Emergence of Oil as a Strategically Vital Commodity

Emergence of Oil as a Strategically Vital Commodity

Second World War only reinforced lessons learned in the First. Oil followed only armaments and ammunition in importance for winning a war. Hitler, cognizant of Germany’s lack of raw materials and energy, except for coal, built facilities in Germany that made gasoline from coal. Gasoline fueled the aircraft and tanks essential for the success of blitzkrieg, which was a rapid deployment of armies to envelop an enemy before resistance could be organized. The Nazi army quickly invaded Romania to seize its oil fields. Hitler’s thrust into the Soviet Union and Rommel’s thrust in North Africa were to join at the Baku oil fields, placing Middle East and Soviet oil under Axis control. Fortunately for the Allies, both suffered from severed supply lines. Hitler’s army’s replenishment lifeline was cut at Stalingrad as was Rommel’s gasoline lifeline to North Africa to fuel his tanks. Likewise, in the Battle of the Atlantic, Hitler tried to cut the British lifeline of troops, armaments, ammunition, and oil flowing from the US with submarine U-boats. Germany’s capacity to wage modern warfare ended when the Allies finally won air supremacy and bombed Hitler’s coal-to-gasoline production plants.

War in the Pacific was likewise heavily influenced by oil and by attempts to interrupt its flow. In the months prior to Pearl Harbor, the US imposed an embargo of scrap steel and oil to Japan as signs of its disapproval of Japan’s invasion of China. Japan depended on scrap metal as a raw material for making steel to produce armaments. Since Japan could find substitute sources of scrap metal or steel as a consequence of its alliance with Nazi Germany and by other means, the critical embargo was oil. With the US supplying 80 percent of Japanese oil, the embargo forced Japan to set its sights on the Dutch East Indies oil fields. Japanese leaders knew that the supply line of oil from Dutch East Indies to Japan was long and vulnerable to hostile naval forces. Only one navy was powerful enough to interrupt Japan’s oil lifeline; and in this sense, the oil embargo made Pearl Harbor inevitable. Severing the lifeline of raw materials and oil to Japan from its conquered territories in Southeast Asia was a major goal of the war in the Pacific spearheaded by US submarines.

Era of the Seven Sisters

For over a half-century, between the First World War and the oil crisis of 1973, world oil business was conducted largely through seven sisters, Exxon, Shell, British Petroleum (BP), Gulf, Texaco, Mobil, and Chevron, each ranking among the world’s largest companies. Exxon, Mobil, and Chevron were the leftovers of the Standard Oil Trust breakup. Gulf and Texaco were the products of keeping Standard Oil out of Texas (Exxon eventually became a major player in Texas through its subsidiary, Humble Oil). BP, Churchill’s brainchild, branched out far from its original purpose. Since the 1973 oil crisis, seven sisters have been reduced to four; Exxon and Mobil have recombined, Chevron purchased Gulf Oil and combined with Texaco. BP, while it did not combine with any of the other seven sisters, absorbed Sohio, Amoco, and Arco, three leftovers of the Standard Oil breakup. Earlier conflicts between oil men that had plagued attempts to amalgamate had been overcome. As the decades passed, top executives with no links to the founders or their immediate successors, stepped aside to let others head the amalgamations, their hurt feelings assuaged by generous bonuses and retirement packages.

The seven sisters were fully integrated multinational companies that controlled every facet of the oil business. Upstream activities included exploring and developing oil fields. Downstream activities included refining crude oil and distributing refined products by pipelines, tankers, and tank trucks to gas stations and industrial, commercial, and residential end users. Oil companies felt that they owned an oil field, even if it were located in a foreign nation under a concession agreement. Every aspect of the oil business from exploring, drilling, production, refining, distribution, and marketing was not only controlled, but the assets in oil fields, pipelines, tankers, refineries, storage facilities, tank trucks, and filling stations were owned by the oil companies. Tankers were the exception. Although oil companies owned tankers to take care of base needs, they preferred to charter tankers from independent tanker owners to take care of variable needs. This assured the oil companies that their tanker fleets would be fully employed while independent tanker owners bore the risk of their vessels being under or unemployed. Oil prices and production volumes were set with the oil companies sitting on one side of the table and oil producers on the other, with a generally one-way dialog between the two. This world collapsed in 1973, a pivotal year in the oil industry.³²

The seven sisters both competed and cooperated. They competed with one another over market share and cooperated with one another in exploring and developing oil-producing properties. Oil industry leaders had to learn to deal with this dichotomy, but in a way they were groomed to both cooperate and compete from the beginning. For example, an individual starting to climb the corporate ladder was drilling manager in an isolated part of South America. Over the hill was another individual in charge of drilling for a competing oil company. When a drill bit broke in the middle of nowhere, the individual could order a replacement from the home office and wait weeks to receive it, which would result in his missing the scheduled completion date. Alternatively he could walk over the hill and borrow one from his competitor. The competitor’s drilling manager was more than willing to cooperate because he knew that he now had a ready source of replacement parts across the hill that would allow him to complete his drilling program on time. Because the performance of both would be judged in terms of time and cost required to complete their respective drilling programs, both advanced their careers by walking over the hill when they needed help.

Costly and risky oil exploration and development programs are often carried out by a syndicate of oil companies. Potentially enormous losses associated with exploration and oil field development can be spread over the syndicate members without having a single oil company bear the entire risk of loss. Risk of loss has not been reduced, but the extent of loss a single company must bear is limited to its share of the syndicate. To some degree, risk of loss is reduced since cooperation allows oil companies to share particular skill sets and technological expertise with others. Thus not every company has to be an expert in every facet of exploration and development. In a well-structured syndicate, companies assume responsibility for specific functions they are particularly well adept at fulfilling. Nevertheless, each participant keeps a wary eye on the others to ensure that no one takes advantage of a situation as Deterding did with Marcus.