Lessons from the History of the Oil Industry

This blog documents my efforts to educate myself about energy, clean tech and sustainability. I’ve been doing a lot of reading and thought I would share, from time to time, my assessment of the books and articles I read.

In that vein, I have just finished reading what is probably the definitive history of the oil industry. It’s called The Prize : The Epic Quest for Oil, Money & Power, by Daniel Yergin, who is chairman of Cambridge Energy Research Associates.

At 788 pages (before notes), this is a comprehensive book. It is also a fascinating narrative and as relevant and valuable today as it was when it was published in 1991. (The paperback was issued in 1993).

What follows is not a detailed review of the book but rather a list of a few of themes that stood out most for me.

Oil and international geopolitics. Anyone who lived through or studied the “oil shocks” of the 1970s is at least a little familiar with the role that oil plays in international geopolitics. What is fascinating, though, is that oil has played this role almost from the beginning of the industry. The book shows, for example, the key role that oil began to play in military strategy as early as World War I, demonstrating that reliable supplies are critical not only to economic security but to military security.

Tumultuous boom-and-bust cycles of oil prices and supply. The oil industry has been plagued by cycles of boom and bust from its inception. This wreaks havoc with investment plans. And it also provides some context for the rise of the giant oil trusts, like Rockefeller’s Standard Oil, and the logic of building integrated oil companies that control sources of production, refining, distribution and marketing, which were an attempt to tame the wild dynamics of the industry.

The dramatic power shift from oil companies to exporting countries. One of the central narratives of the book is about the shift of power from oil companies and the Western countries from which they hailed, to the oil-exporting nations. This was driven by ever escalating demand for oil in the developed world and a growing sophistication on the part of oil producers in linking political and economic objectives. In the early days of global oil exploration, the major oil producers in the Middle East were barely countries themselves, emerging from the collapse of the Ottoman Empire and the withdrawal of colonial rule with little ability to assert themselves on the global stage. The book vividly illustrates the transition from the period in which sophisticated global oil companies were able to manipulate local rulers and secure valuable terms to the days when savvy political leaders from oil-producing countries and oil ministers began to call the shots and began to capture substantially more of the value of the oil they were sitting on.

Larger-than-life characters. The book is populated by memorable characters with quirky personalities, audacious goals, and often a high tolerance for risk. The profiles of John D. Rockefeller, Marcus Samuel, JP Getty, Armand Hammer were great. My favorite character, though, is Calouste Gulbenkian, “son of a wealthy Armenian oil man and banker, who had built his fortune as an importer of Russian kerosene into the Ottoman Empire…” Gulbenkian became known as Mr. Five Percent, after negotiating a 5% stake of a Persian oil concession for himself. He was a relentlessly effective negotiator and “totally and completely untrusting.” He would often retain multiple experts for their and pit them against each other until he alone determined what he felt was the truth of the matter at hand.

Scarcity, capital costs, planning horizons. There is a striking contrast between the dynamics of this old-economy industry, in which so much crucially depends on scarcity and access to supply, and new-economy industries, in which so much depends on technology, innovation and distribution. Old and new each have some of each, of course, but the supply component is so dominant in the oil industry. A related element is capital costs and planning horizons. High and long in oil, lower and shorter in high-tech. A world of low distribution costs and zero marginal costs—like the Internet world I’ve been living in for nearly ten years—like a fairyland compared to the oil business.

Security, economic growth, and the environment. The book’s conclusion articulates what I suppose has been the conventional wisdom for a long time: that energy security, economic growth and environment concerns are in conflict. “A far-reaching clash between anxieties about energy security and economic well-being on the one side, and fears about the environment on the other, seems all but inevitable,” Yergin wrote. It is striking that today, at least in some circles (including the coming Obama administration) it is commonplace to argue that those goals are not in conflict any longer, that developing alternative energy sources will benefit the environment, reduce our reliance on unstable fuel sources, and fuel economic growth (through investment in and development of new technologies and markets related to them). Today, a lot hinges on our ability to finesse or transcend the “far-reaching clash” that Yergin described.

This is a great book. If you are serious about being informed about the energy industry, I’d consider it essential reading. You can buy it at Amazon by following this link: The Prize : The Epic Quest for Oil, Money & Power

(Note, if you buy from that link, you are also buying me a cup of coffee. Thanks!)

What are you reading? Any suggestions to share?

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1 Comment

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One response to “Lessons from the History of the Oil Industry

  1. Pingback: My Clean, Green, Sustainable Reading List « Green Research™

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