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Fa ct Sheet Two: A history of Oil P roduction

We tend to think of crude oil as a very modern invention, powering our cars, trucks and airplanes. In fact, the Greek historian Herodotus reports, crude oil was used to make walls and towers in the ancient world over four thousand years ago. However, Babylon, which used crude oil in such a fashion, did not use the modern extraction methods we just found out about. Instead, it used oil from naturally occurring oil pits.

The first really modern pits opened in the 1850’s, after a method was found to extract kerosene from petroleum. Kerosene was used for, amongst other things, light and heat, and is still used today.

It took another hundred years however, for oil to become the world’s most dominant fuel – even in the 1950’s coal was still more important. The internal combustion engines in cars, which we now associate so strongly with oil, once ran on, amongst other things, coal and gas.

As we saw in the previous section, oil is traded on the open market, with prices rarely set between two countries, but instead as a function of the supply and demand in the market in general. However, because of oil’s centrality to the world economy, there have been frequent attempts to structure the market, to use it for political purposes.

One of the biggest changes in the history of oil was the creation of the Organization of Petroleum Exporting Countries in 1960. The organization was founded in an attempt to support and promote the interests of the members, which today include Venezuela, Saudi Arabia, Iran and the United Arab Emirates. The organization initially began in reaction to a 1960’s American law enacted by President Eisenhower which attempted to put quotas on Persian Gulf oil and favor Mexico and Canada. Today, OPEC adjusts its supply of oil in order to combat shortages or gluts through coordinating production amongst member nation-states. Sudan began talks to join OPEC in 2007.

One of the most famous cases of the political use of oil was in the early 70’s. In 1972, crude oil cost roughly $3.00 a barrel. By the end of 1974, the price has quadrupled.

In between, the Yom Kippur war had occurred, which began with an attack on Israel by Syria and Egypt. Many of the principal oil consuming nations, including the United States, had supported Israel, and as a punishment, many Arab exporting nations, including OPEC members, had imposed an embargo. While some other nations increased produced to make up for the shortfall, it was not enough, and prices sky-rocketed.

The media reactions from this period are uncannily similar to those we heard in the American media when crude oil prices hit $147.30 in June 2008. One of the results of the oil embargo of the 70’s was the creation of strategic stocks. Nations heavily dependent on oil began to build up reserves of oil, to try to off-set any loss from similar embargos. The only time the United States has since needed to use its reserves was very briefly during the 1991 Gulf War.

Further examples of the political use of oil include the United Nations sanctions imposed on Iraq after the invasion of Kuwait in 1990, which limited the amount of oil Iraq could sell on the global market.

But it is not just that the oil market can be used as a political weapon. It also reacts to political events. Amid fears about supply, for instance, the Iranian revolution was the case of the then-highest prices in post-WWII history.

The history of oil is also history of the world, as we see from the way the oil price is tied to world events:

Source: BP Statistical Review of World Energy. June 2008.

Further Questions

Discuss as a class.

Given the close connection between oil prices and world events, what type of pressure do you think this puts on countries like the United States of America in their dealings with oil producing nations? Can these pressures be avoided?

Are there ways in which oil could be insulated from political shocks? Should it be?

Do you think the use of oil as a political tool is justified? Can you think of any cases today in which one could use oil as a political weapon profitably?

Further Reading

Daniel Yergin. The Prize: The Epic Quest for Oil, Money, & Power. Free Press.