Geopolitics: How has oil shaped geopolitical power dynamics?

Crude oil, once extracted, is sent to refinery in order to separate hydrocarbons by distillation according to needs:

• Heavy hydrocarbons (bitumen, heavy fuel oils, lubricants) ⇒ heavy fuel oils for ships, bitumen for road construction

• Semi-heavy hydrocarbons (domestic fuel oils, diesel, kerosene) ⇒ kerosene for airplanes, diesel for cars and heating

• Light hydrocarbons (naphtha, gasoline) and gas (butane, propane) ⇒ lighters, cooking, gasoline for cars, naphtha used in petrochemistry to create plastic, synthetic fabrics, medicines and cosmetic products

The challenge for many oil exporting countries is to increase refining capacities. Even though reserves may seem an opportunity, they do not necessarily lead to the economic development of a country (example: Venezuela): mastering petrochemistry is essential for valorising oil.

The oil industry is one of the most profitable industries but also requires the most capital investments → drilling wells, production facilities, oil platforms, refining plants, storage tanks and pipelines for transportation towards terminals. Therefore, the oil industry is very demanding in investments and techniques but offers high ROI.

NB: one barrel = about 159 liters

Oil Characteristics

History

I. Second Half of the 19th Century (1846-1900)

During the second half of the 19th century, global oil consumption expanded significantly. While coal remained the main energy source during the Industrial Revolution, the increase in energy demand for lighting, transport and machinery pushed countries to seek for alternatives.

Interest in oil arose worldwide with new oil fields: Wietze (Germany), Krosno (Austro-Hungarian Empire), Ploiești (Romania), Baku (Russian Empire) and Titusville & Oil Springs (USA). In the USA, this caused a " black gold rush" quickly making it the world’s largest producer.

Innovations in the oil industry emerged quickly, driven by companies like Standard Oil (owned by J.D Rockefeller). Oil became essential in global trade as kerosene replaced whale oil, and lubricants powered factories and locomotives. In 1900, oil has become a strategic global commodity, in the wake of the energy revolution (with the automobile era) coming the 20th century, defining modern power.

The development of oil during this period is described as a “new epoch of energy”, unmatching any other energy source, The Age of Oil, Leonardo Maugeri

II. Early 20th Century (1900-1939)

Oil demand skyrocketed in the start of the century, especially with the invention of the internal combustion engine which revolutionized transport. The number of automobiles worldwide grew from a few thousands to over 30 million, from 1900 to 1930. The Ford Model T (in 1908) was a turning point in the mass-production car industry.

The change in ship engines and the aviation boom (mostly during WWI) have also supported oil growth.

Winston Churchill decided in 1912 to convert the British Royal Navy from coal to oil, supporting the idea that high service range will be necessary to defend its Thalassocracy. This decision made Great Britain highly dependent on Persian oil, leading to the creation of the Anglo-Persian Oil Company (APOC) in 1908.

During WWI, oil became vital for military resource. The Allies’ victory was partly due to American oil supplies (25m barrels exported to Europe in 1917), while Central Powers were suffering severe shortages.

Many oil fields were discovered from 1900 to 1939:

• Venezuela: Maracaibo Basin (Zulia state) in 1914. By the 1930s, the country became the second largest producer after the USA, mainly exporting to the UK and the Netherlands.

• Persia: William Knox D’Arcy (a British entrepreneur) obtained a 60-year concession from the Qajar dynasty in 1901, giving him the right to explore, extract and sell Persian oil. The concession was transferred to APOC to develop the highly profitable Masjed Soleyman oil field (paying 16% of royalty on profit only).

• Iraq: After the fall of the Ottoman Empire, Great Britain took control of Iraq’s oil under San Remo Treaty (1920), leading the exploitation of the Kirkuk’s giant field, discovered in 1927.

• Arabic Peninsula: Bahrain’s Awali field (1932), Kuwait’s Burgan field (1938), Saudi Arabia’s Dammam No. 7 (1938).

• Romania: oil fields around Ploiești were supplying 8% of global output before 1914. These fields became a strategic bombing target during WWII.

Seven Sisters:

• Anglo-Persian Oil Company (BP)

• Gulf Oil (which merged with Chevron)

• Royal Dutch Shell (Shell)

• Standard Oil of California (Chevron)

• Standard Oil of New Jersey (later Exxon, now ExxonMobil)

• Standard Oil of New York (later Mobil, now ExxonMobil)

• Texaco (which merged with Chevron).

The Seven Sisters had negotiated highly asymmetric agreements with locals, Local populations saw little benefit from the new business, leading to resentment and anti-colonial movements later on (ex: Mossadegh nationalization plan in 1951).

In Texas, newborn cities like Houston and Beaumont grew exponentially after the “Spindletop Gusher” (1901), marking the start of American oil production.

Baku turned into one of the wealthiest cities of the Russian Empire.

“He who controls oil controls the world,” U.S. President Calvin Coolidge.

III. During WWII (1939-1945)

Oil had become the single most strategic commodity on Earth. Its control defined the pace of military production and the country’s strength. Unlike WWI, the Second World War was a mechanized war, fought with tanks, aircraft and ships, all powered by oil. The Allies were burning over 7m barrels a day.

“Oil hunger” was the biggest threat to armies.

In the other side, Germany was facing severe oil shortage from the start. It had limited reserve and relied on synthetic fuel derived from coal and on oil coming from Romania. Ploiești was heavily bombed during the Operation Tidal Wave (1943), when the US attacked the refineries.

Hitler’s 1942 invasion of the Soviet Union was largely driven by the goal of seizing the Caucasus oil fields in Baku. As Germany failed to reach those, the fate of the war changed completely.

Japan was also lacking oil and was heavily dependent on US oil imports. In 1941, following the Japanese aggression of China, the US imposed an oil embargo on Japan. Tokyo then attacked Pearl Harbor, seeking the control of Dutch East Indies, rich in oil reserves.

In contrast, the Allies controlled around 85% of the world’s oil production — especially through the United States (60% alone, with Texas, California and Oklohama), the Soviet Union (mostly Baku and Grozny) and the Middle East (Abadan in Iran, Haifa in British Palestine, Iraq, Bahrain and Saudi Arabia).

American tankers carried massive volumes of oil across the Atlantic and Indian Oceans, often under threat from German U-boats.

“World War II was fought with oil, over oil, and largely because of oil. By its end, the map of global power was drawn not only by armies, but by pipelines and refineries.” The Prize, Daniel Yergin.

IV. After WWII (1945-1960)

In February 1945, US President Franklin D. Roosevelt met King Abdulaziz Ibn Saud, the founder of modern Saudi Arabia. The two leaders initiated the Quincy Pact which guaranteed Saudi Arabia a full security and stability from the US in exchange for privileged and stable access to Saudi oil. This unofficial treaty has been respected for over seven decades, shaping Post-War geopolitics in the Middle East.

At the time, Saudi oil production was only ~20,000bbl a day, but the Dammam and Ghawar fields (discovered in 1938 and covering ~80bn barrels of oil) assured great potential. The Saudi-American partnership was operationalized through ARAMCO (Arabian American Oil Company) which was a joint-venture between US oil majors (SOOC, Texaco, Exxon and Mobil).

By 1950, ARAMCO built the Trans-Arabian Pipeline (TAPLINE), a 1,214 km line connecting Dhahran (Saudi Arabia) to Sidon (Lebanon), shortening the traditional shipping route.

The Quincy Pact marked a shift in oil control from the UK, which had dominated Persian and Iraqi oil, to the US, starting the era of “petrodollar diplomacy.”

In the 1950s, oil companies were still taking huge benefit from the unequal agreements, creating nationalist movements in oil countries. Inspired by the negotiation between Venezuela and the US in 1948, Saudi Arabia renegotiated the Quincy Pact in 1950, allowing them 50% of royalty on oil profits.

In Iran, APOC had maintained the highly unbalanced agreement since 1901 (20% of royalties). After failed negotiations with APOC, Mohammad Mossadegh decided to nationalize the oil in 1951. The UK retaliated with an international embargo and in 1953, the CIA and MI6 orchestrated a coup-d’état (“Operation Ajax”), placing into power the Shah of Iran Mohammad Reza Pahlavi, loyal to Western interests and allowing exploitation of its oil.

The frustration also led to the Baghdad Conference in 1960, where OPEC was founded by Iran, Iraq, Saudi Arabia, Kuwait and Venezuela.

Meanwhile, the USSR was building its own Energy empire. During WWII, it had tried to protect its Caucasus oil fields (Baku, Grozny, Maykop), which produced over 20m tons per year before the Nazi invasion. In the 1950s, an army of geologists started oil exploration, in rough permafrost conditions, in the Volga-Urals region and Ob and Irtysh river basins (in Western Siberia). The discovery of the Ust-Balyk field (1953) and the Samotlor field (1965) gave them a strong advantage in the Energy race against the US.

New discoveries in the Kuwait Burgan field, Libya’s Sirte Basin and Nigeria’s Niger Delta diversified global oil production.

Finally, oil drilling known main advances in geophysics in this period:

- The use of seismic reflection techniques (developed during WWII for submarine detection) which permitted better mapping of underground reservoirs.

- Refining chemistry: catalytic cracking processes which increased gasoline yields from crude oil (crucial for cars and jets).

V. New era: 1960-1970

During the 1960s, oil was abundant and very cheap (~3$/bbl), surpassing coal as the world's primary energy source (from 25% in 1950 to 50% in 1970).

Consumption in western countries was booming (“Thirty Glorious Years”), due to motorization, urbanization and aviation growth, which supported the demand for oil.

The Organization of the Petroleum Exporting Countries (OPEC) was created in 1960, the main goals being i) to challenge the “Seven Sister” cartel which was setting the prices and the production levels, ii) to coordinate production quotas iii) increase revenues to fund their development and modernization.

In the next decades, Libya, Algeria, Nigeria, Qatar, the UAE, Indonesia, and Ecuador joined the organisation, representing by the 1970s nearly two-thirds of world reserves.

As the UK withdrew from the Middle East, it left room for the US “Twin Pillars” strategy: supporting the Shah in Iran and defending Saudi Arabia to ensure stability in the region and stable oil supply.

VI. End of the illusion: 1970-1988

In 1972, the US faced its own “peak oil” with production from its main fields (Texas and Oklahoma) starting to wane. The US became a net importer of oil for the first time to meet house demand. Middle East was gaining sovereignty against a dependent western world.

In October 1973, during the religious day of Kippur, Israel was attacked by Egypt and Syria. The Jewish State was backed up militarily by the US and Western Europe. In response, OPEC members used oil for the first time as a political weapon: i) they imposed an embargo on oil exports to Israel’s allies ii) and they cut production by 5% every month.

Prices skyrocketed from $3 to $11, and inflation and unemployment spiked, initiating a “stagflation”.

Western countries were looking for alternatives, massively investing in nuclear power, coal and hydroelectricity. France launched “Messmer Plan” with an objective of 80 nuclear power plants built by 1985. Oil companies started exploring offshores in the North Sea (UK & Norway), in Alaska and the Gulf of Mexico.

In 1979, another earthquake hit the oil market: the Iranian Revolution overthrew Reza Pahlavi and brought Ayatollah Khomeini to power. It was the start of the Islamic Republic, founded on religious radicalism and anti-West ideology.

Iran’s oil production (which was the second largest in the world) went from 6m bbl/day to 2.5m bbl/day, provoking a global oil shortage. Oil prices increased from $15 to $32.5. It was the second major oil shock. In November 1979, the crisis worsens with the 52 American diplomats taken hostage by revolutionaries, paralyzing any relation between the US and Iran.

The crisis led to the Carter Doctrine (1980), declaring that the US should use military power to protect its interests in the Gulf.

Added to the Revolution, the USSR invaded Afghanistan in December 1979, in a climate of Cold War, with threat of soviet control of the Persian Gulf and its oil reserves.

The 1970s crisis put an end to the ‘oil illusion’ and forced Western countries to i) be less dependent on the Middle East, ii) build petroleum reserves iii) increase nuclear energy production iv) and to diversify its supply.

From 1980 to 1988, the Middle East experienced one of the bloodiest wars of the region: Iran and Iraq were fighting over border disputes, ideological rivalry and control of oil routes. Both countries destroyed each other’s oil infrastructure (refineries, tankers and terminals), particularly near the Shatt al-Arab waterway through which much of Iran’s exports passed.

The war forced Western countries to defend their oil tankers under the “Operation Earnest Will.”

At the same time, non-OPEC producers (Mexico, the North Sea, Alaska, the USSR) took benefit of the turmoil, increasing output and its market share (OPEC’s market share falling to 30% of global supply).

By 1985, financial markets had more power than the OPEC on prices. Prices remained at $20, and revenues fell for producer countries.

VII. New age: 1988-2000

In 1990, Iraq was heavily indebted (~$80bln), after its war with Iran, which was also under the debt wall. Iraq’s dictator, Saddam Hussein, accused Kuwait of overproduction and of stealing Iraqi reservoirs. He decided to invade Kuwait in August 1990, to seize its oil fields and to threat Saudi Arabia.

The “Operation Desert Storm” (1991), initiated by the US and Western countries, was underway to expel Iraqi forces from Kuwait.

Over 700 oil wells were set on fire by the Iraqi troops, causing one of the worst environmental disasters in history. Prices went up to $35/bbl before falling back to pre-war level ($20/bbl). Iran and Iraq were considered as “rogue states” by the US and sanctions against them devastated their economy, promoting even more anti-Western ideology.

After the collapse of the USSR in 1991 and the highly popular victory in the Gulf war, the US exposed its dominance in global conflicts: it established permanent military bases in Saudi Arabia, Bahrain and Qatar, and naval control in the Strait of Hormuz. But the presence of western forces in Saudi Arabia (home to the Mecca and Medine) angered many Islamists, including Ousama Ben Laden.

Saudi Arabia highly increased production in 1993–1994, cutting prices and regaining its role as the swing producer. But these low prices made offshore drilling and alternative investments unprofitable, disadvantaging western countries.

Russian oil output fell by 40% after the collapse of the USSR, but investment by western companies in the mid-1990s revived production, making it a top supplier alongside Saudi Arabia at the end of the millenium.

In the 1990s, companies were massively consolidating: ExxonMobil (1999), Chevron + Texaco (2001), Conoco + Phillips (2002), BP + Amoco (1998), Shell and TotalFinaElf (later TotalEnergies).

VIII. Boom in consumption: 2000-2025