I finished reading Daniel Yergin’s The Prize: the Epic Quest for Oil, Money and Power, tells the story of the world oil industry from its beginning with the drilling of the first oil well in Titusville, Pa., in 1859 to Saddam Hussein’s failed invasion of Kuwait in 1991, with a brief epilogue bringing it up to date. I’m now reading his current book, The Quest: Energy, Security and the Remaking of the Modern World.
It is a big, detailed book which I would not recommend except to somebody such as myself with a lot of time on their hands. I read it, even though it was published 20 years ago, because I believe the best way to understand something is to understand its history.
The main things I took away from the book:
▪ An appreciation that the creation of the modern oil industry really was an epic achievement in terms of engineering, technology, organization and the enormous obstacles, both natural and human-made, to be overcome.
▪ An understanding of the central place of the United States in the history of the world oil industry, and of the oil industry in the development of the United States
▪ An understanding of the key importance of oil in world politics and military power.
▪ A realization that the history of the world oil industry has always been a cycle of boom and bust, glut and scarcity, which makes the current runup in gasoline prices nothing new.
Nowadays I think of oil in terms of the Middle East, but for a century or more the United States was the main producer and exporter of oil. In the earliest days most of the world’s oil supply came out of Pennsylvania, and the next big discoveries were around Baku in the Russian Empire and Borneo and Sumatra in the Dutch East Indies. Texas and Oklahoma did not become important oil regions until late in the 1920s, and Saudi Arabia until after World War Two.
Cheap oil made possible much of what we regard as the American way of life. The oil industry was created to provide kerosine for illumination, as a substitute for illumination. But without a pre-existing oil industry, there would have been no auto industry, aviation industry or any other industry based on internal combustion. Early U.S. preeminence in oil made possible our early preeminence in these other industries. Our periods of greatest prosperity, especially the period from 1945 to 1973, coincided with low oil prices.
I tend to take fruits of oil-fueled industry for granted, but, as Yergin pointed out, there was a time when none of this existed. Somebody had to think of drilling for oil instead of digging for oil. Somebody had to think of setting up gasoline pumps instead of selling it in cans. Somebody had to figure out how to drill for oil in the jungles of Borneo, the deserts of Persia, the bottom of Lake Maraciabo in Venezuela and the north slope of Alaska. It really was an epic story.
Crude oil prices adjusted for inflation. Double click to enlarge.
We think of oil in terms of scarcity, but there have been times when an oil glut was considered the more serious problem. This was the case during the Great Depression, when the Texas oil industry was collapsing under overproduction of oil. The Texas Railroad Commission (which, despite its name, regulated oil) worked with the Roosevelt administration to set up a system of production allocations regulating what could be taken from each oil field. The federal government restricted foreign imports to prevent Texas oil from being overwhelmed.
Texas increased and decreased production in order smooth out the cycle of boom and bust, so that oil-using businesses wouldn’t be ruined by sudden increases in oil prices nor oil producers by the sudden collapse.
This helps explain why Texas oilmen for so many years supported the Democratic Party. When I first learned how this system worked, back in the 1950s, it seemed to me to be an example of government-protected monopoly working against the public interest. After reading Yergin’s book, I can see the need for some entity to fulfill the function of the Texas Railroad Commission. Price controls don’t work, as we Americans learned in the 1970s. But it is a good thing to smooth out swings in prices when they are so wild that they periodically crash an industry.
In later years Saudi Arabia took over the function of swing producer, which partly explains the tight relationship between the U.S. government and the Saudi royal family since President Franklin Roosevelt’s first meeting with King Ibn Saud in 1945. Saudi Arabia’s function as swing producer has been a great source of tension with Iran. The Iranian government, which unlike Saudi Arabia rules over a large population who need jobs and income, has always wanted to maximize production and income, while the Saudis have been able to afford to take a longer view.
U.S. gasoline prices adjusted for inflation
There’s a lot more in the book. I put it down with a greater awareness of how oil is intertwined with everything and what a radical change ending our “addiction” would be.
Click on The Stuff That Makes the World Go Round for Leslie H. Gelb’s review of The Prize in the New York Times.
Click on “the world’s most critical nonhuman economic resource” for a review of The Prize in The Freeman: Ideas on Liberty.
Click on Overdue Evaluation for a 2006 review of The Prize by Doug Merrill on the A Fistful of Euros web log.