THE MODERN PETROLEUM INDUSTRY
THE MODERN PETROLEUM INDUSTRY The first modern use of petroleum was for kerosene, discovered in 1852. A kerosene lamp was invented in 1857, and the first kerosene factory was built near Baku in 1859. Gasoline was a by-product of kerosene production. After 1901 most petroleum was used for fuel oil to heat and light buildings and for gasoline to power automobiles with internal combustion engines.y.
From a macroeconomic perspective, petroleum is important because the industrial systems of Western nations and Japan all are based upon its use as a major source of cheap energy and of chemicals for other uses. About 30 percent of the top fifty industrial firms in the United States are petroleum or chemical firms. A similar proportion of the top fifty non-American industrial firms also produce petroleum or chemical products. Petroleum has become essential for fueling production facilities in all industries and for powering, heating, cooling, and lighting buildings and illuminating streets. It thereby makes possible the high-density urban agglomerations so characteristic of western Europe and North America. Without it Western societies would have had to develop either a more efficient energy source or an extensive form of land use rather than the intensive form now practiced. Such a use of land for living space, given a growing population, would threaten food production by depleting the acreage of farmable land. Moreover, because petroleum fuels the vast bulk of industry, virtually all employment in the West depends in the final analysis on its use. Petroleum fuel shortages mean unemployment, and large-scale unemployment can have catastrophic political consequences. Paradoxically, another use of petroleum since the mid-twentieth century has been to encourage decentralization of massive urban agglomerations into the suburbs, requiring the use of petroleum to fuel vehicles. A sustained shortage of petroleum thus would halt this trend toward decentralized land use.
Industry Structure The modern petroleum industry is structured into four types of organizations: (1) state enterprises, (2) multinational corporations, (3) the Organization of Petroleum Exporting Countries (OPEC), and (4) legally organized commodity exchanges. In most petroleum-producing countries in the early twenty-first century, the state owns a petroleum company with a legal monopoly on the production and distribution of crude petroleum. The largest of these after 1918 was the Soviet state petroleum enterprise.
Most crude petroleum is produced by Western companies. In 1870 the Standard Oil Company was created by the Rockefeller brothers and two other partners. In 1893 the Standard Oil Trust was formed in New Jersey to evade an antitrust suit brought by the state of Ohio. Gulf Oil Corporation was formed in 1901 by the Richard K. Mellon family. Texaco was founded as the Texas Company in 1901 by Joseph S. Cullinan, Walter B. Sharp, and Arnols Shaect. The U.S. Supreme Court in 1911 ordered Standard Oil Trust dissolved. The component companies, still with the plurality of shares owned by the former Rockefeller shareholders, continued to operate as ostensibly separate companies. These companies were Standard Oil of Ohio, Standard Oil of Indiana, Standard Oil of New York, Standard Oil of New Jersey, Standard Oil of California, Standard Oil of Kentucky, Atlantic, and the Ohio Oil Company (later Marathon). The Royal Dutch Company for the Exploration of Petroleum Sources in the Netherlands Indies was established in 1890. It merged in 1907 with Shell Transport and Trading Company, a British company, to form Royal Dutch Shell. The British government formed the Anglo-Iranian Oil Company in 1914. This company ultimately became British Petroleum. In 1924 the Compagnie Française des Pétroles was established by the French government. ELF began before World War II (1939–1945) with the establishment of three small companies to explore for gas near oil seepages in Aquitaine. Italy in 1926 formed Agencia Generale Italiani Petroli (AGIP). In 1953 ENI was founded as a conglomerate of thirty-six subsidiaries, including AGIP. These companies all were multinational, multidivisional, and vertically and horizontally integrated firms. Within each company, five major functions were performed—exploration, drilling and production, transportation, refining, and distribution to final consumers. Subsidiaries were responsible for each function. Transfers of product among these subsidiaries and other divisions of the companies were accomplished using shadow pricing or some other form of transfer pricing. Actual payments were made only for transactions with outside firms.
PEC was established in Baghdad in September 1960 as an intergovernmental organization of five original member states—Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. Its charter required that each member acquire an increasing level of control of production. By 1970 each member state was required to own a minimum of 55 percent of foreign petroleum companies operating within its jurisdiction. Iraqi production has not been part of OPEC quota agreements since March 1998 due to U.S. and United Nations controls. Other OPEC members have included Qatar (joined 1961), Indonesia and Libya (1962), Ecuador (1963–1993), Trucial States of Oman (now United Arab Emirates, 1967), Algeria (1969), Nigeria (1971), Gabon (1975–1995), and Angola (2007). The OPEC cartel was formed to control the world oil supply so as to increase revenue to member states. It operates by assigning members an annual supply quota for crude oil production and export. In 2005 it controlled about 41.7 percent of world production. OPEC also sets prices. THE ERA OF THE SEVEN SISTER COMPANIES, 1911–1980 The name seven sisters was coined in a 1961 Time magazine article to refer to the dominant firms in the world oil industry: Royal Dutch Shell, Anglo Persian Oil (Anglo-Iranian Oil/British Petroleum/BP), Gulf Oil, Texaco, and three of the Standard Oil companies from the 1911 trust dissolution—Standard Oil of New Jersey (Humble Oil [Esso]/Exxon), Standard Oil of New York (Socony/Socony-Vacuum/Socony-Mobil/Mobil), and Standard Oil of California (Socal/Chevron). With the exception of Royal Dutch Shell, which is British and Dutch, these are all U.S. or British companies. Only the U.S. companies had their own significant domestic supply sources in the founding period of the industry from 1850 to 1950. The British and Dutch thus undertook a worldwide search for sources, beginning with their colonies and extending after World War I (1914–1918) to the League of Nations territories mandated to their administration. The seven sisters and Atlantic Richfield (ARCO), called majors, were vertically integrated, and all had similar structures. They had separate subsidiaries for exploration, production, refining, and distribution and geographic subsidiaries for operations in different areas. The most important “independent” or nonintegrated companies, which did not operate in at least one of the areas defining the integrated companies, in this period included Getty, Phillips, Signal, Union, Continental, Sun, Amerada Hess, Cities Service, Marathon, Compagnie Française des Pétroles, Occidental, ENI, Tenneco, and Skelly Oil. In 1983 Occidental acquired Cities Service. Texaco acquired Getty in 1984.