The Politics of Oil
History TOPIC ID 96
The modern era of oil production began on August 27, 1859, when Edwin L. Drake drilled the first successful oil well 69 feet deep near Titusville in northwestern Pennsylvania. Just five years earlier, the invention of the kerosene lamp had ignited intense demand for oil. By drilling an oil well, Drake had hoped to meet the growing demand for oil for lighting and industrial lubrication.
Drake's success inspired hundreds of small companies to explore for oil. In 1860, world oil production reached 500,000 barrels; by the 1870s production soared to 20 million barrels annually. In 1879, the first oil well was drilled in California; and in 1887, in Texas. But as production boomed, prices fell and oil industry profits declined.
In 1882, John D. Rockefeller devised a solution to the problem of unbridled competition in the oil fields: the Standard Oil trust, which brought together forty of the nation's leading refiners. Through its control of refining, Standard Oil was temporarily able to control the price of oil.
During the early twentieth century, oil production continued to climb. By 1920, oil production reached 450 million barrels - prompting fear that the nation was about to run out of oil. Government officials predicted that the nation's oil reserves would last just ten years.
Up until the 1910s, the United States produced between 60 and 70 percent of the world's oil supply. As fear grew that American oil reserves were dangerously depleted, the search for oil turned worldwide. Oil was discovered in Mexico at the beginning of the twentieth century, in Iran in 1908, in Venezuela during World War I, and in Iraq in 1927. Many of the new oil discoveries occurred in areas dominated by Britain and the Netherlands: in the Dutch East Indies, Iran, and British mandates in the Middle East. By 1919, Britain controlled 50 percent of the world's proven oil reserves.
After World War I, a bitter struggle for control of world oil reserves erupted. The British, Dutch, and French excluded American companies from purchasing oil fields in territories under their control. Congress retaliated in 1920 by adopting the Mineral Leasing Act, which denied access to American oil reserves to any foreign country that restricted American access to its reserves. The dispute was ultimately resolved during the 1920s when American oil companies were finally allowed to drill in the British Middle East and the Dutch East Indies.
The fear that American oil reserves were nearly exhausted ended abruptly in 1924, with the discovery of enormous new oil fields in Texas, Oklahoma, and California. These discoveries, along with production from new fields in Mexico, the Soviet Union, and Venezuela, combined to drastically depress oil prices. By 1931, with crude oil selling for 10 cents a barrel, domestic oil producers demanded restrictions on production in order to raise prices. Texas and Oklahoma passed state laws and stationed militia units at oil fields to prevent drillers from exceeding production quotas. Despite these measures, prices continued to fall.
In a final bid to solve the problem of overproduction, the federal government stepped in. Under the National Recovery Administration, the federal government imposed production restraints, import restrictions, and price regulations. After the Supreme Court declared the NRA unconstitutional, the federal government imposed a tariff on foreign oil.
During World War II, the oil surpluses of the 1930s quickly disappeared. Six billion of the seven billion barrels of petroleum used by the allies during the war came from the United States. Public officials again began to worry that the United States was running out of oil.
It seemed imperative that the United States secure access to foreign oil reserves. Increasingly, policy makers and the oil industry focused their attention on the Middle East, particularly the Persian Gulf, which they believed would become the center of postwar oil production. As early as the 1930s, Britain had gained control over Iran's oil fields and the United States discovered oil reserves in Kuwait and Saudi Arabia. After the war ended, Middle Eastern oil production surged upward. Gradually, American dependence on Middle Eastern oil increased.
During the 1950s, a combination of cheap fuel and a burgeoning consumer culture led to an orgy of consumption. With only six percent of the world's population, the United States accounted for one-third of global oil consumption. Foreign oil was so cheap that coal-burning utilities made the expensive shift to oil and natural gas. World oil prices were so low that Iran, Venezuela, and Arab oil producers banded together in 1960 to form OPEC, the Organization of Petroleum Producing States, a producers' cartel, to negotiate for higher oil prices.
By the early 1970s, the United States depended on the Middle East for a third of its oil. Foreign oil producers were finally in a position to raise world oil prices. The oil embargo of 1973 and 1974, during which oil prices quadrupled, and the oil crisis of 1978 and 1979, when oil prices doubled, graphically illustrated how vulnerable the nation had become to foreign producers.
The oil crises of the 1970s had an unanticipated side-effect. Rising oil prices stimulated conservation and exploration for new oil sources. As a result of increasing supplies and declining demand, oil prices fell from $35 a barrel in 1981 to $9 a barrel in 1986. The sharp slide in world oil prices was one of the factors that led Iraq to invade neighboring Kuwait in 1990 in a bid to gain control over 40 percent of Middle Eastern oil reserves.
In the century-and-a-half since Edwin L. Drake drilled the first oil well, the history of the oil industry has been a story of vast swings between periods of overproduction, when low prices and profits led oil producers to devise ways to restrict output and raise prices, and periods when oil supplies appeared to be on the brink of exhaustion, stimulating a global search for new supplies. This cycle may now be approaching an end. It appears that world oil supplies may truly be reaching their natural limits. With proven world oil reserves anticipated to last less than forty years, the age of oil that began near Titusville may be coming to an end. In the years to come, the search for new sources of oil will be transformed into a quest for entirely new sources of energy.