Oil Is Discovered in the Middle East

views updated

Oil Is Discovered in the Middle East

Overview

Petroleum has become steadily more useful and valuable since the first oil well was drilled by Edwin Drake (1819-1880) in 1859. The first major oil fields were discovered in Pennsylvania and Ohio, with major strikes in Texas and Oklahoma to follow in 1901. Shortly after, the first oil concessions in Persia (now Iran) were granted, and the race for Middle East oil was on. Since that time, the discovery and exploitation of oil in the Middle East has had a profound influence on modern society and politics. Oil created vast fortunes and industrial empires, launched at least one war, promoted the widespread use of petroleum, gave birth to OPEC, realigned twentieth-century politics, and much more. It's safe to say that the huge reserves found in the Middle East played a tremendously important role in shaping the world we live in.

Background

Since antiquity, natural petroleum seeps were known, and the petroleum collected there was used for a variety of purposes. Not until the mid-nineteenth century, however, was any formal effort made to extract the oil for commercial use. When this finally happened, the first place people drilled for oil was near these seeps, assuming that they portended oil below. Oil seeps had been found for thousands of years in Persia.

In 1901, British businessman William D'Arcy convinced the Persian government to award him a concession for oil exploration, extraction, and sales in exchange for £20,000 and 16% of profits over the next 60 years. At one point when he was on the verge of bankruptcy, D'Arcy appealed to the British government for help; they agreed to assist him, fearing he might otherwise sell his concession to a foreign country such as Russia. Britain, still a great power at that time, also wanted to maintain a political presence in the Middle East. The British government pressured an existing British oil company, Burmah Oil, to give D'Arcy the financial assistance he needed in 1905; shortly thereafter, large amounts of oil were found.

In the following years, oil was discovered in a great many places in the Middle East: the Arabian Peninsula, beneath the Caspian Sea, beneath what would become the nations of Iraq, Kuwait, the United Arab Emirates, and others. In 1944, a prominent petroleum geologist named Everette DeGolyer reported to the U.S. government that he was certain the Middle East nations were sitting atop at least 25 billion barrels of crude oil, at least 5 billion of which were in Saudi Arabia. Not reported at that time were his unofficial estimates of up to 300 billion barrels of oil—a third of which he thought underlay Saudi Arabia. In a report to the State Department, DeGolyer's team commented that "The oil in this region is the greatest single prize in all history."

At that time, the Middle East produced slightly less than 5% of the world oil supply; over 60% came from the U.S., which was providing virtually all oil for the Allied armies in World War II. Concerns about the longevity of America's domestic petroleum reserves began to emerge at the same time that the Saudi Arabian economy began to suffer—the war kept many Muslims from making their required pilgrimage to Mecca. Saudi economic troubles and American fears complemented each other, and the U.S. began to take an active part in finding and extracting Arabian oil. This marked the beginning of Middle Eastern petroleum's ascent to its current domination of the global petroleum market.

Impact

Middle East oil was discovered during the first rush to look for oil outside the U.S., when governments and industrialists were attempting to find out how much petroleum was available for further industrial expansion. In addition, with the advent of mechanized warfare on land, the increasing use of aircraft, and the transition of naval propulsion from coal to oil, petroleum became a vital strategic commodity. The U.S. and most of Europe found themselves with a seemingly inexhaustible source of energy to power their growth. This abundant, cheap energy encouraged them to increase their reliance on power-hungry machines and internal combustion engines. This industrialization ensured a high standard of living, but its almost total dependence on access to cheap energy became the Achilles heel of the developed world.

The Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela primarily in retaliation for price cuts made by the oil companies. (Current membership also includes Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, and Nigeria.) At that time, most oil wells were owned by petroleum companies who had been granted concessions by the nations on whose territory the wells lay. These companies paid only a fraction of their proceeds to the countries. When prices dropped, the oilproducing nations lost a great deal of money. OPEC was organized to raise and stabilize the price of crude oil. By regulating the amount of oil produced, the price could, theoretically, be maintained artificially high, increasing revenues for these nations. Of course, raising the price too high would be counter-productive because it would encourage less energy consumption, the recovery of otherwise marginal reserves, or both. So setting oil production and pricing became an intricate balancing act.

OPEC flexed its economic muscles in 1973 when, in retaliation for American support of Israel during the Yom Kippur war, it raised the price of oil from $3 per barrel to $12 per barrel and, for a short time it even stopped selling oil to the U.S. Other price increases followed; by 1980 oil was $30 per barrel. This shocked the U.S. into realizing its dependence on foreign oil, encouraged energy conservation, research into alternate forms of energy, and increased development of domestic reserves. Although oil produced by non-OPEC nations surrounding the North Sea oil fields and in Southeast Asia has diminished OPEC's power somewhat, OPEC nations still control a disproportionate share of world oil production, and retain a great deal of power as a result.

In addition to setting prices, countries like Saudi Arabia, Qatar, Iraq, and Venezuela nationalized their oil production in the 1970s, when they realized they could bank all the profits of oil production rather than just taking their concession fee. The government simply informed the oil companies that the government was buying their oil fields. The companies were paid off, asked to leave the country, and the government began operating the oilfields instead.

The influx of oil dollars, in turn, has made many OPEC nations dependent on petroleum to maintain their economy. Venezuela is an excellent example of the perils of over-dependence on a single commodity for a nation's economic well-being. Venezuela suffered in two ways: Much of the oil revenue was siphoned off from the economy by a corrupt government, which kept the revenue from benefiting the nation as a whole. In addition, the Venezuelan government counted on an unending and everincreasing cash flow from oil. When prices dropped in the 1980s, Venezuela lost this revenue and much of their hard-won economic prosperity vanished with it. Plus, with little money saved because of rampant corruption, much of the infrastructure built with petro-dollars began to crumble.

Finally, since oil has a definite military value, protecting oil reserves, even in other countries, becomes a high priority for industrial nations. In World War II this led the Allies to bomb the Ploesti oil fields in Romania to deprive the Nazis in Germany of this energy source. In more recent years, Saddam Hussein invaded Kuwait and threatened to do the same to Saudi Arabia. This would have placed him in direct control of over 20% of total global oil production, which was considered an intolerable situation. For this, and other reasons, a coalition of forces waged war against Iraq to protect Saudi Arabia, restore Kuwait, and maintain unfettered access to Middle East petroleum. This, more than anything else, illustrates the importance of Middle East oil in today's world.

P. ANDREW KARAM