150 Years of Oil

pgabriel · Sep 1, 2009

Series of Articles on Oil Industry in America, who's 150 year anniversy was over the weekend

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One hundred and fifty years ago last Thursday, in the sleepy lumber town of Titusville, Pa., “Colonel” Edwin Drake was persistently hammering a pipe into the ground in search of a replacement for depleting whale oil as a fuel for lamps. At a depth of 69 feet below ground he finally struck oil, and the world changed forever. Over a century and a half his 25 barrels per day well would give rise to a global industry of 85 million barrels per day, making oil the world's most strategic commodity, one that supplies 40 percent of the world's energy.

Just like in Drake's own life — he died two decades later penniless — oil has been both a curse and a blessing for humanity. It has been a driver of seminal events and a backdrop behind great powers' foreign policy. During World War I, “the Allies had floated to victory upon a wave of oil,” as the British statesman Lord Curzon noted. The post-war contention between Turkey and Britain in the early 1920s over Iraq's oil-rich Mosul, Imperial Japan's expansionist policy of the 1930s that led to a four-year war in the Pacific, Adolf Hitler's invasion of Russia, America's repeated military interventions in the Middle East and the “New Great Game” currently taking place in Central Asia have all been tied to oil dependence.

On the other side of the balance sheet, petroleum has enabled the production of industrial chemicals, medicines, plastics, asphalt and lubricants, all of them critical to our modern society (contrary to popular belief, the U.S. uses very little oil today to make electricity. At present, only 2 percent of U.S. electricity is generated from oil.) Most importantly, it has enabled mobility, and hence a rapid flow of goods and services, perhaps the key contributor to the impressive global economic growth of the modern era. Today, roughly two-thirds of the world's oil is used for transportation. More importantly, most of the world's cars, trucks, planes and ships can run on nothing but oil.

Oil's 150th birthday is a somber one. It has only been one year since oil prices were at their historic high of $147 a barrel and gasoline reached more than $4 a gallon. Since then, on the heels of a painful global recession, prices have dropped sharply and motorists are again indulging on cheap gas. But as James Schlesinger, America's first energy secretary, once said , when it comes to energy “we have only two modes — complacency and panic.” And panic will inevitably resurface once the economy zooms out of the recession and demand for liquid fuel surges. The reason is that the current economic conditions have thwarted the much needed investment in new production. Within OPEC alone, 35 major exploration projects have been shelved since last year.

Failure by producers to prepare the ground for the post-recession era could send oil prices to much higher levels than those we saw last summer. This could, in turn, drive the world into a new round of economic turmoil, leading to a W-shaped, double dipped, recovery instead of a traditional V-shaped recovery in which economic growth bounces back quickly from a slump.

In the more distant future, even darker clouds loom on the horizon.

After recently examining the status of the world's 800 top oil fields, the International Energy Agency (IEA) concluded that the world is heading for a severe oil shock because most of those fields have passed their peak production and are declining at a rate twice as rapid as previously thought. The agency stated that in order to meet future demand for oil, four new Saudi Arabias will have to be added to the global oil market between now and 2030. But this year's warning of Ali al Naimi, the Saudi oil minister, of a coming “catastrophic” shortfall in petroleum production raises doubts whether we can count on the one Saudi Arabia that exists, not to mention the four that don't.

And yet, despite the multiple warnings that, in the words of the IEA's chief economist, “We have to leave oil before oil leaves us” and despite our politicians' proclamations about the need to “break our oil addiction,” we do the exact opposite: Every year more than 50 million new petroleum-only cars roll onto the planet's roads, each with an average street lifespan of 15 years, hence locking our future to petroleum for many years to come.

To prevent price volatility and meet the staggering need of our economy for oil, we must first understand that the much touted policies that aim to either increase oil supply through domestic drilling or decrease its use by boosting fuel efficiency, while helpful, are insufficient as they do not address the factor that gives oil its strategic status: the petroleum-only vehicle.

In fact, experience of the past three decades shows that whenever oil producers like the U.S. increase their production, OPEC, a cartel that owns 78 percent of world oil reserves but remarkably produces today fewer barrels per day than it did 35 years ago, decreases supply accordingly, keeping the overall amount of oil in the market the same. Similarly, when demand for oil drops, as was the case over the past year, OPEC quickly responds with production cuts. In other words, when we drill more, OPEC drills less; when we use less, OPEC drills less. Changing this vexing dynamic requires game-changing strategy — competition and fuel choice in the transportation sector that can only be achieved if every new vehicle is built as a platform on which fuels can compete.

A few types of vehicle technologies already offer such a possibility.

The first, and most affordable, is the flex-fuel vehicle that can run on any combination of gasoline and alcohol (alcohol does not mean just ethanol, and ethanol does not mean just corn). It costs an extra $100 per new car to make a regular car flex-fuel. All it takes is a fuel sensor and a corrosion-resistant fuel line, since alcohol is more corrosive than gasoline. An open fuel standard requiring that every new car sold in the U.S. be flex-fuel would not only give rise to an industry of alternative fuels and the associated refueling infrastructure, but it would also drive foreign automakers to add fuel flexibility to all of their models, effectively making it an international standard.

Electricity is another springboard to the post-petroleum era. It is cheap, largely clean, domestically produced and can be made from multiple sources. Its refueling infrastructure is widely available. All that is needed for an electric car to connect to the grid is an extension cord. Most automakers have already committed to produce models of limited range pure electric vehicles (EV) or plug-in hybrid electric vehicles (PHEV). The latter allow drivers to travel on stored electric power for the first 20-40 miles after which the car keeps running on the liquid fuel in the tank, providing the standard 300 mile to 400 mile range. For the 50 percent of Americans who drive 25 miles per day or less, shifting from barrels to electrons would make the visit to the local gas station a rarity. If all of those Americans owned PHEVs, a population the size of New York, Florida and Pennsylvania combined would be off oil most days of the year. A PHEV would normally drive 100-150 miles per gallon of gasoline. If it is also made as flex-fuel and fueled with a blend of 80 percent alcohol and 20 percent gasoline, oil economy could reach more than 500 miles per gallon of gasoline.

As former Saudi oil minister Sheikh Ahmed Zaki Yamani once observed, “Technology is a real enemy for OPEC.”

Skeptics of this vision hold that oil is not likely to easily vacate its pedestal and that the world may no longer be awash with conventional oil, but the amount of reserves offshore and in the universe of nonconventional sources like oil shale and tar sands can extend oil's play for decades to come, albeit at a great cost to the environment. Additionally, they explain, alternative fuels and advanced automotive technologies will no doubt face nontrivial challenges on their way to mass-market penetration. But even those skeptics would shudder at the prospects of a nuclear Middle East, with its massive youth bulges and lurking social discontent. The obvious advantage to having the key to global mobility should be enough of an impetus to ensure that in the 200th anniversary of Drake's discovery, oil be far less central to the world economy than it is today.

Luft is executive director of the Institute for the Analysis of Global Security (IAGS) and publisher of the Journal of Energy Security. He also is a co-author of “Energy Security Challenges for the 21st Century.”
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pgabriel · Sep 1, 2009

another
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Almost from its beginnings 150 years ago this month, the oil industry has been a high-risk international business driven by speculators and technological innovation.

Edwin Drake and the New Haven, Conn., investors who funded the United States' first commercial oil drilling operation in rural Pennsylvania aren't so different from today's venture capitalists betting big on a new, unproven technology, author and energy industry analyst Daniel Yergin says.

Drake was labeled “mad” and came within days of tapping out his funds as he adapted equipment that previously had been used only for water wells in search of a lamp fuel cheaper than whale oil.

Within just a few years, the forest of wells that followed was feeding an international market, says Susan Beates, the curator at the Drake Well Museum in Titusville, Pa.

Despite the similarities with 1859, though, the oil industry in 2009 faces challenges that make past barriers seem like mere bumps in comparison — surging energy demand from the developing world, volatile price swings that spawn both boon and bust, and demands to limit the environmental damage of fossil fuels.

“But the age of oil is not over,” Yergin says. “Over the next two to three decades, on a global basis we'll see oil demand increase, but there will be a tremendous drive for us to use it much more efficiently.”

That drive, and particularly the role that natural gas may play in it, could help keep another generation of workers in Houston's office towers and refineries employed.

“In some ways Houston isn't the oil capital as much as it is the natural gas capital of the world, at least for the last half century,” says Joseph Pratt, a historyprofessor at the University of Houston who specializes in the energy industry.

Amory Lovins, president and chief scientist of the Rocky Mountain Institute, predicts the U.S. could just about eliminate its need for oil by 2040 by expanding on a number of energy efficiency efforts that have sprung up since an Arab oil embargo sparked the energy crisis of the early 1970s.

These include reducing oil's use as a transportation fuel through lighter, fuel-efficient vehicles, shifting to a combination of natural gas and nonagricultural biofuels, improving building efficiency standards and other measures.

“It's not going to happen because of concern for the climate but because it's profitable. Any company that saves energy knows it saves money,” Lovins says. “The whaling industry of the 1800s didn't die out because it ran out of whales. It ran out of customers. Whales were actually saved by profit maximizers of the oil industry.”

The energy industry certainly doesn't widely embrace Lovins' timeline for oil's decline, but Pratt says the business knows a thing or two about saving energy. Refineries and drilling platforms use huge amounts, so company engineers are constantly find ways to do more with less.

“I'm a believer in that collective engineering impulse to find better ways to get oil and natural gas and maybe better ways to use it,” Pratt says. “When it comes to better and cleaner ways to use it, we've just touched the surface on our abilities.”

The likelihood of government mandates to reduce greenhouse gas emissions will increase the importance of natural gas, which was more nuisance than resource for much of the industry's history because of difficulties in transporting it. Its combustion emits far less carbon dioxide, and it can be adapted to run all manner of equipment.

Less than a decade ago there were concerns about the adequacy of domestic natural gas sources, Yergin says, leading to anxiety among power companies and large industrial users. But advances in drilling technology that are letting companies get gas from plentiful shale formations have changed that outlook.

Less than a decade ago there were concerns about the adequacy of domestic natural gas sources, Yergin says, leading to anxiety among power companies and large industrial users. But advances in drilling technology that are letting companies get gas from plentiful shale formations have changed that outlook.

By some estimates shale gas formations can meet U.S. demands for many decades to come. A report released earlier this year says that including shale, gas reserves estimates are up 35 percent from the year before.

“There's a lot more confidence about using gas,” Yergin says.

Pratt says Houston is particularly well suited for a future that relies more heavily on natural gas because it's such a big part of the city's past.

The abundance of natural gas near the city helped fuel the growth of industries along the Houston Ship Channel after World War II. An extensive national pipeline network emanated from the area, bringing the fuel to both coasts.

The companies that build the pipelines historically have been in Houston, as have the researchers who improve on the technologies to extract, process and move the fuel. The intellectual and financial resources that reside in the energy companies that stretch from downtown westward to Katy are unrivaled by any other city, Pratt says.

“To say oil will be around for another 150 years is an exaggeration,” Pratt says. “But I'd say that for the second half of the petroleum age, natural gas will be the predominant fuel.”
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Dairy Ashford · Sep 1, 2009

Probably a happier and more momentous anniversary than we care to admit, like when the 50-year marker for Sputnik came and went with nary a whimper.

rocketsjudoka · Sep 1, 2009

At the rate we are using oil we might not get to a 200 year anniversary.

wreck · Sep 2, 2009

i was hoping it was an article about how well have oil for another 150 years.

conquistador#11 · Sep 2, 2009

Drill baby drill?
“Technology is a real enemy for OPEC.” That line explains everything from politcis to bud adams getting into the texas sports hall of fame.

famicom · Sep 2, 2009

I thought this 20/20 video was interesting about oil running out.. but who knows what to believe nowadays.

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famicom · Sep 2, 2009

Oh yea the report was from 2006.

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150 Years of Oil

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