The Age of Energy

The war in Europe had only been over for a few months when first President Roosevelt traveled to meet a world leader he might not have given the time of day to just a few years before - Saudi King Ibn Saud. There is no official record of what Roosevelt and the Saudi king discussed, but a number of accounts assert the US president promised to guarantee Saudi national security (not least from Great Britain whose imperial traits Ibn Saud had a particular dislike for) in return for continued and preferential access to Saudi oil. The potential prize was huge – in 1939, Standard Oil of California along with Texaco had struck Saudi oil. The companies had agreed a 60 year concession with Ibn Saud covering 440,000 miles, one sixth of the continental US. Now, geologists at the newly formed Saudi-American Oil Compnay, Aramco, confirmed there was more oil underneath the Saudi sands than in the whole of the United States.

The US and Saudi Arabia had good reason to be concerned. The world was divided into two camps and Middle East oil was caught in a superpower struggle between the US and the Soviet Union. As Daniel Yergin describes in The Prize, his sweeping history of the oil industry, the US believed that “The Middle Eastern oil fields had to be preserved and protected on the Western side of the Iron Curtain to assure the economic survival of the entire Western world.”

In 1940, America had accounted for two thirds of all global oil production. But the immediate post-war years saw an enormous growth in world oil demand and, while the US could still meet most of its own domestic demand, Saudi oil soon became an important part of the Marshall Plan to bail out Western Europe. US president Harry S. Truman wrote to the Ibn Saud in 1948, “No threat to your Kingdom could occur that would not be a matter of immediate concern to the United States.”

Socal and Texaco had won the right to develop Saudi Arabia’s oil industry but they quickly realized that the task was so immense that they needed outside help.  The companies that Socal and Texaco reached out to were Exxon and Mobil.

The entry of Exxon and Mobil into Saudi Aramco signaled the end of the Red Line Agreement but it also allowed all the US and European majors to put aside their rivalries and protect their mutual interests in the Middle East. United, they could shut out other oil companies from lucrative contracts and also control Middle East oil output. So successful were they in this strategy that they earned themselves the enmity of other independent companies. They also picked up a sardonic nickname to describe their cozy realtionship, the Seven Sisters. Through the multi-decade sweetheart deals signed in Iraq, Iran and Saudi Arabia the Sisters (Exxon, Mobil, Shell, BP, Texaco, Socal and Gulf) would transform themselves into the greatest multinationals in the world. For a time, they would be more powerful than the countries whose oil fields they were drilling.

The US government let the four Aramco members act as de facto US ambassadors to Saudi Arabia, not least because the US government was a strong supporter of the new state of Israel, a position the anti-Zionist Saudi King abhorred. Despite their disagreements over Israel, both the US and Saudi found common cause in a greater concern: the Soviet Union’s own territorial ambitions in the region. And this wedded US foreign policy even more closely to the business needs of the major oil companies. So while back in the states, the companies were fighting tooth and nail against the government over new antitrust and price fixing charges, abroad they were America’s eyes and ears in what was becoming the most influential region of the world.  This blurring of business and diplomacy suited both parties: the oil companies had been negotiating deals in the Middle East since the 1920s and they understood the workings of the region better than the US state department. The companies’ close ties to the US government also enhanced their standing with Middle East governments. Before long though, the perception that the majors were doing Washington’s bidding would come back to haunt them.

The Rise of Big Oil

The lessons of the First World War were all too obvious – the Great Powers needed oil to survive. And while new finds were being made in the US and Mexico, one region of the world was attracting more interest than any other – the Middle East. Pre-war the US had been content to develop its domestic reserves and leave foreign prospecting to the Europeans. Now, it was adamant that Britain and France should not carve up the Middle East alone.

Britain and France had agreed to divide up responsibility for the Arab lands of the Ottoman Empire, which had been allied with Germany during the war, but had now disintegrated.  Central to their ambitions was Mesopotamia, which Britain quickly renamed Iraq, and specifically the region around Baghdad and Mosul that were believed to hold huge oil reserves. Iraq’s potential had first been identified by a savvy Armenian oil prospector, Calouste Gulbenkian. In 1914 he put together the Turkish Petroleum Company, a syndicate involving Anglo Iranian, Shell, Deutsche Bank and himself, holding five percent of the concern.

After the war, Britain and France agreed to let the US companies, Standard of New Jersey (Exxon), Socony (Mobil) and five other US companies take Deutsche Bank’s stake in what was now called the Iraq Petroleum Company.  With Britain overseeing Iraq, the local puppet rulers rubberstamped a very favorable concession for the foreign companies - exclusive drilling rights in Iraq until the year 2000.

Gulbenkian, wary of being squeezed out by the major oil companies, was insistent on one condition in the contract: no member of the Iraq Petroleum Company would undertake operations anywhere else within the Middle East lands of the former Ottoman Empire without the joint cooperation of the other members. There was just one problem – no one was really sure just how far the Ottoman lands extended. So when the new members of the company came together to finalize the deal, Gulbenkian took a red pencil and drew a rough line on a map around what he understood to be the Ottoman lands. Inside the line lay all of Iraq and Saudi Arabia. Gulbenkian’s guess had fortuitously pinpointed the greatest oil fields in the world and it put them in the hands of Western oil companies. In establishing a de facto non-compete agreement between Shell, BP, Exxon and Mobil, Gulbenkian’s Red Line agreement, as it became known, created a cartel out of the world’s pre-eminent oil companies. As for Gulbenkian, he got to keep his original stake in the company. He would forever be known as Mr. Five Percent.

The Second Great Oil War

Twenty years after the end of World War I, Europe once again found itself facing war. This time, all the powers knew that oil would make the difference between victory and defeat. The US once again used its plentiful oil fields to supply its own war needs and those of Great Britain. But Germany, just as in the First World War, was forced to undertake a risky strategy to capture foreign oil supplies.

Germany believed that its key to victory was a series of short overwhelming mechanized attacks – the blitzkrieg – and at first it was very successful. One reason for the blitzkrieg was that Hitler knew he didn’t have enough oil to compete in long drawn-out battles. To counter this weakness, Germany had two goals in mind – its Panzer tank divisions would punch through Russia and snatch the Baku oil fields before continuing on to secure the grand prize of Iraq and Iran. But Operation Blau, as this grand oil grab was called, faltered before it could ever reach Baku. The German army had to travel thousands of miles to reach the Caucuses and the speedy Nazi tanks outran their own fuel supply lines. Short of gas, and caught in the heavily defended Caucasus mountains, the armored divisions had to be refueled by camel trains as their own trucks had run out of gas. In its desperation to capture Baku, Germany left its sixth army stranded and short of fuel outside Stalingrad. Surrounded by Soviet forces after a six-month siege, the Germans needed only to fight for 30 miles to escape. But their tanks only had 20 miles of fuel in them. The decision to strand the sixth army by refusing to divert the Baku-bound forces was taken by Hitler himself. “Unless we get the Baku oil, the war is lost,” he told his commander of the forces in the Caucasus.

Fuel shortages would continue to bedevil both sides as the war went on. General Erwin Rommel, father of the Afrika Korps, the most mobile and effective tank division Germany possessed was undone in North Africa when the allies destroyed his refueling lines of supply while the hard-charging American General George Patton and his rampant Third Army was prevented from what could have been an early and decisive invasion of Germany in 1944 by a lack of fuel. “My men can eat their belts” he said, “but my tanks have gotta have gas.”

The United States may never have entered the war were it not for Japan’s desperation to capture the oil fields of Indochina. As early as the mid-1930s, Japanese economic planners had come to the conclusion that Japan’s plans for the aggressive colonization of Southeast Asia would fail unless it controlled its own oil destiny. That meant invading the oil fields of the Dutch East Indies but this strategy risked an attack by the US, who already wary of Japan’s imperial ambitions, had recently moved the American fleet from California to Pearl Harbor in Hawaii. Faced with Japan’s invasion of Southern Indochina and its new alliance with Germany and Italy the US had frozen all Japanese financial assets cutting off its ability to purchase US oil.

It was at this point that Japan took its own fateful plunge – the pre-emptive attack on Pearl Harbor in an attempt to destroy US influence in the Pacific. To a degree they were successful. The December 7, 1941 assault decimated many ships in the fleet. But the Japanese also made a big mistake. They failed to hit the four and a half million barrels of oil stored at Pearl Harbor. If they had destroyed America’s Pacific oil reserves the whole fleet would have been immobilized.

Over the next four year, Japan would be methodically expelled by Allied forces from the Pacific islands and Southeast Asia. And with each defeat, it saw its access to oil dwindle. By the time the first atomic bomb was dropped on Hiroshima in August 1945, Japan was already a spent force. The US navy was sinking every Japanese oil tanker before it could return home from the Dutch East Indies and the Japanese Navy didn’t have enough fuel to leave its home base. The shock of the atomic attacks ended the war, but it was a lack of oil that defeated Japan.

The Start of the Addiction

Perhaps it was because of Samuel’s understanding of maritime trade or maybe it was because Shell now had large excess reserves of Borneo fuel oil following its recent merger with Royal Dutch, an East Indies-based rival, but Samuel led the campaign to make the British Royal Navy abandon coal-fueled ships in favor of oil.

Since the late 1890s, Britain and Germany had been caught up in an increasingly high-stakes naval arms race. Central to both sides’ military ambitions was control of the world’s oceans. The British admiralty was dead set against switching to oil – not least because, while Britain enjoyed great reserves of coal, it had no oil of its own. Nevertheless, after a decade of lobbying, Samuel finally got the ear of a new First Lord of the Admiralty, the young Winston Churchill.

Churchill quickly grasped the advantages of an oil-fueled battle fleet. Between two such well-matched imperial powers as Britain and Germany, naval superiority would tip the balance and Churchill saw how Britain could achieve that. Oil fuel allowed faster cruising speeds and faster acceleration than coal furnaces. It took up less room allowing for greater armaments and manpower. It was also cheaper to operate. In April 1912, Churchill took the “fateful plunge” as he described it and commissioned a series of new battleships all dependent on oil.

In one swoop, Churchill had made the security of Great Britain dependent on foreign oil. Yet the lure of oil - its mobility and the advantage it afforded the British fleet at war - was enough to persuade him. With oil, Churchill wrote, “we should be able to raise the whole power and efficiency of the Navy to a definitely higher level; better ships, better crews, higher economies, more intense forms of war power.” As he put it, “mastery itself was the prize of the venture.”

Churchill found the oil he needed to run his navy in Persia where a new company, Anglo-Iranian Oil had struck a rich seam of oil. Yet despite the company’s potential, it was desperately short of capital. In 1913, Churchill announced that, in the interests of national security, the government would buy 51 percent of the company and Anglo Iranian would sign a long-term contract to supply fuel oil to the British Navy. The agreement stipulated that the company must always remain a British concern and, to protect its investment, the government increased its military presence in Persia. Anglo Iranian would soon change its name to British Petroleum, or BP. And Great Britain had become the first Western power to tie its economic and national security to Middle East oil. Others would soon follow.
The First Oil War

Nowadays we take technology in warfare for granted. Ever since the first Gulf War in 1991, the media has fallen over itself to catalogue new military inventions – be it stealth fighters, smart bombs or real-time video footages of the battleground that can be monitored from thousands of miles away. But, as Germany and the allied powers of Great Britain and France squared off in 1914, neither side understood the differences that the internal combustion engine would bring to modern conflict.

The First World War dragged on in an increasingly bloody stalemate for four years as each side introduced more deadly mobile weapons and the carnage grew exponentially. In 1916, the tank was introduced to combat and by 1918, the allied forces were using over 150,000 cars, trucks and motorbikes to transport troops and supplies. During the course of the war, the combustion engine also took to the skies. In 1915, the Royal Air Force had only 250 planes to call upon; by war’s end, British industry had produced 55,000, France 68,000 and Germany 48,000.

These inventions increased mobility on the battlefield, spreading the conflict over a far greater area than military planners had ever imagined. And it changed the odds of warfare. Even the finest infantry and cavalry was no match against the new fighting machines. Over 13 million people died and millions more were wounded during the four-year conflict.

It took huge quantities of oil to supply both sides’ war effort. Oil production at Anglo-Persian’s operations increased ten-fold from 1912 to 1918 and in 1917, Great Britain, with an eye to Mesopotamia’s oil potential, captured Baghdad from the Turks. Yet Britain and France still found themselves facing huge oil shortages at the height of the war. There was only one place they could turn for help – the United States. By 1917, the US was producing 335 million barrels of oil, 67 percent of total world output, and nearly one quarter of that was sent to Europe. In total, the US supplied 80 percent of the allies’ wartime petroleum needs. One quarter of that came from Standard Oil of New Jersey.

Germany’s oil problems were even more severe. Cut off from overseas oil by the allied naval blockade, it had only one other option – the oil fields of Romania. Yet despite a full-press effort to capture the oil fields, British saboteurs got there first putting Romanian oil out of action for five months. On November 11, 1918, Germany, faced with an acute oil shortage for the coming winter, surrendered. As Lord Curzon, a member of Britain’s War Cabinet, triumphantly announced, “The Allied cause had floated to victory on a wave of oil.”

The enivironmental and social costs of climate change would wipe away the record profits recorded by BP, ExxonMobil and Shell in the last year reports BBC NEWS