The Seven Sisters
The scramble to fill the increasing demand for oil let to further exploration and production and to further consolidation in the industry. "[Oil] output was regularly expanded—from nine to ten per cent yearly—and exploration uncovered sufficient new reserves to supply mass consumption and the conversion of a large part of the economy to oil."22 By the end of World War II there were seven large, multinational oil companies, based in the United States and Britain, that held a near monopoly over deliveries of oil in the industrialized world. These seven large companies formed a cartel that is often called the Seven Sisters. The Seven Sisters included the British companies Royal Dutch Shell and British Petroleum (BP) and the American companies Exxon (former Standard Oil of New Jersey), Gulf, Texaco (the latter two created after the Splindletop discovery), Mobil (former Standard Oil of New York), and Standard Oil of California (later Chevron).23 They controlled 92 percent of reserves and 88 percent of production until the 1950s.24 These companies, mostly privately owned, became partial owners or controllers of the assets of oil-producing countries. They obtained contracts from producer countries that enabled them to control the exploration and production of oil resources in these countries, while paying royalties to the countries on any profits they made from the successful exploration and production of the countries' oil reserves. The companies essentially controlled the world's oil trade, even the oil refining and transportation aspects. Through the 1950s the Seven Sisters dominated the world oil market, with three-fourths of the world's refinery capacity and distribution, nearly one-third of the oil tanker fleets, and a good share of maritime traffic, and they were able to keep prices high for all their oil-related activities without much competition.
Industry analysts sometimes cite the dominance of these oil companies in the middle of the 20th century as a contributor to many of the energy-related issues that resonate in the world today, such as the oil crisis in America in
1973-1974. The roots of this oil crisis are often traced back to 1959 and 1960, when new oil companies began to challenge the dominance of the Seven Sisters cartel, bringing about pricing reductions. This development destabilized the relationships among the seven large companies and between the seven companies and the countries in which they produced oil. This shift in balance of power from the oil-producing companies to the oil-producing countries occurs naturally over time: Initially the host government needs the oil industry to develop the resources that it cannot develop on its own; the host government has little to offer except future profits. Once the industry is in place, however, the oil company cannot simply pick up and go; it needs to remain where the natural resource is, and thus the host government gains a bargaining chip. When one of the Seven Sisters, Standard Oil of California, decided to defer an oil price cut by reducing the royalties it paid to oil-producing countries for developing oil reserves in these countries, the oil-producing countries formed the Organization of Petroleum Exporting Countries (OPEC), a multinational organization aimed at coordinating oil production policies and pricing among oil-producing nations. Functioning in a similar way to the Ach-nacarry Accords between the major oil companies at the time, OPEC standardizes the amount of oil exported by its members, thus regulating the price of oil. When this organization was formed, its highest priority was to establish arrangements between major oil companies and oil-producing countries that were more favorable to the latter. When it was founded in 1960, its original members were Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. Today member nations, which together produce 40 percent of the world's oil, are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. It is the founding of OPEC, say analysts, that connects the Seven Sisters to the oil crisis of the early 1970s, for it did not take long before OPEC began to exert significant influence over the oil market.25 In 1970 the Middle East owned most of the world's oil reserves, with the Seven Sisters controlling 70 percent of the Western world's oil production. By 1973 oil had commanded nearly half of the world's total primary energy supply, double its share in 1949.26 And in 1970 the Seven Sisters decided to reduce their investments in the Middle East to keep prices down and deflect competition. This policy resulted in sudden oil shortages in the United States in the winter of 1970-1971. But the real crisis began when a coalition of Arab nations in the Middle East became entrenched in a political conflict in 1973, engaging in a brief war with Israel known as the Yom Kippur War. The war started in October of that year. Because the United States and other Western nations had shown support for Israel during this war, the Middle Eastern oil-exporting countries that were part of OPEC decided to stop exporting oil to the United States and the other Western nations to exert political pressure.
This gave OPEC the opportunity to carry out a coup on oil prices, raising them from $3.0111 a barrel in October 1973, at the start of the embargo, or stoppage, of oil exports, to $11.651 in January 1974.
The oil embargo ended in March 1974, but it had great implications for the U.S. economy and American sentiments about energy. American consumers waited on long lines for gasoline that cost four times the amount it cost just a few months earlier. The situation led to greater conservation in oil-consumer countries such as the United States; in fact, between 1979 and 1982 overall energy consumption in the United States decreased 10 percent, and consumption in the industrial sector dropped by 20 percent.27 The shock to the American energy system also resulted in the establishment of government policies to prevent the United States from being caught short on oil should another oil emergency occur. The Energy Conservation and Policy Act of 1975, for example, established the Strategic Petroleum Reserve (SPR), an emergency stockpile of oil, which was recently ordered filled to capacity. Also, the U.S. president who took office in 1977, Jimmy Carter, approved additional funding for the development of alternative energy resources to offset the country's dependency on oil.
Shortage of Oil and Other Nonrenewable Energy Sources
Thus, during this period, energy-related issues such as energy crises and shortfalls, energy affordability and economics, and foreign oil dependence, political instability, and foreign relations all converged upon the United States and other oil-consuming countries. In 1970 U.S. production of crude oil reached its highest level, at 9.4 million barrels per day (11.7 million including both petroleum and natural gas), as reported by the EIA.28 Since then production in the lower 48 states has been generally declining. Thus, the peak in U.S. oil production occurred in 1970, and there are ample data to suggest that world oil production will peak in the early part of the 21st century.29 Yet the world's population is now four times higher than it was when that first oil field was struck in Titusville, and the demand for oil around the world shows no signs of slowing. The largest oil-consuming countries, China and the United States, appear to be demanding more oil than ever. China is the world's second largest consumer of oil, behind the United States, with a total demand of 7.4 million barrels per day projected in 2006 by the EIA.30 China's oil demand is projected by EIA to reach 14.2 million barrels a day by 2025. Meanwhile, average U.S. petroleum consumption stood at about 20.6 million barrels a day during 2006, which was less than the 2005 average of 20.8 million.31
There are still many who contend that the future oil supply situation is not as dire as some predict. The U.S. Geological Survey and the EIA both report that oil and fossil fuel production will peak much later, about 50 to 100
years into the future, and that they will remain dominant energy sources for at least another 25 years.32 Other commentators point to improvements in oil extraction technology and the discovery of new supplies of oil, including vast undersea pools of oil in the Gulf of Mexico and off the coasts of West Africa and Brazil.
Whatever the case, it is true that oil is the dominant source of energy for the entire world. It replaced coal as the world's primary energy source in 1946; the world now relies on oil-based fuels for about 90 percent of its energy for transportation, using more than 26 billion barrels of oil each year. Furthermore, the manufacture of 95 percent of all goods and food products worldwide involves the use of petroleum, which is the basis for fibers, polymers, packing materials, plastics, and more.33 In addition, the world's consumption of other hydrocarbon fuels aside from oil has proceeded at a rapid pace. Natural gas, for example, is the resource of choice for both heat and electricity in the modern world.
Natural gas usage is of particular concern, because its consumption is especially on the rise; the number of central electrical power plants that use natural gas has been growing each year. Some experts project that the production peak for natural gas is only a decade or two later than that of oil. According to BP, the world's resources-to-production (R/P) ratio for natural gas declined to 65.1 years in 2005 (which, however, is still well above oil's R/P ratio of 40.6 years). Coal is another resource whose supplies are waning, though coal is recognized to be more available than other hydrocarbon fuels, with estimates of remaining reserves ranging from 200 to 300 years.34
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