were constantly emerging. War entry by the petroleum-rich
The war was won establishing first the
The Period between the Great Wars
If the importance of resources and oil brought about victory and Anglo-Saxon supremacy in World War I, it became clear in the period between the wars that any allusions by other nations to compete would require access to economic resources, primary among which was oil.
In 1932, Standard Oil of California
struck oil in
Petroleum supplies from the Arabian
World War II
In their ideology of supremacy,
Hitler, who ascended to power in 1933,
viewed the situation in this way: The German population was too small and the
Much later, in June 1941, two days
before the invasion of
Following the ascension of Hirohito to
the Imperial throne in 1926, expansion of the Japanese Empire accelerated,
Heralding things to come, the level of
atrocities perpetrated by the Japanese military on the local population was at
par with the most murderous actions by Hitler’s Special Task Forces in
Coveting the oil of
By July 1941,
President Roosevelt came to the conclusion that the only way out of the difficulties of the world was to cut off supplies to the aggressor nations “particularly... to their supply of fuel to carry on the war.”
Roosevelt, still hoping to avoid war, did not impose a
complete oil embargo on
On June 22, 1941, German forces invaded the
In December 1941, just as
Facing a seemingly impenetrable front
In Asia, the entire Japanese foray
The American naval campaign took over from that point. A war, first of attrition and then growing in intensity, targeted oil tankers in particular.
By early 1944, the sinking of oil
tankers outpaced their construction, and oil imports to
The atomic bombs dropped in
The Post-War Period
World War I was won by the Anglo-Saxon powers because they
had anticipated the need for petroleum and assured their supplies to
successfully prosecute their campaigns. World War II was a reaction by
A Remarkably Transparent Crisis
Access to petroleum and unhindered movement of the commodity
are crucial elements to both the welfare of the
The message was unmistakable. Disturbing or threatening to disturb petroleum supplies and trading would not be tolerated.
The stewardship of petroleum, as
perhaps the most vital commodity in the world economy today, has brought about
both power and responsibility for the
Chapter 5~Primary Colors
Money, technology and people are the primary colors—or elements—of this industry.
The strength of the oil industry is not research or
technology development per se; it is that people innovate on the basis of
technological advances. International petroleum professionals live and work
there, helping to produce a commodity that is vital and a credible source of
income for the developed world. Oil people are not merely inconvenienced and
harassed, but have been kidnapped, and in some cases, murdered. Countries like
The petroleum industry and petroleum producing countries have the money, or at least they have very large incomes becoming some of the world’s most successful enterprises, earning many times the amount they would have without petroleum.
The magnitude of investment can be gauged with what we have called the activation or reactivation index. This is a measure of the total investment required to establish access to new oil, expressed in dollars per barrel per day of stabilized production.
In almost all petroleum-exporting countries, although the
reservoirs are prolific, local culture and deficient infrastructures result in
high costs of $3,500 per barrel of oil per day in
Attracting investment money requires the presence of oil (reserves), prolific reservoirs capable of delivering large production rates, and low activation costs. Large amounts of money have always flowed freely in the oil industry, with groups of investment banks routinely lending $300 million to $500 million and more for projects around the world.
The amount of money that the oil industry moves and invests is exceptionally large, but there is a thunderous, almost arrogant, subtlety about the situation.
In this era of political correctness, companies are much more likely to tout their “social spending” of a few hundred-thousand-dollar contributions to the opera and the theater, other civic causes, or the ubiquitous environmental and safety issues but the $1 billion his or another company invests in a deepwater platform in the Gulf of Mexico, implying a several-fold impact on the local economy, warrants barely a mention on the business page.
Certainly, oil is money, and money is a requisite for success in the petroleum business, but money alone is not enough.
Technology is neither a tangible possession nor a static state. Many unique features distinguish the technology of the petroleum industry. First, there is little doubt that technology is crucial, and that deployment and integration of technology is essential to the industry’s success. Yet, this technology is highly diversified and applied to industry segments with different needs.
Seismic exploration and processing, enhanced oil recovery and the construction of deepwater production facilities have little in common yet the petroleum industry is the industry with the smallest R&D spending. New technologies necessary for the mature fields are not cost-competitive in the prevailing market. National oil companies have long implied that technology is vital.
What should not create any confusion, but unfortunately
does, from soccer moms all the way to the
Technology that provides access to them is dominant over any
exploitation technologies for mature fields. The option is deep water, first in
the Gulf of Mexico, with estimated holds of 46 billion barrels of
“technically recoverable” oil reserves, then in
In the last half of the 20th century, the world focused so much on technology that many equated technology with value. However, it is technology momentum that creates value and the need for people with certain unique qualities.
The disparity in the technology momentum of various
countries—so prominent in the petroleum industry—is not an
educational issue. The bulk of key positions in the
People from the same countries who are trained and
acculturated by major transnational corporations do considerably better.
Schlumberger hires hundreds of new people each year, about two-thirds of them
from some 80 countries outside the
Chapter 6~The Color of the Rainbow
The petroleum industry is the largest business in the world forming a huge rainbow-colored blend of cultures, on both national and corporate levels as producers, consumers and purveyors of technology.
Until the late 1950s, half the cumulative oil in the history
of the business had been produced and consumed in the
The movement became the stimulus for new technology, major
diversification of exploration and production outside the prolific areas of the
Middle East and
Difficult areas such as the North Slope of Alaska, the North Sea and the southern tip of Argentina were no longer considered frontier petroleum provinces and continental United States oil fields were maturing with a good well in Texas potentially produced 20 barrels of oil per day (“bbl/d “) and 500 barrels of water compared to a Algeria or Iraq well producing 2,000 to 4,000 bbl/d and virtually no water.
The identities of the major producing and exporting
countries haven’t changed much during the past 20 years.
The 1990s collapse of the Iron Curtain revealed gross
petroleum production practices, abominable disregard of even rudimentary
environmental concerns (e.g., 10 percent or more of pipeline oil leaking off en
route), and sustained economic crisis of Russia caused an almost immediate
implosion of production levels, by as much as 35 percent.
The Energy Wealth and Poverty of Nations
Economist and Historians study the wealth and poverty of nations and the causes of the rise and fall of empires. Industrialization is analyzed as the key variable linked to wealth. In an ongoing 40-year process, industries have fled the rich countries passing from the developed countries to the developing world. While energy consumption clearly indicates wealth, holding the technology assets is probably far more critical than hosting the industry itself and could lead Nations and major powers to go to war for energy resources in the future as they have in the past.
Petroleum Production and Technology in the Cultural Context
The cumbersome physics, the economic dimensions, and the social and cultural implications of petroleum exploration and production technology are industry exclusive. Technology and technology management create a formidable economic challenge affected by cultural propensity. The petroleum industry is technology-intensive, and its operations will surely require more highly advanced technologies in the future; the question is one of timing oil field maturing and the emerging of a few highly consolidated service companies that offer services and technologies in areas that were traditionally exclusive to producing companies.
The Cultures of Petroleum Producing Countries
Who, Then, Does the Work?
Often non-elite locals work at pitifully low salaries in
more populous countries. Elsewhere, people are imported for service from other
nations such as
Service companies often lack the necessary supervision and technical cooperation between local management and the knowledgeable technical force potentially yielding inconsistent and substandard quality. Critical jobs are often done by the British or even Texans.
Emergence of Local Services
The service industry stewards much of petroleum technology and does the real work, making it emblematic of the national struggle for autonomy. Nationals are enthusiastic about the potential for developing local capabilities and having local services profit.
Local service companies viable in an area of technology reduce costs by 30 to 60 percent. At 30 percent reduction, the international service companies co-exist but at a 60 percent reduction are not necessary. The emergence of a local service economy can be expressed as a function of cultural predisposition and technology accessibility. Cultural predisposition is a broad measure of the competitiveness, cultural beliefs and values that dictate a country’s capacity to interact in global commerce, and optimize operations.
Technology accessibility is a measure of the region’s access to petroleum technology, operational expertise, and legal and financial infrastructures. An emerging local service economy might better serve its region by offering the strongest local technology proficiencies such as tubular supply, acidizing or cementing instead of the logistically complex services of propped fracturing or advanced wireline services. Local service companies should incorporate national and current business interests along with new players to succeed.
The Costs of Culture
Although culture is difficult to change, national behavioral modification is possible if a company, or even a government, recognizes the region’s economic and social hardships and maintains staying power, long-term stamina and discipline to effect beneficial change. The risks and responsibilities for the petroleum producing countries are great, but the potential rewards for the petroleum business and the entire national agenda are even greater.
Oil was changed from some of its more constructive colors to a tawdry yellow as a chasm between Big Oil and Big Government developed in the 1990s. Big Oil was contrasted with Big Government, while the computer, aerospace and biomedicine industries were major government benefactors and collaborators.
The implicit role of government is to safeguard democracy and human rights, to defend national sovereignty and to uphold the rule of law. This is supposed to define social and economic interaction. Government attempts to stringently regulate human and economic behavior have almost invariably backfired, in certain cases, with catastrophic results.
Regulations, unless imposed as part of a well-thought-out, long-term national policy, stifle the activities of rugged individualists and capitalists thwarting competition and entrepreneurialism, two of the most important elements of economic success.
History of Intervention: The World War I Era
The dust had barely settled from the 1911 breakup of Standard Oil when the petroleum industry was called to perform its patriotic duty during World War I.
Private industry was initially fearful of government
control, but when the government effectively suspended antitrust laws and
liberalized certain provisions of the federal tax code, the industry
enthusiastically cooperated with efforts to create what amounted to a
Nonetheless, the post-World War I period was a good time to
be in the oil business in
As always, a bust followed the boom. The bust of the late
1920s and 1930s was unprecedented in severity. Obvious problems caused by
the collapse of the
This led to extraordinary actions by the respective state
governments—actions that would be incomprehensible today—to limit
the amount of production to only what the current market demanded. Major oil
producers embraced the changes but many independent producers had a different
view and diverted their entrepreneurial ingenuity to circumventing the law.
Frustrated by the ineffectiveness of proration enforcement, Oklahoma Governor
William "Alfalfa Bill"
These actions brought a temporary, if artificial, stability to the market. Private entities such as the Texas Petroleum Council and the Texas Bankers Association became quasi-governmental agencies for restricting the purchase and transport of hot oil.
While the major petroleum companies were busy cooperating
with local, state and federal governments to produce workable market-demand
proration, independent producers blamed low-cost oil imports for the industry’s
price woes, rather than unrestrained domestic production. This was rather
creative, since, at that time, the
The major producers, who had invested in foreign production and downstream assets, were long-time opponents of a tariff on crude oil imports but recognized that the tariff was politically necessary for appeasing the independents, and economically necessary for insulating the domestic market so that market-demand pro-ration could work. Agitation by the independent producers before a revenue-hungry Congress was enough to push through a tariff of 21 cents per barrel, roughly 25 percent of the oil-import price.
By 1936, additional legislation and private enforcement had reduced the hot oilers to minor players, and the crude oil market was finally stabilized. Partial state regulation had turned into statewide control, which would turn into federal interstate control.
The natural gas industry had been split into three parts by 19th century legislation: production, long-distance transmission and local distribution. The passage of the Natural Gas Act of 1938 was a triumph for distribution and transmission lobbyists. In 1954, the Supreme Court extended the act to include the production of gas sold into interstate markets.
The wellhead price of gas sold in the interstate market would be set by government fiat for the next 32 years, resulting in the natural gas shortages of the 1970s. Producers mounted a concerted effort to neutralize wellhead regulation, but congressional action met with sustained vetoes from both Presidents Harry Truman and Dwight Eisenhower.
It is difficult to find a clearer example of intervention breeding more intervention.
MOIP and OPEC
In spite of objections from the majors, industry
independents were able to push through one more favorable
intervention—the protectionist Mandatory Oil Import Program of 1959
(MOIP), which limited crude imports to 9 percent of domestic demand and created
import limits for crude products. National security was the apparent
justification for the MOIP, so overland imports from
1970s: The Nixon-Carter Era
The industry felt the first signs of government hostility in 1969 with the reduction of the depletion allowance—that percentage of mineral production exempted from federal income tax. The mood in Congress was decidedly against the industry. In 1970, a Democratic Congress enacted, and President Richard Nixon signed the Economic Stabilization Act, which granted the president the authority to impose comprehensive wage, price and rent controls.
The petroleum industry initially supported the measure as a means of combating inflation from domestic supply not keeping up with demand. Nixon abolished import quotas in 1973 to satisfy domestic demand and in 1974 price deregulation was implemented industry by industry to alleviate the shortages.
The oil industry was the exception. Import crude oil
prices that exploded after the 1973 Arab Oil Embargo were the justification for
leaving oil-price controls in effect, even while oil industry suppliers,
along with the rest of the
Decades of political favoritism were coming home to roost. The public and most of Congress ranked the industry somewhere between common crooks and white-collar criminals. Price controls had the effect of suppressing supply just as national demand was being stimulated. The combination was a godsend for OPEC.
Domestic production continued to slide, and the door
for OPEC imports opened wider. The
The domestic petroleum industry languished until the 1979
Iranian Revolution removed Iranian crude from the world market. This
second energy crisis prompted yet another political response from the
White House. Oil prices were decontrolled, and the resulting windfall was
captured for the American people by the Windfall Profits Tax (first
proposed by Nixon). The
Things were relatively quiet on the natural gas front in the late-1970s. However, gas price controls certainly exacerbated the oil crisis as gas became less available and prone to spot outages. Industrial and utility gas users with fuel-switching capability tended to opt for fuel oil at precisely the worst time for domestic producers (and the best time for OPEC).
The Carter administration reneged on a campaign promise to deregulate natural gas by enacting the Power Plant and Industrial Fuels Use Act and the Natural Gas Policy Act (NGPA) in 1978. The NGPA instituted incremental pricing that required industrial gas users to subsidize residential users; introduced a multitude of gas categories, each with its own price ceiling; and extended regulation into the intrastate market. In 1978, NGPA price ceilings ranged from $1.83 per barrel of oil equivalent to $12.33 per barrel of oil equivalent, all for the same commodity.
1980s: The Reagan Era
President Ronald Reagan terminated crude oil price controls
eight days after taking office in 1981. By 1984, oil imports declined 50
percent from their peak under price controls. Falling oil import
requirements in the
Between November 1985 and February 1986, world crude prices
fell from $32 per barrel to $10 per barrel as OPEC members, most notably
1990s: The Non-Interventionist Stance
The Reagan era put a neat bookend on the oil industry's
government regulatory interventionist story. Since then, the sustained success
and real and perceived largess of the industry has justified an almost
hands-off approach. Reagan's successors, often in spite of their public
pronouncements, have realized that cheap and abundant energy is the cornerstone
of a vital economy, a clear rationalization for a diverse set of events,
ranging from the
The NGPA was phased out between 1989 and 1992 and replaced by wellhead price deregulation and a federal mandate to convert gas transmission companies into common carriers. The price of natural gas was allowed to seek its free-market level for the first time since 1954. Industrial users have returned in force as natural gas consumers, as well they should. Gas is a naturally preferred fuel because of its superior environmental characteristics and large domestic supply.
Government in the New Millennium
The outlook for oil and energy at the turn of the millennium
is promising. Regulation of
Government should be a facilitator, creating infrastructure and preserving a level playing field while avoiding legislation that encourages irrational or unlawful behavior by the private sector. Government investments in infrastructure do not interfere with or affect the interests of private industry, and this is good. Although government infrastructure investments have paid handsome dividends in the computer, aerospace and biotechnology industries, government has failed the petroleum industry. The U.S. government must abandon its currently negative predisposition toward the oil industry—focusing primarily on antitrust and environmental issues—and embrace oil and gas as the ubiquitous driver it is for the economic and environmental well-being of the United States and the world in the next century.
Chapter 8~New Green
New Green, the color of oil as modern-day environmentalism stands tall among the elitist community, multibillionaires and movie stars in the industrialized world, must be distinguished from environmentalism of the stewardship variety.
The Arctic National Wildlife Refuge (ANWR) is wide-open, desolate and a barren tundra. There are no forests. There are no deer, only caribou in massive herds, not peacefully grazing in isolation. There are certainly no hills for a waterfall to cascade. Short of oilfield development, there would be no way for a photographer, an environmentalist or anyone’s grandchildren to visit ANWR, and outside of oil exploration, there is no reason to go there. Lost completely is the fact that a typical 2,000-megawatt power plant would need to be replaced by 20,000 windmills of the typical 100-kilowatt capacity, not three. For this imagery to have any semblance of accuracy, the entire landscape (before the camera zooms in on the power plant) would need to be covered with windmills. Environmentalism, couched in difficult-to-combat superficial imagery, has taken a sinister turn in a highly-publicized, gross disregard for the impact that the energy industry has on the world economy. Using moralistic, yet blatantly dishonest slogans and pseudo-science, the environmental movement has digressed dangerously.
of the most fundamental truths rarely surfaces from the movement: there
is no credible alternative to hydrocarbons in either the near or distant foreseeable
future. There is little question that industrialization has brought
about visible changes on the planet, especially in comparison to the primitive
human state. Until a few decades ago, these changes—mostly technological,
but at times, aesthetic—were the source of pride. The romantic-notion of
an agrarian civilization in balance with nature found in modern
environmentalism is an irrational ideology opposed to all industries and
industrial development. Today’s movement is a political expression by privileged
people in search of a self-fulfilling cause, or a campaign by anti-capitalist
zealots who hate the energy industry. Environmentalism is an issue that simply
cannot have an antagonist. For others, the environment is the rallying cry
against capitalism and free enterprise. The devastating consequences to the
world economy are not their concern. For the petroleum industry, whose main
purpose is the production of hydrocarbons, the potential for a spill or venting
to the atmosphere has always been a cause for concern and has brought fear of
real costs and public relations problems. Anticipation of problems, real or
imagined, has affected both the industry and public opinion. Offshore
largely unnoticed period of silence reigned in the global warming debate from
mid-1998 through 1999. Between the two Earth Summits of 1992 and 1997, there
was a swarm of publications on the greenhouse effect and global warming. The
whirlwind of activity culminated in perhaps the largest convocation of
environmental ideologues in
Will an obvious setback in the global warming rhetoric tone down the environmental movement? Facts have never really been important in zealotry. A major United Nations environmental report that was released in September 1999 hints at the answer and claims that “new dimensions have been added,” and describes other environmental catastrophes that are in the making: a global nitrogen problem, forest fires, and increased frequency and severity of natural disasters. The latter certainly has no industrial or human cause.
Beyond the nuisance factor, environmentalist slogans and activities pose no real long-term danger to the petroleum industry. No multimillionaire environmentalist can truly live through an energy shortage, nor can any politician survive a self-imposed energy crisis. Petroleum is the lifeblood of current and emerging world economies. Its use can and likely will grow, both in developed and developing nations, in an environmentally prudent fashion. The problem is one of public perception, which can take a perfectly logical course of action and turn it inside out. It is not likely that anyone is going to correct the campaign of global warming and other misinformation promulgated by the environmental ideologues. Their missteps of the 1990s are likely to be translated into political power at the turn of the millennium because pseudo-science and deceit have become mainstays of the environmental debate.
Energy is the crowned king and oil is now the color purple.
Energy use is so vital to the well-being and quality of life that "Wealth through Energy" should be the mantra of the world.
This is the reality, but the sociopolitical dimensions of energy, especially new energy sources, are far more complex. While the world is now more optimistic than ever in facing the future, there are still many voices of discontent and dissonance.
Energy, especially oil and gas, brings out all those emotions and even more because, even presumably knowledgeable people believe that our reliance on depleting resources will render us unfit when they run out.
The world’s top priority and most populist and humane vision for the next millennium should be to secure energy sources indefinitely, abundantly and cheaply.
Where Are We Now and Where Are We Going?
At the end of one millennium, whose last century both shaped and was shaped by energy, and at the beginning of a new one, energy consumption is lopsided among nations.
It is essential to understand the makeup and future of today’s hydro carbon and non-hydrocarbon energy sources.
The conventional forecast: total world energy demand will increase by 2.1% per year, reaching 612 quads or about 300 million MBOE per day. Oil demand, presumed to increase by 1.8% per year will reduce its share slightly from almost 40% in 2000 to about 37% in 2020. Gas use, on the other hand, is expected to increase by 3.3% per year and, therefore its share will escalate from about 22% to 29% during the same period.
This forecast misses the huge potential of gas.
It Will Not Be Easy And It Will Cost
Over the next decades, producing oil at the pace that the world is demanding is not going to be easy and come at no cost, by just “opening the taps”.
Starting just at the beginning of the new millennium, the world petroleum demand is right at 75 million barrels per day (bpd) and, over the last decade it has been increasing at about 2% per year. The US Department of Energy has used a “reference case” that assumes a 2.1% annual increase in total energy demand over the next 20 years and 1.8% increase in oil demand. With this trend, the daily consumption should be 90 million bpd in 2010.
At the same time, existing production declines at about 10% per year. Activation (or, re-activation) must cover both the shortfall and the increased demand. Thus, the cumulative amount of new oil production that must be added over the next decade is almost 100 million bpd but with increasing annual rates, such as 9.5 million bpd at the fifth year and 10.4 million bpd at the tenth year.
Keeping up with easily predictable demand over the next decade becomes a $425 billion exercise; it is more than a trillion dollars over the next twenty years.
It Will Be Even More Difficult Later (But Do Not Despair)
Flawed supply and demand predictions have induced public bewilderment, distrust and, more important, government inaction or poorly conceived reactions. The world running out of oil has been an ongoing theme from the very infancy of the industry at the turn of the 19th century.
Aggravating the case for petroleum further is the invisibility of the resource and its highly capricious distribution, its actual magnitude even when discovered and the recovery factor assigned to it.
A first attempt can be made to understand the situation by examining cumulative production of oil and gas thus far in the entire history of petroleum.
How sustainable are current oil consumption trends? Assuming today’s 75 million barrel per day consumption (27 billion barrels per year) at 1.8% annual increase would require an additional cumulative recovery of 7500 billion barrels of oil by the end of the 21st century, or 2.5 times current reasonable estimates of ultimate recovery.
However, our scenario of massive transition to natural gas by the year 2020, the projected additional cumulative oil consumption by then will not be 650 billion barrels (as suggested by the IEA estimates) but only 300 billion barrels. More important is that the daily consumption will not be 107 million barrels but will drop to about 55 million barrels, lower than today’s consumption.
We predict that oil will not run out on us for the next three centuries, at least.
The total longevity of natural gas is difficult to estimate because it can itself be produced from coal. But we can readily estimate that gas will certainly be the primary fuel and, in turn, the main source of hydrogen well into the 22nd century.
Beyond Natural Hydrocarbons
Even with abundant gas, though, the long-term future of energy simply cannot be left to natural hydrocarbons. However, hydrocarbons can cushion transitions by providing very robust interim solutions and by paving the way to the hydrogen economy.
A few resources, currently not in widespread use can be readily envisioned for the not too distant future. We have already advocated a marked increase in deep offshore petroleum activity and we have explained the rationale. Another obvious foray will be for natural gas hydrates which exist in massive quantities in arctic reservoirs and offshore. Re-exploitation of known petroleum resources with enhanced oil recovery techniques will increase reservoir recovery substantially. Coal gasification and coal liquefaction are processes with known and proven operation. Shifts in economic conditions and managing their applications can render all of these as conventional and not exotic resources.
We can never see a substantial future for solar, wind and the so-called renewable energies. They may evoke all sorts of emotional responses but their ability to pick up a sizeable portion of future energy is limited.
We see two potential energy sources for the future: nuclear fission and fusion for stationary energy.
From Vision to Implementation
Of course, all visions, far-reaching and rational as they may be, may find implementation more difficult.
The world is run by government fiat, it is not likely that
The winter peak will become larger, but the summer negative
peak will go away and may even become positive. Air conditioning demand has its
own peak. Gas storage adds both a mitigating and potentially destabilizing
element. Gas shortages will be almost inevitable during these years of
transition and will cause power shortages. Brownouts are not just likely; they
are certain. And because the
Transformation of the Business
The information revolution is transforming the petroleum industry. The global reach that is entailed by the most advanced and newest information technologies fits very well with the eminently global petroleum business.
An industry that has been committed to free trade throughout its history should be expected to eagerly embrace the new mechanisms that break down barriers—be they economic, cultural or political.
We are bullish on the energy industry and incurably optimistic on its future and the future of the world.
If there is one thing that we would like to accomplish with this book is to educate people on the topic of energy and its impact. Often, it is astounding how energy-illiterate people are, many thinking that electricity is a form of energy, instead of a form of power, and others believing that wood burning accounts for 30% of the world energy mix when, in fact, it may be less than one tenth of one percent.
Energy and its appropriate deployment is the most critical of all wealth-generating activities and it is the most important modern indicator of the wealth and poverty of nations. Society and energy will merge in an unbreakable bond for the entire future of humankind.
Abundant and cheap energy should always be the goal: Wealth through Energy.
Governments, while they should stay out of the petroleum business, should enable its future by funding critical long-term research on future technologies. In view of the significant time lag between R&D and implementation this is an appropriate role of government.
Maintaining a rich energy future will be challenging, it will require the best management and technology man can master, will demand constant attention to cost but will have enormous and gratifying benefits.
On September 11, 2001 the color of oil became grey. The
two-decades built optimism that engulfed the
The cauldron of Arab and Islamic discontent never hit so hard and close with such diabolical efficiency and mystifying stealth. Diverse ends of the political spectrum could not believe the obvious.
For the previous 50 years the international commercial aviation was based on a simple principle. Sane people do not commit suicide with explosives in their suitcases. More to the point the notion of the teenaged, disenfranchised, poverty-stricken suicide types in many cultures did not fit the middle-class, university-graduate, in their thirties-with-families hijackers.
The Evolution of
Much of the situation today is more a case of a cultural conflict between the West and Islamic nations, whose culture does not adjust and absorb to modernity. Religion becomes a catch-all, rejecting what could not be assimilated and promoting the goodness of the differences justifying the status quo.
European colonialism, explicitly the result of cultural and economic imperialism is one of the roots of the problems today.
An agreement between
While it is easy now to be a revisionist or re-interpreter
of the history of those events, at that time, among Europeans and Americans,
the idea that super-powers
The Israeli presence has also been a very convenient reason to explain away Arab and Moslem failures.
How could a country of three million people, the Moslem
logic goes, keep it’s own against hundreds of millions of Arabs? The West
must be behind everything. It could not be Israeli air force pilots that
totally destroyed the air forces of both
In the name of the struggle against the West and its proxy,
The Vacuum and the Emergence of Militant Islam
The most frequently asked question in the
When Gamal Abdel Nasser consolidated power in
At the time, practically every Arab and Moslem country desperately wanted to join the modern world. But all failed.
Mix in poverty-driven civil unrest, lack of jobs and a huge “youth bulge” and there is a recipe for disaster. More than half of Arab countries’ population is under the age of 25. History has demonstrated repeatedly that a huge increase of restless young men in any country leads to social upheaval.
The modern Islamic fundamentalist movement started in 1954
All hell broke loose when in 1979 Ayatollah Ruhollah
Khomeini toppled the Shah of Iran and brought about a sudden and very decisive
Mosques throughout the region became places for militant politics to be discussed and provided social services, medical assistance, temporary housing and counseling. Where “modern” governments failed, Islam would provide, and where it couldn’t it could blame the authorities and their infidel protectors.
The Saudi royals stayed in power deftly walking a tightrope
that was made easier by oil money. It bought a semblance of stability for years
but dangerous signs are everywhere, the most striking of which is just this:
the per capita income of
Bin Laden’s appeal to the Arab and Moslem masses is perhaps the single-most important element that simply cannot be fathomed by the vast majority of American and European citizens.
The question must then be asked, “can the Saudi royals withstand the public pressure put on them by the Saudi people?” Can they maintain their ability to produce and sell oil?
Energy after September 11, 2001: First, the Jobs Story
A careful study of
Supply of oil in the world today and the foreseeable future
means almost singularly the
Changes will happen naturally and natural gas may become the premier fuel for our economic future. Natural gas supply broadens and diversifies the energy debate. Countries that are also-rans or not even members in OPEC today will gain new prominence. Importing massive quantities of natural gas will create a new era of international energy because gas resources are not necessarily distributed in relation to oil sources. This transition will not come easy as building infrastructure of any kind is painful and will go through major growing pains.
Susceptibility of oil and natural gas infrastructure to terrorist threats
The main effect of terrorism is to generate terror. The
petroleum industry deals with threats and real danger every day, around the
world. A pipeline in
The industry may sustain injury from terrorism, but in not being deterred, it may in fact contribute very positively in winning the war psychology.
The inescapable energy demand
The transition from wood to coal to oil to natural gas is a historical imperative that has little to do with the arguments of shrill environmental ideologues.
Natural gas is promoted by something we call inverse economy of scale. While nuclear and coal require massive plants to reach economy of scale, not many sides can either afford or need the 2000 MW power capacities that such economies require. Natural gas power generation becomes more attractive as the power plants become smaller breeding diversity and efficiency.
In spite of this exciting potential for the future, the West
and especially the
Containment of the
Policy based on domestic US pressures and moral premises and
On March 20, 2003 President George W. Bush announced that he
had ordered the coalition to launch an "attack of opportunity"
against specified targets in
It may be a good thing for the
All of this comes with some potentially wrenching
psychological effects. The ease of Saddam’s demise certainly portents bad
news for the leaders of practically all countries in the Arab and Moslem world.
Instability may become the norm and the
There will be an acute tension between maximizing Iraqi oil production and managing oil prices by adhering to OPEC quotas.
The 1969 Vienna Convention, which the
An Obvious New
What is then left that could shape the future American
policy in the area? Not much outside of oil. This would mean that only five
Oil and natural gas are what the
The first economic policy step by the
Reliance on highly accessible and affordable
About the Author:
ECONOMIDES is a Professor at the Cullen College of Engineering,