Petroleum Politics: US v/s OPEC

On January 10, 1901, an enormous geyser of oil exploded from a drilling site at Spindletop Hill in Texas, USA. Reaching a height of more than 150 feet and producing close to 100,000 barrels a day, the “gusher” was more powerful than any previously seen in the world. Oil erupted for nine days before it could be brought under control with the technology of the time. Although, oil was first discovered in America in 1859 by Colonel Drake, known as the father of American Petroleum Industry, the discovery of the Spindletop geyser in 1901 is considered to be the start of modern oil age.
Within a year, more than 1,500 oil companies had been chartered in US, and oil became the dominant fuel of the 20th century.

With the technological breakthroughs of the 20th century, oil emerged as the preferred energy source. The key drivers of that transformation were the electric light bulb and the automobile. Henry Ford started the commercial production of Model “T” automobile in 1908. This was the world’s first inexpensive, mass-produced car.

As oil was first commercially extracted and put to use in the United States; consequently, pricing power for the fuel lay with the United States, which was, at that time, the largest producer of oil in the world. The dominance of the United States during the first half of 20th century is illustrated by the fact that regardless of where oil was produced in the world, its price
was fixed at that of the Gulf of Mexico.

Beginning with World War I, oil became a strategic energy source and a tremendous geopolitical prize. In 1919, however, the U.S. Geological Survey estimated that U.S. oil supplies will run out in ten years, triggering the country’s first oil security fears. Though the United States produced roughly one million barrels of oil per day, or 65 percent of global oil supplies, more than 90 percent was consumed domestically. Following British and French attempts to shut U.S. oil companies out of regions they controlled in the Middle East, the U.S. government began active oil diplomacy in the late 1920s, insisting on an ”open door” policy that would allow all companies to compete for foreign concessions regardless of national origins.

In the 1930s, Gulf Oil, BP, Texaco, and Chevron were involved in concessions that made major discoveries in Kuwait, Saudi Arabia, and Libya. Based on those discoveries, a cartel of seven companies was formed that controlled the world’s oil and gas business for much of the twentieth century. Known as the Seven Sisters, they included: Exxon (originally Standard Oil), Royal Dutch/Shell, BP, Mobil, Texaco, Gulf, and Chevron. Five out of these seven companies were American.

Oil production in America was not able to catch up with the fast pace of industrial development. American reliance on imported oil, which began during the Vietnam war, increased further during the economic boom period of the 1950s and 1960s. Here’s a snapshot of America’s dependence on imported oil since the 1940s:

* in the late 1940s, for the first time, the US began to import oil
* in the 1950s, 10% of US oil consumption was imported
* in the 1960s, 18% of US oil consumption was imported
* in 1973, the share of imports in US oil consumption reached 30%
*By 1977, share of imports in US oil production increased to 50%

America’s dependence on imported oil provided Arab countries and OPEC (which had been formed in 1960 to counter the hegemony of Western oil companies) with increased leverage to influence oil prices. The Seven Sisters controlled much of the oil market till the early part of 1970s. However, the 1973 oil shock swung the pendulum in OPEC's favour. That year, in response to U.S. support for Israel, OPEC and Iran stopped oil supplies to the United States. Further, events like the disintegration of the Soviet Union in 1991 and Asian Economic Crisis in 1997 helped OPEC strengthen its control over oil prices.

OPEC presently holds 40% of the world’s conventional oil reserves and has the world’s lowest barrel production costs. This enables it to have a wide-ranging influence over oil prices. Thus, when there is a glut of oil in the world, OPEC cuts back on its production quotas. When there is less oil, it increases oil prices to maintain stable levels of production.

In the last 3 decades, The Shale Industry in the US has been able to increase production to a major extent, which has reduced US’s dependence on imported oil. Shale oil is generated in Shale rock through processes like Pyrolysis, hydrogenation and thermal dissolution. Extraction of oil from Shale Rock formations, however, is costlier. Shale oil drilling in US picks up only when crude oil prices are expected to sustain above $60 for a long period. The significant fall in crude prices during 2014 to 2017 forced many shale oil producers in US to shut shop. Presently, US imports 20% of its oil demand.

To conclude, regions that hold pricing power over oil control vital levers of the world’s economy. Conspiracy theories in political circles widely acknowledge that the wars such as Persian Gulf war, US’s movement of troops to Saudi Arabia to forestall invasion, Iraq wars, etc. had control over oil production and prices, rather than “preservation of democracy” and
religious reasons as the main intent. The United States controlled oil prices for a major part of the previous century, only to cede it to the OPEC countries in the 1970s. However, the technological advancement in extraction from Shale Rock formations might shift the power back to US in the years to come. Also, US’s focus towards greener resources of energy might tilt the balance in future.

Our investment Adviser, Anurag Roonwal penned his thoughts about Petroleum Politics.

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