10 events in oil's history that shook the world
ArabianOilandGas looks at some of the oil industry's amazing stories
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Since the oil industry came into being in the mid-1800s, you could say that it’s been a slightly more controversial industry than most. The scrapes the oil industry has gotten itself into over the last 150 years have shaped the political landscape of the world in many ways.
Oil has caused wars, assassinations, massive man-made disasters, governments being overthrown and effects every single person living in the world today. And to think it all started with an eccentric retired railway engineer being jeered by onlookers in Titusville Pennsylvania.
So with this in mind, ArabianOilandGas.com brings you the 10 oil industry events that shook the world. The events are ranked chronologically, not in order of importance, and we have tried to include events that had widespread political repercussions rather than just being the largest or first.
What is interesting about the list is the amount of events where the actions of maybe one or two people have led to catastrophic results costing many lives and billions of dollars. You can't help wondering how life might have differed if decision taken at the time had been different. Would OPEC have ever been founded if President Eisenhower had not placed a tax on Middle East oil imports? Would Iraq have invaded Kuwait in 1990 if the Kuwait government had given Saddam Hussein time to repay the loans his country owed them? We'll never know.
If you feel that we have missed anything from the list that should be there, please feel free to leave a comment.
- Edwin Drake drills for oil in Pennsylvania
- Standard Oil is broken up
- The CIA overthrows the Iranian government
- The founding of OPEC
- Arab oil embargo
- Iranian Revolution causes oil crisis
- Saudi Aramco reverts to state ownership
- Exxon Valdez oil spill
- Iraq invades Kuwait
- Oil price hits $147
Edwin Drake drills for oil in Pennsylvania (1859)
For a man credited as the founder of the hydrocarbons industry, Edward Drake made an unlikely oil pioneer.
Drake was a former railroad engineer who was employed by the Seneca Oil Company in the late 1850s to search for oil deposits on land owned by the company in Titusville, Pennsylvania.
After assembling a team of drillers and purchasing equipment, Drake began the drilling operation. The project suffered numerous setbacks, including several well collapses, crowds turning up daily to jeer and the Seneca Oil Company eventually becoming embarrassed by the whole situation and pulling the financial plug.
But Drake persevered and after securing independant financial backing, made his breakthrough. Drake devised a drilling method where an iron pipe was driven through the ground and into the underlying bedrock, thus allowing him to drill inside the pipe and stopping the hole from collapsing. On August 28th, 1859, Drake’s well, or Drake’s Folly, as it had been called by the locals, successfully began to extract oil.
Drake’s well pumped 25 barrels per day (bpd) of oil that was sold for heating and lighting. Legend has it that the oil was initially collected in a bath tub.
As with most pioneers Drake failed to build on his early success and died in abject poverty 15 years later. Drake’s fatal mistake was that he failed to file a patent for his drilling system and within days his method for extracting oil was being copied by everyone else. A series of oil booms followed in the area shortly after that all capitalised on Drake's new method.
However, the engineering principles behind the method are still used today and the site of Drake’s well is now a museum dedicated to the man credited with founding the oil industry as we know it.
Standard Oil is broken up (1911)
If Standard Oil still operated as a single entity today it would quite effortlessly be the largest company in the world and be worth well in excess of US$1 trillion. It’s founder John D. Rockefeller has been named as the richest man in history and is as famous for his philanthropy as he was for his highly dubious business practices.
Founded in Ohio in 1870, Standard Oil soon had an effective stranglehold on the American oil industry and by employing (even for 130 years ago) some cut-throat methods, managed to drive scores of competitors out of business.
By the early 1900s Standard Oil controlled 91% of production and 85% of sales of oil products in the US. However, pressure was growing at what was seen as an unaccountable company that was too powerful, even for the US government, to handle.
The situation eventually came to a head in 1911 when the Supreme Court of the United States ruled that Standard Oil were guilty of monopolizing the oil industry and ordered the company to be broken up into several competing firms.
It speaks volumes of just how powerful Standard Oil was when you consider that it was broken up before the two World Wars of the 20th Century and before the advent of the petrochemical, automobile and aviation industries. One can only speculate as to how big the company may have become if the US government had allowed it to exponentially grow over the last 100 years.
To give an idea of how powerful Standard Oil was, the companies still in operation today that can be linked back to John D. Rockefeller’s firm includes ExxonMobil (both Exxon and Mobil were once subsidiaries of Standard), Chevron, Saudi Aramco (amazingly a former subsidiary of Chevron) and BP (BP merged with Standard spin-off Amoco in the 1980s).
The CIA overthrows the Iranian government (1953)
The origins of supermajor BP can be traced back to May 1901 when William Knox D'Arcy was granted a exploratory oil concession by the Shah of Iran. What followed was a near 80 year rollercoaster ride of espionage, assassinations, overthrown governments and eventually BP being unceremoniously booted out of the country and all of its oil assets confiscated by Ayatollah Khomeini.
The company D’Arcy founded back in the early 1900s was called the Anglo-Persian Oil Company and it struck oil in Iran in 1908, the first commercially viable oil to be found in the Middle East. The company began extracting the oil and eventually changed its name to the Anglo-Iranian Oil Company (AIOC) in 1935.
So far so good, but things soon began to go awry after the Second World War. Unrest was growing in Iran at was deemed to be unfavourable concession terms being given to the AIOC. When Ali Razmara, the pro-western prime minister was assassinated in 1951, the nationalist , Mohammed Mossadeq took over and the oil industry was immediately nationalised.
In direct response to this event, the United States' secret service, the Central Intelligence Agency (CIA), organized a military coup in early 1953 , overthrew Mossadeq and installed pro-Western general Fazlollah Zahedi in his place. Shortly afterwards the Shah of Iran swiftly established himself as dictator of the country and invited the foreign oil companies back.
The AIOC changed its name to the British Petroleum Company in 1954 and quickly tried to reassume it’s monopoly in Iran, but adverse public opinion meant that BP had to make do with conventional production sharing agreements with the newly formed National Iranian Oil Company (NIOC) and other foreign oil firms were invited into the country.
The status quo continued until the Iranian Revolution in 1979.
The founding of OPEC (1960)
As with most of the events on this list the United States plays an important role in the founding of the Organization of Petroleum Exporters Countries.
In 1960 the US government led by President Eisenhower decided that the cheap oil entering the country from places such as the Middle East and Venezuela was not only hurting domestic producers, but also that dependence on foreign oil was a threat to national security.
To protect the country’s interests, Eisenhower placed an import tax on oil coming from Venezuela and the Middle East. The import tax resulted in the domestic price of US oil being artificially high and allowed US producers to make huge profits at the expense Venezuela and the Middle East oil exporters.
In response to the import tax, the energy ministers from Saudi Arabia and Venezuela invited their counterparts from Iraq, Iran, Kuwait to a meeting held in Baghdad between September 10-14 to explore ways in which petroleum-producing nations could forge stronger link to protect their interests. It was at the Baghdad Conference that OPEC was born.
Now the cartel has 12 members, the five founders have since been joined by Algeria, Angola, Ecuador, Libya, Nigeria, the UAE and Qatar. OPEC has been based in Vienna since 1965.
OPEC has achieved far more prominence and political clout in recent years as the balance of power has shifted from the supermajors to the national oil companies. As no viable alternative to hydrocarbons is yet on the horizon its power and influence can only grow.
Arab oil embargo (1973)
On October 16, 1973, OPEC member states agreed to raise the price of oil by a staggering 70% to US$5.11 a barrel. The following day member states belonging to the Organization of Arab Petroleum Exporting Countries (OAPEC) agreed to stop shipping oil to any countries that aided Israel during the Yom Kippur war.
When the US president Richard Nixon announced $2.2 billion of military aid to Israel, Libya announced that it would no longer ship oil to the US. The other members of OAPEC swiftly followed suit. Shortly after the embargo was extended to include the Netherlands.
The ramifications of the embargo was felt immediately as oil soared in price from $3 to $12 a barrel. Oil shortages were also felt throughout the world and rationing was initiated by most countries in the Western Hemisphere.
However, the long term effects of the embargo were extraordinary and dramatically altered the way world began to view its own energy security. The United States gave the green light to massive oil exploration projects offshore and in the previously cost prohibitive State of Alaska.
Other nations such as France and the UK diversified their energy sources with massive investment in natural gas, nuclear power and renewable energy. Japan even changed its focus from oil heavy industries to electronics and led its car industry to produce smaller, more economic models.
In the oil industry itself, the balance of power shifted from the supermajors, or Seven Sisters as they were then known, to nationalised oil companies. The supermajors were also accused at the time of profiteering from the crisis and many experts believe that as a result have been treated with suspicion by general public in Western nations ever since.
Geo-politically Middle East oil exporters are thought to have fared badly since they used the “oil weapon” as a method of achieving their political aims. It is believed that the events in 1973 began the alternative energy movement which has gathered enormous momentum over the past 36 years (with climate change also lending a helping hand) and has increased the region’s dependence on Western countries buying its oil.
Iranian Revolution causes oil crisis (1979)
It seems that the 1970’s were somewhat of a golden period when it comes to volatile upheavals in the oil industry. In fact the industry today, even with all the recent problems in Iraq and the recent election demonstrations in Iran, seems tame by comparison.
The 1979 Iranian Revolution was a remarkable event in that nothing like it had ever been seen before. A series of mass demonstrations and strikes against the Shah Mohammad Reza Pahlavi was followed by a small pockets of fighting between guerilla forces and the Shah’s troops. Within days a monarchy had been turned into an Islamic theocracy headed by the charismatic Ayatollah Khomeini.
One of the first things the Ayatollah did was nationalise the oil industry and throw out all the supermajors that held production contracts in the country, and with them went thousands of highly skilled oil workers. The move devastated the country’s oil sector and while Iran continued to pump oil during this time it was nowhere near the levels of production seen before the revolution.
Other OPEC nations, headed by Saudi Arabia, were quick to ramp up production to plug the hole in supply and as a result the world’s output only dropped by 4%. Such a small percentage point reduction should have meant that Iran’s drop in output would not be as badly felt by the global energy markets and so long as no-one panicked, a potential major crisis could be averted. Then everyone started to panic.
The price of oil rocketed over the next 12 months from US$15.85 to $39.50 and the rush to secure supplies caused acute shortages across the world.
The fall-out of the crisis was manifold. Other OPEC nations who had increased their own oil production made huge profits as the oil price remained artificially high. However, the high oil prices resulted in many major nations initiating energy conservation policies and in 1980 demand for oil dropped while production remained relatively steady.
Over the next six years the glut of oil on the market culminated in the oil price dropping to below $10 a barrel in 1986. OPEC’s output dropped to levels not seen since 1969, causing widespread discontent among the member states and plunging many, including Nigeria and Venezuela, into near bankruptcy.
Saudi Aramco reverts to state ownership (1980)
Saudi Arabia was not the first country to fully nationalise its hydrocarbons industry, but being the world’s biggest oil producer means that it is by far the most important.
Saudi Aramco was founded in 1933 when Standard Oil of California (now the US supermajor Chevron) signed an exploration agreement with the Saudi Arabian government. Amazingly it took the company four years to find oil in the country, finally making a discovery at Dammam in 1937.
The company changed named again in 1944 to the Arabian American Oil Company (Aramco) and began to flourish, particularly after it confirmed the discovery of the world’s largest oilfield, the gigantic Ghawar field as well as the world’s largest offshore field, the Safaniya, in 1956.
Following the 1973 Arab oil embargo of the US and the Netherlands Saudi Arabia bought a 25% stake in the company , increasing it to 60% in 1974 and eventually assumed 100% ownership in 1980.
It has turned out to be a shrewd move by the Saudi Arabian government. If Aramco was a publicly traded company it would quite easily be the world’s largest. Nationalisation has freed the company from shareholder demands and allowed it to invest in long-term development strategies.
Due to its size and oil assets (which are a closely guarded state-secret), Aramco has given Saudi Arabia the financial clout to massively invest in its own infrastructure and has also awarded the relatively small nation a prominent position on the world stage.
Not bad for a former subsidiary of Chevron.
Exxon Valdez oil spill (1989)
Although the Exxon Valdez oil spill, that occurred in Alaska in 1979, is not even close to being the worst spill ever to occur at sea, it is the most famous.
On March 23, 1989, the ship was leaving the picturesque Prince William Sound in Alaska when it maneuvered out of the shipping lane to avoid hitting icebergs. Shortly after midnight on March 24, the crude carrier struck Bligh Reef and emptied around 40 million litres (out of a cargo of 200 million litres) of crude oil into the ocean.
What followed was an environmental disaster of biblical proportions. The oil spread out onto around 28,000 square kilometres of ocean devastating both the indigenous wildlife and habitat of the Alaskan coastline. Local industries such as tourism and fishing ended overnight and hundreds of thousands of animals are believed to have perished almost immediately.
To make matters worse due to the remote location of the spill, the clean-up operation was only possible by helicopter and boat. Over 11,000 local residents and Exxon employees were involved in the clean up operation.
The fall-out from the disaster continues to this day as legal wrangling between Exxon (now ExxonMobil) and the local government and population of Alaska rumbles on as do accusations about the long-term damage to the environment, wildlife and the local economy.
The disaster resulted in strong opposition to oil exploration in remote areas of natural beauty such as Alaska by environmental groups and the adverse publicity for ExxonMobil and the oil industry in general, still shows no sign of going away.
The spill also played a major part in fast-tracking the introduction of double-hulled tankers to transport crude oil. It is believed that while a double-hulled vessel would not have actually prevented the disaster it would have cut the amount of oil spilled into the ocean by 60%.
Iraq invades Kuwait (1990)
The super giant Rumaila oil field lies on the border between Iraq and Kuwait and is shared by the two countries. Rumaila has recently been in the news after the concession to develop the Iraq side of the field was awarded to a BP-led consortium. However, it hit the headlines for all the wrong reasons back in 1990 as accusations of Kuwait using slant- drilling techniques to ‘steal’ oil from the Iraq side of the field was used as an excuse by Saddam Hussein’s regime to launch the invasion of Kuwait that led to the first Gulf War.
Relations between the two countries had been frosty to the point of freezing in the lead up to the invasion due to a furious arguament over US$40 billion of loans Kuwait had made to Iraq during the Iran-Iraq war.
Kuwait refused to pardon the debt, which led Iraq to promise to repay the money owed by raising the price of oil through OPEC production cuts. However, in what may go down as one of its more rash decisions, Kuwait decided to increase oil production thus preventing an increase in prices.
The move was seen in Baghdad as an act of aggression and had a catastrophic effect on the Iraq economy. It was estimated at the time that Kuwait’s actions were costing Iraq $14 billion a year in lost oil revenues.
Much saber rattling and many heated exchanges between the countries followed and the situation wasn't helped by Saddam Hussein believing that a swift and decisive invasion of the prosperous Kuwait could solve his country’s financial woes at a stroke.
So at 2am on August 2 1990, Iraq invaded Kuwait.
The result is well documented - two major wars in Iraq with the loss of hundreds of thousands of military and civilian lives. The Saddam regime was eventually overthrown in 2003 by US and British forces after accusations that the Gulf state was accumulating weapons of mass destruction (none were ever found). Saddam Hussein was tried by an Iraq court for executing 148 Iraqis, found guilty and subsequently executed on Decemeber 30 2006.
Before his death Hussein issued an apology for the invasion.
During the war Kuwait also suffered huge environmental damage after 600 oilwells were set alight by retreating Iraqi forces.
Oil price hits $147 (2008)
When you listen to various oil experts today arguing that US$75 is a fair price to pay for a barrel of oil, you can’t help wondering why the same people weren’t calling for $75 oil during mid-2008 when the oil price hit $147.27 a barrel.
The demand for oil and other commodities, has been fueled by the massive growth of developing nations such as China and India coupled with the unprecedented growth by most major Western nations between 1995 and 2008.
However, unlike the oil crises that occurred in the 1970s there was no war, or embargo to adequately explain why oil became so expensive last year. In 2003 for example the price for a barrel of oil varied between $20-$30. So what caused the price to rocket in 2008?
Respected figures from the major oil producing nations have always insisted that the market was adequately supplied with crude oil during the whole period. Politicians from the US have disputed this, but while demand was extremely high it does seem that oil producing nations had increased output to cover the additional global requirement.
The finger of blame has been pointed by many at speculators trading oil on the commodities market coupled with the weak dollar. A study by Masters Capital Management, showed that over $60 billion was invested oil in the first six months of 2008 driving the price up to the magical figure of $147.27. The study also showed that $39 billion was withdrawn in September 2008 which caused prices to fall significantly.
What is clear however, is that massive spikes in the oil price do far more harm than good. The brief spike enjoyed by the oil producers last year has been followed by a massive drop in prices since. The global recession caused by the banking crisis has caused a severe drop in demand for oil and while prices are currently hovering above the $60 a barrel mark there seems things will get worse before they get better for the oil industry.
Sources: Times Online, Reuters, Britannica.com, wikipedia.com, Wall Street Journal, New York Times