News and Information
Oil
The New York Times, By Jad Mouawad
Overview
More than a century and a half after it was discovered, oil continues to play an essential role in the global economy.
But while it remains the top source of energy, oil has fallen off its pedestal since the energy shocks of the 1970s and 1980s, which proved how reliant the developed world had become on petroleum products, and how vulnerable it was to shortfalls in supplies.
In 1973, oil accounted for 46 percent of the world's total energy consumption; by 2005, its share had declined to 35 percent. But oil remains well ahead of other energy sources: coal meets 25 percent of the world's energy needs, natural gas is next with a market share of 20 percent, and nuclear power meets 6 percent of the planet's energy needs.
The spectacular run-up in oil prices, between 2002 and 2008, was sparked by the rapid growth in oil demand from developing countries, particularly China, and the industry's inability to increase production fast enough. Additional factors, such as a growing interest by investors in commodities, and concerns that oil might be running out, all contributed to pushing prices to an all-time peak of $147 a barrel by July 2008.
The bubble burst in the wake of the financial crisis, which provoked a global recession and depressed demand, and led to a price collapse. Within months, however, oil had recovered, and many experts anticipate price to once again bounce up after the global economy picks up.
Now, fueled by concerns about energy security, as well as the threat of global warming, oil's position is once again under pressure.
Historical Background
The existence of oil seeps has been known since the dawn of civilization. But the industrial revolution created the need for better lighting.
The first commercial oil well was struck by Colonel Edwin L. Drake in Titusville, Pennsylvania, in 1859, igniting an oil rush that quickly spread to Texas and California. At the time, oil was used as fuel for lamps.
Spurred by the automobile revolution at the beginning of the new century, the nascent industry quickly expanded around the world, with geologists fanning the globe and striking oil from Russia to Indonesia. By the 1950s, most of the big fields of the Middle East, including Saudi Arabia's giants, had been discovered.
After the Second World War, the business was dominated by a small group of very powerful and mostly American companies, which were dubbed the Seven Sisters: Standard Oil of New Jersey, which later become Exxon; Royal Dutch Shell, an Anglo-Dutch company; British Petroleum, which eventually shortened its name to BP; Standard Oil of New York, or Socony, which became Mobil; Standard Oil of California, or Socal, later Chevron; Gulf Oil; and Texaco.
At the height of their power, these companies dominated the petroleum trade, and set international oil prices.
OPEC and the Birth of Oil Nationalism
The turning point in the politics of oil came in the 1960s and 1970s, when new governments formed after the independence movement that swept through Africa and the Middle East began demanding a bigger share of the natural resources lying under their country. These demands led to the creation of the Organization of the Petroleum Exporting Countries, in 1960, in Baghdad.
Within a few decades, these governments nationalized their oil industries, formed national companies, and, in many places, kicked out foreign companies.
In the 1970s, international companies had unrestricted access to 85 percent of the world's known oil reserves at the time. The former Soviet bloc controlled 14 percent, and national oil companies only restricted access to one percent of the globe's known oil pool.
By the middle of this decade, the picture had changed dramatically. International oil companies only have full access to seven percent of the world's oil reserves today, mostly in the Untied States and the North Sea. The rest is either controlled by Russian companies or by national oil companies that offer limited access to foreign investments. Saudi Arabia, which holds a quarter of the world's known oil reserves, does not allow any foreign investments; its oil industry is controlled by Saudi Aramco.
Oil Shocks
The Arab-Israeli conflict of 1973, some Arab producers led by Saudi Arabia set up an oil embargo against the United States to protest against their support of Israel. While the embargo was short-lived, it drove up prices and showed how potent a weapon oil could be.
But for producers, the weapon turned out to be a doubled-edged one. Consuming countries began to establish energy policies that aimed at reducing their dependency on oil, encouraged conservation, and boosted the development of other sources of energy, including nuclear power.
The second oil shock of the late 1970s and early 1980s, which followed the Iranian Revolution, precipitated that movement. It also spurred a new wave of exploration in the North Sea and Alaska, where massive new reserves were discovered.
By the mid-1980s, however, with oil prices falling, energy policy in the United States took a backseat for the next two decades.
The Rise of China
Since the beginning of the 2000s, the industry has undergone another major shift. The rise of China's economy meant that the developing world was becoming an increasingly important consumer of oil.
Between 1998 and 2008, China accounted for a third of the growth in global oil demand. Its consumption, which reached 8 million barrels a day, rose more than five times faster than the rest of the world.
Still, the United States remains the world's top consumer, accounting for roughly one in four barrels of oil. In 2008, it consumed 19.4 million barrels a day in 2008, out of a total of 84.4 million barrels a day.
The Third "Oil Shock"
The inability of oil producers to crank up their production fast enough, and fears that demand might overtake supplies, helped fuel the run-up in prices of 2008. Investors piled into the commodity markets, which became increasingly viewed as a one-way street, while some market analysts and pundits talked about the prospect of oil at $200 per barrel.
Over the summer, the surge in prices turned into a stampede. By July 2008, prices had surged to a record of $147 a barrel, driving gasoline prices in the United States well above $4 a gallon.
But as the global economy faltered, so did oil demand, and prices tumbled to $34 a barrel by December. However, the respite was short-lived. By the middle of 2009, oil prices had again rebounded to $70 a barrel.
Technical Features of Oil
Oil has unique features that make it hard to replace: Few other fuels pack as much punch in such a small volume, and can be so easily moved around. It also dominates the transportation sector, which accounts for 64 percent of all the oil used around the world. The rest is used in the petrochemical and plastics industry, as well as in construction and in some industries.
The various components that make crude oil can be separated by distillation. By increasing the heat, refiners can obtain various products, ranging from light fuels, like gasoline, to kerosene, gas oil, lubricating oil, and then to heavier products such as fuel oil, bitumen, and paraffin.
Running Out of Oil?
As long as the world has relied on oil, it has feared running out of it.
In recent years, the theory of peak oil has resurfaced, claiming that the world's ability to increase production had reached its high-water mark, and that producers would not be able to maintain their output at current levels.
But thanks to new technologies, such as three-dimensional seismic imaging, horizontal drilling, or the ability to drill in ever-greater water depths, the industry has so far managed to raise its output. Many executives argue that the limits today are not to be found underground but in geopolitical factors above ground which limits access to oil reserves.
Still, policymakers are striving for ways to reduce oil consumption and reduce greenhouse gas emissions. In the United States, Congress has adopted very aggressive mandates to spur the development of biofuels, while encouraging the growth in hybrid and eventually electric vehicles.
It's a daunting challenge. The world's population is expected to grow by 50 percent over the next four decades, and with it, the need for fuel.
