Petroleum - A Global Industry From Its Beginning*
Michel T. Halbouty, Chairman, Michel T. Halbouty Energy Company
Search and Discovery Article #70003 (2000)
*Presented here with permission of Energy Houston, a publication of International Business Publishers, Inc., with website, www.worldenergysource.com.
When Colonel Drake brought in his famous well in western Pennsylvania in 1859, he helped found an industry dominated by international factors that have influenced exploration and production in this country as well as in the rest of the world. In fact, petroleum may be the first industry to be truly global from its inception.
The Civil War, which started less than two years after that momentous discovery, is a good example. The Union was able to offset its world cotton trade loss with oil shipments. In fact, exports far exceeded domestic use of oil throughout the war. A $l-per-barrel tax on oil added to northern coffers, and oil helped keep northen industry operating at a high level. This condition led to constant exploration for petroleum during the Civil War and an accelerated program immediately after the war. Between 1859 and 1874, this country provided 90 percent of the world's oil. Between 1874 and 1883, our production was never less than 80 percent of the world total.
In 1884, when the Baku fields in Azerbaijan (before becoming a part of U.S.S.R.) started producing, this dominance began to dwindle. In fact, between 1898 and 1901, this Caspian-Sea region was the world's leading oil producer. Spindletop (Figure 1) and the fields that followed it in the Southwest returned the United States to oil leadership in 1902.
Early International Demand
By 1914, the first year of World War I, the United States was producing five times as much oil as Russia. In the meantime, several international factors had prompted an increased demand for oil exploration in this country. One factor was the dual recognition by the British that (1) oil was necessary to the operation of their navy, and (2) their navy was the backbone of the British Empire's world power leadership.
Of course, the United States Navy and other navies of the world, as well as merchant marine units, were also converting to oil. As early as 1916, the president of the Board of Trade in England told the House of Commons that his country had to secure control of the world's supply of oil. In that year, the United States was producing 777,000 barrels of the world's 1,180,000 barrels of oil daily, or approximately 66 percent.
Because of unstable domestic supply, foreign countries were unable to rely completely on American oil. British, Dutch and French companies began to explore in the Middle East, Mexico, Venezuela, Colombia, and the Far East to safeguard their needs.
The Seeds of Discontent
The seeds of oil policy problems, both national and international, were sown between 1910 and 1916. American oil companies had started searching for oil on a worldwide basis in order to supplement and protect their foreign markets.
In the early 1910s, American oil companies received a considerable setback when the State Department announced that all American companies operating on foreign shores would have to go on their own. This meant that Americans in countries such as Venezuela were left without government support. Consequently, many valuable foreign oil properties passed into the hands of the British and the Dutch. When World War I started in 1914, Americans were producing oil in only two foreign countries - Mexico and Romania. Dependence of other countries on the United States for petroleum kept exploration activities here at a very high level.
World War I, incidentally, created the long-prevailing Mideast problem. The tremendous potential for discovery and development there created a rivalry between the great powers in their search for oil independence.
The years 1911 to 1914 brought about British realization that ships could not run at the required 25 knots with any fuel except oil. Therefore, on July 17, 1913, Winston Churchill announced that the British would supply their own oil from sources under British control or influence. The Germans, French, Dutch and Russians were entertaining similar thoughts. Thus began the departure of other countries from dependence on the United States for petroleum.
An example of the unreliability of the United States' supply occurred in 1912. This country was suffering from one of its oil famines, which was ended abruptly by the discovery of the Cushing field in Oklahoma. Cushing established Oklahoma as the premier oil state and dropped crude prices from $1.05 to 55 cents per barrel. Within less than a year, Cushing began to decline, and this country dropped into another oil famine, which proved Churchill's point.
England and other countries had to have their own supplies of petroleum; they just could not depend any longer on supplies from the United States. By the time we entered World War I in April 1917, petroleum had become indispensable to the world's activities.
Despite its unreliability as a source of supply, this country provided the Allies with 90 million barrels of oil, or virtually all of the oil used in land, sea, and air operations in World War I.
Fears of Shortages
During the war, Petroleum World of London first warned of an impending shortage of petroleum.
The international interest in oil had brought new heights in oil exploration. Demand brought prices that attracted new risk capital in this country. Gasoline, which sold for 13 cents a gallon in 1914, had doubled in price by May 1917, and there were persistent rumors that these prices would go as high as 40 cents a gallon.
A.C. Bedford, president of Standard Oil Company of New Jersey, was appealing to every oil producer in the country to seek the utmost possible output of crude oil. He called it their patriotic duty, adding, "Frankly, there is no shortage of oil, simply a shortage of effort to get it out of the ground."
As a result of pleas by President Wilson and Bedford, oil production was stepped up by almost 100,000 barrels per day, which was a little more than one-tenth of production in that year. After the United States entered the war and the demand for oil became virtually impossible to meet, the price of crude advanced to $2.25 per barrel, up from $1.40, adding great stimulus to exploration.
From 1919 to 1923, severe worldwide oil shortage scares resulted in an increased search for oil in all foreign fields. United States Secretary of Commerce Herbert Hoover told leading oil company executives to "get out and find some oil." He said that if we had to depend upon foreign sources, they should be "from our own American companies."
Britain and Holland were already strong in Mexico and had the cream of the concessions in Venezuela thanks to the United States' non-protection policy established just before World War I.
The San Remo Oil Agreement
Although the United States was still supplying 72 percent of world production, American companies were, excluded from oil rights in many countries, notably in the Middle East mandated nations, through the San Remo Oil Agreement, which was signed on April 24, 1920.
Under its terms, the British and French divided all the Middle East oil under their influence and barred the United States from participation. When this secret pact was exposed, the United States government adopted a hard open-door policy on petroleum. Smarting under this snub from its two recent allies, the United States gave a strong shove to American companies to embark on petroleum expeditions all over the world.
American geologists became active in nearly every country believed to be favorable for oil production. Much of the knowledge of prospects in many undeveloped regions is contained in major company files as a result of this far-flung activity of the early 1920s.
About this time, Navy Secretary Josephus Daniels panicked, fearing the navy would run out of oil and America's first line of defense would be imperiled. He started a campaign for government control and nationalization of oil, with the Shipping Board and the Department of the Interior supporting his position.
These foreign forays, heavy imports from Mexico, and pleas for nationalization temporarily dried up venture capital in this country and caused a drastic decline in exploration activity.
Also, Mexico's famous "Golden Lane" gushers had started going to salt water, thereby dampening the pleas of independent producers for an oil import tariff. Suddenly, because of this worldwide oil shortage scare, wildcat activity in this country picked up and again there was overproduction at home.
Britain and The Netherlands were increasing production steadily despite the loss of their Russian (U.S.S.R.) properties shortly after the war. They were highly active in Western Hemisphere developments. Although U.S.SR. had expropriated all foreign oil interests under the new Bolshevik regime, she reached a low of 9.6 percent of world production.
The Manning Scare
At home, Dr. Van H. Manning, Director of the Bureau of Mines, was saying that within the next two to five years, the oil fields in this country would reach their maximum production, and from that time on, we would face an ever-increasing decline. This view caused the Council of National Defense, composed of most of the President's Cabinet, to advocate government acquisition of Indian lands for exploration of oil under government control.
George Otis Smith, Director of the Geological Survey, warned that the United States would be out of oil in 18 years and would have to depend on foreign sources or use less oil, but the rest of the world would have an ample supply for the next 50 years.
Professor Harold Hibbart of Yale University told the American Chemical Society that our supply of crude oil would be entirely exhausted within 23 years and that no solution was in sight. He said he felt confident, however, that chemists would eventually solve this problem through research. Crystal balls were not much better then than they are today, it seems.
It is likely that a national petroleum company would have succeeded had not Secretary of State Bainbridge Colby warned that foreign nations would refuse to do business with such a company in areas within their jurisdiction.
To impress the British and French with its determination for an open-door policy in the Middle East, the United States government threatened to place an oil embargo on any country discriminating against American oil interests. On January 19, 1921, the Financial Times declared: "It is now clear that the French government, like the British, aims at non-monopoly of the oil business. The policy of the open door is to be adopted, and as a result, the Royal Dutch group will be in a position to obtain concessions from the French government."
The Red Line Agreement
This was the first trace of the famous Red Line Agreement. It was consummated on July 31, 1928, with the organization of the Turkish Petroleum Company, composed of the Anglo-Persian Oil Company, Royal Dutch-Shell Company, Compagnie Francaise des Petroles, and Near East Development Company, each with 23.75 percent ownership, and Calouste Gulbenkian with the other 5 percent. It limited activities of the participants to specific Middle Eastern areas marked out by a red line on the map.
Toward the end of 1922, Sir Edward Mackay Edgar, British financier and industrialist, was telling his people that America's insatiable demand for oil would bring on a worldwide shortage. He speculated: "As for oil, America has already reached the importing stage. Our business, as Britons, is to sit tight on what we have and export all the oil, cotton, and metal possible in the non-American world. In that way, we shall do more than safeguard our position; we shall be able to supply America."
This statement by Sir Edward promoted the so-called John Bull scare. But the John Bull scare was drowned in a flood of oil by November 4, 1923. The ink was hardly dry on Senator Robert M. La Follette's prediction that gasoline would go to $1.00 a gallon when discoveries in the Los Angeles basin, at Elk Hills, Huntington Beach, and Santa Fe Springs counteracted the decline of Mexico's "Golden Lane" fields.
Added to the discoveries at Hewitt, Tonkawa, and Burbank in Oklahoma; Smackover in Arkansas; and Big Lake in Texas, these pushed the price of crude down from $2.00 per barrel in February to $1.00 in November. At the same time, gasoline went from 21.5 cents to 13.5 cents a gallon.
These incidents relaxed tensions between this country and its former allies. President Coolidge rescinded the exclusion of Roxana Petroleum Company from Indian lands in the United States. And in 1928, by the Red Line Agreement and through a strong State Department determination to have American companies gain a foothold in the Middle East, the Near East Development Company, composed of five major American companies, gained a 23.75 percent interest in the Iraq Petroleum Corporation.
The Great Depression
The period 1929-1935 in this country was concerned largely with the Great Depression and efforts to bring about conservation. A phase of this conservation movement was the attempt to establish worldwide proration. The Federal Oil Conservation Board was stressing the international aspect of overproduction, and the American Petroleum Institute's committee on world production and consumption of petroleum worked out a plan on the subject for its board. The whole idea was killed when the Attorney General ruled that Americans could not participate.
Worry over world petroleum supplies temporarily faded into the background with the first giant discoveries in Venezuela and the East Texas field, the world's first billion-barrel fields.
In 1929, the Independent Petroleum Association of America (IPAA) was formed in Colorado Springs for the express purpose of working for a tariff on petroleum imports. The organization credited the new oil surplus in this country to imports from foreign fields.
International companies immediately began to curtail imports voluntarily in fear of the tariff or even a total embargo on foreign oil imports. In June 1932, an excise tax of 21 cents per barrel on foreign crude and $1.05 per barrel on gasoline went into effect.
As World War II approached, oil's importance was enhanced in international affairs. Germany, realizing it would probably be cut off from oil in the war it was planning, started the development of liquid fuel from coal. To a lesser extent, similar experiments were underway in England, France, and Belgium.
France began the process of substituting alcohol for motor fuel by restricting petroleum imports and providing subsidies to grain producers. Romania, which at one time sold oil all over Europe, was confining its markets to German and Italian outlets. By 1938, Mexico had expropriated foreign oil properties, as Bolivia had done a year earlier, and other South American countries began to organize government-owned oil companies.
In the United States, domestic oil was flooding the market. In Bahrain, Saudi Arabia, and Kuwait, American oil companies were making sensational strikes.
Despite all of this, when the United States entered World War II on December 7, 1941, petroleum was one of the few American industries prepared for the emergency. The industry was called upon to supply the bulk of 100-octane gasoline, toluene, aviation lubricants, synthetic rubber materials, and other critical products.
Almost immediately after Pearl Harbor, the transportation bottleneck for petroleum shipments to the East Coast became acute as a result of intensified German submarine activity. The proposal to build the "Big Inch" and "Little Big Inch" pipelines brought on a genuine shortage scare for petroleum.
The War's Influence
From the Senate came cries that the British were not making oil available to the Allies from Middle East sources. In 1943, the Petroleum Reserve Corporation was formed to put the government in the pipeline business to transport American oil from Saudi Arabia to the Mediterranean coast. The charter of this government corporation also provided for the building of refineries and other activities in foreign countries.
It was again evident that the United States government intended to go directly into the foreign oil business. This action brought immediate and strong protest from the oil industry and precipitated the "great debate" on domestic oil policy. President Wilson's Secretary of State, Bainbridge Colby, who attacked the first attempts to nationalize the oil industry, came out of retirement to attack this new attempt.
The Oil Administrator, Secretary Harold Ickes, campaigning for the government-built Trans-Arabian pipeline, revived the old campaign declaring, "We are running out of oil." The President, the Joint Chiefs of Staff, the Secretary of the Navy, and the Secretary of War all joined in the chorus.
Eventually, the Petroleum Reserve Corporation was killed by the National Oil Policy Committee. It is ironic that Ickes had appointed this committee, composed largely of oil men, to support him in his position.
The next step by Oil Administrator Ickes was an effort to bring about an Anglo-American oil agreement providing for an orderly development of reserves in the Middle East and other foreign countries. The treaty was never ratified by the Senate.
In the meantime, the oil industry was hampered by an Office of Price Administration (OPA) price on oil and products, as well as a low priority for steel and steel products.
Tremendous oil discoveries were being revealed in the Middle East by the United States Petroleum Mission.
Steel had become available for the building of the Trans-Arabian pipeline to deliver Texas Company and Standard of California oil to the Mediterranean.
The Anglo-American Treaty fight was to continue until well after the end of the war. In the midst of all of these debates and rationing of oil products and strangulation by OPA, this country was supplying by far the greatest amount of oil to the war effort.
In the closing stages of the war, the Soviets attempted to secure oil concessions in Iran but were refused on the grounds that the Iranian public would consider that permission had been granted under duress with foreign troops stationed in their country.
Since Iran was backed by both the United States and Great Britain, this issue threatened to grow into a Big Three crisis. The issue was called a proving ground of allied oil policy. The editor of one United States oil trade journal viewed the situation as "a display of pressure politics by the Soviet government against foreign governments, possibly leading to serious activities for American oil companies now operating in the Near East."
From these events sprang the troubles in the Middle East, which erupted first with the Suez crisis and then with the Arab-Israeli war.
Looking back, it seems obvious that the international situations of the domestic oil industry in World War II were serious. The United States government consistently refused to grant crude oil price increases and steel necessary to stimulate seriously needed wildcat drilling. It seems that the government was deliberately trying to keep domestic exploration down while promoting Middle East oil development, despite the relative danger of enemy acquisition.
At the same time, the government was squandering good money promoting a synthetic fuel program - the ill-fated Canol project in Canada and keeping the lid on the Elk Hills Naval Reserves No. 1. In spite of this, domestic production increased from 3,842,000 barrels per day in 1941 to 4,695,000 barrels per day in 1945.
As World War II ended, it was obvious that the world had for the first time become truly oil conscious.
The Soviets prolonged the stay of their troops in Iran, then the largest oil-producing country in the Middle East, precipitating the first United Nations crisis and launching the Cold War.
An Era of Emergency
In the aftermath of World War II, the Truman Doctrine, the Marshall Plan, the Korean War, and the North Atlantic Treaty Organization were all part of an era of emergency. All these factors involved petroleum supply and refinery, pipeline, and marketing considerations that would sooner or later influence exploration in the United States.
The United States, immediately after World War II, faced the Cold War oil scare, which resembled to some extent the John Bull oil scare that followed World War I.
The State Department began attempts to revive the stalemated Anglo-American Oil Treaty, supported by the Joint Chiefs of Staff and members of the Army-Navy Petroleum Board.
Attention was called to the fact that "the Soviets threaten Middle East oil," and Secretary of the Interior Julias A. Krug revised the old "United States scarcity-foreign plenty" approach.
Although OPA price ceilings were removed in late 1946, crude prices reached a 15-year high and domestic production and exploration were in high gear when the Marshall Plan backers in Congress suggested a government policy aimed at saving domestic oil and drawing on Middle East oil as much as possible. This plan, of course, would have destroyed our domestic exploration and eliminated the independent.
Postwar demand in this country was little short of phenomenal. The Army-Navy Petroleum Board testified that the military services faced an acute shortage of aviation gasoline.
In spite of this, oil shipments were going to U.S.S.R., but eventually criticism caused the Office of International Trade to re-institute wartime controls on oil exports. Behind all of this was the obvious government promotion of the Anglo-American Treaty, which was already doomed.
The Red Line Agreement was quietly dissolved, and the 50/50 profit sharing policy initiated in Venezuela spread to the Middle East. Production of both areas was expanding rapidly.
"Sowing the petroleum" was the Venezuelan plan to plow oil royalties and taxes back into public improvements. All of this had a braking effect on domestic exploration. In 1948, the United States lost its tremendous advantage of being a net oil exporter with the reversal of the historical West-to-East oil flow. In 1950, the outbreak of the Korean War created a new oil emergency, and exploration picked up with great success.
In 1951, Mohammed Mossadegh (then Prime Minister) nationalized Iranian oil. This constituted a serious threat to the Korean oil supply, to NATO, and to the success of the Marshall Plan. This act was Soviet-inspired, but the Foreign Petroleum Supply Committee's plan of action averted impending disaster.
In 1952, the Select Senate Committee on Small Business released a previously classified staff report of the Federal Trade Commission titled "The International Petroleum Cartel," which stirred up dissention and cast new suspicions on the vital oil industry. Huge foreign demand following the European recovery brought on a temporary supply problem.
Two years later, with the backing of the State Department, the Iranian oil consortium was formed, indicating the importance of Middle East oil to the free world. Americans then moved into other areas of the Middle East, Africa, and South America in what has been described as the greatest search for oil in history (Figure 2).
This search inspired an editorial in one of this country's leading trade journals, which indicated that oil might lead to world freedom. The editorial read: "The rapid, widespread expansion of American free enterprise oil operations over a huge portion of the globe may provide multitudes of people with greatly improved living conditions and thereby build a formidable barrier against the spread of communism."
What the writer did not realize was that communism would be attracted to those areas of development.
On July 26,1956, one of the momentous international factors in the history of petroleum occurred when Egypt seized and closed the Suez Canal. England and France took steps to force the reopening, but their efforts were thwarted by the Soviet Union's offer to send volunteer forces to Egypt, and later, a threat of atomic reprisals against NATO nations.
The issue was finally settled by Eisenhower's Middle East Doctrine. Europe's Middle East oil supply was cut off. The Foreign Supply Committee became the Middle East Emergency Committee, and Soviet policy in the situation was described as an attempt to use Nasser-style Arab nationalism as a dagger to strike at the oil jugular of the Western alliance.
As oil was moved around the Cape to Europe, the Middle East Emergency Committee became the focal point of an intra-industry debate on imports. Independents demanded more pipeline connections. State proration policy, especially in Texas, drew fire when allowables were not raised to meet the crisis.
A 50-cent crude oil price increase stunned Washington and most of the major oil companies except Humble, which instigated the increase. In Washington, a Massachusetts congressman called for an all-member National Petroleum Commission to take over all phases of the industry in the interest of national security and the economy.
In the overall picture, the Middle East Emergency Committee provided Europe with sufficient oil to prevent a million-barrel daily shortage. And when the crisis was all over, our domestic industry was unable to reverse its program quickly enough. The result was an oil exploration and drilling depression from which we have not yet recovered.
In an address before the Chicago Executives Club in mid-November, 1965, Howard W Page, director of Standard of New Jersey, explained the action of the Western nations, especially the United States, in the crisis when he said: "The importance of the Middle East lies in the fact that it is the greatest single reservoir of energy available to supply the growing needs of the entire Eastern Hemisphere outside the Iron Curtain. It is also important because it is the testing ground for new nations. What happens there profoundly affects not only Europe, but Africa, the Far East, and even Latin America. And what happens in all these places affects America."
As soon as the crisis ended, politicians clamored for investigations, and new proposals emerged for federal control of the entire industry, and even for internationalization of the entire Western world's petroleum industry.
The Soviets sat by silently for a few months, getting their first satellite into orbit, and then opened a new Middle East campaign centering on Muscat and Oman (Oman), Syria, and Egypt.
Meanwhile, crude oil buyers in this country were putting purchaser proration into effect.
To try to keep things safe in the Middle East, the State Department was pushing American international companies toward increased imports of oil into this country, and by October 1957, Texas was on a 12-day producing schedule after three successive 13-day months. Domestic producers, many of whom had loans based on twice that many producing days in this country, were perplexed as they found themselves swimming in a sea of surplus oil.
Stepping Up the Cold War
Now the Soviets stepped up the Cold War in the Middle East, and worldwide demand for oil suddenly took a temporary but highly significant downward turn. The Soviets, concentrating exclusively on the Middle East, put on a propaganda barrage stressing their military strength and technical superiority as indicated by Sputnik's flashing signals as it orbited the earth.
On June 5,1967, a third of the free world's petroleum supply was suddenly halted as Israeli and Arab guns flashed out in the historic Six-Day War.
The Soviets' and Arabs' determined efforts to create a European oil famine failed. This country supplied 90 million barrels over and above normal production during the crisis. That, interestingly enough, is exactly the amount of oil the United States had provided to win "the war to end all wars" in Europe between 1914 and 1918.
Throughout the entire crisis, the Soviets were urging the Arabs to use their powerful economic weapon oil - to punish the United States and other Western powers friendly to the Israelis.
U.S.S.R. also was out in the marketplace offering to supply Soviet oil to help the unfortunate Europeans. As strange as it seems, they found some takers.
I have dealt here with only the most obvious but probably some of the most significant factors that molded the petroleum industry.
This is a subject upon which a book of several volumes could and should be written for an industry with virtually no sense of its own history.
Domestic exploration in this country has been influenced by international factors sine the 1860s.
Possibly the most important factors were those occurring immediately before and immediately after World War I. They were factors based on poor leadership and the fallacious assumption that the United States had exhausted its sources and supply of domestic oil.
Since then, foreign wars, insurrection, political actions and maneuvers, crises, expropriations, revolutions, and fantastic discoveries in many parts of the world have had tremendous and often immediate effects on petroleum exploration and will continue to do so.
Many events will occur that will surely affect the entire industry--some bad, some good! In spite of this, worldwide exploration will continue unabated because the remaining petroleum potential is huge, and as much oil and substantially more gas will be found than has been produced to date.
Michel T. Halbouty is an internationally renowned earth scientist and engineer whose career and accomplishments in geology and petroleum engineering have earned him recognition as one of the world's outstanding geoscientists. He received his MS and BS degrees in geology and petroleum engineering from Texas A&M University. He also earned the Professional Degree in Geological Engineering from Texas A&M University. The Montana College of Mineral Science and Technology conferred the degree of Doctor of Engineering (hc) upon him. He was awarded the degree of Doctor of Geoscience (hc) by the USSR Academy of Sciences, the only such honor bestowed on a scientist outside Russia. The University of Nanjing (People's Republic of China) presented him with an Honorary Professorship in Geology for his numerous contributions to the advancement of petroleum geology in China. He was also elected a member of the Chinese Academy of Engineering.
A former president of the American Association of Petroleum Geologists, Halbouty is widely sought as a speaker by scientific and lay groups all over the U.S. and the world. Halbouty was the first independent to explore in Alaska. The finding of the West Fork Gas field on the Kenai Peninsula in 1959 was the first discovery by an independent in Alaska. He is recognized as the petroleum industry's preeminent wildcatter. He chaired President Reagan's Energy Policy Advisory Task Force and later was appointed by President Reagan as leader of the Transition Team on Energy.