CARE - Book Summary

Chapter 1~Green

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.

Nouveau Riche

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 United States and Europe that emerged from the industrial revolution. Nowhere did oil wealth have the impact that it brought on the Arab Peninsula, and nowhere else did money become so synonymous with national identity. Tribal fiefdoms, quickly renamed as countries in vast deserts with indescribable national borders, suddenly found themselves with per capita incomes at the level of Europe’s—with a couple of them surpassing the per capita income of the United States.

“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 Saudi Arabia and Venezuela, almost 3.5 times the costs in the U.S. Gulf of Mexico, to $7,500 per barrel per day in Iraq, to as high as $15,000 per barrel per day in Kuwait. It is constant and real intervention—people, drill bits and rigs—not market or political movements, that sustains production; without this intervention, production in every field in the world will decline. This is the simple physical law at the core of the petroleum business, a law that is poorly understood by most analysts. Without new capacity, global oil production would decline at 6 to 10 percent per year.

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 U.S. economy. Many pundits correctly point to the use of hydrogen and fuel cells for powering the next-generation automobile, but very few recognize or admit that natural gas will be the dominant source of hydrogen. Someone who understands the industry is far more capable of capitalizing on the value of natural gas than any MBA-trained “analyst.” While many are abandoning the oil industry as a dour investment, those who really understand the business are quietly reinvesting. The pump price is now almost inconsequential compared to the cost of car lease payments, insurance, and maintenance, which combined, may be 10 times the cost of the fuel. The wise investor buys for the long-term because energy is the world’s biggest business, and it continues to move, unstoppable, forward.

Chapter 2~Black

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.

Exploration

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 North America, and the other half, in the rest of the world. An array of high-tech tools and instrumentation now makes it possible to take measurements-while-drilling and to track the advance of the drill bit in real time and to guide the drilling process inside a target formation. Once a target formation has been identified and a well drilled, the well’s petroleum potential must be evaluated. If the well holds sufficient potential, it is prepared for production, or “completed.”

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.

America at The Center of The World's Biggest Business

A proclamation made in 1943 by U.S. Interior Secretary Harlod Ikes, implying that the United States, and in particular its government, should secure foreign oil reserves. The most obvious turn would be for the United States to look to the Arabian Peninsula, loosely mandated by Britain since the end of World War I, in particular, one point and place—the Middle East.

In 1943, the U.S. government could have had the largest of all national oil companies.

The implications could have been enormous:

· Had the U.S. government been the controlling authority, instead of Exxon and the rest, Saudi Arabia might not have nationalized its oil industry as it did in 1976;

· In the USA, if Exxon’s eventual role were to be practiced by the U.S. government, the evolution of competing companies would have been dramatically different, both domestically and globally.

As it happened, while not owning reserves directly, the U.S. government still felt a need to be involved; regulations became the proxy. The private U.S. concerns were left to do their negotiating and self-financing to develop the deserts of Saudi Arabia and other far reaches of the globe. This is what defined the American oil business.

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 Cleveland area. At that critical moment, and maybe for the last time in his storied life, Rockefeller did not enjoy any leverage over his competitors. But he would create his advantage quickly. If nineteenth-century nihilist Friedrich Nietzsche argued that the “language of good and evil” was not rooted in truth or reason, but in the “will to power,” it was Rockefeller as a monopolist that embodied the philosophy. He started by imparting in the business his extreme sense of thrift and economizing, not from the office but in the refinery works.

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 Lake Shore deal, Cleveland soon surpassed Pittsburgh as the leading refining center. In 1870, the partnership of Rockefeller, Andrews and Flagler was replaced by a joint-stock company called the Standard Oil Company (Ohio), with John D. Rockefeller as president. At this stage, Standard Oil controlled 10 percent of American oil refining.

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 United States, and by default, the world.

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 and U.S. markets began to erode slightly with the advent of California production, the Nobels and Russian oil, and Marcus Samuel and Shell Transport & Trading in Asia. The first automobiles were introduced—making John D. Rockefeller much wealthier in retirement than when he was working.

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, after Roosevelt was out of office and 20 years into Rockefeller's retirement, the court’s decision was no longer needed. The entire monopoly was made possible by the world's production being conveniently and extendedly confined to one small part of Pennsylvania. With exploding production in Texas, Oklahoma, California, the Middle East, Southeast Asia and Russia, Standard Oil’s dominance was not sustainable.

The breakup did have the enduring effect of strengthening the government's hand, providing a necessary balance in dealing with the massive U.S. industrial and capitalist machine that has lasted until today. The oil business in the United States has never completely recovered in its public image.

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 U.S. petroleum retail sales and less than 4 percent of daily world oil production, trailing national oil companies. The combined oil reserves of Exxon and Mobil are even less, closer to 1 percent of the world oil.

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.

Chapter 4~Red

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.

Britain and the United States benefited from the rapid and disparate economic evolution and inequitable benefits from technological advances. Russia was the first European country to feel the impact of oil development. Two of Europe’s most prominent merchant families, the Rothschilds and the Nobels, won petroleum concessions in Imperial Russia.By 1880, the area around Baku on the Caspian Sea was producing much of European oil and for the next 30 years, the Rothschilds and the Nobels would control Russian production.

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 Baku, Joseph Djugashvili, wrote much later that his effort was to create “unlimited distrust for the oil industrialists.” Eventually, Djugashvili became better known as Joseph Stalin.

At the same time, the managing director of Royal Dutch, Henri Deterding, won over Marcus Samuel’s Shell trading company in London, and Royal Dutch/Shell was born. In 1911 the company, amid the Russian pre-revolutionary fervor, bought out the Nobels and the Rothschilds in Russia and became the petroleum power to be reckoned with in the European continent.

The triumphs of Royal Dutch/Shell—a group masterminded by a Dutchman, resident of Britain, and with large ownership by Marcus Samuel, a British Jew—did not sit well with many Britons and especially Charles Greenway, managing director of Anglo-Persian. His oil company, under the control of Scottish merchants, had drilled for oil in Persia (encompassing today’s Iran and Iraq) and found shows in 1903. In 1909, a huge discovery was proven. Repeatedly, Greenway invoked the national interest and spoke of Royal Dutch/Shell as a “foreign syndicate.”

In 1911, Winston Churchill, became convinced: a petroleum-powered navy provided better flexibility, strength and speed than coal. The challenger was Germany. Conflict between Britain and Germany appeared imminent in 1911, but the precursor to future battles took place in Persia. Lord Gurzon, Viceroy of India had earlier called Persia a piece “on a chessboard upon which is being played out a game for the domination of the world.”

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 Russia an entire social order was violently overthrown by the Bolshevik Revolution. Even in the rest of Europe, the destructive and powerful petroleum-driven, mechanized innovations erased the gold-tassled, horse-mounted, battle-field-picture-perfect aristocratic dandy.

Britain, with no oil of its own, secured access and ownership to Anglo-Persian oil to supply the demand for petroleum which increased exponentially during the war. Battlefield vehicles, unilaterally-converted to petroleum-power, tilted the balance of the war to Britain’s side.

New petroleum-run technological advances were constantly emerging. War entry by the petroleum-rich United States during the last 18 months of the conflict nailed the coffin on petroleum-denied Germany.

The war was won establishing first the Britain then the United States Anglo-Saxon culture, ideals and language as the dominant influence in the world.

The Period between the Great Wars

Germany and Japan in Asia, clearly willing to compete in the world of ideas, culture and economic supremacy, did not accept the order after World War I. The two nations presumed ideological and even racial superiority, and thus with mathematical certainty moved towards World War II to overthrow the Anglo-Saxon victory.

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 Bahrain, signed an agreement with Saud in 1933—all demanded in gold and Arabia entered the petroleum world with a commanding United States occupation.

Petroleum supplies from the Arabian Peninsula and Persia fueled the upcoming Allied war effort, World War II, in Europe and the Middle East and became a decisive factor for victory in the confrontation with Germany and Japan.

World War II

In their ideology of supremacy, Germany and Japan felt clearly that petroleum resources were vital and, even when found in other countries, were theirs by the right of the mighty.

Hitler, who ascended to power in 1933, viewed the situation in this way: The German population was too small and the territory of Germany was too economically limited to guarantee the survival of his racially superior people in the international arena of racial competition. Immediate expansion of territory and on a vast scale was the only solution.

Much later, in June 1941, two days before the invasion of Russia, Hitler was explicit: “What one does not have, but needs, one must conquer.”

Following the ascension of Hirohito to the Imperial throne in 1926, expansion of the Japanese Empire accelerated, first into China and then throughout Asia. In December 1941, the Japanese-held territories covered an area as large as any in history.

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 Eastern Europe and during the Russian invasion.

Coveting the oil of Indonesia, and after the German occupation of the Netherlands in 1940, Japan immediately sent a delegation to Batavia, the capital of East Indies. They were rebuffed; increasing Japan’s self-image as being under siege. The Japanese population was increasingly hateful of the ABCD countries (America, Britain, China and the Dutch) for depriving Japan of such a vital resource.

By July 1941, Japan occupied almost all of Indochina.

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 Japan (in spite of considerable political pressure) until the final escalation of hostilities in July and August 1941, leading to Pearl Harbor.

On June 22, 1941, German forces invaded the Soviet Union. Hitler’s general and specific aims were expressed clearly earlier: “against the Baku oilfields.”

In December 1941, just as Japan was launching its attack on Pearl Harbor, a Russian counteroffensive aided by the relentless winter repelled the German stranglehold on Moscow, which came within a few miles from the city from three sides.

Facing a seemingly impenetrable front spanning the Soviet Union from North to South, Hitler planned a summer offensive in the south expressly to secure oil supplies. In July, 1942, German forces pushed through, and in early August they crossed the Kuban River as an imminent threat to the Caucasus oil fields. On August 9, the German army reached the giant oilfield in Maikop and found that the Soviets had blown up all petroleum facilities and wells. The same day they arrived in Krasnodar; the story was the same there and everywhere else. The Germans never reached Grozny, the center of the Caucasus petroleum production. Baku would not be occupied. Hitler was deprived of his prize and on January 31, 1943, the beginning of the end had just begun for the Germans.

In Asia, the entire Japanese foray into Indonesia and Southeast Asia was for oil. By the time Japan gained complete control of the islands in March 1942, Dutch and American engineers who manned the petroleum production operations and refineries had blown up the facilities, Without a military counter-force, it did not take much time for the Japanese to start petroleum production again and almost all was shipped to Japan.

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 Japan fell to less than 50 percent of their level a year earlier. By early 1945, they stopped completely; Japan was ripe for defeat.

The atomic bombs dropped in Hiroshima and Nagasaki may have precipitated the Japanese surrender, it is the petroleum shortage that brought Japan to its knees.

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 Germany and Japan to the domination by the victors of the previous war. Petroleum has been used as a weapon in winning the Cold War by the United States.

A Remarkably Transparent Crisis

Access to petroleum and unhindered movement of the commodity are crucial elements to both the welfare of the United States and the European Union, and the health of international economy.

Iraq’s invasion of Kuwait and the Gulf War is an example of the length to which the United States will go to safeguard a smooth petroleum economy.

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 United States. This is the century of petroleum, and by implication this is the American Century, Pax Americana.

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 Saudi Arabia, a self-professed devout and highly exclusionary Moslem nation, and Venezuela, with a populist and leftist government, make money, but not enough to be independent of the Western infidels and capitalist. They have entire technology infrastructures built expressly to reduce their dependence on the United States and Western Europe but they lack technology momentum and remain heavily dependent on the West.

Money

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 Saudi Arabia to $7,500 per barrel of oil per day of new production in Iraq. The activation index can also be very high in west Texas, on the order of $10,000. The costs are low, but the area is mature and the most prolific reservoirs have been depleted. Although a well might have been drilled for $500,000 in 1999—inexpensive by world standards—a good production rate would be 50 barrels of oil per day contrasted with the average well producing almost 600 barrels of oil per day in Mexico or 6,000 barrels of oil per day in Saudi Arabia.

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

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 U.S. president, is the role technology can and cannot play in extending domestic petroleum reserves and, especially, production. These concepts are central to our energy self-sufficiency, economy and national security. Finding new reservoirs is the name of the game.

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 Brazil and West Africa. Taking cue from the Alaskan experience, these yet-to-be discovered reservoirs could propel the U.S. production to unseen levels creating a veritable trillion-dollar opportunity for the United States and its petroleum industry.

People

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 Kazakhstan government, for example, are filled with Kazakhs who hold MBAs from prestigious Western universities. And just about every senior technocrat in national oil companies is an engineering graduate of a university in the United States. Yet, this does not adequately fulfill the people requirement. National oil companies without clear-cut economic goals, such as profit, and with political ties to regimes with populist and ideological agendas, are the graveyards of would-be entrepreneurs and potential technological innovators.

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 United States and Europe. After undergoing formal training for two to three years, these workers become quintessentially international. Their rise in the Schlumberger ranks is completely unrelated to their national origin, resulting in an upper management that is astonishingly diverse. Understanding the primary colors of petroleum (money, technology and people) explains a number of things.

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.

Historical Basis

Until the late 1950s, half the cumulative oil in the history of the business had been produced and consumed in the United States. The threat of the politically motivated Arab Oil Embargo caused the first energy crisis of the 1970s and 1980s and high oil prices made many marginal fields attractive. Huge exploration budgets and development costs in difficult locations became bearable to the multinational oil companies.

The movement became the stimulus for new technology, major diversification of exploration and production outside the prolific areas of the Middle East and Venezuela into countries such as Angola, Peru and Papua New Guinea, increased offshore activity, and for commercial production in dozens of countries on all continents including the new European oil powers of Norway and Scotland.

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. Saudi Arabia, the United Arab Emirates, Libya, Algeria, Indonesia, Iran, Iraq, Mexico, Nigeria and Venezuela, still dominate oil movement.

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. China became an oil-importing rather than exporting country in the late1990s, and its 1.2 billion people were postulated to represent the biggest and controlling future market for oil. Recent Asian economic crisis may suggest that the 21^st century market will be American.

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

Saudi Arabia, Algeria, Libya, Indonesia, Iran, Iraq, Nigeria and Venezuela are the world’s largest exporters estimated to control perhaps 80 percent of all oil reserves. Petroleum production is the only business central to the national wealth and poverty of some Middle East societies created with a multitude of castes and classes composed of locals, Arabs, Europeans and a rainbow of servile nationalities.

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 India, China, Egypt and Nigeria, and the Palestinians. These workers may not have the latest technological knowledge, but because they have awful employment alternatives they become part of an environment that neither appreciates their presumed skills nor is willing to offer technological skill advancement.

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.

Chapter 7~Yellow

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 U.S. petroleum cartel. Enthusiasm waned as the Navy sent warships to pressure coastal refineries in demand that war discounts be continued after war activities were suspended.

Nonetheless, the post-World War I period was a good time to be in the oil business in America. An expanding economy, automobiles for the masses, and a rapidly improving highway system all led to a boom time in the oil patch.

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 U.S. economy were compounded by new production from several very prolific reservoirs. Production from the Seminole field, discovered in 1925, followed by the Oklahoma City field in 1929, and especially the gushing East Texas field in 1930, caused the per-barrel price of oil to drop quickly from $3 to $ 1 to 10 cents.

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" Murray issued an executive order to shut down the Oklahoma City and Seminole fields in 1931. Within a few weeks, Texas Governor Ross Sterling, a founder and former chairman of Humble Oil, followed suit in shutting down the East Texas field.

Stability

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 United States was a net exporter of oil, and would remain so until 1948.

Import Duties

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 Canada and Mexico were given preference. A direct and ominous effect of MOIP was the formation of the Organization of Petroleum Exporting Countries (OPEC) in 1960. OPEC was created expressly to counter protectionist legislation in the United States. The implementation of MOIP represented a turning point in the political balance of power in the industry. Major producers now understood that they could not counter the political clout of the independents. From World War I through MOIP, nearly all legislative government interventions were cooperative—in fact, many were suggested or virtually demanded by the oil and gas industry itself.

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 U.S. economy, were price-deregulated. This sent domestic oil production into a free fall.

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.

The U.S. government responded to the oil embargo with a series of faltering measures. The Emergency Petroleum Allocation Act of 1973 was amended by the Energy Policy and Conservation Act of 1975, which in turn was amended by the Energy Conservation and Production Act of 1976. In 1974 and 1975, U.S. domestic crude oil sold for an average price of $7.27 per barrel, while those exporting oil to the United States received $12.51 per barrel. This amounted to a reverse import tariff of 72 percent.

Domestic production continued to slide, and the door for OPEC imports opened wider. The United States had embargoed its own petroleum resources.

President Jimmy Carter brought the premise that the function of the economy could be quantitatively measured and therefore it could also be quantitatively managed. In 1977, Carter proposed the establishment of the Department of Energy (DOE) and the adoption of a comprehensive national energy plan based on scientific econometric models. The main thrusts of the Carter national energy plan were price controls, synthetic fuels and mandatory conservation. The DOE brought overcharging lawsuits against nearly every major oil company, some alleging overcharges of nearly $1 billion. Although the announcement of these suits was frequently front-page news, the eventual dismissal or settlement of the suits rated barely a mention.

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 U.S. economy became more energy-efficient.

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 United States and new oil supplies worldwide created a third energy crisis—this time, one that consumers would find entirely satisfactory.

Between November 1985 and February 1986, world crude prices fell from $32 per barrel to $10 per barrel as OPEC members, most notably Saudi Arabia, scrambled for market share. The cartel's pricing power disintegrated almost overnight. The Windfall Profits Tax, no longer needed in the presence of dramatically declining world crude prices, was terminated. The Synthetic Fuels Corporation and the Strategic Petroleum Reserve (SPR) were bolstered by the Reagan administration, but the remainder of the Ford-Carter energy policy was scrapped. Synthetic fuels proved unattractive in the new, low-cost energy era.

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 U.S. involvement in the Gulf War under President Bush to the unchallenged BP Amoco and ExxonMobil mega-mergers under President Clinton. The government will not intervene on behalf of producers; major producers almost uniformly (and sometimes militantly) support this government stance. The independent producers cry foul; and the consumer is oblivious—more likely to complain about a 10-cent increase in the price of gasoline than a trillion-dollar decision, good or bad, made in Washington, D.C.

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 U.S. oil and gas production is relatively light. World and domestic crude oil prices remain near or below the inflation-adjusted historical average price. Domestic natural gas production and consumption are poised to increase at a healthy pace, displacing some oil imports. Price volatility (taking into account the price crash of 1998) has been declining for several years for both oil and gas.

Future U.S. Energy Policy

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.

One 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 development, in Texas, is something to covet; in California, it is detested. Although the petroleum production environment and its potential problems are manageable, and by and large the industry has done a remarkable job in doing so, nothing compares to the discussion of global warming. The issue is nothing more and nothing less than this: Is the production and use of hydrocarbons, today and in the future, a positive influence on humankind? Or is it, as emphatically stated by U.S. Vice President Al Gore, “the most serious threat that we have ever faced,” and our continued use of hydrocarbons, “an effort to avoid facing the awful, uncomfortable truth.”

Global Warming

A 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 Kyoto, Japan, in 1997. Yet, there was something strange. After an avalanche of publications and announcements leading to Kyoto, practically nothing surfaced in the popular press after mid-1998. There is no scientific “consensus.” The history of science shows that opinions widely held by the scientific community are often overturned by research and observation. Claims of “consensus” in the global warming debate have been one of its most curious (or ominous) features. A formidable and growing set of observations counter the consensus. There are two methods of observing atmospheric temperature change directly: weather balloons and satellites. Satellites, in use since 1979, provide a uniform global picture of the temperature of the lower atmosphere and provide the most accurate picture currently available. Weather balloon data suggest a global cooling trend in the range of -0.02 C to -0.07 C per decade. The raw temperature data collected by satellites suggest a cooling trend of -0.04 C. The much more legitimate process of scientific publications and peer-reviewed work lags well behind the political and populist venues. It does appear that the earth may be warming as part of a 100-year trend (much of this trend predating World War II and the growth of CO2 emissions). What we debate is the highly politicized and pseudo-scientific process that is not even internally consistent.

What’s Next?

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.

The Problem

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.

Chapter 9~Purple

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 United States, with 280 million people (4.6% of the world population of 6 billion) consumes about 25% of all energy, almost 7 times the per capita use of the rest of the world.

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 19^th 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 21^st 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 22^nd 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 U.S. government would pay to increase the capacities for facilities needed for importing liquid natural gas into the country. Shortages are the most convincing impetus for investment. It is no longer speculation but a fact that effectively all electric power plants planned or under construction will be limited only by the capacity of the U.S. turbine manufacturers in the foreseeable future. The result will be profound.

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 U.S. electricity supply is now extensively tied up in so-called “reliability regions,” the power grid is inflexible.

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.

Chapter 10~Grey

On September 11, 2001 the color of oil became grey. The two-decades built optimism that engulfed the United States and much of the rest of the world suddenly took a dour hue, a sinister grey. The royal purple color faded, at least for the foreseeable future.

Wealthy, Saudi Arabia has played a huge role in the fundamentalist Islamic resurgence as the world’s largest producer of petroleum origin of the most imposing oil and gas reserves and almost all of the 19 identified hijackers. Oil, the West’s only real interest in the region, has provided much of the funding for terrorism.

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 the Middle East

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 Britain and France in 1916 accepted the principle of Arab independence. The agreement divided the region into zones of permanent influence.

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 Britain and France would be awarded Protectorates in the Middle East was natural and highly desirable. There was little regard or thought about the public opinions of Arab and Moslem people, the vast majority of which were illiterate. The few Arab intellectuals were themselves products of the colonial system and its view of the world. The newly established League of Nations formally granted the Anglo-French Mandates in 1922. The idea for the establishment of a Jewish state was driven not only by Zionism, an intellectual and political movement that existed for decades, but also European notions of human rights and national self-determination.

Israel’s right to exist has a liberal political motivation, prompted by a sense of European guilt of horrors of the Holocaust.

Israel is a nation with western sensibilities of human rights, democracy and to a large practical extent, a separation of church and state. Israel’s western outlook is also the cause of much of the Islamic rage towards the west, what they see as the modern manifestation of the Crusades, not a refuge of the long-suffering Jews of the Diaspora.

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 Egypt and Syria. It must have been American and British pilots, manning planes with just painted Israeli insignia.

In the name of the struggle against the West and its proxy, Israel, there has not been a single democracy from Morocco to Pakistan and beyond. The struggle becomes a clarion call for those outside of power to claim the religion as a means to cleanse and purify their religious heritage. Political opposition, a hallmark of democracy in the West became treason, punishable by death.

The Vacuum and the Emergence of Militant Islam

The most frequently asked question in the United States and Western Europe after the September 11, 2001 carnage is one word–Why?

When Gamal Abdel Nasser consolidated power in Egypt in the 1950’s his modern themes of self-determination, socialism and Arab unity sparked a fire in the Arab world. Arabs thought that their dreams of independence and self-determination finally were becoming a reality. Nasser came from a very modern background. He was born in Alexandria, under British rule. He spent his youth in the army, the most Westernized section of the society. He wore Western style suits and dark shades. Almost immediately he became “The Lion of Egypt” and unquestionably the most beloved man in the Arab world.

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 when Nasser cracked down on the Muslim Brotherhood, imprisoning more than a 1,000 of its leaders. While imprisoned, one of the leaders, Sayyid Qutub wrote the book that has become the modern political Islamic manifesto, “Signposts on a Road.” Qutub called for a government that was based on strict Islamic principles.

Saudi Arabia: Oil and Islam

All hell broke loose when in 1979 Ayatollah Ruhollah Khomeini toppled the Shah of Iran and brought about a sudden and very decisive re-Islamization of Saudi Arabia.

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.

Saudi Arabia, acutely aware of the movement within tried to appease both sides. It is fair to say that the Saudi royals have had the most difficult act of governance in the world. While they have been allied with the United States they funded madrasas (religious schools), not just in Saudi Arabia but everywhere, from Egypt to Pakistan and Afghanistan and the former Soviet Islamic republics. A central part of the curriculum tells of an America that is the evil empire of sin, where women show their legs and where everyone drinks alcohol, where homosexuality is rampant.

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 Saudi Arabia with a population whose average age is 25 has dropped from a high of $17,000 a decade ago to $7000 today.

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 US employment throughout the OPEC era provides a rather stark conclusion: every period of negative U.S. job growth has been preceded by a major energy supply disruption.

Petroleum Supply

Supply of oil in the world today and the foreseeable future means almost singularly the Middle East. Saudi Arabia is by far the world’s largest exporter of oil with a capacity to increase supply far beyond past levels.

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 Colombia was exploded 107 times in 6 months before they temporarily shut in their giant oilfield in the Llanos Basin. In almost all countries from Venezuela to Algeria to Papua New Guinea to throughout Sub-Saharan Africa petroleum production facilities resemble armed camps with security that surpasses that of real armed camps.

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 United States are still and continue to be highly dependent on Middle East oil.

United States Policy in the Middle East

The United States foreign policy in the Middle East has been formed ever since the end of World War II, when the United States supplanted Britain as the dominant Western power. The policy included three elements:

Containment of the Soviet Union.

Petroleum supply.

Policy based on domestic US pressures and moral premises and affinity towards Israel.

The Last Gulf War

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 Iraq. On April 9 Baghdad fell and by April 15 with pockets of resistance completely eradicated. Hussein and his entire government were decimated or disappeared.

It may be a good thing for the U.S. and Western relations in the Arab street to behave dynamically once in a while. The Arab world understands and generally respects power.

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 United States will have difficulty defending its allies in Egypt, Jordan and the most vital of them all, Saudi Arabia.

Invading Iraq and occupying it proved quite easy. Managing the country afterwards is rife with real and unpalatable public perception problems.

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 United States prominently signed describes that part of Iraqi oil can be used for the occupation's military cost, but the rest of it must be used strictly for the benefit of the Iraqi people and the reconstruction of the country.

Next, the U.S. will face a public relations nightmare as steps are taken to re‑establish and increase Iraqi oil production. This work will be done with heavy involvement by U.S.-based oilfield service companies as these companies are almost exclusively the vendors of petroleum technology worldwide.

An Obvious New Middle East Policy

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 countries, Saudi Arabia, Iran, Iraq, Kuwait and Libya have the potential to affect the American economy. They are also the countries where American strategic interests focus.

Oil and natural gas are what the United States and the developed World want from the area and the multinational oil companies should become the vehicles for any new policy.

The first economic policy step by the United States in the Middle East should be to “encourage” privatization or re-privatization of the oil sector in the five major producing countries. The relationship should be clear from the start, just business. If oil and natural gas production should be done and transported in military style settings, the United States can support lavishly the necessary security.

Reliance on highly accessible and affordable Middle East oil is now, and for the foreseeable future, an irreplaceable element for our economy. There should be no doubt that any military doctrine by the United States clearly must have an uninterrupted flow of Middle East petroleum as a central theme.

About the Author:

MICHAEL J. ECONOMIDES is a Professor at the Cullen College of Engineering, University of Houston, and the Managing Partner of a petroleum engineering and petroleum strategy consulting firm. His interests include petroleum production and petroleum management, a particular emphasis on natural gas, natural gas transportation, LNG, CNG and processing, advances in process design of very complex operations, economics and geopolitics. He is also the Editor-in-Chief of the Energy Tribune (www.energytribune.com). Previously he was the Samuel R. Noble Professor of Petroleum Engineering at Texas A&M University and served as Chief Scientist of the Global Petroleum Research Institute (GPRI). Prior to joining the faculty at Texas A&M University, Professor Economides was the Director of the Institute of Drilling and Production at the Leoben Mining University in Austria. Before that, Dr. Economides worked in a variety of senior technical and managerial positions with a major petroleum services company. Publications include authoring or co-authoring of 11 professional textbooks and books, including The Color of Oil and 200 journal papers and articles. Economides does a wide range of industrial consulting, including major retainers by national oil companies at the country level and by Fortune 500 companies. He has had professional activities in over 70 countries. In addition to his technical interests he has written extensively in wide circulation media in a broad range of issues associated with energy, energy economics and geopolitical issues. He also appears regularly as a guest and expert commentator on national and international television programs.