Oil

The Quest for Oil

On August 27, 1859, Edwin Drake (1819–1880) struck oil 69 feet (21 m) below the surface of the earth near Titusville, Pennsylvania. This was the first successful modern oil well, which ushered in the age of petroleum. Not only did petroleum help meet the growing demand for new and better fuels for heating and lighting but also it proved to be an excellent fuel for the internal combustion engine, which was developed in the late 1800s.

Sources of Oil

Almost all oil comes from underground reservoirs. The most widely accepted explanation of how oil and gas are formed within the earth is that these fuels are the products of intense heat and pressure applied over millions of years to organic (formerly alive) sediments buried in geological formations. For this reason they are called fossil fuels. They are limited (nonrenewable) resources, which means that they are formed much more slowly than they are used, so they are finite in supply.

At one time it was believed that crude oil flowed in underground streams and accumulated in lakes or caverns in the earth. In the twenty-first century, scientists know that a petroleum reservoir is usually a solid sandstone or limestone formation overlaid with a layer of impermeable rock or shale, which creates a shield. The petroleum accumulates within the pores and fractures of the rock and is trapped beneath the shield. Anticlines (archlike folds in a bed of rock), faults, and salt domes are common trapping formations. (See Figure 2.1.) Oil deposits can be found at varying depths. Wells are drilled to reach the reservoirs and extract the oil.

How Oil Is Drilled and Recovered

Most oil wells are drilled with a rotary drilling system, or rotary rig, as illustrated in Figure 2.2. The rotating bit at the end of a pipe drills a hole into the ground.

Drilling mud is pushed down through the pipe and the drill bit, forcing small pieces of drilled rock to the surface, as shown by the arrows in the diagram. As the well gets deeper, more pipe is added. The oil derrick above the ground supports equipment that can lift the pipe and drill bit from the well when drill bits need to be changed or replaced.

After oil reservoirs have been tapped for several years or decades, their supply of oil becomes depleted. Several techniques can be used to recover additional petroleum, including the injection of water, chemicals, or steam to force more oil from the rock. These recovery techniques can be expensive and add to the cost of producing each barrel of crude oil.

Oil can also be recovered from oil sands, which are deposits of a thick, tarlike form of crude oil called bitumen that is mixed with sand and water and buried in the earth. Oil sands that are near the surface of the earth are recovered by open-pit mining, a process in which huge shovels and trucks dig it up after removing the soil, clay, and gravel that lie on top. Oil sands that are deep within the earth are recovered by drilling to the deposit and then injecting steam to bring bitumen to the surface. Other processes are sometimes used as well. It takes about 2 short tons (1.8 t) of oil sands to produce one barrel of oil and is an extremely expensive and specialized process. (A short ton is 2,000 pounds [907 k].) As oil prices escalated in the middle of the first decade of the 2000s and new oil sands technologies became available, extracting this crude product from oil sands and processing it became profitable.

In ‘‘Alberta Oil Sands’’ (August 25, 2008, http://www.ags.gov.ab.ca/energy/oilsands/alberta_oil_sands.html), the Alberta Geological Survey states that even though oil sands are found in about seventy countries worldwide, the largest deposit is the Athabasca oil sands of Alberta, Canada. According to the article ‘‘Oil Sands Facts’’ (June 20, 2007, http://www.energy.gov.ab.ca/OilSands/790.asp), oil derived from oil sands made up 42% of Canada’s crude output in 2006. Large quantities of oil sands are also found in Venezuela. Eastern Utah is the primary location of the tar sands in the United Sates, but these reserves are small in comparison to the reserves of Canada and Venezuela. The Oil Shale and Tar Sands Programmatic Environmental Impact Statement Information Center estimates in ‘‘About Tar Sands’’ (2008, http://ostseis.anl.gov/guide/tarsands/index.cfm) that the oil sands reserves of Utah hold approximately 12 billion barrels to 19 billion barrels of oil.

Types of Oil

While crude oil is usually dark when it comes from the ground, it may also be green, red, yellow, or colorless, depending on its chemical composition and the amount of sulfur, oxygen, nitrogen, and trace minerals present. Its viscosity (thickness, or resistance to flow) can range from as thin as water to as thick as tar. Crude oil is refined, or chemically processed, into finished petroleum products; it has limited uses in its natural form.

Crude oils vary in quality. ‘‘Sweet’’ crudes have little sulfur, refine easily, and are worth more than ‘‘sour’’ crudes, which contain more impurities. ‘‘Light’’ crudes, which have more short molecules, yield more gasoline and are more profitable than ‘‘heavy’’ crudes, which have more long molecules and bring a lower price in the market.

Besides crude oil, there are two other sources of petroleum: lease condensate and natural gas plant liquids. Lease condensate is a liquid recovered from natural gas at the well. It consists primarily of chemical compounds called pentanes and heavier hydrocarbons and is generally blended with crude oil for refining. Natural gas plant liquids, such as butane and propane, are recovered during the refinement of natural gas in processing plants.

Uses for Oil

Many of the uses for petroleum are well known: gasoline, diesel fuel, jet fuel, and lubricants for transportation; heating oil, residual oil, and kerosene for heat; and heavy residuals for paving and roofing. Petroleum by-products are also vital to the chemical industry, ending up in many different foams, plastics, synthetic fabrics, paints, dyes, inks, and even pharmaceutical drugs. Many chemical plants, because of their dependence on petroleum, are directly connected by pipelines to nearby refineries.

How Oil is Refined

Before they can be used by consumers, crude oil, lease condensate, and natural gas plant liquids must be processed into finished products. The first step in refining is distillation, in which crude oil molecules are separated according to size and weight.

During distillation, crude oil is heated until it turns to vapor. (See Figure 2.3.) The vaporized crude oil enters the bottom of a distillation column, where it rises and condenses on trays. The lightest vapors, such as those of gasoline, rise to the top. The middleweight vapors, such as those of kerosene, rise about halfway up the column. The heaviest vapors, such as those of heavy gas oil, stay at the bottom. The vapors at each level condense into liquids as they are cooled. These liquids are drawn off, and processes called cracking and reforming further refine each portion. Cracking converts the heaviest fractions of separated petroleum into lighter fractions to produce jet fuel, motor gasoline, home heating oil, and less-residual fuel oils, which are heavier and used for naval ships, commercial and industrial heating, and some power generation. Reforming is used to increase the octane rating of gasoline.

Refining is a continuous process, with crude oil entering the refinery at the same time that finished products leave by pipeline, truck, and train. At most refineries storage capacity is limited, so if there is a malfunction and products cannot be refined, the oil may be burned off (flared) rather than stored. Whereas a small flare is normal at a refinery or a chemical plant, large flares or many flares likely indicate a processing problem.

Refinery Numbers and Capacity

One hundred forty-nine refineries were operating in the United States in 2007, a drop from 336 in 1949 and 324 in 1981. (See Table 2.1.) Refinery capacity in 2007 was about 17.4 million barrels per day (mbpd), below the 1981 peak of 18.6 mbpd. As of 2007 U.S. refineries were operating near full capacity. Utilization rates generally increased from a low of 68.6% in 1981 (a period of low demand because of economic recession) to a high of 95.6% in 1998. Even though capacity has fallen since 1998, in 2007 it was still high at 88.5%.

As Table 2.1 shows, fewer refineries were operating in the United States in the early twenty-first century than in the past. The number dropped partly because the petroleum industry shut down older, inefficient refineries and concentrated production in more efficient plants, which tended to be newer and larger. The industry also consolidated. For example, the merging of Gulf Oil Corporation into Chevron Corporation in 1984 led to the closing of two large refineries. Many other large mergers and closings followed. According to the U.S. Government Accountability Office (GAO), in Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry (May 2004; http://www.gao.gov/ highlights/d0496high.pdf), more than twenty-six hundred mergers have occurred in the U.S. petroleum industry since the 1990s, ‘‘most frequently among firms involved in exploration and production.’’ Industry officials told the GAO that mergers increase efficiency, reduce costs, and improve a company’s ability to control prices.

An equally important reason for the drop in the number of U.S. refineries is that some members of the Organization of Petroleum Exporting Countries (OPEC) started refining their own oil products to obtain higher prices in the world market. This strategy, employed particularly by Saudi Arabia, was intended to maximize profits.

The last large refinery built in the United States was completed in 1976, and the last new refinery of any size began operation in Valdez, Alaska, in 1993. However, the demand for U.S.-refined petroleum continues to grow. The Energy Information Administration (EIA) states in Annual Energy Outlook 2006 (February 2006, http://www.eia.doe.gov/oiaf/archive/aeo06/pdf/0383(2006).pdf) that refinery expansion is expected from 2010 to 2030. A startup company has announced plans to open a major new refinery in Arizona in 2010.

Loss and Volatility of Oil Industry Jobs

The oil industry has experienced both rapid expansions and contractions in its history as it responds to changes in demand, the development of new technologies, and other economic imperatives. For example, corporate mergers not only restructure companies and reduce the number of refineries but they also affect the number of jobs. In ‘‘Oil and Gas Extraction’’ (August 27, 2008, http://www.bls.gov/iag/tgs/iag211.htm), the U.S. Bureau of Labor Statistics explains that the oil and gas extraction industry has been in an employment decline since reaching a peak of 264,800 employees in April 1982. By April 1992, when employees numbered 187,600, about 29% of petroleum jobs had been lost. As of June 2008 employment in the oil and gas extraction industry segment was up 35%, to 160,500, from the all-time low of 118,400 experienced in December 2003, but 39% below the 1982 figure.

Oil prices have created some of the volatility experienced in oil employment. In 1996, after a decade of low oil prices (except for one short-term spike in 1991; see Figure 1.2 in Chapter 1), drilling slowed and the demand for rigs collapsed. New rig construction stopped altogether. Thousands of rigs were left idle, sold for scrap metal, or shipped overseas, and their crews were put out of work. Idle rigs became a source of spare parts for those still operating. In 1997, following a rise in oil prices, the demand for rigs soared, but by 1998 the market for rigs had once again dwindled as oil prices sank. Rising oil prices in 1999 eventually boosted the demand for drilling equipment. Even though crude oil prices declined in 2001, they rose again in 2003 and continued to rise, again spurring demand for oil rigs. In ‘‘Baker Hughes Rigs Running by Week in the U.S. 1990–2008’’ (2008, http://files.shareholder.com/downloads/BHI/354184748x0x210176/A4F015D6-B26E-49F3-88EC-7CF675D9DA62/US_Rig_Report_070208.xls), Baker Hughes Inc., a company that has tallied weekly U.S. drilling activity since 1940, states that domestic oil drilling has rebounded sharply since late April 1999. In 1999 an average of 629 rigs ran weekly, compared to 1,768 in 2007.

Domestic Production

U.S. production of petroleum (including crude oil and natural gas plant liquids) reached its highest level in 1970 at 11.3 mbpd. (See Table 2.2.) Of that amount, 9.6 mbpd were crude oil. After 1970 domestic production of petroleum first declined, then rose from 1977 through 1985, and finally declined fairly steadily. (See Figure 2.4.) By 2007 U.S. domestic production averaged about 6.9 mbpd, a decrease of 39% from the 1970 production level. Of the 6.9 mbpd, 5.1 mbpd were crude oil.

The decline in the U.S. production of petroleum is due to a decline in both the number of producing wells and the number of barrels produced per day per well. In Annual Energy Review 2007 (June 2008, http://www.eia.doe.gov/aer/pdf/aer.pdf), the EIA indicates that the 500,000 producing wells in the United States in 2007 yielded 10.2 barrels per day per well, compared to the 531,000 producing wells in 1970, each yielding 18.1 barrels per day.

Figure 2.5 shows the overall flow of petroleum in the United States for 2007. Most of the domestic crude oil production shown (5.1 mbpd) occurs in only a few states. According to the EIA, in ‘‘Crude Oil Production’’ (January 2008, http://www.eia.doe.gov/neic/infosheets/crudeproduction.html), in 2006 these states were Texas (21%), Alaska (15%), California (12%), Louisiana (4%), Oklahoma (3%), and New Mexico (3%). Most domestic oil (3.4 mbpd, or about 66% in 2007) came from onshore drilling, whereas the remaining 1.7 mbpd came from offshore sources. (See Figure 2.6.)

Supplies from Alaska, which increased with the construction of a pipeline in the late 1970s, have begun to decline. Notice the gap between ‘‘Total’’ and ‘‘48 states’’ in Figure 2.7; the difference is Alaska’s share of U.S. oil production. The EIA explains in ‘‘Alaska’’ (August 21, 2008, http://tonto.eia.doe.gov/state/state_energy_profiles .cfm?sid=AK) that Alaska oil production peaked in 1988 at 2 mbpd and has since been in decline. Unless protected wildlife refuges in Alaska are opened for drilling, U.S. oil production there will likely continue to decline. The Alaskan government and the administration of President George W. Bush (1946–) strongly support drilling for oil in Alaska’s Arctic National Wildlife Refuge (ANWR). In June 2008 President Bush once again asked Congress to consider legislation that would allow drilling in the ANWR as one measure to increase domestic oil production. However, this

proposal is highly controversial for environmental reasons. Legislation to allow the drilling has been stalled in Congress several times.

Not only is domestic oil production affected by the availability of this resource and the legislative and legal approval to drill for it, but also production is affected by the expense of drilling and extraction. For example, U.S. producers spend more money than Middle Eastern producers to drill and extract crude oil, because oil is available in enormous, easily accessible reservoirs in the Middle East. U.S. oil is not as easily recovered. When the cost of oil recovery severely reduces the profit margin on a barrel of oil, U.S. producers may shut down their most expensive wells, especially in times when oil prices are low. When oil prices are high, even the most expensive extraction methods, such as those used to recover oil from the oil sands of Canada and Venezuela, are still cost effective.

Domestic Consumption

In 2007 most petroleum was used for transportation (14.3 mbpd, or 69%), followed by industrial use (5.1 mbpd; 25%), residential use (0.8 mbpd; 4%), electric utilities (0.3 mbpd; 1%), and commercial use (0.3 mbpd; 1%). (See Figure 2.8.)

Most petroleum used in the transportation sector is for motor gasoline. In the residential and commercial sectors, distillate fuel oil (light fuel oils; refined fuels used for space heaters, diesel engines, and electric power generation) accounts for most petroleum use. Liquid petroleum gas is the primary oil used in the industrial sector. In electric utilities residual fuel oils (heavy fuel oils) are used the most.

In Annual Energy Review 2007, the EIA shows that from 1979 through 1982 there was a decline in the amount of motor gasoline used in the transportation sector, which was attributed to the federal Corporate Average Fuel Economy (CAFE) regulations. The CAFE regulations required increased miles-per-gallon efficiency in new automobiles. However, motor gasoline use has increased relatively steadily since then, partly because the number of users has increased and partly because vehicle efficiency has leveled off—consumers once again preferred less efficient vehicles, such as sport utility vehicles (SUVs). By 2008, however, with the skyrocketing price of gasoline, the popularity of the SUV declined. Smaller ‘‘crossover’’ SUVs and economy models came into favor with much of the American public.

World Oil Production and Consumption

Total world crude oil production has increased somewhat steadily since 1960, reaching 73.3 mbpd in 2007. (See Table 2.3.) Though there was a downturn in the early 1980s from a high point in 1978 of 60.2 mbpd, by 1996 world crude oil production edged above the 1978 value to 63.8 mbpd and continued to rise by 10 mbpd more by 2007.

The largest producer of crude oil in 2007 was Russia, followed by Saudi Arabia, the United States, Iran, China, Mexico, Canada, the United Arab Emirates, Kuwait, Venezuela, Nigeria, Norway, Iraq, and the United Kingdom. (See Figure 2.9.) Together, Russia, Saudi Arabia, and the United States accounted for 32% of the world’s crude oil production.

Like total world crude oil production, total world petroleum consumption has increased somewhat steadily, reaching 84.6 mbpd in 2006. (See Table 2.4.) In 2006 the United States was by far the leading consumer, using 20.7 million barrels of petroleum per day, followed by China (7.2 mbpd), Japan (5.2 mbpd), Russia (2.8 mbpd), and Germany (2.7 mbpd). Other leading petroleum consumers were India, Canada, Brazil, South Korea, Mexico, France, the United Kingdom, Italy, and Spain. (See Figure 2.10.)

Oil Imports and Exports

Countries that have surplus oil (e.g., Saudi Arabia) sell their excess to countries that need more than they can produce, such as the United States, China, Japan, and west European countries. They sell petroleum as both crude oil and refined products, although the trend has been moving toward refined products because they bring higher profits. According to the EIA, in Annual Energy Review 2007, the leading supplier of petroleum to the United States in 2007 was Canada, followed by Mexico, Saudi Arabia, Venezuela, Nigeria, Iraq, Russia, the United Kingdom, and Brazil.

Even though the United States produces a significant amount of petroleum, it has been importing oil since World War II (1939–1945). Initially, the imported oil was cheap and available, suiting the demands of a growing American population and economy. Furthermore, relatively low world crude oil prices often resulted in reduced domestic oil production: when the world price was lower than the cost of producing oil from some U.S. wells, domestic oil became unprofitable and was not produced. So more oil was imported.

The amount of oil imported to the United States has fluctuated over the years. Total net imports (imports minus exports) rose from 4.3 mbpd in 1982 to 12 mbpd by 2007, down from 12.5 in 2005. (See Table 2.2.) In 1985 imported oil supplied only 27.3% of American oil consumption. (See Figure 1.8 in Chapter 1.) Just five years later, in 1990, the proportion had risen to 42% and by 2007 to 58.2%.

Concern about Oil Dependency

In the 1970s U.S. leaders were concerned that so much of the country’s economic structure, based heavily on imported oil, was dependent on decisions in OPEC countries. Oil resources became an issue of national security, and OPEC countries, especially the Arab members, were often portrayed as potentially strangling the U.S. economy. Efforts were made to reduce imports by raising public awareness and by encouraging industry to create more energy-efficient products, such as automobiles that got better gas mileage. Nonetheless, the EIA notes in Annual Energy Review 2007 that total petroleum imports rose from 3.4 mbpd in 1970 to 8.5 mbpd in 1979, but dropped to 6.9 mbpd in 1980.

The Ronald Reagan (1911–2004) and George H. W. Bush (1924–) administrations, which ran from 1981 to 1989 and from 1989 to 1993, respectively, took a different view. They saw oil supply as an economic, rather than as a political, issue and allowed energy issues to be handled by the marketplace. According to the EIA, during those years total petroleum imports dropped dramatically, from 6 mbpd in 1980 to a low of about 5.1 mbpd from 1981 to 1985, but then increased to 8.6 mbpd by 1993.

During the Bill Clinton (1946–) administration, which ran from 1993 to 2001, U.S. dependence on foreign oil continued largely because low prices throughout most of the 1990s set back energy-conservation efforts. In fact, efficiency gains in automobiles were offset by the public’s growing preference for large vehicles, such as SUVs. Total imports of petroleum grew steadily. In 2001 the United States imported 11.9 mbpd, up from 8.6 mbpd in 1993.

Many factors diverted the public’s attention from U.S. dependence on foreign oil. For example, a comfort level had been achieved through oil reserves, such as the U.S. Strategic Petroleum Reserve and the U.S. government-required reserves in Europe, and the knowledge that, in emergencies, non-OPEC oil producers such as the United Kingdom and Norway could increase their output. Furthermore, increased use of pipelines across Saudi Arabia and Turkey lessened concern about the disruption of supplies. The pipelines allow tankers to load oil in the Red Sea or the Mediterranean Sea, rather than in the potentially dangerous Persian Gulf. Tankers do not have to navigate through the narrow Strait of Hormuz, where saboteurs might be able to stop the flow of oil.

Heavy dependence on foreign oil continued during the George W. Bush (1946–) administration (from 2001 to 2009), and by 2007 about 65% of the nation’s crude oil supply (10 mbpd out of a total 15.1 mbpd) came from outside the country. (See Figure 2.5.) According to the EIA, in Annual Energy Review 2007, nearly 45% of that crude oil came from OPEC nations.

Concern that U.S. dependence on foreign oil, especially OPEC oil, represented a threat to national security or national stability changed somewhat after the terrorist attacks of September 11, 2001. It was heightened by the war on terror, the war with Iraq, and the consequent unrest in Middle Eastern nations. Still, demand for the product persisted. By mid-2008 demand had continued to grow, oil prices had increased dramatically, and oil supplies and reserves were tight.

Projected Oil Supply and Consumption

The EIA projects in Annual Energy Outlook 2006 that domestic crude oil production will increase from 5.4 mbpd in 2004 to a peak of 5.9 mbpd in 2014, with the peak attributed to offshore production, particularly in the deep water of the Gulf of Mexico. After 2014 production is projected to fall to 4.6 mbpd in 2030. However, even though domestic supply is expected to remain relatively constant though 2030, demand is projected to increase significantly. (See Figure 2.11.) Thus, the agency foresees an increasing dependence on petroleum imports.

Strategic Petroleum Reserve

Early in the twentieth century the Naval Petroleum Reserve was established to ensure that the U.S. Navy would have adequate fuel in the event of war. Large tracts of government land with known deposits of oil were set aside. In 1975, in response to the growing concern over U.S. energy dependence, Congress expanded this concept by creating the Strategic Petroleum Reserve. Oil and refined products are stored in forty-one deep salt caverns in Louisiana and Texas. (The caverns are used because oil does not dissolve salt the way water does.) If the United States suddenly finds its supplies cut off, the reserves can be connected to existing pipelines and the oil pumped out.

At the end of 2004 the Strategic Petroleum Reserve contained 697 million barrels of oil (see Figure 2.12), equal to fifty-eight days’ worth of imported oil. Figure 2.13 shows a decline in the reserves in terms of days’ worth of net imports, from a high of 115 days in 1985, to a low of 50 days in 2001, to 58 days in 2007. This decline reflects the country’s increasing reliance on imports since 1985. As the nation has imported a greater amount of oil, the days of net import replacement represented by the amount of oil in the reserves have dropped, even though the amount of oil in the reserves has increased.

Oil Prices

The law of supply (availability) and demand (need) often explains changes in the price of oil. Higher prices lead to increased production—it becomes profitable to operate more expensive wells—and reduced demand—consumers lower usage and increase conservation efforts. The factors also work the other way: Reduced demand or increased supply generally causes the price of oil to drop. The demand for petroleum products varies. Heating oil demand rises during the winter. A cold spell, which leads to a sharp rise in demand, may result in a corresponding price increase. A warm winter may be reflected in lower prices as suppliers try to clear out their inventory. Gasoline demand rises during the summer—people drive more for recreation—so gas prices rise as a consequence.

Wars and other types of political unrest in oil-producing nations add volatility to petroleum prices, which fluctuate—sometimes dramatically—depending on the situation at the time. Wars, such as the war in Iraq, can also seriously affect the oil extraction and refining capabilities of a country, which, in turn, affects oil prices. Weather disasters, such as Hurricane Katrina along the Gulf coast in the summer of 2005, affect these capabilities and the price of oil as well.

Petroleum demand also reflects the general condition of the economy. During a recession, demand for and production of petroleum products usually drop. On the edge of recession in late 2007 and early 2008, the United States saw its dollar decline in value dramatically and its housing market crumble, so investors looked to oil as a safe haven for their money. Even though oil prices would be expected to drop in such poor economic times, oil market speculation appeared to be a major factor in the rise of oil prices in 2007 and 2008. (See Chapter 1.)

The Organization of Petroleum Exporting Countries

Consumers prefer low prices that allow them to save money or get more for the same price, whereas producers naturally prefer to keep prices high. With this goal in mind, some oil-producing countries formed OPEC in 1960. OPEC is a cartel (a group of businesses that agree to control production and marketing to avoid competing with one another). Since 1973 OPEC has tried to control the oil supply to achieve higher prices.

OPEC has faced long-term problems, however, because high prices in the late 1970s to mid-1980s encouraged conservation, thereby reducing demand for oil and leading to a sharp decline in oil prices. As a result of the decreased demand for oil and lower prices, OPEC lost some of its ability to control its members and, consequently, prices.

Nevertheless, OPEC actions can still effectively influence the petroleum market. For example, in an attempt to halt the downward slide of oil prices in 1999, Saudi Arabia, Mexico, and Venezuela agreed to cut production by 1.6% to 2 mbpd. Many other oil-producing nations also limited their production. The limitations worked: During the summer of 2000 oil prices climbed. The EIA explains in Annual Energy Review 2000 (August 2001, http://tonto.eia.doe.gov/ftproot/multifuel/038400.pdf) that refiners paid $16.71 in real dollars per barrel of crude oil in 1999. In 2000 the price had risen to $26.40 per barrel. More recently, OPEC agreed to cut its crude oil output by 1.2 mbpd by November 2006, and by an additional 500,000 barrels per day in February 2007. The price of oil then began to rise. (See Figure 1.2 in Chapter 1.)

Gasoline Prices

Many older Americans can remember when gas cost thirty cents per gallon. From 1972 to 1980 the price of a gallon of regular leaded gasoline (in dollars of that time, [nominal] dollars that do not consider inflation) more than tripled, whereas the price in real dollars, which account for inflation and in Table 2.5 reflect the buying power of the dollar in 2000, rose 83%. In 1981 the price of a gallon of regular unleaded gasoline was $2.33 in real dollars. However, after 1981, as a result of the international oil glut, real prices tumbled. In 1998 the price per gallon was only $1.10, and after price increases in 1999 the price of unleaded gas still averaged only $1.51 in 2000 and less in 2001 through 2003.

By the end of April 2006, prices at the pump had soared in the United States. In many major cities prices hovered around $3 per gallon (in nominal dollars) for regular gasoline. Table 2.5 shows that regular unleaded gasoline in 2006 cost $2.22 per gallon in real (2000) dollars—close to $2.33 per gallon in real dollars in 1981. Oil prices were rising all over the world in response to high demand, especially in the United States, China, Japan, and India. In addition, the U.S. government was changing the additives required in certain fuel blends, which caused shortages in parts of the country, pushing fuel prices up even more.

The White House explains in the press release ‘‘President Bush’s Four-Part Plan to Confront High Gasoline Prices’’ (April 25, 2006, http://www.whitehouse.gov/news/releases/2006/04/20060425-2.html) that to confront the high gasoline prices, President Bush announced a four-part plan in April 2006. The plan included:

1. Investigating whether the price of gas had been unfairly manipulated since Hurricanes Katrina and Rita hit the Gulf coast in the summer 2005
2. Promoting greater fuel efficiency by providing tax credits for all hybrid and ‘‘clean diesel’’ vehicles sold in 2006
3. Boosting supplies of crude oil and gas by temporarily halting deposits to the Strategic Petroleum Reserve
4. Calling on Congress to support the Advanced Energy Initiative (February 2006, http://www.whitehouse.gov/stateoftheunion/2006/energy/print/index.html), the goals of which were ‘‘promoting energy conservation, repairing and modernizing our energy infrastructure, and increasing our energy supplies in ways that protect and improve the environment’’

However, by 2007 gasoline prices had risen above the high recorded in 1981, to $2.34 per gallon in real (2000) dollars. Figure 1.3 in Chapter 1 shows the tremendous price spike in both real and nominal gasoline prices during this period. In ‘‘Weekly Retail Gasoline and Diesel Prices’’ (August 25, 2008, http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_a_epmr_pte_cpgal_w.htm), the EIA notes that gasoline prices at the pump in nominal dollars the week of July 21, 2008, averaged over $4.06 in the United States.

In 2007 and 2008 President Bush moved his agenda forward to improve fuel economy in vehicles and reduce U.S. dependence on foreign oil. In his 2007 State of the Union address, he proposed a ‘‘Twenty in Ten’’ policy (January 2007, http://www.whitehouse.gov/stateoftheunion/2007/initiatives/energy.html) of reducing by 20% the amount of gasoline Americans used within the next ten years by increasing the fuel efficiency of automobiles—increasing the CAFE standards—and using alternative fuels. Congress responded by developing the Energy Independence and Security Act (EISA) of 2007, which mandated that fuel producers make at least 36 billion gallons (136 billion L) of biofuel annually by 2022. EISA also required that the CAFE standard be raised for cars and light trucks to 35 miles per gallon (6.7 L/100 km) by model year 2020. In the press release ‘‘President Bush Discusses Energy’’ (June 18, 2008, http://www.whitehouse.gov/news/releases/2008/06/20080618.html), the White House explains that in June 2008 President Bush asked Congress to pass legislation to help increase domestic production of oil by exploring the Outer Continental Shelf for oil resources; allowing the extraction of oil from oil shale located in the Green River Basin of Colorado, Utah, and Wyoming; permitting exploration in the Arctic National Wildlife Refuge in Alaska; and expanding and enhancing U.S. oil refinery capacity.

Environmental Concerns about Oil Transportation

Transporting oil carries significant environmental risks. According to the U.S. Department of the Interior, oil tanker accidents are the cause of most transportation spills.

The Exxon Valdez Oil Spill

Even though a number of events have influenced American attitudes toward oil production and use, one of the most notable occurred in March 1989, when the oil tanker Exxon Valdez hit a reef in Alaska and spilled 11 million gallons (41.6 million L) of crude oil into the waters of Prince William Sound. The cleanup cost Exxon nearly $1.3 billion, a sum that does not include legal costs or any valuation for the wildlife lost. The spill was an environmental disaster for a formerly pristine area. Even measures used to clean up the spill, such as washing the beaches with hot water, caused additional damage.

Adam Liptak reports in ‘‘Damages Cut against Exxon in Valdez Case’’ (New York Times, June 26, 2008) that the legal arguments about the extent of Exxon’s liability were ended on June 25, 2008, when the U.S. Supreme Court ruled that the $5 billion punitive (punishment) damage award previously set by an appeals court was too high. To the dismay of many of the people affected by the spill, the punitive damages were reduced to about $500 million. The ruling had broad implications for the lowering of punitive damages in general.

The Oil Pollution Act of 1990

The Exxon Valdez spill led to debate in the United States about tanker safety and design. Over the years, oil tankers have grown in size. The American Petroleum Institute indicates in Large Tankers: Our Energy Lifelines (1976) that in 1945 the largest tanker held 16,500 short tons (15,000 t) of oil; by 1976 supertankers carried more than 550,000 short tons (499,000 t). These ships are difficult to maneuver because of their size and are likely to spill more oil if damaged.

The Exxon Valdez oil spill led Congress to pass the Oil Pollution Act of 1990, which increased, but still limited, oil spillers’ federal liability (financial responsibility) as long as spills were not the result of ‘‘gross negligence.’’ The bill also mandated compensation to those who were economically injured by oil spills. Damages that can be charged to oil companies were limited to $60 million for tanker accidents and $75 million for accidents at offshore facilities. The law specified that the rest of the cleanup costs were to be paid from a $500 million oil-spill fund generated by a $0.013-per-barrel tax on oil. Individual states still have the right to impose unlimited liability on spillers. Oil companies were also required to phase in double-hulled vessels by 2015. Essentially, a double-hulled vessel carries its oil in a container inside another container, providing extra protection in case of an accident.

Oil Spills Still Occur Worldwide

In November 2002 the twenty-six-year-old, single-hulled tanker Prestige was damaged off the coast of Spain and spilled approximately 5,000 short tons (4,500 t) of heavy fuel oil, according to Spanish government estimates. The ship continued to leak, so Spanish authorities ordered the leaking vessel towed to the open ocean. Several thousand more short tons of oil were released as it sank, although much of the oil may have solidified inside the ship in the cold water at the bottom of the ocean. Scientists estimate the oil spilled from the Prestige caused the deaths of nearly 250,000 seabirds. It also killed unknown numbers of fish and dolphins and was responsible for economic damage to the Spanish fish and shell-fish industries.

In December 2007 a Samsung-owned barge collided with the Heibei Spirit oil tanker, which was anchored off the west coast of South Korea. About 10,500 short tons (9,500 t) of crude oil were spilled, destroying the ecology of the region and damaging the southwestern coastline. The Heibei Spirit was a single-hulled tanker, a key factor in what is considered to be the worst Asian oil spill in a decade.

These examples of oil spills are only that—examples. Oil spills occur relatively frequently around the world. Smaller oil spills occur as well. For example, oil frequently washes ashore on Newfoundland’s south coast. The oil often comes from bilge water (waste water contaminated with oil that accumulates in the bottoms of ships). Bilge water should be properly dumped, but it is often pumped into the ocean to save dumping costs.

Not All Oil Spills Are Due to Oil Transportation

According to the Natural Resources Defense Council (NRDC), in ‘‘Recovering from Katrina: Greater New Orleans Region, 2005–Present Day’’ (2008, http://www.nrdc.org/ej/partnerships/katrina.asp), Hurricane Katrina, which hit the coast of Louisiana and Mississippi in 2005, triggered spills of more than 8 million gallons (30.3 million L) of petroleum and hazardous chemicals (generally refinery products). The Gulf coast is home to many oil refineries with scores of oil storage tanks and miles of oil pipeline. Some tanks and pipelines did not withstand the floodwater, releasing oil and refinery products into the soil and buildings of New Orleans. Before people can safely move back into these areas, the oil and other refinery products must be cleaned up because these chemicals can be hazardous: short-term exposure to certain chemicals in the oil causes dizziness and nausea; long-term exposure is linked to leukemia and other serious ailments. The NRDC is working with local groups to identify contaminated soils and sediments and remove them.

Oil

David S. Painter

Oil was an integral part of U.S. foreign policy in the twentieth century, and its influence has shown no sign of diminishing in the twenty-first century. Oil has been and continues to be central to military power and to modern industrial society, and possession of ample domestic oil supplies and control over access to foreign oil reserves is a significant, and often overlooked, element in the power position of the United States relative to its rivals. While demand for oil is worldwide, for most of the twentieth century the major industrial powers, with the significant exceptions of the United States and the Soviet Union, had meager domestic oil production, and, with the same two exceptions, the major oil producers were not industrial powers. Because of this disparity, struggles over access to oil have been an important focus of rivalry among the great powers and a significant source of conflict between oilconsuming industrial countries and oil-producing nonindustrial nations.

Control of oil has been intimately linked to broader political, military, and economic objectives. These larger foreign policy concerns have shaped the issue of control and have, in turn, been shaped by it. For example, all the major postwar doctrines of U.S. foreign policy—the Truman, Eisenhower, Nixon, Carter, and Reagan doctrines—relate, either directly or indirectly, to the Middle East and its oil.

The history of oil and foreign policy also provides important insights into the relationship between private power and public policy that are crucial to understanding the nature and development of U.S. foreign policy in the twentieth century. Finally, the impact of oil use on the environment has become almost as important an issue as access to oil.

OIL AND WORLD POWER

The United States dominated world oil production in the first half of the twentieth century. U.S. fields accounted for slightly more than 70 percent of world oil production in 1925, around 63 percent in 1941, and over 50 percent in 1950. The U.S. oil industry operated in a unique regulatory environment that included a permissive legal regime, generous tax treatment, and a cooperative system of national production control centered on the state of Texas, which accounted for almost half of total U.S. production. During the Great Depression, the federal government, several state governments, and the oil companies worked out a control system that placed a ceiling on total output and allocated production so that marginal producers could survive in the face of considerable excess capacity. Although Texas authorities refused to require producers to pool their extractive activities in each oil field, thereby allowing wasteful extractive processes to continue, the system allowed high-cost marginal wells to continue to produce, thus preserving lower-cost fields for future use. Higher prices also somewhat reduced consumption. With the Texas Railroad Commission as a balance wheel, the system remained in place until the early 1970s, when domestic production alone could no longer fill national demand.

In addition to being blessed with a thriving and productive domestic oil industry, five of the seven great oil corporations (the so-called Seven Sisters) that dominated the international oil industry from the 1920s to the 1970s were American companies. U.S. oil companies, along with British firms, dominated the oil industries of the two main producing countries in Latin America, Mexico and Venezuela, and had smaller holdings throughout the region. During the 1920s and early 1930s, the United States successfully supported efforts by U.S. oil companies to gain oil concessions in the Middle East. U.S. companies were also involved in regionally significant oil fields in the Netherlands East Indies. By the eve of World War II, U.S. companies accounted for nearly 40 percent of oil production outside the United States and the Soviet Union.

More importantly, the United States possessed the means to ensure the stability of the producing regions and gain access to their oil. The United States Navy had emerged from World War I second to none, thus providing the United States with the capability of securing access to overseas oil-producing areas. The United States was already firmly entrenched in the oil-rich Gulf of Mexico–Caribbean region before World War I for security reasons that predated oil's emergence as a strategic commodity. World War II and the Cold War reinforced traditional U.S. determination to maintain an economic and strategic sphere of influence in Latin America. Securing the Persian Gulf, which emerged as the center of the world oil industry following World War II, was more difficult for several reasons, including the region's distance from the United States, the involvement of rival great powers, and the dynamics of regional politics. Great Britain had emerged as the leading power in the Middle East following World War I. Following World War II, the United States gradually assumed Britain's role as the main guarantor of Western interests in the Middle East.

Oil became an important element in military power in the decade before World War I when the navies of the great powers, led by Great Britain and the United States, began to switch from coal to oil as their source of power. In addition, the major military innovations of World War I—the submarine, the airplane, the tank, and motorized transport—were all oil-powered. Although the surface fleets of the great powers played a relatively minor part in the fighting, German submarines wreaked havoc on British and French shipping and helped bring the United States into the war. In addition, oil carved out a role in the manufacture of munitions when the British, using a process developed by Royal Dutch/Shell, began extracting toluol, an essential ingredient in the explosive TNT, from oil. Access to oil became more important toward the end of the war with the transition from static trench warfare, with its limited demand for oil-powered machinery, to a more fluid operational environment in which tanks, motorized transport, and aircraft played a larger role.

Britain and France were able to draw on over-seas sources of supply from Iran, Mexico, and the United States, while the Germans were limited to oil from Romania. By the last year of the war, the United States was supplying more than 80 percent of Allied oil requirements, and the American navy was playing a key role in supplying and protecting tanker transport of oil to Europe. Although Lord Curzon's boast that the Allied cause had floated to victory on a wave of oil was an overstatement, severe shortages of oil in 1917 and 1918 threatened to immobilize the Royal Navy and the French army. In both cases, urgent requests to the United States for help led to the provision of the needed supplies. In contrast, without such external assistance, oil shortages hindered German military operations at critical points.

In addition to being a tremendous military asset, access to ample supplies of oil provided the United States with important advantages in the industrial transformation of the first half of the twentieth century. By the 1890s, the United States had overtaken Great Britain as the leading industrial power in the world, and by the 1920s, the U.S. economy was larger than the combined economies of the next six great powers (Great Britain, France, Germany, Italy, Soviet Union, and Japan).

Cheap and plentiful supplies of oil were a prerequisite for the automobile industry, which played a central role in the U.S. economy from the 1920s to the 1960s. Oil became the fuel of choice in land and sea transport as well as the only fuel for air transport, and challenged coal as the main source of energy for industry. Oil also played an important, if somewhat less crucial, role in heating and electricity generation, but oil-powered machinery became crucial to modern agriculture, and oil became an important feedstock for fertilizers and pesticides. Indeed, with the development of the petrochemical industry, oil reached into almost every area of modern life. Already almost one-fifth of U.S. energy consumption by 1925, oil accounted for around one-third of U.S. energy use by World War II. Outside the United States, in contrast, oil was a secondary fuel reserved mainly for transportation and military uses and accounted for less than 10 percent of energy consumption in western Europe and Japan before World War II.

The Soviet Union was the only other great power that possessed significant quantities of oil within its borders. The Russian empire had been the world's leading oil producer in 1900, accounting for more than half of world production. Soon thereafter a combination of geological and political problems caused output to plummet. Soviet oil production recovered rapidly in the 1920s, and by 1939 the Soviet Union was the second-largest oil producer in the world, far behind the United States and slightly ahead of Venezuela. Although the Soviets reentered exports markets briefly in the late 1920s, by the end of the 1930s almost all Soviet oil production was being devoted to internal uses.

The other great powers (Great Britain, France, Germany, and Japan) lacked indigenous oil reserves and were therefore dependent on foreign sources. Although British companies held concessions in Latin America, the Middle East, and Asia, maintaining access to this oil required stability in the oil-producing areas and control of the sea routes linking the oil-producing areas to Britain. British security policy called for the Mediterranean and the Middle East to be defended because they lay athwart land, sea, and air routes to India, the Far East, and the Pacific dominions. If the Mediterranean were closed, a prospect that seemed increasingly likely as Britain's relative power declined in the 1930s, access to Middle East oil would be very difficult, assuming that the oil fields and other facilities could be defended. Production in the Far East was not great, and access to its oil would be even more difficult to defend in wartime. Wartime access to Western Hemisphere oil would be dependent on the acquiescence and probably the assistance of the United States, to which Britain had conceded regional supremacy shortly after 1900 and whose help would be needed to transport the oil safely across the Atlantic. This dependence on the United States for vital oil supplies was a critical weakness in Great Britain's power position.

During the 1930s, the British government studied the possibility of reducing its reliance on imported oil by using Britain's ample coal supplies as a source of synthetic oil. It rejected this alternative on security grounds, concluding that, given the British position in the major oil producing areas and the strength of the Royal Navy, reliance on imported oil would be less vulnerable to interdiction than large synthetic oil plants that would be conspicuous targets for air attack.

France's stake in foreign oil was largely limited to a share in Iraqi oil production and a few holdings in Romania. Access to Iraq, which by 1939 supplied almost half of France's oil imports, was dependent on British assistance to keep the Mediterranean open and the Middle East secure. Romania was able to fill only a small portion of French oil requirements, and access to Romanian oil would be unreliable in the event of a conflict with Germany. Access to Western Hemisphere oil, the other source of French imports, was dependent on U.S. goodwill and assistance. The French also explored extracting oil from coal and using alcohol as a motor fuel, but neither alternative provided sufficient supplies to relieve France's dependence on imported oil. France was thus doubly dependent, needing British and U.S. cooperation to ensure access to oil.

German and Japanese oil companies had been shut out of the major foreign oil-producing areas, leaving both nations dependent on foreign companies for necessary supplies and thus vulnerable to economic and political pressure. Moreover, their access to oil in the Middle East and the Western Hemisphere was threatened by British and U.S. control of the oil-producing areas and Anglo-American command of the sea routes to these regions.

Convinced that oil was essential to fuel his ambitions, Nazi leader Adolf Hitler moved to promote the development of a synthetic fuel industry in Germany shortly after taking power in 1933. By the outbreak of World War II, coal-derived synfuels accounted for nearly half of Germany's peacetime oil needs. The process of extracting oil from coal was complicated and expensive, and the huge installations required massive amounts of steel and were very vulnerable to air attack. Therefore, obtaining access to oil that did not depend on sea routes subject to interdiction by enemies remained an important part of Nazi expansionist strategy.

Germany received large quantities of oil from the Soviet Union under the terms of the 1939 Nazi-Soviet Pact, and in November 1940 gained assured access to Romanian oil when Romania was forced to adhere to the Tripartite Pact. These supplies were inadequate for Germany's needs, leading Hitler to look to the conquest of the rich oil fields of the Caucasus as a way to gain oil for Germany's highly mechanized military machine. Thus, the desire to gain assured access to oil was an important factor in Hitler's decision to invade the Soviet Union in June 1941.

Obtaining access to oil was also a key factor behind Japan's decision to attack the United States. By the end of the 1930s, Japan was dependent on the United States for 80 percent of its oil needs. Most of the rest came from the Netherlands East Indies, where Shell and the Standard-Vacuum Oil Company, a jointly owned subsidiary of Standard Oil (New Jersey) and Socony-Vacuum, controlled production. The Netherlands East Indies possessed the largest reserves in East Asia, and control over its oil would go a long way toward meeting Japan's oil needs. On the other hand, seizing the Netherlands East Indies would lead to conflict with Great Britain and the United States. Nevertheless, the Japanese chose this course after the United States, Britain, and the Netherlands imposed an oil embargo on Japan in the late summer of 1941 in response to Japan's decision to take control of all Indochina.

World War II marked the apogee of oil's direct military importance, and the role of oilpowered weapons systems demonstrated that oil had become the lifeblood of the modern military machine. All the key weapons systems of World War II were oil-powered: surface warships (including aircraft carriers), submarines, airplanes (including long-range bombers), tanks, and a large portion of sea and land transport. Oil continued to play an important role in the manufacture of munitions, and the development of petroleum-based synthetic rubber helped relieve Allied dependence on Southeast Asian natural rubber supplies, most of which were in the hands of the Japanese for much of the war.

The United States entered World War II with a surplus production capacity of over one million barrels per day, almost one-third of U.S. production in 1941. This margin enabled the United States, almost single-handedly, to fuel not only its own war effort but that of its Allies, once the logistics of transporting the oil safely across the Atlantic had been mastered. In addition, U.S. leadership in oil-refining technology provided the U.S. military with such advantages as 100-octane aviation gasoline and specialty lubricants needed for high performance aircraft engines.

The Soviet Union also benefited from having indigenous oil supplies. The Soviets were able to retain control of the vital Caucasian oil fields, and rushed new fields in the Volga-Urals region, safely removed from the fighting, into production. These successes helped Soviet forces attain the mobility necessary to repel the German invaders and go on the offensive.

German and Japanese failure to gain secure access to sufficient oil supplies was an important factor in their defeat. German synthetic fuel production proved barely adequate for wartime requirements, and failure to gain control of the rich oil fields in the Caucasus, coupled with setbacks in the Middle East and North Africa, left the German military vulnerable to oil shortages throughout the war. Indeed, Germany was able to hang on as long as it did only because the absence of a second front until the summer of 1944 kept oil requirements at manageable levels. In the late summer of 1944, the Allied bombing campaign began belatedly targeting synthetic fuel plants. By the end of the war, the German war machine was running on empty.

The Japanese gained control of the Netherlands East Indies in 1942, but many of the oil facilities had been sabotaged and took time to restore to full production. More importantly, transporting oil from the East Indies to Japan proved increasingly difficult owing to the remarkable success of U.S. submarines in interdicting Japanese shipping. By late 1944, Japan faced serious oil shortages, with crippling military consequences.

With the exception of the jet engine, the major military innovations of World War II—radar, ballistic missiles, and the atomic bomb—were not oil-powered. Nevertheless, oil remained central to the mobility of land, sea, and air forces. Despite the development of nuclear-powered warships (mainly aircraft carriers and submarines), most of the world's warships remained oil-powered, as did aircraft, armor, and transport. In addition, each new generation of weapons required more oil than its predecessors. Thus, while the advent of the atomic age meant that access to oil would not have been a key factor in a full-scale war between the United States and the Soviet Union, which presumably would have been fought primarily with nuclear weapons and ballistic missiles, such conflicts as the wars in Korea, Vietnam, and the Persian Gulf were fought with conventional, largely oil-powered weapons, thus demonstrating the continued centrality of oil-powered forces, and hence oil, to military power.

Oil's economic importance increased after World War II as the United States intensified its embrace of patterns of socioeconomic organization premised on high levels of oil use, and western Europe and Japan made the transition from coal to oil as their main source of energy. U.S. and world oil consumption skyrocketed in the 1950s and 1960s. Between 1950 and 1972, total world energy consumption increased 179 percent, much faster than population growth, resulting in a doubling of per capita energy consumption. Oil accounted for much of this increase, rising from 29 percent of world energy consumption in 1950 to 46 percent in 1972. By 1973, oil accounted for 47 percent of U.S. energy consumption. Western Europe and Japan were even more dependent on oil for meeting their energy needs; by 1973 oil accounted for 64 percent of west European energy consumption and 80 percent of Japanese energy consumption.

Control of oil played a vital role in establishing and maintaining U.S. preeminence in the postwar international system. Adding to its domestic power base, the United States consolidated its control of world oil in the decade following World War II. By the mid-1950s, U.S. oil companies were firmly entrenched in the great oil-producing areas outside the Soviet Union. Equally, if not more important, the United States, as the dominant power in the Western Hemisphere, controlled access to the region's oil, and the United States alone had the economic and military power to secure Western access to Middle East oil.

The Soviet Union also possessed a powerful domestic oil industry, but despite geographical proximity, extensive efforts, and widespread anti-Western sentiment in Iran and the Arab world, the Soviets failed to achieve a secure foothold in the Persian Gulf and had little impact on the region's oil industry. The Soviets had even less influence over the Western Hemisphere's oil producers. Indeed, the U.S.-led economic boycott of Cuba forced the Soviets to supply the one foothold they possessed in the Western Hemisphere with oil at subsidized prices.

The strong position of the United States in world oil provided multiple advantages. In addition to being central to military power and economic prosperity, control of oil gave the United States leverage over its allies and its former and prospective enemies. U.S. policymakers saw economic growth as essential to preventing the recurrence of the divisive ideological and social conflicts of the interwar years. Soviet expansion into eastern and central Europe as a result of World War II left the Soviet Union in control of almost all of Europe's known indigenous oil reserves as well as important sources of coal in Poland and the Soviet zone of Germany. Making matters worse, postwar western Europe faced a coal shortage of alarming proportions owing to wartime overproduction and destruction and postwar food, transportation, and other problems.

To fuel economic recovery and to prevent western Europe from becoming dependent on the Soviets for energy, the United States sought to ensure that this critical area received the oil it needed. Economic growth, in turn, was crucial to mitigating the divisive class conflicts that had divided European and Japanese society in the first half of the century. Economic growth and prosperity undercut the appeal of leftist parties, financed the welfare state, perpetuated the ascendancy of moderate elites, and sustained the cohesion of the Western alliance. By controlling access to essential oil supplies, the United States was able to reconcile its aim of German and Japanese economic recovery and integration into a Western alliance with that of ensuring against the recurrence of German and Japanese aggression.

Economic growth in western Europe and Japan was central to the containment of Soviet power and influence during the Cold War because it helped prevent these areas from falling to communism through internal processes. Finally, for many years after World War II the Soviets lacked sufficient oil to fight a major war. Hit hard by wartime damage, disruption, transportation problems, equipment shortages, and overuse, Soviet oil production dropped after the war, and the Soviet Union was a net importer of oil (mostly from Romania) until 1954. Exclusion of the Soviets from the Middle East retained oil for Western recovery, and kept the Soviets short of oil. In addition, U.S. and British strategic planners wanted to keep the Soviets out of the Middle East because the region contained the most defensible locations for launching a strategic air offensive against the Soviet Union in the event of a global war. Throughout the Cold War, ensuring Western access to Middle East oil was a basic objective of U.S. foreign policy.

THE ORIGINS OF U.S. FOREIGN OIL POLICY

Access to foreign oil first emerged as an issue in U.S. foreign policy following World War I, because of the growing importance of oil to modern industrial society and modern warfare, fear of exhaustion of U.S. domestic reserves, and the need of U.S. companies with foreign markets for additional sources of supply. Although U.S. oil production quickly rebounded with several new oil finds, culminating in the discovery of the great East Texas oil field in 1930, increasing the presence of U.S. companies in foreign oil fields allowed U.S. companies to supply their foreign markets from overseas sources. Not only was foreign oil usually cheaper to produce and transport, thus boosting company profits, but utilizing over-seas oil to meet foreign demand reduced the potential drain on U.S. reserves.

Rejecting such alternatives as government ownership of oil reserves or the division of the world into exclusive spheres of influence, the United States insisted instead on the Open Door policy of equal opportunity for U.S. oil companies to gain access to foreign oil. A clash with the British over access to Middle East oil was averted when the U.S. government threw its support behind private cooperative arrangements between U.S. and British oil corporations. A multinational consortium, the Iraq Petroleum Company, established in 1928, allowed selected U.S. oil companies access to Iraq's oil along with British and French companies. To ensure that the development of the region's oil took place in a cooperative manner, the consortium agreement contained a self-denying ordinance that prohibited its members from engaging in oil development within the area of the old Ottoman Empire, which was marked on a map with a red line. In addition to the Red Line Agreement, the major British and U.S. oil companies sought to manage the world oil economy through a series of agreements between 1928 and 1934 that allocated markets, fixed prices, eliminated competition, and avoided duplication of facilities.

The U.S. government successfully supported subsequent efforts by other U.S. oil companies to gain concessions in the Middle East. In 1930, Standard Oil of California (SOCAL), which had not been party to the cooperative agreements, obtained a concession on the island of Bahrain, off the coast of Saudi Arabia, and in 1933 obtained extensive concession rights in Saudi Arabia. The Texas Company joined forces with SOCAL in Bahrain and Saudi Arabia in 1936. Meanwhile, Gulf Oil Company, in partnership with Anglo-Persian, had gained access to Kuwait, which was not within the Red Line.

U.S. and British companies also worked together to control Latin American oil. U.S. and British oil companies had been active in Mexico since the turn of the century, drawn by the rich deposits along the Gulf of Mexico coast and the generous terms offered by Mexican dictator Porfirio Díaz. Production continued during the revolution (1910–1920), and Mexico was briefly the world's leading oil exporter during World War I and the early 1920s.

One of the chief goals of the Mexican revolution was to reassert national control over the nation's economic life. The revolutionary constitution of 1917 reserved subsoil rights to the state, leading to almost a decade of conflict with the foreign oil companies, who had convinced Díaz to go against Spanish law and grant them ownership of subsoil rights. Private ownership of subsoil rights would make it difficult for Mexico to share in the profits generated by oil exports since the oil companies, as owners of the oil, would not have to pay royalties to the Mexican government. Although the United States and Mexico were able to work out a compromise that protected the position of companies already operating in Mexico, Mexican oil production declined sharply during the 1920s as the major oil companies remained concerned over the course of the revolution and shifted their investment to Venezuela. By the eve of World War II, Venezuela had become the third leading oil producer in the world and the leading exporter.

In March 1938, a labor dispute between the major oil companies and Mexican oil workers resulted in government intervention and the nationalization of the main U.S. and British oil companies operating in Mexico. Not only did the companies lose their properties, but henceforth foreign capital was denied access to a basic sector of the Mexican economy. Moreover, the resource in question was an exportable commodity in great demand by the developed countries. Thus, the Mexican action challenged not only the position of the international oil companies but also the role of multinational corporations in the economic development of what would become known as the Third World.

The oil companies reacted strongly to nationalization, instituting a boycott of Mexican oil and pressuring oil equipment manufacturers not to sell equipment to Petróleos Mexicanos (Pemex), the state-owned oil company that took over the nationalized properties. Concerned about the impact of nationalization on U.S. investment abroad, the Department of State supported the companies' demands for full and immediate compensation. Although President Franklin D. Roosevelt softened "immediate" compensation to "prompt," Mexico could only raise the funds to pay compensation through the long-term operation of the industry. Since the companies, with the support of the U.S. government, were working to prevent Mexico from selling its oil abroad, the demand for full and prompt compensation amounted to denying Mexico the means of carrying out nationalization.

The Mexicans refused to give in, however, and Pemex turned to Germany, Italy, and Japan for markets and equipment. In addition to oil, U.S. economic interests in Mexico included mining, ranching, and manufacturing firms, and the worsening international situation provided further impetus for a shift in U.S. strategy. In November 1941, with war imminent, the U.S. government reached agreement with Mexico on compensation. Contrary to the views of some scholars, the settlement of the oil controversy did not constitute acceptance of nationalization or abandonment of the oil companies. The U.S. government remained opposed to nationalization and viewed settlement of the compensation issue not only as necessary to ensure Mexico's cooperation in international affairs but also as a way to keep the door open for U.S. companies to return to Mexico in the future. The agreement was limited to the issue of compensation for the expropriated properties and was significantly silent on the question of the future status of foreign participation in the Mexican oil industry. For the rest of the 1940s, the United States sought, albeit unsuccessfully, to convince the Mexican government to reverse nationalization.

Concerned not to repeat the Mexican experience, the U.S. government played a major role in facilitating a settlement between the Venezuelan government and the major oil companies that resulted in a fifty-fifty profit-sharing agreement in early 1943. Although some scholars see the oil settlement as evidence of the subordination of the interests of U.S. corporations to larger foreign policy goals, those goals and the interests of the U.S. oil companies involved did not conflict but were complementary. Both aimed at ensuring the continuation of the companies' control and continued U.S. and British access to Venezuelan oil. In addition to profit sharing, the settlement included confirmation of the companies' existing concession rights, their extension for forty years, and the opening of new areas to the companies. Venezuelan oil production increased substantially, and Venezuelan oil played an important role in fueling the British and U.S. war efforts.

Although the United States was able to fuel its own war effort and that of its allies from domestic oil production during World War II, the increased consumption strained U.S. oil reserves. The possibility of running short of oil led to concerns over the long-term adequacy of U.S. reserves. Policymakers in the U.S. government soon focused their attention on the Middle East, especially on Saudi Arabia. The Middle East not only contained one-third of the world's known reserves; it also offered better geological prospects for the discovery of additional reserves than any other area.

Believing that government ownership was necessary to protect the national interest and to ensure public support for whatever measures might be necessary to secure access to Saudi Arabia's oil, the Roosevelt administration contemplated creating a government-owned national oil company to take over the concession rights in Saudi Arabia held by the Arabian American Oil Company (ARAMCO), a jointly owned subsidiary of Standard Oil of California and the Texas Company. It also proposed having the U.S. government construct and own an oil pipeline stretching from the Persian Gulf to the Mediterranean as a means of demonstrating and securing the U.S. stake in Middle East oil. By war's end, the U.S. government had also worked out the text of an oil agreement with Great Britain that called for guarantees of existing concessions, equality of opportunity to compete for new concessions, and a binational petroleum commission to allocate production among the various producing countries in order to integrate Middle East oil into world markets with minimal disruption. Expansion of Middle East production would enhance U.S. security by reducing the drain on U.S. and other Western Hemisphere reserves.

Divisions within the U.S. oil industry, coupled with the strong ideological opposition of American business and politicians to government involvement in corporate affairs, derailed these initiatives. In the case of the plan to purchase ARAMCO, the company's owners, while willing to accept some government involvement to secure their position and provide capital for further development of their potentially rich concession, were not willing to sell out entirely. The rest of the oil industry, ideologically and pragmatically opposed to government involvement in corporate affairs, vigorously opposed the plan, forcing its abandonment.

Similarly, while the companies that would benefit from the proposed pipeline supported the plan, the other major oil companies opposed it because it would give their competitors significant advantages. Domestic producers, fearing that the pipeline would allow Middle East oil to push Venezuelan oil from European markets into the United States, also opposed the plan. Congress, increasingly conservative and ever receptive to appeals cast in terms of defense of free enterprise, joined the opponents to defeat the pipeline plan.

The Anglo-American Oil Agreement was compatible with the interests of the major U.S. oil companies. All the U.S. majors held concessions in the Middle East, and all initially believed that an international allocation mechanism was needed to assimilate growing Middle East production without disrupting markets. The domestic oil industry, on the other hand, had worked out a system of production control in the 1930s, which protected the interests of smaller companies. Domestic producers feared that the proposed petroleum commission would allow cheap foreign oil to flood the U.S. market. While the U.S. government had no intention of destroying the domestic oil industry, it did intend to use the proposed commission to increase Middle East oil production and conserve U.S. oil supplies for future defense needs. The concerns of the independent oil companies were heard in Congress, and the Anglo-American Oil Agreement never came to a vote.

The only foreign oil policy on which all segments of the industry could agree was that the government should limit its involvement in foreign oil matters to providing and maintaining an international environment in which private enterprise could operate with security and profit. Thus, in the end, the United States, as it had in the 1920s, turned to the major oil companies to secure the national interest in foreign sources of oil. Even though oil industry divisions limited some types of government assistance to the major oil companies, reliance on the major oil companies as vehicles of the national interest in foreign oil enhanced the influence of the oil industry and facilitated control of the world oil economy by the most powerful private interests.

In a series of private deals in 1946 and 1947, the major U.S. oil companies managed to secure their position in the Middle East by joining forces with each other and their British counterparts. The centerpiece of the so-called "great oil deals" was the expansion of ARAMCO's ownership to include Standard Oil of New Jersey and Socony-Vacuum. The result was a private system of worldwide production management that facilitated the development of Middle East oil and its integration into world markets, thus reducing the drain on Western Hemisphere reserves. To help consolidate this system, the U.S. government supported fifty-fifty profit-sharing arrangements between the major oil companies and host governments. Owing to provisions in the U.S. tax code granting U.S. corporations credits for taxes paid overseas, this solution to host-country demands for higher revenues transferred the cost of higher payments from the oil companies to the U.S.

Treasury. Utilizing private oil companies as vehicles of the national interest in foreign oil did not mean that the government had no role to play. On the contrary, the policy required the United States to take an active interest in the security and stability of the Middle East. This was especially the case in Iran, where fear of Soviet expansion and determination to maintain access to the region's resources transformed U.S. policy from relative indifference to deep concern for Iranian independence and territorial integrity. To secure Iran's role as a buffer between the Soviet Union and the oil fields of the Persian Gulf, the United States provided economic and military assistance and gradually assumed Britain's role as a barrier to the expansion of Russian influence in the Middle East. U.S. support came at a price, however. During this period, the United States began looking to the shah of Iran as the main guarantor of Western interests in Iran. U.S. support for the shah and the Iranian military was crucial to the young shah in his struggle with internal rivals for power.

Although mention of oil was deliberately deleted from President Harry Truman's address, the Truman Doctrine (1947), with its call for the global containment of communism, provided a political basis for an active U.S. role in maintaining the security and stability of the Middle East. The Marshall Plan also helped solidify the U.S. position in the region by providing dollars for western Europe to buy oil produced by U.S. companies from their holdings in the Middle East. Fully 10 percent of Marshall Plan aid went to finance oil imports.

U.S. support for a Jewish homeland in Palestine complicated but did not nullify U.S. efforts to maintain access to Middle East oil. The apparent conflict between U.S. economic and strategic interests in Middle East oil on one hand, and its emotional support for a Jewish homeland in Palestine on the other, led the United States to follow a policy of minimal involvement. Although the United States voted for the United Nations resolution calling for the creation of Israel in November 1947 and recognized the new country immediately in May 1948, it refrained from sending troops, arms, or extensive economic assistance to enforce the UN decision for fear of alienating the Arab states and providing an opening for Soviet influence in the Middle East. Ironically, the Palestine problem enhanced the status of the major oil companies as vehicles of the national interest in Middle East oil. While official relations with the Arab states suffered somewhat because of U.S. support for Israel, the oil companies managed to maintain a degree of distance from government policy and thus escaped the burden of Arab displeasure. On the other hand, failure to enforce the UN decision led to the issue being decided through arms, with results that still haunt the region.

The policy of public support for private control of the world's oil reinforced traditional U.S. opposition to economic nationalism, especially when it affected U.S. companies and threatened to reduce oil production for export to world markets. U.S. security interests called for the rapid and extensive development of Mexico's nearby reserves, but U.S. assistance to Mexico to achieve that goal could be seen as a reward for nationalization and thus encourage other nations to take over their oil industries. Unable to convince the Mexican government to reverse nationalization, the United States maintained its policy of providing no assistance to Pemex, and, as it had before the war, focused instead on Venezuela. Although willing to work with the nationalist government that ruled Venezuela between 1945 and 1948 as long as it did not challenge corporate control of the oil industry, the United States stood by when the democratically elected government was ousted in a November 1948 military coup, and worked closely with the brutal dictatorship that ruled Venezuela for the next decade.

The Truman administration also sought a solution to the problem of oil security by under-taking a large-scale program of synthetic fuel production as a way of obtaining oil from domestic sources. Synthetic fuel production required massive amounts of steel, produced millions of tons of waste products, and cost more than natural petroleum. Although a potential boon to the ailing coal industry, the oil industry opposed the development of competition at public expense, and convinced the Eisenhower administration to cancel the government's synthetic fuel program in 1954.

The U.S. response to the nationalization of the Iranian oil industry highlighted the main elements of U.S. foreign oil policy—opposition to economic nationalism, an activist role in maintaining the stability and Western orientation of the Middle East, and public support for and non-intervention in the operations of the major oil industry. The Iranian crisis of 1951–1954 grew out of Iran's nationalization of the British-owned Anglo-Iranian Oil Company (AIOC) in the spring of 1951. AIOC's Iranian operations were Britain's most valuable overseas asset, and the British feared that if Iran succeeded in taking over the company all of Britain's overseas investments would be jeopardized. Although the United States shared British concerns about the impact of nationalization on foreign investment, it also feared that British use of force to reverse nationalization could result in turmoil in Iran that could undercut the position of the shah, boost the prospects of the pro-Soviet Tudeh party, and might even result in intervention by the Soviets at Iranian invitation. The crisis broke out in the midst of the Korean War, making U.S. policymakers extremely reluctant to risk another confrontation. Therefore, the United States urged the British to try to reach a negotiated settlement that preserved as much of their position as possible. The British, however, preferred to stand on their rights and force Iran to give in by organizing an international boycott of Iranian oil and attempting to manipulate Iranian politics.

U.S. efforts to mediate a settlement failed, as did less public attempts to convince the shah to remove nationalist Prime Minister Mohammad Mossadeq. By 1953 the oil boycott had sharply reduced Iran's export earnings and decimated government revenues, and British and U.S. involvement in Iranian internal affairs had exacerbated the polarization of Iranian politics. Moreover, the end of the Korean War and the completion of the U.S. military buildup allowed a more aggressive posture toward Iran. Fearing that Mossadeq might displace the shah and that Tudeh influence was increasing, the United States and Britain organized, financed, and directed a coup that removed Mossadeq and installed a government willing to reach an oil settlement on Western terms.

Following the coup, the United States enlisted the major U.S. oil companies in an international consortium to run Iran's oil industry. Cooperation of all the majors was necessary in order to fit Iranian oil, which had been shut out of world markets during the crisis, back into world markets without disruptive price wars and destabilizing cutbacks in other oil-producing countries. The antitrust exemption required for this strategy undercut efforts by the Department of Justice to challenge the major oil companies' control of the world oil industry on antitrust grounds and strengthened the hand of the major oil companies, whose cooperation was needed to ensure Western access to the region's oil.

The U.S. role in the coup and the subsequent inclusion of U.S. oil companies in the Iranian consortium mark important milestones in the gradual process by which the United States replaced Great Britain as the main guardian of Western interests in the Middle East. The experience also reinforced the U.S. tendency to see the shah as the best guarantor of Western interests in Iran. U.S. security and economic assistance helped the shah establish a royal dictatorship, ending the progress Iran had been making toward more representative government. Iranian nationalism, in turn, veered from liberalism and secularism, laying the groundwork for the fundamental rupture in Iranian-American relations that followed the Iranian revolution of 1978–1979. Finally, the short-term success of the Iranian model of covert intervention influenced subsequent U.S. actions in the Middle East, Latin America, and Asia.

COPING WITH CHANGE

With Mossadeq's fate serving as a warning to those who might challenge the international oil companies and their sponsors, the 1950s and 1960s were the golden age of the postwar oil regime. At the peak of their influence in the 1950s, the seven major oil companies controlled over 90 percent of the oil reserves and accounted for almost 90 percent of oil production outside the United States, Mexico, and the centrally planned economies. Moreover, they owned almost 75 percent of world refining capacity and provided around 90 percent of the oil traded in international markets.

Despite these strengths, the system contained the seeds of its own demise. The Iranian crisis demonstrated that threats to Western access to Middle East oil could come from within the region. Although the United States did not rule out the possibility of Soviet military intervention in the Middle East, U.S. threat assessments increasingly focused on the decline of British power, instability within the countries of the region, the anti-Western cast of Middle Eastern nationalism, and turmoil resulting from the Arab-Israeli conflict.

The Suez crisis grew out of the nationalization of the British-and French-owned Suez Canal Company by Egyptian nationalist leader Gamal Abdel Nasser in July 1956. The Suez Canal was an important symbol of the Western presence in the Middle East and a major artery of international trade; two-thirds of the oil that went from the Persian Gulf to western Europe traveled through the canal. Viewing Nasser's action as an intolerable challenge to their position in the region, the British, together with the French, who resented Nasser's support for the Algerian revolution, and the Israelis, who felt threatened by Egyptian support for guerrilla attacks on their territory, developed a complex scheme to recapture control of the canal and topple Nasser through military action.

The plan, which they put into action in late October, depended on U.S. acquiescence and cooperation in supplying them with oil if the canal were closed. The Egyptians closed the canal by sinking ships in it. In addition, Saudi Arabia embargoed oil shipments to Britain and France, and Syria shut down the oil pipeline from Iraq to the Mediterranean. Incensed by his allies' deception, concerned about the impact of their actions on the Western position in the Middle East, and embarrassed by the timing of the attack—just before the U.S. presidential election and in the midst of the Soviet suppression of the Hungarian revolt—President Dwight D. Eisenhower put pressure on the British, French, and Israelis to withdraw. The United States refused to provide Britain and France with oil, blocked British attempts to stave off a run on the pound, and threatened to cut off economic aid to Israel. The pressure worked. Following the withdrawal of Anglo-French forces, the U.S. government and the major oil companies cooperated to supply Europe with oil until the canal was reopened and oil shipments from the Middle East to Europe restored.

In the wake of the Suez crisis, President Eisenhower pledged to protect Middle East states from the Soviet Union and its regional and local allies. In addition, the United States sought to bolster its friends in the region through economic and military assistance. With the exception of Lebanon, where fourteen thousand U.S. troops landed in July 1958 to shore up a pro-Western regime, most of these friends were authoritarian monarchies, demonstrating that despite its rhetoric about democracy, the United States was primarily interested in access to oil. Israel presented the United States with an additional dilemma. On one hand, it was pro-Western and militarily the most powerful country in the region. On the other hand, U.S. support for Israel was a major irritant in relations with the Arab states of the Middle East, including the key oil-producing countries in the Persian Gulf.

The Suez crisis highlighted the growing importance of Middle East oil for western Europe. During the 1950s and the first half of the 1960s, the United States was capable of supplying its oil needs from domestic sources, and Middle East oil went mainly to western Europe and Japan. Some Middle East oil made its way into the United States, and, more importantly, Middle East oil displaced Venezuelan oil from European markets and led to an increase in U.S. oil imports with consequent pressure on prices and high-cost domestic producers.

The question of oil imports presented U.S. policymakers with a strategic dilemma. If what would be needed in an emergency was a rapid increase in production, oil in the ground was of little use, and even proved reserves would not be particularly helpful. The need could only be filled by spare productive capacity. Too high a level of imports would undercut such capacity by driving out all but the lowest cost producers. Moreover, reliance on imports, especially from the Middle East, was risky from a security standpoint because of the chronic instability of the region and its vulnerability to Soviet attack. However, restricting imports and encouraging the increased use of a nonrenewable resource would eventually under-mine the goal of maintaining spare productive capacity and preserving a national defense reserve.

Rising oil imports led to demands by domestic producers and the coal industry for protection against cheaper foreign oil. In contrast, the President's Materials Policy Commission, appointed by President Truman in January 1951 and headed by the chairman of the Columbia Broadcasting System, William S. Paley, had called for a policy of ensuring access to the lowest cost sources of supply wherever located. The commission's report, issued in June 1952, rejected national self-sufficiency in favor of interdependence, arguing that the United States had to be concerned about the needs of its allies for imported raw materials and about the needs of pro-Western less developed countries for markets for their products. Although the commission admitted that self-sufficiency in oil and other vital raw materials was possible, it argued that it would be very expensive, that the controls necessary to make it possible would interfere with trade, that it would undercut the goal of rebuilding and integrating western Europe and Japan under U.S. auspices, and that it would increase instability in the Third World by limiting export earnings.

Nevertheless, after attempts to implement voluntary oil import restrictions failed, the Eisenhower administration, in March 1959, imposed mandatory import quotas, with preferences given to Western Hemisphere sources. Although the Mandatory Oil Import Program (MOIP) seemed to be a victory for advocates of national self-sufficiency, the result, ironically, was to make the United States more dependent on oil imports in the long run because the restrictions meant that increases in U.S. consumption were met mainly by domestic production.

High levels of oil use were built into the U.S. economy in several ways. Following World War II, the U.S. transportation sector was transformed as automobiles, trucks, buses, airplanes, and diesel-powered locomotives replaced steam and electric-powered modes of transportation. Between 1945 and 1973, U.S. car registrations increased from 25 million to over 100 million, and per capita gasoline consumption in the same period skyrocketed as fuel efficiency fell and gas-guzzling car models grew more popular. Neglect of public transportation and dispersed housing patterns fostered by increasing suburbanization further fueled increased automobile use. In addition, the nation's truck population grew from 6 million in 1945 to around 21 million in 1973, and trucks increased their share of intercity freight traffic from 16 percent in 1950 to 21 percent in 1970.

Public policy aided and abetted these changes. Since the early 1930s, the so-called highway lobby had been promoting public expenditures for highway construction. Between 1956 and 1970, the federal government spent approximately $70 billion on highways, as contrasted with less than $1 billion on rail transit.

The dramatic rise in U.S. oil consumption, coupled with a shift in investment to more profitable overseas areas, decimated the U.S. reserve position. By 1965, the U.S. share of world production had fallen to about a quarter and by 1972 to a fifth. The U.S. share of world oil reserves declined even more drastically, from around 46 percent on the eve of World War II to a little more than 6 percent in 1972. With U.S. oil consumption continuing to climb, domestic production was no longer able to meet demand, and oil imports rose from 9 percent of U.S. consumption in 1954 to 36 percent by 1973.

U.S. oil import restrictions also put downward pressure on world oil prices by limiting U.S. demand for foreign oil. Beginning in the mid-1950s, increasing numbers of smaller, mostly U.S.-owned companies challenged the majors' control over the world oil economy by obtaining concessions in Venezuela, the Middle East, and North Africa. Drawn by the lure of high profits, aided by the increasing standardization and diffusion of basic technology and the security provided by the Pax Americana, and unconcerned about reducing the generous profit margins available in international markets, the newcomers cut prices in order to sell their oil. Pressure from the production of these companies, coupled with the reentry of Soviet oil into world markets in the late 1950s, exerted a steady downward pressure on world oil prices.

Declining oil prices led to a resurgence of economic nationalism in the producing countries, whose incomes were reduced. In September 1960, following cuts in posted prices (the price on which government revenues were calculated) by the major oil companies, the oil ministers of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela met in Baghdad and formed the Organization of the Petroleum Exporting Countries. OPEC was able to prevent further declines in posted prices, and a strong increase in world demand in the 1960s allowed the companies to increase production, thereby maintaining their overall level of profits. As new sources of African production entered the market later in the decade, however, market prices resumed their downward trend.

Despite falling prices, the spectacular increases in oil consumption enhanced the position of Middle East oil in the world oil economy. At the same time the U.S. oil position was eroding, the Middle East and North Africa were becoming the center of the world oil industry. By 1972 these areas accounted for 41 percent of world oil production and contained almost twothirds of the world's proved reserves. Reacting to the changing circumstances, the region's oil producers, along with other OPEC members, began to pressure the oil companies to gain control of pricing and production decisions.

The profound political, economic, and strategic consequences of the U.S. involvement in the Vietnam War and the overall course of the Cold War reinforced the geological and economic factors that gave Middle East oil increased importance. By the early 1970s, the Soviet Union had achieved rough strategic parity with the United States, which raised the risks involved in U.S. intervention in the Middle East. Moreover, in the midst of the Vietnam War, the British decided to end their military commitments "east of Suez." To make matters worse, U.S. relations with the Arab oil producers, including Saudi Arabia, were becoming increasingly strained owing to U.S. support for Israel following the 1967 Arab-Israeli war, which left most of Palestine under Israeli control.

When the United States moved to airlift arms to Israel during the 1973 Arab-Israeli War, the Arab members of OPEC imposed an embargo on oil shipments to the United States and the Netherlands and reduced shipments to other countries, depending on their position in the Arab-Israeli dispute. The oil companies carried out the embargo, though they undercut its political purpose by shifting non-Arab oil to the embargoed countries and distributing the cutbacks so that both embargoed and nonembargoed countries had their oil imports cut by about 15 percent. Arab OPEC members unilaterally raised the price of oil by 70 percent in October, and by December the price had quadrupled from its level before the embargo. Although Iran and other non-Arab OPEC members did not join the embargo and cut back production and exports, they were happy to go along with the price increases spurred by the embargo and production cutbacks.

Differences among the United States and its allies on higher oil prices and on the Arab-Israeli conflict undercut attempts at a unified response to the embargo. Although there was some tough talk about military action to regain control of the Middle East oil fields, the reality of the Cold War and fears during the Gulf War of 1991 (later borne out), that use of force would lead to the destruction of the oil fields, prevented such action. U.S. allies, noting that higher international oil prices could provide the United States, which was much less dependent on imported oil than they were, with a means of reversing the decline in its share of world production, doubted the U.S. commitment to lowering oil prices, further complicating a unified response.

The United States sought to salvage the old oil order by organizing the Western consuming nations in a united front against OPEC. In February 1974 the U.S.-initiated Washington Energy Conference laid the groundwork for the establishment later in the year of the International Energy Agency. The IEA called on member states to reduce their reliance on Middle East oil by diversifying their sources of energy and adopting policies promoting reductions in oil consumption.

The United States also moved to shore up its position with the oil-producing countries. In 1969, President Richard Nixon had announced that the United States could no longer intervene directly in all parts of the world, but rather would rely on regional allies, which it would provide with arms and other assistance to carry out their tasks. In the Middle East, the United States looked to Iran and Saudi Arabia as the "twin pillars" of pro-Western stability in the region, and rewarded the two monarchies with almost unlimited access to the latest U.S. military equipment. Between 1970 and 1978, for example, the United States sold Iran over $20 billion worth of military equipment and training. The United States also provided massive military and economic assistance to Israel following the 1973 war, viewing the Jewish state as a strategic asset and counter to Soviet client-states such as Syria and Iraq. Egypt (after 1973) and Turkey also received large amounts of U.S. aid.

The Arab oil embargo had a major economic impact. Higher oil prices intensified the economic problems faced by the United States and the other Western industrial countries in the 1970s, especially inflation, which was now accompanied by stagnation and increased unemployment. Non–oil-producing developing countries were also hit hard as they had to pay higher prices for products from the developed countries as well as for oil. Many countries borrowed large sums from Western banks to cover their costs, a move that contributed to the Third World debt crisis of the 1980s when the United States sharply raised interest rates in late 1979.

In contrast, higher prices enabled the Soviets, who were in the process of developing new oil and gas fields in Siberia, to increase their export earnings. While allowing the Soviets to import large amounts of Western grain and machinery, most of the exports came from new areas east of the Urals, and the cost of developing the necessary transportation infrastructure drained scarce capital from other sectors of the economy. Oil earnings also tended to mask the Soviet Union's increasingly severe economic problems and to reduce incentives for undertaking sorely needed structural reforms. The oil crisis may also have contributed to Soviet decisions to increase their involvement in the Third World in the 1970s, decisions that proved costly not only in terms of resources but also in their negative impact on détente.

The first oil shock also accelerated efforts by oil-producing countries to gain control of their oil industries. While the timing and extent of nationalization differed, most OPEC nations effectively nationalized their oil industries during the 1970s. The equity participation of the international oil companies in OPEC production fell from about 94 percent in 1970 to about 12 percent in 1981. Although they lost control of production and their ability to set prices, the major oil companies received generous compensation. In most cases, the companies maintained access to the oil they had previously owned through long-term contracts and were retained to manage the newly nationalized industries. Moreover, higher oil prices provided the major oil companies with windfall profits, easing the pain of losing formal control of their concessions.

Because it was both a major oil producer as well as the leading oil consumer, higher oil prices posed a dilemma for the United States. On one hand, higher prices could provide U.S. domestic producers with incentives for increased exploration and development, making the nation more self-sufficient in oil. On the other hand, higher prices fed inflation and slowed economic growth. The fact that the oil companies profited from higher oil prices and oil shortages prompted suspicions that the companies had colluded with OPEC to produce such an outcome. These suspicions made it impossible for the U.S. government to remove oil price controls, initially imposed in August 1971 as part of a larger package of wage and price controls. Although lower domestic oil prices lessened the impact of the rise in international oil prices on the U.S. economy, they also encouraged consumption and led to increased demand being met mainly by imported oil. When the second oil shock hit in 1979, the United States was more dependent on oil imports than in 1973.

The overthrow of the shah of Iran in early 1979 provoked this second oil shock, disrupting markets and causing prices to double. The fall of the shah and fears of internal unrest in Saudi Arabia convinced U.S. policymakers that the previous policy of reliance on regional surrogates to guard Western interests in the Middle East was no longer viable. While Israel was useful to counter Soviet clients, too great a reliance on Israel could prove counterproductive by alienating the Arab states. Therefore, the United States began to explore the possibility of introducing U.S. military forces into the region. These plans received a boost from the Soviet intervention in Afghanistan in December 1979, which revived fears of direct Soviet encroachment in the region. In addition, the United States was concerned that Soviet and Cuban involvement in the Horn of Africa, an area in the northeast part of the continent close to the Middle East, could threaten Western access to Middle East oil.

The prospect of losing access to Middle East oil led President James Earl Carter to announce in January 1980 that "an attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such assault will be repelled by any means necessary, including military force." The Carter administration followed up soon thereafter with steps to create the long-discussed rapid deployment forces for possible use in the region. Planned from the time of the collapse of the shah's regime, the move reflected U.S. belief that local forces were not sufficient to protect Western interests in the Middle East from either Soviet aggression or internal instability. The Carter administration also sought to strengthen the "special relationship" between the United States and Saudi Arabia by continuing to sell sophisticated arms to the desert kingdom and by allowing the Saudis to buy massive amounts of U.S. Treasury securities outside normal channels.

The administration of Ronald Reagan (1981–1989) built on these initiatives, forging a foreign oil policy based on market forces and military power. Reagan began by ending oil price controls, allowing U.S. prices to rise to international levels in the hope that this would provide incentives to domestic producers and spur conservation. The Reagan administration continued the buildup of U.S. forces in the Middle East, transforming the Rapid Deployment Force into the Central Command. The Reagan administration also stressed close relations with Saudi Arabia, and worked with the Saudis and other conservative Persian Gulf producers to drive down international oil prices. Lower oil prices would not only help Western consumers but would also cut Soviet oil earnings. Finally, the United States began filling the Strategic Petroleum Reserve (SPR), established in 1977 to reduce the nation's vulnerability to oil supply interruptions. By 1990 the SPR held almost 600 million barrels of oil, somewhere between eighty and ninety days of net oil imports at then prevailing import levels. The other industrial nations also built up similar, and in some cases higher, levels of strategic reserves. Strategic reserves, although expensive to create and maintain, functioned as a substitute for the spare production capacity that the United States had once possessed.

Higher oil prices worked their way through the economies of the Western industrial nations and Japan to encourage significant increases in energy efficiency. The amount of energy required to produce a dollar of real gross national product declined 26 percent between 1972 and 1986. The gains in efficiency in oil use were even more dramatic: by 1990, 40 percent less oil was used in producing a dollar of real GNP than in 1973. As a result, by 1990 oil played a less significant role in the economies of the Western industrial nations than it had before the two oil shocks of the 1970s.

Higher oil prices also encouraged consumers to switch to other energy sources. While the use of coal and nuclear power increased, both turned out to have significant drawbacks, particularly those relating to the environment, and neither addressed the transportation sector, which accounted for the bulk of oil use. Although U.S. automobile fuel efficiency almost doubled between 1970 and 1990, this gain was partly eroded by a 40 percent rise in total motor vehicle use in the same period. In addition, the number of trucks on U.S. roads tripled between 1970 and 1990, and their fuel consumption doubled.

Higher oil prices also encouraged the development of alternative sources of oil. With higher prices and improving technologies of exploration and development, new sources of oil came on line in Alaska, Mexico, the North Sea, and the Soviet Union. U.S. production increased only briefly, however, and soon leveled off at around seven million barrels a day. Middle East oil production, which had accounted for 41 percent of world output in 1973 and 37 percent in 1977, fell to 19 percent by 1985. In 1986, with supply increasing and demand dropping, oil prices collapsed.

The collapse of oil prices provided a boost to Western economies but it also decimated the U.S. domestic oil industry, forcing the closure of high-cost wells. All producers experienced huge declines in export earnings. The Soviet Union was especially hard hit, and the collapse of oil earnings undercut Soviet leader Mikhail Gorbachev's hopes to use oil revenues to cushion the shock of economic reform. By the end of the decade, the Soviet oil industry was suffering from the same problems affecting the nation as a whole, and production and exports declined sharply.

Although lower prices led to increased demand for oil, producers in the Middle East captured most of the increase because they controlled the lowest cost fields. By 1990, oil imports were making up nearly half of U.S. oil supply, around 70 percent of western Europe's oil supply, and over 90 percent of Japan's oil supply; and 25 percent of U.S. imports, 41 percent of western Europe's imports, and 68 percent of Japan's imports originated in the Middle East.

Nevertheless, after rising sharply in the aftermath of the Iraqi invasion of Kuwait in August 1990, oil prices soon returned to preinvasion levels. The IEA contributed to stability by calling on member countries to make simultaneous use of their respective stockpiles. The success of U.S. diplomacy and military forces in the 1991 Gulf War demonstrated that with the end of the Cold War and the resulting retreat of the Soviet Union from a world role, the ability of the United States to intervene in the Middle East had increased significantly.

Low prices prevailed throughout most of the 1990s despite Iraq's exclusion from world oil markets. Russian oil exports recovered owing to Russia's need for export earnings and the drastic drop in domestic demand because of widespread deindustrialization. The Asian financial crisis of 1997 also kept demand down despite China's increasing imports. In the United States, lower oil prices led to increased consumption, as the number of private motor vehicles, especially gas-guzzling sport-utility vehicles and light trucks, continued to climb. By the end of the decade, the fuel efficiency gains of the 1980s had been lost. Rising consumption and OPEC production cuts led to sharp price increases in 2000 and 2001. What happened in the 1990s may foreshadow a pattern whereby lower prices lead to greater consumption which leads to higher prices which lead to lower consumption which leads to lower prices and the repeat of the cycle. Thus, a foreign oil policy based on market forces and military power has its own set of problems.

THE POLITICAL ECONOMY OF FOREIGN OIL POLICY

Oil has been unique as a vital resource owing to its pervasiveness in the civilian economy and its continuing centrality to military power, and maintaining access to the great oil-producing areas of the world has been a key goal of U.S. foreign policy since World War I. The objective of maintaining access to economically vital overseas areas resonated with the global conception of U.S. national security interests that emerged during World War II and dominated U.S. policy throughout the Cold War. U.S. leaders sought to prevent any power or coalition of powers from dominating Europe and/or Asia, to maintain U.S. strategic supremacy, to fashion an international economic environment open to U.S. trade and investment, and to maintain the integration of the Third World in the world economy.

Control of oil helped the United States contain the Soviet Union, end destructive political, economic, and military competition among the core capitalist states, mitigate class conflict within the capitalist core by promoting economic growth, and retain access to the raw materials, markets, and labor of the periphery in an era of decolonization and national liberation. Moreover, the strategic forces necessary for maintaining access to overseas oil were fungible; that is, they could, and were, used for other purposes in other parts of the world. Likewise, as the Gulf War demonstrated, strategic forces from other parts of the world could be used to help maintain access to oil. Thus, there has been a symbiotic relationship between maintaining power projection capabilities in general and relying on strategic forces to maintain access to overseas oil. In short, control of oil has been a key component of American hegemony.

While national security concerns have been an important source of foreign oil policy, definitions of national security and national interest have not been shaped in isolation from the nature of the society they were designed to defend. Arguments that claim a noncapitalist United States would have followed the same policies, even when sincere, assume no changes in domestic economic, social, and political structures, and thus miss the point entirely. They also ignore the constraints, opportunities, and contradictions that the structure of society, and in particular the operation of the economic system, impose on public policy.

The expansion of U.S. business abroad beginning in the late nineteenth century increasingly linked the health and survival of the U.S. political economy to developments abroad. These concerns were not restricted to fears for the nation's physical security or to the well-being of specific companies or sectors but rather were linked to concerns about the survival of a broadly defined "American way of life" in what was seen as an increasingly dangerous and hostile world.

U.S. oil companies were among the pioneers in foreign involvement, looking abroad initially for markets and increasingly for sources of oil. The U.S. government facilitated this expansion by insisting on the Open Door policy of equal opportunity for U.S. companies. Although the United States became a net importer of oil in the late 1940s, it was able to meet its oil needs from domestic resources until the late 1960s. Still, U.S. leaders were aware as early as World War II that one day the nation would no longer be able to supply its growing consumption from domestic oil production. This realization led to a determination to maintain access to the great producing areas abroad, especially in the Middle East.

Once the issue was defined in terms of access to additional oil, the interests of the major oil companies, which possessed the means to discover, develop, and deliver this oil, coincided with the national interest. In these circumstances, the major international oil companies have been vehicles of the national interest in foreign oil, not just another interest group. To maintain an international environment in which private corporations could operate with security and profit, the U.S. government became actively involved in maintaining the stability and pro-Western orientation of the Middle East, in containing economic nationalism, and in supporting private arrangements for controlling the world's oil.

Although there was a broad consensus in favor of policies aimed at ensuring U.S. control of world oil, the structure of the U.S. oil industry significantly shaped specific struggles over foreign oil policy. Like much of U.S. industry, the oil industry was divided between a mass of small-and medium-sized companies and a handful of large multinational firms. Within these divisions the competing strategies of different firms often led to intense conflict and to efforts to enlist government agencies as allies in the competitive struggle. Any public policy that seemed to favor one group of companies was certain to be opposed by the rest of the industry. Divisions within the industry were at the base of much of the oil companies' ideological opposition to government involvement in oil matters. In addition, oil companies shared the general distrust of the democratic state that prevailed throughout American business.

There were also conflicts with other energy producers, especially the coal industry, though these were somewhat muted owing to oil's near monopoly position in the transportation sector. Coal, in contrast, was used mainly for heating and electricity generation, as was natural gas, which increased its share of overall U.S. energy consumption, largely at the expense of coal. There was less conflict with industries that were themselves heavy oil users, in part because most of them were able to pass increased costs along to consumers. The automobile industry, in particular, has been heavily dependent on inexpensive oil for its very existence, and thus has shared the oil industry's interest in continued and growing use of its products.

The U.S. government was also frequently divided over foreign oil policy. Competing bureaucracies and institutions, each with their own set of organizational interests, supported different policies. While these divisions often influenced the specific contours of foreign oil policy, they generally reflected the divisions in the U.S. oil industry. For both organizational and ideological reasons, the Department of State has represented the interests of the major oil companies whose actions can have a great impact on U.S. foreign policy. Congress, in contrast, has played its traditional role as the protector of small business and often backed the numerically dominant independent oil companies and the coal industry, whose interests have been mostly within the United States. Presidents have tried to mediate the conflicts among government agencies, with Congress, and among competing industry groups, and craft compromises acceptable to the greatest number of groups possible.

Even though industry and government divisions effectively blocked some types of government actions, the splits did not reduce the oil industry's influence on U.S. foreign policy. Almost all segments of the oil industry agreed on policies aimed at creating and maintaining an international environment in which all U.S. companies could operate with security and profit. Thus, the impact of business conflict was not a free hand for government agencies but rather strict limits on government actions and control of the world oil economy by the most powerful private interests.

Foreign oil policy has been shaped not only by the structure of the oil industry, which has changed over time, but also by the privileged position of business in the United States. The oil industry has operated in a political culture that favored private interests and put significant limits on public policy. Thus, the fact that business interests were often divided and that specific business interests at times did not prevail does not mean, as some analysts argue, that the oil industry and other business sectors had little influence on U.S. foreign policy. On the contrary, the overall structure of power within the United States had a profound impact on U.S. foreign oil policy.

Corporate power not only influenced the outcome of specific decisions but more importantly, significantly shaped the definitions of policy objectives. The realization that U.S. oil consumption threatened to outpace domestic production led to plans to ensure access to foreign oil reserves. The alternative of reducing, or at least slowing, the growth of rapidly rising consumption has only rarely been seriously considered.

Part of the reason for a supply side focus has been the obvious strategic and economic advantages of controlling world oil. Nevertheless, the degree to which U.S. public policy has ignored conservation cannot be explained solely by foreign policy considerations. The consideration and adoption of alternative policies limiting the consumption of oil has also clashed with well-organized political and economic interests, deep-seated ideological beliefs, and the structural weight of an economic system in which almost all investment decisions are in private hands.

The oil industry has been one of the most modern and best-organized sectors of the U.S. economy, and both domestic and international companies have opposed policies that reduce the demand for their products. Domestic producers have argued that greater incentives for domestic production are the answer to U.S. oil needs, while companies with interests overseas have argued that they can supply U.S. oil needs, provided they receive government protection and support.

Demand-side planning, in contrast, involves end-use and other restrictions that clash with the interests of the oil industry and other industries using oil. Planning for publicly defined purposes, such as limiting demand for oil products, requires a role for public authority—supplanting the market in some areas—that has been unacceptable to the dominant political culture of the United States. In addition, the patterns of social and economic organization, in particular the availability of inexpensive private automobiles, the consequent deterioration of public transportation, and the continuing trend toward increased suburbanization, all of which were premised upon high oil consumption, have been regarded as natural economic processes not subject to conscious control, rather than as the results of identifiable, and reversible, social, economic, and political decisions. Conservation also goes against the ideology of growth and the desire, reinforced by the experiences of depression and war, to escape redistributionist conflicts by expanding production and the absolute size of the economic "pie." Finally, decisions to look to external expansion to solve internal problems rather than confront them directly has been characteristic of U.S. foreign policy throughout the nation's existence.

The structure of power within the United States has also deeply affected the U.S. response to the environmental impact of oil use. While abundant oil has helped fuel American power and prosperity, it also helped entrench social and economic patterns dependent on ever-higher levels of energy use. Whether or not these patterns are sustainable on the basis of world oil resources, it has become increasingly clear that they are not sustainable ecologically, either for the United States or as a model of development for the rest of the world.

At the beginning of the twenty-first century, oil accounted for 40 percent of world energy demand, and energy use was the primary source of carbon dioxide, the main greenhouse gas. For this reason, environmental scientists considered air pollution associated with energy use to be the main threat to the earth's climate. Increased energy demand will only make the situation worse. In short, there are environmental limits to continuing, let alone expanding, the high production–high consumption lifestyle associated with the U.S. model of development. Therefore, the most important question facing the United States in regard to oil in the twenty-first century may not be how to ensure access to oil to meet growing demands, but rather how to move away from what is clearly an unsustainable development path.

BIBLIOGRAPHY

Adelman, M. A. The World Petroleum Market. Baltimore, 1972. Attempt to apply neoclassical economics to world oil markets.

——. The Genie Out of the Bottle: World Oil Since 1970. Cambridge, Mass., 1995. Continues the analysis to the 1990s.

Anderson, Irvine H. The Standard-Vacuum Oil Company and United States East Asian Policy, 1933–1941. Princeton, N.J., 1975. Oil and Pearl Harbor.

——. Aramco, the United States, and Saudi Arabia: A Study in the Dynamics of Foreign Oil Policy, 1933–1950. Princeton, N.J., 1981. Stimulating combination of business history and foreign policy analysis from a perspective that plays down industry influence.

Blair, John M. The Control of Oil. New York, 1976. Classic study of the oligopolistic organization of the oil industry.

Bromley, Simon. American Hegemony and World Oil: The Industry, the State System, and the World Economy. University Park, Pa., 1991. Critical account of the role of oil in under-pinning U.S. hegemony within the global system.

Clark, John G. The Political Economy of World Energy: A Twentieth-Century Perspective. Chapel Hill, N.C., 1990. Full of useful information and statistics.

Eckes, Alfred E., Jr. The United States and the Global Struggle for Minerals. Austin, Texas, 1979. Study of oil and other minerals as sources of conflict.

Engler, Robert. The Politics of Oil: A Study of Private Power and Democratic Directions. New York, 1961. Classic study of the impact of private power on American democracy.

Goode, James. The United States and Iran: In the Shadow of Mussaddiq. New York, 1997. Perceptive account of the oil nationalization crisis.

Heiss, Mary Ann. Empire and Nationhood: The United States, Great Britain, and Iranian Oil, 1950–1954. New York, 1997. Solid study, focusing on Anglo-American relations.

Kapstein, Ethan B. The Insecure Alliance: Energy Crises and Western Politics Since 1944. New York, 1990. Solid study of oil and the Western alliance.

Koppes, Clayton R. "The Good Neighbor Policy and the Nationalization of Mexican Oil: A Reinterpretation." Journal of American History 69 (June 1982): 62–81.

Lesser, Ian O. Resources and Strategy. London and New York, 1989.

Levy, Walter J. Oil Strategy and Politics, 1941–1981. Edited by Melvin A. Conant. Boulder, Colo., 1982. Collection of papers by a leading oil consultant compiled by another leading industry analyst.

Lieber, Robert J. The Oil Decade: Conflict and Cooperation in the West. New York, 1983. Astute account of the oil crises of the 1970s and alliance politics.

Meyer, Lorenzo. Mexico and the United States in the Oil Controversy, 1917–1942. Translated by Muriel Vasconcellos. Austin, Texas, 1977. Oil and U.S.–Mexican relations as seen by a leading Mexican scholar.

Miller, Aaron David. Search for Security: Saudi Arabian Oil and American Foreign Policy, 1939–1949. Chapel Hill, N.C., 1980. Pioneering study of the origins of the special relationship between the United States and Saudi Arabia; very informative on security issues and the Palestine question.

Nye, David E. Consuming Power: A Social History of American Energies. Cambridge, Mass., 1998. Valuable for long-term perspective.

Painter, David S. Oil and the American Century: The Political Economy of U.S. Foreign Oil Policy, 1941–1953. Baltimore, 1986. Detailed examination of U.S. foreign oil policy during the critical transition years of World War II and the early Cold War and an important source for this essay.

——. "International Oil and National Security." Daedalus 120 (fall 1991): 183–206.

——. "Oil and World Power." Diplomatic History 17 (winter 1993): 159–170. Analysis of oil's contribution to U.S. power based on a critical review of Yergin and Bromley and a source for this essay.

Palmer, Michael A. Guardians of the Gulf: A History of America's Expanding Role in the Persian Gulf, 1833–1992. New York, 1992. Useful overview.

Patterson, Matthew. "Car Culture and Global Environmental Politics." Review of International Studies 26 (2000): 253–270. Insightful on the symbiosis between the automobile and oil use.

Penrose, Edith T. The Large International Firm in Developing Countries: The International Petroleum Industry. Cambridge, Mass., 1969. Indispensable to understanding the operations of vertically integrated corporations.

Philip, George. The Political Economy of International Oil. Edinburgh, 1994. Concise and analytical historical account focusing on relations between the oil companies and Third World oil producers.

Rabe, Stephen G. The Road to OPEC: United States Relations with Venezuela, 1919–1976. Austin, Texas, 1982. Solid study of relations with important Latin American producer.

Randall, Stephen J. United States Foreign Oil Policy, 1919–1948: For Profits and Security. Kingston, Ontario, 1985. Especially strong on Latin America.

Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Shaped. New York, 1975. Colorful and insightful study of the major oil companies.

Schneider, Steven A. The Oil Price Revolution. Baltimore, 1983. Detailed examination of the origins and consequences of the oil shocks of the 1970s.

Skeet, Ian. OPEC: Twenty-Five Years of Prices and Politics. New York, 1988. Dispassionate and well-informed.

Skeet, Ian, ed. Paul Frankel, Common Carrier of Common Sense: A Selection of His Writings, 1946–1988. New York, 1989. Includes Frankel's classic Essentials of Petroleum (1946), a basic work for understanding the oil industry.

Stivers, William. Supremacy and Oil: Iraq, Turkey, and the Anglo-American World Order, 1918–1930. Ithaca, N.Y., 1982. Analysis of oil and Anglo-American relations in the 1920s.

Stoff, Michael B. Oil, War, and American Security: The Search for a National Policy on Foreign Oil, 1941–1947. New Haven, Conn., 1980. Examines oil and Anglo-American relations during World War II.

United States Senate, Subcommittee on Multinational Corporations. Multinational Oil Corporations and U.S. Foreign Policy. Washington, D.C., 1975. Critical report based on the invaluable work of the Church Committee in the mid-1970s.

Venn, Fiona. Oil Diplomacy in the Twentieth Century. New York, 1986. Pioneering study stressing oil's strategic importance.

Vernon, Raymond, ed. The Oil Crisis. New York, 1976. Still the best study of the 1973–1974 oil crisis.

Vietor, Richard H. K. Energy Policy in America Since 1945: A Study of Business-Government Relations. New York, 1984. Useful account of energy policy from a pluralist perspective.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York, 1991. Anecdotal but comprehensive and informative, a treasure-trove of information with an extensive bibliography.

See also Collective Security; Environmental Diplomacy; Globalization; Multinational Corporations; The National Interest.

THE SEVEN SISTERS

Seven large, vertically integrated oil companies dominated the world oil industry from the 1920s to the 1970s. With annual sales in the billions of dollars, the so-called "seven sisters" have consistently ranked among the largest industrial companies in the world. The five American international major oil companies were Standard Oil Company (New Jersey), which became Exxon in 1972; Socony-Vacuum Oil Company, which became Socony Mobil in 1955 and Mobil in 1966; Standard Oil Company of California, later Chevron; the Texas Company, which became Texaco in 1959; and Gulf Oil Company. Chevron bought Gulf in 1984, and in 1998 Exxon and Mobil merged to form Exxon-Mobil.

The other two international majors were Anglo-Persian Oil Company, which changed its name to Anglo-Iranian in 1935 and to British Petroleum in 1954, and the Royal Dutch/Shell group. The British government held a majority share in British Petroleum from 1914 to the 1980s, when Margaret Thatcher's government sold its shares to private investors. Although ownership was divided between Dutch (60 percent) and British (40 percent) interests, Shell had its operating and commercial headquarters in London and was regarded as a British company.

OIL AND THE AMERICAN WAY OF LIFE

The history of oil and foreign policy provides many examples of the links between the internal organization of the United States and its external behavior. Oil and the automobile have been potent symbols of the American way of life since the second decade of the twentieth century, and American popular culture has come to equate the private automobile and personal mobility with individual freedom. Thus, when it became clear in the 1940s that U.S. domestic oil production would soon no longer be able to meet domestic demand, American leaders looked abroad for additional sources of oil. The alternative of reducing, or at least slowing, the growth of rapidly rising consumption was not considered.

Remarks by Secretary of Defense James Forrestal in early January 1948 illustrate this tendency to look to external expansion to solve internal problems rather than confronting them directly. Meeting with the head of the Socony-Vacuum Oil Company to discuss the impact of turmoil over Palestine on access to Middle East oil, Forrestal stated that he "was deeply concerned about the future supply of oil for this country, not merely for the possible use in war but for the needs of peace." He then warned that unless we had access to Middle East oil, American motor-car companies would have to design a four-cylinder motor-car sometime within the next five years." Annual per capita oil consumption in the United States in 1948 was 14.4 barrels. Had U.S. public policy, through the preservation of public transportation, the promotion of efficiency, and other measures (including four-cylinder motorcars), maintained this level of oil use, the United States would have consumed significantly less oil over the following half century, with consequent benefits for the environment, the quality of life, and U.S. oil security. Instead, U.S. oil consumption climbed steadily, reaching an annual per capita level of 31 barrels in 1978. Although it declined sharply for a brief period in the early 1980s, annual per capita oil consumption soon renewed its upward trend, reaching 26.1 barrels in 1999.

chapter 2
OIL

THE QUEST FOR OIL

On August 27, 1859, Edwin Drake struck oil sixty-nine feet below the surface of the earth near Titusville, Pennsylvania. This was the first successful modern oil well, which ushered in the "Age of Petroleum." Not only did petroleum help meet the growing demand for new and better fuels for heating and lighting, but it also proved to be an excellent fuel for the internal combustion engine, which was developed in the late 1800s.

Sources of Oil

Almost all oil comes from underground reservoirs. The most widely accepted explanation of how oil and gas are formed within the earth is that these fuels are the products of intense heat and pressure applied over millions of years to organic (formerly alive) sediments buried in geological formations. For this reason they are called fossil fuels. They are limited (nonrenewable) resources, which means that they are formed much more slowly than they are used, so they are finite in supply.

At one time it was believed that crude oil flowed in underground streams and accumulated in lakes or caverns in the earth. Today, scientists know that a petroleum reservoir is usually a solid sandstone or limestone formation overlaid with a layer of impermeable rock or shale, which creates a shield. The petroleum accumulates within the pores and fractures of the rock and is trapped beneath the seal. Anticlines (archlike folds in a bed of rock), faults, and salt domes are common trapping formations. (See Figure 2.1.) Oil and natural gas deposits can be found at varying depths. Wells are drilled to reach the reservoirs and extract the oil. Deep wells are more expensive to drill and are usually attempted only to reach large reservoirs or when the price of oil is high.

How Oil Is Drilled and Recovered

Oil is crucial to the economies of industrialized nations, and oil production is strongly influenced by market prices.

FIGURE 2.1

Scouting for new deposits and drilling exploratory wells is expensive. It is also costly to drill, maintain, and operate production wells. If the price of oil falls too low, operators will shut off expensive wells because they cannot recover their higher operating costs. In general, when oil prices are high, oil companies drill; when prices are low, drilling drops off.

Figure 2.2 shows a diagram of a rotary drilling system, or rotary rig. The rotating bit at the end of lengths

FIGURE 2.2

of pipe drills a hole into the ground. Drilling mud is pushed through the pipe and the drill bit, which forces the mud and bits of rock from the drilling process back to the surface, as shown by the "up" arrows in the diagram. As the well gets deeper, more pipe is added. The oil derrick supports equipment that can lift the pipe and drill bit from the well when drill bits need to be changed or replaced.

Oil deposits are not distributed evenly over the world, and some that have been tapped for decades are being exhausted. As an oil reservoir is depleted, various techniques can be used to recover additional petroleum. These include the injection of water, chemicals, or steam to force more oil from the rock. These recovery techniques can be expensive and are used only when the price of oil is relatively high.

TYPES OF OIL

While crude oil is usually dark when it comes from the ground, it may also be green, red, yellow, or colorless, depending on its chemical composition and the amount of sulfur, oxygen, nitrogen, and trace minerals present. Its viscosity (thickness, or resistance to flow) can range from as thin as water to as thick as tar. Crude oil is refined, or chemically processed, into finished petroleum products; it has limited uses in its natural form.

Crude oils vary in quality. "Sweet" crudes have little sulfur, refine easily, and are worth more than "sour" crudes, which contain more impurities. "Light" crudes, which have more short molecules, yield more gasoline and are more profitable than "heavy" crudes, which have more long molecules and bring a lower price in the market.

In addition to crude oil, there are two other sources of petroleum: lease condensate and natural gas plant liquids. Lease condensate is a liquid recovered from natural gas. It consists primarily of chemical compounds called penthanes and heavier hydrocarbons and is generally blended with crude oil for refining. Natural gas plant liquids are natural gas liquids that are recovered during the refinement of natural gas in processing plants.

USES FOR OIL

Many of the uses for petroleum are well known: gasoline, diesel fuel, jet fuel, and lubricants for transportation; heating oil, residual oil, and kerosene for heat; and heavy residuals for paving and roofing. Petroleum by-products are also vital to the chemical industry, ending up in many different foams, plastics, synthetic fabrics, paints, dyes, inks, and even pharmaceutical drugs. Many chemical plants, because of their dependence on petroleum, are directly connected by pipelines to nearby refineries.

HOW OIL IS REFINED

Before oil can be used by consumers, crude oil, lease condensate, and natural gas plant liquids must be processed into finished products. The first step in refining is distillation, in which crude oil molecules are separated according to size and weight.

During distillation, crude oil is heated until it turns to vapor. (See Figure 2.3.) The vaporized crude enters the bottom of a distillation column, where it rises and condenses on trays. The lightest vapors, such as those of gasoline, rise to the top. The middleweight vapors, such as those of kerosene, rise about halfway up the column. The heaviest vapors, such as those of heavy gas oil, stay at the bottom. The vapors at each level are then condensed to liquid as they are cooled. These liquids are drawn off, and the processes of cracking and reforming further refine each portion. Cracking converts the heaviest fractions of separated petroleum into lighter fractions to produce jet fuel,

TABLE 2.1

motor gasoline, home heating oil, and less-residual fuel oils, which are heavier and used for naval ships, commercial and industrial heating, and some power generation. Reforming is used to increase the octane rating of gasoline.

Refining is a continuous process, with crude oil entering the refinery at the same time that finished products leave by pipeline, truck, and train. Although storage tanks surround refineries, they have limited storage capacity. If there is a malfunction and products cannot be processed, they may be burned off (flared) if no storage facility is available. While a small flare is normal at a refinery or a chemical plant, a large flare, or many flares, likely indicates a processing problem.

REFINERY NUMBERS AND CAPACITY

In 2003, 149 refineries were operating in the United States, a drop from 336 in 1949 and 324 in 1981. (See Table 2.1.) Refinery capacity in 2003 was about 16.8 million barrels per day, below the 1981 peak of 18.6 million barrels. As of 2003 U.S. refineries were operating near full capacity. Utilization rates generally increased from a low of 68.6% in 1981—a period of low demand because

FIGURE 2.3

of economic recession—to a high of 95.6% in 1998. Although capacity fell slightly in the years since 1998, it was still high in 2003.

As Table 2.1 shows, fewer refineries were operating in the United States in the early twenty-first century than in the past, but they were working at near maximum levels. One reason for the drop in the number of U.S. refineries is that the petroleum industry began shutting down older, inefficient refineries and concentrating production in more efficient plants, which tended to be newer and larger.

Consolidation within the industry has also played a role in refinery operation. For example, the merger of Gulf Oil Corporation into Chevron Corporation in 1984 led to the closing of two large refineries, one in Bakersfield, California, and the other in Cincinnati, Ohio. In 1998 Exxon merged with Mobil Oil and BP merged with Amoco. BP Amoco then bought Arco in April 2000 to create the world's largest non-OPEC (Organization of the Petroleum Exporting Countries) oil producer and the third-largest natural gas producer. In the May 2004 article "Effects of Mergers and Market Concentration in the U.S. Petroleum Industry," in GAO Highlights, the General Accounting Office noted that "over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s." The report said that the majority of the mergers occurred later in that period and took place most frequently among firms involved in oil exploration and production. Industry officials suggest that mergers increase efficiency, reduce costs, and enhance a company's ability to control prices.

Another reason for the drop in the number of U.S. refineries is that some OPEC countries have begun to refine their own oil products to maximize their profits. This strategy, employed particularly by Saudi Arabia, led to a drop in demand for U.S. refineries. As of November 2002 no major refinery manufacturer had plans to begin construction, a process that takes three to five years to complete. The last large refinery built in the United States was completed in 1976, and the last completed refinery of any size began operation in Valdez, Alaska, in 1993. The Annual Energy Outlook 2004, produced by the Energy Information Administration (EIA), stated that financial and legal considerations make it unlikely that new refineries will be built in the United States.

LOSS AND VOLATILITY OF OIL INDUSTRY JOBS

As mergers in the oil industry restructure companies and make combined operations more efficient, not only are there fewer refineries, there are fewer jobs. From 1982 to 1992, for example, there was a loss of 28% of petroleum refining jobs.

In 1996, after a decade of low oil prices, drilling slowed and the demand for rigs collapsed. New rig construction stopped altogether. Thousands of rigs were left idle, sold for scrap metal, or shipped overseas, and their crews were put out of work. Idle rigs became a source of spare parts for those still operating. In 1997, following a rise in oil prices, the demand for rigs soared, but by 1998 the market for rigs had once again dwindled as oil prices sank. Rising oil prices resulting from OPEC restrictions in 1999 eventually boosted the demand for drilling equipment. Although crude oil prices declined in 2001, they rose again in 2003 and reached an all-time high in late 2004, again spurring demand for oil rigs. According to Baker Hughes Inc., a company that has tallied weekly U.S. drilling activity since 1940, domestic oil drilling has rebounded sharply since late April 1999, when a low point was reached following the oil price collapse of late 1997.

Job loss has also occurred in other facets of the oil industry. The number of seismic land crews and marine vessels searching for oil in the United States and its waters decreased sharply after 1981. From 1982 to 1992, oil-extraction companies lost 51% of their workforce. In Texas, once the center of the U.S. oil industry, jobs plummeted from 80,000 in 1981 to 25,000 in 1996. In 1998 the Texas Comptroller of Public Accounts estimated that for every $1 drop in the price of oil per barrel, 10,000 jobs are lost in the Texas economy. That translated into 100,000 jobs lost in the Texas oil industry from October 1997 to December 1998. According to a February 6, 1999, article in the New York Times ("Oil Industry Sees More Losses"), the oil industry lost 24,415 jobs between November 1997 and February 1999 because of the decline of oil prices during that period. But domestic oil drilling rebounded sharply between mid-1999 and late 2004, creating an upswing in numbers of oil industry jobs.

DOMESTIC PRODUCTION

U.S. production of petroleum reached its highest level in 1970 at 11.3 million barrels per day total. (See Table 2.2.) Of that amount, 9.6 million barrels per day were crude oil. (See Figure 2.4.) After 1970 domestic production of petroleum declined. By 2003 U.S. domestic production averaged about 7.5 million barrels per day. (See Table 2.2.) Of that amount, 5.7 million barrels per day were crude oil. (See Figure 2.4.) Figure 2.5 shows the overall flow of petroleum in the United States for 2003.

According to the Annual Energy Review 2003, published by the EIA, in 2003 the 520,000 producing wells in the United States produced an average of eleven barrels per day per well, significantly below peak levels of more than eighteen barrels per day per well in the early 1970s. Any new oil discoveries are unlikely to result in a significant increase in domestic production in the near future because of the long lead-time needed to prepare for production.

Most domestic oil production takes place in only a few U.S. states. Texas, Alaska, Louisiana, California, and the offshore areas around these states produce about 75% of the nation's oil. Most domestic oil (about 64%, or 3.7

TABLE 2.2

FIGURE 2.4

million barrels per day) comes from onshore drilling, while the remaining 2.1 million barrels come from offshore sources. (See Figure 2.6.) Supplies from Alaska, which increased with the construction of a direct pipeline in the late 1970s, have begun to decline. Notice how the gap between "Total" and "48 States" is narrowing in Figure 2.7; this gap is Alaska's share of U.S. oil production.

Unless protected wildlife refuges in Alaska are opened for drilling, U.S. oil production will likely continue its decline. The Alaskan government and the administration of President George W. Bush strongly support drilling for oil in Alaska's Arctic National Wildlife Refuge. But there is great controversy over this proposal because of environmental concerns. The U.S. House of Representatives has approved drilling in the Arctic refuge in the past, only to have the proposal repeatedly fail in the Senate. As of November 2004 no agreement had been reached.

The United States is considered to be in a "mature" oil development phase, meaning that much of its oil has already been found. The amount of oil discovered per foot of exploratory well in the United States has fallen to less than half the rate of the early 1970s. Of the country's thirteen largest oil fields, seven are at least 80% depleted. Geological studies have estimated that 34% of the undiscovered recoverable resources are in Alaska, but it is uncertain whether the oil will ever be recovered.

Domestic production is also hampered by the expense of drilling and recovering oil in the United States compared to the expense incurred in Middle Eastern countries. Middle Eastern producers can drill and bring out crude oil from enormous, easily accessible reservoirs for around $2 a barrel. In contrast, the U.S. Department of Energy (DOE) estimates it costs an American oil producer about $14 to produce a barrel of oil, not counting royalty payments and taxes, which add to the cost. Of all the successful domestic oil wells drilled, only about 1% have been "wildcat" wells that have led to the discovery of new large fields, and these discoveries have provided only minor additions to the total proved reserves.

DOMESTIC CONSUMPTION

In 2003 most petroleum was used for transportation (66%), followed by industrial use (25%), residential use (4%), electric utilities (3%), and commercial use (2%). (See Figure 2.8.)

Most petroleum used in the transportation sector is for motor gasoline. In the residential and commercial sectors, distillate fuel oil (refined fuels used for space heaters, diesel engines, and electric power generation) accounts for most petroleum use. Liquid petroleum gas (LPG) is the primary oil used in the industrial sector. In electric utilities residual fuel oils are used the most.

A modest decline in residual fuel oil consumption has been caused by the conversion of electric utilities and plants from heavy oil to coal or natural gas energy. An initial decline in the amount of motor gasoline used, beginning in 1978, was attributed to the federal Corporate Average Fuel Economy (CAFE) regulations, which required increased miles-per-gallon efficiency in new automobiles. However, motor gasoline use has increased steadily since then, partly from an increase in users and partly from a leveling off in vehicle efficiency as consumers once again prefer less efficient vehicles, such as larger automobiles and sport utility vehicles (SUVs).

WORLD OIL PRODUCTION AND CONSUMPTION

Total world petroleum production has increased somewhat steadily, reaching 69.5 million barrels per day in 2003, after a downturn in the early 1980s. (See Table 2.3.) The major producers in 2003 were, from most to least, Saudi Arabia, Russia, the United States, Iran, China, Mexico, Norway, United Arab Emirates, Venezuela and Canada, and Nigeria and Kuwait. (See Figure 2.9.) Together, Saudi Arabia, Russia, and the United States accounted for 33% of the world's crude oil production.

Like total world petroleum production, total world petroleum consumption has increased somewhat steadily, reaching 78.2 million barrels per day in 2002. (See Table 2.4.) In 2002 the leading petroleum consumers were, from most to least, the United States, Japan, China, and Russia. Figure 2.10 shows the major petroleum consumers of selected Organization for Economic Cooperation and Development (OECD) countries—a group of thirty nations

FIGURE 2.5

committed to democratic government and a market economy. They develop and refine economic and social policies. The major OECD consumers in 2002 were, in order, the United States, Japan, Germany, South Korea, Canada, France, Mexico, Italy, United Kingdom, and Spain. The United States was by far the leading consumer in either category, using 19.8 million barrels per day, followed by Japan (5.3 million barrels a day), China (5.2 million barrels a day), Germany (2.7 million barrels a day), and Russia (2.6 million barrels a day). (See Table 2.4.)

OIL IMPORTS AND EXPORTS

Around the world there are inequities between those countries that use petroleum and those that possess it. Countries with surpluses (Saudi Arabia, for example) sell their excess to others that need more than they can produce (the United States, China, Japan, and western European countries). Petroleum is sold as crude oil or as refined products. World trade has been moving toward refined products, as the petroleum-exporting countries have realized that they can make a greater profit from refined oil products than from crude oil.

Though the United States produces a significant amount of petroleum, it has been importing oil since World War II (1939–45). This reflects the gradual exhaustion of reserves in the United States and the growing energy demand caused by population growth and economic expansion. Initially, the relatively low price of foreign oil encouraged U.S. dependence on it. American industry and economic life have been built on oil's cheap availability. But the price of foreign oil has gone up, and OPEC controls its availability.

Relatively low crude oil prices and the resulting reduced domestic oil production are the major causes of an increase in imports since 1985. From a low total net import (imports minus exports) of 4.3 million barrels per day in 1985, oil net imports increased to 11.2 million barrels per day by 2003. (See Table 2.2.) In 1985 imported oil supplied only 27.3% of American oil consumption. Just five years later, in 1990, the proportion had risen to 42%, and by 2003 it was 56.1% as demand continued to grow. (See

FIGURE 2.6

FIGURE 2.7

Figure 1.6 in Chapter 1.) According to the Energy Information Administration's Annual Energy Review 2003, the leading suppliers of petroleum to the United States in 2003 were, from most to least, Canada, Saudi Arabia, Mexico, Venezuela, Nigeria, Iraq, United Kingdom, and Norway.

CONCERN ABOUT OIL DEPENDENCY

In the 1970s the United States and its leaders were very concerned that so much of the U.S. economic structure, based heavily on oil, was dependent upon the decisions of OPEC countries. Oil resources became an issue of national

FIGURE 2.8

security, and OPEC countries, especially the Arab members, were often portrayed as potentially strangling the U.S. economy. The decisions of the Ronald Reagan and George H. W. Bush administrations in the 1980s and early 1990s to permit the energy issue to be handled by the marketplace was consistent with their economic philosophy but indicated that they saw oil supply as an economic, not a political, issue. This downplayed the political side of the energy problem in the international arena. The Clinton administration was unable to do much about America's dependence on foreign oil, as low prices throughout most of the 1990s set back energy conservation measures and public concern. In the United States efficiency gains in automobiles have been offset by the preference for large vehicles, such as SUVs. Such preferences imply lack of public interest in reducing the consumption of foreign oil. By 2003 about 63% of the nation's crude oil supply came from outside the country, as shown in Figure 2.5, and 42.2% of that came from OPEC nations, as reported in the Annual Energy Review 2003.

The decline in public concern about America's dependence on foreign oil is the result of factors other than low prices and the desire for large vehicles. One factor is a "comfort level" with oil that has been achieved through oil reserves, non-OPEC suppliers, and decreased demand. The United States and European nations have developed substantial reserves to withstand oil supply fluctuations. These reserves include the Strategic Petroleum Reserve (SPR) in the United States and government-required reserves in Europe. Furthermore, in emergencies, non-OPEC oil producers such as the United Kingdom and Norway can increase their output. Although demand for oil had stabilized in the 1990s because of the conservation efforts of many industrialized nations, particularly European countries, the demand increased in the early 2000s as China, Japan, and the United States consumed more energy.

The increased use of pipelines across Saudi Arabia and Turkey has made the job of picking up oil from these countries safer. A growing number of tankers pick up their oil in either the Red Sea or the Mediterranean Sea before delivering it to Europe or the United States. These ships do not have to go through the potentially dangerous Persian Gulf. In addition, since many American strategists are wary of navigation in the Straits of Hormuz, where a future enemy might be able to stop the flow of oil to the West, shipment through pipelines lessens the importance of the waterway. On the other hand, such pipelines could be destroyed relatively easily in a war.

Based on these factors, if the oil shortages that developed in 1973 and 1979 occurred again, the result would likely not be the same. Despite the U.S. role as protector of Kuwait's oil in the Persian Gulf, there seemed to be little serious concern that America's dependence on foreign oil, especially OPEC oil, represented a threat to national security or national stability. This position changed somewhat after the terrorist attacks of September 11, 2001, and their aftermath—the "War on Terrorism," which included the war with Iraq and the consequent unrest in Middle Eastern nations. These events resulted in a sense that the United States should be less dependent on foreign oil, yet demand for the product persisted. In 2002 experts suggested that if the United States attacked Iraq, as it ultimately did in March 2003, the result might be a stabilization of the supply and price of oil (Michael E. Kanell, "War in Iraq: Is It about Oil?" The [Montreal] Gazette, October 26, 2002). Nevertheless, in late 2004 oil prices had not stabilized. In fact, oil prices increased dramatically at that time as concerns about terrorism in Iraq and elsewhere rose, the value of the dollar declined, demand for oil remained high, and oil supplies and reserves were tight.

PROJECTED OIL SUPPLY AND CONSUMPTION

The EIA, in its Annual Energy Outlook 2004, projected that domestic crude oil production in the lower forty-eight states would increase from 4.6 million barrels per day in 2002 to 5.2 million barrels per day in 2008, then decline to 4.1 million barrels per day in 2025. The projected peak in production in 2008 is attributed to offshore production. The EIA projects that total offshore oil production will rise to 2.5 million barrels per day in 2008, then decline to 2.1 million barrels per day in 2025. Onshore lower forty-eight oil production is projected to decline, with 2025 values ranging from 1.9 million barrels per day to 2.1 million barrels per day. Crude oil production in Alaska is expected to continue at about 900,000

TABLE 2.3

FIGURE 2.9

barrels per day through 2016; it is then projected to decline to 510,000 barrels per day in 2025.

Due to declines in crude oil production after 2008 and in Alaska in 2016, the domestic petroleum supply is expected to decline after 2008 as well. However, consumption is projected to increase significantly from 2002 to 2025 (see Figure 2.11.) Thus, the EIA projects an increasing dependence on petroleum imports, with imports filling 70% of American petroleum needs in 2025, up from 53% in 2002. (See Figure 2.11.)

STRATEGIC PETROLEUM RESERVES

In 1923 the Warren G. Harding administration set up the Petroleum Reserve to ensure that the U.S. Navy would have adequate fuel in the event of war. In 1975, in response to the growing concern over America's energy dependence, Congress turned the Strategic Petroleum Reserve (SPR) over to the Department of the Interior under the Energy Policy and Conservation Act (PL 94–163). An additional law, PL 101–383, expanded the SPR and created a second reserve for refined products.

SPR oil is stored in deep salt caverns located at four storage sites in Louisiana and two in Texas. (Oil does not dissolve salt the way water does.) Each site's caverns vary in capacity, but most can hold approximately 10 million barrels of oil. The SPR system currently has forty-one such caverns. If the United States suddenly found its supplies cut off, the reserve system would be connected to existing commercial lines that would start pumping the oil.

At the end of 2003 the SPR contained 638 million barrels (see Figure 2.12), enough to equal fifty-seven days of imported oil should the supply be cut off (see Figure 2.13.) The SPR increased in 2002 and 2003 due to the importation of sixty-four million barrels of crude oil for this purpose. Figure 2.13 shows a decline in the reserves, from a high of 115 days in 1985 to the current fifty-seven days. This decline is the result of two major factors:

1. It reflects the increase in imports since 1985. As the nation has imported a greater amount of oil, the days of import replacement represented by the amount of oil in the SPR have dropped.
2. It reflects a real decline in quantity. In 1996–97, millions of barrels of oil were sold (at a loss of $10 a barrel or so) to help balance the federal budget. Also, oil was withdrawn from the reserves at the start of the Persian Gulf War in 1990–91. In September 2000 President Clinton authorized the release of 30 million barrels of oil to bolster oil supplies, particularly heating oil in the Northeast.

OIL PRICES

The law of supply and demand usually explains oil price changes; the price of goods reflects a relationship

TABLE 2.4

FIGURE 2.10

FIGURE 2.11

between the supply (availability) and the demand (need). Higher prices increase production, as it becomes profitable to operate more expensive wells, and reduce demand, as consumers lower usage and increase conservation

FIGURE 2.12

efforts. The factors also work the other way: Reduced demand or increased supply generally cause the price of oil to drop.

The demand for petroleum products varies, and petroleum prices usually fluctuate with demand. Heating oil demand rises during the winter. A cold spell, which leads to a sharp rise in demand, may result in a corresponding price increase. A warm winter may be reflected in lower prices as suppliers try to clear out their inventory. Gasoline

FIGURE 2.13

demand rises during the summer, when people drive more on vacations and for recreation, and gas prices usually rise as a consequence. Petroleum demand also reflects the general condition of the economy. During a recession, demand for and production of petroleum products drops. Wars and other types of political unrest in oil-producing nations add volatility to petroleum prices, which fluctuate—sometimes dramatically—depending on the situation at the time.

While consumers prefer low prices that allow them to save money or get more for the same price, producers naturally prefer to keep prices high. Oil producers formed the OPEC cartel in 1960. A cartel is a group of businesses that agree to control production and marketing to avoid competing with one another. Since 1973 OPEC has tried to control the oil supply in order to achieve higher prices.

OPEC has faced long-term problems, however, because high prices in the late 1970s to mid-1980s encouraged conservation, reducing demand for oil and leading to a sharp decline in oil prices. As a result of the decreased demand for oil and lower prices, OPEC lost some of its ability to control its members and, consequently, prices.

Nevertheless, OPEC actions can still effectively influence the petroleum market. For example, in an attempt to halt the downward slide of oil prices in 1999, Saudi Arabia, Mexico, and Venezuela agreed to cut production by 1.6% to 2 million barrels a day. Many other oil-producing nations also limited their production. The limitations worked: During the summer of 2000 oil prices climbed. According to a 2001 report by the Energy Information Administration (EIA) of the Department of Energy (Annual Energy Review 2000), the price in real dollars paid by refiners for crude oil in 1999 averaged $16.71 per barrel, and in 2000 averaged $26.40 per barrel.

Gasoline Prices

Many middle-aged and older Americans can remember when gas cost 30 cents per gallon in the early 1970s. From 1973 to 1981, the price of a gallon of leaded regular gasoline (in current dollars that do not consider inflation) more than tripled, while the price in real dollars (adjusted for inflation) rose 81%. (See Table 2.5.) In real dollars the price of a gallon of regular unleaded gasoline was $2.33 in 1981. However, after 1981, as a result of the international oil glut,

TABLE 2.5

real prices tumbled. In 1998 the price was only $1.10, and after price increases in 1999, the price of gas still only averaged $1.51 in 2000 and 2003. By the fall of 2004, however, gasoline prices hovered around $2.00 per gallon.

ENVIRONMENTAL CONCERNS ABOUT OIL TRANSPORTATION

Transporting oil carries significant environmental risks. According to the U.S. Department of the Interior, the cause of most transportation spills is oil tanker accidents, such as the grounding of the Exxon Valdez in 1989.

The Exxon Valdez Oil Spill

A number of events have influenced American attitudes toward oil production and use. One of the most notable occurred in March 1989, when the Exxon Valdez oil tanker hit a reef in Alaska, spilling 11 million gallons of crude oil into the waters of Prince William Sound. The cleanup cost Exxon $1.28 billion, which does not include legal costs or any valuation of the wildlife lost. The spill was an environmental disaster for a formerly pristine area. Even measures used to clean up the spill, such as washing the beaches with hot water, caused additional damage.

The Exxon Valdez spill also led to debate about added safety measures in the design of tankers. Tankers are bigger than ever before. In 1945 the largest tanker held 16,500 tons of oil; today, supertankers carry more than 550,000 tons. These supertankers are difficult to maneuver because of their size and are likely to spill more oil if damaged. Although there have been fewer spills since 1973, the amount of oil lost has been roughly the same.

The Oil Pollution Act of 1990

The Exxon Valdez oil spill led Congress to pass the Oil Pollution Act of 1990 (PL 101–380) after having debated the issue for sixteen years. The bill increased, but still limited, oil spillers' federal liability (financial responsibility) as long as a spill is not the result of "gross negligence." The bill also mandates compensation to those who are economically injured by oil-spill accidents. Damages that can be charged to oil companies are limited to $60 million for tanker accidents and $75 million for accidents at offshore facilities. The rest of the cleanup costs are paid from a $500 million oil-spill fund generated by a 1.3 cents-per-barrel tax on oil. Individual states still maintain the right to impose unlimited liability on spillers. Oil companies were also required to phase in double hulls on oil vessels over a twenty-five-year period by 2015. Double hulls provide an extra container in case of accidents.

Accidents Still Occur Worldwide

In mid-November 2002 the twenty-six-year-old, single-hulled tanker Prestige was first damaged, then sank in the Atlantic Ocean off the coast of Spain. The Spanish government estimates the ship spilled approximately 5,000 tons of heavy fuel oil when it was damaged and an additional 12,000 tons as it sank. The ship continued to leak, and the Spanish authorities ordered the leaking vessel to be towed to the open ocean. As of mid-2004 an international team of scientists estimated that the oil spilled from the Prestige caused the deaths of nearly 250,000 seabirds. The spill also killed unknown numbers of fish and dolphins, and was responsible for economic damage to the Galician fish and shellfish industries, closing the Spanish coastline to fishing.

OIL

OIL. Oil is liquid fat, usually plant-derived, used as a cooking medium, as a lubricant to keep food from sticking to pans, and as a source of flavor. Oil from animal sources, particularly fish oil, is also used as a nutritional supplement. Oil is also ubiquitous in processed foods.

The difference between oil and fat is that oil is liquid at room temperature while fat is solid. Chemically, both are composed of hydrocarbon chains and are potent sources of energy. The strong molecular bonds of fats and oils make them relatively resistant to heat and thus suitable for high-heat cooking methods such as deep-frying. Oil can be used in conjunction with other fats, such as butter, to raise the temperature of the other fat at which it would otherwise begin to break down and smoke.

History of Oil

Olive oil and sesame oils are among the most ancient oils in the Western world, dating back to 4,000 years or more. Olive trees are relatively simple to cultivate and, once the olives are prepared, the oil can be obtained by pressing. Both olive oil and sesame oil were used in southern Europe, while northern countries typically used animal fats such as lard or goose fat.

In the Orient, oil was pressed from soybeans, while sesame, mustard seed, and safflower oils were used in India and ancient Egypt. Peanuts, corn, and sunflower seeds were available in the New World, but oil was generally extracted only from squash seeds, especially squash belonging to the species Cucurbita pepo.

The nineteenth century saw the rise of international trade in tropical oils, particularly palm and coconut oil. The raw materials, which included hearts of palm and dried coconut meat (copra), were exported from Africa and the Pacific islands to industrial countries to be pressed for oil. The vast production of corn in the United States provided a source of oil to be used in cooking and in the manufacture of oleomargarine.

In nineteenth-century Africa, both the French and British introduced larger-scale peanut farming specifically for peanut oil, which was used as an adulterant in cheap grades of olive oil, and as a base ingredient in soap.

Composition of Oils

Oils, like other fats, consist mostly of triglycerides, which are three fatty acids attached to a molecule of glycerol (an alcohol built around three atoms of carbon). A fatty acid consists of a carboxyl group (carbon, oxygen, and hydrogen linked together), which in turn is linked to a hydrocarbon chain. The more the hydrocarbon chain is filled with hydrogen atoms, the more chemically stable it will be. A fatty acid fully loaded with hydrogen is said to be "saturated," while a less hydrogen-rich acid is "monounsaturated" or "polyunsaturated," depending on its structure. Oleic acid is a common monounsaturated fat, while linoleic acid is the most common polyunsaturated fatty acid.

The more saturated a fat is, the more likely it is to be solid at room temperature (such as lard or shortening). Oils are liquid because they are less saturated than fats. They are also less shelf-stable because their chemical structures are more likely to be affected by exposure to oxygen, causing them to become rancid or develop offflavors. To make the product more stable, food processors pump hydrogen through the oil to fill in the gaps in its chemical structure, a process known as "hydrogenation." Highly hydrogenated oil is creamy or solid at room temperature, useful for making oleomargarine or other processed food products.

Oils generally have about the same caloric value of approximately 120 calories per tablespoon whether the fatty acids are saturated or not. More important to health-conscious consumers is the role of fatty acids in raising or lowering the presence in the bloodstream of the high-density lipoprotein (HDL) or low-density lipoprotein (LDL) associated with cholesterol. HDL (the "good cholesterol") is a beneficial substance that helps the body get rid of excess cholesterol, while LDL (the "bad cholesterol") builds up in the arteries and can increase the risk of heart disease. Eating foods high in monounsaturated fatty acids is believed to help lower LDL cholesterol levels and decrease the risk of heart disease, while the consumption of saturated fats may increase levels of LDL and total cholesterol. The consumption of polyunsaturated fats in place of saturated fats decreases LDL cholesterol levels. The American Heart Association recommends the consumption of oils that have no more than two grams of saturated fat per tablespoon.

Unsaturated fat content is a major selling point for household oils. One of the major oils on the market, canola oil, was developed specifically to appeal to consumers concerned about fat content. Canola—short for "Canadian oil"—is a variety of the rapeseed plant developed in Canada with less fatty acid than the traditional variety and thus a lower level of saturated fat than most other oils.

The chemical structure of oils makes them relatively stable at high temperatures, but at some point oil begins to break down and give off smoke; beyond this point there is danger of fire. The smoke point for most oils is around 410°F (210°C), although some oils have even higher smoke points. The smoke point gets lower as oil is reused due to degradation of chemical bonds and contamination of the oil with food particles. Commercial operations that re-use oil will pass it through a filter to take out the contaminants.

Sources of Oil

In addition to olives, oil is obtained from legumes such as peanuts and soybeans; from the seeds of many plants, including corn, rapeseed (canola), sesame, cottonseed, sunflower, palm, safflower, coconut, grapeseed, mustard, pumpkin, and avocado; and from tree nuts such as walnuts,

almonds, hazelnuts, and pistachios. Tree nut oils are usually expensive and do not respond well to high heat, so they are used primarily to dress salads or to add flavor to baked goods.

The finest oils are simply extracted from the raw material (such as olives or nuts) by pressure. This is called "cold pressed" or "first pressed" oil. Oil that remains bound up in the raw material can be extracted by heat or chemical solvents.

Oils labeled by specific names, such as peanut oil, are obtained from those particular plants; a product labeled merely "vegetable oil" is a blend of various oils. In the production of vegetable oils, seeds are cracked, cooked, and run through a press to extract readily obtainable oil. The pulp is further processed to obtain the rest of the oil, which is neutral and tasteless; if flavor is desired, the oil can be mixed with the product of the first pressing to restore flavor and color.

Uses of Oil

Oil has a variety of uses in cooking, most of them based on its ability to transfer heat to the food while remaining stable itself. Asian food is often stir-fried in a little hot oil, just enough to keep the food from sticking to the pan. Chicken can be sautéed or fricasseed in a few tablespoons of oil, while pieces of breaded fish can be fried in shallow oil—perhaps a quarter of an inch deep.

Frying large pieces of food in deep oil requires a temperature of 350° to 375°F (177° to 191°C). At that temperature, the hot oil will sear the surface of the food being fried, trapping moisture within the food. The food thus cooks in its own moisture rather than in the oil, which is why properly fried food is not greasy. Greasiness results from frying at a temperature lower than optimal.

In Italy, olive oil is used as a dipping sauce for bread at the table. Olive oil is preferred as a salad dressing because it has its own flavor to contribute to the dish.

In food manufacturing, oils are used in a host of products, ranging from soups and gravies, salad dressings, bread and rolls, and fried foods to nondairy toppings and frozen desserts, coffee creamers and cocoa mixes, candy bars and cakes, and in most processed snack foods.

Fish Oil

Some species of fish such as Atlantic menhaden have high levels of certain essential fatty acids, called omega-3 fatty acids, which the human body is not able to synthesize by itself and must obtain from food. Oil made from these fish is sold as a nutritional supplement. Menhaden oil is used in the production of margarine and shortening in Europe and has been approved for use in the United States.

See also Butter; Cooking; Fats; Fish; Frying; Snacks .

BIBLIOGRAPHY

Lane, Mark, and Judy Ridgway. The Simon and Schuster Pocket Guide to Oil, Vinegars, and Seasonings. New York: Simon and Schuster, 1990.

McGee, Harold. On Food and Cooking: The Science and Lore of the Kitchen. New York: Fireside Books, 1984.

Pehaut, Yves. "The Invasion of Foreign Foods." In Food: A Culinary History from Antiquity to Present, edited by Jean-Loius Flandrin and Massimo Montanari, pp. 457–463. New York: Penguin Books, 1999.

Tannahill, Reay. Food in History. New York: Three Rivers Press, 1988.

Richard L. Lobb