The Geopolitcal Importance of the Oil Industry

The origin of the modern oil industry lies in the middle of the 19th century, when a group of American businessmen hired Professor Benjamin Silliman Jr. to investigate whether a thick black substance that bubbled up in various springs and salt mines in Pennsylvania known as “Rock Oil” could be used as a fuel for oil lamps. Silliman studied the Rock Oil and learned that through a process of distillation a fluid could be extracted...
26th February 201452 min
The origin of the modern oil industry lies in the middle of the 19th century, when a group of American businessmen hired Professor Benjamin Silliman Jr. to investigate whether a thick black substance that bubbled up in various springs and salt mines in Pennsylvania known as “Rock Oil” could be used as a fuel for oil lamps. Silliman studied the Rock Oil and learned that through a process of distillation a fluid could be extracted which made for an excellent fuel for oil lamps.
Not long after, in 1859, Edwin D. Drake opened up a tremendous source of supply of Rock Oil which helped the kerosene-industry to skyrocket. Through utilizing technology originally developed for drilling water wells, “Colonel” Drake was able to tap into a source of Rock Oil below ground. Thanks to “Colonel” Drake, therefore, Rock Oil no longer had to be gathered from ponds and salt mines in small quantities at a time, but it could be gathered and made available for distillation in large quantities from a single location.
Following this innovation the kerosene-industry could benefit from an abundant supply of cheap raw material, which enabled it to underprice its vegetable and fat based lamp oil competitors. Very quickly, kerosene became a multi-million dollar, global business.
In 1865 the American entrepreneur John D. Rockefeller entered the Rock Oil refining business. Starting with one small refinery, he innovated by integrating into this business the activities upstream and downstream from refining. Eventually he was able to bring the entire American oil industry – from the production and refining of the crude oil, to transporting and marketing the kerosene – under the control of his Standard Oil Company, from which ExxonMobil and Chevron would later emerge.
In other parts of the world entrepreneurs tried to enter the kerosene business as well.
Baku, which today is in Azerbaijan but during the 19th century it was part of the Russian Empire, had since time immemorial been known for its “eternal fires” – places where oil and gas seeped to the surface and had (been) ignited. Knowing this, the Swedish Nobel brothers Robert, Ludvig and Alfred saw an opportunity to establish in Russia what Rockefeller had established in America. With financing from the French arm of the Rothschild family they founded the Branobel oil company and eventually managed to bring Russian oil production, refining, transport and marketing under their control.
Further east Indonesia would become a competitor to American and Russian kerosene. A Dutchman named Aeilko Zijlker was once travelling for business on the Indonesian island of Sumatra and learned from his local guide that there were ponds there filled with a thick black liquid that the locals used to make torches. Zijlker was so fascinated by the brightness of the flame of these torches that he took a sample of the black liquid and had it analysed in Jakarta. After tests confirmed the fluid was Rock Oil containing large amounts of kerosene, Zijlker established the Royal Dutch petroleum company to market the Indonesian oil. Eventually Royal Dutch teamed up with the British sea-shipping firm SHELL to become Royal Dutch / SHELL.
As far as the Middle East is concerned, there the kerosene business began in 1901 when a British businessmen named William Knox D’Arcy decided he wanted to benefit from the known Rock Oil seepages in Persia. In return for a small sum Knox D’Arcy was able to motivate the Shah to sign a contract for a 60 year concession covering most of Persia. Thereafter, however, D’Arcy struggled to finance the exploration and development activities, which drove Knox D’Arcy into the arms of the British government. On the advice of Thomas Boverton Redwood, the leading oil-industry expert of his time, Knox D’Arcy approached the British government for a loan for his business. Redwood was also an advisor to the British government and he saw potential in oil as a fuel for the British Royal Navy – a fuel superior to coal. Redwood wanted to ensure the British developed access to oil independent from the foreign companies in America, Russia and Indonesia and therefore sought to bring Knox D’Arcy and the British government together in a business venture. Eventually, Redwood was able to convince the British government to support Knox D’Arcy. The Anglo-Persian Oil Company (APOC), which would later on become British Petroleum (BP), was thus formed as a partnership between the two parties, and oil began flowing from Persia to Great Britain.
The Emergence of Oil as a Strategic Commodity
The development of the oil industry throughout the 19th century, was in parallel to Germany’s rise as a geopolitical power. After Otto Von Bismarck had united the various German states under the leadership of Prussia in 1870, unified Germany quickly developed technologically and economically. Consequently, it soon began knocking on the doors of the then global superpower the British Empire challenging it for control over the seas.
In his competition with the British Empire the German Emperor Wilhelm turned eastwards to establish close relations with the Ottoman Khilafah. Undoubtedly the motto “the enemy of my enemy is my friend” played in role in this, but the German–Muslim alliance was natural for a number of other reasons as well.
Already in 1871 a team of scientists had visited the lands of what are today Iraq, Kuwait and Saudi-Arabia and concluded that oil had to be present there, but that challenges in regards to transporting this oil to the markets of the West and East would make it difficult for this oil to compete with the oil of America and Russia. At the turn of the century Emperor Wilhelm therefore sent a technical committee to the Muslim lands in the Middle East to investigate the oil potential again. Emperor Wilhelm’s team concluded in 1901 that the Muslim Middle East sat on a veritable “lake of petroleum” of almost inexhaustible supply. The committee advised the German government to begin work on getting access to these resources, to be able to break the American / Russian / British control over the oil industry.
Germany had the technical and financial ability to undertake such a project in the Muslim lands. The main requirement was the building of railways to connect the oil producing areas with the oil consuming areas. The Muslim Khalifah Abdul Hameed II shared the German interest in undertaking this work in the Ottoman Khilafah, because this would further economic integration of the various provinces of the Islamic State and thereby increase agricultural production, trade and general economic development. Also, it would enable him to move the Muslim army around the Islamic State much faster, strongly enhancing the power it could project at any one given place at any one given time.
In 1904, therefore, Deutsche Bank signed a deal with the Khilafah that allowed them to explore for oil in the land between the Tigris and Euphrates rivers. Germany and the Ottoman Khilafah also began cooperating in the building of railroads. Using German financing and engineering, first Constantinople was connected to Central Europe through what became known as the Orient Express. Thereafter the German-Islamic alliance set to work on building the Anatolian Railway connecting Constantinople to Konya. German engineers designed it, Muslim labourers built it, while the Khalifah and the German Empire shared the costs. Then work began on the final eastward extension of the line, the Hejaz Railway to Al Madina through Damascus; and the Bagdad Railway to the port city of Damascus through Baghdad.
The plan was to eventually link this network of railways with the Oriental railroad that had already connected Central Europe to Constantinople, and on to extend this railway to Berlin. Such that the German heartland would have direct access to large quantities of oil, in a way that could not be interfered with by the British Navy.
An event in 1911 convinced the British that something drastic would have to be done in keeping the proactive German Empire at bay. That year the German Emperor Wilhelm sent a naval vessel to the port of Agadir, Morocco, to test the ability of the French to withstand German naval power. The British realized from this that Germany was looking to take over their empire, “on which the sun never sets”.
Admiral of the British Royal Navy at that time was a certain Winston Churchill. After learning that ships powered by oil would be able to travel faster than coal-powered ships, accelerate faster, travel further, and be much easier to operate; he decided that the British Navy would be the first in the world to transform from coal-powered to oil-powered ships. The British government decided to use Iran as its preferred source of oil. It therefore took direct control of the Anglo-Persian Oil Company. At the same time it worked out an agreement with the Royal Dutch oil company to make Indonesian oil a secondary back-up source for the commodity of now critical importance to the British Empire.
Oil had now become not just a commodity of economic importance, but also of strategic importance. And this increased the importance to the Germans of their railway connecting in and with the Muslim world. Britain therefore began political and economic efforts to stop the German – Muslim alliance from succeeding with its plans, mainly because the possibility of the railways reviving the Ottoman Khilafah and providing the Germans with overland access to the oilfields of the Muslim world was now simply too big a threat to its interests. Eventually Britain even turned to military means to protect its hegemony in the world. That is why it hastened to war with Germany and the Ottoman Khilafah in 1914, after the assassination of the Austrian Archduke Ferdinand in Sarajevo. World War I, therefore, was the first war for oil in history.
World War I would not be the only time a war was fought for control over oil. After Churchill’s decision to have the British Navy powered by internal combustion rather than steam, oil became more than just the “black gold” – it also became the “black weapon” for which wars were fought and through which battles were won or lost. This made the colonialist western states even more desiring of control over the Muslim world.

 

During World War II many of the German battle plans revolved around bringing under control these major oil producing regions of the world. Adolf Hitler invaded Russia with the aim of capturing first the oil fields of the Caucasus and then those around Baku. The ultimate aim was for the German army to proceed from Baku into Iran from its northern border and take possession of the British oil production facilities there. This German attack on Iran was to be supported by a western Iranian front, for which Hitler sent his trusted General Erwin Rommel into North Africa. His mission was to first wrestle control over the Suez Canal from the British to cut one of the two major supply lines of the British, and then move into the Arabian Peninsula and Iraq to invade Iran from its western border. Interestingly enough the German “grand plan” in North Africa would fail due to an inability to supply the rapidly advancing Rommel with fuel. When the German armies in Russia  got stuck in the winter cold, Hitler’s war was lost.

This outcome of World War II changed the global balance of power equation drastically. America and Russia emerged as the new global power houses, taking over a lot of the influence Britain and France used to have over world affairs. But not all.

For example, British dominance in Iran remained. And with it, British control over one of the most important oil producers in the world. Very quickly, however, the Americans began making plans to end this British hegemony over Persia.
Under the leadership of George McGhee the American diplomats in the Middle East began to incite local populations against British influence. This way it became public knowledge in Iran that between 1945 and 1950 the Anglo-Persian Oil Company (APOC) made profits worth 250 million Pound Sterling on Iranian oil, while the Iranian government received just 90 million Pound Sterling in royalties – through taxing APOC even the British government made more than that on Iranian oil. Additionally, it became known that APOC was selling Iranian oil at a substantial discount to the British Navy. At the same time American oil companies went around the Middle East offering local rulers a much better deal than the British – 50% of the oil profits and US government support in case of domestic opposition against dealing with the American influence, i.e. full American support in case the British tried anything to stop the deal. All this together caused the Iranian public to demand nationalization of the oil Industry.

 

At first, the Iranians demanded from Britain a 50-50 profit split, just as the King of Saudi-Arabia had agreed with American oil companies sponsored by George McGhee. When the British refused to deal, in 1951, the situation erupted. The Iranian parliament voted in favor nationalizing the oil industry, this infuriated the British. They threatened military invasion and through the United Nations organized an embargo of Iranian oil. Then the Americans intervened. They told the British that they would not tolerate a military invasion of Iran. But, conscious of the British support in the war the Americans were fighting against the Soviets and China on the Korean Peninsula, they also told the British they would support them to find a solution for the Iranian crisis. America offered to help the British remove the Iranian prime-minister Mossadegh from power, if after that the British would give up the Anglo-Persian control over Iranian oil and share it with American firms. (The Americans presented this latter part of the plan to the British as necessary to misguide the Iranian public and make them accept continued Western dominance over Iranian oil). Grudgingly, the British agreed. So in 1953 the CIA launched Operation Ajax which, as is common knowledge these days, removed Mossadegh from power. Following this, Iranian oil was brought under the control of a consortium of seven Western oil companies. Anglo-Persian was back in Iran, but now had to share Iranian oil with five American oil companies – Standard Oil of New Jersey (later known as Exxon), Standard Oil of New York (Later known as Mobil), Standard Oil of California (Later known as Chevron), Texaco (since 2001 part of Chevron) and Gulf Oil (since 1984 part of Chevron) – as well as Royal Dutch/Shell and CFP from France (today named Total).

 

More recently the American Gulf wars of 1990 and 2003 were without doubt linked to oil. Shortly after Saddam’s invasion of Kuwait in 1990, Dick Cheney, the then American Secretary of Defense under Bush the 1st, told the Senate Armed Forces Committee: “Our strategic interests in the Persian Gulf region, I think, are well known, but bear repeating. We obviously also have a significant interest because of the energy that is at stake in the gulf”. At that time Iraq possessed 10% of the world’s proven oil reserves and it acquired another 10% by seizing Kuwait. The occupation of Kuwait also placed Iraqi forces within a few hundred miles of the Ghawar oil field in eastern Saudi Arabia, the biggest oil field in the world pumping some 5 million barrels per day. Cheney used this to justify military action against Saddam’s Iraq: “He was clearly in a position to be able to dictate the future of worldwide energy policy, and that gave him a stranglehold on our economy and on that of most of the other nations of the world as well”. [1]

 

After working as head of the oil and gas services firm Halliburton Cheney returned to public office in 2001 as Vice-President under Bush the 2nd. In this role one of his first projects was the development of a new American Energy Policy. In his second week in office he began having a series of meetings with executives from the major oil companies in the world – ExxonMobil, Conoco, SHELL and BP. [2] The outcome of these discussions was a report that said that for the long-term, America should try to reduce its energy consumption and increase the share of energy produced from renewable sources. However, the report acknowledged that in the near term America would remain reliant on imported fuel. After then setting out in detail what existing American interests in foreign energy resources were, it proposed where America should go next to secure a diversified supply of oil. [3] For this Cheney had gathered detailed maps of all Iraqi oil fields, as well as maps of oil fields and pipelines in Saudi Arabia and the United Arab Emirates and a list of oil and gas development projects in those two countries. [4] Six months following the publication of this report 11 September happened and America hastened to attack Iraq for a second time.

Oil Geopolitics in the 21st Century

Today, a common misconception is that wars are fought over oil because huge profits can be made in the oil business. Some people believe, therefore, that oil companies push their governments to engage in geopolitics using all means, including war, to secure for themselves these profits.
This view grossly underestimates the importance of oil, however. The economies of the world today are all totally dependent on energy. Since most of the energy produced comes from oil and gas, it can be said that oil and gas are the lifeline of the world economy as we know it. If for any country this lifeline would is cut, it would have disastrous consequences for the inhabitants of that country. Transportation would come to halt, so markets would no longer be supplied. Factories would grind to a halt, inventories would quickly run out. Complete chaos would ensue.
When it comes to geopolitics, therefore, the primary objective of governments is to secure a steady and reliable supply of oil and gas. Indeed, no country would pass on the opportunity of having national companies manage that supply since immense profits can be made this way. But if the engagement of a national oil company could threaten the security of the supply, this objective would quickly be discarded. Realizing the profit potential in the oil business is therefore only a secondary objective behind security of supply.
For as far as the countries with global interests are concerned, they have a further ambition which is to control the supply of oil globally. “Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world”, Henry Kissinger is reported to have said.
In the past, Western countries used colonialism to achieve all three of their objectives (secure supply, control oil flows, control oil production) at once. Britain made Iran an effective colony, after which British companies produced the oil there and transported it back home for usage by the British Navy. When America began promoting “national independence” to weaken the British position globally, the policy of the Western colonialist countries changed slightly, from direct military colonization to the agency-model where the colonialist establishes an obedient local as a ruler. This affected the oil policy of the colonialist countries. To be able to maintain the agent in his position, public support for the agent became a matter of importance. Consequently, a façade of independent decision making on the part of the leaders of the colonized countries had to be ensured before the oil of the colony could be exploited. Usually this was done by having the oil companies from the colonialist countries sign formal agreements with the agents in the colonized countries, such as the Americans did in Saudi Arabia. Due to the increase in awareness and hence power of the general public in the Muslim world, over time these deals between the agent rulers and the oil companies from the colonialist countries have had to be made ever more advantageous for the colonized countries, to the detriment of the oil companies. But since the primary objective of the colonialist countries is securing supply, this is not seen as a big problem by the colonialists. Also, of course, because they know that through their agents they can ensure that the colonized will spend their newfound wealth in the colonizers country.
In response to this development, under George W Bush America decided to focus on ensuring that its military controlled the transport routes of oil. So the Americans have ensured it operates military bases around the world from which it can control these transport routes or at a minimum “exercise power” over these routes, rather than focus on control of the oil wells themselves. [1] It has also ensured that the international military alliance NATO supports the American objective to control the flow of oil. In 2008 at the Bucharest Summit, NATO members agreed that part of NATO’s role in the world is “supporting the protection of critical infrastructure”. [2]
The major choke points when it comes to the transport of oil and gas have therefore become the scene of geopolitical conflict: [3]
  • In the Arabian Gulf and the Strait of Hormuz a conflict between Iran and the Gulf countries was created to enable a continued American presence in the region.
  • Yemen and Somalia have been thrown into chaos because the Bab al Mandab and the Gulf of Aden are critical for the westward traffic of oil from the Gulf region.
  • In Egypt Abdul Nasser fought against the British-imposed King Farouk and the Muslim Brotherhood to first establish and then maintain American dominance; and today America works against popular aspirations; all in part because of the importance of the Suez Canal.
  • In the Indian Ocean, America and Britain were in conflict over Sri Lanka because it lies on the major transport route for eastward traffic from the Gulf.
  • The South China Sea is slowly but steadily becoming an area of conflict between China and America’s agents in South East Asia, not just because the area could possess large amounts of oil and gas but also because it is of critical importance for the transport of oil and gas to China, Korea and Japan.
  • Through Erdogan the Americans challenged the long standing ties between the Turkish (military) establishment and Great-Britain, in part at least because the Turkish Straits are critical for the transport of oil from Caspian Sea.
  • In Georgia Russia engaged the American agent-government militarily, in part because of the importance of the Baku-Tbilisi-Ceyhan pipeline that transports Caspian oil to the Mediterranean.
  • The Urengoy–Pomary–Uzhgorod pipeline (West-Siberian pipeline or the Trans-Siberian pipeline) lies at the heart of the conflict between Europe and Russia in Ukraine, which shows itself in the Ukrainian political arena.
 “fracking”
It is often thought that oil production is about tapping into pools, lakes or even seas of oil deep below the surface of specific places on earth. In reality, however, this is not the case. Crude oil exists inside porous rock formations and the standard oil production technique is to drill a hole into these rock formations to allow the natural pressures deep inside the earth to push the oil flow towards and through the hole to the surface.
In certain parts of the world, oil and gas are trapped in very dense rock formations (“tight oil”). Due to the density of these rock formations it is impossible for oil to flow. Drilling a hole into these rock formations to tap the oil will therefore not produce any meaningful quantities.
This issue has been resolved through an oil production technique called hydraulic fracturing, commonly known as “fracking”. Under fracking a mixture of water and chemicals is injected into the dense rock formation to cause hairline fractures. The chemicals in the water are intended to prevent these fractures from closing, such that the oil can start flowing in the direction of the well and from there onto the surface.
Fracking has substantially increased American oil and gas production ever since it was introduced on a large scale about 5 years ago. It has increased American oil production 30%, from 5 million barrels per day in 2008 to 6.5 million barrels per day in 2012. This has led the American Energy Information Administration (EIA) to conclude that “under certain conditions” America could become energy independent or even a net exporter of energy by 2040, which would significantly alter the state of geopolitics. [4]
It is very unlikely, however, that the “certain conditions” the EIA is referring to will ever come into existence. One of the major challenges that will need to be overcome is very high depletion rates of fracking wells. The average fracking well in the US produces 600 barrels per day with an annual decline rate of around 40%, meaning that after one year the same average well produces just 360 barrels per day. Just to keep production flat, therefore, a very large number of new wells need to be drilled every year. This is what makes the production of oil from dense rock formations very expensive. [5]
Another major challenge for the fracking industry is water usage. Fracking requires the injection of large quantities of water. Most of this water gets lost in the dense rock formation. The portion of it that comes back to the surface with the oil (and gas) is heavily polluted by the chemicals that are mixed into it as well as by the oil and gas it interacts with below the surface. Although America is very rich in water eventually there will arise competition for water between fracking, consumption and other industries such as agriculture. (In other parts of the world the water needs of fracking will prevent the exploitation of the tight oil. China, for example, has very large oil reserves in such rock formations, but essentially all of them are in areas where water is very scarce.)
The implication of this is that while fracking might have a lasting effect on the energy balance in some countries, it will not do so in a way that will turn the energy balance for this country upside down. [6] This applies even more to the global energy balance, meaning that the geopolitical impact of fracking will most likely remain limited.

 

[1] “Bush-Cheney Energy Strategy: Procuring the Rest of the World’s Oil”, Michael T. Klare, 2004 www.commondreams.org/views04/0113-01.htm

 

[2] “Document Says Oil Chiefs Met With Cheney Task Force”, www.washingtonpost.com/wp-dyn/content/article/2005/11/15/AR2005111501842.html
[4] “Group: Cheney Task Force Eyed on Iraq Oil”, H. Josef Hebert, www.globalpolicy.org/component/content/article/185/40573.html
[5] “US military on the scent of oil”, Colonel Daniel Smith, www.atimes.com/atimes/Front_Page/FK20Aa01.html
[6] “NATO’s role in energy security”, www.nato.int/cps/en/natolive/topics_49208.htm
[7] “World Oil Transit Chokepoints”, www.eia.gov/countries/regions-topics.cfm?fips=wotc&trk=p3
[8] “Annual Energy Outlook 2013”, www.eia.gov/forecasts/aeo/pdf/0383%282013%29.pdf
[10] “Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation”, www.sciencedaily.com/releases/2013/10/131028141516.htm

 

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